Vero, Workers Compensation (NSW) Ltd v Ferretti Pty Ltd

Affidavit evidence

1. Mr Haq reads his affidavit dated 8 July 2024, which refers to the incorporation of the Company in May 2020 to act as trustee of the Ashraf Education Trust, which purchased a commercial property in August 2021 in the Sydney central business district which could be leased out to commercial or retail tenants. Mr Haq's evidence is that the only asset owned by the Company is that commercial property, which was purchased in August 2021, partly with funds contributed through a company associated with Mr Haq and his wife, partly with funds contributed by Mr Haq and his wife personally, and partly from a loan from a third party lender. Mr Haq refers to his intention that the relevant property would be leased to commercial or retail tenants, and it was occupied by a tenant when it was originally purchased; however, the property was then vacant from September 2021 until July 2023 and Mr Haq refers to the adverse impact of the COVID-19 pandemic at that time. A third party now occupies the property, under licence, and there is evidence that that third party is willing to execute a lease with the Company in respect of the property, on specified terms, following the termination of the winding up that Mr Haq now seeks.
2. Mr Haq also addresses the liabilities and creditors of the Company, and refers to expenses which he pays in respect of the Company and to steps which are presently being taken to prepare draft financial statements in respect of the Company. Mr Haq notes that the Company had not lodged tax returns in previous years, and to his understanding that it had not traded, and it appears that Mr Haq is taking professional accounting advice in that respect. Mr Haq also refers to steps which have been taken to meet the liquidator's remuneration, by payment of the amount of that remuneration into his solicitor's trust account, to be paid to the liquidator upon a termination order being made, and the position as to the Company's ongoing financial position.
3. Mr Haq acknowledges a shortfall of $24,000 as between the Company's income and its expenses (including loan repayments, council rates, strata levies and land tax) in each year. He indicates that he and his wife are willing and able to meet that amount on behalf of the Company on an ongoing basis and, if the present tenant of the property does not enter into a lease, at least for the next 12 months pending a sale of the property to meet the Company's liabilities.
4. Mr Haq also points to the circumstances which had led to the previous failure to meet strata levies which had resulted in the winding up order against the Company, and the fact that that process has demonstrated to him the need to be vigilant about those matters. I accept the costs of the liquidation will undoubtedly carry a significant lesson for Mr Haq, and that there were factors which contributed to his lack of attention to the Company's affairs at the time the strata levies were not paid. Mr Haq also addresses the attitude of the Company's creditors, and notes that payment of the loan to the third party lender in respect of the property are payable monthly, and the principal is not now due and payable, and that he has continued to make the required payments to that lender while the Company has been in liquidation.
5. Mr Haq also addresses the circumstances which led to the winding up of the Company, to which I have referred above, and I am satisfied that those do not raise issues of public morality adverse to Mr Haq. The affidavit dated 22 July 2024 of Mr Samakeh, a solicitor acting for Mr Haq, addresses service of the proceedings upon the Australian Securities and Investments Commission and the lender in respect of the property, which has indicated that it will withhold any enforcement action pending the outcome of this application to terminate the liquidation.
6. By an affidavit dated 18 July 2024, Mr Honner, who is an employee in the liquidator's firm, refers to aspects of Mr Haq's affidavit and confirms that he is not aware of other creditors of the Company than those that Mr Haq has identified, and that the lender has provided the confirmation to which I referred above. Mr Honner calculates the shortfall in the Company's revenue as $28,000 in the first year, due to a one-month rent-free period which would be given to the proposed tenant of the property, but takes the view the difference between that and Mr Haq's calculation of the shortfall is not material. Mr Honner expresses the view that the Company has access to sufficient funds to meet its ongoing expenses, based on the sources of funds set out in Mr Haq's affidavit. That view plainly assumes that moneys available to Mr Haq personally are to be treated as available to the Company, and I would have proceeded on that basis.

Submissions and determination

1. Mr Oakes, who appears for Mr Haq in the application, refers to the applicable principles and to the factors identified by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, and in my judgment in Re MWM Sydney Pty Ltd (in liq) [2016] NSWSC 688 at [16]-[21]. Broadly, a person who seeks to terminate a winding up under s 482 of the Act must establish that order is appropriate, and the factors in Re Warbler are relevant factors.
2. The relevant matters were also identified by Austin J in Vero, Workers Compensation (NSW) Ltd v Ferretti Pty Ltd (2006) 57 ACSR 103; [2006] NSWSC 292 at [17], as including the interests of the company's creditors, including future creditors; the interests of the liquidator, particularly with regard to costs; the interests of contributories and the interests of the public, including the public interest in matters of commercial morality; and the public interest that insolvent companies should be wound up.
3. I will refer to matters which affect the interests of the Company's creditors, including future creditors, below, but they have primarily turned upon an assessment of the Company's solvency. The interests of the liquidator, with regard to costs, are addressed by the agreement for payment of the liquidator's costs and he has not opposed Mr Haq's application. Here, the Company was wound up as a result of non-payment of a relatively small debt, and in circumstances which did not indicate any failure of commercial morality by Mr Haq, where he had previously provided financial support to the Company over a considerable period of time. The public interest that insolvent companies should be wound up does not prevent a termination of the winding up if, as I will find below, the steps that are taken by Mr Haq will be sufficient to restore the Company's solvency.
4. Several issues arose in the application and require greater attention. The first was the proposition put by Mr Oakes that third party financial support was relevant to support the Company's solvency, and he pointed to the history of Mr Haq providing such support for the Company, other than on the occasion which, apparently by inadvertence and when distracted by a personal matter, he failed to take steps to ensure that strata levies due by the Company were paid. As matters have developed, it is ultimately not necessary to determine whether the winding up of the Company could have been terminated on the basis of a practical expectation of financial support by Mr Haq.
5. I am inclined to think that that would not have been sufficient where the case law has generally required that there exist an enforceable commitment to provide financial support if required to establish solvency, and it would be difficult to establish such an enforceable commitment where Mr Haq had control of the Company so that any contractual commitment to the Company could readily be released by Mr Haq. In the event, Mr Haq has now adopted an alternative approach which addresses that concern.
6. Mr Haq now proposes adopting an approach which has been recognised in earlier case law by subscribing a significant amount of capital to the Company in the amount of $50,000 by way of equity rather than debt. There are several cases in which that approach has been accepted, on occasion by way of undertakings given by a shareholder to undertake such capitalisation in the future, and on other occasions on the basis that the relevant steps should be completed prior to an order being made to terminate the winding up: Owners' Strata Plan 70294 LNL Global Enterprises Pty Ltd (2006) 60 ACSR 646; [2006] NSWSC 1386; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797; Re Living Creatively Exhibitions Pty Ltd (in liq) (subject to deed of company arrangement) [2013] NSWSC 717 at [1]. In Re Kimberly Securities Ltd [2014] NSWSC 298, in a case which had some matters in common with this case, I made an order terminating a winding up, on the basis that the applicant would subscribe a significant amount of capital to the company. I there noted that that approach avoided the need to deal with issues of subordination, if further loan funds had been provided to the company, and pointed to the difficulties which had arisen in respect of arrangements of that kind. I also there adopted the approach, which I will also adopt here, of indicating the Court's decision, so as to give the Plaintiff comfort that he may proceed with the relevant steps, but deferring the making of the termination order until the necessary steps have been taken.
7. Mr Oakes rightly recognises the question whether Mr Haq's contribution of $50,000 by way of equity to the Company is sufficient in the relevant circumstances, and I am satisfied that it is. A company's solvency is established by its capacity to meet its debts as and when they fall due, looking forward to some extent in the future. However no creditor dealing with a company ever has complete certainty that that company will be able to meet its debts in the future; here, the cashflow of the Company, at least if the lease is entered, together with Mr Haq's recognition that the property will likely need to be sold if the lease is not entered into, and the amount of that is to be substituted to the Company, would be sufficient to establish the Company's solvency and give a creditor, dealing with the Company in the foreseeable future, comfort as to its capacity to meet its debts as and when they fall due.
8. A further issue arose because, as Mr Oakes fairly recognised, an amount is due by the company to a related party, on terms that that amount will only be repayable when the relevant property is sold. As matters stand, it appears that the value of the property, on a sale, would be sufficient to discharge the debt of the secured third party lender but not to discharge both the debts of that secured third party lender and the related party debt. I accept that is not a matter which presently has the consequence that that Company is insolvent, because the principal on the debt to the secured lender is not presently due and payable, and because the arrangements which have been reached in respect of the related party debt are such that that debt is not presently due and payable, nor is it due and payable in the immediate future, so as to deprive the Company of present solvency, once a further capital contribution is made.
9. In these circumstances, I am satisfied that the winding up of the company should be terminated, upon the recapitalisation of the Company in the manner which I have noted above, and upon payment of the liquidator's costs, expenses and disbursements as agreed between the parties. Those steps should take place prior to an order for termination of the winding up. An order terminating the winding up can be made in Chambers, on the basis of an affidavit confirming that they have occurred. I have noted, in the course of the hearing, that practical issues may arise as to how equity is to be issued in the Company, while it is in liquidation, but those issues should be capable of resolution between Mr Haq and the liquidator, and the matter can be relisted if any difficulty arises in that respect.

Orders

1. Accordingly, I make the following orders.
2. By consent, order pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that the remuneration, costs, expenses and disbursements of Mr Scott as liquidator of the Company up to the termination of the winding up of the Company be fixed in the sum of $238,080.81 (inclusive of GST).
3. Relist the matter in the Corporations Motions List, with a view to making orders for termination of the winding up upon the Company's recapitalisation and payment of the liquidator's remuneration and expenses, in the Corporations Motions List at 9.15am on 19 August 2024.
4. Reserve liberty to apply, including for the making of orders terminating the winding up in Chambers, upon submission of an affidavit demonstrating that the steps contemplated by this judgment have been taken.

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