FEDERAL COURT OF AUSTRALIA

Lechmere Financial Corporation v Aspermont Limited [2003] FCA 1138

CORPORATIONS – insolvency – application to wind up company in insolvency – non-compliance with statutory demands – presumption of insolvency arising therefrom – whether company discharged onus of demonstrating solvency – whether discretion of Court should be exercised to decline to order winding up

Corporations Act 2001 (Cth) ss 95A, 459A, 459C(2)(a), 459F(1), 459G, 459H, 459J, 459K, 459P, 459P(1), 459S, 467(1)

Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 approved

Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1993) 11 ACSR 1 cited

Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 applied

Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 cited

Eagle v The New Zealand School of Advertising, Marketing and Public Relations Limited (1989) 4 NZCLC 64,844 considered

Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711 applied

Hungerfords v Walker (1989) 171 CLR 125 cited

Jones v Dunkel (1959) 101 CLR 298 applied

Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 applied

London, Chatham & Dover Railway Co v South Eastern Railway Co [1893] AC 429 cited

National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (unreported, NSWCA, Mason P, Handley and Sheller JJA, 23 April 1997, BC 9701417) cited

President of India v La Pintada Compama Navigacion SA [1985] AC 104 cited

Re Bond Corporation Holdings Ltd (1990) 1 WAR 465 followed

Re National Computer Systems & Services Ltd (1991) 6 ACSR 133 cited

Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675 considered

Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343 approved

LECHMERE FINANCIAL CORPORATION v ASPERMONT LIMITED

W3003 of 2003

RD NICHOLSON J

20 OCTOBER 2003

PERTH

IN THE MATTER OF ASPERMONT LIMITED

ACN 000 375 048

THE COURT ORDERS THAT:

1.                  Subject to the following orders, the application to wind up the defendant be adjourned until 18 November 2003.

2.                  The period within which the application is to be determined is extended to and includes 18 November 2003.

3.                  The defendant forthwith pay into Court the sums of:

(a)               $117 000.00

(b)               $838 500.00

being a total of $955 500.00.

failing which by close of business on 21 October 2003, the application will stand granted in terms of order 8 hereof.

4.                  The defendant forthwith apply to the Supreme Court of Western Australia to discharge the interim injunction granted with its consent on 13 December 2002 injuncting it from making payment of the statutory demands to the plaintiff, failing proof of which being filed and served within 48 hours thereof, the application will stand granted in terms of order 8 hereof.

5.                  In the event the injunction is discharged, the defendant shall forthwith file and serve an authority for the Court to pay the monies held by it to the plaintiff and upon such payment the application shall stand dismissed.

6.                  In the event the application to discharge the injunction is refused, the defendant shall forthwith file and serve notice of such refusal whereupon the Court will list the application for determination on a date and time to be fixed on or before 18 November 2003.

7.                  In the event the defendant has not complied with either direction (5) or (6) by close of business on 17 November 2003 the matter be listed for determination of the application at 2.15pm on 18 November 2003.

8.                  Upon non-compliance with orders 3 or 4 the terms on which the application will stand granted are:

(a)               The defendant be wound up by the Court on the ground that the defendant is insolvent.

(b)               Garry John Trevor of c/- Ferrier Hodgson, Level 14, 26 St George’s Terrace, Perth, Western Australia, be appointed liquidator of the defendant for the purpose of the said winding up.

(c)               The liquidator is to open a trust account at the branch of the National Australia Bank situate at 50 St George’s Terrace, Perth, Western Australia for the purpose of the winding up.

9.                  The defendant pay the plaintiff’s costs of the application (including reserved costs) to be taxed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF ASPERMONT LIMITED

ACN 000 375 048

REASONS FOR JUDGMENT

1                     The plaintiff brings an application in reliance on s 459P(1) of the Corporations Act 2001 (Cth)(‘the Act’) for the defendant company to be wound up in insolvency.  The ground relied upon is that the defendant has failed to comply with statutory demands dated 14 January 2002 and 18 July 2002 and so must be presumed to be insolvent in accordance with the provisions of s 459C(2)(a).

2                     The grounds on which the defendant opposes the application are:

‘(1)      The statutory demands were not ‘still in effect’ at the end of the period for compliance within the meaning of s 459F(1) of the Act.  Therefore, no presumption of insolvency has arisen under s 459C(2)(a).

 (2)      The company could not comply with the statutory demands due to an order made in the Supreme Court of Western Australia before the end of the period for compliance restraining it from paying Lechmere the monies the subject of the statutory demands.

 (3)      In any event, the company is solvent as it is able to pay all of its debts as and when they become due and payable.’

background circumstances

3                     The plaintiff is a corporation incorporated in the British Virgin Islands and operating out of Monaco.

4                     The defendant is a public company listed on the Australian Stock Exchange.  It has approximately 103 million shares on issue held by 960 shareholders.  The Executive Chairman of Directors is Mr Kent.  A company controlled by him, Drysdale Investments Ltd (‘Drysdale’), holds about 47% of the issued shares.  The defendant’s principal activities are publishing magazines, journals and internet news services for the mining, oil and gas, construction and transport industries.  It has 48 employees. 

5                     The first statutory demand, that dated 14 January 2002, required the defendant to pay to the plaintiff or to secure compound interest in respect of a debt in the sum on $117 000.  It was described as interest on a loan of $780 000 owed by the defendant to the plaintiff which loan bears interest at the rate of 15% per annum for the half yearly period ending 30 June 2001 and 31 December 2001. 

6                     In the statutory demand dated 18 July 2002 the plaintiff as creditor sought payment to it or security or compounding of a debt in the sum of $838 500.  That included the sum of $780 000 as the principal amount of the loan together with interest on the loan (bearing interest at the rate of 15% per annum) for the half yearly period ended 30 June 2002. 

7                     On 12 August 2002, Mr Kent instituted proceedings CIV2117 of 2002 in the Supreme Court of Western Australia against the plaintiff seeking declaratory and injunctive relief against the plaintiff in relation to the monies the subject of the statutory demands.  In those proceedings he claims that the monies are due and payable to him. 

8                     On 28 November 2002, the Supreme Court of Western Australia dismissed applications by the defendant under s 459G for orders to set aside each of the statutory demands.  In dismissing these applications the Supreme Court ordered that the period for compliance with the statutory demands be extended by 21 days to 19 December 2002. 

9                     On 13 December 2002, Mr Kent applied to the Supreme Court in CIV2117 for and obtained an interim injunction restraining the defendant from paying to the plaintiff the monies the subject of the statutory demands.  The defendant consented to the injunction. 

10                  On 24 October 2002 Mr Kent had obtained orders in CIV2117 for leave to amend the writ of summons by adding the plaintiff as a defendant and to serve the notice of the amended writ on the plaintiff.  The plaintiff was then served with the notice of the amended writ and the order for the interim injunction at Monaco on 6 February 2003.

11                  It is common ground that the defendant has not paid the amounts of the debts demanded in either the first or second statutory demands or secured or compounded for those amounts to the plaintiff’s reasonable satisfaction within 21 days after 28 November 2002.  The consequence is that the sums demanded remain due and payable to the plaintiff by the defendant.

12                  It is not in contest that the notice of the application for winding up has been duly advertised and is not in contest save for the principal grounds of opposition previously set out. 

13                  On 6 June 2003, Master Sanderson in the Supreme Court of Western Australia gave reasons for judgment in CIV2117 of 2002 in connection with an application by the second and third defendants in that action (Mr MacLellan and the present plaintiff) to set aside service of the writ out of the jurisdiction.  In the indorsement of claim in that matter it was recited, that by an agreement made in Perth on or about August 1997, the present defendant agreed to ‘assume responsibility’ for a debt of Mr Kent to the present plaintiff.  Mr Kent claims that the debt is property of a trust of which he is sole beneficiary. that the trust has been terminated and directions have been given to pay the debt and interest to him.  It is further recited in the indorsement that the trustees refused or neglected to follow such directions and the present defendant refuses to acknowledge the claim of Mr Kent.  The Master could find no proper basis in this for the second and third defendants to be properly joined as parties to the action.  Mr Kent has lodged an appeal from that decision. 

14                  The position of the defendant in this matter is that it has set aside in a deposit with a recognised bank sufficient cash for payment of the amount demanded by the statutory demands.  The evidence is that it is ready, willing and able to pay the monies the subject of those demands to the plaintiff as soon as the injunction in Mr Kent’s proceedings is discharged.  It has given notice to that effect to both the plaintiff and to Mr Kent.  It has not paid monies into Court, although it claims to have put a number of proposals to the plaintiff in respect of that matter.  It is willing to pay the amount demanded by the statutory demands into Court within 48 hours if the Court should so now order. 

whether statutory demands ‘still in effect’

15                  Section 459F(1) of the Act provides that if, at the end of the period for compliance with the statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.  For the defendant it is submitted that by reason of the injunction ordered in CIV2117 on 13 December 2002 the statutory demands were not ‘still in effect’ at the end of the period for compliance, being 19 December 2002, within the meaning of s 459F(1).  Therefore, it is said, no presumption of insolvency has arisen under s 459C(2)(a). 

16                  The closing submissions for the defendant accept that this proposition is unable to be supported by any proper authority.  Reference was made to Eagle v The New Zealand School of Advertising, Marketing and Public Relations Limited (1989) 4 NZCLC 64, 844.  There an application for a winding up order was dismissed because an order made with the company’s consent in a separate action which froze the company’s trading account and prevented the company from complying with a notice of demand under the New Zealand Companies Act.  In argument here it was accepted for the defendant that, as plaintiff’s counsel had submitted, that decision is of no assistance to the defendant because it was based on the construction of the relevant legislation which is different from the provisions of the Act. 

17                  In my opinion there is no proper foundation for holding that the injunction had the effect of occasioning the notices of demand not to be ‘still in effect’.  This is supported by reference to s 459K which provides that a statutory demand has no effect while there is in force under s 459H or s 459J an order setting aside the demand.

INABILITY TO COMPLY WITH STATUTORY DEMANDS DUE TO INJUNCTIVE ORDER

18                  Here again the decision in Eagle can be of no assistance to the defendant because of the differences in the legislation there dealt with and the Act.  There is no other authority advanced on behalf of the defendant to suggest that the existence of the injunction has any relevance to the matters in issue in this proceeding.  Furthermore, it is the case that the defendant has not taken any steps to discharge the injunction following the finding by the Master in the Supreme Court that no rights of action could exist against it by Mr Kent if it paid the amounts the subject of the statutory demands to the plaintiff. 

WHETHER DEFENDANT HAS REBUTTED PRESUMPTION OF INSOLVENCY

19                  The case for the defendant agrees with the case for the plaintiff in accepting that the propositions stated by Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] are appropriate propositions upon which to proceed in this proceeding, namely:

‘The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions:

·        The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J.

·        In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.

·        Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency.  Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared:  Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.

·        There is a distinction between solvency and a surplus of assets.  A company may be at the same time insolvent and wealthy.  The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J;  Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466.

·        The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry.  The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.

·        The question of solvency must be assessed at the date of the hearing.  However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.

·        It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights:  Elite Motor Campers Australia v Leisureport Pty Ltd (supra).’

20                  This statement was accepted as a statement of relevant principles to the issue of rebutting the presumption of insolvency by the New South Wales Court of Appeal in Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711 at [16].

21                  The final proposition is sufficient to dispose of the suggestion, lightly made in the written submissions for the defendant and not taken further, that the bringing of this proceeding may amount to an abuse of process because it was commenced by the plaintiff with knowledge of the making of the injunction. 

22                  It is accepted for the defendant that the test of solvency and insolvency within the meaning of s 95A of the Act is to be analysed by using a cash flow test rather than a balance sheet test.  However, I accept this is not to say that consideration of balance sheets have no bearing on the issue of solvency or insolvency:  Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343. 

evidence

23                  The defendant seeks to discharge the onus of rebutting the presumption of insolvency by relying upon three affidavits of Mr LG Cross, a Director and Secretary of the defendant and a certified practicing accountant.  He has been a director of the defendant for three years and is a director of four other public companies.  His evidence was that his role as a director focuses on the financial aspects of the defendant’s operations and he keeps in very close contact with the defendant’s chief financial officer.

24                  The case for the plaintiff relies upon three affidavits going to service of the statutory demands, failure to comply with them and issue of a prospectus by the defendant in which reference is made to the loan from the plaintiff to the defendant.

25                  Mr Cross’ evidence was vague.  It was apparent his knowledge was basically limited to the statements in the records put before him and was based only on limited knowledge of the transactions, the records referred to or any investigation concerning them.  I place no weight on his conclusionary opinions directed to the solvency of the defendant.

26                  During the hearing Mr Kent and the chief financial officer of the defendant were in Court.  Neither was called to give evidence.  On issues to which I will refer the failure to call either or both of these persons supports an inference that their evidence would not have assisted the defendant’s case and makes it possible for the Court to more readily draw any inference fairly to be drawn from the other evidence:  Jones v Dunkel (1959) 101 CLR 298.

MR CROSS’ PRIMARY EVIDENCE

27                  Mr Cross’ evidence was that the defendant is able to pay its debts as and when they fall due and is solvent.  His evidence was the defendant is continuing to pay all of its other creditors in the ordinary course of business and in accordance with their normal trading terms and conditions.  At the same time, it has funds set aside for payment of the amount demanded by the statutory demands.

28                  Mr Cross attested that the defendant is currently funding development of new products through its internet news sites and has been applying cash reserves in establishing those assets.  Revenue from the defendant’s operations increased by 11.09% over the last financial year from $3 580 000 (30 June 2002) to $3 997 000.  In line with that trend, the defendant expects that revenue from its operations will increase by a further 19% to above $4 750 000 during the current financial year.

29                  Mr Cross produced a consolidated unaudited statement of financial position as at 30 June 2003.  The plaintiff did not take issue about the financial statement not being audited.

30                  Mr Cross says the financial statement gives a true and fair view of the financial position of the company as at 30 June 2003, apart from an error in the value of the company’s investments included in the financial statement as a current asset.  He says there has not been any material change in the defendant’s financial position since then.

defendant’s submissions

31                  To consider whether the defendant brings a case which rebuts the presumption of insolvency, I turn initially to the submissions as made for the defendant.

Statement of financial performance

32                  Counsel for the plaintiff refers to the statement of the company’s financial performance for the period ending 31 January 2003 annexed to the affidavit of Mr Cross sworn on 19 February 2003 and questions why a similar statement to 30 June 2003 has not been produced.  He says that the only inference that can be drawn from the defendant’s failure to do so is that it would have shown a far worse position.

33                  For the defendant, it is submitted there was no need to produce a similar statement as particulars of the defendant’s financial performance for last financial year are produced in the defendant’s report to the Australian Stock Exchange for the quarter year ended 30 June 2003 annexed to Mr Cross’ affidavit of 31 July 2003.  I accept that submission.

Consolidated accounts

34                  In evidence is a document entitled ‘Consolidated Unaudited Statement of Financial Position as at 30^th June 2003’.  It discloses total current assets of $2 022 922 and total current liabilities of $1 927 029, this disclosing a balance sheet credit of $95 893.  In current assets, cash is shown as $1 166 265.  Receivables consisted of $634 348 due from trade debtors after making provision of $22 901 for doubtful debts. 

35                  Counsel for the plaintiff submitted that the financial statement did not purport to be a statement of the defendant’s and was therefore unreliable and, in any event, it is a consolidated statement for the company and its controlled entities.

36                  For the defendant it is submitted that as it has controlled entities, particulars of which are set out in the defendant’s last annual report, a consolidated statement presents the clearest picture of the defendant’s overall financial position as it allows for the elimination of 100% owned investments, receivables and liabilities to show the real net position of the defendant.  An example of this is the elimination upon consolidation of the defendant’s liabilities to controlled entities. 

37                  Given that a balance sheet approach should not be determinative; a comparison of a corporations current assets and current liabilities may provide a useful guide to the overall ability of the company to pay its debts (See Lee Kong v Pilkington (Australia) Ltd (1997) 25 ACSR 103 at 120); the economic entity of the defendant comprises it and all the entities it controls (AASB Accounting Standards AASB 1024 at par 10) and the focus the submissions for the plaintiff brought to the consolidated accounts, there is no reason not to accept them for the purposes of this application.

Company’s liabilities to controlled entities

38                  Counsel for the plaintiff raised the issue of a non-current liability of the company to controlled entities in the order of $18 million as mentioned in the defendant’s annual report 2002, more particularly the notes to accounts in Mr Cross’ affidavit of 19 February 2003.  He makes reference to the statement that the directors of controlled entities have resolved that controlled entity loans are interest free and repayable only when the parent entity has the financial means to do so.  Counsel says that such terms for the repayment of the loans are so uncertain as to be incapable of being given contractual understanding, suggesting that the terms are void for uncertainty:  Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1993) 11 ACSR 1.

39                  For the defendant it is submitted that on considering the liability on a consolidated group basis, which is appropriate in the circumstances of loans between a parent entity and a controlled entity, the terms on which the defendant is to repay the loans becomes immaterial.  It is submitted that, as can be seen from the relevant line in the accounts, the loans are eliminated completely on consolidation.  This is explained in note 29 to the accounts as follows:

‘Although the statement of financial position of the parent entity discloses an excess of liabilities over assets at 30 June 2002 of $15,698,000 this has arisen in prior years from abnormal write-downs of loans with controlled entities which are not currently trading.  These loans eliminate on consolidation and the consolidation statement of financial position discloses an excess of assets over liabilities of $2,455,000.  Accordingly, the parent entity and economic entity do not have a going concern problem at 30 June 2002.’

I accept this submission for the defendant.

Bank reconciliation for 30 June 2003

40                  On cross-examining Mr Cross, counsel for the plaintiff conducted a test for what he described as double counting in relation to the reconciliation of the defendant’s operating account at 30 June 2003.  He focused on an amount owing by Aust Steel listed in the receivables reconciliation at 30 June 2003 on a bank deposit slip dated 1 July 2003 and annexed to Mr Cross’s affidavit of 19 August 2003. 

41                  Mr Cross produced a copy of the company’s bank reconciliation as at 30 June 2003 which revealed that the amount had been properly recorded as a receivable in the receivables reconciliation as the payment had been received on 1 July 2003 and deposited in the account the same day. 

Provision for doubtful debts

42                  Plaintiff’s counsel cross-examined Mr Cross about the reasonableness of the provision of $22 901 for doubtful debts, as mentioned in par 12(2) of his affidavit of 31 July 2003.  He referred to the fact that the receivables reconciliation annexed to Mr Cross’ affidavit of 19 August 2003 disclosed that debts listed as owing pre-April totalled about $74 000.

43                  Mr Cross explained that the defendant’s policy for doubtful debts conformed with the accounting standard that provision should be made if there is no reasonable explanation the debt will be received.  The defendant did not make the provision on a percentage basis but on analysis of each debt.  He said the defendant’s approach was a conservative one of going through the debtors, virtually one by one, picking out any considered doubtful.  He considered the provision to be adequate.  He also said last year the defendant’s bad debts were $11 000 out of a turnover of nearly $4 million and that it had a very high collection rate.  As to the pre-April debts, he said the majority of debts had since been paid.  I accept Mr Cross’ evidence on this issue.

Application of s 459S

44                  For the plaintiff it is contended that the statement of financial position as at 30 June 2003 does not present a true view of the defendant’s liabilities because interest of about $134 000 said to have accrued on the loan from the plaintiff to the defendant since 30 June 2002 has not been brought to account.  It is maintained that interest has accrued and continues to accrue because the loan, which is the subject of the second statutory demand dated 18 July 2002, is still to be repaid.  It is common ground between the parties that the loan was to be repaid by 30 June 2002 and, of course, is still to be repaid.  It is also common ground that interest was payable on the loan to 30 June 2002 at the rate of 15% per annum.  As counsel for the plaintiff has submitted, if that interest is brought to account it would result in a deficit of current assets to current liabilities. 

45                  Counsel for the plaintiff asserted that the defendant is ‘debarred’ from replying to his contention that interest is payable on the loan after 30 June 2002 by s 459S.  He submitted that under that section the defendant must have the leave of the Court to reply and has not sought such leave.  Section 459S provides as follows:

‘In so far as an application for a company to be wound up in insolvency relies on the failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:

(a)               that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b)               that the company could have so relied on, but did not so rely on (whether it made such an application or not).’

46                  The statutory demands upon which this application is founded demand the repayment of the loan which was due to be repaid by 30 June 2002 and the payment of outstanding interest on the loan to that date.  As mentioned above, the defendant does not dispute that the loan was to be repaid by 30 June 2002 or that interest is payable on the loan to 30 June 2002.  The defendant only disputes that interest is payable on the loan from 30 June 2002.  That is not a ground relied on by the defendant for the purpose of its applications for the demands to be set aside nor is it a ground that the defendant could have relied on.  The statutory demands do not demand the payment of interest after 30 June 2002, only up to 30 June 2002.  I therefore accept the submission of the defendant that it is not prevented by s 459S from replying to the plaintiff’s contention and does not require the leave of the Court to reply.

Interest on loan after 30 June 2002

47                  The evidence of Mr Cross was that the company has only brought to account the interest payable on the loan to 30 June 2002 because that is the extent of the defendant’s liability so far as the defendant understands the position.  He says it is a question to which the directors have given some consideration and received legal advice.

48                  The plaintiff relies on statements about loans between it and the defendant in a prospectus issued by the company in February 2000.  The prospectus stated:

‘5.        LECHMERE LOAN

            The following information is a summary of the provisions of a loan agreement between the Company and Lechmere Financial Corporation, a foreign company registered in the British Virgin Islands:

·          During the period 22 October 1992 to 6 April 1995 Lechmere advanced in total $150,000 for working capital;

·          In 1997 Lechmere assumed the liability for payment to all Aspermont’s outstanding creditors equal to an amount of $184,000;

·          Also in 1997 Lechmere advanced a further $780,000 to assist with the acquisition from Mr AL Kent his 50% share of Australia’s Mining Monthly;

·          Aspermont agreed to pay Lechmere interest at the rate of 15% per annum.

As at 30 June 1999 the balance of the loan stood at $1,040,000, which will be repaid in full from the proceeds of the Issue.’

49                  The plaintiff’s case relies on the statement ‘Aspermont agreed to pay Lechmere interest at the rate of 15% per annum’.  The defendant does not resile from the statements in the prospectus, which it describes as merely ‘a summary’ of the loan arrangements.  It contends nothing can be properly established from the statements on whether the defendant is liable to pay interest on the loan after 30 June 2002 and there is no other evidence before the Court on the issue.

50                  The evidence of Mr Cross was that he has never seen any loan agreement between the plaintiff and the defendant and he is not aware of the existence of any such agreement.  He says that if an agreement did exist, as a director of the company he should be aware of it.  The plaintiff has not produced any evidence as to the existence of any instrument or other writing recording the terms of the loan.  In those circumstances, it is submitted for the defendant that it can only be assumed on the evidence that the plaintiff advanced the funds, which are substantial, to the defendant without any proper record of the terms and conditions upon which it made the advance, whatever those terms and conditions may be. 

51                  The evidence of Mr Cross was also that the defendant has not received any claim or demand from the plaintiff for payment of the interest.  It appears it is also common ground between the parties that, as stated in the statutory demands, interest on the loan is payable half yearly.  It is therefore submitted for the defendant that if the plaintiff is so sure of its right to charge interest on the loan after 30 June 2002, it could have been expected to have called for payment of the interest for the half yearly periods ended 31 December 2002 and 30 June 2003.

52                  Relying on the statements in the prospectus, counsel for the plaintiff submitted there is no evidence before the Court that the obligation to pay interest does not otherwise continue.  However, it is said for the defendant, equally there is no evidence before the Court that interest does continue after 30 June 2002.  The submission for the defendant is the only evidence before the Court is a short, open-ended statement that was made well before the loan became due for repayment.  It is said not to be of any assistance in properly determining the issue.

53                  For the defendant it is submitted these proceedings are not the appropriate forum to determine which party is right about the issue of ongoing liability for interest after 30 June 2002.  The dispute may be the subject of other proceedings to be brought by the plaintiff or, for that matter, by Mr Kent:  Re National Computer Systems & Services Ltd (1991) 6 ACSR 133 at 135; 9 ACLC 1,361 at 1,363 per McLelland J.

54                  I consider that the evidence in the prospectus concerning the loan raises a prima facie position that the loan is subject, until repayment, to interest at the rate of 15% per annum.  That raises an issue on which the onus passes to the defendant to negate.  It cannot therefore be the position that the issue of whether or not interest is so payable does not arise here.

55                  The evidence of Mr Cross does nothing to negate the prima facie position.  The failure to call Mr Kent or the chief financial officer of the defendant although they were present in Court, enables the better drawing of an inference that the defendant is unable to adduce evidence to negate the prima facie position or to support the submissions for it. 

56                  The law is that an unsecured debt does not carry interest unless the parties agree:  London, Chatham & Dover Railway Co v South Eastern Railway Co [1893] AC 429 and President of India v La Pintada Compama Navigacion SA [1985] AC 104 at 115.  In relation to damages the rule may be inapplicable – Hungerfords v Walker (1989) 171 CLR 125 – and the general law may, in any event, award interest in application of the doctrine of unjust enrichment:  National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (unreported, NSWCA, Mason P, Handley and Sheller JJA, 23 April 1997, BC 9701417) referred to in Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285.

57                  Here, however, there is evidence raising a prima facie position of an agreement that interest is payable.  The prospectus was obliged to state all material facts and no limitation on payment of interest to 30 June 2002 is expressed.  Such limitation, unless express, would be contrary to the ‘presumption’ of continuance of the position which has been accepted as applicable prior to that date in respect of each half year.  Absence of any demand by the plaintiff for interest post 30 June 2002 neither provides any proof no such interest is payable nor prejudices the exercise of the right to demand such payment if it is otherwise due and owing. 

58                  The case for the defendant fails to rebut the prima facie position arising in this proceeding on the issue of payment of interest on the loan post 30 June 2002.  I find such interest was a current liability not taken into account.  The plaintiff posited a figure of $134 650.68 to the date of the hearing which has not been contested. 

Contingent liabilities

59                  For the defendant it is accepted that it is clear, as plaintiff’s counsel submits, that in determining whether or not the defendant is insolvent the Court may take into account a contingent or prospective liability.

60                  Plaintiff’s counsel asserts that on past history the defendant will never be able to pay Drysdale and its other debts as it cannot generate sufficient monies to do so.  The case for the defendant says these assertions are entirely speculative and relies on the statement in Re Bond Corporation Holdings Ltd (1990) 1 WAR 465 at 163 per Ipp J:

‘A winding up should not be allowed to proceed on the speculative basis that a company may possibly at a future date experience severe financial difficulties.’

61                  I accept that regard to contingencies cannot proceed on a speculative basis.

Convertible note agreement

62                  For the plaintiff it is submitted that the defendant’s liability under a convertible note agreement with Drysdale should be treated as a current liability, not as a non-current liability as provided in the statement of financial position.  It is said Drysdale can call up the loan by reason of two events of default having occurred under the agreement, Drysdale not having waived its rights in respect of those events of default as it did in respect of another event of default by a letter of 29 July 2003 to the defendant. 

63                  The defendant does not dispute that the events of default have occurred.  However, it says that until such time as Drysdale calls for the repayment of the loan in accordance with the agreement it is proper to still treat the liability as a non-current liability.

64                  Clause 3.2(a) of the agreement provides that:

‘Upon or at any time after the occurrence of an Event of Default, the Lender may by notice to Aspermont declare that:

(i)                 its Loan is immediately due and payable; or

(ii)               it immediately gives the Conversion Direction, notwithstanding that the Conversion Period has not yet commenced or has terminated and the provisions of clauses 2.4(c) and (d) will apply.’

Further, cl 2.4(c) of the agreement provides that:

‘If the Conversion Direction is given the Lender, subject to the issue and allotment of the Specified Shares and the Specified Options, then the whole of the Loan together with any interest will be deemed to be fully discharged and repaid free and clear of any deductions of present or future withholding taxes otherwise payable on the repayment of the Loan.’

65                  Although Drysdale is aware of this winding up application, (as stated in the letter to the defendant) it has not given any notice to the defendant declaring the loan due and payable.  Moreover, Drysdale might elect to give the conversion direction instead of declaring the loan due and payable.  If it chooses to give the conversion direction, under cl 2.4(c) of the agreement the whole of the loan will be deemed to be fully discharged and repaid.  Therefore, it is submitted for the defendant that until such time as Drysdale gives notice to the defendant in terms of cl 3.2(a) of the loan is not due and payable.

66                  Accordingly, it is submitted for the defendant that it is proper for the company’s liability under the agreement to be brought to account as a non-current liability.  There is no dispute by the defendant that the liability would immediately become a current liability once Drysdale gives notice declaring the loan immediately due and payable.

67                  Although there is no evidence before the Court as to Drysdale’s intentions in respect of the events of default, apart from the letter, it should be noted that it is the largest shareholder in the defendant and is controlled by the defendant’s executive chairman of directors, Mr Kent.  As mentioned earlier, it holds 48 million ordinary shares in the defendant, being about 47% of the issued shares.  It also holds 40 000 000 share options being about 68% of the total share options on issue. 

68                  The Australian Accounting Standards 1040 par 9.1 states:

‘…

current liability means liability that:

(a)               arises and is expected to be settled in the normal course of the entity’s operating cycle; or

(b)               is at call or due or expected to be settled within twelve months of the reporting date’

In my opinion the defendant’s liability under the convertible note agreement does not give rise to a current liability because there is no expectation absent notice from Drysdale of settlement within the time frames descriptive of a current liability. 

Defendant’s financial position after 30 June 2003

69                  It is common ground between the parties that the question of solvency must be assessed at the date of hearing.

70                  In Mr Cross’ affidavit of 19 August 2003 he states that there has not been any material change in the defendant’s financial position since 31 July 2003.  He says that the defendant remains able to pay all of its debts as and when they become due and payable.  He also states that the market value of shares and options held by the defendant in listed companies as investments increased from $30 811 to $48 208 since 30 June 2003.

71                  For the defendant attention is directed to a copy of statements for the company’s operating account from 1 July 2003 to 31 July 2003 as annexed to Mr Cross’ affidavit of 19 August 2003.  The first statement, for the period 1 July 2003 to period 15 July 2003, shows a credit balance at the end of the period of $236 000.  The second statement, for the period 16 July 2003 to 31 July 2003, shows a credit balance at the end of the period of $116 000.  It is accepted that a credit balance at the end of the month cannot be relied on without a reconciliation of the account at that date.  However, the statements show that during the month the credit balance of the account did not fall below $109 000. 

plaintiff’S SUBMISSIONS

72                  Apart from what has been set out in relation to the defendant’s submissions, the plaintiff submits the following.

Receivables

73                  The plaintiff pointed to evidence of a cheque for $31 000 received after 30 June 2003 from Mr Kent which subsequently was dishonoured.  I accept this evidence and the inference urged from it that the defendant was working capital deficient. 

Convertible note procurement fee

74                  The procurement fee on the convertible note agreement was 6 per cent payable to Drysdale, a sum of $60 000 due in September 2002.  It was not referred to in the financial statements Mr Cross accepted it could not be said from the quarterly reports that the amount had been paid to Drysdale.  He accepted his evidence that it had been paid was an assumption.  Neither Mr Kent nor the chief financial officer of the defendant, present in Court, were called on the issue:  Jones v Dunkel.

Future cash flow

75                  I accept the submission for the plaintiff there is no evidence of future cash flow save unsubstantiated statements projecting revenue rises. 

Asset saleability

76                  The plaintiff submits there is no evidence showing that the defendant can go out into the market place and borrow, charge or sell any of its assets.  This is in circumstances where the defendant has never made a profit from its operations.  I accept these submissions. 

REASONING

77                  The consequence of the foregoing reasoning is that I consider there are three additional liabilities to be taken into account, namely:

• Interest on the loan from the applicant after 30 June 2002: $134 650
• Procurement fee on convertible notes owing by the defendant to Drysdale: $60 000
• Value of dishonoured cheque from Mr Kent to the defendant: $31 000

Total: $225 650.

78                  Those liabilities are additional in that they are not so accounted for in the consolidated unaudited statement of financial position as at 30 June 2003.  Having in mind that the balance sheet is but a guide to the issue of insolvency, I note that on that statement as unamended the surplus of current assets over current liabilities is $95 893.  With the addition of the added liabilities of $225 650 that changes to a deficit of $129 757.

79                  It is the fact that the cash reserves as at 30 June 2003 were stated as being $1 166 265.  No evidence has been brought to cast doubt on that figure or on the evidence for the defendant that it can now pay into court the amounts the subject of the statutory demands.

80                  Nevertheless I am of the view that the defendant has failed to rebut the presumption of insolvency.  In order to discharge the onus of rebuttal it is necessary for the party bearing that onus to present the court with the fullest and best evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J cited in Ace at [44] and Expile at [16].  In several significant respects the defendant has failed to satisfy this requirement.

81                  First, the defendant’s case, in its reliance upon the consolidated unaudited statement in particular and the absence of audited accounts in general, has relied on unaudited accounts and unverified claims of ownership or valuation when these are not ordinarily probative of solvency: Expile at [16].  Secondly, no evidence has been led on the credit resources available to the defendant: Expile at [16] and the authorities there cited.  Thirdly, no attempt has been made in the case for the defendant to demonstrate that the presently available cash resources either alone or in conjunction with the realisation of assets or raising of credit, would enable the defendant to meet its debts as and when they may fall due.  Fourthly, this approach has been adopted in circumstances where the defendant is a publicly listed company under listing obligations that would on any usual approach mandate its compliance with full and frank disclosure.  Fifthly, the defendant did not call those witnesses who could have given evidence likely to have more fully disclosed its financial position and instead relied upon the testimony of a witness who patently had limited knowledge of the matters concerning which he testified.

82                  For these reasons I consider the defendant has failed to discharge the onus of rebutting the presumption of insolvency.

discretion of the court

defendant’S SUBMISSIONS

83                  Even if the Court finds the defendant has failed to discharge the onus of proving it solvency, the Court has a discretion not to order a winding up.  The legislature’s intention in that respect is clear from s 459A which provides ‘On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency’.  This application is made under s 459P.  Further, s 467(1) provides that on hearing a winding up application the Court may dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application, as mentioned above.

84                  In Ace Contractors, Weinberg J, having found that a company had failed to rebut the presumption of insolvency, addressed the matters which he considered to be relevant to the exercise of his discretion to decline to order that the company be wound up.  One matter addressed was that, notwithstanding the effect which the Court must give to the presumption and to the company’s failure to discharge the onus of demonstrating actual solvency, the company might in reality be solvent.  That is, the evidence, apart from the presumption, may not demonstrate that the company is actually insolvent.  While he accepted that it is not in the public interest for an insolvent company to continue trading, he was of the view that the case before him was not a case where actual, rather than presumed, insolvency had been found.  For that reason, and the other reasons mentioned in his judgment, he adjourned the application for a short time in order to allow the company to pay the amount of the statutory demand on the basis that if it did the application would stand dismissed.

85                  Another matter addressed by his Honour was the interests of other unsecured creditors.  An order for winding up might put at risk a going concern and the interests of other unsecured creditors might be adversely affected.  In appropriate circumstances, it may be better for the creditors as a whole to allow the company to trade on rather than have the company wound up.  Weinberg J considered the Court has a duty when considering whether to make an order for the winding up of a company to have regard not only to the interests of the applicant creditor, but to the interests of all creditors, particularly those who are unsecured:  Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675.

86                  For the defendant it is submitted that if it is found the defendant has failed to rebut the statutory presumption and is to be treated as insolvent, a winding up order should not be made for the following reasons.

87                  It is said the evidence demonstrates the defendant is a going concern and is solvent.  The defendant is continuing to pay all of its other creditors in the ordinary course of business and in accordance with their normal trading terms and its collection of receivables continues to be in the ordinary course of business.  At the same time, the defendant has sufficient funds set aside with its bankers to pay the total amount demanded by the statutory demands.  Further, as stated above, total revenue from the company’s operations increased by 11% over the last financial year.  In line with that trend, the defendant expects that revenue from its operations will increase by a further 19% during the current financial year.  In the circumstances, it would not be in the interest of the defendant’s creditors as a whole for the defendant to be wound up and it should be allowed to trade on.

88                  It is submitted the plaintiff has not produced any evidence to show anything to the contrary.  Its only evidence, apart from affidavits concerning the statutory demands, is the affidavit of Mr Chang presenting a search of the company obtained from the Australian Securities and Investments Commission and a copy of the company’s prospectus.

89                  The defendant also placed reliance on the fact that counsel for the plaintiff asserts the defendant is insolvent because on the evidence before the Court it has failed to discharge the onus upon it to rebut the statutory presumption and does not contend that the evidence demonstrates the defendant is actually insolvent.

90                  Furthermore, it is submitted this is not a case of a company not having funds available to comply with a statutory demand and its continued viability being in serious question.  Nor is it a case of a company denying that the monies demanded by a statutory demand are payable and refusing to pay.  The defendant has sufficient case set aside to meet the demands, as mentioned above, and is ready, willing and able to pay the monies to the plaintiff as soon as the injunction against it in Mr Kent’s proceedings is discharged.

91                  As stated previously, the defendant is willing to pay the amount demanded by the statutory demands into Court and, as it has the cash set aside, it can do so within 48 hours.

plaintiff’S SUBMISSIONS

92                  For the plaintiff it is submitted that for a publicly listed company to be unable to rebut the presumption of insolvency makes any stay wholly inappropriate.  Further, the absence of any payment to date is referred to.  It is said a stay would put creditors and shareholders at risk.

REASONING

93                  The matters which are relevant to the exercise of the discretion to decline to order that the respondent be wound up are as follows:

• The defendant made application (unsuccessfully) to the Supreme Court to set aside the statutory demands.
• The plaintiff is presumed to be insolvent by the effect of s 459C of the Act but it is not contended that the plaintiff is in fact insolvent.
• If the defendant were wound up at this time it would put at risk a going concern in which the interests of other unsecured creditors might also be adversely affected. 
• The defendant has large cash reserves and will pay out the demands if the injunctive restriction is lifted.

94                  In these circumstances I propose to adjourn this matter on the following basis.  The defendant should forthwith pay into the Court the monies required by the statutory demands, failing which the application should stand granted.  If before 18 November 2003 the defendant has authorised the payment to the plaintiff of the amount due and payable pursuant to the statutory demands, the application to have the defendant wound up will stand dismissed as and from the date of lodgement with the court prior to the same date of proof of such payment given under oath on behalf of the plaintiff and the defendant.  If, on the other hand, these sums are not paid by that time, the matter will be listed on that date for the determination of the application that the defendant be wound up forthwith.

95                  Inherent in this is that the defendant must now immediately apply to the Supreme Court of Western Australia on an urgent basis for the discharge of the injunctive restriction on the defendant authorising the payment for which opportunity is provided by the adjournment, failing which the application should stand granted.  The application cannot be resolved by the Court holding the monies paid to it as that will not occasion the discharge of the debts. 

96                  The fact that the defendant is a publicly listed company which would still be trading in circumstances where it has not rebutted the presumption of insolvency is a matter for consideration by those responsible for the conditions of such listing and not a barrier to the proposed course of action.

97                  The defendant should pay the applicant’s costs of this application.

98                  The proposed course of action constitutes special circumstances justifying the Court extending the time within which the application must be determined until and including 18 November 2003.

Associate:

Dated:              20 October 2003