Turco & Co Pty Ltd v Pendella Holdings Pty Ltd; In the matter of Pendella... [2010] FCA 213 | Case summary

CONSIDERATION 49 I turn then to consideration of the evidence without material regard to the non‑current asset in the balance sheet described as "Receiveables - G Parish". 50 In this case, the plaintiff has served on the defendant company a statutory demand in respect of a debt claimed of $38,004.40. The defendant has not complied with the demand and did not make any application under s 459G CA for an order setting it aside. As a result, the Court must presume that the company is insolvent: see s 459C(2)(a) CA. By reason of s 459C(3) CA the presumption operates, except so far as the contrary is proved, for the purpose of a winding up application made under s 459P CA. The primary question in this proceeding is whether the company has proved the contrary so far as is this presumption of insolvency is concerned. 51 It is open to the company to call evidence going to its solvency to rebut the presumption of insolvency without the leave of the Court. Where a ground for resisting the winding up application could have been raised earlier, but was not, the leave of the Court is required under s 459S CA. However, an argument that the company is in fact solvent is not a ground the company can rely on in an application to set aside a statutory demand. Therefore, leave in this regard is not required under s 459S: see Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [139]. 52 Section 95A CA 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. Counsel for the parties to this proceeding acknowledge that in this regard, the CA focuses on the cash flow test rather than a balance sheet test in determining whether or not a company is insolvent. Counsel also accept that it is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. The court must have regard to commercial realties. 53 Counsel for the company contends that commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable. The Court accepts that this is the case although in this case this approach appears to have little scope for application. 54 The Court also accepts that in assessing whether a company's position as a whole reveals a surmountable temporary liquidity or an insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality in that, in normal circumstances, creditors will not always insist on payment and that they will allow some latitude in time for payment of their debts, though that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: see Southern Cross Interiors Pty Ltd (In Liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621, at [54]. 55 It is generally accepted that a company's financial statements and assets are not irrelevant to the inquiry that must be undertaken, although the question of insolvency is not to be answered merely by looking at these statements of assets: see Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 65. 56 Equally it is accepted that a company's capacity to raise funds from its resources or by way of unsecured borrowings can be taken into account when assessing insolvency on a cash flow basis: see Sandell v Porter (1966) 115 CLR 666; [1996] HCA 28, at 670. 57 Counsel for the company accepts that in order to rebut the presumption that it is insolvent, it needs to present the Court with the fullest and best evidence of the financial position of a defendant and that, ordinarily, unaudited accounts and unverified claims of ownership or valuation are not probative of solvency; nor are bald assertions of solvency arising from a general review of the accounts even if made by qualified accountants: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd; Ex Pile Pty Ltd (ACN 093 403 135) v Jabb's Excavations Pty Ltd (ACN 066 676 926) [1999] FCA 728 at [44] (Jabb's Excavations). However it is also fair to comment, I think, that depending on the particular facts of a case presented, it may be inappropriate to impose too high a standard in some cases, for example, where to do so would be to require a small viable company with no creditors to expend significant sums employing external accountants to rebut the presumption of insolvency: see, in this regard, Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd (2008) 219 FLR 422; [2008] QSC 210, at [29]. Here, Mr Jeffery is called as an independent auditor, although his investigations may be said to have been relatively limited, as explained below. 58 It is also accepted all round that the question of solvency must be assessed at the date of the hearing, though this does not mean that future events must necessarily be ignored: Jabb's Excavations. 59 Where, as here, the application for winding up in insolvency relies on a failure by the company to comply with a statutory demand, the company must make a decision whether or not the particular debt said to be owing is material to establishing its solvency: Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37, at 674. It is generally accepted that the concept of "material" in this context is not the same as "determinative of" and that a capacity to have some effect is all that is required: see Bluechip Development Corporation (Cairns) Pty Ltd (ACN 117 021 566) v PNP Realty Pty Ltd (ACN 092 364 633) [2009] ACTSC 33 at [28]. 60 It is also appropriate to note, as counsel for the company emphasises, that s 467(1) CA gives a court a discretion not to wind up a company in circumstances where the insolvency is not actual but presumed. See Jabb's Excavations; Lechmere Financial Corp v Aspermont Ltd [2003] FCA 1138 at [83] - [85]. Circumstances for the exercise of the discretion may be where the defendant is able and willing to pay the amount of the debt said to give rise to the presumption of the insolvency. That, of course, is not the case here. 61 The profit and loss statement audited by Mr Jeffery shows a gross profit for the year ended 30 June 2009 of $399,412 for the business of the company. This include sales of $1,324,641, from which purchases of $925,229 had been deducted. 62 The profit and loss statement for that same period lists various expenses totalling $329,778, including for employment, a levy to Newfurn and a range of other expenses that bespeak the continuing operation of a business. An operating profit of $79,215 is disclosed in the profit and loss statement. 63 The balance sheet for the year ended 30 June 2009 discloses total assets of $363,753. The current assets, including inventory of $50,000, total $62,673. The non‑current assets total $297,080. 64 The balance sheet also includes liabilities, including current liabilities to Bankwest, ANZ credit card, "Joondalup loan" and "trade creditors". The total of these liabilities is $252,812 with the trade creditors constituting $104,359. The total of the liabilities is calculated at $596,552 showing an excess of liabilities over assets of $232,799. Thus there is a negative equity disclosed in that sum. 65 Counsel for the company, by reference to the evidence of Mr Jeffery says that it may be considered instructive to notionally update the balance sheet to include the contract for the supply of floor coverings in the sum $299,241, which would increase the company's assets to $662,994. Further, if one accepts that Mr Parish will not call up the long term liability of $167,500 due to him at any time in the foreseeable future, then the company's liabilities may be reduced to $429,052, although one should reasonably add in the currently disputed debt claimed by the plaintiff of approximately $38,000 making total liabilities of approximately $460,000. In these circumstances the negative equity is turned around into a positive equity on the balance sheet of approximately $200,000 and so it may be said that the debt claimed by the plaintiff of $38,000 is not material to the question of solvency so far as the balance sheet is concerned. Counsel for the company accepts, however, that the balance sheet is not determinative of the question of solvency and that the CA focuses on the cash flow test. In this regard, so far as the trade creditors or other creditors referred to in the balance sheet are concerned, counsel for the company says that there is no evidence to suggest that debts cannot be and are not being met as and when they fall due. To the extent that there was an issue with the ATO, payment arrangements are now in place. There is nothing to suggest that arrangement is not being honoured. 66 Counsel for the plaintiff questions whether a notional updating of the balance sheet is permissible or an appropriate way to approach the question of solvency in this case and whether the onus to discharge the presumption of insolvency has been satisfied. So far as the contract for the supply of floor coverings is concerned, counsel points out that this is a contract into the future and, in any event, nothing is known as to what the profitability of the contract will be and when income from it will be received. To some extent this latter submission is correct, although the affidavit evidence of Mr Parish concerning this contract and such contracts is not challenged. It is a contract to be performed between March and December 2010. A deposit has apparently been paid. One may assume it involves a commercial installation. Mr Parish in his affidavit sworn 19 September 2009, says the normal gross profit margin for commercial installation is between 19% and 23%. If one assumes - even though there is no direct evidence concerning the profitability of this contract - that 20% were the profit margin on this particular contract, then the profit margin would be in the vicinity of $60,000. There is however nothing to suggest that this profit will be earned any sooner than the completion date in December 2010, aside from the deposit which has already been paid. The amount of the deposit has not been indicated but presumably it has been taken into account in the current cash flow context and financial statements produced to the Court. 67 So far as the disclosed liabilities and other creditors of the company are concerned, no creditors have come forward in relation to this application, or have been identified as problem liabilities as at the date of the hearing. The current liability to Bankwest has been identified by Mr Parish in his affidavit sworn 19 September 2009. At [7.7.7] he says the bank loan is secured by a term deposit held by Bankwest for $89,000. The ANZ credit card is in a small sum. Mr Parish at [7.7.10] of that same affidavit identifies the securities that the company has provided for the operation of the Southgate Carpet Choice store. These include the term deposit held by Bankwest, a term deposit held with ANZ of $50,000, a second mortgage granted to the ANZ of $100,000 and a secured business loan of $40,000. 68 I consider in all the circumstances that it is reasonable, so far as the balance sheet is concerned, to recognise that the liabilities currently shown as $596,552 should, in a more practical business environment, be considered without regard to the long term liability to Mr Parish of $167,500. That reduces the total liabilities to approximately $429,000. The balance sheet discloses total assets of $363,753. However, I am not inclined to accept the submission made on behalf of the company that this figure could notionally be increased by the value of the contract that is about to performed between March and December 2010 in a gross sum of $299,241. It is a prospective contract not currently earning income, although I accept it does represent some value to the company. The result on this approach is that liabilities exceed the assets by approximately $65,000, to which sum the amount of $38,000, the subject of the statutory demand of the plaintiff, should be added, suggesting a figure of approximately $105,000. This, of itself, having regard to Mr Jeffery's evidence, suggests the solvency/insolvency of the company is balancing on a knife's edge. 69 While it is useful to look at the company's balance sheet, the balance sheet approach is not a determinative guide to insolvency. Rather, it is the cash flow test applied in a practical business environment that requires close consideration. The practical business environment, on the evidence before the Court, is that the Southgate Carpet Choice store - the sole store now operated by the company - is apparently doing business as usual. It is managed by the son of Mr Parish. Various securities have been provided to Bankwest and the ANZ and other securities have also been provided. Arrangements have been put in place with the ATO so that regular monthly payments are to be made to the ATO in respect of the existing liabilities commencing November 2009. There is nothing in the material provided to the Court on this application to suggest that those liabilities are not being met according to the arrangements put in place with the ATO. Nor is there any other evidence to suggest that trade creditors of the business of the company are not currently being satisfied. No doubt this was a factor that led Mr Jeffery in his November 2009 affidavit to remark that it appeared the company was meeting its debts as and when they fell due. 70 However, it seems to me that a critical question is whether the $38,004.40 liability, the subject of the statutory demand, by reference to which insolvency is presumed, is material to the solvency issue. In this regard, it is difficult to see how the company could presently pay this liability if it is required to do so. If the company were obliged to pay that sum at the time of the hearing of this proceeding, having regard to the finely balanced position in relation to the range of other creditors - especially the ATO and trade creditors - it must be doubted the company would have the capacity to pay the debt. There is no evidence, for example, to suggest any surplus income or ready access to finance to which recourse can be had for such a purpose. The costs (presumably) incurred by the company in engaging the auditor and solicitors and counsel for this proceeding are not the subject of any evidence but presumably have been accounted for. The balance sheet position, as noted, is at best precarious. The contract to be completed in December 2010 is some way off. There is no suggestion that Mr Parish ordinarily rises to the occasion to pay such debts, although given the general state of affairs of the company disclosed by the evidence, such as deferment of the long term liability, perhaps he occasionally does. 71 In my view, the uncertain position as to the company's insolvency or solvency position is not resolved one way or the other by the evidence of Mr Jeffery. In a case like this the Court looks to independent evidence going to the solvency of the company to determine the issue. Mr Jeffery initially conducted an audit in late 2009 without regard to any insolvency proceedings in the Court and issued a qualified audit report. As noted earlier, he noted the poor record keeping of the company and the fact that it appeared that the accounts had been understated by a considerable sum of in excess of $417,000. For these reasons, he reasonably formed the view that the accounts could not be relied upon in the form presented. Nonetheless, the matters of concern to him were, in a sense, all on the "credit side" from the company's solvency point of view. If one were to: ignore the long term liability of the company to Mr Parish; assume the verification of the understatement of the accounts; and take into account as a subsequent material event the $299,241 contract incurred after the date of the balance sheet, then from his point of view the solvency of the company would in all probability be proved. 72 In his November 2009 affidavit, Mr Jeffery expressed the view in relation of the conduct of the business that it would appear that, at the date he made his affidavit the company was in a position to pay its debts as and when they fell due. However, when pressed both in cross‑examination (and again asked about in re‑examination), Mr Jeffery made it clear that the case for solvency would be strengthened only if it were proved beyond doubt that the $167,500 liability would not be claimed and investigations confirmed that the accounts had been understated. The evidence supports the view that the long term liability to Mr Parish will not be acted upon by Mr Parish in the present circumstances. That plainly is a positive in relation to the solvency issue. However, there is little before the Court to verify that the accounts have been understated. There is also an absence of any real evidence as to the trading position of the company as of the date of the hearing, although there is affidavit evidence from Mr Parish that the company has done better than expected in the months leading up to his November 2009 affidavit. 73 In the face of this, counsel for the company, in effect, asks the Court to infer that, in the present circumstances at the date of the hearing, the company is meeting its obligations to trade creditors and that nothing untoward has occurred that would affect the view to be taken of the solvency of the company. For example, there is nothing to suggest that the arrangements with the ATO are not being met. 74 So far as the contract soon to be performed is concerned, it is difficult to take into account the materiality of that contract in respect of which it would appear, in the absence of evidence to the contrary, that a profit will not be earned until December 2010 at the earliest. 75 The result is that it is difficult for the Court, just as it was difficult for the Mr Jeffery, to say that the solvency of the company has been plainly demonstrated. It is a possibility, but it is not clear that it is solvent. 76 The statutory presumption is that the company is insolvent. It is for the company to rebut the presumption of insolvency. The company has called evidence which demonstrates that there are a variety of factors that lend support to the view that the company might be solvent. However, in my view, that is as far as the evidence goes and solvency has not been satisfactorily proven. When additionally the question is asked what material effect the disputed debt of approximately $38,000 would have, if any, on the question of solvency, I consider the answer can only be that it would have a decidedly negative effect. If the company were called upon to pay that debt forthwith, the call for payment would certainly have a material effect upon the company's position. There is nothing to suggest that the company has the wherewithal to meet that payment at this juncture. It is known that the plaintiff requires that debt to be paid. It is not the case of a trade creditor who may be prepared to "give and take" a little in relation to the timely payment of an invoice. There is no evidence that any other creditor of the company has an outstanding demand for immediate payment. The only other relevant creditor in this regard is the ATO, which has been prepared to accept payment of a large debt on terms over some years. 77 In these circumstances, it seems to me that the debt the subject of the statutory demand which has produced the presumed insolvency of the company, is a material factor in assessing the extent to which the company has proved to the contrary the presumption that the company is insolvent. I am not satisfied, on all the evidence, that the company has rebutted the presumption of insolvency, that is to say, that it has proved to the contrary the presumption of insolvency. Evidence has been adduced which suggests that the solvency/insolvency position is on a knife's edge. While I acknowledge that it is a drastic step to wind up a company in insolvency and I should not make such an order lightly, I am simply not satisfied that the evidence adduced by the company proves to the contrary the presumption of insolvency. 78 In these circumstances, the company's opposition to the application for winding up must fail.

Turco & Co Pty Ltd v Pendella Holdings Pty Ltd; In the matter of Pendella Holdings Pty Ltd

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (8 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (13)

Cited By (4)