- Bank of Western Australia Ltd v Scotia Downs Pty Ltd

Supreme Court of NSW|2021-08-18|Before: Black J

Solicitors: Edmond Khoury Solicitors (Plaintiff) Solve Legal Services (Defendant) File Number(s): 2021/56299

Nature of the application

By Originating Process filed on 27 February 2021, the Plaintiff, Mr Jean Christian, seeks an order for the winding up of Sails Corp Pty Ltd ("Company") and an order that a liquidator be appointed. The application relies on a presumption of insolvency arising from a creditor's statutory demand dated 3 January 2021 ("Demand"). The Demand claimed the sum of $92,947, being the balance of an amount due to Mr Christian pursuant to a judgment entered by the Local Court of New South Wales on 11 December 2020. There has been reference, in the course of submissions, to pending applications to set aside or vary that judgment, but it is notable that no application to set aside the Demand was brought, nor has that judgment been varied in the eight months or so in which it has been on foot, and it continues to take full effect as a judgment of the Local Court.

Affidavit evidence

Mr Christian relies on his affidavit filed 27 February 2021, which deposed that the Company was on 11 December 2020 indebted to him in the amount of $92,947 arising from the Local Court's judgment, and refers to service of the Demand in respect of the judgment debt. By an affidavit filed on 9 August 2021, Mr Christian's solicitor, Mr El Khoury, referred to that judgment debt and several other judgment debts, which are not relied on and to which I have no regard in this application. He again referred to the issue of the Demand and to the fact it was not paid within the relevant 21-day period, giving rise to a presumption of insolvency under s 459C of the Corporations Act. By an affidavit dated 14 August 2021, Mr El Khoury referred to the issue of a notice to produce, to which the Company partly responded by documents produced yesterday. One of the documents produced is a letter from the Commonwealth Bank of Australia, and, although the form of the letter made available to the Court is partly illegible, I proceed on the basis that it records (as Ms Bailey indicates) that the balance of a bank account of the Company as of close of business on 16 August 2021 was $1,655,821.79. An attachment headed "List of Transactions", also records the existence of that balance, after a transaction on 16 July 2021. I will refer below to the submissions made by Ms Bailey in respect of the significance of the balance of that account. By a further affidavit dated 17 August 2021, Mr El Khoury confirmed that the amount stated in the Demand had not been paid as at that date.
The Company relies on the affidavit dated 29 July 2021 of Mr Fang, who indicated that he became a director of the Company on 24 March 2021 and that Mr Adams was a director of the company prior to that date. Mr Fang refers to notices of motion to set aside or vary the default judgment, to which I have referred above and a listing of those notices of motion in mid-September 2021. He indicates that he became aware of the judgment or Demand on or about 4 March 2021. He contends that the Company was solvent, on the basis that it does not trade, and has a bank account which contains the amount of $1,655,821.79 to which I referred above. Mr Fang indicates that if the Company required additional money to meet its debts or liabilities, beyond the amount it has in its account, he has access to additional assets and funds, held in his personal capacity, which could be utilised for the benefit of the Company. I will return to the significance of those matters below.
Mr Fang also referred to other proceedings in which the Company was involved, although it is not necessary to address those matters for the purposes of this application, and to an exchange of contracts for the purchase of a property in Kanahooka in New South Wales. Mr Fang's evidence is that, when the settlement of the purchase of that property occurs, and if the Company is required to pay all of the amounts in the several proceedings against it, it will have approximately $979,000 in its bank account and the property as an asset. There are two difficulties with that proposition. The first is that the Company is, of course, required to pay the amount that is the subject of a valid judgment against it, so that proposition has no proper element of conditionality about it; and, second, any significance of the proposition that the Company will have available the money in its bank account depends upon whether that money is derived from a loan made by Mr Fang to the Company and the terms on which such a loan is to be repaid.

The parties' submissions

I now turn to the parties' submissions. Mr Allen, who appears for Mr Christian, points out that he relies on the presumption of insolvency arising from the unsatisfied Demand in respect of the application, and the Company bears the onus of demonstrating its solvency by leading the fullest and best evidence of its financial position. I will return to the case law concerning that proposition below. He submits the Company has not tendered any books and records maintained under s 286 of the Corporations Act, so as to establish its financial position, and that the Court could not be satisfied of the Company's solvency without comprehensive financial information including a current balance sheet, and he refers to the observations of Barrett J in TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011] NSWSC 500 in that respect.
Mr Allen submits that the Company's claim that it has money in a bank account does not advance its claim to solvency, where there is no evidence that that money is the Company's money, or as to whether that amount is the proceeds of a borrowing by the Company that is itself repayable on demand. Mr Allen also submits, and I adopt, that little can be drawn from the proposition as to the Company's proposed purchase of real property where all that purchase will do, at best, is to turn any asset that the Company presently has in cash (subject to any corresponding liability) into an asset of a different form.
Mr Allen in turn refers to the formal matters to establish a winding up order, pointing out that service of the Demand is not contested and that there is evidence that the Demand was not satisfied; he also points to a consent of liquidators provided by Messrs Moss and Najjar and to Mr El Khoury's evidence of notification of the application on the Australian Securities and Investments Commission's insolvency website, albeit that occurred late. He also refers to the evidence that the Company has not been wound up on the application of any other party and that the debt has not been paid. The application is heard within, although close to the end of, the six-month period specified in s 459R of the Act, which would expire on 28 August 2021.
Ms Bailey, who as I noted above appears for the Company, in turn submits that the Company has established its solvency and that that is an answer to the winding up application. She points to the money held in the Company's bank account and to Mr Fang's evidence in that respect. It seems to me that that the money held in that account does not assist the Company in this application. It is plain enough that the money held in the Company's bank account does not represent share capital, given the evidence that it has limited share capital as established by a company search. It does not represent retained earnings, given Mr Fang's evidence that the Company does not trade, and the absence of any evidence to indicate a trading history from which an amount of that size could have arisen. Ms Bailey postulates, but Mr Fang does not give evidence, that the money may amount to a gift, presumably by Mr Fang, to the Company, although an alternate inference is plainly available that it results from a loan to the Company, without any fixed term for repayment and therefore repayable on demand. Where Mr Fang does not give evidence, as he could readily have done, as to whether he or anyone else had made such a gift to the Company, I would draw an inference that any evidence he could have given in that respect would not assist the Company, and I can more readily infer that the money held in that account may reflect an amount advanced to the Company, giving rise to a debt that is payable on demand.
In those circumstances, the money in the bank account does not establish the Company's solvency, which could only be established on a cash flow basis if it could be concluded that that money was available to it in the short to middle term to meet its debts, including at least the judgment debt due to Mr Christian, as and when they fell due. That is not the case where the evidence does not indicate, on the balance of probabilities, that the money was not sourced from a loan so that the asset comprising those funds is accompanied by a corresponding debt payable on demand. I do not accept Ms Bailey's submission that Mr Fang's failure to refer to such a loan in his affidavit means it does not exist, since he fails to explain the source of those funds in that affidavit.
Ms Bailey also points to Mr Fang's indication that he is prepared to provide financial support to the Company if required. There are two difficulties with that proposition. The first is a factual one that, whatever financial support Mr Fang is prepared to provide to the Company, it has not extended to payment of the judgment debt in favour of Mr Christian. The second is that, as the Court of Appeal of the Supreme Court of Victoria recently held in Quin v Vlahos [2021] VSCA 205, a company's solvency is not established by the proposition that a director's funds would be available to meet the company's debts, unless it can be said that it is objectively likely at a point in time that the director's financial support would continue, and that would generally not be said unless that company could compel the director to pay the relevant money. There is here no evidence of anything other than Mr Fang's indication of support in his affidavit evidence, and, in particular, no evidence that the Company has any enforceable right to financial support from Mr Fang, which it could enforce if Mr Fang changed his mind in that respect.
Ms Bailey also refers to the Company's intended ownership of the Kanahooka property, but that would only exchange one asset of the Company in money held in its account (to the extent that the Company has such a net asset after setting off any corresponding debt) for an asset in a different form as I noted above. Ms Bailey in turn refers to the Company's liabilities, but that turns on an assumption that the amount held in the Company's bank account is not accompanied by a corresponding debt, which has not been established by the evidence of Mr Fang, as I pointed out above.
Ms Bailey also refers to the well-established principles as to when a company would be solvent, for the purposes of s 95A of the Act, and returns to the proposition, on which the Company's defence stands or falls, that the fact that it has today $1,655,821.79 in its bank account is sufficient to establish its solvency. Ms Bailey also refers to the observations of White J in Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones [2008] 219 FLR 422; [2008] QSC 210 at [29] observing that it would be oppressive if a small and viable company with no creditors was required to expend significant sums to employ an external accountant to analyse its books and records to rebut the presumption of insolvency, and to the approval of that observation in Bank of Western Australia Limited v Scotia Downs Pty Ltd (2011) 87 ACSR 42; [2011] FCA 1302 at [22]. Ms Bailey also emphasises Mr Fang's evidence that the Company is not a trading company, as a matter relevant to the evidence that it would need to lead to establish its solvency, and again returns to the proposition that the Company has a "clear abundance of assets over liabilities," which again turns on whether the money held in its bank account is not matched by a corresponding liability.
Ms Bailey alternatively submits that, if the Court was not satisfied of the Company's solvency, because the Company did not rebut the presumption of insolvency which arises from the Demand, it should exercise its discretion under s 459A of the Act not to order a winding up of the Company. Ms Bailey, in oral submissions, also raised the possibility that the Court might, if it did not exercise that discretion, not order a winding up on condition that money be paid into trust, although it is not apparent how that would advance the Company's ability to pay its debts as and when they fell due, as distinct from merely changing the location where money was held. I also raised, and will return to, the question whether the Court should stay any winding up order, for a short period, to give the Company a further opportunity to pay the judgment debt in favour of Mr Christian, if it wished to do so.

The applicable principles and determination

It seems to me that the Company has not rebutted the presumption of insolvency which arises from its failure to pay the judgment debt within 21 days of the Demand. I reviewed the relevant case law in Re Leasing Holdings Pty Ltd (formerly Charlie Lovett Pty Ltd) [2015] NSWSC 771 and noted that the effect of the presumption of insolvency arising from an unsatisfied creditor's statutory demand was identified by an unanimous High Court in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) (2011) 244 CLR 1; (2011) 83 ACSR 126; [2011] HCA 18 at [28], observing that: "Where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption."
Here, Mr Christian has the benefit of that presumption. In Re Leasing Holdings Pty Ltd above, I also noted that whether a company had established its solvency, in the face of the presumption, was to be determined by reference to the statutory test in s 95A of the Corporations Act which has effect that a company is solvent if and only if it is able to pay all its debts as and when they become due and payable. That definition adopts a cash flow test of insolvency that turns upon the income sources available to a company and the expenditure and obligations that it has to meet, rather than a balance sheet test which would focus on the value of its assets and liabilities, although a balance sheet test could provide context for the application of the cash flow test: see the authorities cited in Re Leasing Holdings Pty Ltd above. Although Mr Fang's evidence is that the Company is not a trading entity, he also gives evidence that it proposes to purchase a property, and that will involve ongoing expenditures; and there is no evidence of the amount of those expenditures, or when they will be incurred, or what income will be available to meet them when they are incurred. The Company's position in that respect stands or falls on the proposition as to the money in its bank account and is undermined by the fact that it has not established that the money takes the form of a gift rather than a loan, payable on demand, where Mr Fang leads no evidence in that respect.
I have not neglected the fact that Ms Bailey relies on the observations in Commonwealth Broadcasting Corporation above. However, as I noted in Re Universal Consultants Group Pty Ltd [2016] NSWSC 1508 at [14], to which Mr Allen draws attention, the fact that the Company does not need to lead evidence of an external accountant to establish solvency does not necessarily mean that it does not need to lead admissible, and sufficient, evidence to rebut a presumption of insolvency. Fundamentally, that would require that it lead evidence, here, from Mr Fang to establish the basis on which the money held in its bank account is to be treated as not having the character of a debt, or that it is as repayable at some time in the future rather than repayable on demand, so that it could be treated as available to meet its debts including the judgment debt due to Mr Christian, as they fell due. There is no such evidence, and to say that the Company does not need to lead elaborate evidence to establish its solvency does not mean that is not required to lead any such evidence.
As I note above, Ms Bailey also raised the possibility that the Court would exercise its discretion not to make a winding up order, and I reviewed two cases which had dealt with the scope of that discretion in Re Universal Consultants Group Pty Ltd above at [17]-[19]. However, as Griffith J observed in Deputy Commissioner of Taxation v TD Preece Pty Ltd [2013] FCA 1365, it is likely to be an exceptional case where the Court would decline to exercise a discretion to wind up a company which is insolvent where that presumption is not displaced. In Re Universal Consultants Group Pty Ltd at [19], I observed one reason that such a case would be exceptional is that: "It involves the Court accepting that a company that is insolvent should not be permitted to continue to trade, exposing its creditors and potential creditors to the risk that their debts will, by definition, not be paid as and when they fall due."
I have not neglected Mr Fang's evidence and Ms Bailey's submission that the Company is not here a trading company; however, to the extent that it proposes to acquire a property, then it will incur future ongoing liabilities, and if it is insolvent, then its creditors will not, by definition, be paid as and when they fall due. It seems to me that here, where a judgment debt has been unpaid for several months, and where the Company has not rebutted the presumption of insolvency, there is no reason that the Court would exercise a discretion not to make a winding up order.
I should also address Ms Bailey's submission that the Court should not make, or stay, a winding up order, on condition that money be paid into trust. I would not adopt that course, where the payment of money into trust takes the discharge of the judgment debt no further, and also does not establish solvency.
I also considered whether I should make a winding up order, but stay it for a short time, to allow the Company to pay the judgment debt in favour of Mr Christian if it sought to do so. I have ultimately concluded that, for the reasons put by Mr Allen, I should not take that course. First, Mr Allen rightly accepts that the application for winding up is directed to the appointment of a liquidator who will gather in the Company's assets and discharge its debts for the benefit of all of its creditors, and that objective is not served by the payment of the judgment debt in favour of Mr Christian alone. It also seems to me that that course is inconsistent with, and falls well short of, what will be required to terminate a winding up order, once it has been made, which would require that the Company show that all of its debts, and the liquidator's costs, and not only the single debt of Mr Christian had been discharged. Where the Company has not discharged the judgment debt over several months; has not sought to set aside the Demand; has not sought leave to challenge the underlying basis of the Demand, under s 459S of the Act; and has not sought to establish its solvency, other than by pointing to an amount held in a bank account which, as I noted above, it has not shown to be a gift rather than a loan that is payable on demand, then it seems to me that the Court must allow the presumption of insolvency its full force, and make a winding up order on that basis.

Orders

For these reasons, I make the following orders:
The Defendant, Sails Corp Pty Ltd, be wound up in insolvency.
Gavin Moss and Mohammad Najjar be appointed as joint and several liquidators of the Defendant.
The Plaintiff's costs of the application be costs in the winding up.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 August 2021

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