Fouracre v Ultra Protective Coatings

4699/03 DARREN ANDREW FOURACRE V ULTRA PROTECTIVE COATINGS PTY LTD JUDGMENT 1 HIS HONOUR: On 24 February 2004 the Registrar in Equity made an order that the defendant company be wound up under the Corporations Act, and he appointed a liquidator. He also made an order on the defendant's application that the winding up order be stayed until 1 March 2004. The evidence before the Registrar included evidence that a statutory demand dated 1 August 2003 was duly served by the plaintiff on the defendant and had not been set aside. The demand claimed $17,989.92, being the amount of a judgment, interest and costs obtained by the plaintiff against the defendant in the Local Court at Singleton on 17 June 2003. I was informed from the bar table that the defendant appeared before the Registrar to oppose the making of a winding up order, but was unsuccessful. 2 On 27 February 2004 a document incorrectly styled "Notice of Motion", but evidently intended to be an interlocutory process under the Supreme Court (Corporations) Rules, was filed, made returnable before the Registrar on 1 March 2004. I am prepared, in the circumstances, to disregard this measure of sloppiness and treat the application as if it were an interlocutory process in proper form. 3 The notice of motion purports to have been made by the defendant, but evidently not with the authority of its liquidator, who (I was informed from the bar table) has not yet commenced to act in the administration of the defendant. On that ground alone, the application might be open to challenge, but the issue of standing was not contested. 4 Apart from an order for transfer to the Common Law Division, which evidently would arise only if the applicant is successful and is entitled to claim costs, the applicant seeks the following three orders: "1. That the Order to Wind Up Ultra Protective Coatings Pty Ltd and to appoint a Liquidator, made by Registrar Berecry on 24 February 2004, be set aside; 2. That the Summons to Wind Up Ultra Protective Coatings Pty Ltd be dismissed; 3. That the Statutory Demand dated 24 June 2003 and served on the defendant be set aside." 5 A propos paragraph 2 of the notice of motion, the only statutory demand before the Registrar when he made his order was the demand dated 1 August 2003, but I take it that the applicant would seek to set aside that statutory demand. 6 When the hearing of the application commenced, the solicitor for the applicant informed the Court that his client sought to review the Registrar's decision, suggesting that the application was intended to be under Part 61 rule 3. On the other hand, the wording of the application suggests that it might be intended to be an application to set aside the winding up order under Part 4 rule 9(3). I shall consider the application on both bases, although my view is that on the evidence, the application must fail however it is regarded. 7 The applicant's sole evidence comprises three affidavits (with annexures) by Graham Baird, the defendant's managing director, who also gave some brief oral evidence. Mr Baird says that he is the sole director and shareholder of the defendant. The company has three employees including Mr Baird, 10 licensed distributors throughout Australia and two licensed distributors in other countries (China and New Zealand). Its business is to manufacture specialised industrial coatings, including anti-graffiti coatings. It operates from premises at Greenacre, which it has sub-leased, the sub-lease having two years to run with a two-year option. 8 Mr Baird has attached to his first affidavit a document headed "Chart of Accounts [Summary]", which bears some resemblance to a balance sheet, listing assets and liabilities and owner's equity, while also listing income, cost of sales and expenses for an unspecified period. Another document, entitled "Balance Sheet June 2003", presents the same "balance sheet" information, in slightly different form. I infer that, notwithstanding that the first document bears the date 30 September 2003, they both relate to the financial year ending 30 June 2003. 9 According to these documents, the company had current and fixed assets the total value of which is $412,019, and current and long-term liabilities of $161,687, amounting to net assets of $250,332. Its income from sales was $205,824 (as I say, apparently for the year to 30 June 2003), with cost of sales of $57,583 (material) and expenses of $88,178. This produces a net income of $60,063. "Owner's equity" is stated to be $330,400,"Owner's Capital" as $320,400,"Owner's Drawings" as $10,400, "Current Year Earnings" as $60,063 and "Historical Balancing" at -$470,931. 10 The two documents indicate cash on hand of $9,307 (in a cheque account and petty cash), trade debtors of $7,358 (after provision for doubtful debts) and inventory of $65,982. Other assets include "Property" at $220,000, "Licensee Fees" at $35,500, and fixed assets of $71,000 including, apart from furniture, fixtures, machinery and equipment, motor vehicles of $28,500. 11 The current liabilities include a visa account for $4,300, trade creditors of $12,387, a GST liability of $10,200, and a payroll liability of $4,800. Long-term liabilities of $130,000 comprise a bank loan of $20,000 and "Long-Term Liabilities" at $110,000. 12 As regards the company's assets, by far the two largest amounts are "Property" and "Inventory", and yet no information whatever is given about those assets. Nor is there any explanation for the "Licensee Fees". There is no information about the maturity of the trade debtors and trade creditors of the company, nor any explanation of the nature and terms of the long-term liabilities. 13 In the absence of further information, it is impossible for the Court to reach the conclusion that the company was solvent on 30 June 2003, bearing in mind the statutory definition insolvency s 95A of the Corporations Act (and see, generally, Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711). A fortiori, it is impossible on the basis of this evidence to reach the conclusion that the company is solvent now. There is ample cause for concern about insolvency, particularly since the company's current liabilities would substantially exceed current assets but for the large quantity of inventory. 14 Mr Baird annexed to his second affidavit, made on 10 February 2004, copies of the defendant's income tax returns for the 2002 and 2003 tax years, evidently recently completed at that stage. No assessments are in evidence. The calculation statements in the returns show tax payable for 2002 of $3,025.80 and for 2003 of $3,351.30. There is no provision for these amounts in the two documents to which I have referred. There is a profit and loss statement attached to the 2003 return for the year to 30 June 2003, which shows a net profit of $11,171, and other figures that appear to be different from the figures in the Chart of Accounts [Summary], including much larger expenses for wages, rent and superannuation, and a figure for motor vehicle costs. Nothing in this information removes the concern about solvency that the other material presents. 15 Annexed to Mr Baird's first affidavit is a copy of a letter from Graham Fardy, who says he is the accountant for the company and in the process of preparing a tax return for the year ended 30 June 2003. Mr Fardy purports to verify that the company is still trading and is "certainly still solvent with net assets totalling $250,332". In the copy letter the date is obscured, but it seems to me probable that Mr Fardy's letter was written not long after 30 June 2003, and appears to refer to the net asset position at that date. In his first affidavit Mr Baird says that Mr Fardy was "currently" (that is, as at 2 December 2003) preparing an up-to-date financial statement for the company. Apart from the tax returns to which I have referred, no such up-to-date financial statements have been put into evidence. 16 Mr Baird asserts that the company is solvent and is trading profitably, with international orders currently in China and New Zealand, in a combined amount of $160,000 per shipping container. He does not identify the number of shipping containers. In his third affidavit made on 26 February 2004, he says that, apart from domestic orders, the company has received overseas orders from China, which included an order from Beijing Osmond Trading Co Ltd dated 14 May 2003 in the amount of $134,400, and an order from ACM Trading and Investments Co dated 8 December 2003 in the amount of $202,400. He has annexed to his affidavit a copy of each of the two orders, but although the affidavit purports to annex a letter of credit, it does not do so. He says that the products have been forwarded to destination as ordered. The two orders refer to payment by letter of credit but there is nothing in the annexures to indicate whether letters of credit have been drawn, or whether payment has been received by the defendant and, if not, when it can be expected. In the absence of evidence of those matters, the evidence about the two orders does not remove the concern about solvency created by the other evidence, or, indeed, have any significance on the question of solvency under the statutory definition. 17 Mr Baird says that the company's bank account is in credit. He has provided evidence of an investment savings account with the Bank of China which shows a balance of $137.72 as at 2 February 2004, a deposit of $155,939 on 10 February 2004, various withdrawals including one of $25,000 (from which, according to notes on the statement, $15,000 was paid into Court in connection with a proceeding in the Common Law Division of this Court to which I shall refer), and a balance as at 16 February 2004 of $176.72. The source of the large deposit is not explained. This evidence does not have any significance on the question of solvency. 18 On 23 December 2003 the defendant filed a summons in the Common Law Division of this Court (No 13418 of 2003) seeking leave to appeal against the decision of the magistrate made on 17 June 2003 (the judgment upon which the statutory demand was based), and an order that the magistrate's judgment be set aside. On 9 February 2004 the Registrar of the Common Law Division made an order staying the enforcement of the magistrate's judgment on condition that the sum of $15,000 be paid into Court. Mr Baird's evidence, not challenged before me, is that this amount was paid into Court on 11 February 2004 from an investment account of the defendant with the Bank of China. 19 On 11 February 2004 the defendant before me commenced a proceeding in the Local Court at the Downing Centre (No 1585 of 2004) by ordinary statement of claim against the present plaintiff, seeking $60,000 plus interest, totalling $71,996.79. The Downing Centre proceeding is related to the Singleton proceeding in that the present plaintiff was a distributor of the defendant's products in the Hunter area, who (according to the defendant) purchased the distributorship for $30,000 payable by two instalments. The plaintiff took the Singleton proceeding to recover the first instalment plus interest, alleging that the product to be distributed was faulty, and in the Downing Centre proceeding in the defendant seeks to recover the second instalment together with general damages. 20 The evidence that the defendant has commenced the Downing Centre proceeding has no significance on the question of solvency, for it points only to the existence of an untested claim. In my opinion, having regard to the evidence as to solvency considered as a whole, neither the Downing Centre proceeding (even if it could be regarded as a set-off against the plaintiff's claim contained in the statutory demand), nor the Common Law Division proceeding to overturn the Singleton judgment, can be regarded as destroying or undermining the statutory presumption of insolvency under s 459C(2), that has arisen by virtue of the service of the statutory demand dated 1 August 2003 and the defendant's failure to make an application to set aside the statutory demand. 21 Section 459G(2) states that application to set aside the statutory demand may only be made within 21 days after the demand is served. No application was made within the 21-day period or at all. Mr Baird's evidence is that he "took the option to defend" the winding up proceeding on the ground of solvency, and now recognises, in hindsight, that he should have acted earlier by seeking to set aside the statutory demand. But it is too late to do so: David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. To the extent that the present application seeks an order to set aside the statutory demand, it is out of time and must be rejected on that simple basis. 22 Section 459S(1) prevented the defendant, without the leave of the Court, from opposing, before the Registrar, the plaintiff's application to wind it up on any ground that the defendant could have relied on for the purposes of an application to set aside the statutory demand. To the extent that the evidence concerning the Common Law Division proceeding seeks to establish that there is a genuine dispute about the existence of the judgment debt upon which the statutory demand was based, that evidence cannot be relied upon, by virtue of s 459S(1), unless the Court grants leave. 23 Section 459S(2) states that the Court is not to grant leave under subsection (1) unless it is satisfied that the ground, which relates only to a debt of $17,990, is material to proving that the company is solvent. On the very sketchy material as to solvency outlined above, the Court cannot be so satisfied, and therefore it is not in a position to grant leave. Quite apart from that, no proper discretionary basis has been identified for granting leave, because Mr Baird's evidence is that he on behalf of the defendant consciously chose not to make an application to set aside the statutory demand, but chose instead to seek to defend the winding up proceeding by asserting that the company was solvent. In doing so, he put the company in a position where it would be necessary for it to rebut the presumption of insolvency that arose by virtue of non-compliance with the statutory demand, and to overcome the restrictions imposed by s 459S. 24 To the extent that it may be appropriate to treat the notice of motion as an application to review the Registrar's decision under Part 61 rule 3 (notwithstanding the defendant's apparent failure to comply the requirements of the rule), there is, in my opinion, no basis for the Court to interfere with the Registrar's order in this case. Even if s 459S were not an obstacle and the defendant could rely upon all the evidence before me in the application, that evidence would fall a long way short of rebutting the presumption of insolvency arising, under s 459C(2), from the defendant's failure to comply with the statutory demand. While the evidence, considered as a whole, does not establish the insolvency of the company, it certainly does not establish the company's solvency on the balance of probabilities. The evidence leaves open far too many questions, as I have indicated. It is, in summary, a very sketchy and unsatisfactory application. 25 To the extent that the application should be seen as an application under Part 40 rule 9(3) (although I note that the Registrar's order appears to have been entered), the applicant has failed to point to any manifest error in the Registrar's decision, of the kind referred to by McLelland J in Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986) 10 ACLR 748. Although the transcript of the Registrar's judgment was not available at the hearing of the application, I was informed from the bar table that the Registrar, having referred to and applied s 459S, evidently in accordance with the principles that I have outlined, referred to Scope Data Systems Pty Ltd v Gorman [2003] NSWSC 137 (Barrett J, 13 March 2003), as authority for the proposition that an appeal or stay of execution does not itself give rise to a genuine dispute as to the existence of a judgment debt. I respectfully agree with Barrett J's reasoning in that case. I note, however, that the case is distinguishable from the present case, in that there a timely application was made to set aside a statutory demand, and the summons to challenge the magistrate's judgment (upon the basis which the statutory demand was issued) had been filed before the statutory demand was made. Even so, nothing before me on the application suggested any manifest error on the Registrar's part. 26 My conclusion is that the application is hopeless on every ground, and should be dismissed with costs. Since no objection was made to the application being brought in the defendant's name, the correct order is for the defendant, which is now in liquidation, to pay the plaintiff's costs of the application. Since, however, the Registrar made an order staying his winding up order contemporaneously with the making of the winding up order, so that the present application could be brought, it seems to me appropriate to regard the plaintiff's costs in defending the application as costs "in respect of the application" for the winding up order, which will therefore carry the priority afforded by s 556(1)(b) of the Corporations Act, and I shall make an order accordingly. **********

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