Geoffrey Bush v Wardair Pty Limited

1 MASTER: This is an application to wind up the defendant in insolvency. The defendant carried on a business of flying instruction and other operations of light aircraft. The company is operated by Salli-Ann Ward, its sole director and shareholder. 2 A statutory demand claiming the sum of $11,000 was served on the company on 17 June 2003. An application to set it aside was dismissed and, accordingly, the presumption of insolvency under Section 459C (2) (a) applies. 3 The defendant has sought to rebut the presumption by tendering its balance sheets and profit and loss accounts for the year ended 30 June 2003. The accounts show a profit before tax of $34,579 and after tax of $26,653 for the year ended 30 June 2003. 4 The current assets are $21,581 and current liabilities are $9,774. Thus net current assets are $11,807. Non-current assets were $48,811 and non-current liabilities were $41,036. The net assets overall were $19,583. 5 The operation is only a modest one as it is conducted by Ms Ward using one owned aircraft and cross-hiring another aircraft. It occupies rental property at Bathurst aerodrome and apparently has ceased its operations at Young. The gross trading from flying operations was $119,300 after paying for aircraft fuel, hire, maintenance and other expenses. 6 The company will be insolvent if it is unable to pay its debts as and when they become due and payable. The question is one of fact to be determined as at the date of hearing. There are many statements of principle in the cases regarding the question which I have to decide. In 7 McPherson, The Law of Company Liquidation Third Edition, page 55, the test was described as : "The primary meaning of the phrase 'unable to pay its debts' is insolvency in the commercial sense - that is, inability to meet current demands, irrespective of whether the company is possessed of assets which if realised would enable it to discharge its debts in full." 8 There is also the oft repeated statement by Chief Justice Barwick in Sandell -v- Porter (1966) 115 CLR 666 at 670 where he said ,in discussing the expression "unable to pay his debts as they become due from his own money" in the Bankruptcy Act, the following: "The conclusion of insolvency ought to be clear from the consideration of the debtors financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtors inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency." 9 Evidence was given as to the defendant's position both by its directors and the company's accountant Mr. Favona. (?) 10 Because of its form most of the relevant parts of Mr Favero's affidavit and its annexure, his statement as to the defendant's solvency, were not admitted into evidence. The accounts, which were a compilation and not an audit were in evidence and were based upon the accountant's records kept by the director. 11 The court thus has to determine the question based upon the accounts and such other evidence as may be available as to payment of the company's debts rather than any expression of opinion by Mr. Favero. 12 There was an attack on the accuracy of the figures. However, the figures, in my view, were fairly current given that the hearing was only two and a half months after the end period of the accounts. Adjustments to these figures can be based upon any other relevant information that might be available. 13 Between the time when the first evidence was put on and the hearing there was some alterations to the accounts. These brought in an income tax liability of $7,877 and a reduction in the amount due to the company by crediting the director's fees of $5,304. It was suggested that there was some manipulation of the company's accounts but I do not see it that way. It seems to me it was a genuine attempt to take advantage of a legitimate tax deduction and, if anything, by reducing the company's assets it went against the defendant company's interests in this hearing. 14 The company is a small one but it is trading profitably. 15 At 30 June it had virtually no trade creditors and evidence has been given of it paying July maintenance bills in August when due. It is paying its long-term loan to Esanda Finance within time and without difficulty. 16 At the present time there is outstanding the amount claimed by the plaintiff $11,000. It was shown as a non-current liability in the accounts but, clearly, having regard to the demand it is a current liability now due. 17 The only other debt of consequence at the present time is the costs order made against the defendant in the statutory demand proceeding. Although those costs are estimated at $16,873 no bill has been served and it is likely to be some time before the amount will become payable. 18 Although there is no evidence of the company's current cash and trade debtors' position, there has been no evidence given which would suggest a deterioration in the position. Income is still being received from flying operations and tuition. In one sense just looking at these figures the current net assets would be sufficient to meet the liability for the $11,000. However, rather than relying on this aspect it is useful to consider the other assets of the company which, according to Barwick CJ the company could "use to meet his debts as they fall due." 19 The only relevant one is the director's loan account of $31,692 which is shown in non-current assets. It is due by the only director and shareholder, Salli-Ann Ward and is the subject of much evidence before me. In the year 2002 the company owed her $30,528. The substantial movement in the loan account has been the result of two matters: first, there was a charge to her account of $35,000 being the proceeds of the Esanda loan which was used by her to pay out the plaintiff when he claimed payment for the aircraft which was originally shown in the books of the company as a gift by him to the company; second, advances to her which include apparently her saving plan for engine replacement. Apparently she transferred $200 per week to an account in her name and I point out that the account was in her name in order to save bank fees. The payments were made over the years to build up a fund to meet the overhaul cost of the aircraft engine. That amount is $27,000 and is now held in her bank account and available to be paid. 20 In her affidavit evidence she suggested that she would have three avenues of getting funds to pay her loan account if needed:

(a) The $27,000; (b) A personal loan; (c) Persons who would provide funds of up to $10,000. 21 The problem with the $27,000 is it will be needed in the reasonably near future. The engine has to be overhauled at 2,000 and has about 100 hours to go before reaching overhaul; at the current rate of utilisation that will occur in about four months time. 22 It is suggested that another aircraft could be used as there is apparently some cross hire arrangement in place with the Bathurst Aero Club. Precise details are not available and it seems to me it is fairly likely that the company will be in a situation where, in the ordinary course of business, it will have to overhaul the engine in the near future. The problem with this is the accounts do not reflect any provision for this expense. Accordingly, the $27,000 will have to be used in the next twelve months for the overhaul of the engine. Certainly, it could be used in the immediate short term to pay $11,000 but the defendant would have to have funds to replace the $11,000 and those funds would have to be found in the next four months. 23 Although she recently took out a personal loan for a car whether she can demonstrate an ability to get another personal loan does not appear in the evidence. 24 There is, however, another source of long-term funds that has become available both to Ms Ward and the company. Mr. Bourke gave evidence before me on the day of the hearing of his desire and ability to provide long-term loan funds of $50,000 to advance the company. 25 Mr Bourke is the owner of a very substantial trucking business at Bathurst. The business owns 60 long haul trailers and 30 long haul prime movers. The company, which is owned by Mr Bourke, from which he would obtain the funds, has a bank account with a credit balance of $146,950.62 as at 8 September. Having seen Mr Bourke give evidence I am quite sure he is genuine and that the $50,000 will be advanced to the company on the long-term basis that he gave in evidence. 26 There are some objective facts which point to the genuineness of the offer:

(a) He has known Salli-Ann Ward as a friend for six years and has observed her to have innovative ideas in running a flying school which he thinks will succeed; (b) He has been associated with flying for 17 years and has a personal interest in it; (c) He has previously invested in flying ventures. 27 There was criticism in the submissions of this offer using pejorative language. I am satisfied it is quite genuine. The suggestion that there might be some breach of director's fiduciary duty if the advance was made by his company was not put to Mr Bourke. In any event the funds could be taken by way of loan by him from his company. 28 In summary I am satisfied that the defendant has access to $50,000 immediately on a long-term basis for the redevelopment of the company. There are no strings attached to the advance and the funds are available to pay creditors. 29 In these circumstances the company is clearly solvent. 30 It was submitted that I should make any dismissal of the proceedings conditional upon the advancement of the funds. Given my level of satisfaction I do not see that this is necessary. 31 I must say it seems somewhat surprising that this submission was made given what transpired the week before the hearing. The former solicitors, whose action led to the failed attempt to set aside the demand, obtained for the defendant a bank cheque for $11,000 and it was tendered in payment of the plaintiff's debt. The plaintiff, as he was entitled, rejected the offer as he desired to proceed with the winding up. Thus, it seems to me. There has been some change of heart after Mr Bourke's evidence. 32 I dismiss the summons and I will hear the parties as to costs.

(Mr White declined to address on costs in the absence of Mr Cashion) MASTER: The question of costs is difficult and I prefer to hear from someone appropriate at an appropriate time. 33 I adjourn the matter to 9.30am on Wednesday 29 October 2003 at 9.30am for costs' argument. Exhibits may be returned. **********

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