Expile Pty Ltd v Jabb's Excavations Pty Ltd

Judgment 1This is an application by Mr and Mrs Kok, the members of Golden Plantation Pty Ltd ("GP"), for an order under s 482 of the Corporations Act 2001 (Cth) terminating the winding up of GP. 2The winding up was ordered on 31 May 2011 in proceedings brought by TQM Design and Construct Pty Ltd ("TQM"). TQM relied on a presumption of insolvency arising from non-compliance by GP with a statutory demand served by TQM. GP failed to prove that it was solvent: see TQM Design and Construct Pty ltd v Golden Plantation Pty Ltd [2011] NSWSC 500. 3TQM opposes termination of the winding up unless the debt the subject of the statutory demand is paid in full. The liquidator made no submission on the termination question. 4The main focus, upon the hearing of the s 482 application, was on the crucial issue of solvency: specifically, whether the plaintiffs had proved that GP is solvent; or, perhaps more accurately, that it would be solvent if certain steps were taken. 5The plaintiffs rely on the evidence of Mr Robert Bell, a chartered accountant. Mr Bell has furnished a report on the matter of solvency. His qualification to give expert evidence on that subject is not questioned. 6Mr Bell's opinion is based on financial statements of GP for the year ended 30 June 2011. The principal assets at that date are said to have been parcels of undeveloped land at Bloomsbury in Queensland and Penfield in South Australia. In respect of the former, there is a local estate agent's estimate of a selling price of between $950,000 and $1 million. In respect of the latter, there is a local valuer's "forced sale" valuation (ie, a limited sales and marketing period of ten weeks) of $3,850,000. Title searches establish GP's ownership. 7The only other assets at 30 June 2011 were, according to Mr Bell, cash at bank of $138 and very small parcels of shares in Telstra and Air New Zealand (market value $6,468). 8Recorded liabilities at 30 June 2011 were $173,250 owed to National Australia Bank and $2,617,462 owed to the plaintiffs. 9Not recorded in the financial statements to which Mr Bell refers is the debt to TQM. This amounts to $2,035,000. GP regards the debt as disputed. 10Mr Bell refers to a proposed borrowing by GP of $2,300,000. He says that if that sum is borrowed and paid into court in respect of the disputed TQM debt and if the loans from the plaintiffs ($2,617,462) are capitalised (that is, the plaintiffs take an issue of shares and the sum otherwise payable to them is applied in paying for those shares), GP will be solvent - subject to the plaintiffs' continuing to provide sufficient funds to meet the company's ongoing expenses. Implicit in this, I think, is an assumption that the proposed borrowing will be long-term so as not to be relevant to an inquiry as to the company's ability to pay its debts (including the $2,300,00) as they fall due. 11The usefulness of Mr Bell's opinion is severely compromised by the following statements in his report: "9.1 This Report has been prepared on the basis of information supplied to me as detailed at Annexure 1 and based on the instructions and assumptions detailed within the report. In addition, I draw your attention to limitations, if any that are identified in the body of this report. Should further information be subsequently made available to us that materially affects the opinions contained herein, I reserve the right to amend this Report. 9.2 I understand that any financial information supplied has not been audited. Further Lawler Partners Pty Limited has not audited this financial information. Accordingly, I do not express an opinion on such financial data and no warranty of accuracy or reliability is given. 9.3 I do not imply and it should not be construed that I have verified any of the information provided to us, or that my enquiries could have verified any matter which a more extensive examination might disclose." 12This indicates that Mr Bell has taken at face value statements made to him by the plaintiffs, has undertaken no independent verification and, as he says, gives "no warranty of accuracy or reliability" in relation to the financial data with which his report deals - including, in particular, the amount owed by the company to the plaintiffs. It must follow that the court can give no real weight to the opinions Mr Bell expresses. 13As I have said, title searches establish GP's ownership of the two parcels of land and there is evidence of value. The two properties are still owned. They are development sites and do not produce income. GP is, in substance, in a position where it has no cash generating activities and is wholly dependent on financial support from the plaintiffs for its ongoing cash needs. 14I have referred to the NAB debt of $173,250 at 30 June 2011. Mr Kok's evidence is that this has since been paid in full. He has put into evidence a copy of the discharge of mortgage given by NAB. He also says, however, that the funds to satisfy the bank were provided by him - that is, that he paid off the company's debt to the bank. This presumably had the consequence that the company's indebtedness to him was increased accordingly. 15The plaintiffs do not say that GP is today solvent. Rather, they propose to convert their debt into share capital, thereby eliminating the only significant liability apart from the debt to TQM that was the subject of the statutory demand. There is a further proposal in relation to the TQM debt, although the precise nature of the proposal changed somewhat in the course of the hearing. 16The proposal initially advanced was that GP should borrow $2,300,000 from an external source (upon the security of the land it owns) and pay the net proceeds into court to abide determination of the question whether GP is in truth indebted to TQM in terms of the statutory demand. The variant that emerged in the course of the hearing entailed the plaintiffs borrowing the $2,300,000 against a mortgage given by GP over its land and then subscribing the net loan proceeds for shares in GP, with GP then paying the money into court on the basis outlined. 17The problem with the initial proposal is that it sees GP saddled with $2,300,000 debt with no apparent means of servicing or repaying it, except the good intentions of the plaintiffs in the matter of ongoing financial support. The problem with the alternative proposal is that it appears to involve the giving of financial assistance (in the form of the third party security) by GP in connection with the acquisition by the plaintiffs of the shares to be allotted to them in return for their $2,300,000 subscription: Corporations Act , s 260A(1). The company's property would be mortgaged in connection with the plaintiffs' borrowing without any apparent benefit to the company itself. 18There is also the point that the only evidence concerning the proposed borrowing of $2,300,000 is a letter from a company called Global Capital Corporation Pty Ltd. The letter says that that company "would be pleased to consider" a loan proposal conforming to certain specifications, including a term of only six months, an interest rate of 14.5% per annum and full prepayment of interest. On that basis, the loan proceeds would be $2,133,250 (ignoring fees, which amount to more than a further 4% flat - a further $92,000, it seems, so that the net proceeds are of the order of $2 million); and it would be necessary for GP - a company without cash flow - to pay back the full $2,300,000 after six months. First mortgage security would be taken over both the properties. It is clear that Global Capital would not itself lend. No lender is identified and there is nothing to ground a finding that any party of financial substance is ready, willing and able to lend. 19It may be that the plaintiffs envisage the short-term loan (or most of it) being paid out of the moneys in court upon those moneys being returned to GP. But, with no proceedings on foot to test the matter of GP's indebtedness to TQM, it is not shown that there is any reasonable ground of expectation of recovery of the moneys in court by GP in six months' time or at all. 20Enough has been said to make it clear that solvency has not been proved and, as things currently stand, cannot be proved. The court cannot make a finding of solvency except by proof upon the "fullest and best evidence": Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711. That requirement is not satisfied. 21The plaintiffs candidly accept that they have a dilemma. It is a not uncommon dilemma. The plaintiffs cannot raise finance to facilitate the company's return to solvency unless the winding up is terminated; the winding up will not be terminated unless the company is returned to solvency; and the obtaining of funds is dependent on the availability of the company's own property as security. 22The best the court can do in this case is to indicate three things: