Pioneer Concrete Pty Ltd v Ellston

BETWEEN: MELBASE CORPORATION PTY LTD (ACN: 063 631 130) Applicant AND: SEGENHOE LTD (ACN: 000 152 161) Respondent CORAM: Lindgren J PLACE: Sydney DATE: 1 May 1995

MINUTE OF ORDERS THE COURT: 1. ORDERS that the applicant have leave to apply for the respondent to be wound up in insolvency . 2. ORDERS that the respondent have liberty to apply, on three days' notice for an order revoking or attaching conditions to such leave. 3. ORDERS that the costs of the application for leave be the applicant's costs of the proceedings. 4. ORDERS that there be at this stage no order for the applicant to provide security for the respondent's costs of the proceedings. 5. ORDERS that the respondent have liberty for the respondent to restore its motion for security for costs on three days' notice. 6. ORDERS that the costs to date of the respondent's motion for security for costs be reserved. 7. DIRECTS that the proceedings be listed at 2.00 pm on Wednesday 3 May 1995 for the making of directions for the further conduct of the proceedings. 8. DIRECTS that the Registrar give such expedition to the final hearing of the proceedings as the Court's commitments will permit. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No NG 3103 of 1995 GENERAL DIVISION )

IN THE MATTER OF: MELBASE CORPORATION PTY LTD AUSTRALIAN COMPANY NO: 063 631 130

BETWEEN: MELBASE CORPORATION PTY LTD (ACN: 063 631 130) Applicant AND: SEGENHOE LTD (ACN: 000 152 161) Respondent CORAM: Lindgren J PLACE: Sydney DATE: 1 May 1995

REASONS FOR JUDGMENT NATURE OF PROCEEDINGS: The application in these proceedings was filed on 9 March 1995. By its amended application filed on 22 March 1995 the applicant ("Melbase") seeks an order that the respondent ("Segenhoe") be wound up. Melbase is a contributory of Segenhoe. While Melbase relies on the grounds referred to in paras 461 (e), (f) and (k) of the Corporations Law ("the Law"), it also wishes to rely on the ground provided by s 459A, that is to say, that Segenhoe is an insolvent company and should be wound up in insolvency. Sub-section 459P (1) lists seven classes of persons who may apply for a company to be wound up in insolvency, but sub-s 459P (2) provides that in four cases such an application may be made only with the leave of the court. One such case is that of an application by a contributory. Melbase seeks such leave in its amended application. It also sought that leave in a notice of motion filed on 17 March 1995 There is also before the Court a motion on an amended notice of motion filed on 24 March 1995 by Segenhoe for an expedited hearing, directions and an order that Melbase provide security for costs in a form satisfactory to the Court in an amount of $50,000. By consent, I heard Melbase's application for leave and Segenhoe's motion together.

PROVISIONS OF THE LAW GIVING RISE TO MELBASE'S APPLICATION FOR LEAVE: The relevant provisions of ss 459A, 459B, 459D and 459P of the Law are as follows: "459A On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. 459B Where, on an application under section 260, 462 or 464, the Court is satisfied that the company is insolvent, the Court may order that the company be wound up in insolvency. 459D(1)In determining, ..., whether or not the company is solvent, the Court may take into account a contingent or prospective liability of the company. 459D(2)Subsection (1) does not limit the matters that may be taken into account in determining, for a particular purpose, whether or not a company is solvent. 459P(1)Any one or more of the following may apply to the Court for a company to be wound up in insolvency: (a) ...; (b) ...; (c) a contributory; (d) ...; (e) ...; (f) ...; (g) ... 459P(2)An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court: (a) ...; (b) a contributory; (c) ...; (d) .... 459P(3)The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. 459P(4)The Court may give leave subject to conditions. 459P(5)Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency." Sub-section 459P (5) makes it clear that if leave is refused in respect of the application in so far as it is made under ss 459A and 459P, the applicant cannot, notwithstanding s 459B, circumvent the requirement of leave. In the Australian Law Reform Commission's Discussion Paper 32, General Insolvency Inquiry (August 1987), the reason for a requirement of the Court's leave in the case of an application for a winding up in insolvency made by a member or director was stated to be to prevent mischievous and possibly harmful applications. The Commission referred to this in its Report No 45, General Insolvency Inquiry, vol 1, at para 142, and recommended that "Leave of the court in such cases should only be granted if the court is satisfied that a prima facie case has been established that the company is unable to pay its debts". The Explanatory Memorandum to the Corporate Law Reform Bill 1992 contributes nothing further to an understanding of the purpose of sub-s 459P (2). In the event, sub-s 459P (3) utilised not the expression "unable to pay its debts", but the word "insolvent". The meaning of "insolvent" is explicated in s 95A of the Law. Sub-sections 95A (1) and (2) are as follows: "(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. (2)A person who is not solvent is insolvent."

Section 459D provides expressly that the Court may take into account a contingent or prospective liability but that this provision does not limit the matters that may be taken into account in determining for a particular purpose whether or not a company is solvent. Plainly, Melbase bears the onus of satisfying me that prima facie Segenhoe is not able to pay all its debts as and when they become due and payable. The meanings of threshold requirements utilising such expressions as "prima facie" and "prima facie case" have been discussed in different contexts, for example, in the context of the granting of leave to serve originating process outside the Commonwealth (cf Order 8 r 2 (2) (c) of the Federal Court Rules and the cases decided on that provision). Under sub-s 459P (3), the first question to arise is whether the evidence relied on by the applicant, if accepted on a final hearing, would establish insolvency. A further but related question may arise as to how countervailing evidence relied on by the respondent company is to be treated. Clearly, the determination called for by sub-s 459P (3) is of a preliminary nature and is to be distinguished from the determination as to insolvency called for on a final hearing. In Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 ("Beecham"), the High Court said that a plaintiff seeking an interlocutory injunction was required to make out a prima facie case "in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief" (at 622). In World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 (FCA/FC) ("World Series Cricket") at 186, Bowen CJ, after referring to this passage, said: "The strength of the [prima facie] case which the plaintiff must make out will depend upon the nature of the right which he is seeking to assert, and the consequences which will flow from the making of the interlocutory order. However, where the facts are seriously in dispute, the court will not undertake a preliminary trial of the action in order to forecast a probable result, but rather, if the plaintiff has a fair chance of success (and what will be required will vary according to the nature of the case), the court will proceed to look to the balance of convenience."

(These cases concerned applications for interlocutory injunctive relief prior to the adoption in Australia of the "serious question to be tried" formula in preference to that of a "prima facie case", in such cases in the 1980s, cf The Australian Course Grain Pool Pty Ltd v The Barley Marketing Board of Queensland (1982) 57 ALJR 425, Tableland Peanuts Pty Ltd v The Peanut Marketing Board (1984) 58 ALJR 283, and Castlemaine Tooheys Ltd v South Australia (1986) 60 ALJR 679.) To an effect generally similar to that of the quoted passage, in the context of a statutory "prima facie case" threshold are WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 (FCA/FC) at 476 (Beaumont J); Merpro Montassa Limited v Conoco Specialty Products Inc (1991) 28 FCR 387 (FCA/Heerey J) at 390; State of Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 (FCA/French J) at 109-110; Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 (FCA/Wilcox J) at 35-36 and Trade Practices Commission v The Gillette Company (No 1) (1993) 45 FCR 366 (FCA/Burchett J) at 371. The word "may" in sub-s 459P (3) indicates that the Court has a residual discretion whether to grant leave, even if it is satisfied that there is a prima facie case of insolvency. It follows that the applicant for leave must satisfy the court both that there is a prima facie case of insolvency and that leave should, as a matter of discretion, be granted. A question may arise as to whether particular factors are appropriately considered as relevant to the application of the "prima facie case" test or to the subsequent exercise of discretion. The making of an application for winding up in insolvency, the publicity given to it (see s 465A of the Law and Form 519 under the Law; Federal Court Rules Order 71, sub-r 37 (9)and Form 93) and the making by a contributory of the allegation that the company is insolvent are serious matters. But insolvent trading by a company is also a serious matter, particularly for its directors (see ss 588G - 588U of the Law). Moreover, in a case such as this, in which the applicant will rely on the grounds set out in s 461 in any event and has standing as of right under s 462 to apply on those grounds, it may be thought that little additional injury is done to the company by reliance on the insolvency ground in addition, and by the revelation of that reliance in Form 519 under the Law to those interested enough to search at the Australian Securities Commission. Generally, in cases involving a threshold test similar to that posed by sub-s 459P (3), it is a relevant consideration that the test falls to be applied before interlocutory procedures of discovery and interrogatories and perhaps a full range of subpoenas to produce documents have been available to the party bearing the onus of establishing the prima facie case. Although these considerations may not apply with the same force where an applicant for leave under sub-s 459P (3) is a director (since a director has a right of access to the company's records), they apply in the present case, Melbase being merely a holder of a small number of shares in Segenhoe (see later). In summary, the considerations to which I have referred do not point clearly to any particular or distinctive approach to be adopted in the application of the "prima facie case" test under sub-s 459P (3), either generally or in the particular circumstances of the present case. I think it appropriate to approach the question in conformity with the passages quoted earlier from Beecham and World Series Cricket.

PARTIES: Melbase Melbase was incorporated as a "shelf company" on 7 April 1994. Until recently it had a paid up capital of $2.00, total assets of $2.00 and shareholders' equity of $2.00. On 8 March 1995 9,998 further shares of $1.00 each were allotted. This made its issued capital $10,000.00. Of the newly allotted 9,998 shares, 1,498 were issued as fully paid and 8,500 were issued as paid to one cent only. Thus, Melbase has a paid up capital of $1,585.00 and uncalled capital of $8,415.00. The directors of Melbase are Royce Bruce Ritchie ("Ritchie") and his wife Julie Dianne Ritchie. Until the recent allotment, they were its only shareholders. The allotment has introduced as shareholders two companies, Katingal Pty Ltd and Royce Ritchie & Associates Pty Ltd. The 8,500 shares paid to one cent each were allotted to those two companies. There is no evidence before the Court as to the financial substantiality of those two companies. In the absence of any submission that I should do otherwise, I proceed on the assumption that they are able to pay, and would pay if a call were made, the share capital of $8,415.00 at present unpaid by them on the 8,500 shares. On this basis Melbase may be regard as having, in addition to its paid up capital of $1,585.00, a fund of uncalled capital available to it of $8,415.00.

Segenhoe Segenhoe was incorporated on 23 May 1955. It is a public company and its shares are traded on the Stock Exchange. There is evidence that it is actively involved in the thoroughbred breeding industry in Australia and internationally, currently standing eight commercial stallions and consigning around 80 yearlings to the major auction sales conducted in Australia between January and Easter each year; that it was, in 1992 and 1993, the leading larger vendor on average sale prices at the William Inglis Easter yearling sales; and that it is presently negotiating with leading international studs to import and stand at Segenhoe Stud, a number of internationally celebrated stallions for the stud season commencing in September, 1995. Segenhoe's issued share capital is $17,353,702 divided into 43,384,254 shares of 40 cents each. The total amount paid on the issued shares is $16,905,202. Of the 43,384,254 issued shares, 27,807,146 are held by Akron Group Holdings Pty Ltd ("Akron"). The registered offices of both Segenhoe and of Akron are at Suite 1, Level 3, The Georges Centre, 45 Cross Street Double Bay. Michael Peter Sissian ("Sissian") is chairman of the board of directors of each of Akron and of Segenhoe. Melbase holds 2,000 of the shares in the issued capital of Segenhoe, accounting for only .0046% of that capital. However, Ritchie is a director of a further 11 companies which, between them, hold 2,133,000 shares in Segenhoe's capital. With Melbase's 2,000 shares, the aggregate of 2,135,000 shares held by "the Ritchie companies" represent 4.92% of the issued capital of Segenhoe. Moreover, Melbase's application to have Segenhoe wound up is supported by the following further holders of shares in Segenhoe, particulars of whose shareholdings appear opposite their names:

Number of Shareholder Shares held Granic Pty Ltd 200,500 Barrie Wayne Dobson 4,000 Sally Anne Dobson 4,000 Sally Anne Dobson as parent & guardian of Kerry Currie Dobson 4,000 Barrie Wayne Dobson 4,000

Shares 216,500

These 216,500 shares represent .499% of Segenhoe's issued capital. The Ritchie companies and these supporters between them hold 5.419% of Segenhoe's issued capital. At the general meeting of Segenhoe held on 29 November 1994, the directors recommended to the members that when the company had less than 50 members it convert to a proprietary company and change its name to "Segenhoe Pty Limited" . The board also recommended that the company adopt a new memorandum and new articles of association. The latter included articles 28, 88, 91 and 100. These provided, respectively, that the directors might, in their absolute and uncontrolled discretion, refuse to register any transfer of shares and decline to give their reasons and grounds for doing so (28); that dividends might be paid in respect of some shares to the exclusion of others (88); that any general meeting declaring a dividend might direct payment wholly or partly by distribution of specific assets (91); and that any member registered or entitled to become registered as the holder of 95% or more of the issued shares of the company might compulsorily acquire the remaining shares in Segenhoe's capital at a price equal to 125% of the fair value of the shares to be determined by an independent valuer (100). Clearly, the proposed new article 100 would be apt to enable the shareholdings of the "Ritchie companies" to be compulsorily acquired. The directors also recommended that all necessary steps be taken to ensure that securities of Segenhoe are no longer quoted on the Australian Stock Exchange. In the event, the motion relating to conversion to proprietary company status and adoption of a new constitution was adjourned to 10.00 am on 1 June 1995, on a poll with 82.91% of the votes cast being in favour of adjournment and 9.61% of the votes cast being against adjournment. The resolution that the company be de-listed following 30 June 1995 was passed on a poll with 87.7% of the votes cast being in favour and 12.3% of the votes cast being against de-listing.

EVIDENCE RELEVANT TO ISSUE OF SEGENHOE'S INSOLVENCY General The annual reports of Segenhoe show the following figures: Operating Year ended Profit Shareholders' Current Current 30 June (Loss) Funds Assets Liabilities 1990 (6,500,651) 7,276,258 19,981,465 13,129,580 1991 (11,236,394) (5,205,566) 14,362,589 10,890,926 1992 (7,546,007) (12,706,574) 8,691,476 34,477,677 1993 (4,074,779) (17,008,853) 7,187,341 36,699,954 1994 (1,601,470) (18,856,439) 6,238,617 39,037,971 On 10 March 1995 Segenhoe provided to the Australian Stock Exchange, a report for the half-year ended 31 December 1994 including a statement of assets, liabilities and shareholders' equity as at 31 December 1994. This shows that for the half year ended 31 December 1994, Segenhoe had an operating loss, before abnormal items and tax, of $1,214,000. The statement reveals that as at 31 December 1994, Segenhoe had total assets (current and non-current) of $19,132,000, total current liabilities of $39,202,000 and no non-current liabilities, giving a net asset position and shareholders' equity of ($20,070,000). In this respect the position had worsened since 30 June 1994 when shareholders' funds were ($18,856,439). Finally, the statement shows a figure for total current assets of $6,543,000 and a figure for total current liabilities of $39,202,000. Note 1 to, and forming part of, Segenhoe's financial statements for the year ended 30 June 1994 contained the following: "Going Concern The accounts have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Company incurred an operating loss of $630,816 before abnormal losses of $970,654 during the year ended 30 June 1994, and as at that date the Company's total liabilities exceeded total assets by $18,856,439. The economic entity's parent entity, Akron Group Holdings Pty Limited has advised that, in the ordinary course of business, it will not be seeking repayment of any monies due to it at the present time." (emphasis supplied)

The language of Akron's own financial statements for the year ended 30 June 1994 may have been less comforting to Segenhoe. Note 21F (b) to those statements was as follows: "(b)Akron Group Holdings Pty Limited has agreed to provide limited financial support to the controlled entity Segenhoe Limited to enable it to meet debts incurred by the company in the course of conducting its day to day trading activities. However, no assurance has been provided to Segenhoe Limited that Akron Group Holdings Pty Limited will not take action to recover the $32,746,198 (1993 - $32,114,736) due to it." (emphasis supplied)

The statement by directors dated 28 October 1994 forming part of Segenhoe's Annual Report for 1994 contained the following expression of opinion: "1(c) the Company relies on the continued financial support of its parent entity, Akron Group Holdings Pty Limited. Because of the qualified level of financial support advised to the directors by the parent entity as described in note 1 to the financial statements, the company cannot be said to be able to pay its debts as and when they fall due. However, in the absence of any firm decision by the parent entity at the date of this statement to seek repayment of its debt during the next twelve months, the Directors have decided to prepare the Company's accounts on the basis of a going concern." (emphasis supplied) The report of the independent auditors, KPMG Peat Marwick, also dated 28 October 1994 contained the following passage which appeared at page 35 of Segenhoe's 1994 Annual Report: "As stated in Note 1, the financial statements have been prepared on the basis of a going concern, which contemplates the continuity of business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. As at 30 June 1994 the Company and the economic entity owed a total of $32,746,198 to its parent entity, Akron Group Holdings Pty Limited. The Directors of the parent entity have reserved the right to seek repayment of the total debt owing to it at any time, although they have indicated that there is no present intention to do so within the next twelve months. Notwithstanding assurances given to the Directors of Segenhoe Limited from the parent entity that it will provide financial support in respect of trade debts incurred by the Directors in continuing to conduct the ordinary business of Segenhoe Limited, the Company (and hence, the economic entity) is not in a position to repay the current debt due to the parent entity. In the event that the parent entity seeks repayment of debt owed to it by Segenhoe Limited, then all non-current assets would need to be reclassified as current assets and satisfactory arrangements would need to be made with the holders of registered securities over the assets of Segenhoe Limited (refer Notes 17E and 18) to allow for the orderly disposal of Segenhoe Limited's assets to partially repay the debt to the parent entity."

The relationship between Segenhoe and Akron indicated by the foregoing must be reviewed in the light of a document dated 28 November 1994 under the seal of Akron, and an affidavit of Sissian sworn 11 April 1995, both of which are referred to later. There was in evidence a transcript of the proceedings of the annual general meeting of Segenhoe held on 29 November 1994. Sissian was in the chair. I was referred to the following extracts of statements by Sissian: "Obviously, the company has no realistic prospect of continuing to service its financial commitments from that point onwards and those commitments then included more than $35 million in interest bearing debt. The company was a basket case ... At this juncture, it is appropriate that I draw your attention to the qualification in the Auditors Report on page 35 of the 1994 Annual Report. The directors have now received notification that Akron has reviewed its position in relation to debts owing to it by Segenhoe and Akron reserves the right to seek repayment of those debts at any time after 23 March 1995. The debts presently stand at $33.391 million. Akron's preservation of its rights is in line with the qualification contained in the Auditors Report set out in the 1993 Annual Report. Akron's actions should not be interpreted as a call for repayment of the debt, but rather as a notification of the reservation of its rights. In the current circumstances ladies and gentlemen, the company's continuance as a listed company is clearly an anachronism. Delisting will affect the liquidity of Akron's shareholding in a manner identical to that of the minority. Akron intends to vote in favour of the resolution to delist Segenhoe, upon the basis that listing is anachronistic and costly in the circumstances of the company at the present time. The Board first proposed the delisting by notice sent to shareholders on 26 August 1994. Thus, those members who don't wish to maintain an unlisted shareholding in Segenhoe have had three months to sell their shareholding on the market and, doubtless, will have further time before the delisting process is completed ... I can't imagine any circumstances in which the company's financial position would improve to a point which would make any material impact on its deficit of shareholders funds of $18.8 million. What I would be prepared to favourably consider would be an amendment to that resolution which provides for the delisting to take place, let's say, in June of next year. The reason I say that, is that the notices proposing the delisting of the company were originally posted in August of this year and if we go through until say June of next year that really gives those people who don't wish to maintain an investment in an unlisted company very adequate time in which to quit that investment, bearing in mind that the company has such a significant deficiency of shareholders funds, I would think that would be more than adequate time for people to get out."

There was evidence that Segenhoe did not pay to The Australian Stock Exchange Limited the annual listing fee for the year commencing 1 July 1994, and that in consequence securities of Segenhoe were suspended from official quotation prior to the commencement of trading on 23 August 1994. However, securities of the company were reinstated to official quotation prior to the commencement of trading on Friday, 26 August 1994 following payment of the fee. Sissian explained that the initial non-payment was due to an oversight and that the fee was paid promptly when the oversight was discovered.

Relationship between Segenhoe and Akron Some aspects of the relationship between Segenhoe and Akron have already been referred to. Segenhoe survives only because of the support of Akron. There were in evidence two documents under the common seal of Akron. By the first document (dated 18 November 1993), Akron advised Segenhoe in the following terms: "Pursuant to resolutions of the Boards of Directors we hereby advise under seal that Akron Group Holdings Pty Limited will provide sufficient financial support to Segenhoe Limited to enable it to pay its debts as and when they fall due during the period up to and including the 30th September 1994. At that date Akron Group Holdings Pty Limited and its subsidiaries will review their position in respect of the nature and extent of the provision of continuing such financial support to Segenhoe Limited. Akron Group Holdings Pty Limited and its subsidiaries will not take any direct or indirect action or directly or indirectly cause any action to be taken in respect of the Convertible Notes which it currently holds in Segenhoe Limited, for the recovery of the amounts owed to the Noteholders under the terms of the Deed of Trust. Finally, Akron Group Holdings Pty Limited and its subsidiaries will use their best endeavours to assist Segenhoe Limited in any negotiations with its other creditors or financiers, to facilitate the continuing operations of Segenhoe Limited as a going concern."

This document bore the impression of Akron's seal and the sealing purports to have been authorised by order of Akron's board and effected in the presence of two signatory directors. By the second document (dated 28 November 1994), Akron advised Segenhoe as follows: "Pursuant to resolutions of the Board of Directors we hereby advise under seal that Akron Group Holdings Pty Limited will provide sufficient financial support to Segenhoe Limited to enable it to pay the debts which it incurs in its day to day trading operations as and when they fall due during the period up to and including 30 September 1995. However, we have decided to review our position in relation to debts owing to us by your Company and currently totalling $33,391,229 as at 31 October 1994 ('the Debt'). The Statement of Present Intent referred to in the Auditors Report to Members set out on page 35 of your Company's 1994 Annual Report [the reference is to the passage from the report dated 28 October 1994 of KPMG Peat Marwick quoted above] will be withdrawn four months from today. In other words, we reserve the right to seek repayment of the Debt at any time after 23 March 1995. This letter should not be interpreted as a call for repayment of the debt but rather as a notification of reservation of our rights as from that date." (emphasis supplied)

This document also bore the impression of Akron's seal and the sealing purports to have been authorised by order of Akron's board and effected in the presence of one director and the secretary. The document dated 28 November 1994 under the seal of Akron is the latest formal statement of its position. But it must be read in the light of Sissian's affidavit evidence referred to below. In an affidavit sworn on 24 March 1995, Sissian gave evidence that the board of Akron has not contemplated calling for payment of the debt owed by Segenhoe and would not be reviewing the question of demanding payment in the current financial year (ended 30 June 1995). Sissian says that the liabilities of Segenhoe as at 30 June 1994 in respect of creditors and borrowings of the order of $39 million are all liabilities owed to Akron with the exception of: (a) trade creditors including accruals ($489,215); (b) prepayment for services to be rendered by Segenhoe in the current financial year ($4,017,483); (c) provisions ($342,246) which have been written back as income. Sissian's evidence is that Segenhoe accrues interest on the debt to Akron (a "convertible note" debt) to the extent of $1,405,600 per half year ($2,811,200 per year) but that no corresponding accrual is made in the books of Akron and that interest has never in fact been paid. He says that putting Segenhoe's interest liability to Akron to one side, Segenhoe made an audited profit of $1,206,348 in the year ended 30 June 1994, and an unaudited profit of $191,793 in the six months to 31 December 1994. As well, he says that the National Australia Bank ("NAB") has provided Segenhoe with documentation for a $3 million overdraft and bill facility which would now be in place but for Melbase's application in these proceedings. He said that Akron's board agreed to subordinate the debt owed to Akron by Segenhoe to the position of NAB to enable it to grant that facility to Segenhoe. Sissian also gave certain evidence by an affidavit dated Tuesday 11 April 1995 filed in Court on that date and read by way of a re-opening of Segenhoe's case pursuant to leave which had been granted on Monday 3 April. The leave to re-open had been on terms that the affidavit be filed by Friday 7 April. This had not been done and the matter was re-listed on Tuesday 11 April at the instance of Melbase for the purpose of its asking that I proceed to determine its application for leave under sub-s 459P (3) without further ado. In response Segenhoe sought to read the affidavit. The paragraphs sought to be read, and in the event in fact read, were as follows: "1................................................ 2.I am a director of and Chairman of the Board of Directors of Akron Group Holdings Pty Limited ('Akron'). Akron has agreed to waive the payment of interest by Segenhoe to Akron on the convertible notes for the financial years ending 30 June, 1995 and 30 June, 1996. This will mean that Segenhoe will not accrue any interest on the convertible notes due for payment to Akron for those two years. In each of those years I expect that Segenhoe will generate a profit in excess of 1.5 million dollars. 3.Segenhoe is presently, in consultation with its corporate advisers, formulating a proposal to submit to the Board of Akron which, if accepted, will see Segenhoe return to a position of balance sheet equilibrium. I expect that the proposal will be put to the Board of Akron by 5 May, 1995." The solicitor for Melbase submitted that I should revoke the leave to re-open. He submitted that paragraph 2 meant no more than that interest for the years ended 30 June 1995 and 30 June 1996 would not be required to be paid during those years, and admitted of the possibility that Akron retained the right to require payment after 30 June 1996. I said that I construed paragraph 2 as a statement that Akron had agreed to waive, release or forego the right to payment of interest for the two years permanently and absolutely. Senior counsel for Segenhoe said: " ... my clear instructions from my instructing solicitor, who can go into the witness box if necessary, are that what he was told by Mr Sissean [sic] is that ... - Akron has agreed finally to waive the right to receive payment. And waiving the payment is the waiving of the right to receive payment in my respectful submission."

Senior counsel for Segenhoe had also said: " ... what Akron has agreed to do and has done is to forever waive interest by Segenhoe for two financial years, that is, the current financial year and the next financial year, ..."

I proceed on the basis that (a) the position in relation to the principal of Segenhoe's indebtedness to Akron (including previously capitalised interest) said to have been $32,746,198 as at 30 June 1994 and $33,391,229 as at 31 October 1994, is that Akron has reserved the right to require payment at any time after 23 March 1995 but Sissian says that it has not in fact contemplated doing so and will not be reviewing the question until after 30 June 1995; and (b) the position in relation to interest on that debt is that Sissian says that Akron has agreed to give up its right to interest of $2,811,200 for each of the two financial years ended 30 June 1995 and 30 June 1996 (a total amount given up of $5,622,400). According to Segenhoe's annual report for 1994, for the year ended 30 June 1994 the amount of interest payable by Segenhoe to Akron was $2,807,818, and Segenhoe's operating loss was ($1,601,470). On those figures, elimination of the interest would have resulted in an operating profit of $1,206,348 for that year.

APPLICATION OF LAW TO THE EVIDENCE The issue presented by sub-s 459P (3) of the Law is whether Melbase has established a prima facie case that Segenhoe is not "able to pay all [its] debts as and when they become due and payable". The words "as and when they become due and payable" make it clear that although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of "forward looking". The reference to "prospective liability" in sub-s 459D (1) is consistent with this. Section 95A of the Law states a "cash flow test" rather than a "balance sheet test" of insolvency; cf R M Goode, Principles of Corporate Insolvency Law (1990) at 25-27. But this is no reason to construe the word "debts" in the section as referring only to those debts which are treated for accounting purposes as having been incurred on revenue account as distinct from capital account. Different descriptions have been given of the meaning of the expression "become due". With respect, I agree with Gummow J's statement in Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 ("Sycotex") that "any conflict between the authorities may be more illusory than real and factual rather than legal" (at 434E). In Pioneer Concrete Pty Ltd v Ellston (1985) 10 ACLR 289, a case under s 556 of the Companies Code, Carruthers J said that "the question whether a debt has or has not become due is to be determined by reference to the legal agreement between the parties" and that "hesitation on the part of a creditor (probably for commercial reasons) to take immediate steps to enforce its rights ... can have no bearing upon this question" (at 301). In 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371, Foster J expressed the view that a debt does not necessarily "become due" for the purposes of s 556 of the Companies Code upon the date originally stipulated for payment, and that it is proper to take into account not only the arrangements made by the company with the creditor for an extension of time, but also, for example, "whether a course of dealing between the company and a particular creditor would reasonably lead to an expectation on the part of the [company] that some reasonable extension of a period of credit would be allowed by the creditor as a matter of grace" (at 378). His Honour went on to say that "nice questions of fact must be involved in such considerations", and that the question of whether the "due" date for payment of the debt has been extended "will depend upon the precise circumstances relating to the individual debt, and the particular creditor" (ibid). In Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACSR 247 (SA/FC), also a case under s 556 of the Companies Code, Debelle J referred to these two cases and expressed the view (at 254) that the approach of Carruthers J was to be "preferred". In Sycotex, a case under s 556's successor provision, s 592 of the Law, Gummow J said that the question "whether a debt falls due when it is legally required for payment or whether the court can take into account normal or likely indulgences granted to the company by its creditors" is not "a question of law to be decided by the application of a rigid rule" (at 434D,E). His Honour continued: "Rather, the statute appears to focus attention upon what it is reasonable to expect in a given set of circumstances, such a consideration necessarily being made by someone operating in a practical business environment. Attention is focused at whether a person would expect that at some point the company would be unable to meet a liability. Such a question is necessarily a factual one to be decided in light of all the circumstances of the case. At one end of the spectrum a company may be operating in an industry where a code of practice of paying 60 days after invoicing has arisen, despite stated terms of 30 days. If the company has a large number of creditors, it may be reasonable to expect that all of them would not suddenly insist on being paid in 30 days. At the other end of the spectrum would be a case where a single creditor had granted an indulgence on one occasion. It may well not be reasonable to expect a repetition of that event."

Clearly, his Honour construed the notion of debts "becoming due" in the context of the provision of which it formed part. All four cases mentioned concerned the "insolvent trading" provision which refers to an expectation as to whether a company will be able to pay all its debts as and when they become due. In Hall v Press Plumbing a Division of Aust-Amec Pty Ltd, unreported, FCA/Lindgren J, 20 September 1994, a liquidator sought to recover as "preferential payments" amounts paid by a company, subsequently in liquidation, to one of its creditors. I rejected a proposition that for the purposes of the expression "is unable to pay his debts as they become due from his own money" in sub-s 122 (1) of the Bankruptcy Act 1966 (Cth), one must disregard debts unless there is evidence that the creditors are actively seeking to enforce the right to be paid. The proposition was that only in such a case was a debt "commercially due" and that the statute is concerned only with debts "commercially due" in that sense. I added that the notion of "become due" is a legal one, and that a debt is not rendered "not yet due" by reason of nothing more than the fact that the creditor has, to date, forborne from pursuing recovery. Unlike the four cases mentioned above which were concerned with an expected ability to pay debts when they fell due, that case, like the present one, required the ability to pay debts as they become due to be determined as an objective fact as at a particular time. There are several reasons why a debt may not have "become due and payable". The terms of the contract between debtor and creditor may be such that there must first be the making of a demand and a non-compliance with it after the allowance of a reasonable opportunity; cf Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491. Even where there was once a date stipulated for payment, the contract may have been subsequently varied, expressly or by implication, and the implication may have arisen from conduct including a course of dealing. Moreover, a creditor may be estopped from insisting upon payment without first giving notice effective to put an end to an assumption by the debtor, caused or contributed to by the creditor, that payment need not be made. The point is that on the facts of individual debtor-creditor relationships, the ordinary operation of legal and equitable principles may produce the result that a debt does not become "due and payable" (in the sense of entitling the creditor to sue the debtor to judgment immediately and without any intervening act or event) until later than the original contractual terms would allow. Statutory provisions of the kind with which this case is concerned require an assessment to be made as to when all of a person's or company's debts "become due and payable", and they require that this assessment be made collaterally, rather than in inter partes litigation between debtor and creditor. Where there is evidence of the existence and amounts of those debts (this evidence will often be in the form of the debtor's business records or admissions to be found in reports and financial statements which it has issued) it will ordinarily be appropriate to infer that they have already "become due and payable" unless there is evidence suggesting otherwise. But where some such evidence exists, the "collateral" nature of the assessment called for as contemplated by the legislation may make it appropriate to be liberal in the drawing of inferences in support of a conclusion that principles and doctrines of the kind to which I have referred above have been activated. The observations just made do not apply in the circumstances of the present case. The "due and payable" issue has been raised as between Segenhoe and one creditor only, Akron, and Sissian, the chairman of directors of both companies, gave evidence. It has been open to Segenhoe and its parent company, Akron, to place fully before the Court all evidence relevant to showing when Segenhoe's debt to Akron has or will "become due and payable". Segenhoe has not submitted that Akron is not entitled, immediately and without first making demand, to institute proceedings against it for payment of the principal of Segenhoe's indebtedness of some $33 million. Be this as it may, in the absence of evidence to the contrary I think that on the evidence, prima facie that existing debt will be due and payable following 30 June 1995 at the latest. It is clearly appropriate to "look forward" at least as far as 30 June 1995. Segenhoe will be unable to pay that debt at that time. This conclusion alone suffices to establish that prima facie Segenhoe is unable to pay all its debts as they become due and payable. In relation to Akron's "waiver" of the interest for the years ended 30 June 1995 and 30 June 1996, several observations must be made. Although the solicitor for Melbase did not object to para 2 of Sissian's affidavit sworn 11 April 1995 on the ground that the evidence of Akron's "agreement" was not in admissible form (an objection which I would have upheld), he did submit that that paragraph did not establish an agreement which was legally binding on Akron and that Akron remained at liberty to require payment. It is significant that unlike the earlier documents dated 18 November 1993 and 28 November 1994 referred to above, Akron's promise is not under seal. In the absence of evidence of the furnishing of consideration for Akron's promise or evidence of circumstances founding an estoppel, I accept Melbase's submission that Akron's promise to release its right to interest for the two years is not binding on it. Melbase also submitted that Akron's promise was not binding on it because its convertible notes in Segenhoe which gave rise to Segenhoe's liability are, according to Akron's 1994 Annual Report, the subject of first and second charges, and there is no evidence that either chargee consented to Akron's giving up the two years' interest, totalling some $5,622,400, of its security. Although the instruments of charge were not in evidence, I think that there is merit in this submission also. In view of the conclusion which I reached in relation to principal, it is not necessary that I decide whether the interest is properly to be regarded as becoming due and payable during the two years ended 30 June 1995 and 30 June 1996. But it may be useful to state my view on this question. In the light of the non-binding nature of Akron's promise, the cautious position taken in Akron's own 1994 Annual Report in relation to Segenhoe's indebtedness (referred to earlier), the duties of Akron's directors to its shareholders and creditors and the parent-subsidiary relationship between Akron and Segenhoe, I am not satisfied by the evidence that Akron has become disentitled to be paid the interest in accordance with the terms governing the convertible notes. In these circumstances, I am satisfied that prima facie the interest of $2,811,200 for each of the years ended 30 June 1995 and 30 June 1996 has and/or will "become due and payable" in accordance with those terms. Segenhoe is unable to pay that interest. For the foregoing reasons, I am satisfied that there is a prima facie case that Segenhoe is insolvent. Therefore, I may give Melbase the leave which it seeks under sub-s 459P (3) of the Law. Segenhoe did not submit that if I should find a prima facie case of insolvency, I should nonetheless refrain from granting leave because of any discretionary factors. There are, in any event, such factors favouring the granting of leave. Firstly, it is, generally speaking, not in the public interest that an insolvent company should continue trading. Secondly, it is not in the interests of minority shareholders such as Melbase that they should be "locked into" an insolvent company. Thirdly, these proceedings for the winding up of Segenhoe will continue in any event, and it is convenient and appropriate that Melbase be permitted to rely upon the insolvency ground in addition to the various grounds referred to in s 461 of the Law. Evidence which was less than clear suggested that Segenhoe's financial position may change in the near future. For this reason, although I will grant to Melbase the leave sought, I will grant to Segenhoe liberty to apply for an order revoking that leave or attaching conditions to it.

SEGENHOE'S MOTION FOR SECURITY FOR COSTS It is not suggested that Segenhoe has in any way caused the Melbase's impecuniosity. On the most favourable view, Melbase is to be regarded as having funds available to it of only some $10,000 to pay any award of costs against it. A detailed affidavit of Steven Robert Burns dated 22 March 1995 of Segenhoe's solicitors gives an account of the likely amount of the fees and disbursements to be incurred by Segenhoe in defending these proceedings. He was not cross-examined and no countervailing evidence as to the likely amount of those fees and disbursements was led by Melbase. In summary, Mr Burns' evidence is that Segenhoe will incur costs and disbursements, including counsel's fees and fees for experts' reports, in the order of $65,000. Segenhoe asks that I order that Melbase provide security for costs in a form satisfactory to the Court in an amount of $50,000. This is opposed by Melbase. The precise basis of Melbase's opposition was not at all times clear. Commencing with the undoubted proposition that Segenhoe does not have a right to an order for security and that I have a discretion under sub-s 1335 (2) of the Law, the solicitor for Melbase directed his submissions to convincing me that the conduct of Segenhoe's parent company, Akron, and of Segenhoe's directors, and in particular, of Sissian, is so deserving of censure that in the public interest there should be a winding up of Segenhoe and consequential investigation of its affairs. But he did not expressly submit that if I made an order for the provision of security, that course of events and its supposed benefits would be stultified. Melbase pointed to the fact that Akron had been set upon a course of expropriating the Ritchie companies and that the result of the High Court's decision in Gambotto v WCP Limited (1995) 127 ALR 417 ("Gambotto") was that the proposed alteration to Segenhoe's articles of association could not be validly effected (senior counsel for Segenhoe said that the proposal was being reviewed in the light of Gambotto). Melbase submitted that once Segenhoe ceases to be listed on the Australian Stock Exchange after 30 June 1995, it will no longer be possible for small shareholders like Melbase to sell their shares in the company. As well, Melbase submitted that it makes the present application for the winding up of Segenhoe, not for any personal advantage (it will receive nothing out of a winding up), but in the public interest. Certain evidence relating to benefits to Akron at the expense of Segenhoe does appear to give some cause for concern. So does the course which Akron was following of making possible the expropriation of the Ritchie companies' shareholdings. But these matters have not been the subject of detailed evidence or submissions on the present interlocutory application. In all the circumstances I think that the appropriate exercise of discretion at this stage is not to make an order for security for costs but to give leave to Segenhoe to restore its motion for security upon three days' notice.

CONCLUSION There will be an order granting Melbase leave under sub-s 459P (3) of the Law subject to Segenhoe's having leave to apply for an order revoking that leave or attaching conditions to it. Melbase's costs of its application for leave will be part of its costs of the proceedings. I decline at this stage to order Melbase to provide security for Segenhoe's costs, but will grant leave to Segenhoe to restore its motion for security on three days' notice. I am satisfied that the case warrants an expedited hearing (Segenhoe's motion for directions to that end was not opposed by Melbase). There will be a direction to the Registrar accordingly.

I certify that this and the preceding 33 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: Dated: 3 May 1995 Heard: 24 March, and 11 April 1995 Written submissions completed: 13 April 1995 Place: Sydney Decision: 1 May 1995 Appearances: Mr P Fordyce, solicitor of P A Somerset & Co, solicitors appeared for the applicant. Mr J L B Allsop SC instructed by Greaves Wannan & Williams, solicitors appeared for the respondent.