Bibby Financial Services v Wolf Industries

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5926/03 BIBBY FINANCIAL SERVICES AUSTRALIA PTY LTD V WOLF INDUSTRIES AUSTRALIA PTY LTD JUDGMENT 1 HIS HONOUR: The defendant ("Wolf") carries on business as a supplier of "washroom consumables" such as toilet paper and hand towels to commercial consumers. It has commercial relationships with suppliers, Ultimus Products Pty Ltd and Smartpak Australia Pty Ltd, and has incurred debts to those two companies. Ultimus and Smartpak have purported to assign debts owed to them by Wolf, by factoring arrangements, to the plaintiff ("Bibby") and to the applicant, Scottish Pacific Business Finance Pty Ltd ("Scottish") respectively. 2 On 2 September 2003 Bibby served a statutory demand on Wolf for $311,848.40. Particulars were given of 20 items identified by dates and amounts of invoices and the due date for payment, totalling the amount claimed. Wolf disputes this debt but the statutory demand has not been set aside. By originating process filed on 25 November 2003, Bibby instituted the present proceeding, seeking the winding up of the defendant on the ground of insolvency and purporting to rely on the defendant's failure to comply with the statutory demand. 3 Early in February 2004 Wolf settled Bibby's claim. When the case came before Registrar Berecry on 6 February 2004, the solicitor for Bibby informed the Court that Bibby had settled with Wolf, the solicitor for Scottish indicated that Scottish would seek to be substituted, and the solicitor for Wolf indicated that Scottish's application would be opposed. The Registrar subsequently referred the application for substitution to me for hearing. 4 Scottish claims to be a creditor of Wolf, as assignee of debts owed by Smartpak, in the sum of $550,945.10. On about 20 November 2003 Scottish served a statutory demand on Wolf for $310,925.77. The statutory demand set out some 37 items identified by date, reference and amount. The claim relates to invoices issued by Smartpak to Wolf in the period from 2 June to 26 August 2003. Wolf disputes the debt claimed by Scottish in the statutory demand, except for a sum of $14,371.91. It tendered a bank cheque for that amount to Scottish on 27 January 2004. According to the affidavit evidence filed on behalf of Scottish, further debts were assigned by Smartpak in the months of September and October 2003 in the total amount of $204,633.56. Wolf has not provided any evidence to dispute Scottish's claim in respect of the debts for September and October. 5 Wolf made an application in the Supreme Court of Queensland to set aside the statutory demand served by Scottish, on the ground that there was a genuine dispute as to the existence of the debt which was the subject of the demand. The application was filed within the 21 day time limit set by s 459G of the Corporations Act, but Wolf now concedes that service of the originating process on Scottish was defective. According to Wolf, the defect was that the Form 1 Notice under the Service & Execution of Process Act had not been attached to the originating process, due to inadvertence on the part of Wolf's Queensland solicitors rather than negligence, error or omission by Wolf itself. Section 459G of the Corporations Act says that an application to set aside a statutory demand may only be "made" within 21 days after the demand has been served. The time limit is a strict one that cannot be cured by the Court under s 1322: David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. Evidently the view was taken by Wolf and its advisers that the failure to comply with the Service & Execution of Process Act was fatal to the application to set aside Scottish's statutory demand. 6 In January 2004 Wolf amended its application for relief in the Queensland proceeding, withdrawing its claim to set aside the statutory demand and seeking instead an injunction to restrain Scottish from applying for a winding up order for non-compliance with the statutory demand. The application for an injunction came before Helman J on 27 January 2004 and his Honour dismissed it, ordering Wolf to play Scottish's costs of the application. The costs have not yet been assessed. 7 Helman J accepted that there was "a question to be tried" as to the existence of the debt which was the subject of Scottish's statutory demand, without exploring the substance of the dispute. In effect, he assumed that the "serious question to be tried" criterion for an interlocutory injunction was satisfied, and focused his attention on the balance of convenience. Wolf submitted to me that Helman J had made findings about its legal position and the strength of its claims. In my opinion that is not correct. 8 Helman J held that Scottish was justified in serving the statutory demand, and since the demand had not been set aside, Scottish was entitled to rely on the presumption of insolvency that arose from failure to comply with the demand. He noted that s 459S would leave it open to Wolf to seek leave, on any application for a winding-up order, to raise its dispute as to the debt in question, and said that the Court may very well grant such leave because the dispute about the debt appeared to be material to proving that Wolf was solvent. He held that the balance of convenience favoured deferring the question of solvency, and the question of existence of the debt which was the subject of Scottish's demand, to the Court that would hear any application for winding up made on behalf of Scottish. He noted that Scottish may not make such an application because of the possibility that Wolf might be wound up on the application of Bibby. 9 Wolf contends that there is a genuine dispute as to the balance of the indebtedness claimed by Scottish. On the view I have taken of the present application, it is unnecessary for me to make any determination as to the existence of a genuine dispute as to Scottish's debt, and so I shall do no more than outline the evidence on this matter. 10 The sole director and shareholder of the Wolf is Robert Little. Mr Little is also a director of Pacific Industrial Converting Pty Ltd ("Pacific"), which manufactures hand towels and supplies them to Wolf, amongst others. According to Mr Little, Pacific has for a number of years supplied hand towels to Smartpak and Ultimus. 11 Mr Little says that early in July 2003 he met with representatives of Smartpak and Ultimus to discuss accounts owing between Smartpak, Ultimus, Pacific and Wolf. He says that at the date of that meeting Wolf owed Smartpak $147,253.32, and owed Ultimus $22,509.60. Ultimus, he says, owed Pacific $467,009.04. Mr Little's evidence is that the parties to the July meeting reached an agreement that it would be more efficient for the various debts to be set off against one another, with the resulting position journalled to the accounts of the respective companies. He says that in consequence, the Smartpak debt and the Ultimus debt were set off against the Pacific debt, with the result that the Smartpak debt and the Ultimus debt were extinguished and the Pacific debt was reduced to $297,166.72. 12 Mr Little says that it was also agreed that the Pacific debt would be reduced by Smartpak paying $188,500 on account of Ultimus to one of Pacific's creditors. This left Ultimus owing Pacific $108,666.72. There were residual debts existing between the parties but according to Mr Little's evidence, Wolf would owe nothing to Smartpak and Ultimus. 13 In addition to these matters of "set off", Wolf contends that the internal accounting records relied upon by Scottish to prove its indebtedness are unsatisfactory. It says that there is evidence that goods said to have been delivered by Smartpak were never delivered. It also challenges Scottish's claim that notice of the assignment of the debts, which are the subject of the statutory demand, was properly given. 14 Wolf claims that it is solvent. It is not necessary, for the purpose of exercising my discretion with respect to substitution, to reach any conclusion as to solvency. I note, however, that the evidence before me gives rise to a plausible contention that the company is solvent. When the evidence of both parties is before the Court on the winding up application, it may appear that the company's solvency depends upon whether it is indebted to Scottish any amount claimed. I shall do no more than briefly summarise the evidence as to solvency presented by Wolf at the hearing of the application for substitution. 15 Evidence was filed in the Queensland proceeding on its behalf, including tax returns and financial statements which indicate that the company made small profits in the years ending 30 June 2002 and 30 June 2003, and in the six months to December 2003, and that its total balance sheet assets exceeded its total balance sheet liabilities by about $191,000, as at 30 June 2003. 16 In the present proceeding, there is additional evidence showing net assets of $43,945.98 as at 31 January 2004, and net income in the period from July 2003 to January 2004 of $39,530.69. As at 31 January 2004, company had an overdraft in excess of $34,000, liability to trade creditors of $79,827.79 and other current liabilities including liability for PAYE tax of over $19,000. It would be necessary to explore the company's cash flow more fully before any conclusion about overall solvency could be reached, but (as I have said) there is at least a plausible contention that the company is solvent. 17 The proceeding brought by Bibby for the winding up of Wolf was initiated by an application under s 459P by Bibby as a creditor of Wolf. Scottish's application for substitution as plaintiff in the winding up proceeding is governed by s 465B of the Corporations Act. Subsection 465B(2) states that the Court may only make an order for substitution if it thinks it appropriate to do so: (a) because the application is not being proceeded with diligently enough; or (b) for some other reason. Here subparagraph (a) is satisfied because Bibby has settled its claim with Wolf and no longer wishes to proceed with the application at all. I may therefore make the order for substitution if, in the exercise of the discretion conferred by the section, I think it appropriate to do so, provided that Scottish has the requisite standing. 18 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. 19 Wolf challenges Scottish's standing on the ground that Scottish has not shown that it is a creditor, because of the existence of a genuine dispute as to its debt. Scottish offers four answers: (i) because of the unsatisfied statutory demand, Wolf cannot challenge its standing as a creditor for the purposes of the application for substitution; (ii) its status as a creditor in respect of the assignment of Smartpak's invoices for September and October 2003 has not been disputed; (iii) there is no genuine dispute as to the existence of that part of the debt said to be affected by "set off", because of the absence of mutual cross-demands; (iv) there is no genuine dispute arising out of alleged non-receipt of goods, because that claim is not supported by the evidence, and because by asserting a bona fide dispute Wolf is attempting to approbate and reprobate. 20 I have decided that Scottish is entitled to succeed on ground (i). Were necessary for me to do so, I would also rely on ground (ii), because the evidence before me establishes, on the balance of probabilities, that Wolf is indebted to Scottish in respect of the September and October 2003 invoices and no dispute has been asserted in respect of them. It is unnecessary for me to deal with grounds (iii) and (iv), and indeed it is undesirable to do so, because the law is structured (in the ways that I shall point out) 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. 21 Part 5.4 of the Corporations Act is structured so as to facilitate proof of insolvency, for the purposes of an order for the winding up of a company in insolvency, where there is an unsatisfied statutory demand. Failure to comply with a statutory demand gives rise to a presumption of insolvency under s 459C(2), casting the onus on the company to prove its solvency when the application for winding up is heard. The company may apply to set aside the statutory demand under s 459H if there is a genuine dispute about the existence or amount of the debt or the company has an offsetting claim, but it can only do so within the strict limitation period prescribed by s 459G(2). Importantly for present purposes, if the company has not availed itself of the opportunity to apply to set the demand aside, it is precluded by s 459S from opposing the application for winding up in insolvency on any ground that it could have relied on in an application to set the demand aside, unless the Court grants leave to do so. The Court is not to grant such leave unless it is satisfied that the ground is material to proving that the company is solvent: s 459S(2). 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. 23 That is why courts have taken the view, since the commencement of Part 5.4 in its present form, that it is not open to the company to challenge the standing, as a creditor, of an applicant who has served an unsatisfied statutory demand which has not been set aside, at the hearing of the application to wind the company up in insolvency: Braams Group Pty Ltd v Miric (2002) 44 ACSR 124; House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527; Chief Commissioner of Stamp Duties v Paliflex (1995) 17 ACLC 467. Where the company wishes to challenge the debt which was the subject of the statutory demand, it must satisfy the requirements of s 459S: Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661. 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. 26 Wolf relies on South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465. There Ryan J in the Federal Court of Australia declined to make an order for substitution where the applicant for substitution claimed to be a creditor but the company demonstrated a genuine dispute with respect to the debt. In that case, however, the applicant for substitution had not served a statutory demand at all, and the claim to indebtedness was on the face of it questionable. It is unnecessary for me to consider whether it is appropriate for a court to rule upon the genuineness of a dispute as to a debt claimed by an applicant for substitution, where the claim is not supported by a statutory demand. I respectfully observe, however, that to the extent that his Honour relied on Re Calsil Ltd (1982) 6 ACLR 515 (a case decided before Part 5.4 took its present shape, and at a time when a company could challenge the petitioning creditor's debt at the hearing of the winding up application), his reasoning may have been superseded by subsequent decisions such as the Braams Group case and Switz v Glowbind. 27 Once the question whether there is a genuine dispute as to the existence of the debt relied upon by Scottish is excluded, discretionary considerations point towards making an order for substitution. The amount claimed in the statutory demand has not been paid. Scottish claims to be owed an additional substantial amount. While there is, as I have said, some evidence that Wolf is solvent, the evidence does not clearly demonstrate that Wolf would be solvent after meeting Scottish's claim. In any event the question of solvency cannot be determinative at this stage, when the evidence is incomplete. Solvency will be the main issue for determination at the hearing of the winding up application. The fact (if it be so) that Wolf was prevented by its solicitor's mistake from continuing with its application to set aside Scottish's statutory demand is not a consideration of any weight on the application for substitution, although it will have some significance on the application for leave under s 459S. 28 Counsel for Wolf invited me to grant leave under s 459S. No interlocutory process has yet been filed and served on Scottish for that purpose, but counsel proffered a form of application under s 459S at the hearing of the application for substitution. In my opinion this is not the occasion for granting leave under s 459S, nor for expressing a view as to whether leave will or ought to be granted if the application is renewed by interlocutory process or at the hearing of the application for winding up. I am not satisfied that Scottish has been given an adequate opportunity to address the questions that will be raised by such an application - in particular, the question whether the ground upon which Wolf wishes to rely is material to prove that Wolf is solvent: s 459S(2). The evidence of Scottish, and its submissions to me, have been directed towards establishing that, having regard to s 459S and other considerations, Wolf is precluded from challenging its standing as a creditor on the application for substitution. 29 Now that I have dealt with that question, Wolf may choose to make a separate application under s 459S with a view to having the issue decided before the hearing, but I would not encourage it to do so. In my opinion, in the interests of efficiency, any application under s 459S should be considered at the hearing of the winding up application, so that the question of solvency can be addressed comprehensively and the proceeding can be finally resolved without any duplication of hearing time. 30 I shall therefore make an order to substitute Scottish for Bibby as the applicant for winding up. Unless there is a strong reason advanced for doing otherwise, I shall order that Scottish's costs of the application for substitution be Scottish's costs in the proceeding. **********

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