Braams Group Pty Ltd v Miric

Whether Zhaos has established that Ryals Hotel is insolvent

1. With that background, essentially three issues arise in this application. The first is whether Zhaos has established that Ryals Hotel is insolvent, for the purposes of establishing a winding up on that basis, or could otherwise establish a winding up on the just and equitable ground. In its grounds of opposition in its Notice of Appearance, Ryals Hotels contended it is solvent. The second, which is also raised by the Notice of Appearance filed by Ryals Hotel, is whether the proceedings are an abuse of process, either in the usual sense of that term, or in the specific sense which that term has in winding up proceedings. The third is whether, irrespective of the position in respect of the first and the second issues, whether the Court would exercise its discretion, which both parties accept exists, under s 467 of the Corporations Act either to dismiss the winding up application, or to adjourn it for a significant period, given the circumstances to which I referred above and Zhaos' non-compliance with the COVID-19 Regulations to which I have referred above.
2. I deal first with the question whether Zhaos has established that Ryals Hotel is insolvent in fact. In his opening submissions, Mr Johnson submits that there have been ongoing disputes as to the non-payment of rent falling due under the terms of the lease, and acknowledges that Zhaos does not rely upon any presumption of insolvency arising from non-satisfaction of a creditor's statutory demand issued pursuant to the provisions of s 459E of the Corporations Act. Mr Johnson submits that, in circumstances of the grounds of opposition raised by Ryals Hotel there is an obligation to provide the "fullest and best" evidence of its financial position; avoid making bald assertions of solvency arising from unaudited uncertified or incomplete financial statements; and disclose details of outstanding assets and liabilities in a manner capable of proper verification. I remind myself that Zhaos must establish the factual and legal basis of the case for which it contends, notwithstanding that Ryals Hotels advances the contrary proposition.
3. Mr Johnson submits, uncontroversially, that s 459A of the Corporations Act permits the Court to wind up a company in insolvency, insolvency being defined in s 95A of the Corporations Act and is generally to be determined on a cash flow test rather than an asset test. Mr Johnson submits that there are ongoing obligations under the terms of the lease for Ryals Hotel to make rental payments, although he fairly acknowledges the impact of the COVID-19 Regulation which, as I noted above, he submits does not extend to obligations that arose prior to 24 March 2020. Mr Johnson in turn emphasises the limited evidence led by Ryals Hotel to seek affirmatively to establish its solvency and contends that, on the balance of probabilities, Zhaos has established Ryals Hotel's inability to pay debts as and when they fall due.
4. Mr Elliott in turn submits that s 95A(1) of the Corporations Act has the effect that a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable and refers to my summary of the applicable principles in Re Humur Pty Limited [2020] NSWSC 1759 at [17] - [18]. He submits that whether a company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of its assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305; [2001] NSWSC 621 at [54]. Mr Elliott points out that surmountable temporary illiquidity is insufficient to establish insolvency. He also recognises that a failure to pay an undisputed debt may in limited circumstances of itself provide a foundation for an inference that a company cannot pay its debts from any source available to it: Cornhill Insurance Plc v Improvement Services Ltd [1986] 1 WLR 114; Taylor Industrial Flooring Ltd v M&H Plant Hire (Manchester) Pty Ltd [1990] BCLC 216; Just Juice Corporation Pty Ltd v Murrayland Fruit Juice Pty Ltd (1990) 2 ACSR 541 at 546; Re Plutus Payroll Pty Limited [2017] NSWSC 1360 at [30] - [31].
5. Mr Elliott submits that, here there is a genuine dispute as to whether and/or to what extent rent is due and payable under the Ryals' lease as a consequence of the operation of the COVID-19 Regulation. He submits, by reference to the evidence and I accept that, Ryals Hotel is an "impacted lessee" (COVID-19 Regulation, cl 4) because it qualifies for the JobKeeper program and its turnover is less than $50M; the expression "COVID-19 pandemic period" in the Code of Conduct is in turn the "period during which the JobKeeper program is operational", and that program commenced operation on 1 April 2020, and the COVID-19 Regulation had retrospective effect to 1 April 2020 in relation to rent and outgoings for the period from that date; on 22 May 2020, Ryals Hotel requested that Zhaos renegotiate the rent payable under its lease, and Zhaos then recognised that Ryals Hotel was an "impacted lessee"; Zhaos was obliged to renegotiate in "good faith" the rent payable under the impacted lease, having regard to the economic impacts of the COVID-19 pandemic and the leasing principles set out in the Code pf Conduct; Zhaos "was required to offer Ryals Hotel proportionate reductions in rent payable in the specified form; and, to put it shortly, Zhaos did not do so and that issue was not resolved by mediation.
6. Mr Elliott also submits that: "… in light of the uncertain effect of the Covid-19 Regulations on the obligation to pay rent, an inference cannot be drawn that Ryals Hotel's omission to pay full rent during the 'COVID-19 pandemic period' is indicative of insolvency. Moreover, to identify an undisputed component would require the Court to undertake a notional renegotiation of the Ryals Lease, which Zhaos has not attempted to undertake."
7. Mr Johnson in turn submitted that any outstanding rental accruing prior to the date of commencement of the COVID-19 Regulation is unaffected as to obligation to make any payment by the regulation. He also submitted that the presentation of a winding up summons is not "prescribed action" in terms of the COVID-19 Regulation, a matter that I need not address.
8. I accept that it is possible, although rare, for a party to establish the basis for a winding up in insolvency, without relying on a presumption of insolvency established under the creditor's statutory demand regime. The circumstances in which that might arise are illustrated in the judgment of Brereton J in Re Plutus Payroll Pty Ltd above and more recently in the judgment of Matthews JR in Re MSB Capital Holdings Pty Ltd [2020] VSC 775. Matthews JR there undertook a comprehensive review of the matters which may be necessary to establish insolvency, particularly in circumstances where that insolvency is said to arise from the failure to pay an undisputed debt. Matthews JR also there referred to circumstances in which the English courts have been prepared to accept that, in some circumstances, the non-payment of an undisputed debt will support a finding of insolvency. The position in that respect has been left open in New South Wales, at least in the decision of Just Juice Corp Pty Ltd v Murrayland Fruit Juice Pty Ltd above. The position does not seem to have arisen squarely thereafter, so far as a number of later cases, including Re Plutus Payroll Pty Ltd above, involve elements where the failure to pay a debt is simply one of a number of indicators of insolvency. There is also no suggestion, in the English case law or in the Australian case law, including MSB Capital Holdings Pty Ltd above, that a failure to pay a disputed debt will provide significant support for an inference of insolvency, at least if not combined with other indicators of insolvency.
9. It does not seem to me that this case involves an undisputed debt. Instead, it involves amounts that (although this ignores the application of the COVID-19 Regulation for a large part of the period) fell due by way of rent on a regular basis, in circumstances where the parties had been for some time in dispute. That dispute involved at least the proceedings before Darke J; the unsatisfied judgment in favour of Ryals Hotel in those proceedings; the costs which would arise from those proceedings, which had been ordered in Ryals Hotel's favour but not yet assessed or paid; and the further issues which arose in respect of Ryals Hotel's request for a reduction in rental during the COVID-19 pandemic, the unsuccessful mediation that sought to resolve that question and Zhaos' failure to provide any rent reduction notwithstanding the COVID-19 Regulation.
10. In MSB Capital Holdings Pty Ltd above, Matthews JR also referred to a number of indicators of insolvency, noted by Brereton J in Plutus Payroll, which turn upon a close analysis of the financial position of the relevant company, including matters such as liquidity ratios, overdue taxes, access to alternative finance, the ability to raise capital, and other matters. There has been some exploration of those issues in cross-examination of Mr Ryals in this case, but there is, for example, here no expert evidence that seeks to address those issues, either led by Zhaos, or led by Ryals Hotel to seek to affirmatively establish its financial position. I give less weight to the absence of evidence as to that matter led by Ryals Hotel than would ordinarily be the case; given the shift in Zhaos' case in the hearing from that which it had previously put in correspondence, to focus not on the entirety of the rent claimed to fall due over the last 12 months, but on the period prior to the commencement of the Code of Conduct and the COVID-19 Regulation. Mr Johnson submits, in a way which had not previously been articulated by Zhaos, that having regard to the rent which fell due in the earlier period, allowing a set-off of the amount of the judgment in favour of Ryals Hotel in the proceedings before Darke J, but disregarding the contingent liability of Zhaos to pay costs to Ryals Hotel in respect of those proceedings, then an amount is due and payable by Ryals Hotel for rent payable in early 2020, prior to the pandemic. I recognise that the evidence, at least so far as it relates to the single bank account of Ryals Hotel, which addressed by the evidence, does not suggest that there is presently enough held in that account to meet the amount of rental falling due in that earlier period.
11. I am not persuaded that it has been established that Ryals Hotel is insolvent by reason of any inability to pay that amount from cash at hand in its bank account. No doubt, many companies in the hospitality and hotel industry could not establish solvency on such am exacting test, as is indeed implicit in the legislative intervention to introduce the COVID-19 Regulation and the Code of Conduct. It is apparent from Mr Ryals' evidence on cross-examination that he has at least some capacity to raise funds from friends and relatives in respect of expenditures, including the costs of the earlier proceedings between the parties. I am not persuaded that Zhaos has established insolvency, upon the test set out on the case law, where that would depend upon its showing not only that Ryals Hotel could not fund the amounts due in the earlier periods from the money it held at bank, but also that it could not meet that amount, as and when it fell due, from other funds, including funds which it may borrow over a longer period or which Mr Ryals could raise, from friends and relatives. The evidence led by Zhaos did not exclude that possibility. For these reasons, Zhaos has not established Ryals Hotel's insolvency, even on the narrower case which it ultimately advanced.

Winding up on just and equitable ground

1. Mr Johnson also submitted that Ryals Hotel has for a prolonged period of time continued to operate the premises the subject of the lease in circumstances where it failed, neglected or refused to pay accruing liabilities as and when they fell due, in particular, prior to 24 March 2020 and thereafter both in respect of those amounts and amounts subsequently accruing. He submits that there is no proper evidence of engagement of the COVID-19 Regulation, a proposition which I have not accepted. Mr Elliott responds that the principles to be applied were summarised by Brereton J In the matter of Re Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]-[20] and that Zhaos has not, and cannot, discharge the onus of establishing this ground. Where Zhaos has not established Ryals Hotel's insolvency in fact, or that the suggested failure to pay rent is inconsistent with the position which would exist had Zhaos complied with the COVID-19 Regulation, it has also not established any basis for winding up on the just and equitable ground.

Abuse of process

1. Mr Elliott submitted that this application amounts to an abuse of process based on two grounds. First, he submits that there is a genuine dispute about the debt said to be due; that Zhaos has not proceeded by a means appropriate for the determination of the issue of indebtedness; and that the COVID-19 Regulation and the Code of Conduct provide the mechanism for dealing with a rent dispute and enforcement during the COVID-19 pandemic period. Second, he submits that the proceedings are being brought for an improper purpose, namely to exert pressure to pay on Ryals Hotel, and to bring about an "Insolvency Event" under the lease which will permit Zhaos to terminate the lease and re-take possession without complying with the requirements of the COVID-19 Regulation. He submits that, by relying solely on a failure to pay rent to bring the winding up action, Zhaos is by these proceedings attempting to subvert the COVID-19 Regulation.
2. In opening submissions, Mr Johnson pointed to the absence of a response from Ryals Hotel's solicitors to a letter dated 3 September 2020 from Zhaos' solicitors seeking further information as to the basis of this ground of opposition. He noted that the principles upon which the Court would normally act in connection with an argument in connection with "abuse of process" in the commencement and maintenance of winding up proceedings are substantially settled and referred to Williams v Spautz (1992) 174 CLR 509; (1992) 107 ALR 635; David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 270; (1995) 18 ACSR 225; [1992] HCA 34 and Braams Group Pty Ltd v Miric (2002) 44 ACSR 124; [2002] NSWCA 417. He submitted that the assertion of "abuse of process" has not been made out.
3. I am satisfied, for the reasons put by Mr Elliott in written submissions, that Ryals Hotel fell within the scope of the COVID-19 Regulation during the relevant period. That regulation imposed an obligation on Zhaos to renegotiate the rental payable in good faith and in accordance with the requirement for proportionate reduction in the rent payable in the form of waivers and deferrals of up to 100% of amount ordinarily payable on a case-by-case basis. I have also referred about to the evidence, summarised by Mr Elliott in submissions, of the substantial decline in Ryals Hotel's revenues over the relevant period. I am comfortably satisfied that Zhaos did not comply with that obligation, by putting an offer of occupancy for a rent free period, subject to a condition that Ryals Hotels incur substantial expenditure to expand is accommodation (by introducing campsite accommodation in its basement) at a time that student and other demand was reduced by the COVID-19 pandemic.
4. I recognise that, as Robb J observed in Sneakerboy Retail Pty Ltd t/as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 at [79], there may be uncertainty as to the extent of the consequences of non-compliance with a lessor's obligation to re-negotiate the lease, or to do so in good faith under the COVID-19 Regulation. However, any uncertainty to those consequences does not have the result that that matter should be disregarded by the Court, when it comes to dealing with an application to wind up a company in the hospitality or hotel industry, in the midst of a global pandemic, that has sidestepped the limitations on creditor's statutory demands by seeking to establish insolvency in fact, and in circumstances where the amount of the debt is itself disputed because it would only be established by compliance, at least in respect of the large part of the period, with the COVID-19 Regulation.
5. Turning now to the scope of concept of abuse of process, Mr Elliott helpfully draws attention to the decision in L & D Audio Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd [1982] 7 ACLR 180 at 183, where McLelland J observed three forms of abuse of process in respect of a winding up, one of which involved the application being brought for an improper purpose, but another of which involved an application which would raise matters that were inappropriate for determination in such a proceeding, for example, where there was a substantial contest as to the existence or enforceability of a debt. Mr Elliott rightly recognises that that category of abuse of process has, at least to a substantial extent, been displaced following the introduction of Part 5.4 of the Act, largely because winding up proceedings normally now take place following the issuance of a creditor's statutory demand where any genuine dispute as to the debt or off-setting claim would be addressed. Here, however, the creditor's statutory demand process has not been invoked by Zhaos; Ryals Hotel has never had the opportunity to assert, in response to a creditor's statutory demand, that the claim was brought in respect of a disputed debt, or to have the amount that was properly the subject of such a demand determined in such proceedings; and, in those circumstances, it seems to me that there is continuing room for the wider principle of abuse of process, particularly when combined with the other matters to which I have referred above.
6. It seems to me, the winding up application, even when narrowed in the way that Mr Johnson sought to narrow to avoid reliance on the debt for the period after the COVID-19 Regulation applied, necessarily places in issue the wider dispute between the parties, and that dispute cannot properly be resolved in an application of this kind. It also seems to me that, where Zhaos has, in correspondence, asserted an entitlement to payment of substantially larger amounts, not having regard to the effect of a renegotiation under the COVID-19 Regulation, then there would be an abuse of process in the relevant sense in seeking to put a case that would require determination of the amount payable following the renegotiation, which had never occurred, and that that abuse of process is not avoided by seeking at the last moment to rely on a narrower portion of the rent claimed.
7. I do not find on the relevant facts that Ryals Hotel has established its alternative claim that the winding up application is brought for an ulterior purpose, in order to seek to terminate the lease, potentially in connection with an ongoing sale process in respect to the property. It does not seem to me that the evidence today goes far enough to establish that proposition on the balance of probabilities, although one certainly could not exclude that possibility on the relevant facts.

Section 467 of the Act

1. In any event, had I found that insolvency had been established, which I have not, and had I not found that the element of abuse of process was present in the way in which the application was formulated and pursued until today, I would have exercised the Court's discretion under s 467 of the Act to dismiss the winding up application, or otherwise to adjourn it for a significant period, likely 12 months, as Mr Elliott has submitted the Court should. Section 467(1) of the Act permits the Court to stay or dismiss winding up proceedings with or without costs, even if a ground has been proved on which the Court may order the company be wound up on the application. Prior to the introduction of that section by the Corporate Law Reform Act 1992 (Cth), the general law recognised that a finding of insolvency can result in there being an entitlement to a winding up, but nonetheless recognised a corresponding discretion to decline to make a winding up order: FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (No 2) [1988] 14 NSWLR 643 at 660 and see my review of the authorities in Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551.
2. It seems to me that this winding up application is brought in circumstances that the legislature has sought to narrow the circumstances in which a creditor's statutory demand may be brought, and to defer the point at which a basis for winding up may arise under a creditor's statutory demand, in order to avoid the result Zhaos here seeks to achieve, that a company that is significantly impacted by the circumstances of the COVID-19 pandemic should be wound up in the midst of that pandemic, with adverse consequences to its employees, or, here, its single remaining employee. As I have noted above, Zhaos seeks to side-step that narrowing by bringing the winding up application on the basis of insolvency in fact, and Mr Johnson sought, as I have also noted above, to seek to focus on the prior period to support that application in the course of the hearing. It seems to me that there is a strong basis, given the legislative approach to the COVID-19 pandemic which is reflected in the creditor's statutory demand provisions, and in the COVID-19 Regulations to which I have referred, for exercising the Court's discretion under s 467 of the Act to dismiss or adjourn this application.
3. I would therefore have dismissed the application under s 467 of the Act, or at least adjourned it for a 12-month period to allow Ryals Hotels an opportunity to seek to recover its fortunes, hopefully with the advantage of proper compliance with the COVID-19 Regulation by Zhaos, had I not determined that it should be dismissed on other grounds.

Orders

1. For these reasons, the winding up application is dismissed with costs. I noted that Mr Elliott has indicated that Ryals Hotel will, having regard to this judgment, be seeking a special order as to costs, or a gross sum costs order. I will make orders for the filing of evidence and submissions and for the parties to advise whether that application can be determined on the papers or they seek an oral hearing.

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