Supreme Court New South Wales Medium Neutral Citation: State Debt Recovery Office v Veraz Enterprises Pty Ltd [2011] NSWSC 900 Hearing dates: Monday, 8 August 2011 Decision date: 08 August 2011 Jurisdiction: Equity Division - Corporations List Before: White J Decision: 1. Order that the interlocutory process filed on 1 August 2011 be dismissed. 2. Order that the applicant pay the liquidator's costs. 3. The exhibits may be returned but should be retained for at least 28 days by the applicant's solicitors Catchwords: CORPORATIONS - winding up - application to terminate winding up - consideration of solvency and assets and liabilities of company - neither solvency of company nor its having an excess of assets to liabilities established by fullest and best evidence - application dismissed Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Re Warbler Pty Ltd (1982) 6 ACLR 526 Metledge v Bambakit Pty Ltd [2005] NSWSC 160 Acconci v Alpha Technologies Corporation Ltd (In Liq) (2010) 79 ACSR 505 Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd [2004] NSWSC 783 Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196 Category: Principal judgment Parties: State Debt Recovery Office (Plaintiff) Veraz Enterprises Pty Ltd (Defendant) Representation: N Sullivan (Liquidator) M D Farrar (Defendant) Champion Legal (Plaintiff) File Number(s): 2011/185220 Judgment 1HIS HONOUR : This is an application under s 482 of the Corporations Act 2001 (Cth) for an order terminating the winding-up of the defendant. 2On 28 July 2011, the Court ordered that the defendant be wound up and that Messrs Cussen and Cathro of Deloitte Touche Tohmatsu be appointed as liquidators of the defendant. 3The defendant was wound up on the application of the State Debt Recovery Office. It was wound up in insolvency for failing to pay a debt of $4,600 which was the subject of a statutory demand dated 31 March 2011. The evidence in support of the winding-up application included evidence that the statutory demand for that sum had been served on the defendant on 6 April 2011. 4The debt the subject of the statutory demand, was in respect of two unpaid fines: one for $1,550 said to have a due date of 3 August 2003; and the other for $3,050 said to have a due date of 24 November 2010. 5The application to terminate the company's winding-up is brought by Ms Voskra Mateska who deposes that she is a director and contributory of the defendant. 6The criteria to which the Court customarily has regard in deciding whether to exercise its discretion under s 482 to terminate the winding-up of a company were listed by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526. As Barrett J said in Metledge v Bambakit Pty Ltd [2005] NSWSC 160 the criteria need not be "rigidly applied" but " provides useful guidance ". 7One of the criteria stated was that there be service of the notice of the application on all creditors and contributories. That is not a necessary requirement. In Acconci v Alpha Technologies Corporation Ltd (ACN 006 613 636) (in liq) (2010) 79 ACSR 505 Dodds-Streeton J, applying what I said in Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd (in liq) [2004] NSWSC 783 at [20], observed that whilst the general rule is that all creditors must be notified of the application, it was not an absolute rule. However, it is a requirement of the Supreme Court (Corporations) Rules 1999 that unless the Court otherwise orders, an application for the stay or termination of a winding-up be served on ASIC a reasonable time before the hearing (r 2.8(3)). That was not done in this case. I take it that I am asked to dispense with the operation of that rule. 8A vital consideration is that the Court be satisfied that the company is solvent and that its liabilities not exceed its assets, otherwise future creditors may be prejudiced by an order terminating a winding-up. Moreover, in Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196 Hammerschlag J said (at [26]) that: " ... the solvency of the Company is to be demonstrated by the applicants who bear the onus to do so by leading the 'fullest and best' evidence of the company's financial position ... Proper verification of assets and liabilities is critical to rebut the presumption of insolvency. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency ... " 9It is not the practice of the Court to act on the evidence of the single director or shareholder who controls the company. Confirmation of solvency, and of an excess of assets over liabilities, is generally to be provided either by the liquidator, if the liquidator has carried out sufficient investigation to be able to express an informed opinion, or from the evidence of an external accountant who has carried out the necessary verification. 10In the present case the liquidators neither consent to nor oppose the application. They are not in a position to provide assistance to the Court by expressing a view as to the solvency, or as to the assets and liabilities, of the company. The winding-up order was made only on Thursday of the week before last. Ms Mateska and the other director of the company have not provided the liquidator with any of the books or records of the company. That is so notwithstanding that pursuant to s 474 of the Corporations Act, on the winding-up order being made, it was the liquidators who were to take into their custody all of the property of the company. That included the company's financial records. 11Immediately after Ms Mateska was informed that an order had been made for the winding-up of the company she protested to the liquidator that the company was solvent. She made arrangements to pay the debt claimed by the State Debt Recovery Office, including the amount of its legal costs up to 23 June 2011. The liquidator sought to arrange a meeting with her, but that meeting did not take place. Her solicitor advised the liquidator on 29 July 2011 that she did not consider that a meeting was necessary as there was " ample evidence to show that the company is solvent ". The liquidator asked to be provided with evidence of the company's solvency and said that management accounts, balance sheets and/or cash flow figures would provide a good starting point. No such information was provided to the liquidator. 12What then is the evidence of solvency on this application? In her affidavit of 1 August 2011 Ms Mateska made the bald assertion that " Veraz Enterprise is a solvent corporation which is trading successfully ". That sentence was read without objection but carries no weight as the basis for the opinion was not revealed. 13In support of the application an affidavit was read from the company's accountant, a Mr Joseph Russo. He deposed: " 2. I have prepared 2009 and 2010 income tax returns and financial statements for Veraz Enterprises Pty Limited based on information provided by company officers. I have also prepared draft 2011 financial statements and draft 2011 income tax return for the company based on information provided by the company officers. 3. Based on these reports prepared based on the information provided by the company officers, it is my opinion that Veraz Enterprises Pty Limited has had a positive net asset value since I have acted for the company. 4. I have attached a draft 2011 Balance Sheet for Veraz Enterprises Pty Ltd showing a net asset value of approximately $282,000 as at 31 March 2011. The gross asset value exceeds $4,800,000. The major creditors are company shareholders and related parties. 5. The company does not have any employees and there are no outstanding wage tax or superannuation obligations. 6. In my opinion, the company is solvent and will be able to pay its debts as [and] when they fall due in the normal course of trading. " 14He attached to his affidavit a draft balance sheet as at 30 June 2011. This document showed that the company had what were called total current assets of $5,004 consisting of cash on hand of $4 and prepaid borrowing expenses of $5,000. It showed that the company has non-current assets of $4,892,929 consisting of five parcels of land in Warrawong, Dapto, Wollongong and Unanderra. It is significant on this application that one of the properties, being a property in Globe Lane, Wollongong, is recorded in the draft balance sheet as having a value or cost (it is not clear which) of $800,000. There is evidence that a tentative offer has been made for the property in the amount of $[figure omitted from published reasons], although the offer is subject to contract and due diligence. 15The balance sheet attached to Mr Russo's affidavit of 4 August 2011 shows the company as having total liabilities of $4,615,351. These are stated to consist of liabilities of $94,237 to the Australian Taxation Office described as the " GST clearing ", secured loans of $1,951,164, and unsecured loans described as " Loans - Directors & Relatives $2,243,949 " and " Loans from other persons $326,000 ". 16Ms Mateska gave oral evidence that the debt of $326,000 was owed to her and that the debt of $2,243,949 is a debt owed to the estate of Mr Vince Zarev who died on 14 June 2011, and who was the co-director of the company. 17Mr Russo did not say what steps, if any, he has taken to verify the value of the assets or the amount of the liabilities of the company. No earlier financial statements were provided. There was no evidence as to what accounting records were maintained, such as ledgers or cashbooks, or what they reveal. 18The draft balance sheet as at 30 June 2011 did not include as a liability the debt then owed to the State Debt Recovery Office. Nor does the draft balance sheet record any debts to trade creditors. Ms Mateska's evidence is that the company carries on business as a landlord of both residential and commercial premises. It is possible, but surprising, that a company carrying on such a business would not have any trade debts. But the failure to record the debt owed to the State Debt Recovery Office raises an obvious question as to the reliability of the draft balance sheet attached to Mr Russo's affidavit. 19The applicant tendered a copy of a draft income tax return for the company as at 30 June 2011, also prepared by Mr Russo, which I was told was the draft tax return referred to in paragraph 2 of his affidavit. That draft tax return discloses a trading loss for the year ended 30 June 2011 of $49,282. It contains the same figures as to the company's total assets and total liabilities referred to earlier in these reasons as set out in the draft balance sheet. That is to say, total assets of $4,897,933 and total liabilities of $4,615,351. However, whereas the draft balance sheet attached to Mr Russo's affidavit shows that of the liabilities of $4,615,351, there were only $94,237 of current liabilities, the draft income tax return shows current liabilities of $621,482. 20There is no evidence that any of the non-current liabilities as shown in the draft balance sheet were repaid or substantially repaid. The discrepancy in the figure for current liabilities is unexplained. 21I should add that it may well be that the explanation for the figure of current liabilities of $621,482 in the income tax return is that that is the sum of the figure of $94,237 shown as current liabilities for " GST clearing " and the secured debt owed to IMB on the line of credit that as at 30 June 2011 was $527,244, rounded up to the nearest dollar. 22If that is the explanation for that variance there is a real question as to what weight I should attribute to Mr Russo's affidavit which described the liabilities to IMB on the line of credit as a non-current liability if, as the income tax return might imply, it is a current liability. 23The draft income tax return shows a figure of $4,915,710 against the description " total debt ". Counsel was unable to explain that figure, given the statement that the company's total liabilities were stated to be only $4,615,351. 24There is a further question in relation to the accounts provided, and that is the level of cash. The balance sheet shows cash of only $4.00. The explanation for there being only $4.00 of cash on hand is that the rents collected are paid directly into a line of credit account of the company with IMB. Ms Mateska was unsure of the total limit on that line of credit account. 25There was no evidence to establish what the limit is. At one point she said that the limit was some $511,000 and then $520,000 and then $550,000. It is not clear at all that there is an available line of credit against which moneys can be drawn on the account with IMB to pay current debts. 26I asked Ms Mateska how it was proposed that the company meet the liability shown on the draft balance sheet of $94,237 owed to the Australian Taxation Office. She said that an arrangement had been made with the Australian Taxation Office whereby the Australian Taxation Office had agreed to accept payment of that debt by instalments. A letter from the Australian Taxation Office dated 3 August 2011 was then tendered to support that contention. The Australian Taxation Office has agreed to accept arrangement for payment by instalments being monthly instalments of $6,000 from 15 September 2011 to 15 April 2013 and a further instalment of $5,623.14 on 15 May 2013. 27It may be that by virtue of that arrangement the company is currently solvent and could meet its liabilities now if they fall due. However, on an application such as the present, the applicant is obliged frankly to put forward full evidence as to the company's solvency. The fact that the company found it necessary to reach an agreement with the Australian Taxation Office for payment of a current tax liability by monthly instalments raises obvious questions as to the company's solvency. 28If the statements in the draft balance sheet are correct, then the value of the company's assets substantially exceeds the debts owed to third parties, other than in respect of unsecured loans. Ms Mateska's evidence is that all of the unsecured loans are owed either to her or to the estate of the late Mr Zarev. She is the executor of the estate. It is curious that in the summons for administration of that estate filed only last week Ms Mateska did not include as an asset of the estate the debt of $2,243,949 which she says is owed by the company to the estate. That was so notwithstanding that the inventory of estate assets included other debts owed to the estate and that the debt of $2,243,949 would far exceed the value of other assets described as being owned by the deceased. That raises a question as to the reliability of her evidence as to who is entitled to the loan described as " Loans - Directors & Relatives ". 29No undertaking was proffered that the debts said to be owed to related persons would be capitalised. 30Whilst it may well be that the value of the company's assets exceeds its liabilities, that is not established on the material before me on this application. Neither the solvency of the company, nor its having an excess of assets to liabilities, is established by the fullest and best evidence. 31It is said that it is urgent that an order be made today terminating the winding-up. The reason for that is that on or about 8 July 2011 Ms Mateska received an offer from GPT RE Limited to purchase the property in Globe Lane for a substantial sum well in excess of $800,000. The offer was said to be open for a period of 30 days. However, the offer was not of a kind that on acceptance it would lead to binding legal obligations. The offer was said to be subject to an exclusive due diligence period and subject to contract. In other words, if the offer had been accepted within the stated period of 30 days (which expired yesterday), that would not mean that the company would be in a position to enforce a contract for the purchase of the property. 32Whilst there may be a commercial risk that the offer will not be renewed, there would be nothing to preclude the parties (by that I mean, as matters presently stand, the liquidator and GPT RE Limited) from negotiating a sale. In any event the fact that the company may lose a valuable commercial opportunity is not a sufficient reason to depart from the well-established principles in relation to applications for the termination of a winding-up. 33On those principles the applicant has failed on this application to make good a case for termination of the winding-up of the company today. The dismissal of the interlocutory process of 1 August 2011 will not preclude the applicant from making a fresh application when she has the necessary evidence. That application should be served on ASIC, if it is made. 34For these reasons I order that the interlocutory process filed on 1 August 2011 be dismissed. I order that the applicant pay the liquidator's costs. The exhibits may be returned but should be retained for at least 28 days by the applicant's solicitors. 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. Decision last updated: 17 August 2011