New South Wales Supreme Court CITATION : Australian Beverage Distributors v The Redrock Co [2008] NSWSC 3 HEARING DATE(S) : 6, 7 & 11 December 2007 JUDGMENT DATE : 23 January 2008 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Proceedings dismissed CATCHWORDS : CORPORATIONS - winding up in insolvency - standing to bring proceedings as creditor in reliance on assignment of debt - service of notice of assignment and originating process - abuse of process - scope of "premature publication rule" - solvency, where arrangements have been made with creditors and company relies on unsecured loans by related parties LEGISLATION CITED : Corporations Act 2001 (Cth), ss 95A, 459A, 459P, 467 Supreme Court (Corporations) Rules 1999 (NSW), rules 2.11, 5.6 Alcatel Australia Ltd v PRB Holdings Pty Ltd (1998) 27 ACSR 708 Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd (2007) 61 ACSR 441 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966 Australian Mid-Eastern Club Ltd v Yassim (1989) 1 ACSR 399 Australian Securities and Investment Commission v Edwards (2005) 54 ACSR 583 Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124 Bank of Australasia v Hall (1907) 4 CLR 1514 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 54 ACSR 228 De Montfort v Southern Cross Exploration NL (1987) 17 NSWLR 468 Deputy Commissioner of Taxation v Barroleg Pty Ltd (1997) 25 ACSR 167 Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78 Deputy Commissioner of Taxation v Visidet Pty Ltd [2005] FCA 830 DMK Building Materials Pty Ltd v CB Baker Timbers Pty Ltd (1985) 2 NSWLR 711 Emmanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1 CASES CITED : Hastie & Jenkinson (a firm) v McMahon [1991] 1 All ER 255 Hymix Concrete Pty Ltd v Geraghty (1977) 2 ACLR 559 Iso Lilodw' Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561 Lewis v Doran (2005) 54 ACSR 410 Liquor National Wholesale Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 392 Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) (1967) 116 CLR 177 Nationwide Produce Holdings Pty Ltd (in liq) v Franklins Ltd [2001] NSWSC 1120 Re Allebart Investments Pty Ltd (1969) 92 WN (NSW) 726 Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 Re Steel Wing Co Ltd [1921] 1 Ch 349 Rohan Trading Co Pty Ltd v Glengor Pastoral Co Pty Ltd [2003] NSWSC 1265 Roy Morgan Research Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311 Sandell v Porter (1966) 115 CLR 666 Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 PARTIES : Australian Beverage Distributors Pty Ltd (P) The Redrock Co Pty Ltd (D) FILE NUMBER(S) : SC 2039/07 COUNSEL : Mr D Allen (P) Ms A Seward (D) SOLICITORS : Catalyst Legal Pty Ltd (P) Kemp Strang (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J WEDNESDAY 23 JANUARY 2008 2039/07 AUSTRALIAN BEVERAGE DISTRIBUTORS PTY LTD V THE REDROCK CO PTY LTD JUDGMENT (Revised 23 January 2008 for minor errors) 1 HIS HONOUR: By an originating process filed on 28 March 2007, the plaintiff ("ABD") sought an order that the defendant ("Redrock") be wound up in insolvency under s 459A of the Corporations Act 2001 (Cth). The originating process also referred to the "just and equitable" ground in s 461(k) of the Corporations Act, but at the hearing counsel for ABD informed the court that his client would not seek relief on that ground. 2 The making of the application for winding up was advertised in the Sydney Morning Herald on 3 April 2007, and a notification of the application in Form 519 was filed with ASIC on 28 March 2007. 3 Redrock has appeared and has contested the application for winding up. In Part B of its further amended notice of appearance, Redrock set out the following grounds of opposition to the winding up application: "1. The application is an abuse of process and brought for an ulterior purpose. 1A. The application was published by the plaintiff in a manner other than that prescribed by legislation or the rules of court. 2. The application was not properly served. 3. As at the date of commencement of these proceedings, the defendant had not been provided with notice of the assignment of the amount claimed as owing to the plaintiff as set out in paragraph 12 of the affidavit of David Anthony James sworn 28 March 2007 herein, and the plaintiff had no standing to commence the application. 4. The defendant has tendered payment of the amount claimed by the plaintiff to be owing to it by the defendant. 5. The defendant is solvent. 6. There is a genuine dispute as to the existence of any further amounts said by the plaintiff to be owed to it by the defendant in relation to 42 Below Ltd." The relevant companies 4 Redrock was formed in 1994. Its directors are Ian Kinsella and Simon Stonier. The issued capital of the company is one B class share held by Mr Kinsella, one C class share held by Mr Stonier, and 157 ordinary shares, of which 132 are held by Mr Stonier and 25 are held by Mr Kinsella. 5 ABD was formed in June 2002. At the time of the hearing it was not trading, and had only traded to a very limited extent in 2007 (T 28). According to an ASIC Company Extract made on 1 May 2007, its directors are John James and David James, who are brothers. There is currently only one issued ordinary share, held by John James, according to ASIC's records. Liquor National Wholesale ("LNW") was also formed in June 2002. Its directors are John James and David James. Again, there is currently only one issued ordinary share, held by John James according to ASIC's records. Thus the two companies are owned and controlled by the same people. Evidence was given to White J, in an interlocutory application, to the effect that, notwithstanding ASIC's records, the sole director and beneficial owner of the share capital of both ABD and LNW is David James. At the hearing before me, David Brooks (who gave evidence on behalf of ABD) said he believed that David James is the sole director of ABD (T 25) and that David and John James each hold one share (T 26). The evidence given on behalf of ABD at the final hearing 6 The principal evidence given on behalf of ABD was the evidence of Mr Brooks. In the past he has practised as a solicitor, but currently he does not hold a practising certificate. He described himself as an employee of ABD and as a "manager" responsible for handling ABD's legal affairs, including these proceedings and some litigation between LNW and Redrock (T 27). He said he also manages the legal affairs of LNW, and is answerable to the managing director of the companies, David James. 7 Although ABD relied on affidavit and oral evidence by David James in interlocutory circumstances, it did not do so at the final hearing. There was evidence that on the day before the commencement of the hearing, Mr James departed Australia for Japan on business. There was no satisfactory explanation given for why he did not arrange his overseas commitments so as to be available to give evidence on such an important occasion for his company (see T 29). I make this observation in the context that the evidence of Mr James was of particular importance to White J, who heard and dismissed Redrock's application for summary dismissal of the proceedings, brought (inter alia) on the ground of abuse of process, while recognizing that the question of abuse of process would remain alive at the final hearing (Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966). The business relationship between Redrock and LNW 8 Immediately prior to October 2005 Redrock traded as a non-alcoholic beverage distributor, distributing soft drinks including the Splitrock and Tiro brands. At an earlier stage it also carried on a liquor wholesaling business, but it ceased to do so in about October 2004. From about 2002, LNW conducted a wholesale liquor and soft drink business under the business name "Blue Hills Liquor". 9 From about October 2005 until 23 February 2007 Redrock and LNW were parties to a business arrangement for the distribution of non-alcoholic beverages. The nature of the business arrangement is not clear from the evidence before me, although there is an account of it in the judgment of Brereton J in Liquor National Wholesale Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 392, at [3]-[10]. It appears from Brereton J's judgment (at [12]-[13]) that, although it was contemplated that a new company would be formed, that did not occur and instead the business was conducted through LNW. When the arrangement was entered into, Redrock sold its delivery trucks to LNW (T 69). Brereton J noted (at [18]) that a related entity of LNW purchased a computer from Redrock which it later had upgraded. He also described arrangements for obtaining an exclusive distribution agreement for the distribution of Splitrock and Tiro drinks during the course of these business arrangements (at [5], [18]), and described the distribution of these brands as "the mainstay of the Redrock business" (at [52]). 10 On 21 February 2007 David James forwarded to Simon Stonier and Ian Kinsella a long e-mail letter in which he catalogued various disagreements between them and complaints by him about Redrock's failure to attend to certain matters (including the incorporation of a proposed new company, Redrock Distributors Pty Ltd) and purported to terminate any agreement that existed between Redrock and LNW. By letter dated 23 February 2007 Mr Kinsella replied on behalf of "Redrock Beverages" (using the letterhead "Redrock Distributors"), purporting to accept the termination as of that date, and to accept the need to make arrangements to handle the distribution of "our portfolio of brands" elsewhere. He said that from that time onwards, LNW was no longer authorised to purchase stock on behalf of Redrock or to sell stock under the Redrock Distributors name or logo, or to use the Redrock name or logo in relation to any company name, business name or trademark. According to Brereton J (at [27]), shortly afterwards a number of employees who had been transferred to LNW from Redrock resigned from LNW, and Mr Kinsella removed the computer server which had served Redrock business from LNW's premises. 11 On about 5 March 2007 Redrock recommenced trading as a non-alcoholic beverage distributor, trading as "Redrock Beverages". It was necessary at that time for Redrock to acquire the assets and services needed to conduct business, including delivery trucks (T 70), to establish an administration structure and to obtain premises. According to the evidence of Simon Stonier (affidavit 1 May 2007), during March 2007 Redrock incurred costs associated with starting a new trading operation, including payment of a rental deposit, rentals of hired vehicles prior to entering leases, the provision of consulting services for accounting software, and the maintenance of a workforce out of proportion to the volume of goods traded. Almost all of Redrock's suppliers are supplying it on a COD basis, although Redrock is continuing to provide its clients up to 45 days trading terms. 12 LNW now conducts an alcoholic and non-alcoholic distribution business under the name Bluestar Beverages, in competition with Redrock so far as non-alcoholic drinks are concerned (T 25). 13 LNW is the plaintiff in proceedings No 1726 of 2007 against Redrock, Mr Kinsella and Mr Stonier in this court. Those proceedings have been strenuously contested. According to Brereton J (at [29]), LNW's primary case is that it is entitled absolutely to the Redrock business, including the associated goodwill and name. It contends that it acquired the sales and distribution activities of the business formerly conducted by Redrock under the name "Redrock Beverages", and that by setting up an conducting its own business from March 2007 onwards Redrock is passing off the new business as that of LNW, engaging in misleading and deceptive conduct, derogating from its grant of the business to LNW, and converting LNW's customer lists, computer server, mail, internet registry keys and website, books and records to its own use. LNW alleges that Mr Kinsella and Mr Stonier are in breach of fiduciary duties or duties of fidelity owed by them as employees of LNW, or liable as accessories to breaches of duty by Redrock. Alternatively, LNW alleges that the business formerly conducted by Redrock became the property of a joint venture between Redrock and LNW which has now been terminated for (alleged) breach by Redrock. Redrock denies that the arrangements amounted to a joint venture, and says that they were merely contractual or quasi-contractual arrangements which were breached and repudiated by LNW (Brereton J at [31]). Alternatively, if there was a joint venture, Redrock says that the joint-venture has broken down without blame on its the past and so it is entitled to the return of what it contributed to the joint-venture, including the business name, goodwill, computer, internet registry keys and website. 14 The subject of Brereton J's judgment, delivered on 19 March 2007, was an interlocutory application by LNW to restrain Redrock, Mr Kinsella and Mr Stonier from conducting any soft drink distribution business under the name Redrock, to compel them to procure for LNW the supply of Splitrock and Tiro soft drinks at cost price for distribution in New South Wales, to require them to deliver up the computer server removed from LNW's premises and LNW's customer lists, registry keys and mail, and to require them to notify Australia Post that the address for delivery of all mail for Redrock Beverages and Redrock Distributors was LNW's post office box. LNW also sought the appointment of a receiver to the Redrock business. In the usual way, his Honour considered the strength of LNW's case on a prima facie basis, and the balance of convenience. After reviewing the arguments of the parties and the evidence before him, he concluded that both parties had an arguable case so far as final relief was concerned, but that LNW's case based upon the assertion of a joint venture (as opposed to its case based upon a claim to equitable ownership of the business) was somewhat stronger than Redrock's case (at [48]). As to balance of convenience, his Honour declined to appoint a receiver, on the ground that to do so might ruin the Redrock business (at [54]). He declined to grant an interlocutory injunction to restrain Redrock from carrying on the Redrock business, but he decided to grant an injunction requiring Redrock to keep strict accounts and provide regular reports and opportunities for LNW to have inspections to satisfy itself of the veracity of those accounts (observing, at [59] that Redrock would not be permitted to oppose access on the ground of commercial confidence or sensitivity). He required delivery up to LNW of certain customer lists but not others, and did not required delivery up of the computer server. He made an order restraining LNW from carrying on any soft drink distribution business under the Redrock name. 15 LNW made an interlocutory application on 19 April 2007 for the appointment of a receiver to the assets and undertaking of Redrock, and in the alternative, orders that would clarify Brereton J's orders for inspection. That motion was resolved on 15 June 2007 by consent orders which, according to Mr Brooks, tidied up the inspection process. 16 According to Simon Stonier (affidavit of 1 November 2007), pursuant to Brereton J's orders, Redrock has been providing to LNW on a monthly basis full details of all its customers, including items and quantities sold and contact details for the customers. Mr Stonier's evidence is that Bluestar Beverages is using that information to contact Redrock's customers. Exhibited to his affidavit of 1 November 2007 is a flyer he received from one of Redrock's customers. The document is undated but it bears a logo for Bluestar Beverages and is signed by Mr Irving. It seeks to reassure "valued customers" that the business continues to operate with the same address and contact particulars but with a change of trading name so as to avoid unnecessary confusion for customers, in consequence of "two of our senior employees leaving and starting up a rival business trading under a similar name". 17 On 26 November 2007 Redrock's solicitors wrote to LNW's solicitors enclosing a notice of motion returnable on 30 November 2007 in proceedings No 1726 of 2007, seeking (inter alia) that the orders for Redrock to provide financial information for LNW be revised to limit the requirement to the provision of a monthly verified profit and loss statement and balance sheet, are also seeking an injunction to restrain LNW from conducting any business as a soft drink distributor in New South Wales in competition with Redrock. An affidavit of Mr Kinsella made on 27 November 2007, evidently in support of the notice of motion, indicates continuing concern on the part of the directors of Redrock that LNW is misusing the information supplied to it by Redrock for its own competitive advantage: for example, by obtaining supply from producers identified by Redrock in the information supplied under the court orders, for resale at a price undercutting Redrock's price. On 28 November 2007 LNW's solicitors responded indicating that they would oppose the motion but offering to resolve the matter on a basis that would limit the inspection arrangements (though not as much is sought by Redrock) and would be subject to an undertaking by Mr Brooks (who would carry out inspections) not to disclose information to other employees or directors of LNW. ABD's standing to bring winding up proceedings 18 ABD has brought the present proceedings on the basis that it is a creditor of Redrock having standing to do so under s 459P(1)(b). It claims to be a creditor in respect of two debts, one initially owed by Redrock to Doulman Industries and the other initially owed to 42 Below. It is appropriate to consider the question of standing first, before exploring such questions as insolvency, because the issue of insolvency arises only once the threshold of standing has been passed (Roy Morgan Research Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311, 320 per Santow J). Debt to Doulman Industries 19 As at 26 March 2007, Redrock was indebted to a company called Doulman Industries in the sum of $2113.66, in respect of several invoices for motor vehicle repair works for Redrock in the period from July to November 2006, carried out on instructions from Mr Kinsella. Several invoices were rendered over that period for a total amount of $2113.66. 20 On 26 March 2007 Doulman Industries entered into a deed of assignment with ABD by which it assigned the debt to ABD in consideration of the sum of $2113.66. Under the terms of the deed, Doulman Industries agreed to provide all reasonable assistance to ABD to recover the debt, including swearing an affidavit as to how the debt arose and that it was owing by Redrock at the time of assignment. 21 ABD did not make any demand to Redrock for payment of the debt. Instead, on 28 March 2007 it filed the originating process in the present proceedings, asserting its standing to do so as a creditor in reliance on the assignment to it of the Doulman Industries debt. On 28 March 2007, just before the filing of the originating process in the present proceedings, notice of the assignment was purportedly served on Redrock by Mr Brooks on behalf of ABD. Although the efficacy of service is challenged, my conclusion (expressed below) is that the notice was effectively served. 22 There is no dispute as to the amount of the Doulman Industries debt, nor as to the fact that it was owing at time of the deed of assignment. On 11 April 2007 Redrock's solicitors said that Redrock did not dispute the invoices issued by Doulman Industries and it enclosed Redrock's bank cheque in favour of ABD for $2113.66 in full and final payment of that debt. On 12 April 2007 ABD's solicitors responded by letter, rejecting the tender of payment on the basis that Redrock was "clearly insolvent". On 8 May 2007 Redrock's solicitors wrote again, saying that there was no proper basis to refuse the tender of payment and indicating Redrock's intention to pay the funds into court. On 8 July 2007 Redrock paid the amount of $2113.66 into court, where it remains. 23 In my view the requirements of s 12 of the Conveyancing Act 1919 (NSW) for the valid legal assignment of a debt were satisfied when written notice of the assignment was served on 28 March. Therefore at the time of filing of the originating process, ABD was creditor of Redrock in the sum of $2113.66. That being so, the issue is whether Redrock's status has been affected by either the tender of payment or payment into court, both of which occurred after the commencement of the proceedings. 24 As long as the applicant for winding up is a creditor at the time of the filing of the application, s 459P(1) gives the court jurisdiction to hear and determine the application, even if the applicant has ceased to be a creditor after the filing but before the hearing (Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) (1967) 116 CLR 177, at 194-5 per Menzies J). The court may permit another creditor to be substituted as applicant (Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78; DMK Building Materials Pty Ltd v CB Baker Timbers Pty Ltd (1985) 2 NSWLR 711). But if the original applicant wishes to proceed, though no longer a creditor, the court may (Motor Terms at 195 per Menzies J), and probably will (Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 54 ACSR 228 at 232 [15] per Barrett J) refuse to make a winding up order in the exercise of its discretion. 25 Similarly, if the company tenders payment of the original applicant's debt after filing but before the hearing, and the tender is refused, those facts may be relevant to the exercise of the court's discretion to decline to make a winding up order, although there have been cases, such as Deputy Commissioner of Taxation v Barroleg Pty Ltd (1997) 25 ACSR 167, where the court has made a winding up order in such circumstances. Tender and refusal of payment, even refusal without justification, does not eliminate the debt, even though the availability of bank cheques for payment may be the equivalent in practical terms of payment (Deputy Commissioner of Taxation v Visidet Pty Ltd [2005] FCA 830, at [its 3] per Gyles J, citing Australian Mid-Eastern Club Ltd v Yassim (1989) 1 ACSR 399 at 403 per Meagher JA). 26 Thus it is appropriate in the present case to take the tender and refusal of payment into account as discretionary factors. The exercise of the court's discretion is considered below. 27 White J addressed the effect of payment into court in his judgment on the interlocutory application ([2007] NSWSC 966 at [27]), in a passage with which I respectfully agree: "Counsel for ABD submitted that tender, accompanied by payment into court, may be a defence to an action in debt, but it is only a defence in the sense that, by paying the money into court and proving the tender and the defendant's continued willingness to pay the debt since tender, the defendant may bar any claim for interest or damages after the tender, and the creditor will be liable to pay the debtor its costs of the action on the ground that the action should not have been brought. Tender itself does not discharge the debt (Chitty on Contracts, General Principles, 27th ed (1994) Sweet & Maxwell, London at [21-070]). This is an accurate statement of the effect of the defence of tender to an action in debt ( Dixon v Clark (1848) 5 CB 365 at 377; 136 ER 919 at 923-4; Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 568)." 28 In Nationwide Produce Holdings Pty Ltd (in liq) v Franklins Ltd [2001] NSWSC 1120, Barrett J reached a somewhat different view, relying on the observations of Meagher JA in Australian Mid-Eastern Club v Yassim, and those of Santow J in Alcatel Australia Ltd v PRB Holdings Pty Ltd (1998) 27 ACSR 708. Noting the observation of Meagher JA that tender coupled with continuing willingness to pay and actual payment into court is an "answer" to a claim for debt, Barrett J said that if this is so, the plaintiff's creditor status should probably regard be regarded as gone (at [8]). I am not sure that this follows; as I read Meagher JA's judgment, the position is as described by White J, namely that the tender and payment into court constitutes a defence to an action in debt protecting the debtor from a claim to interest or damages but it does not eliminate the debt. If the debt is not eliminated, the creditor's status as a creditor is preserved notwithstanding the payment into court. 29 Consequently ABD, having become a creditor by legal assignment of the Doulman Industries debt on 28 March, has remained a creditor in respect of that debt ever since that time, notwithstanding tender of payment and payment into court. However the fact of payment into court, like the tender and refusal of tender of payment, are matters relevant to the exercise of the court's discretion. Debt to 42 Below 30 My conclusion about the Doulman Industries debt means that ABD has standing as a creditor to bring the proceedings. ABD also relied on its equitable ownership of another debt, said to be owed by Redrock to a New Zealand company called 42 Below Ltd. While it is strictly unnecessary to deal with this alternative basis for standing, it is appropriate to do so, in circumstances where there was some considerable evidence about the 42 Below debt and the matter was fully argued. 31 On 26 June 2007 a New Zealand company called 42 Below Ltd entered into a deed of assignment with ABD with respect to a debt of $9,957.12 said to be owed by Redrock to 42 Below. According to the deed of assignment, the consideration for the assignment was payment of $9,957.12 by two equal instalments, the first to be paid on entry into the deed and the second within one month thereafter. As with the deed of assignment by Doulman Industries, 42 Below agreed to provide all reasonable assistance to ABD to recover the debt, including swearing an affidavit as to how the debt arose and that it was owing by Redrock at the time of the assignment. But there is no such affidavit in evidence. 32 It appears that no notice of the assignment was ever given by ABD to Redrock, and that the first notification of the assignment to Redrock was on about 26 November 2007, when Mr Brooks' affidavit of 20 November annexing a copy of the deed of assignment was forwarded to Redrock's solicitors (T 43). Mr Brooks said he knew that if he had told Redrock about the assignment, Redrock would have been likely to tender a bank cheque for the amount of the alleged debt, and he said if that had occurred, ABD would have refused payment (T 44). 33 The evidence includes a series of invoices issued by 42 Below to Redrock in June and August 2004, apparently for the supply of liquor products, at a time when Redrock was engaged in liquor wholesaling. There are six invoices for a total amount of $20,842.61. There is also a schedule, prepared by 42 Below but undated, which lists these invoice amounts under the heading "Prior to Transfer to CUB", and refers to a credit of $2885.49 "During CUB Time", leaving a balance of $17,957.12. The schedule also lists repayments made, normally of $500 but without any firm regularity, during the period from 21 October 2005 to 30 May 2006, under the heading "Post-transfer Back to 42 Below", leading to a balance owed of $9,957.12. 34 The evidence also includes some quite amiable e-mail correspondence between Mr Kinsella and a representative of 42 Below, in which Mr Kinsella responded to queries about payment by proposing, in his e-mail of 17 October 2005, that the outstanding balance, then $17,957.12, would be paid at the rate of $500 per week until cleared. 42 Below agreed to this arrangement, by e-mail of the same date, and stressed the importance of adhering to it. It appears from the schedule to which I have referred that this arrangement was not adhered to strictly and the debt had been reduced but not cleared by May 2006. 35 The evidence of Mr Stonier (affidavit of 5 December 2007) indicates that the headings in 42 Below's schedule refer to a transaction, approximately early in 2005, by which 42 Below was acquired by Carlton and United Breweries Ltd ("CUB"). Mr Stonier said that at the time of that acquisition, Redrock had an outstanding balance to 42 Below of about $17,000. However, he said that by about mid-2005 Redrock had returned a substantial amount of undersold stock of 42 Below products to CUB, and had paid out its full liability to CUB for non-alcoholic beverages. So according to Mr Stonier, by mid 2005 there was nothing owing to 42 Below. In about October 2005 42 Below was (to use Mr Stonier's word) "reacquired" from CUB. Then 42 Below demanded payment of the $17,000. Mr Stonier sought legal advice on Redrock's position from Mr Brooks, who by e-mail dated 16 August 2006 pointed out that there would be a strong argument in court that Redrock's periodic payments amounted to an admission of the debt. 36 Mr Stonier gave evidence of a conversation he had with Andrew Steele of 42 Below on about 14 September 2006, according to which Mr Steele explained that the business had been sold to CUB on the basis that the Redrock debt had no value, but when the business was acquired back from CUB the debt was still on the books and so the new owners had required payment. 37 Although this evidence is very vague, it seems to me more likely than not that Redrock's clearing of its account with CUB did not involve discharge of the debt to 42 Below, which remained "on the books" of 42 Below, and therefore a debt capable of being enforced by 42 Below in the hands of its new owners. Redrock's assertion that no money is owing is weakened by the fact that when 42 Below demanded payment of the $17,000, Redrock reached an arrangement for payment by instalments, and in fact paid approximately $9,000 under that arrangement, before ceasing to make further payments. Mr Stonier explained that "Redrock did not have the resources to contest the debt legally", but it seems to me improbable that the company, with obvious cash flow problems even in 2005-6, would have agreed to an instalment arrangement involving payment of $9,000 if there were good grounds for denying liability to pay the debt. At least one would have expected to see some correspondence setting out grounds for disputing liability. 38 Mr Stonier also gave evidence that in his conversation with Mr Steele on 14 September 2006, he said that Redrock had paid $.50 in the dollar, an arrangement Redrock had reached with a number of other suppliers for products that Redrock no longer distributed. He said he thought 42 Below would be happy with this arrangement. He claimed that Mr Steele said: "I will get back to you if we are going to pursue it". But he received no further contact from 42 Below. In cross-examination, Mr Stonier conceded (T 137) that Mr Steele might also have said "Let's leave it there for the moment". 39 At its highest, this is evidence of an offer of compromise by Redrock of a debt for past consideration, namely the earlier instalment payments. Apart from the absence of valuable consideration, there is some uncertainty about whether the offer was accepted, because (even Mr Stonier's version of the conversation) Mr Steele seems to have been talking about enforcement rather than compromise of liability. 40 Mr Brooks gave evidence of some conversations he had with Mr Steele in April and June 2007, during which Mr Steele claimed that 42 Below was a creditor of Redrock. The documentary evidence that I have summarised was, according to Brooks, supplied to him by Mr Steele after Mr Brooks proposed an assignment of 42 Below's debt. There is no direct evidence from 42 Below as to the current level of debt at the date of assignment, but the deed assignment itself contains a recital with respect to the amount of the debt. 41 In all the circumstances, my conclusion is that the remaining balance of the account, $9,957.12, remained a debt due and payable by Redrock to 42 Below at the time of the deed of assignment. When all the evidence is considered, I do not believe that there is any foundation for a genuine dispute about the existence or amount of the debt. 42 Since the assignment to ABD was for valuable consideration, the consideration being the promise of payment by two instalments, ABD became an equitable assignee of the debt upon the execution of the deed of assignment. An equitable assignee of a debt is a creditor within the meaning of s 459P(1)(b), entitled to apply for a winding up order (Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966 at [18] per White J, citing Re Steel Wing Co Ltd [1921] 1 Ch 349; Re Allebart Investments Pty Ltd (1969) 92 WN (NSW) 726; and Rohan Trading Co Pty Ltd v Glengor Pastoral Co Pty Ltd [2003] NSWSC 1265 at [14]). 43 Here, the equitable assignment occurred after the commencement of the proceedings and after tender and refusal of payment of the Doulman Industries debt. If ABD had accepted payment of the Doulman Industries debt, there would have been an issue as to whether ABD could effectively re-establish its status as a creditor by taking a subsequent assignment of the 42 Below debt, so as to avoid the adverse exercise of the court's discretion at the hearing. The case law on this question is summarised by White J in Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966, at [21]-[26] (noting, especially, De Montfort v Southern Cross Exploration NL (1987) 17 NSWLR 468). The issue does not in fact arise because the tender of payment was refused and ABD remained a creditor in respect of the Doulman Industries debt. It continued to be a creditor notwithstanding payment of the amount of the debt into court. Consequently it was a creditor in respect of the Doulman Industries debt at the hearing. But in my view if ABD had ceased to be a creditor in respect of the Doulman Industries debt, the balance of authority indicates that it could have relied on the assignment of the 42 Below debt to give it the status of creditor at the hearing (see Bidald Consulting at 232 [15] per Barrett J), although the circumstances of the acquisition of the 42 Below debt, by equitable assignment without notice rather than (say) by trading, would be relevant to the exercise of court's discretion. Service of the notice of assignment and originating process 44 According to an ASIC Historical Extract dated 1 May 2007, the registered office of Redrock in the period from 20 October 1999 to 17 April 2007, and therefore its registered office at 28 March 2007, was "Plus Consulting (Sydney) Pty Ltd 'BT Tower' Unit 703 Level 7 1 Market St Sydney NSW 2000". According to the Historical Extract, the registered office was changed on 18 April 2007 to "Plus Advisory (Sydney) Suite 306 1-3 Burbank Place Baulkham Hills NSW 2153". Other evidence indicates that Plus Advisory are Redrock's accountants. Mr Brooks gave evidence that he obtained an ASIC Company Extract on 23 March 2007, which is in evidence. It showed the former address as the registered office of Redrock. Both ASIC Extracts show Redrock's principal place of business as Unit 7, 25 Ossary St, Mascot NSW 2020. 45 Two notices of assignment of debt, under s 12 of the Conveyancing Act 1919 (NSW), were prepared in the form of letters dated 27 March 2007, addressed in each case to the directors of Redrock at Suite 701, 1 Market St. Note that Suite 701 is not the registered office of Redrock according to the Historical Extract, but the letters were endorsed to the effect that they were to be hand-delivered. One letter was from ABD and the other was from Doulman Industries, and in each case the letter said that on 26 March Doulman Industries had assigned to ABD all its right title and interest in the debt of $2113.66 owed by Redrock to Doulman Industries. 46 ABD's evidence as to service of the notices of assignment and the originating process was given by Mr Brooks, supported and confirmed in an affidavit by Paul Irving, who described himself as a "general manager" and co-employee with Mr Brooks. The evidence was not challenged and I accept it. 47 Mr Brooks said that he and Mr Irving went together to Level 7, 1 Market St on 28 March 2007. They observed that there appeared to be four separate office suites, of which three were occupied and one was vacant. None of the offices appeared to be occupied by either Redrock or Plus Consulting. Two of the offices had small plaques above their doors, one saying "Tenant 1" and the other "Tenant 4, 5". There was no office marked Unit 703 or Suite 703 or even 3. Mr Brooks said he went into the office of Homeloans Ltd, "Tenant 1", which was next to the vacant office (the elevators being on the other side of the Homeloans office). He asked the receptionist whether she knew if Plus Consulting had been next door and she said she thought they had been. His evidence made it clear that she was referring to the vacant suite next door (cf White J's observations, [2007] NSWSC 966 at [17]). Mr Brooks slid a copy of each of the two notices of assignment half way under the door of the vacant office. 48 Mr Brooks said he then searched the white pages in the internet telephone directory and found an entry for "Plus Advisory" showing the address, Unit 1505, 99 Bathurst St, Sydney. He said he was familiar with this address because documents in proceedings No 1726/07 between LNW and Redrock had been served on Redrock at that address. He and Mr Irving went to the Bathurst Street address, observing that the office of Plus Advisory, which they entered, was one of several newly refurbished office suites. Mr Brooks spoke to a woman who said her name was "Andrea", telling her he had some letters for Redrock and asking whether he could serve them there, and she replied "Yes". He then handed her a copy of each of the two notices of assignment. 49 Mr Brooks was aware that the business premises of Redrock were at Mascot. He said he did not go there as he lives in Newcastle and he did not have time to travel to Mascot (which is in the opposite direction). Further, he said he believed that service at the business premises of Plus Advisory would ensure that the documents would immediately come to the attention of Redrock, as he understood Plus Advisory to be Redrock's accountants. 50 On the same day Mr Brooks and Mr Irving went to the Supreme Court registry and initiated the present proceedings by filing the originating process and an interlocutory process and a supporting affidavit by David James. They then returned to Level 7, 1 Market St and Mr Brooks slid a copy of each of the originating process, interlocutory process and supporting affidavit partly under the door of the vacant office, over the top of the two notices, which were still there. They then went back to the Bathurst Street address and gave copies of those documents to Andrea, saying that they were additional documents to serve on Redrock. 51 Mr Stonier gave evidence (affidavit of 1 November 2007) that the directors of Redrock did not become aware of the assignment of the Doulman Industries debt, or the making of the winding up application, until 3 April 2007, when they were provided with a copy of ABD's letter of that date to Westpac Banking Corporation, by the bank. Mr Stonier said he subsequently became aware that ABD had also sent a copy of the originating process and affidavit to Bertshell on 3 April. 52 That evidence seems to be inconsistent with the records of Plus Advisory and Australia Post. It appears that employees of Plus Advisory dealt with the documents that had been handed to Andrea, because work-in-progress records for Redrock produced by Plus Advisory on subpoena contain entries on 30 March 2007 to the effect that "court orders" that had been served "to Redrock c/-Plus" had been scanned, and "express posted out all to Battery St SS". That appears to be a reference to Mr Stonier's residential address in Clovelly. There is also an entry on the same day, evidently made by Andrea, for "Simon Stonier - Affidavit of David James & notices of assignment of debt BN 1624586". It appears that this is Australia Post's reference number for an express post article. In response to a subpoena to produce documents relating to delivery of an express post article bearing that number, Australia Post has produced records indicating that the article was delivered on 31 March 2007. In my opinion the court should accept this documentary evidence in preference to Mr Stonier's evidence based on his recollection. My conclusion is that, after Plus Advisory received the notices of assignment, originating process and affidavit at their Bathurst Street address on 28 March, they dispatched them by express post to Simon Stonier's residential address on 30 March, and the documents were delivered at that address on 31 March. Although Plus Advisory's notes do not expressly mention the originating process, it seems to me plausible to infer that this document was included in the express post article with all the others that were handed to Andrea. I am unable to say whether the documents were received and seen by Mr Stonier at his residence. 53 My view is that the steps taken by Mr Brooks and Mr Irving constituted effective service on Redrock of both the notices of assignment and the originating process and supporting affidavits. Here I differ from White J, but I do so in circumstances where the evidence before me was apparently more substantial and complete than the evidence placed before his Honour on the interlocutory application. White J ([2007] NSWSC 966 at [17]) was inclined to the view that notice of assignment of the Doulman Industries debt had not been given in accordance with s 12 of the Conveyancing Act at the time when the winding up proceedings were commenced. He said notice had not been given in any of the ways contemplated by s 170 of the Conveyancing Act, and the evidence did not establish that the notice of assignment was left at the company's registered office in accordance with s 109X(1)(a) of the Corporations Act. He said that the evidence was insufficient to establish that the vacant office at which the document was left had been the registered office of Redrock. 54 The evidence now before me supports a firm inference that the documents were left at Suite 703, which was the registered office of Redrock at that time. There is evidence in ASIC's records that Suite 703 was an address of Plus Advisory. Mr Kinsella and Mr Stonier gave oral evidence that Plus Advisory provided secretarial services to Redrock including registered office services. They also gave evidence that Plus Advisory left its Market Street address some time in the first half of 2007. There were only four offices on Level 7, three of which were occupied. The receptionist for Tenant 1, Homeloans, told Mr Brooks she thought Plus Consulting had been next door, the vacant office being next to the Homeloans office. It is appropriate, putting all this evidence together, to infer that Suite 703 was the vacant office next to Homeloans, when Mr Brooks left the documents. 55 Section 109X(1) of the Corporations Act says, so far as relevant: "109X(1) For the purposes of any law, a document may be served on a company by: (a) leaving it at … the company's registered office; …". Since this provision applies, as Commonwealth law, for the purposes of any law, it is applicable to the service on a company of a notice of assignment given under s 12 of the Conveyancing Act 1919 (NSW), and to the service of an originating process and supporting affidavits in proceedings for winding up brought under the Corporations Act itself. A document may be served under s 109X(1)(a) simply by leaving it at the company's registered office, at any rate where there is no evidence of non-receipt. Here I have found, on the evidence, that the documents were left at the office that was, at the time, the company's registered office as recorded with ASIC. ASIC's subsequent records show that the registered office was changed, but only after the date of service. I have not accepted Mr Stonier's evidence that he did not receive the documents. In my view, in the factual circumstances, service of both the notices of assignment and the originating process and affidavits was effective on 28 March 2007 under s 109X(1)(a). Redrock's financial position 56 Working out the true financial position of Redrock presents a challenge to the court, because Redrock has chosen to rely on several sets of financial statements which overlap with one another in terms of time but are not entirely consistent in terms of quantum. Moreover, none of the sets of financial statements relate to the position of Redrock at the time of the hearing. The court has no alternative but to do its best to make inferences from all of the available material, notwithstanding the inconsistencies. The April financial statements 57 Simon Stonier annexed to his affidavit of 1 May 2007 a profit and loss statement for April 2007 dated 30 April 2007, a balance sheet as of April 2007 dated 30 April 2007, a statement of cash flow for April 2007 dated 30 April 2007 and an aged receivables summary dated 30 April 2007. Mr Stonier said in his affidavit that these documents were as at 29 April 2007, but that appears to be wrong having regard to the dates on the documents themselves. There is also a document in spreadsheet form described by Mr Stonier as cash flow projection to February 2008. I shall refer to these documents as "the April financial statements". They describe the financial position of the company at the end of its first full calendar month after its resumption of trading on 5 March 2007. 58 The profit and loss statement, on its face for the month of April 2007, shows a net profit of $18,429.26. That is different by a few dollars from the figure in the cash flow statement, suggesting either that the cash flow statement was prepared earlier and not revised, or that the accounting is sloppy. 59 According to the balance sheet, there were trade receivables $198,098.38, "historical trade debtors" of $5,905.37 and inventory of $86,541.08. It appears that "historical" trade debtors are debtors whose obligations arose while Redrock was in a business arrangement with LNW prior to 5 March 2007, whereas the bulk of trade debtors arose out of trading after 5 March 2007. Fixed assets comprised computer equipment and motor vehicles recorded at cost in the sum of $23,782. Current liabilities included trade payables $19,204.55 and "historical trade creditors" of $29,512.22 (again, "historical" relates to credit obligations incurred during the business relationship with LNW). These were offset by an entry for "LNW Account Balance" in favour of Redrock of $51,627. The total tax liability was shown at $180,343.03, of which $171,703.09 was described as "ATO Running Balance". "Long term liabilities" totalling $516,182.15 were recorded, comprising the following: IA Kinsella $20,000 JM Kinsella $25,000 SB Stonier $150,000 KB Stonier $40,000 G Maidens $150,000 S Wright $131,182.15 60 The balance sheet records as a cash asset "Bank Westpac [negative] $294,894.25". That is the only balance sheet entry for Westpac, but there is an entry for "Clearing Accounts" of negative $73,150.34. The Westpac Business One Loan statement from 27 to 30 April 2007 shows a closing overdraft balance of $389,599.42. 61 The cash flow statement for April shows a positive net cash flow from operating activities of $8,563.41. That figure includes cash injections by loans during April from Ian Kinsella ($20,000), Simon Stonier ($5,000) and Kenneth Stonier ($25,000). Cash at the beginning of the period is given at negative $376,790.39, and cash at the end of the period is stated at negative $368,226.98. 62 The document described as a cash flow projection is also a projection of gross profits on a monthly basis from March 2007 up to and including February 2008. Whereas gross profit for March 2007, evidently an actual figure, is given at $35,051, the projections trend upwards to reach gross profit of $96,000 in December 2007, falling back a little to $84,000 in February 2008. The net figures range from negative $9,635 in March 2007 to a high figure of positive $33,110 in December 2007. 63 The aged debtors summary, expressed to be as at 30 April 2007, shows that of the $198,098.38 of trade receivables shown on the balance sheet, 79% were 0-30 days and 21% were 31-60 days. The May financial statements 64 Annexed to Mr Stonier's affidavit made on 21 May 2007 were the following further financial statements: a balance sheet as of April 2007, a profit and loss statement for each of March and April 2007 and the total of those two months, an aged payables summary, a trial balance as at April 2007, an account transactions accrual report for the period from 1 July 2006 to 30 April 2007, a general ledger summary for the same period, and an aged receivables summary as at 30 April 2007. Each of these documents is dated 18 May 2007. I shall refer to them as "the May financial statements". The April figures in the May financial statements are significantly different from those in the April financial statements, but Mr Stonier does not offer an explanation for the differences. There is no cash flow statement or cash flow/gross profit projection in the May financial statements, notwithstanding the significance of cash flow to the question of solvency. 65 The profit and loss statement shows a net profit for April of $5,457.87, about $13,000 less than the April net profit shown in the April financial statements. The difference is principally a combination of higher indirect expenses in every category (approximately $7,000 higher in total) and the introduction of interest charges of nearly $6,000. 66 The balance sheet in the May financial statements records the overdraft to Westpac at $395,363.72, more than $100,000 higher than in the April financial statements, but there is no substantial entry for "clearing accounts". The figure in the May financial statements is consistent with the Westpac bank statements that are in evidence. Trade receivables are about the same, while stock on hand is higher in the May balance sheet by about $20,000. Related party loans have been adjusted to increase Mr Kinsella's loan by $20,000 and Simon Stonier's loan by $30,000. Other figures are in line with the earlier version of the balance sheet. The November profit and loss statement 67 Exhibited to Mr Stonier's affidavit of 1 November 2007 is some information updating the May financial statements. This takes the form of a profit and loss statement covering the period from March to September 2007, giving figures for each of those months and totals for the period from March to September. I shall refer to it as "the November profit and loss statement", as a convenient means of designating it, without intending to suggest that the figures are for the month of November. It is instructive to compare the figures for the month of April (the last month of "actual" figures) in the April and May profit and loss statements with the figures for that month (again, actual rather than estimated figures) in the November profit and loss statement. The November figures for the month of April give net profit of $2423.94, reduced by approximately $16,000 from the net profit shown in the April profit and loss statement, and approximately $3,000 from the net profit showed in the May profit and loss statement. A comparison of the break down of the results in the April and November figures shows that there were only small differences between the operating profit figures but there was a substantial difference in indirect expenses, up from $38,889 and the April figures to $49,008.09 in November figures ($46,096.69 in the May figures), comprising relatively small increases of expenses in the sales, distribution and administration departments and the introduction, in the November figures, of expenses with respect to financing agreements totalling $6,394. 68 The forecast net profit figures for the months from May to September 2007 given in the April financial statements may be compared with the actual figures in the November financial statements by means of the following table: Table 1: Net Profit ($) Month May June July August September April figures 2,233 2,232 2231 3,114 9,113 November (16,986) (27,593) (23,428) (21,078) (7,561) figures 69 In his affidavit of 1 November 2007 Mr Stonier endeavoured to explain these large discrepancies between the forecasts of actual figures over the period from March to September 2007 by referring to the following matters: · actual sales were slightly less than forecast sales because of competition from Bluestar Beverages; · start-up expenses were greater than anticipated: warehouse equipment and repair costs were about $6,600 greater than forecast, distribution service and repair costs were about $5,600 greater than forecast, and IT consultancy costs were about $4,400 greater than forecast); · wages were greater than anticipated: sales department wages were up by about $17,500 (employment of an additional sales representative), distribution wages were up by about $6,300 (the hiring of a casual employee), and administration wages were up by about $12,500 (again, the hiring of a casual employee). 70 It will be seen that these matters account for a shortfall of about $52,900 over the period from March to September 2007, whereas the total discrepancy for the months of May to September (shown in the table above) is over $115,000. Consequently the variances noted by Mr Stonier fall well short of explaining the difference between the April figures and the November figures for monthly net profit in the period from May to September. This is a significant conclusion because it tends to undermine Mr Stonier's evidence, said to be based on his experience since 2004 in the soft drink distribution business, that the forecasts in the April financial statements for the months from November 2007 to February 2008 are realistic. I cannot accept that those forecasts are realistic in view of the fact that the forecasts for every other month from May onwards have proved to be very substantially wrong. 71 In cross-examination Mr Kinsella accepted that in the period from March to September 2007 all income derived by Redrock, excluding income which could be said to have been derived from loans from unsecured creditors, was less than all of the expenses incurred by Redrock, and that the only reason Redrock was able to pay creditors in the period from March to September 2007 was because of the unsecured borrowings obtained from him, his sister, Simon Stonier and Kenneth Stonier (T 107-8; see also Mr Stonier at T 133). Mr Russell agreed in cross-examination that since February 2007 Redrock has experienced negative cash flow, but for its unsecured borrowings from the related parties, and would not be able to pay its creditors but for those borrowings (T 141). The September financial statements 72 Also exhibited to Mr Stonier's affidavit of 1 November 2007 are some September financials, including a profit and loss statement for the month of September, a balance sheet as at the end of September and a cash flow statement for September. I shall call these "the September financial statements". 73 The profit and loss statement shows a net profit of negative $7,561.54, which is in accordance with the November financial statements to which I have referred. 74 The September balance sheet records the Westpac overdraft as having reached $423,065.32. Trade receivables are shown at $231,600.87, and stock on hand is given at $97,062.03. Fixed assets, presumably at cost, are of negligible value because of accumulated depreciation. Current liabilities include " trade payables" of $15,917.31 and "historical trade creditors" of $7,000. The "LNW Account Balance" still appears as a current liability at negative $51,627. The ATO running balance is shown at $116,431.63, and only a small net amount of GST has been collected but not paid. Long-term liabilities comprised the loans by Simon Stonier, Kenneth Stonier, Ian Kinsella, JM Kinsella and G Maidens, shown at $340,000, $70,000, $60,000, $5,000 and $150,000 respectively. The loan by S Wright is shown at $117,474.77. If the figures are taken at face value, Simon Stonier put an additional $190,000 into the company between April and September, Ian Kinsella injected a further $20,000 (as well as taking over $20,000 of the debt owed to his sister: see T 106) and Kenneth Stonier injected a further $30,000. 75 Mr Stonier gave evidence explaining that "historical creditors" were written back to $7,000, except for one creditor, namely Belaroma, on the basis that the creditor claims were subject to disputes and that Redrock did not regard the amounts as payable. 76 The cash flow statement shows net income of negative $7,561.54 and net cash flow is from operating activities as negative $47,757.39. This is shown to decrease cash during the month of September from an initial negative figure of $339 $949.11 to a negative cash figure at the end of September of $387,706.50. The monthly financial statements, February-August 2007 77 In September 2007 Mr Lewis, the accounting expert engaged by ABD, was provided with a set of financial statements, comprising monthly profit and loss, cash flow and balance sheet statements for February-August 2007, for the purpose of preparing a supplementary report. The profit and loss statements give net profit figures that are different from the figures in the April cash flow projections and in the November financial statements. The differences are shown in the following table, as regards April -August: Table 2: Net Profit ($) Month April May June July August April figures 18,398 2,233 2,232 2,231 3,114 November 2,423 (16,986) (27,593) (23,428) (21,078) figures February- August 8,013 (12,237) (34,094) (17,325) (18,289) figures 78 The April figures are forecasts (except for the month of April itself) and so one would expect a variance between them and the actual figures produced later. But there is no evidence to explain the differences between the November figures and the financial statements provided to Mr Lewis, both purporting to give actual figures (though the June financial statements provided to Mr Lewis are labelled "draft"). 79 The end of month balance sheets show a deficiency growing from $780,564.07 in April to $877,507.40 in August. The cash flow statements showed negative cash flow for the months of February, March, April and July 2007, and positive cash flow in May, June and August; cash at the end of April is given as negative $393,911 47, while the figure at the end of August is $318,562.60. Updated cash flow projections 80 For the purpose of preparing his second report, Mr Russell (the accounting expert retained by Redrock) was shown some updated cash flow projections for the 5 months to the end of February 2008, which he annexed to his report. He said they indicated that Redrock would be trading at a profit and with positive cash flow during that period, reflecting the increased level of trading during the summer months in accordance with the directors' expectations. 81 The document annexed to his report is a spreadsheet divided into forecasts and actuals. The forecasts run from March to February but the actuals from March to September only. I have compared the forecast and actual figures in the document with other financial information in Table 3: Table 3: Forecast and Actual Net Profit ($) Month April May June July August April figures (forecasts, 18,398 2,233 2,232 2,231 3,114 except for April) November 2,423 (16,986) (27,593) (23,428) (21,078) figures (actual) February- 8,013 (12,237) (34,094) (17,325) (18,289) August figures (actual) Updated forecasts 525 525 (21,100) 3,838 (6,788) Actual results in forecasts 2,898 (16,935) (36,303) (17,937) (19,846) document 82 This comparison shows the wide variances between forecasts and actual results, and also between various versions of actual results. It should be noted that the documents supplied to Mr Russell gave the following additional projections of monthly net profit: September $7,525; October $19,525; November $17,213; December $31,525; January $5,213; February $19,525. This shows a forecast surge in net profit during the summer months, except for January. Experts' reports Mr Russell's May report 83 Redrock relied on a report by Paul Russell, a partner of the firm SimsPartners. In his principal report dated 29 May 2007, Mr Russell expressed the opinion that Redrock was solvent as at 30 April 2007. 84 There is a threshold difficulty with this report, as with all the other expert reports to which I shall refer. Although there was no objection to admissibility on this ground, it is evident from the text of the report that Mr Russell had regard to some material that is not in evidence, including an affidavit of Simon Stonier of 28 May 2007 and various kinds of financial information. Some of the financial reports upon which he relied are annexed to his report, though not otherwise in evidence. But the balance sheet as at 30 April 2007 and the profit and loss statement for April 2007, upon which he said he relied, are not annexed to the report, and so court is left to make such inferences as it can from the body of the report, in an attempt to identify the version of these documents used by Mr Russell for the purposes of his report. 85 On balance, I am prepared to infer that the profit and loss statement and balance sheet upon which Mr Russell relied were the documents I have referred to as "the May financial statements", printed out on 18 May 2007. I take into account that in his report, Mr Russell referred to a profit and loss account for the period to 30 April 2007 which indicated that the company traded at a small loss of $4342 in the six-week period to that date. This appears to be the profit and loss statement printed on 18 May 2007. Further, the figures he gave for related party loans are the updated figures in the May financial statements rather than the earlier figures in the April financial statements. In reaching this conclusion, I assume that there is not a third version of the financial statements for the month of April, which Mr Russell might have used. 86 Mr Russell proceeded by assessing Redrock's working capital position (working capital being the difference between current assets and current liabilities). Of course, working capital is only an indication of whether the company is able to meet the liabilities arising out of its day to day activities from the income produced by those activities, and therefore does not directly determine the company's solvency. But I accept that an enquiry into working capital may be of some utility in the case of a trading company such as Redrock. 87 Mr Russell found that the company's total current assets amounted to $379,452, the principal components of which were trade debtors ($197,445.17) and stock on hand ($116,108.29). This figure differs from the total current assets stated in the May balance sheet (negative $67,538.49), principally because the balance sheet includes the Westpac debt of $395,363.72 as a negative cash asset, and treats the LNW account balance of $51,627 as a negative liability. Mr Russell removed the Westpac debt from his working capital calculations entirely (for reasons considered below), and transferred the LNW account balance from current liabilities to current assets, on the basis that (according to Redrock) LNW owed it that amount. Mr Russell found that total current liabilities were $216,006, leading to a working capital surplus of $163,446. 88 Mr Russell commented on individual items in his calculation of working capital. The effect of his comments seems to be to reduce current assets by the amount of deposits with suppliers, $6,979, on the ground that this amount would not be readily recoverable. He observed in respect of several current liabilities that they were not due for payment on 30 April 2007, but he did not suggest that they should be treated as non-current. 89 His treatment of certain particular matters should be noted. He treated as a current liability only $130,000 out of the total ATO running balance account of $166,399, on the basis that the remaining $36,399 was due outside the 12 months period that is used for distinguishing between current and non-current liabilities. 90 He treated as a current liability only $27,600 out of the total liability to Mr Wright of $131,182, on the basis that the debt to Mr Wright was being repaid at the rate of $2,300 per month and consequently only 12 monthly instalments would be due within the 12 month period. 91 As to the Westpac debt, he noted that the overdraft balance as at 30 April 2007 was in excess of the approved limit by an amount of $15,363 and that the overdraft was returned to terms by 8 May 2007. His calculation of working capital did not take into account any part of the Westpac debt, not even the amount in excess of the approved limit, nor any interest obligation. Mr Russell inferred from the fact that the bank allowed the overdraft to exceed its limit that "the bank clearly has sufficient levels of comfort to allow this to occur". 92 As to the related party loans, Mr Russell observed that because of "forbearance agreements" the loans were not due and payable as at 30 April 2007. Although he did not expressly say so, he evidently did not disagree with the treatment of these loans in the balance sheet as non-current liabilities. 93 Mr Russell interpreted the profit and loss account for March and April 2007 as showing that after a six-week period of trading, Redrock's business was trading at a break-even position or better. He did this because, although the profit and loss statement indicated a small loss of $4,342 for the period, some expenditure on furniture and fitout had been expensed rather than capitalised and depreciated over the useful life of the assets involved, and some of the other expenditure incurred in March and April was commencement and set-up expenditure that would be of a non-recurring nature. 94 Mr Russell relied on cash flow projections to February 2008 (identical with those annexed to Mr Stonier's affidavit of 1 May 2007) as indicating that the business was forecast to trade profitably from May 2007 onwards and would reach a cash flow positive position (after allowing for creditors' repayment loan repayments) from September 2007 onwards. He also noted Simon Stonier's undertaking to fund any cash flow shortfall and that he had a facility of $100,000 available to him for that purpose. 95 He concluded that, on the basis of the information he had reviewed (including current and projected financial performance and the provision of further financial support by Simon Stonier, if required), Redrock was solvent as at 30 April 2007. Mr Lewis' June report 96 ABD relied on a report by Alan Lewis, managing director of Alpha Business Consulting Pty Ltd and formerly a partner of Ferrier Hodgson, dated 14 June 2007, as to the financial position of Redrock at 30 April 2007. As with the May report by Mr Russell, the evidence does not clearly indicate what material was placed before Mr Lewis. His report annexes a letter of instructions from ABD's solicitors, which purports to enclose copies of various affidavits and Mr Russell's May report. In the text of his report he says that these affidavits and Mr Russell's report are attached, but the report as tendered does not contain those attachments. Some of the listed affidavits are not before the court, and it is not clear whether the copy of Mr Russell's report supplied to Mr Lewis included the annexures to that report and any version of the balance sheet as at 30 April and the profit and loss account for the month of April 2007. 97 Once again, the court must make such inferences as the materials justify. Mr Lewis expressly placed emphasis on the April balance sheet when referring to Redrock's overall deficiency. It is not clear whether he noticed that this balance sheet was different from the May balance sheet (that is, the balance sheet as at 30 April 2007, printed out on 18 May 2007). Later he referred to the figure for historical trade creditors ($29,512.22, which was evidently taken from the April balance sheet, and impliedly criticised Mr Russell for using the figure $26,512.22 (which Mr Russell evidently took from the May balance sheet). 98 On balance, I think it is appropriate to proceed on the basis that Mr Lewis had before him the balance sheet as at 30 April and the profit and loss statement for March and April 2007 which formed part of what I have called "the May financial statements". Mr Lewis expressed the opinion that these are management accounts that are "not necessarily constructed from the point of view of generally accepted accounting principles and presentation, particularly with respect to the critical issue of current liabilities". He said he was not provided with any list of the historical trade creditors totalling $26,512. 99 Mr Lewis concluded that Redrock was insolvent as at 30 April 2007, measured by what he called "the balance sheet test", "the working capital test", and "the cash flow test". It is unnecessary to descend into the semantics of this, especially since none of these three tests, as articulated by Mr Lewis, accurately reflects the applicable law. It is more important to focus on Mr Lewis' expert assessment of the factual components of his conclusions. 100 Mr Lewis' June report is essentially a critique of Mr Russell's May report. First, he criticised Mr Russell for failing to take into account the overall balance sheet deficiency of Redrock. He referred to Redrock's balance sheet as at 30 June 2006 and the deficiency disclosed there, noting an increase in the deficiency of nearly $278,000 over the preceding 12 months. That, it seems to me, is not a significant consideration for the court, whose task is to assess the state of solvency of the company in December 2007, especially having regard to the fact that the 2006 figures reflect business conducted in the course of Redrock's business arrangement with LNW. Moreover, reference to the growth in the deficiency in isolation is unhelpful because it does not take into account what caused that increase and how the deficiency has been funded. 101 Secondly, Mr Lewis referred to the fact that the whole of the ATO running balance was treated in Redrock's balance sheet as a current liability, and that the balance sheet treated the whole of the Westpac debt as, in effect, a current liability by treating it as a negative current asset. He said this suggested that both of these large debts are current liabilities of Redrock and consequently there is a deficiency of working capital and Redrock does not have the resources to discharge the liabilities in full. In my opinion it is unsafe to rely on the method of accounting for these liabilities adopted in the April and May balance sheets. I agree with Mr Lewis' opinion that these financial statements appear to be management accounts not prepared in compliance with applicable accounting standards, and they have obviously not been audited. I therefore reject Mr Lewis' opinion on this point. 102 Thirdly, Mr Lewis referred to the history of the ATO debt in the period from July to October 2006 and drew the conclusion that the company could not meet its current PAYG and GST obligations in that period. That is not an issue that I need to determine, given that there were further negotiations with the ATO in December 2006 resulting in the repayment programme which evidence has been given; and given also that the company was operating in 2006 under a business arrangement with LNW and did not recommence business on its own account until 5 March 2007. 103 Mr Lewis said that "the statement" (presumably the April balance sheet) did not show any fresh liability for 2007, from which he drew the inference that Redrock had not submitted its PAYG and GST returns. But the April balance sheet does contain entries for GST collected and paid and PAYG withholding payable, and moreover, the May balance sheet states that GST paid exceeded GST collected. Mr Lewis' inference is unfounded. Consequently, there is no adequate basis for him to query whether Redrock has complied with the conditions of the payment arrangement of March 2007 (specifically the requirements for meeting all future lodgement and payment obligations by the due dates). In any event, that question is outside Mr Lewis' field of expertise and is not otherwise supported by evidence. 104 Fourthly, Mr Lewis expressed the opinion that the Westpac facility is wholly repayable on demand, and therefore under paras 60-65 of Australian Accounting Standard AASB 101, the whole of the Westpac liability should be treated as a current liability. That conclusion, he said, was reinforced by the consideration that Redrock had exceeded its authorised borrowing limit and so the facility was in default as at 30 April 2007. It seems to me unnecessary for the court to decide whether this is correct. The question whether the Westpac debt is a current liability goes to the level of working capital but ultimately that is not the question for the court to decide. The matter for the court to resolve is the question of insolvency under s 95A of the Corporations Act: whether, having regard to the terms of the Westpac facility and the bank-customer relationship obtaining at the relevant time, the company is able to meet all its debts as and when they become due and payable, including the debt to Westpac. 105 Fifthly, Mr Lewis refers to the historical trade creditors of $26,512 and says that by their very description as historical traders, it is likely that these creditors have debts that are due and payable, and the fact that they have not been paid was in his view indicative of Redrock being insolvent. In my opinion is necessary to dig further into the question of historical trade creditors to see what the debts were and whether, in each case, the amounts were due and payable and whether there were any arrangements for repayment. 106 Sixthly, Mr Lewis referred to the forbearance arrangements for the related party debts, considered above. He said that since the evidence related only to the period of 12 months beginning on 21 May 2007, it was arguable that the debts were due and payable on 30 April 2007, though subsequently deferred. It is unnecessary for me to deal with that argument, since the question for me to determine relates to the solvency of the company in December 2007, within the forbearance period. 107 Seventhly, Mr Lewis suggested it was insufficient for the company to have traded at a break even level in the six months to the end of April 2007, given its very substantial deficiency, and that it ought to been operating at a profit; he added that related party loans could be converted to issued capital to improve the balance sheet. The latter observation is undoubtedly true but since this has not occurred, the court must take the financial arrangements as they are. The six week period to 30 April 2007 was a start-up period and I therefore do not accept that a more positive profit performance was needed in order to establish solvency. 108 Eighthly, Mr Lewis questioned whether the projected positive cash flow from October 2007 to February 2008 would be sufficient to make significant inroads into reducing the company's deficiency. There is a real question whether the court should accept the projected net profit and positive cash flow figures, as noted elsewhere. But if they are correct, net profit in the period from March 2007 to December 2008 would be $145,236, a figure significant enough to contribute to the improvement of the company's financial fortune and a positive step towards reduction of deficiency. 109 As for the additional $100,000 said to be available to Simon Stonier from the National Australia Bank, Mr Lewis noted that the bank said that loan contracts were yet to be executed, and suggested that the bank's statement of availability of these funds was no more than a "letter of comfort". I accept that on the evidence before me, the bank is not strictly obliged to allow the drawdown of these additional funds. On the other hand, there is nothing to suggest that the bank would resist doing so. The question whether, in those circumstances, the availability of the additional $100,000 should be taken into account in assessing solvency is a question of law, rather than a question for expert accounting evidence. 110 Overall, Mr Lewis doubted Mr Russell's positive assessment of Redrock's solvency by referring to the absence of an established trading record, the fact that the Westpac facility was fully drawn, the seasonal nature of the business in the absence of any cash flow budget beyond February 2008, in the absence of any assessment of how the operations of Redrock would be turned around to make it sufficiently cash flow positive to eliminate its balance sheet deficiency over forthcoming years. Those matters are generally relevant and of assistance to the court, but there are countervailing factors to be taken into account, including an assessment of whether the company's debts are presently due and payable and whether the company is entitled to rely, for solvency purposes, on the availability of additional funds from Mr Stonier. Mr Lewis' October report 111 Mr Lewis wrote a short supplementary report dated 2 October 2007, after he was provided with profit and loss statements for the months from April to August 2007 inclusive, and balance sheets for the end of each of those months, together with business activity and installed activity statements, payroll journals and Westpac bank statements. Fortunately, those documents have been tendered and are in evidence. 112 In his October report Mr Lewis said that the losses in the months of February-August inclusive further eroded the working capital and asset base of Redrock, and he noted the increasing balance sheet deficiency is for those months, emphasising the increase in the deficiency over that period, which was in the order of $98,000. He concluded that the February-August results led him to conclude that Redrock remained insolvent, presumably as at 31 August 2007. 113 Information provided to Mr Lewis showed that there was a substantial difference between actual and forecast performance, as shown in Table 2 above. But he said he was reluctant to comment on this, because there were different versions of profitability and cash flow budgets prepared by Mr Stonier and Mr Russell. He concluded, however, that Redrock did not have positive cash flow and was not achieving profits as forecast in those budgets. 114 During his oral evidence, I asked Mr Lewis to assume that at the point in time at which the court was required to determine the solvency of Redrock, the company's financial condition was in all respects the financial condition applying on 30 September 2007, except that the shareholders had subscribed an additional $70,000 cash in share capital. Mr Lewis expressed the opinion that in those circumstances, Redrock would be solvent on what he called "the cash flow test" applicable under s 95A (T 101). The significance of the round figure of $70,000 was that Mr Lewis had earlier estimated that this amount would be sufficient to bring the Westpac facility with in terms (he said $43,000 would be required to do so) and to pay all outstanding historical creditors then listed at approximately $26,000 (T 97-8). Mr Russell's November report 115 Mr Russell produced a further report on 2 November 2007, expressing his opinion as to the solvency of Redrock as at 30 September 2007. He was provided with the two reports by Mr Lewis as well some additional financial information and affidavits by Simon Stonier and Ian Kinsella each dated 2 November 2007. I assume that Mr Stonier's affidavit was the one in fact dated 1 November, and that Mr Kinsella's affidavit was the one in which the date in November has not been filled out. He was also given the September balance sheet, which he annexed to his report, but it is not clear whether he had the September profit and loss statement and cash flow statement. 116 Mr Russell noted the variance between forecast and actual performance of the company and prepared the table to display it. Unfortunately the table does not specify the months to which it relates. Nor (bearing in mind the differences between the figures supplied to Mr Lewis and the September and November figures set out above) is the source of the actual figures clear. In any event, he concludes that there is at variance between the budgeted profit and the actual loss for the period that he is looking at, of $129,512. That approximates to the sum of the monthly variances noted in Table 1 above. 117 Mr Russell then listed a series of explanations for the variances, some given by Mr Stonier in his affidavit of 1 November and some apparently given directly to Mr Russell. The explanations provide reasons for reduced sales and additional expenditure but they do not assist the court to determine whether the problems which prevented the company from reaching its forecasts were temporary problems that are unlikely to recur. 118 He noted that the ATO running balance account as at 22 September 2007 was $119,782.04, and that Redrock had complied with its payment arrangement with the ATO to pay $2500 per week. He noted that according to the affidavit of Kenneth Stonier of 31 October 2007, he is prepared to provide an additional $175,500 to meet current liabilities of Redrock that cannot be met from its trading activities pending the resolution of the current proceedings with LNW. 119 Mr Russell set out the working capital position as at 30 September in tabular form. His figures showed a working capital deficit of $189,847, compared with a substantial working capital surplus in his earlier report. The principal reason for this difference is his inclusion in the later report of the Westpac debt as a current liability. He noted that the Westpac balance as at 30 September, $423,065.32, was in excess of the approved limit by $43,065.32. He also noted that he had been told by Simon Stonier that on a number of occasions in the period from May to September the bank loan facility exceeded the limit approved by the bank, but Redrock's business banking manager had not conveyed any concern regarding the temporary excesses. He conceded that in the circumstances, Mr Lewis was "technically correct" to bring the bank loan facility in as a current liability for the purpose of calculating working capital, but he added: "however, in a real and practical sense there is no commercial expectation that the loan will be called upon for repayment by the bank within the foreseeable future and particularly within a period of 12 months." 120 Mr Russell commented on the individual items making up the current assets and current liabilities. It is noticeable that the ageing of trade debtors, all necessarily limited in the early report to no more than 60 days as the company had been trading on its own account for only about 6 weeks, had spread out so that 5.9% were aged over 60 days and 94.1% were aged 31 to 60 days. That raises the question as to whether some provision for bad debts would be appropriate. 121 Mr Russell noted that historical trade creditors, shown in his earlier report at $26,512, have been reduced by $19,512 to $7,000. This was because the amount of $19,512 was not regarded by the company as payable. The remaining $7,000 was, according to Mr Stonier, an agreed settlement amount for payment of the debt claimed by Belaroma. 122 Mr Russell recorded a number of leases, and some premium funding arrangements, that the company had entered into since his first report. The total amount due as at 30 September 2007 was $130,454.38 but the timing of the obligation was such that only $43,784.48 was a current liability and $86,669.90 was a non-current liability. He included neither the assets nor the liabilities in his calculation of working capital, explaining in cross-examination that these matters had not been "finalised in the company's accounts" because the capitalisation of new leases is normally a year-end adjustment, though he agreed that the sum of $43,784.48 was a current liability (T 142-3). Obviously the liabilities are relevant to the assessment of cash flow and solvency. 123 After responding to Mr Lewis' criticisms of his earlier report (the responses, to the extent that I accept them, have been incorporated into my comment on Mr Lewis' reports set out above), Mr Russell concluded that Redrock was solvent as at 30 September 2007, but at several stages in his report he stressed the importance to his conclusion of the continued financial support of Simon Stonier and others. Redrock's indebtedness 124 According to Mr Stonier (affidavit of 1 November 2007), the only substantial liabilities of Redrock are to Westpac, the ATO, directors and related parties, and Scott Wright. There is evidence about each of these debts, and alleged debts to Motorpass, Belaroma and LNW. These matters are considered below. I have already dealt with the debts to Doulman Industries and 42 Below. There was some cross-examination of Mr Kinsella about debts to Plus Advisory, Redrock's accountants, evidently designed to establish that they are a creditor of the company not noted in the November financial statements. But Mr Kinsella's response, that Plus Advisory's fees are covered by a financing agreement which is accounted for in the financial statements (T 119), appears to be satisfactory. Mr Kinsella was also cross-examined about Redrock's legal expenses in the present proceedings and in the proceedings brought against it by LNW, which according to him amount to about $400,000. He accepted that there was no provision for those fees in the financial statements, but he gave evidence that those fees were being paid by a third party without any agreement by Redrock to reimburse the fees (T 123). 125 There were some evidence that in late 2006 or early 2007 Redrock was indebted to Bertshell, Unilever and Chep, but Mr Kinsella gave evidence that each of those debts had been paid out entirely (T 130). A company called Phoenix Organics Australia Ltd took proceedings against Redrock in September 2005 claiming a debt of $26,136.45. Mr Kinsella gave evidence that this amount has been fully paid (T 118). Westpac 126 Westpac has been Redrock's bank for a substantial period. It extended overdraft credit to Redrock, with a limit of $150,000, under an arrangement referred to as a "Business Options Overdraft" until the end of February 2007 and at that time the account was converted to a "Westpac Business One Loan". According to the loan documentation (Ex D7): · the purpose of the new facility was to cover stock purchase and setup costs and to replace the previous Business Options Overdraft; · the credit limit was $380,000; · finance was subject to an annual review but repayable on demand, although an "interest only" term was granted for the first 12 months subject to Westpac's right to vary at any stage; · there was a requirement for "strict quarterly reviews with management accounts provided no later than 30 days from quarter end". 127 Additionally, there were three other facilities. First, there was a banker's undertaking for a rental bond with a limit of $16,000. Secondly, there was an equipment financing facility with a limit of $250,000. Thirdly, there was a Westpac business card with a limit of $10,000. 128 The Westpac facilities were secured by a fixed and floating charge by instrument dated 21 January 2004 and also by a debt and interest guarantee by Mr Kinsella to the limit of $650,000, and a guarantee by Simon Stonier to the limit of $650,000 supported by a second mortgage over his residential property at Clovelly. 129 Bank statements for various periods within the timeframe from February to November 2007 indicate that the overdraft balance fluctuated during that time between about $234,000 and about $420,000, with the overall trend being for the overdraft debt to increase up until about May and then to be relatively steady within the range of, roughly, $350,000-$420,000. The closing balance on 28 September 2007 was $400,346.89, which may be compared with a closing balance of $233,631.19 on 28 February 2007. 130 Mr Stonier gave evidence that the loan limit has been exceeded temporarily from time to time but Redrock has not received any communication from the bank expressing concern. Australian Taxation Office 131 The ATO took some enforcement steps in November 2006. On 22 November 2006 it issued a statutory demand to Redrock for $184,744. The debt was described as a running account balance deficit debt as at 22 November 2006 in respect of amounts due under the BAS provisions of the taxation legislation [BAS provisions include, generally, the goods and services tax provisions, the PAYG withholding provisions, the PAYG instalment provisions, the fringe benefits tax instalment provisions and deferred company instalment provisions], as well as administrative penalties and a general interest charge. On 29 November 2006 the ATO issued a Director Penalty Notice to Ian Kinsella as the director of Redrock for $20,893. Although an equivalent notice to Simon Stonier, the other director of Redrock, is not in evidence, it appears from other documents that one was issued to him as well. 132 Redrock's response, by a written submission dated 12 December 2006, was to apply to the ATO for the establishment of a payment arrangement on similar terms to the payment arrangement on which it had defaulted. At about this time the ATO was pressing for Redrock's financial statements for the 2005 and 2006 years, as referred to below. Redrock's new proposal involved regular payments of $5,000 per month. This proposal was rejected by the ATO on 25 January 2007, and the ATO proceeded to garnishee money owed to Mr Stonier by a company called Killara 9 Pty Ltd at the rate of 15 cents in the dollar. 133 It appears that Redrock's directors then explored the appointment of voluntary administrators and the possible terms of a deed of company arrangement. An essential ingredient of the proposal was that it would remove any prospect of personal liability for the directors in respect of the ATO debt. But there was no voluntary administration, and Redrock was able to negotiate a new arrangement with the ATO, confirmed in the ATO's letter to Redrock dated 29 March 2007 (part but not all of which is in evidence). According to that letter, Redrock's indebtedness to the ATO (said by Mr Stonier to amount to approximately $171,000 at the beginning of May 2007) would be discharged by weekly instalment payments of $2500, under a payment schedule that would eliminate the debt in July 2008. The arrangement was said to be conditional upon the information supplied to the ATO by Redrock being accurate. 134 Mr Stonier gave evidence (affidavit of 1 November 2007) that since March 2007 Redrock has continued to make payments to the ATO in accordance with the agreed payment plan, and that by 22 September 2007 the balance outstanding to the ATO was $118,777.32. Director and related party loans 135 The loans provided by directors and related parties of Redrock are subject to deferral arrangements (I use the expression "related party" loosely, as a convenient label, not in the technical sense defined in Ch 2E of the Corporations Act). Up to May 2007 Simon Stonier, Kenneth Stonier (the father of Simon Stonier), Ian Kinsella, Jennifer Kinsella and Geoffrey Maidens had lent Redrock amounts totalling, respectively, $340,000, $40,000, $25,000 and $150,000. Simon Stonier has given evidence that he does not require payment of the funds within the next 12 months, and thereafter only on demand. The others have each given evidence that their loans are subject to an agreement to the effect that they are not repayable within the next 12 months and thereafter only on demand; and they have each written a letter to the directors of Redrock dated 21 May 2007 confirming that arrangement. 136 Since May 2007 Kenneth Stonier and Ian Kinsella have provided additional loans so that the total amount outstanding to Mr Stonier had reached $70,000 by 31 October 2007, and the total amount outstanding to Mr Kinsella had reached $60,000 by a date in November 2007. There evidence is that the full amounts owing to them are subject to the same arrangement as deposed to in their earlier affidavits. 137 Simon and Kenneth Stonier both gave evidence that they have facilities with the National Australia Bank in respect of which there are available loan funds. In the case of Simon Stonier, $100,000 was available as at 1 May 2007 under an approved line of credit facility. In the case of Kenneth Stonier, the amount available was approximately $175,500 as at 31 October 2007. Simon Stonier said that to the extent that there was any shortfall in the operating profit of Redrock in the foreseeable future, he would fund that shortfall from that facility. Kenneth Stonier said he was prepared to commit the available funds to meeting any current liability of Redrock that cannot be met from its trading activities pending the resolution of the proceedings between Redrock and LNW. Scott Wright 138 There is not much evidence about this debt. In his May report, Mr Paul Russell expressed his understanding that the loan from Mr Wright was "in respect of funding provided to Redrock via Mr Wright through funds he obtained from a third party", and he said the loan is repayable at the rate of $2,300 per month. Motorpass 139 Mr Brooks gave evidence that he was contacted on 22 April 2007 by a representative of a business called Motorpass, who told him he was chasing an account owing under the name of Redrock, which was well overdue. There is evidence of monthly accounts issued by Motorpass to Redrock, the last being dated 23 April 2007, for $3045.19, which included unpaid amounts from previous months. Mr Brooks drew attention to the fact that the list of trade creditors annexed to the affidavit of Simon Stonier made on 21 May 2007 did not list Motorpass as a trade creditor, and that the Westpac bank statements for the period from February to May 2007 did not record any payment to Motorpass. 140 Mr Stonier gave evidence (affidavit of 2 June 2007) that, early in March 2007 following termination of the business arrangement between Redrock and LNW, he arranged for mail addressed to Redrock at the premises it had shared with LNW to be redirected to Redrock's new postal address at Mascot. However, between 5 March and 10 April 2007 Redrock did not receive any redirected mail. On 10 April 2007 Redrock solicitor wrote to Australia Post. According to Mr Stonier, this was because the redirection of mail had been placed on hold following a request by LNW. In cross-examination Mr Brooks said that he had attempted to cancel the redirection of mail but did not succeed (T 42), but I accept the evidence of Mr Stonier that in fact he did not receive redirected mail. 141 On 10 April 2007 Redrock's solicitors wrote to Australia Post asking that the redirection be reinstated so that Redrock could collect its mail at Mascot. Some time after 10 April 2007 Mr Stonier received the Motorpass invoices for March and April. In May Redrock made two payments which, according to Mr Stonier, have brought the Motorpass account up to date. I see no reason to disbelieve that evidence. I conclude, therefore, that there is no error in the financial information supplied by Redrock, with respect to any debt by Motorpass. Belaroma 142 A company called Belaroma Coffee Pty Ltd claims to be owed $20,911.80 by Redrock for the supply of coffee products. On about 1 June 2007 Mr Stonier had a telephone conversation with Andy Simpkin of Belaroma, in which Mr Simpkin said he had received an offer to assign the debt to ABD. Mr Stonier said he replied there was an agreement between them to the effect that only $7,000 was outstanding, and they discussed payment of that amount. Mr Simpkin said he would like the payment to be resolved before Christmas. It had not been resolved by the time of the hearing. Mr Simpkin did not sign the deed of assignment but he sent a copy of the draft deed to Mr Stonier. It is in the same form, mutatis mutandis, as the deeds of assignment executed by Doulman Industries and 42 Below. Mr Kinsella agreed in cross-examination that Redrock owed Belaroma $7,000 as at 1 February 2007 and also as at the end of September 2007 (T 117). LNW 143 It appears that in an affidavit not currently before the court, David James alleged that Redrock is indebted to LNW in the sum of $67,019.60. According to the evidence of Simon Stonier (affidavit of 2 June 2007), rather than Redrock owing any money to LNW, LNW is indebted to Redrock in the sum of $51,627. Since that amount is accounted for as a current asset in Redrock financial statements from time to time, it is necessary to form a view about the claims. According to Mr Stonier, Redrock forwarded invoices to LNW between January 2006 and February 2007 totalling $340,031.20. The invoices, which are in evidence, refer to "miscellaneous products (including GST)", billed monthly for the period from October 2005 to January 2007. Mr Stonier said that since January 2006, Redrock has received payments from LNW in the total amount of $253,682 in respect of those invoices. That would leave the balance of $86,349.20, but during November and December 2006 Mr Stonier and David James had negotiations in relation to those invoices and on 19 February 2007 Mr Stonier wrote an e-mail to Mr James which refers to failure, presumably by LNW, to make payment for the period to December 2006 of $37,755. The e-mail purports to enclose an invoice for January 2007 (not in evidence) of $13,873, making a total balance outstanding of $51,628. 144 This evidence amounts to showing that Redrock has made a claim for $51,628 against LNW, in the e-mail of 19 February 2007. But no particulars are given and the January invoice is not put into evidence. The closest the evidence comes to explaining or particularising the claimed amount is a statement in Mr Stonier's affidavit of 21 May 2007 that the amount of $51,627 is due and owing by LNW to Redrock "from the proceeds of goods sold by Liquor National pursuant to an agreement between the defendant and Liquor National". In the circumstances it would not be safe for the court to conclude that any of this money is in fact owing, given that the debt is disputed by LNW and that LNW claims to be owed money by Redrock. Nor is it appropriate, in my view, for the court to proceed on the basis that Redrock owes any amount to LNW, in view of the paucity of the evidence. Court's conclusions as to Redrock's debts 145 As at the commencement of the hearing, it seems to me that Redrock had the following debts: · to Westpac under the Westpac Business One Loan, for an amount in the vicinity of $380,000, the facility limit, repayable on demand but evidently not the subject of any such demand, even though the company had from time to time exceeded the facility limit; · to Westpac for loans made under other more specialised facilities, repayable on demand but not the subject of any such demand; · to the Australian Taxation Office for a running account balance in the vicinity of $100,000, subject to a repayment plan with which the company was complying; · to its directors and related parties for the total amount of $625,000, generally subject to arrangements with them under which the amounts are not repayable until about May 2008, and then only on demand; · to Scott Wright for an amount in the vicinity of $100,000, subject to a monthly repayment arrangement which the company is complying with; · to ABD as legal assignee of the Doulman Industries debt in the sum of $2113.66, fully covered by Redrock's payment into court; · to 42 Below in the sum of $9,957.12, subject to an equitable assignment to ABD; · to Belaroma Coffee in the sum of $7,000. Court's conclusions as to Redrock's insolvency 146 The question for the court is whether, at the time of the hearing, Redrock was insolvent in the sense identified in s 95A of the Corporations Act. In Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608, at 198 [106], Palmer J said: "I think that I must approach the application of s 95A of the CA with two considerations in mind. First, the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact 'to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable': Southern Cross Interiors Pty Ltd (in liq) vDCT (2001) 53 NSWLR 213 at 224 …". 147 His Honour's judgment was upheld on appeal (Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243). I respectfully adopt his Honour's approach in the present case. 148 Weighing up all of the financial and expert evidence, and the evidence about particular debts, I have reached the conclusion that Redrock has not been shown to have been insolvent as at the time of the hearing. 149 According to my findings, only the debts to 42 Below and Belaroma Coffee are debts presently due and payable but not paid. The total amount of those debts is $16,957.12. The company's trading over the period from March to September 2007 has not generated any positive cash flow and has not been profitable. Forecasts up to February 2008 appear to be very optimistic, in circumstances where earlier projections for months for which actual figures are now available have proven to be very wide of the mark. As the experts agreed, the company's cash flow performance in the period from March to September, and its working capital deficiency, have been bolstered by additional unsecured loans by the directors and related parties, amounting in that period to $240,000. 150 In the circumstances it seems unlikely that the negative profit and cash performance from March to September 2007 has been turned around in the period from October to early December 2007. That makes it unlikely that repayment of the 42 Below and Belaroma debts, relatively small though they are, could be funded out of trading operations up to early December or otherwise in the short term. 151 However, I am satisfied by the evidence of Simon and Kenneth Stonier that they personally have access to loan funds through banking facilities for amounts more than ample to permit them to on-lend to the company so that it can discharge these two debts, and that they are willing to do so on terms that would not entitle them to demand repayment until May 2008 at the earliest. It is permissible for the court, in assessing the solvency of the company, to take into account the immediate availability of funds from unsecured loans made by directors or other related parties, provided that the loan terms are such as to exclude the loan liability from consideration as part of the company's debts due or near due (Australian Securities and Investment Commission v Edwards (2005) 54 ACSR 583; [2005] NSWSC 831 at [99] per Barrett J; Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608 at [104] per Palmer J; affirmed (2005) 54 ACSR 410; [2005] NSWCA 243). It is sometimes said that offers of credit by directors or proprietors prompt the question as to why they do not inject the money as share capital (see Ford's Principles of Corporations Law (Butterworths, looseleaf), at [20.100] page 20,160). Here, however, there is some rationality in funding through loan accounts rather than share capital, if the directors are right that the company's fortunes will be turned around through its summer sales performance. Therefore the mere fact that those two debts are due and payable and have not been paid is not sufficient to justify the conclusion that the company is insolvent. 152 The evidence, though hardly compelling, has led me to conclude that, whether or not the company's debt to Scott Wright is strictly repayable on demand, there are in place satisfactory arrangements such that it is reasonable to expect repayment to occur by monthly instalments of $2300 and that there will be no valid demand for immediate repayment of the whole balance (cf Re Kerisbeck Pty Ltd (1992) 10 ACLC 619), and that this is not a case of mere "indulgence or concession" by the creditor (see Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54]; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; [2003] VSC 123; Emmanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205; Iso Lilodw' Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561; [2002] NSWSC 644; White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 at [290]-[294]; [2004] NSWSC 71). In those circumstances the balance of the debt is not to be treated as immediately due and payable for the purpose of assessing the company's solvency under s 95A. 153 The same principles are to be applied to the debts owed by the company to the Australian Taxation Office and Westpac, although in each case the position is factually more complicated. So far as the ATO is concerned, the evidence shows that there is a repayment arrangement in place, and being observed by the company. There is nothing to indicate that the ATO has sought to demand immediate repayment of the balance owing. ABD contended that this could happen because the company had supplied false financial information to the ATO, but I have reached the conclusion that that contention should be rejected, for reasons set out below. I am persuaded by the evidence that the balance of the debt should not be treated as immediately due and payable for the purpose of assessing solvency. 154 As to Westpac, the documentation indicates that the Westpac Business One Loan is repayable on demand, but no demand has been made although "strict quarterly reviews" have been required and have presumably occurred. The evidence does not indicate any different position with respect to the other facilities. Moreover, as Mr Stonier said in evidence, the facility limit for the Business One Loan has been exceeded from time to time and yet the company has not received any communication from the bank expressing concern. While it may well be open to the bank to seek to bring the facility to an end by demanding repayment, it does not follow, as a matter of commercial reality, that if Westpac decided to do so the company would immediately fall into insolvency. The question would be whether it could refinance with another financial institution on comparable terms. The answer to that question may well depend upon the state of the litigation between LNW and the company at the time of the application for finance, as well as the company's current and projected financial performance having regard to the expected improvement in sales in summer months. 155 There is no evidence from Westpac as to its attitude, but in the circumstances the court is not in a position to make findings of fact about Westpac's attitude and intentions. The correct conclusion, on the evidence, is that ABD has not proven that Westpac's position in commercial reality is such that money is due and payable to it, or will become and due and payable in the near future, but the company is unable to pay. 156 The loans by directors and related parties are for a very large total amount but there is evidence, not identical with respect to each loan though substantially along the same lines, sufficient to persuade the court that the loans are not debts immediately due and payable or due and payable in the near future. The lenders have agreed that no demand for repayment will be made until May 2008 at the earliest, and it appears there is no present intention to make demand for payment at that time. The company's financial position in May 2008 should be clearer, in the sense that its performance over the summer trading months will be known. I agree with Palmer J (Lewis v Doran, at [113]) that the willingness of a third party to advance unsecured funds on deferred repayment arrangements should be "cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality". But in my view the evidence in the present case amounts to a cogent demonstration, when one has regard not only to what the directors and related parties have said but also to what they have done by way of provision of funds. 157 In assessing the solvency of a company, the court's task is not limited to a consideration of the individual debts of the company. An assessment must also be made on an overall basis, considering such questions as whether the company's financial difficulty stems from a temporary lack of liquidity or an endemic shortage of working capital (Bank of Australasia v Hall (1907) 4 CLR 1514; Sandell v Porter (1966) 115 CLR 666; Hymix Concrete Pty Ltd v Geraghty (1977) 2 ACLR 559). Where the question of solvency arises in the context of a winding up application, the question is "prospective", in the sense that the company's ability to pay its debts must be determined not only by reference to debts payable as at the date of the trial but also by reference to its ability to pay debts which will fall for payment some time in the near future (Lewis v Doran at [107], per Palmer J). 158 I have found the overall assessment to be the most troubling part of the solvency analysis in this case. I am very concerned at the discrepancy between forecast and actual figures, set out at length in my analysis of the various financial statements. In my view the directors have not satisfactorily explained that discrepancy. The result is that their current forecasts are unreliable. On the other hand, it is plausible to expect an improvement in the company's sales performance over the summer months. While the company's achievement of its forecasts to February would not do much to address its large balance sheet deficiency, the achievement of a satisfactory cash flow and trading profit during the summer months would be an indicator that the business established in March 2007 may be viable. 159 I am also very concerned that it has evidently been necessary for the company to reinforce its working capital position not only by the initial director and related party loans, but also by substantial increases in those loans in the period from March to September. If it were likely that further injections of loan capital would be needed at the same rate per month in future, the company would very quickly fail, as the available related party resources are limited, at most, to about $275,000. Again, however, it is the prospect of improved performance during the summer months, together with recognition that the business is substantially a start-up business in Redrock's hands, that has led me to resist the conclusion that the company's cash burn demonstrates present insolvency. ABD's allegation that Redrock misled the ATO 160 In Part C of the originating process, ABD asserted that it was an actual creditor of Redrock having standing under s 459P(1)(b), and made allegations going directly to the question of solvency. However, para 4 of Part C raised matters of a different character. It is as follows: "4. Further, the Defendant: a) is seeking to avoid payment of those liabilities by directing creditors to seek payment of those liabilities from unrelated entities b) is seeking to avoid enforcement action by the Australian Taxation Office by submitting false financial statements to that authority c) in the alternative to b) has insufficient accounting controls to allow it to generate financial statements to give a true and fair view of the financial position of the Defendant." 161 Those matters were asserted as grounds of insolvency. But para 7 of Part C made these additional allegations: "7. Further the plaintiff seeks that the defendant be wound up pursuant to s 461(k) of the Corporations Act in that it is putting forward to the public, in particualry [sic] the ATO, financial information which is false, is disclaiming liabilities, is attempting to delay creditors by referring them to Liquor National Wholesale Pty Ltd for payment and is ordering goods and services on the account of Liquor National Wholesale Pty Ltd." 162 As mentioned earlier, ABD no longer relies on the just and equitable ground, but it continues to assert that Redrock has provided financial information to the ATO which is false. That is considered below. As to the allegation that Redrock is disclaiming liabilities, Mr Brooks was asked in cross-examination what evidence ABD had adduced to support that claim, and he said (T 37) that was a reference to the evidence regarding Doulman Industries that I have summarised above. That evidence does not support the claim. He was asked what evidence supported the allegation that Redrock is attempting to delay creditors by referring them to LNW for payment, and he said (T 37) that referred primarily to the Doulman Industries evidence, and possibly also the Motorpass evidence. None of that evidence supports the claim. When asked what evidence there was that Redrock was ordering goods and services on the account of LNW, Mr Brooks said he did not know but he understood that the allegation related to orders placed on the accounts of Fosters (T 37). But there is no evidence about those matters. 163 It appears that, for reasons connected with their prior business arrangement, LNW has had access to back-ups of the computer server previously shared by it with Redrock (T 31). ABD restored the back-up onto the hard drive and then reviewed Redrock's mail folder. In that way ABD obtained an e-mail from Jackie Lim of Plus Advisory to Simon Stonier dated 21 December 2006, enclosing "final draft accounts for the 2006 year along with 2005 comparatives". The e-mail and an attached June 2006 balance sheet with previous year comparatives are in evidence. 164 ABD invites the court to infer from these documents that: (i) Redrock traded at a loss of $277,919 for the 2006 financial year and a loss of $473,500 for the 2005 financial year; (ii) Redrock had a deficiency of net assets to equity of $931,624 as at 30 June 2006, compared with $653,704 as at 30 June 2005; (iii) Redrock's total assets were negative $21,871 as at 30 June 2006, compared with positive $649,558 as at 30 June 2005; (iv) excluding Redrock's bank overdraft, the total assets available to creditors as at 30 June 2006 were approximately $30,000, whereas liabilities were approximately $960,000; (v) the total net deficiency of current liabilities to current assets as at 30 June 2006 was $931,623 72. 165 The first and most obvious point to make about these submissions is that the financial statements attached to Ms Lim's e-mail were described as draft financial statements. There is no evidence that the drafts were ever adopted by Redrock. The second obvious point is that they relate to the 2005 and 2006 financial years, and are therefore not directly relevant to the present state of solvency of Redrock. Putting those matters to one side, points (i)-(iii) are correct according to the summary in Ms Lim's e-mail and the attached document, and point (iv) is correct when one takes into account that the negative balance in Redrock's working account with Westpac as at 30 June 2006 was (according to the draft) $51,640.33. As to point (v), in fact the total current assets as at 30 June 2006, as per the draft, were negative $43,652.68, while the total current liabilities were $909,753.04, so the gap between current liabilities and current assets was in fact wider than ABD submitted (ABD's figures are for total assets and total liabilities). 166 The evidence also includes an e-mail (apparently obtained in the same way) from David Mah Chut of Plus Advisory to someone called "Anthony" dated 5 February 2007, which attaches some points detailing events subsequent to a meeting at the end of 2006, "as summarised by Simon Stonier". The e-mail contains some information about ATO recovery proceedings against Redrock and its directors. Redrock's dealings with the ATO are considered separately above. It appears from the e-mail and its attachment that some consideration was being given, at that time, to the appointment of voluntary administrators to Redrock, with a view to development of a deed of company arrangement. The attached notes summarised the main liabilities of the company and as to assets, the notes say "virtually zero (3 run-down cars)". 167 Finally, the evidence includes an e-mail from Jackie Lim to David Mah Chut, copied to Simon Stonier, dated 12 December 2006, attaching a draft letter from Mr Stonier to the ATO and a draft profit and loss statement and balance sheet for the 2006 financial year, together with a profit and loss statement and balance sheet for the 2005 financial year stamped "draft" but bearing the handwritten word "final". The draft letter from Mr Stonier to the ATO was intended to attach these financial statements, in response to the ATO's request, but the draft letter observed, "kindly note that these accounts are draft and subject to adjustments to be finalised shortly". The e-mail reported that Ms Lim had stamped the 2005 and 2006 "capital accounts" as drafts and had prepared a covering letter for Mr Stonier to sign, and referred the reader to the attachments, saying that Mr Stonier would forward the attachments "along with everything else" to the ATO on that day. 168 The draft financial statements attached to the e-mail of 12 December contained figures markedly different from the figures in the later drafts attached to the e-mail of 21 December, outlined above. As Mr Brooks noted in his affidavit made on 20 November 2007, notable differences include the following: (a) profit for the year ending the 30 June 2006 according to the 12 December figures was $92,957.59, but according to the 21 December figures there was a loss of $277,919; (b) trade debtors were stated at $178,666.95 in the 12 December figures but only $7,987.65 in the 21 December figures; (c) MYOB and staff and capital debtors were recorded at $306,829.27 in the 12 December figures but at zero amounts in the 21 December figures; (d) motor vehicles owned and under lease were recorded at $131,057.90 and $225,299 respectively in the 12 December figures but only $41,812 and $21,500 respectively in the 21 December figures; (e) total net assets after liabilities were given in the 12 December figures at negative $538,438.53 but at negative $931,623.72 in the 21 December figures. 169 Several points should be noted about these discrepancies. First, the figures in both sets of documents were described as drafts. Secondly, there is no evidence to show that the 12 December figures were actually submitted by Redrock to the ATO without adjustment. Thirdly, the draft covering letter to the ATO expressly stated that the figures were drafts and subject to adjustment. Fourthly, if (as appears likely, given the pressure evidently being applied by the ATO) intensive work was done on the financial position of Redrock between 12 and 21 December 2006, substantial adjustments would not necessarily have indicated that the earlier figures were misleading or, a fortiori, known to be misleading by the directors. Fifthly, there is no evidence as to whether the revised figures, if accepted by the directors, were supplied to or concealed from the ATO. 170 Simon Stonier gave evidence that the 12 December version of the financial statements was a draft generated by Redrock's then accounting software, the Capital Office program. The accounts were generated for submission to Plus Advisory as Redrock's accountant, shortly after 30 June 2006. They were unadjusted figures. When forwarded to the ATO they were described as drafts and the covering letter (as noted above) made this point clearly. The figures in the 21 December version of the financial statements were prepared by Plus Advisory using their MYOB system, and reflect adjustments made by Plus Advisory to the earlier Capital Office documents. I accept this evidence. 171 My conclusion is that the allegations contained in paras 4 and 7 of Part C the originating process have not been made out, on the evidence. Abuse of process 172 In Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966, White J gave a clear and comprehensive account of the law of abuse of process, which I respectfully adopt for present purposes (see also TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410). 173 In dismissing Redrock's application for summary dismissal of the proceedings, White J found ([2007] NSWSC 966 at [42]) that one of Mr James' purposes, and hence one of ABD's purposes, was to obtain a collateral advantage for which winding up proceedings were not designed, namely to put pressure on Redrock by employing it in litigation and thereby causing it to incur expense and consume executive time. But he observed that the proceedings could only be dismissed as an abuse of process on this ground if that purpose was the predominant purpose. He noted that it was not put to Mr James that this was the case, and held that it was not. He found that the predominant purpose of Mr James was to crush Redrock by putting it into liquidation. He held that this was not an abuse of process. The predominant purpose of Mr James was to pursue a substantial claim for winding up with malicious intent, in order to achieve the consequences that winding up would bring. It was not an abuse of process to seek a winding up order so as to achieve the outcome that Redrock would cease to carry on its business except so far as necessary for the beneficial disposal or winding up of the business; nor was there any abuse of process in seeking to obtain the tactical advantage which a winding up order would give ABD with respect to the Commercial List proceedings. 174 White J's conclusion that the present proceedings had not been shown to be an abuse of process did not imply condonation of ABD's conduct (at [46]). He left for the court at the final hearing the question whether the intentions and tactics of ABD are relevant to the exercise of the discretion to make or refuse a winding up order, if the grounds for doing so are established at the final hearing (at [47]). 175 At the final hearing the only evidence as to ABD's purpose in bringing the winding up proceedings was given by Mr Brooks. He informed the court that in his view, any employee of ABD could make an admission on behalf of that company in relation to its dealings (T 26). It is unnecessary to decide whether that broad proposition is true, but in the circumstances I accept that Mr Brooks was in a position to give evidence as to ABD's purpose in bringing and maintaining the winding up proceedings. 176 In my opinion the evidence of Mr Brooks as to ABD's purpose was not fully frank. Counsel put to him, no doubt in light of White J's findings, that the reason for these proceedings is to crush Redrock's business, and he denied that this was so (T 22). He said the purpose of the proceedings was to wind up Redrock, because ABD believed that Redrock was insolvent, although he acknowledged that Redrock's business would presumably be sold by the liquidator (T 22, 32). I find it implausible that ABD, a company owned and controlled by the owners and controllers of LNW, which had been in a business arrangement with Redrock and asserted an entitlement to Redrock's business in other proceedings, would have gone to the trouble of buying debts so as to give it standing to bring winding up proceedings simply because it believed Redrock to be insolvent. 177 Evidence suggesting that ABD had other purposes in commencing the winding up proceedings emerged during the cross-examination of Mr Brooks. Mr Brooks was cross-examined about a single-page document of Bluestar Beverages headed "Important Notice Redrock Distributors & Blue Hills Liquor". The document announced LNW's decision to trade as Bluestar Beverages. It said: "Currently we are unable to source the brands Splitrock and Tiro for supply to customers and note that this is currently a matter related to Supreme Court proceedings that we have commenced. We will keep you updated on our progress on that score." 178 That was a reference to the proceedings by LNW in this court, in which it asserts a proprietary interest in the Redrock business (T 67). Mr Brooks acknowledged that there is a distribution agreement for Splitrock and Tiro drinks which is an asset of Redrock's business. He accepted that a liquidator of Redrock would be interested in selling such an asset, and that LNW wanted to obtain that distribution agreement. He accepted that there was no chance of acquiring the agreement while Mr Stonier and Mr Kinsella were in control of Redrock but there would be at least a chance of doing so if a liquidator were to be appointed. It is plausible to infer that one of the purposes of ABD in bringing and maintaining the winding up proceedings is to secure the Splitrock and Tiro distribution agreement for LNW. 179 Mr Brooks was also cross-examined about his letter to Westpac of 3 April 2007, informing it of the commencement of the winding up proceedings. He said he was aware at that time that the bank might react adversely upon receipt of that information, and that ABD would have been very happy if the bank had joined in the proceedings as a supporting creditor, and if they had made Redrock's facility repayable at call (T 71). 180 While this evidence establishes that Mr Brooks and ABD had a number of collateral purposes, as well as the purpose found by White J to be the predominant purpose, I am not persuaded by the evidence that any of these other purposes was dominant. In my view, the evidence at the final hearing leads to the conclusion that ABD's predominant purpose was to pursue the winding up proceedings vigorously and to extract all such advantages as the law affords, through winding up and liquidation, to persons who have had dealings with the company (including advantages that may arise through the sale of the company's assets and to compromise of legal proceedings by the liquidator). In other words, I agree with White J's interlocutory conclusion as to the predominant purpose of ABD. That being so, I reject the contention that the bringing and maintaining of the present proceedings amounts to an abuse of process. The publication issue 181 On 3 April 2007 Mr Brooks on behalf of ABD wrote to Redrock's account manager at Westpac, enclosing the originating process in the present proceedings, an interlocutory process and the affidavits of Mr Doulman and David James. Mr Brooks said he was handling the winding up application on behalf of ABD and understood that the bank was a creditor of Redrock, and asked to be advised if the bank wish to appear at the return date stated on the originating process. He also invited the bank to comment on various versions of financial statements of Redrock attached to the affidavit of Mr James. These were the 12 December 2006 and 21 December 2006 versions of draft financial statements for 2006 and 2007, discussed above. 182 When Westpac, by facsimile dated 3 April 2007 to Redrock's solicitors, supplied a copy of Mr Brooks' letter and the enclosed originating and interlocutory processes and affidavits, it did so under a covering letter saying that the bank would need to be provided with a written response from Redrock explaining how they would address the situation, and specifically querying whether there had been any defaults in the repayment arrangements for the ATO debt. 183 Redrock complains that because the documents have been sent to Westpac and Bertshell, it has had no opportunity to take steps to prevent damage to its business caused by the winding up application becoming known. Mr Stonier gave evidence that Bertshell has altered its terms of trade with Redrock so as to place it on COD terms. He said that prior to October 2005, and also in the period from October 2005 until February 2007 when Redrock and LNW were working together, Bertshell supplied soft drink on 30 day terms. On about 17 April 2007 Redrock received a copy of Mr Brooks' letter to Bertshell of 3 April 2007, endorsed with the handwritten words "Ian, what is this???". Mr Stonier said that shortly afterwards he had a conversation with a director of Bertshell who told him, "we can't give you terms while those proceedings are going on". Since that time Redrock has continued to purchase products from Bertshell, but only on a COD basis. 184 Mr Stonier also said Westpac rejected Redrock's application for "Merchant Services Facility" to process credit card and eftpos payments from customers, made on about 1 May 2007 was refused by Westpac, whose account manager told him: "I'm sorry we can't give you the merchant services facility in light of the winding up application." However, he accepted in oral evidence that the facility was subsequently granted after further representations made by him to Westpac's business banking manager, and the facility was available to Redrock at the time of the hearing (T 138-9). 185 On 3 April 2007 Mr Brooks on behalf of ABD also wrote to Bertshell, a soft drink bottler and a major supplier of soft drink distributed by Redrock, enclosing the originating process, the interlocutory process and the affidavits. 186 Mr Brooks said in his oral evidence that he also wrote to other creditors, recalling Belaroma, Unilever and APW (T 59). The letters are not in evidence. 187 Rule 5.6 of the Supreme Court (Corporations) Rules 1999 (NSW) ("the publication rule") is in the following terms: "5.6(1) Unless the Court otherwise orders, the plaintiff must publish a notice of the application for an order that a company be wound up. (2) That notice must be: (a) in accordance with Form 9; and (b) published in accordance with rule 2.11: (i) at least 3 days after the originating process is served on the company, and (ii) at least 7 days before the date fixed for hearing of the application." 188 Rule 2.11 provides that the notice must be published once in a daily newspaper circulating generally in the State or Territory where the company has its principal, or last known, place of business. 189 Redrock's Further Amended Notice of Appearance alleges that the application for winding up was published by ABD in a manner other than that prescribed by legislation or the rules of court. In a document entitled "Particulars of Premature Publication Issue", Redrock alleged that ABD breached rule 5.6(2)(b)(i) by publishing notice of its winding up application at a time when it had failed to properly serve the originating process on the defendants. I reject that specific allegation, on the basis that according to my finding, the originating process was served on 28 March 2007. 190 In my opinion, the publication rule does not imply that, after the expiration of the three-day period, notice of the application is to be published only in the manner designated by rule 2.11 and not in any other manner, such as by sending it to particular creditors of the company. The scope of the rule was analysed by Beazley JA (with whom Hodgson and Santow JJA agreed) in Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd (2007) 61 ACSR 441; [2007] NSWCA 57, at [101]-[122]. It emerges from that analysis that the concern of the courts has been to give a company served with a winding up application the opportunity to avoid the potentially damaging consequences of advertisement by attending to payment of the applicant's debt, or by taking appropriate proceedings, in the case of a contested debt or on other grounds, to restrain advertisement (see especially at [106]). The implied restriction is on premature publication, not on publication after the expiration of the three-day period. The court's discretion to decline to order the winding up of an insolvent company 191 Redrock submitted that, if the court concludes that the company is insolvent, it should nevertheless decline to make a winding up order in the exercise of its discretion. That discretion is conferred by s 467(1)(a), which states that on hearing a winding up application the court may dismiss the application with or without costs, even if the ground has been proved on which the court may order the company to be wound up on the application. It is, of course, unusual for the court to decline to order the winding up an insolvent company. 192 The question of exercise of the court's discretion does not arise in the present case, because I have reached the conclusion, on balance, that Redrock is not insolvent. I note, however, that there are a number of matters that may well have led me to refuse to make a winding up order if I had concluded that the company is marginally though not clearly insolvent. Relevant to the exercise of the court's discretion would be the collateral purposes of ABD that I have found to exist; the fact that its standing depends upon an assignment of a debt the amount of which has been tendered and paid into court by the company, and it seeks to rely on an equitable assignment to it of another debt of which notice was not given to Redrock until some months after the assignment took place; the fact that ABD chose to communicate with Westpac and Bertshell and others in circumstances where, in my view, it must have been plain to Mr Brooks that there was a substantial risk of damage to Redrock; and the fact that a related company of ABD, LNW, is engaged in litigation with Redrock as to the ownership of the business conducted by Redrock and the distribution rights for Splitrock and Tiro products. I agree with White J ([2007] NSWSC 966 at [46]) that there was "malicious intent" involved in using the proceedings to subject Redrock to the cost and trouble of additional litigation, although that malicious intent did not amount to a predominant purpose and was not accompanied by the use of fraudulent means. 193 However, it is unnecessary for me to decide whether these factors would prevent the court from making a winding up order if Redrock were insolvent, and indeed it is impossible to to so in the abstract, without a finding of specific grounds of insolvency. Conclusions 194 ABD has standing to bring and maintain the present proceedings and has properly served the originating process. It has not engaged in an abuse of process or premature publication contrary to the implied restriction in rule 5.6(2)(b)(i). But it has failed to prove any grounds for the winding up of Redrock. Consequently, the proceedings will be dismissed. I shall appoint a time to hear the parties on the question of costs. ********** 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.