In the matter of Wetherill Park Holdings Pty Ltd

1. [1]

   HER HONOUR: The plaintiff, Wetherill Park Plaza Pty Ltd, seeks to appoint a liquidator to the defendant company, Wetherill Park Holdings Pty Ltd, on the grounds of insolvency by reason of its failure to comply with a statutory demand. The demand sought $153,810.16 based on a default judgment entered against the defendant in the District Court of New South Wales. The plaintiff had sued the defendant in respect of vendor finance provided in connection with the sale of a development site in Wetherill Park.

2. [2]

   The application was opposed, effectively, by the defendant’s secured creditors, Bridge Street Capital No 2 Pty Ltd (BSC2) and Saddleback Mountain Estates No 2 Pty Ltd (SME2), who provided short-term finance to the defendant to complete the purchase. The secured lenders’ representative was Graham Werry. It proved to be a disastrous transaction for the secured lenders, in part, because the then director of the defendant, Mark Bryers, misled the secured lenders in respect of the purchase price in order to obtain finance. The defendant then defaulted on the loans. The secured lenders replaced Mr Bryers as director, installing David Cacciola instead (Mr Cacciola was the mortgage broker who originally dealt with Mr Bryers in respect of the secured loans).

3. [3]

   The application was opposed on two grounds:

4. [4]

   As to the first ground, Black J observed in In the matter of Wetherill Park Holdings Pty Ltd [2020] NSWSC 982 that the case concerns “the significant question of any impact on the winding up application of the setting aside of that judgment: cf. the case law establishing that a creditor’s statutory demand based on a judgment debt will be set aside, where that judgment is set aside: TQM Design & Construct Pty Ltd v M I Kitchen Design Pty Ltd [2011] NSWSC 800; Rhodium Australia Pty Ltd v Stateway Pty Ltd [2012] WASC 205; and Mutton v Living Australia Pty Ltd [2020] FCA 739 at [77]”: at [2]. These principles are considered at [7]-[15] and applied at [94]-[99].

5. [5]

   As to the second ground, with default interest running on the secured loans at 48% per annum, the defendant is woefully insolvent. The secured lenders’ strategy to recover their money is: to stave off the appointment of a liquidator, including by negotiating with, and paying out pre-existing unsecured creditors where possible or convenient; to continue to fund expenses associated with keeping the development prospects of the site alive; with the assistance of Mr Cacciola, to procure cheaper construction finance; to complete the development; and, use the development profit to repay the principal – and some interest at least – to the secured lenders. As Mr Werry said:

6. [6]

   Whilst I have had the benefit of detailed and careful submissions by counsel, I have not reproduced the submissions in the judgment. I have nonetheless considered each of the arguments raised.

ABUSE OF PROCESS

1. [7]

   The implications of the judgment on which a statutory demand was based being set aside must be considered in two scenarios, the first being where an application is made to set aside the statutory demand under section 459G of the Corporations Act 2001 (Cth). In that event, once the judgment is set aside, so too will be the demand. Thus, in TQM Design & Construct Pty Ltd v M I Kitchen Design Pty Ltd [2011] NSWSC 800, Hammerschlag J considered that, in such circumstances, the demand should be set aside for “some other reason” under section 459J(1)(b) of the Corporations Act. At [6]:

2. [8]

   Similarly, in Rhodium Australia Pty Ltd v Stateway Pty Ltd [2012] WASC 205, an application was sought to set aside a statutory demand based upon judgment obtained in the Magistrates’ Court of Western Australia. The plaintiff succeeded in having the default judgment set aside. The defendant conceded that the statutory demand should also be set aside. On the question of costs, Master Sanderson followed TQM Design, noting at [7]:

3. [9]

   The second scenario is where no application to set aside the statutory demand is brought. In that event, the fact that the judgment is set aside will have no consequence for the winding-up application unless leave has been granted under section 459S of the Corporations Act to raise the contested nature of the underlying debt.

4. [10]

   For example, in The Owners – Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412, the owner of a lot in a strata plan failed to comply with a statutory demand served by the Owners Corporation, based upon judgment obtained in the Local Court. The lot owner had sought to set aside the default judgment, but failed, and appealed to the District Court. The appeal was yet to be heard, but if successful, the default judgment would be set aside. At the hearing of the application to wind up the lot owner, Austin J explained why the appeal was not relevant to the application before him. At [28]:

5. [11]

   Similarly, in Alternative Engine Technologies Pty Ltd v Kruger Ventures Pty Ltd (No 2) [2010] SASC 60, Alternative served a statutory demand based upon a default judgment obtained in the Adelaide Magistrates’ Court. Kruger did not apply to set it aside. Alternative sought to wind up Kruger. The default judgment was then set aside. As to the effect of the Magistrates’ Court judgment being set aside, Judge Lunn observed at [11]:

6. [12]

   Similarly, in Mutton, Rans Consulting obtained default judgment against Living Australia in the Magistrates’ Court of South Australia. Living Australia applied, unsuccessfully, to have the default judgment set aside and then appealed to the Supreme Court of South Australia. In the meantime, Rans Consulting served a statutory demand, which went unanswered, and commenced proceedings seeking to wind-up Living Australia on the ground of insolvency. Three months later, the Supreme Court upheld Living Australia’s appeal, such that the default judgment was set aside. Where no steps were taken to set aside the statutory demand, the setting aside of the default judgment on which the demand was based had no effect on the statutory presumption of insolvency: at [78].

7. [13]

   Living Australia contended that the continuation of the petition by Rans Consulting after the setting aside of the default judgment was an abuse of the Court’s process. White J set out the matters which could support an exercise of the Court’s discretion to set aside a winding-up order, “If the presumption of insolvency and s 495S are put to one side”: at [94]. After listing these matters, his Honour continued, “However, the presumption of insolvency does apply and Living Australia is required to prove the contrary of the presumption”: at [95].

8. [14]

   Finally, In the matter of New View Windows Pty Ltd trading as Narellan Windows and Glass [2020] NSWSC 1905, a statutory demand was issued relying on a default judgment issued in the District Court. The demand was not complied with nor set aside and an application by Narellan Windows for leave under section 495S was unsuccessful. An application was brought to wind up the company, following which the default judgment was set aside in the District Court. Black J declined to dismiss the winding-up application as an abuse of process, following Nomak Holdings. At [12]:

9. [15]

   There is no doubt that this Court has an inherent jurisdiction to prevent an abuse of process, including when dealing with a winding-up application: Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374; [2007] NSWCA 57 at [57] per Beazley JA, with whom Hodgson and Santow JJA agreed. However, the power and discretion has been circumscribed by the scheme in Part 5.4 of the Corporations Act. Where the creditor has served a statutory demand which has not been set aside, there is no abuse of process merely by proceeding with a winding-up application after the expiry of the statutory 21-day period in the knowledge that there is a genuine dispute about the debt: Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 44 ACSR 124 at [28]-[50] per Stein JA; at [77]-[80] per Ipp JA, with whom Mason P agreed, following Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 17 ACLC 467 per Austin J; Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 20 ACLC 304 per Palmer J and State Bank of New South Wales v Tela Pty Ltd (No 2) [2002] NSWSC 20; (2002) 188 ALR 702 per Barrett J. See also Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216 at [70], [75] per White J; In the matter of Kornucopia Pty Ltd [2020] VSC 7 at [85]-[86] per Sifris J.

WITNESSES

1. [16]

   The plaintiff relied on affidavits sworn by its solicitors, Philip Stratford and Patrick Doherty; its director, David Lyons; forensic accountant, Mariano Rossetto; and process server, Andrew Saad. Mr Doherty was cross-examined. He was a perfectly decent fellow and I accept his evidence. Mr Rossetto was cross-examined. He was an impressive witness who was honest and straightforward.

2. [17]

   The defendant relied upon the evidence of its director, Mr Cacciola; the representative of the company’s secured lenders, Mr Werry; and a liquidator, Andre Lakomy. Whilst Mr Cacciola and Mr Werry notionally gave evidence on behalf of different companies, they effectively gave evidence with the same voice and in the same interest, being that of the secured lenders. Each of these witnesses were cross-examined.

3. [18]

   Mr Cacciola is a mortgage broker/property developer. He was, on occasion, argumentative, evasive and non-responsive: see, in particular, [85], [125]. Mr Cacciola volunteered information where possible to suggest that the development was advanced and would succeed but provided no documents to support a one-page feasibility study or suggested pre-sales, although he said he had such documents available to him, “Yeah, I do, yeah”. I am hesitant to rely on his evidence in the absence of corroboration by other reliable evidence.

4. [19]

   Mr Werry is a property developer and financier, as well as a solicitor. Some of Mr Werry’s evidence was unsatisfactory or unlikely: see [113], [116], [118]. Mr Werry frequently said “I can’t recall” in answer to a difficult question. He proffered evidence where possible to indicate that the lenders who he represented – and potentially other lenders – would support the company going forward. He also proffered unkind remarks where possible, particularly in relation to Mr Bryers (this may be understandable given Mr Werry’s description of his experiences with that person). I am hesitant to rely on his evidence in the absence of corroboration by other reliable evidence.

5. [20]

   Mr Lakomy’s approach was “high level”, see for example at [127] and [135]. Mr Lakomy did not appear to be interested in the detail. He relied upon correspondence received from Mr Werry and what he was told by Mr Werry without checking it. In any competition between the experts, I preferred the evidence of Mr Rossetto.

6. [21]

   Also in evidence was a series of emails and letters written between Mr Werry and Mr Cacciola, or from Mr Werry to Mr Lakomy, or from John Dykes, a director of SME2, to Mr Werry but apparently written by Mr Werry, which came into existence after the commencement of this litigation. Whilst, on their face, these emails might otherwise be considered “business records” within the meaning of section 48 of the Evidence Act 1995 (NSW), the time at which the documents were prepared (which was generally contemporaneous with giving instructions to Mr Lakomy to prepare a further solvency report) and the generally self-serving nature of the contents of these documents had the consequence that I have attached little weight to this documentary evidence unless the contents of such documents have been otherwise proved: Averkin v Insurance Australia Ltd (2016) 92 NSWLR 68; [2016] NSWCA 122 at [114] per Leeming JA (McColl and Basten JJA agreeing); Vitali v Stachnik [2001] NSWSC 303 at [12] per Barrett J.

FACTS

1. [22]

   The plaintiff owned land in Wetherill Park, which had the benefit of a development consent to construct an industrial development comprising 24 two-storey industrial units and a café, together with an acknowledgment by council that the development had been physically commenced and further development consent to subdivide the site.

2. [23]

   In 2016, the plaintiff lodged another development application to instead construct bulky goods units, a child care centre, medical centre, service station/convenience store and retail food outlet. An agreement for lease was entered into with Woolworths Ltd in respect of the service station/convenience store. An agreement for lease was entered into with Hungry Jack’s Pty Ltd in respect of the retail food outlet.

Sale of land to Halecret

1. [24]

   In April 2017, the plaintiff sold the land to Halecret Holdings Pty Ltd for $19.9 million. Completion of the contract for sale was to take place once development consent was obtained. Special Condition 12 of the contract for sale disclosed the existence of the two agreements for lease, required the purchaser to be responsible for compliance with those agreements, and included an indemnity by the purchasers in respect of any claim that may be made by Woolworths or Hungry Jack’s. The shareholders and directors of Halecret guaranteed Halecret’s performance of the contract for sale.

2. [25]

   The plaintiff was unable to obtain development consent. In October 2017, the plaintiff’s solicitor who acted on the sale, Mr Stratford, advised Halecret of this fact and enquired whether Halecret wished to proceed with the purchase. Negotiations ensued. In March 2018, Halecret agreed to buy the land for a reduced price of $16.9 million, that is, $3 million less than the original price.

Change of purchaser

1. [26]

   On 21 March 2018, Mr Stratford wrote to the purchaser’s solicitor confirming the changes to be made to the contract for sale as a result of negotiations. The letter noted:

2. [27]

   As Mr Stratford’s letter observed, Mr Bryers was now ‘taking over’ as the purchaser of the land. More specifically:

3. [28]

   The registered office of the defendant and Halecret became Mr Bryers’ address in Glebe. Halecret’s solicitor also changed; Salim Kassem was retained.

4. [29]

   On 29 March 2018, two deeds of variation were executed in respect of the contract of sale, reducing the sale price and changing the guarantor to Mr Bryers. Mr Lyons executed the deeds on behalf of the plaintiff whilst Mr Bryers executed the deeds on behalf of Halecret and as guarantor.

Finance from secured lenders

1. [30]

   Mr Bryers sought finance to complete the purchase. In addition, a section 96 modification was prepared to amend the original development consent for the site to 48 industrial/showroom strata units, 2,300 metres of storage units and a café together with 271 car spaces. That is, the proposed development to include premises leased to Woolworths and Hungry Jack’s was abandoned, which had implications for the agreements for lease, in respect of which the purchaser had given an indemnity to the vendor.

2. [31]

   As mentioned, completion of the sale was scheduled for 24 April 2018. Halecret did not have funds to settle. The plaintiff served a notice to complete. On 18 May 2018, a third deed of variation was executed, extending the time for completion to 25 May 2018 on terms, including that the price of the land was increased by $350,000 to $17.25 million.

3. [32]

   On 20 May 2018, the defendant obtained a valuation of the site.

4. [33]

   On 25 May 2018, Halecret was unable to complete again. The plaintiff agreed to extend the time for completion to 28 May 2018, then to 29 May 2018. On 30 May 2018, a fourth deed of variation of the contract of sale was executed, extending the time for completion to 4 June 2018 on terms, including that the price of the land be increased by $50,000 to $17.3 million.

5. [34]

   Mr Bryers approached Credit Solutions Group to assist with raising finance. Mr Werry was invited to consider Mr Bryer’s application. On 6 June 2018, Integrated Securities Ltd issued a letter of funding approval for the defendant, advising that Summer Lawyers were to draft mortgage documents, with execution to take place on 12 June 2018. (Summer Lawyers were the solicitors for the secured lenders). On 7 June 2018, Mr Kassem forwarded a copy of the letter of approval to Mr Stratford, noting:

6. [35]

   Mr Kassem asked for a further deed of variation to be prepared to allow completion to be extended to Friday, 15 June 2018. Mr Stratford was also informed by Mr Kassem that the property would be transferred to the defendant after settlement. On 12 June 2018, a fifth deed of variation was executed in respect of the contract for sale. Completion of the contract was now to take place at 3.00 pm on Friday, 15 June 2018.

7. [36]

   On 13 June 2018, Halecret executed two mortgages in favour of BSC2 and SME2 to secure $10 million and $12.16 million respectively.

8. [37]

   These mortgages were not registered. Further, although Mr Werry referred in his first affidavit to a Loan Facility dated 19 June 2018 (as did the pleadings in the District Court proceedings), in cross-examination Mr Werry said that there was no loan agreement apart from the mortgages.

Deed of Priority

1. [38]

   On 15 June 2018, Mr Kassem provided cheque directions to Mr Werry and Summer Lawyers in anticipation of settlement at 3.00 pm that day. Mr Werry replied, advising settlement was contingent on inter alia “Execution by the Vendor of the Deed of Priority for the vendor finance loan”. The scheduled settlement came and went. Later that afternoon, Summer Lawyers forwarded a Deed of Priority between the lenders and the vendor to Mr Kassem. These emails were not copied to the Mr Stratford or Mr Lyons. A copy of the proposed deed was not in evidence.

2. [39]

   Later that evening, Mr Stratford sent an email to Mr Kassem advising, “Our client will only settle on Monday if all monies payable, including the additional sum of $50,000 that your client agreed to pay, are handed over”. Later still, Mr Stratford provided an Amended Settlement Statement (“the only amendment is to the interest payable”) and amended cheque directions. Mr Stratford advised that the documents were submitted strictly on a “without prejudice” basis, with the plaintiff reserving its right not to complete the contract and to terminate. Attached to Mr Stratford’s email was a letter confirming settlement was to occur at 3.30 pm on 18 June 2018 and setting out cheque directions. The cheques totalled $18,761,066.07. In addition, the letter stated, “Please also provide a further Bank Cheque in favour of [the vendor] in the sum of $50,000” (emphasis in original). The Amended Settlement Statement noted that the sale price of the land was $17.3 million less the deposit and adjustments.

3. [40]

   The amended cheque directions largely conformed with those provided by Mr Kassem on 15 June 2018, referred to at [38]. However, the cheques required on settlement now exceeded the net loan funds, after deduction of pre-paid interest and fees referred to at [36]: there was now a gap of some $111,000.

4. [41]

   On Sunday, 17 June 2018, Mr Kassem emailed Summer Lawyers, requesting an amendment to the proposed Deed of Priority to record new details for the second mortgagee, being LC Corporate Restructuring Pty Ltd as trustee for the Wetherill Park Unit Trust. It appears that the identity of the trustee had been uncertain. Later that day, Summer Lawyers provided an amended deed.

5. [42]

   On Monday, 18 June 2018, Summer Lawyers forwarded revised mortgages to Mr Kassem for execution by his client. The revised documents concerned a construction loan advance of $31.5 million. Soon afterwards, Mr Werry emailed Summer Lawyers advising that there was no possibility of completing the purchase that day. Mr Werry requested that the plaintiff be added as a party to the Deed of Priority, together with the following clause:

6. [43]

   Mr Bryers promptly replied:

7. [44]

   Mr Werry pressed for the amendment to the Deed of Priority. Later on 18 June 2018, Mr Kassem advised Summer Lawyers and Mr Werry by email:

8. [45]

   Thus it would appear that the reason why the secured lenders wished the plaintiff to be a party to the Deed of Priority was to vary the contract of sale so that Halecret had no liability in respect of the agreements for lease with Woolworths and Hungry Jack’s which – by reason of the purchaser now pursuing a different type of development – would likely become a real exposure. The plaintiff was not ultimately a party to the deed. In evidence is an undated Deed of Priority between the mortgagor (defined as the defendant, Halecret, Platinum Trading and Mr Bryers), first mortgagees BSC2 and SME2, second mortgagee LC Corporate as trustee for Wetherill Park Unit Trust, and third mortgagee Weriton Finance No. 2 Pty Ltd. The recitals to the deed noted that the second mortgagee had “previously provided or will be providing funds to the Borrower, secured by the Second Mortgagee Security” and it had been agreed that BSC2 and SME2 would take priority over the second mortgagee. The Second Mortgagee Priority Amount was $3.94 million.

9. [46]

   The deed appears to have been executed in conjunction with the proposed additional loan by BSC2 and SME2 of $31.5 million construction finance. As I read the document, it anticipated that the second mortgagee, LC Corporate as trustee for Wetherill Park Unit Trust, had lent, or would lend, $3.94 million to the defendant, Halecret, Platinum Trading and Mr Bryers, to be secured over the land, but in respect of which it sat behind BSC2 and SME2 as to $53.66 million. The Deed of Priority contained an entire agreement clause: clause 11.14. (LC Corporate has since been deregistered.)

Vendor finance

1. [47]

   Completion of the sale did not occur on 18 June 2018. According to Mr Stratford, however, the plaintiff agreed to provide vendor finance to enable the sale to complete. As mentioned at [40], a gap had emerged between the loan funds available and the funds required on settlement. On 19 June 2018, a Mortgage Linked Loan Agreement was prepared whereby the plaintiff agreed to lend $115,000 to Halecret and the defendant, to be repaid on 31 July 2018 for a fixed interest fee of $10,000. The loan was to be secured by a mortgage over the Wetherill Park property. The agreement was executed by Mr Lyons for the vendor. Mr Bryers signed the agreement as guarantor and on behalf of Halecret and the defendant.

2. [48]

   As completion continued to be delayed, the principal sum of $115,000 on the Mortgage Linked Loan Agreement was crossed out and, in handwriting, $127,853 was recorded. The alteration is explained in an email from Mr Kasseem to Mr Stratford on the afternoon of 20 June 2018:

3. [49]

   Completion finally occurred at 3.30 pm on 20 June 2018. On settlement, the total amount due to the plaintiff was $18,820,052.37, being the adjusted amount calculated in the Amended Settlement Sheet of 15 June 2018 of $18,761,066.07 together with two days’ interest of $8,986.30 and the agreed adjustment in favour of the defendant for $50,000. On settlement, Halecret handed over two cheques totalling $18,692,199. The shortfall between the funds due to the vendor and the funds provided by the purchaser, being $127,852.37, was funded by vendor finance as documented in the Mortgage Linked Loan Agreement.

4. [50]

   On 21 June 2018, Mr Stratford sent an email to Mr Kassem, thanking him for assistance in settling the matter and attaching a signed copy of the Mortgage Linked Loan Agreement.

5. [51]

   Mr Kassem promptly replied, thanking Mr Stratford for his patience and effort to complete the transaction.

6. [52]

   Shortly after settlement, Mr Stratford lodged a caveat on the title of the land in accordance with the terms of the Mortgage Linked Loan Agreement. The caveat recorded that the plaintiff claimed to have a charge over the land pursuant to the loan agreement, which secured a loan of $127,853.

A fraud?

1. [53]

   In these proceedings, Mr Cacciola annexed Mr Stratford’s letter of 15 June 2018 to his affidavit but attached a different settlement adjustment sheet, which referred to a purchase price of $20.3 million. Mr Stratford said that the settlement adjustment sheet did not originate from his office and was not attached to his letter of 15 June 2018. Rather, he deposed:

2. [54]

   As I understood it, Mr Werry said that he was deceived by Mr Bryers into believing that the purchase price of the land was $3 million more than, in fact, it was, and that the additional $3 million was being provided by the plaintiff as vendor finance. Mr Bryers’ representation was said to be made, at least in part, by the Deed of Priority.

3. [55]

   As mentioned, the details contained in the Deed of Priority in respect of the second mortgagee do not indicate any link with the plaintiff. Mr Werry said that Mr Bryers represented to him that the plaintiff was the majority unitholder in the Wetherill Park Unit Trust. Mr Werry did not know whether the representation was true or not. Mr Werry said the Deed of Priority represented that $3.94 million was being provided by LC Corporate, which was the alter ego for the plaintiff. “So I, I suggest we’re being deceived by this document”. Mr Werry said Mr Bryers had thereby misrepresented that the plaintiff was providing vendor finance. In cross-examination of Mr Werry:

4. [56]

   Mr Werry agreed that he had no communications directly with the plaintiff before BSC2 and SME2 advanced their loans to the defendant. Nonetheless, Mr Werry maintained the view that the plaintiff was involved in a deception.

5. [57]

   The suggestion that the plaintiff was somehow involved in deceiving BSC2 and SME2 into advancing funds to the defendant which it would not otherwise have advanced was difficult to follow, on the evidence in these proceedings at least. I presume that this accounted for an amendment to the defendant’s grounds of opposition, on 15 June 2020, by deleting a contention that the Mortgage Linked Loan Agreement was unenforceable by reason of the plaintiff’s misleading and deceptive conduct in unlawfully and artificially inflating the sale price of the property by $3 million by a side deed and falsely representing that vendor finance was required to enable the defendant to defeat the purchase at that artificially inflated price. I infer that the defendant’s legal representatives rightly apprehended that they did not have a proper basis to advance such a contention in these proceedings.

6. [58]

   Assuming that Mr Bryers misled Mr Werry as to the purchase price of the land, there was no evidence in these proceedings that the plaintiff was in any way involved in such a misrepresentation and, indeed, evidence to the contrary. Mr Stratford’s description of the circumstances in which the vendor finance came about was perfectly straightforward and unremarkable. His evidence was not challenged; Mr Stratford was not required for cross-examination. Mr Lyons, a director of the plaintiff, gave evidence that the monies the subject of the default judgment were due and payable and there was no genuine dispute as to the debt. Mr Lyons was not required for cross-examination either. It may be that, in the District Court proceedings, Mr Werry can marshall additional evidence which supports a contention that the plaintiff was somehow involved in his deception but, on the basis of the evidence in these proceedings, the defence and cross-claim make serious allegations without the necessary factual substratum.

Defendant defaults

1. [59]

   On 31 July 2018, the defendant did not repay the vendor finance under the Mortgage Linked Loan Agreement. Interest began to accrue.

2. [60]

   On 17 September 2018, the plaintiff provided its consent to the registration of various dealings on the title of the land, including a transfer from the plaintiff to Halecret, a further transfer from Halecret to the defendant, and three mortgages in favour of BSC2 and SME2. On 18 September 2018, the defendant executed three mortgages over the land in favour of BSC2 and SME2. The mortgages secured $12.16 million, $10 million and $31.5 million respectively, the latter being a one year loan to fund construction. These mortgages were registered. Mr Cacciola said that the delay in registering the transfer and mortgages was due to a tax issue.

3. [61]

   On 24 September 2018, a deed of variation was executed in respect of the Mortgage Linked Loan Agreement by the plaintiff, Halecret, the defendant and Mr Bryers, extending the time for repayment of the vendor finance to 30 September 2018, with 15% per annum interest to be charged in addition to the fixed interest fee of $10,000. On 28 September 2018, a further deed of variation was executed, extending the term of the loan to 31 October 2018, to be repaid by weekly instalments of $15,000 commencing on 5 October 2018. The weekly instalments were not paid and, on 15 October 2018, Mr Stratford wrote to Mr Kassem advising that Halecret and the defendant were in default. Mr Stratford advised that he was instructed to commence proceedings against the borrowers and the guarantor for recovery of monies due to the plaintiff. By October 2018, the defendant was also in default of the two initial loans from BSC2 and SME2, and incurring default interest of 4% per month.

4. [62]

   On 6 November 2018, the plaintiff lodged a second caveat on the land, which claimed the same estate or interest as the earlier caveat, but prohibited the recording of any dealing other than a plan affecting the estate or interest claimed by the caveator. On 7 November 2018, Mr Stratford sent a follow up letter to Mr Kassem, noting that the plaintiff had “been attempting to contact your client with a view to confirming when the loan will be repaid” but had received no response. A further follow up letter was sent on 19 November 2018.

5. [63]

   On 3 December 2018, Mr Kassem wrote to Mr Stratford seeking information about the property, but made no reference to the demands for payment. On 5 December 2018, Mr Stratford simply replied that he was instructed to commence proceedings for default under the Mortgage Linked Loan Agreement.

6. [64]

   It appears that Mr Bryers was now seeking to raise alternate construction finance. According to a deed of settlement referred to at [108], on about 4 January 2019, Magnolia Capital Pty Ltd issued a term sheet to the defendant, offering to provide finance of some $35.9 million. The offer was accepted.

7. [65]

   It was apparent during the hearing that Mr Werry and Mr Bryers had a significant falling out. On 22 January 2019, Mr Bryers ceased to be a director of the defendant and was replaced by Mr Cacciola. According to Mr Cacciola, Mr Bryers was removed at the request of BSC2. This was effected by BSC2 exercising its power of attorney for Platinum Trading, the sole shareholder of the defendant. BSC2 was also entitled, by reason of a charge over the assets of Platinum Trading, to have the shares in the defendant transferred to BSC2. However, Mr Werry chose not to exercise this right as it would trigger a substantial stamp duty impost.

8. [66]

   Mr Cacciola said that, on his appointment as director of the defendant, he had an agreement with the secured lenders that “we are here to deliver the project and they will not charge default interest”. Mr Cacciola would be paid a director’s fee and, while interest was not waived, the lenders would take their profit out of the project. The lenders, however, reserved their rights to pursue Mr Bryers as guarantor for the full amount.

9. [67]

   On 30 January 2019, Magnolia Capital withdrew its offer of finance as Mr Bryers had resigned without reference to Magnolia Capital. Magnolia Capital lodged a caveat over the Wetherill Park property to secure its mortgage broker success fee. A caveat was also lodged by Lumley Finance and Loans Pty Ltd, apparently for similar reasons.

District Court proceedings

1. [68]

   On 5 February 2019, the defendant’s registered office changed from Glebe to an address in Pitt Street, Sydney, being the office of Mr Werry. Six days later, on 11 February 2019, the plaintiff filed a statement of claim in the District Court, suing Halecret, the defendant and Mr Bryers for monies owing under the Mortgage Linked Loan Agreement as amended by the deeds of variation. The amount claimed was $127,853 plus the fixed interest amount of $10,000 plus interest which had since accrued. Mr Lyons verified the statement of claim, confirming that he believed that the allegations of fact contained in the statement of claim were true.

2. [69]

   The defendant’s address was identified in the statement of claim as the Glebe address. The plaintiff’s legal representative was nominated on the statement of claim as Mr Doherty. In cross-examination, Mr Doherty said that, when the proceedings were commenced, he ascertained the registered office of the defendant either from a company extract or documents which had been used for the purposes of preparing the statement of claim. On 21 February 2019, Mr Doherty served the statement of claim by posting it to the Glebe address.

3. [70]

   On 1 April 2019, Mr Doherty swore an affidavit of service, deposing that he had served the defendant by posting the statement of claim to the company’s registered office in Glebe. It is self-evident from the affidavit of service that, when Mr Doherty swore the affidavit of service, he held the belief that the Glebe address was, in fact, the registered office of the defendant. It was not suggested to Mr Doherty that he has sworn a false affidavit of service. Rather, Mr Doherty was asked:

4. [71]

   I have no reason to doubt Mr Doherty’s evidence. As the registered office of the defendant had changed shortly before the statement of claim was prepared and served, service on the Glebe address rather than Mr Werry’s office was an innocent oversight.

5. [72]

   On 1 April 2019, Mr Doherty’s affidavit of service was filed with the District Court. On 2 April 2019, judgment was entered against Halecret, the defendant and Mr Bryers in favour of the plaintiff in the sum of $153,810.16. Halecret was deregistered soon after.

Potential further funding

1. [73]

   It is apparent that efforts continued to be made to raise additional funds for the development. Those efforts were now being made by Mr Werry and Mr Cacciola. As part of these efforts, the defendant sought to remove caveats on title so that further lenders could obtain security for their loans. To this end, on 4 June 2019, Mr Kassem sent an email to Mr Stratford, advising that he was retained by the defendant, noting that the plaintiff had registered two caveats in respect of the same interest, and requested that one be withdrawn. No mention was made of the letters of demand or the interest sought to be secured by the caveats.

2. [74]

   In July 2019, Mr Werry received an offer of finance for the defendant, being $7.421 million from CVS Lane Solutions Pty Ltd, to be secured by a first mortgage over the land. The loan was to be guaranteed by Mr Werry and Platinum Trading (a company still owned by Mr Bryers but of which Mr Werry was now sole director). In order to secure the loan, the defendant was required to demonstrate that it had contributed a minimum amount of equity of $6.748 million and had the capacity to meet holding and any development costs in respect of the property for the term of the loan, being 15 months. Mr Lakomy agreed that the defendant was not in a position to contribute equity and, if the funds were provided by the secured lenders, then chances were that would be by way of a loan rather than equity.

3. [75]

   On 23 July 2019, Mr Kassem again emailed Mr Stratford in respect of the two caveats lodged by the plaintiff over the property. Mr Kassem advised:

4. [76]

   The plaintiff provided a copy of the judgment by annexing it to a statutory demand. The orders made by the District Court, as attached to the demand, noted the address of the defendants as being the Glebe address. The demand was delivered on 1 August 2019. No application was made to set aside the statutory demand.

5. [77]

   The defendant was also endeavouring to persuade Magnolia Capital to remove its caveat in order to obtain funding from CVS Lane. On 7 August 2019, Summer Lawyers wrote to the caveator’s lawyers, on Mr Werry’s instructions, requesting that the caveat be withdrawn for various reasons including:

These proceedings

1. [78]

   On 15 October 2019, the plaintiff filed an originating process seeking to wind up the defendant on the grounds of insolvency, relying on its failure to comply with the statutory demand. The originating process was served and the defendant was directed to serve grounds of opposition by 21 November 2019 and any affidavits by 12 December 2019.

2. [79]

   On 11 November 2019, BSC2 deposited $160,000 into Summer Lawyers’ trust account for the defendant to cover the plaintiff’s claim plus costs. On 12 November 2019, a further $22,984 was deposited. On 9 December 2019, the defendant retained Mr Lakomy to prepare a solvency report. In evidence are financial statements and a tax return for the defendant for the year ended 30 June 2019. It is likely that the financial statements were prepared at this time. Mr Cacciola said that no tax returns have been lodged.

3. [80]

   In the 2019 financial year, the defendant sustained a loss of $472,968 and had net assets of -$4,171,968. Oddly, interest accrued but unpaid was not included in the accounts. Further, although – given the company’s default under its loans – the borrowings were due and payable, the borrowings were nonetheless recorded as non-current liabilities. The notes to the financial statements reported “Other Creditors” of $153,810, in respect of which Note 11 to the financial statements advised:

4. [81]

   In addition, a balance sheet was prepared as at 10 December 2019. Also on 10 December 2019, Mr Werry sent an email to Mr Cacciola:

5. [82]

   By further email sent shortly afterwards, Mr Werry outlined a claim for misleading and deceptive conduct against the defendant, suggesting that BSC2 and SME2 were deceived by Mr Bryers and the company into believing that Halecret was purchasing the land for $19.9 million, increased to $20.3 million, and, on that basis, agreed to lend $18.7 million on the proviso that the plaintiff provided $3.94 million by way of vendor finance for the shortfall in the purchase price. According to Mr Werry, Mr Bryers provided a deed prepared by Mr Kassem, said to be an agreement for vendor finance for $3.94 million (which should now be understood as a reference to the Deed of Priority). The mortgagees demanded payment of $3 million lost as a consequence of the deception, and suggested that Mr Cacciola pursue claims for contribution from all parties who participated in the deception. (Mr Cacciola agreed that he was not aware of the deed referred to by Mr Werry and did not ask Mr Werry for it, although he understood it to be a crucial document in Mr Werry’s claim).

6. [83]

   On 12 December 2019, a Deed of Variation was executed by the defendant (Mr Cacciola), Platinum Trading (Mr Werry), BSC2 (Mr Werry) and SME2 (director, John Dykes). Other parties said to be affected by the Deed of Variation – Halecret and Mr Bryers – did not execute the deed (although Halecret had been de-registered). The deed sought to vary the loans and mortgages by substituting a new schedule to each document and provided:

7. [84]

   The Deed of Variation contained the following special conditions:

8. [85]

   Mr Werry agreed that he gave instructions to prepare the deed to show that the defendant was solvent. Mr Werry agreed that the purpose of the document was for use in these proceedings. Mr Werry added that the deed did not define all that the secured lenders were prepared to do; their support may extend beyond the deed of variation. Mr Werry agreed that he would decide whether debts, referred to in Special Condition 1, were in dispute and should be paid. Mr Cacciola denied that the Deed of Variation signed on 12 December 2019 – the day before Mr Lakomy’s solvency report – was prepared for the purposes of assisting the defendant in these proceedings, but appeared uncomfortable giving this unlikely answer.

9. [86]

   Also on 12 December 2019, Mr Werry provided Mr Lakomy with background in relation to the defendant and outlined his plans to develop the site. In respect of the debt the subject of the statutory demand, Mr Werry advised:

10. [87]

    On 13 December 2019, Mr Lakomy provided a solvency report, concluding that the defendant was solvent.

Application to set aside default judgment

1. [88]

   On 17 December 2019, the defendant’s solicitors sought the plaintiff’s consent to set aside the default judgment and to dismiss the winding up application with no order as to costs. In that event, Summer Lawyers proposed to continue to hold $182,934 in its trust account until order of the Court or resolution of the dispute. The proposal was rejected.

2. [89]

   Mr Doherty could not recall whether he became aware that the statement of claim had been served on the wrong address on receipt of the letter of 17 December 2019, or whether he became aware before or after the letter. The following exchange occurred in cross-examination:

3. [90]

   On 18 February 2020, Mr Werry sent an email to Mr Lakomy and counsel regarding the defendant’s plans to repay the secured loans, noting:

4. [91]

   On 27 March 2020, presumably in anticipation of the default judgment being set aside, the plaintiff filed a motion in the District Court seeking summary judgment in the amount of $177,788.77. On 6 April 2020, Judge Hatzistergos set aside the default judgment but declined to order summary judgment as he was not satisfied that there was no triable issue: Wetherill Park Plaza Pty Ltd v Halecret Holdings Pty Ltd (District Court (NSW), Hatzistergos DCJ, 6 April 2020, unrep).

5. [92]

   On 15 April 2020, the defendant filed an amended interlocutory process in these proceedings, contending that these proceedings should be dismissed on the basis that it is an abuse of process for the plaintiff to maintain the proceedings.

6. [93]

   On 4 May 2020, the defendant filed a cross-claim in the District Court seeking $3 million, but abandoning any award above $750,000. Mr Stratford does not believe that the defendant has a legitimate or viable defence or cross-claim in the District Court proceedings.

FIRST GROUND: ABUSE OF PROCESS

1. [94]

   The defendant does not suggest that the commencement of these proceedings was an abuse of process but, rather, the continuation of these proceedings once default judgment was set aside. I have reviewed the principles at [7]-[15]. Here, the defendant did not apply to set aside the statutory demand in the 21-day period. As noted at [76], the statutory demand attached a copy of the District Court orders, which recorded the address of the defendant as being the Glebe address. A review of the District Court orders attached to the demand would have revealed that the statement of claim had likely been served at that address. Self-evidently, Mr Werry must have realised that the statement of claim had not been served at the Pitt Street address. However, no issue was taken with the plaintiff in respect of service of the statement of claim at the time, nor was any application made to set aside the demand. Whilst the defendant, in these proceedings, initially sought leave under section 459S of the Corporations Act, that application was abandoned. As such, the presumption of insolvency has arisen and the focus of the Court’s attention is on whether the defendant is in fact solvent. The fact that the default judgment has since been set aside does not divert this focus.

2. [95]

   As to the defendant’s submission that, as the default judgment had been set aside, the plaintiff is now a contingent creditor for the purposes of section 459P(1)(b) of the Corporations Act, this proposition was described by Black J in New View Windows as “plainly incorrect”, at [7]:

3. [96]

   Further, Black J held that the plaintiff’s status as a creditor did not depend upon the existence of a default judgment but from the supply of goods to the defendant, for which it had not been paid. Whilst, in New View Windows, the defendant suggested that it had a claim which could be brought against the plaintiff, at [8]:

4. [97]

   The same can be said in this case. As I understood it, there was no real suggestion that the plaintiff did not provide the vendor finance documented in the Mortgage Linked Loan Agreement, or that it had not been repaid. As mentioned at [75], when the defendant’s solicitor, Mr Kassem, became aware of the default judgment in July 2019, he did not appear to quibble with the plaintiff’s entitlement to the judgment sum. Mr Kassem, of course, had been involved in the transaction at the time when the vendor finance was provided: see [47]-[51]. Nor, for that matter, were Mr Cacciola or Mr Werry in a position to contend otherwise as the provision of vendor finance under the Mortgage Linked Loan Agreement pre-dated Mr Cacciola’s appointment as a director of the defendant; nor was there any suggestion that Mr Werry had any dealings with the plaintiff in respect of it either. When the defendant applied to set aside the default judgment – seven months after becoming aware of it – the application appears to have been prompted by the defendant’s efforts, in these proceedings, to establish solvency: see [90].

5. [98]

   The defendant has not established that the winding-up application was brought for a purpose foreign to the statutory regime. The plaintiff’s solicitor denied that the reason why, on becoming aware that the statement of claim had been served on the wrong address, the plaintiff persisted with the winding-up application was to force the defendant to pay a disputed debt. Mr Doherty was not pressed on his answer, which I accept: see [89]. Nor, consistent with the authorities, was the plaintiff obliged to desist in prosecuting the winding-up application in circumstances where the defendant had neither sought to set aside the statutory demand nor obtained leave under section 459S.

6. [99]

   Rather, adopting Black J’s assessment in New View Windows, the plaintiff brought the proceedings because it contended that the defendant owed a substantial debt to it, which had been due and payable for a substantial period and had not been paid. The plaintiff sought to invoke the winding-up regime by which the defendant’s activities would be ended, its assets marshalled and the claims of its creditors ascertained and payments made. “That, it seems to me, does not involve an abuse of process, but, instead, the use of the winding up regime for the purpose for which it exists”: New View Windows at [13]. Thus, the defendant’s first ground of opposition fails.

PROGRESSION TOWARD HEARING

1. [100]

   On 5 May 2020, the plaintiff requested that the defendant agree to the monies held in Summer Lawyers’ trust account being paid into the District Court pending determination of the proceedings.

Another potential financier

1. [101]

   On 12 May 2020, Stacks Managed Investments Ltd made an offer of finance to the defendant of $5 million for a two year term, to be guaranteed by Mr Werry, SME2 and Bridge Street Capital Pty Ltd (another company associated with Mr Werry). The purpose of the loan was to partially repay the loans from SME2 and BSC2. The repayment strategy noted:

2. [102]

   On 26 May 2020, the plaintiff’s solicitors wrote to the defendant’s solicitors again in respect of the request that the trust monies be paid into Court, nothing that the transfer had not occurred and the defendant had given no binding commitment to transfer the monies. Thus, the plaintiff would be submitting that such funds were not held in good faith, were not under the control or direction of the defendant, and should not be taken into account in determining the solvency of the defendant.

3. [103]

   On 5 June 2020, Mr Werry sent an email to Mr Cacciola confirming the ongoing financial support of BSC2 and SME2 and suggesting that the lenders were making good progress with the development project. A further solvency report was provided by Mr Lakomy on 9 June 2020, opining that the defendant was solvent by reason of this financial support. Mr Werry also swore an affidavit updating the financial position of the secured lenders and repeating their support. On 15 June 2020, Mr Cacciola swore a further affidavit saying that the development was now likely to take longer than previously thought: although approval had been obtained for Stage 1 of the development in February 2020, the company was seeking to modify the development consent for Stage 2. A more favourable quotation had been obtained from a builder. It was expected that the project would be completed by August 2021 and, by October 2021, the loans from BSC2 and SME2 would be repaid.

4. [104]

   On 22 June 2020, Stacks Finance followed up its offer with Mr Werry, who advised that he was endeavouring to have caveats removed from title before proceeding with the loan. Mr Werry enquired whether Stacks Finance would proceed with the facility if the caveators consented to registration of its first mortgage, but was told that the caveats needed to be removed. Mr Lakomy agreed it was speculative as to whether Stack Finance’s offer of finance could be availed of.

5. [105]

   On 30 June 2020, the defendant entered into a contract with an engineering firm to commence preliminary development activities. The defendant agreed to pay fees of $273,500 for Stage 1 and $167,250 for Stage 2 of the development, covering structural engineers, civil engineers, building services, design services and various consultants. In addition to consultants, the construction cost – as referred to in the contract and also summarised in a Feasibility Analysis prepared by Mr Werry in May 2020 – was some $20.5 million.

6. [106]

   In evidence is a letter dated 6 August 2020 from SME2 as trustee for Saddleback Mountain Estates Unit Trust. The letter is from Mr Dykes, but unsigned. The font and writing style is that of Mr Werry, who agreed that he wrote the letter “after discussion with Mr Dykes”. The letter stated that SME2 was prepared to extend its loans to 31 October 2021, “noting that you have made good progress with the development of the property at Wetherill Park and resolving legal issues”. Having been advised by Mr Werry that the defendant required $880,538.40 to fund expenses up to 31 October 2020, SME2 agreed to retain cash reserves of $1 million in its bank account to cover these costs and any other incidental expenses.

7. [107]

   On 11 August 2020, Mr Cacciola swore his fifth affidavit, noting that the company’s activities were limited to holding the property and preliminary works in anticipation of carrying out building works and selling industrial units. Mr Cacciola attached the recent communications from Mr Dykes and Mr Werry confirming their financial support. Financial statements for the 2020 financial year were attached and explained. The company was said to have long term plans for funding its activities and those plans are not “set in stone. I expect to consider the long term funding plan of the Defendant in more detail after the determination of these Court proceedings”. In cross-examination, Mr Cacciola said that he was negotiating with construction financiers to obtain finance on less expensive terms than that provided by BSC2 and SME2. Mr Werry also swore his fourth affidavit, noting that Bridge Street Capital and BSC2 continued to provide financial support to the defendant. On 12 August 2020, Mr Lakomy prepared his fourth solvency report, again opining that the defendant was solvent under the cash flow test and balance sheet test, in particular, having regard to the financial support of BSC2 and SME2.

8. [108]

   On 28 August 2020, the defendant entered into a deed of settlement and release with Magnolia Capital: the defendant agreed to pay Magnolia Capital $50,000 and, in return, Magnolia Capital agreed to remove its caveat.

9. [109]

   On 2 September 2020, mid-hearing, a further deed of variation was signed, in an effort to address criticisms of the regime identified by the plaintiff’s senior counsel. As ultimately framed, the suspension of interest is now framed in the following terms (clause 2(d)):

10. [110]

    The further deed of variation contains the following special conditions:

11. [111]

    As I understand Special Condition 1, the secured lenders now agree to pay all of the defendant’s debts without the previous condition, “subject to such debts not being in dispute” (see [84] above). The new pre-condition is that the defendant must request BSC2 and SME2 to pay the debt. As Mr Cacciola appears to be acting at all times in accordance with the instructions of Mr Werry, for practical purposes there appears to be little difference between Special Condition 1 in this and the previous version of the deed of variation.

Non-payment of a creditor

1. [112]

   On 1 September 2020, the hearing began. On 2 September 2020, the defendant tendered an email chain between TFH Hire and Mr Werry in respect of settlement of a debt. The email chain comprised TFH Hire’s acceptance, on 22 July 2020, of the amount of $1,000 and Mr Werry’s email of 31 August 2020 noting that the monies had been paid. The intervening emails were omitted from the email chain tendered. The full story is as follows.

2. [113]

   On 29 April 2020, TFH Hire sent a final notice for payment to Mr Cacciola, seeking $5,819.73 owed by the defendant. On 5 May 2020, Mr Werry replied, describing himself as “the inhouse Legal Counsel for [the defendant]”. Mr Werry added “Corporate Legal Counsel” to his usual email signature, explaining that the defendant was his client. I found this explanation difficult to accept. In the email itself, Mr Werry suggested that TFH Hire’s claim was misguided inter alia as the invoices rendered by TFH Hire were addressed to an address in Glebe. Some of the allegations in Mr Werry’s email were unfortunate. On 1 July 2020, TFH Hire replied comprehensively, answering Mr Werry’s queries and seeking payment of the outstanding debt within seven days. Mr Werry made an offer that BSC2 would pay $1,000 in full and final settlement of the claim, advising that winding up proceedings were on foot such that if the offer was rejected, no funds would be available to unsecured creditors. TFH Hire asked Mr Werry to increase his offer to $2,200 “in order for us to break even”. On 16 July 2020, Mr Werry replied that there was no scope to increase the offer. On 22 July 2020, TFH Hire accepted Mr Werry’s offer of $1,000 (this was the first email in the chain tendered).

3. [114]

   On 6 August 2020, TFH Hire asked when the monies would be paid. On 18 August 2020, Mr Werry advised that he was arranging payment but Bridge Street Capital required an assignment of the debt to Edessa Holdings Pty Ltd in consideration for the $1,000 payment. TFH Hire requested a copy of the draft deed of assignment for consideration, which was supplied. On 19 August 2020, TFH Hire advised that it was not interested in assigning the debt as it would be more beneficial to pursue the total amount owing through a debt collector. On 19 August 2020, Dynamic Commercial Collections wrote to the defendant on behalf of TFH Hire, demanding $7,431.18 within 14 days.

4. [115]

   On 25 August 2020, Mr Cacciola asked TFH Hire whether it would agree to payment of $1,100 the next day, with no assignment. TFH Hire replied, “We advised your legal representative (Graham Werry) that we are pursuing the full value, which will include additional charges for pursuit through a collection agency”. At 10.00 pm on 31 August 2020, Mr Werry sent an email to TFH Hire advising, “Pursuant to your acceptance of the offer of settlement an amount of $1,000 has been paid to your account …”, and attached confirmation of payment (this was the second email in the chain tendered). The hearing before me began the next day. On 1 September 2020, TFH Hire’s debt collection agency replied to Mr Werry, noting that the offer of $1,000 had been rejected and was not accepted as full and final settlement of the debt owing. Rather the remaining balance was demanded in accordance with the letter of demand.

5. [116]

   On 2 September 2020, the defendant tendered an email chain comprising only TFH Hire’s email of 22 July 2020 (accepting the settlement offer of $1,000) and Mr Werry’s email of 31 August 2020 (attaching confirmation of payment) without the intervening nor subsequent emails concerning the proposed assignment and TFH Hire’s decision to pursue the full amount using a collection agency. Mr Werry agreed that the abbreviated email exchange was tendered to establish that there was no dispute with this particular creditor and the issue had been resolved.

6. [117]

   Mr Werry’s explanation as to why he had omitted the intervening emails was unsatisfactory. Mr Werry maintained that TFH Hire was bound by its acceptance of his offer to pay $1,000 notwithstanding that he did not pay the money but instead sought to re-negotiate the deal by requiring that the debt be assigned to Edessa Holding. Whilst a lay person may hold such a view, I expect a solicitor would more likely have appreciated that Mr Werry’s conduct was either a counter offer or repudiated the settlement agreement. Either way, TFH Hire was likely entitled to proceed on the basis that the settlement agreement was no longer effective. Presumably, the abbreviated email chain was tendered to support the defendant’s contention that the defendant was solvent, including because it was able to pay its creditors with the support of the secured lenders. Without the intervening emails, such an abbreviated version of the communications between TFH Hire was apt to give a misleading picture. This should have been, and likely was, obvious to Mr Werry.

DEFENDANT’S FINANCIAL POSITION

1. [118]

   As to the financial position of the defendant, Mr Cacciola appeared to have no first hand knowledge; he relied on Mr Werry to attend to that side of the company’s affairs. According to Mr Cacciola, the books and records of the company were held by Mr Werry, who was responsible for arranging the preparation of accounts by an accountant used by Mr Werry and BSC2 and for “all our transactions”. Mr Lakomy never spoke to Mr Cacciola but obtained initial information from Mr Werry and liaised with Mr Werry for three or four days prior to his first solvency report. For his part, Mr Werry said he could not recall whether he reviewed the accounts of the company to satisfy himself that the accounts were correct. I consider this evidence to be unlikely as it was clear that Mr Werry had devoted significant industry to satisfying the Court that the defendant was solvent and would have appreciated that the accounts would come under significant scrutiny.

2. [119]

   Mr Cacciola agreed that, apart from the prepaid four months interest, the defendant had not paid any interest on the loan from BSC2 and SME2, such that default interest at 48% per annum was running. Mr Cacciola did not know how much interest the company owed to its secured lenders, which appeared to be a critical piece of information in relation to the financial position of a company of which he was a director. Mr Cacciola explained, “There’s been no discussion about the interest accruing. It’s been [about] delivering the project and finishing the project”.

3. [120]

   Mr Cacciola agreed that Mr Werry approved and paid invoices as the defendant could not itself pay. In evidence were reconciliation schedules maintained by Mr Werry – the most recent being 5 August 2020 – which detailed the receipts and expenses in respect of the defendant. Some $2.1 million had been received - mainly tax refunds - and some $2.9 million had been expended on interest, property holding costs and development expenses. It also appears that a payment plan had been entered into with NSW Revenue, such that Bridge Street Capital was paying the defendant’s land tax obligations by instalments. As I understood it, the reconciliation schedule did not include any bills received by the defendant which Mr Werry had not paid. As such, the reconciliation schedule did not include the defendant’s creditors who, for whatever reason, had not been paid.

4. [121]

   The most recent financial statements for the defendant, being for the 2020 financial year, were signed by Mr Cacciola on 11 August 2020. The notes to the accounts recorded that the financial statements did not comply with any Australian Accounting Standards unless otherwise stated. The accounts were not audited. Mr Lakomy assumed the unaudited accounts were correct. According to the financial statements, the company lost $268,235 in the 2020 financial year, bringing accumulated losses to $741,203. The company had negative total equity of $4,440,203.

Assets

1. [122]

   As to current assets, three were listed. First, the funds held by Summer Lawyers in its trust account, comprising $182,984. I do not regard the funds held in Summer Lawyers’ trust accounts as an asset of the defendant. The funds were paid by BSC2. The funds do not belong to the defendant and Mr Werry agreed that the monies held in Summer Lawyers’ trust accounts were certainly not security for the monies sought by the plaintiff but to demonstrate the capability of meeting that obligation if the plaintiff was successful in the District Court. Mr Werry said that he intended to leave the funds there for that purpose, to demonstrate capability of payment.

2. [123]

   The terms on which the monies are held in the trust account have remained equivocal over time. The plaintiff’s request that the monies be paid into Court has been rebuffed. The funds having been provided by BSC2, and in the absence of any clear, unequivocal, irrevocable direction being given by that company to pay the monies to the defendant, should it be successful in the District Court proceedings, I place no weight on the placement of those funds with Summer Lawyers; I expect the funds would be immediately withdrawn should a liquidator be appointed to the company. The inclusion of this amount in the balance sheet for the defendant is nothing but window dressing.

3. [124]

   Second, a prospective claim against Mr Kassem for $201,000 which, at that point in time, had not travelled beyond a letter of demand, according to which, Mr Kassem had been retained by the defendant – on discovery of Mr Bryers’ misrepresentation of the purchase price of the land – to obtain a refund of excess stamp duty paid on the transfer; on receipt of the refund, Mr Kassem declined to remit the refund to the defendant but disbursed it in accordance with instructions given by those standing behind Halecret. I accept that the defendant may have a chose in action; whether the asset is a current asset, or has a value of essentially the full amount of the defendant’s claim, is less clear. Mr Lakomy did not review receivables to assess recoverability, which Mr Rossetto suggested should have been done.

4. [125]

   Third, the land was recorded as inventory, at a value of $16,075,985 together with capitalised costs and work in progress, totalling $18,136,230. When asked why Mr Cacciola had not used the May 2018 valuation of $13 to $15 million, he said he had applied the “market uplift” apparent from “RP Data”, then suggested that the $13 to $15 million valuation was based upon a mortgagee in possession, which would lose the benefit of any contracts of sale already on foot (although the valuation itself does not appear to have been prepared on that basis).

5. [126]

   Mr Werry said that he provided the land valuation, which was his estimate of value based on a feasibility analysis. That seems more likely, as the value of $16,075,985 roughly corresponds with the most recent feasibility analysis in evidence, prepared in May 2020. Mr Werry prepared the document, the purpose of which was to ascertain what the value of the land might be if it was put to market; as a developer would want to earn a 20% profit margin, that had to be built into the equation to see what a developer might may pay for the land. Reliance on the (one-page) feasibility analysis to support the value in the financial statement is problematic, including because a key assumption in the feasibility analysis was that the development produced 50 units for sale. Mr Cacciola agreed that, so far, only 28 units had been approved; he was seeking to increase the number of units to 54. Nor did the feasibility analysis incorporate the $2.9 million also spent by Mr Werry on the project.

6. [127]

   Mr Lakomy did not check whether assets were recorded in the balance sheet at realisable value. Mr Lakomy did not enquire whether the defendant had a valuation for the land, and saw the valuation for the first time during cross-examination. Mr Lakomy appeared unconcerned that the land was recorded in the balance sheet at a value as if it had the benefit of a section 96 approval, even if it did not. “… [I]nternally, from an accounting perspective, if they believe they’re going to get the approval, and they think the land is worth more with it, that’s the amount they would be putting in”.

7. [128]

   Mr Rossetto said the notes to the financial statements did not permit the land to be put in the balance sheet at the company’s valuation. The accounting policies described in the notes required the land to be measured at the lower of cost and net realisable value, where net realisable value was estimated using the most reliable evidence available at the reporting date. To my mind, the one-page feasibility analysis of the defendant’s secured lenders stating the price which the property might realise, based on assumptions not then present, does not appear to meet this description.

Liabilities

1. [129]

   In terms of creditors, the only current creditor listed was the plaintiff’s judgment debt of $153,810.

2. [130]

   The interest owing, but unpaid, to the secured lenders was not recorded at all. Notwithstanding this, Mr Cacciola denied that the accounts did not accurately reflect the liabilities of the company as he, Mr Werry and Mr Dykes “had negotiated not to charge the default interest and for us to deliver the project and see the project through”. Mr Cacciola said there was an agreement in writing, pointing to an email of 5 June 2020 from Mr Werry: see [103]. Further, Mr Cacciola said there had been verbal agreements “the whole way through this process since I took over as a director”. When it was pointed out that such discussions were not referred to in Mr Cacciola’s five affidavits in these proceedings:

3. [131]

   Mr Werry had also not done any calculation of the interest owing by the defendant as, “To do so would be just totally academic. If you’re capitalising interest at 4% per month, it just becomes totally out of all proportion to the value of the asset. … I can simplify things like this. The amount of principal owed as at the default date already exceeds the value of the assets of the company”. When the plaintiff’s calculation of unpaid interest – being approximately $33 million – was put to Mr Werry, he agreed, “I’d need a calculator, but yes, it’s a very substantial amount …”.

4. [132]

   Mr Lakomy did not know that interest was unpaid on the secured loans. He did not calculate the amount of unpaid interest and did not regard it as a relevant consideration.

5. [133]

   Mr Lakomy agreed that the monies expended by the secured lenders on behalf of the defendant – as recorded in the reconciliation statements – should be included as a current liability in the defendant’s financial statements, but were not.

6. [134]

   Mr Lakomy also considered that BSC2 had a claim against the defendant for $3 million, and the defendant had a cross-claim against the plaintiff for indemnity in the full amount of $3 million or, alternatively, for contribution in the amount of $1.5 million. “So, the amount that BSC2 will seek against [the defendant] will depend on how much it recovers from its cross-claim against [the plaintiff] with the intention of ensuring [the defendant] has net assets of at least $1 … As such this contingent claim against [the defendant] does not make [the defendant] insolvent”. Mr Lakomy agreed that the $3 million claim was not included in the accounts of the defendant at all – nor even as a note to the accounts – and Mr Lakomy was aware that Mr Werry said he was not making such a claim, at this stage at least.

7. [135]

   The secured loans of $22,806,607 were listed as non-current liabilities, even though, according to the Deed of Variation dated 12 December 2019, the secured loans were repayable on 31 October 2020, that is, four months after the reporting date. Mr Cacciola and Mr Werry both said they did not understand the difference between a current and non-current liability. Mr Lakomy did not mention, in his four reports, that the secured loans should be recorded as a current liability, rather than a non-current liability. Mr Lakomy considered it irrelevant whether the secured lenders were recorded in the balance sheet as current or non-current liabilities. He did not think this made a difference to solvency: given that, under the deed of variation, the secured lenders agreed to limit their claim to an amount that ensured that the company always had net assets of $1.

8. [136]

   The defendant’s financial statements were poorly prepared but, in light of the evidence in these proceedings, the current assets of the defendant were substantial being, essentially, the net realisable value of the land (being inventory for this company), being something in excess of $13 million. The section 96 modification which formed the basis of the higher figure in the May 2018 valuation and Mr Werry’s feasibility analysis had not been approved as at the reporting date, although there appears to have been partial approval, being for Stage 1 of the development. The current liabilities are some $50 million. On my calculation, the net current asset position of the defendant is roughly -$35 million. Thus, as mentioned at the outset, the financial position of the secured lenders is critical to whether the defendant is solvent.

FINANCIAL POSITION OF BSC2 AND BRIDGE STREET CAPITAL

1. [137]

   According to Mr Werry’s final affidavit, the financial statements for BSC2 for the financial year ended 30 June 2020 have not been finalised. The most signed recent financial statements for BSC2 were those for the year ended 30 June 2019, according to which:

2. [138]

   Most recently, an unsigned, undated balance sheet for BSC2 as at 31 March 2020 showed net assets of $2. The most recent bank statement for BCS2 – being January 2020 – has a credit balance of $600. On its own, BSC2 does not have the financial resources to support the defendant.

3. [139]

   Mr Werry explained that Bridge Street Capital was, effectively, the funder behind BSC2 and intended to continue funding that company in relation to the defendant. Bridge Street Capital operated a mortgage finance business in its capacity as trustee of Headlands Unit Trust and provided funds to BSC2 as a vehicle for effecting loans and taking mortgages and other loan security. Bridge Street Capital and BSC2 conduct a low volume mortgage business with relatively short term loans of between three to six months.

4. [140]

   Mr Werry said these companies are able to control their loans to manage their cash flow to coincide with the timing of funds required by the defendant to develop the property, for example, to make progress payments to a builder. Mr Werry suggested that BSC2, with the support of Bridge Street Capital, was capable of providing financial support for the defendant even without SME2.

5. [141]

   Mr Lakomy agreed that BSC2 did not have the cash resources to fund the defendant, unless provided by Bridge Street Capital. Bridge Street Capital’s ability to provide funding depended upon its willingness to do so and Mr Lakomy agreed that, beyond seeing various emails from Mr Werry, he was not aware of any signed agreement entered into by Bridge Street Capital to provide the funding.

FINANCIAL POSITION OF SME2

1. [142]

   According to Mr Werry’s final affidavit, the financial statements for SME2 for the financial year ended 30 June 2020 had not been finalised. The most recent bank statement – being for July 2020 – showed a credit balance of some $15 million. Initially, when providing information to support the financial position of SME2, Mr Werry provided financial statements for the SME Investment Trust.

2. [143]

   However, it later appeared that the SME Investment Trust was not the trust which lent monies to the defendant, rather, Saddleback Unit Trust No 2 was the relevant trust (which does not explain the loan to Halecret recorded in SME Investment Trust’s accounts). Mr Werry said that SME2 was the trustee of Saddleback Unit Trust No 2, SME Investment Trust and Saddleback Mountain Estate Unit Trust. Mr Werry saw the assets of each of the trusts as being available to provide financial support if needed as the trust had the same beneficial owner and there was a pattern of internal loans between the trusts to provide funding as and when required.

3. [144]

   Mr Lakomy agreed that SME2’s capacity to fund the defendant depended upon the capacity in which it was acting and the assets of the particular trusts in question. When it was pointed out to Mr Lakomy that the financial statements for the SME Investment Trust were different from the trust which provided the loans funds to the defendant, Mr Lakomy assumed that whichever trust was proposed to provide the funds had power to do so.

4. [145]

   On 20 February 2020, Mr Dykes sent an email to Mr Cacciola and Mr Werry offering financial support to the defendant on behalf of SME2. It was said that SME2 had sufficient monies, together with BSC2, to fund construction and intended to do so. Alternatively, SME2 would co-operate with BSC2 to invite another financier to provide construction funding and take a first mortgage in priority to SME2’s mortgage. Mr Dykes expected that, on completion of the project, some $6 to $7 million would remain available to pay interest on the monies repaid to SME2 and BSC2. As it is reasonably apparent that Mr Werry drafted emails and letters emanating from Mr Dykes, I was left with some disquiet as to whether Mr Dykes was fully appraised of events in this matter. However, I note that the deeds of variation executed on 2 September 2020 bore Mr Dykes’ signature and thus I am entitled to assume that he was.

EXPERT EVIDENCE

1. [146]

   Mr Lakomy gave four solvency reports and, in each, was of the view that the defendant is solvent now and in the immediate future, and the debt claimed by the plaintiff is not pivotal to its solvency. The defendant was said to be solvent under the cash flow test and balance sheet test, with no unpaid (undisputed) debts and access to sufficient external funding in BSC2 and SME2 to meet ongoing operational costs and disputed debts. Mr Lakomy relied, in particular, on the deed of variation by which the secured loans were extended and interest suspended.

2. [147]

   Mr Lakomy accepted the contents of various letters and emails sent to him by Mr Werry and SME2 setting out the funding requirements to develop the land, together with the secured funders’ commitment to support the defendant. Mr Lakomy concluded, based on the financial information already summarised, that BSC, BSC2 and SME2 were solvent and had sufficient cash to meet forecast development expenses if their cash flows were managed accordingly.

3. [148]

   Mr Lakomy took into account that the defendant would obtain a construction certificate to develop the property and would arrange a fixed price building contract by 30 September 2020, which would enable the defendant to obtain a construction loan. Offers of finance had been received from CVS Lane and Stacks Finance but, if external funding was not sourced, the secured lenders would fund construction works and had the financial capacity to do so “as long as [their] cash flow [is] managed accordingly”. Further, the defendant had access to the monies held in Summer Lawyers’ trust account to meet the plaintiff’s claim.

4. [149]

   Mr Lakomy noted that construction costs were expected to be in the region of $20.26 million to $20.5 million, with Stage 1 comprising $11.9 million and Stage 2 comprising $8.3 million. Mr Lakomy said that the defendant expected that, during the course of construction, progress payments would be made to the builder on a monthly basis. Based on an expected construction schedule of nine months, this equated to an average monthly progress payment of some $2.3 million.

5. [150]

   Mr Lakomy said – on what basis was unclear – that the company intended to sell the majority, if not all, of the 28 units approved in Stage 1 prior to commencing construction of Stage 2. Stage 1 was expected to take nine months. Profits from Stage 1 would be used to fund Stage 2. If all 28 units from Stage 1 were sold, the cash flow should be sufficient to fund Stage 2, otherwise finance would be required depending on how many units sold. The secured lender had confirmed it was committed to supporting the company to provide further funding for Stage 2 if required. I note however that, in February 2020, Mr Werry appears to have followed up pre-sales achieved by Mr Bryers. An email from a real estate agent advised that two of the interested purchasers had “every intention” of purchasing the unit but had been advised that the history of the site was not positive, and they should wait for construction to commence.

6. [151]

   Mr Lakomy maintained that he held “a very, very strong opinion” that the defendant is solvent.

7. [152]

   The plaintiff retained Mariano Rossetto to critique Mr Lakomy’s first report. Mr Rossetto did not specifically critique Mr Lakomy’s subsequent solvency reports, although commented upon those reports during cross-examination. In short, Mr Rossetto considered that Mr Lakomy had not done a proper solvency assessment. As the solvency of the defendant was completely linked to the solvency of BSC2 and SME2, Mr Rossetto considered that a detailed analysis and investigation of these companies was needed. Both companies appeared to be simple proprietary limited companies; no audited financial statements had been lodged with the Australian Securities and Investments Commission; the companies did not appear to be financial institutions engaged in lending money and no financial statements had been provided.

8. [153]

   Similarly, Mr Rossetto criticised Mr Lakomy’s conclusion that the defendant was solvent on a balance sheet test. Even assuming that the deed of variation had the effect of reducing the monies owed to the secured lender such that the net asset is at least $1, this did not limit the monies owed to unsecured creditors such as the plaintiff.

9. [154]

   Mr Rossetto did not believe it was possible for Mr Lakomy to reach a view as to the solvency of the defendant based on the information provided; insufficient analysis and investigation was done in the preparation of Mr Lakomy’s reports.

SOLVENCY

1. [155]

   As matters stand, there is a presumption of insolvency by reason of the company’s failure to comply with the statutory demand. The onus is on defendant to prove that the company is solvent: section 459C(3). Section 95A(1) of the Corporations Act provides:

2. [156]

   To discharge the onus the Court should ordinarily be presented with the “fullest and best” evidence of its financial position: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J. As Santow JA (with whom Meagher and Handley JJA agreed) explained in Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 at [16]:

3. [157]

   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: Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (sixth bullet point). The future trading debts of the defendant are relevant, including the debts for the reasonably immediate future: Leslie v Howship Holdings Pty Ltd [1997] FCA 133; (1997) 15 ACLC 459 at 466-7.

4. [158]

   In this case, the defendant’s accountant did not give evidence. Mr Lakomy’s review of the financial statements appears to have been cursory. Mr Lakomy calculated that the defendant’s current ratio (that is, current assets over current liabilities) was 2.5, indicating that the company was solvent. In doing so, Mr Lakomy took into account the monies held in Summer Lawyers’ trust account (which do not belong to the defendant), the chose in action against Mr Kassem (which was not assessed for recoverability) and the amount owing to the plaintiff. This calculation did not take into account the $30 million in unpaid interest owed to the secured lenders, nor the principal of the secured loans (due to be repaid two months after Mr Lakomy’s report) nor development costs already paid by the secured lenders. Suffice it to say that, if these current liabilities are taken into account, then the defendant is not solvent on the cash flow test.

5. [159]

   The secured lenders are entitled to the only real asset of the company, being the land. Aside from the defendant’s obligations to the secured lenders, the defendant owes money to the plaintiff and has a chose in action against its former solicitor of unknown value. The defendant’s ability to pursue the chose in action against its former solicitor is a matter on which there was no evidence. The evidence was silent as to whether the secured lenders intended to fund such litigation.

6. [160]

   The defendant is woefully insolvent viewed in isolation from the financial support proffered by the secured lenders. Thus, in determining solvency, regard must be had to the wherewithal of the secured lenders to support the company until the means by which it is said that the defendant can repay the secured lenders – the development of the land and sale of the units – is complete. The defendant’s solvency thus hinges upon the willingness and ability of the secured lenders to provide financial support to achieve their identified repayment strategy.

7. [161]

   The quality of the financial information in respect of the secured lenders was poor. No recent signed financial statements were available. The evidence provided by Mr Werry as to the financial circumstances of these companies was cursory at best. The most recent bank statements of the secured lenders, in isolation, tell me nothing about their overall ability to support the defendant in respect of a substantial construction project.

8. [162]

   As I understood it, the secured lenders operate a business of making short term loans and would only be able to pay a builder “by provisioning moneys repaid from mortgage loans to third parties”: see [101]. That is, the secured lenders would essentially divert their business from short term lending to making progress payments to a builder. On 20 February 2020, Mr Werry advised Mr Lakomy that only a quarter of the construction costs were required in cash at the commencement of construction, “They do not need to hold the whole $26m cash …”. The builder would issue monthly progress claims averaging $3 million a month over a nine month construction programme. SME2, Bridge Street Capital and BSC2 would have sufficient cash flow from mortgage loans which were due to be repaid over that period.

9. [163]

   That is, the secured lenders do not have on hand all funds needed to complete the Wetherill Park development but can arrange their cash flows to pay bills as needed. It is not clear to me, however, that BSC2, Bridge Street Capital and SME2 have the ability to fund the construction cost in this manner. Certainly, it does not appear – contrary to Mr Werry’s assertion – that BSC2 and Bridge Capital can do it without SME2. As to whether Bridge Street Capital was able to manage its cash flow to fund construction, Mr Lakomy said:

10. [164]

    There is insufficient evidence to establish that loans advanced by BSC2, Bridge Street Capital or SME2 will be repaid in sufficient quantum during the course of the building project to fund completion of this development. Further, there is almost nothing, beyond assertion, to indicate that any development of the land by Mr Cacciola and Mr Werry has progressed in any meaningful way. A one-page feasibility analysis does not instil confidence. The fact that an Early Contractor’s Involvement Agreement was executed on 30 June 2020 does no more than suggest that the very initial planning stages of any construction work may soon be undertaken. The information on which Mr Lakomy has based his opinion appears to be very ‘thin’.

11. [165]

    I am not satisfied that the defendant is solvent, either by reason of its own financial position or having regard to the financial resources available to it via its secured lenders. Where the cost of construction is more than $20 million, it is simply unclear whether secured lenders can execute their strategy set out at [5].

12. [166]

    Further, the fact that the deed of variation limits the secured lenders’ ability to recover its loans from the defendant says nothing about the unsecured creditors of the company who, clearly enough on the evidence, cannot be paid by the defendant as and when their debts fall due. If the defendant requests the secured lenders, then the secured lenders will pay the plaintiff. The likelihood of the defendant giving such a direction is unknown. The second ground of opposition fails.

COSTS

1. [167]

   The plaintiff sought an order that its costs of the proceedings be paid by third parties as well as the defendant under section 98 of the Civil Procedure Act 2005 (NSW) as opposition to the winding up application was driven principally by BSC2, Mr Werry and Mr Cacciola, the director appointed by BSC2. The defendant requested that this issue be determined after the parties had the benefit of the Court’s decisions and reasons. In particular, the defendant was unable to speak for Mr Werry and Mr Cacciola in respect of any application for costs made against them. I agree.

ORDERS

1. [168]

   For these reasons, I make the following orders:

   1. (1)

      Pursuant to section 459A of the Corporations Act 2001 (Cth), order that the defendant be wound up on the grounds of insolvency.

   2. (2)

      Order that Giles Geoffrey Woodgate of Level 2, 6-10 O’Connell Street Sydney NSW 2000, registered liquidator, be appointed to act as the liquidator of Wetherill Park Holdings Pty Ltd.

   3. (3)

      Order that the plaintiff’s costs of and incidental to these proceedings be paid out of the assets of the defendant.

   4. (4)

      In the event that the plaintiff presses its application for an order that the costs of these proceedings be paid by third parties: