Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675; Fire and All Risks Insurance Co Ltd v Southern Cross Exploration NL (1986) 4 ACLC 447; Re DTX Australia Ltd (1987) 11 ACLR 444, 5 ACLC 337; Garreffa Holdings Pty Ltd v Damen Pty Ltd [1998] WASC 147; Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, distinguished.

Mercantile Credits Ltd v Foster Clark (Australia) Ltd [1964] HCA 66; [1965] ALR 574 at 575, referred to.

Judgment Number: [2000] TASSC 99

1 The applicant has applied for an order that the respondent be wound up in insolvency. As at 27 September 1999, the respondent owed the Commonwealth $288,766.89 in respect of (a) tax instalment deductions relating to its employees' earnings for most of the months from April 1998 to April 1999, (b) additional tax for the late payment of such tax instalment deductions, (c) unpaid sales tax for the period from 1 April 1998 to 30 April 1999, (d) additional tax for the late payment of such sales tax, and (e) superannuation guarantee charges for the years ended 30 June 1993 to 30 June 1998 inclusive. Apparently the company did not make superannuation payments in respect of its employees to any superannuation funds over a six year period, but instead paid its employees the amounts that it should have paid to superannuation funds. On 27 September 1999, a statutory demand for the said debts was served on the company by post pursuant to the Corporations Law, s459E. There is no evidence as to when the demand was delivered by the postal authorities to the registered office of the company. By virtue of the Corporations Law, s109Y(b), service must be taken to have been effected at the time when the demand would have been delivered in the ordinary course of post. That provision prevails over the Evidence Act 1995 (Cth), s160: Howship Holdings Pty Ltd v Leslie [1996] NSWSC 314; (1996) 41 NSWLR 542 at 547 - 548. The demand was mailed at 3.05pm on a Monday. As it was mailed by a public servant based in Hobart, I infer that it was mailed in Hobart's central business district. It was sent by ordinary post to the company's registered office, which is in Hobart. I take judicial notice of the fact that such mail, if posted during business hours, is ordinarily delivered on the business day after posting. I therefore take service to have been effected on 28 September 1999. The demand required the company to pay the total of the debts, or to secure or compound the total amount to the creditor's reasonable satisfaction, within 21 days after its service on the company. That period expired on 19 October 1999. The demand was not complied with. The debts remain outstanding. However, the application for the winding up of the company was not filed until 21 January 2000, a little over three months after the period for compliance with the statutory demand expired. Under the Corporations Law, s459C(2)(a), the court must presume that a company is insolvent if, during or after the three months ending on the day when the application was made, the company failed to comply with such a statutory demand. In this case, because the interval between the last day for compliance and the date of filing the application is a little over three months, the applicant is not entitled to the benefit of that provision.

2 However, I am satisfied that the company is insolvent. Mr Walters, who appeared for the company and opposed the making of an order winding it up, did not contend otherwise, but submitted that the application ought to be adjourned for six months to give one of the company's directors, Mr Bovell, an opportunity to arrange for payments to be made to some of the company's creditors from sources other than the funds of the company. He read two affidavits of Mr Bovell and one sworn by the company's accountant, Mr Denehey. I am able to make findings as to the company's financial position on the basis of what was said, and left unsaid, in those affidavits.

3 According to Mr Bovell's affidavits, the company owns a foam plant, which he is arranging to sell to another company for $200,000. For the purposes of the proposed sale, he proposes that the plant be upgraded at a cost of $50,000, so that he expects the net proceeds of the sale to be about $150,000. The company also owns a building at Cygnet which is on the market with an asking price of $105,000. The affidavit material is silent as to whether the company has any other assets. I expect any significant assets would have been mentioned, given the stance that it has taken in these proceedings. I therefore infer that it has no other significant assets.

4 In his affidavit of 20 June 2000, Mr Bovell provided the following summary of the company's creditors and debts:

Udaipar Pty Ltd (family trusts) - $400,000 (previous 2 year loan funds only)

These figures total $1,142,000. The tax debts may be a little overstated since I have no evidence that the total of the amounts owing exceeds the demanded sum of $288,766.89. Australia and New Zealand Banking Group Ltd has a registered fixed and floating charge over virtually all the assets of the company. I have no evidence as to what other securities (if any) or personal guarantees it has in relation to the company's debts. Tasmania Development and Resources, a statutory corporation established under the Tasmanian Development Act 1983, holds a registered second ranking fixed and floating charge over all the assets of the company. Mr Bovell and his wife have guaranteed the payment of the debts owed by the company to that corporation. Its registered charge is its principal security. I do not know whether it holds any collateral securities. It seems clear that, if the foam plant were sold for $150,000 clear and the Cygnet land sold for $105,000, such sales would not yield any significant amount for the benefit of unsecured creditors after the payment of the $242,000 said to be owing to the secured creditors, together with incidental expenses such as a real estate agent's commission and legal costs. Udaipar Pty Ltd is apparently the trustee of a family trust controlled by Mr Bovell. I have no evidence as to the identities of the unsecured creditors to whom $200,000 is said to be owing, nor as to the amount or age of any of the individual debts.

5 The company carried on the business of manufacturing foam and furniture until January 2000. Since then, it has ceased manufacturing. It apparently has no income. It continues to employ two people whose only role appears to be to attend to customers' warranty claims. Otherwise the company is not trading. Mr Bovell says that the directors are paying about $14,500 per month to the company to enable it to reduce its debts. It may be that these funds are not coming from the directors personally, but that they are causing other entities to provide funds to the company. There is no suggestion that there are any other resources available to the company from which it is able to pay or reduce its debts.

6 It is obvious that the company is not able to pay all its debts as and when they become due and payable. It is insolvent for the purposes of the Corporations Law by virtue of s95A thereof, which includes the following provisions:

"(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

7 Under the Corporations Law, s459A, the Court therefore has a discretion to order that the company be wound up. That section reads as follows:

"On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency."

8 As a general rule, a creditor of an insolvent company has a right ex debito justitiae (ie, as a matter of legal right) to have the company wound up: Mercantile Credits Ltd v Foster Clark (Australia) Ltd [1964] HCA 66; [1965] ALR 574 at 575_;_ IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 49 ALJR 176 at 182; Re London Suburban Bank (1871) 6 Ch App 641 per Mellish LJ at 643; Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675. However, there are exceptional cases in which courts will refrain from making winding up orders in such circumstances.

9 In Presha Engineering, the company had had two bad years as a result of one unfortunate contract, but had resumed trading profitably. Murphy J (of the Supreme Court of Victoria) decided it would be appropriate to give it an opportunity to trade out of its problems and therefore adjourned the winding up petition for six months, giving the petitioning creditor liberty to apply. In Fire and All Risks Insurance Co Ltd v Southern Cross Exploration NL (1986) 4 ACLC 447, the insolvent company was a public company whose board had resolved to make a call of 2 cents on 34 million partly paid contributing shares. It was expected that within a short time it could raise sufficient funds to pay the plaintiff as a result of the call on the shares and/or the auction of shares forfeited for non-payment of the call, and/or the sale of a part of its interest in a group of gold mines, and/or the sale of some part of its interest in a mining exploration permit. Hodgson J (of the Supreme Court of New South Wales) adjourned the proceedings for 26 days with a view to the company raising sufficient funds to pay its debt to the plaintiff. In Re DTX Australia Ltd (1987) 11 ACLR 444, 5 ACLC 337, the insolvent company was a listed public company. There was evidence that it was undergoing a reconstruction and anticipated an injection of millions of dollars from Hong Kong. A number of its creditors appeared at the hearing. The majority of them, both by number and by value, supported an application for an adjournment. Master Seaman QC (of the Supreme Court of Western Australia, as he then was) granted a short adjournment on the basis that all the creditors were likely to be paid as a result of the anticipated reconstruction of the company. In Garreffa Holdings Pty Ltd v Damen Pty Ltd [1998] WASC 147, the defendant, although technically insolvent, had assets exceeding its liabilities and was trading profitably. Master Bredmeyer adjourned the winding up application for six months. In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, the respondent was undertaking a town house development. Its debt to the applicant was small compared to the anticipated profit from that development. Weinberg J adjourned the application for 14 days to enable the respondent to pay the debt on which the application was based. Unlike the insolvent companies that were the subjects of the above cases, the respondent's position is hopeless. There is no prospect of it ever trading again. There is no prospect of its unsecured creditors receiving any significant payment from its own resources.

10 Mr Bovell proposes to cause the loan account debts to Udaipar Pty Ltd to be written off, and to cause further funds to be paid to the company, either by way of gifts or by way of irrecoverable loans. I will assume for the purposes of this decision that the terms of Udaipar's family trust deed permit it to forgive the debt owing to it, and that there is no fiduciary obligation standing in the way of any entity making available the funds that Mr Bovell proposes that the company should receive, although there was no evidence as to these points. Mr Bovell has substantial interests in other companies in Australia and New Zealand, some or all of which are involved in the manufacturing of foam. He says that he has been paying about $14,500 per month to the company for the reduction of its debts since January 2000, and proposes to continue payments at or about that rate. He says that he is willing to use his assets to prevent any winding up of the company. His motives are unclear. No doubt the winding up of the company could affect his commercial reputation and make it difficult for entities controlled by him, or associated with him, to obtain loans. However, there is no evidence that he is personally liable for any of the unsecured debts of the company. Apparently Mr Bovell does not propose to maintain his altruistic attitude towards the payment of the company's creditors if a winding up order is made. It is now over nine months since the statutory demand was served on the company, but Mr Bovell has apparently not used that time to liquidate assets, or sufficient assets, to discharge the company's debts.

11 It seems likely that, if a winding up order were made, that would put an end to the company's plan to upgrade its foam plant for the purposes of selling it, that much less than the anticipated $150,000 would be realised on the sale of that plant, that the sale of the Cygnet land by a liquidator or mortgagee would result in a lower price than the company could obtain if it were still trading, that a liquidator's fees would be substantial, and that the applicant and the other unsecured creditors would get nothing from the company.

12 Mr Denehey, the company's accountant, has spoken to 26 of the unsecured creditors, and says that they have all agreed to give the company and Mr Bovell time to implement a strategy to satisfy their debts. The secured creditors have not taken any steps to enforce their securities. The wishes of a majority in value of the creditors, if expressed, will always be considered: Mercantile Credits Ltd v Foster Clark (Australia) Ltd (supra) at 575. In this case, the applicant is owed more than the total sum owing to the unsecured arms-length creditors. Mr Walters submitted that I should direct that a meeting of creditors be convened pursuant to the Corporations Law, s547, for the purpose of informing myself as to the wishes of the creditors as to whether the company should be wound up. I think that course is inappropriate. It may well be that a number of creditors would perceive that a winding up order would destroy any chance of them being paid and would therefore oppose the winding up of the company, but other considerations are more important.

13 There are a number of factors which weigh in favour of the company being wound up immediately. For one thing, the sale of its foam plant for $200,000 is by no means a certainty. The proposed purchaser claims it is still looking for finance. Although Mr Bovell has been negotiating for the sale of some of his other interests, he has apparently not entered into any contract for the sale of any assets, nor even agreed upon prices with any prospective purchasers. As I do not understand what is motivating him to make payments to the company, I am far from confident that he will continue to make such payments. His conduct in failing to ensure the company made the payments required by law in respect of tax instalment deductions, sales tax, and superannuation leaves me with no confidence in him. Even if I were to adjourn this application for six months, and a further $87,000 was to be paid to the company during that period as proposed, the total amount owing to the applicant and the other arms-length unsecured creditors at the end of that period would still be no less than $400,000, ignoring interest. Despite the disadvantages of winding up the company, and despite the possibility that many of the company's creditors might prefer it not to be wound up, I think the company is so hopelessly insolvent that the only appropriate course is for it to be wound up now. I am simply not persuaded that the applicant should not have the order that, as a general rule, he is entitled to ex debito justitiae. I have therefore decided to order that the company be wound up in insolvency.