Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd

Reasons why extension sought

1. In support of the application, the plaintiff relies on an affidavit of its director, Gary Cohen, who points to four reasons why an extension should be granted. First, Mr Cohen deposes that the plaintiff wishes to appeal. Although the draft summons seeking leave to appeal and draft notice of appeal are annexed to Mr Cohen's affidavit, he has instructed the solicitors to file these documents "as soon as possible and no later than 14 days". Why the summons has not already been filed is not explained. He does not suggest that the plaintiff has received counsel's advice on the prospects of success on appeal, either the advice of senior counsel or at all.
2. Second, Mr Cohen says that, as a listed company on the Australian Securities Exchange (ASX), the plaintiff is obliged to make disclosures to the ASX and the market about insolvency. Mr Cohen is concerned that, if no extension is granted and Invigor does not comply with the statutory demand, he will have to tell the market. On one view of the plaintiff's continuous disclosure obligations, this matter should already have been disclosed to the market.
3. Third, Mr Cohen says that the plaintiff has a loan from a US lender. Mr Cohen says, and I accept, that if the plaintiff fails to comply with the statutory demand today then this will be likely an "Insolvency Event" entitling the US lender to demand immediate repayment: clause 6.1(j), 6.2(b) of the Loan Agreement. Mr Cohen says that he understands from previous discussions with the US lender "and other commercial partners of the plaintiff" that, in the event of an "Insolvency Event", they will demand immediate repayment of their loans.
4. However the "Maturity Date" of the US loan is 2 February 2019. Clause 5.3 of the Loan Agreement requires the plaintiff to "fully and finally pay all monetary Obligations" on the "Maturity Date". Self-evidently, that has not happened. It would appear that the plaintiff is already in default under the Loan Agreement.
5. Fourth, Mr Cohen says the plaintiff is currently in confidential negotiations with other parties to raise capital funding. These negotiations will be jeopardised by an "Insolvency Event" and the threat of an application to wind up the plaintiff. Mr Cohen expects this will likely be fatal to the plaintiff's future. I do not consider the potential interruption of fund-raising activities by a presumed act of insolvency as sufficient reason to extend time, indeed, it might be a reason not to extend time.

Law

1. The principles which guide such an application are set out in In the matter of Britten-Norman Pty Limited [2013] NSWSC 424 at [4]: The principles applicable to an application to extend the time for compliance with a statutory demand where an appeal against an order declining to set aside the demand has been filed (or in this case foreshadowed) are well established. The relevant matters are, first, the prospect of success in the appeal and whether an arguable case has been shown; second, whether the appeal will be rendered nugatory unless the extension is granted; and, third, the prejudice the respective parties will suffer in the alternative eventualities: see Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) NSWSC 877; [2004] 50 ACSR 544; Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1378; (2006) 60 ASCR 393; NA Investment Holdings Pty Ltd v Perpetual Nominees Limited [2010] NSWSC 373; Kallawar Holdings Pty Ltd v Commonwealth Bank of Australia (No 2) [2010] VSC 362.
2. As to whether the appeal has prospects of success and whether an arguable case has been shown, and adopting Austin J's approach in JEM Developments Pty Ltd v Hansen Yuncken Pty Ltd (2006) 60 ACSR 393; [2006] NSWSC 1378 at [5], it is unnecessary and inappropriate for me to review the ground of appeal in detail or express specific views on the summary of argument. It is enough to say on this application that the plaintiff has made out a reasonably arguable case for appeal.
3. The second question is whether an appeal will be rendered nugatory unless the time is extended and I accept that, absent an extension of time, that would be the result: JEM Developments at [22]; Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544; [2004] NSWSC 877 at [16].
4. The third question is the prejudice the respective parties will suffer if time is extended or declined. If time is not extended, the plaintiff will be deprived of its opportunity to appeal. Less importantly, the plaintiff will be required to make a disclosure to the market, will have committed an event of default under the US Loan Agreement (if it hasn't already), and its further efforts to raise funding will be prejudiced and its continuing existence compromised. Against this, if time is extended then Raus Capital is not kept out of money by reason of the extension as the only consequence of not granting the extension would be that the statutory presumption of insolvency would arise today: JEM Developments at [25].
5. Raus Capital was prepared to consent to an extension on terms that the plaintiff pay into Court $500,000, or alternatively $250,000, such sum to be paid out of Court as the Court may direct on determination of the summons seeking leave to appeal or, if leave be granted, the appeal. In doing so, the defendant framed the orders consistent with those made by Beazley P in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (No 2) [2018] NSWCA 341. The plaintiff does not agree to pay either $500,000 or $250,000 into Court but has offered 125 million ordinary shares in the plaintiff as security. It will be apparent from my first judgment that those shares may already be considered to be held on trust for the defendant.
6. In Grandview, the President departed from the approach taken by Barrett J in Australian Beverage Distributors being that, where the demand was not based on a judgment debt, it does not ordinarily follow that the plaintiff is required to pay the moneys into Court as a condition on the stay pending appeal. As Barrett J explained, at [16]: The defendant says that the plaintiff should be required to pay into court, to abide the outcome of the appeal, the full sum of $158,051.21 to which the Master reduced the statutory demand. The plaintiff says that the defendant should not be given the form of priority or security that that would entail. I accept the plaintiff's submission. This is, after all, not a debt recovery action. A company on which a statutory demand is served is in no sense required to comply with it. It may, if it wishes, allow the statutory presumption of insolvency to arise (by not paying the demanded sum) and, if a winding up application follows, seek to show that it is in fact in a solvent state so that a winding up order is not justified. The statutory demand process is no more than a process that defines where the burden of proof lies in winding up proceedings
7. In JEM Developments, Austin J took the same approach at [28]: … Given that a statutory demand is not an instrument for recovery of a debt, but is rather, as Barrett J remarked, a process that defines where the burden of proof lies in winding up proceedings, there is no good reason for allocating to the defendant the advantage of receipt of the amount it claims, in circumstances where the plaintiffs assert entitlements to substantially greater amounts and there is a prospect that their challenge to the statutory demand may be successful on appeal. The same approach was taken by Black J in Britten-Norman at [9].
8. The President departed from this approach in Grandview because of a number of factors: the defendant's delay in prosecuting its offsetting claim; a length delay in the statutory demand process; the "seriously contestable" nature of the offsetting claim; and the fact that the defendant had admitted a debt was owing to the plaintiff of some $1 million. At [16]-[17]: 16 None of the discretionary factors to which Austin J referred are present in this case. Importantly, contrary to my misapprehension that Grandview had commenced proceedings in respect of its claim, Grandview has taken no steps to do so. Rather, it has kept Budget out of its monies for nearly 12 months. Further, as I stated and as the primary judge indicated in his judgment, the quantum of Grandview's offsetting claim is "seriously contestable". 17 For those reasons, I am of the opinion that this matter is sufficiently distinguishable from Australian Beverage Distributors v Cranswick Premium Wines and Jem Developments v Hansen Yuncken such that, in the exercise of my discretion, I would order that Grandview pay an amount into Court. In doing so, I do not seek to detract from the statements of Barrett J in Australian Beverage Distributors v Cranswick Premium Wines and of Austin J in Jem Developments v Hansen Yuncken, other than to say that a payment into Court will not necessarily give Budget any priority interest, nor would it constitute Budget a secured creditor. If, during the course of the court proceedings, Grandview is wound up, the liquidator would undoubtedly have access to the monies paid into Court for the purposes of the winding up, including for distribution amongst the creditors generally. If Grandview is wound up after the monies are paid out to Budget, the monies would fall to be dealt with in accordance with the Corporations Act, Pt 5.6. The President ordered that the defendant pay one third of the admitted debt into Court as a condition of the extension, in orders in the same form as those sought by the defendant.
9. The defendant points to five factors which support such an order being made in this case: 1. The moneys owed by the defendant under the Loan Agreement were due to be paid on 30 November 2018. 2. Mr Cohen, in two emails sent as CEO of Invigor, offered to pay, variously, $250,000 or $500,000 to the defendant. The emails are set out at paragraphs [19] and [21] of my first judgment. The plaintiff says that these emails should be read as having been written by Mr Cohen in his capacity as a director of Marcel Equity and points to the email set out at [12] of my first judgment. 3. The proffered security of 125 million ordinary shares is less than the moneys owed to the defendant and, it appears to be accepted, will likely fall substantially in value in the event of an insolvency event reported to the market. 4. No application for leave to appeal has yet been filed. 5. There are no matters of significance raised in the proposed ground of appeal.

Consideration

1. It seems to me that the only matter which warrants extending the time to comply with the statutory demand is that the plaintiff wishes to appeal. The prejudice suffered by the parties in the alternate eventualities favours an extension. However, I am concerned that the summons seeking leave to appeal has not yet been filed. Although draft documents are annexed to Mr Cohen's affidavit, it is apparently not in mind to file these documents immediately, but only within the next two weeks. The plaintiff has offered an undertaking to prosecute the appeal with expedition which, with respect, is not how it has been prosecuted thus far.
2. Whilst having regard to the factors referred to by Beazley P in Grandview, it seems to me that this application for an extension of time should be dealt with, effectively, in two stages. It seems to me firstly that the plaintiff has to actually appeal, not in two weeks, but immediately. I am prepared to extend the time to comply with the statutory demand for two days, that is, to 16 August 2019. If, by then, the plaintiff has filed a summons seeking leave to appeal, then the plaintiff may seek a further extension, either from me, the Corporations List duty judge or the Court of Appeal. I adopt the observation of Barrett J in NA Investment Holdings Pty Ltd v Perpetual Nominees Ltd [2010] NSWSC 373 that, in the ordinary course, it is preferable for a judge at first instance to extend the time for compliance with the statutory demand only for a relatively short period, on the basis that the matter will then be under the control of the Court of Appeal which can then address the need for any further extension or compliance with the demand: at [10]. In this case, a short extension will ensure that the plaintiff actually files a summons seeking leave to appeal in a timely manner rather than in the apparently leisurely fashion which is proposed.
3. If the plaintiff seeks a further extension of time, then on that occasion the Court can consider further whether balancing the prejudice suffered by the respective parties can or should be cured in the method proposed by the defendant that is, that the plaintiff be required to provide a security in the form of a payment into court of part or all of the amount sought by the defendant in the statutory demand.
4. For these reasons I make the following orders: 1. Upon the undertaking of the Plaintiff's solicitor to pay all applicable filing fees, the Plaintiff is granted leave to file in Court: 1. an Interlocutory Process dated 13 August 2019; 2. the affidavit of Gary Cohen affirmed 13 August 2019. 1. The Court notes the undertaking of the plaintiff to prosecute its application for leave to appeal from the judgment of 7 August 2018 in these proceedings as expeditiously as possible. 2. Pursuant to section 459F(2)(a)(i) of the Corporations Act 2001 (Cth) extend time for compliance with the statutory demand served by the defendant on the plaintiff on 18 March 2019 to 4.00 pm on 16 August 2019. 3. Costs of this application to be reserved pending the outcome of any application for leave to appeal and, if brought, any appeal. 4. Confirm Orders 3 and 4 made on 7 August 2019.

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