New South Wales Supreme Court CITATION : State Debt Recovery Office v L & G Contracting Service Pty Limited [2009] NSWSC 1116 HEARING DATE(S) : 21 and 24 September 2009 JUDGMENT DATE : 24 September 2009 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 24 September 2009 DECISION : 1. Direct that the liquidator of the defendant, Mr David Ian Mansfield, is justified in withdrawing from the company's bank account the sum of $16,826.15 as his remuneration; 2. Subject to order 1, order that the winding-up of the defendant be stayed up to and including 29 September 2009; 3. Stand over the further hearing of the interlocutory process to 9.30 am on 29 September, 2009. CATCHWORDS : CORPORATIONS – winding up – application to terminate winding up – consideration of company's solvency and company's assets and liabilities – winding up stayed to allow deed of release to be entered into in order to discharge a liability of the company to its director with a view to the winding-up being terminated Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Ltd [1999] NSWSC 494; (1999) 17 ACLC 972 CASES CITED : Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd (in liq) [2004] NSWSC 783 Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 State Debt Recovery Office PARTIES : v L & G Contracting Service Pty Limited FILE NUMBER(S) : SC 3401/09 COUNSEL : Plaintiff: N Obrart Defendant: N Sullivan SOLICITORS : Plaintiff: Champion Legal Defendant: ADL Legal IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Thursday, 24 September 2009 3401/09 State Debt Recovery Office v L & G Contracting Service Pty Limited JUDGMENT 1 HIS HONOUR: This is an application that the winding-up of L & G Contractor Services Pty Ltd (in Liquidation) ("the company") be terminated. The application is brought by Mr Ying Geng who has standing both as a contributory and creditor. 2 Up to 31 March 2009 the company carried on business as a karaoke bar and relaxation centre in Parramatta. It also owned and operated a paper box construction business. It was wound up by order made on 23 July 2009 on the application of the State Debt Recovery Office. 3 Mr Geng deposes that the circumstances in which the winding-up order came to be made was that in about 2006, the company was fined by WorkCover as a result of a workplace injury. Mr Geng deposes that he understood that he was personally liable to pay the fine and that he made arrangements with the State Debt Recovery Office to pay the fine by instalments. By reason of some administrative hiccup, his payments were rejected by the State Debt Recovery Office. He did not receive a copy of the statutory demand which preceded the winding-up application, and was not aware that the winding-up order had been made until after the event. 4 Mr Geng deposes that the company has no outstanding debts or liabilities other than a debt owed to him and amounts owing to the liquidator for his remuneration. 5 The company has sufficient assets in its bank account to meet the liquidator's claim for remuneration. If I am satisfied that the company is solvent and that its assets would exceed its liabilities if the winding-up is terminated, then this is a proper case for termination of the winding-up. 6 Mr Geng has paid the debt owed to the State Debt Recovery Office and has paid its legal expenses in connection with the winding-up application. He is willing to convert the whole of his "shareholder loan" to capital. He deposes that the company is indebted to him in the sum of $219,122 and he will release the company from any liability in respect of the loan. I am told that he is willing to enter into a deed with the company that will release the company from any liability which it might have to him. 7 The liquidator has provided a report on the current position of the winding-up. That report, so far as it concerns the financial position of the company, is not based upon the liquidator's review of the primary books of account or the primary accounting records of the company. Rather, it is based upon a Report as to Affairs as submitted by Mr Geng, upon Mr Geng's affidavits sworn in these proceedings, and upon financial statements for the company as at 30 June 2009 provided to the liquidator by the company's accountant, Mr Stephen Chan, of Australasian Business Services. 8 Based on those materials, the liquidator summarised the assets and liabilities of the company as follows: " Cash at bank $ 23,579.00 Debtors 27,660.00 Plant and Equipment 107,006.00 Other Assets 58,065.00 Total $ 216,310.00 Unsecured creditors - State Debt Recovery Office $ 24,000.00 Australian Taxation Office 978.00 Mr Geng 219,122.00 Deficiency ($27,790.00) " 9 The cash at bank will be applied in meeting the liquidator's remuneration. He seeks confirmation that he can draw remuneration in an amount of $16,826.15. There is no opposition to that claim and I am satisfied from the liquidator's time sheet that it is a proper claim. 10 The liquidator says that the debt of $27,660 represents a debt owed by an associated company, Australia Industrial. This is based on information given by Mr Geng. 11 From 1 April 2009, Australia Industrial has carried on the karaoke and relaxation centre business formerly carried on by the company. Australia Industrial is in the course of taking over the paper box construction business. 12 The company's accountant, Mr Chan, has provided a trading and profit and loss statement and balance sheet for Australia Industrial as at 30 June 2009. Those financial statements indicate that if it owes a debt of $27,660, Australia Industrial should be in a position to satisfy that debt. 13 The company's balance sheet as at 30 June 2009 records a debt of $27,660 as an asset and I infer that it is the same debt that is said to be owed to it by Australia Industrial. It is not separately recorded as a liability on the balance sheet of Australia Industrial. I do not take it into account in assessing whether there is a surplus of assets over liabilities. 14 There has now been placed before the court evidence concerning the plant and equipment, including depreciation schedules itemising that plant and equipment. I am satisfied that such items exist and they are properly accounted for at cost less depreciation in the company's accounts. It is not possible to say how much the assets might realise if they had to be sold to meet the claims of future creditors, but it is clear that even on a forced sale they would have a material value. 15 The item for other assets of $58,065 relates to rental and electricity bonds. It is doubtful that they represent assets which would be available to meet the claims of future unsecured creditors. 16 So far as the liabilities of the company are concerned, so far as they are disclosed in the financial statements, the debt owed to the State Debt Recovery Office has been paid. The liquidator's enquiries of the Australian Taxation Office show that the ATO is not aware of any outstanding taxation liabilities of the company. It advised its position might change following the lodgment of any outstanding taxation returns and business activity statements. 17 The company's taxation returns and business activity statements have been attended to up to the period ended 30 June 2009 and the liquidator is satisfied that the liability of $978 in respect of GST appears to be the company's only taxation liability following the completion of these lodgments. As I have said, the debt owed by the company to Mr Geng will be discharged by being capitalised. 18 The question is whether I should be satisfied that there are no other creditors of the company. Mr Geng deposes that there are none other than a lessor of premises in Parramatta. In his affidavit of 3 September 2009 Mr Geng said that as lessee of premises in Aird Street, Parramatta the company was under a liability for continued rental payments; that it had always met those rental payments; and that from 11 June 2009 Australia Industrial had been paying rent under the lease. 19 There is corroboration from the managing agent that the lease payments have always been kept up-to-date. The evidence of the trading performance of Australia Industrial shows substantial trading profit for the year ended 30 June 2009 and its balance sheet indicates its ability to continue to pay rent under the lease. 20 Mr Geng deposes that the company's paper box construction business has no outstanding debts and liabilities. There is also evidence that the rent on premises formerly leased by the company at Granville, which are used for the paper box construction business, which is being taken over by Australia Industrial, has always been kept up-to-date. That lease has expired and was not to be renewed by the company, but by Australia Industrial. 21 Mr Geng deposes that all debts and liabilities owed to the company's suppliers have been satisfied. He deposes that the company's only outstanding debt was the debt payable to the State Debt Recovery Office, together with costs, and those debts have since been paid. 22 On applications to terminate a winding-up, the court does not act on mere assertions by the controller of a company as to its solvency and as to its assets and liabilities. The court requires corroboration of such assertions. Sometimes the corroboration is provided by a liquidator, if the liquidator is in a position to verify the asserted facts as to the financial position of the company. Sometimes it is provided by an external accountant (Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Ltd [1999] NSWSC 494; (1999) 17 ACLC 972 at 973; Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd (in liq) [2004] NSWSC 783 at [23]-[25]; and Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 at [33]-[34]). 23 Today the applicant has read the affidavit of Mr Chan, who has been the accountant for the company since its incorporation in 2004. He has prepared the company's business activity statements, its taxation returns, balance sheets and profit and loss accounts. His evidence is generally corroborative of the evidence given by Mr Geng. However, he is not in a position from his own knowledge to say whether the company has any creditors other than the debt owed to Mr Geng. The reason for this is that the financial statements are prepared from invoices with which Mr Chan is provided by Mr Geng and from the company's bank statements. Mr Geng instructs Mr Chan that the invoices have been paid either by Mr Geng personally, or from the company's bank account. The invoices are paid in cash. Mr Chan treats any excess of the invoices over the amount of cash drawn from the company's bank accounts as loans made by Mr Geng to the company. 24 If there were creditors of the company who were unpaid, it does not appear that Mr Chan would have knowledge of them. Hence, he deposes that he is not in a position to say that if the winding-up of the company were terminated, the company would be able to pay its debts as and when they fell due, because he does not know whether there are outstanding debts, as a cash basis for accounting is used. 25 The question then is whether I should be satisfied with Mr Geng's verification of the absence of any external creditors. I think in this case I can be. That is so for two principal reasons. The first is that no creditor of the company has come forward to make any claim in the liquidation other than, of course, the State Debt Recovery Office. If there were any external creditors, one would expect the liquidator to have been informed by them of their debts since the winding-up order was made. 26 The second reason why I accept Mr Geng's verification of the absence of external creditors is that he has properly attended to the lodgment of the company's income tax returns and its business activity statements. Of course, that fact is not directly probative of the absence of creditors. But it does indicate that Mr Geng has attended to the company's taxation obligations with proper attention. I think I can have regard to that in assessing the credibility of his affidavit evidence. 27 For these reasons I am prepared to make an order for termination of the winding-up once I am satisfied that the company's liability to Mr Geng has been discharged. I am not prepared to make an order terminating the winding-up on the basis of an undertaking that at some time in the future the company's debt to Mr Geng will be satisfied by the issue of shares. Rather, I will stay the winding-up for a short period to allow the directors to take the necessary steps to issue the shares and to allow a deed of release to be entered into. That stay will not preclude the liquidator from withdrawing his remuneration of $16,826.15. 28 For these reasons I make the following orders: 1. Direct that the liquidator of the defendant, Mr David Ian Mansfield, is justified in withdrawing from the company's bank account the sum of $16,826.15 as his remuneration. 2. Subject to order 1, order that the winding-up of the defendant be stayed up to and including 29 September 2009. 3. Stand over the further hearing of the interlocutory process to 9.30 am on 29 September, 2009. ****** 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.