Court's conclusions as to Redrock's debts
145 As at the commencement of the hearing, it seems to me that Redrock had the following debts:
· to Westpac under the Westpac Business One Loan, for an amount in the vicinity of $380,000, the facility limit, repayable on demand but evidently not the subject of any such demand, even though the company had from time to time exceeded the facility limit;
· to Westpac for loans made under other more specialised facilities, repayable on demand but not the subject of any such demand;
· to the Australian Taxation Office for a running account balance in the vicinity of $100,000, subject to a repayment plan with which the company was complying;
· to its directors and related parties for the total amount of $625,000, generally subject to arrangements with them under which the amounts are not repayable until about May 2008, and then only on demand;
· to Scott Wright for an amount in the vicinity of $100,000, subject to a monthly repayment arrangement which the company is complying with;
· to ABD as legal assignee of the Doulman Industries debt in the sum of $2113.66, fully covered by Redrock's payment into court;
· to 42 Below in the sum of $9,957.12, subject to an equitable assignment to ABD;
· to Belaroma Coffee in the sum of $7,000.
Court's conclusions as to Redrock's insolvency
146 The question for the court is whether, at the time of the hearing, Redrock was insolvent in the sense identified in s 95A of the Corporations Act. In Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608, at 198 [106], Palmer J said:
"I think that I must approach the application of s 95A of the CA with two considerations in mind. First, the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact 'to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable': Southern Cross Interiors Pty Ltd (in liq) vDCT (2001) 53 NSWLR 213 at 224 …".
147 His Honour's judgment was upheld on appeal (Lewis v Doran (2005) 54 ACSR 410; [2005] NSWCA 243). I respectfully adopt his Honour's approach in the present case.
148 Weighing up all of the financial and expert evidence, and the evidence about particular debts, I have reached the conclusion that Redrock has not been shown to have been insolvent as at the time of the hearing.
149 According to my findings, only the debts to 42 Below and Belaroma Coffee are debts presently due and payable but not paid. The total amount of those debts is $16,957.12. The company's trading over the period from March to September 2007 has not generated any positive cash flow and has not been profitable. Forecasts up to February 2008 appear to be very optimistic, in circumstances where earlier projections for months for which actual figures are now available have proven to be very wide of the mark. As the experts agreed, the company's cash flow performance in the period from March to September, and its working capital deficiency, have been bolstered by additional unsecured loans by the directors and related parties, amounting in that period to $240,000.
150 In the circumstances it seems unlikely that the negative profit and cash performance from March to September 2007 has been turned around in the period from October to early December 2007. That makes it unlikely that repayment of the 42 Below and Belaroma debts, relatively small though they are, could be funded out of trading operations up to early December or otherwise in the short term.
151 However, I am satisfied by the evidence of Simon and Kenneth Stonier that they personally have access to loan funds through banking facilities for amounts more than ample to permit them to on-lend to the company so that it can discharge these two debts, and that they are willing to do so on terms that would not entitle them to demand repayment until May 2008 at the earliest. It is permissible for the court, in assessing the solvency of the company, to take into account the immediate availability of funds from unsecured loans made by directors or other related parties, provided that the loan terms are such as to exclude the loan liability from consideration as part of the company's debts due or near due (Australian Securities and Investment Commission v Edwards (2005) 54 ACSR 583; [2005] NSWSC 831 at [99] per Barrett J; Lewis v Doran (2004) 50 ACSR 175; [2004] NSWSC 608 at [104] per Palmer J; affirmed (2005) 54 ACSR 410; [2005] NSWCA 243). It is sometimes said that offers of credit by directors or proprietors prompt the question as to why they do not inject the money as share capital (see Ford's Principles of Corporations Law (Butterworths, looseleaf), at [20.100] page 20,160). Here, however, there is some rationality in funding through loan accounts rather than share capital, if the directors are right that the company's fortunes will be turned around through its summer sales performance. Therefore the mere fact that those two debts are due and payable and have not been paid is not sufficient to justify the conclusion that the company is insolvent.
152 The evidence, though hardly compelling, has led me to conclude that, whether or not the company's debt to Scott Wright is strictly repayable on demand, there are in place satisfactory arrangements such that it is reasonable to expect repayment to occur by monthly instalments of $2300 and that there will be no valid demand for immediate repayment of the whole balance (cf Re Kerisbeck Pty Ltd (1992) 10 ACLC 619), and that this is not a case of mere "indulgence or concession" by the creditor (see Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54]; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; [2003] VSC 123; Emmanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205; Iso Lilodw' Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561; [2002] NSWSC 644; White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 at [290]-[294]; [2004] NSWSC 71). In those circumstances the balance of the debt is not to be treated as immediately due and payable for the purpose of assessing the company's solvency under s 95A.
153 The same principles are to be applied to the debts owed by the company to the Australian Taxation Office and Westpac, although in each case the position is factually more complicated. So far as the ATO is concerned, the evidence shows that there is a repayment arrangement in place, and being observed by the company. There is nothing to indicate that the ATO has sought to demand immediate repayment of the balance owing. ABD contended that this could happen because the company had supplied false financial information to the ATO, but I have reached the conclusion that that contention should be rejected, for reasons set out below. I am persuaded by the evidence that the balance of the debt should not be treated as immediately due and payable for the purpose of assessing solvency.
154 As to Westpac, the documentation indicates that the Westpac Business One Loan is repayable on demand, but no demand has been made although "strict quarterly reviews" have been required and have presumably occurred. The evidence does not indicate any different position with respect to the other facilities. Moreover, as Mr Stonier said in evidence, the facility limit for the Business One Loan has been exceeded from time to time and yet the company has not received any communication from the bank expressing concern. While it may well be open to the bank to seek to bring the facility to an end by demanding repayment, it does not follow, as a matter of commercial reality, that if Westpac decided to do so the company would immediately fall into insolvency. The question would be whether it could refinance with another financial institution on comparable terms. The answer to that question may well depend upon the state of the litigation between LNW and the company at the time of the application for finance, as well as the company's current and projected financial performance having regard to the expected improvement in sales in summer months.
155 There is no evidence from Westpac as to its attitude, but in the circumstances the court is not in a position to make findings of fact about Westpac's attitude and intentions. The correct conclusion, on the evidence, is that ABD has not proven that Westpac's position in commercial reality is such that money is due and payable to it, or will become and due and payable in the near future, but the company is unable to pay.
156 The loans by directors and related parties are for a very large total amount but there is evidence, not identical with respect to each loan though substantially along the same lines, sufficient to persuade the court that the loans are not debts immediately due and payable or due and payable in the near future. The lenders have agreed that no demand for repayment will be made until May 2008 at the earliest, and it appears there is no present intention to make demand for payment at that time. The company's financial position in May 2008 should be clearer, in the sense that its performance over the summer trading months will be known. I agree with Palmer J (Lewis v Doran, at [113]) that the willingness of a third party to advance unsecured funds on deferred repayment arrangements should be "cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality". But in my view the evidence in the present case amounts to a cogent demonstration, when one has regard not only to what the directors and related parties have said but also to what they have done by way of provision of funds.
157 In assessing the solvency of a company, the court's task is not limited to a consideration of the individual debts of the company. An assessment must also be made on an overall basis, considering such questions as whether the company's financial difficulty stems from a temporary lack of liquidity or an endemic shortage of working capital (Bank of Australasia v Hall (1907) 4 CLR 1514; Sandell v Porter (1966) 115 CLR 666; Hymix Concrete Pty Ltd v Geraghty (1977) 2 ACLR 559). Where the question of solvency arises in the context of a winding up application, the question is "prospective", in the sense that the company's ability to pay its debts must be determined not only by reference to debts payable as at the date of the trial but also by reference to its ability to pay debts which will fall for payment some time in the near future (Lewis v Doran at [107], per Palmer J).
158 I have found the overall assessment to be the most troubling part of the solvency analysis in this case. I am very concerned at the discrepancy between forecast and actual figures, set out at length in my analysis of the various financial statements. In my view the directors have not satisfactorily explained that discrepancy. The result is that their current forecasts are unreliable. On the other hand, it is plausible to expect an improvement in the company's sales performance over the summer months. While the company's achievement of its forecasts to February would not do much to address its large balance sheet deficiency, the achievement of a satisfactory cash flow and trading profit during the summer months would be an indicator that the business established in March 2007 may be viable.
159 I am also very concerned that it has evidently been necessary for the company to reinforce its working capital position not only by the initial director and related party loans, but also by substantial increases in those loans in the period from March to September. If it were likely that further injections of loan capital would be needed at the same rate per month in future, the company would very quickly fail, as the available related party resources are limited, at most, to about $275,000. Again, however, it is the prospect of improved performance during the summer months, together with recognition that the business is substantially a start-up business in Redrock's hands, that has led me to resist the conclusion that the company's cash burn demonstrates present insolvency.
ABD's allegation that Redrock misled the ATO
160 In Part C of the originating process, ABD asserted that it was an actual creditor of Redrock having standing under s 459P(1)(b), and made allegations going directly to the question of solvency. However, para 4 of Part C raised matters of a different character. It is as follows:
"4. Further, the Defendant:
a) is seeking to avoid payment of those liabilities by directing creditors to seek payment of those liabilities from unrelated entities
b) is seeking to avoid enforcement action by the Australian Taxation Office by submitting false financial statements to that authority
c) in the alternative to b) has insufficient accounting controls to allow it to generate financial statements to give a true and fair view of the financial position of the Defendant."
161 Those matters were asserted as grounds of insolvency. But para 7 of Part C made these additional allegations:
"7. Further the plaintiff seeks that the defendant be wound up pursuant to s 461(k) of the Corporations Act in that it is putting forward to the public, in particualry [sic] the ATO, financial information which is false, is disclaiming liabilities, is attempting to delay creditors by referring them to Liquor National Wholesale Pty Ltd for payment and is ordering goods and services on the account of Liquor National Wholesale Pty Ltd."
162 As mentioned earlier, ABD no longer relies on the just and equitable ground, but it continues to assert that Redrock has provided financial information to the ATO which is false. That is considered below. As to the allegation that Redrock is disclaiming liabilities, Mr Brooks was asked in cross-examination what evidence ABD had adduced to support that claim, and he said (T 37) that was a reference to the evidence regarding Doulman Industries that I have summarised above. That evidence does not support the claim. He was asked what evidence supported the allegation that Redrock is attempting to delay creditors by referring them to LNW for payment, and he said (T 37) that referred primarily to the Doulman Industries evidence, and possibly also the Motorpass evidence. None of that evidence supports the claim. When asked what evidence there was that Redrock was ordering goods and services on the account of LNW, Mr Brooks said he did not know but he understood that the allegation related to orders placed on the accounts of Fosters (T 37). But there is no evidence about those matters.
163 It appears that, for reasons connected with their prior business arrangement, LNW has had access to back-ups of the computer server previously shared by it with Redrock (T 31). ABD restored the back-up onto the hard drive and then reviewed Redrock's mail folder. In that way ABD obtained an e-mail from Jackie Lim of Plus Advisory to Simon Stonier dated 21 December 2006, enclosing "final draft accounts for the 2006 year along with 2005 comparatives". The e-mail and an attached June 2006 balance sheet with previous year comparatives are in evidence.
164 ABD invites the court to infer from these documents that:
(i) Redrock traded at a loss of $277,919 for the 2006 financial year and a loss of $473,500 for the 2005 financial year;
(ii) Redrock had a deficiency of net assets to equity of $931,624 as at 30 June 2006, compared with $653,704 as at 30 June 2005;
(iii) Redrock's total assets were negative $21,871 as at 30 June 2006, compared with positive $649,558 as at 30 June 2005;
(iv) excluding Redrock's bank overdraft, the total assets available to creditors as at 30 June 2006 were approximately $30,000, whereas liabilities were approximately $960,000;
(v) the total net deficiency of current liabilities to current assets as at 30 June 2006 was $931,623 72.
165 The first and most obvious point to make about these submissions is that the financial statements attached to Ms Lim's e-mail were described as draft financial statements. There is no evidence that the drafts were ever adopted by Redrock. The second obvious point is that they relate to the 2005 and 2006 financial years, and are therefore not directly relevant to the present state of solvency of Redrock. Putting those matters to one side, points (i)-(iii) are correct according to the summary in Ms Lim's e-mail and the attached document, and point (iv) is correct when one takes into account that the negative balance in Redrock's working account with Westpac as at 30 June 2006 was (according to the draft) $51,640.33. As to point (v), in fact the total current assets as at 30 June 2006, as per the draft, were negative $43,652.68, while the total current liabilities were $909,753.04, so the gap between current liabilities and current assets was in fact wider than ABD submitted (ABD's figures are for total assets and total liabilities).
166 The evidence also includes an e-mail (apparently obtained in the same way) from David Mah Chut of Plus Advisory to someone called "Anthony" dated 5 February 2007, which attaches some points detailing events subsequent to a meeting at the end of 2006, "as summarised by Simon Stonier". The e-mail contains some information about ATO recovery proceedings against Redrock and its directors. Redrock's dealings with the ATO are considered separately above. It appears from the e-mail and its attachment that some consideration was being given, at that time, to the appointment of voluntary administrators to Redrock, with a view to development of a deed of company arrangement. The attached notes summarised the main liabilities of the company and as to assets, the notes say "virtually zero (3 run-down cars)".
167 Finally, the evidence includes an e-mail from Jackie Lim to David Mah Chut, copied to Simon Stonier, dated 12 December 2006, attaching a draft letter from Mr Stonier to the ATO and a draft profit and loss statement and balance sheet for the 2006 financial year, together with a profit and loss statement and balance sheet for the 2005 financial year stamped "draft" but bearing the handwritten word "final". The draft letter from Mr Stonier to the ATO was intended to attach these financial statements, in response to the ATO's request, but the draft letter observed, "kindly note that these accounts are draft and subject to adjustments to be finalised shortly". The e-mail reported that Ms Lim had stamped the 2005 and 2006 "capital accounts" as drafts and had prepared a covering letter for Mr Stonier to sign, and referred the reader to the attachments, saying that Mr Stonier would forward the attachments "along with everything else" to the ATO on that day.
168 The draft financial statements attached to the e-mail of 12 December contained figures markedly different from the figures in the later drafts attached to the e-mail of 21 December, outlined above. As Mr Brooks noted in his affidavit made on 20 November 2007, notable differences include the following:
(a) profit for the year ending the 30 June 2006 according to the 12 December figures was $92,957.59, but according to the 21 December figures there was a loss of $277,919;
(b) trade debtors were stated at $178,666.95 in the 12 December figures but only $7,987.65 in the 21 December figures;
(c) MYOB and staff and capital debtors were recorded at $306,829.27 in the 12 December figures but at zero amounts in the 21 December figures;
(d) motor vehicles owned and under lease were recorded at $131,057.90 and $225,299 respectively in the 12 December figures but only $41,812 and $21,500 respectively in the 21 December figures;
(e) total net assets after liabilities were given in the 12 December figures at negative $538,438.53 but at negative $931,623.72 in the 21 December figures.
169 Several points should be noted about these discrepancies. First, the figures in both sets of documents were described as drafts. Secondly, there is no evidence to show that the 12 December figures were actually submitted by Redrock to the ATO without adjustment. Thirdly, the draft covering letter to the ATO expressly stated that the figures were drafts and subject to adjustment. Fourthly, if (as appears likely, given the pressure evidently being applied by the ATO) intensive work was done on the financial position of Redrock between 12 and 21 December 2006, substantial adjustments would not necessarily have indicated that the earlier figures were misleading or, a fortiori, known to be misleading by the directors. Fifthly, there is no evidence as to whether the revised figures, if accepted by the directors, were supplied to or concealed from the ATO.
170 Simon Stonier gave evidence that the 12 December version of the financial statements was a draft generated by Redrock's then accounting software, the Capital Office program. The accounts were generated for submission to Plus Advisory as Redrock's accountant, shortly after 30 June 2006. They were unadjusted figures. When forwarded to the ATO they were described as drafts and the covering letter (as noted above) made this point clearly. The figures in the 21 December version of the financial statements were prepared by Plus Advisory using their MYOB system, and reflect adjustments made by Plus Advisory to the earlier Capital Office documents. I accept this evidence.
171 My conclusion is that the allegations contained in paras 4 and 7 of Part C the originating process have not been made out, on the evidence.
Abuse of process
172 In Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966, White J gave a clear and comprehensive account of the law of abuse of process, which I respectfully adopt for present purposes (see also TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410).
173 In dismissing Redrock's application for summary dismissal of the proceedings, White J found ([2007] NSWSC 966 at [42]) that one of Mr James' purposes, and hence one of ABD's purposes, was to obtain a collateral advantage for which winding up proceedings were not designed, namely to put pressure on Redrock by employing it in litigation and thereby causing it to incur expense and consume executive time. But he observed that the proceedings could only be dismissed as an abuse of process on this ground if that purpose was the predominant purpose. He noted that it was not put to Mr James that this was the case, and held that it was not. He found that the predominant purpose of Mr James was to crush Redrock by putting it into liquidation. He held that this was not an abuse of process. The predominant purpose of Mr James was to pursue a substantial claim for winding up with malicious intent, in order to achieve the consequences that winding up would bring. It was not an abuse of process to seek a winding up order so as to achieve the outcome that Redrock would cease to carry on its business except so far as necessary for the beneficial disposal or winding up of the business; nor was there any abuse of process in seeking to obtain the tactical advantage which a winding up order would give ABD with respect to the Commercial List proceedings.
174 White J's conclusion that the present proceedings had not been shown to be an abuse of process did not imply condonation of ABD's conduct (at [46]). He left for the court at the final hearing the question whether the intentions and tactics of ABD are relevant to the exercise of the discretion to make or refuse a winding up order, if the grounds for doing so are established at the final hearing (at [47]).
175 At the final hearing the only evidence as to ABD's purpose in bringing the winding up proceedings was given by Mr Brooks. He informed the court that in his view, any employee of ABD could make an admission on behalf of that company in relation to its dealings (T 26). It is unnecessary to decide whether that broad proposition is true, but in the circumstances I accept that Mr Brooks was in a position to give evidence as to ABD's purpose in bringing and maintaining the winding up proceedings.
176 In my opinion the evidence of Mr Brooks as to ABD's purpose was not fully frank. Counsel put to him, no doubt in light of White J's findings, that the reason for these proceedings is to crush Redrock's business, and he denied that this was so (T 22). He said the purpose of the proceedings was to wind up Redrock, because ABD believed that Redrock was insolvent, although he acknowledged that Redrock's business would presumably be sold by the liquidator (T 22, 32). I find it implausible that ABD, a company owned and controlled by the owners and controllers of LNW, which had been in a business arrangement with Redrock and asserted an entitlement to Redrock's business in other proceedings, would have gone to the trouble of buying debts so as to give it standing to bring winding up proceedings simply because it believed Redrock to be insolvent.
177 Evidence suggesting that ABD had other purposes in commencing the winding up proceedings emerged during the cross-examination of Mr Brooks. Mr Brooks was cross-examined about a single-page document of Bluestar Beverages headed "Important Notice Redrock Distributors & Blue Hills Liquor". The document announced LNW's decision to trade as Bluestar Beverages. It said:
"Currently we are unable to source the brands Splitrock and Tiro for supply to customers and note that this is currently a matter related to Supreme Court proceedings that we have commenced. We will keep you updated on our progress on that score."
178 That was a reference to the proceedings by LNW in this court, in which it asserts a proprietary interest in the Redrock business (T 67). Mr Brooks acknowledged that there is a distribution agreement for Splitrock and Tiro drinks which is an asset of Redrock's business. He accepted that a liquidator of Redrock would be interested in selling such an asset, and that LNW wanted to obtain that distribution agreement. He accepted that there was no chance of acquiring the agreement while Mr Stonier and Mr Kinsella were in control of Redrock but there would be at least a chance of doing so if a liquidator were to be appointed. It is plausible to infer that one of the purposes of ABD in bringing and maintaining the winding up proceedings is to secure the Splitrock and Tiro distribution agreement for LNW.
179 Mr Brooks was also cross-examined about his letter to Westpac of 3 April 2007, informing it of the commencement of the winding up proceedings. He said he was aware at that time that the bank might react adversely upon receipt of that information, and that ABD would have been very happy if the bank had joined in the proceedings as a supporting creditor, and if they had made Redrock's facility repayable at call (T 71).
180 While this evidence establishes that Mr Brooks and ABD had a number of collateral purposes, as well as the purpose found by White J to be the predominant purpose, I am not persuaded by the evidence that any of these other purposes was dominant. In my view, the evidence at the final hearing leads to the conclusion that ABD's predominant purpose was to pursue the winding up proceedings vigorously and to extract all such advantages as the law affords, through winding up and liquidation, to persons who have had dealings with the company (including advantages that may arise through the sale of the company's assets and to compromise of legal proceedings by the liquidator). In other words, I agree with White J's interlocutory conclusion as to the predominant purpose of ABD. That being so, I reject the contention that the bringing and maintaining of the present proceedings amounts to an abuse of process.
The publication issue
181 On 3 April 2007 Mr Brooks on behalf of ABD wrote to Redrock's account manager at Westpac, enclosing the originating process in the present proceedings, an interlocutory process and the affidavits of Mr Doulman and David James. Mr Brooks said he was handling the winding up application on behalf of ABD and understood that the bank was a creditor of Redrock, and asked to be advised if the bank wish to appear at the return date stated on the originating process. He also invited the bank to comment on various versions of financial statements of Redrock attached to the affidavit of Mr James. These were the 12 December 2006 and 21 December 2006 versions of draft financial statements for 2006 and 2007, discussed above.
182 When Westpac, by facsimile dated 3 April 2007 to Redrock's solicitors, supplied a copy of Mr Brooks' letter and the enclosed originating and interlocutory processes and affidavits, it did so under a covering letter saying that the bank would need to be provided with a written response from Redrock explaining how they would address the situation, and specifically querying whether there had been any defaults in the repayment arrangements for the ATO debt.
183 Redrock complains that because the documents have been sent to Westpac and Bertshell, it has had no opportunity to take steps to prevent damage to its business caused by the winding up application becoming known. Mr Stonier gave evidence that Bertshell has altered its terms of trade with Redrock so as to place it on COD terms. He said that prior to October 2005, and also in the period from October 2005 until February 2007 when Redrock and LNW were working together, Bertshell supplied soft drink on 30 day terms. On about 17 April 2007 Redrock received a copy of Mr Brooks' letter to Bertshell of 3 April 2007, endorsed with the handwritten words "Ian, what is this???". Mr Stonier said that shortly afterwards he had a conversation with a director of Bertshell who told him, "we can't give you terms while those proceedings are going on". Since that time Redrock has continued to purchase products from Bertshell, but only on a COD basis.
184 Mr Stonier also said Westpac rejected Redrock's application for "Merchant Services Facility" to process credit card and eftpos payments from customers, made on about 1 May 2007 was refused by Westpac, whose account manager told him: "I'm sorry we can't give you the merchant services facility in light of the winding up application." However, he accepted in oral evidence that the facility was subsequently granted after further representations made by him to Westpac's business banking manager, and the facility was available to Redrock at the time of the hearing (T 138-9).
185 On 3 April 2007 Mr Brooks on behalf of ABD also wrote to Bertshell, a soft drink bottler and a major supplier of soft drink distributed by Redrock, enclosing the originating process, the interlocutory process and the affidavits.
186 Mr Brooks said in his oral evidence that he also wrote to other creditors, recalling Belaroma, Unilever and APW (T 59). The letters are not in evidence.
187 Rule 5.6 of the Supreme Court (Corporations) Rules 1999 (NSW) ("the publication rule") is in the following terms:
"5.6(1) Unless the Court otherwise orders, the plaintiff must publish a notice of the application for an order that a company be wound up.
(2) That notice must be:
(a) in accordance with Form 9; and
(b) published in accordance with rule 2.11:
(i) at least 3 days after the originating process is served on the company, and
(ii) at least 7 days before the date fixed for hearing of the application."
188 Rule 2.11 provides that the notice must be published once in a daily newspaper circulating generally in the State or Territory where the company has its principal, or last known, place of business.
189 Redrock's Further Amended Notice of Appearance alleges that the application for winding up was published by ABD in a manner other than that prescribed by legislation or the rules of court. In a document entitled "Particulars of Premature Publication Issue", Redrock alleged that ABD breached rule 5.6(2)(b)(i) by publishing notice of its winding up application at a time when it had failed to properly serve the originating process on the defendants. I reject that specific allegation, on the basis that according to my finding, the originating process was served on 28 March 2007.
190 In my opinion, the publication rule does not imply that, after the expiration of the three-day period, notice of the application is to be published only in the manner designated by rule 2.11 and not in any other manner, such as by sending it to particular creditors of the company. The scope of the rule was analysed by Beazley JA (with whom Hodgson and Santow JJA agreed) in Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd (2007) 61 ACSR 441; [2007] NSWCA 57, at [101]-[122]. It emerges from that analysis that the concern of the courts has been to give a company served with a winding up application the opportunity to avoid the potentially damaging consequences of advertisement by attending to payment of the applicant's debt, or by taking appropriate proceedings, in the case of a contested debt or on other grounds, to restrain advertisement (see especially at [106]). The implied restriction is on premature publication, not on publication after the expiration of the three-day period.
The court's discretion to decline to order the winding up of an insolvent company
191 Redrock submitted that, if the court concludes that the company is insolvent, it should nevertheless decline to make a winding up order in the exercise of its discretion. That discretion is conferred by s 467(1)(a), which states that on hearing a winding up application the court may dismiss the application with or without costs, even if the ground has been proved on which the court may order the company to be wound up on the application. It is, of course, unusual for the court to decline to order the winding up an insolvent company.
192 The question of exercise of the court's discretion does not arise in the present case, because I have reached the conclusion, on balance, that Redrock is not insolvent. I note, however, that there are a number of matters that may well have led me to refuse to make a winding up order if I had concluded that the company is marginally though not clearly insolvent. Relevant to the exercise of the court's discretion would be the collateral purposes of ABD that I have found to exist; the fact that its standing depends upon an assignment of a debt the amount of which has been tendered and paid into court by the company, and it seeks to rely on an equitable assignment to it of another debt of which notice was not given to Redrock until some months after the assignment took place; the fact that ABD chose to communicate with Westpac and Bertshell and others in circumstances where, in my view, it must have been plain to Mr Brooks that there was a substantial risk of damage to Redrock; and the fact that a related company of ABD, LNW, is engaged in litigation with Redrock as to the ownership of the business conducted by Redrock and the distribution rights for Splitrock and Tiro products. I agree with White J ([2007] NSWSC 966 at [46]) that there was "malicious intent" involved in using the proceedings to subject Redrock to the cost and trouble of additional litigation, although that malicious intent did not amount to a predominant purpose and was not accompanied by the use of fraudulent means.
193 However, it is unnecessary for me to decide whether these factors would prevent the court from making a winding up order if Redrock were insolvent, and indeed it is impossible to to so in the abstract, without a finding of specific grounds of insolvency.
Conclusions
194 ABD has standing to bring and maintain the present proceedings and has properly served the originating process. It has not engaged in an abuse of process or premature publication contrary to the implied restriction in rule 5.6(2)(b)(i). But it has failed to prove any grounds for the winding up of Redrock. Consequently, the proceedings will be dismissed. I shall appoint a time to hear the parties on the question of costs.
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