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

Supreme Court of NSW|2019-08-09|Before: Rees J

Solicitors: Sachs Gerace Broome (Plaintiff) Pure Legal (Defendant) File Number(s): 2019/46938

Judgment

HER HONOUR: This matter is listed for hearing today on an application under section 459A of the Corporations Act 2001 (Cth) to appoint a liquidator to the defendant company, Edifice Australia Pty Limited, on the grounds of insolvency. Edifice is a builder. The plaintiff is AFM Masonry Pty Limited.
This morning, Edifice sought leave to move on an interlocutory process filed at about 8.30 pm last night seeking to adjourn the hearing because Gavin Moss was appointed as an administrator to the company, apparently yesterday afternoon. The purpose of the adjournment was to enable a section 439A report to be prepared and, potentially, a first meeting of creditors to be held.
Edifice, by its administrator, does not necessarily accept that, if I refuse to grant the adjournment, that it is insolvent and a liquidator should be appointed, so it will be necessary to deal, firstly, with the application for an adjournment and then, if necessary, to proceed to consider whether Edifice is solvent.

Section 440A(2)

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.
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.
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].
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.
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.
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

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.
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.
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.
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".
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.
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

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.
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.
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.
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.
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

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Legislation Cited (1)

Cases Cited (15)

Cited By (2)