Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd

Application to set aside default judgment

1. On 17 December 2019, the defendant's solicitors sought the plaintiff's consent to set aside the default judgment and to dismiss the winding up application with no order as to costs. In that event, Summer Lawyers proposed to continue to hold $182,934 in its trust account until order of the Court or resolution of the dispute. The proposal was rejected.
2. Mr Doherty could not recall whether he became aware that the statement of claim had been served on the wrong address on receipt of the letter of 17 December 2019, or whether he became aware before or after the letter. The following exchange occurred in cross-examination: Q. I put it to you that the reason why these proceedings continued after you became aware, was to force the defendant to pay a disputed debt? A. No. Mr Doherty was not pressed on his answer, which I accept.
3. On 18 February 2020, Mr Werry sent an email to Mr Lakomy and counsel regarding the defendant's plans to repay the secured loans, noting: If we eliminate [the plaintiff's] claim by our Notice of Motion to set aside the District Court judgment and deal with the other caveators' spurious claims, [the defendant's] only legitimate debts are its mortgage loans … The next day, the defendant filed a motion in the District Court to set aside the default judgment.
4. On 27 March 2020, presumably in anticipation of the default judgment being set aside, the plaintiff filed a motion in the District Court seeking summary judgment in the amount of $177,788.77. On 6 April 2020, Judge Hatzistergos set aside the default judgment but declined to order summary judgment as he was not satisfied that there was no triable issue: Wetherill Park Plaza Pty Ltd v Halecret Holdings Pty Ltd (District Court (NSW), Hatzistergos DCJ, 6 April 2020, unrep).
5. On 15 April 2020, the defendant filed an amended interlocutory process in these proceedings, contending that these proceedings should be dismissed on the basis that it is an abuse of process for the plaintiff to maintain the proceedings.
6. On 4 May 2020, the defendant filed a cross-claim in the District Court seeking $3 million, but abandoning any award above $750,000. Mr Stratford does not believe that the defendant has a legitimate or viable defence or cross-claim in the District Court proceedings.

FIRST GROUND: ABUSE OF PROCESS

1. The defendant does not suggest that the commencement of these proceedings was an abuse of process but, rather, the continuation of these proceedings once default judgment was set aside. I have reviewed the principles at [7]-[15]. Here, the defendant did not apply to set aside the statutory demand in the 21-day period. As noted at [76], the statutory demand attached a copy of the District Court orders, which recorded the address of the defendant as being the Glebe address. A review of the District Court orders attached to the demand would have revealed that the statement of claim had likely been served at that address. Self-evidently, Mr Werry must have realised that the statement of claim had not been served at the Pitt Street address. However, no issue was taken with the plaintiff in respect of service of the statement of claim at the time, nor was any application made to set aside the demand. Whilst the defendant, in these proceedings, initially sought leave under section 459S of the Corporations Act, that application was abandoned. As such, the presumption of insolvency has arisen and the focus of the Court's attention is on whether the defendant is in fact solvent. The fact that the default judgment has since been set aside does not divert this focus.
2. As to the defendant's submission that, as the default judgment had been set aside, the plaintiff is now a contingent creditor for the purposes of section 459P(1)(b) of the Corporations Act, this proposition was described by Black J in New View Windows as "plainly incorrect", at [7]: First, the case law indicates that the question of standing would generally be determined at the time that the winding up application is commenced and at that time … [the creditor] had the benefit of a default judgment although that default judgment was later set aside. The authorities which deal with that matter include the judgment of Barrett J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 54 ACSR 228; [2005] NSWSC 397; at [12]ff, where his Honour also noted … that a winding up application would generally be dismissed if, at the time it came before the Court for determination, the original entity which pursued it was no longer a creditor, and no other creditors sought to be substituted in its place. That proposition does not arise here, where there is no suggestion that, to the extent that [the creditor] was a creditor at the time it issued the Demand or at the time the winding up application was brought, that debt was subsequently paid so as to cause it to cease to become a creditor of [the defendant].
3. Further, Black J held that the plaintiff's status as a creditor did not depend upon the existence of a default judgment but from the supply of goods to the defendant, for which it had not been paid. Whilst, in New View Windows, the defendant suggested that it had a claim which could be brought against the plaintiff, at [8]: That does not have the consequence that [the creditor], which was a creditor of [the defendant] from the supply of goods, then ceases to be a creditor and becomes a contingent creditor of [the defendant]. To the contrary, all it establishes, at its highest, is that [the defendant] may be a contingent creditor of [the creditor] with a claim that it will seek to set off against the debt that it owes to [the creditor]. Nothing in that proposition is capable of depriving [the creditor] of the standing as creditor that arises from the debt owed to it, arising from the supply of goods, irrespective of whether that question is determined at the time the winding up application is commenced or at the time of this hearing.
4. The same can be said in this case. As I understood it, there was no real suggestion that the plaintiff did not provide the vendor finance documented in the Mortgage Linked Loan Agreement, or that it had not been repaid. As mentioned at [75], when the defendant's solicitor, Mr Kassem, became aware of the default judgment in July 2019, he did not appear to quibble with the plaintiff's entitlement to the judgment sum. Mr Kassem, of course, had been involved in the transaction at the time when the vendor finance was provided: see [47]-[51]. Nor, for that matter, were Mr Cacciola or Mr Werry in a position to contend otherwise as the provision of vendor finance under the Mortgage Linked Loan Agreement pre-dated Mr Cacciola's appointment as a director of the defendant; nor was there any suggestion that Mr Werry had any dealings with the plaintiff in respect of it either. When the defendant applied to set aside the default judgment - seven months after becoming aware of it - the application appears to have been prompted by the defendant's efforts, in these proceedings, to establish solvency: see [90].
5. The defendant has not established that the winding-up application was brought for a purpose foreign to the statutory regime. The plaintiff's solicitor denied that the reason why, on becoming aware that the statement of claim had been served on the wrong address, the plaintiff persisted with the winding-up application was to force the defendant to pay a disputed debt. Mr Doherty was not pressed on his answer, which I accept: see [89]. Nor, consistent with the authorities, was the plaintiff obliged to desist in prosecuting the winding-up application in circumstances where the defendant had neither sought to set aside the statutory demand nor obtained leave under section 459S.
6. Rather, adopting Black J's assessment in New View Windows, the plaintiff brought the proceedings because it contended that the defendant owed a substantial debt to it, which had been due and payable for a substantial period and had not been paid. The plaintiff sought to invoke the winding-up regime by which the defendant's activities would be ended, its assets marshalled and the claims of its creditors ascertained and payments made. "That, it seems to me, does not involve an abuse of process, but, instead, the use of the winding up regime for the purpose for which it exists": New View Windows at [13]. Thus, the defendant's first ground of opposition fails.

PROGRESSION TOWARD HEARING

1. On 5 May 2020, the plaintiff requested that the defendant agree to the monies held in Summer Lawyers' trust account being paid into the District Court pending determination of the proceedings.

Another potential financier

1. On 12 May 2020, Stacks Managed Investments Ltd made an offer of finance to the defendant of $5 million for a two year term, to be guaranteed by Mr Werry, SME2 and Bridge Street Capital Pty Ltd (another company associated with Mr Werry). The purpose of the loan was to partially repay the loans from SME2 and BSC2. The repayment strategy noted: Repayment Strategy Saddleback Mountain Estates No. 2 Pty Ltd and Bridge Street Capital Pty Ltd are jointly engaged in the business of mortgage lending and property development. Repayment of the loan would be made from the cash flow of the companies by provisioning moneys repaid from mortgage loans to third parties to repayment of the prospective loan.
2. On 26 May 2020, the plaintiff's solicitors wrote to the defendant's solicitors again in respect of the request that the trust monies be paid into Court, nothing that the transfer had not occurred and the defendant had given no binding commitment to transfer the monies. Thus, the plaintiff would be submitting that such funds were not held in good faith, were not under the control or direction of the defendant, and should not be taken into account in determining the solvency of the defendant.
3. On 5 June 2020, Mr Werry sent an email to Mr Cacciola confirming the ongoing financial support of BSC2 and SME2 and suggesting that the lenders were making good progress with the development project. A further solvency report was provided by Mr Lakomy on 9 June 2020, opining that the defendant was solvent by reason of this financial support. Mr Werry also swore an affidavit updating the financial position of the secured lenders and repeating their support. On 15 June 2020, Mr Cacciola swore a further affidavit saying that the development was now likely to take longer than previously thought: although approval had been obtained for Stage 1 of the development in February 2020, the company was seeking to modify the development consent for Stage 2. A more favourable quotation had been obtained from a builder. It was expected that the project would be completed by August 2021 and, by October 2021, the loans from BSC2 and SME2 would be repaid.
4. On 22 June 2020, Stacks Finance followed up its offer with Mr Werry, who advised that he was endeavouring to have caveats removed from title before proceeding with the loan. Mr Werry enquired whether Stacks Finance would proceed with the facility if the caveators consented to registration of its first mortgage, but was told that the caveats needed to be removed. Mr Lakomy agreed it was speculative as to whether Stack Finance's offer of finance could be availed of.
5. On 30 June 2020, the defendant entered into a contract with an engineering firm to commence preliminary development activities. The defendant agreed to pay fees of $273,500 for Stage 1 and $167,250 for Stage 2 of the development, covering structural engineers, civil engineers, building services, design services and various consultants. In addition to consultants, the construction cost - as referred to in the contract and also summarised in a Feasibility Analysis prepared by Mr Werry in May 2020 - was some $20.5 million.
6. In evidence is a letter dated 6 August 2020 from SME2 as trustee for Saddleback Mountain Estates Unit Trust. The letter is from Mr Dykes, but unsigned. The font and writing style is that of Mr Werry, who agreed that he wrote the letter "after discussion with Mr Dykes". The letter stated that SME2 was prepared to extend its loans to 31 October 2021, "noting that you have made good progress with the development of the property at Wetherill Park and resolving legal issues". Having been advised by Mr Werry that the defendant required $880,538.40 to fund expenses up to 31 October 2020, SME2 agreed to retain cash reserves of $1 million in its bank account to cover these costs and any other incidental expenses. Finally, instead of executing another Deed of Variation, I note the terms of our revised loan agreement are set out in this email [of 20 February 2020] and below. By reference to the Substitute Schedules to the Deed of Variation dated 12 December 2019 and the paragraphs in the Special Condition to the Deed, I confirm that, subject to the Debtors and Borrowers not being in default under any Security Documents at the time: 1. The Lenders agree to pay any existing and future debts, incurred by the Borrowers, as and when the debts fall due. 2. The Lenders agree to limit the amount of the Secured Money under the Mortgage, prior to the Final Repayment Date of 31 October 2021 and any unsecured claim against the Borrower, to an amount not exceeding $1.00 less than the Borrowers total net assets. Mr Werry agreed that Mr Dykes was available to give evidence. The same day, Mr Werry sent an email to Mr Cacciola confirming that BSC2 would provide funding for any debts which the defendant had to pay. The same day, Mr Lakomy was instructed to prepare a further solvency report.
7. On 11 August 2020, Mr Cacciola swore his fifth affidavit, noting that the company's activities were limited to holding the property and preliminary works in anticipation of carrying out building works and selling industrial units. Mr Cacciola attached the recent communications from Mr Dykes and Mr Werry confirming their financial support. Financial statements for the 2020 financial year were attached and explained. The company was said to have long term plans for funding its activities and those plans are not "set in stone. I expect to consider the long term funding plan of the Defendant in more detail after the determination of these Court proceedings". In cross-examination, Mr Cacciola said that he was negotiating with construction financiers to obtain finance on less expensive terms than that provided by BSC2 and SME2. Mr Werry also swore his fourth affidavit, noting that Bridge Street Capital and BSC2 continued to provide financial support to the defendant. On 12 August 2020, Mr Lakomy prepared his fourth solvency report, again opining that the defendant was solvent under the cash flow test and balance sheet test, in particular, having regard to the financial support of BSC2 and SME2.
8. On 28 August 2020, the defendant entered into a deed of settlement and release with Magnolia Capital: the defendant agreed to pay Magnolia Capital $50,000 and, in return, Magnolia Capital agreed to remove its caveat.
9. On 2 September 2020, mid-hearing, a further deed of variation was signed, in an effort to address criticisms of the regime identified by the plaintiff's senior counsel. As ultimately framed, the suspension of interest is now framed in the following terms (clause 2(d)): The Lenders will suspend any obligation on any of the Debtors to pay unpaid or accruing interest or any fees due or payable under the Security Documents, until the Final Repayment Date. The Final Repayment Date is 31 October 2021.
10. The further deed of variation contains the following special conditions: 1. Upon request by the Mortgagor, the Lender will pay any of the Mortgagors debts when they fall due for payment provided an Event of Default has not occurred under this Mortgage. 2. The Lendors will limit the amount of the Secured Money due to be paid by the Mortgagor under this Mortgage to an amount that is no more than $1.00 less than the amount which is realised from WPH's Charged Assets. 3. Notwithstanding any clause in this Mortgage, representation made or otherwise, the above Special Conditions 1 - 2 can only be enforced by a party to this Mortgage and no other party. 4. Notwithstanding any clause contained within this Mortgage and subject to clause 5 below, the Lenders waive any prior Event of Default by the Mortgagor under this Mortgage. 5. An Event of Default will have occurred under clause 18.2(q) of this Mortgage if the Mortgagor is would up under Supreme Court proceedings NSW 2019/00321482 ("Proceedings").
11. As I understand Special Condition 1, the secured lenders now agree to pay all of the defendant's debts without the previous condition, "subject to such debts not being in dispute" (see [84] above). The new pre-condition is that the defendant must request BSC2 and SME2 to pay the debt. As Mr Cacciola appears to be acting at all times in accordance with the instructions of Mr Werry, for practical purposes there appears to be little difference between Special Condition 1 in this and the previous version of the deed of variation.

Non-payment of a creditor

1. On 1 September 2020, the hearing began. On 2 September 2020, the defendant tendered an email chain between TFH Hire and Mr Werry in respect of settlement of a debt. The email chain comprised TFH Hire's acceptance, on 22 July 2020, of the amount of $1,000 and Mr Werry's email of 31 August 2020 noting that the monies had been paid. The intervening emails were omitted from the email chain tendered. The full story is as follows.
2. On 29 April 2020, TFH Hire sent a final notice for payment to Mr Cacciola, seeking $5,819.73 owed by the defendant. On 5 May 2020, Mr Werry replied, describing himself as "the inhouse Legal Counsel for [the defendant]". Mr Werry added "Corporate Legal Counsel" to his usual email signature, explaining that the defendant was his client. I found this explanation difficult to accept. In the email itself, Mr Werry suggested that TFH Hire's claim was misguided inter alia as the invoices rendered by TFH Hire were addressed to an address in Glebe. Some of the allegations in Mr Werry's email were unfortunate. On 1 July 2020, TFH Hire replied comprehensively, answering Mr Werry's queries and seeking payment of the outstanding debt within seven days. Mr Werry made an offer that BSC2 would pay $1,000 in full and final settlement of the claim, advising that winding up proceedings were on foot such that if the offer was rejected, no funds would be available to unsecured creditors. TFH Hire asked Mr Werry to increase his offer to $2,200 "in order for us to break even". On 16 July 2020, Mr Werry replied that there was no scope to increase the offer. On 22 July 2020, TFH Hire accepted Mr Werry's offer of $1,000 (this was the first email in the chain tendered).
3. On 6 August 2020, TFH Hire asked when the monies would be paid. On 18 August 2020, Mr Werry advised that he was arranging payment but Bridge Street Capital required an assignment of the debt to Edessa Holdings Pty Ltd in consideration for the $1,000 payment. TFH Hire requested a copy of the draft deed of assignment for consideration, which was supplied. On 19 August 2020, TFH Hire advised that it was not interested in assigning the debt as it would be more beneficial to pursue the total amount owing through a debt collector. On 19 August 2020, Dynamic Commercial Collections wrote to the defendant on behalf of TFH Hire, demanding $7,431.18 within 14 days.
4. On 25 August 2020, Mr Cacciola asked TFH Hire whether it would agree to payment of $1,100 the next day, with no assignment. TFH Hire replied, "We advised your legal representative (Graham Werry) that we are pursuing the full value, which will include additional charges for pursuit through a collection agency". At 10.00 pm on 31 August 2020, Mr Werry sent an email to TFH Hire advising, "Pursuant to your acceptance of the offer of settlement an amount of $1,000 has been paid to your account …", and attached confirmation of payment (this was the second email in the chain tendered). The hearing before me began the next day. On 1 September 2020, TFH Hire's debt collection agency replied to Mr Werry, noting that the offer of $1,000 had been rejected and was not accepted as full and final settlement of the debt owing. Rather the remaining balance was demanded in accordance with the letter of demand.
5. On 2 September 2020, the defendant tendered an email chain comprising only TFH Hire's email of 22 July 2020 (accepting the settlement offer of $1,000) and Mr Werry's email of 31 August 2020 (attaching confirmation of payment) without the intervening nor subsequent emails concerning the proposed assignment and TFH Hire's decision to pursue the full amount using a collection agency. Mr Werry agreed that the abbreviated email exchange was tendered to establish that there was no dispute with this particular creditor and the issue had been resolved.
6. Mr Werry's explanation as to why he had omitted the intervening emails was unsatisfactory. Mr Werry maintained that TFH Hire was bound by its acceptance of his offer to pay $1,000 notwithstanding that he did not pay the money but instead sought to re-negotiate the deal by requiring that the debt be assigned to Edessa Holding. Whilst a lay person may hold such a view, I expect a solicitor would more likely have appreciated that Mr Werry's conduct was either a counter offer or repudiated the settlement agreement. Either way, TFH Hire was likely entitled to proceed on the basis that the settlement agreement was no longer effective. Presumably, the abbreviated email chain was tendered to support the defendant's contention that the defendant was solvent, including because it was able to pay its creditors with the support of the secured lenders. Without the intervening emails, such an abbreviated version of the communications between TFH Hire was apt to give a misleading picture. This should have been, and likely was, obvious to Mr Werry.

DEFENDANT'S FINANCIAL POSITION

1. As to the financial position of the defendant, Mr Cacciola appeared to have no first hand knowledge; he relied on Mr Werry to attend to that side of the company's affairs. According to Mr Cacciola, the books and records of the company were held by Mr Werry, who was responsible for arranging the preparation of accounts by an accountant used by Mr Werry and BSC2 and for "all our transactions". Mr Lakomy never spoke to Mr Cacciola but obtained initial information from Mr Werry and liaised with Mr Werry for three or four days prior to his first solvency report. For his part, Mr Werry said he could not recall whether he reviewed the accounts of the company to satisfy himself that the accounts were correct. I consider this evidence to be unlikely as it was clear that Mr Werry had devoted significant industry to satisfying the Court that the defendant was solvent and would have appreciated that the accounts would come under significant scrutiny.
2. Mr Cacciola agreed that, apart from the prepaid four months interest, the defendant had not paid any interest on the loan from BSC2 and SME2, such that default interest at 48% per annum was running. Mr Cacciola did not know how much interest the company owed to its secured lenders, which appeared to be a critical piece of information in relation to the financial position of a company of which he was a director. Mr Cacciola explained, "There's been no discussion about the interest accruing. It's been [about] delivering the project and finishing the project".
3. Mr Cacciola agreed that Mr Werry approved and paid invoices as the defendant could not itself pay. In evidence were reconciliation schedules maintained by Mr Werry - the most recent being 5 August 2020 - which detailed the receipts and expenses in respect of the defendant. Some $2.1 million had been received - mainly tax refunds - and some $2.9 million had been expended on interest, property holding costs and development expenses. It also appears that a payment plan had been entered into with NSW Revenue, such that Bridge Street Capital was paying the defendant's land tax obligations by instalments. As I understood it, the reconciliation schedule did not include any bills received by the defendant which Mr Werry had not paid. As such, the reconciliation schedule did not include the defendant's creditors who, for whatever reason, had not been paid.
4. The most recent financial statements for the defendant, being for the 2020 financial year, were signed by Mr Cacciola on 11 August 2020. The notes to the accounts recorded that the financial statements did not comply with any Australian Accounting Standards unless otherwise stated. The accounts were not audited. Mr Lakomy assumed the unaudited accounts were correct. According to the financial statements, the company lost $268,235 in the 2020 financial year, bringing accumulated losses to $741,203. The company had negative total equity of $4,440,203.

Assets

1. As to current assets, three were listed. First, the funds held by Summer Lawyers in its trust account, comprising $182,984. I do not regard the funds held in Summer Lawyers' trust accounts as an asset of the defendant. The funds were paid by BSC2. The funds do not belong to the defendant and Mr Werry agreed that the monies held in Summer Lawyers' trust accounts were certainly not security for the monies sought by the plaintiff but to demonstrate the capability of meeting that obligation if the plaintiff was successful in the District Court. Mr Werry said that he intended to leave the funds there for that purpose, to demonstrate capability of payment.
2. The terms on which the monies are held in the trust account have remained equivocal over time. The plaintiff's request that the monies be paid into Court has been rebuffed. The funds having been provided by BSC2, and in the absence of any clear, unequivocal, irrevocable direction being given by that company to pay the monies to the defendant, should it be successful in the District Court proceedings, I place no weight on the placement of those funds with Summer Lawyers; I expect the funds would be immediately withdrawn should a liquidator be appointed to the company. The inclusion of this amount in the balance sheet for the defendant is nothing but window dressing.
3. Second, a prospective claim against Mr Kassem for $201,000 which, at that point in time, had not travelled beyond a letter of demand, according to which, Mr Kassem had been retained by the defendant - on discovery of Mr Bryers' misrepresentation of the purchase price of the land - to obtain a refund of excess stamp duty paid on the transfer; on receipt of the refund, Mr Kassem declined to remit the refund to the defendant but disbursed it in accordance with instructions given by those standing behind Halecret. I accept that the defendant may have a chose in action; whether the asset is a current asset, or has a value of essentially the full amount of the defendant's claim, is less clear. Mr Lakomy did not review receivables to assess recoverability, which Mr Rossetto suggested should have been done.
4. Third, the land was recorded as inventory, at a value of $16,075,985 together with capitalised costs and work in progress, totalling $18,136,230. When asked why Mr Cacciola had not used the May 2018 valuation of $13 to $15 million, he said he had applied the "market uplift" apparent from "RP Data", then suggested that the $13 to $15 million valuation was based upon a mortgagee in possession, which would lose the benefit of any contracts of sale already on foot (although the valuation itself does not appear to have been prepared on that basis).
5. Mr Werry said that he provided the land valuation, which was his estimate of value based on a feasibility analysis. That seems more likely, as the value of $16,075,985 roughly corresponds with the most recent feasibility analysis in evidence, prepared in May 2020. Mr Werry prepared the document, the purpose of which was to ascertain what the value of the land might be if it was put to market; as a developer would want to earn a 20% profit margin, that had to be built into the equation to see what a developer might may pay for the land. Reliance on the (one-page) feasibility analysis to support the value in the financial statement is problematic, including because a key assumption in the feasibility analysis was that the development produced 50 units for sale. Mr Cacciola agreed that, so far, only 28 units had been approved; he was seeking to increase the number of units to 54. Nor did the feasibility analysis incorporate the $2.9 million also spent by Mr Werry on the project.
6. Mr Lakomy did not check whether assets were recorded in the balance sheet at realisable value. Mr Lakomy did not enquire whether the defendant had a valuation for the land, and saw the valuation for the first time during cross-examination. Mr Lakomy appeared unconcerned that the land was recorded in the balance sheet at a value as if it had the benefit of a section 96 approval, even if it did not. "… [I]nternally, from an accounting perspective, if they believe they're going to get the approval, and they think the land is worth more with it, that's the amount they would be putting in".
7. Mr Rossetto said the notes to the financial statements did not permit the land to be put in the balance sheet at the company's valuation. The accounting policies described in the notes required the land to be measured at the lower of cost and net realisable value, where net realisable value was estimated using the most reliable evidence available at the reporting date. To my mind, the one-page feasibility analysis of the defendant's secured lenders stating the price which the property might realise, based on assumptions not then present, does not appear to meet this description.

Liabilities

1. In terms of creditors, the only current creditor listed was the plaintiff's judgment debt of $153,810.
2. The interest owing, but unpaid, to the secured lenders was not recorded at all. Notwithstanding this, Mr Cacciola denied that the accounts did not accurately reflect the liabilities of the company as he, Mr Werry and Mr Dykes "had negotiated not to charge the default interest and for us to deliver the project and see the project through". Mr Cacciola said there was an agreement in writing, pointing to an email of 5 June 2020 from Mr Werry: see [103]. Further, Mr Cacciola said there had been verbal agreements "the whole way through this process since I took over as a director". When it was pointed out that such discussions were not referred to in Mr Cacciola's five affidavits in these proceedings: Q. And so that if there were any arrangements, I suggest, for the purposes of limiting the liabilities of Wetherill Park Holdings you would have referred to such arrangements in your affidavit, correct? A. No, I didn't believe it would be an issue. This evidence seemed unlikely.
3. Mr Werry had also not done any calculation of the interest owing by the defendant as, "To do so would be just totally academic. If you're capitalising interest at 4% per month, it just becomes totally out of all proportion to the value of the asset. … I can simplify things like this. The amount of principal owed as at the default date already exceeds the value of the assets of the company". When the plaintiff's calculation of unpaid interest - being approximately $33 million - was put to Mr Werry, he agreed, "I'd need a calculator, but yes, it's a very substantial amount …".
4. Mr Lakomy did not know that interest was unpaid on the secured loans. He did not calculate the amount of unpaid interest and did not regard it as a relevant consideration.
5. Mr Lakomy agreed that the monies expended by the secured lenders on behalf of the defendant - as recorded in the reconciliation statements - should be included as a current liability in the defendant's financial statements, but were not.
6. Mr Lakomy also considered that BSC2 had a claim against the defendant for $3 million, and the defendant had a cross-claim against the plaintiff for indemnity in the full amount of $3 million or, alternatively, for contribution in the amount of $1.5 million. "So, the amount that BSC2 will seek against [the defendant] will depend on how much it recovers from its cross-claim against [the plaintiff] with the intention of ensuring [the defendant] has net assets of at least $1 … As such this contingent claim against [the defendant] does not make [the defendant] insolvent". Mr Lakomy agreed that the $3 million claim was not included in the accounts of the defendant at all - nor even as a note to the accounts - and Mr Lakomy was aware that Mr Werry said he was not making such a claim, at this stage at least.
7. The secured loans of $22,806,607 were listed as non-current liabilities, even though, according to the Deed of Variation dated 12 December 2019, the secured loans were repayable on 31 October 2020, that is, four months after the reporting date. Mr Cacciola and Mr Werry both said they did not understand the difference between a current and non-current liability. Mr Lakomy did not mention, in his four reports, that the secured loans should be recorded as a current liability, rather than a non-current liability. Mr Lakomy considered it irrelevant whether the secured lenders were recorded in the balance sheet as current or non-current liabilities. He did not think this made a difference to solvency: given that, under the deed of variation, the secured lenders agreed to limit their claim to an amount that ensured that the company always had net assets of $1.
8. The defendant's financial statements were poorly prepared but, in light of the evidence in these proceedings, the current assets of the defendant were substantial being, essentially, the net realisable value of the land (being inventory for this company), being something in excess of $13 million. The section 96 modification which formed the basis of the higher figure in the May 2018 valuation and Mr Werry's feasibility analysis had not been approved as at the reporting date, although there appears to have been partial approval, being for Stage 1 of the development. The current liabilities are some $50 million. On my calculation, the net current asset position of the defendant is roughly -$35 million. Thus, as mentioned at the outset, the financial position of the secured lenders is critical to whether the defendant is solvent.

FINANCIAL POSITION OF BSC2 AND BRIDGE STREET CAPITAL

1. According to Mr Werry's final affidavit, the financial statements for BSC2 for the financial year ended 30 June 2020 have not been finalised. The most signed recent financial statements for BSC2 were those for the year ended 30 June 2019, according to which: 1. The company earned $7.65 million in mortgage loan interest, but incurred a roughly equivalent amount of expenses. 2. No profit was recorded, either for the 2018 or 2019 financial years, although Mr Werry said this was a mistake. 3. Its assets included cash on hand of $4,000, trade and other receivables of $12.9 million and non-current receivables of $4.7 million, including loans to Halecret / the defendant of $2,370,281. The company also had current creditors of $500,000 and non-current borrowings of $17 million. 4. As at 30 June 2019, BSC2 had net assets of $2.
2. Most recently, an unsigned, undated balance sheet for BSC2 as at 31 March 2020 showed net assets of $2. The most recent bank statement for BCS2 - being January 2020 - has a credit balance of $600. On its own, BSC2 does not have the financial resources to support the defendant.
3. Mr Werry explained that Bridge Street Capital was, effectively, the funder behind BSC2 and intended to continue funding that company in relation to the defendant. Bridge Street Capital operated a mortgage finance business in its capacity as trustee of Headlands Unit Trust and provided funds to BSC2 as a vehicle for effecting loans and taking mortgages and other loan security. Bridge Street Capital and BSC2 conduct a low volume mortgage business with relatively short term loans of between three to six months. 1. Financial statements for Headlands Unit Trust for the year ended 30 June 2019 reported a net profit of $6 million for the financial year (up from $550,000 the previous year) and net assets in the same amount, including a loan to BSC2 of $14 million. 2. An unsigned, undated balance sheet for Headlands Unit Trust as at 31 March 2020 showed net assets of some $6 million, including a loan to BSC2 of $9 million. 3. Bridge Street Capital's Promissory Note liabilities as at June 2020 comprise 10 notes totalling $7.41 million, of which six mature on 30 June 2021 (totalling $5.58 million) and the balance mature on 30 June 2022. 4. The most recent Bridge Street Capital bank statement - being for July 2020 - showed a credit balance of some $20,000.
4. Mr Werry said these companies are able to control their loans to manage their cash flow to coincide with the timing of funds required by the defendant to develop the property, for example, to make progress payments to a builder. Mr Werry suggested that BSC2, with the support of Bridge Street Capital, was capable of providing financial support for the defendant even without SME2.
5. Mr Lakomy agreed that BSC2 did not have the cash resources to fund the defendant, unless provided by Bridge Street Capital. Bridge Street Capital's ability to provide funding depended upon its willingness to do so and Mr Lakomy agreed that, beyond seeing various emails from Mr Werry, he was not aware of any signed agreement entered into by Bridge Street Capital to provide the funding. Q. But how they're going to do that they've never explained to you, have they? A. No. Look, I will say that I have had a conversation with Mr Werry about this and essentially he has confirmed BSC 2 is in the lending business. They don't want to necessarily sit on a lot of money which doesn't need to be paid so they are putting money out the door but they will proactively manage that to make sure it comes back to meet the costs of the company when they need it. Q. But they never explained how they're going to proactively manage it? A. Well, proactively manage it by making sure that the loans putting out the door are not on a long term. Q. Whether they've done that or not, you don't know? A. No.

FINANCIAL POSITION OF SME2

1. According to Mr Werry's final affidavit, the financial statements for SME2 for the financial year ended 30 June 2020 had not been finalised. The most recent bank statement - being for July 2020 - showed a credit balance of some $15 million. Initially, when providing information to support the financial position of SME2, Mr Werry provided financial statements for the SME Investment Trust. 1. An unsigned, undated balance sheet for the SME Investment Trust as at 30 June 2020 shows net assets of some $27 million, including a loan to Halecret (being a deregistered company) of $15.8 million. (Noting that the defendant was also a borrower, the impairment of the loan would not appear to be complete, but limited perhaps to its recoverability by reference to the value of the land). 2. Financial statements for SME Investment Trust for the 2019 financial year report income of $1.7 million (down from $3.4 million the previous year) and net assets of $28.8 million (up from $25.5 million the previous year).
2. However, it later appeared that the SME Investment Trust was not the trust which lent monies to the defendant, rather, Saddleback Unit Trust No 2 was the relevant trust (which does not explain the loan to Halecret recorded in SME Investment Trust's accounts). Mr Werry said that SME2 was the trustee of Saddleback Unit Trust No 2, SME Investment Trust and Saddleback Mountain Estate Unit Trust. Mr Werry saw the assets of each of the trusts as being available to provide financial support if needed as the trust had the same beneficial owner and there was a pattern of internal loans between the trusts to provide funding as and when required.
3. Mr Lakomy agreed that SME2's capacity to fund the defendant depended upon the capacity in which it was acting and the assets of the particular trusts in question. When it was pointed out to Mr Lakomy that the financial statements for the SME Investment Trust were different from the trust which provided the loans funds to the defendant, Mr Lakomy assumed that whichever trust was proposed to provide the funds had power to do so.
4. On 20 February 2020, Mr Dykes sent an email to Mr Cacciola and Mr Werry offering financial support to the defendant on behalf of SME2. It was said that SME2 had sufficient monies, together with BSC2, to fund construction and intended to do so. Alternatively, SME2 would co-operate with BSC2 to invite another financier to provide construction funding and take a first mortgage in priority to SME2's mortgage. Mr Dykes expected that, on completion of the project, some $6 to $7 million would remain available to pay interest on the monies repaid to SME2 and BSC2. As it is reasonably apparent that Mr Werry drafted emails and letters emanating from Mr Dykes, I was left with some disquiet as to whether Mr Dykes was fully appraised of events in this matter. However, I note that the deeds of variation executed on 2 September 2020 bore Mr Dykes' signature and thus I am entitled to assume that he was.

EXPERT EVIDENCE

1. Mr Lakomy gave four solvency reports and, in each, was of the view that the defendant is solvent now and in the immediate future, and the debt claimed by the plaintiff is not pivotal to its solvency. The defendant was said to be solvent under the cash flow test and balance sheet test, with no unpaid (undisputed) debts and access to sufficient external funding in BSC2 and SME2 to meet ongoing operational costs and disputed debts. Mr Lakomy relied, in particular, on the deed of variation by which the secured loans were extended and interest suspended.
2. Mr Lakomy accepted the contents of various letters and emails sent to him by Mr Werry and SME2 setting out the funding requirements to develop the land, together with the secured funders' commitment to support the defendant. Mr Lakomy concluded, based on the financial information already summarised, that BSC, BSC2 and SME2 were solvent and had sufficient cash to meet forecast development expenses if their cash flows were managed accordingly.
3. Mr Lakomy took into account that the defendant would obtain a construction certificate to develop the property and would arrange a fixed price building contract by 30 September 2020, which would enable the defendant to obtain a construction loan. Offers of finance had been received from CVS Lane and Stacks Finance but, if external funding was not sourced, the secured lenders would fund construction works and had the financial capacity to do so "as long as [their] cash flow [is] managed accordingly". Further, the defendant had access to the monies held in Summer Lawyers' trust account to meet the plaintiff's claim.
4. Mr Lakomy noted that construction costs were expected to be in the region of $20.26 million to $20.5 million, with Stage 1 comprising $11.9 million and Stage 2 comprising $8.3 million. Mr Lakomy said that the defendant expected that, during the course of construction, progress payments would be made to the builder on a monthly basis. Based on an expected construction schedule of nine months, this equated to an average monthly progress payment of some $2.3 million.
5. Mr Lakomy said - on what basis was unclear - that the company intended to sell the majority, if not all, of the 28 units approved in Stage 1 prior to commencing construction of Stage 2. Stage 1 was expected to take nine months. Profits from Stage 1 would be used to fund Stage 2. If all 28 units from Stage 1 were sold, the cash flow should be sufficient to fund Stage 2, otherwise finance would be required depending on how many units sold. The secured lender had confirmed it was committed to supporting the company to provide further funding for Stage 2 if required. I note however that, in February 2020, Mr Werry appears to have followed up pre-sales achieved by Mr Bryers. An email from a real estate agent advised that two of the interested purchasers had "every intention" of purchasing the unit but had been advised that the history of the site was not positive, and they should wait for construction to commence.
6. Mr Lakomy maintained that he held "a very, very strong opinion" that the defendant is solvent.
7. The plaintiff retained Mariano Rossetto to critique Mr Lakomy's first report. Mr Rossetto did not specifically critique Mr Lakomy's subsequent solvency reports, although commented upon those reports during cross-examination. In short, Mr Rossetto considered that Mr Lakomy had not done a proper solvency assessment. As the solvency of the defendant was completely linked to the solvency of BSC2 and SME2, Mr Rossetto considered that a detailed analysis and investigation of these companies was needed. Both companies appeared to be simple proprietary limited companies; no audited financial statements had been lodged with the Australian Securities and Investments Commission; the companies did not appear to be financial institutions engaged in lending money and no financial statements had been provided. These entities may well have bank account balances of $13m and $20m, but they could also have liabilities which exceed these balances. It could be both BSC2 and SME2 are insolvent. Further, the fact that Mr Werry, by email, said that BSC2 and SME2 were willing to provide funding was no guarantee that actual funding would occur.
8. Similarly, Mr Rossetto criticised Mr Lakomy's conclusion that the defendant was solvent on a balance sheet test. Even assuming that the deed of variation had the effect of reducing the monies owed to the secured lender such that the net asset is at least $1, this did not limit the monies owed to unsecured creditors such as the plaintiff. You can exclude the debt to the secured lenders to zero, take out the property. The secured lenders, as far as I understand unless you can tell me differently, have nothing to do with the other assets and the other liabilities. So you cannot exclude the other assets and you cannot exclude the other liabilities. The secured lenders cannot reduce the other liabilities to a dollar. They still exist.
9. Mr Rossetto did not believe it was possible for Mr Lakomy to reach a view as to the solvency of the defendant based on the information provided; insufficient analysis and investigation was done in the preparation of Mr Lakomy's reports.

SOLVENCY

1. As matters stand, there is a presumption of insolvency by reason of the company's failure to comply with the statutory demand. The onus is on defendant to prove that the company is solvent: section 459C(3). Section 95A(1) of the Corporations Act provides: A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
2. To discharge the onus the Court should ordinarily be presented with the "fullest and best" evidence of its financial position: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J. As Santow JA (with whom Meagher and Handley JJA agreed) explained in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16]: However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. What occurred fell well short of that … [A]dopt[ing] … Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 …: 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: In the matter of Simionato Holdings Pty Ltd (above); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
3. 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: Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (sixth bullet point). The future trading debts of the defendant are relevant, including the debts for the reasonably immediate future: Leslie v Howship Holdings Pty Ltd [1997] FCA 133; (1997) 15 ACLC 459 at 466-7.
4. In this case, the defendant's accountant did not give evidence. Mr Lakomy's review of the financial statements appears to have been cursory. Mr Lakomy calculated that the defendant's current ratio (that is, current assets over current liabilities) was 2.5, indicating that the company was solvent. In doing so, Mr Lakomy took into account the monies held in Summer Lawyers' trust account (which do not belong to the defendant), the chose in action against Mr Kassem (which was not assessed for recoverability) and the amount owing to the plaintiff. This calculation did not take into account the $30 million in unpaid interest owed to the secured lenders, nor the principal of the secured loans (due to be repaid two months after Mr Lakomy's report) nor development costs already paid by the secured lenders. Suffice it to say that, if these current liabilities are taken into account, then the defendant is not solvent on the cash flow test.
5. The secured lenders are entitled to the only real asset of the company, being the land. Aside from the defendant's obligations to the secured lenders, the defendant owes money to the plaintiff and has a chose in action against its former solicitor of unknown value. The defendant's ability to pursue the chose in action against its former solicitor is a matter on which there was no evidence. The evidence was silent as to whether the secured lenders intended to fund such litigation.
6. The defendant is woefully insolvent viewed in isolation from the financial support proffered by the secured lenders. Thus, in determining solvency, regard must be had to the wherewithal of the secured lenders to support the company until the means by which it is said that the defendant can repay the secured lenders - the development of the land and sale of the units - is complete. The defendant's solvency thus hinges upon the willingness and ability of the secured lenders to provide financial support to achieve their identified repayment strategy.
7. The quality of the financial information in respect of the secured lenders was poor. No recent signed financial statements were available. The evidence provided by Mr Werry as to the financial circumstances of these companies was cursory at best. The most recent bank statements of the secured lenders, in isolation, tell me nothing about their overall ability to support the defendant in respect of a substantial construction project.
8. As I understood it, the secured lenders operate a business of making short term loans and would only be able to pay a builder "by provisioning moneys repaid from mortgage loans to third parties": see [101]. That is, the secured lenders would essentially divert their business from short term lending to making progress payments to a builder. On 20 February 2020, Mr Werry advised Mr Lakomy that only a quarter of the construction costs were required in cash at the commencement of construction, "They do not need to hold the whole $26m cash …". The builder would issue monthly progress claims averaging $3 million a month over a nine month construction programme. SME2, Bridge Street Capital and BSC2 would have sufficient cash flow from mortgage loans which were due to be repaid over that period. The Companies' mortgage loans are all relatively short term, typically 3 to 6 months so the Companies can set loans for the next 12 months to manage their cash flows to ensure loans are repaid to coincide with the builders [sic] forecast progress claim schedule.
9. That is, the secured lenders do not have on hand all funds needed to complete the Wetherill Park development but can arrange their cash flows to pay bills as needed. It is not clear to me, however, that BSC2, Bridge Street Capital and SME2 have the ability to fund the construction cost in this manner. Certainly, it does not appear - contrary to Mr Werry's assertion - that BSC2 and Bridge Capital can do it without SME2. As to whether Bridge Street Capital was able to manage its cash flow to fund construction, Mr Lakomy said: A. … I accept that I don't have a schedule of the mortgages for BSC, and when those moneys are due and to be repaid. … So, it was a matter of getting moneys back in the door from the loans, and not putting money out the door for a while. That cash balance would increase quite quickly. Q. But you haven't assessed their ability to actually manage their loans, have you, and to provide A. I haven't done a detailed assessment of the BSC loan book holding, no. Q. And they haven't provided you with any cash flow model to show how they propose to do that, correct? And whether or not it's in fact possible, correct? A. I haven't seen a cash flow model.
10. There is insufficient evidence to establish that loans advanced by BSC2, Bridge Street Capital or SME2 will be repaid in sufficient quantum during the course of the building project to fund completion of this development. Further, there is almost nothing, beyond assertion, to indicate that any development of the land by Mr Cacciola and Mr Werry has progressed in any meaningful way. A one-page feasibility analysis does not instil confidence. The fact that an Early Contractor's Involvement Agreement was executed on 30 June 2020 does no more than suggest that the very initial planning stages of any construction work may soon be undertaken. The information on which Mr Lakomy has based his opinion appears to be very 'thin'.
11. I am not satisfied that the defendant is solvent, either by reason of its own financial position or having regard to the financial resources available to it via its secured lenders. Where the cost of construction is more than $20 million, it is simply unclear whether secured lenders can execute their strategy set out at [5].
12. Further, the fact that the deed of variation limits the secured lenders' ability to recover its loans from the defendant says nothing about the unsecured creditors of the company who, clearly enough on the evidence, cannot be paid by the defendant as and when their debts fall due. If the defendant requests the secured lenders, then the secured lenders will pay the plaintiff. The likelihood of the defendant giving such a direction is unknown. The second ground of opposition fails.

COSTS

1. The plaintiff sought an order that its costs of the proceedings be paid by third parties as well as the defendant under section 98 of the Civil Procedure Act 2005 (NSW) as opposition to the winding up application was driven principally by BSC2, Mr Werry and Mr Cacciola, the director appointed by BSC2. The defendant requested that this issue be determined after the parties had the benefit of the Court's decisions and reasons. In particular, the defendant was unable to speak for Mr Werry and Mr Cacciola in respect of any application for costs made against them. I agree.

ORDERS

1. For these reasons, I make the following orders: 1. Pursuant to section 459A of the Corporations Act 2001 (Cth), order that the defendant be wound up on the grounds of insolvency. 2. Order that Giles Geoffrey Woodgate of Level 2, 6-10 O'Connell Street Sydney NSW 2000, registered liquidator, be appointed to act as the liquidator of Wetherill Park Holdings Pty Ltd. 3. Order that the plaintiff's costs of and incidental to these proceedings be paid out of the assets of the defendant. 4. In the event that the plaintiff presses its application for an order that the costs of these proceedings be paid by third parties: 1. Direct the plaintiff, within 14 days, to file and serve (including on any third party) any additional evidence or submissions in support of such an order, and to advise whether the plaintiff is content for its application to be determined on the papers or whether a further hearing is sought. 2. Direct the third parties to provide, within 21 days thereafter, any evidence or submissions in reply, and to advise whether the third parties are content for this question to be determined on the papers or whether a further hearing is sought.

Amendments 25 March 2021 - update cross-references. 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: 25 March 2021