HIS HONOUR: On 19 January 2015, the plaintiff Riche Corporation Pty Ltd filed an originating process claiming an order that the defendant Williamson Building Corporation Pty Ltd be wound up in insolvency and a liquidator appointed. The originating process relied on the failure of the defendant to comply with the creditor's statutory demand served on it by the plaintiff. Following service of the originating process, the matter was resolved as between the defendant and the plaintiff, by the payment by the defendant of the amount of the debt on or about 5 February 2015. By interlocutory process filed on 27 February 2015, the present applicant Xanvic Pty Ltd applies pursuant to (Cth) Corporations Act 2001, s 465B, for an order that it be substituted as plaintiff.
As has been explained in a number of cases, on an application for substitution under s 465B, the Court is faced with three main issues. The first is whether the applicant is, in the words of the section, "a person who might otherwise have so applied for the company to be wound up". The second is whether it is appropriate to make an order for substitution, as referred to in subsection (2). The third is a question of discretion: if the first two requirements are satisfied, whether as a matter of the discretion such an order should be made [see, for example, In the matter of Aquaqueen International Pty Ltd [2014] NSWSC 527, [22]; In the matter of C2C Investments Pty Ltd [2012] NSWSC 1443].
The issue whether the applicant for substitution might otherwise have applied for the company to be wound is judged at the date on which the originating process claiming the winding-up order is filed [Deputy Commissioner of Taxation v Sun Heating Pty Ltd [1983] 2 NSWLR 78; (1983) 9 ACLR 314; Bidald Consultant Pty Ltd v Miles Special Builders Pty Ltd (2005) 54 ACSR 228, [15]].
The applicant's submissions invoke the decision of the High Court in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1, 16, for the proposition that where the proceedings rely on a failure to comply with the statutory demand, the status of the debt -that is to say, whether or not it is genuinely disputed - is irrelevant.
I do not agree, and I do not think that that is what the High Court said in ASIC v Lanepoint. The Court was there concerned with circumstances in which the company was presumed to be insolvent for reasons other than failure to comply with a creditor's statutory demand. In the relevant passage in Lanepoint, the Court, it seems to me, acknowledges that the principle that a court will not order a winding up where a debt is bona fide disputed on some substantial ground is founded at least in party in the Court's requirement to be satisfied as to the standing of the applicant for winding up as a creditor. On an application for substitution, the status of the applicant as a creditor at the date of the winding up proceeding is absolutely fundamental, and in that context I do not see how it could be suggested that the status of the debt is not relevant.
There has been some debate as to where the onus lies. The applicant invokes the judgment of White J in Earthwave Corporation Pty Ltd v Starcom Group Pty Ltd [2011] NSWSC 694, [22], for the proposition that where it is said on an application of this kind that there is a bona fide dispute about the debt claimed by the applicant for substitution, the onus is on the company to show that there are clear and persuasive grounds, or substantial grounds, for the dispute. In that respect, his Honour relied on the judgment of the Full Court of the Supreme Court of Western Australia in Beverage Holdings Pty Ltd v Greater Pacific Investments Pty Ltd (1990) 3 ACSR 743, 747, 749.
In principle, in my view, and with great respect, it is difficult to see how that can be so. An applicant for substitution has to demonstrate an entitlement to be substituted, and demonstrating an entitlement to be substituted involves showing that the applicant is, as I have said, a person who might otherwise have so applied for the company to be wound up - which, for relevant purposes, involves showing that the applicant was a creditor of the company at the relevant date.
What the cases show is that, on an application for substitution, the Court will not resolve the status of the applicant as such a creditor if there is a bona fide dispute about its claimed debt. In practice, there may be no difference between the two positions. The applicant bears the onus of showing that it is a creditor. It will fail to do so if the defendant shows that there is a genuine dispute on clear and persuasive grounds. The defendant does not have to establish, on balance, that the applicant is not a creditor.
In this case, the applicant's claimed debt arises out of a contract between the defendant and it, whereby the defendant contracted the applicant to provide project management services for a construction project. According to the affidavit of the defendant's director, Mr Obeid, the conversation on or about 20 November 2013 which culminated in the contract included words to the effect as follows:
OBEID: "On the basis that you complete the project ready for occupation by the end of October, I would be happy to pay you a $50,000 bonus, but you have to understand that if we don't complete by that date I will lose the government grant and the valuation of the property will be reduced by about $2 million as a result of the loss of the grant."
ARMEN: "Sounds good. It's agreed."
I hasten to add that the terms of that conversation are the subject of disagreement. However it was followed, on 22 November 2013, by an email from the applicant to the defendant which attached "Our revised proposal" and confirmed, "This is a 10-month project with one month buffer included in regards to December/January holiday season," and added, "The time line is achievable if the construction certificates and trades were locked in ready to start".
The relevance of a 10-month period was that it would expire in about October, which was the period to which Mr Obeid had referred in his version of the conversation. The attached "Revised proposal" was brief in its terms:
Hi Michael,
Firstly, XANVIC would like to express their appreciation for being given the opportunity to work on this project.
After have [sic] a brief look at the plans Xanvic can definitely offer the right team for the project.
Below are the rates Xanvic are able to offer for the development at 12 Weigland ave, Bankstown.
Project manager/forman $60.00
Leading hand/carpenter $55.00
Third year carpenter/skilled labour $35.00
Labour hire $30.00
Incentive on O/C $50,000
All figures are exclusive of GST
Regards
Adric and Armen
The applicant submits that the $50,000 "incentive" was payable upon provision of an occupation certificate, and that there was no precondition as to time for completion. The defendant contends that the contractual terms were such that the entitlement to the payment of $50,000 was dependent upon completion of the project by the end of October 2014.
In this respect there is, self-evidently, a dispute between the parties. The real question is whether it can be characterised as a sufficiently genuine dispute to deny, for present purposes, the applicant the standing of a creditor.
At least on Mr Obeid's version of the conversation, the $50,000 was described as a "bonus" that was going to be paid "on the basis that you complete the project ready for occupation by the end of October". It was stated in the context of further information that the reason for that was that he would lose significant value, as much as $2 million, if it were not completed by that date. There would be little utility in the reference to the end of October or to the loss of value if the $50,000 was not contingent on completion by that date. If the $50,000 was to be payable regardless of when the project was completed, then a statement "On the basis that you complete the project ready for occupation by the end of October" would make no sense. Accordingly, it seems to me that, on Mr Obeid's version, the conversation was such that it, at least arguably, made the entitlement to $50,000 conditional on completion by the end of October.
It is true that that is not reflected in the subsequent email correspondence. That said, it is described in the "Revised proposal" as an "incentive". One asks, an incentive for what? If it was going to be payable on completion in any event, then it incentivised nothing. The use of the term "incentive" itself suggests that it was incentivising something, and lends some support to the view that it was incentivising prompt completion.
There are undoubtedly contrary arguments. They include that there does not appear to have been any complaint before about 22 December 2014 about belated completion, but that only goes to show that the issue is disputable. I do not think that the fact that there is no specific written condition tells against the defendant's argument, nor that it makes the defendants argument "inconsistent with contemporaneous documents".
It seems to me at least distinctly arguable that this was not a contract wholly in writing, but a contract of a fairly informal kind that was partly oral and partly written and that, if Mr Obeid's version of the conversation be accepted - and I cannot at this stage say that it could not be accepted - then an argument that the $50,000 was payable only in the event of completion by the end of October could well succeed.
On no view was the project completed by the end of October, though as to when precisely it was completed there is some dispute. An occupation certificate was issued on 10 December 2014. The applicant says, on its construction of the contract, that the $50,000 incentive payment became payable then. If so, that would be before the winding up proceedings were commenced and would give the applicant standing as a creditor. But for the reasons I have given, there is a dispute as to whether that is the proper construction of the contract, and thus whether the $50,000 became payable then.
Even if the entitlement to the incentive arose upon an occupation certificate, the contract does not appear to make any provision as to the timing of any payments to be made, and at least arguably that leaves to the (NSW) Building and Construction Industry Security of Payment Act 1999 the determination of when entitlements to payments fall due. To that it may be necessary to return.
On 22 December 2014, Mr Obeid of the defendant met with the plaintiff's directors, Mr Bidaic and Mr Alexander. The conversation was, at least at times, robust. It is clear enough, even on the applicant's evidence, that on that occasion Mr Obeid indicated that he disputed any entitlement to payment of the $50,000.
What is seriously in contention about that meeting is whether an invoice for the $50,000 (or $55,000, as it was inclusive of GST), was handed over on that occasion. The applicant's witnesses say that invoice 527 for that amount was handed to Mr Obeid. Mr Obeid and another witness categorically deny that that was the case. Some support for their position is provided by the circumstance that, the following day, what was said to be the outstanding invoices due to the applicant, albeit for labour and materials, were provided and did not include the said invoice 527. Shortly after that, the defendant paid all the outstanding invoices on the footing that that was a final payment and no issue appears to have been taken with that at the time.
The plaintiff's debt was paid on 5 February. The originating process was first returnable on 19 February. Two days before then, the solicitor who had acted for the plaintiff on the originating process sent an email to the solicitor for the defendant in the following terms:
As a matter of courtesy, I thought I would tell you that I have been instructed to act for Xanvic Pty Limited and to seek leave to have Xanvic Pty Limited substituted in the RicheCorp proceedings. I attach a copy of the tax invoice and the email confirming the agreement between the parties...
On the same day, the defendant's solicitor forwarded that email to the defendant. The defendant says that that was the first occasion on which it received or Mr Obeid saw invoice 527. Mr Obeid responded to his solicitor the same day saying that he had no record of having received that invoice and disputing Xanvic's entitlement to the bonus.
The applicant submits that its debt is not amenable to being disputed because of the effect of the (NSW) Building and Construction Industry Security of Payment Act 1999, s 14(1), which provides that where a payment claim has been served and no payment schedule has been provided in response to it, then the recipient of the payment claim is indebted to the claimant for the amount of the payment claim.
In Aldoga Aluminium Pty Limited v De Silva Starr Pty Limited [2005] NSWSC 284, Palmer J held that that did not mean that such a debt could not be the subject of dispute in proceedings for the winding up or in s 459G proceedings. In In the matter of Douglas Aerospace Pty Ltd [2015] NSWSC 167, I explained why I thought, on the one hand, that the criticism of his Honour's decision by the Court of Appeal of Western Australia in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 was misconceived but, on the other, that it was difficult to see how, consistent with the decision of the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473, such a debt could be disputed, except on the basis that the conditions referred to in s 14(1) were not satisfied.
But, here, the defendant says that there is a dispute as to whether the conditions in s 14(1) are satisfied. Those conditions are, essentially, that the payment claim has been served and that there has been no payment schedule provided within time. There is, on the evidence, plainly a dispute as to whether the payment claim was served, as the applicant says it was, on 22 December 2014. There is no dispute that the defendant's solicitor, then acting in defence of the winding up proceedings instituted by Riche, received by email a copy of the payment claim on 17 February 2015 in the way in which I have described, but it seems to me that there is a very real question as to whether that can amount to service of the payment claim.
First, the solicitor was, as it seems to me, not plainly authorised to receive service of a payment claim.
Secondly, and more importantly, the context in which the document was provided is not a context which bespeaks service of the payment claim. As it seems to me, the document was provided expressly as a "copy" of something that the sender presumed had previously been served, and in the context of courteously advising the solicitor of the essential matters which founded the foreshadowed application for substitution. There was nothing to draw to the solicitor's attention nor, for that matter, to the defendant's attention, when it ultimately reached it, that this was the payment claim to which the defendant would fail to respond at its peril. In my view, it is at least distinctly arguable that that was not service of the payment claim. Thirdly, if it were service of the payment claim, there would then be a live question as to when the amount due pursuant to s 14 became due and payable. There is at least a reasonable argument that, by operation of section 11(1A)(a), it did not become payable until 15 days after service. The significance of that is that if the applicant is relying on the debt that arises under Security of Payment Act, s 14, as being conclusive and not amenable to dispute, then there was no such debt at the date of institution of the winding up proceedings. If it relies on the debt that it says arose on or about 10 December 2014, then there is and was a genuine dispute as to the existence of that debt.
Accordingly, even if by service on 17 February of the payment claim there is now a conclusive debt, as at the commencement of the winding up proceedings, there was a genuine dispute as to the standing of the applicant. That supports the view that it could not properly have itself commenced winding up proceedings on that date.
The defendant also submitted that the contract was at least arguably not one to which the Security of Payment Act applied by reason of s 7(2)(c). In the light of the views to which I have otherwise come, it is unnecessary to resolve that issue.
The defendant further submitted that Palmer J's views in Aldoga were not plainly wrong, and that it was open to raise any underlying dispute arising from the construction contract and not just a dispute as to whether the conditions in s 14(1) were satisfied in this context. Again, although I have expressed the view that it is difficult to see how in the light of s 14 a debt could be disputed save on the basis of the satisfaction of the subsection (1) conditions, it is unnecessary to take that matter further.
From the foregoing, it will be apparent that there are in my judgment genuine issues, in the sense in which that term is used, as to the terms of the contract - including, in particular, what were the terms on which the incentive payment was payable, whether the terms on which that payment were payable were, as a matter of fact, satisfied, and whether, and if so when, any payment claim under the Security of Payment Act was served.
Without resolving those issues, which are not capable of resolution on this application, it is not possible to be satisfied that the applicant was a person entitled to commence the winding up proceedings on the date on which they were commenced. Alternatively put, the defendant has raised a genuine dispute as to the applicant's standing in that respect.
In those circumstances, the second and third questions do not strictly arise, but I should refer to the question of solvency, because both on the question of the appropriateness of making an order and, more particularly perhaps, on the question of discretion, it is not without significance.
The evidence that the defendant has adduced on this application may not meet the strictures of that required on the hearing of a contested winding up proceeding to rebut a presumption of insolvency, though it may be thought to go close to doing so. But for the purposes of the present application, that evidence indicates, so far as it goes, that the defendant is very solvent. In short, it indicates assets, most of them current, in the order of $760,000; liabilities in the order of $60,000; and net equity of about $700,000, which is ample not only to satisfy the disclosed liabilities but also to satisfy the applicant's liability if it turns out that such a liability exists.
For those reasons, I will not make an order under s 465B for substitution. The Court orders that:
1. The interlocutory process filed on 27 February 2015 be dismissed, with costs assessed in the sum of $11,000.
2. The originating process be dismissed.
[3]
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Decision last updated: 18 February 2016