Bulwinkel Enterprises Pty Ltd, Re [2015] QSC 112

SUPREME COURT OF QUEENSLAND CITATION: Re Bulwinkel Enterprises Pty Ltd [2015] QSC 112 PARTIES: STEPHANIE ROEBUCK AS EXECUTOR OF THE DECEASED ESTATE OF SUZANNE FLORENCE BULWINKEL (applicant) v BULWINKEL ENTERPRISES PTY LTD ACN 132 387 396 (respondent) FILE NO/S: 9299 of 2014 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 8 May 2015 DELIVERED AT: Brisbane HEARING DATE: 20 February 2015 JUDGE: Martin J ORDER: 1. Application allowed. 2. The applicant is to provide minutes of order. CATCHWORDS: CORPORATIONS – WINDING UP – APPLICATIONS FOR WINDING UP BY COURT – PROCEDURE – LEAVE TO OPPOSE WINDING-UP APPLICATION – where the respondent company had entries in favour of the deceased recorded as debts on its financial accounts – where the respondent claims that the amounts are not debts and are recorded for accounting purposes only – where the respondent did not comply with a statutory demand calling on those debts and did not apply for it to be set aside within the statutory time limit - where the respondent seeks leave to oppose the application for winding up in insolvency – whether the respondent has adequately explained why an application to set aside the statutory demand was not filed within time – whether the debt is material to solvency – whether the respondent is insolvent regardless of the debt Corporations Act 2001 (Cth) s 95A, s459A, s459C, s 459G, s 459P, s 459S -- 1 of 9 -- 2 Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 COUNSEL: M Jones for the Applicant S Hogg for the Respondent SOLICITORS: Mahoney Lawyers for the Applicant M + K Lawyers for the Respondent [1] The applicant, Ms Roebuck, is the executor of the estate of her late mother Suzanne Florence Bulwinkel. At the time of her death, Ms Bulwinkel was married to Dr Kim Bulwinkel, a shareholder and former director of the respondent. Dr Bulwinkel’s now wife, Lena Bulwinkel, is the sole director of the respondent, but Dr Bulwinkel remains responsible for the day to day management of the company. [2] On 13 June 2014 the applicant served the respondent with a statutory demand for the payment of $990,377.63. This amount is made up of an unpaid trust distribution to the deceased of $219,040.79 and a loan from the deceased to the respondent of $771,336.84. The latter debt arises from the sale of a property owned by the deceased to Dr Bulwinkel through Bulrock Pty Ltd as trustee of the Bulwinkel Development Trust. The respondent replaced Bulrock Pty Ltd as trustee of the trust, indemnifying Bulrock Pty Ltd against all of its debts. [3] The respondent has failed to comply with the Statutory Demand and did not file an application to set aside the statutory demand within the time limit of 21 days following service pursuant to s 459G of the Corporations Act 2001 (the Act). That period expired on or about 2 July 2014. Given this failure, there is an onus on the respondent to rebut the presumption of insolvency under s 459C(2)(a). [4] The applicant applies, pursuant to s 459P of the Act, for an order to wind up the respondent in insolvency. [5] Although the respondent has not filed an application for leave, it now relies on the power of the court to grant leave under s 459S of the Act. This section provides: “(1) In so far as an application for a company to be wound up in insolvency relies on a 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). (2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent.” -- 2 of 9 -- 3 [6] The respondent seeks leave to rely on the ground that the debt the subject of the statutory demand is disputed. The court cannot grant leave under s 459S unless it is satisfied that the relevant ground, that is the existence of the debt, is material to proving that the company is solvent. The respondent submits that, leaving aside the disputed debt, the company is solvent. [7] The applicant opposes the grant of leave under s 459S of the Act on the basis that the statutory demand was properly served and that the debt is not material to the question of solvency. Ms Roebuck argues that, even if the debt upon which the statutory demand was based can be disproved, the company is still insolvent. [8] The statutory demand was sent by the applicant’s solicitors via pre-paid post to the respondent’s registered office – the offices of Blue Rock Accountants. [9] In his affidavit sworn 9 December 2014, Mr Bulwinkel sets out a number of matters which are advanced to explain why no application to set aside the statutory demand was filed. [10] The first of these is that his accountants did not impress upon him the importance of the statutory demand. After his accountants brought it to his attention on 10 June 2014, the demand was forwarded on to Mr Bulwinkel by post. It is unclear at what date the statutory demand reached Mr Bulwinkel. Nevertheless, a statutory demand contains the following advice and clearly marked warning: “Section 459G of the Corporations Act 2001 provides that a company served with a demand may apply to a court having jurisdiction under the Corporations Act 2001 for an order setting the demand aside. An application must be made within 21 days after the demand is served and, within the same period: (a) an affidavit supporting the application must be filed with the court; and (b) a copy of the application and a copy of the affidavit must be served on the person who served the demand. A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.” [11] Dr Bulwinkel is an orthopaedic surgeon. He has engaged in property purchases, sales and developments. There is no reason to think that he would not have appreciated the importance of that advice and warning. [12] He also refers to three other significant matters: (a) His ill health. Dr Bulwinkel suffers from a rare disease which, if untreated, can lead to very serious impairments. He was, at the -- 3 of 9 -- 4 relevant time receiving chemotherapy treatment which had side- effects including: headaches, malaise, nausea, and night sweats. (b) His mother was terminally ill and he was attending on her in hospital. She died on 27 June 2014 and he had to make the necessary arrangements for her funeral and deal with her affairs. (c) He was engaged in a dispute with the National Australia Bank over the foreclosure of two properties and was dealing with the Financial Ombudsman Service. This took up a lot of his time. [13] The circumstances which are set out above in summary form provide some explanation for the respondent not applying under s 459G within 21 days of 10 July and provide some support for granting leave to oppose the application. I note that there is no explanation for the absence of any action to dispute the debt until the winding up application was served. In any event, the court is prevented from granting leave under s 459S unless the debt is material to the question of solvency. I now turn to that issue. “… material to proving that the company is solvent” [14] There is a divergence of views as to the consequence of the relationship between the disputed debt and the company’s solvency. For example, in Switz Pty Ltd v Glowbind Pty Ltd1 , Spigelman J2 said: “[42] Section 459S(1) directs attention to facts and matters upon which the company wishes, if granted leave, to oppose an application to wind it up. Subsection (2) imposes a mandatory condition that the court must be satisfied that the ground which the company wishes to use in this way is “material to proving that the company is solvent”. [43] The words are not “material to solvency” or “material to finding solvency” but “material to proving” solvency. The use of the word “proving”, a present participle in the active voice, indicates that the test is to be applied to a process then under way, or in contemplation, before the Court. Section 459S(1) makes it clear that that process of “proving” is being conducted by the company. [44] The statutory context is as follows: (i) A “creditor” may apply to the Court for a company to be wound up in insolvency (s 459P(1)). (ii) Upon receipt of such an application the Court is empowered to order that “an insolvent company be wound up in insolvency” (s 459A). (iii) A company is insolvent if it is not able “to pay all (its) debts, as and when they become due and payable” (s 95A). 1 (2000) 48 NSWLR 661. 2 With whom Giles and Handley JJA agreed. -- 4 of 9 -- 5 (iv) Where, as here, the company has failed to comply with a statutory demand, the Court “must presume that the company is insolvent” (s 459C(2)). (v) The presumption referred to in (iv) “operates except so far as the contrary is proved for the purposes of the application” (s 459C(3)), relevantly, the application under s 459P for a company to be wound up in insolvency (s 459C(1)). [45] The phrase which falls for consideration in the present case from s 459S(2) — “the ground is material to proving that the company is solvent” — relates back to the process envisaged in s 459C(3) — “except so far as the contrary is proved”. [46] The purpose of the longstanding statutory demand procedure is to minimise the transaction costs which the law imposes on creditors seeking to enforce debts. The threat of winding up is often effective to ensure that a recalcitrant debtor does not seek to exploit the delays and costs that legal disputation may impose on commercial transactions. That threat is rendered ineffective to the degree to which such delays and costs are permitted to intrude into the statutory procedure itself.” (emphasis added) [15] Spigelman CJ went on to say: “[54] If … the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it “proving” its solvency, cannot be satisfied.” [16] There are other authorities which express different views about the meaning of “material” in s 459S(2). They are well summarised in McPherson’s Law of Company Liquidation3: “3.1255 … Notwithstanding that there is considerable authority for the stricter view that for the ground to be "material" to proving solvency within s 459S(2), it must be "pivotal", "crucial" or determinative of solvency, that stricter approach, with respect, overstates the rigour of the requirement imported into s 459S(2) by the word "material". In this context, material means "likely to influence the determination of a cause" rather than to be necessarily decisive of it. As several judges have pointed out, "material to proving" in s 459S(2) is not the same as "determinative of". Also, the stricter approach appears to preclude the company mounting inconsistent arguments about its solvency in the alternative, or saying that it is solvent if a number of disputed debts, including the demanded one, are discounted. Of course in some cases it will make 3 Thomas Reuters, McPhersons Law of Company Liquidation (at 2 May 2015). -- 5 of 9 -- 6 no difference which approach is adopted, for example where "the company’s position is completely" drowned in debt and is manifestly insolvent, no matter what happens in its dispute with the plaintiff. Where a company seeks to invoke s 459S, it is thus not merely a question of looking at the evidence supporting the creditor's claims, it is a matter of seeing whether the ground on which the company wishes to oppose winding up that could have been raised in an application to set aside the statutory demand goes towards proving that the company is solvent, bearing in mind that at the winding-up application stage the company bears the onus of proof. Thus, defects in the statutory demand will usually not be able to be raised on an application under s 459S, since they are unlikely to affect the company’s solvency (though it might be possible to argue, independently of s 459S, that the demand is so defective that it did not constitute a demand under s 459E and non-compliance with it did not create the presumption of solvency under s 459C(2)(a)… In determining whether a company can be proved to be solvent or not for the purposes of s 459S(2), the court may take into account contingent or prospective liabilities of the company (Corporations Act 2001 s 459D(1)). These are to be interpreted in the same manner as "contingent or prospective creditor" in s 459P(1).” (citations omitted, emphasis added) [17] On the basis that the ground is “likely to influence the determination” of the issue before the Court, I will grant leave under s 459S to oppose the winding up application. [18] The parties proceeded on the basis that all the evidence relating to both the application for leave to oppose and the application to wind up would be heard at the same time. This was said to be the most convenient way to deal with the entire matter. Is the company insolvent? [19] The argument advanced by the respondent was that the company is insolvent only if the court is satisfied that the debts the subject of the statutory demand are valid. The applicant submits that the respondent is insolvent regardless of the debt the subject of the statutory demand. [20] Section 95A of the Act states: “(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. (2) A person who is not solvent is insolvent.” [21] I will deal first with the debts the subject of the statutory demand. -- 6 of 9 -- 7 [22] The respondent relied on an affidavit of Christina Cooper. She is an accountant who has been working for both Dr Bulwinkel and the respondent for four and a half years. She deposed to the respondent acting as trustee only for the Bulwinkel Development Trust and not trading in its own right. The only income it earns is from rent and dividends. She said that the entry for the loan from Suzanne Bulwinkel of $771,337 is an accounting treatment to enable the trust to offset any costs it incurred against the value of the loan. She also deposed that the entry “Benef A/c – Suzanne Bulwinkel” of $219,041 was merely an entry in the books and was not an actual distribution to be made. [23] The evidence, though, points to a different categorisation of the loan. It arose in the following way. In the middle of 2008 the deceased was recently divorced from her former husband. She had a house in Yeppoon but had insufficient income to meet the costs of maintaining that property or to pay off other debts she owed. An arrangement was entered into by Dr Bulwinkel whereby he would cause an entity he controlled to purchase the property, together with an adjoining property and pay out the deceased’s debts. Dr Bulwinkel caused Bulrock Pty Ltd as trustee for the Bulwinkel Development Trust to purchase that property from the deceased and to purchase the adjoining property. The property had a value of $1,050,000. The sum of $250,000 was deployed towards satisfying the debts of the deceased. There was, therefore, a notional shortfall of $800,000 between the value of the property transferred and the consideration paid to her by Bulrock Pty Ltd. As is noted above, the respondent replaced Bulrock Pty Ltd as trustee of the trust. [24] From the time of that transaction until the most recent accounts were produced, the financial reports of the respondent consistently showed a loan owing to the deceased by the respondent in an amount that reflected that shortfall of $800,000 less some deductions. [25] There has been a considerable amount of correspondence passing between the applicant and Dr Bulwinkel about various matters concerning the deceased’s estate and the finances of the respondent. For example, in a document emailed by Dr Bulwinkel to the applicant dated 12 June 2009, there is a reference to a “$600,000 contribution from Suzanne Bulwinkel [which] will be a commercial loan to Bulwinkel Enterprises Pty Ltd”. [26] In May 2010 Dr Bulwinkel emailed the deceased’s sister and told her that the deceased was owed $800,000 by Bulwinkel Enterprises. Shortly after that Dr Bulwinkel handed the applicant a document that contained a statement to the effect that the debt owed by Bulwinkel Enterprises to the estate was $800,000 and which acknowledged that the respondent owed the deceased the amount of $219,040.79 in the deceased’s current account. [27] From then until the service of the statutory demand, there are numerous pieces of correspondence in which it is acknowledged by Dr Bulwinkel that the respondent owed the deceased the sums which are the subject of the statutory demand. Even after the service of the statutory demand Dr Bulwinkel sent an email to the applicant -- 7 of 9 -- 8 containing financial statements for the respondent which acknowledged the loan in the sum referred to above and the distribution which has also been referred to above. [28] In the face of all those contemporaneous documents the respondent argues that the amounts the subject of the statutory demand were merely “accounting treatments” for tax purposes and did not refer to any true liability. The most recent categorisation of these amounts by the respondent is inconsistent with the manner in which they had been treated for some five years. If the respondent is correct now in the manner in which it says these amounts should be viewed, then it must also follow that the respondent, and its director or directors, have over a number of years: (a) Caused the preparation of false financial accounts; (b) Falsely declared them to be accurate; (c) Lodged false tax returns; and (d) Engaged in a sham to minimise tax through a contrivance. [29] I do not accept the argument for the respondent that these debts do not exist. There is a recorded basis for the treatment of the balance of the purchase price of the Yeppoon property as a loan. The deceased received only a portion of the value of the property, the respondent (after transfer from the original trustee) received the full value of the property. It would be reasonable to describe the difference as a loan. [30] The treatment of the beneficiary’s account was consistent until the application for winding up was brought. I do not accept that it can be properly categorised in the way the respondent argues. [31] The respondent’s contention that these debts were disputed was not raised until the winding up application was served. For the reasons given above, I regard this contention as spurious. [32] The respondent has failed to discharge the onus upon it of proving solvency. The amounts used to support the statutory demand are debts owed by the respondent to the applicant. It follows, then, on the concession of the respondent, that the respondent is insolvent. [33] I turn now to consider the alternative argument put by the applicant. It was argued that, whether or not the debts supporting the statutory demand were valid, the respondent was insolvent. [34] On the face of the respondent’s 2014 financial reports, leaving aside the debt the subject of the statutory demand, the respondent has a net liability position of $6,883. However, the applicant claims the deficit is larger as certain asset items in the balance sheet are overstated. Further, the profit and loss statement shows an overall loss of $4,495. -- 8 of 9 -- 9 [35] The respondent, in reliance on the affidavit of Ms Cooper, submits that despite the appearance of the balance sheet, an entry for the Homeside Loan of $611,757 is a non-current liability for accounting purposes only. Ms Cooper deposes that the entities responsible for payment of the loan are Bulrock Pty Ltd as borrower and Dr Bulwinkel as guarantor. Even if this is the case, Bulwinkel Enterprises Pty Ltd took on all of Bulrock Pty Ltd’s liabilities and no evidence has been presented from the lender demonstrating that the debt is not enforceable against the respondent. [36] The respondent submits that any cash flow shortfall has been and can continue to be funded by Dr Bulwinkel. However, the correspondence between Dr Bulwinkel and the applicant’s solicitors suggest that since the statutory demand was served, he has not been in a stable financial situation despite his assurances that there are now no impediments to his returning to full-time work as an orthopaedic surgeon. [37] There is also evidence, which I accept, that the respondent’s statement of assets is inflated in important respects. First, there is the value of $249,000 ascribed to Masterpiece Investments. Dr Bulwinkel, in cross examination, said that he had been unsuccessful in many efforts to sell the shares in that investment – there had been three failed attempts to have the shares publicly listed. It appears that the value in the company’s books reflects the price paid for the shares, but that is not a true measure of their value in circumstances where they cannot be sold. Dr Bulwinkel accepted that there was no prospect that of recovering anything from Masterpiece Investments in the next six months. [38] Secondly, there is the value ascribed to the Lock St property of $900,000. That was the price paid in 2005. But, in a valuation of December 2014 (exhibited to the respondent’s material), it is said to be worth only $770,000. [39] Thus, on those two entries, there is an over-estimation of the respondent’s assets of nearly $420,000. In the most recent financial report (which includes the debts in the statutory demand) the respondent shows a total equity position of -$997,000. If the statutory demand debts are excluded then, taking into account the over-estimations, there is still an excess of liabilities over assets of over $420,000. [40] It was clear from the evidence of Dr Bulwinkel that there is no prospect of paying down that debt. The respondent has not shown that it is solvent. Orders [41] The application is allowed. The applicant is to bring in minutes of order. -- 9 of 9 --