Case: Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609
Outcome: cited
take the same view in relation to the conduct concerning the release into the marketplace (by reason of the conduct of Alfred Wong and Lielkajis) of the Second Information Memorandum concerning the promissory notes to be issued by GPEC. That conduct occurred in circumstances where the Board had placed a prohibition upon GPEL seeking to raise funds through promissory notes. GPEL's wholly owned subsidiary GPEC became an issuer of promissory notes pursuant to the Second Information Memorandum. The deliberative processes of the Board in making an informed judgment as to whether GPEL through its subsidiary was in a position to raise money from the public with confidence that such money could be repaid and in circumstances where the Board could be confident that the Information Memorandum reflected a full, accurate and truthful description of the circumstances of GPEL, its business undertaking and its prospective activity, were foreclosed . The minutes of meetings of the directors and the memorandum by Richard Nott reflect the strength of feeling in relation to issues central to a decision as to whether GPEL ought to raise money from the public through GPEC or otherwise by means of promissory notes. 143 Public interest in the governance of corporations and particularly corporations listed on the Australian Stock Exchange demands engagement by the Board in material questions which affect or are likely to affect the affairs of the company and the interests of the members and creditors. In this case, the Board had expressed a strong view that further issues of promissory notes, in the context of the company's liquidity, its relationship with lenders and general capital adequacy considerations (quite apart from going concern issues), must not occur. The question of whether that prohibition might continue to operate was not taken to the Board. Explanations by Alfred Wong of a 'soft launch' or a general high level introduction to the market of GPEL provides no compelling explanation for depriving the Board of the opportunity to engage in the affairs of GPEL and GPEC on such a material matter. I am satisfied that a winding up order ought be made in respect of both companies pursuant to s 461(1)(k) of the Act. I am also satisfied that in respect of the use of the JFCP funds by Alfred Wong and the foreclosure of the deliberative processes of the Board in assessing the matters I have described, Alfred Wong acted in the affairs of the company in his own interests rather than in the interests of members as a whole and in a manner that was unjust or unfair to other members including JFCP because the funds were immediately deployed to reduce debt to a related entity rather than the deployment of the funds as 'construction equity' to attract the Investec facility. Accordingly, an order ought to be made that GPEL be wound up pursuant to s 461(1)(e). EVENTS POST 31 DECEMBER 2004 On 23 February 2005, the Audit Committee met. The external auditors, BDO, reported that a key issue for GPEL would be the going concern and the recoverability of the 5MW plant at Staplyton. Ian Fergusson '... stressed that the issue of going concern for the company will still need to be monitored very closely by management and the Board. ' Peter Gan reported that he was continuing to work on the preparation of a capital management plan to be presented at the next Board meeting. Peter Gan also reported that GPEL was budgeting for a $5M loss in the 30 June 2005 financial year. On 1 April 2005, GPEL received a report from Expansion Capital Finance Pty Ltd ('Expansion Capital') directed expressly to the question of a 'solvency concern'. The report was procured as part of a capital management study for GPEL against the background of four matters then under consideration by GPEL, namely; whether the pilot plant should be put on a program of care and maintenance due to the 'quite severe operational problems with the Staplyton 5MW plant' ; whether GPEL ought to sign an EPC agreement for a proposed plant without having secured debt and equity financing for the plant; whether GPEL ought to utilise a promissory note funding program; and, whether GPEL ought to raise further equity funds to construct the Morwell plant then under consideration and later abandoned. The author of the report observed that placing the 5MW plant on care and maintenance might involve an 'event of default' under the Investec facility in terms of a material change in circumstance. The author also gave detailed consideration to the financial aspects of the operation of the pilot plant. As to the EPC contract, the author recommended against signing an EPC contract in the absence of appropriate debt and equity funding. As to the intended equity raising, the author observed that: 'Further capital injections are subject to the market's confidence in GPEL. In my opinion that confidence is rapidly being eroded for a number of reasons namely: ... it was stated in an ASX release on 18 November 2004 that the $6.3m capital raising at that time was to be used for the roll-out of the projects in GPE's pipeline and in fact these funds were used to retire debt to Richland. recent company announcement referred to the IBAL (Investec) indicative offer of finance (dated 30 December 2003) as "existing debt facilities" when in fact this is not the case.' The author of the report observed that GPEL appeared to have the 'ability to meet its obligations over the next year as and when they fell due as GPEL had the Richland loan ($2M facility drawn to $460,000 at the end of February 2005) and Promissory Note facility ($10M facility drawn to $450,000 at the end of February 2005) to draw upon. However, GPEL's ability to service those facilities relies completely on its ability to raise further equity capital. Consequently, if that ability is severely impaired, GPEL may not be able to meet its obligations as and when they fall due' [emphasis added]. At the meeting of directors on 4 April 2005, the Board considered a recommendation to sell the pilot plant to Viridis as one mechanism for solving the continuing issues surrounding the pilot plant and further considered the financial position of GPEL going forward. The minutes record these matters: 'Richard enquired about Jardine Fleming's original payment and what was their understanding of the investment and also commented that there needed to be more certainty as to the loans from Richland going forward. There was general concern over the Company's solvency situation. As for the loans from Richland, the Company still has a $2 million line of credit. The company needs $13 million to put up the plant either by raising equity for the new plant and/or selling the 5MW plant at Staplyton and about $0.5 million for the monthly burn rate. Alfred also expressed his concern that as a shareholder he feels that the company should really stand on its own feet and not keep relying on him for funding. As for the money received from Jardine Fleming, it was acknowledged that it was used to retire debt owing to Richland, however, Alfred stressed that he has also been supportive of GPE and has always covered the burn rate for the last two years. Alfred also pointed out that the interest rate charge by Richland to GPE was also more favourable than the market rate. Richard pointed out that whatever interest rate is charged by Richland, we need to have certainty of the facility. Richard requested that Peter give Alfred some notice before he draws on the money and also have a plan drawn up as to when he is planning to call on the balance. Peter will review and report to the board on the loan facility documentation from Richland and ensure that both parties are even-handedly dealt with'. [emphasis added] At the meeting of directors on 20 April 2005, management gave a presentation on GPEL's new business strategy with the "main focus on stabilising the Company's capital position and ensuring that it was a going concern". The minutes record: '(a) Shortage of capital was putting GPE's business strategy at risk. There is strong indication that the EPC contractor, Easteel, will walk away from the power plant project, as they are growing more concerned about GPE's ability to fund the project. GPE's loss of credibility is also affecting the company's ability to procure reliable fuel contracts . Currently, there is pressure from the creditors to clear the outstanding debts and there is also concern that two of its major creditors, Investec and TechComm may want the debts repaid immediately. Management was concerned that an administrator may be appointed if the Company's capital situation was not immediately stabilised. Management suggested that all projects should be put on hold. Management made extensive recommendations about green waste fuel management and a possible move upstream into related fuel supply acquisition to provide certainty of supply for possible projects.' [emphasis added] The minutes further record these matters: '(k) Loan facility with Richland The loan facility documentation between Richland and GPE is underway and a more formal drawdown arrangement is being organised. Alfred expressed his concern for an equitable arrangement to be put in place. Richard stressed that under the Company's present liquidity situation , repayment of a loan prior to other creditors' payments can constituted preferential treatment. Also with the issue of the promissory notes distributed through a related company of Alfred's, this could expose the Company and Alfred unnecessary especially since the Jardine's money was for a specific purpose and not for the retirement of debt. All of this could be interpreted as the CEO/chairperson have privileged information when the debt facility was repaid using investment funds received from a third party. The Richland loan has to be restructured and formulised so that both Alfred and the Company are clear on the terms. Richard advised Alfred that he believes the loan should be repaid. Robert too stressed that the state the company is in, it is imperative that the funds are replaced as soon as possible. Robert also advised that it would not be wise to allow this issue to come back and bite us in the future. Richard also concluded that the raising of promissory notes through a company related to Alfred in order to retire GPE's debts with Alfred could be construed as a conflict of interest.' [emphasis added] Under the heading 'Managing Director's Report', the minutes of the meeting of 20 April 2005 record these matters: 'Returning to the issue of the Richland loan, Alfred claimed that the debt to Richland was due and payable at the same time as when the Jardine money also came in, to which Richard responded that it is still crucial that Alfred replaces the money that was repaid rather than using the promissory notes to replace the original loan facility, which still generates an additional income for Alfred. It was agreed that Peter would work with Richard on the drafting of a new loan arrangement for GPE with Richland that meets everyone's satisfaction, by the end of this month. Alfred requested that this review considered giving him security over the loans. Robert too has been very concerned about the company's solvency and any loan arrangements with Richland should be clearly documented. The loan should also be a long term loan with the prospect of being converted to equity, as was the original loan facility with GPE.' [emphasis added] As to the position in relation to creditors, Peter Gan explained that 'he really needed about $1 million to pay off all the immediate creditors with a 30+ day ageing excluding TechComm, whose outstanding amount is to be converted to equity.' [emphasis added] Alfred agreed to loan GPE through Richland the $1M required to repay the immediate creditors. At the meeting of directors on 11 May 2005, the pressing question of cash flows available to GPEL was further discussed, a capital management plan was tabled and further discussion occurred of access to an additional $1M from Richland to pay the debts of creditors then due and owing. Peter Gan also noted the 'fall back $5M credit facility from Richland'. On 6 June 2005, Peter Gan prepared a strategic 'Update to Investec' and sent it to Investec officers Richard Byrne, Mark Schneider and Cosmas Kapsanis. The Peter Gan update attached a report from TechComm which proposed a third option for limited 'running' of the plant having regard to the first two suggested options of either closing down the pilot plant with a small number of staff on site to maintain the plant with periodic start-ups pending sale or, alternatively, 'mothballing' the plant with 'minimum manning'. In relation to the pilot plant, Peter Gan noted that the net operating pre-tax loss for the financial year to 30 June 2005 was $3M; GPEL was planning to decommission the plant and place it in care and maintenance; the long term solution involved either scrapping the plant, modifying it and operating it with a 13.5MW plant; or, to relocate the plant. At the Audit Committee meeting on 15 June 2005 the need for a debt raising policy to be approved by the Board was discussed among other matters previously mentioned. In terms of the external audit of GPEL's undertaking, the auditors noted that the decommissioning of the pilot plant would obviously have an impact on the valuation of the asset. On 15 June 2005, Investec wrote to GPEL noting that the proposal to place the pilot plant on 'care and maintenance' would reduce the value of the security. Investec expressed concern that cessation of generation might cause GPEL to be in breach of the terms of the Power Purchase Agreement. Investec suggested a restructuring of payments satisfactory to Investec. Consequent upon that letter a meeting took place on 22 June 2005 between Peter Gan and Jose De Nobrega and Cosmas Kapsanis on behalf of Investec. The note by Cosmas Kapsanis arising out of that meeting records Peter Gan's observation that GPEL intended to place the pilot plant on care and maintenance; GPEL would continue paying principal and interest payments; GPEL perceived the solution to the pilot plant's difficulties was to develop a 13.5MW plant; funding for the plant would be established through existing credit facilities in association with project finance and debt facilities from Investec; that if Investec put the pilot plant loan into default that day and triggered a right to call for immediate payment, GPEL 'would not have the financial capacity to repay and it was unlikely that any additional money would be provided by shareholders, resulting in the company being put into bankruptcy. ' The Kapsanis note records that 'Peter clearly understood our strong preference for immediate repayment but is unable to fund that repayment from the resources available to him. He undertook to seek funds from Alfred Wong for a partial repayment (probably 50% of the residual he indicated to us that requiring repayment now of 100% of the residual is akin to demanding total repayment and would have the same consequence).' On 30 June 2005, a meeting took place between Alfred Wong and Peter Gan and Cosmas Kapsanis and Mark Schneider on behalf of Investec. Peter Gan and Alfred Wong expressed their confidence in GPEL. The Kapsanis note of the meeting records: 'We (Investec) restated our request for repayment or a reduction in the debt outstanding. We propose that if they couldn't fully repay the bullet (balloon payment) at this time, that they repay half of the bullet, being approximately $1 million and continue advertising the loan to the same schedule, resulting in a zero balloon at the expiry of the term.' GPE asked whether, in exchange for a partial repayment of the bullet we would consider extending the term of the facility and we indicated that our credit was unlikely to accept such a proposal'. At the meeting of directors on 6 July 2005, the Richland GPEL credit facility was discussed as was the assignment arrangement between Richland and Austcorp and the perceived affect upon GPEL's liquidity arising out of the assignment. Alfred Wong's perception that the Richland facility available to GPEL was to be an 'evergreen' facility was noted. On 4 August 2005, GPEL's auditors, BDO (Ian Fergusson), wrote to GPEL outlining events since 31 December 2004 which 'bring into question both the carrying value of the Company's assets and the ability of the Company to continue as a going concern' . [emphasis added] Those events were the continuing operating losses incurred in respect of the 5MW pilot plant necessitating either closing the plant or placing the plant into a 'care and maintenance' arrangement; issues regarding the technical and commercial viability of the Staplyton No. 2 project and the Morwell project; the weakness identified in the direction and management of the company; and the report to GPEL by Expansion Capital dated 1 April 2005 questioning whether GPEL was trading whilst insolvent . BDO expressed the view that GPEL appeared to have no means of generating cash to repay debts other than through the successful commercialisation of the pilot plant, Staplyton No. 2 and the project at Morwell. Further, funding secured from Investec was provisional on the technical feasibility of the projects. BDO emphasised that: 'It is imperative that the directors satisfy themselves that the company is a going concern' [emphasis added]. In order for the Board and the Audit Committee to be satisfied of that matter, BDO recommended that the following reports should be prepared: '&#9679; Detailed cash flow projections covering in particular the period up to the generating plants coming on line and generating positive cash flows. &#9679; Reports on the current status of both the Staplyton and Morwell projects, the reports to include, confirmation of technical viability, confirmation that fuel supplies can be obtained, detailed project plans showing when the project will come on line and cash flow projections for each plant during the construction phase and for estimated cash flows to be generated when the plant is operational.' BDO observed that the proposal to place the pilot plant on care and maintenance may involve a material adverse change in the progress of that project. BDO also observed that during the conduct of the audit of the accounts to 30 June 2005, BDO had become aware of the Expansion Capital report. BDO noted the operational difficulties (adequate fuel supplies) with the Staplyton No. 2 and Morwell projects and the fund raising program undertaken by GPEL through the issue of the promissory notes repayable on 31 March 2007 and 30 September 2007 before the Staplyton No. 2 and Morwell plants would be operational. BDO was concerned that GPEL 'would appear not to be in a position to repay [the notes] unless further funds are raised prior to Staplyton 2 and Morwell coming on line' . BDO expressed its 'dissatisfaction with management and the Board for not advising us of the Expansion Capital Finance Report at the time it was considered by the company' [emphasis added]. Further, BDO regarded the repayment of $3.4M to Richland as a significant event. BDO noted that the loan, so far as BDO understood the matter, attracted a conversion entitlement to equity at the option of GPEL and that: '... given the fact that the company requires additional funding to complete its ongoing projects and to meet its day to day operating expenses, the repayment of the loan was not envisaged in making our previous assessments as to the company's going concern position. Repayment of the loan would not appear to be in the interests of the company given its funding requirements'. BDO expressed concern that since the convertible loan was to Richland there may have been a risk that the interests of GPEL were not considered. BDO drew the attention of the directors to the release to the Australian Stock Exchange on 18 November 2004 stating that the JFCP capital was raised to roll-out projects in GPE's pipeline. BDO also expressed reservations about the impaired carrying value of the pilot plant, the carrying value of the Staplyton No. 2 and Morwell projects and the need for directors to be satisfied that the carrying value of intellectual property rights was consistent with the 'recoverable amount' for that asset. Ian Fergusson concluded his letter by observing that: 'In light of the above comments, it is imperative that the directors have sufficient evidence that the company is solvent and is a going concern ' [emphasis added] . BDO advised the directors that BDO had a responsibility to review GPEL's assumptions as to solvency and going concern and form an opinion 'as to the appropriateness of the evidence to support the going concern assumption. [emphasis added] ' BDO requested the information to be supplied within two weeks. On 11 August 2005, Alfred Wong met with Stephen Chipkin, Mark Schneider and Cosmas Kapsanis to consider a proposal from Investec for a reduced exposure to the 'Staplyton Green Energy project'. The amount outstanding at that date was $3.232M and the remaining term was 45 months. Alfred Wong advised Investec that the pilot plant had not been placed on care and maintenance and 'continues to operate'. Investec sought GPEL's response to its request for immediate payment of $573,000.00 being the sub-debt tranche with continued payments of $46,000 per month to amortize the senior debt at an accelerated rate. Alfred Wong advised Investec that the: '... operating company did not have the funds to make this payment' and 'the lack of funds is the result of a) the lack of cash generation by the project and b) an inability of GPE to further draw down on a loan facility that Alfred's family trust has made available to it. This is because Alfred's facility was intended to be secured by a first ranking F&amp;F charge over the assets of GPE. This security has not been put in place and Alfred has become aware that $2 million of the $5 million funding has been advanced on an unsecured basis. The trust will not permit further substantive drawings without security'. Alfred Wong offered to pay Investec the next three months principal interest payments constituting $141,000.00 in all. On 17 August 2005, Ian Fergusson wrote to Alfred Wong as requested at the Audit Committee meeting the previous day setting out a list of '... audit evidence that would help to assist us in reaching a conclusion to the audit process' [emphasis added]. As to the question of whether GPEL might be found to be a solvent going concern, BDO requested detailed cash flow projections for the next three years covering the period of repayment of the promissory notes, forecasts demonstrating cash outflows from operations, cash outflows from investments, GPEL's required funding throughout the three year period, a detailed business plan, detailed group budgets, discounted cash flow forecasts, supporting evidence for all assumptions made in the forecasts, the preparation of a sensitivity analysis in relation to the forecasts, details of future funding arrangements including amounts required, dates by which funds would be required, sources of funds, evidence that promissory notes could be repaid as each note fell due, a letter of support and confirmation of balance debt from Investec in relation to the loan covenants, a copy of a signed loan agreement for the $5M credit facility with Richland, a letter of support from major shareholders and other matters. BDO also sought information concerning the assessment of the carrying value of tangible fixed assets and intangible assets, the nature of contingent commitments and up-to-date management information and copies of Board minutes so as to enable BDO to assess 'post balance sheet events'. BDO also requested Financial Statements to be drafted particularly having regard to the filing deadline of 30 September 2005 and a 'Statement of Cash Flow Workings'. On 25 August 2005, Scott Tobutt, a BDO representative, advised Ian Fergusson that the higher level information such as the business plan and letters of support were being dealt with by Alfred Wong but that no completion date could be provided. Further, Tobutt observed that as he went through the list of required information with Edwin Yeung, ' Edwin would say "yes we have that" or "it has been done" or "we can get that" etc which we have heard before and we seemed to be going around in circles ' [emphasis added]. Tobutt confirmed that he had requested a file with cash flows for the group, management judgments as to each cash flow scenario behind each cash flow forecast, the supporting documentation for and evidence supporting all assumptions made by management together with additional evidence such as project reports and commitments for each of the projects. The same approach was to be adopted in relation to the valuation of the assets including the intangible assets. On 31 August 2005, Alfred Wong requested a letter of support for GPEL's future green waste to energy projects, from Investec. On 9 September 2005, BDO (Ian Fergusson) again wrote to Alfred Wong observing that BDO was 'yet to receive any response from management' consequent upon BDO's earlier correspondence. Further, Ian Fergusson observed that BDO was 'yet to receive the majority of the key items' requested by the letter of 17 August 2005. Further, BDO observed that the quality of the information that had been provided was 'unsatisfactory from an audit perspective' . BDO expressed concern about the capacity to prepare and file a particular statement by 13 September 2005. BDO emphasised the number of significant issues that had to be addressed before completion of the audit could occur and, in consequence, finalisation of the annual report by 30 September 2005. In the letter dated 9 September 2005, Ian Fergusson said this: 'Our audit to date had raised the following significant issues which we believed have not been resolved satisfactorily and will result in BDO issuing a qualified audit opinion; &#9679; Overall Going Concern of GPE &#9679; Carrying value of the Staplyton 5MW plant ($7.6 million) &#9679; Carrying value of the 13.5MW Staplyton Reactor plant ($3.6 million) &#9679; Carrying value of the Morwell costs ($300k) &#9679; Carrying value of the Intellectual Property Rights ($4.5 million)' Ian Fergusson further expressed this view in the letter of 9 September 2005: 'BDO cannot form an opinion on the going concern assertion and the carrying value of assets based solely on management representations , and unfortunately this is the only evidence which has been provided so far. In order to be able to form an opinion as to the ability of GPE to continue as a going concern and to determine the recoverable amount of its assets, we still require supporting evidence to show that any of GPE's assets will be commercialised and that GPE is able to continue as a going concern.' [emphasis added] The letter observes that BDO was yet to receive a significant body of material. The letter attaches a two page schedule of information sought such as data in relation to the carrying value of the assets, forecasts, the rationale for the determination of the recoverable amount of the intellectual property assets, details of the amortization policy, confirmation that the 13.5MW Staplyton project will go ahead and a significant body of other material. As to going concern, 17 classes of information were sought by BDO. As to the tangible fixed assets, five classes of information were sought. Five classes of information were sought in relation to the intangible assets and four classes of information in relation to contingencies and other commitments. On 13 September 2005, Ian Fergusson on behalf of BDO wrote to Alfred Wong in these terms: 'I am writing to you to express our concerns in respect of the corporate governance of the company and its solvency and the impact these concerns have on our ability to remain as auditors of the company. Corporate Governance We are aware of the factoring of the Richland Investment Australia (Ltd) loan that had been made to Green Pacific Energy Limited (GPE) and its subsequent repayment. Notwithstanding comments made by you, supported by legal advice you have obtained, we have difficulty in concluding that this action was in the best interests of GPE. We are aware of the information memorandum which is seeking to raise promissory notes to be issued by GPE. This action appears to be have been instigated by yourself without the mandate of the Board. Further, we are concerned whether the information being provided to potential lenders is adequate and whether it is misleading. The above actions would appear to reflect a lack of corporate governance that is required of listed entities. Going Concern Again, the matter of going concern and adequate business plans have been discussed at recent Audit Committee meetings. We note that creditors appear to be paid in a selective way and only when further loan monies from entities you are associated with are received. Without an adequate business plan and funding for projects to provide GPE with power plants that can generate positive cash flows, it is difficult for us to determine how GPE is able to remain a going concern. Implications for BDO We would welcome receipt of firm evidence that the matters raised above have been either rectified or adequately addressed. You should be aware that the matters are of a nature that require us to advise ASIC under section 311 of our concern. The Act imposes specific requirements for auditors to advise ASIC whenever the auditor has any reason to believe a breach of the Corporations Act has occurred. Further, it raises difficult issues for us as auditors. Our own client acceptance procedures and guidelines include matters such as assessing whether the governance culture in the entity is satisfactory. Accordingly, unless the Board is able to adequate demonstrate the GPE is a going concern (we regard the ability to adequately fund future projects as a key aspect of this) and is able to demonstrate how corporate governance issues are to be adequately address, we will regretfully be required to resign as auditors of the company at the forthcoming annual general meeting.' [emphasis added] On 13 September 2005, Scott Tobutt reported to Ian Fergusson upon Tobutt's discussions with Edwin Yeung. Edwin Yeung told Tobutt that he had been discussing the BDO letters requesting audit evidence with Alfred Wong. Tobutt, in his note to Ian Fergusson, observed that Edwin Yeung had told him that Alfred Wong and Edwin Yeung were aware that BDO was not satisfied with the valuation of the assets but that it was unlikely that GPEL would be able to provide any further evidence to alter BDO's preliminary views. Tobutt reported that Alfred Wong and Edwin Yeung were concentrating on 'proving that the company is a going concern' . Scott Tobutt also observed that Edwin Yeung was under the impression that all of BDO's fees had been paid. However, an amount of $37,950.00 was outstanding to BDO. Edwin Yeung said he would look into this issue and if the fees were still outstanding, Edwin Yeung would arrange for the amount to be paid. Tobutt reported to Ian Fergusson on 19 September 2005 that Edwin Yeung would be discussing the business plan with Alfred Wong that day. BDO had still not been paid the outstanding fees and in Tobutt's report to Ian Fergusson on 19 September 2005 Tobutt noted: 'he [Yeung] said he would arrange for this [payment] today ( sounds familiar! )' [emphasis added]. On 21 September 2005, Tobutt reported to Ian Fergusson concerning discussions with Edwin Yeung. Edwin Yeung said that he had gone through the business plan with Alfred Wong and that the review would be finished by the end of the week. Tobutt told Yeung that GPEL and BDO were 'seriously running out of time' . Tobutt had advised Yeung that 'the Board had to confirm that they were sticking to the current valuations in which case we were unable to prove this with the evidence provided'. Tobutt added, in his email report to Ian Fergusson of 21 September 2005: ' it sounded like the letters we had sent previously had not sunk in in any way ' [emphasis added]. Tobutt added this observation: 'In relation to going concern, I asked if the company had managed to get a letter of support from Alfred but he [Yeung] said that this was covered by the $5m Richland loan facility. I also asked if the company had confirmation from Investec that the loan breaches would have no impact and that the funding going forward was still available. He said that the offer was still there from previous. I said that it had been agreed by Alfred at the Audit Committee that he would be able to get these confirmations and subsequently they have not told us otherwise. It appears that this is not going to be the case which will obviously affect the going concern.' As to the question of fees payable to BDO, Tobutt observed: 'We have still not been paid and we are seriously running out of time. It would already be very difficult to finish the accounts within the deadline due to mine and Tim's other commitments'. On 23 September 2005, Ian Fergusson wrote to Edwin Yeung noting that BDO had not heard from GPEL in respect of the outstanding matters detailed in the letter of 9 September 2005. Ian Fergusson requested urgent advice as to whether the financial statements were to be finalised based upon the results and state of affairs disclosed earlier to the Stock Exchange; whether Edwin Yeung had been able to prepare further evidence as previously requested supporting the carrying values adopted by the directors; and the date by which the annual report would be available for review and audit by BDO. Ian Fergusson pointed out that 'it is difficult for me to see how the financial statements will be able to be signed by 30 September 2005' . On 26 September 2005, Mark Schneider sent an email to Helen Ho at GPEL advising that Investec would very much like to be able to provide a letter of support as sought by Alfred Wong but that such a letter would be 'premature' at least until the Staplyton No. 1 project had been 'refired and can be demonstrated to be operating in accord with the original financial model' . On 27 September 2005, Scott Tobutt sent an email to Edwin Yeung expressing observations based upon BDO's initial review of the annual report as provided by GPEL. That day, Edwin Yeung responded. The issues involved questions concerning the accounts payable; a comparison of the financial results as formulated with the preliminary results reported to the Stock Exchange; the foreshadowed operating result of a net loss after income tax of $13,615,601.00; the proposed 'impairment loss' in relation to the pilot plant; and other matters. On 28 September 2005, Ian Fergusson sent an email to Edwin Yeung concerning the draft annual report, in these terms: 'There are many aspects of the Report we are concerned about and this is necessarily slowing down the process. The Directors Report, in my view, does not portray a balanced position of the state of affairs of the company. Your note 1A to the accounts is not, in my opinion appropriate. It is too opinionated and should restrict itself to the issues impacting the company to remain a going concern. It would appear that the company has failed to advise the ASX ... of the increased write down of the 5MW [plant] put through the books subsequent to the lodgement of the 4E [statement] .' [emphasis added] Edwin Yeung responded on 29 September 2005. Further exchanges took place between Tobutt and Yeung on 29 September 2005 particularly in relation to clarification of whether Investec was content to take no action in relation to the matter Peter Gan had disclosed to BDO during the course of an audit visit namely, 'that the debt service covenants of the loan [Investec] had been breached' . Edwin Yeung advised that Investec had not asserted a breach based upon a failure to comply with the debt service covenants. The breach previously noted by Peter Gan related to the ratios GPEL was required to maintain under the Investec agreement namely, the DSCR and FDSCR ratios. On 29 September 2005, Edwin Yeung further advised that no issue had been taken by Investec concerning the matter of the covenants in relation to the debt service ratios. On 30 September 2005, Edwin Yeung pressed BDO for a statement in relation to the going concern nature of GPEL. Tobutt responded advising that because of the sensitivity of the accounts both GPEL and BDO needed to be satisfied that all issues have been resolved. On 30 September 2005, Edwin Yeung responded to BDO's proposed going concern statement. Edwin Yeung sought to incorporate in the qualification BDO proposed to make on the topic of whether GPEL was a going concern a comment at point 35 to this effect: 'We have received a commitment from the major shareholder (Richland) that funds of $5m will be made available to the company. We have received no commitment that the loan will not be demanded for repayment within the next 12 months.' On 7 October 2005, BDO issued an independent audit report to the members of GPEL which contained a number of qualifications. As to the Staplyton pilot 5MW plant, BDO said this: 'GPEL has determined the carrying value of its Staplyton 5MW plant to be $2,865,212. The 5MW plant is currently operating at a loss and will not be able to generate positive cash flows unless it is operated in tandem with another plant such as the proposed Staplyton 13.5MW plant project. In our opinion, the carrying amount is in excess of the assets recoverable amount and therefore GPEL has not applied the requirements of AASB1010. In our opinion, the Staplyton 5MW plant should be written down to its scrap value or $0 and therefore $2,865,212 (or such lesser amount) be written off as an expense to the Statement of Financial Performance. Had this been done, the operating loss before income tax would increase to $16,480,813 and Total equity reduced to $428,925.' BDO further qualified the report in relation to the Staplyton 13.5MW plant, other projects of GPEL and the intangible assets. BDO expressed the opinion that the financial report of GPEL was not in accordance with the Corporations Act 2001 as the accounts did not give a true and fair view of the company's financial position as at 30 June 2005 nor of GPEL's performance for the financial year ended on that date. Nor did the accounts comply with Accounting Standards and the Corporations Regulations 2001 . The independent audit report contained this statement: '... Inherent Uncertainty Regarding Continuation as a Going Concern Without further qualification to the opinion expressed above, attention is drawn to the following matter. Note 1A of the financial report details the directors' opinion on the company's ability to continue as a going concern. In our opinion, the ongoing viability of the company is dependent upon its securing sufficient further equity as well as loan funds to enable it to successfully develop new green energy plant facilities. In the event that the company becomes unable to continue as a going concern, it is likely to be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those current stated in the financial report.' On 7 October 2005, Alfred Wong on behalf of GPEL provided BDO with a letter setting out a wide range of comments in relation to the matters which had been the subject of inquiry by BDO and, in particular, comments in relation to asset valuations of property, buildings, plant and equipment and intellectual property, comments in relation to the liabilities of GPEL, its contingent liabilities, events subsequent to balance date and remarks in relation to the opinion of GPEL that the financial statements should be prepared on the basis that GPEL is a going concern. As to that matter, Alfred Wong's letter contained these observations: '... Going Concern 32. We believe that it is appropriate for the financial statements to be prepared on a going concern basis. The ongoing viability of the consolidated entity is dependent upon the ongoing financial support of its shareholders and lenders. We have sufficient funds to enable us to pay creditors as they fall due for 12 months from the signing of this letter. 33. We have the abilities to successfully commercialise a power plant following the lessons learnt from the Staplyton 5MW. We can confirm that the Staplyton 13.5MW construction will go ahead, and that we will be able to secure the necessary debt and equity funds to finance this. We also believe that the group will be able to secure the appropriate fuel sources. 34. We have received a commitment from the major shareholder (Richland) that funds of $5M will be made available to the company. We have received no commitment that the loan will not be demanded for repayment within the next 12 months.' On 7 October 2005 at a meeting of directors, Alfred Wong presented the Annual Report for the financial year ending 30 June 2005 and explained that the auditors had qualified the report. The minutes of the meeting note Alfred Wong's observation concerning his ' disappointment with BDO for delaying the completion of the audit resulting in GPE being suspended from trade since 3 rd October 2005' [emphasis added]. The directors adopted the Annual Report. The minutes also note that 'Alfred also explained [to directors] that since the Board made a decision not to issue any more promissory notes until there is a firm strategy in place, $50,000 had already been receipted. The advice given was not to return the monies received because this may be viewed negatively by the market. The product should be pulled out of the market slowly. Alfred asked the Board to ratify the decision to accept the monies received to date'. The Board did so. The action items attached to the minutes note that a review was to be undertaken, assigned to Alfred Wong, to 'review Richland credit facility loan documentation for Board endorsement (A resolution is to be put forward before the shareholders to approve the credit facility with fixed and floating charge over the company's assets)' . At the meeting of directors on 26 October 2005 Alfred Wong reported that GPEL required capital of approximately $16M to purchase plant. The minutes note that Alfred Wong's expectation was that GPEL would probably be able to raise about $10M from Investec by way of debt and the balance of $6M would need to be subscribed as capital. Alfred Wong suggested that strategic partners might be sought for a rights issue. On 28 October 2005, BDO submitted its final report to GPEL's Board noting that: 'The Board should be aware that the comments made by management have not been substantiated or validated by us' . As to the Richland $5M facility, BDO noted that the loan agreement had not been properly executed as the provision of security by GPEL had to be approved by shareholders at the forthcoming Annual General Meeting. The final report noted that: 'The lender has allowed periodic drawdowns of the facility to fund GPE's working capital requirement. At the date of this report (which is for the period ending 30 June 2005) total funds drawn are close to $2.2 million leaving a further $2.8 million available for future usage. The company has received no commitment that the loan will not be demanded for repayment within the next 12 months'. Counsel for the defendants put to Ian Fergusson that BDO had failed to have regard to or take account of the various matters put to BDO by Alfred Wong in the letter of 7 October 2005. Ian Fergusson rejected that criticism on the basis that although some of the things contained in the letter had been put to BDO previously, the proposition simply represented management statements rather than an attempt to come to grips with the request by BDO to provide independently verifiable audit evidence to support statements by management. I accept the evidence of Ian Fergusson generally. On 31 October 2005, BDO forwarded a letter of resignation as auditors to Alfred Wong. The covering letter enclosed BDO's final fee account with an explanation of the basis for the fee. In cross examination, counsel for GPEL and GPEC put the proposition to Ian Fergusson that the question of discontent and non-payment of professional fees was the real source of discontent and the reason for the resignation by BDO as auditors. Although plainly enough this was an issue, I am satisfied that the dominant cause of the resignation was BDO's discontent with responses by GPEL and GPEC to continuous requests for proper audit evidence to enable BDO to form an opinion about matters central to the completion of the financial accounts and the independent view BDO needed to form on matters of particular importance to the members and creditors of GPEL. On these matters, I accept the evidence of Ian Fergusson. In the course of the hearing, I asked Ian Fergusson to explain the reasons why, on behalf of BDO, he resigned the position as GPEL's auditor. He responded: 'I think predominantly, it would have been because I came to the conclusion that not only did we have a difference of opinion on key aspects of matters pertaining to the company that probably would never be resolved but I was also concerned that information that was vital to be able to do a thorough audit was very hard to get from the board, which made carrying out an audit for us very time consuming and very difficult. And then there comes the financial side of things, where we seem to be in perpetual conflict on what a reasonable fee would be, given the circumstances, and where you don't get paid your fees, you do sometimes get into a situation where you think you have a your independence gets impaired. So a whole number of reasons, but it all adds up to the fact that I thought that BDO should part company with GPE.' Ian Fergusson acknowledged that although not all of BDO's professional fees had been paid in respect of the audit work, GPEL disputed aspects of the matter. On 11 January 2006, GPES No. 1 purchased plant and equipment for power generation located at Altona in Victoria from Samvic Services Pty Ltd ('SSPL') for $1.875M plus GST. The plant and equipment was dismantled and transported to Staplyton in Queensland. The plant has not been fully or finally installed. On 16 January 2006, Mark Schneider sent an email to a number of individuals within Investec concerning the failure on the part of GPES No. 1 to make a payment under the existing Investec facility. Edwin Yeung explained that there were insufficient funds in GPEL's account and that: 'St George Bank therefore stopped the payments' . In Mark Schneider's email he explains to Investec personnel that he had explained to Edwin Yeung that: '... we considered this a very serious matter and would need to consider our position' . Edwin Yeung asked if Investec could exercise some flexibility during the course of the week: 'In view of the fact that this was the first instance of a payment being dishonoured' . In cross examination, counsel for GPEL and GPEC put to Mark Schneider that in Schneider's commercial experience, although the default was not insignificant: '... it's not the sort of thing that is unknown, is it? A. --- No, I guess it's the no ... it's not unknown' . In relation to the question of Investec's willingness to continue lending, counsel for the defendants put to Mark Schneider: 'You remained as a group, or Investec as a company, remain, at least in the general sense, interested to lend throughout 2005 and into 2006? A. --- Yes I think it's fair to say that subject to the conditions precedent which were, you know, which were in the original document being met, we were still, in principle, willing to advance funds. Quite. Into 2006? A. --- Possibly. I mean, the question wasn't ever one we really had to deal with practically.' Counsel for the defendants objected to the relevance of the evidence concerning the financial circumstances of GPES No. 1 and its relationship with Investec in an assessment of the financial standing or solvency of GPEL. The objection is based on the notion that the Investec loan for the pilot plant was confined solely to GPS No. 1. However, it is clear that compliance by the subsidiary with the conditions of the loan was a material matter to Investec in its existing or future relationship with the parent, GPEL not only because GPEL was a sponsor of the Investec loan to GPS No. 1 but also, Investec looked to GPEL to deal with and solve any question of non-compliance with the terms of the loan facility, by GPS No. 1. On 10 April 2006, Richland and GPEL entered into a 'Loan Facility Agreement'. The facility is described as an unsecured facility with a limit of $5M for: '... working capital purposes' of GPE and its subsidiaries and to pay part of the purchase price payable by GPE Staplyton No. 2 Pty Ltd to the seller of the 16MW power plant situated at 300 Millers Road, Altona' at an interest rate of 11.95% per annum for a period of six months (ie. until 10 October 2006) unless extended by Richland or called up at an earlier date pursuant to the terms of the agreement. The agreement provides that on or before a date 15 days before 10 October 2006, GPEL may give Richland notice requesting an extension of the termination date. Clause 6 provides: 'This extension is automatic if the notice is supported by a statutory declaration by a director of GPE stating that GPE will be insolvent if the Money Owing is repaid on the forthcoming Termination Date. ['Money Owing' means the aggregate of all money of whatever nature owing or unpaid by GPEL to the financier.] GPE may give more than one notice under this clause. This clause does not apply to a Termination Date that arises as a result of the cancellation of the Facility pursuant to clause 9. [which deals with the consequences of an Event of Default].' Clause 10 provides a mechanism by which the 'Money Owing' may be converted into shares. The mechanism is that on or before the Termination Date, GPEL shall obtain all necessary approvals including the approval of shareholders to convert the debt due at the conversion date into fully paid ordinary shares in GPEL in a manner as determined by a meeting of directors (in circumstances where Alfred Wong is to abstain from voting at the meeting of directors). If the directors decide to undertake a rights issue, the conversion price will be that set out in the issue document. In the event that directors otherwise decide, the conversion price shall be based on an issue price of a 15% discount of the weighted average trading price of shares in GPEL traded on the Australian Stock Exchange over the five business days before the conversion date. Once all approvals have been obtained the debt due at the conversion date: '... shall automatically be converted into fully paid ordinary shares in GPE' . On 10 April 2006, Richland entered into a further loan facility agreement with GPEL for an unsecured facility of $1,055,000 at an interest rate of 11.95% to enable GPEL to pay part of the purchase price payable by the Staplyton No. 2 subsidiary to the seller of the Altona plant. The drawdown date for the facility was 31 March 2006 with a termination date on 30 September 2006 unless extended or otherwise called up in consequence of an event of default. The mechanism for the extension of the Termination Date is in the same terms as [182]. Clause 10 of the agreement provides: ' 10. Repayment of the Facility (a) Subject to this document the Customer [although undefined, the reference plainly means GPEL] must pay the Money Owing to the financier in full on the Termination Date. (b) If GPE or any of its subsidiaries seeks External Financing [which is defined to mean any raising of funds other than from Richland] for the acquisition of the Power Plant or otherwise, it must stipulate in the relevant Disclosure Document that the funds raised from the External Funding will be used in part to repay the Money Owing. Once those funds from the External Financing are obtained, they must be used immediately repay the Money Owing to the financier in full. It is acknowledged that if the External Financing is in the form of a rights issue by GPE, the financing may participate in the rights issue by converting the Money Owing into shares in GPE on the terms set out in any document relating to that rights issue.' Both agreements of 10 April 2006 are signed by Alfred Wong.' On 10 April 2006, Richland and GPEL entered into a further unsecured loan facility agreement at a facility limit of $1.2M to enable GPEL to pay monies to TechComm: '... following a settlement of a dispute with it or judgment being obtained by TechComm against GPE and GPES No. 1 (as the case may be)' [abbreviations added], or alternatively, for the working capital purposes of GPEL and its subsidiaries. The Termination Date is six months from the date of the advance made to GPEL for the purpose so defined. The clause dealing with the extension of the Termination Date is in the same terms as the other two agreements of 10 April 2006 and the 'Repayment of the Facility' clause is in the same terms as clause 10 of the $1,055,000 Facility Agreement. On 10 April 2006, GPEL entered into a further Loan Facility Agreement with the brother-in-law of Alfred Wong, Mr Osmond Kwok for an unsecured facility of $1.5M to enable GPE Staplyton No. 2 Pty Ltd to pay part of the purchase price of the Altona power plant. The facility is a six month facility from first drawdown date which is acknowledged to be 10 April 2006. GPEL may give a notice to Osmond Kwok requesting an extension of the Termination Date. Clause 6 provides: 'This extension is not automatic and the Financier, may at its absolute discretion, decline to grant the extension'. The facility is to be repaid in full on 10 October 2006. There is no entitlement in GPEL to convert the debt to fully paid issued shares in GPEL. Clause 10(b) of the agreement provides that if GPEL or any of its subsidiaries seeks to raise funds from anyone other than Osmond Kwok, GPEL or the relevant subsidiary must stipulate in the disclosure document that the funds so raised will be used to repay the debt due to Osmond Kwok. Alfred Wong in his affidavit filed 19 July 2006 says that in the period 17 December 2004 to 10 April 2006, GPEL drew down upon the Richland facilities of 8 and 9 December 2004 in an amount of $4,904,174.78; the principal amount drawn down under those facilities at 30 June 2006 constituted $6,734,174.78; since that date, further amounts of at least $80,000 have been advanced by Richland to GPEL; there have been no repayments of any amount to Richland; the $5M facility and the $1,055,000 facility are fully drawn; and the $1.2M facility is partly drawn. Osmond Kwok in his affidavit filed 25 July 2006 says that since making his facility available, GPEL has drawn down an amount of $937,396.10. On 17 May 2006, GPEL entered into an unsecured $3M Loan Facility Agreement with Ace Bond Capital Ltd ('ABCL') at an interest rate of 11.95% for the '...working capital purposes of GPE and its subsidiaries' for a period of 12 months from the first drawdown date of the facility. The extension of the Termination Date and potential conversion of the debt to fully paid ordinary shares in GPEL is in these terms: ' Extension of the Termination Date Or Share Conversion On or before a date that is 15 days before the Termination Date, GPE may give a notice to the Financier requesting either : (a) an extension of the forthcoming Termination Date, which extension is automatic if the notice is supported by a statutory declaration by a director of GPE stating that GPE will be insolvent if the Money Owing is repaid on the forthcoming Termination Date; (b) a conversion of the Money Owing into fully paid ordinary shares of GPE at an issue price per share of 15% discount of the weighted average trading price of GPE's shares on the ASX over the five business days prior to the conversation date, subject to shareholders' approval being obtained (if required); or (c) an extension of the forthcoming Termination Date for part of the Money Owing in the manner contemplated by paragraph (a) and the conversation of the remaining Money Owing in the manner contemplated by paragraph (b)'. In relation to the facility provided by ABCL, Alfred Wong in his affidavit filed 25 July 2006 says that he was a director of Tourism Hotel &amp; Leisure Ltd ('THL') for the period 13 May 2004 to 26 March 2006 and also a director of Great Pacific Hotel Investments Pty Ltd ('GPHI') for the period 1 March 2004 to 11 May 2006; GPHI is a wholly owned subsidiary of ABCL; ABCL is a company incorporated in the British Virgin Isles and controlled by Mr Nels Tong; Nels Tong has no interest in ABCL but was one of the original individuals represented by GPFG when the approach was made in 2003 to the administrators of Envirostar for the GPFG group to acquire control of the entity (ie. 77% of the issued shares); THL is indebted to GPHI in the sum of $7,301,264.46 which amount is payable by 30 September 2006. Accordingly, ABCL's wholly owned subsidiary GPHI has a significant asset in the form of a debt due by 30 September 2006 and thus ABCL is said to have the capacity to make the promised $3M loan available to GPEL. Danny Au-Yeung has been a director of GPEL since 15 April 2003. On 25 July 2006, Danny Au-Yeung filed an affidavit in which he deposes to a debt payable to him by GPEL of $81,333.33 in respect of directors' fees. Accordingly, the position is this. Richland has provided GPEL with three facilities two of which are fully drawn ($5M and $1.055M and fall due for payment on 10 October 2006 and 30 September 2006). The partly drawn $1.2M facility falls due for repayment six months from the date of the advance. The Osmond Kwok facility is to be repaid in full on 10 October 2006. No part of the ABCL facility has been drawn down. The clauses providing for an extension of the term in each agreement do not expressly identify the extended date although, as a matter of construction, the parties presumably intended that the facility would be extended for a new term of the same period as the old term. In any event, the effect of the extension will be simply to postpone the date when the debt pursuant to each facility must be paid. It may be that the term of the facility will again be extended and in that sense, Richland, might proceed on the footing that the facility 'evergreen'. If the only consequence of extending the term is to postpone the date on which the debt becomes due and payable with no obvious mechanism by which cashflows will be available to GPEL to pay the debt or the rescheduled debt pursuant to each facility and no assets are available that might be realised in an orderly fashion to meet obligations when they fall due, the conclusion is open that GPEL, having regard to all the relevant circumstances, is unable to pay its debts as they fall due. It should be noted that the extension of each Richland facility is expressly predicated upon the submission to Richland of a statutory declaration signed by a director that GPEL will be insolvent if repayment of the debt is effected at the repayment date. In order to address the possibility that GPEL might thus be insolvent, Richland, Osmond Kwok and Danny Au-Yeung depose to these matters. As to the Richland facilities, Alfred Wong on behalf of Richland wrote a letter to the directors of GPEL on 17 May 2006 referring to the three facilities and advised that Richland would convert all monies owing under the three facilities into ordinary shares of one cent each in GPEL upon the approval of the shareholders of GPEL being obtained. At paragraphs 73 and 74 of his affidavit sworn 19 July 2006, Alfred Wong said this: '73. Furthermore, while I am confident that the shareholders will approve that conversion, even if that approval was not obtained, in my capacity as the director of Richland, I acknowledge the terms of the current facility agreements which have the effect that if 15 days before the Termination Date GPE gives a notice to Richland requesting an extension of the Termination Date such extension will be automatic if the notice is supported by a statutory declaration by a director of GPE stating that GPE will be insolvent if the money owing is repaid on the forthcoming Termination Date. In any event, as the director of Richland I confirm that Richland will not call up the debt owed by GPE if GPE was, or to do so would render GPE, insolvent.' 74. As the director of Richland I am aware that GPE is technically in default of the current facility agreements as the application to wind up GPE by ASIC has been on foot for more than seven days and has not been withdrawn or dismissed. However, as the director of Richland, I confirm that Richland waives the default for the benefit of GPE and will not call up the amounts owed under the current facility agreements in reliance on that event of default'. Mr Kwok has sworn an affidavit in which he deposes to a letter of 17 May 2006 to GPEL's directors in which he says: 'I confirm that I shall convert all monies owing to me under the above facility agreement into ordinary shares of one cent each in GPE, upon the approval of shareholders of GPE being obtained' . Danny Au-Yeung by his affidavit filed 25 July 2006 annexes a copy of his letter to the directors of GPEL by which he confirms that he is prepared to convert all of the fees payable to him into ordinary shares of GPEL at one cent per share. On 5 July 2006, GPEL and GPES No. 1, Investec Bank and BMI Group Pty Ltd ('BMI') entered into a share Sale Agreement whereby GPEL sold all its shares in GPES No. 1 to BMI and GPEL waived all inter-company loans to GPES No. 1. A Deed of Assignment of Security was also executed between the parties. Under this deed, all the rights under or arising from the loan facility provided by Investec to GPS No. 1 were assigned to BMI. Investec acknowledged that all rights or claims it may have had against GPEL or GPES No. 1 in connection with the loan facility provided by Investec, were waived. The defendants called evidence from Mr Robert William Elliott a chartered accountant and partner of Hall Chadwick, Chartered Accountants, to give evidence in relation to the question of whether, in Robert Elliott's expert opinion, GPEL is in a position to pay its debts as and when they fall due. Robert Elliott concludes that if the agreement of Richland, Alfred Wong, Osmond Kwok and Danny Au-Yeung to convert each of the amounts due to them to ordinary shares in GPEL at one cent is not approved by the shareholders, there is a potential solvency issue. Robert Elliott contends that GPEL has, in any event, the opportunity to obtain an extension of the Termination Date beyond 30 September 2006 and 10 October 2006 and because the extension is automatic if supported by the relevant declaration as to insolvency in the event of payment, those debts will not become due and payable and thus GPEL is not insolvent. Robert Elliott contends that the non-automatic extension in respect of the Osmond Kwok agreement would mean that replacement funds would be required in the event that the approval of shareholders for the issue of shares in GPEL is not obtained. Robert Elliott contends that on the assumption that the amounts paid to Richland, Kwok and Au-Yeung are converted to shares or, alternatively, the amount payable to Richland is extended and the debt payable to Kwok on 10 October 2006 is not 'called up' by him, GPEL will have a cash surplus of $3,363,300 after meeting operating expenses for the 12 months from 1 July 2006 to 30 June 2007 estimated to be less than $800,000. This postulated result may be a little odd in terms of demonstrating the solvency of GPEL. The cashflow statement for the 12 months to 30 June 2007 does not demonstrate any revenue from operating activities. There are none and thus no revenue. There is no evidence that the conditions precedent to the attraction of the Investec loan are likely to be satisfied nor that the Altona power plant has been installed. The cash surplus of $3,363,300 is predicated upon draw downs of $250,000 each month for 12 months from ABCL, draw downs of $65,830.00 for the months of July, August, September, October, November and December of 2006 and January 2007 from Richland, and draw downs for the months of February, March, April, May and June of 2007 of $112,520.00 from Osmond Kwok. These financing cash-in flows amount to $4,023,430.00 and after meeting operating expenses and other outgoings there is a surplus of cash at 30 June 2007 of $3.36M. In that sense, GPEL's accumulating cash position by draw downs might well result in a cash surplus but that result is entirely dependant upon draw downs from ABCL, Richland and Kwok. Since there are no operational activities generating cash flows in the financial year, it is difficult to see how the obligation of GPEL to repay the further amounts drawn down under the financial facilities will be met even assuming the current draw downs are either converted to equity or, alternatively, extended or not pressed. This is not that class of case where an external or related third party financier is providing interim financial support pending the sale of a major asset. The answer is said to be that all amounts drawn down under the Richland and Kwok facilities ($7,671,571 in all) and all further cash flow draw downs to 30 June 2007 projected by Robert Elliott to be $460,830.00 from Richland and $562,600.00 from Kwok, will be converted to equity if the shareholders approve. If not, Richland recognises the automatic extension entitlement in GPEL and, in any event, Richland will not call up the debt. Osmond Kwok has agreed to convert his debt to issued shares in GPEL. Osmond Kwok is silent on his attitude to recovery of the debt in the event that the shareholders fail to pass the relevant resolution. Accordingly, the non-current loans by Richland and Kwok when they become current on 30 September 2006 and 10 October 2006 will, it is said, be converted to equity or converted to non-current loans or, in the case of Richland, if the loan (together with further draw downs) remains current, it will not be pressed or claimed. In that sense, the balance sheet position of GPEL must be adjusted, it is said, to take account of the realities, in a commercial sense, of that evidence. Robert Elliott has assessed a pro forma balance sheet as at 30 June 2006 submitted to him by GPEL and has considered those adjustments that need to be made to reflect a true and accurate position particularly in relation to the current assets and current liabilities of GPEL. In assessing that balance sheet and the adjustments made to it, the carrying value of property plant and equipment has been written down to a minimum realisable value of $2.5M and the carrying value of intangible assets at $4.47M has been written down to zero. Total assets, current and non-current, are $2.97M. Of the current assets, trade and other receivables were written down from $287,921.00 to $178,455.00 and then further adjusted to $96,116.00 once Robert Elliott examined GPEL's primary documents relating to business activity statement returns and thus the likely refund to GPEL. Cash and cash equivalents in the current assets amount to $290,299.42. As to current liabilities, the pro forma balance sheet suggests that trade and other payables amount to $1,865,817 but Richard Elliott believes that the amount should be adjusted by $976,155.00 in respect of payables to related entities. These amounts are to all be converted into equity. They are these: Accrued Interest payable to Richland $477,505.00 Amounts payable to related entities for shared expenses $49,301.00 Directors' fees payable to Alfred Wong and Danny Au-Yeung $221,111.00 Rent payable to G P Energy for Staplyton site $115,587.00 Rent payable to G P Energy for Morwell site $112,642.00 Total $976,155.00 An amount of $207,636.00 included in the payables item represents interest accrued on the loan facility provided by Investec which has been assigned to BMI and, it is said, assumed by BMI. Similarly, the payables item includes $9,460.00 incurred by GPES No. 1 and that debt has been assumed by BMI. The adjustment is $1,193,251 resulting in a current liability for trade and other payables of $672,566.00. The other significant current liability is in respect of short term borrowings. That amount of $3,154,455 is represented by the loan facility repayable to Investec which has been assumed by BMI. The entire amount has been adjusted out of the balance sheet. Current liabilities are said therefore to be $720,815.00 and current assets are $391,879.00. In Robert Elliott's initial report of 19 July 2006 which was then the subject of a supplementary report correcting errors in the earlier report and, in turn, the subject of oral evidence of further corrections, Robert Elliott concluded that having regard to the adjustments I have mentioned and the assumptions previously discussed concerning the conversion of the relevant loan facilities to equity or the extension or non-enforcement of the relevant debts, the adjusted pro forma balance sheet at 30 June 2006 reflects a net asset position of $726,341.00. By reason of the further adjustments concerning the trade and other receivables from $178,455.00 to $96,116.00 and some minor additional matters, Robert Elliott concludes that the adjusted consolidated balance sheet demonstrates total net equity of $644,002.00. Although Alfred Wong deposes to the conversion of monies owing under the Richland facilities to shares or alternatively the election not to press for recovery of the debt (assuming no extension), it seems to me that the evidence is not clear that those commitments extend to rent payable to G P Energy or amounts in respect of shared expenses. As to the working capital requirements for a period from July 2006 to 30 June 2007, Robert Elliott said this at page 6 of Schedule E to the material annexed to his affidavit filed 20 July 2006: 'GPE has also restructured its management team since the resignation of the previous MD resulting in a much lesser salary expense of around $38k per month as compared with $91k per month previously. GPE will not take on any other operation in the near future other than the construction of the 13.5MW power plant as the stage 2 project at Staplyton. However, the construction will not start until the facility from FPCFM is available in which case all the construction cost will be covered by this facility. Under the current operation mode and taking into account other incidental operating costs and interest payable on promissory notes, the total monthly operating cost of the group should be around $80k per month (in terms of cash flow) giving a total of $960k for the next 12 months.' The mechanism to be relied upon to fund those projected capital requirements includes draw downs upon the ABCL facility of $3M, recourse to Richland and Kwok and the proposed issue of further shares in GPEL to raise $418,359.00 in share capital. On the question of the basis for his view as to solvency, Robert Elliott said in answer to counsel for the plaintiff: 'Look I believe the company is solvent because it has the capacity to meet its obligations as and when they fall due' . Counsel for the plaintiff put this proposition: Q: 'And you believe that, don't you, because of the unsecured loans that you think are available to the company?' ... A: ' Yes ' . Edwin Yeung also accepted in cross examination by counsel for the plaintiff that GPEL's ability to draw upon the loans is 'essential to GPE's solvency' . Robert Elliott was also asked to explain the cash flow test for solvency and apply the quick ratio test to determine the ratio in the case of GPEL. In applying the quick ratio test, Robert Elliott identified that the ratio as 0.54. On the state of the present evidence, Robert Elliott accepts that the question of whether GPEL is, at the date of the hearing, having regard to all relevant circumstances, in a position to pay its debts as and when they fall due, is to be determined on the footing that GPEL has demonstrated access to sufficient cash flow by reason of unsecured loans which are both certain and available to GPEL. All projected working capital requirements can be met through draw downs upon the Richland, Kwok or ABCL facilities. If the ABCL facility is disregarded for the moment, the projected working capital requirements can be funded by draw downs upon the balance of both the Richland and Kwok facilities. However, in order to be satisfied that GPEL is able to pay its debts as and when they fall due having regard to the commercial reality of the circumstances which have confronted GPEL for some time, it seems to me that it would be necessary to conclude that the two facilities are available, calls for draw downs upon the facilities will be satisfied and that GPEL is otherwise in a position to establish a basis upon which there is a serious prospect that it will establish operational cash flows to enable it repay debt and to service proposed infrastructure investment facilities sought by GPEL so as to establish an underlying commercial activity for the company. It seems to me it is artificial to perpetually or in an 'evergreen' way extend debt facilities (or continually convert existing and future debt to issued shares) in circumstances where a company which began its operations under the existing shareholder group on 15 April 2003 has failed to establish a single operating plant (other than a pilot plant exhibiting serious technical difficulties and negative cash flows) which is generating any cash flow derived from what is said to be core operations. GPEL is entirely dependent upon external related lenders. Although it is important to have regard to the evidence of a commitment by Richland and Kwok to convert all of their debt to equity, GPEL's solvency should first be assessed on the present state of its financial capacity to pay debts as and when they fall due conditioned by its relationship with related or unrelated funders. Richland has not yet in fact converted any of its substantial debt to equity although questions of capital adequacy have been under discussion in the affairs of GPEL for a long time. Plainly enough, GPEL has been under-capitalised in terms of its equity base and has only been able to sustain its operations by access to debt. On 6 July 2005, Alfred Wong regarded that debt as evergreen (ie. not, in his view at that time, the likely subject of equity conversion) [115]. On 4 April 2005, Alfred Wong said that GPEL should stand on its own feet and not keep relying on him for funding [148]. On 20 April 2005, directors of GPEL pressed Alfred Wong to refund the money paid to Richland from 19 November 2004 to 9 December 2004; and on 7 October 2005 when responding to BDO's proposed qualification of the accounts to 30 June 2005 on the topic of 'going concern', Alfred Wong, although confirming that funds of up to $5M were available to the company from Richland, noted that Richland had made 'no commitment that the loan would not be demanded for repayment within the next 12 months' [179]. Osmond Kwok in establishing his facility with GPEL did so on terms that the extension of the facility beyond 10 October 2006 was not automatic and Osmond Kwok expressly reserved a right to decline any extension of the facility. The amount due under these facilities on 30 September 2006 and 10 October 2006 will be at least $7,671,570.88 (subject to further interest). Although the Board minutes evidence expressions of view by directors that the Richland debt ought to be converted to equity (or on one occasion a view that the debt should be restructured as long term debt) and the minutes reflect a statement of willingness on the part of Alfred Wong to convert Richland's debt to equity, no part of the debt has been converted to equity nor any step taken to implement that position. The sworn commitment or promise by Alfred Wong to now convert all of Richland's debt soon to be current (together with further draw downs postulated by Robert Elliott and other debts due outside the facilities to Richland such as rent) to equity arises only in the context of the ASIC proceedings. Similarly, Alfred Wong's brother-in-law, Osmond Kwok, has adopted a position that he too will convert debt owed to him (together with further draw downs under the facility) to equity, in the face of the ASIC proceedings. Robert Elliott has made assumptions that these events will occur and on the footing of those present assumptions, he concludes GPEL is solvent. For my part, I am not prepared to rely upon these promises since Richland, in particular, has had many opportunities to convert debt payable to it both current and non-current to equity in the context of lengthy discussions about solvency and capital adequacy over a long period of time. In considering whether GPEL has discharged the onus of demonstrating that it is not insolvent, it is important to have regard to all of the circumstances and in that context, it should be remembered that concerns have been expressed about the solvency of GPEL and whether it might properly be considered a 'going concern' almost from the very moment that the GPFG Group secured control of Envirostar. In particular, this question has been alive to Alfred Wong and Richland from June 2003 and a question of real concern to the Board and GPEL's external auditors for some time. The issues of solvency, cash flow demands, the financial constraints confronting GPEL and conversion of Richland's debt to equity (against the background of the operational and financial problems associated with the pilot plant) were discussed at a directors meeting on 20 May 2004 [42]; a directors meeting on 21 July 2004 [43]; a directors meeting on 18 August 2004 (especially budget projections of expenditures and Richard Nott's concern over the company's liquidity) [44]; a meeting of the Board's Audit Committee on 20 September 2004 [46]; in BDO's report to the Board concerning the accounts to 30 June 2004 (observing 'the inherent uncertainty regarding continuation as a going concern') [47] [49]; BDO's notes to the 30 June 2004 accounts and particularly Note 1 [50]; a directors meeting on 22 September 2004 addressing operating cash flows, the need for a definitive plan to resolve GPEL's capital issues and conversion of Richland debt to equity [51] [54]; a directors meeting on 17 November 2004 (addressing financing options, the need to secure construction equity to attract the Investec funding and the need, in terms of debt relief, to convert the Richland debt to equity as GPEL 'does not have the finance to repay the loan' [58] [60]; a directors meeting on 15 December 2004 involving an extensive discussion of all of these matters [62]-[64]; the attraction of JFCP funds and immediate use of the subscription by Alfred Wong to retire debt to Richland, G P Energy and Austcorp [68] [115]; the election by Alfred Wong in conjunction with Lielkajis to proceed with placing a GPEL/GPEC promissory note product in the market without Board approval [117] [136]; the BDO (Ian Fergusson) advice to the Audit Committee on 23 February 2005 that the issue of 'going concern' for GPEL would need to be monitored 'very closely by management and the Board' [145]; the Expansion Capital Report directed expressly to the 'solvency concern' [145]; the directors meeting on 20 April 2005 concerning management's presentation with 'the main focus on stabilising the company's capital position and ensuring that it was a going concern' and issues concerning the Board's view that Richland should replace the loans [149] [151]; Peter Gan's report of 6 June 2005 concerning strategic options arising out of the problems concerning the pilot plant [154]; the extensive exchanges between BDO and GPEL between 4 August 2005 and the ultimate qualification of the accounts for the financial year ending 30 June 2005 [160]-[182]; the particular concerns expressed by BDO as to corporate governance and solvency [170]; and the failure to establish an operational power plant by meeting the construction equity arrangements and other conditions of the Investec offer which had been the subject of a statement to the Australian Stock Exchange. As to the future prospects of operational revenue, the defendants rely upon the affidavits of William Keith Lamont, Eduard Avila Alcordo and Garry Paul Ridout filed on 20 July 2006, 19 July 2006 and 31 July 2006 respectively. William Lamont is an Executive Director and Chief Operating Officer of GPEL. He is also an electrical engineer with considerable experience in power engineering and fluidised bed combustion systems ('FBCS technology'), boiler design and coal gasification. William Lamont has been employed by GPEL since May 2002 (then Envirostar) as the General Manager for Engineering and Construction. He remained the General Manager until 16 September 2005 and in that role he has been responsible for much of the technical work and particularly the installation and commissioning of the Stage 1 pilot power plant at Staplyton. William Lamont was appointed Chief Operating Officer in August 2005 and appointed a director of GPEL on 16 September 2005. William Lamont says that the purpose of constructing the pilot power plant at Staplyton was to test and prove the efficacy of fuel and ash handling systems in a plant utilising FBCS technology. William Lamont observes that the pilot plant was commissioned on 23 March 2004 and was 'not without its problems'. However, the primary purpose of the pilot plant was to test and perfect designs especially for fuel handling and ash handling. He observes that the small output capacity of the pilot plant made it sub-economic because it suffered from adverse economies of scale and problems of access to quality waste. William Lamont says that the Staplyton No. 2 project for a 13.5MW electrical power plant has been designed so as not to suffer from the same technical problems exhibited in the pilot plant and because the plant has much greater output of megawatt power as a function of its cost base, it enjoys greater economies of scale and greater efficiency. Moreover, an in-principle agreement with BMI exists for waste collection of quality fuel. William Lamont says that the current ASIC investigation and these proceedings has meant that the project to develop the 13.5MW Stage 2 plant has been placed on hold. Further, William Lamont says that the proceedings have also, in his judgment, been responsible for GPEL being deprived of funding through an Australian Federal Government Scheme called the LETDF Scheme which is designed to promote clean coal technology. In addition, William Lamont says that GPEL was moving confidently towards involvement in the design and construction of a coal gasification plant at Dalian in China and that this project has been 'put on hold' because of the present ASIC investigations and proceedings. The position, of course, is that the minutes of meetings of the Audit Committee, minutes of meetings of directors and exchanges between GPEL and Investec concerning the pilot plant and the terms and conditions upon which project funds might be made available taken in conjunction with the difficult capital raising issues confronting GPEL particularly having regard to the ongoing reservations on the part of BDO, has not meant that these projects have been put on hold or lost to GPEL because of ASIC's investigation or these proceedings. Rather, the systemic difficulties confronting GPEL in its capital funding (debt and equity), governance, management, preparation and implementation of budgets and operational plans, concerns regarding GPEL's capacity to provide proper audit information to its external chartered accountants to enable an informed opinion to be reached, the use of the JFCP subscription and other matters, have all been inherent in the inability of GPEL to establish an operational plant. Moreover, the problems confronting GPEL in establishing an operational pilot plant were sufficiently significant that the solutions canvassed by directors included closing the plant entirely, placing it on care and maintenance or, as ultimately occurred, selling the plant to a third party. Similarly, the material demonstrates that the Dalian project has not been pursued for reasons unrelated to these proceedings. William Lamont says that the Staplyton No. 2 project is commercially and technically viable and he has prepared a report identifying the basis for that conclusion. The conclusion rests on these matters: (a) the second hand power plant located at Altona (being the relevant plant to be deployed) is technically sound; (b) the power plant is capable of being relocated and recommissioned at Staplyton at approximately $16M; (c) 'with certain obstacles to be overcome, the power plant should be in commercial operation at Staplyton with positive income being generated for GPE within a period in the order of 12 to 14 months from relocation to Staplyton and first draw down of funding'; (d) GPEL will be able to establish an interconnection point with Energex for despatch of electricity, or alternatively, a temporary connection point might be made available; (e) 'the clear profit from the project once installed and commissioned would be in the order of $1M to $1.5M annually'. William Lamont says that as to the financial modelling, the overall cost of the project ($16M) includes purchase of the second hand power plant from Altona; dismantling and transportation of the plant to Staplyton; refurbishment of the major equipment; design and construction of new fuel handling components; ash handling components, boiler, fluidised combustion system, condensing system and installation and commissioning at Staplyton. William Lamont's report contains a series of schedules including a forecast profit and loss statement for the years 2006 to 2020. If the plant operates for a full 12 months in the year 2007 the projected total revenue is $7.45M with total operating costs of $4.09M. The model assumes depreciation of $700,000.00, interest costs of $554,892.00, earnings before tax of $2.1M and earnings after tax of $1.47M based upon 85% availability of the plant and 100,521MW hours generated at $37.08. Of course, on William Lamont's evidence, such a plant would not begin generating revenue assuming all of the matters described in William Lamont's report and mentioned at [229] occurred without interruption. Eduard Alcordo is an investment banker who has been involved in arranging finance for infrastructure projects, particularly power plant projects, in the Asia Pacific region including six power plant projects below 20MW capacity, four power plants over 20MW capacity and two coal fired steam turbine power plants. Eduard Alcordo is an Executive Director of FPC Funds Management Pty Ltd ('FPCFM') and an Executive Director of First Pacific Capital Underwriters Pty Ltd. Eduard Alcordo says this: '6. The [FPCFM] companies are interested in this project [Staplyton No. 2] and is looking to provide financial backing for it. FPCU is involved in completing due diligence with respect to the projects. 7. FPCFM has sourced $3 million in indicative subscriptions to fund the first two "milestones" in respect of the project. For this purpose, the first milestone is the purchase of the turbine generator and the second milestone is the first part of construction of the power plant. 8. MPI Group, an Australian engineering company with extensive experience in commissioning small power plants, were appointed due diligence engineers by the FPC companies with respect to the project. Phase 1 of the due diligence has been completed and MPI Group has commenced Phase 2 of the due diligence. However, Phase 2 has been suspended awaiting the outcome of the present proceedings with ASIC.' The due diligence process will resume subject to the resolution of these proceedings. The indicative Term Sheet is a three page indication of key terms. GPEL would be the EPC contractor and would be responsible for operation and maintenance of the proposed plant. The owner would be FPC Funds Management Pty Ltd or a company controlled by it subject to a facilities management agreement by which GPEL would lease the plant from the owner, secure all approvals, permits and licences, establish the relevant power purchase agreements, fuel supply agreements and other relevant contracts. The facility is for a total cost of A$22M amortised over 25 years together with a five year option with a payment in the first year estimated to be A$4,070,000 and in subsequent years a base amount of A$2,970,000 indexed every two years to inflation. The off-take power purchase agreement is to be with Energy Australia for a term of 10 years under a take or pay arrangement. The Term Sheet is subject to the execution of proper documentation. The Term Sheet was signed by Alfred Wong on 12 March 2006. William Lamont's report dated 24 October 2005 does not take into account in the profit and loss projections, the lease costs set out in the Term Sheet of March 2006. The post tax earnings for the five years 2007 to 2011 are $1.4M, $1.7M, $1.8M, $1.8M, $1.9M. The lease costs are projected to be $4M in the first year and $2.9M for each year thereafter subject to adjustment for inflation every two years. The final affidavit is that of Garry Ridout who is the sole Director and Company Secretary of Samvic Pty Ltd. That company provides mechanical, combustion and electrical engineering services specialising in combustion engineering technology. By an agreement dated 11 January 2006, GPEL Staplyton No. 2 Pty Ltd agreed to purchase a 16MW power plant located at Altona in Victoria for $1.875M plus GST. Garry Ridout says that after completion of the purchase, Samvic suggested to GPEL that it would be able to on-sell the plant for $3.75M. The offer actually made to Samvic was $5M and Garry Ridout values the plant on a 'quick sale' basis at $2M. Garry Ridout says that equivalent new plant with the same generating output would be $20M. It seems to me that all of this evidence simply means that GPEL has taken steps towards investigating in conjunction with engineers and an infrastructure financier the extent to which the present 'contingency' of establishing a 13.5MW power plant at Staplyton might be realised. It is no more than a contingency and is entirely dependent upon installation of the plant, testing, operational verification, consistency of operation (demonstrating the efficacy of the plant) and the extent to which successful deployment and commissioning of the Altona plant at the level required to sustain availability of the plant projected in the model (including despatch of electricity) thus assuring the revenue, can be achieved. Such a project could not contribute operational revenue until, at the earliest, January 2008. A further proposition put by the plaintiff is that even though it is open to conclude that Richland, Kwok and ABCL are willing to continue to provide financial support to GPEL, the defendants have not established that those entities have the capacity to provide funds when called upon to do so. The particular criticism is put in this way. While Richland has made significant loans in the past to GPEL, that, of itself, does no more than give rise to a basis for inferring that it might do so in the future. The defendants tendered the financial accounts for the Richland Property Trust as evidence of the capacity of Richland to continue to provide financial support. Alfred Wong gave evidence that Edwin Yeung, GPEL's internal accountant, had prepared those accounts based upon information that: '... out of the system when we were requested by ASIC to get access to that information' . The accounts are not audited accounts. In cross examination by counsel for the plaintiff, Edwin Yeung said, having had the accounts for the Richland Property Trust put to him for examination, that he had not seen them before. When asked again about the accounts he further confirmed that he had not seen the accounts before. The plaintiff says that the financial accounts for Richland in its trustee capacity fall well short of a persuasive demonstration of Richland's substance in that the accounts are unaudited; no explanation has been given by GPEL of the failure to produce audited accounts particularly in circumstances where Alfred Wong controls the trustee of the Richland Trust; and, finally, the balance sheet of 31 March 2006 for the trust cannot be regarded as a reliable or accurate statement of the assets and liabilities of the trust because: (i) the balance sheet includes an asset at a value of $101,100.00 when the asset will not be available for realisation within 12 months; (ii) the balance sheet includes a variety of negative assets and liabilities; (iii) an item identified as 'trade creditors' of $666,000.00 described in the balance sheet as a current liability has not been updated since December 2005; and (iv) the balance sheet includes as an asset, a loan of $3,653,359.89 payable to Richland by a company described as Richfield Development PL and that company was deregistered in January 2006. Alfred Wong was asked why the balance sheet as at March 2006 incorporated an asset being a debt to Richland from a company deregistered in January 2006. Alfred Wong said that the obligation would be assumed by other entities. At page 209 of the Transcript, Alfred Wong was asked a number of questions concerning the service upon him of a bankruptcy notice by Bridgecorp Finance Limited. Alfred Wong accepted that the debt to Bridgecorp was a judgment debt obtained in the Supreme Court in New South Wales in circumstances where the debt was not defended. When asked why the debt was not defended, Alfred Wong responded: 'When it's a genuine obligation, you do not defend. We I mean, initially, we defend the apparent hearing obligation of myself, because we think that their interest, all the things, the calculations were wrong, grossly overstated. Later on they changed the claim to just on the principal, so, therefore we do not defend' . Alfred Wong agreed that the judgment debt was approximately $1.2M concerning an obligation under a guarantee. Alfred Wong also agreed that he and Danny Au-Yeung are both defendants in a proceeding in the Equity Division of the New South Wales Supreme Court (No. 50023 of 2005) commenced by Greentown Bellambi Pty Ltd ('GBPL') and Greentown Real Estate Group Co. Ltd ('GREG') concerning claims made by the plaintiffs pursuant to guarantees signed by the defendants in the action. The claim is for an amount of Chinese RMB 50,059,946 against both defendants which Alfred Wong says is approximately A$8M. There is a separate claim against Alfred Wong for A$3,746,707M. Alfred Wong says that he is defending the proceedings and the question in issue is whether the guarantee is a valid guarantee or not. As to the other financiers, the plaintiff says that Dr Osmond Kwok is Alfred Wong's brother-in-law and there is no reason to believe that Osmond Kwok's financial capacity could not have been demonstrated on the evidence with a statement of assets and liabilities. The accounts of the Richland Property Trust show an asset described as 'Loan James Kwok $862,707.79'. As to ABCL, that company is registered in the British Virgin Isles and is controlled by Nels Tong. Alfred Wong gave evidence that he has no interest in ABCL. Nels Tong was one of the original investors represented by the GPFG Group when arrangements were made with the administrators of Envirostar. The financial accounts for the Richland Property Trust show an asset described as 'Loan Nels Tong Loan A/C - $986,822.82'. The basis upon which ABCL is said to have a demonstrated capacity to provide financial support of $3M to GPEL is that one of the company's subsidiaries, GPHI, is owed a debt of $7.3M on 30 September 2006. No financial accounts have been put in evidence concerning ABCL. As to ABCL, I am not willing to rely upon the evidence of the loan facility with that company as a basis for concluding that ABCL is in a position to support an apparent commitment to provide loan funds of $3M. There is no credible evidence of that company's capacity to provide draw downs upon the facility. No accounts, either audited or unaudited, have been put in evidence. Moreover, having regard to the participation by Nels Tong in the GPFG syndicate and the apparent relationship between Richland and Nels Tong reflected in the loan facility in the accounts of the Richland Property Trust, I am not satisfied that there is a demonstrated basis for relying upon that facility in assessing the solvency of GPEL. Moreover, I accept that having regard to the judgment debt obtained by Bridgecorp Finance Limited; the further claim reflected in the New South Wales Supreme Court proceedings; the circumstance that GPEL failed to comply with the statutory demand served upon it by TechComm; the acceptance by Alfred Wong that at the time that the JFCP funds were received, GPEL 'owed a considerable amount of money to numerous creditors' (82 in all [84]); and the recognition that to the extent that creditors' payments have been delayed, the delay was not a function of an inability of Richland to provide funds but rather 'delayed payment of creditors' was a function of implementing 'tight cash flow policies' so as to reduce borrowings:- in other words, the policy of GPEL has been to delay paying debts as and when they are due as a cash flow management policy [89] a serious question arises as to whether further funds will be available under the facilities. I accept that Richland has demonstrated a willingness to advance funds to GPEL and historically has done so. However, once satisfied that there is a serious question of the capacity of Richland to provide the further advances, it seems to me that the onus has not been discharged by GPEL. However, even if it can do so, it seems to me that the fundamental question is whether the advances themselves can be repaid. Further, I examine the question of GPEL's solvency on the basis that I am not willing to infer or accept that all debt including future debt if advanced by Richland and Osmond Kwok will be converted to equity including the particular additional debts due to Richland such as rental payments [211]. In addition, the current proposal is that GPEL will enter into a new relationship with an infrastructure funder in respect of a $22M commitment in terms of a facilities management lease involving substantial future commitments to a third party. In the absence of a statement of assets and liabilities on the part of Osmond Kwok and audited accounts on behalf of the Richland Property Trust, I am not satisfied that there is a demonstrated capacity to provide the proposed advances to GPEL through access to these facilities and accordingly, I am not satisfied that at the date of the hearing looking forward but also having regard to the history of GPEL's financial condition, it can pay its debts as and when they fall due. The circumstances surrounding the claim made by TechComm are also important. On 26 August 2005, TechComm served a statutory demand upon both GPEL and GPES No. 1 demanding payment from both entities of an amount of $960,857.57. On 15 September 2005, GPEL made an application to the Supreme Court of New South Wales under s 459G of the Act to set aside the statutory demand. On 29 May 2006, Associate Justice MacGready determined that application and ordered that the statutory demand be varied pursuant to s 459H(4) by reducing the amount of the demand to $881,817.34. His Honour also declared the demand to have had effect as varied, as from the date of service upon GPEL, namely, 26 August 2005. No order was made for an extension of time to comply with the varied statutory demand. On 29 May 2006, TechComm's lawyers wrote to GPEL's lawyers demanding payment of the varied amount by 10.00am on Wednesday, 7 June 2006. The date for compliance with the demand expired on 6 June 2006. By that date, TechComm had not received payment of the varied amount or any part of it (that is, the undisputed part). On 13 June 2006, TechComm entered into a Deed of Assignment with Richland and GPEL by which TechComm assigned its right, title and interest in an Agreement which had given rise to the claim for the debt, and the debt itself, to Richland for the sum of $660,000.00 (including GST) in full and final settlement of all claims TechComm might have against either GPEL or GPES No. 1. On 19 June 2006, GPEL gave notice to the Australian Stock Exchange of the resolution of the matter; notice that Richland would release GPES No. 1 from any liability in respect of the assigned debt; Richland would fund the payment of the purchase price or assignment sum through an $1.2M loan facility granted to GPEL on 10 April 2006; and Richland would convert the amount equal to that purchase price into shares in GPEL at one cent per share, subject to shareholder approval. In an affidavit filed 26 June 2006, Germaine Mei Lin Kee deposes to a conversation with the Managing Director of TechComm, David Whan, on information and belief, that the compromise had been reached with TechComm and TechComm had accepted the assignment sum from a third party in satisfaction of GPEL's obligation. Alfred Wong in his further affidavit filed 31 July 2006 deposes to the circumstances surrounding discussions with David Whan to resolve the matter. Alfred Wong says that he was unaware that if the time for compliance with a statutory demand was to be extended, an application had to be filed under the Act pursuant to s 459F(2)(a)(i) as a result of which the time for compliance elapsed. In any event, Alfred Wong says that GPEL was investigating, with its lawyers, whether grounds of appeal existed in respect of his Honour's orders and whether an application for leave to appeal ought to be made. Nevertheless, the position remains that a demand was made which resulted in a variation to the demand by application by GPEL and GPES No. 1 to the Supreme Court of New South Wales to reduce the demand to $881,817.34. Whatever the measure or extent of that further dispute GPEL might have had with the reduced amount, no part, even the undisputed part of the debt, was paid by GPEL or Richland consequent upon his Honour's variation until the total compromise amount was paid as part of an assignment of the debt. GPEL commercially held TechComm out of the undisputed part of the debt until TechComm comprised the entire claim. One further matter should be mentioned in relation to the evidence relied upon by GPEL concerning the events generally. An affidavit by Danny Kam Yun Au-Yeung who became a director of GPEL on 15 April 2003 was filed and relied upon. Danny Au-Yeung deals with the topics which are addressed by Alfred Wong and adopts the position adopted by Alfred Wong. In cross examination, Danny Au-Yeung accepted that he had had the benefit of reading Alfred Wong's affidavit material and throughout his affidavit he extensively refers to paragraphs of Alfred Wong's primary affidavit sworn 18 July 2006 and filed on 19 July 2006. Although it is understandable that Mr Au-Yeung might have had regard to events and circumstances which would assist his independent recollection of events, I accept that Alfred Wong's affidavit and other material has very substantially influenced the formulation of Danny Au-Yeung's views, his recollection of events and his evidence. Accordingly, I do not rely upon the affidavit as probative of any fact in issue. Mr Bain QC made it clear in his submissions that Danny Au-Yeung's affidavit was prepared and read in the application simply so as to avoid any adverse Jones v Dunkel inference. ASIC has applied pursuant to s 459P for an order that GPEL be wound up in insolvency pursuant to s 459A of the Act. GPEL seeks to rebut for the purposes of s 459C(3) the presumption arising pursuant to s 459C(2) by reason of GPEL's failure to comply with TechComm's statutory demand. Robert Elliott contends that GPEL is solvent because it can pay its debts as and when they fall due because it has access to unsecured funds from Richland, Kwok and ABCL. I propose to disregard recourse to funds promised by ABCL in determining whether GPEL is able to pay its debts as and when they fall due, for the reasons indicated at [244]. In addition, having regard to the matters mentioned at [223], I am not prepared to conclude that promises now made by Richland and Kwok that all funds payable to each of them will be converted to equity is a basis for a valid assumption made by Robert Elliott in determining whether GPEL is able to pay its debts as and when they fall due, looking forward. Substantial non-current debts will become current debts on 30 September 2006 and 10 October 2006 although it may be that those debts will be rendered non-current by reason of an extension of the term of the facility on the assumption that the shareholders' resolution to convert the debt to equity is either not passed or not sought. It seems to me in those circumstances that GPEL is necessarily insolvent having regard to all the circumstances confronting GPEL reflected in these reasons including those matters identified at [223] and a demonstrated failure to establish a plant generating sustainable operational positive cash flows. It is, of course, commercially realistic to have regard to access to funds from third parties or related parties and there is 'no compelling reason to exclude from consideration [such] funds' ( Lewis v Doran 54 ACSR 410 at [109] per Giles JA with whom Hodgson and McColl JJA agreed). That observation, however, is conditioned by the qualification that 'provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable' ( Lewis v Doran at [109]) and further at [109]: 'It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable '. Although in Sandell v Porter [1966] HCA 28 ; (1966) 115 CLR 666 at 670, Barwick CJ recognised that funds that could be gained from the use of the company's assets either by realisation by sale or by mortgage or pledge of those assets within a reasonably short period of time relative to the debts in question, represent resources available to the company which might be deployed in paying debts as and when they fell due (and thus a factual matter aiding in the determination of solvency), the circumstances confronting GPEL do not involve the realisation of assets within a short period of time as, apart from the uninstalled Altona plant, there are no realisable assets and no asset which might be the subject of a charge which might convert, subject to redemption, the asset into cash. Putting to one side the conversion to equity contention, the debt facilities provided by (and proposed further facilities by Kwok and Richland) are substantial and relatively short term. If those debts are rendered non-current at 30 September 2006 and 10 October 2006 by extension for another term they will, within a period of 12 months at the latest, fall due for repayment or further extension or conversion, in the ordinary course. The circumstances of GPEL do not fall into that class of case where a banker to the group might provide funds to meet a shortfall until, for example, completion of the sale of a major asset such as a 'shopping centre' ( Re Adnot Pty Ltd (1982) 7 ACLR 212). The continued extension or suspension of the currency of accumulating debt which might in the immediacy of the date for payment be postponed to a later date does not suggest solvency if there are no actual operating revenues on the horizon or assets that might actually be realised to meet the automatic deferral. Such arrangements simply have the effect of postponing 'the evil day' for payment in an environment where there are no demonstrated revenues and no realisable assets. On the question of the discharge of the evidential burden, the Court must be presented, unless otherwise explained, with the 'fullest and best' evidence of the financial position of the lenders: Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609. Clearly, 'unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared' ( Ace Contractors &amp; Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 per Weinberg J relied upon by Santow JA in Expile v Jabbs Excavations (with whom Meagher and Handley JJA agreed) 45 ACSR 711 at 719. If the solvency of GPEL ultimately relies upon access to financial facilities from Kwok and Richland (and ABCL), as Robert Elliott contends consistent with the views of Edwin Yeung, it is essential in the context of all of the circumstances GPEL has confronted and continues to confront described at [223] and in these reasons generally that persuasive and compelling evidence be adduced of the capacity of the lenders to provide continuing support. I am satisfied there is a serious question that the lenders do not have that capacity. In addition, the capacity of GPEL to retire that debt and future debt not only drawn down from those lenders but obligations established to meet new liabilities such as those arising under a facilities management infrastructure lease of the kind described by Eduard Alcordo, is not demonstrated. In all the circumstances, I am not satisfied that GPEL has discharged the onus of proving that it is not insolvent. I propose to make an order pursuant to s 459A of the Act that GPEL be wound up in insolvency. Five objections have been made to sentences contained in paragraphs 18, 24, 28, 31 and 39 of the affidavit of Heymala Eardley filed on 5 July 2006. The objection in each case is put on the basis that the relevant sentence is in the nature of a comment or a submission. I propose to admit each of those sentences under challenge and treat those matters as simply contextual comment. Paragraph 16 of the affidavit of Pierre Rene Prentice filed 5 July 2006 is objected to in total on the ground that it represents inference or comment in the nature of a submission. I propose to admit paragraph 16 of the affidavit as relevant to a fact in issue namely, the character of the representation made to JFCP. The last sentence of paragraph 12 of the affidavit of Paul Willis filed 13 July 2006 is the subject of an objection on the ground that it is simply a matter of inference. The sentence deals with the reaction of Paul Willis to GPEL's press release to the Australian Stock Exchange on 26 November 2004. I propose to admit the statement as it goes to the question of the understanding Paul Willis gained in relation to the use GPEL would make of the JFCP funds. I certify that the preceding two hundred and fifty nine (259) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate: Dated: 20 September 2006 Counsel for the Applicant/Plaintiff: Mr C Wilkins Solicitor for the Applicant/Plaintiff: Special Counsel to ASIC Counsel for the Respondent/Defendants: Mr R Bain QC and Mr P Looney Solicitor for the Respondent/Defendants: Bennett &amp; Philp Date of Hearing: 31 July 2006 to 3 August 2006 Date of Judgment: 20 September 2006 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2006/1254.html