In the matter of Yelin Group Pty Ltd - Li v Jin - [2012] NSWSC 74 - NSWSC 2012 case summary

In the matter of Yelin Group Pty Ltd - Li v Jin - [2012] NSWSC 74 - NSWSC 2012 case summary — Zoe

Judgment 1HER HONOUR : Before me for hearing on 30 January 2012 was an application brought initially by Notice of Motion filed on 3 August 2011 by Mr Li (the sole director of Yelin Group Pty Ltd), in which Mr Li sought relief in respect of a winding up order made against the company in these proceedings on 8 July 2011 on the application of the plaintiff creditor. 2An Amended Interlocutory Process dated 23 December 2011 was filed (pursuant to leave granted on 7 December 2011 by Barrett J, as his Honour then was) at the commencement of the hearing before me, joining as additional applicants to these proceedings both Australia Shoppingtown Development Limited (the sole member of Yelin) and the company itself. It is on the Amended Interlocutory Process that the applicants now press their claim for relief under s 482 of the Corporations Act 2001 (Cth), seeking an order for the termination of the winding up of the company. (The applicants did not press for orders under Uniform Civil Procedure Rule 36.16, as had initially been the primary basis on which the application was to be made.) 3Mr Jin, who had previously had commercial dealings with Mr Li in relation to a property development at Parramatta, has been joined as a respondent to the Amended Originating Process (he having filed a Notice of Appearance and having been represented when the matter was first listed before the Court on Mr Li's application in September last year). Mr Jin claims to be a creditor of Yelin for an amount in excess of $600,000. (This is disputed by the applicants who contend that, to the contrary, Mr Jin is indebted to the company for a substantial amount in the order of about $500,000.) Mr Jin opposes the relief sought on the basis that the company is, and has been for some time, insolvent. 4Counsel for Mr Jin (Mr Baird) maintains that if the winding up is now terminated and Mr Jin's claim to be a creditor were later (in the Common Law proceedings that are shortly to be heard) to be upheld, then Mr Jin will be prejudiced (if a fresh winding up application is required to be made) because of the operation of the statutory relation back provisions by reference to the later winding up, although there was no evidence of any specific prejudice in this regard. 5The plaintiff did not appear on the present application and no longer has any interest in the outcome of the proceedings, its debt and its claimed costs of the winding up proceedings having been paid in full (by Mr Li). The debt in question was for a relatively minor amount ($4,731). Mr Jones, the liquidator appointed to Yelin in July this year, consents to the termination of the winding up and also did not appear on the application. The amounts due to the liquidator for his remuneration and expenses have been met. Legal Principles 6Section 482 of the Corporations Act 2001 (Cth) provides that: At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. 7The application may be made by a creditor or contributory of the company (s 482(1A)). In the present case, Mr Li seeks relief as a creditor of the company and is recorded as such in Yelin's accounts but in any event Australia Shoppingtown, as the sole shareholder of the company, has standing to bring the present application and has now been joined as an applicant for that purpose. Australia Shoppingtown is a company incorporated in the British Virgin Islands and controlled by Mr Li. 8As to the matters to be taken into consideration on an application under s 482, a succession of cases have adopted (with some refinement) the list set out in the judgment of Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 ( Anderson v Palmer [2002] NSWSC 192, per Barrett J, as his Honour then was, at [5]; Modena Imports Pty Ltd (In Liq), In the Matter Of; Leveraged Capital Pty Ltd (Admin App) (In Liq) v Modena Imports Pty Ltd (In Liq) [2010] NSWSC 739, per Palmer J at [13]; In the Matter of SNL Group Pty Ltd (In Liq); Su v SNL Group Pty Ltd (In Liq) [2010] NSWSC 797, per Bergin CJ in Eq at [22]; Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq) [2011] VSC 577, per Ferguson J at [17]; to name but a few). The list is a guideline (not a set of rigid principles) as made clear by Santow J (as his Honour then was) in Dubolo Pty Ltd (t/as Fender Signs) v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723 at 724. That list is as follows:

The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay: In Re: Calgary and Edmonton Land Co Ltd (In liq) [1975] 1 WLR 355; at p358-p359 per Megarry J. See also s243 of the Act.
There must be service of a notice of the application for a stay on all creditors and contributories, and proof of this: Re South Barrule Slate Quarry Co (1869) 8 Eq 688; Re Bank of Queensland Ltd [1870] 2 QSCR 113.
The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Krextile Holdings Pty Ltd v Widdows (supra); Re Data Homes Pty Ltd (supra), Law of Company Liquidation (supra) at p395.
The attitude of creditors, contributories and the liquidator is a relevant consideration: s243(1), Calgary and Edmonton Land Co Ltd (supra).
The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought: In re a Private Company (1935) NZLR 120; Re Mascot Home Furnishers Pty Ltd (1970) VR 593; at p598.
If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd (supra).
The general background and circumstances which led to the winding-up order should be explained: Krextile Holdings Pty Ltd v Widdows (supra).
The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to 'commercial morality' or the 'public interest': Krextile Holdings Pty Ltd v Widdows (supra). 9In summary, therefore, the factors relevant to be taken into account relate to the circumstances in which the winding up occurred; the interests and attitude of the liquidator, creditors and contributories; the solvency and financial position of the company and questions of commercial morality or public interest. In Anderson v Palmer , Barrett J noted the emphasis to be placed on the factors relating to the solvency and financial stability of the company (at [6]): ... In a case such as this where the company was wound up because of inability to pay its debts as they fell due, the whole focus has moved to a system of administration presided over by the liquidator in the interests of creditors, with the interests of members relegated to a subordinate position. It cannot be expected that restoration of control of the company's destiny to its shareholders and directors (or, in this case, its sole shareholder and director) will be allowed by the court in the exercise of its discretion unless it can be seen that the debts of the existing creditors have been or will be paid and that there is a sufficient degree of additional financial strength and stability to promote confidence in the company's ability to continue without any appreciable risk of reverting to liquidation. It would not be an appropriate or prudent exercise of the court's discretion to re-launch a company which, while for the moment technically solvent, was in such a border line position that it might well succumb again to compulsory winding up in the short term. As Street J said in Re Data Homes Pty Ltd [1971] 1 NSWLR 338, the court will not exercise its discretions in a way which has "the consequence of permitting an insolvent company to go forth again into the community". The same applies to a company which is technically solvent but likely to become insolvent. 10In a different but not wholly dissimilar context, the public policy against returning an insolvent company to the commercial world was also emphasised in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235, at [288]-[289]. 11In Re SNL Group Pty Ltd , Bergin CJ in Eq similarly emphasised at [24] that: ... in determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the Company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to solvency. 12In Anderson v Palmer , Barrett J noted that in an enquiry as to solvency and financial stability focus is to be placed on three broad issues, "first, the capacity of cash resources (including resources immediately convertible into cash) to meet debts due or likely to become due in the short term; second, any capacity there may be to raise money quickly by resort to assets not immediately convertible into cash; and, third, an assessment that there exists a sufficient financial capacity to create confidence that there will be no relapse into insolvency" (at [7]). 13Addressing the question of solvency later in Brolrik v Sambah [2001] NSWSC 1171 at [34], Barrett J considered as instructive the principles enumerated by Weinberg J (in the context of a company seeking to resist a winding up order in consequence of non-compliance with a statutory demand) in ACE Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728: There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of the company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 465-466. The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J. The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467. 14As to what evidence is required to be adduced in relation to the question of solvency, in TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011] NSWSC 500, Barrett J at [18] observed that "unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency". Earlier, in Metledge v Bambakit Pty Ltd; Manuel Koutsourais, Applicant [2005] NSWSC 160, his Honour had said at [31]: .... Upon an application of the present kind, as in the case of defence to a winding up summons where the presumption of insolvency operates, the party bearing the onus of proof must lead the "fullest and best" evidence of the financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 477. And as was pointed out in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 by Santow JA (with whom Meagher and Handley JJA agreed), "proper verification of assets and liabilities is critical to rebut the presumption of insolvency". 15At [33], his Honour noted that "Mere assertions by a company's controller as to its solvency and the state of its assets and liabilities are of no real value to the court" (referring to Expile ) and that the court will not act on unsubstantiated evidence of such a person (referring to Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Ltd (1999) 17 ACLC 972 per Austin J). Barrett J observed at [34]-[35] that in Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd [2004] NSWSC 783, White J had referred to two approaches to the proof of solvency, those being the verification by the liquidator of financial facts sufficient to express an opinion that the company is solvent "or, at least, to put before the court critically assessed information which assists it in coming to such a conclusion" and the performance of such a task (ie, verification or the adducing of critically assessed information) by an external accountant. Barrett J said (at [34]) that the court is receptive to that kind of evidence "provided that it sufficiently demonstrates the basis for the opinion that the company is solvent and reflects investigations and verification beyond the mere say-so of the company's controller". The need for up-to-date and comprehensive financial information was emphasised by Barrett J again in TQM Design and Construct . 16As to the position where the company's liabilities include a debt to a company's controller, in Metledge Barrett J noted that such a debt was a factor in determining insolvency and was not disposed to accept a mere assertion or assurance by that person that the debt would not be pursued. At [30], his Honour said: ... it would not be to the point to say that the indebtedness was merely "in-house". Debt of that kind remains a factor in determining solvency. Nor would it be to the point to say that Mr Koutsourais would never sue or even that he was prepared to consent to some contractual subordination of his debt: Re Nature Springs Pty Ltd (1994) 13 ACSR 50; Sutherland v Rahme Enterprises Pty Ltd (2003) 46 ACSR 458; Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd [2004] NSWSC 783. 17In In the Matter of Golden Plantation Pty Ltd [2011] NSWSC 1610, Barrett J noted (at [21]) that applicants in this kind of proceeding not uncommonly face the dilemma that they cannot raise finance to facilitate the company's return to solvency unless the winding up is terminated; the winding up will not be terminated unless the company is returned to solvency; and the obtaining of funds is dependent on the availability of the company's own property as security. His Honour said (at [22]) that: The best the court can do in this case is to indicate three things:

In an appropriate case, the court will, upon an application of this kind, allow money to be paid into court in respect of such a disputed debt: see, for example, Re SNL Group Pty Ltd [2010] NSWSC 797 noting that in the situation where money is paid into court it is generally necessary that payment into court be on the footing that the moneys are to remain in court pending some specified event. His Honour also referred to Re SNL Group Pty Ltd as an example of an approach sometimes taken by the court of indicating a willingness to terminate a winding up if certain steps are taken (and then granting leave under s 471A(1A) to allow those steps to be taken); on the basis that the s 482 application will be adjourned to allow time for necessary action to be completed. 18In TQM Design and Construct , where there had been an asserted willingness (deposed to on affidavit) by the director in question to take steps in relation to the liability constituted by director's loans but where there was no evidence that, by the hearing of the application, any steps had been taken to capitalise or subordinate the loans in question, his Honour said (at [29]): Except, perhaps, when it relates to something to be done in the near future and in circumstances where the matter will return promptly to court, an undertaking given to the court is not a satisfactory foundation upon which to allow an insolvent company to continue in operation. (my emphasis) 19Finally, by way of an outline of the applicable legal principles, I note that it is well recognised that winding up proceedings are not the proper forum for the resolution of issues as to disputed debts. In South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465, Ryan J identified as the second policy objective in this context that the court should not allow a creditor whose debt is the subject of a genuine dispute to use winding up proceedings as a debt-collecting mechanism and that winding-up proceedings should not be used as an instrument of oppression to be held over the head of a company otherwise trading satisfactorily. 20In Tokich Holdings P/L v Sheraton Constructions (NSW) P/L (In Liq) CGU Workers Compensation (NSW) Ltd v Tokich Holdings P/L; Application of Sheraton Constructions (NSW) P/L (In Liq) [2004] NSWSC 527, White J (in an application for the substitution of the creditor on a winding up application) said at [82] that: In my view I should apply the usual principle that the Court in exercising its jurisdiction under Ch 5.4 is not the proper forum for resolving disputed debts. There is no evidence of insolvency except the presumption which arises from the non-compliance with CGU's statutory demand. There is no evidence of the existence of any unsatisfied creditor, other than the possible debt owed to Sheraton Constructions. Although the case is not on all fours with South Eastern Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1,328, I agree with Ryan J in that case that the application for substitution involves the weighing up of competing policies. On the one hand an insolvent company should not be permitted to continue to trade. On the other, the winding up jurisdiction should not be used as the forum for resolving genuinely disputed debts. In this case, unlike ACP Syme Magazines, there is no evidence of actual insolvency. I do not consider the unsatisfactory financial records of Sheraton Constructions to be a sufficient reason for deciding the disputed debt. The absence of proper records makes the dispute more difficult to resolve and is a factor against the resolution of the question. Facts 21As noted above, Mr Li (and his wife) and Mr Jin were previously involved in various commercial dealings including the development of a property at Parramatta. There are ongoing disputes involving these parties and Yelin itself. Those disputes are the subject of proceedings (no. 2007/260695) listed for hearing to commence in the Common Law Division in this Court at the end of this month. In those proceedings, Yelin claims that Mr Jin was jointly and severally liable (with Mr Li and associated interests) in respect of a guarantee given in 2003 to a financier (St George Bank) in respect of the Parramatta project. 22Briefly, as I understand it, the development of the Parramatta property (into 26 residential and 3 commercial units) was undertaken with the assistance of a construction loan or facility from the St George Bank. In 2003 the guarantee (the authenticity of which is disputed by Mr Jin) was given in connection with that loan. 23Mr Li has given evidence that the repayment (or partial repayment) of the St George Bank construction loan occurred after completion of the building and following the sale of 17 of the 26 residential units, leaving a balance of $1.5m which was then refinanced and converted to mortgage loans secured by the then 8 unsold residential units (and excluding the 3 commercial units). His evidence is that since 2004 Yelin has collected rental income from the units held by it and that it serviced the interest repayments payable in relation to the mortgage out of the net income from the rentals (which he says was then approximately $80,000 per annum). 24In August 2008, a demand was made by the bank on Mr Li (and his associates) for the repayment of the $1.5m balance of the construction loan (and for another $1.6m loan the details of which were not made clear to me). In this context, it seems that agreement was reached with Yelin for the payment by it of some or all of the moneys necessary to meet this demand and an agreement was entered into by it with Mr Li (and a Mr Kang) whereby this was to be treated as a loan to them and an obligation to pay interest on those moneys to Yelin was acknowledged. 25In evidence (Exhibit F, tab 2) is a one page agreement dated 1 September 2008, signed by Mr Li (and a Mr Ling Kang) with Yelin, reciting that "In accordance of the guarantee provided by Yelin ... for the mortgage loan from St George Bank to Mr Wenguo Jin, Ling Kang and Xiongying Li drawn down in July 2003, any repayments made in pursuance to the above mentioned guarantee constitute a loan to the parties signed here below". (The document was not signed, nor was there provision for it to be signed, by Mr Jin.) In its terms, the September 2008 document records an agreement as follows:

The interest rate is single rate of 8.75% per annum accruable to the principal. 26It is not disputed, as I understand it, that in 2009 Yelin discharged in full the borrowings covered by the guarantee. By the end of 2009, Yelin had sold all residential units. The 3 commercial shops (which are retained by Yelin) are now the subject of a mortgage to Perpetual Trustee to secure a loan of approximately $468,000. 27Yelin contends that, by reason of the payment by it of the debt owing to St George, it has a claim for subrogation to the securities held by St George and hence a claim against Mr Jin (on the guarantee) at least for his share of the amount of the debt discharged by Yelin (although as the guarantee was joint and several, Yelin's claim against each of the guarantors would technically be for the full amount). The amount so claimed ($399,866.80) is recorded in Yelin's accounts as an asset (comprising part of the amount of $924,170.08 appearing under the heading 'Other Debtors'). Also recorded in the accounts is a loan alleged to have been made by Yelin to Mr Jin of $100,000. 28Mr Jin denies liability under the guarantee. I was informed by Mr Baird (and Mr Li in the witness box confirmed that he was aware of the dispute in this regard) that Mr Jin disputes the authenticity of his signature on the relevant document). Mr Jin claims that, as at 31 December 2011, he was owed $602,848.72 by Yelin (for moneys lent to the company and interest thereon). He contends that the payment made to him of $100,000 in December 2003 was a payment made by Yelin in partial repayment of the earlier advances by him and not a loan by the company. (The claims by Mr Jin are the subject of the Fourth Cross-Claim in the Common Law Division proceedings.) 29Read in these proceedings (but only as evidence of the claim made by Mr Jin and the basis on which he asserts that claim, not as to the truth of what was asserted therein) was an affidavit deposed to on information and belief by Mr Jin's solicitor (Mr Penkin). Mr Penkin refers to Mr Jin's claim against the company as being based on the making, between about June 2000 and April 2003, by Mr Jin of a number of advances to Yelin and the transfer to Yelin his interest in two properties (the total so advanced being quantified at $1,076,969.00), in respect of which Mr Jin contends that repayments of $945,000.00 had been made by January 2004, leaving an amount of $194,089.94 plus interest outstanding. The interest component is what has increased the claim to over $600,000. 30On 8 July 2011, as noted earlier, an order was made for the winding up of Yelin (on the basis of the statutory presumption of insolvency arising from non-compliance with a statutory demand that had been served on the company). The debt claimed (being a debt for strata levies in respect of the building at Parramatta which had been the subject of the property development in which both Mr Li and Mr Jin were involved) was not large in amount and has since been paid. 31Yelin did not appear on the hearing of the Originating Process. Mr Li has deposed (in his affidavit sworn 6 December 2011) that he was overseas when the statutory demand was sent to the registered office of Yelin (that being the premises from which Mr Li's accounting business operates); that he was also overseas when the winding up application was before the Court; and that the matter only came to his attention after the winding up order was made. Mr Li says that had he been aware while he was overseas of the statutory demand and winding up application then he would have taken steps to address those matters. 32There is evidence from Mr Heng Cao, an accountant employed by Mr Li's accounting firm as to the circumstances in which he received and reviewed the company's mail during Mr Li's absence. He supports Mr Li's evidence that the mail in relation to the statutory demand and winding up application was not brought to Mr Li's attention during that period. There is also evidence by both Mr Li and Mr Cao as to the arrangements that have now been put in place to ensure that, in the future, documents received at the company's registered office are brought promptly to Mr Li's attention. Counsel for the applicants (Mr Golledge) thus submits that, although there has been a measure of inattention to the company's affairs, there is no evidence of commercial immorality or delinquency on behalf of the director in the sense in which that phrase is understood in cases dealing with applications such as this. 33On 3 August 2011, shortly after Mr Li became aware that a winding up order had been made, Mr Li filed the now superseded Notice of Motion. In that application, Mr Li described himself as a contributory but he accepts that he is not a shareholder (rather, he is the sole director of the company). The sole shareholder is Australia Shoppingtown. 34The liquidator has not yet called for proofs of debt and hence there has been no determination by the liquidator as to the claimed debts of either Mr Li or Mr Jin. 35By Deed Poll executed by Mr Li on 23 January 2012, expressed to be for the purpose of facilitating the termination of the winding up of Yelin, Mr Li has agreed (subject to and conditional upon the Court making an order to terminate the winding up of Yelin) to forgive amounts owing by Yelin to himself (in respect of director's loans recorded in the accounts of Yelin) and by Yelin to Jerry Li & Co Pty Ltd (Mr Li's accounting practice) for accounting fees). In cross-examination, Mr Li accepted that the amounts contemplated to be so forgiven include director's loans recorded as assets in his personal statement of financial position. 36It is not disputed that the sole trading activity of Yelin as at the date of the winding up was that of renting out the three commercial units it retained in the Parramatta development and that its sole income (other than interest payments under the September 2008 agreement) is derived from its ownership of those units. Its day-to-day expenses are connected with its holding of those units (including quarterly strata levies and mortgage repayments). 37Two charges are noted in the ASIC search of Yelin as registered over the assets of the company - one is registered by Westpac (formerly St George Bank), the other by Suncorp Metway Ltd. Mr Li's evidence is that the debts secured by those charges have been discharged. The only security presently on foot is the mortgage over the 3 commercial units securing the $468,000 loan. Mr Li has deposed that the mortgage repayments are up to date (and there is no suggestion that the mortgagee has made any demand that would indicate the contrary). 38Mr Golledge submits that any shortfall between the company's rental income (that having been reduced as a result of the fact that only one of the commercial units is presently tenanted) and the recurring liabilities for bank charges and council rates has to date been (and is able to be) met from the interest paid to Yelin by Mr and Mrs Li (pursuant to the September 2008 agreement) as interest on amounts due to the company by reason of it having discharged the debts of Mr and Mrs Li (together with those alleged to be owing by Mr Jin) as guarantors in respect of the St George bank loan. 39From a balance sheet position, leaving aside for the moment the disputed claims between the company and Mr Jin, Yelin has a surplus of assets over liabilities. It has real property assets with a present value of $665,000 (that being supported by a real estate valuation of the commercial units in evidence before me) on which the amount owing to the mortgagee is $468,000. The financial statements prepared for the year ended 30 June 2011 disclose a very modest profit before income tax of $8,146.12. 40As to Mr Jin's claim to be a creditor, Mr Golledge submits that (the only evidence having been led on Mr Jin's behalf being hearsay evidence by his solicitor as to his claims) the court can form no firm view as to whether it will ultimately be found that Mr Jin is or is not a creditor of Yelin. Application of legal principles to the facts 41A number of the factors to which consideration must be given can be fairly quickly addressed in the present case. 42As to the circumstances in which the company came to be wound up, an explanation has been given that, in my view, makes clear that there was inadvertence or inattention on the part of Mr Li's employee as to the import of the statutory demand and the winding up application. I accept that this indicates a failure at the administrative level within the company but that there now have been measures put in place to seek to avoid any repetition of the situation. I accept that explanation. (It seems to me highly unlikely that Mr Li would have arranged for payment of the liquidator's and creditors' costs if he were not determined to ensure that more care was taken in the future in relation to the timely payment of the company's debts.) 43As to the interest of the liquidator, his remuneration and expenses have been paid and he has consented to the orders sought (Exhibit B). As to the interest of contributories, the sole shareholder is pressing the present application. Thus, as Barrett J observed in Brolrik at [30], there is a clear statement by the contributory of what it sees as being in its best interests. 44As to the interests of creditors, those admitted creditors have been paid. There is hotly in dispute the status of Mr Jin as a creditor (or debtor) of the company. In Brolrik , at [32], Barrett J considered the position where a creditor's debt was disputed (though there the creditor was the petitioning creditor) and said: I have omitted from this list of relevant considerations Sambah's allegation that Brolrik is not in truth a creditor and was not entitled to serve the statutory demand on the basis of which the winding up order was made. That, on the evidence, is a matter of which those in charge of the affairs of Sambah were aware from the very beginning. It was, in fact, canvassed in correspondence between the respective solicitors after the statutory demand had been served. The appropriate course would have been to attempt to have the demand set aside. That is the proper avenue for raising issues about the genuineness of the debt claimed by the party moving for winding up. This is borne out by the discussion of the authorities by Palmer J in Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867. His Honour favoured the approach taken by Tamberlin J in Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411 over that of Heerey J in Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523. 45There having been no application to set aside the statutory demand in that case, Barrett J adopted what was said by Palmer J in Redglove that "if the debtor company fails to substantiate the dispute in the manner which is required by Pt 5.4 and, in particular, by s 459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s 459C, s 459Q and s 459S" and went on at [33] to say that: Once the statutory presumption of insolvency has arisen through non-compliance with a statutory demand which has not been set aside under the regime specifically designed to resolve disputes about the debt underlying the demand, that presumption stands unless, of course, rebutted by evidence. The importance of keeping such disputes within their appropriate forum and context is emphasised in the observations of Palmer in Redglove Holdings quoted above. 46Although Mr Jin's claim has not been substantiated (and although he was not the petitioning creditor and therefore the position is not on all fours with that in Brolrik ) it seems to me that unless it can be said on the material before me that this is not a bona fide claim (and that does not appear to be the case) the potential for a debt of this kind to be established should be taken into account in considering the solvency of the company as at today's date and the likelihood of its solvency in the near future. 47As to the public interest, there being no suggestion of any commercial immorality in the conduct of business on the part of the company, in the present case this turns on the question of solvency. I have noted above the recognition in a number of cases that it is contrary to the public interest to terminate the winding up of a company if, after termination, it would remain insolvent. 48In Brolrik , his Honour said at [31]: Finally, the court must consider the public interest. The main component of that interest in cases such as the present is that companies not shown to be solvent and financially stable should be left in liquidation so as to avoid risk and prejudice to those with whom they in future do business: Re Mascot Home Furnishers Pty Ltd [1970] VR 93; Re Data Homes Pty Ltd [1971] 1 NSWLR 338. There are also components which concern themselves with the possibility of breach of the law having been committed which a liquidator, as an officer of the court, would be bound to investigate ( Re Allebart Pty Ltd [1971] 1 NSWLR 24), but there is no suggestion of any such factor here. 49Other than the amount claimed by Mr Jin as his debt, there seems no reason to consider that the company is not (or would not remain in the future) solvent, having regard to the limited nature of its business operations, the agreement in place with its director by which interest payments are to be and have been made to the company, Mr Li's willingness to forgive debts owing to him by the company, and the likelihood that once the winding up was terminated the company could resume efforts to lease the vacant commercial units. 50Tendered in evidence on this application was an independent expert report dated 23 January 2012 prepared by Mr Geoffrey Stewart Turner, a chartered accountant who deposes to having some 27 years experience as a registered liquidator. Mr Baird objected to the admission into evidence of this report on the basis, first, that it did not make clear the witness' qualifications and expertise; and, secondly, that it does no more than adopt the director (Mr Li)'s report as to the affairs of the company. 51I accepted that the statement by Mr Turner that he had been involved, in his capacity as registered liquidator, in investigations into company trading while insolvent and unfair preference claims did not provide a basis on which one could test his expertise in this area. However, I considered that it could be inferred that a chartered accountant with 27 years' experience as a registered liquidator was in a position to review and explain financial statements (which is, in essence, what Mr Turner has done together with verification of certain of the income and expense items in the accounts). As to the second objection, I made clear that on my reading of the report, various of the parts to which objection was taken by Mr Baird were no more than Mr Turner's summary of what the directors' report as to affairs said. Read on that basis, there was a question of the weight to be accorded to the evidence but, at least insofar as Mr Baird had verified certain of the income/expense entries in the accounts, I considered that the report was admissible. 52Mr Turner had been provided with a real estate valuation of the commercial units owned by Yelin putting their value at $665,000 with a net market annual rental income of $49,500. (At present, only one of the three units is leased - the others are available for rent but there is an issue with the marketing of the property for lease while the company is in liquidation.) 53From a balance sheet perspective (and I accept that this is not the test for insolvency), the financial statements for 2011 (annexure 7 to Mr Turner's report) in summary show an estimated surplus of assets over liabilities of $62,084. The assets include "Other Debtors" of $924,130 (of which almost $400,000 is referable to the company's claim under the guarantee against Mr Jin - the balance representing, as I understand it, the company's corresponding claims against the other guarantors) and Accounts Receivable of $100,000 (that being the disputed loan to Mr Jin). There is no provision in the accounts for Mr Jin's claim against the company (quantified by his lawyers, including interest, at in excess of $600,000) although there is reference to the claim as a contingency in a note to the accounts. 54Note 13 to the accounts, headed "Contingency", refers to the claims of $399,866.80 and $100,000 as forming contingent assets out of the Other Debtors account and to a cross-claim by Mr Jin of $194,089.94 (as it was previously quantified by Mr Jin) as a contingent liability. The note itself draws attention to the fact that these amounts are not reflected in the accounts. (Mr Li, in cross-examination as to this, was adamant that the accounts had been properly prepared in accordance with accounting standards or practice and there was no suggestion to the contrary in Mr Turner's report.) 55Mr Turner confirmed in his report that he had sighted the valuations of the property and confirmed that he had verified the payment of the petitioning creditor's and liquidators' costs by Mr Li. He has also verified the amount referable to the trading activities of the company (by reference to the lease agreements, invoices and statements provided to him). 56As to the reference in the financial statements for the year ended 30 June 2011 to a shareholder's loan (referred to in the financial statements for the previous year as a director's loan) of $325,483.16, Mr Li confirms is a loan by him to the company that will be forgiven under the Deed Poll if the condition to which that Deed Poll is subject if satisfied. Mr Li's position is that the annual interest charges payable by the company on its mortgage ($45,788) are offset by interest payments paid under the September 2008 agreement. 57In evidence were extracts from the financial statements for the years ended 30 June 2003 (Exhibit 2); 2005 (Exhibit 3) and 2009 (Exhibit 4) from which it is apparent that the entries for the $100,000 account receivable did not appear in the accounts until sometime in the 2009 year and that the amount referable to the claim against Mr Jin under the guarantee also was only recorded in that year. The latter is perhaps not surprising since the repayment of the St George Bank loan (giving rise to the claimed right of subrogation to its rights under the guarantee) only occurred in 2009. (Emphasis was placed by Mr Baird, in relation to the former accounting entry, on the fact that the entry did not appear in the accounts until some time in the 2009 year though the amount said to have been the subject of the loan seems to be referenced back to a cheque provided to Mr Jin in 2003, but it is not appropriate for me to make any comment on that issue as it will be dealt with in the context of the dispute in the Common Law proceedings.) 58Mr Baird submits that on an examination of the balance sheet as at 30 June 2011, Yelin's claimed surplus of assets to liabilities depends largely upon the validity and collectability of the amount recorded for 'Other Debtors' ($924,170.08) and the other amount recorded of $100,000.00 as Account Receivable - No. 1; those amounts being partly or wholly in dispute and the subject of the Common Law proceedings in this Court. He also submits that there is no evidence as to the collectability of the balance of the $924,170.08 (which relates to Mr Li and his associate's two-thirds share of the guaranteed amounts). Mr Baird submits that neither ought to be taken into account as a current asset of the company when considering its liquidity and solvency, particularly on the cashflow test. (Insofar as Mr Li has proffered a guarantee to meet any shortfall in the company's ability to meet its debts as and when they fall due following termination of the winding up, Mr Baird notes that there has been no proposal to accommodate the position of Mr Jin as a creditor.) 59As to the collectability of the amounts claimed as liabilities of Mr Li (or his ability to service the interest repayments under the September 2008 agreement), there is evidence by Mr Li as to his total personal net assets (in the order of $1,999,333). Mr Li's statement of financial assets (largely unchallenged in cross-examination) includes an amount owing from Yelin as to the winding up costs met by Mr Li (of $42,886) and the director's loan of $325,483 (both of which Mr Li accepts will be forgiven, and hence no longer assets, if the Deed Poll comes into operation). An amount of $250,000 is shown as an amount owing to Mr Li by Australia Shoppingtown (evidenced by a letter of the company confirming that amount owing as being a loan from Mr Li to permit the company to settle an account with a Mr Xie). The Jerry Li & Co balance sheet as at 30 June 2011 notes current liabilities of shareholder loans exceeded by net assets of $223,370.19. 60In relation to the recorded profit before income tax of $8,146.12 for the financial year ended 30 June 2011, Mr Baird notes that Yelin's income consisted of interest and investment income of $40,053.71, an assets revaluation gain of $15,000.00 and profit from rental operations of $18,541.09. He submits that as no detail is provided as to the assets revaluation gain of $15,000.00, it is difficult to see how this item could be taken into account in considering solvency and liquidity. As to the item for interest and investment income, Mr Baird notes that this represents interest charges calculated at 8.75% on the above amount of $924,170.08 "after deducting the contingent amount $399,866.80 claimed from Mr Jin". (While Mr Baird submits that there is no evidence that this interest has been paid by any party and that it should not be taken into account in determining solvency, the September 2008 agreement imposes a liability on Mr Li (and for that matter Mr Kang) that Mr Li does not deny (and, insofar as he or his company appears to have met various of the expenses to date, there seems no reason to discount the availability of funds from that source). 61Mr Baird contends that, absent the two (non-cash) income items (of $15,000.00 for assets revaluation gain and $40,053.71 for interest), Yelin is not in receipt of sufficient income to pay both its bank interest of $43,112.00 and annual strata levies of $13,965.09 and hence that the applicants have failed to establish that the company is solvent within the meaning of s 95A Corporations Act or that there is a positive case for the favourable exercise of the Court's discretion. 62Mr Golledge submits that if all 3 units were rented at a market rental this would cover expenses (at least in relation to the mortgage repayments) and that in any event the supplementary income from interest payable by Mr Li meets any shortfall. Insofar as Mr Jin's status as creditor has not been established, it is submitted that, in assessing solvency, the debt claimed by Mr Jin should not be taken into account; alternatively, that as a matter of discretion the court should not refuse this application on the untested claim of Mr Jin. 63If Mr Jin is a creditor of the company in the amount claimed by him (and not liable to it under the guarantee that he disputes having signed and/or for the loan of $100,000 noted in the Accounts Receivable entry in the accounts) then it seems difficult to conclude otherwise than that there would be a substantial deficit of assets over liabilities. The arrangements between Yelin and Mr Li in the September 2008 agreement do not extend to the payment of such a debt on behalf of the company if it were to be established. (Although in Mr Li's affidavit in these proceedings he proffers a guarantee to be liable for the company's debts as and when they fall due if the winding up is terminated, it is not clear that this extends to Mr Jin's claimed debt and even if it did it would not on its face seem to be an undertaking enforceable by the company.) 64Without the income from Mr Li, the company would not presently be able to meet its debts as and when they fall due, at least not without realising some of its property (which may well not be immediately realisable depending on the property market of which there is no evidence, though I note that Mr Li in the witness box referred to the realisation of property assets in the past as a means of generating income) or enforcing the claims against Messrs Jin, Kang and Li. As to the latter, the claim against Mr Jin cannot realistically be seen as readily realisable since it depends on the outcome of the proceedings against Mr Jin. 65However, the financial support provided by Mr Li cannot be characterised as no more than voluntary support that could be withdrawn at any time. Mr Li has, and has acknowledged in these proceedings, an obligation under the September 2008 agreement to pay the interest that is relied upon by the company as meeting any shortfall in income for its day-to-day expenses. 66I note that in Lewis v Doran (2004) 208 ALR 385; (2004) 184 FLR 454; (2004) 50 ACSR 175; (2004) 22 ACLC 1009; [2004] NSWSC 608, at [112]-[116], Palmer J held that a company could be considered to be solvent on the basis that it had available to it, as a resource from which debts could be paid, ongoing support from related entities or the directors and which had historically resulted in those creditors actually being paid. 67The court must look to the "commercial reality" of the position in assessing solvency ( Lewis v Doran , at [106]-[112] and [119]). In Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 it was said that the issue of insolvency is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances. In New World Alliance Pty Limited, Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425, Gummow J, then in the Federal Court of Australia, considered that the situation must be viewed as it would be by someone operating in a 'practical business environment'. (So, for example, in Lam Soon Australia Pty Ltd v Molit (No 55) (1996) 70 FCR 34 where there was "financial support" from the parent company, this was sufficient to warrant a finding of solvency.) 68The commercial reality of the situation seems to me to be that this company is being supported by its sole director (and the principal of its sole shareholder) and that it is in a position to meet its day-to-day debts as and when they fall due with the benefit of that support. But for the prospect that the company may have a substantial liability to Mr Jin (the likelihood of which I am not in a position to assess nor is this something on which it would be appropriate for me to comment), I would have had no difficulty in concluding that solvency had been established for the purposes of this application and that the winding up should, in all the circumstances, be terminated. My concern, however, is that the prospect that the claim by Mr Jin may succeed means that a termination of the winding up at this stage may mean that, with hindsight, an insolvent company is permitted to re-enter the commercial world. While the company is a small company and its ordinary trading debts seem likely to be met in any event through the support of its director, the cases make clear that it is not in the public interest to permit such a situation to arise. 69This brings me to the tension between the very firm statements in the authorities that the winding up jurisdiction is not to be used for the resolution of disputed debts and the equally firm statements as to the public interest in an insolvent or potentially insolvent company not being permitted to re-enter the commercial world. In this context, Mr Golledge submits that Mr Jin is seeking to obtain a forensic advantage from the errors on the part of Yelin which led to the winding up order being granted (since Mr Jin would not, it is said, have been in a position to rely upon a statutory demand procedure in respect of his claimed debt which is clearly in dispute). I accept that in that sense Mr Jin is seeking now to preserve the position in which Yelin has found itself as a result of the inadvertence that led to the winding up order being made. However, that does not alter the fact that what I must now consider (as part of the application to terminate the winding up) is whether it is in the public interest to permit this company to return to the commercial world. 70In the present case, I accept that it is not in the public interest at this stage to terminate the winding up, since that would have the effect that a potentially insolvent company is able to resume its business operations. However, I consider that the public interest would be adequately protected if there were to be a stay of the winding up pending the outcome of the Common Law proceedings which are shortly to be heard. I do not consider it necessary to require Yelin (as the price of such relief) to make provision for Mr Jin's disputed debt, for the reason that the hearing of the proceedings in which that dispute is to be determined will occur in the very near future and it seems to me that Mr Jin's position can be protected by an undertaking that will preserve the assets of the company in the interim. In that regard, I have noted above the comments made by Barrett J in TQM Design and Construct as to the circumstances in which an undertaking would not be acceptable. The present case seems to me to fall within the exception his Honour there recognised. 71During the course of submissions I raised this as a potential outcome and invited the parties to reach agreement on the form of undertaking that might be acceptable to both if I were ultimately minded to grant a stay of the winding up. They have agreed on the form of such an undertaking as follows: Upon an order being made staying the winding-up of Yelin Group Pty Ltd (In Liquidation) ("the Company"), and until further order of the court, Xiongying (Jerry) Li and the company undertake not to dispose of, further encumber, deal with or diminish the value of any of the Company's assets including the properties located at Lot 27, Lot 28 and Lot 29 of 32 Hassall Street, Parramatta, New South Wales being title reference Lot 27 in SP70733, Lot 28 in SP70733 and Lot 29 in SP70733 respectively, except in the ordinary course of the Company's business including paying business expenses bona fide and properly incurred. 72With one qualification, I consider such an undertaking to be acceptable. The qualification is that, as Yelin is presently in liquidation, it is not open to Mr Li as its director to proffer an undertaking binding on the company and there is no suggestion that Mr Jones has given such an undertaking. However, as Mr Li is the controlling mind of Yelin (and of its sole shareholder, Australia Shoppingtown), I consider that an undertaking by Mr Li alone would be sufficient. To remove any doubt as to the position of Yelin in that regard, I consider that the undertaking by Mr Li should include an undertaking (upon the operation of the stay of the winding up) to procure a similar undertaking not to take the steps identified above from the company itself. Conclusion 73The solvency of Yelin is dependent on the outcome of the proceedings between it and Mr Jin that are listed for hearing very soon. I am not in a position (nor would it be appropriate for me) to make any comment as to the likely outcome of those proceedings. However, if Mr Jin's claim succeeds then the company would appear likely to be insolvent and I do not consider it in the public interest in those circumstances to make an order that would have the effect of permitting a potentially insolvent company to re-enter the commercial world. While I recognise the force of the cases in which an order staying or terminating a winding up is made subject to the provision for payment of the disputed creditor's debt, the provision of an undertaking would in this case adequately preserve the position pending a final determination of the status of Mr Jin as a creditor or otherwise. 74Accordingly, I make the following orders: 1.Upon the undertaking, which is hereby noted, of Xiongying (Jerry) Li not, until further order of the Court, to dispose of, further encumber, deal with or diminish the value of any of the assets of Yelin Group Pty Ltd (In Liquidation) ("the Company") (including the properties located at Lot 27, Lot 28 and Lot 29 of 32 Hassall Street, Parramatta, New South Wales being title reference Lot 27 in SP70733, Lot 28 in SP70733 and Lot 29 in SP70733 respectively), except in the ordinary course of the Company's business including paying business expenses bona fide and properly incurred, and subject to the further undertaking by Mr Li (on the operation of these orders) to procure a commensurate undertaking from the Company, I order that the winding-up of the Company be stayed pending judgment in proceedings no. 2007/260695 in this Court. 2.I grant leave under s 471B for Mr Jin to pursue the cross-claim brought against the Company in proceedings no 2007/260695 in this Court. 3.I stand over these proceedings until after the determination of proceedings no. 2007/260695 and give liberty to the parties to apply to restore the matter to the list for final orders after the determination of those proceedings. 75I will hear submissions, as necessary, from Counsel in relation to costs of this application.

In the matter of Yelin Group Pty Ltd - Li v Jin

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Cases Cited (21)