In The Matter Of iInvest Pty Limited [2012] NSWSC 1292

Supreme Court New South Wales

Medium Neutral Citation: In The Matter Of iInvest Pty Limited [2012] NSWSC 1292 Hearing dates: 15 October 2012 Decision date: 15 October 2012 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Winding up application adjourned Catchwords: CORPORATIONS - creditors statutory demand - where company is presumed to be insolvent - company seeks to oppose appointment of liquidator on grounds it is solvent - evidence required to prove solvency - whether evidence adduced by company is fullest and best evidence

CORPORATIONS - creditors statutory demand - where company is presumed to be insolvent - Corporations Act, s 467(1) - discretion to adjourn winding up application - where there is some prospect of realising assets of the company by auction sufficient to satisfy creditor's debt Legislation Cited: (Cth) Corporations Act 2001, s 459G, s 467(1), s 459F, s 459C Cases Cited: Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163, (2003) 45 ACSR 711 iInvest Pty Ltd v Huxley Associates Limited [2012] NSWSC 175 Re Statewide Developments Pty Ltd [2011] NSWSC 1537 Category: Interlocutory applications Parties: Huxley Associates Limited, Company Number 3093651 - Plaintiff iInvest Pty Ltd ACN 003 042 635 -Defendant Representation: Mr Newton - Plaintiff Mr Harker-Mortlock (Director - In Person) -Defendant DLA Piper Australia - Plaintiff File Number(s): 2012 / 161616

Judgment (ex tempore) 1HIS HONOUR: By originating process filed on 21 May 2012 the plaintiff Huxley Associates Limited claims an order that the defendant iInvest Pty Ltd be wound up in insolvency and a liquidator appointed. 2The plaintiff served a creditor's statutory demand claiming a debt of £52,333.08 on the defendant on 4 July 2011, as appears from the affidavit of Arlen Tierney sworn 14 July 2011. The defendant applied on 25 July 2011, to have the statutory demand set aside under (Cth) Corporations Act 2001, s 459G. That application was dismissed by Hammerschlag J on 29 February 2012 [iInvest Pty Ltd v Huxley Associates Limited [2012] NSWSC 175]. An application by the defendant for an extension of the time for compliance with the demand, made on 7 March 2012, was dismissed by Hammerschlag J that day. The defendant failed, on or before 7 March 2012, which was the time for compliance as extended by operation of s 459F, to comply with the demand. Accordingly, the company is presumed to be insolvent, pursuant to s 459C. 3A consent of liquidator has been filed by Morgan Kelly, an official liquidator. The originating process, supporting affidavit of Tania Louise Bowers sworn 14 May 2012, an affidavit of service of the s 459G demand, and consent of liquidator were served on the company at its registered office, at 1380 Cooks Hill Road, Yass, on 28 May 2012, as appears from the affidavit of Arlen James Tierney sworn 6 June 2012. Notice of appearance and intention to oppose the application was filed by the company on 4 July 2012, the grounds of opposition then being: 1. The creditor is solvent; 2. The creditor and the debtor are arranging resolution of the debt. 4Notice of the application was published in the Sydney Morning Herald on 4 June 2012, and a search made in the records of ASIC in relation to the company, on 15 July 2012, discloses that no administrator has been appointed, no other winding up application is pending and no winding up order has been made, as appears from the affidavit of Amanda Sarris sworn 15 October 2012. The indebtedness has not been cleared or reduced, as appears from the affidavit of Richard David Shears sworn 11 October 2012. 5The company contends that it is solvent, in reliance on an affidavit of its director, James Harker-Mortlock, sworn 27 September 2012. Essentially, that affidavit annexes what is said to be a list of the company's assets, being two pieces of real property at Yass, two debts said to be due from third parties, equipment and farm machinery and intellectual property rights, all said to total $11,621,250. The properties at Yass are said to be worth a total of $3.8 million. The list of liabilities reveals liabilities secured on the real property totalling about $3,650,000, and other liabilities, bringing the total liabilities to $3,797,777. 6In Re Statewide Developments Pty Ltd [2011] NSWSC 1537, Barrett J, as his Honour then was, described the evidence which it would be expected that a company seeking to rebut the presumption of insolvency would adduce, as follows: [56] The task faced by a company seeking to prove its solvency was described and discussed by the Court of Appeal (Santow JA; Meagher JA and Handley JA concurring) in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711. The central and vital message (at [16]) was that "proper verification of assets and liabilities is critical to rebut the presumption of insolvency." [57] The Court of Appeal expressly approved a number of propositions set out in the judgment of Weinberg J in Ace Contractors & Staff Pty ltd v Westgarth Development Pty Ltd [1999] FCA 728, including the following: 1.In order to discharge the onus of proving solvency, the company should ordinarily present the court with the "fullest and best" evidence of its financial position. 2.Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency; nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared. 3.There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency. 4.The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account. 5.The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored. [58] In the present case, the only evidence put forward by Statewide is that of Mr Maitland. As a chartered accountant, he has expertise relevant to understanding and explaining a company's financial situation. As an employee of the company that owns 50% of the shares in Statewide and looks after Statewide's administrative and financial affairs, he has the means of access to relevant information but, at the same time, an interest that would not have been at work had Statewide chosen to obtain a solvency report from an unconnected qualified person. Given the employment relationship, it may be that Mr Maitland should be regarded as "self-interested sources", to adopt language used in Expile Pty Ltd v Jabb's Excavation Pty Ltd (at [15]). Absence of substantiating evidence of an external expert commissioned to report on the state of solvency cannot but be seen as significant in this kind of case: Deputy Cmr of Taxation v Sydney Concrete Steel Fixing Pty Ltd [1999] NSWSC 494; (1999) 17 ACLC 972 at [8]. [59] I am not satisfied that the court has been presented with the "fullest and best evidence" of Statewide's financial position. Statewide has not put any detailed financial statements before the court. It has given only something that falls significantly short of that, being Mr Maitland's abbreviated statement of assets and liabilities (plus some explanation by him of particular items) and some information he has chosen to provide about cash flows. This is of the unsatisfactory quality referred to at item 1 of para [57] above. See also Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163, (2003) 45 ACSR 711, [15] - [16]. 7In this case, the evidence of solvency, such as it is, emanates from "self-interested sources" of the type referred to in those cases. There are not even unaudited accounts, but merely a list of assets and liabilities. There is no verification of the claims of ownership, no independent evidence of value of the assets in question, no evidence as to the recoverability of the third party debts in question, and no appropriate evidence of the terms of the liabilities. For example, if it were suggested that a mortgage debt to the Commonwealth Bank was payable only on sale of the property and not presently payable, one would expect to see that in the terms of the mortgage, or recorded in some other way, and not merely by assertion from the mouth of the director. 8Accordingly, it seems to me that, applying the tests enunciated by the Court of Appeal and Barrett J, the evidence is quite insufficient to rebut the presumption of insolvency. 9There is, nonetheless, evidence that an auction is to take place on site at the property on 26 or perhaps 27 October 2012. There is some slight evidence that the asking price proposed by the agent is in the vicinity of $3.5 to $4 million, which is consistent with the assertion that the properties are worth a total of $3.8 million. 10If the properties sold for that price, then that should realise a fund which would permit repayment of the Commonwealth Bank and the second mortgage in the amounts disclosed, and leave a surplus to satisfy the plaintiff's claim. Of course, if the property sells for a price at the bottom end of the asking price range, the sufficiency of the proceeds to do so will be doubtful. That will be clearer after the auction. If sufficient proceeds are realised to permit the plaintiff to be paid, then the plaintiff will be paid more rapidly and at significantly less expense than if a liquidator is appointed. 11Corporations Act, s 467(1), gives the Court extensive powers on the hearing of a winding up application. It provides that, subject to subsection (2), which is not relevant for present purposes, and s 467A, which is also not relevant for present purposes, on hearing a winding up application the Court may (a) dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application, or (b) adjourn the hearing conditionally or unconditionally, or (c) make any interim or other order that it thinks fit. 12Given the proximity of the auction and the possibility that its result may enable the plaintiff to be paid in full, it seems to me that in this case I should adjourn the hearing until shortly after the auction, in order to enable it to be ascertained whether the prospect that the plaintiff can be paid is a real one, and, if so, to extend the six month period which will otherwise expire on 21 November 2012. 13I make the following orders: (1)Adjourn the proceedings to the Corporations Judge motions list on 29 October 2012 at 9.45am upon the undertaking of the defendant by its director and its director to the Court that they will use their best endeavours to ensure that the property is submitted to auction not later than 27 October 2012. (2)Order that the defendant pay the plaintiff's costs of today.