Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd

Federal Court of Australia|2013-09-02|Before: Mr P, Mr J, Ball J, Jacobson J

Introduction 1 The plaintiff (Bluestone) applies under ss 459A and 459P of the Corporations Act 2001 (Cth) (the Act) for an order that the defendant (Equilibrium) be wound up in insolvency. The circumstances in which the application is brought, and Equilibrium's opposition to the order, are unusual. 2 Bluestone is a judgment creditor of Equilibrium. It obtained judgment in the Supreme Court of New South Wales in April 2009 for $600,000 to which interest and costs have been added. Equilibrium has paid Bluestone the sum of approximately $294,000 in partial satisfaction of the judgment debt but it has not sought or obtained an order setting aside the balance of the judgment. Nor has it sought a stay of the judgment. 3 Instead, in three separate sets of proceedings brought by Equilibrium to set aside statutory demands served upon it by Bluestone, Equilibrium has asserted that it has an offsetting claim equal to or greater than the amount of the judgment debt. 4 The first statutory demand was served by Bluestone on Equilibrium (then known as Abadeen Group Pty Ltd) on 23 September 2010. Equilibrium's application to set it aside was dismissed by Ball J in February 2010: see Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137. His Honour found that the offsetting claims asserted by Equilibrium were not genuine claims which attracted the operation of s 494H of the Act. 5 For reasons which were not explained, Bluestone did not make an application to wind up Equilibrium notwithstanding Equilibrium's failure to satisfy the first statutory demand. 6 On 18 September 2012 Bluestone served a second statutory demand on Equilibrium, which then applied for an order to set it aside under s 459G of the Act. The matter came before Brereton J on 10 December 2012. In the course of argument about an adjournment of the application, his Honour indicated that Equilibrium could not seriously contend that its offsetting claim was greater than the amount of the demand. His Honour said that "on any view" of the offsetting claims asserted by Equilibrium, there was a "substantiated" debt due to Bluestone of at least $294,689.67: see In the matter of First Equilibrium Pty Ltd [2012] NSWSC 1625 at [3]. 7 His Honour offered Bluestone an election of adjourning the hearing for some months for a final hearing on all issues or immediately varying the demand to the sum of $294,689.67 in accordance with s 459H of the Act. Brereton J indicated that if Bluestone elected to vary the demand this would not preclude it from arguing at a future time that there was no genuine dispute or offsetting claim in respect of the balance of the debt, or from issuing a further statutory demand for the balance. 8 Bluestone elected to vary the demand to the lower sum and on 17 January 2013 Equilibrium paid Bluestone the sum of approximately $294,000 in payment of the varied statutory demand. 9 On 21 January 2013 Bluestone served a third statutory demand on Equilibrium for the balance of the judgment debt which then stood at approximately $588,000. Equilibrium applied in the Supreme Court of New South Wales to set the demand aside. On 14 March 2013 consent orders were made, without admissions, setting aside the third statutory demand. 10 Nearly two weeks later, on 27 March 2013, Bluestone filed its originating process in this Court making an application for a winding up order on the ground of Equilibrium's insolvency. The application was not made on the ground upon which such applications are usually founded, namely, failure to comply with a statutory demand. Rather, Bluestone seeks to prove, as a question of fact, that Equilibrium is insolvent. 11 Bluestone has not filed expert evidence seeking to establish Equilibrium's insolvency. Instead, Bluestone relies upon the "commercial realities" of the matter. In particular, Bluestone points to the fact that the judgment has been outstanding for over four years, and that Equilibrium has taken no steps to establish its asserted offsetting claim, other than to put the claim forward in proceedings of an interlocutory nature where the only issue is as to the arguability of the asserted offsetting claim. 12 Bluestone also relies upon inferences to be drawn from the fact that the sole director of Equilibrium has sworn affidavits in this proceeding which do not disclose the existence of any assets available to meet the judgment debt other than the asserted offsetting claims. 13 In addition, Bluestone relies on inferences of insolvency to be drawn from a form of balance sheet belatedly introduced into evidence by Equilibrium. The balance sheet is unsigned but purports to describe the financial position of Equilibrium for the financial year ended 30 June 2011.

The issues 14 Two essential issues arise in the application. The first issue is whether Bluestone has standing as "a creditor" in accordance with s 459P(1)(b) of the Act. 15 This issue arises because, notwithstanding Bluestone's judgment debt, Equilibrium contends that the existence of a counterclaim based on substantial grounds for an amount equal to or exceeding the debt is generally regarded as sufficient to raise a bona fide dispute so as to defeat the plaintiff's standing as creditor. 16 The debate between the parties on this issue turned partly upon the question of whether the authorities which establish that a company may not be wound up on the application of a creditor whose debt is disputed, apply in the present case. 17 However, Bluestone also contended that neither of the offsetting claims asserted by Equilibrium is a genuine claim within the meaning of s 459H(5). 18 The second issue is whether Bluestone has established, to the requisite standard, that Equilibrium is insolvent.

FACTUAL BACKGROUND 19 The background to the proceedings which resulted in Bluestone's judgment debt of $600,000 is described in the judgment of Ball J: see Abadeen v Bluestone at [4]-[10]. 20 Ball J went on at [11]ff of his judgment to describe the offsetting claims asserted by Equilibrium and the principles which apply to determine whether an asserted offsetting claim satisfies the provisions of s 459H of the Act. His Honour observed, citing earlier authorities, that an offsetting claim need not satisfy the requirements of "counterclaim" or "set-off" at general law. 21 Notably the offsetting claims upon which Equilibrium relied before Ball J included a claim which it asserts in the present proceeding. That claim is said to arise from the assignment of certain rights under an agreement for sale of units in a unit trust conducted by a company known as 282 Oxford Street Pty Ltd. 22 The agreement is described as the Unit Sales Agreement dated 15 August 2006 between Sharlotte Pty Ltd and Bluestone under which Sharlotte agreed to sell and Bluestone agreed to purchase Sharlotte's units in the 282 Oxford Street Unit Trust for $450,000. That sum has not been paid but by a Deed of Assignment dated 1 October 2010, Sharlotte assigned to Equilibrium its right, title and interest in the debt due by Bluestone. The consideration for the assignment was expressed to be $1. 23 The relevant clauses of the Unit Sales Agreement are clauses 2.1, 2.2, 2.2.1, 2.2.2 and 6.1. I will set those out in full as follows: 2 SALE AND TRANSFER OF UNITS 2.1 In consideration of the agreement by Bluestone to pay the sum of $450,000.00 contained in this deed, Sharlotte agrees to sell all its interest in the Sale Units in the Trust to Bluestone and to transfer to Bluestone those 50 units (free of Encumbrances and other third party rights and interests). 2.2 Bluestone shall pay the total consideration payable to Sharlotte in the following manner: 2.2.1 As to the sum of $400,000.00 by cheque or cheques drawn as directed by Sharlotte on 15 November 2006. 2.2.2 As to the sum of $50,000.00 by cheque or cheques drawn as directed by the Sellers on 31 March 2007. … 6 BENEFICIAL INTEREST IN SALE UNITS 6.1 Sharlotte and Bluestone agree that the beneficial interest in the Sale Units shall be transferred to Bluestone as at the date of this deed. … . 24 His Honour gave two reasons for finding that the offsetting claim was not genuine. The first was that there was no evidence that Sharlotte had been in a position to transfer its units to Bluestone free of encumbrance. The second was that there was no evidence that Sharlotte had signed the purported assignment: see Abadeen v Bluestone at [45]-[46].

The offsetting claims 25 The principal offsetting claim on which Equilibrium relies is the assignment of Sharlotte's rights under the Unit Sales Agreement. 26 Equilibrium has adduced evidence from Mr Justin Brown in an attempt to overcome the adverse findings made by Ball J. However, in my opinion (even if there is no issue estoppel arising from his Honour's judgment), the findings made by his Honour apply equally in the present application. 27 In particular, there is no evidence directed to the question of Sharlotte's ability to transfer the units in 282 Oxford Street Unit Trust to Bluestone free of encumbrance or other third party rights or interests. 28 That is fatal to Equilibrium's assertion that Bluestone is in breach of its obligation to pay the instalments of $400,000 and $50,000 under the Agreement. Bluestone's obligation was expressly predicated upon Sharlotte's agreement to transfer its Units free of encumbrance. 29 The terms of cl 6.1 of the Unit Sales Agreement do not assist Equilibrium. It is true that the effect of the clause is to transfer an equitable interest in the Units to Bluestone. However, Bluestone's equitable interest was subject to any existing encumbrance or third party rights. Clause 6.1 does not address the question of whether such rights existed. It was for Equilibrium to establish by evidence that at very least, Sharlotte was in a position to transfer to Bluestone an unencumbered legal interest in the Units. It did not do so. 30 The second offsetting claim asserted by Equilibrium was an assignment by Babcock and Brown Real Estate Finance Pty Ltd (B & B) to Equilibrium of B & B's rights against Bluestone as guarantor of a Loan Facility Agreement for the development of a property at St Kilda Road, Melbourne. 31 The documents upon which Equilibrium relies are described in paragraphs 5 to 11 of Mr Brown's affidavit of 11 February 2013. That affidavit was filed in the Supreme Court of New South Wales but was read, with leave, in the present application. 32 The development was known as the Chevron Development and the Loan Facility Agreement was known as the Chevron Facility. Ball J concluded that the purported assignment of rights under the Chevron Facility did not give rise to a genuine offsetting claim: see Abadeen v Bluestone at [36]-[43]. 33 The position is no different in the present application. Indeed, the short answer to Equilibrium's contention is that the effect of cl 2.5 of the mortgage document is that the Chevron Facility was limited in recourse to the proceeds of sale of the property comprising the Chevron Development.

Standing 34 Since I have come to the view that Equilibrium does not have a genuine offsetting claim against Bluestone, it is not open to Equilibrium to contend that Bluestone is not a creditor. It follows that Bluestone has standing under s 459P(1)(b) of the Act. 35 It is therefore unnecessary for me to address Equilibrium's contention that its offsetting claims have the effect of defeating Bluestone's standing as a creditor. However, I will address that issue briefly. 36 The general principle was succinctly stated by White J in Tokich Holdings Pty Ltd v Sheraton Constructions Pty Ltd (in liq) [2004] NSWSC 527 at [72]. His Honour said that the preponderance of authority is that a company may not be wound up on the application of a person claiming to be a creditor whose debt is disputed unless the dispute is resolved; otherwise, the applicant for a winding up order will not establish its standing as a creditor. His Honour supported that statement of principle with a long line of well established authority. 37 Tokich was not concerned with the question of whether a dispute as to the debt includes the existence of a genuine offsetting claim. But even if such a claim is capable of constituting a dispute as to the existence of the debt, the difficulty which arises here is that Bluestone's debt has been resolved by litigation whereas the asserted offsetting claims have not been litigated. 38 In those circumstances it seems to me that the better view is that the principle stated in R Derham, The Law of Set-Off (3rd ed, Oxford University Press, 2003) at [2.73] applies to the present case. The principle is that: … a judgment debtor cannot extinguish or reduce the amount of the judgment by setting off an unlitigated simple contract debt owing to him by the judgment creditor. 39 The authority for that principle is a decision of Gibbs CJ in Philipson v Caldwell (1815) 6 Taunt 176; 128 ER 1001. His Honour said that there is no instance where the courts have interfered to establish a set-off against a judgment, when the party might try that question in an action. 40 It is true that the definition of an offsetting claim under s 459H(5) of the Act is wider than the technical meaning of set-off. However, it seems to me that, at least in relation to the circumstances of the present case, the existence of a genuine offsetting claim (if established) would not constitute an answer to Bluestone's standing. It may constitute a ground upon which the Court's discretion under s 459A would be exercised against the making of an order to wind up the company. But that question does not arise here.

Solvency 41 The question which arises is whether Bluestone has adduced evidence which establishes that Equilibrium is unable to pay its debts as and when they fall due: see s 95A of the Act. Bluestone is required to demonstrate that Equilibrium was insolvent in accordance with this test both at the time of filing the application and at the hearing. 42 The principles which govern the test of solvency were usefully stated by Mandie J in Australian Securities and Investments Commission v Plymin & Ors (2003) 46 ACSR 126 at [386]ff. The effect of the authorities may be summarised for present purposes by stating that the question of whether a company is solvent is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: see Southern Cross Interiors Pty Ltd (in liq) v Deputy Federal Commissioner of Taxation (2001) 53 NSWLR 213 at [54] per Palmer J. 43 As Palmer J observed in Southern Cross, in considering the company's financial position as a whole, the Court must have regard to commercial realities. That proposition has regard to the resources that are available to meet liabilities of the company as and when they fall due, and the nature of those resources. 44 Here, although the evidence is somewhat scant, the inescapable fact is that Equilibrium has failed to pay a judgment debt obtained by Bluestone more than four years. Equilibrium has not pointed to any resources, whether cash or otherwise, to be able to meet that liability. Instead it has asserted offsetting claims which it has failed to litigate, other than in the manner referred to above. 45 I accept that Bluestone has the onus of satisfying me that Equilibrium is insolvent in accordance with the principles referred to above. However, I am entitled to take into account the history of the proceeding, including the background described by Ball J in Abadeen v Bluestone and the subsequent proceedings. 46 I am also entitled to take into account the fact that Mr Brown gave evidence in this proceeding yet he made no attempt to address the question of the solvency of Equilibrium. This does not entitle me to infer that Equilibrium is insolvent but I could infer that his evidence would not have assisted: see Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418 per Handley JA. 47 It seems to me to follow that the failure of Mr Brown to give evidence on this topic is a factor I can take into account as a part of the consideration of the financial position of Equilibrium, considered as a whole, in particular in light of the overall history and the failure to pay the judgment debt. 48 Moreover, such evidence as was tendered on behalf of Equilibrium on this issue supports a finding of insolvency at all relevant times. That evidence consists of the unsigned Financial Report of Equilibrium for the year ended 30 June 2011. 49 The Balance Sheet forming part of Exhibit 2 records the only substantial assets as trade receivables of $342,000 but that figure includes a receivable of $335,000 said to be due from Bluestone. Thus, the balance sheet purports to bring to account as an asset the unlitigated offsetting claims which I have found not to be genuine. 50 Worse still, the Balance Sheet fails to record as a liability the $600,000 judgment debt due to Bluestone. It is referred to in note 4 as a "contingent liability". 51 Once the necessary adjustments are made, the Balance Sheet which was tendered by Equilibrium makes it clear that the company was insolvent as at 30 June 2011. There is no evidence to suggest that the position has altered. 52 Accordingly, I am satisfied that Equilibrium was insolvent at all relevant times for the purposes of this proceeding.

Other issues - Section 553C 53 It was submitted on behalf of Equilibrium that I must take into account on the issue of standing, and perhaps on the issue of solvency, the provisions of s 553C(1) of the Act which deal with mutual credits and set-off in relation to proofs in insolvency. 54 The short answer to this submission is that I have found that there were no mutual credits or mutual dealings. 55 But, in any event, s 553C(1) and the principles stated in authorities such as Gye v McIntyre (1991) 171 CLR 609 do not arise. That subsection, and the principles stated by the High Court in Gye and earlier authorities are concerned with the determination of the sum which is admissible to proof against an insolvent company that is being wound up. 56 Although Bluestone was ordered to be wound up in 2012, the issue of set-off under s 553C(1) does not arise and has no relevance to the issue of the standing of Bluestone or the solvency of Equilibrium.

Conclusion and orders 57 I am satisfied that all necessary matters, including formal matters, have been established. 58 I will therefore make orders in accordance with the originating process. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

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