Listen
NSW Crest

Supreme Court
New South Wales

Medium Neutral Citation:
In the matter of Aquaqueen International Pty Ltd [2014] NSWSC 1645
Hearing dates:
10 and 21 October 2014
Decision date:
20 November 2014
Jurisdiction:
Equity Division - Corporations List
Before:
Black J
Decision:

Orders made that the defendant be wound up, for the appointment of a liquidator to the defendant and for plaintiffs' costs of the application (including any reserved costs as agreed, assessed or otherwise fixed by the Court) be reimbursed in accordance with Corporations Act 2001 (Cth) s 466(2). Liberty reserved to plaintiffs to bring such further application as they may be advised in respect of any liability of director of defendant as to costs or any application for a gross sum costs order.

Catchwords:
CORPORATIONS - winding up - winding up in insolvency on application of substituted creditors - where there has been non-compliance by company with creditor's statutory demand - presumption of insolvency - whether company has rebutted presumption of insolvency - whether company should be wound up.
Legislation Cited:
- Civil Procedure Act 2005 (NSW) ss 56, 57, 58, 59, 60, 98
- Companies (New South Wales) Code s 364
- Corporations Act 2001 (Cth) ss 95A, 95A(1), 95A(2), 459A, 459P, 459R, 465A, 465B, 466(2), 470, 588FE
- Evidence Act 1995 (NSW) s 136
- Legal Profession Act 2004 (NSW)
Cases Cited:
- Al Raeid v Minister for Immigration & Multicultural Affairs [2000] FCA 1357
- Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) [2011] HCA 18; (2011) 244 CLR 1
- Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124
- Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd [2011] NSWSC 186; (2011) 248 FLR 384
- Bull v Lee (No 2) [2009] NSWCA 362
- Carr v Finance Corp of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246
- DMK Building Materials Pty Ltd v CB Baker Timbers Pty Ltd (1985) 2 NSWLR 711; 10 ACLR 16
- Earthwave Corporation Pty Ltd v Starcom Group Pty Ltd [2011] NSWSC 694
- First Strategic Development Corporation Ltd (in liq) v Chen & Ors [2014] QSC 60
- International Cat Manufacturing Pty Ltd (in liq) v Rodrica [2013] QCA 372; (2013) 97 ACSR 200
- Jackson v Conway [2000] FCA 1530
- Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555
- Notaras v Waverley Council [2007] NSWCA 333
- Re C2C Investments Pty Ltd [2012] NSWSC 1443; (2012) 92 ACSR 266
- Re LJAC Energy Pty Ltd (in liq) [2013] NSWSC 1231
- Turco & Co Pty Ltd v Pendella Holdings Pty Ltd [2010] FCA 213
- Williams v Scholz [2008] QCA 94
Category:
Principal judgment
Parties:
Titan National Pty Ltd and Kathryn Wood-Weber (Plaintiffs)
Aquaqueen International Pty Ltd (Defendant)
Representation:
Counsel:
Ms C Perry (Solicitor) (Plaintiffs)
Ms S Penson (in person) (Defendant)
Solicitors:
Pure Legal (Plaintiffs)
File Number(s):
2013/297134

Judgment

1By Interlocutory Process filed on 9 April 2014, the Plaintiffs, Titan National Pty Ltd and Ms Kathryn Wood-Weber, as substituted creditors, seek an order that the Defendant, Aquaqueen International Pty Ltd ("Company"), be wound up under s 459P of the Corporations Act 2001 (Cth).

2I should first set out the background to the application and also something of the chronology of events in respect of these proceedings. The Company initially brought proceedings in the District Court of New South Wales against Mr Wolfgang Weber and the present Plaintiffs, Titan National Pty Ltd and Ms Kathryn Wood-Weber. Those proceedings were dismissed on 6 June 2011 and, on 24 June 2011, the District Court made an order that the Company and its director Ms Penson jointly and severally pay the costs of the present Plaintiffs of those proceedings, including on an indemnity basis from 26 February 2010.

3By Originating Process filed on 2 October 2013, Mr Weber applied for an order that Company be wound up under s 459P of the Corporations Act. Mr Weber's winding up application was founded on a creditor's statutory demand claiming the amount of $38,484.48. That amount was a judgment debt arising from the assessment of costs of the District Court proceedings under the Legal Profession Act 2004 (NSW).

4The Plaintiffs filed a Notice of Intention to Appear, presumably to support the winding up application, on 26 November 2013. The Plaintiffs also obtained an assessment of the costs order made in their favour in the District Court in the sum of $111,416.95 and associated costs ("Judgment Debt"). The assessor's certificate was registered in the District Court, and a judgment of the District Court was issued on 5 December 2013, although there has been controversy as to the circumstances of that registration in the District Court and to some extent in earlier stages of these proceedings. There have since been numerous other applications in respect of aspects of the costs assessment and the judgment arising from it in the District Court, the Common Law Division of this Court and the Court of Appeal, and there have also been several interlocutory applications in respect of the winding up. However, that judgment has never been stayed by the District Court or this Court.

5The Company opposed the original winding up application brought by Mr Weber on the basis of various grounds set out in its Notice of Appearance filed on 11 November 2013, which I addressed in my unreported judgment in respect of Mr Weber's winding up application delivered on 25 March 2014. For the reasons set out in that judgment, I ordered that the Company be wound up on Mr Weber's application and that liquidators be appointed, but, in the particular circumstances, stayed those orders for a period to provide the Company with an opportunity to discharge its debt to Mr Weber and extended the time for determination of the winding up application under s 459R of the Corporations Act.

6On 9 April 2014, Brereton J, by consent, set aside the orders made on 24 March 2014 for the winding up of the Company and the appointment of liquidators and granted leave for the Plaintiffs to file an interlocutory process in respect of an application for substitution. By Interlocutory Process filed on 9 April 2014, the Plaintiffs applied under s 465B of the Corporations Act to be substituted as plaintiffs for Mr Weber and for a further order extending the period within which the winding up application be determined.

7The application for substitution was then heard and determined by Brereton J in his judgment delivered on 30 April 2014 ([2014] NSWSC 527) and his Honour made orders that, under s 465B of the Corporations Act, the Plaintiffs be substituted as plaintiffs in the proceedings, and extended the time for determination of the winding up application to 30 September 2014. The Company subsequently sought to set aside the orders for substitution and, on 19 May 2014, Brereton J delivered a further judgment ([2014] NSWSC 947) dismissing the application to set aside the orders for substitution. His Honour also made orders that the Company not be entitled to rely on any affidavit evidence in defence of the winding up summons not filed and served by 7 July 2014 without further leave of the Court; that the Plaintiffs not be entitled to rely on any evidence in reply not filed and served by 28 July 2014 without further leave of the Court; and adjourned the proceedings to 4 August 2014.

8On 4 August 2014, I declined leave for the Company to file a further affidavit but permitted it to file and serve any application to amend the Grounds of Opposition by 6 August 2014 and I adjourned the winding up application to 25 August 2014 with a view to being heard on that date. On 6 August 2014, I made orders in chambers extending the time for the Company to file and serve any application to amend the Grounds of Opposition to 11 August 2014, and that no such application to be filed or served after 11 August 2014 without leave of the Court.

9On 18 August 2014, Brereton J dismissed an interlocutory process filed by the Company on 11 August 2014 seeking an extension of time for the Company to comply with the statutory demands and for the dismissal of the Plaintiffs' Amended Originating Process. In doing so, his Honour also revoked Ms Penson's leave to appear on behalf of the Company. On 25 August 2014, I adjourned the Plaintiffs' winding up application to 8 September 2014, where Ms Penson had once again appeared in person for the Company and without legal representation and I noted that the adjournment was a substantial indulgence to the Company.

10On 8 September 2014, I granted leave to Counsel to appear on behalf of the Company, instructed directly by Ms Penson, and adjourned the proceedings to 26 September 2014 and made orders permitting the Plaintiffs to serve expert evidence by 22 September 2014 in response to an affidavit of Ms Penson, and for the Company to serve any affidavit evidence in reply by 24 September 2014 and for the Company to produce a number of categories of documents for inspection by the Plaintiffs by 12 September 2014. I also extended the time for determination of the winding up application to 30 October 2014. On 24 September 2014, I granted leave for Counsel who had for a short time been retained by the Company to withdraw from appearing on behalf of the Company. I also extended the time for production of documents by the Company to 30 September 2014, extended time for filing of the Plaintiffs' expert report to 3 October 2014 and for any evidence in reply to 8 October 2014, and set down the winding up application for hearing on 10 October 2014.

11On 10 October 2004, I declined an application by the Company for a further adjournment of the hearing of the winding up application and that application was heard on 10 and 21 October 2014.

The applicable legal principles

12The Plaintiffs are entitled to rely in this application on a presumption of insolvency created by the failure to comply with the creditor's statutory demand issued by Mr Weber. In Re C2C Investments Pty Ltd [2012] NSWSC 1443; (2012) 92 ACSR 266, I referred to the decision of Needham J in DMK Building Materials Pty Ltd v CB Baker Timbers Pty Ltd (1985) 2 NSWR 711; 10 ACLR 16, where his Honour observed that an order for substitution allowed a substituted creditor to take advantage of a defendant's failure to comply with a notice of demand under s 364 of the Companies (New South Wales) Code, and to the decision of White J in Earthwave Corporation Pty Ltd v Starcom Group Pty Ltd [2011] NSWSC 694. I observed (at [20]) that:

"The policy underlying the substitution provisions includes that, where one creditor has issued a statutory demand, other creditors should not need to issue such a statutory demand but, if the debt of the first creditor is paid out after a presumption of insolvency has arisen, those other creditors may rely on that presumption of insolvency in a subsequent winding up application."

The effect of that presumption was summarised by a unanimous High Court in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) [2011] HCA 18; (2011) 244 CLR 1 at [28], observing that:

"...where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption."

13The principles applicable to a determination of the Company's solvency are also well-established. Section 95A(1) of the Corporations Act has effect that, relevantly, the Company is solvent if and only if it is able to pay all its debts as and when they become due and payable. Section 95A(2) has effect that a person who is not solvent is insolvent. That definition adopts a "cashflow test" of insolvency which turns upon the income sources available to the Company and the expenditure obligations that it has to meet, rather than a balance sheet test which focuses on the value of the Company's assets and liabilities reflected in its books, although a balance sheet test can provide context for the application of the cashflow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213; Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 at [370]ff. Whether the Company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively in all the circumstances, including the nature of the Company's assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation above at [54]; Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555 at [103]; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd [2011] NSWSC 186; (2011) 248 FLR 384 at [48]-[49].

The Plaintiffs' lay evidence

14The Plaintiffs read several affidavits in support of the winding up application. The Plaintiffs read an affidavit of service of Mr Weber's creditor's statutory demand dated 6 September 2013 and also read Mr Weber's affidavit dated 26 September 2013, which recorded the service of a creditor's statutory demand on the Company on 28 November 2012, and the fact that the Company had failed to pay the relevant amount or secure or compound for that amount to Mr Weber's reasonable satisfaction, and indicated Mr Weber's belief that that amount was due and payable by the Company to him.

15The Plaintiffs also rely on the affidavit of their solicitor, Ms Christine Perry, dated 25 July 2014, which sets out the orders for costs made in their favour in the District Court and the process of assessment of those costs. These include an initial application made by the Company and Ms Penson for review of those costs by the Cost Review Panel, an unsuccessful application to the District Court to appeal the Cost Review Panel's determination, and a judgment issued in the District Court on 7 May 2014 in the amount of $111,584.95, comprising the original amount of the judgment of $111,416.95 and a filing fee of $168. Ms Perry also refers to additional costs orders that have been subsequently made in favour of the Plaintiffs in the District Court, including orders made on 1 May 2014, 7 May 2014 and 30 May 2014. Ms Perry also refers to information provided to her by Mr Weber's solicitors that the costs orders made against the Company in respect of Mr Weber's winding up application have not been paid. Ms Perry also responds to evidence given by Ms Penson in respect of costs orders in favour of the Company in the District Court proceedings and her evidence is that she is aware of only one such costs order in favour of the Company, made on 23 April 2010, and that those costs under that order have not yet been assessed. The Plaintiffs also lead expert evidence of the Company's insolvency to which I will refer below.

16An affidavit of Ms Wood-Weber (also known as Ms Wood) dated 9 October 2014 confirms that the Company is indebted to the Plaintiffs in the amount of $189,590.77 represented by the Judgment Debt and other costs, including costs pursuant to a costs order made by Gibson J in the District Court in the amount of $57,747.78 made on 19 August 2014 and further costs orders of lesser amounts made by Brereton J and by me in these proceedings and by Gibson J in the District Court on 9 October 2014. Ms Wood-Weber also refers to other claims against the Company in respect of orders for costs which had not yet been assessed and to claims for pre and post-judgment interest against the Company.

17There is evidence that this application has been served upon the Company, which appeared in it, represented by Ms Penson, by leave. A notification of winding up application has been lodged with the Australian Securities and Investments Commission ("ASIC"), initially by Mr Weber and subsequently by the Plaintiffs, and notice of the winding up application has been published. A consent of official liquidator to appointment has been filed and served upon the Company. I will refer to further evidence as to the Company's solvency below.

The evidence led by the Company as to solvency

18As I noted above, the Plaintiffs are entitled to rely on, and do rely on, the presumption of insolvency arising from the unsatisfied creditor's statutory demand issued by Mr Weber. It is a matter for the Company, by affirmative evidence, to rebut that presumption of insolvency.

19The Company relied on Ms Penson's affidavit dated 7 July 2014 in opposition to the winding up application, which in turn exhibited an earlier affidavit dated 28 February 2014 and various other judgments, transcripts and other correspondence in relation to the proceedings in the District Court and in this Court. The documents exhibited to that affidavit included a sealed judgment of the District Court recording an amount due to the substituted creditors of $111,584.95, which corresponds to the Judgment Debt.

20Ms Penson relies on a further affidavit dated 11 August 2014 which provided a detailed history of the proceedings, to which I have referred above. That affidavit also exhibited information provided by the Company's accountant in the form of a letter dated 8 August 2014 to the Company which attached a profit and loss statement for the Company for the year ended 30 June 2012. Ms Penson also referred to a judgment of the District Court in a security for costs application against the Company in April 2010, which declined to order security for costs against the Company. That judgment is not determinative of any factual issue in these proceedings and, in any event, the Company's financial position as at April 2010 is of little assistance in determining its present solvency. Ms Penson also refers to the fact that an amount has been made available to the Plaintiffs by the District Court, from an amount lodged with the District Court by the Company, of $20,000. That matter does not seem to me to affect either the presumption of insolvency arising from the unsatisfied creditor's statutory demand issued by Mr Weber or the substantial amount of the Judgment Debt that remains unpaid.

21Ms Penson also relies on the fact that the statutory demand was not served with an affidavit in support, but no such affidavit is required in respect of a judgment debt, including one arising from an assessment of costs. That affidavit also advanced a case of abuse of process, which Ms Penson did not develop in submissions before me. I should make clear that I do not accept that case, so far as it emerges from Ms Penson's affidavit, since it seems to me that the Plaintiffs plainly have a proper purpose in pursuing a winding up application where the fact that the Judgment Debt and other costs orders made in their favour have not been met, for a considerable time, reinforces the presumption that the Company is insolvent which in any event arises from the unsatisfied creditor's statutory demand issued by Mr Weber.

22Ms Penson also relied on her affidavit dated, on the first page, 25 August 2014 and on the second page, 5 September 2014, which appears to have been prepared in the period where the Company was represented by Counsel in the proceedings. That affidavit annexed a financial report for the Company for the year ended 30 June 2014 prepared by its external accountant from books and financial records provided by Ms Penson to that accountant. The financial report annexed to Ms Penson's affidavit is described as a "special purpose financial report prepared for use by director and member of the company". Note 1(d) to the Notes to the financial statements records that:

"These financial statements have been prepared on the going concern basis. This basis has been adopted as the company has received continuing financial support from the related parties and it is the belief and understanding that such financial report will continue to made [sic] available."

An audited version of that financial report dated 30 June 2014 is in evidence (Ex R2) which is also described in Note 1 as a "special purpose financial report". It nonetheless includes a director's declaration and an auditor's report dated 22 September 2014

23Those financial statements indicated that the Company had made relatively small losses in each of the years ended June 2011 ($3,232), June 2012 ($430), June 2013 ($18,383) and a relatively small profit in the year ended June 2014 of $3,612. The Company's balance sheet recorded limited current assets, primarily comprised of inventory, as at 30 June 2013 ($19,604) and 30 June 2014 ($26,622), non-current assets comprised of plant and equipment, substantial unsecured loans and a negative asset position as at 30 June 2013 of $134,903 and as at 30 June 2014 of $131,291. Ms Penson's affidavit evidence also included a yearly cash flow of the Company up to June 2014.

24Ms Penson's evidence is that the Company's balance sheet recorded a contingent liability described in Note 8 and a spreadsheet:

"following disputes which exist concerning payment of legal costs, charges and expenses either ordered against the Company or in favour of the Company".

That reconciliation includes costs owed by the Company to the Plaintiffs of $150,944.43 inclusive of GST, of which $152,344.43 is shown as not paid; amounts due to Mr Weber of $45,864.58 inclusive of GST, of which $7,380.10 is shown as not paid; and amounts due to Giles Payne & Co, who previously acted for the Company, in the amount of $218,655.30 inclusive of GST of which the amount of $159,724.53 is shown as not paid. These are, obviously enough, very substantial amounts. Note 8 to the Company's financial statements in turn reads as follows:

"A contingent liability exists in relation to ongoing legal proceeds [sic]. The extent of such being that the company may be liable for costs of the other party. This amount has been quantified as net of Goods and Services Tax of $149,518. A further amount yet to be determined has been identified net of Goods and Services Tax of $19,255. The combined total of such being $168,773 net of the Goods and Services Tax.

In accordance with Note 1(d) and Note 5 the director has determined that the impact of any such liability would not affect the company's ability to meet its debts as and when they fall due and payable."

I will refer further to the treatment of those costs orders in those financial statements below. Ms Penson also noted that in some cases the legal costs and charges payable by the Company had also been ordered against Ms Penson, although I note that that matter did not affect their enforceability against the Company.

25Ms Penson's evidence was that the unsecured loans referred to in the Company's balance sheet were owing to her and she did not intend to call for the payment or repayment of that loan account within a period of 12 months (Penson 5.9.2014 [7]). There is no evidence of the terms of that loan. I will proceed on the basis that that loan neither undermines, nor supports, the Company's solvency in that situation. Ms Penson's evidence is also that the Company does not have employees, other than her, although it periodically retains sub-contract labour directly or through employment agencies; it did not have an overdraft and there were no outstanding amounts due in respect of PAYG tax and all business activity statements have been lodged up to the quarter ended 30 June 2014 and the income tax return for the year ended 30 June 2013 had been filed; and employee benefits owing the Company were all due to Ms Penson.

26Ms Penson's evidence was that the Company's financial affairs were accurately reflected in those financial statements for the year ended 30 June 2014 and there had been no material change to its financial circumstances since the balance date referred to in those financial statements, 30 June 2014. That statement requires qualification, since there have been several costs orders made against the Company in these proceedings. I do not have regard to the possibility that the Company may also have incurred legal costs for a short period of time in which it engaged Counsel, prior to his being granted leave to withdraw at his request, since the evidence does not disclose whether Ms Penson may have assumed liability for those costs personally, in place of the Company.

27Ms Penson also refers, in paragraph 8 and Annexure A of her affidavit, to amounts owed to the Company which she suggests may be offset against the amount claimed by the substituted creditors. In particular, Ms Penson refers to an application for costs assessment which she and the Company filed on 3 June 2014 for $22,083.38 claimed to be owed by the Plaintiffs since April 2010. To the extent that that amount is referrable to costs, it will not be due for payment until it is assessed, and there is no evidence that it has been assessed. In any event, the question of any offsetting claim arising from it does not impugn the presumption of insolvency which arises from Mr Weber's unsatisfied statutory demand; it does not impugn the substituted creditors' right to bring this winding up application, which has already been determined by Brereton J; and it has little relevance as a matter of discretion, since any amount that may emerge from the relevant assessment is significantly less than the Judgment Debt. The evidence of the accounting expert called by the Plaintiffs, Ms Vouris, to which I will refer further below, is that, even if an offset were available, the amount of $150,944.43 would still be owed by the Company, part of which is the Judgment Debt.

28Ms Penson also gives evidence of her intention to provide financial support to the Company, in particular circumstances, so as to support its solvency. Her evidence is that:

"In the event of any amount reflected as a contingent liability in respect of the liabilities of the Company it is my intention in the same manner that I have previously done to provide necessary funds to satisfy those liabilities as and when they become presently due and payable and any disputes relating to that liability have been determined as necessary by a Court of competent jurisdiction."

She adds that:

"In the event of one of the liabilities found to be due and payable in respect of the contingent liabilities referred to in the reconciliation being finally determined against me by the Court or at an appellant [sic] level I undertake to the Court in these proceedings that I will satisfy such liabilities from my own resources by way of loan to the Company."

These statements plainly depend upon a particular view of the concept of "due and payable" and "finally determined", since it is clear that the Company does not consider a debt should be paid merely because it arises from a court judgment that has not been stayed, and the determination of many disputes in the matter have been followed by further disputes arising from application by the Company to set aside the previous determinations.

29In some circumstances, an undertaking by a director or third party to provide financial support to a company may support its solvency, even if it is not legally enforceable, and possibly even if that support is informal in character, provided the prospect of receipt of those funds is in fact sufficient to allow the company to meet its debts: Williams v Scholz [2008] QCA 94 at [110]; International Cat Manufacturing Pty Ltd (in liq) v Rodrica [2013] QCA 372; (2013) 97 ACSR 200; First Strategic Development Corporation Ltd (in liq) v Chen & Ors [2014] QSC 60 at [67]-[69]. On the other hand, in Re LJAC Energy Pty Ltd (in liq) [2013] NSWSC 1231, in the context of an application for termination of a winding up, Lindsay J noted at [34]-[35]) that:

"It is not enough that such a party state an intention to support the company financially, or logistically, in the future or, even to provide an assurance that such support will be forthcoming. Particularly it is not enough when a company's benefactor is not under a contractual obligation to provide support or, for whatever reason, has failed in the past to provide timely support.

The Court generally needs to be satisfied that the Company's ability to pay its debts as and when they fall due is grounded upon a foundation in net assets and a cash flow not contingent upon a promoter's discretion."

For present purposes, the latter observations by Lindsay J are of particular significance. The fact that the Judgment Debt and other costs orders against the Company have remained unpaid throughout the relevant period demonstrates that Ms Penson is unlikely to utilise personal funds to repay debts of the Company generally, but only such debts as she chooses to pay. A director's advancing personal funds to pay some, but not other, debts of a company does not establish its solvency.

30Ms Penson gives evidence as to her ownership of a property at Alexandria, subject to a first registered mortgage in respect of a lender, and to her belief that the property has a present market value significantly exceeding the amount of the loan upon it. That property is relied on to indicate her capacity to meet such an undertaking. It is not necessary to determine a further dispute between the parties as to the equity that is in fact available to Ms Penson in respect of that property, where it is also subject to a caveat lodged by the solicitors previously acting for the Company and Ms Penson has raised concerns as to the validity as to that caveat in the course of submissions and has moved to set it aside, since, for the reasons noted above, I am not satisfied that Ms Penson will take any steps to place the Company in funds to pay the Judgment Debt or other debts owing to the Plaintiffs, even if she has the personal means to do so.

31By a further affidavit dated 10 October 2014, Ms Penson led evidence of her reason for being absent overseas in the period 3 October 2014 to 9 October 2014. That evidence was directed to matters that I addressed in a judgment delivered on 10 October 2014, declining further to adjourn the winding up application. Ms Penson also tendered an affidavit dated 20 October 2014 sworn in District Court proceedings, which was admitted subject to a limiting order that it was proof only of the matters raised in the District Court proceedings and not of the truth of its contents (Ex R8).

32I should add, for completeness, that the Company has also taken the position, in correspondence with the Plaintiffs' solicitors, that it is not required to pay the various costs orders against it unless it is issued a tax invoice by the persons in favour of whom the orders for costs have been made, or that person's solicitors, so that the Company may claim a GST input credit in respect of that amount. That argument is not available in this application since it was not raised in any application to set aside the creditor's statutory demand issued by Mr Weber and no leave was sought or granted to raise it in this application on the basis of any suggested materiality to the Company's solvency. I should add that I consider the position adopted by the Company is plainly incorrect. First, a court judgment is enforceable, when delivered, against the person against whom it is made and that enforceability is not qualified by any further conditions, in respect of tax invoices or otherwise, which that person may seek to impose upon their compliance with it. Second, as Ms Perry, who appears for the Plaintiffs, points out, where a costs order is made in respect of solicitor's costs incurred by a client, to reimburse that client for those costs, the client may well be entitled to a GST tax credit in respect of that expenditure and, if so, GST may arguably be excluded from the claim for costs. In the present case, it appears that Ms Wood-Weber paid the relevant costs individually and was not entitled to such a tax credit. In any event, the person who is obliged to reimburse those costs could not be placed in a position where they are issued a tax invoice, and are potentially entitled to recover a second GST input credit in respect of the same service as that to which the client is entitled to recover any relevant GST input credit.

The expert evidence led by the Plaintiffs as to the Company's solvency.

33The Plaintiffs in turn rely on the affidavit of Ms Kathleen Vouris, who is a registered and official liquidator and a certified practising accountant and who prepared an expert report dated 3 October 2014 in respect of the Company's solvency. Ms Vouris had been provided with the Expert Code of Conduct and confirmed that she read and agreed to be bound by it.

34Ms Vouris expressed the opinion, for the reasons set out in her report, that the Company was insolvent. Ms Vouris gave that opinion on the basis of an assumption, established by the evidence, that the amount of $111,416.95 recorded in a certificate of determination issued by the costs assessor to the Plaintiffs on 2 September 2013 had been due and payable at all times since at least 11 December 2013. Ms Vouris also recorded her review of relevant documents, including Ms Penson's affidavit sworn 5 September 2014 to which I have referred above and financial documents relating to the Company, including the audited financial statements as at June 2014 and the cash flow statement for the year ended June 2014 to which I also referred above. There is a dispute between the parties as to the adequacy of documents produced by the Company in the proceedings, which may in turn have impacted Ms Vouris' ability to prepare her report. I do not consider it necessary to determine that dispute, since it has been possible to determine this application on other grounds.

35Ms Vouris recognised the test for solvency in s 95A of the Corporations Act and also referred to the presumptions of insolvency arising in certain circumstances under s 588FE of the Corporations Act. Ms Vouris expressed the view that the Company's audited financial reports do not comply with applicable accounting standards, as they fail to recognise the order for costs in favour of the Plaintiffs as a liability, and treat those amounts as a contingent liability. Ms Vouris' evidence was that a liability is to be recognised, under AASB 101, when it is probable that the future sacrifice of economic benefits will be required and the amount of the liability can be measured reliably. In my view, there can be no doubt that a judgment of the District Court for costs, which has never been stayed, must be treated as a liability and not merely a contingent liability of the Company. Apart from anything else, no relevant contingency can be identified which would affect the status of that liability, since neither the Company's agreement to a judgment against the Company nor the Company's exhausting every possible avenue of review or appeal is required to make that judgment enforceable against it. Ms Vouris calculated that, once the Judgment Debt is treated as a liability in the Company's accounts, its liquid assets as at 30 June 2014 would be negative $84,794.95. She notes that she has not treated plant and equipment as available to pay current liabilities, and it seems to me that approach is correct, both where plant and equipment is not treated as a current asset in the Company's accounts and where, as Ms Vouris points out, it would not readily be realisable to meet the Judgment Debt.

36Ms Vouris also noted that the Company's cash flow statement for the year ended June 2014 indicated an operating cash flow for the year of $8,622, which would have been negative had the Company paid the Judgment Debt owed to the Plaintiffs in that period. Ms Vouris also noted that the Company has traded at a loss since June 2011 with the exception of the 2014 year, in which it recorded a modest profit. Ms Vouris also noted that the Company has had a liquidity ratio below 1 since at least June 2014, one of the several matters to which Mandie J referred in Australian Securities & Investments Commission v Plymin above as relevant to a determination of insolvency. Several other of the matters to which his Honour referred, including overdue Commonwealth and State taxes, poor relationships with the company's lender or suppliers placing the company on cash on delivery arrangements, creditors unpaid outside trading terms or payments to creditors of rounded sums are not established, because there is no evidence that the Company had overdue taxes, there is no evidence that it has a lender and it apparently trades on a cash on delivery basis.

37Ms Vouris summarised her conclusions, which I generally accept, as that, according to the Company's balance sheet, the Company has a negative net asset position for June 2014, if the Judgment Debt, is included, and that the net asset position of the Company indicates the Company does not have sufficient available liquid assets to discharge its due and payable debts. Ms Penson cross-examined Ms Vouris at some length, and refers to aspects of her evidence in her submissions. I have had regard to that cross-examination and Ms Penson's submissions in that regard, but it does not seem to me that that cross-examination undermined the substantive analysis of the Company's solvency undertaken by Ms Vouris.

The parties' submissions

38By her outline of written submissions dated 9 October 2014, Ms Perry identifies two alternative bases for a winding up order, namely, a failure to comply with the creditor's statutory demand issued by Mr Weber, giving rise to a presumption of insolvency, and actual insolvency under s 459A of the Corporations Act on the basis that the Company is unable to pay all debts due and payable by it including the Judgment Debt and numerous other costs orders made against it. Ms Perry submits, and I accept, for the reasons noted above, that the Plaintiffs are entitled to rely on a presumption of insolvency created by the failure to comply with the creditor's statutory demand issued by Mr Weber. Ms Perry also refers to the well-established principle that the test for solvency under s 95 of the Corporations Act is a cash flow test rather than a balance sheet test, to which I have also referred above, and refers to the evidence as to the Company's cash flow which emerged from Ms Vouris' report, to which I have referred above, and to the adverse developments in the Company's financial position so far as costs orders have been made against it since 30 June 2014. Ms Perry also submits that, so far as a balance sheet test is relevant, the Company has insufficient current or total assets to meet all debts due and payable at the time of the hearing, including the debts owing to the Plaintiffs. That matter also seems to me to be established by Ms Vouris' evidence to which I have referred above.

39Ms Perry refers to the observations of the Federal Court in Turco & Co Pty Ltd v Pendella Holdings Pty Ltd [2010] FCA 213 at [57] that:

"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 ... 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." [citations omitted]

In that case, the Court had regard to evidence of an independent auditor, although recognising that his investigations were relatively limited. Ms Perry submits, and I accept, that the accounts prepared by the Company in this case are not sufficient to rebut the presumption of insolvency, or to establish its solvency in fact, where those accounts incorrectly treat presently enforceable costs orders, which have not been stayed, as contingent liabilities rather than as liabilities; the extent of the Company's cash flow, current assets and the presently enforceable claims against it emerging from the reconciliation of costs orders indicate the Company's inability to meet its present debts when due; and the information in those financial statements is provided as at 30 June 2014 and there have been adverse developments in the Company's position since that date, by reason of further costs orders made against it.

40Ms Perry also points out that, notwithstanding Ms Penson's evidence that she would support the Company, she has not offered any security in respect of the Judgment Debt; she has not made the Company any loan to allow it to pay that debt; and there is no evidence of her seeking a third party loan in order to place her in a position to do so. As I noted above, in circumstances that Ms Penson has in fact taken no step to sell or borrow upon her residential property at Alexandria, I do not consider that her ownership of that property assists in demonstrating the Company's solvency.

41Ms Penson, in her submissions on behalf of the Company, in turn outlines the history of the Company's dispute with Mr Weber and the Plaintiffs, commencing in 2009 when the Company received notice terminating the lease of the building it leased from Mr Weber and the substituting creditors. Ms Penson sets out several adverse developments in respect of proceedings brought by the Company in respect of the termination of the lease, which were unsuccessful and in which costs were ultimately ordered against it. Ms Penson also sets out the subsequent history of proceedings in this Court, including the winding up application made by Mr Weber, my judgment delivered on 25 March 2014, and subsequent applications brought by the Company in the District Court and this Court.

42Ms Penson also set out a lengthy "report" in her submissions from the Company's auditor, which was said to be in reply to Ms Vouris' expert report dated 3 October 2014. That report refers to the fact that the Company is a small proprietary company and makes several statements of fact as to the manner in which the Company receives its financing, which would properly be treated as matters of assumption and which are in any event addressed in Ms Penson's evidence. The report refers to other matters raised in Ms Penson's affidavit, where it can rise no higher than the evidence led in that affidavit, and makes several adverse comments as to Ms Vouris' treatment of that affidavit which can properly be treated as matters of submission. The report then makes several criticisms of Ms Vouris' approach to the cash flow test and the balance sheet test, which seem to me to be argumentative in character, rather than to involve any particular application of accounting expertise, and draws attention to the Company's cash flow if depreciation were excluded, a matter which emerges from the financial reports that are already in evidence. The report also undertakes a calculation as to the Company's cash flow if transactions with its director and shareholder were excluded, without explaining the relevance of that calculation, and based on documentation attached to Ms Vouris' report. That calculation can again be treated as a matter of submission, since it involves a mathematical exercise and not the application of accounting expertise. The report asserts that plant and equipment, which is treated as non-current in the accounts, "is readily available to be used as security for borrowings if required". That is plainly a question of fact which must depend upon the nature of the relevant equipment and is not a matter which can be established by assertion by an accounting expert. The report also indicates that the accountant is unable to comment as to certain other matters, including aspects of the treatment of legal costs, and indicates that the accountant was not aware of the caveat previously lodged by the Company's (or Ms Penson's) former solicitors over her residential property.

43That report also expresses the view that Ms Penson "has always provided timely support" to the Company and that:

"Such being the case it is difficult not to conclude that the sole director and shareholder is willing and prepared to provide the financial support to the company as and when required. There is no evidence either currently or in the past to suggest that the sole director and shareholder has failed to provide timely support."

It seems to me that that observation is a submission as to the evidence in the proceedings, which can be treated as made by Ms Penson, and does not depend upon the application of accounting expertise. That report also indicates that the special purpose report for June 2014 was audited, which has been common ground in the application, and was acknowledged by Ms Vouris in her cross-examination.

44In the course of Ms Penson's oral submissions, I raised with Ms Penson the difficulty that the Court cannot treat a report, which is not verified by the person which provided it, and which does not comply with the Expert Code of Conduct, as expert evidence in the proceedings. Ms Penson sought to be permitted to lead further affidavit evidence from the Company's auditor in identical terms to the material set out in her submissions. I indicated that I would deal with that application in this judgment. I am not satisfied that I should extend the time to the Company to lead such evidence or grant leave to the Company to lead such further evidence. I accept that, in some circumstances, the Court might have been persuaded to further extend that time, where Counsel has ceased to act for the Company and Ms Penson was again representing it in the proceedings.

45However, it does not seem to me that, having regard to the principles set out in ss 56-60 of the Civil Procedure Act 2005 (NSW), it would be in the interests of the just, quick and cheap resolution of the proceedings to further delay their determination to permit Ms Penson to file and serve a further affidavit of the Company's auditor in the present case. First, Ms Vouris' report was filed in accordance with the Court's order extending the time for service of the Plaintiffs' expert evidence to 3 October 2014, made on 24 September 2014; the Court also made an order on that date, when the Company was represented by Counsel, extending the time for the filing of evidence in response by the Company to 8 October 2014; and an order permitting further evidence at this point would further delay the determination of a winding application that has already been long delayed. That result does not seem to me to be appropriate or consistent with the interests of justice or the policies underlying s 459R of the Corporations Act, for the reasons I indicated in my earlier judgment declining further to adjourn the proceedings on Ms Penson's application. Second, to the extent that Ms Penson seeks to lead evidence in identical form to the "report" of the Company's auditor (as set out in her submissions) by an affidavit from the Company's auditor, large parts of it would not be admissible, because they do not involve the application of accounting expertise, or would only be admitted subject to a limiting order under s 136 of the Evidence Act 1995 (NSW) that they were admitted as submission only. In these circumstances, it seems to me that the Company suffers no disadvantage if I have regard, as I have done, to the matters quoted from the report from the Company's auditor as matters of submission.

46Ms Penson also submits that the Company's solvency is clearly demonstrated by the fact that it has made payments, for example to Mr Weber of $38,484 and to the Plaintiffs of $20,000, plus a further amount of $2,500 to the substituted creditors. The former payment was made after the Court had made an order winding up the Company, but stayed it to allow that payment to be made if the Company wished to do so; the latter was made from funds held by the District Court, pursuant to an order by that Court; and the payment of $2,500 has not been the subject of substantive submissions. The difficulty with this submission seems to me that the fact that a company pays some debts, and not others, does not establish that it is able to pay its debts as and when they fall due. Ms Penson submits that the apparent decline of the Company's revenue between 2011 and 2014 relates, not to deterioration in its business, but to changes in the exchange rate between the Australian dollar and the United States dollar. It ultimately does not seem to me that this matter is of particular significance in the application; however, to the extent that it is relevant, the fact that a decline in revenue results from a change in the exchange rate does not mean that it has not occurred.

47Ms Penson also rejects any suggestion that the Company has not paid its legal representatives, implicitly on the basis that she rather than the Company engaged one of those representatives, and also on the basis that the Company's representatives in trade mark proceedings in China were engaged under a special arrangement that did not require the Company to pay their costs. It does not seem to me to be necessary determine these matters, since the Company's insolvency is established without regard to whether it does or does not owe unpaid amounts to legal representatives, including the unpaid amounts due to its former solicitors recorded in the reconciliation attached to its financial statement. Ms Penson also submitted, and I will assume, that she has served a lapsing notice to remove the caveat lodged by her former solicitors over her residential property. Ms Penson points out that additional costs orders ordered by the District Court and in respect of applications in this Court are either disputed or would only be payable if it is the subject of a costs assessment. Assessment is not required in respect of lump sum costs orders made by the District Court or this Court, and this proposition does not otherwise assist the Company to establish its solvency so far as costs orders that have been assessed or ordered as lump sum orders and not stayed have not been paid.

48I should note, for completeness, that Ms Penson sent a further submission to my Associate after I had reserved judgment, including reiterating the Company's willingness to file an affidavit of its accountant in the form of the "report" contained in her submissions. No leave had been sought or granted for the making of that further submission. The courts have repeatedly emphasised that the making of further submissions after judgment is reserved without leave is inappropriate: Carr v Finance Corp of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246 at 257-258, where Mason J observed that the hearing is the time and place to present argument, whether it be wholly oral or oral argument supplemented by written submissions; see also Al Raeid v Minister for Immigration & Multicultural Affairs [2000] FCA 1357 at [41]; Jackson v Conway [2000] FCA 1530 at [28]; Notaras v Waverley Council [2007] NSWCA 333 at [147] per Tobias JA, with whom Mason P and Hodgson JA agreed; Bull v Lee (No 2) [2009] NSWCA 362 at [8], although I recognise that Ms Penson may not have been aware of that principle as a layperson, albeit one who is now very experienced in the conduct of litigation. In accordance with those authorities, I have not had regard to that further submission.

Conclusion and orders

49I am satisfied, for the reasons set out above, that the presumption of insolvency arising from the unsatisfied creditor's statutory demand served by Mr Weber has not been rebutted and that the Company's insolvency has been established as a matter of fact. The applicable procedural requirements in respect of a winding up have been satisfied, including determination of the winding up application within the period extended by the Court from time to time under s 459R of the Corporations Act; there is evidence of service of the Originating Process upon the Company and of notification of the winding up application to ASIC under s 470 of the Corporations Act and of publication of a notice of winding up in accordance with s 465A of the Corporations Act by publication on ASIC's website. I make the usual order dispensing with the requirement for publication in a daily newspaper on that basis. As I noted above, the consent of an official liquidator has been obtained to appointment.

50The Plaintiffs also seek to have liberty reserved to bring such further application as they may be advised in respect of any liability of Ms Penson as to costs or any application for a gross sum costs order under s 98 of the Civil Procedure Act 2005 (NSW). The Court has power to make a costs order may be made against a director who represents a company in proceedings or a gross sum costs order in an appropriate case, although whether this is such a case would be a matter for further evidence and submissions. I will reserve liberty for the Plaintiffs to bring any such application as these issues, following delivery of this judgment, on the basis that any remaining issues as to costs should be addressed promptly. Any such application by the Plaintiffs and all evidence in chief in support of it should therefore be filed and served within 21 days, so that directions can then be made as to any evidence in response to be filed by the Company (and Ms Pension, if applicable) and any such application can be determined early in the new year.

51Accordingly, I make orders that:

1. The Defendant, Aquaqueen International Pty Ltd (ACN 094 129 389), be wound up.

2. Mr Trent Andrew Devine of Jirsch Sutherland be appointed as liquidator to the Defendant.

3. The Plaintiffs' costs of the application (including any reserved costs as agreed, assessed or otherwise fixed by the Court) be reimbursed in accordance with s 466(2) of the Corporations Act 2001 (Cth).

4. Reserve liberty to the Plaintiffs within 21 days to bring such further application as they may be advised in respect of any liability of the director of the Defendant, Ms Penson, as to costs or any application for a gross sum costs order under s 98 of the Civil Procedure Act 2005 (NSW), any such application is to be made returnable in the Corporations Motions List and all evidence on which the Plaintiffs rely in chief in respect of any such application to be filed and served within that 21 day period.

**********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

Decision last updated: 20 November 2014