By application made under s 482 of the Corporations Act 2001 (Cth) Mr Daniel Browne, as a contributory of Nostalgia Motorcycles Pty Limited (in liq) ("Company") applies for the termination of the winding up of the company.
On 8 December 2015, I heard the first stage of the application, and expressed a preliminary view that Mr Browne might well be able to establish that the Company was solvent, although the evidence before me at that time was not sufficient to establish that matter, but stayed the liquidation to today, to allow Mr Browne the opportunity to lead further evidence in that respect. Mr Browne has taken up that opportunity and substantive further evidence has been led in the application today.
Mr Browne relies on several affidavits in support of the application. By his affidavit dated 7 November 2015, he set out the circumstances on which the Company came to be wound up which, in short, involved a winding up application brought, in respect of a debt as to which there appears to have previously been a dispute, at least so far as the Company was concerned, which it appears did not come to the Company's attention because its registered office address had not, notwithstanding instructions previously given by it, been changed from that of its former accountants. Mr Browne properly recognises that the position where the address of the Company's registered office was not properly recorded is not satisfactory, and undertakes to change the details of that office going forward.
Mr Browne sets out the matters which, so far as the Company was concerned, gave rise to a dispute as to the debt on which the winding up occurred. It is not necessary to say anything other than to recognise that the dispute, so far as the Company was concerned, appears to have been genuine. Nonetheless, Mr Golledge, who appears for Mr Browne, properly proceeds on the basis that the winding up of the Company was regular, and accordingly Mr Browne must now satisfy the Court that a basis for termination of the winding up is established.
Mr Browne leads evidence of the attitude of St George Bank which provides a floor plan finance facility to the Company to this application. Correspondence with St George Bank indicates that it is aware of this application and is continuing its floor plan finance facility pending its result. Mr Browne also leads evidence that the Company's major supplier of stock, Harley-Davidson Australia Pty Ltd, has also been advised of the application and is continuing its support for the Company pending the outcome. There is also evidence that another supplier to the Company, which supplies helmets and tyres, is taking a similar position. Mr Browne led evidence of the Company's creditors, and its financial position, which was supported by a significant amount of internal corporate financial information. There was a potential difficulty with that evidence, to which I referred when the matter was first heard before me on Tuesday, namely that there was limited corroboration of it by any external source, so that, although the Court could infer that these were the records that the Company maintained, it nonetheless had little external comfort as to the accuracy of those records, beyond Mr Browne's evidence in that regard.
Mr Browne's evidence also recognised that the liquidator's costs needed to be paid in order to satisfy the Court that the liquidation ought to be terminated, and confirmed the availability of a bank cheque in that respect, for costs as then estimated, and that an undertaking would be offered in that respect. In the event, some complexities have arisen by reason of later updates of the liquidator's cost figures, which have been addressed in the manner to which I will refer below.
Mr Browne also relied on an affidavit dated 7 December 2015 of the Company's accountant, Mr John Croce, which indicated his view that the Company was solvent. A potential difficulty with that affidavit was that that conclusion had been reached by reference to internal company records, and Mr Croce had then made limited attempts to verify the information contained in those records, and there was also a potential difficulty that some of the information to which Mr Croce had had regard was current as to 31 October 2015, which was not the most current information that might be available as to the Company's position. Nonetheless, the information to which Mr Croce referred did suggest that the Company was profitable, both in the 2015 financial year and to a greater extent in the current financial year, and that it had significant cash at bank and significant trade creditors. While the Company's balance sheet showed a modest excess of current liabilities over current assets, that is of limited significance, in circumstances that the question as to solvency is one of cash flow, not a balance sheet position. The information referred to by Mr Croce also showed a significant improvement in the Company's profitability over the position in the years 2013 and 2014.
By a further affidavit of 8 December 2015, Mr Browne had provided certain additional information, and corrected certain matters in his earlier affidavit. I have noted but need not refer further to that affidavit.
By a further affidavit dated 11 December 2015, a former director of the company, Mrs Joanne Browne, who is Mr Browne's mother, confirms that she has advanced certain funds to the Company, which are recorded in its balance sheet as loans, but that there is no fixed repayment date and she has taken no steps to call up the loan notwithstanding the winding up order and has no present intention of calling up the loan. In some circumstances, the Court will require formal confirmations of that position, for example, by way of subordination arrangements or other formal documentation, in order to terminate a winding up. Given the strength of the other evidence as to the Company's solvency before me, it does not seem to me to be necessary to insist on such confirmation in this application.
As I noted above, Mr Browne has taken steps, since the matter was listed on Tuesday, significantly to strengthen the Company's evidence as to solvency. In particular, Mr Croce has undertaken what seems to me to be a thorough verification of the Company's position, albeit that it does not purport to be, nor could it be within this confined time period, an audit. Mr Croce's further affidavit dated 11 December 2015 indicates that, first, Mr Croce has undertaken a systematic exercise in seeking to verify significant aspects of the information recorded in the Company's financial records against source materials, and has done so conscious of his obligations under the Expert Code of Conduct. In particular, Mr Croce has taken steps to verify cash at bank, receivables, factory rebates owing to the Company, inventories, amounts which may in future be recovered by the Company by way of tax savings reflecting earlier losses, trade creditors, and other creditors and accruals. Mr Croce does not purport to have verified every item in the Company's financial records, but the exercise which he has taken seems to me to have considerable significance, so far as it allows the Court to be confident that those records are corroborated by materials other than the director's evidence as to their correctness. I am satisfied, having regard to Mr Croce's affidavit, that the Court may properly proceed on the basis that those records provide a sound basis for assessing the Company's solvency.
Mr Croce notes that the Company has recently lodged a business activity statement, and that an amount is presently held by the Company's solicitors for payment of the tax arising from that business activity statement. An undertaking is proposed to be offered by Mr Browne in that respect. Mr Croce concludes, by reference to the work that he has undertaken, that the Company's financial records produced from its internal accounting system provide an accurate statement of it trading results. It seems to me that that conclusion is fairly drawn on the basis of the work that Mr Croce has done, and I am reinforced in that view by the fact that Mr Croce has, on occasion, identified errors in the Company's accounting, not of major significance, some of which improve the Company's position and another of which is modestly adverse to it. Those matters seem to me to indicate that the process adopted by Mr Croce has involved a testing of the Company's financial records which is appropriate to allow greater comfort as to their accuracy.
Mr Croce also refers to a cash flow forecast which he has undertaken, commencing with the Company's business plan, but making certain adjustments which are less optimistic than that business plan. That forecast is significant, both because cash flow is, of course, critical to a company's solvency, and also because Mr Croce's review of it provides support for the view formed by the director in that respect. Mr Croce reconfirms, in this affidavit, his assessment of the Company's solvency, having regard to the further work which he has undertaken.
By a further affidavit dated 11 December 2015, Mr Browne confirms steps which have been taken by the Company which amount to compliance with the undertakings which have been provided by the Company, during the period of the stay that the Court had ordered. In particular, Mr Browne confirms, as does documentary evidence, steps taken by the Company to preserve deposits paid by customers, during the short period in which the stay has been in place. The undertakings which were required over that short period would be released, if the winding up is terminated.
The case law relevant to the circumstances in which a winding up will be terminated is well established, and it is sufficient that I briefly refer to it here. Section 482 of the Corporations Act provides for termination of a winding up, and 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. Other relevant factors include whether the company's debts have been discharged, its trading position and general solvency, and the circumstances leading to the winding up: Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533. In Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24], Bergin CJ in Eq in turn noted, in a passage that has frequently been cited subsequently, that the most significant matter for consideration in such an application is the company's solvency, and other considerations tend to be taken into account in determining whether the company has returned to, or will be returned to, solvency. This is not a case, now that additional evidence has been led, where the Company relies only on evidence of Mr Browne, as a director or shareholder, without external confirmation, and the Company has led evidence that it is capable of providing support for a conclusion of solvency: contrast Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16].
In the present case, perhaps understandably, the Company's liquidator has taken a limited role in the application. He appeared before me on Tuesday, but his submissions at that time were largely directed to protection of his interests, by way of costs in respect of the winding up, a matter which is a legitimate interest on his part. He did not appear today, and accordingly the Court has not been assisted by the liquidator's view of the Company's solvency. However, it should be recognised that the liquidator has been in office only for a very short time, and that, as Mr Golledge points out, I can at least assume that the liquidator would, as an officer of the Court, have brought any evidence that was adverse to the Company's solvency that had come to his attention within that short time to the Court's attention in such an application.
In Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [15]ff, Brereton J in turn conducted a detailed review of the considerations which informed the exercise of the Court's discretion to terminate a winding up and identified several factors arising from the case law to which I will return. He noted that, in such an application, the Court must be satisfied that the state of affairs that require that the company be wound up no longer exists and, where a winding up was on the grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent.
In the present case, I proceed on the basis that a presumption of insolvency arose in the winding up application, by reason of a failure to comply with a creditor's statutory demand, albeit in circumstances that that demand, it appears, had not come to the Company's attention. I am satisfied, given the evidence led before me, that the Company has affirmatively established its solvency, at least to the extent that the Court can be comfortable that there is no reason to consider that it is at greater risk of financial difficulty, or creditors are at greater risk in dealing with it, than is an ordinary incident of commercial life. In particular, as Mr Golledge points out, there is no evidence of the kind one would ordinarily see, in an insolvent company, of for example, of debts being paid outside their ordinary trading terms, unpaid tax or unpaid superannuation, or unpaid wages or entitlements of employees. The absence of such evidence is consistent with the views which Mr Croce has formed, based on his analysis of the Company's financial records. I am also satisfied, given the views which I have expressed above, that the interests of creditors, including future creditors who may deal with the Company, will be protected if the Company is released from winding up.
I am satisfied that the interests of the liquidator, particularly with regard to remuneration, are sufficiently protected. A difficulty arose in that respect because the Company had drawn two bank cheques, in payment of amounts due to the liquidator, based on an earlier estimate, and the liquidator has updated his calculation today, in a manner that increases those amounts. Mr Browne has fairly offered an undertaking to pay, or cause the Company to pay, any further amount which may be due to the liquidator (by way of remuneration as determined by the Court under s 473 of the Corporations Act or by way of indemnity), beyond the amount of these two bank cheques. It seems to me that that undertaking is sufficient to protect the liquidator's interests in these circumstances, where the difference between the two figures is relatively small, and Mr Browne could fairly proceed on the basis of the information which was available when the matter was listed on Tuesday, having not been notified of further information until shortly before this application was heard.
In this case, the interests of contributories are consistent with a termination of the winding up. No issue as to the public interest, including matters of commercial morality, has arisen that is contrary to the termination of the winding up. The Company has taken steps to place the liquidator in funds to discharge the debt owed to the petitioning creditor and that debt will accordingly be paid.
One further issue arose in respect of the application, where the creditor which sought the winding up has appeared, and sought to be heard under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). The amount which the Company has undertaken to pay the liquidator includes that creditor's debt, and its costs of the winding up application. It does not seem to me that the creditor is entitled to the costs of its appearance today, in circumstances that it has chosen to appear under r 2.13 of the Supreme Court (Corporations) Rules. As the authorities make clear, that rule has the effect that a person who is heard under it is rarely exposed to a liability for costs and the benefit which a party obtains by taking that course carries a corresponding burden, that it will only be in exceptional circumstances that an order for costs will be made in favour of a party which appears under that rule: Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129; (2004) 48 ACSR 681; Re Gia Firenze Investments Pty Ltd [2013] NSWSC 99 at [14]. It seems to me that the creditor's appearance today, while properly undertaken so as to protect its commercial interests, is not one that could be classed as special, unusual or exceptional for the purposes of that rule. Mr Gower, who appeared for the creditor, after his attention was drawn to that principle, fairly did not seek to make extended submissions to the contrary.
Accordingly, I note the undertaking given by Mr Browne recorded in the schedule to the short minutes of order, I make orders in accordance with the short minutes of order, initialled by me and placed in the file, and I also order that these orders be entered forthwith.
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Decision last updated: 01 March 2016