T-S Capital Partners LLC v Paltar Petroleum Limited

Federal Court of Australia|2019-05-03|Before: Black J, Stewart J

Pursuant to section 459P(2)(b) of the Corporations Act 2001 (Cth), leave is granted nunc pro tunc to the plaintiff to bring an application for winding up in insolvency of the defendant.
Pursuant to section 459A of the Corporations Act 2001 (Cth), the defendant be wound up in insolvency.
Ryan Eagle and Peter Gothard of Ferrier Hodgson be appointed as liquidators of the defendant.
The costs of the plaintiff's application be costs in the winding-up of the defendant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 On 3 May 2019 I made orders winding up the defendant. These are my reasons. 2 The current proceeding for the winding up of the defendant was initiated in the New South Wales Supreme Court by an originating process filed on 12 June 2018 seeking that the defendant be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth), i.e. that it is just and equitable that the company be wound up. Subsequently, the defendant applied in the Supreme Court to have the proceeding transferred to this Court. That was on the basis that there was another proceeding already progressing in this Court which was said to be related. On 14 August 2018, Black J made orders for the transfer of the winding up proceeding to this Court. 3 The plaintiff filed its statement of claim in this Court on 12 October 2018. For the first time, the plaintiff sought an order that the defendant be wound up in insolvency under s 459A of the Act. 4 Although the defendant filed a defence to the statement of claim contesting that it is insolvent, and it filed evidence in support of the defence, when the matter was ultimately heard there was no contest. That arose from the following circumstances. 5 On 17 April 2019, with the final hearing on the plaintiff's application only two weeks away, the board of directors of the defendant adopted a resolution under s 436A of the Act appointing administrators. The stay of proceedings against the defendant imposed by s 440D of the Act on account of the administration did not stay the winding up proceeding which continued: Cory v Registrar of the Federal Court of Australia [2010] FCA 1215; 190 FCR 240 at [23]-[24] per Jagot J. 6 Although the administrators initially indicated that they might oppose the winding up on the basis that the plaintiff is not a creditor of the defendant, a status which they were still investigating, they ultimately did not do so. 7 The administrators also indicated that they would oppose the winding up on the basis that it had not been determined within six months of the winding up application being made as required by s 459R(1) of the Act. However, when I extended that period of time under s 459R(2) by correcting earlier orders that had omitted to grant such an extension that basis of opposition also fell away. 8 The administrators also sought that I adjourn the winding up application, but I declined to do so. The administrators accepted that in that event it was inevitable that the company would be wound up. 9 My reasons for extending time and refusing the adjournment application are reported as T-S Capital Partners LLC v Paltar Petroleum Limited (administrators appointed), in the matter of Paltar Petroleum Limited (No 1) [2019] FCA 635. I made those orders on 3 May 2019 and then proceeded to hear the winding up application. Due to the company being in administration, the directors were not in a positon to oppose the winding up, and the administrators did not oppose it. The hearing therefore proceeded on an unopposed basis.

Applicable principles for winding up 10 The statutory requisite for making a winding up order under s 459A of the Act is that the company is insolvent. The plaintiff must establish insolvency at the date of the filing of the application, which is taken in this case to be 12 October 2018, and at the date of the hearing: Syd Mannix Pty Ltd v Leserv Constructions Pty Ltd [1971] 1 NSWLR 788 at 790 per Jacobs JA with Holmes and Moffitt JJA agreeing; Ann Street Mezzanine Pty Ltd (in liquidation) v Beck [2009] FCA 333; 175 FCR 532 at [9]-[12] per Finkelstein J. 11 The meaning of solvency and insolvency is derived from s 95A of the Act. It provides that 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, and that a person who is not solvent is insolvent. The ability of the company to pay its debts as and when they become due and payable is to be assessed objectively in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight: Lewis v Doran [2005] NSWCA 243; 219 ALR 555 at [103] per Giles JA, with Hodgson and McColl JJA agreeing. 12 It has been held that s 95A of the Act adopts a "cash flow test" of insolvency which is directed to income sources that are available to the company and expenditure obligations it has to meet, rather than a balance-sheet test which focuses on the value of the company's assets and liabilities reflected in the company's books, although a balance-sheet test can provide context for the application of the cash flow test: Campbell Street Theatre Pty Ltd (receiver and manager appointed) (in liquidation) v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 at [23] per Black J. 13 With regard to expert evidence, the ultimate question of whether a company is insolvent on a particular date is one for the court and the most determinative material in that regard is not the opinion of experts, but the inferences to be drawn from the primary records of the company and those with whom it is dealing: Spencer v VMD Packaging Pty Ltd [2001] NSWCA 118 at [53] per Heydon JA with Hodgson CJ in Eq and Davies AJA concurring. 14 With regard to the drawing of an inference as to insolvency, the courts have developed various indicia of insolvency. In ASIC v Plymin (No 1) [2003] VSC 123; 46 ACSR 126, Mandie J considered the question of solvency in the context of claims of insolvent trading by directors. His Honour (at [368]-[380]) set out what he described as the "well-accepted approach laid down in the authorities" to the question of determining solvency. His Honour then (at [386]) set out a checklist of indicia of insolvency, including: continuing losses; liquidity ratios below 1; no access to alternative finance; inability to raise further equity capital; creditors unpaid outside trading terms; solicitors' letters, summonses, judgments or warrants issued against the company; payment to creditors of rounded sums which are not reconcilable to specific invoices; and, inability to produce timely and accurate financial information to display the company's trading performance and financial position and to make reliable forecasts. See also Morris v Danoz Directions Pty Ltd (in liquidation) (No 2) [2010] FCA 836 at [13] per Perram J and Hancock v Conergy Pty Ltd (in liquidation), in the matter of DCM Solar Pty Ltd (in liquidation) [2015] FCA 738 at [63] per Yates J where these indicia were adopted in this Court. 15 In FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (1998) 14 NSWLR 643, the NSW Court of Appeal considered the significance of even small debts in establishing insolvency. Kirby P (at 649E) observed that "a company's failure to pay a small debt may often be the best possible evidence of the company's insolvency".

The plaintiff's standing 16 The plaintiff pleaded its case for the winding up of the defendant on the basis that it is both a creditor of the defendant and a contributory within the meanings of paragraphs (b) and (c), respectively, of s 459P(1) of the Act. In its defence, the defendant did not admit that the plaintiff is a creditor but admitted that the plaintiff is a contributory. The defendant had at one time sought to have the proceeding summarily dismissed on the basis that the plaintiff is not a creditor because, as it was said, its claim is subject to forbearance and is not presently due and payable. The interlocutory application for summary dismissal was later abandoned. 17 That notwithstanding, in order to avoid having to deal with any complexity on the question of whether it is a creditor, the plaintiff at the hearing asserted its case on the basis that it is a contributory. That meant that it required leave nunc pro tunc under s 459P(2)(b) of the Act to make the winding up application. A failure to obtain leave before bringing the application does not render the proceeding a nullity; the failure may be cured by a grant of leave nunc pro tunc: Emanuele v ASIC [1997] HCA 20; 188 CLR 114. 18 Section 459P(3) provides that the court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. The word "may" in the provision indicates that the court has a residual discretion whether to grant leave, even if it is satisfied that there is a prima facie case of insolvency; it follows that the applicant for leave must satisfy the court both that there is a prima facie case of insolvency and that leave should, as a matter of discretion, be granted: Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 279; AustLII reference [1995] FCA 1225; 17 ACSR 187 at 190 per Lindgren J. 19 For reasons I will get to, I am satisfied that the defendant is insolvent. Further, there is no apparent reason why the plaintiff should not be granted leave to continue the proceeding to wind up the defendant. 20 In any event, on the basis of the affidavit of Jorge Machnizh dated 12 October 2018, I am satisfied that the defendant is presently indebted to the plaintiff in the sum of approximately $3 million. The administrators had the opportunity to contend to the contrary and elected not to do so. I accept the evidence of Mr Machnizh that the letters of forbearance which gave rise to the contention that the plaintiff's claim is not presently due and payable were unauthorised and therefore ineffective. For these reasons, I am satisfied the plaintiff also has standing as a creditor of the defendant to bring the present proceeding.

Insolvency 21 Said Jahani, a Chartered Accountant and partner at Grant Thornton, prepared two reports with regard to the solvency of the defendant. These were confirmed by him on affidavit as reflecting his true opinion and they were tendered. 22 In the first report, Mr Jahani concludes that the defendant has been insolvent since at least 9 August 2017, and has remained so up to the date of that report being 7 February 2019. Mr Jahani also considered various indicia of insolvency and concluded that at least the following were present: inability to raise further equity capital, inability to produce timely and accurate financial information to display trading performance and financial position and make reliable forecasts, creditors unpaid outside trading terms, no access to alternative finance, special arrangements with creditors, and what he termed "Legal issues". Taken together, those are powerful indications of insolvency. 23 In his second report, Mr Jahani undertook what he describes as a working capital analysis for each month during the period July 2018 to the present on the basis of further information he had received. That information constituted an electronic copy of a MYOB data file of the defendant's books of account produced by the defendant under a notice to produce. From that file, Mr Jahani was able to extract data from which he produced monthly balance sheets for each month during the period I have mentioned. Making certain assumptions favourable to the defendant on account of some unknowns, Mr Jahani confirmed his opinion that the defendant was insolvent from at least 9 August 2017 and thereafter, and that it is still insolvent. 24 In my earlier reasons for judgment referred to above, I analysed the defendant's payables reconciliation summaries (at [63]). I refer to that analysis. It also strongly evidences the defendant's insolvency throughout the relevant period. 25 In that regard, I draw particular attention to some small debts, including that owed to Andrew Quigley & Co of $11,550 which was owed throughout the period and remains unpaid. That too is significantly indicative of insolvency. 26 Mr Assaf SC, who appeared with Mr Simpkins for the plaintiff, took me through the audited annual financial reports of the defendant for the years 2013 to 2016, which demonstrate substantial working capital deficiencies throughout that period. The report in each case contained a statement by the auditors drawing attention to there being a material uncertainty regarding the continuation of the defendant as a going concern and that it may be unable to realise its assets and extinguish its liabilities in the normal course of business. 27 The last audited financial reports were for 2016 although they were signed only in June 2018. In its defence, the defendant admitted that contrary to its statutory obligations it had failed to lodge with ASIC any audited financial report for the financial year ended 31 August 2017, which was due to have been lodged by 31 December 2017. It also admitted that it had been late in lodging its audited financial reports for every year from 2012 to 2016. In some cases it was several years late. These failures are also indicia of insolvency. 28 For completeness, the plaintiff also tendered an unaudited and unsigned draft of a special purpose financial report for the period from 1 January 2017 to 31 August 2017, and made submissions with reference to other evidence that was tendered to show why it did not properly reflect the financial position of the defendant on that date. Without evidence as to who prepared it, from what and for what purpose, I am not able to place any weight on what it contains. There is therefore no need for me to look further at the plaintiff's responses to the report. 29 On the basis of the evidence of insolvency that I have referred to above, I am more than satisfied that the defendant was insolvent in October 2018 at the time that the statement of claim was filed, and that it has remained insolvent thereafter. 30 There are no apparent reasons to cause me to exercise my discretion against ordering the winding up of the defendant. 31 With reference to the affidavit of the plaintiff's solicitor Pravin Aathreya, I was satisfied with regard to the formal requirements of notice and publication. 32 I received in evidence a consent from the proposed liquidators, Ryan Eagle and Peter Gothard of Ferrier Hodgson, to be appointed as liquidators. The evidence is that they are eminently qualified. They were appointed administrators of the defendant on 17 April 2019. They therefore already have some familiarity with the affairs of the company and are well positioned to assume the role of liquidators. 33 In the circumstances I made orders winding up the defendant and appointing Messrs Eagle and Gothard as liquidators. There was no reason not to make the customary order that the costs of the proceeding be costs in the liquidation, particularly given that the plaintiff's efforts have resulted in the liquidation of the defendant for the benefit of all its creditors, not just the plaintiff. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stewart.

Corporations Act 2001(Cth)ss 95A, 459A, 459P

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