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Judgment - ex tempore

1. By Interlocutory Process filed today, by leave, the Applicant, Mr Glenn Reindel, seeks an order under s 482 of the Corporations Act 2001 (Cth) that the winding up of the Defendant, Deccan Holdings Pty Ltd (in liq) ("Company") be terminated. That order is sought by consent of the Plaintiff for the winding up order and the liquidator appointed to the Company. However, the liquidator appointed to the Company has not appeared, and has also led no evidence of any inquiries that he may have made to satisfy himself as to the Company's solvency, so the Court is not aware of the basis on which that consent is given.
2. The application is supported by five affidavits, two of which are affidavits of a former director and current shareholder in the Company, Mr Reindel, who applies, as I noted above, to terminate the winding up. Two are affidavits of a current director of the Company, Mr Pereira. The fifth affidavit is that of Mr Ng, a solicitor employed by the firm which acts for Mr Reindel, who gives evidence of service of the application upon the Australian Securities and Investments Commission. The Commission has in turn advised that it considers the matter is properly left for the determination to the Court and has advised that it does not propose to intervene in the proceeding or seek to be heard on the application.
3. By his first affidavit dated 14 December 2015, Mr Reindel indicates that he was one of two directors of the Company up to 2 November 2014, when it appears he resigned, and Mr Pereira continued as a director until the Company was placed in liquidation on 6 November 2015.
4. Mr Reindel's evidence is that the Company was incorporated in July 2014 for the sole purpose of holding shares in another company, Eustralis Pharmaceuticals Ltd ("Eustralis") as bare trustee for two other entities in which Mr Reindel and Mr Pereira have interests. Mr Reindel acknowledges that the Company was placed in liquidation on 6 November 2015 on the application of the Plaintiff, Ms Florian-Kellett ("Ms Kellett"), on the basis of an amount of $90,200 claimed to be owing by the Company pursuant to a sale of shares and loan agreement between the Company and Ms Kellett.
5. Mr Reindel refers to arrangements made with Ms Kellett to fund another corporate entity in which companies associated with him and Mr Pereira are shareholders. Mr Brown, who appeared for Mr Reindel in the application, fairly accepted in the course of submissions that the circumstances of these arrangements are not wholly clear, following the evidence led in the application, and it seems to me that concession was properly made. It appears that the arrangements at least involved an advance of $45,100 to the Company on the basis of the loan agreement, in connection with a proposed purchase by Ms Kellett of shares in Eustralis from the Company. It will immediately be noted that that transaction involved a company which, on Mr Reindel's evidence, was incorporated for the sole purpose of holding shares, and which he repeatedly notes did not incur liabilities, incurring a liability of $45,100 pursuant to a loan agreement. There is, to that extent, something of an inconsistency between the basis of Mr Reindel's and Mr Pereira's evidence, that this is a Company which holds assets and does not incur liabilities, and the evident facts of the transaction which it entered into. It may be that, as Mr Brown submits, the position is that the Company generally holds assets and generally does not incur liabilities, other than for the one occasion on which it did so. Of course, that proposition has the difficulty that it leaves it open that the Company will incur liabilities in the future, as it has incurred a substantial liability in the past, if it wishes to do so. Mr Brown also fairly concedes that the Company will, in any event, inevitably incur liabilities by reason of fees payable to the Australian Securities and Investments Commission in respect of its continuing registration.
6. Mr Reindel sets out, at some length, correspondence leading to the winding up application, in a manner which appears to suggest that there was an understanding with Ms Kellett's solicitors that the winding up application would be deferred. However, no application has been made to set aside the winding up order, and there is no suggestion it was not regularly made. Mr Reindel in turn gives evidence that the Company was purely used as a nominee to hold the Eustralis shares for the entities associated with him and Mr Pereira and that, other than in respect of its dealings with Ms Kellett, the Company had not traded or received income, did not have employees, did not have assets or liability in its own right and did not operate a bank account. The proposition that the Company did not have assets or liabilities in its own right is presumably intended to reflect a proposition that it held assets or liabilities as a trustee, but has insufficient regard to the fact that an entity which deals as trustee in fact incurs liabilities in its personal capacity, subject to any right of indemnity against the trust.
7. Mr Reindel refers to steps which he proposes that the Company will take to ensure that documentation delivered to its registered address in the future comes to its attention, which reflects a suggestion in his affidavit that the winding up application did not come to his personal attention. Mr Reindel also refers to arrangements which have been made for payment of the liquidator's expenses and the amount due to Ms Kellett, and I infer that those arrangements are acceptable to the liquidator and Ms Kellett, because they consent to the application.
8. Mr Reindel in turn refers to the suggested urgency of the application, which relates to his involvement with financing facilities with a trading bank, in connection with other entities, which have a term that he not be or have been a director of an insolvent company. Mr Reindel indicates that he is concerned that, if the Company is not reinstated, and the bank ceases funding arrangements, funding to that third entity will be prejudiced and a potential project will be jeopardised. I accept that that is, of course, plainly a legitimate basis on which to seek the termination of a winding up. It remains, of course, that a winding up should only be terminated if the matters which are properly required to be established, in order to support a termination, are in fact established. I will refer to those matters below.
9. Mr Reindel in turn relies on the affidavit of Mr Pereira dated 14 December 2015 which also confirms that, apart from the Company's dealings with Ms Kellett, it had not traded or received any income in its own right, but only as trustee. I have referred above to the fact that that proposition has insufficient regard to the fact that a trustee incurs liabilities in its own right, notwithstanding that it will have a right of indemnity against the trust, in an appropriate case, in respect of such liabilities. Mr Pereira in turn states, by way of a conclusory assertion, that the Company has never had any assets, presumably with the exception of the shares in Eustralis, and has never had any liabilities, presumably with the exception of the liability to Ms Kellett. He also notes that the Company has not produced financial accounts for the year 30 June 2015, having been incorporated on 22 July 2014, and has not been required to report or lodge any tax returns for the 2015 financial year. No further explanation is given as to why the Company considers that it is not obliged to lodge tax returns.
10. Mr Pereira also refers to the circumstances of the winding up of the Company, to conversations which led him to believe that no further action would be taken with respect to the creditor's statutory demand issued to the Company, and to a subsequent misunderstanding by which solicitors retained by the Company, it is said, did not appear on the winding up application.
11. By further affidavit dated 17 December 2015, Mr Reindel in turn refers to the attitude of Ms Kellett and the liquidators to the application which, as I noted above, has now advanced to consent to the application, and to the fact that he has caused an amount to be paid in respect of liquidator's fees and expenses and an amount to be paid to Ms Kellett into his solicitor's trust account. He offers an undertaking to the Court to pay the amount due to Ms Kellett from that solicitor's trust account, should the winding up be terminated by the Court, and that undertaking is in turn reflected in proposed orders to be made by the Court.
12. Mr Reindel's affidavit also annexes what he describes as the Company's "verified" financial statements for the period ended 30 June 2015 and 1 July 2015 to 31 October 2015, prepared by the Company's accountant. It seems to me that that description is not a fair description of those documents, which are special purpose financial statements, subject to comprehensive disclaimers by the accountant, which have the result that they provide no information beyond whatever information the director of the Company provided to the accountant. In particular, the disclaimers indicate that the director of the Company is solely responsible for the information contained in the special purpose financial statements; that the special purpose financial statements have been prepared on the basis of information provided by the director of the Company; that the accountant's procedures used "accounting expertise to collect, classify and summarise the financial information, which the director provided" in compiling the financial statements; that those procedures do not include verification or validation procedures; and that no audit or review has been performed and accordingly no assurance is expressed.
13. Mr Brown fairly acknowledges that those financial statements provide no further information, beyond the information which the director has provided. Indeed, it seems to me that those financial statements raise more questions than they answer. In particular, they record that the Company has no income and no expenses in each of the relevant years, and the balance sheet includes a figure of $100 for current assets, total assets and net assets in each of those years, and no reference to liabilities. Those financial statements accordingly raise at least the questions, first, as to how the Company is paying the expenses which, as Mr Brown properly recognises, it must necessarily incur in respect of its continued existence as a corporate entity and, second, what has occurred in respect of the liability which it owed to Ms Kellett which is not reflected in its financial statements. It should also not be understood, in applications of this kind, that the provision of unverified financial reports, involving no element of independent inquiry by an accountant, will advance the application beyond the level of bare assertion by a director. It is, of course, readily possible for an accountant to undertake verification as to a company's financial position, in order to strengthen an application of this kind, and that is often done. That has not occurred here.
14. Mr Reindel also relies on a further affidavit of Mr Pereira dated 17 December 2015, which again repeats the statement that the Company has never traded and never received income in its own right, only as trustee, and has never had any assets or liabilities. I have referred above to the difficulty that that statement does not seem to reflect either its ownership of the shares in Eustralis, albeit as trustee, or its liability to Ms Kellett. Mr Pereira in turn indicated, by way of a bare statement, that if the winding up of the Company is terminated and the Company is to incur future liabilities, he will ensure that there are sufficient funds available to it to meet those liabilities. The authorities make clear that a statement of that kind provides little, if any, support for an application to terminate a winding up. I will refer to those authorities below.
15. Mr Pereira also refers to his intention to deregister the Company within the next few months, if the winding up of the Company is terminated. Plainly, statements of that kind in an affidavit are also only matters of present intention, at best, and in any event the prospect of future deregistration does not absolve the Court of the need to consider the position of creditors in the period pending that deregistration.
16. I turn now to the relevant authorities. The factors relevant to whether a winding up should be terminated were summarised by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, where his Honour noted that, in that case, a stay, but also a termination of a winding up, is a discretionary matter, and there is an onus on the applicant to make out a positive case for such an order. His Honour noted the nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged must be shown. He notes that the current trading position and general solvency of the company should be demonstrated. Those propositions have been frequently noted in subsequent cases, although the case law has also noted that they are not intended to be exhaustive or to be regarded as rigid principles.
17. There are several cases which have emphasised the importance, in applications of this kind, of proof, preferably including accounting evidence, as to a company's financial position: QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26], where White J observed that the Court was unlikely to be persuaded of a company's solvency on the evidence of a single director or shareholder without external confirmation, typically obtained either from the liquidator or from the evidence of an external accountant. That observation has since been approved by Barrett J in 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, 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 and, in Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd above, Barrett J noted that principle also applied where a party sought to show that solvency could be achieved by a particular course of conduct. I will refer to a modest qualification of that principle in recent cases below, but I in turn followed those observations in Re 311 Hume Highway Liverpool Fund Pty Ltd (in liq) [2013] NSWSC 465; (2013) 93 ACSR 683 at [7]ff.
18. Evidence of that kind is directed to what is, on the authorities, very likely the most important issue in an application to terminate a winding up, namely the solvency of the company. The importance of that matter was noted by Barrett J in Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3]; and in Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24] Bergin CJ in Eq similarly observed that: "It is clear 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".
19. In Re Glass Recycling Pty Ltd [2014] NSWSC 439, Brereton J in turn reviewed the relevant authorities, identifying the factors which are relevant in such an application. His Honour noted (at [18]) that such an application required that the Court be satisfied that the state of affairs that had required that a company be wound up no longer exists. His Honour there noted that, where the winding up was on grounds of insolvency, as is the case here, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent, and again noted that that was the most significant consideration. His Honour noted that those matters may be less demanding, where an application does not involve the rebuttal of a presumption of insolvency, which may be the case, for example, where a company has been wound up for some reason other than insolvency. However, in the present case, the Company is under a Court ordered winding up, arising from a failure to comply with a creditor's statutory demand.
20. I am conscious that, in the present case, there are three matters which might be said to support a termination of the winding up. The first is that the short minutes of order proposed by Mr Reindel contemplate that the amount of approximately $22,000 to be paid, pursuant to undertakings offered by Mr Reindel in respect of the termination of the winding up, would be applied to capitalise shares in the Company. However, the significance of such capitalisation would depend upon the extent of other creditors in the Company, and the evidence in that respect seems to me to be little more than bare assertions of the directors that no such other creditors exist. The second matter that might support a termination of the winding up is the consent of the liquidator and Ms Kellett, but in the present case the liquidator has not disclosed whether he has made any inquiries, and if so what they are, so as to satisfy himself that he may properly consent to the termination of the winding up, or whether and on what basis he has formed an affirmative view of the Company's solvency. It may be that there is information known to the liquidator which would support such an order, that information has not been disclosed in this application.
21. There are, on the other hand, several factors which seem to me to tend against an order for termination of the winding up, at least on the evidence as it now stands. First, I can have little confidence in the financial statements on which the Company has relied in the application, so far as they do not seem to record either the assets which it holds as trustee, namely the shares in Eustralis, or the liability to Ms Kellett which was the subject of the winding up application. Those financial statements have not been verified by any adequate inquiry made by the accountant, and the disclaimers which surround them are so comprehensive that they provide no real support to the application. The evidence led in respect of the application also seems to involve a misunderstanding of the legal status of debts incurred by a trustee, so far as each of the affidavits in support appear to proceed on the basis that liabilities incurred by the Company as trustees are not the Company's liabilities, but liabilities of the trust. The evidence generally appears to fall within the category of evidence which has been referred to in the cases as involving, in effect, bare assertions of solvency by directors, and in this case by a former director, that the Company does not have debt, or that the Company will not incur debts in the future or that, if the Company incurs debts in the future, it will be funded in a manner then to be decided so as to meet those liabilities. Statements of that kind should obviously be treated with greater scepticism in respect of a company which has once already been wound up in insolvency.
22. It is important for applicants in applications of this kind to understand that these are serious applications, and that the termination of a winding up has serious implications for a company, and for creditors who may deal with the company in the future. That underpins the requirement that the Court has frequently emphasised of the need to lead adequate evidence in respect of such an application.
23. Accordingly, as the evidence now stands, I am comfortably satisfied that this application should be dismissed. I will, however, hear Mr Brown as to whether the Applicant seeks a stay of my order dismissing the application, for a period, in order to allow the opportunity to lead evidence that could have been, but was not, led in support of this application. That evidence might include, for example, evidence of an adequate review by the Company's accountants of its financial statements, which properly had regard to the character of liabilities incurred by a trustee, and the extent of its right of indemnity against the trust. It may include, for example, evidence of the liquidator, as to the steps which he has taken to investigate the creditors of the Company, and to form any view as to whether such creditors have been identified, and to corroborate the view expressed by the directors they do not exist. It may include, for example, obtaining a tax clearance from the Australian Taxation Office so that it is clear that the directors' belief that the Company need not lodge tax returns is properly founded. It is a matter for the Applicant, and his legal advisers, to determine the evidence which would be led, to allow the Court to be satisfied, in a manner that it presently cannot be, of the Company's solvency going forward.
24. I therefore make the following orders:
25. The Interlocutory Process dated 15 December 2015 be dismissed.
26. Stay Order 1 to 4pm, 15 January 2016.
27. Liberty to apply on two business days' notice, by notice to the Associate to Black J.