Plaintiff v Defendant

2 On 26 September 2018 the defendant filed an interlocutory process pursuant to s 459S of the Act, seeking leave to rely on the ground of genuine dispute, which had not previously been relied upon to set aside the plaintiff's statutory demand. This judgment deals only with the defendant's s 459S application.

3 The plaintiff is a licensed real estate agent in Victoria and the defendant is a property development company. In April 2013, the defendant was formed for the purposes of developing 283 Harbour Esplanade, Docklands ('the Docklands Property').

4 The parties entered into an Agency Agreement on 3 September 2013 ('the Agency Agreement'), where the plaintiff was appointed as the defendant's agent to market and procure sales of residential and commercial units at the Docklands Property. The parties also entered into other agreements, being a full commission incentive agreement, a deed of variation and an amended agency agreement (collectively, 'the Agreements').

5 On 6 December 2017, the parties entered into a Deed of Acknowledgement for commission which was owing to the plaintiff under the Agency Agreement.

6 On or about 9 May 2018, the defendant received from the plaintiff an amended agency agreement dated 3 September 2013 ('the Purported Amended Agency Agreement'). The defendant's directors deny having ever discussed an amended agreement with the plaintiff, or having signed it. The directors deny providing Anthony Gilbert, a previous director of the defendant, the agency to sign it.

7 On 6 August 2018, pursuant to the Purported Amended Agency Agreement, the plaintiff issued Tax Invoice no 1245 to the defendant for the amount of $8 million. On 14 August 2018 the plaintiff issued a statutory demand on the defendant for the payment of that debt, which was served on the defendant on 15 August 2018. The statutory demand claims the defendant owes the plaintiff $8,962,456.62.

8 The defendant seeks leave under s 459S of the Act so that it can raise a genuine dispute. The plaintiff concedes that there is a genuine dispute and asserts that if the defendant obtains leave, its application to wind up the defendant will be dismissed.

9 Section 459S of the Act states:

s 459S Company may not oppose application on certain grounds

(1) In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:

(a) that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b) that the company could have so relied on, but did not so rely on (whether it made such an application or not).

(2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent.

10 The defendant did not comply with the statutory demand served on it and is presumed insolvent. It can only get leave to raise a genuine dispute pursuant to s 459S of the Act by demonstrating that the debt claimed by the plaintiff is material to proving that the defendant is solvent. There then remains the issue of whether I will exercise my discretion to grant leave, which depends on the reason why the defendant did not raise the dispute within the 21 days prescribed by the statutory demand.

11 Section 459S of the Act was considered by the New South Wales Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd[2] ('Switz v Glowbind') where Spigelman CJ (with whom Handley and Giles JA agree) stated:

By the time an application under s459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s459S(2) directs attention, in part, to what it is that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the Court cannot be "satisfied" of the mandatory precondition in s459S(2). An objective element is introduced by the word "material" but that can only be determined after identifying the company's contentions.

...

The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.[3]

12 Divergent views have arisen regarding the meaning of the term 'material to proving the company is solvent' contained in s 459S(2). The more strict view of materiality was adopted by the New South Wales Court of Appeal in Switz v Glowbind. However, a line of authority has developed where a more lenient view of materiality has been adopted.

13 The defendant submits that the Court should not follow Switz v Glowbind but should consider whether the debt is material to proving solvency on the terms stated by Austin J in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd ('Chief Commissioner of Stamp Duties').[4] Austin J reflected on the high threshold for materiality as set out by the Western Australia Court of Appeal in Bayview Holdings Pty Ltd v Zan Holdings Pty Ltd.[5]

14 In response to this high standard, Austin J said:

... The Court considers the materiality question before deciding whether to grant leave to the company to dispute the debt. It has not, at that stage, reached a conclusion about the company's overall solvency, and may not have heard all the relevant evidence. It is not in a position to decide, at that stage, whether the debt in question is the difference between solvency and insolvency.[6]

...

In my opinion the exercise of the discretion to grant leave under s 459S(1), involves three considerations, namely:

(i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand;

(ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and

(iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent.[7]

15 For the purpose of the application before me, the parties agree that whatever test I apply in relation to materiality will make no difference to the outcome of this dispute.

16 The plaintiff correctly submits that there are four possible outcomes to the application before me. The first is that the Court could find that the defendant is solvent but for the debt claimed by the plaintiff, in which case leave would be granted to the defendant under s 459S of the Act. Second, the defendant is solvent regardless of whether the debt is owed to the plaintiff and the Court would need to grant leave under s 459S of the Act. That would most likely lead to a conclusion that a substantive defence of solvency would be made out at the trial and that would be the end of the matter. Third, that the defendant is insolvent whether or not the debt is owed. In that case, the Court should dismiss the defendant's application for leave. Fourth, that the Court is unable to be satisfied one way or the other on the material presented by the defendant. If that is the case then the Court could not be satisfied that the plaintiff's debt is material to solvency and the application for leave under s 459S of the Act would be also dismissed.

17 The plaintiff relies on the third and fourth outcomes but its primary submission is that the material relied on by the defendant is so deficient that the Court could not be satisfied for the purposes of s 459S that the debt is material to proving solvency. It submits that whichever test I chose to apply would lead to that outcome.

18 The definition of solvency is found in s 95A of the Act. It provides:

Solvency and insolvency

(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.

19 In Sandell v Porter,[8] Barwick CJ described what may constitute insolvency and stated:

... Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amounts of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency...[9]

20 In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[10] Weinberg J referred to evidence required to be put on behalf of the company to rebut the presumption of insolvency. His Honour stated:

• The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd [1997] FCA 125; (1997) 15 ACLC 477 per Mansfield J.
• In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
• Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (above); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J_; Leslie v Howship Holdings Pty Ltd_ (1997) 15 ACLC 459 at 463 per Sackville J.
• There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (above); Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (above) at 465-466.
• The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (above) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
• The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (above) at 466-467.
• It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd (above).[11]

21 To rebut the presumption of insolvency, the defendant relies on audited accounts. The plaintiff submits that the Court cannot determine whether the defendant is or is not insolvent because the accounts presented are not accurate. These accounts were audited by George Georgiou, a chartered accountant and a managing partner at Connect Audit.

22 In an affidavit sworn on 1 March 2019, Mr Georgiou deposes that:

- on 26 November 2018, he and a staff member Elliot Da Silva attended the defendant's offices at Hallam South and met Kwong Yip, a former director of the defendant and Ting Qu, the defendant's account manager;

- he and Mr Da Silva spoke to Ms Qu about ledgers and systems that the defendant had in place, in order to better understand the organisation, its operations and its methods of financial reporting;

- he and Mr Da Silva recommended that the defendant migrate its financial information to a system called Xero;

- after the migration of the defendant's financial information to Xero, Ms Qu reconciled the general ledger against several bank accounts;

- he and Mr Da Silva requested documentation and received documents relating to the defendant's payment to the plaintiff while the defendant was not in possession of any loan documentation. Ms Qu informed that no such loan documentation existed in respect of the loans between the related entities;

- the defendant's directors Li Shao and Bin Wang provided a representation letter confirming that the financial records and other company records contained and reflected in the defendant's accounts for each of the relevant periods were, in their opinion, true and correct and complied with the relevant statutory reporting requirements and were in accordance with Australian accounting standards; and

- in auditing the defendant's financial accounts for the relevant periods, he formed the opinion that the financial reports were properly prepared in accordance with the Act, including giving a true and fair view of the defendant's financial position and complying with Australian accounting standards to the extent described in the financial notes attached to each financial statement.

23 Mr Georgiou when cross-examined agreed that the information he based his audited accounts on was provided to him by Mr Shao and Ms Qu. He gave the following evidence:

And what form does that paper trail take?---There's an audit trail.

On Xero?---Yes.

Xero has an audit trail function, so - - -?---Yeah.

- - - one could go back through and see all the adjustments that were made?---Correct.

Thank you. Now, these adjustments were being made in respect of accounts that dated back over a considerable period of time. Would you agree? Three years?---Correct.

And so they were somewhat historical?---Yes.

Now, you were taking instructions from Ting or Mr Zhou[12] or both of them?---Both.

Did you take instructions from anyone else on behalf of Altus Development?---Ah, Lester.

What's the surname?

MR GRONOW: It's Kwong Yip. He's called Lester Yip.

MR FARY: I see. (To witness) Mr Yip?---Yeah, I knew - I know him as Lester.

I see. And Lester was a former director of Altus Development. Did you know that to be the case?---Yes.

Did you speak with any of the other directors of Altus?---No.

So I take it that you didn't discuss or take instructions from Mr Lin?---No.

And you didn't discuss or take instructions from Mr Wang?---No.

And insofar as adjustments were made, they were made at the behest of Mr Zhou?---And Ting.

And Ting. But the person with the authority to give you instructions was Mr Zhou?---Correct.

And Ting was working under Mr Zhou's authority?---Correct.[13]

24 He also agreed that the accounts he relied upon were in disarray. When cross examined he gave the following evidence:

Okay. Now, at the time of your engagement, the company didn't use Xero, did it?---No.

And you, as part of the audit process, asked for the company to migrate their system to Xero; is that correct?---I recommended that they, ah, use Xero.

And the reason for that was that their accounting software and system was inadequate, wasn't it?---It was, ah, very difficult to audit because it's a proprietary building, ah, construction management software system.

And what are the difficulties in auditing that system?---Their general ledger is, ah, difficult to - to follow as opposed - and difficult to audit, whereas Xero, which most of our clients use, is much easier to audit and to follow.

What are the specific difficulties with the general ledger?---Ah, accounts, ah, weren't reconciling.

That's not a problem with the software, is it? It's a problem with the record-keeping?---Um, it's a problem with the record-keeping and also the software.

And so I put to you what confronted you when you were at first engaged was poorly kept financial records of the company?---Ah, what do you mean by "poorly kept"?

Not the kind of record-keeping that you, as a registered auditor, would expect a company of this size and type to keep?---Most of our clients use Xero, and that's why we recommend that they use Xero

...

MR FARY: What confronted you when you were appointed was inadequate record-keeping in the sense that Altus Development did not keep records of the type that you, as a registered auditor, would expect that it would keep?---That's correct.

And would you agree that those records were in a state of disarray?---They were difficult to audit.

They were difficult to audit because they were in a state of disarray?---Yes.[14]

25 The defendant relies in part on Mr Shao's evidence in relation to solvency. The plaintiff submits that Mr Shao is not a reliable source as to the defendant's assets and liabilities due to his poor knowledge and understanding of the defendant's financial affairs.

26 Under cross-examination, Mr Shao made the following admissions:

- He did not familiarise himself with the financial affairs of the defendant when he was appointed a director of the defendant. When cross-examined he gave the following evidence:

Now, in March of 2017 when you were appointed as a director of Altus Developments, how did you familiarise yourself with the financial position of the company?---I wasn't in charge for finance back then.

But you were appointed as a director?---Yes.

And do you appreciate that one of your functions as a director is to have an understanding of its financial position and performance?---It was (indistinct) who was looking after finance back then.

And you didn't take any responsibility for that yourself as a director?---No, I didn't have the responsibility for finance. [15]

- He did not know very much about finance.[16] He did not understand the difference between a current and non-current asset. When cross-examined he gave the following evidence:

Yes. Do you see that? And so it's your evidence that that's an asset of Altus Developments but it's not a current asset?---I don't quite understand the definition of "current asset" and "non-current asset", so you might need to ask the accountant.

I see. So if you don't understand the difference between a current asset and a non-current asset, you wouldn't be in a position to say whether the assets here that are recorded as current assets are in fact current assets?---Yes. [17]

- As at 31 December 2018, he was unable to identify the borrowers in relation to the 'non-current assets - receivables' in the audited accounts. When cross-examined he gave the following evidence:

That's the spot where you're supposed to find further details about that asset, and do you agree that it doesn't identify who the borrowers from Altus Development are that give rise to this non-current asset?---No, it doesn't identify the lender or the borrower.

And can I suggest to you that these are primarily - well, this is intended to record loans that are primarily made to related entities?---I'm not sure.

You can't say whether it's loans to related entities or unrelated persons?---It's better to ask the professionals, the accountant, because I cannot tell. [18]

- If he could not locate a record of a liability in the bank statements of the defendant, he ignored it. When cross-examined Mr Shao gave the following evidence:

So in summary, if there's no record of the transaction in the bank statements you just ignore it?---Yes.

And you don't tell the auditor about it?

INTERPRETER: No, he didn't tell the auditor.[19]

- That the auditor's task was to ascertain the true position of the defendant; his role as a director was to provide the auditor with documents relevant to that task and he was to provide the auditor with documents even if a claim was disputed. When cross-examined he gave the following evidence:

I see. Now, do you understand that the auditor's task was to try and ascertain the true financial position of Altus Development?---Yes.

And your role as a director of Altus was to provide the auditor with any documents which were relevant to that task?---Yes.

And do you agree that you were to provide the auditor with documents with claims which Altus disputed?

INTERPRETER: Excuse me, can you please ask the question again?

MR FARY: Did he understand that it was his obligation as the director to ensure that the auditor got documents in respect of claims which Altus disputed?---Yes, I understand. [20]

27 The plaintiff submits that there are grounds to doubt Mr Shao's reliability and credibility as a witness, including:

- an assertion made by Mr Shao that the defendant had engaged 'professional accountants' whose names he could not remember to create financial accounts for the defendant before the audit took place.[21] No such financial documents have been discovered by the defendant and the evidence is in direct contraction to evidence given by Ms Qu and Mr Georgiou;

- his insistence that the advance of $500,000.00 by Sinoace Holdings Pty Ltd ('Sinoace') to the defendant on 16 October 2018 was not a loan[22] despite the transfer notice clearly stating that the payment was a loan;

- his insistence that the defendant had not acquired its rights under a Put and Call Deed from Garland Projects Pty Ltd (ACN 156 037 848)('Garland')[23] and that the defendant does not owe Garland any money in circumstances where he had previously signed off as to the accuracy of the audited accounts to 31 December 2009, with such accounts recording a debt of $1.439 million owing by the defendant to Garland.

28 The plaintiff submits that not all of the relevant documents and information were provided by Mr Shao to the auditor. When cross-examined Mr Georgiou gave evidence that he was not informed of:

- a claim by Greg Andrews, the liquidator of Garland as to $10 million dollars;

- a claim by Monarch Tower Pty Ltd (ACN 606 801 647)('Monarch') as to $6.93 million dollars;

- a claim by Digital Harbour (Holdings) Pty Ltd (ACN 088 304 956)('DHH') for $1.412 million dollars;

- a claim by Senfull Investment Ltd ('Senfull') in a shareholder oppression proceeding in which it is claimed by Senfull that there has been an improper assessment of a $27 million loan made by Senfull to the defendant; and

- dealings with EW Investment Holdings Pty Ltd ('EW Investment')/Mingzhou Wei.

29 I agree that there were some inconsistencies in the evidence given by Mr Shao and there were some parts of his evidence which were not reliable. The evidence of Mr Shao did not assist the defendant. It confirmed that any information relied upon by the accountants needed to be carefully scrutinised.

30 In relation to the Garland liability, Mr Georgiou gave the following evidence when cross-examined:

MR FARY: Yes. (To witness) It's a hypothetical question, that if you had known, if you had been told that there was a dispute between Senfell[24] and Altus Nominees as to the identity of the true creditor, then in order to classify it as non-current, you would need to have had a letter of comfort from Senfell, I put to you?---If I had been told, yes.

If you had been told, but you weren't told?---Correct.

And Mr Zhou had every opportunity to tell you, didn't he?---Yes, he did.

Now, at paragraph of your affidavit - perhaps if I could ask that the witness be shown his affidavit.

...

MR FARY: ... Now, at paragraph 18, you say that, "The general ledger of the unsecured related party loans to Altus shows Altus is currently indebted to Garland in the sum of 1.39 million, which has been reduced from the original 2 million or so, due to moneys flowing between Garland and Altus in the past. I've verified this transaction by reviewing Altus' bank statements. There was no loan document to support this under the non-current liabilities of the company". Were you aware that Garland was in liquidation?---I don't remember.

If you had been told that Garland was in liquidation would you, as part of your audit, have made inquiries of the liquidator of Garland?---Yes.

Did you make inquiries of the liquidator of Garland?---I didn't know it was in liquidation.

Thank you. Did you obtain copies of Garland's financial statements?---No, I didn't.

Did you speak with - I take it you didn't speak with Mr Lin because you haven't spoken to Mr Lin about any matter, have you?---No. [25]

31 In relation to the Monarch liabilities, when crossexamined Mr Georgiou gave the following evidence:

No? Now, at paragraph 17 of your affidavit, you say, "The 28 financial statements including an amount of 5 million owed by Altus to Monarch" - sorry, "Owed to Altus by Monarch as receivables or the loans of this entity". And you verify that transaction by reviewing the bank accounts, "And there was no loan document to support this receivable"; do you see that?---Yes.

Now, can you have a look at pp.1 through 17 of the court book?---Sorry, what numbers?

Pages 1 through 17?---Yes.

So these are the documents which ought to be accounts for Monarch and Altus in 2017 and 2018?---Yes.

So perhaps if you could just familiarise yourself with pp.1 through to 17?---Yes.

Were you shown these documents as part of your audit?---I wasn't shown the Monarch Tower ledgers and I can't recall whether I was shown the Altus documents as I think these were prepared under the old system.

The pre-Xero system?---Correct.

You can't recall? Now, if you go to court book p.1. So this is the Monarch Tower balance sheet and under the heading "Liabilities", but in the column "Debit" is an amount called, "Altus Development loan of 6.8 million"; do you see that?---Yes. Yes.

And do you agree that what this document purports to show is a negative liability of $6.8 million? In other words: an asset?---Correct.

And I take it that you - because you weren't provided with this document - have not investigated how it was that in a set of accounts there was a liability - sorry, a - yes, a liability of Altus to Monarch of 6.8 million, whereas, in the paragraph 17 I took you to, you've talked about an obligation going in the other direction of 5 million. I take it you haven't investigated the reason for that discrepancy?---Well, I'm not the auditor of Monarch Tower. So I haven't been given this information until today.

I see. Perhaps if I can ask you to flip forward, then, to the Altus balance sheet for 2017. Sorry, p.5. And you will see, about halfway down, this time, of course, in the "Credit" side of the ledger, 6.805 million Monarch Tower, under "Assets"; do you see that?---Yes.

So in answer to your last question - my last question about not investigating the matter, you pointed out that you weren't asked to audit Monarch, but you were asked to audit Altus. I take it that you haven't investigated this discrepancy between the 6.8 million figure in this balance sheet and the 5 million figure you've referred to in paragraph 17, I think it is, of your affidavit?---Sorry, is that a question? [26]

32 In relation to the DHH liability, when crossexamined Mr Georgiou gave the following evidence:

Now, do you agree that that intangible asset is the rights that Altus Development have under a put and call deed with the company Digital Harbour Holdings?---Correct.

Did you go and get a valuation or did you ask for a valuation of the rights under that deed held by Altus Development?---No, we didn't get a valuation.

So on what basis did you value the rights at 35m?---We didn't value them; the directors did.[27]

33 In relation to the EW Investment/Mingzhou Wei liability, when crossexamined Mr Georgiou gave the following evidence:

Okay. I'll move on to a different topic. Can you have a look in the court book at p.26. This is a document which is called an Apartment Purchase Supply Agreement. It's between Wei Ming Zhao[28] and Altus Development. It's in respect of three lots. Do you see that?---Yes.

And I want to draw your attention to clause 2, which says, "Party B acknowledges that party A has paid $174,419.80. The rest of the payment, 1.399718.89, has already been paid in full in other way"; do you see that?---Yes.

So it seems to suggest that these apartments have been prepaid; do you see that?---I don't see the words "prepaid".

No, I'm putting what's in clause 2 in a different way.

MR GRONOW: Sorry, Your Honour, how's Mr Georgiou's interpretation of this agreement of any value? It says what it says. It's not his document. Your Honour, if he's required to do, can interpret, but why does Mr Georgiou's interpretation of it have any relevance at all?

HIS HONOUR: I think Mr Fary's just trying to see if he understands what it means. That's what I think he's doing, but let's see what the question leads to. Mr Fary, you wish to ask the question again?

MR FARY: Yes, if I could. (To witness) You could agree or disagree with this proposition, or you can say that you're not a lawyer and don't understand, but clause 2, I'm putting to you, suggests that that amount of $174,419.80 is prepaid?---But it doesn't say that, and I don't understand. I don't agree with your assertion or - - -

Okay. You don't agree. Now, in the course of conducting audits, you look at agreements between the company and other parties all the time, I put to you?---Yes.

And you have to form an assessment as to whether they have an impact upon the financial position of the company; isn't that correct?---Correct.

And so if a document like this were put to you, you would have to form an assessment of what impact it had on the company's financial position and make sure that that was accurately recorded in the company's books; is that correct?---Correct.

Now, were you shown this document prior to signing off on the audit?---No.[29]

34 In relation to the Senfull dispute, when crossexamined Mr Georgiou gave the following evidence:

Were you told about a dispute between Senfell, Altus Development and Altus Nominees - - -?---No.

- - - in the course of being instructed about the audit?---No.

Have a look at court book p.18. Do you see that what's sought here by way of declaration is that a purported assignment to Altus Nominees of a loan of $27m made by Senfell to Altus is invalid?---I can read that.

And do you see that there's also a declaration sought that Altus Development remains indebted to Senfell Investment for $27m in respect of the loan?---I can read that.

Do you agree that - and I'd ask you to have a look at the date of the originating process, it's in the tram tracks there?---Where's the date?

The tram tracks. It's got "date of document" and it's got a file date at the top?---Yes. It's been over-stamped, but I think it's 1 August 2018.

I think you're right. I think it's 1 August. Now, do you agree that the claim here by Senfell that it's the true creditor in respect of the $27m loan is something that was relevant to your audit task?---Yes.

And I take it that if you had been aware of this, but not investigated it, then you could not have signed off on the audit certificate in respect of Altus Development?---No.[30]

...

And they didn't provide this information to you?---Correct.

And they should have provided this information to you?---Yes, they should have.

And they denied you the opportunity to investigate these claims as part of your audit?---Yes, they did.

And you signed off on the audit accounts without knowing that the claims even existed?---Correct. [31]

35 The plaintiff's Counsel put a line of questions to Mr Georgiou regarding whether he could give a certificate of solvency when he did not have all the relevant information provided to him. Mr Georgiou gave the following evidence:

Now, I've taken you in the course of the cross-examination today and on the previous occasion to a number of documents that bear upon the financial status of Altus as at the date of the audit. Do you agree with that?---Yes.

Now, I put to you that knowing what you know now and knowing the shortcomings in the information provided to you at the time that you conducted the audit, you could not today give any certificate regarding the solvency or otherwise of Altus?---No, that's not true.

It's not true? You could give an opinion like the one you gave in paragraph 23, notwithstanding that I have identified a number of significant matters which weren't shown to you and which you have not investigated; is that your evidence?---I'd have to investigate all these additional material that's been given to me before I could, ah - - -

So I come back to the question I asked you before. Knowing what you know now and the fact of not having undertaken further investigations, you could not give any opinion as to the solvency or otherwise of Altus?---Well, it's hard to - it's hard to determine. I have to go through all the information.

It's a hypothetical question, it's not hard. And the hypothetical is that if you don't investigate - if you haven't investigated - you accept that as the premise of this hypothetical question?---Yes.

So you haven't investigated?---Yes.

Having regard to that premise, that you could not give a certificate or give an opinion as to the solvency or otherwise of Altus?---I could not give that opinion. [32]

36 The information that was not provided to the auditor leads to a conclusion that the audited accounts cannot be relied on. However, the defendant submits that the omissions of each of these liabilities and the Senfull dispute will affect the question of solvency.

37 A debt of $1.439 million is included in the defendant's accounts as a noncurrent liability. The audited accounts of the defendant also provide for this debt to Garland. Although this debt was classified as a noncurrent liability, after the accounts were audited, Mr Andrews, liquidator, in February 2019, wrote to the defendant demanding payment of $2,068,743.83. That debt has been disputed by the defendant.

38 Philip Newman, chartered accountant, liquidator and a director of PCI Partners Pty Ltd, prepared a report in relation to solvency on behalf of the defendant. When crossexamined in relation to the Garland liability, he gave the following evidence:

... Now, if you were to put the $2m amount claimed by the liquidator of Garland into the current liabilities of Altus Development, on your reconstructed balance sheet, that would result in negative current assets or a deficiency of current assets over current labilities. Do you agree with that?---Yes.

And do you agree that that's an indicia of insolvency?---Well, given the letters of comfort in support from creditors, it may not be, because moneys could be provided to deal with that liability.

We'll come to that in a - - -?---If you're asking me on a balance sheet without anything else, in isolation, it would affect the ratios, but I don't think you can look at it in isolation.

And my question before, though, was it was an indicia. I'm not saying it's conclusive proof of; I'm asking you to agree that it's an indicia of insolvency?---So technically, if there's a deficiency in current assets to current liabilities, is it one of the factors that you would look at in insolvency? Yes.

And it's one of the factors that would support a conclusion of insolvency?---It's one of the factors to consider, but there are many factors to consider.

But of all the factors, it's one of the more significant factors. Do you agree with that?---In its isolation, any liquidity ratio which would show something about liquidity, yeah, it would be an important factor.

Thank you. And if the court were to find that the amount claimed by Garland was, in fact, owed and a current liability, that would mean that your opinion as to insolvency would be unsafe. Do you agree with that?---I don't think you can say that in isolation. There are other factors regarding solvency. [33]

39 In final submissions, Senior Counsel for the defendant said the defendant did not accept that there is any current liability at all to Garland. He also advised, on the last day of the hearing, that the defendant had been served with a further demand from Garland's liquidator, to which it had responded or was going to respond and wanted to put further documents to the Court. The defendant was permitted to file a further affidavit, subject to the plaintiff's right to object, and made further submissions after the affidavit was filed.

40 In response to the defendant's request, the plaintiff submit that it did not oppose the further demand being tendered into evidence and was unlikely to oppose a letter of dispute as to the further demand by the defendant or an affidavit containing the same being tendered into evidence. The plaintiff advised that it would, however, oppose any further affidavit by the defendant being used as a back door means of addressing any of the issues raised in the proceeding**.**

41 On 8 April 2019, an affidavit of Wenwen Wang was filed with the Court. Annexed to that affidavit is a Deed of Assignment which was entered into on 5 April 2019, the day that the trial in this matter concluded. Recitals A and B to that Deed provide:

1. Garland Projects Pty Ltd of Level 5, 700 Springvale Road, Mulgrave (debtor) is indebted to the assignor in the amount of AUD$1,000,000,00 plus all interest due and payable under a written agreement dated 24 June 2017 between the assignor and the debtor, and in the amount of USD$760,000.00 plus all interest due and payable under a written agreement dated 29 July 2017 between the assignor and the debtor (collectively, debt). Both components of the debts are guaranteed by Jian Lin of 20 Kramer Street, Berwick 3806 and Monarch Tower Pty Ltd ACN 606 801 647of Level 5, 700 Springvale Road, Mulgrave (guarantee).
2. The assignor has agreed to assign the debt to the assignee on the terms set out in this deed.

I note that Garland has recorded in its own books and records (as provided in Cornwall's 2 April 2019 letter) the liabilities of AUD$1,00,000.00 and USD$760,000.00 (converted into $944,568.72) owing to Rill. I also note both Rill's Loans have a maturity term of 6 months (which expired in December 2017/January 2018), a lower fixed interest rate of 8% per annum and a higher fixed interest rate of 12% per annum. Therefore, subject to the adjudication of the disputes between the parties, Altus, as a result of the assignment of debt from Rill, has a claim against Garland that may well exceed the amount claimed by Garland.

43 The plaintiff objected to the evidence of Ms Wang on the basis that:

- the evidence goes well beyond that foreshadowed at the hearing;

- the evidence was given after Mr Shao was cross-examined and therefore in circumstances where the plaintiff cannot cross-examine on it;

- no explanation was given for late filing of evidence in relation to the purported assignment;

- two possibilities are open: first, the transaction was in contemplation at the time of the hearing on 5 April 2019 (the date of the purported assignment) but the Court was not told about it; or second, the transaction was a belated attempt by the defendant to plug a perceived hole in its own case after the close of evidence;

- the application really amounts to an application for leave to reopen the defendant's case to adduce fresh evidence without any of the usual supporting material; and

- it is unclear what is sought to be made of the purported assignment.

44 In my view, these are valid objections. I also note that the plaintiff submits that when the Deed of Assignment was obtained the defendant had notice of the fact that Garland was insolvent and consequently, by application of s 553(C)(2) of the Act, mutual credit or set-off is not available to the defendant with respect to any statutory demand issued by the liquidator or Garland against it.

45 The plaintiff further submits that given the late filing of the evidence, it has been denied the opportunity to explore: the Rill/Garland debt, noting that the correspondence attached to the affidavit of Ms Wang (Exhibit WW-4), from the solicitors acting for the liquidator of Garland, contains an allegation of backdating of the loan documentation; and the opportunity to explore the operation of s 553(C)(2) of the Act.

46 More importantly, the omission of the Garland debt, in my view, serves to demonstrate that the audited accounts cannot be relied upon. The filing of this extra evidence does not relate to the adequacy of the audit.

47 The balance sheet for Monarch for 30 June 2018 records a debt of $6,930,724.03 owing to Monarch by the defendant. The balance sheet for the defendant for 30 June 2018 also records a liability of $6,930,724.03 owing by the defendant to Monarch.

48 Although the Monarch liability appears in the liabilities portion of the Monarch balance sheet for 2017 and 2018, it is listed almost exclusively in a column called 'debit', meaning that the entry is a negative liability. In other words, an asset. Not only is this debt recorded against the defendant, but the plaintiff is aware that Monarch paid $2,154,609.30 on behalf of the defendant pursuant to its liability to the plaintiff under the Deed of Acknowledgement dated 6 December 2017.[34] It is aware of the defendant's liability to DHH under the Put and Call Option Restatement Deed dated 12 October 2017, in the amount of at least $257,431.00.[35]

49 The defendant submits that nothing could be taken out of those accounts which demonstrates the debt. I disagree. To me they seem clear.

50 The defendant also submits that the fact that the Monarch debt is noncurrent means that it is of little assistance to the Court in assessing whether it is currently solvent. The main issue here is that the auditor had not been told of this debt which needed to be investigated. Information has been withheld. The debt may be a noncurrent asset, but investigations are required to demonstrate that it is.

51 In February 2017, the plaintiff facilitated the sale of 15 lots in the development of the Docklands Property, valued at $1,492,000.00 to EW Investment, and three lots valued at $1.744 million to Mingzhou Wei (on behalf of the defendant).

52 Valentino Spyriadias, sole director and secretary of the plaintiff, deposes that in or about February 2017, Jian Lin, a director of the defendant, informed Mr Spyriadias that he was going to enter, on behalf of the defendant, into specialised loan agreements with two investors to enable the project to proceed and that the funds would be partially secured by various lots in the defendant's development. To that end, Mr Spyriadias facilitated the sale of 15 apartment lots to EW Investment, with a total contract price of $1.492 million, and three apartment lots to Mingzhou Wei with a total contract price of approximately $1.744 million. Following the receipt of payment of the 10 per cent deposit on these contracts, he was informed by Mr Lin that the balance of the purchase price for these contracts, totalling approximately $11.9 million, would be prepaid by way of specialised loans to the defendant.

53 Apartments Purchase Price Supplementary Agreements between the defendant and EW Investment and Mingzhou Wei purport to record a payment of the full amounts owing under the contract of sale. For Mingzhou Wei, in clause 2 there is an acknowledgement that the balance of $1,399,718.89 has been fully paid. For EW Investment, in clause 2 there is an acknowledgement that EW Holdings has paid the full amount for the above apartments.

54 The defendant asserts that it is the owner of valuable development rights in relation to the development at the Docklands Property, and that it is currently in advanced negotiations to sell those rights to a third party called MRCB Australia Holdings Company Pty Ltd (ACN 614 127 356)('MRCB') for payments totalling $35 million. The defendant says that there has been an in principle agreement to do that since 2018.

55 Mr Shao, when crossexamined, admitted that the entering of the proposed deal with MRCB required the defendant to terminate the contracts with EW Investment and Mingzhou Wei. Not only was Mr Georgiou not informed about these potential liabilities, but neither was Mr Newman who stated that he had not considered what the impacts these buyers' rights would have on his opinion as to the defendant's solvency. Clause 2 and 3 of these agreements provide:

1. Party B acknowledges that Party A has paid the full amount payment for above apartments. Once above apartments satisfy the transferring requirements, Party B shall transfer titles of these apartment to Party A as per related laws in Sydney, Australia.
2. Party B warrants that above apartments would not be sold to the public any longer, and would be transferred to Party A before 1st June 2020. Should Party B and Party C guarantors sell above apartments without Party A's written consent, Party B and Party C shall pay the double amount of sale prices of sold apartments to Party A as the default penalty.

56 When crossexamined, Mr Newman gave the following evidence:

Yes. So p.250, and it's an agreement in a similar form between a buyer called Ming Jian Wei and Altus Development, and it is in respect of a larger number of apartments, and then if I can draw your attention to clauses 2 and 3 of that agreement; you see that?---(No audible response.)

Now, were you provided with a copy of these agreements as part of your brief?---No.

Were you provided with instructions that these buyers asserted rights in respect of apartments in the development proposed to be undertaken by Altus Development?---No. I know there was a - some kind of action regarding the refund of deposits. I don't know if this has anything to do with that or not.

Well - - -?---I haven't seen them before, so - - -

I see. You haven't seen them before. And I take it that you haven't considered what impact these buyers' rights under these apartments would have on the financial position of the company?---No.

And I take - - -?---As I said, unless it's part of the action which was taken by a number of purchasers which was settled and paid in full. If it's one and the same - because I don't know. I wasn't privy to the information about that, so if that had something to do with that, I understand that's been settled.

I see?---And - and I've had the payment confirmed - that that - the provisions had been satisfied. So if it's - one's got something to with the other, indirectly, I'm aware of it.

Thank you. And I take it that you wouldn't be able to point to any entry in the audited accounts which make provision in respect of these potential claims of these buyers?---I'd have to look at the audited accounts again, if there was something specific in there. It doesn't come to mind, but I'd have to have a look at the - is that something I should do now - - -

Yes?--- - - - to have a look if there were - - -

If you can identify in the audited accounts where there's a provision made - - -?---I don't believe there was but I don't want to say unequivocally without - I'm just looking at the seven - ten year. There doesn't appear to be anything, other than refunded security deposits, unless that's it. But I can't see anything specifically about - - -

Yes?--- - - - that, no.

But do you agree that on the face of these documents that there is a potential liability faced by Altus Development if these apartment contracts - - -[36]

....

MR FARY: Yes, thank you. (To witness) If you assume that there is a liability to refund these parties' consideration, that would affect your opinion as to solvency; would you agree?---Well, if there's an additional current liability, are you saying? That this is the - a claim. I mean - - -

Yes, assume there's an additional current liability of the amount paid by these purchasers?---Yeah. It would, ah, affect it. I mean, if any additional current liability appeared, it would affect my assessment of solvency.

And - - -

HIS HONOUR: Excuse me. (To witness) It would depend on the size of liability, wouldn't it?---Well, um, there - yes, but here we're talking about, like, $10m.

Well, we're talking more than that?---Or - or what appears to be. So given the amount of funds that were available in the bank, then I would say, yes, it would affect - but, yes, you're right. If it was $10, it wouldn't matter.

But this liability would, is what you're saying. If this was a liability, it would?---Well - well, if that 10m is the number. I don't know what number is the amount that would have to - would be involved here. I don't know because in my report there was $500,000 in a bank account.

I read that?---And there was far less than that in liabilities or in liabilities that were current.

Thank you, Mr Newman?---So if you added more than that amount into the balance sheet, then, yeah, it would affect the cash flow.[37]

57 The defendant submits that the Apartments Purchase Price Supplementary Agreements are not valid and binding contracts on the defendant because they have not been executed or agreed to by the defendant in conformity with s 127 of the Act or otherwise, and the defendant has not received the amount stated in the two documents. It says, therefore, that they should be disregarded from a solvency point of view.

58 I do not agree that they should be disregarded. These contracts are very important in the context of solvency. They needed to be part of the audited accounts and they should have been investigated. If they were in the accounts, Mr Georgiou should have contacted a representative of EW Investment and Mingzhou Wei and asked for evidence about their liabilities. That has not been done.

59 Pursuant to clause 10.2(f) of the Put and Call Deed between DHH and the defendant, the defendant owes DHH an amount of $1.412 million. Clause 10.2(f) of the Put and Call Deed provides:

DHH and Altus acknowledge and agree that an application to amend the Planning Approval was submitted on 5 August 2016 which, if approved on the terms submitted, will result in a revised Net Aggregate Area of 35,589m². DHH and Altus agree that in the event that this application to amend the Planning Approval is approved on the terms submitted then the balance of the recalculated Uplift Amount payable by Altus to DHH for the purposes of clause 10.2(d)(ii) will be an additional $1,412,000 (excluding GST).

60 In relation to this liability, when cross-examined Mr Shao gave the following evidence:

MR FARY: That's right. And that fee is 1.412m.

INTERPRETER: Yes. Okay.

WITNESS: Yes.

MR FARY: And do you accept that that fee is currently due and owing by Altus Development to DHH?---No.

Why do you say it's not owing?---Ah, because according - ah, no, because according to the model, if the - and when the developing company gets the land - the land permit or the land certificate, then it should be the developing company that pays this amount.

So that's your understanding of the operation of the agreement between DHH and Altus Developments?---Yes.

Now, in your affidavit, you said that DHH had sent an email to you that stated it was DHHs expectation that Altus would not be responsible for that fee as Altus was not proceeding with the development of the Docklands land.

Do you recall giving that evidence?---Ah, yes.

And can I suggest to you that what the situation that DHH was referring to in the email was a situation where a purchaser took over the rights from Altus Development and took on the obligation to pay the fee?---Yes.

But if there's no agreement struck, the liability will rest with Altus Development?---If there was no agreement, then there's nothing.

No sale agreement struck. If there's no sale agreement struck, then the liability will remain with Altus Developments.[38]

...

MR FARY: Okay. I'll rephrase. (To witness) If Altus Developments does not manage to enter into an agreement with MRCB for the sale of rights under the put and call option, then Altus Developments will have to pay the uplift fee?---If no - if the, ah, sales agreement was not - was not signed, then nothing will happen because presently the negotiation has been going between the three parties. Therefore, Altus does not - is not obliged to pay the uplift fee.

Not my question again. If the sale to MRCB does not complete, I put to you that Altus would be liable to pay the $1.4m uplift fee?---So everything is based on your hypothesis if the sale doesn't go ahead. Then how can we - how can I give you a conclusion if everything's based on if.

I'm going to keep asking this question until I get an answer. If the sale to MRCB does not go through, Altus will be the one that has the liability to pay $1.412m to DHH?---If you insist, then my answer is yes.

Thank you. And in fact Altus Developments has a present obligation to pay DHH $1.412m under the put and call option restatement deed?---Is this $1.412m the same as the $1.4m that you mentioned previously?

Yes?---What's your question, again? That I didn't pay or what - - -

My question is that Altus Developments has a present liability under the put and call deed to pay to DHH $1.412m?---It's not a present obligation. It's not present.

I see. It's been deferred, has it?---What do you mean by deferred?

Well, the witness said it's not a present obligation. Is he suggesting it's a future obligation?---That's all based on all of your ifs, and then it will be in the future.

I see. And can I put to you that there's no reference in the audited accounts to any liability of Altus Developments to pay this fee of $1.412m to Digital Harbour Holdings?---There's no reference on the weighted accounts, because we are not supposed to pay it. We don't need to pay it. [39]

61 Again, this is a matter that should have been brought to the auditor's attention. A $1.4 million debt is a matter that is important and should be investigated by an auditor.

62 In this Court there is a pending shareholder oppression proceeding brought by Senfull, alleging that there has been an improper assignment of a $27 million loan made by Senfull to the defendant, and then on to Altus Nominees Pty Ltd (ACN 602 942 352)('Altus Nominees'). The director of Senfull, Mr Lin, who is also a director of the defendant and Altus Nominees, has not given any evidence in this proceeding. Senfull seeks a declaration that the defendant remains indebted to Senfull for $27 million in respect of the loan.

63 The defendant accepts a contingent liability in respect of the oppression proceeding and says that a note to qualify the accounts ought to have been included in the financial statements.

64 The defendant submits that it appears from court documents in that proceeding that the nature of the proceeding is not a new debt claim against the defendant, but rather a dispute about which related entity of the defendant is a proper creditor in relation to an existing noncurrent liability totalling $27 million. As a result, even if the Senfull oppression proceeding is successful, the result will not affect the defendant's solvency in circumstances where all the companies have said they will not call in the debt unless and until the defendant sells its development rights.

65 In the oppression proceedings, Senfull seeks an order pursuant to s 233(1)(j) of the Act that upon receipt of the proceeds of sale of the rights, entitlements and the interests of the defendant in respect of the land described in Certificate of Title 11471 Folio 519 and any subdivision thereof, the defendant repay the loan to Senfull. The defendant submits that Senfull will not ask to be paid until the defendant has sold the development rights and has the proceeds.

66 If Senfull is entirely successful, the plaintiff submits that the fact that Senfull sought that relief is not tantamount to a letter of comfort. It submits that one sets out in the relief in the orders one thinks the Court can give, and that is a very different matter to saying I support the company and I do not expect repayment of my loan.

67 Again, the issue here is that the auditor was not given documents, nor was he told of the proceeding. Both he and Mr Newman agreed that it was a fact relevant to the audit process and the solvency assessment that was made by Mr Newman.

68 The defendant relies on two reports prepared by Mr Newman in relation to the question of solvency. Mr Newman is a chartered accountant and director of PCI Partners Pty Ltd. He is a registered liquidator and a liquidator of this Court and the Federal Court of Australia. He is also a registered Trustee in Bankruptcy.

69 In his summary of opinions in the first report, Mr Newman is of the view that the defendant is and remains solvent at all times on the following basis:

Based on the audited financial statements for the half year ended 31 December 2018, Altus' current assets total $5,125,517 and its current liabilities total $178,983. Accordingly, the company has sufficient liquid assets to pay its current liabilities as and when they fall due.

70 Mr Newman's second report was made after he was provided with audited financial statements of the defendant for the financial year ending 30 June 2016. Those statements were relevant to his analysis of the defendant's balance sheet, profit and loss, liquidity, and conclusions that he reached in his other report. He states that:

1. After having assessed the audited financial statements of the financial year ended 30 June 2016, it is my opinion that the addition information contained in the audited financial statements does not have the effect of altering the conclusions I reached under section M of the existing Expert Report, because the conclusions reached in my Expert Report analysed the 2016 financial statements by reference to the comparatives in the financial statements for the financial year ended 30 June 2017. There is no information in the Annual Report for the financial year ended 30 June 2016, which would change my opinion.
2. Accordingly my view remains that Altus was solvent as at 31 December 2018 and at all relevant times earlier than that date.

1. I have not conducted an audit of the information or other documents provided to me. In reaching the opinions and conclusions set out in this report, I have assumed that the information provided to me is accurate, complete and reliable unless otherwise stated.

1. I have not been provided with any underlying accounting records which support the audited financial statements provided for Altus, save for the ledger accounts for the current liabilities.

72 When crossexamined, he gave the following evidence:

Now, if the court were to draw the conclusion that the audited accounts were not reliable - - -?---Yes?

- - - would you agree that that would also undermine your conclusion of solvency?---If they were unreliable and incorrect, yes. [40]

73 As I am of the view that the audited accounts are unreliable due to the numerous omissions referred to above, Mr Newman's report does not assist in determining whether the defendant was solvent, as his report relies on these accounts.

74 There are issues that are of concern in the 2018 Audited Balance Sheet. In the current assets section of the balance sheet, the defendant claims that it is owed $4,536,905.00 by the plaintiff. That is a disputed claim and it may not be an asset. It is definitely not a current asset.

75 Receivables of $6,285,968.00 are included in noncurrent assets. These receivables seem to relate to unsecured loans. Mr Shao, when crossexamined in relation to these noncurrent assets gave the following evidence:

That's the spot where you're supposed to find further details about that asset, and do you agree that it doesn't identify who the borrowers from Altus Development are that give rise to this non-current asset?---No, it doesn't identify the lender or the borrower.

And can I suggest to you that these are primarily - well, this is intended to record loans that are primarily made to related entities?---I'm not sure.

You can't say whether it's loans to related entities or unrelated persons?---It's better to ask the professionals, the accountant, because I cannot tell. [41]

76 Mr Shao gave evidence that there were no written loan agreements from which he could verify the loans outstanding.

77 The non-current assets do not include a debt owed by Monarch of $5,076,128.00. The balance sheets, as at 30 June 2017 and 30 June 2018, did not record this amount. It was only included in the balance sheet after the audit had been done. There is doubt as to whether this debt could be repaid. Mr Shao, when crossexamined, gave the following evidence:

Do you agree that Monarch sold its only asset, being 258 City Road, Southbank, some time in 2018?---Yes.

And do you agree that that gave rise to a GST liability of $3.2 million?---Yes.

And do you agree that that liability became due in April of 2018?---I don't agree.

When did that liability become due?---When - when I receive any notice to inform me to pay, that's the day when it's due.

So your understanding of the tax law is that there's no liability until you receive a notice from the Tax Office?---No.

What's your understanding of the tax law?---That we pay - we pay back the liability when it's due.

Has Monarch paid the amount of GST that arose as a result of the sale of 258 City Road, Southbank?---Not yet.

And do you agree that the liability is likely to be an amount in excess of $3 million?---Yes. More or less along those lines.

And do you agree that Monarch has defaulted on a lease it signed in respect of 250 Queen Street, Melbourne?

INTERPRETER: Excuse me. Mark? Is that - - -

MR FARY: Monarch - - -

INTERPRETER: Monarch.

MR FARY: - - - has defaulted on a lease it signed for 250 Queen Street, Melbourne?---Yes. [42]

78 There is also an item in the noncurrent assets referred to as intangibles. This relates to the defendant's development rights under the Put and Call Option Deed with DHH. The defendant submits that it is currently in advanced negotiations to sell those rights to MRCB, the payments totalling $35 million, and there has been an in principle agreement to do so since 2018.

79 In an affidavit sworn by Mr Shao on 5 February 2019, he deposes that:

I am informed by Ms. Wang, and verily believe that Fumens Lawyers have not received any response from Mansour Lawyers to Fumens' letter dated 20 June 2018. There have been further significant negotiations between DHH, MRCB Australia and Altus since June 2018 in relation to the sale of Altus' development rights and associated rights. Those negotiations related to proposals for the assignment of existing Consultant Agreements to MRCB Australia, the parties' respective tax liabilities as result of the transaction and the structuring of contractual documentation effecting the sale of Altus' rights. Those negotiations have not yet resulted in a concluded agreement. Following those further negotiations, I wrote an email to the directors of DHH on 22 January 2019 at 11:39 am seeking their confirmation on DHH's position in this commercial transaction, to which Mr. David Napier (Mr. Napier), being one of the directors of DHH replied on the same day at 3:36 pm confirming that DHH does not intend to exercise its rights to terminate the HOA whilst negotiations are continuing, and the Altus Payment has now been agreed to be fixed at the sum of $35 million. As at the date of making this my affidavit, no document finalising the proposed transaction has been executed.

80 In an email from Mr David Napier of DHH sent to Mr Shao on 22 January 2019, Mr Napier states:

We can confirm that Digital Harbour (Holdings) Pty Ltd does not intend to exercise its rights to terminate the Heads of Agreement whilst negotiations are continuing.

We can also confirm that despite item 7(b) of the Schedule of the Heads of Agreement which sets out a variety of payments/benefits receivable by Altus from MRCB (or its nominee), the Altus payment has now been agreed to be fixed at the sum of $35 million.

- hearsay;

- not a binding agreement not to exercise a right; and

- is subject to a condition subsequent (negotiations continuing over which the plaintiff has no control).

82 Evidence was given by Mr Shao that the planning permit on which the claimed asset is relying will expire on 29 July 2019.

83 The plaintiff submits that there is reason to be sceptical that continued negotiation with MRCB of the purported potential purchase of the rights will result in a concluded deal because:

- negotiations have been on foot since November 2017;

- the Heads of Agreement between the defendant, DHH and MRCB on 30 June 2018 expired on 30 July 2018;

- no binding agreement has been reached between the defendant and MRCB in the intervening six months; and

- there has been a presale of 18 apartments by others to EW Investment Holding Pty Ltd and Mingzhou Lee. It says that the $35 million valuation attributed to the rights in the December balance sheet overstates the present value and it does not take into consideration:

• that the rest of the binding agreement with MRCB may not come to fruition;
• the risk that MRCB may not complete any agreement entered into; and
• the fact that under the proposed deal payment will be staged over a number of years.

84 I have some doubts about this item in the accounts, but I note that Mr Newman did not factor the development rights high in the insolvency analysis because he was looking at liquidity and the ability to pay debts as and when they fall due. He stated that a noncurrent asset, paid over time in different stages, would not affect what he said in his report. When crossexamined, he gave the following evidence:

Well, no, for the purpose of your insolvency analysis - whether you would need to take into account the fact that the money wasn't going to be paid immediately?---Well, it hasn't factored high in my insolvency analysis, because I've been looking at liquidity and the ability to pay debts as and when they fall due, so it's - although it's not been totally disregarded, it is a non-current asset, so if that was going to be over three years and paid - or paid over time in different stages, then that wouldn't affect what I would've said in my report.[43]

85 Of more concern to me are the current liabilities which include trade and other payables in the sum of $178,983.00. Ms Qu created a document from the financial records of the defendant, entitled Unpaid Invoices Summary, which included an amount of $785,494.28 to 16 suppliers. That document was not provided to the auditors and in an affidavit sworn by Ms Qu on 8 November 2018 she deposes that the current liabilities of Altus shown in the management accounts as at 31 October 2018 was $38,844.65 and that amount does not include the amounts claimed by the plaintiff which the defendant disputes.

86 Ms Qu was crossexamined regarding the current liabilities and, after hearing her evidence, I cannot accept that the trade payables should only be $178,983.00. For example, when crossexamined in relation to a debt of $52,284.94 owing to Green Seasons Real Estate Pty Ltd she gave the following evidence:

See underneath Garland it's got the supplier "Greensea"?[44]---Yes.

When did Altus pay that invoice, such that you did not need to include that debt on your list of aged creditors of 31 October?---This is the same story; it's a loan, and we transferred their interest.

You're suggesting a group of real estate agents converted their invoice into a loan; is that your evidence?---Greensea is not one of the real estate agents.

Well - - -?---It's a shareholder.

Have a look next to the entry for supplier Greensea. Do you see it says Greensea Real Estate Pty Ltd?---So even if the name of the Greensea company is a real estate agent, it doesn't mean that our relationship is a customer - supplier's relationship. It's a creditor and debtor relationship.[45]

87 In relation to a debt of $52,800.00 owing to E-Sen.com Pty Ltd, trading as LeisureCorp, when crossexamined, Ms Q gave the following evidence:

Can I take you to another entry, Ms Qu. See three down from Greensea, LCE?---Yes.

When did Altus pay that invoice such that you did not need to include that liability in your aged creditors list at 31 October?--- This one has been paid in March. I recall that we had agreement at the time that we will make a payment in some period, so I transferred it out.

Paid in March of what year?---March this year.

Do you mean in the last eight days?---Yes.

Doesn't explain, though, Ms Qu, why you didn't include it in your aged creditors of 31 October 2018, though, does it?---That was before 31 October. Our director had a negotiation with the supplier in relation to the amount, and the director told me there will be a decrease in the amount, so I just transferred it out. That's how I understood it.

So the director told you to take this entry out, did he?---That's how I understood it, and that's how I do it according to my understanding, because it was under negotiation, so it has to be changed. But I've told a director about this.

Of course. Which director told you to take this liability out of Altus' aged creditors list?---There is a - it was me transferring this account out, because it was under negotiation of the amount, and then I just informed the director about what I did. There is a difference between this and the director telling me what to do.

Yes, and there's a difference between that response and the response you gave earlier, in my submission?---What did I give you?

I suggest to you, Ms Qu, that your earlier response was that a director of Altus told you to take this LCE liability off the books, because he or she had come to an arrangement with the creditor?---In the process of the negotiation between the director and the supplier, I told the director that we should make adjustment with this account, and, after I did it, I also informed the director that I did it.

So my understanding - that you're saying that the sworn answer that you gave moments ago that a director told you to do this is actually not true; is that what your evidence now is?---I am just giving a true account of what's happened, and if you just take my words on the face value, I can refuse to answer your questions.

I'll move on to another entry, Ms Qu. If you move three down from LCE, you'll see there's a supplier with the codename Obsidian?---Yes. [46]

88 In relation to a debt owing to Obsidian Projects Pty Ltd in the sum of $325,262.20, Ms Qu gave the following evidence:

... Ms Qu. If you move three down from LCE, you'll see there's a supplier with the codename Obsidian?---Yes.

When did Altus pay Obsidian the $325,000 recorded in this invoice summary such that you did not need to include this in your age creditors list of 31 October 2018?---That's also put in by the previous accountant. And the previous director told them that this supplier didn't actually provide any services. And then I just made adjustment with this entry and I just reverse it. So you're saying because you were told it was disputed, you just deleted it. Is that your evidence?

MR GRONOW: Sorry, Your Honour. She didn't say it was disputed. She said that the supplier didn't provide any services. That's different, in my submission. It's not what she said.

HIS HONOUR: Rephrase the question, Mr Schulz.

MR SCHULZ: I withdraw that question, then. Is it your evidence, Ms Chiu, that because you were told that the supplier hadn't provided any services to justify that invoice that you deleted it?---Please don't mislead me. I didn't delete it. I just reversed it, because I thought this entry may be disputable.[47]

89 In relation to a debt owing to PriceWaterhouseCoopers in the sum of $7,520.70, Ms Qu gave the following evidence:

Now, can I next go down to the PwC entry, which is $7,520.70?---(Direct) Yeah. M'mm, yeah.

Yes. Now, can you tell His Honour what you did with that amount?---(Through interpreter) I was also told by the director, "There's a possibility that we don't have to pay for this invoice", so I did a reverse on this entry as well. So the suppliers also didn't make any claims for this invoice.[48]

90 From the evidence given by Ms Qu, I cannot be satisfied that the trade and other payables of $178,983.00 properly reflects what is due to the defendant.

91 In relation to noncurrent liabilities of $33,487,631.00, it appears that these liabilities referred to loans, but there is very little or no evidence concerning attempts at repayments. Mr Jian Lin was not called to give evidence. He may have been able to give evidence of an $18 million debt recorded as being owed to Altus Nominees by the defendant, but he is in dispute with the defendant in relation to the oppression proceeding brought by Senfull. Without any meaningful documentation I have doubts regarding this item in the balance sheet.

92 In demonstrating solvency, the defendant placed great emphasis on letters of support. The first is from Sinoace, up to $3,500,000.00. The letter provides:

I have previously advanced $1,300,000.00 to Altus through Sinoace Holdings Ltd, a company of which I am the sole director, to finance its costs in the Development of the Land located at 238 Harbour Esplanade, Digital Harbour, Docklands (the Land).

I am aware that Altus is currently proceeding towards completion of the assignment of its rights to develop the Land to an alternative property development company.

I am writing this letter to confirm that Sinoace and I will continue to support Altus for its future liabilities in a sum up to AUD $3,500,000.00 for the calendar year ending on 31 December 2019.

Enclosed is a reference letter from UBS AG Singapore Branch, which I believe is able to show that I am capable of providing further financial support to Altus.

93 It also has a letter of support from Shenzhen Dongaz Investments & Devt Co. Ltd, up to $5 million. That letter provides:

I am the legal representative of Shenzhen Dongaz Investment & Development Co., Ltd, Registration No. 91 4403 0110 5407 845 ("The Company") of Suite 304C, Building B, YingDaLi Digital Science and Technology Park, Futian Free Trade Zone, Futian District, Shenzhen City, Guangdong Province, China.

This letter is used to confirm that the Company will financially support Altus for its future liabilities in a sum up to AUD $5,000,000.00 for the calendar year ending on 31 December 2019.

94 These letters of support do not assist the defendant because, as can be seen, the report is in respect of future liabilities, not present liabilities. I also note that there is no evidence about the financial capacity of the two entities. I would have expected to have evidence about the capacity of these two entities to support the defendant. The letters of support do not assist the defendant without that information.

95 The accounts of the defendant were in disarray. Not only were they in disarray, but there were omissions from those accounts. The transactions omitted from the accounts were not provided to the auditor and were not investigated. The audit prepared by the accountant does not assist me in determining whether the defendant was solvent. On my analysis of the accounts and the evidence that has been presented, it would be more likely that it is insolvent. However, I do not need to decide that. The onus is on the defendant to demonstrate that it is solvent or that the debt claimed by the plaintiff is material to solvency. A reliance on the audited accounts to satisfy the onus is not sufficient.

96 I do not have to consider the reason why the defendant did not challenge the statutory demand within the 21 day period, but I will consider whether I would have exercised my discretion under s 459S of the Act.

97 The statutory demand was served on the defendant on 15 August 2018. It was served on the defendant's registered office which was the office of its accountant, Nexia Australia. A statutory demand was not brought to Mr Shao's attention until 22 August 2018.

98 On 27 August 2018, the defendant's solicitor sent a letter to the plaintiff's solicitors, inviting the plaintiff to withdraw the statutory demand. The letter stated:

1. We act for Altus Development Pty Ltd and understand that you act for Zeninvest Pty Ltd t/as Bella Charlton.
2. We refer to your letter to our client dated 14 August 2018 enclosing Statutory Demand for Payment of Debt (your letter).
3. We are instructed that our client's accountants - Nexia Australia received your letter and the enclosed Creditor's Statutory Demand for Payment of Debt and Affidavit Accompanying Statutory Demand sworn by Valentino Spyriadis on 22 August 2018.
4. We have reviewed your letter and the enclosures and believe that the Statutory Demand made by your client has been made without any proper bases (sic).
5. In particular, we believe that your client has not been entirely forthcoming with its instructions as there has been a continuing dispute about the existence of the alleged debt to which the demand relates.
6. We enclose herewith recent email correspondences between our respective clients pertaining to this dispute, which will form part of our client's evidence.
7. Please be advised that should your client not withdraw its Statutory Demand by 4 pm, 28 August 2018, we are instructed to make an application to court for an order setting the demand aside in reliance on Section 459H(1)(a) of the Corporations Act 2001 (sic), without further notice.
8. Should the proceeding be commenced, we will rely on this letter as matter of costs (sic).
9. Please kindly advise if your office has instruction to accept service for the above-mentioned proceeding on behalf of Zeninvest Pty Ltd.

99 On 31 August 2018, the plaintiff's solicitors sent a letter to the defendant's solicitors enclosing an explanatory email from the plaintiff to the defendant (dated 31 August 2018), which details the basis on which the statutory demand was valid and enforceable. There was no mention of when the statutory demand was served.

100 Mr Shao instructed his solicitors to file an application to set aside the statutory demand because he deposes that the debt was not owing and because there was a defect in the demand which caused the defendant to be unable to work out from reading the statutory demand how the debt arose.

101 An application to set aside the demand was filed on 7 September 2018. On the same day, the plaintiff filed its application to wind up the defendant.

102 The defendant submits that the plaintiff had ample notice of the defendant's intention to oppose the application and the grounds on which the debt is disputed. It says the plaintiff's solicitors were aware of the defendant's misapprehension to the time of service, but did not correct the misapprehension or draw it to the defendant's attention, which is a powerful discretionary factor for granting leave under s 459S of the Act.

103 The plaintiff submits that the defendant has failed to provide sufficient explanations for its failure to dispute the debt and the time taken to apply to set the statutory demand set aside. It says that there is no evidence to support that Mr Shao held a reasonable mistaken belief as to the date of service and that it was not reasonable for the defendant to presume that service of the demand had been effected on its registered address on 22 August 2018. It says the defendant's failure to issue an application to set aside the statutory demand within time rests entirely on its own conduct of delaying issuing an application for seven days after having being advised that the application would not be voluntarily withdrawn by the plaintiff.

104 The plaintiff submits that the defendant's failure is due to its own inattention and activity, which Black J in Re Vangory Holdings Pty Ltd ('Vangory Holdings')[49] held could not constitute a reasonable explanation for the failure to set aside a demand within time.

105 In Vangory Holdings, a statutory demand was served by post to the company's registered office which was situated at the home of a person who described himself as a consultant to the company. Its director was unaware of service of the demand until the originating process for a winding up application was served. The consultant did not bring the demand to the director's attention. The consultant did not deal with the demand and argued that his depression, marital difficulties and the stress that he was under at the time contributed to what he did and did not do. In his explanation, he did not address the position in respect of not communicating receipt of the statutory demand to his wife, who remained a director of the company and from whom he was separated.

106 A second demand was served on the company. The consultant, with regard to that second demand, dealt with the company's solicitors.

107 Black J noted an implication in the consultant's evidence that he was unable to address the demand by reason of illhealth, depression or demands of other proceedings, is at least potentially inconsistent with his apparent ability to respond to the second demand. On the other hand, there was no apparent benefit to the company or to the consultant in responding to one demand and ignoring the other.

108 Black J held that the explanation for the company's failure to bring any application to set aside the statutory demand within the 21 day period was not a reasonable explanation. It was open to the company to put in place adequate arrangements to ensure that any creditor statutory demand delivered to its registered office was appropriately addressed, despite the consultant's known health issues and known commitments in respect of other proceedings involving the company.

109 The defendant relies on Ewen Stewart and Associates Pty Ltd v Blue Mountains Virtual Helitours Pty Ltd (No 2)('Ewen Stewart v Blue Mountains').[50] In that case, the sole director for the defendant received a statutory demand on 1 June 2010, which was served on 27 May 2010 at the defendant's registered office. The director wrongly assumed that the demand was only served on the defendant when he received it.

110 White J held that it was not a persuasive explanation for the defendant's failure to bring the application to set aside a statutory demand within time. However, there was more to it. The director sent a letter to the firm of solicitors that had personally served the statutory demand, stating that the company confirmed that it had received the statutory demand on 1 June 2010 and asking for confirmation that 'this is your acknowledged date of service.' There was no response to that letter. White J held that the plaintiff's solicitor should have responded by pointing out Mr Arnott's error.

111 Here, a letter was sent to the plaintiff's solicitors, stating that the demand was served on 22 August 2018. The letter, written on behalf of the defendant, undoubtedly would have been written pursuant to the defendant's instructions. The plaintiff was not asked of any confirmation, but the plaintiff's solicitors responded to that letter and did not correct that error.

112 The facts before me are similar to that in Ewen Stewart v Blue Mountains and therefore I propose to follow White J. Vangory Holdings, which the plaintiff relies upon, can be distinguished on its facts. Therefore, the defendant would succeed if the only issue before me was discretion.

113 The plaintiff concedes that if there is a genuine dispute for the purposes of the application, then the defendant has provided a persuasive argument for failing to bring the set aside a statutory demand application within time. However, the defendant has not satisfied me that the debt claimed in the demand is material to the question of solvency. Pursuant to s 459S(2), the Court is not to grant leave under s 459S unless it is satisfied that the ground is material to proving that the company is solvent. The defendant has not done so. The defendant will not be given leave pursuant to s 459S. Its application will be dismissed.

[1] The originating Process is dated 7 September 2018, however filing occurred on 6 September 2018.

[2] [2000] NSWCA 37.

[4] [1999] NSWSC 15; (1999) 149 FLR 179 ('Chief Commissioner of Stamp Duties').

[5] [1998] WASCA 287, 1241.

[6] Chief Commissioner of Stamp Duties, 192 [44].

[8] (1966) 115 CLR 666.

[10] [1999] FCA 728.

[12] The transcript incorrectly refers to Mr Shao as Mr Zhou.

[23] See T19.20-20.9; Mr Fary asked Mr Shao whether he had an option to develop the land under a put and call agreement, which was originally held by Garland. Garland was unable to develop the land, but Mr Shao denies that Garland had assigned its rights to the defendant.

[24] The transcript incorrectly refers to Senfull Investments as Senfell.

[28] The transcript incorrectly refers to Mingzhou Wei as Wei Ming Zhao.

[44] The transcript incorrectly refers to Green Seasons Real Estate Pty Ltd as Greensea.

[49] [2015] NSWSC 546.

[50] [2011] NSWSC 113; (2011) 29 ACLC 11-006.