QBE Workers' Compensation P/L v P Russell Enterprises Pty Ltd

Supreme Court of NSW|2005-10-27|Before: Compensation P, White J

CITATION : QBE Workers' Compensation P/L v P Russell Enterprises Pty Ltd [2005] NSWSC 1128

DECISION : Applicant's amended interlocutory application dismissed.

CATCHWORDS : CORPORATIONS - Winding-up - Application to stay or terminate winding-up of defendant company - Company's total liabilities substantially exceed total assets - Where evidence as to company's financial position is incomplete and otherwise unreliable - Corporations Act s 482 - Held that ability to meet current liabilities does not suffice to justify the order - Application dismissed.

Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70 CASES CITED : Re Nature Springs Pty Limited (in Liquidation) (1994) 13 ASCR 50

QBE Workers' Compensation Pty Ltd PARTIES : v P Russell Enterprises Pty Ltd

Applicant: Creswick McCarthy SOLICITORS : Respondent: Jones King Lawyers

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

3492/05 QBE Workers' Compensation (NSW) Ltd v P Russell Enterprises Pty Ltd JUDGMENT 1 HIS HONOUR: This is an application pursuant to subsection 482(1) of the Corporations Act 2001 (Cth) for an order staying or terminating the winding-up of the defendant company. 2 The application is made by Mr Phillip Russell, who is a director and shareholder of the defendant company. The other directors of the defendant company are Mr Phillip Russell's parents. 3 The company was wound up pursuant to an order made on 15 July 2005 on the application of QBE Workers' Compensation (NSW) Limited. QBE had served a statutory demand on 27 April 2005. 4 The circumstance in which the company failed to pay the debt for Workers' Compensation insurance premiums was explained by Mr Russell as being that he had written to QBE in about February 2005 and advised it that the business of the company was to be sold and that the defendant company was to receive proceeds of the sale at the completion date of the contract for sale. At that time, the completion date was expected to be on 1 May 2005. 5 Mr Russell said that he did not receive the creditor's statutory demand for payment dated 27 April 2005, nor the originating process filed on 16 June 2005. However, it is clear from evidence filed by Mr Russell from the company's accountant, Mr Rodgers, that both a statement of liquidated claim in the Local Court and the originating process was served at the registered office of the company. Its registered office was the office of the company's accountants. 6 Mr Rodgers deposes to having sent the documents by post to Mr Phillip Russell. Mr Russell says that he did not receive them. The way in which the company dealt with documents of that importance does not engender confidence in the manner in which its affairs were conducted. 7 In support of the present application for termination or stay of winding-up, Mr Russell and Mr Rodgers initially swore affidavits on 4 August 2005. Mr Russell then deposed to the company having creditors as at 15 July 2005, consisting of QBE Workers' Compensation (NSW) Limited, Integral Energy Australia, Greg Rodgers & Associates, Australian Taxation Office and Timezone. Mr Rodgers gave evidence to like effect. 8 The evidence initially filed in support of the application also showed that on 24 May 2005 the company entered into a contract for the sale of a business called Timezone, Wollongong for an amount of $150,000. Seventy five thousand dollars was paid to the company in June of 2005. 9 On 23 August 2005 Mr Russell swore a further affidavit identifying a further creditor who he said was owed $3,537. 10 On 23 September 2005, Mr Rodgers swore a further affidavit in which he deposed to understanding that the creditors of the defendant had been fully paid or were about to be fully paid by the liquidator. He annexed a letter from the liquidator dated 22 September 2005 in which the liquidator said that bank cheques had been drawn prior to a hearing expected to take place on 26 September for the payment of the seven identified creditors. 11 Mr Russell annexed what he said was an updated profit and loss statement for the defendant for the year ended 30 June 2005, but which included a balance sheet as at 30 June 2005. The balance sheet showed that the company had a total assets, both current and fixed as at 30 June 2005, of $78,110, and total liabilities of $141,979. The assets included intangible assets of goodwill and formation expenses of just under $16,000. 12 The liabilities included a non-current liability under the description "Loan - Blue Stone Mortgages" of $123,201. That liability was not identified in either of the affidavits of Mr Russell, nor in the affidavit of Mr Rodgers.

13 When the matter was last before me on 13 October 2005, I invited counsel for the applicant to file further evidence, if he wished to do so, to explain those accounts and the liabilities of the company, as well as its assets. It appears, from further evidence which has been filed, that the company owes money to the parents of Mr Russell, who are also directors of the company. The amount of the debt that is currently outstanding is said to be about $123,000. The company borrowed money from them to purchase the Timezone franchise. The evidence establishes that the monthly payments owed to Mr and Mrs Russell senior have been made. 14 I am told by counsel for the applicant that the balance of $75,000 owed under the contract for the sale of the Timezone franchise has been received and that, after that receipt, the liquidator holds an amount of about $25,000 over and above the amount which would be required to pay all of the current creditors of the company. That, however, does not include the debt owed to Mr and Mrs Russell senior. 15 A chartered accountant in the office of the liquidator, a Mr Granger, has also deposed that the company is in a position to pay all creditors whose accounts are currently payable. He does not suggest that the company has sufficient resources to pay all of its creditors, including Mr and Mrs Russell senior. 16 Before the defendant company went into liquidation, it acquired a franchise for a new business called Kwik Kerb Wollongong, involving the construction of concrete garden borders. Notwithstanding the winding-up order, that business has continued to be conducted. It has been conducted by Mr Russell with the liquidator's approval. 17 It appears that Mr Russell has met such expenses as there are of that business from his own funds, or from cash payments received from customers of the business. Those payments have been banked into his personal account, apparently with the liquidator's acquiescence. It is said that this business is a straightforward one and it is profitable. As it is acknowledged that the business is owned by the company, Mr Russell is anxious that the company be brought out of liquidation in order that it can operate it. 18 Mr and Mrs Russell senior have also deposed to wishing the winding-up of the company to be terminated. 19 There is, however, a fundamental difficulty with the application. 20 In Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70, Austin J said at 79: "In considering an application to stay or terminate a court-ordered winding up under s 482, the court has regard to various categories of interests. First, the court considers the interests of creditors, taking into account whether they object to the proposed termination. But even if all the existing creditors agree, the court may take the view that the proposed termination puts at risk the interests of future creditors. For example, the court is likely to be concerned where the proposal preserves the existing debts but defers their payment, particularly if the deferment has no enforceable status: see the remarks of Street J at first instance in Re Data Homes Pty Ltd [1971] 1 NSWLR 338 at 341. Similarly, if the proposal is that the principal shareholder/creditor will pay out all the other creditors and seek recovery of his debt by instalments, the court is unlikely to permit the company to start trading again and thereby incur additional debts, since if the company fails again, recovery by the new creditors may be prejudiced by the existing debt."

21 There has been no proposal here for the deferment by Mr and Mrs Russell senior of their debt. 22 In Re Nature Springs Pty Limited (in liq) (1994) 13 ACSR 50 McLelland CJ in Eq said: "It is a long established principle that it is contrary to the public interest to terminate the winding up of a company if after the termination the company would remain insolvent in the sense that its liabilities will substantially exceed its assets, even if there is a contractual subordination of all existing debts to future debts."

23 In this case no question of subordination of existing debts to future debts arises. 24 As these authorities explain, it is contrary to the public interest to permit a company, whose liabilities substantially exceed its assets, to resume trading, because, if the company again faces insolvency, future creditors will find themselves in competition, not only with other future creditors, but also with existing creditors. So, in the present case, where the current business carried on by the company is on a small scale, if the company were again to be wound up after being brought out of liquidation on the present application, having both a small amount of assets and a small value of future creditors, those creditors would be in competition, not only with each other, but with Mr and Mrs Russell for their existing debt in the order of $123,000. It is not in the public interest to permit that possibility. 25 There are other difficulties with the application. 26 The evidence of the financial position of the company remains unsatisfactory. It has been said on a number of occasions that the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant. 27 In this case the evidence of Mr Russell is supported by the evidence of the external accountant, Mr Rodgers. However, I do not consider his evidence to be satisfactory. There is no explanation as to how he came to depose, as he did, in his affidavit of 4 August 2005, that the creditors of the company consisted of five persons without mentioning the very substantial debt owed to Mr and Mrs Russell. In those circumstances I place little confidence in his later statement of his understanding that the creditors of the company had been or were about to be fully paid. Nor is there an up-to-date statement of assets and liabilities from the liquidator. 28 The evidence most recently filed discloses that as well as the debt owed to Mr and Mrs Russell senior, the defendant company entered into a lease of a motor vehicle on 1 June 2005. The balance sheet as at 30 June 2005 disclosed a liability in respect of that debt in an amount of $633. Mr P Russell deposes to the lease payments being of the order of $600 per month. He deposes that the liquidator is taking care of the lease payments whilst the company is in liquidation. It does not appear to me that an attempt has been made to assess the value of the liability of the company under the lease. 29 Nor has there been an attempt to assess the extent of the debt, if any, which the company may owe Mr Russell as a result of his incurring expenses on the company's behalf in the conduct of the kerbing business. It may be that he is a net debtor of the company in respect to that business. There is simply no evidence about it.

30 The court will not order a stay or termination of the winding-up unless it is satisfied as to the quality of the evidence of the financial position of the company which is put before it. However, for the reasons I have previously given, even if I were satisfied as to the quality of the evidence as to the financial position of the company, its position, as so revealed, is such that it would not be appropriate to make the order sought. For these reasons, I dismiss the applicant's amended interlocutory application.

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