A threshold issue - s 459S of the Corporations Act
85 640 was substituted as a creditor pursuant to s 465B of the Corporations Act. After an order for substitution is made, the substituted applicant may proceed as if it had been the original applicant. That is, a substituted applicant relies on the presumption of insolvency arising from the failure to comply with the statutory demand issued by the original applicant. In this case, 640 relies on the presumption of insolvency arising from Splash Bay's failure to comply with the Rosch Demand in support of its application to wind it up.
86 The grounds raised by Splash Bay in opposition to the application to wind it up concern the debt owing by it to 640, 640's standing as a creditor and, more generally, 640's conduct in pursuing the application. Insofar as the grounds concern the debt owing by 640 or its standing, the parties raised as an issue whether Splash Bay was required to seek leave pursuant to s 459S of the Corporations Act to oppose the application to wind it up in reliance on those grounds. 640 submitted that they were grounds which Splash Bay could have relied on in opposing the 640 Demand and hence it required leave to raise them in this proceeding. Splash Bay submitted that s 459S would not apply to 640's application to wind it up and that it is free to raise all of the grounds included in its amended notice of appearance in opposition to the application without the need for it to seek leave pursuant to s 459S(1). Splash Bay further submitted that, on a proper construction of s 459S, the requirement for leave attaches to disputes that could have been set up in the face of the Rosch Demand, which does not relate to any debt owed to the substituted plaintiff, 640. Splash Bay was unable to take me to any authority squarely in support of that submission but referred to the judgment in Bibby Financial Services Pty Ltd v Wolf Industries Pty Ltd (2004) 49 ACSR 45; [2004] NSWSC 134 (Bibby) as authority for the proposition that the standing of a creditor who applies to be substituted and who has served a statutory demand that has not been satisfied cannot be questioned.
87 I accept Splash Bay's submission that the requirement for leave in s 459S applies to grounds raised in opposition to the Rosch Demand, that being the statutory demand upon which 640 relies to wind up Splash Bay. But it does not follow that Splash Bay is then free to raise grounds seeking to dispute the debt said to be owing to 640 or 640's standing as a creditor in answer to the application to wind it up. While s 459S of itself does not, in this case, operate to constrain Splash Bay vis a vis 640, the scheme of Pt 5.4 of the Corporations Act means that Splash Bay is not free to raise such grounds as it wishes in opposing the application. In my opinion the only grounds it can raise are those that did not exist or could not be raised at the time for compliance with the 640 Demand. My reasons follow.
88 The starting point to consider the operation of s 459S in circumstances where there has been an order for substitution of a new applicant is the policy behind Pt 5.4 of the Corporations Act which, it is well understood, was to introduce efficiency into the winding up process. The purpose of Pt 5.4 was to allow disputes concerning the existence or quantum of a debt to be dealt with quickly and at an early stage so as not to impede the resolution of an application to wind up a company in insolvency: see Assaf F, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths, 2012) (Assaf, Statutory Demands) at [1.35]. That policy has been reflected in the approach of courts in their consideration of different aspects of Pt 5.4. It equally impacts upon the approach to the issue now before me.
89 In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) (2011) 244 CLR 1 the High Court (Gummow, Heydon, Crennan, Kiefel and Bell JJ) said at [27]-[28]:
27. The evident policy of Pt 5.4 is that there be a speedy resolution of applications to wind up in insolvency. To that end, a challenge to a statutory demand is to be made promptly, before the application for the order for winding up in insolvency is determined and, where possible, disputes are to be resolved on the application to set aside the demand. Section 459S provides that where an application to wind up in insolvency relies upon a failure by the company to comply with a statutory demand, the company may not, without leave, oppose the making of an order on a ground which (a) it relied on in an application to set aside the demand or (b) it could have relied on but did not (whether or not it in fact made the application). That leave is not to be granted unless the court is satisfied that the ground is material to proving that the company is solvent. Thus if leave is sought on the basis that the debt is disputed, the existence or amount of that debt must be relevant to a conclusion as to the company's solvency. This requirement of s 459S is consistent with the operation of the presumption of insolvency under s 459C, which applies even if leave is granted to raise a ground of opposition. It applies because there has been a failure to comply with a demand which remains in effect.
28. Under the present statutory scheme, where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption. This may be contrasted with the position which formerly pertained, where the presumption that a company was unable to pay its debts could not arise if the debt the subject of the demand was shown to be the subject of a genuine dispute of substance.
(citations omitted)
And at [32]-[33]:
32. There is a policy evident in the current statutory scheme that disputes concerning a statutory demand should, where possible, be determined prior to the determination of the winding up application and therefore separately from that application. The requirement of leave, to raise an objection at the hearing of that application which could have been taken in an application to set aside a demand, confirms this. But such a policy says nothing about what is to occur if there remains an issue about a debt at the time the application for an order for winding up in insolvency is heard. Sections 459A and 467(1)(c) make plain that the court retains a discretion to stay proceedings on an application to wind up a company in insolvency.
33. What was said by Gibbs J in In re QBS Pty Ltd about practical considerations, which may attend the resolution of a dispute about the existence or extent of a debt, remains relevant to applications for winding up, subject to some qualifications arising out of the present statutory scheme. The court may consider that although such a dispute may affect a conclusion as to solvency, the dispute may be more conveniently resolved in other proceedings which have been, or will be, brought for that purpose. Much may depend upon the nature of the dispute, and the extent to which it is removed from the central question of solvency. In this regard the court will bear in mind that the question of solvency, which it is required to determine upon an application for winding up in insolvency, is affected by the statutory presumption. The starting point, where the presumption operates, is that the onus is on the company to rebut the presumption, by proof of its solvency. And when considering whether to separate out a dispute from the winding up proceedings, the court will also bear in mind the statutory objective, that such applications are to be determined within six months, subject only to extensions granted in special circumstances.
90 Section 459S(1) relevantly provides that where "an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand" the company cannot, without the leave of the Court, oppose the application on a ground that it could have relied on for the purposes of "an application by it for the demand to be set aside", but did not so rely. The demand referred to in the chapeau of s 459S, for the purposes of this application, is the demand served by the original plaintiff, Mr Rosch. That is, 640, the substituted plaintiff, relies on Splash Bay's failure to comply with the Rosch Demand. As I have already observed, the grounds which Splash Bay is precluded from raising, without leave of the Court, are those that it could have raised in an application to set aside the Rosch Demand. But that is not the end of the issue.
91 There have been few decisions in which the operation of s 459S has been considered in circumstances where an applicant on the winding up application was substituted pursuant to s 465B. In the earliest of them that I have been able to locate, Kelvingrove (1993) Pty Ltd v Paratoo Pty Ltd (1998) 16 ACLC 964 (Kelvingrove), the respondent argued that the substituted applicant could not bring the application because it was not within one of the categories in s 459P entitled to bring an application pursuant to s 459A as it was neither a creditor nor a contingent creditor. Master Sanderson observed that it seemed to him that the question of whether the applicant was a creditor or contingent creditor fell to be argued at the time the application for substitution was made and that once an order was made the substituted creditor must have standing. Master Sanderson further noted that the main argument by the respondent in opposing the application for winding up was a claim by the respondent that the debt upon which the application was based was subject to a bona fide dispute. During argument on that issue a question arose as to how s 459S would affect the capacity of the respondent to raise that issue. At 967 Master Sanderson observed:
Clearly, s 459S is directed at a situation where a company has failed to comply with a statutory demand, a winding up application is made and the company then seeks to argue that there is a genuine dispute as to the debt upon which the statutory demand was based. The section does not appear to allow for the situation where the winding up application, although based on a failure to comply with a statutory demand, is made by a substituted applicant. Here, Paratoo says there is a genuine dispute about whether it is indebted to Kelvingrove. It would seem to me that leave would be required if, as part of its opposition to the winding up application, Paratoo sought to argue that it was not indebted to Mr and Mrs Frizell. But it does not require leave with respect to the substituted applicant.
What is clear, however, is that as this is a final application only admissible material, of which the deponent has direct knowledge is to be permitted in affidavits: see O 37 r 6(1). This stands in contrast to an application to set aside a statutory demand. Such applications are interlocutory in nature and affidavits in support of the applications "may contain statements of information or belief with the sources and grounds of that information and belief": see O 37 r 6(2). This puts a corporation seeking to resist an application to wind up by a substituted creditor at somewhat of a disadvantage as against the original applicant. The answer to this is, I think, that the application for the creditor to be a substituted applicant is interlocutory. It is at this stage that the question of whether there is a bona fide dispute ought be considered. …
92 The learned Master correctly identified that leave would be required to raise a ground in opposition to the winding up application that the company could have raised on an application to set aside the original plaintiff's demand. But while on its face it might follow that leave is not required to raise grounds in opposition to the substituted plaintiff's debt or standing, it is, with respect to the learned Master, not a complete answer to leave the matter where it appears he did. The learned Master did not identify what grounds a defendant could properly raise vis a vis the substituted plaintiff in opposition to an application to wind it up. While the learned Master's view on the subject is not clear, if he was suggesting that such grounds were at large then, in my opinion, such a view would not give sufficient consideration to the policy behind, and the effect of, Pt 5.4 of the Corporations Act and its operation. Master Sanderson's subsequent observations that the question of whether there is a bona fide dispute ought to be considered at the stage of the application for substitution are apt and, in my opinion, shed some further light on the issue, although not entirely for the reasons identified by the learned Master.
93 In Bibby Austin J considered an application for substitution by Scottish Pacific Business Finance Pty Ltd (Scottish), which was opposed by the defendant (Wolf). Wolf alleged that there was a genuine dispute as to a part of the indebtedness claimed by Scottish. At [17] Austin J found that subpara (a) of s 465B(2) of the Corporations Act was satisfied because the plaintiff had settled its claim with Wolf and no longer wished to proceed with the application. His Honour noted that he could make the order for substitution if, in the exercise of his discretion, he thought it was appropriate for him to do so, provided that Scottish "had the requisite standing". At [18] his Honour continued:
Subsection 465B(1) authorises the Court to make an order substituting, as applicant in an application under (inter alia) s 459P for a company to be wound up, "a person … who might otherwise have so applied for the company to be wound up". According to s 465B(4), after an order for substitution has been made, the application may proceed as if the substituted applicant had been the original applicant. Subsection (1) raises the question whether the applicant for substitution might have applied for the company to be wound up. Subsection 459P(1)(b) authorises a creditor (including a secured, contingent to prospective creditor) to apply to the Court for a company to be wound up in insolvency. The question is whether Scottish is a "creditor" for the purposes of that provision. It has not been suggested that Scottish has standing to seek a winding up order on any other ground.
94 Austin J noted that Wolf challenged Scottish's application on the ground that it had not shown that it was a creditor because there was a genuine dispute as to the existence of its debt. In response, among other things, Scottish relied on its unsatisfied statutory demand and submitted that, for that reason, Wolf could not challenge its standing as a creditor for the purposes of its application for substitution. Austin J held that Scottish was entitled to succeed and to be substituted as a creditor because of the unsatisfied statutory demand. His Honour said that it was not necessary for him to deal with the other bases upon which Scottish answered the allegation that there was a genuine dispute in relation to the debt and that it was undesirable to do so because "the law is structured … so as to make it inappropriate to explore whether there is a genuine dispute undermining the applicant's status as a creditor, in an application for substitution by an applicant who relies on an unsatisfied statutory demand": at [20].
95 After referring to aspects of Pt 5.4 of the Corporations Act his Honour said at [22] and [24]-[25]:
22. These provisions have the consequence that the proper occasion to raise a genuine dispute about a debt which has been the subject of a statutory demand is in an application to set aside the statutory demand, rather than at the hearing of the winding up application. Subsection 459P(1)(b) confers standing on a "creditor" to make an application for a company to be wound up in insolvency. If it were necessary, at the hearing of the winding up application, for the applicant to prove its status as a creditor, or to rebut a contention by the company that there was a genuine dispute as to the existence of the debt, the scheme of Part 5.4 would be undermined.
…
24. In my opinion, it is equally not open to the company to challenge the standing, as a creditor, of an applicant for substitution under s 465B who has served a statutory demand which the company has neither satisfied nor set aside. It would be anomalous if the company were prevented from asserting a dispute in respect of a debt otherwise than by leave under s 459S, where the original applicant for winding up persisted to the hearing, but could raise a dispute by challenging the standing of an applicant for substitution.
25. In my view the words of ss 465B(1) and (4) point to the contrary conclusion. Where the applicant for substitution has itself served a statutory demand that has neither been satisfied nor set aside, it is a person who might have applied for the company to be wound up in insolvency in reliance upon those facts, rather than in reliance upon the fact of the debt. The position of an applicant for substitution who relies on a statutory demand that has not been satisfied or set aside is indistinguishable from the position of the original applicant who relies on such a statutory demand. The latter's standing as a creditor cannot be challenged, and the former is a person who might have applied for the company to be wound up on exactly the same basis as the latter (compare the wording of subsection (1)). Further, substitution will permit the applicant to proceed as if it had been the original applicant (see the wording of subsection (4)), and therefore place it in a position to rely on the statutory demand without any challenge to its standing as a creditor, subject only to s 459S.
96 As submitted by Splash Bay, the effect of the decision in Bibby is that a creditor who has an unsatisfied statutory demand and who applies to be substituted as a creditor in an application to wind up a company on whom that demand was served will have standing, which cannot be disputed, because of the unsatisfied statutory demand. As Austin J notes the appropriate time to raise a dispute about the debt on which a statutory demand is based is in the 21 day period following service of the demand by the filing and service of an application to set aside the demand and the resolution of that application. Once the statutory demand expires, there will be a presumption of insolvency upon which the creditor can rely to bring an application to wind up the company under s 459A. The standing of the creditor cannot be challenged. Equally, the standing of the substituted creditor, who stands in the shoes of and can proceed as if it was the original creditor or applicant and is thus placed in a position to rely on the statutory demand, cannot be challenged, "subject only to s 459S". As the substituted creditor stands in the shoes of the original creditor or applicant, the reference to s 459S must be a reference to the need to seek leave to rely on a ground that was or could have been relied on for the purposes of an application to set aside the demand of the original applicant.
97 In In the matter of C2C Investments Pty Limited (No 9) [2013] NSWSC 269 Black J had before him an application to wind up the defendant (C2C) by the Commonwealth Bank of Australia, which had been substituted as plaintiff pursuant to s 465B. At [3] Black J referred to Bibby at [24]-[25] where Austin J noted that the effect of substitution was to permit the substituted creditor to proceed as if it had been the original applicant and thus placed it in a position to rely on the original applicant's statutory demand without any challenge to its standing as a creditor, subject only to s 459S of the Corporations Act. At [4]-[5] his Honour said:
4. In this matter, C2C initially foreshadowed an application under section 459S of the Corporations Act to seek to oppose the winding up on grounds in respect of the debt claimed by CBA, although that application was not pressed. In my view, the decision not to press it was soundly made, not least because it appeared to misconceive the structure of substitution under the Corporations Act, by seeking to challenge the winding up, not by reason of any challenge to the demand originally served by Community Association, but instead by reference to matters involving dealings between CBA and C2C.
5. It would also have been open to C2C, without leave, to seek affirmatively to establish its solvency in opposition to a winding up application. It has ultimately not sought to do so. In these circumstances, as a unanimous High Court noted in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) [2011] HCA 18; (2011) 244 CLR 1; (2011) 83 ACSR 126 at [28]:
"...where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption."
98 I respectfully agree with the observations of Black J that the structure of substitution of an applicant as mandated by s 465B of the Corporations Act means that, once the substitution order is made, the company the subject of the application to wind up cannot challenge the winding up by reference to issues as between the substituted applicant and the company. The time for determining the substituted applicant's standing is at the time of the determination of the application for substitution. As Austin J held in Bibby, where such an application is based on an unsatisfied statutory demand, there can be no issue about the substituted applicant's standing as a creditor.
99 As a substituted plaintiff stands in the shoes of the original plaintiff and relies on the original plaintiff's demand, the defendant can, subject to leave being granted under s 459S, oppose the application to wind it up on grounds that it could have relied on in an application to set aside the original plaintiff's demand. But where the defendant seeks to challenge the standing of a substituted plaintiff, relying on grounds that it could have relied on in an application to set aside the substituted plaintiff's demand, s 459S has no role to play. While there is no express statutory limitation on the grounds a defendant might seek to rely on in those circumstances, it does not follow that the defendant is free to raise whatever grounds it wishes.
100 The usual time for a defendant to raise issues challenging a substituted plaintiff's standing as a creditor is at the time of the application for substitution. But if the substituted plaintiff relies on an unsatisfied statutory demand as the basis for its application for substitution then a challenge to the proposed substituted plaintiff's standing will fail: see Bibby. In those circumstances, the time for a defendant to raise issues about the substituted plaintiff's standing on the basis of the debt the subject of its statutory demand was in the 21 day period after service of the substituted plaintiff's demand. If it did not raise those issues by way of an application pursuant to s 459G of the Corporations Act to set aside the demand then it cannot subsequently, on an application to wind it up, raise grounds that it could have raised in such an application, with or without leave.
101 For the purposes of this proceeding this means that it is not now open to Splash Bay to raise grounds that it could have and should have raised following service of the 640 Demand. This outcome may be harsh as it, in effect, removes the safety net, as it has been described (see Assaf, Statutory Demands at [10.9]) that is provided by s 459S to a company the subject of a winding up application. But it is, in my opinion, the outcome of the operation of the legislative scheme and is in line with its policy intention. Notwithstanding this outcome, it remains open to Splash Bay, or a company in its position, to lead evidence of its solvency in answer to an application to wind it up.