Gematech Pty Ltd v Bardi Investments Pty Ltd

8 According to Mr Crockford, immediately upon receipt of the statutory demand, he travelled by car to his solicitors Shaddick, Baker & Paull at Richmond and left the demand and the accompanying affidavit there with an instruction to the receptionist to give it to Mr Shaddick, solicitor.

9 On 22 June 2007 Mr Crockford spoke to Mr Shaddick whom he says told him he would write to Gematech's solicitors telling them that the debt was disputed. Mr Shaddick apparently did not do so although the evidence does not reveal why not. 10 On 13 August 2007, no application having been made to set aside the statutory demand, Gematech filed originating process to wind up the Company on the ground of insolvency. 11 On 13 September 2007 the matter came before a Registrar of the Court. The Company was represented by counsel and on his application the proceedings were, with Gematech's consent, stood over to 27 September 2007. 12 In the meantime, Mr Crockford on behalf of the Company obtained legal advice from Mr Shaddick orally and in writing. 13 In a letter dated 13 September 2007 to the Company and Mr Crockford, Mr Shaddick summarised his advice. His advice included that it would be necessary, if the winding up were to be defended, that there be obtained a report by a qualified auditor to establish the Company's solvency. He pointed out that substantial legal costs would be involved. He recorded Mr Crockford's instructions that the main role of the Company was that of a trustee and that it did not own substantial assets in its own right. Mr Shaddick wrote, amongst others: "I therefore confirm my advice that you should urgently seek independent taxation and accounting advice as to the feasibility of Bardi Investments unburdening itself of its trusteeships and submitting to a winding up order." 14 Mr Crockford responded to Mr Shaddick's letter in a letter dated 17 September 2007.

15 Mr Crockford recorded, amongst others, that Gematech's claim was unsubstantiated and circumstantial and he said the following: "Despite these issues it is important that this matter is laid to rest and the company not be seen as a defaulter if possible. The company does not owe the debt and whatever is done this should end the matter." 16 In it he also recorded that advice had been taken from a firm of accountants and their advice was that the Company "be allowed to be wound up". There were apparently attached to his letter minutes appointing a new trustee to the various trusts.

17 On 11 October 2007 the Company was, without opposition, wound up and Mr James Alexander Shaw of Ferrier Hodgson was appointed liquidator. 18 In his affidavit sworn 4 December 2007, read on the application Mr Crockford explains his decision not to contest the winding up application in the following terms: Bardi Investments, in accordance with advice from Don Shaddick, then did not proceed to contest the winding up application. Further to that advice, I made the decision not to contest the winding up, as I considered that by that means the dispute between Gematech and Bardi Investments could be most easily and cheaply brought to an end. Although the claim by Gematech was (and is) strongly disputed by reason of the true events as they are related in this affidavit, after considering advice from Don Shaddick I could not see any point in incurring substantial costs disputing the winding up and then probably engaging in expensive litigation with Gematech on the issue of the two payments.

19 Once the Company was wound up, Mr Crockford, it seems, came to the conclusion that the decision to allow that to happen was a bad mistake. 20 He had thought that: "Allowing Bardi Investments to be wound up was a method of simply and cheaply bringing finality to Gematech's claim." 21 However, having received communications from ASIC and the liquidator Mr Crockford came to understand that there was on foot a process involving extensive work and expense for him in assisting the liquidator in examining the Company's affairs, that the winding up could prejudice his prospects of being a director of other companies and that "it was going to be far more difficult to untangle" the Company's affairs than simply to appoint a new trustee as he had originally thought. 22 Hence, this application. The relevant principles 23 Sections 482(1) and (1A) of the Act provide as follows: (1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. (1A) An application may be made by: (a) in any case - the liquidator, or a creditor or contributory, of the company; (b) ….

24 The approach to be taken by the Court to applications such as the present, and the factors to which the Court may and should have regard, have been the subject of consideration in the authorities: see Re Telescriptor Syndicate Ltd [1903] 2 Ch. 174; Re Mascot Home Furnishers Pty Ltd [1970] VR 593; Re Data Homes Pty Ltd [1972] 2 NSWLR 22; Re Warbler Pty Ltd (1982) 6 ACLR 526; Dubolo Pty Ltd v Codrington Investment Corporation Pty (1998) 26 ACSR 723; Re Intag International Ltd (in Liq); Westpac Banking Corp v Intag International Limited [1999] NSWSC 645; Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70; Anderson v Palmer [2002] NSWSC 192; Re Nardell Coal Corporation Pty Ltd (2004) 49 ACSR 110; Deputy Commissioner of Taxation v Biosolids Management Pty Ltd [2004] NSWSC 272; Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160; McConnochie v Lopez [2006] WASC 206; Deputy Commissioner of Taxation v Giumar Pty Ltd (in liq) [2006] FCA 101; Re The King & I Pty Ltd [2007] FCA 2085. 25 Relevantly, for present purposes, two things are clear. 26 Firstly, the solvency of the Company is to be demonstrated by the applicants who bear the onus to do so by leading the "fullest and best" evidence of the company's financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609. Proper verification of assets and liabilities is critical to rebut the presumption of insolvency. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of insolvency: Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711. 27 In QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26] White J restated the correct approach as follows: "….the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant."

28 Secondly, in considering the application, the Court is to have regard not merely to the interests of creditors but to the public interest, including whether granting the order would be detrimental to commercial morality: Re Telescriptor Syndicate Ltd; Re Mascot Home Furnishers Pty Ltd; Re Data Homes Pty Ltd; Re Warbler Pty Ltd. 29 In the context of public interest and commercial morality Buckley J Re Telescriptor Syndicate Ltd required to be satisfied that the trading operations of the company had been "fair and above board" and that there was not "an ugly side to the picture", see also Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 694. 30 However, the concepts of commercial morality and public interest are not narrow. 31 In Re Data Homes Pty Ltd (which concerned the equivalent section in the Companies Act 1961 to s 482) at 26-27 Mason JA said: "But it should not be assumed that there is any sharp dividing line between considerations which are detrimental to commercial morality and those which are opposed to the public interest. They clearly overlap. Nor should it be assumed, as the appellant would have it, that each is a narrow concept for in truth they are designed to give expression to the very broad discretion which s. 243 confers upon the court. There is as little reason for confining considerations of commercial morality to the investigation of misconduct in the affairs of the company as there is for restricting the public interest to the pecuniary interests of existing and future creditors…. 32 In Chan v Austgrove Enterprises Pty Ltd (in liq) (1993) 12 ACSR 427 Seaman J said at 430: "There is one indication of want of commercial morality in the conduct of the business of the company, namely the acceptance by the plaintiffs of their former solicitor's advice that the company should go into liquidation leaving [the creditor] with great difficulty of recovering from the company any sum to which it might be entitled.

However, in the end I accept the submission of counsel for the plaintiffs that that conduct should not be seen as an impediment to relief because the plaintiffs remained personally liable to [the creditor] on their guarantees." This application 33 This application was set down to be heard by me on 4 February 2008. 34 By virtue of an order made by Simpson J on 20 December 2007 the winding up had been stayed until 4 February 2008. On that day I extended the stay until 18 February 2008. 35 Mr M W Young of counsel appeared for the applicants, Mr R Marshall of counsel for the liquidator and Mr G B Carolan of counsel for Gematech. 36 The position of the liquidator was that he neither consented nor opposed the orders. 37 The evidence established that the applicants had deposited with their present solicitors the sum of $150,000 of which $70,000 was intended, were the Court minded to make the orders sought, to be held as security for Gematech's claim (which remained in dispute). 38 At the outset Gematech opposed the making of the orders. 39 There was no evidence as to solvency apart from statements made by Mr Crockford in his affidavit to the effect that apart from the liquidator, Gematech's claim and amounts owed to Mr and Mrs Crockford the Company had no creditors. 40 After hearing submissions and some debate with counsel having occurred, Mr Young sought and obtained a short adjournment to obtain further instructions. On resumption of the hearing he informed me that were the Court to make the orders, Mr Crockford would procure the payment, unconditionally, to Gematech of the disputed debt of $70,000. 41 At this point, Mr Carolan for Gematech informed me that Gematech no longer opposed the order. 42 However, I conveyed to Mr Young that on the material before the Court I was not disposed to granting the order and also sought further assistance by way of submissions. 43 The matter was adjourned for two weeks until 18 February 2008 to enable the applicants to provide further affidavit evidence and for the Court to be provided with written submissions. 44 I received written submissions in the intervening period and on 18 February 2007 the applicants sought to read and rely upon an additional affidavit, that of Jason Crofts, a chartered accountant. The Court acceded to the application. 45 The affidavit of Mr Crofts attaches a report dated 14 February 2008 in the following terms: "Bardi Investments Pty Ltd uses an MYOB accounting system for all its accounting functions. We have viewed the complete ledger for the period from July 2006 to October 1, 2007 taken directly from the MYOB accounting system. These accounts were available in hard copy for our viewing (Appendix "A" & "B"). A Balance Sheet as at 11 October 2007 has also been provided (Appendix "C") We note that the accounts have been kept up to date with bank accounts being reconciled each month correctly. In examining these general ledger accounts we are of the opinion the only debt due and payable by the company is that to "B & D Crockford" in the amount of $26,365.73. Based on the attached financial records I have the view that if the creditors / Barry & Dianne Crockford waived the above liability then Bardi Investments Pty Ltd would have no debts due and payable and the company would be solvent."

46 Mr Young informed the Court that apart from what had been put in writing, the applicants did not wish to make any further submissions.

47 I have come to the conclusion that I should not exercise my discretion to terminate the winding up of the Company even though, having regard to the arrangements made or to be made to pay Gematech's claim, Gematech's interests may be better served by terminating the winding up. Solvency 48 It is apparent from the report of Mr Crofts that all he has done is to examine a ledger and balance sheet as at October last year and to restate the ultimate effect of the records he has been shown. 49 He has undertaken no process of audit or verification so as to be in a position to confirm the accuracy of the accounts. 50 The accounts are, in any event, more than four months old. 51 The applicants have not demonstrated the solvency of the Company by the "fullest and best" evidence and there has been no proper verification of assets and liabilities so as to enable the Court to be satisfied accordingly. 52 The records tendered show, and Mr Crockford in his affidavit indicates, that as at 11 October 2007 the Company owed Mr Crockford and his wife $26,365.73 as a current liability. It had a net deficiency of assets over liabilities to that extent. 53 In his affidavit, Mr Crockford undertakes "to waive my interest in that debt if and when the winding up of Bardi Investments is terminated". In an affidavit sworn 4 December 2007 Mrs Crockford offers the same undertaking. 54 Having regard to my conclusion that the applicants have in any event not met the requirement to establish solvency, it is not necessary to consider whether the undertaking proffered would be a satisfactory foundation to allow the Company to continue in operations: see TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 at [124]; Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386 at [25].

Public interest and commercial morality 55 It was put that the winding up came about because Mr Crockford "partly through inexperience with winding ups and partly through poor legal advice did not fully understand the implications of the threatened winding up." 56 In my view, the principal motivation on the part of Mr Crockford for casting the Company adrift was to thwart Gematech, leaving it with a judgment against a shell. 57 Leaving aside such rights of indemnity as the Company would have against the trust assets and the process which would have to ensue were the indemnity to be asserted, Mr Crockford achieved the end to which his conduct was aimed. 58 I was referred to the decision of Barrett J in Sunarto v Zurich Australian Workers Compensation Ltd [2001] NSWSC 422 where his Honour terminated a winding up in circumstances where a director partly through language difficulties and inexperience did not fully understand the implications of a threatened winding up and for that reason did not appear to oppose it. 59 That is not this case. 60 The additional expense and inconvenience which come with a winding up, and the risks to which the directors are exposed, are the collateral consequences which accompany the attainment of the goal Mr Crockford had in mind. It could hardly be said that he did not fully understand the implications of the goal itself (namely to put an end to Gematech's asserted entitlement). What he apparently did not appreciate was the effect of the collateral consequences. 61 Furthermore, unlike Chan v Austgrove Enterprises Pty Ltd there was no personal liability on the part of the directors to Gematech or any guarantee. 62 In my view, to terminate the winding up would, in these circumstances, not be in the public interest, nor would it serve the ends of commercial morality.

63 The application to terminate the winding up of Bardi Investments Pty Ltd (in liquidation) ACN 000 554 021 is refused. 64 The originating process is dismissed. 65 I will hear the parties on costs. **********

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