Allen v Tobias [1958] HCA 13; (1958) 98 CLR 367

Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Kong & Ors v Pilkington (Australia) Ltd, unreported; SCt of WA; Library No 970437; 9 September 1997

Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823

Re Bond Corporation Holdings Ltd (1990) 1 WAR 465

Re Newark Pty Ltd (In Liq); Re Taylor v Carroll (1991) 9 ACLC 1592

Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666

Taylor v Australia & New Zealand Banking Group Limited [1988] 13 ACLR 780

I agree with the reasons for judgment of Steytler J and with the order proposed by his Honour.

I agree with the reasons for judgment of Steytler J and with the order proposed by his Honour.

This is an appeal against the decision of a Master of this Court whereby he ordered that the appellant be wound up.

The respondent applied to wind up the appellant on the ground that it was presumed to be insolvent by virtue of s459C(2)(a) of the Corporations Law because the appellant failed, during the period of three months ending on the day upon which the winding up application was made, to comply with a statutory demand issued pursuant to s459E of the Corporations Law.

The demand was for payment of a sum of $22,532.60 said to be owing by the appellant to the respondent for plumbing work performed by the respondent at a restaurant owned by the appellant. The demand, as provided for by s459E(2)(c) of the Corporations Law, required the appellant to pay the amount of the debt, or to secure or compound for that amount to the respondent's reasonable satisfaction, within 21 days after service thereof on the appellant. At the end of that 21 day period the demand was still in effect but the appellants had not complied with it with the consequence that it was, as the respondent contended, presumed to be insolvent (s459F and s459C(2)(a) of the Corporations Law).

The appellant had not, during the 21 day period, availed itself of the opportunity to apply to the court for an order setting aside the statutory demand pursuant to s459G(1) of the Corporations Law. That being so, that course was no longer open to it (s459G(2) of the Corporations Law and David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265). It had, consequently, to prove that it was solvent if it wished to avoid being wound up, the presumption provided for by s459C(2)(a) operating, by virtue of s459C(3), "except so far as the contrary is proved for the purposes of the application". However it could not, without leave of the court, oppose the winding up application on a ground that it could have relied on in support of an application to set aside the demand had it brought such an application (s459S(1)) and the court could not give it that leave unless satisfied that the ground was material to proving that the appellant was solvent (s459S(2)).

The appellant applied for leave under s459S contending, in reliance upon affidavit evidence filed by it, that there was a bona fide dispute as to whether or not it was indebted to the respondent. The learned Master accepted that contention saying that, on the evidence before him, he could not be satisfied one way or the other as to the appellant's indebtedness to the respondent. However he refused the application for leave. In doing so he said that it was necessary for an applicant, before obtaining leave, to show that the debt upon which the statutory demand is based is the difference between actual solvency and insolvency. He found that it was not.

In considering the question of the appellant's solvency the learned Master said that there were four applicable principles which emerged from the consideration of the statutory provisions, and the relevant authorities, by Sackville J in Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 465. These, he said, are as follows:

"(1) Section 95A(1) of the Corporations Law states a 'cashflow test' rather than a 'balance sheet test' of solvency. It follows that the mere fact that the company's assets exceed its liabilities does not establish solvency.

(2) The adoption of a cashflow test does not mean the extent of the company's assets are irrelevant to the enquiry.

(3) The resources of the company requiring consideration include the credit resources in the sense of terms of credit available to it.

(4) The question of solvency must be assessed at the date of hearing. This does not mean that future events are to be ignored."

In applying these principles to the facts before him the learned Master found that the appellant had "completely failed" to discharge its onus. He said in this respect that it had provided no cash flow analysis at all and that it had made no attempt to "break down" its debtors or, to any significant extent, its creditors. He consequently had little hesitation in ordering that the appellant be wound up.

The appellant pursued two grounds of appeal, having abandoned a third shortly prior to the commencement of the hearing of the appeal.

The first was that the learned Master erred in finding that the appellant had failed to discharge its onus of proving that it was solvent. It contended that the Master should have found that it was solvent in the light of unchallenged evidence that its current assets substantially exceeded its current liabilities and that it had, in effect, received an injection of capital of $50,000 on about 30 June 1997.

The second was that the learned Master erred in refusing to grant leave to the appellant under s459S of the Corporations Law. It contended, in this respect, that the learned Master was wrong in finding that it was necessary for the appellant to prove that the debt upon which the statutory demand was based made the difference between solvency and insolvency before leave could be granted. Moreover it contended that the learned Master erred, in considering whether leave should be given under s459S, by assuming, for that purpose, the correctness of what had been asserted by the appellant to be its financial position rather than by considering what the evidence as a whole revealed or was likely to reveal as regards the appellant's solvency.

As to the first ground of appeal the balance sheet upon which the appellant relied in asserting that it was solvent reflected its financial position as at 15 May 1997. It disclosed total assets of $75,956 the whole of which was comprised by current assets. Its total liabilities (not including that of $22,532.60 said by the respondent to be owing to it) also amounted to $75,956 of which $25,956 comprised current liabilities and $50,000 comprised a non-current liability in the form of a fully drawn advance from the National Australia Bank Ltd.

The appellant's principal current asset is shown as being an amount of $68,644 due from a company known as Virium Pty Ltd. A note to the balance sheet (which was said to be true and correct in an affidavit sworn on behalf of the appellant) records that Virium Pty Ltd had the capacity to repay that amount "as per Balance Sheet, attached". No balance sheet was attached. Nor was there any evidence, at all, as to the date or dates upon which Virium Pty Ltd would be able to repay the amount owed by it. Moreover it appeared from the balance sheet that Virium Pty Ltd had owed to the appellant an amount of $35,247 on 19 March 1997 and, from the evidence as a whole, that the appellant had not traded between 19 March 1997 and 15 May 1997. That raised questions, which the appellant made no attempt to answer, as to the nature and recoverability of the debt owing by Virium Pty Ltd. It was apparent from the balance sheet that if Virium Pty Ltd was unable to pay the amount owed by it reasonably promptly then the appellant would be left with current assets of only $7,312 from which to meet current liabilities (not including the disputed debt) of $25,956 comprising trade creditors, to whom a total of $8,794 was owed, and sundry creditors, to whom a total of $17,162 was owed.

Counsel for the appellant sought to meet this difficulty by referring to evidence which established that on 30 June 1997 a third party made a gift of $50,000 to the appellant which it had used to discharge a second fully drawn advance of $50,000 which had been made to the appellant by the National Australia Bank Ltd. He submitted that, because the gift had been used for this purpose rather than for that of satisfying trade or sundry creditors in circumstances in which there was no evidence that the Bank was pressing for payment, it should be inferred that the appellant saw no difficulty as regards its ability to pay its trade and sundry creditors.

The problem with this submission is that there was no evidence to explain why it was that this second fully drawn advance from the bank was discharged by means of the gift of $50,000. There are many possible reasons why that might have been done which have nothing to do with the appellant's assessment of its ability, or otherwise, to pay its other debts as and when they fell due. I notice, in this respect, that the appellant's March 1997 balance sheet shows that the debt which had been owing to the bank and which was discharged by means of the gift was a current liability, unlike the other fully drawn advance made by the National Australia Bank Ltd to the company which was shown as a non-current liability.

Counsel for the appellant also pointed to a letter dated 15 May 1997 from the National Australia Bank Ltd, tendered in evidence at the hearing before the learned Master, which confirmed that, as at 15 May 1997, "all arrangements between the Bank and ... [the appellant] had been met in a fully satisfactory manner with all terms met in a timely and professional manner" and that the Bank was "comfortable with ... [its] overall position". However, that letter says nothing as to the ability of the appellant, at the material time, to meet its other debts as and when they fell due.

Finally, in this respect, counsel for the appellant pointed to the fact that no other creditor had been "involved" in the winding up proceedings. That seems to me to do little to advance the position. The fact that no other creditor had become "involved" in the winding-up proceedings might mean that none had been dissatisfied with respect to payment, or arrangements for payment, of the debt due to it. However it might equally mean that each was content to leave the running to the respondent or even that the amount owing to it was not sufficient to justify the expense of winding up proceedings. There was no evidence either way.

It seems to me in the end that the appellant did not do enough in order to discharge its onus. As the learned Master has said, it made no attempt to provide any cash flow analysis. In circumstances in which it was so heavily dependent upon the timely repayment of the debt owing by Virium Pty Ltd it was, I think, necessary for it to do more than merely to assert that Virium Pty Ltd had the capacity to repay that debt. If the appellant was to demonstrate that its cash flow would enable it to meet its liabilities as and when they fell due (and the appellant took no issue with the four principles which were enunciated by the learned Master) then it was required, in the circumstances, to produce evidence sufficient to establish that the debt payable by Virium Pty Ltd was likely to be paid, in whole or part, in sufficient time to enable the appellant to meet its other debts as and when they fell due.

The appellant having failed to adduce any such evidence I am not persuaded that the learned Master erred in finding that it had failed to discharge its onus.

This conclusion makes it unnecessary for me to consider the second ground of appeal. It will be apparent from what I have said that the existence or otherwise of the disputed debt was immaterial to the conclusion at which the learned Master arrived. However I will, nevertheless, deal with that ground.

The learned Master said in effect that, merely because the appellant asserted that it was solvent regardless of whether or not the disputed debt was taken into account, it followed that the existence or otherwise of the debt was not determinative of its solvency and therefor material to proving that it was solvent.

That approach seems to me, with due respect to the learned Master, to have been wrong. The materiality or otherwise of the disputed debt to the appellant's solvency was required to be assessed having regard for the available evidence as a whole. There will often be the prospect that a company's assertions as to its financial standing will not be made out when the whole of the available evidence is considered (as proved to be the case here). If that prospect is not evaluated at the time of the hearing of the application the court would be left to decide the application on the strength, only, of the applicant's own assertions. That could not have been the intention of the legislature. The court is required by s459S to be satisfied that the ground sought to be raised is material to proving that the company is solvent, not that it is material on the strength of the applicant's contentions only.

Moreover the test, under s459S(2), is that of whether or not the ground sought to be raised in opposition to the application is "material" to proving that the company is solvent, not that of whether or not it is determinative of the company's solvency. It is not only determinative evidence which is material to proof of solvency. It will often be enough, for the purposes of an application under s459S, to show that the ground sought to be raised might turn out to be determinative of the applicant company's solvency once all of the evidence has been heard, depending upon what evidence is accepted by the trier of fact.

However it seems to me, as I have said, that nothing turned upon the matters raised in this second ground of appeal.