Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd

Background

1. By way of background, Lewis Paints was incorporated on 4 June 1987 and at all relevant times, has been a company of which Mr Lewis has been the sole director, shareholder and secretary. Prior to 8 June 2015, Lewis Paints was referred to as Porter's Paints Pty Ltd. The company carried on business in relation to the manufacture and supply of specialty paint products and flooring to the business industry. In or about June 2015, the business was sold to DuluxGroup Australia Pty Ltd (Dulux) and it was around that time that the name of the company was changed to Lewis Paints. Since about 2016, Lewis Paints has ceased to make or supply paints and has not traded; however, both before and after the sale to Dulux, Lewis Paints operated as part of a family-run group of companies in which the only relevant directors were Mr Lewis and his wife.
2. In 1991, Lewis Paints was appointed as the trustee for the Umango Holdings Superannuation Fund (Umango Fund), a position that it held until April 2015 when it was replaced by another company in the group, Umango Nominees Pty Ltd. Mr Lewis and his wife and children are members of the Umango Fund and there is evidence that Mr Lewis draws from it an annual tax-free pension (see Mr Lewis' affidavit at [12], [16] and [45]-[46].)
3. In 1997, another company, Serandon Pty Ltd (Serandon), was incorporated (with Mr Lewis as its sole director, secretary and shareholder) and it was appointed shortly thereafter as trustee of the Lewis Unit Trust. Relevantly, Serandon owns real property in Leichhardt (which is mortgaged to the National Australia Bank (NAB)) and has lent Lewis Paints the sum of $95,573, which is recorded in the Lewis Paints balance sheet as a "non-current liability", and I will return to that in due course. Mr Lewis owns a number of real properties from which he procures rental income. Umango Property Pty Ltd, another company associated with Mr Lewis, owns commercial property in Mascot for the benefit of the Umango Fund and earns rental income on that property.
4. The circumstances leading to the winding up of Lewis Paints relate to a disputed amount by way of fees rendered by an accounting firm, Clark Jacobs (trading as Ecovis Clark Jacobs), which had provided accounting services to Lewis Paints for a period of years. There was apparently a dispute in relation to a particular invoice rendered by the company; and it was in the context of the non-payment of that invoice, that a creditor's statutory demand dated 31 October 2019 was served on Lewis Paints in the sum of $6,500 plus interest, bringing the total amount demanded to $6,692.20.
5. The creditor's statutory demand was served on the registered office of Lewis Paints, which was the same address as Mr Lewis' residential address, but (relevantly for the purposes of Mr Lewis' evidence as to his lack of knowledge of the statutory demand at that time) it appears that Mr Lewis was or may have been overseas or away at that particular time. Following service of the statutory demand and its non-payment, there was an application made for the winding up of the company. The originating process was filed on 12 January 2020 and that was similarly served at the registered office of the company, but again no one was apparently in attendance at the residential premises on that occasion. An order for the winding up of the company was in due course made on 20 February 2020.

Determination

1. The present application is brought by Mr Lewis, in his capacity as a contributory of the company (he being the sole shareholder of the company), and an order is sought pursuant to s 482(1) of the Corporations Act, as I have indicated above. That section provides that, at any time during the winding up of a company, an order may be made staying the winding up either indefinitely or for a limited time, or terminating the winding up on a day specified in the order.
2. The power to terminate a winding up under s 482(1) of the Corporations Act is discretionary. The relevant factors generally informing the exercise of the discretion on an application to terminate the winding up have been set out in a number of cases (see, for example, Re On Q Group Ltd (ACN 009 104 330) (in liq) (subject to deed of company arrangement) (2014) 104 ACSR 470; [2014] NSWSC 1428; Re Glass Recycling Pty Ltd [2014] NSWSC 439 (Re Glass Recycling); In the matter of MWM Sydney Pty Limited (in liquidation) [2016] NSWSC 688; Re Rainbow Carlingford One Pty Ltd (in liq) (ACN 604 122 054) (2019) 140 ACSR 435; [2019] NSWSC 971 (referred to in Austin & Black's annotations commentary on s 482 of the Corporations Act)).
3. Counsel for the applicant on the present application has addressed the guidelines set out in Re Warbler Pty Limited (1982) 6 ACLR 526; (1982) ACLC 323 (Warbler), the usefulness of which was noted by Palmer J in the matter of Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 at [13]; and cited with approval by Brereton J, as his Honour then was, in Re Glass Recycling.
4. Those guidelines are that: the applicant must make out a positive case for the favourable exercise of the discretion; the applicant must show the nature and extent of the creditors and whether or not all debts have been discharged; the attitude of creditors, contributories and the liquidator is a relevant consideration; the applicant must show the current trading position and general solvency of the company; the applicant must explain any non-compliance with statutory duties by the directors; the applicant must explain the general background and circumstances leading to the winding up order; and the applicant must show the nature of the company's business and whether or not the conduct of the company was in any way contrary to "commercial morality" or "the public interest".
5. In Re Glass Recycling, Brereton J said: Essentially, on such an application, the Court must be satisfied, first, that the state of affairs that required that the company be wound up no longer exists. Where the winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent. This is usually the most significant consideration… Thus it has been said that an order terminating the winding up would usually be made if all the creditors are paid out, the liquidators' costs and expenses are covered, and the members agree… [Emphasis added]
6. Emphasis is placed by the applicant in the present case on his Honour's recognition that an order terminating the winding up will usually be made if all creditors are paid out, the liquidator's costs and all expenses are covered, and members have agreed. Reference is also made by the applicant to Black J's decision in In the matter of Beauvale Nominees Pty Ltd (in liq) [2019] NSWSC 1903.
7. As to the relevant factors set out in Warbler, those are addressed as follows. As to the nature and extent of the company and whether all debts have been discharged, reference is made to the affidavit of Mr Filippello, and in particular to the liquidator's report to creditors. This report indicated that the only outstanding creditors in the winding up were AGL (for a relatively small amount) and Clark Jacobs; and it has been confirmed by the liquidator that those amounts have been paid out. There is a non-current liability to which I have referred, that being the liability of $95,573 shown in the balance sheet of Lewis Paints.
8. Mr Filippello has addressed in his affidavit evidence the foundation for the opinion he has formed as to the current solvency of Lewis Paints, based on documents received from the former accountant, Clark Jacobs, and on documents and information obtained by him through the performance of accounting and taxation work for Mr Lewis, his family members, and other members of the group.
9. Reference is made to s 95A of the Corporations Act which sets out the test for insolvency and to the principles stated by Black J relevant to the finding of insolvency in In the matter of Humur Pty Limited [2020] NSWSC 1759 at [18]. It is submitted, by reference to the evidence by Mr Filippello, that none of the indicia of insolvency is present in this case (save for the fact that one GST remittance was paid late).
10. It is accepted that the fact that Lewis Paints was wound up was a relevant consideration. However, it is submitted that this was due to inadvertence on the part of Mr Lewis in that the correspondence addressed to Lewis Paints in relation to the winding up application and the statutory demand did not come to his attention. It is submitted that this inadvertent non-payment to Clark Jacobs occurred in circumstances where Mr Lewis considered that the dispute with Clark Jacobs had effectively been resolved and was awaiting particular documentation (see Mr Lewis' affidavit in relation to those matters).
11. The affidavit evidence on the present application sets out the principal assets of Lewis Paints, those being Division 7A loans to both Mr Lewis' wife and Mr Lewis; and unsecured loans to an Italian company in relation to a "bed and breakfast" business of which Mr Lewis is a director. The non-current liability to Serandon arising from a loan which, as at 30 June 2019, was in the amount of $95,573 is stated, as is the receipt of income in the form of interest repayments made in reduction of the Division 7A loan as well as the existence of tax deductible expenses and tax losses going forward.
12. Lewis Paints has lodged its tax return for the financial years ending 30 June 2018 and 2019, as prepared by Rosenfeld Kant & Co in consultation with the liquidator's staff; and the liquidator has confirmed that no tax liability arises from those returns. The most recent financial statement for Lewis Paints, and for the year ended 30 June 2019, shows a net asset position of $6,666,281 and the receipt of income, constituting a net property which reveals that the company was cash flow positive at that time. Incomplete accounts have been prepared showing the balance sheet position as at March 2020, which similarly shows a cash flow positive position and net positive equity in the company.
13. Mr Filippello, in his affidavit, has deposed to the due repayment of the Division 7A loans by both Mr Lewis and his wife for the period from 2016-2020, and as to the capacity of Mr Lewis to continue to make those repayments based on a number of matters.
14. First, as to Mr Lewis' capacity, which Mr Lewis has exercised in the past, as Lewis Paints' sole director to make resolutions for Lewis Paints to issue dividends which can be set off against the Division 7A loans.
15. Second, as to Mr Lewis' capacity to make cash payments on behalf of Lewis Paints by drawing down on NAB loans available personally to him (and there is evidence that this has also been done in the past). Reference is made to Mr Lewis' affidavit in that regard which demonstrates that there is a further amount of approximately $1.8 million which he is capable of drawing down from his existing NAB loan and which is available to him, if necessary, to pay Lewis Paints. (See Mr Lewis' affidavit at [13] and [76].)
16. Third, Mr Filippello relies upon the fact that Mr Lewis is entitled to draw a tax-free pension from the Umango Fund, if he so wishes (see Mr Filippello's affidavit at [98] and [105].)
17. Fourth, that Mr Lewis has available to him rental income from his various investment properties (which, in his return for the financial year ending 2019, was a net $58,161).
18. In Mr Filippello's assessment of the financial position of Lewis Paints, he places minimal weight on the non-current liability of $95,573 to Serandon, particularly in circumstances where Mr Lewis is its sole director. Mr Lewis has deposed in his affidavit that he would not cause Serandon to call upon the loan unless Lewis Paints could pay it without difficulty. (See Mr Filippello's affidavit at [62]-[75] and Mr Lewis' affidavit at [21]-[22].) Mr Filippello has assumed that, in circumstances where Mr Lewis has previously made funds available to Lewis Paints and Serandon, Mr Lewis would do so again, if necessary (see Mr Filippello's affidavit at [69]-[71] and [75].) It is submitted that this is consistent with the interrelated and supportive way in which the group, Mr Lewis and his wife have operated to date. Reference is made to Mr Lewis' confirmation in his affidavit at [39] that he will continue to make such funds available, if necessary, if the winding up is terminated.
19. Mr Filippello's opinion as to solvency is based on two assumptions: first, that Lewis Paints has no current liabilities to suppliers, including trade creditors which have registered security interests in the Personal Property Securities Register (PPSR)(and there is, as part of the exhibit to his affidavit, a PPSR search which demonstrates that there are no such security interests); second, that Lewis Paints will continue to have access to funding sourced from Mr Lewis in the form of his tax-free pension from the Umango Fund and borrowing from NAB, another lender (and, as noted, Mr Lewis has confirmed that he will make those funds available, if necessary - see [39] of his affidavit).
20. I am satisfied that there is sufficient evidence to show the nature and extent of the company's creditors and, in particular, that there are no currently outstanding creditors.
21. As to the attitude of creditors, contributories and the liquidator, Clark Jacobs has confirmed that it has no opposition to the termination of the winding up, and, similarly, the liquidator does not oppose the termination of the winding up (and there is evidence that the liquidator's fees have been paid). There was representation on behalf of the liquidator on the hearing of this application, and the liquidator's position in that regard was confirmed.
22. An enquiry was made to ASIC as to ASIC's position but, in accordance with its current guidelines, ASIC does not comment on applications of this kind. Nevertheless, there is nothing to suggest that ASIC would oppose the termination of the winding up in the current circumstances.
23. As to the current trading position of the company, the company does not trade and does not intend to trade. I have referred above to the evidence as to its solvency.
24. It was noted in Warbler that, ordinarily, the applicant must provide a full application of any noncompliance by the directors of their statutory duties. There is no evidence here of non-compliance with statutory duties, save that I was taken to a reference in the liquidator's initial report to creditors dated 18 May 2021 in which it was said that there might be issues in relation to breach of ss 180 or 286 of the Corporations Act.
25. As to the former, the only issue appears to be the issue in relation to inadvertence of the company, and a lack of a regime in place to ensure that the company directors would be aware of materials relevant to the company when served. However, Mr Lewis has given evidence that, if the company's winding up is terminated, then he proposes to change the registered office of the company to the address of its current accountants (Rosenfeld Kant & Co) to ensure that important documents such as legal processes do come to the attention of the company, and to continue to ensure that financial statements and income tax returns are prepared and lodged in a timely way. There is no suggestion that financial statements and income tax returns have not been lodged in a timely way in the past.
26. As to the latter, there is no material to suggest that s 286 of the Corporations Act would be enlivened. It appears that Mr Lewis was liaising with the liquidator in relation to the provision of information and records; and the reference to a potential breach of this section was simply a reflection of the fact that the liquidator had limited information as at that time in relation to the financial records of the company. Certainly, the final liquidator's report in May does not indicate any concern in relation to breach of statutory duties by the directors.
27. As to an explanation for the general background and circumstances leading to the winding up, that has been set out above and was provided in the affidavit evidence.
28. The final of the relevant factors referred to in Warbler is as to the nature of the company's business and whether the conduct of the company is in any way contrary to the commercial morality or the public interest. There is nothing to suggest the latter and, as I have noted, the company does not trade. Its main purpose is to operate as part of the group in which it primarily loans moneys and is a significant creditor.
29. In summary, it is submitted for the applicant that the winding up should be terminated in circumstances where it has been established that Lewis Paints is not insolvent and the judgment debt which founded the winding up order resulted because Lewis Paints incorrectly believed it had all but paid a minor creditor, and subsequently, correspondence resulting in the winding up did not come to the attention of Mr Lewis. No material issues as to Mr Lewis' conduct of compliance with his duties here arise.
30. Mr Lewis has given evidence explaining the inadvertence which led to the winding up, and has undertaken to change the registered address of Lewis Paints to ensure it does not happen again. The petitioning creditor Clark Jacobs has been paid out all its outstanding liabilities, and does not oppose the termination of the winding up. Lewis Paints does not have any other creditors whose debts are due and owing. ASIC does not oppose the application, although, as noted, in accordance with its current practice it has not given a formal indication in that regard.
31. The sole director and shareholder Mr Lewis supports the termination of the winding up, and the liquidator does not oppose it. There are no outstanding costs payable or which will become payable to the liquidator, and Mr Lewis continues to be prepared to be the director of Lewis Paints if the winding up is terminated. Mr Lewis confirms there is no intention for Lewis Paints to trade, rather than to continue to operate as part of the company group as indicated above.
32. In all the circumstances, I am satisfied that an order should be made to terminate the winding up.

Orders

1. For the above reasons I make the following orders: 1. Order pursuant to s 482(1) of the Corporations Act 2001 that the winding up of the defendant company be terminated with effect from today from the making of this order. 2. There be no order as to costs. 3. These orders be entered forthwith.

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: 09 August 2021