Xu v Megaward Pty Ltd

Judgment

1. THE COURT: Mr Zongqing Xu has purported to appeal from the dismissal of an originating process filed by him seeking an order that the respondent, Megaward Pty Ltd, be wound up in insolvency.
2. Mr Xu formerly worked as a sub-agent for Megaward selling real property in Sydney, predominantly newly constructed apartments. He claims that he is owed a debt of $392,174.35, being mostly if not wholly commission for introducing clients to purchase properties over a period from 19 March 2015 until 5 June 2017. The details of that claimed debt are presently immaterial, because it was the subject of a statutory demand served upon Megaward on 17 July 2017, and no application was made by Megaward to set aside the demand. In the absence of any application for leave under s 459S of the Corporations Act 2001 (Cth) to adduce evidence to challenge the debt, it is to be presumed that it is due and payable and in the amount claimed.
3. Mr Xu's originating process was filed on 29 September 2017, within three months of the statutory demand, and by reason of s 459C(2)(a) of the Corporations Act, the hearing before the primary judge proceeded on the basis that Megaward was presumed to be insolvent unless, pursuant to s 459C(3), the contrary was proved.
4. The hearing took place on 15 March 2018, with cross-examination of Mr Xu, a director of Megaward and its accountant. The primary judge delivered an oral judgment at 2pm the following day: In the matter of Megaward Pty Ltd [2018] NSWSC 444.
5. The primary judge analysed Megaward's most recent unaudited annual, and in one case quarterly, financial statements, each of which had been prepared on an accruals basis. The financial statements disclosed a history of declaring profits and paying tax as well as a surplus of assets over liabilities, although Mr Xu's (and at least one other debt) were not included either as a liability or a provision. The financial statements also disclosed, highly relevantly for present purposes, a large proportion of aged receivables representing its entitlement to commission from developers. The primary judge concluded that Megaward had shown that it was able to pay its debts as and when they fell due, and so had demonstrated that it was not insolvent. An important element of his reasoning was a conclusion that at the rate at which Megaward realised its receivables, it could pay those disputed debts in about six weeks.
6. After filing a notice of intention to appeal, Mr Xu filed a notice of appeal on 15 June 2018. By notice of motion filed 24 July 2018, Megaward sought an order that the appeal be dismissed as incompetent for want of leave required under s 101(2) of the Supreme Court Act 1970 (NSW). Against the possibility that leave was required, Mr Xu has filed a summons seeking leave to appeal.

Is leave required?

1. Megaward submits that leave to appeal is required by reason of each of paragraphs (n) and (r) of s 101(2) of the Supreme Court Act. That subsection relevantly provides: "(2) An appeal shall not lie to the Court of Appeal, except by leave of the Court of Appeal, from: … (n) a judgment or order of the Court in a Division for the winding up of a corporation, … (r) a final judgment or order in proceedings of the Court, other than an appeal: (i) that involves a matter at issue amounting to or of the value of $100,000 or more, or (ii) that involves (directly or indirectly) any claim, demand or question to or respecting any property or civil right amounting to or of the value of $100,000 or more."
2. Of course, leave is required if either of those paragraphs applies. Each is addressed in turn.

Leave required pursuant to s 101(2)(n)?

1. It was common ground that, had the primary judge made a winding up order, s 101(2)(n) would apply, and Megaward could only appeal to this Court by leave. Mr Xu contended that paragraph (n) did not apply to an unsuccessful application by a creditor to wind up a company. He submitted that: "there was no order 'for' the winding up of the respondent. An orthodox meaning of this preposition is 'in order to obtain': see the Macquarie Dictionary, giving by way of example the expression 'a suit for damages'. When used with the active participle of a verb, the word means 'for the purpose of'. Here, the primary judge's orders did not mention a winding up, let alone provide for it."
2. Further, he submitted that the asymmetric construction would protect both the liquidator and the company's creditors, because, so it was said, the company's finite assets should not be expended in pursuing an appeal without it satisfying the court that a grant of leave is justified. Mr Xu contended that such considerations do not apply where the company has not been wound up.
3. Megaward observed that an unabridged edition of the same dictionary contains 33 entries for the word "for", and emphasised meanings associated with a purpose, an objective or a result (including "to go for a walk" and "his reason for going"). It submitted that the failure of a winding up application is interlocutory in substance, and naturally falls within the paragraph when "for" is read more broadly, and that this was supported by the extrinsic materials. The requirement for leave was introduced by the Courts Legislation Further Amendment Act 1995 (NSW), in support of which the Minister said the following: "It is also proposed that leave to appeal be required from judgments or orders - usually made in the Equity Division - made under the Corporations Law which relate to: setting aside demands under section 469G; restraining the presentation or advertising of presentation of a winding up petition; and making a winding up order. That rationale for these amendments is that although the relevant orders are final in form and therefore attract an appeal as of right, they are interlocutory in substance and, therefore, fall within the intent of section 101(2)(e) which requires leave to appeal from interlocutory judgments or orders made in the court." (emphasis added).
4. Mr Xu resisted reliance upon the second reading speech, on the basis that extrinsic materials have "no significance where the plain meaning of the enacted text is at variance with the meaning that the Minister appeared to give it."
5. The legal meaning of a basic English word, such as "for", when appearing in a statute, is ordinarily determined not by reference to the selection of a favoured possible meaning from a (favoured) dictionary, but rather by reference to the enacted text of the provision, read in its context. The inutility of dictionary definitions has been repeatedly noted both by the High Court and by this Court, most recently by White JA, with the agreement of Gleeson JA and Sackville AJA, in Kiriwina Investment Company Pty Ltd v Green Lees Developments Pty Ltd [2018] NSWCA 210 at [46]. Previously, this Court said in South Western Sydney Local Health District v Gould [2018] NSWCA 69 at [79]: "A dictionary will give a range of meanings of a word. The task of a court is to identify, from text, context and purpose, the particular meaning that a statutory provision bears. The function of a dictionary and the function performed by a court construing a statute are utterly different. It must be borne in mind that the meaning of any word used in a statute depends on the context and purpose of the legislation in which it appears: Coverdale v West Coast Council (2016) 259 CLR 164; [2016] HCA 15 at [18]."
6. The Courts Legislation Further Amendment Act 1995 (NSW) introduced paragraphs (m), (n), (o) and (p). The latter three dealt with the same subject, namely, orders under the Corporations Law dealing with statutory demands, the presentation or advertising of the presentation of a winding up petition, and the making of winding up orders. All were described by the Minister as being interlocutory in substance, although final in form. At the same time, paragraph (m) was also introduced, dealing with applications involving caveats.
7. It is convenient to reproduce all four paragraphs as enacted in order to see their common textual features: "(m) a judgment or order of the Court on an application under section 74K, 74MA or 74O of the Real Property Act 1900; (n) a judgment or order of the Court in a Division for the winding up of a corporation, (o) a judgment or order of the Court in a Division restraining or refusing to restrain the presentation or advertisement of an application for the winding up of a corporation, (p) a judgment or order of the court on an application under section 459G of the Corporations Law,"
8. Megaward's construction is not without force. It is supported by what the Minister said when the legislation was enacted, and the prima facie improbability of a result whereby the nature of the right of appeal from an order disposing of a winding up application depends upon its outcome. That is to say, it seems unlikely that there would be an appeal as of right if the application is dismissed, but for an appeal only by way of leave if the application is successful. Such asymmetry in the appellate rights enjoyed by the unsuccessful litigant is unusual.
9. However, Mr Xu is correct to submit that paragraph (n) does not apply where no winding up order is made, for these reasons.
10. First, an order "for the winding up of a corporation" does not as a matter of ordinary English extend to an order dismissing a summons for the winding up of a company. Of course, and contrary to Mr Xu's submissions, the ordinary natural meaning may be displaced by context, and there is no threshold requirement of ambiguity before resort is had to context.
11. Secondly, in the present case there are powerful matters pointing against any displacement of the ordinary meaning. It will be seen that all four of the paragraphs inserted into s 101(2) by the same 1995 amending Act commence with the words "a judgment or order of the Court" (in the case of paragraph (p), it is "a judgment or order of the court"). However, paragraph (n) departs from the language of the immediately preceding paragraph, and rather than requiring leave when there has been a judgment or order of the Court "on an application for the winding up of a corporation", proceeds more narrowly to apply only to "an order for the winding up of a corporation". What matters here is not so much that it would have been easy to draft the paragraph so that it extended to cases where the application is dismissed, but that the drafting has departed from the words used in the immediately preceding paragraph, which was inserted by the same amending statute.
12. Further, paragraph (n) is more narrowly drafted than its immediate successor, which is applicable in terms both to successful and unsuccessful applications. The same reasoning applies.
13. Thus there is a conspicuous narrowing of language in paragraph (n) when contrasted with the language introduced by the same amending legislation both immediately preceding and immediately following that paragraph. That change in language should, on conventional principles of statutory construction, be respected. Far from the context displacing the ordinary meaning, it is confirmatory of it.
14. Such a result is not entirely without justification. It may be a consequence of a legislative purpose to keep a closer rein on companies which are being wound up, while preserving the ordinary rights of appeal in cases where the company continues to be under the control of its board. The position is a little more complex than was put in submissions.
15. Prior to 1992, it was well settled that the board of directors retained residual authority to cause the company to challenge a winding up order: In re Diamond Fuel Company (1879) 13 Ch D 400; Re Rick Wilson Pty Ltd and the Companies Act (1982) 7 ACLR 354. In Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365 the directors' right to appeal in the company's name against a winding up order was described at 383 as "an exceptional right … [which] derives from necessity, otherwise the company would be unable to challenge such an order."
16. In 1992, s 471A of the Corporations Law was enacted. This was ultimately held at the intermediate appellate level to displace the residual authority in the board of directors to cause the company to challenge a winding up order: Rock Bottom Fashion Market Pty Ltd v HR & CE Griffiths Pty Ltd [2000] 2 Qd R 573; [1997] QCA 399, also reported at (1997) 25 ACSR 467. However, there were some first instance decisions which suggested that the directors' residual power remained, including for example Aetna Properties Pty Ltd v G A Listing & Maintenance Pty Ltd (1994) 12 ACLC 404. Thus although as it turned out there was no need for a separate requirement of leave upon a company's challenge to a winding up order, that was not clear in 1995 when paragraph (n) was inserted into s 101(2) of the Supreme Court Act.

Leave under s 101(2)(r)

1. Megaward's reliance on paragraph (r) is misplaced, as Mr Xu's written submissions in reply made plain. The point is foreclosed by Robert H Barber & Co Ltd v Simon (1914) 19 CLR 24; [1914] HCA 69. The words of s 35(1)(a)(2) of the Judiciary Act 1903 (Cth) "[i]nvolves directly or indirectly any claim, demand, or question, to or respecting any property or any civil right amounting to or of the value of £300" were materially identical to s 101(2)(r)(ii). Griffith CJ dealt with the point as follows (at 27): "The petitioning creditor was the present respondent, who claimed to be a creditor of the Company for about £17,000, which claim the Company disputed. He was therefore a person claiming to be a creditor and seeking to enforce his claim by the process of a compulsory winding up. The effect of the winding up order, so far as it caused a change of status, was immediate and definite, although for some purposes its operation was not conclusive, since the validity and amount of this petitioning creditor's debt might still have been disputed in the winding up. On the other hand the order had the immediate effect of taking the property of the Company out of its own hands in which it remained during the voluntary liquidation, and placing it under the entire control of the official liquidator, with power to carry on the Company's business and to dispose of its property. Under those circumstances it is impossible to deny either that the winding up order was a judgment pronounced in respect of a sum at issue amounting to £300, or that it was a judgment respecting property of that value. From both points of view it was within the terms of s 35(1)(a)(2) of the Judiciary Act. The appeal, therefore, lay as of right, and the learned Judge had no authority to set aside the notice."
2. In oral address, Megaward contended that the force of Robert H Barber & Co Ltd v Simon had been undermined by Oertel v Crocker (1947) 75 CLR 261; [1947] HCA 40. True it is that there is a tension between the two decisions, as may be seen in the reasons of Latham CJ and Dixon J in the latter case. However, nothing in Oertel detracts from the authority of the earlier decision insofar as it applies to a dispute between a petitioning creditor and company. It is also true that Dixon CJ arguably expressed some doubt about Robert H Barber & Co Ltd v Simon in Ebert v The Union Trustee Company of Australia Ltd (1957) 98 CLR 172 at 175; [1957] HCA 88 but this Court remains bound by it.
3. For the purposes of s 101(2)(r), it matters not that the winding up order was not made. The question is whether there is a "matter at issue" or a "claim, demand or question respecting any property or civil right". Applying Robert H Barber & Co Ltd v Simon, the value of that property (whether measured by reference to the value of the company's assets or net assets) exceeded $100,000.
4. For those reasons, Mr Xu's appeal to this Court lies as of right, and Megaward's motion seeking dismissal on the ground of incompetence should be dismissed.

The merits of the appeal

1. There are in substance three submissions made by Mr Xu challenging the conclusion of the primary judge that Megaward had discharged its onus of demonstrating that it could pay its debts as and when they fell due.
2. First, Mr Xu complains that the accounts tendered by Megaward are not "the fullest and best evidence" of its financial position. This draws upon language used by Hayne J in Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081. However, he very properly acknowledged that there was not some inflexible rule that there was only one way of proving solvency, namely, by producing audited accounts. True it is that in some cases - especially if the company is in a weak financial position - a court may take the view that only such evidence would suffice to displace a presumption of insolvency. All this has been explained in a series of cases, including Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 at [11]-[14] (Finkelstein J), Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 at [60]-[61] (White J); and Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd [2012] FCA 363 at [60]-[61] (Robertson J).
3. Fundamentally, as was said in both of the last two decisions: "Hayne J was describing the nature of the evidence one would expect a company to lead in opposition to the application that it be wound up in insolvency. His Honour did not say that only the fullest and best possible evidence of a company's financial position would be sufficient to displace a presumption of insolvency."
4. That does not stand in the way of the fact that in many and probably most such applications, the company would be well advised to adduce the fullest and best possible evidence. That reflects the qualified force of the proposition that "the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent", applied in this Court in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; 45 ACSR 711, which in turn reflects the qualified language used by Hayne J.
5. Secondly, Mr Xu said that the analysis understated the costs of conducting Megaward's business, including tax, accrued commissions and superannuation contributions.
6. Thirdly, Mr Xu said that the primary judge's conclusion that a capacity to pay the debt in a six week period was sufficient to displace the presumption of insolvency was erroneous.
7. Further to all of the above, Mr Xu relied upon the evidence, which was also unchallenged, of another sub-agent, Ms Wang. She claimed to be owed some $48,373. The primary judge proceeded on the basis that her claimed debt was also due and owing, no differently from that of Mr Xu.
8. In light of the nature of the challenge, it is as well to reproduce the entirety of the reasons of the primary judge analysing the financial position of Megaward, despite their length. "16 I turn then to examine the financial position of the company. It is convenient to do so at three dates: first, 30 September 2017, being the date of the interim financial statements last available; secondly, 23 October 2017, being the date of one set of updating evidence; and thirdly, the date of hearing, being the date of a further set of updating material. Because the updating material is incomplete, it is possible only to make some adjustments to the 30 September 2017 position, which is the fullest and most reliable description of the company's financial position. 17 According to the interim financial statements of 30 September 2017, the company had total assets of $2,793,852. Of that, $327,535 were non-current assets, being property, plant and equipment, leaving current assets (comprising receivables of $2,287,870, cash of $112,733, and other assets of $72,712). The total liabilities were $2,034,825. Of them, $134,106 were non-current interest bearing liabilities, leaving current liabilities of $1,900,718, which included payables of $148,581 and accruals for commission of $938,480 and bonus of $90,300. 18 The important conclusions are, first, that total assets exceeded total liabilities by $759,000; secondly, that current assets exceeded current liabilities by $565,598 and thus that the company had a positive current ratio which is an indication of solvency; thirdly, and of some significance, current assets even exceeded total liabilities by $431,491. That, of course, is before providing for the plaintiff's debt and for Ms Wang's debt. But if one includes them as one must, that still leaves current assets in excess of current liabilities by about $125,000, and still leaves the company with a positive current ratio. 19 As at 23 October 2017, there is available evidence of cash at bank, receivables and payables. So far as receivables are concerned, whereas they were $2,280,000 as at 30 September, they had decreased by 23 October to $1,923,503, a reduction of $357,367. Whereas cash at bank had been $112,733 as at 30 September, it had increased to $507,772, an increase of $395,039. It is not in the least surprising that as the receivables decreased, the cash increased, because that would represent the recovery of the receivables. As will in due course be seen, there were substantial recoveries of receivables during that period. 20 So far as payables are concerned, whereas they had been $148,581 as at 30 September 2017, they increased to $195,681, an increase of $47,100. That is likely to represent, at least in part, some of the liabilities that had previously been recorded as accrued commission migrating to become payables, as the receivable commission from the principal was received and an invoice submitted by the subagent. 21 If one merely adjusts the balance sheet for the updated receivables, cash and payables figure, and leaves all other entries unaffected, that would produce a surplus of current assets over current liabilities as at 23 October 2017 of $556,170. That is sufficiently close to the $565,000 of 30 September 2017 as to indicate that there was probably not much further impact on the balance sheet by 23 October 2017. 22 By March 2018, the receivables have reduced to $1,888,545. This is a reduction of a further $34,958, and a total of $392,325 since 30 September 2017. The cash had fallen to $162,009, representing a reduction of $345,763 since 23 October 2017, but still an increase of $49,276 since 30 September 2017. The reduction in receivables and in cash totalled $380,721, which one would expect to see reflected in a corresponding reduction in liabilities. 23 On the liabilities side, the payables indeed did reduce from $195,681 to $36,331, a reduction of $159,350 and a net reduction of $112,250 since 30 September 2017. The application of the remaining $220,371 funded by the reduction in receivables and cash is not apparent from the available documentation. However, as the receivables reduced and commission became payable to subagents, one might well anticipate that the provision for accrued commission would correspondingly reduce as it was converted to payables. 24 If one makes only the adjustments for receivables, cash and payables and applies that to the 30 September 2017 balance sheet, the result would be that current assets exceeded current liabilities by $334,799. However, given that there is another $221,371 of reductions in liabilities funded by the reduced receivables and cash, I do not think that is a reliable figure. The 30 September 2017 financial statements, seen in the light of the results I have deduced for 23 October 2017, and the movements of which there is evidence to March 2018 point to a consistent position of the company having more than $550,000 surplus of current assets over current liabilities - which, as I have said, more than covers the plaintiff's debt and Ms Wang's debt, and after that, still leaves the company in a positive current ratio position. 25 That, however, raises the most important question that underpins the company's claim to solvency, which is the recoverability of its receivables. The receivables are, in many cases, old. As at 20 October 2017, 80% were in excess of 90 days, and a significant body much older than that; only 2.56% were less than 30 days, and 15% between 30 to 60 days. As at 13 March 2018, 53% were in excess of 90 days; another 13% in excess of 60 days; another 5% in excess of 30 days, and 30% within 30 days. This gave rise to a serious question as to the recoverability of the receivables. 26 The company explains this phenomenon as being a function of its business model and operations and that, in many cases, it does not get paid when exchange takes place, and it may agree with a developer not to be paid until settlement. There are a number of matters which inform a view as to the recoverability of the receivables. One, which, to my mind is powerful, is that the accounts being prepared, as they are, on an accruals basis, means that all the receivables are treated as income for the purposes of tax, and are taxable income, unless and until they are written off, in which case they would be expensed and deductible. Again, there is a very powerful taxation incentive to write off bad debts. The very fact that these debts have not been written off but included in financial statements and, as a result, in tax returns, and that liability for tax has therefore been incurred on them, is a strong indicator that they are genuinely regarded as recoverable; otherwise they would have been written off. 27 I have undertaken a detailed examination of the recoverables as at 20 October 2017, in respect of which the director was cross-examined. They can be compared with the receivables as at March 2018 to identify which of those outstanding as at 20 October 2017 have been recovered between then and March 2018. Working down the list of the aged receivables as of 20 October 2017: • Australand North Ryde, which, as at that date, had an in excess of 90 day liability to the company for $16,335 incurred on 31 March 2017 was, by March 2018, fully paid. • Colliers International was fully paid, although a new invoice was issued, apparently being the settlement invoice, the one in the accounts in October being the exchange invoice. • Colliers International, in October 2017, owed $20,707 since 30 June 2017. That too had been paid by March 2018, although new invoices for additional sales had been issued to Colliers. • Crown W1 Developments owed $8,998 in October 2017 since June 2017. That too was paid by March 2018. • GMR Riverstone owed $7,804 in October on a September 2017 invoice. That had been paid and a new invoice issued to it for a new sale. • Gold Max Developments owed $33,346 to the company on invoices that dated from September to October 2017. That was paid and new invoices issued to it for new sales. • Link Realty owed $90,598 on invoices dating from September 2017. They had been paid in full by March and new invoices issued for new sales. • Norwest Schofields owed a total of $369,222 as at October 2017 incurred between April and September 2017. By March, that had been paid in full. That payment also completely explains what, it was suggested, might have been a convenient entry in the bank statements, because it corresponds precisely with the amount that was deposited into the bank account on 23 October 2017. • Norwest Developments owed $124,000 as at October 2017 incurred between June and August 2017. That was paid in full by March and new invoices issued for further sales. • Tien Tong owed a total of $584,474 at October 17 on invoices which dated between May and September 2017. It paid $336,380 by March on invoices up to about June 2017. • Union Grace owed $55,438 in October on invoices dating from June through to September 2017. It was paid in full by March. 28 Accordingly, a total of $1,062,828 of the $1,923,508 aged receivables as at 20 October 2017 had been recovered by mid-March 2018. That represents a recovery of 55% of the aged receivables over a five months period, equivalent to 11% per month. If one applies that rate to the current aged receivables of $1,888,000, that approximates to recoveries of $207,750 per month from the aged receivables. 29 That analysis shows two things. The first is that in the nature of this business there is delay in recovery from debtors because of the time taken for developments to be completed and the sale of units in them to exchange and then settle, and for the developers to pay. That does not mean that debts are not paid as and when they fall due, but that in the practice of the industry it takes time for commission to be received by agents and therefore by subagents. Secondly, it demonstrates that the aged receivables are by no means irrecoverable. 30 If one turns to an analysis of what might be described as the very short-term position, the company's immediate liabilities are its creditors payable of $36,331, the plaintiff of $392,174 and Ms Wang, who I will accept for present purposes is payable, of $48,373; a total of $476,878. The company has $162,009 in the bank. That leaves a difference of $314,869. At the rate at which the company realises its receivables that difference will be recovered in the space of about six weeks."
9. The reasoning may be summarised thus. First, the primary judge directed himself to the most recent time at which financial statements, albeit quarterly and unaudited, were available, namely, 30 September 2017. At that time, there was a healthy surplus of assets over liabilities, and current assets over current liabilities, in both cases significantly exceeding the disputed debts due to Mr Xu and Ms Wang.
10. Secondly, the primary judge looked at the position some three weeks later by reference to an updated statement of the company's receivables and payables, which was in evidence. Towards the end of that period, a significant ($369,222) payment had been made by one debtor, Norwest Schofields. (That deposit could be seen in Megaward's bank statement.) The overall position remained substantially the same, which is exactly what would be expected for a company accounting on an accruals basis.
11. Thirdly, his Honour turned to March 2018. Although there were no updated financial statements, his Honour used the bank statements and updated receivables and payables ledgers to deduce that there continued to be a surplus of assets over liabilities exceeding $550,000, on the basis that receivables had reduced, cash had increased from 30 September by some $49,000 (although it had decreased from 23 October), but payables had been reduced from some $195,000 to $36,000. (The internal accountant's evidence was that the commission due to the sub-agents was only payable after Megaward had been paid by its principal and an invoice issued by the sub-agent).
12. Fourthly, his Honour well appreciated that solvency was not determined merely by a surplus of assets over liabilities, but turned on an ability of the company to meet its liabilities as and when they fell due, in accordance with s 95A of the Corporations Act. Megaward's largest component of current assets, by far, was receivables in the form of commissions payable by developers. His Honour undertook a detailed analysis of the individual receivables, having regard to their age, and the actual payments which occurred in the five months prior to the hearing. That analysis permitted a conclusion that the receivables were being realised, and at a rate in excess of $200,000 per month. His Honour also derived comfort from the fact that the company actually paid tax on its income as recorded (on an accruals basis) in its financial statements.
13. Finally, his Honour concluded that Megaward could pay Mr Xu's debt from the realisation of receivables within a space of some six weeks. He also noted that the "practice" as between developers, agents and sub-agents for payment of commissions was that developers usually delayed payment to the agent beyond the date of exchange or settlement, and that sub-agents were not paid their share of commission until it was paid by the developer to the agent. Overall, his Honour's analysis showed that had Megaward determined to pay the amounts claimed by Mr Xu and Ms Wang it could have done so from its current assets in the accounting period ending 30 September 2017, that that remained the position at 23 October 2017, and that at the date of the hearing it was still able to do so within a fairly short period. His Honour concluded that was sufficient to discharge its onus to prove that the company was able to pay its debts as and when they fell due.
14. In this Court, attention focussed upon the "income statement" and balance sheets for the year ended 30 June 2017, and the same documents for the period from 1 July 2017 to 30 September 2017. The income statement for the year ended 30 June 2017 showed a profit from ordinary activities before income tax of $337,266, income tax of $112,122 and profit after tax of $225,144. Of course, the accounts did not include the debt on which Mr Xu sued (either as an expense in the income statement or liability in the balance sheet) and it was emphasised that that debt could not have been paid out of profits (whether before or after tax). The annual statements showed sales revenue of $6,494,984 (up from $4,656,170 for the previous year), of which some 97% represented sales commission. By far the largest expense was commissions incurred, comprising $3,251,134, up from $1,211,975 in the previous year.

The absence of audited accounts

1. In support of the first submission that the evidence did not permit of the sort of analysis undertaken by the primary judge, Mr Xu pointed to the absence of audited accounts, the absence of any financial statements for any period after 30 September 2017, and the selective records for any period after October 2017 on which it relied.
2. Two features, which may perhaps be relatively unusual in applications of this nature, may be noted immediately. This first is that in addition to the (unaudited) financial statements, the company's bank statements for the period 17 October 2017 to 12 March 2018 were in evidence. The second is that because the company's commission revenue comprised a relatively small number of significant amounts (mostly ranging between $2,000 and $15,000, and sometimes being paid only when all lots in a development were sold), it was possible to verify movements in the receivables and payables ledgers by reference to the bank statements. That will not always be the case. For example, as the primary judge observed, a very large receipt of $369,222 reflecting commission earned in relation to a project at Schofields, which significantly impacted the aged receivables, could readily be traced into a deposit of that amount into the company's bank account on 23 October 2017. Further examples of credit entries in the bank statements matching adjustments to those receivables include payments from Crown W1 Developments, GMR Riverstone, Gold Max Developments, and Norwest Developments.
3. This enabled the primary judge to form a view as to the accuracy of the accounts by reference to an independent and reliable record relating to the same transaction and thus to reach conclusions based on those accounts with a reasonable level of confidence. It will not always be thus. Nor should it be taken that a judge will be required to undertake such an analysis in circumstances where a company fails to provide up to date financial statements, whether audited or unaudited. But no error was shown or is apparent in the primary judge taking that course; indeed, given the detail of the analysis in an oral judgment delivered the day following a contested hearing, it is, with respect, something of a tour de force. Consistently with this being the case, Mr Xu made no submission that any particular element of the analysis by the primary judge was erroneous.

The missing liabilities

1. The financial statements did not include the amounts claimed by Mr Xu and Ms Wang, but it is evident that the primary judge had regard to that. Nor did they include a further, relatively small, commission, of the order of $10,000, said to be owed to another sub-agent. That amount is de minimis (it is a fraction of 1% of annual expenses actually paid).
2. Mr Xu placed greater weight on the fact that tax would have to be paid out of the funds produced on the realisation of the receivables. This does not assist Mr Xu's submission. Megaward accounted on an accruals basis, and declared income on the basis of commission when it was earned, not when payments were made. It had paid significant amounts of tax on the income reflected in the receivables. It would not incur a further tax liability when the receivables were paid. Further, to the extent that it was said that Megaward should have accounted for the debts of Mr Xu and Ms Wang, that could only have had the effect of decreasing the taxable income, leading to a lessening of tax to be paid (and the possibility of an adjustment leading to a refund).
3. Further, the financial statements included not insignificant amounts of depreciation. In the year ended 30 June 2017, there was a depreciation and amortisation expense of $66,645. The significance of this, as Mr Cotman observed, is that it was a non-cash amount, so that it diminished the profit without eating into Megaward's cash. That is to say, the cashflow was healthier than was shown in financial statements insofar as they included depreciation.
4. More generally, while it is true that the analysis by the primary judge put to one side expenses that would have been incurred in that six week period, it also disregarded receipts or receivables to which Megaward became entitled in the same period. Nothing in the financial history of Megaward, which had consistently declared profits, suggests that there would have been any material incurring of expenses which exceeded those receipts or receivables so as to invalidate his Honour's evaluation.

The cashflow position

1. Mr Xu submitted that, especially in the absence of any explanation from a company director, it was to be inferred that those expenses were required to be paid in the relatively near future. The consequence was said to be that once allowance was made for Mr Xu's (and Ms Wang's) debt, Megaward could not pay its debts as they fell due.
2. The evidence demonstrated that Megaward had enjoyed a significant surplus of assets over liabilities for the previous four years, and had derived profits and paid tax and declared franked dividends in each of those years. The surplus of assets over liabilities exceeded the debts claimed by Mr Xu and Ms Wang. Accordingly, the primary judge was correct to focus attention upon the company's cashflow.
3. A recurring difficulty in an analysis of solvency based on financial statements prepared on an accruals basis is deriving reliable information about the company's cashflow. However, focussing upon the most relevant period, the three months from July to September 2017, the financial statements disclosed that there were sales of $1,164,419 (94% representing commission accrued or earned, but not necessarily received, by the company) but that the company's debtors at the beginning of that period were $2,123,349, while debtors at the end of the period were $2,280,870. Although those numbers of themselves say nothing about the extent to which the company's debtor profile continued to be more or less aged, the inference can be drawn that of the sales of $1,164,419 (essentially commission accrued), some $1,006,897 (being opening debtors plus sales less closing debtors) represented receivables (in the form of rights to commissions) which had been paid and received. That amount in turn reflected an average monthly conversion of receivables into receipts of some $335,632, which exceeds the average monthly receipt on which the primary judge's six week analysis proceeded.
4. Mr Xu submitted that paying his claim and that of Ms Wang would necessarily have delayed Megaward paying its other creditors. That submission may be accepted. However the significant thing about this company's financial position is that the largest expense by far was the payment of commission. There was no error in the primary judge regarding the six week period which would be required to realise Megaward's receivables as being consistent with the nature of business in this industry. It is plain from the claims of Mr Xu and Ms Wang that sub-agents who were paid commission on occasion waited for some little period of time (in the case of Mr Xu, there are more than two years of claims for commission).

Conclusion on solvency

1. Megaward was a company with a history of deriving profits, paying tax, declaring franked dividends, and with a surplus of assets over liabilities and a surplus of current assets over current liabilities. Although it failed to provide audited accounts, the financial statements supported by independent and reliable third party records such as the bank statements enabled the judge to conclude that it had displaced the presumption of insolvency. No appellable error in that conclusion has been disclosed.

Was there a presumption of insolvency in this Court?

1. When the appeal was heard, Mr Xu tendered, without objection, updating affidavits to the effect that the debt remained outstanding and from the nominated liquidator as to his ability and preparedness to be appointed. Mr Xu made no attempt to establish the insolvency of Megaward; rather, he sought to demonstrate error in the way in which the primary judge had addressed the presumption of insolvency brought about by s 459C.
2. There may have been a difficulty with proceeding on that basis. It is not clear that the winding up order which Mr Xu asked this Court to make in the course of determining his appeal was subject to the same presumption as had applied at first instance.
3. The statutory presumption of insolvency only applies if, relevantly, a company fails to comply with a statutory demand "during or after the three months ending on the day when the application was made": s 459C(2). When this Court in determining an appeal is asked to make a winding up order, does "the day when the application was made" continue to be the day on which the original winding up summons was filed, as opposed to the notice of appeal?
4. True it is that identical orders have been sought before the trial judge and this Court, namely, orders that the company be wound up and that a liquidator be appointed. However, is it the case that for the purposes of s 459C, this Court is determining the original application filed in September 2017? It seems, to say the least, arguable that this Court is determining an appeal, by way of rehearing, on different evidence from that which had been adduced before the primary judge, and that the original application for a winding up order did not remain undetermined, but rather had been determined and was the subject of fresh proceedings in this Court. On the other hand, the power in s 75A(10) of the Supreme Court Act to give any judgment or make any order which ought to have been made tends to point in the other direction.
5. One other matter might suggest that the notice of appeal amounted to a fresh application for winding up. That matter is that Mr Xu took advantage of the three month period within which to appeal, which is available by serving a notice of intention to appeal. On one view, it sits ill with the requirement to proceed within three months in order to take advantage of the deemed insolvency created by s 459C for a creditor to be able on appeal to choose to extend the time by up to three months after the creditor's application has been dismissed.
6. This question of construction, although it was raised during the hearing of the appeal, was only mentioned briefly and, without conveying any criticism, it could not be said that full submissions were received upon it. It is not necessary to resolve it, because it could not improve Mr Xu's position in this appeal.

Orders

1. For those reasons, Megaward's notice of motion objecting to the competency of the appeal should be dismissed. Mr Xu enjoys an appeal as of right, but it should be dismissed, as should his summons seeking leave to appeal. The costs directed to the question of leave are severable from the costs of the appeal, and in each case should follow the event. Megaward should pay not only the costs of its objection to competency, but also the costs of Mr Xu's summons seeking leave, which was filed in response to the objection.
2. The Court's orders are:
3. Respondent's notice of motion filed 24 July 2018 dismissed.
4. Summons seeking leave to appeal dismissed.
5. Appeal dismissed.
6. Respondent to pay the appellant's costs of its notice of motion filed 24 July 2018 objecting to the competency of the appeal, and of the summons seeking leave to appeal.
7. Appellant to pay the respondent's costs of the appeal.

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