In the matter of Edifice Australia Pty Limited [2019] NSWSC 1215

Facts

1. Edifice was engaged in a property development in Guildford. The first insight into Edifice's financial position is a special purpose financial report prepared by Samuel Hoare, chartered accountant, as part of a solvency report dated 1 May 2019 filed in the substantive proceedings. The special purpose financial report sets out the financial position as at 30 June 2018, albeit that the financial report is not supported by any accounting records of Edifice, nor any lay affidavit evidence. Mr Hoare makes plain that, in preparing this report, he relied upon information provided to him, including "assertions made by the current company office holders". There is no evidence as to what those assertions were. Mr Hoare does not express any opinion as to the accuracy or otherwise of the special purpose financial report. According to the special purpose financial report, Edifice sustained a loss for the year ended 30 June 2018 of $231,595. It had bank accounts with a balance of $2,440. Whilst its current assets were said to comprise $1,955,910, these current assets included cash retentions and a contingent asset of $1.05 million which, as I understand Mr Hoare's solvency report, should probably not be recorded in the year ended 30 June 2018 but in a subsequent financial year and, for reasons which I will come to, are problematic in and of themselves. Excluding those items, the current assets of Edifice as at 30 June 2018 appear to have been $518,094 with total liabilities of $796,612, that is, net assets of -$278,518.
2. In July 2018, AFM Masonry obtained two judgments against Edifice in the Local Court of New South Wales. The judgments later formed the basis of the statutory demand which led to these proceedings. In late July 2018, AFM Masonry received $360.11 under a garnishee order in respect of the judgment debts. This is evidence that the bank accounts of Edifice at that time had minimal balances.
3. In August or September 2018, it appears from Mr Hoare's solvency report and a document authored by Mr Jabbour in support of the interlocutory process, that Edifice ceased operations. There is no evidence as to why it ceased operations.
4. In September 2018, Edifice filed proceedings in this Court to set aside the statutory demand, but that application was dismissed on 5 November 2018 by consent. The time for compliance with the statutory demand expired, therefore, on 12 November 2018: section 459F(2)(a)(ii).
5. In November 2018, an instalment order was made in the Local Court permitting Edifice to pay the judgment debts by $5,000 in each of the two Local Court proceedings. The first of these payments was made in November 2018.
6. On 14 November 2018, Devlan Project Management issued a certificate of practical completion for the Guildford development. Devlan also issued a Superintendents Payment Certificate which referred to contract sums owed to Edifice, less cash retentions and "less Principal Payments TBA on accounts pending finalisation", leading to a balance of "Total claim due negative Contractor to Principal", of - $491,790.77. As I understand this document, it appears that Edifice owed Devlan money in respect of the Guildford development. It may be that, if cash retentions are paid by Devlan to Edifice at some point in the future, the amount which Edifice owes Devlan may be reduced or Devlan may owe money to Edifice. But there is no evidence which would clarify the position, either filed in the substantive proceedings or in support of the application for an adjournment.
7. In December 2018, Edifice failed to make instalment payments under the orders made in the Local Court and the instalment orders were revoked by consent.
8. In January 2019, Micro-Form Pty Limited registered a security interest on the PPSR register in respect of Edifice. There is no evidence as to what moneys are owed to Micro-Form Pty Limited or what the charge relates to.
9. On 12 February 2019, these proceedings were commenced by AFM Masonry seeking the appointment of a liquidator on the basis of the presumed insolvency of Edifice by reason of its failure to comply with the statutory demand: section 459C(2)(a).
10. By 31 March 2019, according to bank statements annexed to Mr Hoare's solvency report, Edifice had an overdraft account with St George Bank of minus $36,586.15 and small credit balances in a Commonwealth Bank and Westpac Bank account of $51.48 and $1,282.60 respectively.
11. On 16 April 2019, Edifice's solicitor sent a letter of demand to a private certifier who had apparently been retained to certify the building works at Guildford, but failed to attend to this task in a timely manner, necessitating the retention of a new certifier. The letter of demand alleged loss and damage of $935,000 for failure to issue construction certificates, occupation certificates and for delay. There is no evidence of any response to the letter of demand. Mr Hoare referred to this letter in support of the statement that Edifice has made an insurance claim in respect of the matter, but the letter does not support that statement.
12. On 30 April 2019, the financial position of Edifice is described in the special purpose financial report of Mr Hoare. Again, Mr Hoare says that he relied upon information provided to him, including assertions made by the current company office-holders but there is no evidence as to what those assertions were. The picture which appears from the special purpose financial report is one of insolvency, not solvency. The net profit of the company for the ten months to 30 April 2019 was a loss of $6,347. Although Mr Hoare refers to a cash retention in respect of the Guildford property and a contingent asset, which I take to be the proposed claim against the former certifier, the total current assets are said to be $1,439,099, but excluding those items is $1,283 in bank accounts, less what Edifice apparently owes Devlan. With further total liabilities of $286,148, Edifice has negative net assets, and significantly so, as at 30 April 2019.
13. The only evidence filed by the defendant in the substantive proceedings is the solvency report of Mr Hoare which refers to creditors totalling $249,500 being AFM Masonry ($50,000), Gayalini Rajendran and A-Line ($152,000), Global Insurance Group ($2,500), Service NSW ($29,000) and Enfrex Metalworks Pty Limited ($16,000). Mr Hoare expressed the view that Edifice was solvent on the basis that: 1. it would be paid the retention money of $387,816 when due on 14 November 2019 (it is not apparent to me that this retention amount is owing having regard to the Superintendents Payment Certificate of 14 November 2018); and 2. that the director has agreed to financially support the company (although there is no evidence of the director's ability to provide such support).
14. The sole director of Edifice is Boutros Jabbour. The sole shareholder of Edifice is Joseph Taouk. No affidavit has been filed by Mr Jabbour or Mr Taouk in either the substantive proceedings or in support of the interlocutory process.
15. On 17 June 2019, Black J set this matter down for hearing, noting that the evidence had been filed and served and no further evidence could be filed and served without leave.
16. On 15 July 2019, Mr Taouk obtained a bank cheque in favour of AFM Masonry for $43,198.30, apparently because AFM Masonry had brought bankruptcy proceedings against him for failure to comply with the Local Court judgment against him personally. As I understand it, the bank cheque has been proffered by Edifice to AFM Masonry as part of settlement discussions for both these substantive proceedings and the bankruptcy proceedings, but on terms which were not accepted by AFM Masonry.
17. On 17 July 2019 Gayalini Rajendran obtained judgment against Edifice for $85,746.86. It is unclear whether this amount was included in the creditors referred to in Mr Hoare's solvency report, or is an additional amount owing.
18. The defendant had been ordered to provide submissions on 7 August 2019, but none were provided.
19. On 8 August 2019, at 2.10 pm, a further printout was obtained by the defendants from an Australian Taxation Office portal showing that income tax previously owing by Edifice of $3,320 had been paid and a credit of $334,816 stood in Edifice's integrated client account. Mr Hoare says that he has been instructed that all BAS statements have been lodged. There is no evidence as to whether the filing of Edifice's tax returns is up to date.
20. At 5.29 pm yesterday, Mr Moss notified the Australian Securities and Investments Commission of his appointment as an administrator to Edifice. At 8.37 pm yesterday an interlocutory process was filed online seeking the adjournment of the hearing today. The reason why the adjournment was sought at such a late stage was said to be that Edifice's efforts to secure payment of all amounts claimed in the statutory demand had been rejected by AFM Masonry. However, at the time when Mr Moss deposed to this fact, on the instructions he had been given, the bank cheque had only been offered to AFM Masonry on terms. The bank cheque was not physically provided to AFM Masonry until a few minutes before the hearing commenced today.
21. The most important annexure to Mr Moss' affidavit is an "Outline of proposed Deed of Company Arrangement" signed by the director of Edifice, Mr Jabbour. 1. Mr Jabbour says that the only secured creditor of Edifice is Micro-form, although I note that Micro-form was not referred to in Mr Hoare's solvency report of 1 May 2019 as being a creditor at all. 2. Mr Jabbour says that there are 12 unsecured creditors totalling $4,886,000. This is in stark contrast to the summary of creditors in the solvency report. Amongst the unsecured creditors are said to be accrued entitlements owing to one employee, who is not named, of $75,000 and $4,811,000 owed to a "general body of unsecured creditors". The shareholder, Mr Taouk, is said to be owed about $4 million and will not prove in the deed fund but his debt will remain a liability of Edifice reducing the unsecured creditors who need to be taken into account to $886,000. However, as Mr Taouk's alleged loan of $4 million is not recorded in the special purpose financial report of Mr Hoare, that suggestion raises more questions than it answers. 3. A list of creditors is said to be annexed to the "Outline of proposed Deed of Company Arrangement" and marked "A", but there is no such annexure. 4. The company is said to have assets of which the only one which actually appears to be an asset is a GST refund of $334,816. The other assets are said to be the cash retention and claim against the former certifier. 5. The director proposes to make a cash contribution of $60,000 "within three months of the date of signing the DOCA". It is proposed that the director will provide the cash contribution in three instalments. The fact that the director needs to make this relatively small cash contribution over three months and in three instalments gives me some concern as to the director's ability to provide the cash contribution at all. 6. The director says that the company ceased building work in August 2018 but "has opportunities for future projects" as well as another joint venture which had ceased "by reason of litigation and a lien exercised by a welding company which has recently settled" and thus the joint venture can apparently now be pursued. The director believes that if the proposed Deed of Company Arrangement is accepted by creditors, the company will return to profitable operations, although there is no evidence as to why that would be the case. 7. The deed fund will aim to produce a return to creditors of 10 cents in the dollar comprising $60,000 cash from a shareholder, which will not be expected for some three months, and the balance from the retention fund available from the Guildford project "with the consent of the secured creditor". It is unclear whether the balance for the retention sum is a sum which will ever be forthcoming given the Superintendents Payment Certificate. There was no evidence or suggestion as to whether the consent of the secured creditor to the retention moneys being paid into the deed fund will be forthcoming. 8. The deed fund is also said to comprise the balance of the contract price from Option and Option Trust No 1, but there is no evidence as to what those trusts are or what the balance of the contract price is.
22. Mr Moss seeks to adjourn the winding up application because he is concerned that, in the event of liquidation of Edifice, in his experience the head contractors frequently withhold retention sums and are reluctant to pay outstanding building works which is not in the interests of creditors.

Section 440A(2)

1. Section 440A(2) of the Corporations Act provides: The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.
2. In In the matter of Cresco Opus Fund No 4 Pty Ltd (administrator appointed) [2019] NSWSC 941, I outlined the principles relevant to an application such as this at [23]-[25]: [23] The principles relevant to an application under section 440A(2) are not controversial. There must be a sufficient possibility, as distinct from a mere optimistic speculation, that the interests of the company's creditors will be accommodated to a greater degree in an administration than in a winding up. The onus is on the administrator to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue rather than liquidation ensue. The question of whether an administration should continue is closely related to whether the creditors can hope to get more by way of payment of their debts by administration than from liquidation. Where there is a realistic possibility that a DOCA may be proposed, it will generally be in the interests of creditors for the administration to continue in order to ascertain whether it will be "beneficial for creditors overall", especially where the adjournment is sought for a short period early in the administration: In the matter of Bobos Engineering Australian Pty Ltd [2015] NSWSC 2027 at [9]; In the matter of Denham Constructions Pty Ltd [2016] NSWSC 1426 at [10]; and In the matter of Dan Phillips Holdings Pty Ltd [2017] NSWSC 954 at [5]. [24] Both parties relied on Deputy Commissioner of Taxation v KJ Consulting Pty Ltd (administrators appointed) [2005] FCA 1827, where Gyles J pointed to several factors which may support an adjournment under section 440A(2), including: (a) that the administration process enables the general body of creditors to exercise commercial judgment as to where their best interests lie; (b) where contributions to a deed fund are to be made by related parties which would not be available if the company enters liquidation; and (c) where the administrator supports the adjournment. [25] His Honour also suggested factors which tell against an adjournment, including: (a) where the company is not trading and is not "liable to be revived or its fortunes revived by trading on as such"; (b) where the company is (as it almost always is) insolvent; and (c) where the majority of creditors oppose the adjournment. See also Weriton Finance Pty Ltd v PNR Pty Ltd (in administration); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd (in administration) (2012) 92 ACSR 88; [2012] NSWSC 1402 at [15] ff where Black J conducted a review of the authorities as to relevant factors in such applications.
3. It is not controversial that applications brought at the last minute should be treated with some scepticism: In the matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15] per Brereton J. Against this, it may be easier for an administrator to obtain an adjournment where the administrator has only very recently been appointed and a short adjournment only is sought. In In the matter of Bobos Engineering Australia Pty Ltd [2015] NSWSC 2012 at [5], Brereton J noted, relying upon the decision of Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377; [2003] NSWSC 47: … the extent of proof that can result in the requisite level of persuasion differs with the circumstances in which this litigation comes before the Court and, in the context of a short adjournment made very soon after the appointment, less may be required than in the context of the longer adjournment, the practical effect of which would be to defeat the winding up application. Applying that lower threshold, his Honour was satisfied in that case that a short adjournment of two weeks was warranted, notwithstanding that "the evidence is quite insufficient to establish that it is in the interests of the company's creditors for the company to continue under administration indefinitely": at [9], [11].
4. In Allied Express Transport Pty Ltd v Exalt Pty Ltd [2013] FCA 455, Jacobson J noted the use of administration as a last ditch effort to stave off proper winding-up proceedings. His Honour was satisfied that the case before him was a last ditch effort, although his Honour in the case before him granted a short adjournment. See likewise Waste Recycling and Processing Services of New South Wales (trading as Waste Service NSW) v Local Government Recycling Co-operative Limited [1999] NSWSC 507 at [17]-[18] per Santow J.
5. Perhaps of closest application to the facts before me is the judgment of Gardiner AsJ, in Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac Pty Ltd) [2012] VSC 60, where circumstances unfolded before him as they have before me today. As the administrator had only been appointed the day before the hearing, he had very little direct knowledge of the company's affairs and relied on what he had been told by the director of the company. His Honour found that the administrator's affidavit did not contain persuasive evidence that it was in the interests of the company's creditors that the company continue under administration rather than be wound up. At [13]: At most, I would characterise the assertions made in his affidavit as being 'optimistic speculation' that at some time in the future such evidence may possibly be obtained. Another factor which influenced his Honour's decision was the fact that, despite the application to appoint a liquidator having been on foot for some time, the application for an adjournment was only brought at the very last moment. There was an absence of explanation as to why the administrator had only been appointed the day before the hearing.
6. Even if the Court is not satisfied that the requirements of section 440A(2) are met, the Court theoretically has a separate discretion to adjourn the proceedings, as it has the power to adjourn any proceedings. But as Campbell J noted in Bradley Keeling Management Pty Limited at [45], there may be no additional factors which make it appropriate to otherwise adjourn the winding up proceedings.

Consideration

1. The question is whether I am satisfied that it is in the interests of the company's creditors to continue under administration. I am not satisfied on the evidence before me today. Mr Moss' affidavit, and I mean no criticism to him, is based upon instructions which he has received from the director of Edifice, which are themselves problematic and not supported by the business records which are in existence and, in many respects, appear to contradict the solvency report of Mr Hoare. I am troubled by the absence of any evidence from the director of Edifice or its sole shareholder which gives me any confidence as to the veracity of the information provided to either Mr Hoare or to Mr Moss.
2. The problem is exacerbated by the "Outline of proposed Deed of Company Arrangement" which, as I have already set out, raises a number of concerns as to the assets and liabilities of Edifice as described by the director as opposed to those set out in Mr Hoare's solvency report on the "assertions made by the current company office holder". It is true that the solvency report was dated 1 May 2019 but the differences between the suggested financial position of the company in the two documents cannot be explained, I think, by the passage of a few months.
3. It does not appear to me that the proposed Deed of Company Arrangement offers any tangible benefits to creditors as a whole. The proposed cash contribution of $60,000, said variously to be forthcoming from the director or the shareholder, will only be paid over three months in three instalments. If the monies are to be paid by the shareholder, then payment would appear uncertain given that he is the subject of bankruptcy proceedings. The balance of the deed fund is said to be forthcoming from the cash retention "with the consent of the secured creditor". On the evidence, this portion of the deed fund appears dubious. The other assets of the company, such as they are, are not proposed to form part of the deed fund.
4. Mr Moss considers the adjournment is in the best interests of creditors "as if I am able to verify a lump sum payment deed proposal and the retentions and GST refund this will provide a better and/or faster return to creditors particularly given that the director and shareholder does not propose to receive any dividend in respect of the debts owed". There is no evidence from the very limited financial information that the directors or shareholders are owed anything anyway. In Re Trigold Nominees Limited (unreported, Supreme Court of Western Australia, Master Sanderson, 5 May 1997), the Master disregarded the administrator's opinion in similar circumstances where, "The opinion so formed is based on no satisfactory material and carries little weight".
5. These proceedings have now been on foot for almost six months such that, if the proceedings are not determined by 12 August 2019, then an extension will have to be given under section 459R of the Corporations Act. The explanation given as to why Mr Moss was only appointed yesterday afternoon does not bear close scrutiny.
6. It is apparent from the evidence that Edifice is insolvent and has been insolvent for some time. I am not satisfied that the short adjournment sought is warranted as the evidence in support of the application for an adjournment does not contain persuasive evidence that it is in the interests of the company's creditors that the company continue under administration rather than be wound up. The assertions made in Mr Moss' affidavit but, more importantly, in the "Outline of proposed Deed of Company Arrangement" amount to, in part, 'optimistic speculation' that such evidence may be obtained but, perhaps more importantly, heighten my concern as to whether the interests of creditors will be better served in an administration rather than liquidation. In these circumstances I am not satisfied that it is in the interests of creditors for the company to continue under administration rather than be wound up. Nor are there any additional factors which might otherwise make it appropriate to adjoin the winding up proceedings. The application for an adjournment is refused.

Solvency

1. I have already set out the evidence going to solvency. As matters stand, there is a presumption of insolvency by reason of the company's failure to comply with the statutory demand. In the substantive proceedings, therefore, the onus is on Edifice to prove that the company is solvent: section 459C(3). Section 95A(1) of the Corporations Act provides: A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
2. To discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of its financial position: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J. As Santow JA (with whom Meagher and Handley JJA agreed) explained in Expile Pty Limited v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163 at [16]: However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. What occurred fell well short of that … [A]dopt[ing] … Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 …: 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 the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
3. The company's evidence in respect of solvency falls far short of this requirement. As I have already explained, there is no explanation by the company as to what the company's activities were, why the company ceased trading, what the company's assets and liabilities were and how those assets and liabilities have changed to the present position. The solvency report is unsupported by business or accounting records of Edifice or lay evidence of its director.
4. I am more than satisfied on the evidence I have seen that the orders sought by the plaintiff should be made. Although Mr Moss has offered his services as a liquidator to the company, the plaintiff should have their preferred liquidator.
5. In those circumstances I make the following orders: 1. Dismiss the interlocutory process filed on 8 August 2019. 2. Order the defendant to pay the plaintiff's costs of the interlocutory process. 3. Order that Edifice Australia Pty Ltd (ACN 147 514 270) be wound up pursuant to section 459A of the Corporations Act 2001 (Cth). 4. Appoint Mitchell Ball of BPS Recovery as Liquidator of the Edifice Australia Pty Ltd. 5. Order the defendant to pay the plaintiff's costs of the proceedings.

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: 13 September 2019