Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd

• Conveyancing Act 1919 (NSW) - s.12 LEGISLATION CITED : - Corporations Act 2001 (Cth) - s.95A, s.459C, s.459H, s.459P, s.459R, s.461

• Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 CASES CITED : - Lewis v Doran (2004) 50 ACSR 175 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213

Evans & Tate Premium Wines Pty Ltd - Plaintiff PARTIES : Australian Beverage Distributors Pty Ltd - Defendant

J.T. Johnson - Plaintiff COUNSEL : C.R.C. Newlinds SC, D.A. Allen - Defendant

Sally Nash & Co - Plaintiff SOLICITORS : Brooks & Co - Defendant

1 On 26 February 2001, the Plaintiff served a Statutory Demand on the Defendant claiming a debt due for goods sold and delivered of $243,312.21. The Defendant commenced proceedings to set aside the Statutory Demand, claiming that it had offsetting claims against the Plaintiff which exceeded the amount due to the Plaintiff. 2 Master Macready held that there was a genuine dispute between the parties as to $84,261 and reduced the amount of the Statutory Demand to $158,051.21 pursuant to s.459H(4) Corporations Act 2001 (Cth). The Defendant appealed unsuccessfully to the Court of Appeal from the Master's judgment. 3 The Plaintiff filed an Originating Process seeking the winding up of the Defendant. After some delay and a number of extensions of time under s.459R(2), the Originating Process has now come on for hearing. The Plaintiff seeks to have the Defendant wound up in insolvency pursuant to s.459P for failure to comply with the Statutory Demand. The Originating Process also stated that the application is made "under s.461 of the Corporations Act" . No further information was given in the Originating Process as to which of the nine possible grounds provided by s.461(1) was to be relied upon. Whether just and equitable ground may be relied upon

4 Shortly after the hearing commenced, Mr Johnson of Counsel, who appears for the Plaintiff, informed the Court that the ground under s.461 upon which the Plaintiff was relying was the just and equitable ground stated in s.461(1)(k) CA. After some discussion, it appeared that, in order to support this ground of winding up, Mr Johnson proposed to explore a number of factual issues, none of which had been notified to the Defendant. 5 I declined to permit Mr Johnson to explore and rely upon these issues. In my view, an application to wind up a company, although commenced by Originating Process rather than Statement of Claim, is not a Court-endorsed exception to the ordinary principles of fairness upon which litigation is now conducted. Issues for determination are to be fairly exposed between the parties so that trial by ambush is precluded and the Court's time is not wasted when matters are adjourned because one of the parties is taken by surprise and requires an adjournment in order to deal with issues not previously raised. 6 If a plaintiff seriously wishes to seek the winding up of a company on the just and equitable ground it must clearly say so in its Originating Process and the facts and circumstances upon which it relies must emerge in a pleading. Often, Points of Claim and Points of Defence are directed to be filed when it is made clear to the Court in interlocutory stages that the Plaintiff relies upon the just and equitable ground to seek the winding up of a company. 7 What must not be permitted to occur is what the Plaintiff sought to do in the present case, namely, to issue subpoenas to a variety of persons and to embark upon various lines of cross examination in the hope that something would turn up which could be fastened upon as justifying the winding up of a company on the just and equitable ground. 8 For example, one of the circumstances upon which Mr Johnson sought to rely as constituting a just and equitable ground for winding up the Defendant was the Defendant's alleged breach of an undertaking to the Court, given at an interlocutory stage of the proceedings, not to dispose of its assets except in the ordinary course of its business. The Plaintiff says that the Defendant has realised some of its assets in order to strengthen its financial position so that it could prove solvency in the proceedings. There is no doubt that the Defendant has realised book debts by factoring them to a third party and has sold motor vehicles which it owned. Whether this is a breach of the Defendant's undertaking and, therefore, a contempt of court should, however, be determined in separate proceedings for contempt. The issue should not be allowed to intrude into these proceedings upon the supposition that, if a contempt of court by the Defendant is proved, the Court should punish the Defendant by winding it up under s.461(1)(k) Corporations Act rather than pursuant to a sequestration order in contempt proceedings.

9 I turn now to the only issue for determination in this case. As the Defendant has failed to comply with the Plaintiff's Statutory Demand, as amended, the Court must presume that the Defendant is insolvent unless the Defendant proves to the contrary: s.459C(2) and (3). The Defendant has undertaken the task of proving its solvency. The question is whether it has succeeded in doing so. 10 The test of insolvency is prescribed by s.95A Corporations Act : "(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent." 11 The law is clear that solvency is, first and last, a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's position the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are available by sale or borrowing upon security, and when such realisations are achievable: see Southern Cross Interiors Pty Ltd (In liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, at 224; Lewis v Doran (2004) 50 ACSR 175, para 106.

12 The Defendant has sought to prove its solvency by an expert report of Mr Raymond Tolcher, an experienced liquidator and accountant. The Plaintiff has not procured an expert report in reply. Instead, it seeks to attack the reliability of a number of facts and assumptions upon which Mr Tolcher's report is founded so that, the Plaintiff says, the report should be given little or no weight. 13 When Mr Tolcher's report was tendered, Mr Johnson objected to the admission of the whole of it. He said that a great deal of the report was hearsay and therefore inadmissible. He pointed as an example to paragraph 20 of the report, which stated: "I am instructed that ABD purchases all of its wine stock from Wine National Pty Limited …. ABD then sells this stock primarily to Liquor National Wholesale Pty Limited trading as Blue Hills … and other national account customers such as Woolworths and Liquorland. I have attached as Annexure 'C' a diagram of company relationships." 14 I do not accept this submission. As I said in making my ruling on Mr Johnson's objection, statements such as this in an expert's report are not evidence which in itself proves the fact stated. Rather, such statements merely disclose the assumed facts and circumstances upon which the expert's report proceeds. If the stated assumed fact is necessary for the validity of the expert's report and the fact is not otherwise proved by admissible evidence, or is not conceded by the other side, then the foundation upon which the report is constructed will not exist and the report will be of no weight. 15 In the present case Mr Tolcher's report contains a number of statements as to what he had been instructed. Amongst the tasks which Mr Tolcher was asked to undertake were the verification of the Defendant's assets and liabilities, the times at which its assets could be realised and the times at which its liabilities had to be paid. Of necessity, he had to commence this task with recounting hearsay, i.e., what he had been told about the company's position in this regard, but his task then required him to test for himself the accuracy and reliability of the information given to him. 16 Mr Tolcher's findings as to the Defendant's assets and liabilities are the result of his own enquiries and of the application of his own interpretative skills and experience as a liquidator and an accountant. However, if there are any important disputed facts or circumstances which underlie the validity of Mr Tolcher's report and which are not verified by Mr Tolcher's investigation of the Defendant's affairs, then those facts and circumstances must be proved satisfactorily by other admissible evidence. If they are not so proved, Mr Tolcher's report is, to that extent, undermined.

17 I turn now to the evidence given by the Defendant's General Manager, Mr David James, and the commentary thereon provided by Mr Tolcher's report. 18 The Defendant commenced trading in July 2002. Mr James was originally the Defendant's sole director and shareholder. Subsequently, he transferred his shares to Mr David Brooks, who is also the Defendant's solicitor on the record in these proceedings. Mr Brooks holds these shares on trust for unidentified investors. 19 Mr James has remained as General Manager of the Defendant and it is clear that he makes most, if not all, of the business decisions relating to the affairs of the Defendant. 20 The Defendant carries on the business of selling and distributing Australian wines. All of the wine brands it presently sells are produced by Wine National Pty Ltd ("Wine National"), a company of which Mr James is the sole director and shareholder. The Defendant sells and distributes wines through a warehouse at Lidcombe and at various distribution points in NSW and interstate. It distributes to Liquor National Wholesale Pty Ltd ("Liquor National") and to other retailers such as Woolworths and Liquorland. Mr James is one of the two directors of Liquor National and was originally its sole shareholder. The proportion of sales of the Defendant as between Liquor National and other retailers is not revealed by the evidence. 21 The Defendant did not always purchase the whole of its stock from Wine National. In about August 2002 it purchased stock from the Plaintiff. It still has some of that stock. Because the Defendant asserts that it owes nothing to the Plaintiff for this stock by reason of a larger offsetting claim against the Plaintiff, the Defendant's internal accounts prepared for the purposes of these proceedings showed neither the stock purchased from the Plaintiff as an asset nor the debt owed to the Plaintiff as a liability. 22 The primary evidence as to the Defendant's assets and liabilities and its financial position generally is given by Mr James. Mr Rick Hodgson is the chief financial officer of the Defendant as well as of Wine National and Liquor National. He is available to give evidence but has not been called by the Defendant. 23 The Defendant has not produced any audited accounts in support of its case. It relies upon assertions made by the Mr James in his affidavits sworn 23 February 2005 and 4 March 2005 and upon Mr Tolcher's report. 24 In general terms, the Plaintiff says that the facts and circumstances critical to assess the Defendant's solvency have not been verified adequately by Mr Tolcher or are not sufficiently verified from primary source materials which could have, and should have, been produced by the Defendant in answer to Notices to Produce. The Plaintiff says that the Court should not be satisfied with the naked assertions of Mr James as to critical facts and circumstances when one would have expected those assertions to have been verified by primary source material and by the evidence of the Defendant's chief financial officer, Mr Hodgson. 25 In response, the Defendant says that much of the evidence given by Mr James was not challenged by the Plaintiff so that it would have been pointless to bring Mr Hodgson to give the same evidence. 26 It is true that Mr Johnson did not challenge much of Mr James' evidence in cross examination in the sense that he did not put to Mr James that the evidence he gave was false or inaccurate. Nor did Mr Johnson suggest to Mr James a version of material facts which was different from the version Mr James put forward. But in the circumstances of a case such as this the consequence cannot properly be taken to be an uncritical acceptance by the Plaintiff of Mr James' evidence.

27 When a company seeks to displace the presumption of insolvency imposed by s.459C(2) CA, it must prove its solvency to the Court's satisfaction and the evidence upon which it relies to do so will almost invariably be within its own knowledge and control. The plaintiff creditor seeking to wind up the company will often not know the company's true financial position and may justifiably take the attitude that, rather than adducing its own expert evidence on solvency, it will wait to see what evidence the company puts forward as to its solvency and whether that evidence, when tested in Court, comes up to the exacting standard of proof which the Court requires. 28 That the Court will not be satisfied of solvency by imprecise proofs and bare assertions is emphasised in the judgment of Santow JA (with whom Meagher and Handley JJA agreed) in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711, at para.16 (citations of authority omitted): "However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. What occurred fell well short of that, as I explain. The relevant principles requiring proper verification are not in question. The trial judge expressly adopted the statement of these from the judgment of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728; BC9902928, which I repeat below. The first three propositions are of cardinal importance for the present case:

The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions:

• The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3);

• In order to discharge that onus the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent;

• 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 made by qualified accountants who have detailed knowledge of how those accounts were prepared. " 29 In the course of his judgment Santow JA pointed out that it was a matter of concern that primary records proving ownership of assets were not produced in answer to Notices to Produce: paragraphs 17 to 21. What emerges clearly from the judgment is that a plaintiff creditor seeking a winding up is well entitled to put the company's evidence of solvency to the test in Court and the company must be ready to back its assertions of fact with convincing, admissible evidence. 30 These observations are of particular significance in the present case. Apart from the investigations which Mr Tolcher has conducted, there has been little produced by the Defendant by way of verification of the assertions of Mr James other than internal management accounts prepared under the supervision of Mr James himself. Some of these documents, namely financial summaries, were clearly prepared for the purposes of this case. Mr James is not an accountant, although I accept that he has had many years' experience in running businesses.

31 There is no issue but that, in order to prove its solvency in these proceedings, the Defendant took steps in January, February and March 2005 to strengthen its financial position. The most significant of these steps was to sell its motor vehicles to Liquor National at their written-down value of $639,604 on 31 January 2005 and out of the proceeds to discharge a debt of $602,000 which the Defendant owed to ANZ Bank under a fully drawn facility. 32 Mr Tolcher investigated this transaction and verified that the ANZ debt had, indeed, been discharged in full. 33 As at 31 January 2005, the Defendant's records showed that it had trade creditors of $529,010. Mr Tolcher investigated the trade debts, both as to their existence and as to their collectability. He was satisfied with the Defendant's figure for trade debts as at 31 January 2005. Further, he found that the Defendant had a very satisfactory record of collectability of book debts. Indeed, he found that since 31 January 2005 the Defendant had received and banked trade debts to the value of about $260,000. 34 I am satisfied that Mr Tolcher's investigation into the book debts of the Defendant, as described in his report, sufficiently verifies that the Defendant had, as at 31 January 2005, book debts to the value of $529,010 and that an appropriate adjustment downwards for bad debts was $18,259. 35 The evidence of book debts as at 31 January 2005 has, however, been superseded by Mr James' evidence that the Defendant's book debts have been factored to Liquor National in order to provide ready cash for the Defendant to meet all of its liabilities. The agreement whereby this factoring arrangement was said to be effected was tendered at the beginning of the trial by Mr Newlinds SC, who appears with Mr Allen for the Defendant, but the tender was rejected after objection by Mr Johnson. He submitted that the evidence of the factoring arrangement was sought to be adduced in breach of the Court's directions for the filing of evidence and without prior notice to the Plaintiff, so that he was unfairly prejudiced in his inability to deal with it. 36 Nevertheless, there are in evidence bank statements and records of the Defendant which show that from 15 February 2005 onwards substantial sums were received by the Defendant into its bank account from Mr James and his wife, which are said to be the proceeds of the factoring arrangement with Liquor National. As at 3 March 2005, the Defendant's bank account showed a credit of $311,257.20, effectively representing the proceeds of the book debt factoring arrangement. This emerged from Mr Johnson's cross examination of Mr James. 37 Mr Johnson criticises the evidence as to factoring of book debts as unreliable. He says that the details of the factoring arrangement are not known, no notices of any assignment of book debts were given to the Defendant's creditors in accordance with s.12 Conveyancing Act 1919 (NSW), and the sums which came into the Defendant's bank account from Mr and Mrs James were, for a short time at least, taken out and lent to company controlled by Mr James called Killara 10 Pty Ltd. Mr Johnson says that the availability to the Defendant of funds from factoring its book debts is entirely a matter in the discretion of Mr James and that whatever arrangement for factoring the debts Mr James has put in place may just as easily be undone by him. 38 In response, Mr Newlinds points out, correctly, that even if the factoring arrangements could be undone in some manner the book debts of the Defendant would not thereby disappear as assets of the Defendant. 39 I am satisfied by the investigations of Mr Tolcher that the Defendant had collectable book debts substantially exceeding $500,000 as at 31 January 2005. Even if the factoring arrangements for these debts could, in some unspecified way, be undone by Mr James the amount of $311,000 in the Defendant's account, being the proceeds of the book debts, would still represent an asset of the Defendant. If that money has to be repaid to Mr and Mrs James or Liquor National because the factoring arrangement has somehow been reversed, entitlement to the proceeds of the book debts already collected would revert to the Defendant. As Mr Newlinds points out, I have no evidence upon which I can find that the proceeds of the book debts so far realised would simply be dissipated dishonestly by Mr James or Liquor National. 40 The other substantial asset of the Defendant which Mr Tolcher has regarded as available to meet the Defendant's liabilities is its trading stock of wine, which has been valued at $646,848 by Mr Orr, an employee of Wine National. Mr Tolcher has rightly observed that Mr Orr's valuation cannot be regarded as an independent valuation. 41 Mr Tolcher's ability to verify the value of the wine stock has been limited by the fact that he has had to accept as accurate the statement by Mr Hodgson that the cost price of the stock shown in the Defendant's stock report is an average of all prices paid for individual items so that prices in the stock list do not always reconcile with the price list of the supplier, Wine National. Mr Hodgson, as I have noted, has not been called to give evidence so that the information which he gave to Mr Tolcher is unverified. 42 However, Mr Tolcher, in accepting a valuation of the stock at $646,848, draws comfort from a letter dated 14 February 2005 from Wine National which states that that company is prepared to purchase all the Defendant's stock at Mr Orr's valuation in the event that the Defendant is otherwise unable to meet its liabilities from its own monies. 43 I cannot place very much weight on this letter. It was obviously prepared for the purposes of this litigation and whether or not the commitment given by Wine National is honoured depends entirely upon Mr James. Further, the financial capacity of Wine National to perform its undertaking has not been verified. 44 However, there is a much more serious difficulty in the acceptance of the proposition that the Defendant has in excess of $600,000 of trading stock with which it can meet its liabilities. As Mr Johnson points out, the only evidence that this stock is owned outright by the Defendant and has been paid for in full is a simple statement to that effect made by Mr James in his affidavit of 23 February 2005. No records of the Defendant have been tendered to prove the statement nor has Mr Tolcher verified it by investigation in the course of preparing his report. 45 As I have noted, the law does not ordinarily accept as probative of solvency "unverified claims of ownership" of assets by a company: Expile (supra) at 719. Ordinarily, the Court should be presented with "the fullest and best evidence" of those matters which the company must prove to demonstrate its solvency: ibid. 46 In the present case, the Court would ordinarily have expected as "the fullest and best evidence" that all the stock said to be owned by the Defendant was in fact owned and paid for by it either a report to that effect from Mr Tolcher, after due investigation, or clear evidence of ownership and payment from the Defendant's primary records. 47 Mr Newlinds says that there is some evidence corroborating Mr James' assertion in the Defendant's "Creditors Aged Trial Balance" printed from the Defendant's records as at 31 January 2005. That document appears as an appendix to Mr Tolcher's report. It shows that as at 31 January 2005 the Defendant's debt to Wine National was just over $16,000 and that that indebtedness was not even thirty days' old. That shows, says Mr Newlinds, that the Defendant has paid for all of its stock save for orders supplied within a few days of 31 January. 48 Mr Johnson points out that the Defendant's Creditors Aged Trial Balance cannot be accepted uncritically as reliable. It shows that as at 31 January 2005 only $1,821.60 was outstanding to a creditor, Browne of Padthaway, and then only for thirty days, whereas other reliable evidence shows that a very much larger amount had been owing to that creditor by the Defendant for much longer than thirty days. 49 Mr Johnson's criticism of the reliability of the Creditors Aged Trial Balance is well founded. I do not feel able to rely upon that document as proving inferentially a fact which should have been proved clearly and directly by properly verified primary materials or business records. Accordingly, I am not prepared to take into account the Defendant's trading stock as available to discharge the Defendant's liabilities as they fall due for payment. 50 I am left further in doubt as to the realisable value of whatever trading stock the Defendant owes when I bear in mind that the Defendant itself now has no infrastructure with which to sell and distribute it. All of its staff have been taken over by Liquor National and its motor vehicles, used for distribution of its stock, were sold to that company as well, in order to provide the means to discharge the Defendant's indebtedness to the ANZ Bank. 51 Liquor National would doubtless provide the Defendant with the facilities with which to sell and distribute its stock but Liquor National would be at liberty to charge the Defendant whatever it wished for doing so - the two parties are certainly not at arm's length. The nett proceeds of realisation of stock are, therefore, unknown.

52 In the end, as Mr Newlinds submitted, the solvency of the Defendant depends mainly upon the value and realisability of its book debts as compared to its liabilities which are now payable or which will be payable in the short term future. 53 The sum of $311,000 in the Defendant's bank account can be regarded as the realisation of book debts to date. There is a further $184,320 in book debts outstanding as at 3 March 2005, as appears from the Defendant's internal records. I accept Mr Tolcher's evidence that the collectability of the Defendant's book debts generally is high and that debts are generally collected within sixty to ninety days. 54 If one works on the provision for bad debts which Mr Tolcher allowed in his report as to the Defendant's position on 31 January 2005, one finds that a discount of five percent for bad debts is very conservative. I would conclude that the additional book debts outstanding as at 3 March 2005 can be valued at $175,000 for the purposes of the present exercise. 55 Mr Newlinds points to the fact that Mr James says that he has deposited in his solicitor's trust account $100,000 to cover legal and accounting fees which may be payable in respect of these proceedings. However, I do not think that this amount should be regarded as an asset of the Defendant for present purposes: the terms of the trust upon which the money is said to be held are not in evidence and, for all one knows, Mr James may be entitled to instruct his solicitor to account to him for the money. Further, the terms upon which this money has been made available to pay prospective debts of the Defendant are not in evidence. 56 The presently available assets of the Defendant to meet its liabilities are therefore the amount in its bank account together with collectable trade debts valued at $175,000 - a total of $486,000. 57 As appears from Mr Tolcher's report, the Defendant's liabilities are trade creditors of $201,347 (which includes the Plaintiff's debt) and inter-company accounts of $146,155 - a total of $347,502. 58 It will be seen that the Defendant has a comfortable margin - in excess of $100,000 - of readily realisable assets to pay its current liabilities. 59 I note in conclusion that there is no evidence that the Defendant has manifested any of the usual indicia of insolvency, e.g. a history of dishonoured cheques, accounting records in disarray, outstanding letters of demand from creditors, unpaid group tax, payroll tax or insurance premiums, or overdue bank facilities. 60 I find that the Defendant has succeeded in demonstrating that it is able to pay its debts as they fall due for payment and that it is solvent. The Plaintiff's Originating Process is, therefore, dismissed. 61 I will hear the parties as to costs. - oOo -

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