TQM Design and Construct Pty Limited v Golden Plantation Pty Limited

Judgment 1This is a contested winding up application. 2The plaintiff proceeds with the benefit of a presumption of insolvency arising under s 459C(2)(a) of the Corporations Act 2001 (Cth) in consequence of the defendant's failure to comply with a statutory demand in the sum of $2,035,000. 3When the winding up application came on for hearing on 12 May 2011, the defendant made an application under s 459S for leave to defend on a ground that could have been relied upon in seeking to have the statutory demand set aside (namely, that there existed a genuine dispute as to the existence of the $2,035,000 debt). That application was unsuccessful: TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011] NSWSC 438. An allegation by the defendant that the statutory demand had not been served so as to give rise to the presumption of insolvency was also disposed of adversely to the defendant: TQM Design and Construct Pty L td v Golden Plantation Pty Ltd [2011] NSWSC 421. 4Upon the hearing of the winding up application, the defendant's principal contention was that the proceedings are an abuse of process and should accordingly be dismissed. 5The abuse of process contention is based on the proposition that the defendant does not in truth owe the plaintiff the money the subject of the statutory demand or, at least, that the plaintiff should not be allowed to proceed on the basis that the money is owed. 6Because of the dismissal of the s 459S application, the defendant is not permitted to oppose the present winding up application on a ground that could have been relied on by it for the purposes of an application for an order setting aside the statutory demand. One such ground (made available by s 459H(1)(a)) is that there is a genuine dispute about the existence of the demanded debt. To contend that the debt is not owing is, of course, to advance the strongest possible form of dispute regarding the debt's existence. 7The defendant says, however, that there is, in the context of a winding up application, a species of abuse of process related to lack of genuineness of the debt the subject of the statutory demand that transcends the notion of mere "dispute" referred to in s 459H(1)(a). This particular species of abuse of process is said to be that identified by the Court of Appeal in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374 as being the "second limb" referred to Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83, that is, where the availability to the applicant for winding up of some more suitable alternative remedy means that the winding up application is being used for an improper purpose. 8The defendant refers, in this connection, to other litigation. By a deed dated 1 October 2009, the defendant guaranteed certain obligations owed by KCL Developments Pty Ltd ("KCL") to the plaintiff (the words of the deed's first operative clause are: "GP [ie, the defendant] agrees to be immediately responsible to TQM [ie, the plaintiff] for the repayment to it of the finance balance"). The defendant charged its property at Penfield in South Australia in support of its obligation as guarantor. The plaintiff maintains that the "finance balance" became due and payable by KCL and demanded payment by the defendant as guarantor. 9KCL, however, sued the plaintiff and others with a view to the avoidance of the contract which was the source of the obligation in respect of the "finance balance" owed to the plaintiff by KCL. The plaintiff moved to have those KCL proceedings struck out. An order striking them out was made by consent and KCL filed amended proceedings. The plaintiff again moved to have the proceedings struck out. That motion has yet to be determined. 10In the result, therefore, proceedings are on foot in which KCL, which is effectively the principal debtor in respect of the "finance balance" the subject of the guarantee given by the defendant to the plaintiff, is seeking to obtain a decision of the court avoiding the instrument from which the guaranteed obligation arises. 11The plaintiff has also commenced proceedings against certain natural persons who are guarantors of the obligation owed to it by KCL. 12The present defendant is not a party to either of the proceedings just mentioned. They are proceedings in which the principal debtor (KCL) and guarantors other than the present defendant attack the source of the alleged principal obligation said to be owed by KCL to the present plaintiff. 13The present plaintiff - that is, the applicant for winding up - does not pursue and has not foreshadowed, as against the defendant, any alternative remedy to which the defendant can point and say, in effect, first, that the plaintiff should agitate for that remedy rather than pursue the winding up application and, second, that the plaintiff's pursuit of the winding up proceeding is infected by an impropriety of purpose coming from the failure to agitate for the alternative. There is, to my mind, no abuse of process within the "second limb" recognised in Australian Beverage Distributors (above). Rather, the case is classically of the s 459H(1)(a) kind. It was open to the defendant, having been served with the plaintiff's statutory demand, to contend that the first of the proceedings I have mentioned called into question the principal indebtedness of KCL and that there was accordingly, in a derivative sense, a genuine dispute as to the defendant's indebtedness as guarantor. The defendant did not take that course and, because of s 459S, cannot seek to defend the winding up proceedings on the basis that the debt claimed in the statutory demand does not exist. 14The defendant has the same problem in relation to another matter it seeks to assert by way of defence, namely, that the deed of 1 October 2009 cannot be relied upon by the plaintiff as the source of any financial obligation of the defendant because to the plaintiff it is not duly stamped with mortgage duty under the Duties Act 2007 (ironically, perhaps, the defendant had to give the "usual undertaking by person liable" under rule 31.13(1) of the Uniform Civil Procedure Rules 2005 in order to introduce into evidence pursuant to s 304(1) of the Duties Act the instrument upon whose unstamped quality it wished to rely). 15It is the contention of the defendant that the deed of 1 October 2009 is a "mortgage" as defined by the Duties Act and that, because it has not been stamped ad valorem with mortgage duty, it cannot be relied on by the plaintiff as a source of the creditor status necessary to enable it to bring the winding up proceedings. Furthermore, it is said, any stamping that might now be effected cannot put matters right so as to invest the plaintiff with creditor status retrospectively to the time of commencement of the proceedings (or any subsequent time up to the time of eventual stamping): Boral Recycling Pty Ltd v Wake [2009] NSWSC 712 . 16Section 459S does not allow the defendant to make this argument: Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 171 FLR 449. In addition, the subject matter of the security created by the deed in question is land in South Australia which means that, in the ordinary course, it is not subject to New South Wales mortgage duty; and the defendant's contention that the deed of 1 October 2009 effects some form of cross-collateralisation or other relevant connection with a mortgage of New South Wales land held by the plaintiff direct from KCL as security for the "finance balance" (so as to create a "mortgage package" within s 214 of the Duties Act ) is simply not made out on the terms of the deed itself. 17It follows that, even if s 459S had not precluded the defendant's submission that the Duties Act in turn precluded the plaintiff's assertion of creditor status as against the defendant, that submission would have failed in its own right. 18Ultimately, therefore, the defendant is thrown back on to the only other ground of defence foreshadowed by it, that is, the ground that entails its displacing the s 459C(1)(a) presumption by affirmatively proving its solvency. It is necessary to examine the evidence relevant to that and, in doing so, to bear in mind some well-established principles regarding solvency and proof of solvency:

1. The question of solvency must be assessed at the date of the hearing, but future events are not to be ignored: Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 466-467; Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16] .
2. The cash flow test is the principal determinant of solvency but this does not mean that the extent of the company's assets is irrelevant to the inquiry, where the assets may be a ready source of cash: Keith Smith v East West Transport Pty Ltd v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501 at [32]-[33]; Expile Pty Ltd v Jabb's Excavations Pty Ltd ( above) , Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243 ; (2005) 54 ACSR 410 at [75]-[78]; Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLC 471 .
3. Credit resources available must also be taken into account ( Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at CLR 671; Expile Pty Ltd v Jabb's Excavations Pty Ltd (above)) but will be of no assistance if they are of such a kind as to involve no more than substitution of one on-demand or near due liability for another: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148 at [99].
4. There is a distinction between solvency and a surplus of assets. A company may at the same time be insolvent and wealthy: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44].
5. The defendant bears the onus of demonstrating its solvency by leading the "fullest and best" evidence of the company's financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081.
6. Proper verification of assets and liabilities is critical to rebut the presumption of insolvency. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd (above); Expile Pty Ltd v Jabb's Excavations Pty Ltd (above).
7. In QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128, White J said at [26], in relation to proof that a company is solvent, that "the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation." 19The most recent financial statements put into evidence by the defendant are for the year ended 30 June 2010, that is, more than ten months before the hearing of the winding up application. These carry a director's declaration dated 29 April 2011. They are not audited. The result for the year in question was a loss of $22,956. The only income items were dividends of $601 and interest of $3. Current assets at 30 June 2010 were $11,830. Non-current assets were $6,651,250 being almost exclusively land (the defendant owns not only the property at Penfield in South Australia but also a property at Bloomsbury in Queensland). There were current liabilities of $28 and non-current liabilities of $1,740,028 made up of bank loans ($178,196) and loans from directors ($1,561,832). 20The National Australia Bank has security in the form of registered first mortgages over the defendant's properties at Penfield and Bloomsbury. In addition, the Penfield property is subject to a contract for sale dated 21 April 2011. The purchaser is Renewable Industries Pty Ltd "and/or nominees". The stipulated completion date is 5 December 2011. The price is $5,818.182. The contract is expressed to be "subject to the purchaser lodging a development application with the City of Playford Council within 60 days of this agreement". The vendor (ie, present defendant) is entitled to rescind if notice of lodgment of such a development application has not been received "following the completion of the 60 day period granted to the purchaser". An initial deposit of $10,000 is refundable if the development application is not lodged by the purchaser. 21The purchaser is not obliged to lodge the development application. The contract for sale is thus, in substance, no more than an option under which the purchaser has the ability to proceed with the purchase or not as it chooses. The contract cannot be regarded as an assured or even probable source of future cash flow, whether in December 2011 or at all. 22The National Australia Bank wrote to Mr Kok, a director of the defendant, on 4 May 2011 referring to the contract for the sale of the Penfield property and saying: "Upon settlement of the sale of this parcel of land, an amount of $1.125M will be required to permanently reduce facilities. The balance of the sale proceeds (over & above $1.125M) will be paid to you." 23This letter confirms that there was still substantial indebtedness to the bank in May 2011. The letter also says: "As Golden Plantation does not have any borrowings with the Bank (other than a $174k. loan which was originally established in your personal name for simplicity purposes), we will look to repay facilities in the name of Axis Learning Centre P/L. There is no other direct liability for Gold Plantation P/L." 24This letter is put forward as evidence of willingness of the NAB to wait for its money. But, of course, it does not say that. It merely says that when the sale of the defendant's land at Penfield is completed, the bank will expect to receive $1.125 million out of the proceeds, even though the debt owed by the defendant to the bank is only $174,000. This indicates some arrangement under which assets of the defendant (in the form of part of its sale proceeds, if a sale eventuates) will be syphoned off for the benefit of persons other than the defendant itself. 25There is no evidence about the terms of the bank facilities. The indebtedness to the bank may well be payable on demand. The defendant has not sought to show that this is not so; nor has it sought to explain the basis on which the bank debt is classified as a non-current liability in the 30 June 2010 balance sheet. The bank's letter is not inconsistent with the existence of a power on its part to call up the whole at any time. 26The more substantial liability at 30 June 2010 was the directors' loans of $1,561,832. Again there is no evidence of when these sums are due and payable but two things indicate that, despite their classification as non-current assets at 30 June 2010, they were then and are now either immediately due and payable or due and payable on demand so as to be seen as a problem when it comes to proving solvency. First, there is the fact that the defendant puts forward as relevant a $3.7 million "indicative" loan offer from an outside source to be examined presently (the proceeds of such a loan could clear both the bank debt and the directors' loans, if still at June 2011 levels); and, second, the defendant says (and Mr Kok, for himself, confirms in his affidavit of 6 May 2011) that the directors are willing to undertake to the court in terms set out in the affidavit as follows: "My wife and I are not seeking to be reimbursed for the loans made by us to the company. We are prepared to capitalise the personal loan due and owing to us. Pending any capitalisation, my wife and I are prepared to subordinate the loans we made to the company behind any external trade creditors." 27This is said in the context of a statement that Mr Kok and his wife have been paying the local government rates and land tax on the properties at Penfield and Bloomsbury. 28Although the statement of willingness made by Mr Kok for himself and his wife and set out above was made in an affidavit of 6 May 2011, it was not suggested at the hearing of the winding up application on 12 and 13 May 2011 that any step had been taken to capitalise or subordinate the loans in question. 29Except, perhaps, when it relates to something to be done in the near future and in circumstances where the matter will return promptly to court, an undertaking given to the court is not a satisfactory foundation upon which to allow an insolvent company to continue in operation. I need not repeat here the reasons for that view I stated in Owners of Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 at [21]-[27]; see also Deputy Commissioner of Taxation v Lencal Excavations Pty Ltd [2004] NSWSC 783 at [18]; Leveraged Equities Limited v Hilldale Australia Pty Ltd [2008] NSWSC 190; (2008) 26 ACLC 182 at [61]. This is not at all a suitable case for the acceptance of an undertaking such as that proposed. 30I have mentioned an "indicative" loan offer of $3.7 million. The defendant has put into evidence a self-styled "indicative letter of offer" dated 11 May 2011 from ABMC Mortgage Centre Pty Ltd of Ashfield. That company itself is not the proposed lender. The lender is described as "Private Fund". The loan amount is $3.7 million. Other attributes of the loan the subject of the "indicative letter of offer" are: "PURPOSE: Refinance - Block of Land

SECURITY: Registered 1st Mortgage over land located at: Penfield, Adelaide "

31The letter also contains the following special conditions: "1. Satisfactory valuation of the Penfield Land security. 2. Letter from BAB confirming Loan pay-out against the land security being $1.125 million. 3. First ranking fixed and floating charge over Golden Plantation Pty Ltd, the applicant borrower." 32The letter contains an endorsement, apparently signed on the defendant's behalf, saying that the defendant wishes to proceed with the loan. 33The indicative letter of offer leaves a number of imponderables. Who or what is the lender described as "Private Fund"? What capacity does "Private Fund" have to provide $3.7 million? Will the two-year loan term be confirmed and, if not, what will the consequence be? Will the contemplated valuation of the property be "satisfactory"? Will the National Australia Bank provide the necessary letter concerning pay-out (and is the letter already in hand sufficient)? Is the defendant willing and able to grant the contemplated first ranking fixed and floating charge? 34A particular imponderable comes from the requirement for a registered first mortgage over the Penfield property. Recorded on the title to that property is a registered mortgage to the National Australia Bank and a caveat lodged by the present plaintiff, no doubt by reference to the specific charge over the Penfield property created by the defendant in favour of the plaintiff by the 1 October 2009 deed. The defendant does not put forward anything to show that the National Australia Bank and the plaintiff would willingly step back to allow "Private Fund" to become the registered first mortgagee. In the case of the plaintiff, it is reasonable to infer that it would not do so except upon payment by the defendant of the very liability under the 1 October 2009 deed that the defendant says is not owing or ought not be enforced against it. 35In summary, there can be no confidence at all that the conditions necessary to obtain this loan can or will be satisfied, that a loan term of two years will be confirmed or that the unidentified "Private Fund" has the financial capacity to provide the contemplated loan moneys. 36I proceed now to state my conclusion of the matter of proof of solvency. Bearing in mind, in particular, the requirements laid down in Expile Pty Ltd v Jabb's Excavations Pty Ltd (above) as well as other considerations outlined at paragraph [18] above, I cannot, on the evidence before me, make the positive finding of solvency for which the defendant contends. There are several reasons for this. First, there is not before the court any balance sheet at a date more recent than 30 June 2010. No real attempt has been made to provide up-to-date and comprehensive financial information. Second, the only analysis the court has of the financial position is that of Mr Kok, its director. No attempt has been made to provide verification by an external accountant. Third, the inference is available and, in the absence of anything to the contrary presented by the defendant, I find that the indebtedness to each of the National Australia Bank and the directors (which exceeded $1.73 million, in aggregate, at 30 June 2010) is due on demand. Fourth, the contract for the sale of the Penfield property to Renewable Industries provides no assurance or even well-based expectation of sale proceeds in December 2011 or at all and therefore contributes nothing to solvency. Fifth, the expressed willingness of Mr Kok and his wife to capitalise or subordinate their debt has not been translated into action and an ongoing and indefinitely subsisting undertaking by them to the court in that respect is an unacceptable measure in a case where the court is asked to make a positive finding on solvency. Sixth, the indicative letter of offer from ABMC Mortgage Centre provides no measure of assurance that any long-term loan is available. 37In the result therefore, the defendant has failed to displace the presumption of insolvency arising under s 459C(2)(a) and the court must proceed on the basis that the defendant is insolvent. 38Since that is so and: (a) the other grounds of defence put forward by the defendant fail; (b) all formal matters required to be proved by the plaintiff have been proved; and (c) nothing else relevant to the exercise of the court's discretion has been placed before it, the orders are as follows:

1. Order that Golden Plantation Pty Ltd ACN 072 462 876 be wound up.
2. Order that Andrew Hugh Wily of Level 5, 175 Castlereagh Street, Sydney, an official liquidator, be appointed liquidator of the said Golden Plantation Pty Ltd.
3. Order that the defendant pay the plaintiff's costs of the proceedings.

Amendments 21 September 2011 - Insert "not" in ssecond line Amended paragraphs: 18.1 21 September 2011 - Insert "not" in ssecond line Amended paragraphs: 18.1 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 September 2011