In the matter of CNL Transport Pty Ltd (in Liq) Hunt v Smith and Another

Background to the winding up

1. The company was incorporated on 15 October 2002 with an issued share capital of $100. It carries on a specialised business of rail track maintenance. In addition to Mr Hunt, it has two casual employees. Its sole customer is Speno Rail Maintenance Australia Pty Ltd (Speno).
2. The company was wound up pursuant to an order made on 27 February 2017 on the application of the Workers Compensation Nominal Insurer (the Insurer). The first defendant, Mr Michael Smith of Hancock Smith was appointed liquidator. Allianz Workers Compensation (NSW) Ltd (Allianz) as agent for the Insurer had served a statutory demand for $22,136.57 on 25 November 2016.
3. Mr Hunt said that he did not receive the creditor's statutory demand dated 25 November 2016, which was served by post addressed to the registered office of the company nor the originating process filed on 27 January 2017. He acknowledged that the company's accountant, Mr Colin Grady, of DFK Laurence Varney, informed him by phone on 27 January 2017 that "We've had something flagged on ASIC. There is an outstanding bill from Allianz. I will flick you an email". Mr Hunt said that he quickly skimmed that email when he received it and then immediately telephoned Allianz to obtain details of what money was owed by the company. Mr Hunt said that the person to whom he spoke at Allianz referred him to Craddock Murray Neumann, the solicitors for Allianz. He spoke to a person at those solicitors who referred him back to Allianz.
4. On 31 January 2017 Mr Hunt received an email from a paralegal at Craddock Murray Neumann stating "Please find our correspondence attached". Mr Hunt said that he viewed the email on his mobile phone, but did not scroll down to see that there was an attachment because the email did not indicate to him, by a paperclip symbol, that there were any attachments. Mr Hunt considered the email to be "odd" because Allianz's solicitors had not advised how much the company owed and where he could make the payment.
5. In fact, the attachment to that email was a letter from Craddock Murray Neumann to the company dated 31 January 2017 which advised that the first return of the winding up proceedings was listed for 27 February 2017 and that the amount claimed, together with legal costs, totalled $28,324.17. Mr Hunt said that he did not read that attachment until he had a conference with his solicitor on 28 February 2017.
6. Mr Hunt said that on 1 February 2017 he caused an amount of $8,899 to be transferred from the company's account with Westpac to the B-Pay account of Allianz as listed on an old Allianz invoice. Recent enquiries by the liquidator indicate that a payment of $8,899.44 was received by Allianz and reduced the debt owing by the company.
7. Mr Hunt said that he did not receive any further correspondence from Allianz after the solicitor's email on 31 January 2017. He explained that he believed that by paying some monies towards the outstanding debt, Allianz would know that the company had the capacity to pay and they would send an invoice for the remaining sum. Mr Hunt said that he was unaware that the matter had proceeded to court. He said that he was first informed of the winding up proceedings on 28 February 2017, being the day following the liquidator's appointment.

Mr Hunt's evidence

1. In support of the application Mr Hunt swore affidavits dated 8 and 14 March 2017 which explained the circumstances outlined above and the company's current financial position. Mr Hunt deposed that the company's outstanding creditors were: DFK Laurence Varney ($9,900), Australian Taxation Office (ATO) ($133,391.21), unpaid superannuation liability ($60,299), Allianz (including winding up costs) ($28,324.17), and Smith Hancock (liquidators - fees and expenses) ($20,500).
2. The amount owing to Allianz is overstated in Mr Hunt's affidavit. According to the liquidator's enquiries, after deducting the $8,899.44 payment made by the company in early February 2017, the debt due to Allianz including the costs of the winding up proceedings is $19,824.29. The liquidator has estimated that his remuneration from 11 March 2017 to the termination of the winding up to be $5,000 excluding GST. In addition, the liquidator's solicitors' costs are estimated to be $5,000 excluding GST.
3. The company also has three equipment finance commercial loans with Wesptac totalling $75,402.83. These relates to three vehicles. The monthly payments are up to date. The total monthly payment is $6,847.43. Mr Hunt also referred to a further debt to the ATO for $11,909.79, which seems to relate to interest and penalty charges. The company's accountant intends to lodge a request with the ATO for these charges to be reviewed. He has expressed confidence that this request will be successful. Time will tell in that regard.
4. Mr Hunt has taken the following steps to discharge the company's outstanding debts: 1. ATO - On 7 March 2017, Mr Hunt arranged payment to the ATO of $133,391.21 from his personal bank account. Further, pending the outcome of the proposed request for a review of the interest and penalty charges, Mr Hunt has deposited $30,000 into his solicitor's trust account. This occurred on or around 2 March 2017, and Mr Hunt has given an authority and direction to his solicitor to immediately provide a trust cheque to the ATO and/or the liquidator for any amounts owing to the ATO upon request by the ATO. 2. Unpaid superannuation liability - On 7 March 2017, Mr Hunt transferred $60,299 into his solicitor's trust account and gave an authority and direction to his solicitor to pay that sum to the relevant superannuation fund once the correct details for the trustee of the fund are determined. Enquiries by the company's solicitor have since determined that the trustee is part of the BT Financial Group. 3. As to the debts owing to the company's accountants, Allianz and the liquidator, it is proposed that these will be paid by the liquidator from the company's credit balance with Westpac, and the liquidator has agreed to pay these debts. There is evidence that, as at 7 March 2017, the company had sufficient funds to pay these debts having a credit balance with Westpac of $65,493.82. There is also evidence in exhibit 1 of an irrevocable authority and direction given by Mr Hunt to the liquidator, that, if the Court makes an order terminating the winding up of the company, the liquidator is irrevocably authorised and directed to pay those debts.
5. The liquidator has allowed Mr Hunt to continue to trade the business of the company under the liquidator's supervision, until the Court determines the company's application on the basis of an agreement with Mr Hunt that Mr Hunt will pay all employee wages (being approximately $2,000 per week) from his personal funds; and that all direct debit payments from the company's accounts, including any insurance liability and monthly payments to Westpac for equipment loans, will be paid by Mr Hunt. Mr Hunt has given affidavit evidence of his compliance with this agreement with the liquidator.

The liquidator's affidavit

1. The liquidator has filed an affidavit sworn 14 March 2017 setting out the work done since his appointment and his analysis of the company's financial position. The liquidator has identified trade creditors totalling $310,723.50 and total realisable assets of $769,950.73, comprising cash at bank of $62,413.73, debtors of $483,219.00 and plant, property and equipment of $223,381.00 (written down value), whilst also noting Mr Hunt's higher estimated realisable value of $647,089.00.
2. The liquidator has also annexed to his affidavit the company's most recent balance sheet and profit and loss statement for the period 1 July 2016 to 28 February 2017. The balance sheet records net assets of $505,195. The profit and loss statement records total income from sales of $963,030, an operating profit of $265,832.17 and a net profit after payment of a fully franked dividend ($135,000) of $140,108.10 for the eight months to February 2017.
3. The liquidator said that following inquiry and investigation, he is not aware of any other creditors than those described in his affidavit and the annexures thereto. The liquidator also confirmed that Mr Hunt had cooperated with the liquidator's investigations and enquiries.

Earlier years' financial performance

1. The financial report for the company for the year ended 30 June 2016 records a net operating loss before income tax of $298,653 and net assets of $365,087. By contrast, in the preceding financial year ending 30 June 2015, the company recorded a net operating profit before income tax of $266,900 and net assets of $748,740.
2. Mr Hunt deposed that the operating loss in the 2016 year was an anomaly. He explained that the company usually invoiced its sole customer Speno every month, but in the 2016 financial year he fell behind on his paperwork due to personal reasons. Mr Hunt separated from his partner and left his primary place of residence in about November 2015. At the time he was working seven days a week and approximately 18 hours a day. He said that he "slacked off" on rendering invoices and also missed payment of the Allianz invoice for the initial workers compensation premium for the period from July 2016.
3. Mr Hunt said that the company's trading terms with Speno are 30 days payment from the end of month and that Speno pays the company in accordance with those terms. He also said that there had never been any major dispute regarding any invoices rendered to Speno or payment of those invoices. He said that the company usually renders invoices to Speno of approximately $1 million a year. This is consistent with the sales recorded in the 2016 financial report, which also includes the figures for 2015. It is also consistent with the total sales recorded in the profit and loss statement of the eight months to February 2017. Mr Hunt said that he expected to receive payment of the most recent invoice rendered to Speno on 1 March 2017 in the sum of $487,487 around the end of the current month.

Mr Hunt's financial position

1. Mr Hunt also gave evidence of his personal financial position. This is relevant to his capacity to comply with his agreement with the liquidator, while he carries on the business of the company, under the liquidator's supervision. It is also relevant to the company's likely future performance, if the winding up is terminated.
2. Mr Hunt owns a home at Regentville purchased in February 2017 for $1,200,000, which is unencumbered. He also owns a factory at Kingswood, from which the company operates its business, which he estimates is worth approximately $600,000. That property is also unencumbered. Mr Hunt had approximately $250,000 cash in his bank account until the winding up occurred. As indicated, he has personally contributed over $200,000 in payment of debts of the company.

Relevant Principles

1. The considerations that generally inform the exercise of the Court's discretion on an application to terminate a winding up are well-established. In Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, Master Lee QC identified a number of factors, which later cases have emphasised provide useful guidelines, although they do not constitute an exhaustive checklist. In Modena Imports Pty Ltd (in liq), In the Matter of Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 at [13], Palmer J identified the following considerations:

• the applicant must make out a positive case for the favourable exercise of the Court's discretion;
• the applicant must show the nature and extent of the creditors, and whether all debts have been discharged;
• the attitude of creditors, contributories and the liquidator is a relevant consideration;
• the applicant must show the current trading position and general solvency of the company;
• the applicant must provide a full explanation of any non-compliance by the directors with their statutory duties;
• the applicant must explain the general background and circumstances leading to the winding up order;
• the applicant must show the nature of the company's business and whether the conduct of the company was in any way contrary to "commercial morality" or "the public interest".

1. Importantly, Palmer J did not suggest any hierarchy of importance of those factors. However, it is well-accepted that usually the most significant matter for consideration is the solvency of the company. Other relevant considerations include the attitude and interests of the creditors, the interests of the liquidator, the interest of contributories, public interest, whether the company's debts have been paid, and the company's trading position and general solvency.
2. In Re Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439 at [18], Brereton J emphasised two matters. The first is that the Court must be satisfied that the state of affairs that required that the company be wound up no longer exists. This means where the winding up was on the grounds of insolvency, it was necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent, and in addition, that it is likely to remain, solvent. Secondly, the Court must be satisfied that it would be reasonable to entrust the affairs of the company, once again, to the directors, under whose management it previously failed. As Barrett J earlier observed in Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3], a central question is: Whether the company's financial health is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. A capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is central to the inquiry.

Decision

1. In the present case, the company was wound up in insolvency based on a presumption of insolvency arising from a failure to comply with a creditor's statutory demand. That occurred in circumstances where the demand and the originating process had not come to the company's attention. I accept the submission that Mr Hunt was clearly distracted by personal issues from attending to the business of the company, which is otherwise ordinarily profitable.
2. If the winding up is terminated, the control of its affairs will be returned to Mr Hunt, its sole director. The fact that the company failed to pay the superannuation guarantee payments in compliance with its statutory obligations for a period of about two years is of concern. Nonetheless, Mr Hunt has provided an explanation for that default, and he has now put in place an arrangement with Westpac where the company will meet its superannuation guarantee liabilities going forward.
3. Notice of the application has been given to ASIC. It has not responded to that notice and has not sought to intervene in the proceedings. Notice of the application has also been given to the company creditors. None have expressed opposition to terminating the winding up.
4. The Insurer appeared by its solicitor and does not oppose terminating the winding up. Nor does the liquidator oppose the application, provided the debts outstanding to the ATO, the unpaid superannuation liability, the liquidator's own remuneration and his solicitor's fees, and the debt and the costs of the winding up due to Allianz as agent of the Insurer are paid. As indicated, that concern is addressed by the irrevocable authority and direction agreed to by Mr Hunt to the liquidator in relation to the payment of those debts.
5. I am satisfied, on the basis of the evidence that provided the company takes the steps next referred to concerning capitalisation of Mr Hunt's recent contributions to the company, the company will be solvent upon an order terminating the winding up and that, as best one can predict, at least in the short term, the company will have available to it sufficient resources to meet its debts as and when they fall due.
6. In that regard, I take into account the affidavit evidence of Mr Hunt concerning his commitment to the company, and his intention to more closely attend to the book work related to the affairs of the company, including ensuring invoicing its sole customer, Speno, monthly.
7. Accordingly, there should be an order terminating the winding up, subject to the following matter.
8. Mr Hunt has proposed that an order be made terminating the winding up and thereafter steps be taken for the capitalisation of Mr Hunt's recent contribution to the company. In my view, those steps should be completed prior to the order being made terminating the winding up: Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd & Ors (2016) 60 ACSR 646 (LNL Global Enterprises) at [25] (Barrett J); In the Matter of SNL Group Pty Ltd (in Liq); Su v SNL Group Pty Ltd (in Liq) [2010] NSWSC 797 at [57] (Bergin CJ in Eq).
9. In LNL Global Enterprises, Barrett J after reviewing the authorities on the issue of whether the Court should accept undertakings in the nature of contractual subordination of loans to a company (which is not what is proposed in the present case), remarked as follows (at [25]-[26]): [25] Neither an undertaking by the associated creditor to the court of the kind now proposed nor a contractual subordination (designed, in each case, to preclude payment to the associated creditor while other creditors are unpaid) represents a sound basis on which to order termination of the winding up of an insolvent company. Purely contractual subordination is unsatisfactory because it can be reversed by the same kind of contractual conduct that created it. An undertaking by the associated creditor to the court that the creditor will not require or accept payment while other creditors are unpaid is unsatisfactory because there is no effective means of monitoring compliance. On occasion, the court may be disposed to order termination of a winding up upon an undertaking being given by an associated party to take some action in the short term - for example, an undertaking to cause tax returns to be lodged ( Deputy Commissioner of Taxation v Star Building Formwork Pty Ltd [2005] FCA 1939 ) or to procure the making of a payment to a certain person by a certain date: Jain v Deojill Pty Ltd (in liq) [2005] FCA 1938 . An undertaking given to the court by an arm's length party involving some short-term action may also be acceptable: compare Singleton v Andreones Pty Ltd [2005] NSWSC 730 . Where some action of the company itself is necessary to put it into a state where termination may safely be ordered, the alternative generally preferable is for leave to be granted under s 471A(1A) for the directors to take the necessary action while the winding up subsists, so that the s 482 order can be made after that action is complete. [26] Where short-term undertakings of the kind I have mentioned are proffered, the court may be disposed to accept them because some person beyond the company and its controllers and associates has an interest in the due performance of the undertaking. As a result, any breach of the undertaking is most likely to become the subject of complaint which, in turn, gives rise to a distinct possibility of moves towards early sanction by way of charge of contempt of court. That, of itself, may represent sufficient assurance of likely compliance in the near term to make the undertaking acceptable.
10. Here, the personal payment of a number of debts by Mr Hunt may create a further debt of the company to Mr Hunt.
11. While the Court has, on occasion, accepted undertakings by those associated with the company to provide a capital contribution as a condition of terminating the winding up (see Glass Recycling), in my view, that is not appropriate in the present case.
12. In Glass Recycling, Brereton J accepted an undertaking by a director of the company to contribute upon termination of the winding up the sum of $20,000 by way of equity capital: at [29]. The undertaking in that case provided the Court with the satisfaction that the contribution would move the state of affairs from one of "bare solvency" to one in which the company had demonstrated solvency and substance. Nonetheless, the capital contribution was a relatively small amount.
13. By contrast, in the present case, the amount of Mr Hunt's recent contributions to the company to enable it to discharge outstanding debts is a significant sum being in the amount of $214,600. There has also been prior non-compliance with other statutory obligations relating to payment of the superannuation guarantee for a number of employees of the company over a period of two years. In all the circumstances, I am satisfied that the necessary steps to capitalise those contributions should be completed prior to the order being made terminating the winding up.
14. That will be achieved by the following orders, which I make: 1. Grant leave under s 471A of the Corporations Act 2001 (Cth) to Mr Hunt to the extent necessary to enable him to comply with any of the following orders; 2. Within one day, Mr Hunt take all steps as may be required to capitalise his contributions to the company of $214,600 by subscribing for capital in the company equivalent to the amount of that contribution on the basis that his contribution is discharged by the shares allotted to him; 3. By 17 March 2017, Mr Hunt file and serve an affidavit deposing to compliance with order 2 above; 4. The court notes the signed Irrevocable Authority and Direction dated 14 March 2017 in respect of payment of the debts owing to the liquidator, the Workers' Compensation Nominal Insurer by its agent, Allianz and the company's accountants, DFK Laurence Varney. Mr Hunt to pay the liquidator's costs of the proceedings agreed at $5,500, including GST; 5. Stand over the matter to 17 March 2017 at 10 am before Gleeson JA for the purpose of making an order terminating the winding up of the second defendant upon the plaintiff demonstrating compliance with order 2.
15. Since delivering these reasons, and as contemplated by the orders referred to above, an affidavit by Mr Hunt sworn 16 March 2017 was filed in Court on 17 March 2017 deposing to the allotment to Mr Hunt of 214,600 shares in the company and annexing copies of the relevant documents evidencing the capitalisation of the personal payments of the company's debts by Mr Hunt in the amount of $214,600. There is also evidence that the company's accountant has lodged a Form 484 with ASIC. A search of the company as at 16 March 2017 (at 4.44pm) confirms that Mr Hunt now holds 214,700 ordinary shares in the company (previous he held 100 such shares).
16. Accordingly, I make the following orders: 1. Pursuant to Corporations Act 2001 (Cth), s 482, that the winding up of CNL Transport Pty Limited (ACN 102 513 468) be terminated with effect from 17 March 2017. 2. That these orders be entered forthwith.

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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 March 2017