Truong v HT Design & Construction Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - winding up in insolvency - non-compliance with statutory demand - defendant company carrying onus to prove solvency - reliance on report and opinion of chartered accountant - report and opinion disclose no satisfactory basis for conclusion stated - plaintiff adduces evidence of substantial debts due and payable not taken into account in report and opinion - defendant's onus not discharged - submission that making of winding up order should be de deferred - no basis for deferral particularly where company trading and incurring debts

LEGISLATION CITED : Consumer Trader and Tenancy Tribunal Act 2001, s.51 Corporations Act 2001(Cth), ss.95A, 459A, 459C(2)(a)

Anvic Holdings Pty Ltd v Constable [2002] NSWSC 424 CASES CITED : Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87

PARTIES : Duc Vinh Truong and Nguyet Nga Truong - Plaintiffs HT Design & Construction Pty Limited - Defendant

COUNSEL : Mr J.T. Johnson - Plaintiffs Mr T.O. Bland - Defendant

SOLICITORS : Watson & Watson - Plaintiffs McDermott & Associates - Defendants

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

5357/06 DUC VINH TRUONG & ANOR v HT DESIGN & CONSTRUCTION PTY LTD

1 By originating process filed on 19 October 2006, the plaintiffs claim an order for the winding up of the defendant in insolvency and an order for the appointment of a liquidator. In making their application, the plaintiffs rely on 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 dated 5 August 2006. 2 The alleged debt on which the statutory demand was based involves a sum of $60,197.85 which, by virtue of an order made by the Consumer Trader and Tenancy Tribunal on 16 June 2006, was to be paid to the plaintiffs on or before 15 July 2006. There was no application by the defendant under s.459G for an order setting aside this statutory demand. 3 Although the defendant foreshadowed an application for leave under s.459S to bring forward, upon the hearing of the winding up application itself, matters that could have been advanced upon a s.459G application, that was ultimately not pressed. This was because, on the defendant's own evidence, impugning of the alleged debt of $60,197.85 would not have been material to proof of solvency so that s.459S(2) would have precluded the grant of leave. I would add that, as will become evident, the sum of $60,197.85 would not have been material to proof of solvency on the plaintiffs' case either. 4 In the end, the case resolved itself wholly into a contest on the question of solvency, with the plaintiffs having the benefit of the rebuttable presumption created by s.459C(2)(a) and the defendant therefore having the onus of proving itself to be solvent. 5 The defendant's task was thus to show, by reference to the evidence, that it is today in a state of solvency as described in s.95A of the Corporations Act: " 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." 6 There was no debate before me on the approaches to be taken to the question of solvency posed by s.95A. It was, I think, common ground that the section directs attention principally and predominantly to the cash flow test in a way described in paragraphs [14] and [15] of the judgment I delivered this morning in Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87: "14 In his report, Mr Topp referred to the two approaches commonly taken to the assessment of solvency - an analysis based on a cash flow test and a review of assets and liabilities by way of balance sheet test. He stated that the former is, in terms of s.95A, predominant. That this is the correct approach was recognised by the Court of Appeal in Keith Smith East West Transport Pty Ltd v Australian Taxation Office (2002) 42 ACSR 501, among other cases (see, for example, Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410; Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471). The effect and implications of s.95A are, in my respectful view, accurately reflected in the following passage in the judgment of Dodds-Streeton J in Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 at p.652: 'Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets."

15 The emphasis must be upon the extent of cash and other liquid assets (by which I mean assets readily convertible into cash), compared with the quantum of debts due and payable and to become due and payable in the immediate future. A comparison between the two can be made only as at a particular point but a state of solvency requires that, at each such point, the cash and liquid assets be sufficient to cover the debts due and payable and to become due and payable in the immediate future. But it is going too far to say that insolvency exists if there is, at a particular point, insufficiency. Such insufficiency is indicative of insolvency but is also consistent with the possibility of a temporary lack of liquidity. The indication of insolvency will be confirmed if the insufficiency represents an "endemic shortage of working capital": Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559. 7 The defendant relies particularly on two affidavits of Mr Singh, a chartered accountant. A report made by Mr Singh is annexed to his first affidavit. The second affidavit corrects or modifies the report by substituting a replacement page. The central part of Mr Singh's evidence is the paragraph of his affidavit reading: "On the basis of my report I have formed the view that H T design is solvent." 8 Mr Singh does not explain what he means by "solvent". He does not describe the process of consideration and analysis that led him to the view stated. He does not refer to a cash flow test, a balance sheet test or any other kind of test. In short, he does nothing at all to explain his conclusion, how he reached it or what it means. For this reason alone his opinion is of very limited use and value. 9 The limits on the usefulness and value of Mr Singh's opinion become more pronounced when one has regard to his annexed report. The report is in what appears to be a prescribed form required by the Building Services Authority of Queensland. The prescribed form seems to be the vehicle for conveying financial information to that authority on a periodical basis. 10 In this report obviously prepared for the purposes of reporting to the Queensland authority rather than for the purposes of these proceedings, Mr Singh says that he carried out tests or checks and sighted evidence as set out in the financial requirements for licensing developed by the Building Services Authority. He does not tell the court what those requirements are. There is therefore no evidence about the tests or checks Mr Singh carried out, nor is it there anything to identify the evidence to which Mr Singh had regard, except for an earlier statement in the report that he had reviewed financial information of the defendant for which the defendant and its directors were responsible, he having conducted no audit. 11 The only conclusion that can be drawn is that Mr Singh has taken entirely at face value whatever it was that the controllers of the defendant told him about its financial position. 12 Forming part of Mr Singh's report is a balance sheet of the defendant as at 30 October 2006, that is, some three and a half months ago. The balance sheet is unaudited and carries no notes. Taken at face value, the balance sheet shows current liabilities consisting wholly of trade creditors of $163,263 and current assets of $281,898. It may be because of this significant excess of current assets over current liabilities as at 30 October 2006 thus disclosed that Mr Singh formed the view he expressed on 6 December 2006 as to solvency - although, as I say, on the material presented, one has no way of knowing the basis for his view. 13 Even assuming that it is the excess of current assets over current liabilities that Mr Singh saw as conclusive, there is further evidence that makes it clear that, as things actually stood on 30 October 2006, current assets were significantly less than current liabilities; and that, it would appear, is also the position today. 14 It is necessary to refer to two items. First, the balance sheet on which Mr Singh relied disclosed a long term liability of $391,614 in respect of a loan from H L P Mortgage Co, apparently part of the JP Morgan group. I shall call it "JP Morgan". The plaintiffs have put the relevant security document into evidence. According to the terms of that document, all moneys secured had "automatically and immediately" become due and payable on 19 October 2006 when the present winding up application was filed or, perhaps, 14 days later when that application had not been withdrawn or dismissed. This was the effect of clause 4.1 of the security document and the definition of "insolvency event" in clause 1.1. 15 Clause 4.1, so far as relevant, is in these terms: "The Amount Owing [defined in clause 1.1 in an 'all moneys' fashion] automatically and immediately becomes due and payable by the Mortgagor to the Lender without the necessity of any prior notice on the happening of any one or more of the following events ('Events of Default'): … (2) an Insolvency Event occurs in relation to the Mortgagor; …" 16 The clause 1.1 definition of "Insolvency Event", so far as relevant, is as follows: "'Insolvency Event' means the happening of any of these events: (1) an application is made to a court for an order (and is not withdrawn or dismissed within 14 days of being made) or an order is made that a body corporate be wound up." 17 The filing of the originating process in these proceedings on 19 October 2006 and its subsistence unwithdrawn and undismissed for 14 days constituted an "Insolvency Event". Clause 4.1 accordingly operated to change whatever had been the regime regarding payment of the JP Morgan debt. 18 In addition, it was accepted at trial that the debt to JP Morgan is now $611,836.70, compared with the $391,614 referred to in the balance sheet to which Mr Singh had regard. The position today therefore is that the state of assets and liabilities reflected in that balance sheet must be adjusted, at the least, by eliminating the $391,614 long term liability and including an additional $611,836.70 in current liabilities. 19 The second matter to which the plaintiffs refer is two orders of the Consumer Trader and Tenancy Tribunal (or CTTT), in addition to that which formed the basis of the statutory demand on the basis of which the plaintiffs commenced these proceedings. Those orders were both made against the defendant in August 2006. Each was an order requiring the payment of money, with payment to be made, in each case, by 5 September 2006. The amounts are $356,373.25 and $340,093, a total of $696,466.25. 20 A certificate of the registrar of the CTTT in respect of each order was filed in the registry of the District Court on 6 December 2006. By force of s.51 of the Consumer Trader and Tenancy Tribunal Act 2001, therefore, each certificate of the registrar of the tribunal operated as a judgment of the District Court as from 6 December 2006. 21 While, for reasons I discussed in Anvic Holdings Pty Ltd v Constable [2002] NSWSC 424, there may have been no debt as such before the filing in the District Court, the position since 6 December 2006 has been that the total of $696,466.25 represents debts presently due by the defendant. This too must be added to the current liabilities in assessing the solvency position today. 22 Let it be assumed that, but for the two items I have mentioned, the financial position today is as depicted in the balance sheet as at 30 October 2006 to which Mr Singh referred (that being an assumption in favour of the defendant, of course). When the two items to which I have referred are taken into account, current assets which remain unchanged at $281,898 are seen to be swamped by current liabilities consisting of trade creditors to the extent of $163,623 referred to by Mr Singh, plus the $611,836.70 immediately due and payable to JP Morgan, plus $696,466.25 immediately due and payable under the District Court judgments - a total of $1,471,925.95. 23 The JP Morgan documents and the District Court judgments, standing alone, speak for themselves to the extent of over $1.3 million presently due and payable. 24 Counsel for the defendant tendered a statement of account in respect of the JP Morgan debt, suggesting that the creditor has not in fact made moves to require full payment and is still accepting periodic payments. He also drew attention to court files in respect of appeals against the two orders of the CTTT. None of that evidence detracts from the quality of debts as immediately and presently due. Assumptions about what a lender, in the position of JP Morgan, might do by way of forbearance or not insisting on its rights or granting indulgences cannot be taken into account in an assessment of solvency. The Court of Appeal reminds us in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 that matters involving financiers' intentions or future actions are to be judged not according to what seems to be feasible or realistic or reasonable to assume, but according to proof of what the financier will do. There is no such proof here in relation to JP Morgan, nor can I make any assumption about the prospects in the appeals that have apparently been instituted in respect of the CTTT orders. In the absence of proof of some countervailing factor, I must take the District Court judgments as I find them. 25 The defendant does not seek to counter the matters involving JP Morgan and the District Court judgments. Nor has the defendant led evidence to show any addition to the current assets supposedly existing as at 30 October 2006. The defendant has not discharged the onus of proving solvency. The defendant is, on the evidence, insolvent and convincingly so. It is, in the words of s.459A, an "insolvent company". 26 It was submitted on behalf of the defendant that the discretion which s.459A undoubtedly confers to make or withhold a winding up order in respect of an insolvent company should be exercised against the making of an order in this case, at least to the extent of deferring the matter. This, it was said, would give time for the defendant to attempt to obtain evidence of a willingness of JP Morgan to continue to stay its hand and to seek to have the District Court judgments stayed. 27 Both those matters formed the basis of an application for an adjournment made by the defendant after the conclusion of the evidence, which application I refused. I did so because the defendant has been aware for a considerable time of both the JP Morgan situation and the situation in relation to the CTTT orders which matured into District Court judgments in December. The time to take the steps now foreshadowed was in the lead up to this hearing, that is in the period of almost four months in which it has been clear to the defendant that it was put to proof of solvency and would be required to prove solvency upon the final hearing. The defendant did not take that opportunity. It is too late now. 28 There is a particularly compelling reason why the s.459A discretion should be exercised in favour of making a winding up order. The evidence led by the defendant makes it clear that the defendant continues to operate in the home building industry and continues to enter into new contracts as well as incurring trade debts in the ordinary course. The court must be vigilant, in the interests of the wider community, not to allow members of that community to become the unwitting victims of insolvent trading. 29 I make the following orders

1. Order that H T Design & Construction Pty Ltd ACN 098 174 317 be wound up in insolvency.

2. Order that Terry Van der Velds of S V Partners, level 16, 120 Edward Street, Brisbane, Queensland, an official liquidator, be appointed liquidator of H T Design & Construction Pty Ltd.

3. Order that the defendant pay the plaintiffs' costs of these proceedings. 30 The orders may be taken out forthwith.

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