Automatic Fire Sprinklers Pty Limited v Watson

Supreme Court of NSW|1999-12-10|Before: Austin J

New South Wales Supreme Court CITATION : Switz -v- Glowbind [1999] NSWSC 1296 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 3407/99 HEARING DATE(S) : 9 & 10 December 1999 JUDGMENT DATE : 24 December 1999

PARTIES : Switz Pty Ltd (Plaintiff) Glowbind Pty Ltd (Defendant) JUDGMENT OF : Austin J

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

JUDGMENT (Delivered orally; revised 13 January 2000)

1 HIS HONOUR: These proceedings are for orders for the winding up of the defendant. They are based upon a creditor's statutory demand served by the plaintiff on the defendant on about 25 May 1999. The demand seeks the payment of a total amount of $1,300,000 comprising a consultant's fee and a sum alleged to be due for failure to deliver a conditional bank guarantee. The plaintiff says that both the consultant's fee and the further sum fell due under the provisions of a consulting agreement between the plaintiff and the defendant in respect of a unit development at 1B Coulson Street, Erskineville, dated 24 October 1999 ('the consulting agreement'). 2 The statutory demand is in the usual form and, as is usual, states the address of the creditor for service of any application. The address which is given is the address of the plaintiff's solicitors. 3 The case came before me in the Equity Duty List on 9 and 10 December 1999 for the purpose of hearing two applications by notices of motion. The first, the defendant's application, was for leave under s 459S of the Corporations Law to rely in the winding up proceedings upon grounds relating to whether the debt claimed by the plaintiff was wholly or partly owed at all. Alternatively, the defendant claims that the proceedings be dismissed pursuant to Pt 13 r 5 of the Supreme Court Rules. 4 It seems to me that the latter application is otiose in the sense that if the former application were to succeed the latter would not need to be considered, but if the former application were to fail then the latter application could not succeed. I say this because the scheme of Pt 5.4 of the Corporations Law is to provide a regime for the determination of disputes of the kind which the defendant seeks to raise, and the effect of that regime is that if the defendant cannot obtain leave under s 459S to raise the issues upon which it seeks to rely then there is no scope for an application under Pt 13 r 5 - at any rate, where (as here) there is no specific evidence of abuse of process. 5 The second application is the plaintiff's application under s 459R(2) that the period for determining the winding up proceedings be extended for six months to 2 August 2000. I will deal with each application in turn.

Section 459S 6 The context in which the defendant's application is made is this. Section 459E and s 459F set up the procedure for a creditor to serve a statutory demand upon a debtor. Section 459G empowers the debtor to apply to the Court for an order to set the statutory demand aside. Section 459G requires that the application may only be made within 21 days after the statutory demand has been served. Section 459G(3) makes it clear that the requirement of the section is that within 21 days after the service of the demand both the application to set it aside and the affidavit supporting the application must be filed with the Court and a copy of both must be served on the person who has served the demand. 7 The High Court of Australia held in David Grant & Co Pty Limited v Westpac Banking Corporation (1995) 18 ACSR 225 that the requirement of s 459G that the application be made and served within 21 days cannot be extended under general curative positions (such as s 1322). The judgment of the Court was delivered by Gummow J, who said (at 227) that the provisions of Pt 5.4 'constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts, unless they are raised promptly.' He quoted from the explanatory memorandum to the Corporate Law Reform Act 1992 which introduced Pt 5.4. Paragraph 688 of the explanatory memorandum speaks of the provisions relating to setting aside a statutory demand as 'intended to be a complete code for the resolution of disputes involving statutory demands'. Gummow J said (at 234) that Pt 5.4 may appear to operate harshly. He observed, however, that this is a consequence of the legislative scheme that has been adopted to deal with perceived defects in the pre-existing procedure relating to notices of demand. 8 Section 459S applies where (as here) an application for a company to be wound up in insolvency relies on the company's failure to comply with a statutory demand. It says the company may not, without leave of the Court, oppose the application on a ground which (in effect) could have been relied upon in an application to set aside the statutory demand. Section 459S(2) stipulates that the Court must not grant leave unless it is satisfied that the ground (that is the ground upon which the company wishes to oppose the application for winding up) is material to proving that the company is solvent. 9 The Court's task in this case involves placing s 459S within the regime described by Gummow J in the David Grant case. I endeavoured to do so in Chief Commissioner of Stamp Duties v Paliflex Pty Limited (1999) 17 ACLC 467. Having reviewed (at 479-481) cases in which s 459S was considered, and noting the observations of Gummow J in the David Grant case, I expressed the opinion which I reiterate now, that s 459S should be used cautiously and even sparingly given the overall policies of Pt 5.4 (at 480). It may be that in a sense, s 459S is a safety net, but it is a safety net only for special cases. An important consequence of the new strategy regime introduced in 1993 is that contention as to whether the debt claimed by the plaintiff in winding up proceedings is owing, is channelled into an anterior proceeding by which the debtor challenges the statutory demand. 10 In the present case the defendant submitted that if I were to grant leave under s 459S then it should follow that the plaintiff would have no standing to proceed with the winding up summons. Counsel for the defendant relied upon cases decided before 1993, and a fortiori before the High Court's decision in the David Grant case, to the effect that it is an abuse of process for a creditor to use winding up proceedings in reliance upon a disputed debt: See CVC Investments Pty Limited v P & T Aviation Pty Limited (1989) 18 NSWLR 295; Re Bond Corporation Holdings Ltd (1990) 1 ACSR 350. 11 In my opinion this submission fails to take account of the momentous changes introduced by the reforms which took effect in 1993. The effect of those reforms is that unless the debtor makes an application under s 459G or succeeds in obtaining leave under s 459S, it is not open to the debtor to assert a genuine dispute about the debt in the winding up proceedings. In other words, absent a s 459G application, s 459S is the only gateway available to challenge the debt upon which the plaintiff relies in the winding up proceedings. If leave is granted under s 459S the consequence is not that the debt which the debtor challenges is disregarded, but merely that the debtor may, in contesting the winding up proceedings, make an assertion which would otherwise be excluded by s 459S. 12 In my decision in the Paliflex case I took the view that the defendant's assertion, to the effect that a debt for stamp duty was not owing, related to a matter which could have been relied upon in a s 459G application, and therefore, in the absence of leave the defendant in that case would have been precluded from challenging the debt. But I took the view then that if leave were granted, the challenge to the debt would be left to be determined within the winding up proceedings - in effect either at the final hearing of the summons or in determination of a separate question should appropriate orders be made for that purpose. The proposition which the defendant in Paliflex was permitted to assert was not that there was a genuine dispute about the debt, as the time for succeeding on that lower threshold had passed. The question which the defendant was authorised to contest, leave having been granted, was whether the debt was owing at all, as part of the bundle of factual issues which leads to the Court's ultimate determination of the solvency or insolvency of the company. This being so, the granting of leave under s 459S does not deprive the plaintiff of standing to proceed with the winding up summons. 13 An application for leave under s 459S raises an obvious difficulty. The question for the Court is whether to allow the debtor to contend there is no debt (or no debt of the amount claimed). The application for leave is not the occasion to answer that question but merely the occasion to decide whether to allow the question to be contested, so the Court must avoid being drawn into the final determination of the debtor's claim. In the Paliflex case, having reviewed the earlier authorities, I expressed the opinion that there were three considerations in an application for leave, namely (at 481): '(i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand; (ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and (iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent.' 14 I shall consider these three issues in turn. My overall conclusion is that these defendant in the proceedings has failed to establish adequate grounds in respect of issues (ii) and (iii), and on the state of the evidence before me I am unable to say more about issue (i) than that my preliminary consideration leaves me sceptical as to the defendant's claim. It follows that the application for leave under s 459S fails.

The dispute about the debt 15 The consulting agreement, not the most happily drafted commercial document, provides for payment by the defendant to the plaintiff of a total $993,000 for provision by the defendant of consulting and engineering services with respect to a property at Erskineville. Of that amount $193,000 was to be paid on the making of the agreement and it was assumed, for the purposes of the case, that this payment had been made. The remaining $800,000 was to be secured by a conditional bank guarantee and the lodgement of a caveat until 'settlement'. Though the evidence before me is very limited, it seems that the 'settlement' referred to was settlement of the purchase of the property. 16 The agreement said that in the event that a conditional bank guarantee was provided for $900,000, $100,000 would be refunded, presumably by the plaintiff to the defendant - though the agreement is confused - on presentation of the bank guarantee. The agreement then said that if (in effect) the defendant was unable or unwilling to deliver a conditional bank guarantee to the plaintiff on settlement then the defendant would 'immediately forfeit' to the plaintiff $500,000. There was a handwritten addendum to the effect that the plaintiff would accept an unconditional bank guarantee in lieu of a conditional bank guarantee should the latter not be attainable. The unconditional bank guarantee would be retained by (in effect) the defendant's solicitor who would provide a certified copy to the plaintiff's solicitor. The original bank guarantee was to be released to the defendant 'upon completion of this agreement'. The word 'completion' appears to refer to the performance of the consulting and engineering services for which the agreement provides, and payment for those services, rather than the settlement of any conveyancing transaction. 17 The defendant says that the requirement of immediate forfeiture of $500,000 is void as a penalty. It says that this provision cannot be a genuine pre-estimate of loss. My difficulty in assessing this submission relates to the incompleteness of the evidence before me. There are two affidavits by Mr R C Takchi. His affidavit of 29 November 1999 relates to the defendant's failure to proceed with the s 459G application. His affidavit of 28 September 1999 deals with substantive matters concerning the contract between the parties, but most of that affidavit was not read on the present application. It is extremely difficult for me to form a picture of the commercial circumstances in which the consulting agreement, which (as is obvious from my account of it) is short and rather clipped in expression, was entered into. 18 Although one must bear in mind the parol evidence rule, it seems to me likely, if there were anything like a full hearing of the defendant's claim with respect to the debt, that there would be further admissible evidence as to the contractual circumstances and that evidence may well shed light on whether the $500,000 should be properly characterised as a penalty or as a genuine pre-estimate of loss. It is enough to say that, on the limited and sketchy evidence I have, it is plausible to regard the latter classification as appropriate. 19 Next, the defendant says that on its proper construction the consulting agreement is an entire contract or entire obligation, in the sense in which those expressions were used by the High Court of Australia in Baltic Shipping Co v Dillon (1993) 176 CLR 344. The defendant relies on the explication of that concept earlier given by Dixon J (as he then was) in Automatic Fire Sprinklers Pty Limited v Watson (1946) 72 CLR 435, 463. The defendant says that if the contract is not an entire contract in that sense, then at least it is a lump sum contract of the kind referred to by the English Court of Appeal in Bolton v Mahadeva [1972] 2 All ER 1322. 20 If the contract is an entire contract, the consideration for the defendant's obligation to pay is the entire and indivisible performance of the contract by the plaintiff. Thus the obligation to pay does not arise until performance is complete. In the present case the defendant relies on some brief evidence to the effect that the plaintiff has failed to comply with several conditions of a development application, has failed to submit structural and other plans to the local council in a timely fashion, and has failed to obtain building approval or to obtain site inspections and certificates or to provide timely notices of variation of plans. These matters are specified in paragraph 82 of Mr Takchi's affidavit of 28 September 1999. 21 The defendant's primary submission is that these failures to perform have prevented the $800,000 from falling due at all because the contract is an entire contract. The question whether the contract is 'entire' is to be determined by ascertaining the intention of the parties. Where, as here, the contract is for the performance of professional services, it is ex facie unlikely that the parties would have intended that no payment whatever would be due until full completion of all of the work. The plaintiff's entitlement to be paid depends upon personal exertion and, no doubt, the incurring of outgoings in the course of carrying out the work. The effect of the defendant's submission is that if performance of the work is in any way imperfect then no money is owing. An intention to achieve that outcome is unlikely. 22 The defendant relies upon the provisions of the consulting agreement to the effect that the bank guarantee will be released 'upon completion of this agreement'. In my opinion those words do not imply, as a matter of construction, that the defendant's entire obligation to pay was conditional upon completion having first occurred. On their face the words relate to the release of the bank guarantee rather than to the payment obligation itself. 23 As regards the defendant's secondary contention that this is a 'lump sum contract', and consequently the plaintiff is entitled to recover payment (subject to a set-off in respect of deficiencies) only where the contract has been substantially performed, there is obviously an important and large factual issue as to whether substantial performance has occurred. I have Mr Takchi's evidence but at this stage nothing else, and even on his evidence I am unable to assess whether the non-performance which he asserts should be regarded as 'substantial'. I believe there is a plausible basis for regarding this as a lump sum contract, but I am unable to conclude that the contract has not been substantially performed. If I had to decide the issue on the extremely limited evidence I have, I would say that the non-performance referred to by Mr Takchi does not amount to a failure by the plaintiff substantially to perform the contract. 24 In the result my preliminary consideration of the defendant's claim with respect to the debt does not produce a favourable outcome for the defendant.

The reason for the company not applying to set aside the demand 25 As I have said, the demand was served upon the defendant on about 25 May 1999. On about 7 June 1999 the defendant's then solicitor notified the plaintiff by facsimile that there was a dispute about the debt. The defendant filed a summons to set aside the statutory demand on 11 June 1999, well within the 21-day period prescribed by s 459G, together with an affidavit by one of the defendant's directors. The solicitors acting for the defendant at that time were D G Thomas & Co. Mr Eddie Takchi was a solicitor employed by that firm, and was the brother of Mr R C Takchi, the general manager of the defendant. 26 On 11 June 1999 Mr R C Takchi drove his brother to the plaintiff's business office at 21 Knox Street, Double Bay. Eddie Takchi went inside and evidently gave the documents to the receptionist. It is now admitted that 21 Knox Street, Double Bay was not at the time the plaintiff's registered office. No attempt was made to serve the documents on the plaintiff's registered office or on the address given in the statutory demand, within the 21-day period. 27 However, the plaintiff's solicitors filed a notice of appearance on 25 June 1999 and there was correspondence between the parties prior to the date on which the summons was listed for hearing. The matter came before the Court on 19 July 1999, but four days earlier the plaintiff's solicitors advised the defendant's solicitors that they intended to take issue regarding the service of the summons. 28 On the morning of 19 July 1999, according to Mr R C Takchi's evidence, he was advised in a conference with counsel that on the issue of service the defendant did not stand a chance. Subsequently, there were negotiations between the legal representatives of the parties, as a result of which the proceedings to set aside the summons were dismissed without any substantial hearing, with the parties bearing their own costs. 29 The defendant says that there was a mistake with respect to service of the s 459G summons which necessitated dismissal of those proceedings, and that the mistake was made by the defendant's solicitors rather than the defendant itself. In those circumstances, says the defendant, it should be granted leave to raise now the grounds which it was precluded from raising on that occasion. 30 I disagree with this submission. I have referred to the observations of Gummow J in the David Grant case and have observed that in consequence of those observations leave under s 459S should be granted sparingly. In this case the statutory demand clearly set out the address for service of any application. There is no explanation for the defendant's failure to act upon that direction other than, by inference, that the solicitors then acting for the defendant overlooked it. To allow leave to be granted on that ground would be to undermine the reasoning of the High Court in the David Grant case. 31 Section 459G is clear and categorical. It specifically requires service of the summons and affidavit within the 21 day period. It does so for the policy reasons described by the High Court and in the explanatory memorandum. However harsh it may seem, the policy is that the debtor has the chance to contest the debt by following a procedure strictly in accordance with what is prescribed by s 459G. The fact that the defendant itself did not fail to follow the procedure, but the failure was by its agent, does not justify departure from the overall legislative policy. 32 There have been cases where leave has been granted under s 459S. One of them is Kekatos v Holmark Construction Company Pty Limited (1995) 18 ACSR 199. But the justification for the leave granted in that case was the confusion in law which the David Grant case finally resolved. It appears that there the debtor's solicitor filed the application within the prescribed time, but did not serve it, misapprehending the state of the law in an understandable fashion because of the conflicting authorities described by Gummow J in the David Grant case. The solicitor's misapprehension here, on the other hand, related to a specific and clear direction in the statutory demand itself as to the address for service. 33 In the Master Paving Pty Limited v Heading Contractors Pty Limited (1997) 15 ACLC 1025 there were special, detailed facts which included assurances on the part of the creditor that the debtor need not worry about the statutory demand. In Gradfan Pty Limited (in liq) v Miling Nominees Pty Limited (1995) 19 ACSR 466 there was plain evidence that the debts which were the subject of the statutory demand were due to a trust of which the plaintiff was no longer trustee, and the defendant failed to make a timely application to set the demand aside in the reasonable belief that in view of this plain fact the plaintiff would not proceed with the winding up. In the Paliflex case the statutory demand and winding up summons were, according to my findings, validly served on the defendant at its registered office, but the defendant's business had moved from that address and I was satisfied that the defendant's director did not find out about the statutory demand until after the expiry of the 21-day period. Additionally, the plaintiff's and defendant's solicitors were in contact with one another during that period and the plaintiff's solicitors failed to draw the defendant's solicitor's attention to the existence of the statutory demand. The present case is on its facts quite distant from the cases which I have described.

Materiality of the dispute about the debt to proof of insolvency 34 At the hearing of the application the defendant sought to tender a report by Anthony deVries, an accountant and registered liquidator, dated 27 August 1999, investigating and reporting on the defendant's solvency. The plaintiff objected to the admissibility of the report. 35 Given the exigencies of the duty list the most convenient course, and the course which I followed, was to reserve on that objection and make a ruling on it now in the course of my reasons for judgment. The admissibility of an expert accountant's report on solvency was considered by the Full Federal Court in Quick v Stoland Pty Limited (1998) 29 ACSR 130. Although their Honours expressed opinions which were not entirely uniform, a clear picture emerges. If there is evidence in the form of financial statements which the Court can read for itself, the opinion of an accountant based solely on those statements is not based on specialised knowledge arising out of training, study or experience and is not admissible under s 79 of the Evidence Act 1995 (NSW) and its Commonwealth counterpart. If however, the accountant's report contains some financial analysis based upon the financial statements or, more pertinently, the accounting records to which they relate, then the accountant's opinion is to that extent an expert opinion and admissible as such. 36 In the present case an initial difficulty is that the financial statements annexed to Mr deVries' report were headed 'Draft for Discussion Purposes'. But the defendant's external accountant, Mr Bartucciotto, gave affidavit evidence that the accounts were prepared by him from internal accounting records of the defendant and that in his opinion they provide a true and accurate account of the defendant's financial circumstances as at 30 June 1999. The financial statements not having been approved by the directors of the defendant, they do not have the status which that approval would give them. But financial statements prepared by the company's external accountant who expresses on oath his view as to their truth and accuracy have some significance. A report which uses such statements is obviously limited by them, and the report's weight is affected by the absence of the directors' approval. However, given the status of the financial statements to which Mr Bartucciotto deposes, the fact that the financial statements are drafts does not per se require that they be excluded from evidence. 37 Mr deVries conducted a substantial analysis having regard to those financial statements and other information which was available to him, including a valuation of the Erskineville property. In my opinion the report is admissible because of the analysis and judgment which it contains. There is no contest that Mr deVries is a person whose expertise qualifies him to express opinions of the kind which the report contains. 38 The report includes an estimated balance sheet as at 20 August 1999 from which it appears that the equity in the company is $858,047. This report does not take account of the $1,300,000 debt which the plaintiff claims. Nor does it adjust the value of current assets to take into account the valuation of the Erskineville property to which I have referred. 39 If the valuation were taken into account then the equity in the company would rise by substantially over $1 million and in that event total equity would be significantly higher than the debt claimed by the plaintiff. In those circumstances, given that this is the defendant's evidence, my opinion is that the defendant here is in the same position as the defendant in Zan Holdings Pty Limited v Bay View Holdings Pty Limited (1997) 15 ACLC 1238. In that case leave was refused because the Master concluded that the company would be solvent even if the disputed debt was owing. 40 On the defendant's own evidence, it seems to me the same conclusion should be drawn in this case. While in a sense a debt of the order of $1.3 million is material, it does not seem to me, given the valuation evidence, that a dispute about the plaintiff's debt would be material to the Court's conclusion that the company is or is not solvent, if the facts at the hearing of the winding up summons are as presented by the defendant now. 41 Given these considerations the application for leave under s 459S fails and the application under Pt 13 r 5 also fails for the reasons earlier given.

The plaintiff's application under s 459P 42 The winding up summons was filed on 2 August 1999. On 30 August 1999 the plaintiff was served with affidavits sworn on behalf of the defendant, including the affidavit of Mr deVries annexing his report. The report is a substantial document and it appears that the plaintiff decided that a response by way of a similar report was needed, and so it set about obtaining the report which eventually was provided by Mr S J Sherman. Though the report is not in evidence before me, it appears that it was completed on about 25 November 1999, the date upon which Mr Sherman swore an affidavit annexing a copy of it. There is no completely satisfactory explanation for the delay of three months in obtaining that report, although one would expect that, if it is a report similar to Mr deVries' report, its preparation would have taken some weeks. 43 The parties have given evidence as to appearances before the Registrar and as to the service of and response to a notice to produce. The defendant says that the plaintiff's affidavits were required to be filed, according to directions, by 12 October 1999 and on that day an extension was granted to 3 November 1999, but in fact Mr Sherman's affidavit was provided only on 25 November 1999. The defendant emphasises that relief should be granted under s 459R only if the Court is satisfied that special circumstances justify the extension, and says that the Court's summer vacation is not itself a special circumstance. 44 It seems to me, however, given the filing of Mr deVries' affidavit and report on 27 August 1999, that it would be unreasonable to expect the plaintiff to complete the preparation of its evidence for some weeks after that date and that the defendant's complaint really is only about a delay of a month or six weeks. Had the case been ready to be set down for hearing a month or six weeks earlier, it is far from clear on the evidence that it would have been set down for hearing this year. The six months period prescribed by the Corporations Law expires on 2 February 2000, the Wednesday of the first week of the new term. While the fact that the vacation intervenes is not of itself a special circumstance justifying an order under s 459R, the fact that reasonable preparations for the hearing in light of the defendant's evidence probably would have necessitated the postponement of the hearing until the new term is, in my opinion, sufficient to justify a small extension. 45 I am not prepared to grant the extension to 2 August 2000 which the plaintiff seeks. In my opinion an extension of one month is all that is justified on the evidence at this stage. My conclusion therefore is that the plaintiff's application succeeds but only for the period of one month.

Costs and Orders 46 The plaintiff has been successful both in respect of the defendant's application under s 459S and its own application under s 459R, though in the latter case for one month rather than for six months. I see no reason why costs should not follow the event and I propose to award costs to the plaintiff in respect of both applications. 47 I make the following orders:

(1) The defendant's application by notice of motion filed on 2 December 1999 for leave under section 459S of the Corporations Law and other relief is denied.

(2) On the plaintiff's application filed on 3 December 1999 for an order under s 459P extending the period for determining the plaintiff's summons for winding up, I order that the period within which the application must be determined be extended to 2 March 2000.

(3) I order that the defendant pay the plaintiff's costs with respect to both notices of motion.

(4) I stand over the proceedings to the Corporations List before the Corporations Judge on 31 January 2000. * * * * * * * * *

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