Double Bay Newspapers Ltd v Fitness Lounge Pty Ltd

Judgment - ex tempore 1On 19 September 2013, the applicant, Joe's European Auto Specialist Pty Ltd ("Company"), was wound up by this Court in an application by a creditor, Owners of Strata Plan No 61835 ("Owners Corporation"), under ss 459A, 459P and 461 of the Corporations Act 2001 (Cth) and a liquidator was appointed. 2By interlocutory process filed on 12 December 2013 the Company and its director, Mr Youssef El-Rachkidi, brought an application under s 482 of the Corporations Act seeking to stay or terminate the winding up. That application was supported by Mr El-Rachkidi's affidavit dated 12 December 2013, which indicates that Mr El-Rachkidi became aware of the winding up application when he received an offer of assistance in defending that application and the Company was not served with the relevant documents at his registered address. That offer of assistance is in evidence and is from a firm of solicitors offering assistance with the winding up application and drew Mr El-Rachkidi's attention to the listing of the winding up application well before the hearing date of the application. Mr Badal, who appears for the Company and Mr El-Rachkidi, contends from the bar table that this letter was not believed by Mr El-Rachkidi, because the Company or Mr El-Rachkidi had, as will emerge below, engaged another person to deal with the matter. 3Mr El-Rachkidi's evidence is that he engaged a person whom he understood was a solicitor to negotiate and settle any dispute and made substantial payments to that person in cash, which he understood to comprise a larger amount in respect of settlement moneys and a relatively smaller amount in respect of fees. He has indicated that he has since become aware that that person is not admitted to practice law in New South Wales. I should emphasise that, if these events occurred, they are undoubtedly unfortunate and damaging to the Company and Mr El-Rachkidi. I am very conscious of their significance in this application. They would, if the Company's solvency were established to a satisfactory standard, provide a strong basis for setting aside the winding up orders. However, the Court's sympathy for Mr El-Rachkidi's experience in this regard cannot be a substitute for proper evidence of the Company's solvency where it seeks to have the winding up terminated. 4Mr El-Rachkidi's affidavit in turn annexes a document described as the "supporting affidavit" of his accountant which is said to confirm the Company's ability to pay its debts as and when they fell due. That affidavit, however, does no more than indicate that the accountant has been shown documents in the winding up proceedings, does not indicate that he has reviewed any financial records of the Company, and asserts without further reasoning that: "In my professional view and opinion as an accountant and having assessed all of the company's affairs. [sic] I certify and confirm that the said company is solvent and able to pay its debts when they fall due. In the light of the extraordinary circumstances and materials supplied to me in my professional view the company and its director personally has the capacity to make payments." This, regrettably, is not a reasoned analysis of the Company's solvency, as I had pointed out to Mr Badal on the first occasion on which the matter was listed before me. 5Mr El-Rachkidi also gives evidence of the appointment of another director of the Company "to further assist in ability to make payments of the debt incurred", and refers to seeking a family friend's assistance to provide him personally with the funds necessary to reinstate the Company to its original position prior to liquidation. The friend, Mr Elias Elia, in turn has made a statutory declaration that he has offered to lend (and, I infer, has lent) money to Mr El-Rachkidi to assist with the pressures on the Company as a result of the winding up and other "unforeseen circumstances". 6Mr El-Rachkidi refers to correspondence between the Company's solicitor and the liquidator and the Australian Securities & Investments Commission ("ASIC") in respect of the application. By letter dated 31 January 2014, the applicant for the winding up, the Owners Corporation, consented to the termination of the liquidator's appointment. By letter dated 29 January 2014, the liquidator noted that the Owners Corporation had been paid in full and indicated that he neither consented nor objected to the Company's application. There is evidence that the liquidator's fees and amounts due to the Owners Corporation and the costs of the winding up application have been paid. There is no evidence of ASIC's attitude to the application. 7When the matter was first listed before me on 3 February 2014, I drew attention to the need to establish the Company's solvency, in the sense of its ability to pay its future debts as and when they fell due, and to the possibility that evidence of an accountant, on a proper factual basis, or evidence of the liquidator, might be suitable for that purpose and adjourned the matter to allow any such evidence to be led. 8Today, Mr El-Rachkidi relies on his further affidavit dated 27 February 2014. He gives evidence that: "my company is not in financial hardship and is able to continue performing in all aspects of a successful company with having sustainable regular income and affording to pay any debts it incurs any time in future". The suggestion that the Company is not in financial hardship might appear, at first sight, surprising where the Company is currently in liquidation by reason of a failure to pay a substantial debt to the Owners Corporation. That position may be explicable on the basis that, as Mr Badal contends, again from the bar table, the failure to pay that debt reflected a dispute with the Owners Corporation as to the amount of strata levies payable. Mr El-Rachkidi indicates, and the evidence supports, that he has paid past creditors in full, inclusive of legal fees, but that does not address the question of the Company's ability to meet its debts going forward. Mr El-Rachkidi annexes a commercial lease with another entity, Sydney Wide Auto Pty Ltd, which is in turn relied upon to support a cashflow statement indicating that the Company would conclude the calendar year ending 31 December 2014 with a surplus, having regard to its rental income and certain outgoings. This evidence has the difficulty, as I will note below, that it is evidence of a director of the Company which is not the subject of any external verification. The courts have repeatedly emphasised that evidence of this character is unlikely to be sufficient to support an application of this kind. The Company also tenders an earlier tenancy agreement and cashflow statement for earlier years, which indicate that Sydney Wide Auto Pty Ltd has in fact been the tenant in earlier years, and that the Company had previously projected a surplus in earlier years. That does not assist the Company's application, where the Company nonetheless found itself wound up notwithstanding the existence of that tenancy and cashflow statements projecting such a surplus. 9I turn now to the basis of the Court's jurisdiction to set aside or terminate a winding up. The first basis, which the Company did not specifically invoke but which I would nonetheless take into account, is r 36.16 of the Uniform Civil Procedure Rules 2005 (NSW) which permits the Court to set aside an order made in the Company's absence. The Company was not present when the winding up order was made, and that may authorise, in an appropriate case, the setting aside of that order to protect the Company's right to be heard and the integrity of the Court's processes: Double Bay Newspapers Ltd v Fitness Lounge Pty Ltd [2006] NSWSC 226; (2006) 57 ACSR 131 at [36]. That jurisdiction is available, on proof of the Company's solvency, notwithstanding there was nothing irregular about the process by which that winding up order was made: Workers' Compensation Nominal Insurer v Teca Pty Ltd [2011] NSWSC 686 at [4]. On proof of the Company's solvency, the Company's misfortunes in respect of its dealing with the person who purported to be qualified as a solicitor and the fact that they appear to explain its failure to defend the winding up application might provide a strong basis for an order setting aside a winding up under that rule. 10Alternatively, a winding up may be terminated under s 482 of the Corporations Act. A person who seeks such an order must establish that the order is appropriate, even if it is not, as here, opposed by the liquidator. Relevant factors include the attitude and interests of creditors, including future creditors whose interests might be prejudiced if the Company were released from the winding up. I have noted above that the Owners Corporation does not oppose the termination of the winding up. Other relevant factors include whether the Company's debts have been discharged, the Company's trading position and general solvency and the circumstances leading to the winding up: Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533; Re Yelin Group Pty Ltd [2012] NSWSC 74 at [8]-[11]. In Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24], Bergin CJ in Eq observed that: "In determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to, solvency." 11I accept that the Company has sought to lead evidence as to solvency. However, that evidence does not, it seems to me, satisfy the standard of evidence which is required in such an application. The importance of proof, preferably including accounting evidence, as to a company's financial position in such an application was emphasised by White J in QBE Workers Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26]. His Honour observed that the Court was unlikely to be persuaded of a Company's solvency on the evidence of single director or shareholder without external confirmation, typically obtained either from a liquidator or from the evidence of an external accountant. His Honour's observation has been repeatedly approved in decisions of this Court, including Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 at [4]. In Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16], the Court of Appeal emphasised that a party seeking to establish solvency must lead the "fullest and best" evidence of the company's financial position. The same approach was adopted in Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196 at [26]-[27]. The evidence before me is not the "fullest and best" evidence of the Company's solvency and is, as I have noted, the form of evidence which the case law has emphasised is unlikely to be acceptable. 12I am sympathetic to the Company's position and to the difficulties which it has faced. However, the Court's jurisdiction in respect of the termination of a winding up has, as I pointed out when the matter was first listed before me, a public interest component, directed to the protection of future creditors. It is open to the Company to lead the fullest and best evidence of its solvency, but to date, it simply has not done so. 13In these circumstances, the best course seems to me, as I foreshadowed in the course of submissions, to dismiss the application, on the basis that the evidence which is required to support it has not been led, but to stay that order for a further period to give the Company a further opportunity to lead adequate and independent evidence as to its solvency. I will hear the Company as to whether it wishes to take up that opportunity and how long it would require to do so. 14I make the following orders: