C & O Voukidis Pty Ltd v Break Fast Investments Pty Ltd [2014] FCA 1000

FEDERAL COURT OF AUSTRALIA

C & O Voukidis Pty Ltd v Break Fast Investments Pty Ltd [2014] FCA 1000 Citation: C & O Voukidis Pty Ltd v Break Fast Investments Pty Ltd [2014] FCA 1000

Parties: C&O VOUKIDIS PTY LTD (IN LIQUIDATION) v BREAK FAST INVESTMENTS PTY LTD

File number(s): VID 1260 of 2013

Judge(s): DAVIES J

Date of judgment: 16 September 2014

Catchwords: CORPORATIONS – insolvency – application to set aside winding up order – whether onus of demonstrating solvency has been discharged – contingent liabilities taken into account – effect of existing legal claims on the company – use of audited accounts to demonstrate solvency – whether the wind up application had been an abuse of process

Legislation: Corporations Act 2001 (Cth) ss 95A, 471A(1A)(d), 459A, 459C, 459D, 459P

Cases cited: Crema Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 Australian Beverage Distributors v The Redrock Co (2008) 26 ACLC 74; [2008] NSWSC 3 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 188 ALR 114; [2001] NSWSC 621 Lewis v Doran (2004) 208 ALR 385; [2004] NSWSC 608 Community Development Pty Ltd v Engwirda Construction Company (1969) 120 CLR 455 The National Bank of Australasia Ltd v Mason (1975) 133 CLR 191 Federal Commissioner of Taxation v Gosstray [1986] VR 876 McLellan v Australian Stock Exchange Limited (2005) 144 FCR 327; [2005] FCA 585 Ambridge Investments Pty Ltd (receiver appointed) (in liq) v Baker [2010] VSC 59 Break Fast Investments v Gravity Ventures Pty Ltd [2013] VSC 89 National Australia Bank Ltd v C & O Voukidis Pty Ltd [2014] NSWSC 384 Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 TQM Design and Construct v Golden Plantation Pty Ltd [2011] NSW SC 500 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163 Metledge v Bambakit Pty Ltd [2005] NSWSC 160 Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd (2004) 213 ALR 373; [2004] NSW SC 1224 Re Lawrence Waterhouse Pty Ltd (in liq); Shaw v Minsden Pty Ltd [2011] NSW SC 964 Re Glass Recycling Pty Ltd [2014] NSWSC 439 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd (2007) 213 FLR 450; [2007] NSWSC 966 Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374; [2007] NSWCA 57

Date of hearing: 3 July 2014

Place: Melbourne

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 61

Counsel for the Applicant: Mr A Heykope

Solicitor for the Applicant: JBT Lawyers

Counsel for the Respondent: Mr M Galvin

Solicitor for the Respondent: Foster Nicholson Jones

Solicitor for the liquidator: Ms L Thompson of CBP Lawyers

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1260 of 2013

BETWEEN: C&O VOUKIDIS PTY LTD (IN LIQUIDATION)

Applicant

AND: BREAK FAST INVESTMENTS PTY LTD

Respondent

JUDGE: DAVIES J DATE OF ORDER: 16 SEPTEMBER 2014 WHERE MADE: MELBOURNE

THE COURT ORDERS THAT:

1. The application by Mr Voukidis under section 471A(1A)(d) of the Corporations Act 2001 (Cth) to institute a review in the name of C & O Voukidis Pty Ltd against the order for its winding up be dismissed. 2. The applicant, Mr Voukidis, pay the costs of the respondent and of the liquidator appointed to C&O Voukidis Pty Ltd ("COV") of the application; 3. The costs of the application be costs in the winding up of COV; 4. The amount paid into the Litigants' Fund by FNJ Lawyers on behalf of the respondent in accordance with Order 1 of the orders made by Registrar Luxton on 7 March 2014 be released to the liquidator appointed to COV forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1260 of 2013

BETWEEN: C&O VOUKIDIS PTY LTD (IN LIQUIDATION)

Applicant

AND: BREAK FAST INVESTMENTS PTY LTD

Respondent

JUDGE: DAVIES J DATE: 16 SEPTEMBER 2014 PLACE: MELBOURNE

REASONS FOR JUDGMENT

introduction 1 On 27 May 2014, a Registrar of this Court ordered C & O Voukidis Pty Ltd ("COV") to be wound up in insolvency and appointed Mr Gary Stephen Fettes ("Mr Fettes") as the liquidator of the company. The wind up order was made on the application of the respondent, Break Fast Investments Pty Ltd ("Break Fast"), under s 459A and s 459P of the Corporations Act 2001 (Cth) ("the Act"). Break Fast relied on the statutory presumption of insolvency under s 459C of the Act arising from the failure of COV to comply with a statutory demand that it served on COV for payment of the sum of $54,696 owing to Break Fast in respect of costs orders that it obtained against COV in proceedings in the Supreme Court of Victoria. The costs orders were made against COV both in its own right and in its capacity as the trustee for the C & Voukidis Pty Ltd Family Trust No. 1 ("VF Trust No. 1") and for the C & O Voukidis Pty Ltd Family Trust No. 2 ("VF Trust No. 2"). 2 Mr Christos Voukidis ("Mr Voukidis"), the sole director of COV, has applied under section 471A(1A)(d) of the Act for approval to institute a review in the name of COV against the order for its winding up. Mr Voukidis requires the Court's approval as the liquidator has not given his consent: s 471A(1A)(c) of the Act. Mr Voukidis contends that the winding up order should be set aside because: (a) COV is solvent; and (b) the wind up application was an abuse of process.

the test for solvency 3 The test for solvency is whether the company can pay all its debts as and when they become due and payable, and a company that is not "solvent" is "insolvent": s 95A of the Act. It is well settled that the test for solvency under s 95A is a cash flow test, rather than a balance sheet test, that looks at liquidity and the company's ability to meet its expenses and liabilities, when payable, out of its available resources: Crema Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 58 ACSR 631; [2006] VSC 338 at [141]. It is also well settled that in determining solvency, commercial realities will be relevant in considering what resources are available to a company to provide an income source out of which to meet its liabilities: Australian Beverage Distributors v The Redrock Co (2008) 26 ACLC 74; [2008] NSWSC 3 at [157]; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 188 ALR 114; [2001] NSWSC 621. Further, as the authorities make clear, the assessment as to whether a company is solvent involves an element of "looking forward" and it is material to consider not only the company's capacity to pay debts currently due, but also its capacity to pay debts that will, or might, become due: Australian Beverage Distributors v The Redrock Co (2008) 26 ACLC 74 at [157]. Section 459D of the Act expressly provides that contingent and prospective liabilities may be taken into account in assessing solvency: Lewis v Doran (2004) 208 ALR 385; [2004] NSWSC 608. 4 Under Australian an existing obligation is an essential element of a contingent liability. For there to be a contingent liability within the meaning of s 459D, there must be an existing obligation out of which, on the happening of the contingency (an event that may or may not occur), there will arise a fixed obligation to pay a sum of money, which can be either liquidated or sounding only in damages: Community Development Pty Ltd v Engwirda Construction Company (1969) 120 CLR 455 at 459; The National Bank of Australasia Ltd v Mason (1975) 133 CLR 191 at 201; Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878; McLellan v Australian Stock Exchange Limited (2005) 144 FCR 327; [2005] FCA 585. 5 One of the issues in the present case is whether the Court should take into account in assessing COV's solvency, potential liabilities of COV arising out of legal claims against it.

The legal claims AGAINST COV 6 COV in its own right and as trustee for each of the trusts is a defendant in four court proceedings: (a) Ambridge Investments Pty Ltd (receiver appointed) (in liquidation) (ACN 077 299 051) v Theodore Baker & Ors – Supreme Court of Victoria proceeding number 2014 of 2005 ("the Ambridge proceeding"); (b) Break Fast Investments Pty Ltd (ACN 090 648 990) & Anor v Gravity Ventures Pty Ltd (ACN 117 153 509) & Ors – Supreme Court of Victoria proceeding number SCI 2010/4463 ("the Break Fast proceeding"); (c) National Australia Bank Limited (ACN 004 044 937) v C & O Voukidis Pty Ltd (ACN 064 693 054) & Anor – Supreme Court of NSW proceeding number 2012/82867 ("the NAB proceeding"); and (d) Perpetual Trustee Company Limited (ACN 000 001 007) & Anor v Onetofour Holdings Pty Ltd (receivers and managers appointed) (ACN 105 084 535) & Ors – Supreme Court of NSW proceeding number 2013/83664 ("the Perpetual proceeding")

The Ambridge proceeding 7 In the Ambridge proceeding, COV is one of eight defendants, which also include Break Fast. The proceedings concern a property in Wellington Parade, East Melbourne that was purchased by Break Fast. Ambridge Investments Pty Ltd ("Ambridge") alleged that Break Fast purchased the property as the manager for an unincorporated joint venture in which Ambridge has a 25% interest. The other joint venturers were alleged to include COV as the holder of a 25% interest. Ambridge sought a declaration that it has a 25% beneficial interest as a joint venturer and as a result a 25% beneficial interest in the property and sought declarations to that effect. The other defendants (including Break Fast and COV) disputed the existence of an unincorporated joint venture, arguing that the property was held under an incorporated joint venture which did not include Ambridge. The Court found that there was an unincorporated joint venture as alleged by Ambridge in which Ambridge holds a 25% interest: Ambridge Investments Pty Ltd (receiver appointed) (in liq) v Baker [2010] VSC 59. The Court made a declaration that: It is declared that the Plaintiff holds a 25% interest in the Wellington Parade Joint Venture under the terms of an enforceable contract of joint venture between the Plaintiff, Ambridge Investments Pty Ltd … the Third Defendant … the Fourth Defendant … [COV] and [Break Fast] in the terms of the written joint venture agreement executed by Break Fast and Ambridge... It is further declared that [Ambridge] holds a 25% beneficial interest in the Wellington Parade Property pursuant to an express trust of which [Break Fast] is the trustee. 8 The Court adjourned the proceeding "to deal with further orders and directions which ought to be made to dispose of the balance of the proceeding", noting at [625]-[626] that: It has been conceded by the defendants that all parties are entitled to the taking of accounts between them. 9 No steps have yet been taken in relation to the taking of accounts and Ambridge has informed the Court in that proceeding that it wishes to await the outcome of the Break Fast proceeding before progressing a claim for the taking of accounts. The question of costs also remains to be determined.

The Break Fast proceeding 10 These proceedings arose from disclosures in the Ambridge proceeding as to the alleged making of various withdrawals and payments from Break Fast's NAB account. In the Break Fast proceeding, Break Fast has alleged, amongst other things, that Mr Voukidis, in his capacity as a director of Break Fast, made a series of payments from the accounts of Break Fast held at the NAB to himself, entities associated with him (which include COV) and third parties, which Break Fast has alleged were wrongful and in breach of the duties that Mr Voukidis is alleged to have owed his co-venturers and to Break Fast. It is alleged that approximately $2.2 million of the alleged wrongful payments were made by Mr Voukidis directly or indirectly to Trust No. 2. Break Fast has further alleged that of the alleged wrongful payments received by COV, some of the funds were used to renovate and or pay mortgages held by the National Australia Bank ("the NAB") over two properties, one at Wyatt Avenue, Burwood, New South Wales ("the Wyatt Avenue property") and the other at Belmore Street, Burwood, New South Wales ("the Belmore Street property"). Both mortgages secured various loans that the NAB made to COV and related companies, and to Mr Voukidis and his wife, which COV guaranteed. The Belmore Street property has since been sold resulting in surplus proceeds (after paying to the NAB amounts secured by that property plus selling costs) of $1,354,075.17. 11 Break Fast claims an equitable interest in the Wyatt Avenue property and the surplus proceeds of sale from the Belmore property. This proceeding is defended and has been listed for hearing to commence on 13 October 2014. 12 It was in this proceeding that Break Fast obtained an order from the Court freezing the assets of COV. In March 2012, by consent of the parties, the Belmore St property was sold by COV and the debt to the NAB secured by that property was paid out. The surplus was ordered by the Court to be held in a NAB controlled monies interest bearing account in the name of COV and the NAB ("the controlled money account") and the moneys in that account are subject to the freezing order. As at 28 February 2014, the balance held in the controlled money account was $1,436,118.95. 13 The costs orders against COV were obtained by Break Fast in these proceedings when COV applied for a further variation of the freezing order to enable the surplus funds held in the controlled money account to be used to pay the debt owed by Mr and Mrs Voukidis to the NAB, which COV had guaranteed. The Court refused that application, stating amongst other reasons that the effect of the variation, if ordered, would more than likely frustrate Break Fast in its attempt to seek a remedy at law: Break Fast Investments v Gravity Ventures Pty Ltd [2013] VSC 89. The application was dismissed with costs and an appeal from that judgment was dismissed, also with costs. 14 The NAB was a defendant to this proceeding. As against the NAB Break Fast claimed damages in respect of the loss that it alleged it suffered as the result of the NAB's conduct in connection with Mr Voukidis's use of the Break Fast's banking facilities with the NAB. On 19 December 2012, the NAB and Break Fast entered into a Deed of Settlement under which they agreed to resolve the proceeding against NAB on terms that included that NAB agreed not to make any claim to the funds held in the controlled money account. Mr Voukidis asserted that the frozen funds in the controlled monies account were therefore available to meet liabilities (subject to the freezing order) because the NAB no longer made a claim on them.

(c) The NAB proceeding 15 The NAB proceeding relates to five separate loan and mortgage facilities to COV and related companies and to Mr and Mrs Voukidis which COV guaranteed and also granted mortgages to the NAB over the Belmore Street property and the Wyatt Avenue property as security for its obligations as guarantor. 16 In May 2011, Mr and Mrs Voukidis fell into default and the NAB served notice of termination and default on Mrs Voukidis requiring her to correct the default by making immediate payment of the amount owing. She did not comply with that notice and the NAB served a notice of demand on her requiring payment of the full amount. That demand was not complied with. In July 2011, the NAB issued a notice to COV under the guarantee demanding payment of the amount due, which was also not complied with. In March 2012, the NAB commenced proceedings against COV, amongst others, to recover possession of the Wyatt Avenue and Belmore Street properties. In January 2013, the NAB applied for summary orders against COV for possession of the Wyatt Ave property. As at 28 February 2013, the total amount due in respect of the indebtedness of Mr and Mrs Voukidis was $2,148,255.45. In National Australia Bank Ltd v C & O Voukidis Pty Ltd [2014] NSWSC 384 the NAB obtained summary judgment for possession of the Wyatt Avenue property and leave to issue a writ of possession. The Court reasoned at [17]-[21]: The guarantee extends to any amount in respect of which the customer is in default at any time, and entitled the Bank to realise any security granted by [[COV]. [I]n my judgment it is beyond argument that the mortgage provided to the Bank by [COV] was available to the Bank to secure ]COV's] liability under the … guarantee in the event of a default by Mrs Voukidis of her obligations … Mr and Mrs Voukidis fell into default. ... the Bank served notice of termination and default on Mrs Voukidis requiring her to correct the default by making immediate payment of the amounts owing. She did not comply with that notice and … the Bank served on her a Notice of Demand requiring payment of the full amount … The demand was not complied with. [T]he Bank issued a notice to [COV] pursuant to the … guarantee demanding payment of the amount due in respect of the … facility… [COV] did not comply with the demand. Subject to the provision of notices, under Clause 20.1(e) of the mortgage … [NAB] is, inter alia, entitled to take possession of the property. The relevant notices were provided in relation to the [Wyatt Ave] property … and further demand was made. … [COV] did not comply with either the statutory notice or the demand … the Bank is clearly entitled to an order for possession.] 17 The reasons for decision also record that COV by way of defence sought a discharge of the mortgage and the guarantee on the basis that the Bank had "wrongfully and unconscionably" caused the surplus funds from the sale of the Belmore St property to be paid into the controlled money account rather than applying them to the reduction of the facility, and then "wrongfully and unconscionably" caused other monies in a term deposit to be paid in reduction of another facility rather than in reduction of the debts secured by the mortgage over the Wyatt Ave property. The Court rejected both claims, reasoning at [26]: The only remedy sought by the Bank is summary judgment for possession. It does not seek to recover the monetary debt. It is difficult to see how there could be any complaint about the surplus funds given that the Bank has dealt with in accordance with Court orders, likewise, the term deposit. These funds in total amount to about two million dollars and would be insufficient to discharge the whole of the indebtedness of Mr and Mrs Voukidis and their related entities. They are insufficient to discharge the total of the indebtedness of Mrs Voukidis alone…. 18 The Court noted that the surplus funds remain the subject of the freezing orders (the term deposit moneys were released). The Court held that the matters raised by way of defence by COV could not defeat the claim for possession. 19 In June 2014 an application by COV to stay the writ of possession was dismissed. The NAB has since sought the liquidator's consent to the sale of the Wyatt Ave property to the current tenant. The liquidator has advised the NAB that "subject to a number of qualifications" he has "no objection in principle to the sale of the property".

(d) The Perpetual proceeding 20 In the Perpetual proceeding, Perpetual claims the sum of $1,612,751.30 (together with interest) in relation to a facility provided to OnetoFour Pty Ltd, alleged to have been guaranteed by COV and five others. No other information about the proceeding was made available, save that the proceeding is defended by COV. Tendered in evidence in this application is a letter from the solicitors acting for COV in the Perpetual proceeding stating: The defence filed on behalf of the company has a reasonable chance of success. 21 The nature of the defence was not disclosed in evidence and apart from the assertion of a reasonable chance of success, no further details were provided. 22 The liquidator deposed in an affidavit sworn on 22 July 2013 that it was his understanding that that the parties had agreed to resolve this proceeding provided no third party sought to leave to join the proceedings and to challenge the settlement before 31 July 2014. No further particulars were provided and it is unknown on the evidence before me whether in fact those proceedings have been settled and, if so, what the terms of settlement are.

COV's EVIDENCE 23 The onus of proving that COV is solvent is on Mr Voukidis. To substantiate solvency, Mr Voukidis produced audited accounts for COV (in its own right) and for each of the two trusts. The audits were done by Mr Alexander Whitehead ("Mr Whitehead") a chartered accountant, who was engaged by the solicitors for Mr Voukidis to audit the accounts for the purposes of Mr Voukidis's application. It is Mr Whitehead's opinion that COV and both trusts were solvent as at 2 July 2014 (when he signed the audit reports).

COV balance sheet 24 The balance sheet for COV as at 2 July 2014 records net assets of $4 comprising: Current Assets $ Cash 4 Right of indemnity from trust assets 94,963 Total Assets 94,967 Current liabilities: Liquidators fees and costs* 32,485 Costs order payable to Break Fast** 62,478 Total Liabilities 94,963 Net Assets 4 * As at 21 July 2014, his fees and expenses had increased to $47,169. ** Includes interest and the costs of the winding up application. COV has paid this amount into Court. 25 Contingent liabilities are recorded in Note 2 of the accounts, which was prepared by COV's solicitor and accepted by Mr Whitehead without any substantial changes. Note 2 discloses that COV is a defendant in the four court proceedings listed above at [6] and contains a description of the claims against COV and the current status of each proceeding. No estimate of any potential liability, if any of the claims are successful, is provided.

VF Trust No. 1 balance sheet 26 The balance sheet for the VF Trust No. 1 as at 2 July 2014 records net assets of $50 comprising: Current Assets $ Cash 50 Total Assets 50 Current liabilities: Creditors 0 Total Liabilities 0 Net Assets 50 27 Note 2 of the accounts is in the same terms as note 2 of the COV balance sheet.

VF Trust No. 2 balance sheet 28 The balance sheet for the VF Trust No. 2 as at 2 July 2014 records net assets of $2,739.483 comprising: Current Assets $ Cash on hand 200 Cash at bank 35,000 Cash held at Federal Court of Australia* 62,478 Cash on term deposit (subject to freezing order) 1,454,279 Total Current Assets 1,551,957 Non-Current Assets Property at trustee's valuation (subject to writ of possession) 5 Wyatt Avenue, Burwood 1,250,000 Investments at trustee's valuation 4 Total Non-Current Assets 1,250,004 Total Assets 2,801,961 Current Liabilities cost order payable to Break Fast 62,478 other creditors - Total Liabilities 62,478 Net Assets 2,739,483 * The monies in the controlled account 29 Note 2 of the accounts is also in the same terms as note 2 of the COV balance sheet.

The audit reports 30 The independent audit report for each set of accounts is in the same terms and notes that the accounts were prepared "for the purpose of disclosing the financial position" of the entity in question. 31 Mr Whitehead states that he believed that the audit evidence that he obtained was sufficient and appropriate to provide a basis for his audit opinion. He gave a qualified opinion as follows: Basis for Qualified Opinion Under the terms of my engagement I was appointed auditor of [the entity] during the period ended 2 July 2014 and therefore I am unable to form an opinion as to whether the opening balances are fairly stated. Qualified Opinion In my opinion, subject to the effects, is any on the financial report of the matter referred to in the Basis for Qualified Opinion paragraph, the financial report presents fairly, in all material respects, the financial position of [the entity] as at 2 July 2014 and its financial performance for the period then ended ...

Breakfast's evidence 32 Break Fast relies on an expert opinion from Mr Paul Lom, chartered accountant, who was instructed to analyse the audit reports of Mr Whitehead and also to provide an opinion on the solvency of COV. Mr Lom was critical of Mr Whitehead's audit reports in a number of respects and disagreed with the opinion of Mr Whitehead that the accounts fairly presented the financial position of COV and the two trusts. Mr Lom also expressed the opinion that COV and VF Trust No. 2 are both insolvent. 33 Mr Lom opined that COV is insolvent "even without considering additional liabilities in relation to the NAB proceedings and the Perpetual proceedings" because it has debts due and payable of $94,963 but its total assets are only $62,482, comprising a right of indemnity of $62,478 plus cash on hand of $4. Mr Lom opined that COV's right of indemnity from trust assets was limited to the costs order payable to Break Fast and did not extend to include the liquidator's fees and costs of $32,485. Mr Lom reasoned as follows: It is my understanding that a trustee is only entitled to make a claim against the assets of the underlying trust in respect of debts incurred in discharging its duties as trustee. The liquidator's fees and costs of $32,485 could not have been incurred whilst COV was a trustee of the [VF Trust No. 2] as the trust deed provides for the termination of the trustee upon the trustee becoming insolvent. In my opinion the right of indemnity from trust assets does not extend to the liquidator's fees and costs of $32,485. As such I believe that the right of indemnity from trust assets is limited to the costs order payable to Break Fast … of $62,478. 34 Mr Lom opined that VF Trust No. 2 is insolvent because it has "at best" $35,000 from which to meet its liabilities, which "far exceed" the funds available. Mr Lom opined that the following assets were not a resource available to COV from which to pay its debts: (a) the cash in the controlled monies account of $1,454,279 because those funds are under the control of the NAB and are subject to a freezing order; and (b) the Wyatt Avenue property shown in the accounts with a value of $1,250,000 because it is subject to a writ of possession. 35 Mr Lom also opined that the liabilities of VF Trust No. 2 have been understated in the accounts. Mr Lom reasoned that as the total amount owing by COV to the NAB under the guarantee was $2,148,255 as at 28 February 2013 and as the assessed value of the Wyatt Ave property is $1,250,000 (before selling costs): … it is clear that the proceeds from the sale of the [Wyatt Ave] property of $1,250,000 will not be sufficient to clear the debt pursuant to the guarantee. It is [his] understanding that judgment for the NAB has crystallized a debt owing to the NAB for the amount of the guaranteed liability that cannot be satisfied from sale of the [Wyatt Ave] property. Whilst the exact amount of the debt is unknown at this point in time, it is capable of reasonable estimation and represents an amount due and payable by COV on behalf of the [VF Trust No. 2]. 36 Mr Lom also considered that the amount claimed against COV in the Perpetual proceeding ($1,612,751.30 plus interest) should have been brought to account as a current liability, and not simply disclosed as a contingent liability, because: … there does not appear to be any basis to the expectation that the liquidator will defend the claim as there did not appear to be any apparent source of funds available to the liquidator for this purpose. 37 Finally Mr Lom expressed the view that the liabilities of VF Trust No. 2 may include a tax debt.

The liquidator's evidence 38 The liquidator, Mr Fettes, also filed an affidavit setting out the financial position of COV in so far as he has been able to ascertain the assets, liabilities and contingent liabilities of COV and the two trusts as at the date the company was placed into liquidation. Mr Fettes did not express any opinion as to solvency, explaining that he has not been provided with the books and records of the company, notwithstanding repeated requests to Mr Voukidis and his solicitors and that as he is unfunded in the administration of the company he has been unable to investigate the veracity of the legal claims made against it. The liquidator stated in his affidavit as follows: The solvency of the Company will depend on the success or otherwise of the legal applications against the Company. Given that and in the absence of adequate books and records of the Company I am unable to form an opinion as to the solvency of the Company.

DECISION ON SOLVENCY 39 A number of issues bearing upon the question of solvency emerged from the evidence but in the event it is unnecessary to consider all the issues raised because, for the reasons that follow, a finding of solvency cannot be made on the audited accounts. 40 It is a long established principle that it is in the public interest that companies not shown to be solvent should be left in liquidation. Mr Voukidis bears the onus of proving the solvency of COV and the case law has repeatedly emphasised that in order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the company: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at [1081] (Hayne J); Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (Weinberg J). 41 There are many cases where the Court has rejected unaudited accounts as insufficiently probative of solvency: TQM Design and Construct v Golden Plantation Pty Ltd [2011] NSW SC 500 at [18] (Barrett J). That is not to mean that production of audited accounts will necessarily be sufficient to prove solvency. Even where audited accounts are produced, the Court will examine the evidence carefully and, as pointed out in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163 at [16] by Santow JA (with whom Meagher and Handley JJA agreed), "proper verification of assets and liabilities is critical to rebut the presumption of insolvency". In Metledge v Bambakit Pty Ltd [2005] NSWSC 160 at [34], Barrett J referred to the two approaches generally taken to proof of solvency: Sometimes, the liquidator can verify financial facts sufficiently to express an opinion that the company is solvent or, at least, to put before the court critically assessed information which assists it in coming to such a conclusion. Sometimes an external accountant can do these things. The court is receptive to that kind of evidence, provided that it sufficiently demonstrates the basis for the opinion that the company is solvent and reflects investigations and verification beyond the mere say-so of the company's controller. In TQM Design and Construct [2011] NSW SC 500 at [18], Barrett J again emphasized that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. 42 There are a number of reasons for not being satisfied with the audited accounts as proof of solvency. 43 It is a matter of considerable concern that the books and records of COV and the trusts have not been produced to the liquidator, notwithstanding repeated requests to Mr Voukidis for production. As the result, the liquidator has not been able to verify COV's financial position or form an opinion on solvency based upon his independent investigations and the Court does not have the benefit of the liquidator's review of the books and records as verification of the assets and liabilities recorded. 44 Further, Mr Voukidis has not led any evidence to explain why no books and records have been produced to the liquidator when a full explanation was called for, given that Mr Voukidis was able to prepare special purpose accounts to present to the Court to show solvency and able to produce the audit evidence to Mr Whitehead that Mr Whitehead required. Nor has Mr Voukidis led evidence about the preparation of the accounts or put the financial information on which the accounts were based before the Court for critical assessment. 45 Moreover, Mr Whitehead's audit cannot be taken as independent verification of the financial facts and that all assets and liabilities have been identified because Mr Whitehead did not verify the accounts beyond making inquiries of Mr Voukidis and the company's solicitor. He did not even make inquiries of the liquidator. 46 In the circumstances, I do not accept the presentation of the audited accounts as proof that the financial facts have been properly and independently verified beyond "the mere-say so" of Mr Voukidis. This is sufficient reason in itself to dispose of this application. But there is further reason to question the reliability of the accounts as presented. 47 First, it appears from the liquidator's affidavit that had Mr Whitehead made inquiries of the liquidator, he would have learnt that Break Fast has additionally claimed to be owed $781,711 by COV "representing its apportioned share of legal costs paid by Break Fast on behalf of [COV]" in relation to legal proceedings. As it is, this claim does not appear in the accounts that Mr Whitehead audited but the state of the evidence is that the claim is a possible liability of COV to be taken into account in assessing solvency. 48 Secondly, Mr Whitehead did not investigate whether COV has an existing liability under the guarantee which was the subject of the NAB proceedings beyond making an inquiry of Mr Voukidis as to whether there were sufficient assets outside the trust out of which the debt may be repaid because, as Mr Whitehead explained, "there's no judgment in respect of any money owing", and the guarantee "may or may not ever be called upon". However, the fact that the NAB has not sought, nor obtained, judgment against COV for any monetary amount does not gainsay that a debt has crystallized under the terms of the guarantee. The level of inquiry by Whitehead was, in my view, plainly inadequate in view of the fact, as Mr Whitehead was aware, the NAB had already made a demand on COV for payment under the guarantee which had not been complied with. As the terms of the guarantee are not in evidence, and as Mr Whitehead did not examine the guarantee to satisfy himself that there is no extant liability, there is no specific evidence to show that a debt has not crystallized and on the state of the evidence the possibility that a debt has crystallized cannot be excluded. 49 Nor did Mr Whitehead investigate whether COV has an existing liability under the guarantee on which it is sued in the Perpetual proceedings beyond observing that the proceeding is defended and that the solicitors acting for COV have stated that the defence has a reasonable chance of success. The level of inquiry by Mr Whitehead was again, in my view, plainly inadequate in view of the fact that in the Perpetual proceeding, COV is sued on a guarantee. As Mr Voukidis has not produced any evidence at all to identify the nature of its defence and there is no specific evidence to show that no debt has arisen, the possibility that COV has a liability to Perpetual under the guarantee on which Perpetual has sued cannot be excluded. It may be that this does not matter now if the case has settled (depending on the terms) but that information is not before the Court. 50 Thirdly, Mr Whitehead agreed in cross-examination that he just "accepted" the word of COV's solicitor that COV has a right of indemnity against the assets of the two trusts in respect of the liquidator's fees and costs. But whether that is correct or not will depend upon the extent to which, if at all, work undertaken by the liquidator related to the affairs of those trusts: Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd (2004) 213 ALR 373; [2004] NSW SC 1224; Re Lawrence Waterhouse Pty Ltd (in liq); Shaw v Minsden Pty Ltd [2011] NSW SC 964. As Mr Whitehead did not make those inquiries of the liquidator, and as the evidence before the Court does not enable a determination as to whether the right of indemnity extends to the whole of the fees, I am not satisfied that the accounts correctly record the value of the indemnity. 51 Fourthly, I find it puzzling that COV's 25% interest in the joint venture (which includes a 25% interest in the east Melbourne property) which was the subject of a declaration by the Court in the Ambridge proceeding was not shown as an asset in the accounts, albeit that Mr Whitehead must have been aware that COV held that interest because it is referred to in the notes to the accounts. The omission is wholly unexplained in the evidence and without that explanation, there is more reason to doubt the accuracy of the accounts. 52 I am therefore not persuaded that the financial position of COV or the trusts as presented in the audited accounts is a secure foundation on which to assess solvency. 53 Furthermore, even if I did not have concern about the reliability of the accounts as presented, it would not be possible to form a conclusion of solvency merely based upon the audited accounts. The test of solvency is not a balance sheet test so that Mr Whitehead's opinion as to solvency, which is no more than an opinion that COV is solvent on the state of the balance sheet, "adds nothing": Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [23] (Brereton J). 54 Mr Whitehead did not take contingent liabilities into account because, as he stated, his function was to audit the accounts and for accounting purposes, contingent liabilities are not recorded. However, contingent liabilities may be taken into account for the purposes of assessing solvency and, in my view, the making of the declaration in the Ambridge proceeding has given rise to the possibility that COV may have to pay an amount to Ambridge on the taking of accounts and the possible liability is, in my view, properly to be characterised as a contingent liability, albeit unquantified, for the purposes of considering whether COV is solvent. Mr Whitehead's evidence was that he had made inquiry of Mr Voukidis and his solicitor as to whether there was any money that may be payable to Ambridge and that Mr Voukidis said "no". Mr Voukidis's unverified assertion cannot be relied upon to conclude that nothing is likely to be payable and as there is otherwise nothing before the Court to indicate what the potential liability may be, and hence the ability of COV to meet that liability, it has not been shown that COV is solvent. 55 Similarly, such information as there is about the Perpetual proceeding indicates that the claim against COV should also be treated as a contingent liability for the purposes of assessing solvency. 56 Finally, I am not satisfied on the state of the evidence that the Wyatt Avenue property is an available asset out of which to meet liabilities. It was argued for COV that the property is an available asset to be taken into account when assessing solvency because, although it is subject to a writ of possession, the bank has not yet executed that writ and may not need to, and secondly even if it did, the asset would be replaced with receivable, being a debt owed by Mr and Mrs Vouikidis to the company. I do not accept either contention. As the reasons of the NSW Supreme Court record, the indebtedness of Mr and Mrs Vouikidis, which the mortgage over that property secured, is greater than the value of the property and moreover, there is no evidence before the Court to indicate that Mr and Mrs Voukidis have any assets out of which they could satisfy any debt due to the company and therefore to satisfy the Court that the company's equity has not been diminished by the writ of possession. 57 Correlatively, even assuming that the monies held in the controlled money account are available to discharge liabilities, I am not satisfied that Mr Voukidis has proven the true financial facts upon which to assess solvency. 58 Counsel for the COV urged the Court not to accept the evidence of Mr Lom, contending that the Court should draw the conclusion that he was not giving independent objective evidence but rather acting as an advocate for Break Fast. In the end, the analysis does not turn on accepting Mr Lom's evidence as against Mr Whitehead's evidence but rather upon the unreliability of the audited accounts as presenting a true and fair view of the company's financial position. The onus was on COV to provide the fullest and best evidence of solvency. It did not do so and, for the reasons given, I cannot make a positive finding of solvency based upon the accounts as presented.

abuse of process 59 This contention lacks any substance. The contention was that Break Fast, by pursuing its wind up application, sought to gain a significant collateral advantage in the Break Fast proceedings because Break Fast "well knows that those proceedings are at an advance stage and they have been set down for trial on 13 October 2014 and that the liquidator is without funds and as such is unlikely to defend those proceedings". It was put that "leaves the way clear for Break Fast without opposition to obtain leave to proceed [against the company in liquidator] and then to obtain orders at trial in its favour which they can then seek to enforce against the monies in the joint account". Reliance was also placed on the fact that Break Fast and the NAB had entered into the settlement deed, the terms of which provided for the recovery proceedings to be dismissed as against the NAB and the NAB agreeing that it would make not claim on the term deposit monies. It was put that the Court "ought not countenance this sort of interference against a background of significant disputation between these parties". 60 The short answer is that it is not an abuse of process to bring proceedings for the purpose of obtaining an order to wind up "whatever entitlement or benefit the law provides if the proceedings terminate in plaintiff's favour": Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd (2007) 213 FLR 450; [2007] NSWSC 966 at [460]. In this case, Break Fast pursued its statutory right to bring the wind up application upon failure of COV to comply with the statutory demand served on it. The debt that is the subject of the statutory demand was not disputed then and is still not disputed. No collateral purpose can be inferred in those circumstances. It may be that a practical consequence of the fact that the company has gone into liquidation is that the liquidator will not defend the proceedings but the tactical advantage that a winding up order could give Break Fast did not make its application to wind up the company an abuse of process; Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd (2007) 213 FLR 450 at [461]; Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374; [2007] NSWCA 57.

conclusion 61 The application for approval by Mr Voukidis to institute a review in the name of COV against the order for its winding up is dismissed. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

Associate: Dated: 16 September 2014