New South Wales Supreme Court CITATION : In the Matter of Enviro Energy Australia Pty Ltd (in liquidation) [2010] NSWSC 1222 HEARING DATE(S) : 23 September 2010 JUDGMENT DATE : 23 September 2010 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 23 September 2010 DECISION : 1. Order that the interlocutory process filed on 8 April 2010 be dismissed; 2. order that the applicant pay the costs of the second respondent and the liquidator on the indemnity basis; 3. order that the applicant pay the costs of Challenger Managed Investments Limited in respect of the interlocutory process on the ordinary basis; 4. exhibits may be returned after 28 days. CATCHWORDS : CORPORATIONS – application under Corporations Act 2001 (Cth), s 482 to stay or terminate winding-up of defendant company – application made by contributory and sole director of defendant company – where applicant proffered undertakings to seek adjournment of proceedings to make arrangements to discharge liabilities – onus on applicant to make out positive case for application – considerations relevant to grant of application – where evidence that company insolvent – where applicant failed to provide books and records to liquidator – where no evidence from external party to corroborate applicant's assertions as to company's financial position – not in the public interest or interests of commercial morality to restore stewardship of company to applicant's control – undertakings proffered not proper basis for adjournment - COSTS – whether company's liquidator and major creditor entitled to indemnity costs – where applicant delinquent in pursuing application LEGISLATION CITED : Corporations Act 2001 (Cth) CATEGORY : Principal judgment Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Limited [1999] NSWSC 494; [1999] 17 ACLC 972 CASES CITED : Metledge v Bambakit Pty Ltd (in liquidation) [2005] NSWSC 160 Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd (in liquidation) [2004] NSWSC 783 TEXTS CITED : McPherson, The Law of Company Liquidation PARTIES : Applicant: Michael Ayoub1st Respondent: Chief Commissioner of State Revenue2nd Respondent: Bruce Gleeson (Liquidator of defendant)Interested Parties: Perpetual Trustee Company Limited and Challenger Managed Investments Limited FILE NUMBER(S) : SC 2009/290836 Applicant: J R Young COUNSEL : 1st Respondent: n/a 2nd Respondent: M Hayter Interested Parties: D Gasic Applicant: Good Legal Pty Ltd SOLICITORS : 1st Respondent: Matthews Folbigg 2nd Respondent Gillis Delaney Lawyers Interested Parties: Norton Rose IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Thursday, 23 September 2010 2009/290836 In the Matter of Enviro Energy Australia Pty Ltd (in liquidation) JUDGMENT 1 HIS HONOUR: This is an application under s 482 of the Corporations Act 2001 (Cth) that the winding-up of the defendant company, Enviro Energy Australia Pty Ltd (in liquidation), be stayed or terminated. 2 It is common ground that the applicant, Mr Michael Ayoub, is a contributory of the company and has standing to make this application. 3 A winding-up order was made on 1 March 2010. The company was wound up in insolvency on the application of the Chief Commissioner of State Revenue. Mr Bruce Gleeson of Jones Partners, Chartered Accountants, was appointed liquidator. 4 The present application was filed on 8 April 2010. There were adjournments to extend the time for the applicant to file and serve the affidavits upon which he relied. On 18 August 2010 the matter was listed before me today. 5 In the course of final submissions the applicant proffered undertakings on the basis of which he submits that the present application should be adjourned to a date on or after 4 December 2010, with a view to the winding-up then being terminated if the undertakings have been satisfied, and if the court is then satisfied that all of the company's liabilities have been discharged. 6 The onus is on the applicant to make out a positive case for a stay or termination of the winding-up. Relevant considerations include proof that the company is solvent, and that its assets exceed its liabilities. For this to be shown, it is necessary for an applicant to establish what the assets and liabilities of the company are. This is usually done by evidence from the liquidator or from an external accountant based on a review of the company's books and records. Courts are generally reluctant to act only on the evidence of the former controller or controllers of the company, unless that evidence is corroborated by evidence of a liquidator who has been able to undertake, and has undertaken, a sufficient investigation of the company's financial position such that he or she can express an opinion as to solvency, or by an external accountant who has undertaken the same kind of tasks (see Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Limited [1999] NSWSC 494; [1999] 17 ACLC 972 at [8]; and Metledge v Bambakit Pty Ltd (in liquidation) [2005] NSWSC 160 at [34] and [35]). 7 Other relevant considerations on applications of this kind include whether or not the conduct of the company's affairs was in any way contrary to commercial morality or the public interest, and whether or not the court is satisfied that it would not be contrary to commercial morality or the public interest to restore the stewardship of the company to its former controller or controllers. 8 All of these matters arise in the present case: that is to say, proof of solvency, evidence from an external party as to the financial position of the company after an investigation of its books and records, and matters of public interest. 9 It appears that the company's business was as an investment company owning land and buildings at Five Islands Road, Cringila subject to leases. It appears that the company's source of income was rents. 10 The applicant deposed that the reason the winding-up order was made was due to the failure of his former solicitor to appear on the return of the originating process by which the Chief Commissioner of State Revenue sought the winding-up order. That order was made in default of appearance. There are some issues raised going to the circumstances in which the solicitor retained for the company did not appear at that time. I do not propose to go into those issues. Suffice it to say that I would not refuse this application solely on the grounds that the evidence did not satisfactorily explain the circumstances in which the winding-up order came to be made. 11 In support of his contention that the company is solvent, the applicant read an affidavit and an expert's report of a Mr Albert Cachia, a chartered accountant. The report was prepared on the basis of information provided to Mr Cachia from which he made assumptions as to the assets and liabilities of the company. Mr Cachia expressed the opinion that the company is solvent and has a surplus of assets over liabilities, and at least a potential surplus of income over expenditure. 12 Mr Cachia also expressed the view that the applicant has substantial other resources from which funds could be provided to enable the company to pay its debts as they fall due. The evidence upon which that assertion was made was rejected. In any event, in the absence of a proposal to capitalise a debt that might be incurred to the applicant, if such resources were required, I doubt that the possibility of funds being available from the applicant could establish solvency. 13 Mr Cachia assumed, on the basis of a document provided to him by a firm of real estate agents, that the company's land had a value of between $5.5 million and $6 million. He adopted what he said was a conservative figure of $5.8 million as the value of the land. 14 For reasons which I then gave, I rejected the evidence from the real estate agent upon which Mr Cachia relied as being evidence of value of the land. There is no evidence which substantiates the assumption as to the value that Mr Cachia adopted. 15 In any event, in July of this year, the liquidator disclaimed that property on the grounds that it is contaminated land and subject to onerous obligations (Corporations Act, s 568(1)(d)). The liquidator gave evidence that a secured creditor, Challenger Managed Investments Limited, appointed a receiver to the property, that the receiver retired following receipt of an expert's report on environmental aspects of the land, and subsequently the liquidator disclaimed the property. 16 The effect of the disclaimer is that the company's rights, interests, liability and property in, or in respect of the property, disclaimed are taken to have been terminated (Corporations Act, s 568D). It is thus clear that unless in some way the disclaimer is set aside, the company does not have the principal asset on which the applicant's evidence as to solvency was based. 17 There is no reason to assume that the disclaimer could or should be set aside. 18 Mr Cachia also assumed that the company's assets included receivables totalling approximately $300,000. These are shown in a balance sheet for the company prepared as at 30 April 2010. It showed receivables totalling $338,264, being debts owed in respect of certain loans. They are not assets the liquidator has been able to collect. 19 Mr Cachia assumed on the basis of the same financial statements that the company had external liabilities (other than what were called financial liabilities) totalling $112,578, consisting of debts of $66,838 owed to trade creditors, $15,000 for PAYG withholding tax and provision for GST of $30,740. However, the liquidator's evidence establishes that the company has at least additional debts of $91,956.98 payable to the Office of State Revenue and $34,241.61 payable to Wollongong City Council. Moreover, as at 1 March 2010 it owed a debt to the Australian Taxation Office of $60,564.36 which may or may not have included the amounts recorded in the company's financial statement for taxation liabilities. 20 The same balance sheet records liabilities described as unsecured loans to entities described as COEMA ($13,000), Chearven Swift ($25,000), Sudchotten ($15,000), Aldi Petroleum ($508,331) and loans from directors ($115,340). The liquidator deposed that until he saw these statements in the balance sheet he was unaware of creditors such as Aldi Petroleum, Sudchotten, Chearven Swift and COEMA. The balance sheet was only provided to the liquidator by way of its being attached to a report prepared by a Mr Martin Green of BRI Ferrier, which was an annexure to Mr Cachia's affidavit. 21 The liquidator deposed that he had been requesting the balance sheet and financial statements of the company for some time. It was only indirectly in this way that a balance sheet was provided to him. 22 The balance sheet also records a liability as at 30 April 2010 of $3,070,976 to Challenger, which it is said is in dispute. As at 2 August 2010, the Challenger loan balance was $3,614,751.45. 23 According to the Challenger statement of the loan account, as at 30 April 2010, the outstanding loan balance was approximately $3,432,030. These discrepancies are not explained. 24 Mr Cachia opined that the company had potential income on the basis of leases he had seen of about $706,600 per annum. He estimated that the rental property expenditure was in the order of $687,000 per annum, whilst he noted that the financial statements in respect of income and expenditure appeared to be incomplete. 25 The liquidator has received no rental income since his appointment. Some of the units are unoccupied. Other tenants have refused to pay rent on the basis that they have off-setting claims against the company, or that their obligations to pay rent are satisfied by contra arrangements with the applicant. In any event, as the property has been disclaimed, the company has no right to income from that source. 26 This evidence clearly shows that the company is insolvent. 27 I should interpolate that included among the company's liabilities, but not reflected in Mr Cachia's report, or in the financial statements which are an annexure to his report, is a contingent liability of the company as guarantor of a debt said to be owed by a petroleum company to Arab Bank Australia Limited. 28 The Arab Bank maintains that the company, together with another company that was also wound up on 1 March 2010, are liable under the guarantee in an amount of approximately $7, 911,000. 29 The evidence goes further than that, and shows that the information provided to the liquidator is totally deficient, and that the financial statements, indirectly produced through their being a part of an annexure to Mr Cachia's report, are themselves unreliable. 30 I infer that the financial statements were prepared by the company's external accountant, Mr Poulton. The applicant has produced no evidence from him, or, if the statements were prepared by some other accountant, by that person, attesting as to what records were available to the preparer of the accounts and the extent to which, if at all, that person conducted an audit, or any other verification, of the information summarised in the accounts. The liquidator has not been able to conduct any such verification because he has not had the books and records of the company. 31 Thus, the external corroboration of the company's finances required on applications of this kind is lacking. Mr Cachia's report is not a substitute for such corroboration. He based his opinion as to solvency on the information provided to him. He did not verify that information. 32 Some information as to the company's financial position was provided by the applicant in his director's report as to the company's affairs. The applicant there stated that the unsecured creditors of the company consisted of himself for an unstated amount, and the Wollongong City Council, and a liability for land tax. He said that the amount claimed by the Wollongong City Council and the amount owing for land tax was $5,000. That is clearly wrong. It demonstrates that the applicant's assertions as to the assets and liabilities of the company are unreliable. 33 The liquidator complains that the applicant did not deliver the company's books and records to him. He says that he obtained from Poulton & Associates financial statements of the company for the year ended 30 June 2008, and certain bank statements, but that was all. The liquidator noted that the applicant claims to have mailed to the liquidator's office all of the books and records of the company, but those records were not received by him. The liquidator, through his solicitors, wrote to the applicant's solicitor on 11 May 2010 asking to be provided with copies of the report as to affairs, and the books and records of the company. On 24 May 2010, the applicant's solicitors, Good Legal, advised that the request had been referred to the applicant to be dealt with. It is the applicant's contention, as later advised on 27 July 2010, that the books and records were sent to the liquidator by post on 28 April 2010. 34 On 27 May 2010, Good Legal stated that the applicant had forwarded to the liquidator's solicitors bank statements collected from Poulton & Associates. On 3 June 2010, the liquidator instituted proceedings seeking orders that the present applicant deliver up to him all of the books and records of the company, and file and serve an affidavit deposing as to what books and records of the company were kept by it, and the last location known to the applicant of each such book and record. 35 On 7 June 2010, orders were made by consent that within seven days the present applicant deliver up to the liquidator all books and records of the company, and file an serve an affidavit deposing to what books and records of the company were kept by it and the last location known to the applicant of each such book and record. No such affidavit has been provided. There is no explanation for that failure. 36 The liquidator also deposes that he was not provided with a report as to affairs and the questionnaire addressed to the applicant (who is the company's sole director) until those documents were provided to him as an annexure to the applicant's affidavit of 26 June 2010. 37 These are serious matters. 38 It appears from the proof of debt provided by the Australian Taxation Office that the company did not lodge business activity statements for the period from 1 April 2009 to 31 December, 2009. The company's income tax return for the year ended 30 June 2009, is also outstanding. There is no explanation for the apparent failure of the company to have complied, in a timely way, with its obligations to lodge business activity statements and its income tax return. 39 I am not satisfied that it would be in the public interest, and in the interests of commercial morality, to restore the stewardship of the company to the control of the applicant. 40 The applicant has proffered undertakings in support of his submission that the proceedings be adjourned that he will make all reasonable attempts to obtain from his brother, or from the Arab Bank, funds necessary to pay out debts owed by the company to Challenger, the Office of State Revenue, the Australian Taxation Office, the Wollongong City Council and the liquidator. He states that he will clarify and, if necessary, negotiate the amounts to be paid, but says that he accepts that the quantum of each debt will be determined by the respective creditors. He undertakes that, subject to obtaining the necessary finance, he will pay the amounts as determined by those creditors after negotiation. He offers to renounce any claim for payment that the company might be liable to make him. 41 There is no evidence as to the applicant's ability to raise the necessary finance. Nor is there any evidence to explain why this proposal was not made (so far as the evidence reveals) until advanced in final submissions. 42 It would be one thing for the applicant to seek the termination or stay of the winding-up if arrangements had already been put in place to pay all of the company's known debts. It is quite another for the applicant to have made this application, apparently on the basis of his assertion that the company was solvent, and then, at the last minute, to seek an adjournment in order for him to attempt to implement that proposal. 43 In my view the proffering of those undertakings does not provide a proper basis for an adjournment. The present application should be dealt with on its merits, such as they presently are. 44 Finally the applicant did not serve the present application on ASIC, notwithstanding r 2.8(3) of the Supreme Court (Corporations) Rules 1999. I see no reason to make an order dispensing with compliance with that rule. 45 In short, the applicant has failed to show the full nature and extent of the company's creditors. I cannot be satisfied on the material on this application that the full extent of the company's creditors are known. I am not satisfied that all of the company's debts which are known will be discharged. The company is clearly insolvent. 46 I do not consider that the applicant has shown he has complied with his statutory duty in relation to the giving of information and the furnishing of a statement of affairs to the liquidator. He has failed to comply with an order of the court requiring the swearing of an affidavit as to what books and records were kept by the company and the last location of those books and records known to him. 47 I am not satisfied that the returning of the company to the stewardship of the applicant would be in the public interest. 48 For these reasons I order that the interlocutory process filed on 8 April 2010 be dismissed. I will hear the parties on costs. [PARTIES ADDRESSED] 49 The liquidator seeks an order that his costs of the application be paid on the indemnity basis. Mr Young, for the applicant, submitted that the costs should be paid on the ordinary basis. 50 The question is whether it was unreasonable for the applicant to have brought and proceeded with the application, that is to say, whether, properly advised, he should have appreciated that the application was without substance and was almost bound to fail, or whether he so conducted himself in the conduct of the proceedings that it is just that the costs be paid on the indemnity basis. In either case, the focus is on whether he has been guilty of a delinquency which warrants costs being ordered on the indemnity basis. 51 The interlocutory process was initially supported by an affidavit of the applicant sworn on 6 April 2010, which did no more than state that he was the sole director of the company, that he was making the application on an urgent basis, and a complete and more comprehensive affidavit would be served. Clearly the application was not ready when it was filed. That occasioned some additional costs because the solicitors for the liquidator had to correspond about the state of the applicant's evidence. 52 The matter was returned before the Registrar on 6 May 2010 when orders were made for the applicant to serve its evidence by 20 May. That was not done. On 7 June 2010 there was a further extension for the applicant to serve his evidence. It was required to be served by 21 June. The applicant's substantive affidavit was not sworn until 26 June 2010. He annexed to his affidavit the report of Mr Cachia. The liquidator's solicitors pointed out the difficulty of that course, and it was not until 12 July 2010 that Mr Cachia swore his affidavit. 53 The liquidator's solicitors wrote to the applicant's solicitor on 21 July 2010, complaining about the applicant's conduct in relation to the liquidation generally, and in relation to his failure to comply with the orders made by Barrett J on 7 June 2010. They also advanced a number of grounds as to why the applicant's case was without substance, including the applicant's failure to comply with his statutory obligations, the nature and extent of creditors, and the applicant's failure to provide books and records. They referred to public interest considerations in the granting of a stay, or termination of the winding-up. Those contentions have been substantially upheld. 54 The liquidator's solicitors had earlier written to the applicant's solicitors concerning deficiencies in the applicant's affidavit of 26 June 2010 and observed, understandably, that it was extremely frustrating for the liquidator to have to deal with the application when the applicant had delayed the matter for a substantial time and then put forward an affidavit which, so it was said, had virtually no prospect of success. 55 I think there has been a relevant delinquency, both in the dilatory conduct of the application and in relation to the substance of the matter. In my view, properly advised, the applicant ought to have appreciated that the application was not one which had reasonable prospects. This is a case for indemnity costs. 56 The second question concerns the costs of Challenger. It has been heard on the application. It made submissions. It filed an affidavit responding to incorrect assertions about its position in the applicant's evidence. Mr Young, for the applicant, submitted that it was not a party to the application, and should not be entitled to costs. 57 In Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd (in liquidation) [2004] NSWSC 783, I referred to the position as it then appeared in McPherson, The Law of Company Liquidation, where the learned editor, Professor Keay, said that it appears necessary to serve notice of the application to terminate a winding-up on all creditors and contributories so as to give those who wish to oppose the order an opportunity of doing so. I observed that, in my view, it was not the rule that all creditors must be served with notice of the application, but that in appropriate circumstances it might be desirable that all, or some of them, be served with the application, particularly where their interests may be adversely affected if the order is made. 58 I also observed that the position is now dealt with by r 2.8(3) of the Supreme Court (Corporations) Rules. In this case, service was not effected under that rule. 59 I think Challenger had a sufficient interest to justify its appearing on the application and adducing evidence on it. An issue appeared to be raised on the applicant's evidence that there was a genuine dispute as to the company's liability to Challenger. The evidence did not establish a ground for a genuine dispute, but it was proper for Challenger to have appeared. Had it not done so, the costs involved in its appearance would, in any event, substantially have been incurred by the liquidator in adducing evidence to the same effect as that adduced by Challenger. 60 In all the circumstances, I think that Challenger is entitled to its costs on the ordinary basis. 61 For these reasons, I order that the applicant pay the costs of the second respondent and the liquidator on the indemnity basis. 62 I order that the applicant pay the costs of Challenger Managed Investments Limited in respect of the interlocutory process on the ordinary basis. 63 The exhibits may be returned after 28 days. ****** 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. 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