Bank of Western Australia Ltd v Scotia Downs Pty Ltd

Federal Court of Australia|2011-11-16|Before: Murphy J

Mr Paul Floreani, a director of the defendant, undertakes to the Court that the defendant will not incur any further liabilities pending determination of Supreme Court of Victoria proceeding No. 5522 of 2010 between the Bank of Western Australia Ltd and Enzo Floreani and Ors.

The defendant is granted leave pursuant to s 459S of the Corporations Act 2001 (Cth).
The application for winding up is adjourned to 20 February 2012, or such other date that the Court orders on application by a party.
The parties have liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 412 of 2011

JUDGE: MURPHY J DATE: 16 NOVEMBER 2011 PLACE: MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 413 of 2011

AND: FLOSPRINGS NOMINEES PTY LTD ACN 094 110 184

JUDGE: MURPHY J DATE: 16 NOVEMBER 2011 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 Before the Court are applications by the plaintiff, Bank of Western Australia Ltd, for orders for the winding up of the defendants, Scotia Downs Pty Ltd (formerly Floreani Family Pty Ltd) and Flosprings Nominees Pty Ltd, both companies having failed to comply with statutory demands. Scotia Downs and Flosprings seek leave under s 459S of the Corporations Act 2001 (Cth) to oppose the winding up applications on grounds that they previously relied on, or could have but did not so rely, in seeking to have the statutory demands set aside under s 459G. 2 The bank provided a loan to Sweetwater Living Pty Ltd to develop a retirement village and aged care facility in Henty, New South Wales. Scotia Downs and Flosprings are two of the guarantors of the loan. The development failed and the bank claims that Sweetwater and its guarantors owe the bank substantial monies. The bank served statutory demands on each of Scotia Downs and Flosprings for approximately $3.9 million, as a debt owing to the bank pursuant to the guarantee. 3 Scotia Downs and Flosprings issued applications to set aside the statutory demands under s 459G of the Act on the basis that there was a genuine dispute as to the debt, or that they had a genuine offsetting claim. These applications were dismissed by a Registrar of the Court. Within the 21 day time limit in the rules for such an application, Scotia Downs and Flosprings applied to review the dismissal but the time for compliance with the statutory demands under s 459F(2)(a)(ii) of the Act had expired. Middleton J dismissed the applications as incompetent. 4 The bank also commenced proceedings seeking payment of the same debt in the Supreme Court of Victoria. This action is brought against each of Sweetwater's personal guarantors although not against the principal debtor Sweetwater. Scotia Downs, Flosprings, Sweetwater and the other guarantors then filed a proceeding against the bank in the Supreme Court of Victoria claiming breach of agreement, negligence, and misleading and deceptive conduct. They seek declarations that they are not indebted to the bank for any amount, and claim damages. The Supreme Court proceeding brought by the bank, and the counterclaim brought by the defendants and others, are fixed for hearing on 21 November 2011. 5 I have determined to grant leave to Scotia Downs and Flosprings under s 459S of the Act. I have also determined that the application for winding up should be adjourned for a short period until after the determination of the Supreme Court proceedings. In my view special circumstances exist for such an adjournment, as required by s 459R of the Act.

Legislation and Principles regarding s 459S 6 Section 459S of the Act provides as follows: (1) Insofar as 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 may not, without the leave of the Court, oppose the application on a ground: (a) that the company relied on for the purposes of an application by it for the demand to be set aside; or (b) that the company could have so relied on, but did not so rely on (whether it made such an application or not). (2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving the company is solvent. 7 The Court's exercise of discretion to grant leave under s 459S requires that the Court: (a) give preliminary consideration to the defendants' basis for disputing the subject debt; (b) examine the reason why the issue of indebtedness was not raised in the applications to set aside the statutory demands, and the reasonableness of the defendants' conduct at that time; and (c) investigate whether the dispute about the debt is material to proving that the defendants are solvent: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467, 149 FLR 179 at [49] ("Paliflex"). 8 Section 459S prevents a defendant from opposing an application for winding up on a ground that it could have relied on for the purpose of an application to set aside the statutory demand, unless it obtains leave of the court, provided that the ground is material to its solvency. It has been described as a "safety net" in relation to the strict requirement of s 459G: Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 at 300-301. Because of the clear policy of the 1992 reforms to ensure that disputes regarding debts the subject of a statutory demand are determined an early stage, leave should be given cautiously: Paliflex at [40]. 9 A precondition to a grant of leave is the requirement in subs (2) that the defendant show that the debt in respect of which it is seeking leave is pivotal to the question of solvency: Grant Thornton Services (NSW) v St George Wholesale Distributors Pty Ltd [2008] FCA 1777 at [19].

Preliminary consideration of the basis for disputing the debt 10 Scotia Downs and Flosprings have consistently and strenuously denied their indebtedness to the bank. They sought a finding under s 459G that there was a genuine dispute or offsetting claim, and applied to review the finding when their application was dismissed. They also filed a Supreme Court action shortly after the bank commenced its proceedings, and have prosecuted it by way of defence and counterclaim. 11 The evidence of Scotia Downs and Flosprings disputing the debt is set out in the affidavits Mr Enzo Floreani sworn 27 October 2010, 25 March 2011 and 11 August 2011. Mr Floreani is the sole director of Scotia Downs, and is also authorised by Flosprings to swear an affidavit on its behalf. These claims of the defendants and accounts of representations allegedly made by the bank and agreements allegedly reached between the parties are also particularised in the Supreme Court proceedings. Mr Floreani deposes, and the Supreme Court proceedings allege, that: (a) The nature of the finance sought and agreed to be provided was to purchase and subdivide land to develop a retirement village and aged care facility on a staged basis. The bank represented that it was experienced in the funding requirements of such developments. Stage one of the project was the construction of 54 independent living units. It was agreed that the loan facilities were like an overdraft, pursuant to which money could be drawn down as necessary to fund the construction of units. As the settlement of units sold took place, the monies received would be remitted to the account and credited accordingly. The facility limit was $5.2 million. (b) Sweetwater commenced construction in early 2007. By March 2007 it had signed contracts for the sale of 24 of 50 units. In the period prior to August 2007, it had completed all of the work associated with the subdivision for the development, and had completed at least half of the work necessary to complete the units that had been pre-sold. It did not reach the funding limits under the loan facilities. (c) On or about 27 August 2007 Mr Floreani met with the bank as Sweetwater was experiencing cash flow difficulties by reason of price escalations and increased supplier and subcontractor costs. He advised the bank that the first five units were nearing completion and that approximately $1.1 million would then be remitted to the account, which would cover the existing cash shortfall and provide a significant buffer against the need for further draw-downs. The bank's representative then indicated that the bank required that the loan facility limit be reduced as it appeared the full facility would not be utilised in the development. (d) The bank then advised in September 2007 that it intended to reduce the loan facility limit from $5.2 million, to approximately $3.15 million. At that time the monies drawn down totalled approximately $2.36 million. Sweetwater was operating within the loan facility limit and was on track to pay out the anticipated debt with the settlement of pre-sold units that were then midway through construction. It was agreed by the bank's representative that the new facility limit could be moved up or down as required, provided the original $5.2 million limit was not reached. (e) Although some further draw-downs were made after September 2007, the bank either responded very slowly or rejected requests for the draw-down of monies after this date. The delay in varying, or the refusal to vary, the facility limit upwards was a breach of the agreement, and contrary to the representations made by the bank. (f) In the period from about August 2007 to mid 2008 a number of contractors and other creditors involved in the construction of units were either not paid or not paid in a timely way. The work on the units slowly ground to a halt, and local tradespeople lost interest in working on the development. Potential local purchasers of units also lost confidence in the development. The work on the development, and sales of units, never regained momentum. (g) The bank's delay or refusal to allow draw-downs resulted in lost sales, an inability to achieve further sales and an inability to construct the remaining units or the proposed nursing home. It also significantly increased Sweetwater's holding costs. In total 26 units were sold, and 10 unit sales were lost because of the delay. The 10 lost sales would have provided the project with approximately $2.3 million. (h) Sweetwater's indebtedness to the bank never reached the $5.2 million limit of the loan facility agreed at the commencement of the project. 12 In summary Mr Floreani deposes that Sweetwater was misled in entering into the loans with the bank, and that the bank's alteration of the nature and limit of the loan facility was a breach of the initial agreement. Further, by significantly delaying or refusing to allow the draw-down of funds under the loan facilities the bank breached the initial agreement, and the variation of it in September 2007. The same conduct was also a breach of representations made by the bank. He asserts a substantial offsetting claim, which is unquantified. 13 The bank relies on affidavits sworn by a manager, Ms Sonya Causovski, on 1 October 2010 and 15 February 2011. Scotia Downs and Flosprings do not contest the evidence of Ms Causovski insofar as it sets out the documents reflecting the loan facility and the variations to it. Ms Causovski deposes that: (a) The aggregate facility limit of the loan facility initially provided to fund the development was $5.07 million, although by 18 September 2007 the limit had been increased to $5.7 million. (b) There was no relevant delay in the provision of funding as the bank continued to provide to Sweetwater all requested draw-downs from August 2007 until March 2008. Draw-downs against the new facility limit agreed in September 2007 were allowed in that month, and in October 2007, November 2007, December 2007, February 2008 and March 2008. (c) In September 2007 Sweetwater owed the bank $2.35 million and the aggregate facility limit was $5.7 million. Sweetwater requested a variation to the facility agreement to provide an additional line of overdraft funding of $350,000 and to reduce the facility limit by consolidating the various accounts to take into account expected debt reduction through completion and sale of units in stages. The loan facility limit was reduced to $2.55 million plus a new overdraft facility of $350,000 and funding of the GST payments of $250,000. The aggregate facility limit was therefore $3.15 million. (d) However, by 17 December 2007 Sweetwater owed the bank $3.77 million, which exceeded the new aggregate facility limit. (e) In March 2008 Sweetwater requested an increase in the facility limit of $650,000. At that time only four units had been completed and cost overruns of approximately $1.35 million had been identified by Sweetwater. The bank declined to increase the facility limit as requested. 14 There are shortcomings in both the evidence of Mr Floreani and that of Ms Causovski. Mr Floreani does not fully contradict the evidence of Ms Causovski, even in his affidavit filed in reply. Amongst other things, he does not properly explain the inconsistency between his allegations of delay in funding, and the bank's evidence that until March 2008 it met each funding request, and he does not respond to the bank's evidence as to the reasons for its refusal of funding requests. Further, in my view it is likely to be difficult for Mr Floreani to make out the case that it was an oral term of the agreement in September 2007 that although the new loan facility limit was reduced to $3.15 million, the total borrowings could be varied upward within the original $5.2 million facility limit. 15 The bank's evidence is deficient in that it does not address Mr Floreani's allegations as to statements and representations made to him by identified representatives of the bank. These allegations found the defendants' offsetting claims of breach of agreement and misleading and deceptive conduct. The bank also fails to explain the reasons for the reduction in the loan facility limit from $5.7 million to $3.15 million in September 2007, other than to suggest that it was at Sweetwater's request. It would be surprising if this was correct. 16 It is impossible on the basis of the material to determine the dispute on the facts or decide the merits of the dispute, and the Court is not required to do so. On hearing an application for leave under s 459S the Court is only required to give preliminary consideration to the basis for disputing the debt. It does not resolve questions of fact nor determine where the merits lie. 17 In considering the grant of leave the Court is not required to determine whether there is a genuine dispute as to the debt. The defendants are seeking a statutory indulgence to raise grounds they have already raised, or could have raised. They must establish that the grounds they propose to rely on in opposing the winding up application are arguable: Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC 1025 at 1033 ("Master Paving"). In my view sufficient evidence is before the Court, containing sufficient particularity, to distinguish the evidence from mere claim or assertion, and it is arguable. The evidence is sufficient to grant the defendants leave to rely on the grounds set out in the affidavits and exhibited pleadings in opposing the winding up. I have not determined that the defendants' evidence disputing the debt is sufficient to successfully oppose the winding up applications, only that it can be advanced.

Why the issue of indebtedness was not raised in the application to set aside the demand, and the reasonableness of the parties' conduct at that time 18 As was noted in Paliflex at [57], the Court must balance the legislative policy in preventing a dispute about a debt being raised at the winding up stage, against the potentially harsh effects of strict time limits for challenging a statutory demand. 19 In this matter, the defendants have consistently challenged the debt, although their articulation of the argument has improved over time. They made an unsuccessful application pursuant to s 459G before a Registrar, and were unsuccessful in their review application because of the strict time limit in s 459F. They have defended the bank's Supreme Court proceeding, and filed a counterclaim in that proceeding making a detailed case against the bank. They have filed affidavits and detailed pleadings particularising their claim in support of this application for leave. Any deficiency in the initial affidavit of Mr Floreani and pleading is not such that the defendants should now be locked out of challenging the debt.

Whether the dispute is material to solvency 20 Having failed to set aside the statutory demand under s 459G the defendants are presumed to be insolvent and as such bear the onus of proving their solvency: s 459C(2) and (3). In order to discharge this onus the Court should ordinarily be presented with the fullest and best evidence of the financial position of the defendants. Unaudited accounts are not ordinarily probative of solvency: Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWSC 96 at [4], Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]. 21 The issue of the solvency of Scotia Downs and Flosprings, and the sufficiency of the evidence as to their financial position, must be considered in light of the uncontested evidence that they are not trading companies, that neither company carries out any business function, incurs any business liability or earns any revenue. Both are merely corporate trustees of family trusts. Other than some encumbered real estate held by one of the defendants which is of insignificant value in the scope of this matter, their only assets are their rights of indemnity against the assets of the respective family trusts. Mr Floreani exhibited unaudited financial statements for the 2010 and 2011 financial years which confirmed this position. 22 Nevertheless the bank contends that the unaudited financial statements of these non-trading companies are not the fullest and best evidence of their financial position. I do not accept this, as they are in my view sufficient. The unaudited accounts are exhibited to affidavits which depose that the defendants do not carry out any business function and do not incur any business liability or earn any revenue, and there is no contest as to this evidence. In Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones (2008) 219 FLR 422 at [29] White J held: Expile concerned a company with significant indebtedness, deficiencies in its accounts and lack of evidence of realistic borrowing capacity to refund repayments of short term liabilities. It would be oppressive if a small, viable company, with no creditors, in the circumstances in which this application has been brought, were required to expend significant sums to employ an external accountant to analyse its books and records to rebut the presumption of insolvency. 23 The only present liabilities of the defendants are the costs due pursuant to orders made in the s 459G application which have not yet been taxed or fixed, and the costs of the unsuccessful review application before Middleton J fixed at $2,500. These costs orders are insignificant in the scope of this matter and are of no relevance to my determination as to the solvency of the defendants. The defendants advised the Court that these costs orders would be met if the fact that they remained outstanding was likely to be determinative of the application. At present, the non payment of these amounts is not determinative. 24 I consider that it cannot be seriously doubted, even in the absence of audited accounts, that the existence of the disputed debt is pivotal to the solvency of the defendants. If the bank's claim does not have to be paid then there is no indication from the material before the Court that the defendants are unable to meet their debts as and when they become due. As the only function is that of a trustee of a family trust, and they incur no business liabilities, any debts they might incur will be modest. If the debt exists, the defendants concede that they are insolvent. This too is plain, given the size of the debt and the lack of assets of the defendants.

Other discretionary considerations 25 The bank further contends that the Court ought not grant leave for other discretionary reasons. It argues that the matters raised are essentially the same as those that were determined against the defendants by the Registrar in the s 459G applications. However, s 459S expressly contemplates that grounds that were, or could have been, relied on in a s 459G application can again be relied on in opposition to a winding up order, provided leave is granted. As was noted by Lander J in Master Paving at 1032 a company "… may also, with leave of the court, oppose the application on a ground that it relied upon, unsuccessfully, for the purpose of an application to set aside the statutory demand … if the ground is material to proving that the company is solvent." 26 The bank also argues that the defendants have not provided a reasonable explanation for the failure to raise in the s 459G application the grounds upon which they now rely. In my view the defendants did raise essentially the same grounds in their s 459G applications as they now raise, although they are articulated more clearly and the claims are pleaded with more precision. The failure to initially put on their best evidence is not so unreasonable that they should now be locked out of relying on these grounds in disputing the debt. 27 Part 5.4 of the Act is aimed at ensuring that disputes about debts are dealt with at an early stage rather than operating to delay winding up: Explanatory Memorandum of the Corporate Law Review Bill para 689. Together with the factors outlined in Paliflex, the fact that a Supreme Court hearing as to the validity of the debt is listed for 21 November 2011 is therefore significant to the exercise of the Court's discretion. In this matter the final resolution of the dispute is so close that no significant delay of the winding up application will occur. I consider that a grant of leave under s 459S is appropriate.

Application under s 459R 28 The Court indicated to the parties that it was considering granting leave under s 459S and adjourning the winding up application until after hearing of the Supreme Court proceeding. On the assumption that leave would be granted, the parties were invited to make submissions as to whether the winding up application should be adjourned on that basis. 29 The power of the Court to adjourn a winding up application is provided in s 467(1) of the Act. An application for a company to be wound up in insolvency is to be determined within six months after it is made unless that period is extended under s 459R. Section 459R requires that the Court must be satisfied that special circumstances exist before the period for winding up is extended. This reflects a public policy in winding up applications being dealt with expeditiously. In this matter any application for extension of the period for winding up must be made before 19 November 2011. 30 The defendants submit that an adjournment of the applications and an extension of the time for their determination until after the imminent hearing of the Supreme Court proceeding on 21 November 2011 is an appropriate means of addressing the concerns of both parties. The bank opposes adjournment of the winding up applications. It contends that the pendency of the Supreme Court proceeding is insufficient reason to do so, particularly given the Registrar's finding that there is no genuine dispute or genuine offsetting claim. 31 I do not agree. The principal debtor Sweetwater has a counterclaim due to be heard within one week which challenges the existence of the debt. The bank has not commenced a statutory demand process against Sweetwater, or sued it in its Supreme Court proceeding. This creates the possibility that Scotia Downs and Flosprings will be wound up in the applications before this Court in a finding based on the inconsistent affidavit material. Shortly thereafter following a full hearing, the Supreme Court may find that Sweetwater owes no debt, and that no monies are owed by the defendants under the guarantee. This is undesirable and irreparably prejudicial to the defendants. 32 If the winding up application is adjourned it need only be adjourned for a short period pending the determination of the Supreme Court proceeding. If the bank is successful in its Supreme Court proceeding the defendants concede that winding up orders would then be appropriate. 33 I also note that this is not a matter where an adjournment may prejudice the bank's ability to recover the alleged debt. It is common ground that the defendants are unable to meet the debt, and it is not contested that they have no assets of significance other than a right of indemnity under the trusts. Further, each of Mr Enzo Floreani, a director of Scotia Downs, and Mr Paul Floreani, a director of Flosprings, have proffered undertakings to the Court that Scotia Downs and Flosprings respectively will not incur any further liabilities pending determination of the Supreme Court proceeding. In these circumstances it is difficult to see any real prejudice to the bank arising from the proposed adjournment. 34 In my view these circumstances constitute special circumstances justifying the adjournment of the winding up application for a short period until after the Supreme Court proceeding is determined. For the present, and having regard to the undertakings offered, I order that the winding up application be adjourned to 20 February 2012. I will consider altering that listing date on the application of one of the parties to do so, or should circumstances change. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.

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