14 Is there then any substantial reason for postponing the evil day? I cannot really see sufficient reason. Indeed, that view is reinforced by the fact that Pt 5.4 of the Act envisages a more or less mechanical process whereby if a statutory demand is not challenged in the appropriate way within 21 days, then the Court should not be particularly free with exercising its inherent power or discretion to prevent the process. It does not seem to me that the instant case demonstrates circumstances where I should intervene and, accordingly, I will dismiss the present motion with costs.
14 It can be seen from the above that his Honour found the company to be insolvent although he considered that the appellant would seem to have an arguable appeal. If the appeal succeeded the present petitioner would not be a creditor and not entitled to pursue the winding up. Nonetheless, the effect of Pt 5.4 of the Corporations Law, and in particular s 459S, was that the company could not oppose the winding up upon a ground that it could have relied on to set aside the statutory demand. Since the company was insolvent on the evidence, and because of s 459S, the winding up order should be made.
15 The hearing of the winding up application then proceeded. It appears that counsel for the company made an alternative submission. First, relying on the materials already before the court, it was submitted that the winding up application should be dismissed. Alternatively, if the order was made, it should be stayed to permit the appeal to proceed.
16 His Honour then gave judgment on the winding up application (paras 16 -25). His Honour said (para 20) that because of the structure of Pt 5.4 and the reasons he had already given, he would not in his discretion dismiss the proceedings. However, it was appropriate to stay the winding up order to 'allow the company as controlled by the directors one last opportunity to make an application to the Court of Appeal for a stay of Foster AJ's judgment'.
17 On 31 January 2002 the Court of Appeal made orders by consent allowing the company's appeal against the judgment by Foster AJ and set aside the judgment against the appellant.
18 The case for the appellant is essentially two-fold. First, the statutory demand and the application for the winding up were an abuse of process because the demand was solely based upon a windfall judgment to which the respondent plainly believed he was not entitled. Young CJ in Eq should have concluded that the proceedings were being brought for an improper purpose and were unjustifiably oppressive. The arguable abuse of process should have led his Honour to either dismiss the proceedings or grant an adjournment.
19 Alternatively, it is submitted on behalf of the appellant by Mr Stevens QC that his Honour's discretion miscarried. His Honour was wrong to find that the company was insolvent and that his discretion miscarried in failing to dismiss, adjourn or stay the proceedings.
20 Counsel for the respondent, Mr Parker, places significant reliance on Pt 5.4 of the Corporations Law, inserted by the 1992 amendments. It is submitted that the circumstances fell far short of establishing an abuse of process. The appellant had every opportunity to seek to obtain a stay of the judgment and/or to seek to set aside the statutory demand. It is not an abuse of process to commence winding up proceedings even where it is known that the debt is disputed (Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 20 ACLC 304). Counsel also submits that there is no mechanism in the legislation for winding up orders to be avoided or annulled by reason of subsequent events.
21 Emphasis is placed by the respondent on the question of insolvency and the presumption of insolvency in s 459C(2)(a). It was for the appellant to rebut the statutory presumption of insolvency and this it failed to do. Mr Parker also supports his Honour's decision not to adjourn the proceedings maintaining that his Honour's decision was discretionary and did not miscarry in terms of House v The King (1936) 55 CLR 499 at 504 - 505.
22 A relevant starting point for consideration of the appeal is the decision of the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. All members of the Court agreed with the judgment of Gummow J.
23 His Honour noted that the then new Pt 5.4 constituted 'a legislative scheme for quick resolution of the issue of insolvency' without the interposition of disputes about debts unless promptly raised (at 270). His Honour set forth the salient provisions of the scheme.
24 Gummow J noted that the scheme contained specific provisions relating to the power of the court to extend time.
25 His Honour referred to examples which Sheller JA had given in Re J & E Holdings Pty Limited (1995) 36 NSWLR 541 at 551 where Pt 5.4 might operate harshly. Gummow J said:
In particular, reference was made to the drastic commercial consequences which may follow the issue of process for winding up and to the inability of a company, which for good reason had been late in filing or serving an application to set aside the statutory demand, to prevent the issue of that winding up process. The damage to the commercial reputation of the company in the meantime might not be answered by the eventual success of the company in defeating the application to wind it up as insolvent. Further, default clauses in securities given by the company may have been so drawn as not to take full account of the new statutory scheme, with the consequence that floating charges may have crystallised and the whole of the principal and interest become payable. [at 279.5]
26 His Honour accepted that in some circumstances there was no doubt that Pt 5.4 may appear to operate harshly. However, this was a consequence of the legislative scheme adopted to deal with perceived defects in the procedures which hitherto had related to statutory demands. Importantly to this appeal his Honour added:
It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz . However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction. [at 279.9]
27 A number of first instance decisions of the Supreme Court have dealt with the relevant statutory context.
28 In House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 14 ACLC 1536 Brownie J did not doubt the power of the court to dismiss or stay winding up proceedings as an abuse of process, citing Williams v Spautz and David Grant. There was however a question of the effect of s 459S on this power. This did not arise for consideration in David Grant.
29 The provision in s 495S is as follows:
(1) In so far 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 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 that the company is solvent.
30 In House of Tan Brownie J said:
In my judgment, the defendant does require the leave of the Court, under section 459S, if it is to litigate the issue. Part 5.4 was enacted to change a branch of the law that was perceived to be unsatisfactory. That branch of the law included a multitude of cases that proceeded on the basis that a company, faced with winding up proceedings, might effectively defend itself by asserting that the alleged creditor was not in truth a creditor, in that the supposed debt was disputed, so that the supposed creditor had no standing to bring the winding up proceedings. The plain intention of the drafters of the legislation, and of the Parliament, was to replace that body of law with the new procedure provided for in Part 5.4. [at 1538]
31 Brownie J's opinion was that the power of courts to stay proceedings that are an abuse of process was effectively limited by Pt 5.4. His Honour accepted that the jurisdiction or power will still exist, although its instances of application would be few in number. In short, a company which asserts that a creditor lacks standing must seek to set aside the statutory demand within the time provided or must obtain leave under s 459S. Further, the ground relied on for leave must be one material to proving solvency (s 459S(2)).
32 In Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467 Austin J considered a claim that the plaintiff was not a creditor and had no standing under s 459P to apply to wind up the defendant in insolvency. It was his Honour's opinion that where an application for winding up relies on the failure of the company to comply with a statutory demand, and no application had been made to set the demand aside, the plaintiff's argument could not be run unless the court granted leave under s 459S(1).
33 His Honour said that if it were possible to raise the issue of indebtedness by challenging standing under s 459P after it had become too late to set the demand aside, the underlying policy of the 1992 reforms to the Corporations Law would be undermined.
34 Austin J added:
In my opinion, the scheme contemplates that disputes about the existence of debts are to be resolved through the process of applying to set aside the statutory demand which relies on the debt. The purpose of the reform was to reduce the occasions when disputes would arise about the debt at the hearing of the winding up application: Explanatory Memorandum to the Corporate Law Review Bill 1992, para 685. To that end, the provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands: Explanatory Memorandum, para 688. The scheme "provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading up to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed at an early stage, rather than after winding up proceedings have commenced": Explanatory Memorandum para 689. The construction for which the defendant contends would fly in the teeth of the legislative intention so revealed. [at 479]
35 His Honour agreed with Brownie J's assessment in the House of Tan of the limited room left for the court's general powers relating to abuse of process.
36 Austin J made a telling point about leave under s 459S. That is that the provision does not lead to the setting aside of the statutory demand and does not remove the presumption of insolvency under s 459C(2)(a). His Honour added, at 481:
… Having granted leave, the Court's task is to deal with the proceedings for winding up, rather than cutting away the demand which is their substratum. The overall question of solvency is the critical issue . If it emerges that the debt upon which the applicant has relied is not owing, the Court may grant leave to a creditor to be substituted as applicant, and if that happens the new applicant may be able to take advantage of the presumption of insolvency which arose out of non-compliance with the initial demand. As Gummow J said in the David Grant case (at ACLC 1,579; ACSR 234), Part 5.4 may appear to operate harshly, but that is consequence of the legislative scheme which has been adopted, and in an appropriate case the applicant for winding up may be restrained on the ground of abuse of process. [Emphasis added]
37 In my opinion Paliflex correctly states the law and the effect of Pt 5.4 and s 459S.
38 The next case is Redglove, a decision of Palmer J delivered on 3 October 2001. The company had failed to apply to have the statutory demand set aside within the time provided by s 459G. However, it sought an order that the creditor be restrained from commencing winding up proceedings, alleging that there was a genuine dispute about the debt, and that it was solvent. It relied on the inherent jurisdiction of the court to prevent a threatened abuse of process.
39 Palmer J considered Gummow J's reference in David Grant to 'an improper purpose which amounts to an abuse of process in the technical sense of that term as explained in Williams v Spautz'.
40 His Honour said that the majority in Williams v Spautz (1992) 174 CLR 509 at 526 said that 'an abuse of process occurs when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or for some collateral advantage beyond what the law offers'. The onus, which is a heavy one, is on the party alleging the abuse of process.
41 Palmer J acknowledged that prior to issue of the statutory demand, the defendant knew that the debt was disputed. This did not make it an abuse of process because, as his Honour said, at 308:
… at the heart of the scheme imposed by Pt 5.4 is the legislative intent that debtors wishing to dispute debts should not be permitted merely to protest in general terms and for an indefinite period; they must particularise the grounds of the dispute upon affidavit and they must do so quickly . By this means, many spurious attempts to delay payment of just debts will be defeated, either because the debtor company cannot support the existence of a genuine dispute when called upon to do so on affidavit or because the grounds of the dispute, once sufficiently exposed, simply do not stand up to the Court's scrutiny. [Emphasis added]
42 His Honour further explained at 308 - 309:
Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by serving a notice of demand under s. 459E in order to invoke the procedures of Pt 5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s. 459G. That is the risk that the creditor takes in serving the notice of demand. But if the debtor company fails to substantiate the dispute in the manner which is required by Pt 5.4 and, in particular, by s. 459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s. 459C, s. 459Q and s. 459S. This is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts . Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor's purpose in seeking the winding up is not to collect payment of its debt or, in default to have the company wound up, but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality . [Emphasis added]
43 Finally, there is a recent unreported decision of Barrett J (State Bank v Tela Pty Ltd (No 2) [2002] NSWSC 20, 1 February 2002). In this case the bank sought to wind up the company on the grounds of insolvency based on an uncomplied with statutory demand, and relied on the presumption of insolvency.
44 The company opposed the winding up alleging that the proceedings were an abuse of the process of the court. Applying Gummow J in David Grant, and s 459S, Barrett J said that it was plain that displacement of the presumption of insolvency will normally be the only avenue available to a company upon the hearing of an application for winding up.
45 His Honour said that the essence of an abuse of process in the present context was some improper purpose on the part of the applicant in bringing the proceedings, the purpose being not to prosecute the proceedings to a conclusion but to use them for some collateral advantage for which they were not designed.
46 Barrett J said:
The scheme of the legislation makes it clear that a creditor has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Part 5.4. It is now abundantly clear that, unless the Division 3 process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist. [at p of 5]
47 His Honour expressly approved of Palmer J's statement in Redglove cited above. He said that this passage recognised the abuse of process exception identified in David Grant but that it would in reality be an extremely rare exception.
48 The judgment of Young CJ in Eq under appeal should be approached on the basis of the evidence before the court on 20 August 2001 and not with the benefit of hindsight that the judgment of Foster AJ was set aside by consent on 30 January 2002.
49 On behalf of the respondent, Mr Parker submits that no abuse of process argument was put below, either in support of a dismissal or an adjournment of the summons. An examination of the transcript generally supports his submission. Certainly, it is likely that the submission was not squarely put to the court.
50 It is plain however that his Honour accepted that the court had inherent power to stay winding up proceedings which are an abuse of process (para 8). However, having acknowledged the power, his Honour accepted that the power and discretion had been circumscribed by the scheme in Pt 5.4. His Honour referred to the House of Tan.
51 The fact that his Honour acknowledged that the company had an arguable appeal and that, if it succeeded, Mr Miric would not be a creditor, goes little distance to establishing an abuse of process in the manner explained by Gummow J in David Grant by reference to Williams v Spautz. There was no evidence before the court which could have led his Honour to conclude that Mr Miric was seeking to obtain something other than a result which the law provided. The fact that Mr Miric knew that the judgment debt he relied on in the statutory demand was disputed did not make it an abuse of process for him to proceed to seek the winding up of the company for non-compliance with the statutory demand (Redglove). No application had been made to set aside the statutory demand. No application had been made to Foster AJ to extend the 7 day stay and no application had been made to the Court of Appeal for a stay between the judgment on 23 April 2001 and the hearing on 20 August 2001, a period of almost 4 months. It is plain that, viewed as at the date of the hearing before his Honour, the evidence fell short of establishing an abuse of process.
52 I turn then to consider whether his Honour should have granted an adjournment and/or stayed the winding-up proceedings.
53 This involves a consideration of s 459S. Under this provision the company would have needed to be granted leave to dispute the debt since it was a matter which could and should have been raised in an application to set aside the statutory demand and made within 21 days of its service. In addition, s 459S(2) meant that the court could only grant leave if the ground was material to proving solvency. As Austin J said in Paliflex, the critical issue is the question of solvency.
54 Again, it is difficult to deduce from a reading of the transcript that an application for leave under s 459S was pressed. Although his Honour dismissed the company's motion, he did not expressly refer to any application for leave. Mr Stevens acknowledged that his Honour is to be taken as having refused leave.
55 It is important to record that his Honour made a positive finding that the company was insolvent 'in any event' (para 9). His Honour found that the company had no assets apart from a right of indemnity against the beneficiaries of the trust or assets. It had debts for legal fees and it owed accounting fees, which it did not seem able to meet from its assets.
56 The appellant challenges his Honour's findings regarding the limited nature of the assets of the company. However his Honour was perfectly entitled to reject Mr Braams' evidence as to the value of the units. Mr Braams was no expert and the value of the units in the Trust needed to be established by appropriately qualified expert evidence. There was no other persuasive evidence before the court that the value of the units was other than nominal. There was no evidence that the units had any readily realisable value to meet the liabilities of the company. The units were not listed and had no ready market.
57 Failure to comply with the statutory demand raised the presumption of deemed insolvency. The onus was on the company to rebut this presumption. It failed to do so. It follows that his Honour was entitled to find that the appellant was in any event insolvent. The issue of insolvency was critical, see Paliflex.
58 In the circumstances, what would be the point of adjourning the winding up application? Even if the appellant had every possibility of ultimately having the judgment against it set aside, this could not alter the solvency problem it faced under s 459S as at 20 August 2001 when his Honour heard the winding up application. The appellant could not oppose the winding up if the ground relied on did not establish that the company was solvent (s 459S(2)). On the finding of his Honour that the company was, on the evidence, insolvent, the judgment debt could not be contested in the proceedings. On the evidence the insolvency finding was one which was properly available to his Honour. The statutory demand simply could not be set aside in the winding up proceedings.
59 In declining to grant an adjournment for 3 weeks, to enable a stay application to be made to the Court of Appeal, his Honour spoke of the 'more or less mechanical process' under Pt 5.4 when a statutory demand is not challenged within 21 days. The appellant is critical of his Honour's approach. However, it seems to me to be consistent with Pt 5.4 and the authorities to which I have earlier referred.
60 In any event, his Honour said that Pt 5.4 meant that the court 'should not be particularly free with exercising its inherent power or discretion to prevent the process' (para 14). Again, this is consistent with the authorities discussed earlier. His Honour added that the case did not demonstrate circumstances in which the court should intervene. This seems to be a perfectly proper exercise of the discretion or power and one untainted by error.
61 In David Grant Gummow J accepted that the rigour of Pt 5.4 had the capacity to operate harshly but that there was the safety valve of abuse of process in the technical sense of Williams v Spautz. On one view it may be thought, especially with the benefit of hindsight, that an injustice might have been done by his Honour proceeding to the winding up. However, his Honour stayed the order to allow the company one last chance to appeal (which it took). Notwithstanding, no abuse of process is apparent. Nor was the other safety net of leave under s 459S really activated (see Hayne J in Texel Pty Ltd v Commonwealth Bank (1993) 11 ACSR 535), and it could not have been because of the finding of the court as to the insolvency of the company in any event.
62 All this leads me to conclude that his Honour was not in error in refusing the adjournment. It would have been futile since his Honour had found the company to be insolvent notwithstanding the disputed judgment. Indeed, in these circumstances it would probably have been inappropriate to have granted an adjournment. The question should always be, does the ground relied on go towards proving solvency?
63 Any injustice to the appellant was brought about by its own inaction over a period of almost 4 months. It had all of that time to seek a stay of the judgment but failed to do so. It could have contested the statutory demand within the 21 days of its currency but did not do so. That meant that it was faced with the presumption of insolvency. To rebut this it was necessary to demonstrate its solvency. It failed to do so.
64 The appellant did nothing to seek to protect its position until it was too late. Moreover, its liabilities exceeded the value of its assets on the evidence before his Honour. If the units had a real marketable value it was for the appellant to place acceptable evidence of that before the court. Again, it failed to do so.
65 In my view, the appeal should be dismissed with costs.
66 IPP JA: I have had the benefit of reading the draft reasons of Stein JA. I agree with his Honour's reasons and conclusions and would add the following comments of my own.
67 On 21 May 2001 the respondent served the statutory demand on the appellant. The demand asserted in effect that the appellant owed $744,792.30 to the respondent by reason of the judgment delivered on 23 April 2001 by Foster AJ.
68 On 4 July 2001 the respondent filed originating process seeking the winding-up of the appellant on the ground that the latter had failed to comply with the statutory demand. By then the 21-day period relating to the setting aside of the statutory demand had expired.
69 On 2 August 2001 the appellant filed a notice of appeal against the judgment of Foster AJ. Thereafter, the appellant filed a notice of motion seeking, amongst other things, a stay or adjournment of the winding-up proceedings pending determination of its appeal against that judgment.
70 On 20 August 2001 the respondent's winding-up application and the appellant's notice of motion was heard by Young CJ in Eq.