Australian Liquor Marketers Pty Ltd v Solowave Pty Ltd [2007] NSWSC 501 | Case summary

6286/06 Australian Liquor Marketers Pty Ltd v Solowave Pty Ltd JUDGMENT 1 HIS HONOUR: Following delivery of my reasons of 1 May 2007, the applicant, Mr Hakki Mustfa, has adduced further evidence as to the financial position of the defendant. Since the hearing on 30 April 2007 and the delivery of my reasons on 1 May 2007, an appearance has been filed by a company called Connaught International Inc, which claims to be a creditor of the defendant by way of assignment of debts allegedly owed by the defendant, either actually, contingently or prospectively, to Reliance Financial Services Pty Ltd and the entity trading as Cassaniti & Associates. It opposes the orders sought by the applicant for the termination of the winding-up. 2 I will deal first with the further evidence as to the defendant's financial position adduced by the applicant. A further itemised account from the Australian Tax Office ("ATO") dated 30 April 2007 has been tendered showing a debt then due of $25,732.45. In substance, this represents the payment of the tax debt as shown on the earlier itemised account referred to in my reasons of 1 May 2007 and an assessment of tax for the 2004 and 2005 financial years. 3 The applicant, through Mr Ashton, has now produced the amended income tax returns for those years and the defendant's 2006 income tax return. The returns are as summarised by Mr McDonald in his affidavit. Mr Ashton deposes that, short of a company audit, he has no reason to believe that the company would be assessed otherwise than as shown on the amended returns and on the 2006 return. There is no indication that such an audit is planned. He annexes an itemised account from the ATO dated 1 May 2007 which includes the receipt of $29,283.45 on 26 April 2007 and processed on 30 April 2007, showing a credit balance of $3,551. 4 On the basis of this further evidence, I am satisfied as to the taxation liabilities of the defendant. This evidence, together with evidence that the debt formerly shown as $8,353.67 has been paid from funds provided by the applicant, satisfies me that once the applicant's loan account is capitalised, there will be a surplus of current assets over current liabilities in excess of $8,000. 5 There is little further information in relation to the company's fixed assets. There is, however, evidence that the nightclub section of the hotel has an inventory of plant and equipment, including things such as lights, sound systems and air-conditioning which were acquired at a cost of $167,956. The figures in the balance sheet for plant and equipment and other fixed assets were taken from capital expenditure entered into an accounting program. The applicant is unable to access the MYOB files setting out the purchases and the assets which constitute the non-current assets in the balance sheet. The reason for this is that the information is contained on back-up discs held by Cassiniti & Associates, which acted as accountant for the defendant and which, it is said, is no longer trading. 6 Whilst there is no further information than that to which I have referred in relation to the non-current assets of the defendant in its balance sheet, the applicant has adduced cogent evidence that the defendant is beneficially entitled to eleven poker machine entitlements allocated in respect of the licence for the DCM Hotel. Poker machines installed at the hotel are owned by the defendant and are used by patrons of the club. The poker machine entitlements were not included in the balance sheet. There is evidence, which I have no reason not to accept, that they have a realisable value of about $1,470,000. 7 On the basis of all of this further evidence, I would be comfortably satisfied that the defendant is solvent. This evidence does not, however, take into account any liability which the defendant might have either as a principal debtor or as a guarantor to Reliance Financial Services Pty Limited ("Reliance"), or to Cassiniti & Associates, or to an assignee of such debts. It appears that Reliance is a company associated with Mr Sam Cassiniti. 8 Nothing was forthcoming on the application concerning Connaught International Inc ("Connaught"), except that it is described in documents as being a company with a Hong Kong address. The evidence adduced by the applicant at the hearing on 30 April included correspondence between the liquidator and Reliance. The liquidator noted that it had been claimed that the defendant was liable as a guarantor of moneys lent by Reliance and that an amount of approximately $460,000 was outstanding to Reliance. The liquidator said that no supporting documentation evidencing the debt had been provided and that in the circumstances, he did not consider that Reliance had provided sufficient evidence that there was a valid claim against the company. The liquidator also observed that the accountant acting for, it seems, Reliance or Cassiniti & Associates, had not provided supporting documentation that debts owing for services provided to other companies had been guaranteed by the defendant. 9 On the further hearing of this application before me, there was evidence that as at 30 June 2003, Reliance was recorded in the defendant's balance sheet as a creditor of the company for moneys lent in an amount of $350,000. However, it is not so recorded in later balance sheets. 10 It appears that on 27 September 2002, Reliance entered into an agreement with the applicant to lend him $250,000. It can be inferred that these moneys were on-lent by the applicant to the defendant. According to a purported deed of assignment dated 13 June 2006 expressed to be between Reliance and Connaught as at that date, the defendant was indebted to Reliance in an amount of $301,494 pursuant to agreements for the making of loans between Reliance and the defendant. However, a later document purporting to be a deed between Reliance and Connaught dated 7 May 2007 recites that the debts in question were owed by the applicant, that is Mr Mustafa, to Reliance under agreements for loans with him of 27 September 2002 and 29 March 2004 which was guaranteed by the defendant on 30 July 2002. That document bears an unidentified signature on behalf of Reliance. 11 Connaught adduced evidence of loan agreements of 27 September 2002 and 29 March 2004 with Mr Mustafa. It adduced evidence of cheques from which it can be inferred that loans of $301,494 were made to Mr Mustafa on or about those dates. However, the evidence that such debts were guaranteed by the defendant is dubious. It consists of a letter dated 30 July 2002 from Reliance addressed to "The Director, Mr Mark McGann, Solowave Pty Limited". The letter set out the terms for the engagement of Reliance for what were called specialist services. Included in the letter was the following paragraph: "In consideration of Reliance performing accounting, taxation and other work at your request for the following persons, companies, trusts, superannuation funds or other entities you unconditionally and irrevocably guarantee to Reliance payment of all the past, present and future professional fees, disbursements and loans of the following persons, companies, trusts, superannuation funds or other entities:" 12 There then followed a list of fifteen persons and companies, including Mr McGann, Mr Mustafa and Hiwind Pty Limited. The letter is apparently signed by Mr McGann. However, he does not purport to sign the letter on behalf of the defendant. The letter was addressed to Mr McGann, who was described as a director of the defendant, but it did not ask for him to sign on behalf of the defendant. No signature was affixed to the letter by anyone purportedly acting on behalf of the defendant. 13 On the face of the letter, the defendant did not give a guarantee. In any event, even if a different view were taken as to the construction of the letter and its manner of signature, or even if there were other evidence to show that the defendant did, through the signature of Mr McGann, become bound by the guarantee in the terms of the letter, it appears to me that as matters presently stand, Connaught's claim against the defendant as a guarantor of the debts owed by Mr Mustafa to Reliance is dubious to say the least. 14 Cassaniti & Associates claims that it was owed $24,110 by the defendant in respect of invoices issued between 2002 and 2005. That firm also claims to be owed $35,434 by Hiwind Pty Limited for services supplied between 2002 and 2004. 15 Connaught tendered a letter of engagement from Cassaniti & Associates dated 21 June 2002 addressed to the defendant. It provided that: "In consideration of Cassaniti & Associates performing accounting, taxation and other work at your request for the following persons, companies, trusts, superannuation funds or other entities you unconditionally and irrevocably guarantee to Cassaniti & Associates payment of all the past, present and future professional fees, disbursements and loans of the following persons, companies, trusts, superannuation funds or other entities."

16 One of the persons whose liabilities were so guaranteed was Hiwind Pty Limited. The letter tendered bears an illegible signature against the designation "client". It was, however, addressed to Solowave Pty Limited and I accept that there is a stronger case for saying that the defendant gave a guarantee in terms of that document, than there is in relation to the alleged guarantee given to Reliance. 17 There are three documents claimed to be instruments of assignment in favour of Connaught. One document is described as a deed. It is dated 13 June 2006 and is expressed to be between Reliance and Connaught. This document names the defendant as a debtor and contains words of assignment in relation to the debts owed by the defendant to Reliance. The document is not signed by or on behalf of Connaught. The expressed consideration for the assignment is $10,000. There is no evidence that this amount was paid. There is no evidence that Connaught accepted the assignment. 18 There is a further document described as an assignment of a debt between Mr Sam Cassaniti and Connaught dated 13 June 2006. Under this document, Mr Cassaniti purports to assign debts owed to him by the defendant. Again, the assignment is said to be to Connaught for consideration of $10,000. There is no evidence that debts owed to Cassaniti & Associates were owed to Mr Cassaniti. In any event, the purported assignment is not signed by Connaught. Again, there is no evidence that the stated consideration of $10,000 was paid and there is no evidence of Connaught's having accepted the assignment. 19 The third purported assignment is contained in a document dated yesterday between Reliance and Connaught. Again, this document is not signed by or on behalf of Connaught. 20 There is no evidence at all about Connaught on this application, except that it is named as a company on documents and is said to have an address in Hong Kong. Counsel who appeared for it on the hearing yesterday could not tell me who its directors were. 21 Of course, doubts as to the validity of the assignment of debts owed by the defendant to Reliance or Cassaniti & Associates go only to the standing of Connaught. If the debts exist, whether or not they have been assigned, they are matters to be taken into account in determining whether the discretion under s 482 of the Corporations Act 2001 (Cth) to terminate the winding-up should be exercised. 22 I have already expressed my doubts that the defendant is liable as a guarantor to Reliance. There is no explanation as to why debts allegedly owed to Cassiniti & Associates from 2002 are still outstanding. There is no evidence of any attempts having been made to collect the debts prior to the defendant being wound up. Suffice it to say that I have serious doubts as to whether the defendant is either actually or contingently indebted to Reliance or to whatever might be the entity which traded under the name of Cassaniti & Associates. 23 I have serious doubts as to the authenticity of the alleged assignment of such alleged debts, but even if the claims now made by Connaught are genuine and even if the alleged debts exist, it does not mean that the defendant is insolvent. Its assets, including its beneficial interest in the poker machine entitlements, would be more than sufficient to satisfy all such debts. Moreover, it is not claimed to be liable as a principal debtor for more than $24,110. There is no evidence that the persons alleged to be principally liable on the debts which the defendant has allegedly guaranteed have defaulted, or are likely to default, or would not be able to indemnify the defendant if the alleged guarantee were called on. 24 Nor do I consider that Connaught would be prejudiced if the winding-up is terminated. Rather, its position would be improved because it is a condition offered for the termination of the winding-up that debts in excess of $300,000 owed by the defendant to the applicant and to Hiwind Pty Limited will be released in consideration for the issue of redeemable preference shares to them. That would be beneficial to Connaught if it is a creditor, as it claims to be. 25 In my view, it is a proper exercise of the judicial discretion under s 482 to order that the winding-up be terminated. There are obvious advantages to contributories and to existing creditors. There are liquid funds with which to pay the existing trade creditors. The trade creditors are aware of the winding-up and have indicated their willingness to continue trading on existing terms. 26 The evidence as to solvency satisfies me that the interests of future creditors would not be at risk if the winding-up is terminated. Whilst the sufficiency of that evidence was criticised by counsel for Connaught by reference to the observations of Weinberg J in Ace Contractors & Staff Pty Limited v Westgarth Development Pty Limited [1999] FCA 728 (cited with approval by the Court of Appeal in Expile Pty Limited v Jabb's Excavations Pty Limited (2003) 45 ACSR 711), and whilst I have been critical of the way in which evidence as to the defendant's financial position has been presented, I am nonetheless satisfied that the company would not recommence trading as an insolvent company. Orders 27 I note the undertakings given to the Court by the applicant through his counsel that: (a) he shall accept from the defendant, in lieu of repayment of the loan he has made to the company, redeemable preference shares fully paid at $1 per share to the value of the total of those loans as at the date of these orders, being $271,231; (b) that he will immediately take all necessary steps for the issuing to him of redeemable preference shares in the defendant to the value of $271,231; and (c) that he will take all necessary steps to ensure that the accounts of the defendant are adjusted to reflect the discharge of the defendant's debt owed to him and the issuing of shares referred to in paragraphs (a) and (b) above. 28 I note the undertakings given to the Court by Hiwind Pty Limited through its director, Mr Mustafa, that Hiwind Pty Limited shall accept from the defendant, in lieu of the repayment of loans of $39,900 made by Hiwind Pty Limited to the defendant, redeemable preference shares fully paid at $1 per share to the value of the total of those loans. 29 I also note the undertakings to the Court given by the applicant through his counsel that: (a) he will immediately take all necessary steps for the issuing to Hiwind Pty Limited of redeemable preference shares in the defendant to the value of $39,900; and (b) he will take all necessary steps to ensure that the accounts of the defendant are adjusted to reflect the discharge of the debt owed by the defendant to Hiwind Pty Limited and the issuing of shares referred to in paragraph (a). 30 Upon those undertakings, I order that the winding-up of the defendant be terminated with effect from today. 31 I order that the liquidator's costs, charges and expenses incurred to 7 May 2007 in the amount of $67,884.83 (inclusive of GST) be drawn and paid from the funds held by the liquidator in St George Bank Ltd, Account No 00055267756 2 ("the liquidation account"). 32 I note that the liquidator's costs, charges and expenses relating to termination of the liquidation are estimated at $5,500 inclusive of GST. 33 I direct that the liquidator be authorised to draw up to $5,500 from the liquidation account in payment of his further costs, charges and expenses and direct that he provide invoices of such further costs, charges and expenses to the applicant. 34 I direct that the liquidator account to the defendant for any funds remaining in the liquidation account following payment of the amounts referred to in the preceding paragraphs. 35 These orders may be entered forthwith.

Australian Liquor Marketers Pty Ltd v Solowave Pty Ltd

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