Metledge v Bambakit

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4915/03 MARY METLEDGE T/AS METLEDGE & ASSOCIATES V BAMBAKIT PTY LTD JUDGMENT 1 HIS HONOUR: The defendant ("Bambakit") is the registered proprietor of a property at 409-411 Princes Highway, Rockdale. Its sole director is Manuel Koutsourais. Its shareholders are Mr Koutsourais and a trust for his children. Mr Koutsourais is the proprietor of a business known as Rockdale Smash Repairs and Towing Services, which he conducts at the premises owned by Bambakit. 2 On 17 September 2003 the plaintiff (Ms Metledge) filed an originating process for orders that Bambakit be wound up and a liquidator appointed to it. According to the originating process, the application was made under ss 459A, 459C, 459P and 461 of the Corporations Act, "on the ground of insolvency". Sections 459A, 459C and 459P relate to winding up in insolvency, but s 461 relates to winding up on other grounds, including the "just and equitable" ground stated in s 461(1)(k). The originating process asserted that Bambakit had failed to comply with a statutory demand served on it on 14 August 2003. It attached a copy of the statutory demand. The statutory demand claimed payment of $34,750.21. 3 Two judgments were entered in favour of Ms Metledge against Bambakit, at the Local Court at Burwood. The first, on 12 August 2002, was in the sum of $15,230.55 for legal services. The second, on 13 August 2003, was in the sum of $18,145.15, for costs. The amount claimed in the statutory demand was the sum of these two judgments, plus interest on the first judgment from 13 August 2002 to 13 August 2003. 4 Bambakit has challenged the first of the two judgments, broadly on the ground that s 192 of the Legal profession Act 1997 (NSW) prevented Ms Metledge from suing for provision of legal services because she had not delivered an itemised account within the requisite period, and further on the ground that there was no waiver of the client's statutory right when Ms Metledge and Mr Koutsourais entered into an agreement for the payment of the amount claimed by instalments. 5 So far Bambakit's appeal has been unsuccessful. Its appeal from the Local Court's decision, lodged out of time but subsequently cured by an order in the Court of Appeal on 12 December 2003, was heard by Master Malpass on 28 March 2003. Bambakit appealed from that decision to a single judge of the Supreme Court, and its appeal was heard by Grove J who delivered his judgment on 19 May 2003. Grove J found that the appeal before him was incompetent. On 12 December 2003 Bambakit obtained leave to appeal to the Court of Appeal from the decisions by the Master and Grove J. But there has been no order staying the operation of the Local Court's judgment of 12 August 2002, and neither an appeal nor a stay of judgment in respect of the Local Court's judgment for costs of 13 August 2003. 6 The debt claimed in the statutory demand has not been paid. No application has been made to set it aside. Therefore the presumption of insolvency under s 459C(2)(a) has arisen. The presumption existed at the time of commencement of the proceeding, and it exists now. Bambakit has offered to pay the full amount claimed by the statutory demand into Court, as security pending the outcome of the proceeding in the Court of Appeal, and its solicitor now holds a bank cheque for that amount. Of course, this does not constitute an unconditional tender of payment. 7 The winding up proceeding came before Registrar Berecry for final hearing on 10 November 2003, on a contested basis. The Registrar, after reviewing the evidence before him, reached the conclusion that Bambakit had established that it was solvent, and accordingly on 13 November 2003 he delivered reasons for judgment and made an order dismissing the proceeding. The case was argued before the Registrar as a case of winding up on the ground of insolvency. In his reasons for judgment, the Registrar pointed out that he did not have jurisdiction to consider the case otherwise than on that ground. 8 In reaching his conclusion that Bambakit was solvent, the Registrar took into account that the company had recently received approval from the National Australia Bank for re-financing in the total sum of $600,000, which would enable it to pay out existing mortgages over the Rockdale property. Noting that expenses in respect of that property were met by Mr Koutsourais, the Registrar observed that as long as Mr Koutsourais forbore from demanding payment from the company, the company would be able to meet its debts from various sources as and when they fell due. The Registrar also took into account evidence of the value of the Rockdale property, which indicated that Bambakit had a remaining equity in the property of a significant amount. He referred to authorities (including Re Adnot Ltd (1982) 7 ACLR 212, at 216) to the effect that the company's available assets, for the purpose of determining solvency, are not restricted to cash resources immediately available, and extend to money procurable by realisation or mortgage or pledge of assets within a relatively short period of time. 9 The case now comes before me by interlocutory process, filed on behalf of Ms Metledge on 24 November 2003, for review of Registrar Berecry's decision under Part 61 rule 3 of the Supreme Court Rules, and for orders that Bambakit be wound up and a liquidator appointed to it. A review of a Registrar's decision under Part 61 rule 3 is a hearing de novo, rather than an appeal: Comalco Aluminium Ltd v Ohtsu Tyre & Rubber Co (Aust) Pty Ltd (1983) 8 ACLR 330. Ms Metledge relies on the ground of insolvency, and also on the just and equitable ground. Having heard the evidence of the parties, I have decided to set aside the Registrar's decision, and make orders that Bambakit be wound up in insolvency, and that a liquidator be appointed. Ms Metledge is unsuccessful on the just and equitable ground. 10 My conclusion on the insolvency ground involves no disagreement with the Registrar concerning the principles that he applied. I have not endeavoured to consider the evidence that was before the Registrar of 10 November 2003, so as to decide whether I would have analysed it in the same way and reached the same conclusion. My decision is based on the evidence before me at the hearing of the application for review, on 10 March 2004. That is the time for determination of the relevant facts: Royal Insurance Co Ltd v Sharp [1983] 1 NSWLR 480, at 488. Plainly some of the evidence before me was not before the Registrar, for the affidavits relied on by Bambakit were made after 13 November and I heard oral evidence from Mr Koutsourais. 11 Counsel for Bambakit drew my attention to the observations of Santow J (as his Honour then was) in Westpac Banking Corporation v Abemond Pty Ltd (unreported, NSWSC, 3 November 1994), to the effect that, although a hearing for the review of a Registrar's decision is a hearing de novo, it is desirable in practice to look for some proper basis for disturbing the decision under challenge, and there is a natural inhibition on unrestrained substitution of the reviewing Court's views for the body that has dealt with the case from the outset. I respectfully agree with Santow J's observations on these matters, but here I have been asked to determine whether Bambakit is solvent on the basis of evidence much of which was not before the Registrar, and my task is therefore to reach a conclusion in accordance with the well-established principles governing the concept of corporate solvency, on the basis of that evidence. The insolvency ground 12 The principal issue is whether, at the date of the hearing before me on 10 March 2004, Bambakit was solvent, that is, able to pay its debts "as and when they become due and payable": s 95A(1). In applying this test, it is appropriate to have regard to such cash resources as the company has or can command through the use of its assets: Sandell v Porter (1966) 115 CLR 666, 670-1 per Barwick CJ. Insolvency is presumed under s 459C(2)(a) because of the company's failure to comply with the statutory demand during the three months ending on 17 September 2003, the day when Ms Metledge made her application to wind the company up in insolvency. Therefore the main question is whether Bambakit has discharged the onus of proving its solvency in the statutory sense. If the Court finds that a ground for winding up exists, it nevertheless retains a discretion to decline to make a winding up order: s 467(1)(a). 13 Bambakit owns the Rockdale property and it does not trade. The uncontradicted valuation evidence of John Frape, a certified practising valuer employed by Egan National Valuers, is that the current market value of the property in February 2004 was $1.3 million, and the rental value was $1,622 per week. The land is zoned "Industrial 4(b)", a zoning which permits only light industrial use. The current automotive industrial use of the property does not comply with that zoning, although according to Mr Frape the property has existing use rights for continuation of its current use. There are no existing development approvals for redevelopment of the land. Mr Frape says that the property is well located on a corner with very good sight lines from the highway, but the workshop building on the land is in very poor condition and would probably require fairly extensive reconstruction to maximise its use. The current zoning would only allow rebuilding over a two level basis, and would not allow redevelopment for home units. The property is under the flight path to Sydney Airport, a fact that makes it fairly unattractive for residential or office use on the upper level. Mr Frape's opinion is that if the property were to be offered to the market for leasing, it would be advisable to expend a minimum of $50,000, presumably on repairs. 14 The evidence of Mr Koutsourais is that he is the tenant of the property from Bambakit under an informal unwritten tenancy. Although the evidence is vague and unclear, it appears likely that the tenancy is a tenancy at will, terminable by the landlord by a short period of notice. Termination of the tenancy is not in contemplation. 15 Bambakit's recurrent expenditure consists of the interest payments on the borrowings secured by the property (by far the largest item of expenditure), and other expenses related to the property, namely council rates, water rates, electricity and land tax. Under the tenancy arrangement Mr Koutsourais himself makes the interest payments direct to the first mortgagee, National Australia Bank. He also directly pays the other outgoings in respect of the property. His evidence is consistent with Bambakit's financial records. He produced evidence that he has paid land tax and water rates recently, but he did not produce evidence of payment of council rates. Notwithstanding that his records are incomplete and inadequate, I am prepared to accept the evidence of Mr Koutsourais that he does pay all outgoings in respect of the property under his tenancy arrangement with Bambakit. He says he intends to continue this arrangement for the foreseeable future. 16 Mr Koutsourais has provided no evidence of his personal ability to continue to make these payments. He has given the Court no financial information about his business, Rockdale Smash Repairs and Towing Services. While there is evidence that he has in fact met the interest payments and outgoings in the past, the evidence does not enable me to reach any conclusion about his ability to do so in future. Some doubt on that score arises from the fact (discussed below) that he has recently borrowed over $34,000 from his sister-in-law, apparently repayable on demand. There is no evidence as to the sister-in-law's attitude to repayment of that debt. 17 The financing arrangement with the National Australia Bank was offered by the Bank on 30 September 2003 and drawn down on 17 November 2003. It is secured by a registered first mortgage over the Rockdale property and a registered fixed and floating charge over the present and future undertaking of Bambakit, together with a personal guarantee by Mr Koutsourais. The financing has two components. The first is a bill facility with a limit of $500,000. The bills issued under the facility are 180 day bills. The interest rate for the time being is determined when the bills are rolled over, and that is next due to occur in May 2004. The facility is in place for three years from September 2003 and only interest is payable until that time. On 8 March 2004 Bambakit's debt under the bill facility was $485,781.38. It appears that the drawdown was used to discharged Bambakit's previous mortgage to IMB Building Society, the financing that was in place when the case was before the Registrar. Mr Koutsourais gave evidence that he replaced the IMB financing because the Bank offered a better interest rate. 18 The second financing component in Bambakit's arrangement with National Australia Bank is an overdraft facility of $100,000. On 8 March 2004 the debt on the facility was $90,375.37. 19 Bambakit's application to the Bank for the financing it has obtained is not in evidence, notwithstanding that a notice to produce it was given. Mr Koutsourais has not informed the Bank of the existence of the present winding up proceeding against Bambakit. Under the terms of the Bank's bill facility letter of offer, clause 17, following are included as events of default: · if an order for payment is made or judgment is entered or signed against Bambakit and not satisfied within seven days (clause 17(d)); · if, in the opinion of the Bank, Bambakit becomes unable to pay its debts, or the assets or position of Bambakit is not sufficiently maintained (clause 17(e)); · if Bambakit fails to make any payment when due, or within any applicable period of grace, in respect of any financial obligation or any such obligation shall, by reason of default on the part of Bambakit, become due or capable of being declared due prior to its stated maturity; (clause 17(f)); · if an application is made for the winding up of Bambakit (clause 17(i)(ii)).

20 According to clause 18 of the letter of offer, if an event of default occurs the Bank shall have the right to serve a notice of termination of the facility on Bambakit, one of the consequences of which being that all monies owing become immediately due and payable. By clause 15(a) Bambakit has warranted to the Bank that there is no proceeding pending before any Court which may result in the letter of offer being rendered invalid or unenforceable, and by clause 16 Bambakit has confirmed by requesting the bank to accept bills that at that time no event of default had occurred.

21 These provisions suggest, having regard to the existing proceeding and the unpaid judgment debts in favour of Ms Metledge, that the Bank is presently entitled to serve a notice of termination causing all monies owing to it under the facility to become immediately due and payable. There is no evidence as to the Bank's attitude, because according to Mr Koutsourais the Bank has not been informed of the present proceeding. There is some general similarity, in this respect, between the present case and Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711, especially at 721-2. The approach I take is the approach adopted by Santow JA (with whom Meagher and Handley JJA agreed) in that case. 22 For approximately the last ten years Mr Koutsourais has had in place a debt factoring arrangement with MBR Financial Services Pty Ltd ("MBR"). It appears that there is a written factoring agreement. The document is not in evidence, but Mr Koutsourais and Mr Palisi of MBR have given evidence about it. Under the arrangement MBR advances to Mr Koutsourais the amounts due to him on the invoices he renders (typically to insurance companies) for panel beating work, less its commission of 3%. The debts are assigned to MBR and the debtors are notified of the assignments. Under the arrangement Mr Koutsourais is obliged to buy back any debts not paid by the debtors within 90 days after the factoring. 23 The exposure of MBR under the factoring arrangement, up to $100,000, is secured by an unregistered mortgage over the Rockdale property, protected by a caveat. The mortgage is in evidence. On its face, it records an amount advanced by MBR to Bambakit. However, the oral evidence of Mr Koutsourais and Mr Palisi is that there was no advance by MBR to Bambakit, but instead Bambakit guaranteed Mr Koutsourais' obligation to MBR under the factoring arrangement up to $100,000. Although Mr Palisi seemed in his evidence to be confused as to whether the smash repair business was conducted by Bambakit or Mr Koutsourais personally, the assertion that Bambakit was a guarantor rather than a direct borrower seems to me to be more consistent with the business structure and the factoring arrangement as a whole, and I accept it notwithstanding its inconsistency with the terms of the mortgage. Mr Palisi gave evidence that in the ten years that he has been dealing with Rockdale Smash Repairs and Bambakit he has never had cause call in or use any security MBR holds, and he does not anticipate that at any time in the future MBR will be realising its security over Bambakit's property. 24 Bambakit's balance sheet and profit and loss account for the years to 30 June 1999, 2000, 2001, 2002 and 2003 are in evidence. They are highly unsatisfactory documents. According to the profit and loss statement for the year ended 30 June 2003, the company made a loss of $3,047, and there were accumulated losses of $112,879. Evidently the figures given are net figures, and no particulars whatever are given. Specifically, there is nothing to show rental income received from Mr Koutsourais or expenses such as interest and outgoings with respect to the property. The balance sheet shows current assets of $105,160 comprising only "receivables" noted to be "other debtors", with no other particulars. There is an asset revaluation reserve of $569,555 but nothing to explain how it is made up. A non-current liability for secured loans of $500,000 is shown, presumably identifying the borrowing which was then from IMB Building Society. The contingent liability to MBR in respect of the factoring arrangement is omitted. No current liabilities are shown. The financial statements for the previous years are similarly uninformative. 25 Mr Koutsourais did not cure any of these deficiencies in his oral evidence. The accountant who prepared the financial statements did not give evidence. 26 Bambakit's tax returns for the 2002 and 2003 tax years have been prepared, but only recently. The evidence of Mr Koutsourais is that the delay in preparation of the tax returns was the result of deterioration in his health from around 1998, as well as documents being placed in storage between 2000 and 2002 due to a problem with termites in the property which has since been rectified. 27 Mr Koutsourais has given evidence that Bambakit has no other creditors, apart from the Bank and MBR and Ms Metledge. I accept that evidence, subject to consideration of the question of liability for goods and services tax. 28 Bambakit has an Australian Business Number and may be liable to pay goods and services tax in respect of the rent it receives by virtue of Mr Koutsourais paying its outgoings. No GST returns have been lodged on behalf of Bambakit at any time. I was informed from the bar table that GST is not payable on the first $40,000 of turnover per annum in the circumstances applying to Bambakit. The evidence indicates that in the years since the GST began, Bambakit's rental income has exceeded $40,000 only once, in 2003. In that year interest expenses were $41,389 and other expenses were $1,300. My conclusion, on the evidence before me, is that if any GST is payable by Bambakit, it is of such a small amount that it does not affect the solvency of the company. 29 Counsel for Bambakit submits that the company's current debts are in the order of $125,125.58; that is, the sum of its debts under the overdraft facility and to Ms Metledge. He contends that Bambakit's liability to MBR under the unregistered mortgage, a contingent liability as guarantor, and its debt under the bill facility to the National Australia Bank, should properly be characterised as non-current liabilities, which are not presently or about to become due and payable. I agree that it is appropriate to treat the liability to MBR as a non-current liability under which nothing is presently, or about to become, due and payable, having regard to the evidence of Mr Palisi, which I accept. However, I do not accept that the debt due to the Bank under the bill facility is to be characterised as a non-current liability, having regard to the terms of the loan facility agreement to which I have referred, which suggest that is open to the Bank to call up the debt immediately. There is no evidence that the Bank has taken any steps to call of the debt; but on the other hand Mr Koutsourais has not informed the Bank of the present proceeding and it may therefore be that the Bank presently has no knowledge of facts that appear to give it the right to demand immediate payment. 30 Counsel for Bambakit submits that the Rockdale property secures liabilities of, at most, $700,000; that is, the bill facility and overdraft which together have a limit of $600,000, and the liability of $100,000 to MBR. He submits that, on the assumption that a bank would lend 70% of the value of the property (an assumption said to be supported by the evidence that the Bank's "Interest Concession Qualifying Criteria" include the requirement that the total amount outstanding does not exceed 70% of the assessed market value of the property, and relying on Mr Frape's valuation of the property at $1.3 million, a further borrowing of $210,000 would be available. I have difficulty with that submission. Bambakit has led no evidence that a vendor would be willing to make any additional loan on the security of the Rockdale property. It has not put into evidence its application for finance made successfully to the National Australia Bank, and so there is nothing before the Court to indicate what information the Bank took into account in deciding to make the present loan facilities available. Mr Frape's valuation, which is evidence read by Bambakit, demonstrates that there would be some difficulties in realising the property, not least of which are the zoning restrictions and the likelihood that substantial expenditure would be needed before marketing. If it be the case (as appears likely) that there is a current event of default entitling the Bank to demand immediate payment of money advanced under the bill facility, that fact may dissuade a financier from providing additional funding. On the evidence before me now, I am unable to conclude that Bambakit would be able to make any further borrowing on security of the Rockdale property. 31 That conclusion appears to be reinforced by the fact that, on 9 March 2004, Mr Koutsourais gave affidavit evidence that he had been able to source additional funds on behalf of Bambakit, equal to the amount claimed in the statutory demand. The statutory demand was made in August 2003. It is not disputed that the amount that it claims, being based on two Local Court judgment debts neither of which has been stayed, is due and payable. Even allowing for the fact that Mr Koutsourais disputes the entitlement of Ms Metledge to recover the amount demanded (or at least, part of it), it ought to have been obvious to him well before 9 March 2004 that the prospect of avoiding the winding up of Bambakit would be improved if payment of the debt was secured. If, as Bambakit contends, it can finance payment of all its debts as and when they become due and payable by borrowing against the Rockdale property, one would have expected a further borrowing against that property to cover Ms Metledge's claim, well before 9 March 2004. In fact, according to the evidence of Mr Koutsourais in cross-examination, the money that he was able to "source" on 9 March 2004 was borrowed from his sister-in-law, apparently repayable on demand. The fact that Mr Koutsourais resorted to a "family" source of finance, and did so at the last-minute, tends to reinforce the doubt, created by Mr Frape's remarks about the marketability of the property, as to the availability of further funding against the property. 32 Counsel for Bambakit submitted that the company could meet its interest payments and outgoings from a market rental of $1,622 per week, the rental value of the property according to Mr Frape's evidence. There is, however, no suggestion that the property will be leased at a market rental. I therefore do not regard the rental value of the property as providing any assistance on the question of solvency in fact. The just and equitable ground

Ms Metledge contends that even if Bambakit is solvent, it should be wound up on the just an equitable ground provided for in s 461(1)(k). She submits that: (a) Bambakit has failed to maintain proper financial records as required by s 286; (b) the company has failed to make a proper reply to her notice to produce, by failing to produce full records of its expenditure on outgoings, its arrangement with MBR, and its application to the National Australia Bank for loan approval, or any aged debtor and creditor ledgers; (c) Bambakit prepared income tax returns only very recently; (d) the company's records do not record any returns having been lodged or payments made in respect of goods and services tax, since the beginning of the tax. 33 The facts before me do not warrant a finding that Bambakit has failed to keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited, as required by s 286. The company's financial statements are deficient in the ways that I have identified, but as far as one can tell, it appears to be a "small proprietary company" for the purposes of s 45A and Part 2M.3 and is therefore not required to prepare a financial report and directors' report under the Corporations Act. If that analysis is correct, the deficiencies in the financial statements do not lead to any contravention of the Act, except to the extent that they may be misleading. Section 286 relates to the financial records upon the basis of which financial statements are prepared. Although there was an inadequate response to the notice to produce issued by Ms Metledge, the evidence of Mr Koutsourais was that records that were not produced were provided to his solicitors and he left the preparation of the financial statements to his accountant. 34 Late lodgement of income tax returns, which have now been prepared up to date and may have been lodged, and failure to lodge returns for the purposes of the goods and services tax where it appears that liability to the tax may be limited to a small amount in one year, do not in themselves warrant an order for winding up on the just and equitable ground. 35 My conclusion, therefore, is that the basis for order on the just and equitable ground has not been established on the facts (cf International Hospitality Concepts Pty Ltd v National Marking Concepts Inc (No 2) (1994) 13 ACSR 368). 36 Counsel for Bambakit raised two other issues in opposition to such an order. First, he contended that it was not open to Ms Metledge to rely upon the just an equitable ground because the originating process referred only to winding up Bambakit "on the ground of insolvency". On the other hand, I note that the originating process expressly mentioned s 461 as well as the statutory provisions dealing with the insolvency ground. 37 Secondly, he contended that, because Registrar Berecry did not have power to determine whether a winding up order should be made on the just and equitable ground, there can be no power to make such a determination on a review of his decision. On a review, according to Bambakit's counsel, the Court effectively stands in the shoes of the Registrar, and while it may receive additional evidence and arguments, it is limited to exercising the Registrar's powers and no more. Counsel relied on the following cases: Builders Licensing Board v Sperway Constructions (Syd) Pty Ltd (1976) 135 CLR 616, 619 per Mason J; Baines v State Bank of New South Wales (1985) 2 NSWLR 729,736 per Powell J; Turnbull v New South Wales Medical Board [1976] 2 NSWLR 281,286-7 per Street CJ; Beaufort Air-Sea Equipment Pty Ltd v Emhart Australia Pty Ltd (Supreme Court of New South Wales, Malpass M, unreported, 18 December 1992); Westpac Banking Corporation v Abemond Pty Ltd, supra. 38 Given the conclusion I have reached on the facts, it is unnecessary for me to reach a decision on either of these grounds. The second ground raises some difficult and unresolved questions, and is best left to be decided when it is necessary to do so. Discretion 39 Counsel for Bambakit submitted that, if the Court were satisfied that a ground for winding the company up had been established, the proceeding should be stood over to 14 days to give Bambakit time to pay the debt referred to in the statutory demand. This submission was made on the basis that the amount of the debt is relatively small, no other creditors have sought a winding up order in relation to Bambakit, and but for the debt Bambakit would be clearly solvent. 40 I have decided to reject this submission and, in the exercise of my discretion, make a winding up order. The statutory demand was served in August 2003 and no unconditional tender of payment has been made since that time. It was open to Bambakit to make an unconditional tender of payment rather than a conditional offer of payment into court, at the hearing on 10 March 2004, but it did not do so. The appeal proceedings relate to the first judgment debt and they do not appear to relate to the second debt. It is not clear on the evidence that if the debt to Ms Metledge were paid, Bambakit would be clearly solvent. That would depend upon the rights of the National Australia Bank under its security documents and the question whether the Bank, if it has rights of intervention, would exercise them. It would also depend on the attitude of Mr Koutsourais' sister-in-law to the enforcement of her debt. There is no evidence of the attitude of these creditors. Conclusions 41 I have therefore decided that the appropriate course is to make an order for the winding up of Bambakit on the ground of insolvency, and to appoint a liquidator accordingly. I shall hear the parties with respect to costs. **********

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