Ace Contractors & Staff Pty ltd v Westgarth Development Pty Ltd

Judgment 1On 6 May 2011, Damian Paul Higgins filed an originating process by which he applied under s 459P of the Corporations Act 2001 (Cth) for an order that the defendant, Statewide Developments Pty Ltd ("Statewide"), be wound up in insolvency and an order appointing a liquidator. Mr Higgins relied on a presumption of insolvency arising under s 459C(2)(a) from Statewide's failure to comply with a statutory demand served on it by him. 2Mr Higgins no longer presses the winding up application. 3On 3 November 2011 I heard an application made by Azure 10-16 Marquet Street Pty Ltd ("Azure") under s 465B of the Corporations Act for an order substituting it as the applicant in the pending winding up proceedings. Evidence and submissions on the question of Statewide's solvency were also receive in recognition of the reality that, if Azure's application was successful, it would be appropriate to determine the s 459P winding up application without a further hearing. 4At the end of the hearing on 3 November 2011, judgment was reserved and, in order to accommodate that, I made an order under s 459R extending the time for determination of the winding up application. 5Section 465B is in these terms: ""(1) The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up. (2) The Court may only make an order if the Court thinks it appropriate to do so: (a) because the application is not being proceeded with diligently enough; or (b) for some other reason. (3) The substituted applicant may be, or the substituted applicants may be or include, the person who was the applicant, or any of the persons who were the applicants, before the substitution. (4) After an order is made, the application may proceed as if the substituted applicant or applicants had been the original applicant or applicants." 6The question raised by s 465B(2) must, for the reason already stated, be determined favourably to Azure. 7The other issue arising is whether Azure is, in terms of s 465B(1) a person "who might otherwise have so applied for the company to be wound up". Azure claims to be within that description because it is a creditor of Statewide. On the authorities, however, substitution will be refused if the claimed debt from which creditor status arises is bona fide disputed: see, for example: CVC Investments Pty Ltd v P&T Aviation Pty Ltd (1989) 18 NSWLR 295 and, more recently, Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527; (2004) 185 FLR 130. The rationale was stated by White J in the latter case at [66] - [68]: "Section 459P does not provide that any person, or any person claiming to be a creditor, may apply to the Court for a company to be wound up in insolvency. It provides that a creditor (including a secured, contingent or prospective creditor) may make that application. As a matter of power as distinct from discretion, the Court may order a company to be wound up in insolvency where the creditor's debt is disputed if the Court determines that the applicant has standing to bring the application. The Court has the power to determine the disputed question and if it determines that the applicant is a creditor it may make an order for winding up. ( Re QBS Pty Ltd [1967] Qd R 218 per Gibbs J at 225; Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455; Brinds Ltd v Offshore Oil NL (1985) 60 ALJR 185 at 188). As a matter of discretion, where the debt and hence the applicant's standing is disputed, the Court will usually not entertain the application for winding up." 8White J held (at [81]) that the court could not make an order under s 465B(1) without first determining whether the applicant for substitution is a creditor. The question whether Azure is a creditor of Statewide therefore lies at the heart of the present application. The question is, moreover, to be answered according to circumstances as they now exist, not by reference to some earlier state of affairs. 9Azure maintains that it is a creditor of Statewide and that there is no ground for finding that there is any bona fide dispute as to the existence of the debt owed to it by Statewide. Statewide, by contrast, says that there is no indebtedness or, at least, that there is a bona fide dispute as to the existence of any indebtedness on its part to Azure. 10Statewide developed a large residential complex at Rhodes. It is not disputed that Azure and Statewide became parties to a contract under which Azure was to provide promotional and marketing services for Statewide in relation to home units in the complex. Nor is it disputed that moneys became payable by Statewide to Azure for the provision of those services and for purposes connected therewith. A formal contract was entered into between the two companies in 2003. It defined the services to be provided by Azure and the reward to be given by Statewide. 11It is necessary to examine the present state of the account between the two companies. 12Azure relies on a written agreement dated 22 April 2008 between itself and Statewide which I shall call "the April 2008 agreement". Statewide accepts that it entered into the April 2008 agreement which was made at a time when Azure had served a statutory demand on Statewide. The statutory demand is referred to in clause 1, while clause 9 states that the agreement is made in consideration of Azure's agreeing to withdraw the statutory demand. 13Clause 2 of the agreement stated: "Statewide agrees and confirms that it is still liable and committed to pay to Azure all of the commissions and invoices outstanding being invoice numbers 20000-20201 inclusive ( Debt ) as per the Agency agreement in relation to the development at 10-16 Marquet Street, Rhodes NSW 2138 ( Property ) which is undisputed." 14Clause 3 and clause 4 refer to agreed "offsets" in favour of Statewide of $200,000 and $214,172, one for office rent and the other for office fit-out 15Clause 7 is in these terms: "Statewide further consents to Azure that this document can be used as proof of debt by Azure." 16The invoices 20000 to 20201 referred to in clause 2 are in evidence. All but a few of them are dated 26 February 2007. All the dates are in February and March 2007. The total of the invoiced amounts is $3,756,941.10. 17On that basis and allowing for the clause 3 and clause 4 offsets, the April 2008 agreement may be taken to acknowledge indebtedness of Statewide to Azure of $3,342,769.10. 18Also dated 22 April 2008 (the date of the agreement already mentioned) is a document headed "Statement: Sales update as at 22 April 2008" which Mr Bhanji, the principal of Azure, said in his evidence was given by him to Mr Joe Touma of Statewide at a meeting between them on that day (being the meeting at the conclusion of which, Mr Bhanji says, the agreement was signed by him and Mr Joe Touma for the two companies). That statement refers to a "total outstanding" of $5,278,423.04. 19In opening his client's case, however, Mr Raphael of counsel, who appeared for Azure, relied wholly on the debt arising from the April 2008 agreement to sustain Azure's present status as a creditor of Statewide. When tendering the document and a receipt for stamp duty paid on it, Mr Raphael said: "As we see the matter, that document operates as an acknowledgement of indebtedness. A sum of money is due, and we seek to be substituted on the basis of that same." 20The document was marked as Exhibit A. Mr Raphael then said: The fact is that the plaintiff [sic; scil 'applicant'] relies exclusively for claiming to be a creditor on the terms of Exhibit A." 21Mr Raphael confirmed near the end of the hearing the accuracy of a brief summation of his case as put by me, as follows: "Well he [Mr Raphael] relies on the document of April 2008, and what he says is evidence of no payment having been made since then." 22Evidence was given in Statewide's case by Mr Maitland, the chief operating officer of a company that owns 50% of the shares in Statewide and looks after its administrative and financial affairs. Mr Maitland is a chartered accountant and holds a degree in economics. His employment in his current position began comparatively recently. He has no first hand knowledge of the events that preceded and gave rise to the April 2008 agreement. His evidence is confined to matters appearing from Statewide's books and records. 23In assessing the state of the account between Azure and Statewide, Mr Maitland took as his starting point two items: the aggregate sum of $3,756,941.10 represented by the invoices 20000 to 20201 referred to in clause 2 of the April 2008 agreement (see paragraph [16] above) and a sum of $2,403,295.40 in an invoice dated 1 July 2004 - a total of $6,160,236.50. Mr Maitland then refers to payments and other allowances by Statewide to Azure, as follows: (a) payment of $2,742,898.22 by means of 23 cheques drawn between 17 July 2003 and 24 April 2007 (b) transfer in the period 2003 to 2007 of two BMW cars valued at $356,000. (c) payment of rent of $200,000 on Azure's office premises between 2003 and 2005; (d) payment of $214,172 for fitting out costs of Azure's office between 2003 and 2005; (e) allowance by Azure of $55,096 on 17 April 2007; (f) deduction by Azure on 30 October 2007 of $139,397.91 from moneys held in Azure's trust account on behalf of Statewide; (g) like deductions totalling $1,448,161.75 as per a statement from Azure dated 10 December 2007; (h) a like deduction of $1,456,712.29 which Mr Maitland says is confirmed by paragraph 39 of Mr Bhanji's affidavit of 7 October 2011 prepared for these proceedings. 24On that basis, Mr Maitland says, the payments to Azure and transfers for its benefit amounted to $6,612,438.17 and exceeded by $452,201.67 the amount of $6,160,236.50 taken by Mr Maitland as his starting point. 25The items of $200,000 and $214,172 for office rent and office fit-out (items (c) and (d) at paragraph [23] above) correspond with clauses 3 and 4 of the April 2008 agreement. There is thus no dispute about these matters. 26In relation to item (a) at paragraph [23] above, Mr Maitland exhibited to his affidavit the cheque book butts of the 23 cheques drawn between 17 July 2003 and 24 April 2007. In most cases, the butt shows no more than "Azure", an amount and a notation such as "Commission". In a small number of cases, there is a number designated by the symbol "#", with several numbers appearing on one butt. The numbers are 11133, 11145, 11146, 11147, 11148, 11159, 11161, 11163, 11167 and 11168. 27If, as seems likely, these numbers are invoice numbers (they are not cheque numbers, since the cheque numbers are printed on the butts), the relevant invoices are obviously not among those in the range 20000 to 20201 referred to in the April 2008 agreement. In any event and as I have said, the invoices 20000 to 20201 all bear dates in 2007, so that cheques drawn between July 2003 and January 2007 could not have been referable to them. Mr Maitland's evidence is that only three of the cheques were drawn after January 2007 - being a cheque for $10,000 in February 2007, a cheque for $33,000 in March 2007 and a cheque for $13,500 in April 2007. 28Some of the cheque butts ascribe a particular amount to a particular number. Thus, for example, the numbers 11133, 11146, 11147 and 11148 have against them $16,402.25, $185.85, $670.00, $1,375.00 and $2,100.00 respectively. None of those amounts corresponds with any of the amounts in the 20000 to 20201 invoices. 29Subject to one possible qualification, there is accordingly no basis for a finding that payments by means of the cheques totalling $2,742,898.22 (item (a) at paragraph [23] above) somehow reduced the aggregate indebtedness of $3,756,941.10 represented by the invoices 20000 to 20201 referred to in the April 2008 agreement or the net indebtedness of $3,342,769.10 acknowledged by Statewide in that agreement. The qualification relates to the cheques drawn in February, March and April 2007. There is at least a possibility that they were in respect of some part of the total in invoices 20000 to 20201. The total of those cheques is $56,500. 30Statewide faces a like obstacle in relation to each of items (b), (e), (f) and (g) at paragraph [23] above. All of the payments and transfers of value there referred to occurred before invoices 20000 to 20201 were rendered and before the April 2008 agreement was entered into. 31Item (h) at paragraph [23] above stands in a different light. Mr Maitland refers to a sum of $1,456,712.29 set out in paragraph 39 of Mr Bhanji's affidavit of 7 October 2010. The affidavit of that date refers to that sum as having been applied by Azure between 24 December 2010 and April 2011 (apparently out of deposit moneys) in reduction of the amounts overdue by Statewide. The significant point is that this is the only evidence that indicates any part payment or part satisfaction by Statewide of the indebtedness acknowledged by it in April 2008. 32The April 2008 agreement is unambiguous in its terms. It is a clear source of a right on the part of Azure to sue upon an account stated. It is not to the point for Statewide to say (as it attempts to do on the basis of other parts of Mr Maitland's evidence) that, having regard to the parties' contract of 2003, Azure had not earned commissions as represented in the invoices 20000 to 20201 or had not fulfilled with conditions prescribed by that agreement as prerequisites to a right to be paid. As regards the aggregate of the invoices 20000 to 20201 (less the amounts for office rent and fit-out), Statewide, by entering into the April 2008 agreement, abandoned any right to rely on such matters. For good consideration in the form of Azure's promise to withdraw the then extant statutory demand (which promise Azure duly performed), Statewide acknowledged that its liability for the amounts in invoices 20000 to 20210 was undisputed and confirmed its liability to pay those invoices. Each invoice referred to a particular amount which appears after the words "Payment due now inc. GST". The conclusion that Statewide, in April 2008, gave a new and independent promise, supported by consideration, to pay every amount stated in such an invoice to be "due now" is simply inescapable. 33At the same time, Azure acknowledged Statewide's right to be paid the sums of $200,000 and $214,172 for office rent and office fit-out. Deduction or set-off for those two sums was thus contemplated. The only evidence of part payment or part satisfaction since April 2088 is that relating to $1,456,712.29 referred to at paragraph [31] above - plus, perhaps, the $56,500 referred to at paragraph [29]. On the whole of the evidence, therefore, there is outstanding today the $3,756,941.10 represented by the invoices 20000 to 20201 the subject of the April 2008 agreement, less $200,000 for office rent, $214,172 for office fit-out, $1,456,712.29 applied out of deposits in the period 24 December 2010 to April 2011 and (perhaps) the $56,500 referred to at paragraph [29] above. The outstanding amount is therefore $1,886,056.81 or perhaps, $1,829,556.81 - leaving entirely to one side, first, the question whether interest should be added pursuant to a provision of the April 2008 agreement concerning interest and, second, offsetting claims that Mr Maitland says that Statewide has against Azure. 34These offsetting claims are estimates of amounts that Statewide expects to be assessed in respect of costs awarded to it in other proceedings. The estimates are approximately $174,000. 35I am satisfied that, assuming the offset just mentioned to be supportable (an assumption in Statewide's favour), Azure is a creditor of Statewide to the extent of at least $1,655,056.81 and that there is no plausible basis on which that indebtedness of Statewide can be disputed. Azure has thus shown a good basis for the making of an order under s465B of the Corporations Act substituting Azure as plaintiff in these winding up proceedings. It will be substituted accordingly. 36I turn now to the winding up application. Because of the presumption of insolvency arising under s 459C(2)(a) from Statewide's failure to comply with Mr Higgins' statutory demand, the insolvency ground must be taken to be established unless Statewide affirmatively proves that it is solvent. 37Statewide has presented evidence which, it says, warrants a conclusion that it is, in terms of s 95A of the Corporations Act , able to pay all its debts as and when they become due and payable and therefore solvent. The evidence was given by Mr Maitland who, as I have said, is a chartered accountant and the chief operating officer of a company that owns 50% of the shares in Statewide and looks after Statewide's administrative and financial affairs. 38The case proceeded in an unusual way, as regards evidence of solvency, because key parts of Mr Maitland's affidavit on the subject were rejected as inadmissible. However, leave was given for oral evidence in chief to be adduced from Mr Maitland on those matters. Mr Maitland was the only witness for Statewide. 39Mr Maitland explained the processes that are in place for the keeping of accounting and financial records by Statewide. He is the leader of a team of four accountants (including himself) who combine to perform the necessary bookkeeping and recording tasks for Statewide and a number of other companies. Although Statewide is not a reporting entity required to produce periodic financial statements and is not subject to any audit requirement, its procedures are said by Mr Maitland to be the same as those that would be adopted by an entity subject to those requirements. - "we still take the same process as though we were preparing a package of documents for an auditor to complete their audit". 40The processes he described enabled Mr Maitland to list assets and liabilities of Statewide at 30 September 2011, as follows: Assets: Cash at bank $470,129 Trade debtors $1,211,101 Unpaid distributions receivable $36,832,768 Stock in trade (net realisable value) $41,145,436 Total $79,658,434 Liabilities: Secured creditors $76,175,376 Trade creditors $ 703.340 GST for September 2011 $ 1,200,564 Management fees $ 786,546 $89,867,826 41The stock in trade asset consists of unsold home units and townhouses. The management fees are payable to issuers of notes. 42On Mr Maitland's assessment, there was, at 30 September 2011, an excess of $790,608 of assets over liabilities. That, of course, does not include indebtedness of Statewide to Azure which, on my earlier findings, was at least $1,655,056.81. When that is taken into account, the excess becomes a deficit of slightly less than $1 million. 43Mr Maitland explained that the asset of $36,832,768 was for amounts due and payable to Statewide, as a beneficiary under discretionary trusts, by Capita Court Pty Ltd and H2O South Port Pty Ltd, the trustees of those trusts. The entitlements arose in the 2010 and 2007 financial years. Mr Maitland was cross-examined about why amounts due had not been paid: "A. This is the nature of private trusts, that often have what we call, the accounting term is 'unpaid present entitlement', or its acronym is UPE, and it's very common practise that for tax purposes certain amounts are distributed but it may not be paid at the same time. They could be paid one year later, some are not paid for ten years, but they always remain as a liability of the trust that has distributed that amount, and they're always an asset of the entity that is due that amount." 44He was then asked about the trustees' capacity to pay: Q. And there's no information that we have as to the capacity of the company with the obligation as trustee to pay actually to do so? A. There's nothing in this affidavit. Both of those two companies are related parties, or subsidiaries of Distinctive FX, of [sic; scil: by] whom I'm employed, so I have full access to those books and records, and both of those companies have the financial capacity to pay those amounts, and will pay them as and when they're called for. " 45Elaboration was forthcoming in re-examination: "Q. Could you tell his Honour how you have come to that understanding and what they are and why they are so capable of paying the monies that would be required of them if they were so required by Statewide? A. Both of those companies that we have referred to are subsidiaries or related parties of Distinctive FX, which is part of the broader group trading under the name of Salvo Property Group. I know the intimate financial details of each of those. The mezzanine subscriber under the security documents is a company AVS Property Pty Limited, which is also a subsidiary or related company of Distinctive FX. AVS has confirmed that they are happy to satisfy their debt, either in cash or by way of assignment, of those receivables from each of those entities at the full face value of $36,831,768. So either way, whether they are paid in full or cash, or whether they are assigned across, they represented the fair value and are 100 per cent recoverable. Q. What is the amount of cash available to these entities? A. Those two entities I have referred to? Q. Yes? A. Well within the group access to cash it is in excess of a few hundred million dollars. Q. What is the source of the receivables you referred to as the alternative to cash? You said cash or receivables that could be assigned, that was your evidence? A. Yes. Q. What is the source of the receivables that might be assigned that you have indicated to his Honour? A. Sorry, these aren't paid distributions. HIS HONOUR Q. AVS would either put these two entities in funds to pay Statewide or buy from Statewide the debts of these two entities, is that it? A. That's correct. So either way AVS is happy to be repaid its debt in cash, or to take assignment of these receivables and receive the cash directly from those two companies." 46Mr Maitland said in his affidavit that, after a review by him of the financial position of Capita Court Pty Ltd, he had assessed that it had the financial capacity to meet its obligations under the relevant deed involving Statewide. That paragraph was rejected on the ground that there was no explanation of the facts on which the opinion was based (and accordingly no way of testing the reliability of those facts against the evidence adduced in the proceedings) and no explanation of the process of reasoning and deduction that had led to the conclusion - there was, in other words, a lack of connection between the opinion expressed and Mr Maitland's specialised knowledge based on training, study or experience as an accountant: Dasreef Pty Ltd v Hawchat [2011] HCA 21; (2011) 85 ALJR 694. 47Mr Maitland's like evidence from the witness box with respect to Capita Court, H2O South Port and AVS Property suffers from the same fatal defect. Mr Maitland's statements that those companies have financial obligations to Statewide, that performance of those obligations will entail receipt of substantial sums by Statewide and that the companies concerned have the capacity to pay (presumably out of the assets of the trust estates of which they are said to be trustees) are no more than bare assertion on Mr Maitland's part. No evidence has been adduced with a view to enabling the court to make findings of fact relevant to the matters of financial obligations and capacity to perform them. Even if Mr Maitland had sought to explain the processes of reasoning that led him to his stated conclusions - which, of course, he did not - the court would have had no factual basis on which to assess the reliability of his conclusions. His unsupported assertion of the availability of "a few hundred million dollars" within "the group" did nothing to improve matters from the viewpoint of proving solvency. 48Statewide's principal creditors are said by Mr Maitland to be Bank of Western Australia Ltd ("BWA") and AVS Property. 49His evidence is that, as at 30 September 2011, the indebtedness to BWA was $27,691,690 and that, since then (as at 26 October 2011), the debt had been reduced to some $16.3 million by the proceeds of settlements. The expiry date under the agreement with BWA is said by Mr Maitland 31 December 2011. Mr Maitland explained the relationship with BWA in his oral evidence as follows: "Q. Is this the case; that you are not aware of any outstanding requirement or demand of the Bank of Western Australia on Statewide, with outstanding meaning something that hasn't been satisfied one way or another? A. No, the facility is not due to expire, or the most recent extension was until 31 December this year. All other requirements are in full compliance. As I have put in my affidavit, just since 30 September there has been about another 11 or $12 million worth of settlement. The debt currently is at $15 million, $16 million. They are more than happy with their current security commission [sic; scil: "position"]. They are very happy they are getting their interest paid every month. It has been a very good transaction for them." 50Mr Maitland did not identify a particular amount of indebtedness to AVS Property. But if, at 30 September 2011, total secured creditors were $76,175,376 and the BWA debt was $27,691,690, one may infer that the AVS Property debt at that date was some $48.48 million. This seems generally consistent with a letter dated 20 October 2011 from AVS Property to both Statewide and a company called Marquet Rhodes Development Pty Ltd. The letter refers to a mezzanine note purchase agreement dated 21 January 2005 between AVS Property as "mezzanine subscriber", Statewide as "purchaser" and Marquet Rhodes as "issuer". The letter refers to an obligation of Statewide to pay $38,066,245 by 15 June 2009 and the fact that that amount had not been paid by the date. The letter goes on to note that, as at 30 June 2011, $45,707,096 was owing by Statewide to AVS Property pursuant to the mezzanine note purchase agreement. Then follows an agreement of AVS to extend the due date to 21 March 2013. 51The position in relation to secured creditors thus appears to be that, according to the AVS Property letter, the AVS Property debt is not due until 21 March 2013 but that, according to Mr Maitland, the BWA debt will be due on 31 December 2011 unless BWA agrees to an extension. 52Mr Maitland gave evidence of Statewide's operating cash flows for the period of 15 months to 30 September 2011. He said that cash receipts in the course of operations were $23,441,293 and cash payments in the course of operations were $12,507,484. When interest received ($378,514) and financing costs paid ($6,355,065) are taken into account, net cash flows from operating activities were a positive $4,957,258. 53Mr Maitland's evidence indicates that by far the bulk of Statewide's assets is represented by the receivables just mentioned and the stock of unsold home units and townhouses. While there is no evidence of likely or expected cash flows from the receivables, there is some information about likely or expected cash flows from the unsold real estate. Exhibited to Mr Maitland's affidavit is a schedule showing, as at 30 September 2011, each remaining property and its status as "available" (that is, not sold), "contract issued" (that is, contract submitted but not exchanged) or "unconditional contract" - indicating an exchanged but uncompleted contract expected to settle in the ordinary course of conveyancing. The total is $45,259,980 (which does not tally with the $41,145 ,436 at paragraph [40] above - the difference probably takes into account costs of realisation), of which $18,990,950 is within the "unconditional contract" category. 54The suggestion thus appears to be that, as at 30 September 2011, Statewide was in a position where almost $19 million was expected to be received in the ordinary course of conveyancing within roughly three months at the outside. A further $5,682,000 out of the total stock was said to be within the "contract issued" category. 55Mr Maitland has also made statements about Statewide's experience and history in relation to payment of trade creditors. A total of $12,507, 404 is said to have been paid in the fifteen months to 30 September 2011 (see paragraph [52] above), with the "creditors aging ratio" - or average time taken to pay trade creditors - being 36 days. But whether there are grounds for an expectation that that (or a similar) pattern will continue is not disclosed by evidence. 56The 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." 57The 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: