DECISION ON SOLVENCY
39 A number of issues bearing upon the question of solvency emerged from the evidence but in the event it is unnecessary to consider all the issues raised because, for the reasons that follow, a finding of solvency cannot be made on the audited accounts.
40 It is a long established principle that it is in the public interest that companies not shown to be solvent should be left in liquidation. Mr Voukidis bears the onus of proving the solvency of COV and the case law has repeatedly emphasised that in order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the company: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at [1081] (Hayne J); Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (Weinberg J).
41 There are many cases where the Court has rejected unaudited accounts as insufficiently probative of solvency: TQM Design and Construct v Golden Plantation Pty Ltd [2011] NSW SC 500 at [18] (Barrett J). That is not to mean that production of audited accounts will necessarily be sufficient to prove solvency. Even where audited accounts are produced, the Court will examine the evidence carefully and, as pointed out in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163 at [16] by Santow JA (with whom Meagher and Handley JJA agreed), "proper verification of assets and liabilities is critical to rebut the presumption of insolvency". In Metledge v Bambakit Pty Ltd [2005] NSWSC 160 at [34], Barrett J referred to the two approaches generally taken to proof of solvency:
Sometimes, the liquidator can verify financial facts sufficiently to express an opinion that the company is solvent or, at least, to put before the court critically assessed information which assists it in coming to such a conclusion. Sometimes an external accountant can do these things. The court is receptive to that kind of evidence, provided that it sufficiently demonstrates the basis for the opinion that the company is solvent and reflects investigations and verification beyond the mere say-so of the company's controller.
In TQM Design and Construct [2011] NSW SC 500 at [18], Barrett J again emphasized that proper verification of assets and liabilities is critical to rebut the presumption of insolvency.
42 There are a number of reasons for not being satisfied with the audited accounts as proof of solvency.
43 It is a matter of considerable concern that the books and records of COV and the trusts have not been produced to the liquidator, notwithstanding repeated requests to Mr Voukidis for production. As the result, the liquidator has not been able to verify COV's financial position or form an opinion on solvency based upon his independent investigations and the Court does not have the benefit of the liquidator's review of the books and records as verification of the assets and liabilities recorded.
44 Further, Mr Voukidis has not led any evidence to explain why no books and records have been produced to the liquidator when a full explanation was called for, given that Mr Voukidis was able to prepare special purpose accounts to present to the Court to show solvency and able to produce the audit evidence to Mr Whitehead that Mr Whitehead required. Nor has Mr Voukidis led evidence about the preparation of the accounts or put the financial information on which the accounts were based before the Court for critical assessment.
45 Moreover, Mr Whitehead's audit cannot be taken as independent verification of the financial facts and that all assets and liabilities have been identified because Mr Whitehead did not verify the accounts beyond making inquiries of Mr Voukidis and the company's solicitor. He did not even make inquiries of the liquidator.
46 In the circumstances, I do not accept the presentation of the audited accounts as proof that the financial facts have been properly and independently verified beyond "the mere-say so" of Mr Voukidis. This is sufficient reason in itself to dispose of this application. But there is further reason to question the reliability of the accounts as presented.
47 First, it appears from the liquidator's affidavit that had Mr Whitehead made inquiries of the liquidator, he would have learnt that Break Fast has additionally claimed to be owed $781,711 by COV "representing its apportioned share of legal costs paid by Break Fast on behalf of [COV]" in relation to legal proceedings. As it is, this claim does not appear in the accounts that Mr Whitehead audited but the state of the evidence is that the claim is a possible liability of COV to be taken into account in assessing solvency.
48 Secondly, Mr Whitehead did not investigate whether COV has an existing liability under the guarantee which was the subject of the NAB proceedings beyond making an inquiry of Mr Voukidis as to whether there were sufficient assets outside the trust out of which the debt may be repaid because, as Mr Whitehead explained, "there's no judgment in respect of any money owing", and the guarantee "may or may not ever be called upon". However, the fact that the NAB has not sought, nor obtained, judgment against COV for any monetary amount does not gainsay that a debt has crystallized under the terms of the guarantee. The level of inquiry by Whitehead was, in my view, plainly inadequate in view of the fact, as Mr Whitehead was aware, the NAB had already made a demand on COV for payment under the guarantee which had not been complied with. As the terms of the guarantee are not in evidence, and as Mr Whitehead did not examine the guarantee to satisfy himself that there is no extant liability, there is no specific evidence to show that a debt has not crystallized and on the state of the evidence the possibility that a debt has crystallized cannot be excluded.
49 Nor did Mr Whitehead investigate whether COV has an existing liability under the guarantee on which it is sued in the Perpetual proceedings beyond observing that the proceeding is defended and that the solicitors acting for COV have stated that the defence has a reasonable chance of success. The level of inquiry by Mr Whitehead was again, in my view, plainly inadequate in view of the fact that in the Perpetual proceeding, COV is sued on a guarantee. As Mr Voukidis has not produced any evidence at all to identify the nature of its defence and there is no specific evidence to show that no debt has arisen, the possibility that COV has a liability to Perpetual under the guarantee on which Perpetual has sued cannot be excluded. It may be that this does not matter now if the case has settled (depending on the terms) but that information is not before the Court.
50 Thirdly, Mr Whitehead agreed in cross-examination that he just "accepted" the word of COV's solicitor that COV has a right of indemnity against the assets of the two trusts in respect of the liquidator's fees and costs. But whether that is correct or not will depend upon the extent to which, if at all, work undertaken by the liquidator related to the affairs of those trusts: Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd (2004) 213 ALR 373; [2004] NSW SC 1224; Re Lawrence Waterhouse Pty Ltd (in liq); Shaw v Minsden Pty Ltd [2011] NSW SC 964. As Mr Whitehead did not make those inquiries of the liquidator, and as the evidence before the Court does not enable a determination as to whether the right of indemnity extends to the whole of the fees, I am not satisfied that the accounts correctly record the value of the indemnity.
51 Fourthly, I find it puzzling that COV's 25% interest in the joint venture (which includes a 25% interest in the east Melbourne property) which was the subject of a declaration by the Court in the Ambridge proceeding was not shown as an asset in the accounts, albeit that Mr Whitehead must have been aware that COV held that interest because it is referred to in the notes to the accounts. The omission is wholly unexplained in the evidence and without that explanation, there is more reason to doubt the accuracy of the accounts.
52 I am therefore not persuaded that the financial position of COV or the trusts as presented in the audited accounts is a secure foundation on which to assess solvency.
53 Furthermore, even if I did not have concern about the reliability of the accounts as presented, it would not be possible to form a conclusion of solvency merely based upon the audited accounts. The test of solvency is not a balance sheet test so that Mr Whitehead's opinion as to solvency, which is no more than an opinion that COV is solvent on the state of the balance sheet, "adds nothing": Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [23] (Brereton J).
54 Mr Whitehead did not take contingent liabilities into account because, as he stated, his function was to audit the accounts and for accounting purposes, contingent liabilities are not recorded. However, contingent liabilities may be taken into account for the purposes of assessing solvency and, in my view, the making of the declaration in the Ambridge proceeding has given rise to the possibility that COV may have to pay an amount to Ambridge on the taking of accounts and the possible liability is, in my view, properly to be characterised as a contingent liability, albeit unquantified, for the purposes of considering whether COV is solvent. Mr Whitehead's evidence was that he had made inquiry of Mr Voukidis and his solicitor as to whether there was any money that may be payable to Ambridge and that Mr Voukidis said "no". Mr Voukidis's unverified assertion cannot be relied upon to conclude that nothing is likely to be payable and as there is otherwise nothing before the Court to indicate what the potential liability may be, and hence the ability of COV to meet that liability, it has not been shown that COV is solvent.
55 Similarly, such information as there is about the Perpetual proceeding indicates that the claim against COV should also be treated as a contingent liability for the purposes of assessing solvency.
56 Finally, I am not satisfied on the state of the evidence that the Wyatt Avenue property is an available asset out of which to meet liabilities. It was argued for COV that the property is an available asset to be taken into account when assessing solvency because, although it is subject to a writ of possession, the bank has not yet executed that writ and may not need to, and secondly even if it did, the asset would be replaced with receivable, being a debt owed by Mr and Mrs Vouikidis to the company. I do not accept either contention. As the reasons of the NSW Supreme Court record, the indebtedness of Mr and Mrs Vouikidis, which the mortgage over that property secured, is greater than the value of the property and moreover, there is no evidence before the Court to indicate that Mr and Mrs Voukidis have any assets out of which they could satisfy any debt due to the company and therefore to satisfy the Court that the company's equity has not been diminished by the writ of possession.
57 Correlatively, even assuming that the monies held in the controlled money account are available to discharge liabilities, I am not satisfied that Mr Voukidis has proven the true financial facts upon which to assess solvency.
58 Counsel for the COV urged the Court not to accept the evidence of Mr Lom, contending that the Court should draw the conclusion that he was not giving independent objective evidence but rather acting as an advocate for Break Fast. In the end, the analysis does not turn on accepting Mr Lom's evidence as against Mr Whitehead's evidence but rather upon the unreliability of the audited accounts as presenting a true and fair view of the company's financial position. The onus was on COV to provide the fullest and best evidence of solvency. It did not do so and, for the reasons given, I cannot make a positive finding of solvency based upon the accounts as presented.