Solicitors:
Team Legal Group (plaintiff)
JK Solicitors (defendant)
File Number(s): 2015/372042
[2]
Judgment (ex tempore)
HIS HONOUR: By originating process filed on 18 December 2015, the plaintiff Champion Home Sales Pty Limited seeks an order that the defendant JKAM Investments Pty Limited be wound up in insolvency and that liquidators be appointed. Fabian Micheletto and Darren John Vardy of SV Partners Official Liquidators have consented to be appointed to act as liquidators.
The application is founded on a creditor's statutory demand dated 21 August 2015, addressed to the defendant company, demanding an amount of $63,383.01 described in the Schedule as:
The payment of costs by the Company to the Creditor as provided by the orders of Darke J in the Supreme Court of New South Wales on 18 July 2014 and Judgment in favour of the Creditor pursuant to the Certificate of Determination of Costs in the Supreme Court of New South Wales Case Number 2015/00027716 determined by the Costs Assessor Kirralee Young on 24 June 2015 as annexed and marked "A". A copy of the sealed Judgement/Order entered on 20 August 2015 is also annexed and marked "B".
Superfluously, in circumstances where the debt was founded on a judgment, an affidavit verifying the debt was also attached to the creditor's statutory demand.
The demand was served on the company on 24 August 2015. The company applied to have the demand set aside, but this application was dismissed by Black J on 16 November 2015. The company failed to pay the amount of the debt demanded, or to secure or compound for it to the plaintiff's reasonable satisfaction, within 7 days after 16 November. Accordingly, the plaintiff has established the presumption of insolvency, and the company is presumed to be insolvent. The onus of rebutting the presumption of insolvency falls on the company.
In an endeavour to do so, the company tenders two main pieces of evidence.
The first is a bank cheque for the amount of the debt which it has tendered to the plaintiff, but which the plaintiff has refused to accept. As is established by, for example, the judgment of the Court of Appeal in Australian Mid-Eastern Club v Yassim (1989) 1 ACSR 399, the tender of payment of a debt underlying a demand, when refused, does not eliminate the debt, and is no answer to a claim for it; at least unless there is a continued readiness to pay the debt, coupled with an actual payment into court. There is no suggestion of a payment into court in this case. As was pointed out in the Australian Mid-Eastern Club case, a creditor may have a good reason for refusing a tender where there is a likelihood of having to return the amount paid if a winding up order is subsequently made. [1] Accordingly, while the ability to pay the debt in question is not irrelevant to the question of solvency, it certainly does not prove solvency.
The other evidence tendered by the defendant is in the form of a balance sheet, annexed to an affidavit of the company's external accountant, who says that he has been the company's accountant for the last four years, and has prepared its financial statements during this time. He attaches a "Current Statement of Assets and Liabilities" for the company dated 11 February 2016. It was, therefore, plainly prepared for the purposes of these proceedings, and so is not admissible as a business record.
He then says, "This has been prepared in accordance with information provided by Mr Elia". A covering letter makes clear that the Mr Elia in question is Mr Elie Elia, a director of the company: the accountant says, in the covering letter, "This was prepared by myself at the direction of Elie Elia from information provided by Elie Elia". On its face, the balance sheet indicates current assets of $486,000, comprising cash and cash equivalent of $71,000, a receivable in the form of a judgment against a third party of $138,000, trade debtors of $245,000, and work in progress of $32,000. Other assets are said to amount to $6,861,000, but they are almost entirely contingent assets, described as "Supreme Court Proceedings", of some $6.6 million, which are not presently available to satisfy liabilities. Total current liabilities are said to be $135,000, comprising - in addition to the liability to the plaintiff of $63,000 - accounts payable of $7,000, income tax of $11,000, and GST of $53,000; other liabilities of $81,000 produce total liabilities of $216,000 against total assets of $7.3 million. If the balance sheet is correct, then there is plainly an ample surplus of total current assets over total current liabilities, and a strong current ratio indicative of solvency.
However, objection was rightly taken to the admissibility of the balance sheet on the basis that it was hearsay. The cash and cash equivalents are not verified, save to the extent of the bank cheque to which I have referred, which may represent that cash and cash equivalents, although the evidence is silent as to whether the bank cheque was drawn out of those assets or not. So far as the receivable is concerned, there is evidence of the existence of a judgment debt in that amount, but no evidence as to its recoverability. There is no evidence, save for the assertion in the balance sheet, that the trade debtors in question exist, or as to their amount, or as to their recoverability; and there is no evidence in respect of the work in progress. Nor is there any evidence that the only liabilities of the company are those listed under liabilities.
It is manifest, on the face of the affidavit and the letter that covers the balance sheet, that it is a hearsay statement prepared on information provided by Mr Elia and at the direction of Mr Elia, and it cannot be taken to be the accountant's own sworn affirmation as to the accuracy of what is set out in it.
I rejected the accountant's opinion that JKAM "has not been insolvent throughout this time and is presently solvent", because the accountant does not set out the reasoning process, which leads to that conclusion in any way, and the facts which underpin such a conclusion are not proven. In any event, the question is ultimately one for the Court and not for an accountant. Although I admitted, subject to objection, the statement of assets and liabilities, for the reasons I have given the document is purely hearsay and ought to be rejected. I also rejected evidence, purportedly given by an "authorised person" on behalf of the company who is apparently authorised by the director to make an affidavit on behalf of the company, in which he purported to set out the assets and liabilities of the company, but did so not as a matter of his own personal knowledge, but by reference to the statement of assets and liabilities prepared by the accountant. He repeatedly says, "The Statement of Assets and Liabilities dated 11 February 2016" identifies the following assets, or the following liabilities etc; nowhere does he depose as to the accuracy of those statements.
In short, there is no admissible evidence whatsoever as to the financial position of the company, beyond the availability of a bank cheque of $63,000 - the equivalent to the claimed debt.
It follows that the presumption of insolvency has not been rebutted. In this respect, it has repeatedly been said, including the Court of Appeal, that 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 they are made by qualified accountants who have detailed knowledge of how those accounts were prepared. [2]
As counsel for the defendant submitted, with reference to the judgment of Finkelstein J in Deputy Commissioner of Taxation v De Simone Pty Limited [2007] FCA 548, that is not to say that in every case audited accounts are required; but it is important to understand that, in saying that audited accounts were not invariably a requirement, Finkelstein J did not say that unaudited accounts, the accuracy of which is proved by no direct evidence, is sufficient. His Honour pointed out that there were other ways of proving solvency than by reference to audited accounts, and that it might well suffice, in some cases, for an officer of the company, with detailed knowledge of its financial position, to depose to the assets of the company and the liabilities of the company of which he or she has personal knowledge in such a way that, if not contradicted and unchallenged, solvency would be obvious. But all of that is contingent upon someone with knowledge of the facts giving admissible evidence of them, which is not the case here.
Accordingly, the plaintiff has proved its case and, subject to what I am about to say, is entitled to an order that the defendant be wound up.
However, the plaintiff's reasons for rejecting the tender of the bank cheque are, at present, less than convincing. Despite the gross deficiencies in the defendant's evidence, I suspect that this company may well be solvent. I propose to afford the defendant an opportunity to put its evidence in order to address the issue of solvency, but it will have to bear the costs of this wasted opportunity to do so.
The Court orders that:
1. Proceedings be adjourned to 29 February 2016 at 9.45am in the Corporations List Judge's motions list;
2. The defendant serve any further evidence of solvency by 24 February 2016;
3. The defendant pay the plaintiff's costs of today.
[3]
Endnotes
Tellsa Furniture Pty Limited v Glendave Nominees Pty Limited (1987) 9 NSWLR 245; 5 ACLR 64; Australian Mid-Eastern Club v Yassim (1989) 1 ACSR 399 at 403.
See in particular Expile Pty Limited v Jabb's Excavations Pty Limited [2003] NSWCA 163; (2003) 45 ACSR 711 at 16 per Santow JA with whom Meagher and Handley JJA agreed.
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Decision last updated: 01 September 2017