In the matter of Universal Consultants Group Pty Ltd [2016] NSWSC 1508

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Universal Consultants Group Pty Ltd [2016] NSWSC 1508 Hearing dates: 17 October 2016 Decision date: 17 October 2016 Jurisdiction: Equity - Corporations List Before: Black J Decision: The Court orders that the Defendant be wound up and Mr Philip Hosking be appointed as liquidator of the Defendant. The Plaintiff's costs of the winding up application be costs in the winding up. Catchwords: CORPORATIONS — Winding up — Application by plaintiff to wind up company on grounds of insolvency – where company failed to comply with creditor's statutory demand issued by plaintiff where the debt specified in demand related to judgment debt owing to plaintiff – where instalment order was made in respect of the judgment debt subsequent to commencement of the winding up application – where plaintiff sought to wind up company relying on the presumption of insolvency arising from company's failure to comply with creditor's statutory demand – whether evidence led by company rebuts presumption of insolvency – whether court should exercise its discretion not to wind up company in circumstances where company's solvency is not established. Legislation Cited: - Corporations Act 2001 (Cth), ss 95A, 459A, 459P, 459Q - Evidence Act 1995 (NSW), s 136 Cases Cited: - Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 - Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) [2011] HCA 18; (2011) 244 CLR 1 - Botany Bay City Council v Parmtree Pty Ltd [2009] NSWSC 896 - Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd [2008] QSC 210; (2008) 219 FLR 222 - Deputy Commissioner of Taxation v T.D. Preece Pty Ltd [2013] FCA 1365 - Druin Pty Ltd v Caporale Designs Pty Ltd [2009] NSWSC 739 - Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 - Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 - Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305; (2001) 53 NSWLR 213 Category: Principal judgment Parties: CCSG Legal Pty Ltd (Plaintiff) Universal Consultants Group Pty Ltd (Defendant) Representation: Counsel: B Fry (Solicitor) (Plaintiff) M Cowden (Defendant)

Solicitors: CCSG Legal (Plaintiff) Hills Legal (Defendant) File Number(s): 2016/190877

Judgment - ex tempore 1. By Originating Process filed on 23 June 2016 the Plaintiff, CCSG Legal Pty Ltd, seeks an order winding up the Defendant, Universal Consultants Group Pty Ltd ("Company") under ss 459A and 459Q of the Corporations Act 2001 (Cth), on the ground of insolvency. The application relies on an unsatisfied creditor's statutory demand ("Demand"), which was in turn founded upon a judgment entered in the Local Court on 7 April 2016 in the amount of $22,227.91. 2. There were subsequent developments in the matter after the issue of the Demand, which have in turn been reflected in submissions put by each of Mr Fry, on behalf of the Plaintiff, and Ms Cowden, on behalf of the Company. It is useful to set out the chronology of events, which will provide context for what follows. On 7 April 2016, as I noted, the Local Court at Sutherland entered judgment in the amount of $22,227.91 against the Company on the Plaintiff's application. It appears that amount related to unpaid solicitor's fees, for acting for the Company in previous proceedings in which judgment had also been given against the Company. On 13 April 2016, the Plaintiff served the Demand in respect of the judgment amount. That Demand was neither complied with nor set aside, and accordingly, a presumption of insolvency arose in respect of the Company. In late June 2016, the Plaintiff filed a winding up application and, in July 2016, the Company brought an application in the Local Court for an instalment order in respect of the judgment ordered in favour of the Plaintiff and against the Company, permitting it to pay that judgment at an amount of $1,500 per month, with the first payment to be made in late July 2016. That instalment order was made by the Local Court, and a subsequent application to set it aside brought by the Plaintiff did not succeed. It should be noted, however, that that instalment order was made after, on any view, the presumption of insolvency had already arisen. 3. It seems to me clear that the Plaintiff has standing to bring this application, either on the basis that it is a creditor in respect of any instalment that is outstanding at any point in time, or at least on the basis that it is a contingent or prospective creditor in respect of future instalments due and payable under the instalment order, and I granted leave under s 459P(2) of the Corporations Act for it to pursue winding up proceedings so far as it fell within that category. 4. The Plaintiff relies on several affidavits in order to support the application. It was common ground between the parties that the formal requirements for a winding up were satisfied, and what was in dispute was the substantive issue as to solvency, and the question as to whether the Court's discretion should not be exercised in favour of a winding up order, even if the Company's solvency had not been established. I note, for completeness, that the Plaintiff relied on an affidavit of Ms Veronica Phillips dated 7 April 2016 in respect of the service of the Demand; an affidavit of Mr Paul Taylor dated 23 June 2016 in respect of the fact that the debt was unpaid at the time the winding up proceedings were commenced; and an affidavit dated 23 June 2016 of Ms Warren. The affidavit of Ms Warren also annexed a credit report, which was admitted without objection, which indicated two other judgments against the Company in favour of Messrs Wang and Chen of a total amount of $121,570. There is also evidence, to which I will refer below, that the Company is or was paying instalment payments in respect of each of judgments in favour of those persons, albeit the evidence refers to a different amount. 5. The Plaintiff also relied on an affidavit of publication dated 22 July 2016, an affidavit of service dated 22 July 2016, and a further affidavit of Ms Warren dated 11 October 2016 which set out the invoices which were the subject of the judgment and the chronological events that led to the judgment in the Plaintiff's favour. The Plaintiff also relied on a further affidavit of Mr Taylor dated 14 October 2016 which indicated that the debt remained outstanding for the amount of $17,500, presumably being the amount of the judgment less the instalments received from the Company. A consent of liquidator of Mr Hosking was tendered. 6. The Company relied on affidavit evidence in response to the application. An affidavit dated 11 August 2016 of Mr Alexander, who is the sole director of the Company, did no more than annex the instalment order made by the Local Court on 22 July 2016 which was, as I noted above, after the presumption of insolvency had arisen and asserts, without further elaboration, that the Company was able to meet the instalment arrangement. 7. By a further affidavit of Mr Alexander dated 28 September 2016, he noted that the Company had commenced in 1994 and operated as an advisory service in respect of persons from overseas who wished to migrate to Australia. Mr Alexander made statements, in the form of assertions, that creditors had been paid in a timely fashion since the incorporation of the Company and that the Company had remained a going concern since its commencement in 1994. The proposition that creditors had been paid in a timely fashion appears to require at least some qualification, so far as the Plaintiff is concerned, since it had an unsatisfied judgment debt for some time, prior to the making of an instalment order by the Local Court. Mr Alexander stated that the Company could continue to pay instalments pursuant to the order made by the Local Court, provided it was able to continue to operate, and had maintained instalments since April 2014, which must be a reference to the instalments in respect of the other judgments, while carrying on its usual operations. It should be noted that Mr Alexander does not, in that affidavit, seek to provide any details of the Company's financial position, including any of the matters which I will note below, as addressed by a further affidavit of the Company's accountant, Mr Gelonesi. 8. By a further affidavit dated 4 October 2016, Mr Gelonesi, who is a chartered accountant, set out the Company's financial statement for the year ending 30 June 2016 and annexed a brief report dated 29 September 2016 with respect to the Company's financial viability. The financial report for the year ended 30 June 2016 included an unsigned director's declaration, a profit and loss statement for the year ended 30 June 2016 and a balance sheet as at 30 June 2016. That information is, at the date of this application, over three months out of date. Putting that matter aside, the balance sheet indicated that the Company had cash and cash equivalents as at 30 June 2016 in an amount of $108.89 and inventories in the amount of $48,500. Those inventories appear to refer, having regard to a note to the accounts, to 'work in progress', and further information as to that work in progress is provided in Mr Gelonesi's report. That balance sheet also refers to current liabilities of $29,669.38, although no explanation is given as to the make-up of those liabilities between the amount the Plaintiff claimed of $22,227.91 and any remaining amount owed on the other judgments to which I have referred. 9. The treatment of work in progress and inventory in the Company's financial statement appears to reflect an accounting policy determined by the director, as indicated by notes to the compilation report. The notes to the compilation report also provide that the director is solely responsible for the information contained in the relevant financial statements and determined that the basis of accounting used is appropriate to meet the Company's needs, and that the special purpose financial statements have been determined on the basis of the information provided by the director, and that the procedures adopted by the accountant do not include verification or validation procedures, and no assurance is expressed. That note also provided that the special financial statements were compiled exclusively for the benefit of the director. Such notes disclaim the ability of others to rely on those accounts and plainly undermine the utility of such accounts when they are tendered before a court, with an invitation for the court to rely on them, when such a disclaimer makes clear that no responsibility is assumed by the accountant for them. 10. Mr Gelonesi's report in turn recognised, properly, that he had been provided with a copy of the Expert Witness Code of Conduct and agreed to be bound by it. He referred to having been provided with Company banking records and with contracts that the Company was working on, and to having satisfied himself that the bank records were correct and the customer contracts were correct. No evidence was led to establish those matters so as to allow the Court to reach an assessment as to the correctness of Mr Gelonesi's conclusion. Mr Gelonesi in turn asserts several facts, none of which were the subject of specific evidence of Mr Alexander; namely that the Company was trading profitably in accordance with the enclosed profit and loss statements; that the Company had met all of its liabilities as they fell due in the last 12 months; the total value of several contracts on which the Company was working; the amount received from them and the amount which would be received from them, once certain nominations were approved, which appears to reflect the amount that has in turn been recorded as inventory in the Company's financial statements; and a statement that the Company had only two liabilities, to the director and the Plaintiff. These are plainly matters of fact, and are not matters which could properly be determined by an expert as distinct from matters which could be assumed by the expert, so as to be the subject of the application of accounting expertise, and the assumptions proved by admissible evidence. Ms Cowden, who appeared for the Company, rightly recognised that those matters could only be admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW), that they were treated as matters of assumption and not as proof of the asserted facts. However, the consequence of that proper limitation is that those matters are in fact not proved by evidence, where Mr Alexander does not lead evidence in respect of those matters. 11. Mr Gelonesi in turn expresses the view that the Company receives regular cash flow and, with the contracts in place, it will continue to do so in the future and has paid all its commitments on time in the past, and on that basis that the Company "passes the solvency test when applying the cash flow test" in that it is able to meet the payment of expenses and liabilities as and when they fall due. That conclusion is, at best, the product of the assumptions which Mr Gelonesi has made and those assumptions have generally not been proved by admissible evidence. 12. Two questions arise in the application, as to which I have had the benefit of detailed and helpful submissions from Mr Fry and Ms Cowden. The first is whether the Company is solvent and the second is, if the Company is not solvent, whether the Court should exercise a discretion not to make a winding up order where an instalment order is in place. It should first be recognised that the Plaintiff has the benefit of a presumption of insolvency arising from the Company's failure to comply with the Demand. The effect of that presumption was summarised by a unanimous High Court decision in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs. apptd) [2011] HCA 18; (2011) 244 CLR 1 at [28] to the effect that: "[W]here 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." 1. The principles applicable to a determination of insolvency are in turn well-established, and were dealt with by the legal representatives in submissions. The definition of solvency in s 95A of the Corporations Act adopts a cash flow test of insolvency, which turns upon the income sources available to the Company and the expenditure obligations that it has to meet: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213 at [54]; and see my summary of the relevant authorities in Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551 at [39]. Generally speaking, a party seeking to displace a presumption of insolvency must lead the "fullest and best" evidence as to its financial position before the court; unaudited accounts and unverified claims of ownership or the value of assets will not ordinarily be sufficient for that purpose; and assertions of solvency made by an accountant from a general review of the company's accounts will not be sufficient to establish solvency, even if the relevant accountant has knowledge of how those accounts were prepared: Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463; Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]; Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16]; Re Gladstone Mortgagee No 1 Pty Ltd above at [40]. 2. Mr Fry fairly drew attention to the observation of White J in Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd [2008] QSC 210; (2008) 219 FLR 222 that audited accounts and significant inquiries would not necessarily be required in dealing with a simple company. While I broadly accept that proposition, the fact that a company does not need to lead evidence of audited accounts does not mean that it does not need to lead admissible, and sufficient, evidence to rebut the presumption of insolvency. It seems to me that, to establish solvency, the Company at least needed to lead evidence from its director to the extent that would be necessary to establish the assumptions made in Mr Gelonesi's report and, perhaps more fundamentally, it needed to lead evidence from its director to establish the basis of any expectation that income would be derived on a monthly basis, to allow it to meet its instalment obligations to the Plaintiff. There is no such evidence, and to say that the Company does not need to lead elaborate evidence to establish its solvency does not mean that it is not required to lead any such evidence. 3. It will be apparent from what I have said above, that, in the present case, it seems to me that the Company's evidence as to solvency falls well short, not only of the fullest and best evidence of solvency, but of evidence that would allow any real confidence as to its ability to meet the instalment arrangements on an ongoing basis, assuming that it has done so in the past. There is, in particular, no evidence before the Court which would allow comfort as to the Company's ability to meet those instalment arrangements on an ongoing basis, from cash flow that is received at regular intervals, of the kind that a cash flow forecast, or other admissible evidence led by the director, may have provided. There is some evidence to the contrary, so far as it appears from a matter assumed in Mr Gelonesi's report that the amount that is treated as work in progress, or inventory, is only due to be received 3–5 months in the future, if certain nominations are approved. There is no explanation of the income that will be received by the Company in the interim, from which instalment arrangements pursuant to the Local Court's judgment could be paid. In these circumstances, I am not satisfied that the presumption of insolvency that arises from failure to comply with the Demand, has been rebutted. 4. The second question, which I can address relatively briefly, without disrespect to the detailed and careful submissions of both legal representatives about it, is whether the Court should decline to make a winding up order on discretionary grounds where it has not been satisfied of the Company's solvency for the reasons that I have noted above. 5. My attention was drawn to the decision in Botany Bay City Council v Parmtree Pty Ltd [2009] NSWSC 896 where Macready AsJ declined to make a winding up order, in circumstances that an instalment order was in place in respect of a judgment. It appears that Macready AsJ did not accept a submission that, in the particular circumstances which involved extensive litigation between the parties, the winding up application was an abuse of process. Macready AsJ also appears (at [42]) to have approached the matter by reference to principles that would apply in an application to set aside a creditor's statutory demand noting that the pursuit of a creditor's statutory demand where an instalment order is in place may amount to some other reason to set aside the demand, Macready AsJ concluded that a winding up application should not be permitted which would avoid the statutory stay arising from an instalment order made by the Registrar in respect of the underlying debt. Macready AsJ there observed (at [100]) that the particular case involved an abuse of process in the more limited sense in that the plaintiff would achieve a result which the legislation did not intend to occur when it enacted the relevant provision, presumably, the provisions which provided for the winding up of insolvent companies. 6. I must respectfully differ from the approach of Macready AsJ, so far as the legislative purpose of the winding up provisions is concerned, at least in a general case. It seems to me clear that the legislative purpose of the winding up provisions in the Corporations Act is to permit a creditor to wind up a company that is in fact insolvent, and to rely upon a presumption of insolvency arising from a creditor's statutory demand, where the presumption of insolvency is not rebutted. I find it difficult to see why those provisions, which are plainly intended to serve a public purpose in preventing an insolvent company from continuing to trade, to the risk of its creditors generally, should be displaced by the fact that an instalment order has been made in respect of a particular debt. Plainly, if the effect of the instalment order is that the company can in fact meet its debts, including the payments due under the instalment order, as and when they fall due, then it should not be wound up. However, that is not because a winding up application in those circumstances would amount to an abuse of process, or be inconsistent with the statutory purpose, but because the company is not insolvent in that case. That is a matter which the Company has not established in this application. I would, in any event, distinguish the decision in Botany Bay City Council v Parmtree Pty Ltd above, so far as it appears to me to involve more complex factual circumstances than the present application. The present application involves a straightforward case of a plaintiff which had the benefit of a presumption of insolvency, where a judgment debt had not been satisfied for a period, seeking to proceed to a winding up, where there is no evidence before the Court which would in fact establish the Company's ability to meet the instalments which it is required to pay on an ongoing basis, and thereby establish its solvency. 7. Ms Cowden also drew attention to the decision in Deputy Commissioner of Taxation v T.D. Preece Pty Ltd [2013] FCA 1365 where Griffiths J noted that, at least in an exceptional case, the court may decline to exercise a discretion to wind up a company, which is otherwise shown to be insolvent, or not to be shown solvent, where it considers that that is properly in the interests of creditors or the community generally. On any view, a case where the court would take that approach must be an exceptional case, since it involves a court accepting that a company that is insolvent should nonetheless be permitted to continue to trade, exposing its creditors and potential creditors to the risk that their debts will, by definition, not be paid as and when they fall due. It seems to me that this is not such a case, and that, in the absence of evidence that would establish the Company's solvency in the present case, there is too great a risk that the exercise of that discretion would expose not only the Plaintiff, but third parties that may deal with the Company to the risk that debts incurred by the Company on an ongoing basis, if and when it chose to incur such debts, would not be met. I am reinforced in that view by the approach adopted by White J in Druin Pty Ltd v Caporale Designs Pty Ltd [2009] NSWSC 739, where his Honour declined to terminate a winding up order, where solvency had not been established, and, more specifically, the presumption of insolvency arising from a failure to set aside a creditor's statutory demand had not been displaced. It seems to me that there is little reason to exercise a discretion not to wind up a company which has not established its solvency, in an ordinary case, where the court would not terminate a winding up in a corresponding case. 8. For these reasons, I am not satisfied that the Court should, in the exercise of its discretion, decline to make the winding up order which would ordinarily follow from a presumption of insolvency, where solvency has not been established in the winding up application. 9. Accordingly, I make the following orders: 1. The Defendant, Universal Consultants Group Pty Ltd, be wound up. 2. Mr Philip Hosking be appointed as liquidator of Universal Consultants Group Pty Ltd. 3. The Plaintiff's costs of the winding up application be costs in the winding up.

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