Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 231 | Case summary

5765/08 HANSON CONSTRUCTION MATERIALS PTY LTD v FEC CIVIL PTY LTD JUDGMENT 1 The plaintiff makes application under s 459P of the Corporations Act 2001 (Cth) for an order that the defendant be wound up and an order appointing a liquidator. The plaintiff relies on one ground only, namely, that the defendant is insolvent. 2 The plaintiff served on the defendant a statutory demand dated 7 October 2008 in respect of a debt of $70,982.90. The defendant did not comply with the demand. Nor was there any application under s 459G for an order setting it aside. The plaintiff therefore has the benefit of a presumption of insolvency under s 459C(2)(a). 3 Upon the present application, therefore, the defendant has the onus of proving that it is solvent, that being the sole ground of defence available to it following dismissal of an application under s 459S: see Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161. 4 In seeking to prove that it is solvent, the defendant relies on affidavits of Mr Barbaro, its sole director, and Mr Dodd, an external accountant engaged by the defendant to prepare financial statements for the defendant. Mr Dodd refers to having prepared financial statements for the period 1 July 2008 to 31 October 2008, a receivables reconciliation to 31 October 2008, a payables reconciliation to 31 October 2008 and a general ledger report for the period 1 July 2008 to 31 October 2008. A copy of each of these is annexed to Mr Dodd's affidavit. A copy of the first is also annexed to Mr Barbaro's affidavit. 5 Also annexed to Mr Barbaro's affidavit is a letter to him from Mr Dodd dated 9 December 2008, as follows: "Please find following a copy of the financial statement for FEC Civil Pty Ltd for the period from 1st July 2008 to the 31st October 2008. This has been prepared from information provided by your office and while we have not audited any information we believe the figures to be a true reflection of your trading results. We appear to have the company on a profitable path and although cash flow has been tight to date the additional profits will see this ease in the near future. We believe that the company is solvent and the reason the debt in question was not paid was not due to solvency issues but that the debt was in dispute and understand that you now have the necessary paperwork to verify this. Should you require any further information please do not hesitate to contact me." 6 The financial statements for the period 1 July 2008 to 31 October 2008 contain a compilation report signed by Mr Dodd and dated 9 December 2008 in which he says, among other things, (a) that the specific purpose for which the special purpose financial report has been prepared is set out in Note 1; (b) that the directors are solely responsible for the information contained in the special purpose financial report; (c) that Mr Dodd's procedures did not include verification or validation procedures; (d) that no audit or review has been performed "and accordingly no assurance is expressed"; and (e) that "no person should rely on the special purpose financial report without having an audit or review conducted". 7 As to (a) above, there is no Note 1 and therefore no description of the relevant special purpose. Item (b) above presumably refers to the sole director, Mr Barbaro, and makes it clear that Mr Dodd has accepted purely at face value what he has been told by Mr Barbaro - while items (c), (d) and (e) show that Mr Dodd has not brought evaluative or verification processes to bear, has not conducted any audit or review and counsels against reliance on the financial statements in the absence of such audit or review. 8 When one reads Mr Dodd's compilation report on the financial statements for the period 1 July 2008 to 31 October 2008, there is no real reason why one should give them any credence at all, except, perhaps, as an uncritical reflection of what he has been told by Mr Barbaro. 9 Also significant is the fact that Mr Barbaro himself has not made any statement that the financial statements present a true and fair view or are otherwise reliable. All he says about the financial statements - indeed, all he says about the defendant's financial position - is as follows: "18. Under cover of letter dated 9 December 2008 I received from the company's accountant financial statements of the company for the period 1 July 2008 to 31 October 2008. Annexed and marked 'G' is a copy of a letter dated 9 December 2008 from Albury Business Management Pty Ltd under the signature of Adrian Dodd and the financial statements for the company. 19. The financial statements show unsecured trade creditors as at 31 October 2008 to be $488,691.18. In respect of these creditors I have negotiated terms of payment and the company is meeting those terms. The company is accordingly paying its debts as they fall due. The Plaintiff's claim apart, there are no claims that have been issued by the unsecured trade creditors and none of those other trade creditors is pressing for immediate payment of their debts. All tax debts have been paid as they fall due. I have not increased the indebtedness of the company since 31 October 2008." 10 Despite the fact that the financial statements themselves say that no one should rely on them, it was submitted on the defendant's behalf that those statements, coupled with Mr Barbaro's evidence just quoted, prove that the defendant is now solvent. 11 I do not accept that submission. In the first place, the financial statements present, at best (and disregarding the serious shortcomings already mentioned), a picture of the financial position and state of affairs as at 31 October 2008 and the results of operations for the relevant period of four months. At the date of the hearing, almost five months had elapsed since 31 October 2008. The only information the court has been given about events since 31 October 2008 is Mr Barbaro's statement in his affidavit of 9 February 2008 that he has "not increased the indebtedness of the company since 31 October 2008". He does not say what he has done (or not done) - or what otherwise has happened - by way of increase or decrease in assets and, in particular, cash and other assets readily convertible into cash. 12 In a case such as this, the defendant must prove solvency as at the time of the hearing. 13 Attention was drawn to the general ledger report prepared by Mr Dodd for the period 1 July 2008 to 31 October 2008 from which it appears that regular monthly payments were made to a number of parties who appear to be lessors or financiers of plant and equipment. This, it is said, shows that debts were paid when due. The payables reconciliation is said to show the same. 14 The question posed by s 95A of the Corporations Act is not whether the defendants made regular payments to creditors in the period of four months covered by the analysis in evidence. It is whether the company is "able to pay all the [company's] debts, as and when they become due and payable". 15 An indication of solvency or insolvency may often be obtained by comparing current assets with current liabilities, although I hasten to say that such a comparison cannot be by any means conclusive. If it were assumed that the balance sheet at 31 October 2008 not only reflected the present position but also contained verified, tested and reliable information, the position would be that current assets of $549,737.44 stood against current liabilities of $578,808.17. The current liabilities would be seen to be made up of trade creditors ($488,691.18), GST payable control account ($29,434.19) and taxation ($60,682.20); with the current assets consisting of cash at bank ($3,304.66), cash on hand ($9.00), trade debtors ($540,291.78) and PAYG instalment ($6,132.00), with no provision for doubtful debts. 16 Thus, even if the trade debtors were recovered in full within a reasonably short time, they would not, in combination with the modest cash assets, cover the whole of the current liabilities. 17 The only non-current asset at 31 October 2008 was plant and equipment which, of its nature, must be retained and put to work for the business to survive. It cannot be regarded as a source of working capital. 18 There is no evidence that any source of capital or financial support of a longer term nature is available. 19 In Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 16; (2003) 45 ACSR 711, the Court of Appeal, drawing on principles summarised in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, emphasised the need for a defendant seeking to rebut the presumption of insolvency to present the "fullest and best" evidence of the financial position. There has been a singular failure on the defendant's part to meet that requirement. 20 The Court of Appeal also observed that unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency; nor are bald assertions of solvency arising from a general review of accounts, even if made by qualified accountants who have detailed knowledge of how the accounts were prepared. 21 In this last connection, Mr Dodd said in his affidavit of 24 February 2009: "On the information the company has provided I am of the opinion that the company is able to pay its debts as and when they fall due." 22 This is bald assertion. Mr Dodd does not explain the processes of deduction and reasoning that led him to the stated conclusion. Coupled with the fact that, as he made clear in the accounts themselves, he had relied only on what he had been told and had carried out no verification or audit, the absence of explanation makes Mr Dodd's bald assertion of no value in support of the proposition that the defendant is solvent. 23 The defendant has failed in its attempt to prove solvency. The presumption of insolvency prevails. I therefore record my finding that the defendant is insolvent. 24 It was submitted on behalf of the defendant that, even if insolvency is found, the court should exercise its discretion against making a winding up order. The only reason advanced is that the defendant's business is viable and the defendant has been paying is major creditors, added to which there is evidence of arrangements having been made by Mr Barbaro to meet the other trade creditors in ways that appear to have been satisfactory since no other creditor seems to have taken proceedings and none has come in to support this application. 25 I have no evidence about payment arrangements except the bald single sentence in Mr Barbaro's affidavit (see paragraph [9] above). Otherwise, the evidence shows nothing more than that some creditors have received regular payments. These matters are by no means sufficient to justify the exercise of the court's discretion as sought by the defendant - that is, the discretion to allow to remain operational within the commercial community a company that the court has found to be insolvent. 26 The orders of the court are as follows: 1. Order that FEC Civil Pty Ltd ACN 120 054 435 be wound up in insolvency. 2. Order that Frank Lo Pilato of Level 1, 103-105 Northbourne Avenue, Turner ACT, an official liquidator, be appointed liquidator of FEC Civil Pty Ltd. 3. Order that the defendant pay the plaintiff's costs of the proceedings. **********

Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd

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