CORPORATIONS - winding up - application for leave under Corporations Act 2001 (Cth) s 459S - whether sufficient explanation for not raising ground of opposition
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CORPORATIONS - winding up - application for leave under Corporations Act 2001 (Cth) s 459S - whether sufficient explanation for not raising ground of opposition
Judgment (3 paragraphs)
[1]
Solicitors:
Mills Oakley Lawyers (Plaintiff)
Norton Rose Fulbright Australia (Defendant)
File Number(s): 2015/103496
[2]
Judgment - ex tempore
By Originating Process filed on 7 April 2015 Cryeng (Thailand) Co Ltd ("Cryeng") seeks an order under ss 459P and 459Q of the Corporations Act 2001 (Cth) that the Defendant, Pioneer Cryogenics Pty Limited ("Pioneer") be wound up in insolvency. By Interlocutory Process filed on 29 May 2015 Pioneer in turn seeks leave under s 459S of the Corporations Act to rely on the existence of a genuine dispute between it and Cryeng about the existence of the debt referred to in the creditor's Statutory Demand dated 11 December 2014 that is in issue. The application raises issues of particular difficulty, some of which are legal in character, and some of which arise from the relevant factual circumstances.
Pioneer bears the onus of establishing the basis for a claim for leave under s 459S of the Corporations Act. It reads an affidavit of its managing director, Mr Loyola, dated 12 January 2015 in support of the application, which sets out something of the history of the relationship between Pioneer and Cryeng. That affidavit identifies commercial dealings between Pioneer and Cryeng, including a claim that Pioneer had supplied equipment and services to Cryeng, which is supported by copies of the invoices issued by Pioneer to Cryeng, and that Pioneer paid, at the request of Cryeng, certain legal fees incurred by Cryeng in Australia. Mr Loyola refers to the circumstances in which those fees were paid, and gives evidence of a request made, apparently on behalf of Cryeng, for the payment of those fees. Mr Loyola also refers to a reconciliation of the account between Cryeng and Pioneer prepared on 9 December 2010, which is said to show a modest balance in favour of Pioneer. That reconciliation was admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) that it was not proof of its contents. It should be noted, however, that it is common ground that the reconciliation accurately reflects the invoices that are in evidence and that it was apparently sent contemporaneously to Cryeng in December 2010.
By a further affidavit dated 29 May 2015, Mr Goldman, a partner of Pioneer's solicitors, sets out the circumstances which lead this matter to come to the Court, as an application under s 459S Corporations Act. Mr Goldman also refers to the form of the creditor's statutory demand, which identifies the debts that are claimed as a debt in the amount of $110,000 relating to the purchase of a second-hand cryogenic container and a debt in the amount of $90,000 relating to the purchase of a second second-hand cryogenic container. Mr Goldman refers to the service of that demand upon Pioneer, a matter as to which Mr Loyola had already given evidence, albeit briefly, in his affidavit dated 12 January 2015, which was apparently initially prepared in support of an application to set aside the demand. Mr Loyola there indicated that the demand had been sent by express post to Pioneer's registered address, which was also his place of residence, on 18 December 2014, and he did not become aware, he says, of the demand until 22 December 2014 and that:
"As a result of the Christmas and New Year period, I was unable to obtain legal advice on how to respond to the statutory demand until 12 January 2015."
Mr Loyola leads further evidence as to that matter in a further affidavit dated 24 June 2015, to which I will refer below.
Returning to Mr Goldman's affidavit, he sets out the sequence of events from the point at which he was consulted in respect of the Creditor's Statutory Demand, initially on 12 January 2015, which led to an attempt to file an application to set aside the creditor's statutory demand in the Federal Court of Australia on 12 January 2015. That application, as filed, was ultimately not served until 13 January 2015. Pioneer ultimately accepted, plainly correctly, that that application was served outside the 21 day period permitted for an application to set aside a creditor's statutory demand under s 459G of the Corporations Act, and may have been so even had it been served on 12 January 2015 rather than 13 January 2015. In those circumstances the application to set aside the creditor's statutory demand filed in the Federal Court of Australia was ultimately dismissed by consent.
By further affidavit dated 24 June 2015, to which I referred above, Mr Loyola gave further evidence as to the circumstances in which the demand had been served upon Pioneer. It appears, both from Mr Loyola's evidence and evidence of a solicitor involved in the matter, on behalf of Cryeng, that an attempt was made to serve the creditor's statutory demand on Pioneer and its registered office at Mr and Mrs Loyola's home on 18 December 2014. Perhaps understandably, Mr Loyola's wife did not admit the solicitor who sought to serve the demand into the home, although that illustrates a difficulty with the position where the registered office of a company is located at residential premises. Subsequently, the creditor's statutory demand was served by express post, apparently arriving on 19 December 2014, although Mr Loyola's evidence is that he did not become aware of it until the next Monday 22 December 2014. He says that he then departed on a Christmas break with his wife and did not return until 5 January 2015. He indicates that he then reviewed the records of Pioneer to collate relevant material, but did not seek to contact his solicitor until 8 or 9 January, and was not able to see him until 12 January, at which point the sequence of events to which I referred above commenced.
I should also note that Pioneer relies on expert evidence to seek to establish its solvency. That expert evidence, in broad terms, indicates that Pioneer is likely to be solvent, or is at least arguably solvent, if the relevant debt is not owed. It also indicates that Pioneer is at least exposed to greater issues as to solvency if the debt is owed, to the extent that the expert relies, for example, upon advice from the director that he would obtain a short extension of the company's overdraft facility to ensure sufficient funds were available, if the offsetting claim was not established, and Cryeng needed to be paid prior to July 2015.
I noted above that the application seemed to me to be one that raised particular difficulties, in circumstances that the legal issues are complex, and that their application in the particular facts involves issues as to which minds may well differ. Both parties accepted in their submissions that the issues under s 459S of the Corporations Act were reflected by my broad summary of the relevant principles in Re Vangory Holdings Pty Ltd [2015] NSWSC 546 at [10]. The section relevantly provides that, so far as an application for a company to be wound up in insolvency relies on a failure to comply with a Creditor's Statutory Demand, the company may not, without the Court's leave, oppose the application on a ground that the company could have relied on, but did not rely on, in such an application. The section provides, in s 459S(2) that the Court is not to grant leave under s 459S(1) unless it is satisfied that the ground is material to proving that the company is solvent.
In Re Vangory Holdings Pty Ltd above, in the passage to which the parties referred, I summarised the matters which were relevant to an application under this section, and I noted that they included whether there is a serious question to be tried as to the ground sought to be raised; the sufficiency of any explanation as to why that ground was not raised in an application to set aside the demand, involving an evaluation of the reasonableness of the debtor's conduct at the time when the application might have been made; and whether the Court is satisfied that the relevant ground is material to proving whether the debtor is solvent. I also noted that the discretion conferred by the section is to be exercised cautiously and sparingly, and with regard to the purpose of Part 5.4 Corporations Act to provide for determination of any objections to a creditor's statutory demand by an application under s 459G of the Corporations Act, rather than at the time of the winding up application.
I first deal with the question whether a serious question to be tried is established in the present case. That consideration is directed to whether Pioneer has a seriously arguable case that the debt is the subject of a genuine dispute and does not require a final determination of that matter: DAG International Pty Ltd v DAG International Group [2005] NSWSC 1036; Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd [2014] FCA 466 at [10]. It is important to recognise, in this context, that the requirements to establish a genuine dispute have recently been reviewed, at some length, by the Court of Appeal in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (NSW 2013) 85 NSWLR 601. Although the Court of Appeal was there dealing with the question whether an offsetting claim was established, it undertook a comprehensive summary of the cases directed to whether a genuine dispute is established, and noted, in particular (at [55]) that it would set too high a standard to require that evidence prove the facts that raise the ground in an initial affidavit to set aside a creditor's statutory demand, and that all that was required was to establish that there was a plausible contention requiring evaluation. Their Honours also observed (at [60]) that the existence of evidence which casts doubt, or even significant doubt, on a contention that there was a disputed debt was not the basis for a rejection of an application to set aside a creditor's statutory demand under s 459H, and did not prevent a genuine dispute being established, and that the absence of contemporaneous documentation was not sufficient to deprive a debt of its genuine character.
Ultimately, Mr Hughes, who appeared for Cryeng, substantially deferred submissions as to whether there is a genuine dispute established by the relevant material to a final hearing, where the question would only arise if leave is granted under s 459S of the Corporations Act. On balance, it seems to me that the material referred to in Mr Loyola's affidavit is sufficient to establish a genuine dispute, at least in the sense of a question that requires further investigation, and on that basis a serious question to be tried is established for the purposes of s 459S of the Corporations Act.
The next question, which has caused me substantial difficulty, is whether there is a sufficient explanation for the failure to apply to set aside the demand. In that context, I must recognise that the creditor's statutory demand procedure has an important role under Pt 5.4 of the Corporations Act, in establishing the insolvency of companies, and there is reason, as the authorities have noted, to seek to have that matter determined at the time that a creditor's statutory demand is served, and not at the time of the winding up application. I have pointed above to the fact that one matter that needs to be assessed is the reasonableness of Pioneer's conduct, in the relevant circumstances, in assessing the sufficiency of the explanation to raise a ground of opposition to the demand in time, and that leave is less likely to be granted where there is some default on the part of Pioneer or its advisors in that regard: see the cases to which I referred in Re Vangory Holdings Pty Ltd above at [20].
In the present case, it seems to me that that question must be addressed in the relevant circumstances. Here, the creditor's statutory demand was served immediately prior to the Christmas vacation. It is also relevant to note that the transactions which gave rise to the relevant demand had occurred some years before, and the question why it became necessary or desirable to serve a creditor's statutory demand in the week prior to Christmas was largely unexplained. I think I am entitled to recognise that, at that time, the attention of persons who might receive such documents may be diverted and that their lawyers are less likely to be available than they would be at other times. That is not to say that some different test applies to whether leave should be granted under s 459S of the Corporations Act when statutory demands are served at that time. It is, however, to recognise that the factual circumstances of that situation are different to the position where a demand is not served at a time giving rise to the particular challenges of the Christmas vacation.
In the present case, it seems to me that Mr Loyola's response to the creditor's statutory demand was far from ideal, given the significance of such a document, and the fact that, as Mr Hughes points out, a statutory demand itself contains a prominent warning as to the adverse consequences that may follow from failure to comply with it. In particular, even on Mr Loyola's expanded explanation, in his second affidavit, of why he took no steps to take legal advice prior to 12 December 2015, there is little explanation of why he took no steps to address the demand while on holiday from 23 December 2014 until his return on 5 January, and then delayed a further two or three days before consulting with his solicitor, who was then in the unenviable position of being consulted and seeking to file proceedings to set aside a creditor's statutory demand on the same day. I have been troubled by this matter, and it seems to me that it could certainly be suggested that Mr Loyola's conduct in that regard fell short of the standard which ought to be expected of company directors, against which the test for leave under s 459S of the Corporations Act should be applied.
However, with considerable hesitation, it seems to me that service of a creditor's statutory demand at this time, on a small proprietary company, raised the risk of what subsequently occurred, and is a matter that I can take into account, and ought to take into account, in assessing the reasonableness of Pioneer's conduct. In these circumstances, although not without considerable hesitation, it seems to me that there is sufficient explanation for the failure to set aside the demand, in the circumstances of its service immediately prior to the Christmas vacation, notwithstanding that at least part of the fault on that regard is that of Mr Loyola. I should emphasise that I do not suggest that there is any principle of law which prevented the service of a creditor's statutory demand in these circumstances, and I am reaching no more than a finding of fact as to the reasonableness of Pioneer's conduct, by Mr Loyola, in the relevant circumstances.
The most difficult question in this case seems to me to be the final question arising under s 459S of the Corporations Act, namely, whether the mandatory requirement under s 459S(2) that the Court is satisfied that the ground is material to proving that Pioneer is solvent is established. Both Mr Cook and Mr Hughes put very able submissions in respect of this question which involves difficult issues of law and fact. Analysis must start with the decision of Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661, which is usually seen as the origin of what is described as a "strict" or narrow" approach to that question. Spigelman CJ (with whom Handley and Giles JJA agreed), there summarised (at [54]-[56]), the materiality requirement in s 459S of the Corporations Act, in terms that have often been quoted and which I do not need to set out in full. Spigelman CJ noted, among other things, that, if a company:
"intends to prove it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to 'proving' its solvency cannot be satisfied."
That observation is, of course, not to be treated as though it were a statutory test. The Court of Appeal was there dealing with a case which fell to be determined in respect of its particular facts and in a context that (as Spigelman CJ noted at [52]) each party had there been, for tactical advantage, seeking to take a position which were in some respects inconsistent with its position in other respects. His Honour noted, in that context, that an objective element was introduced by the word "material" which could only be determined after identifying the company's contentions, and that in turn led to the observation that I have cited above.
The decision in Switz v Glowbind above has subsequently been referred to in numerous cases, which have expressed the relevant test in various ways. I reviewed the relevant case law, and the difference between the strict and the less strict approach, in my decision in Re Vangory Holdings Pty Ltd above at [26]-[33] and I need not repeat that review of the authorities here. At least some of the later cases, including the decisions of Barrett J in Hanson Construction Materials Pty Limited v FEC Civil Pty Limited [2009] NSWSC 161 at [28] and Soundwave Festival Pty Ltd v Altered State (WA) Pty Limited (No 1) at [36]-[37], have adopted an approach which appears, on one view, to be less strict than that adopted in Switz v Glowbind, of whether a relevant matter has the capacity to have some influence or effect upon the proof of solvency, or whether the existence or otherwise of the relevant debt was relevant to or had the capacity to have influence or effect on the question of solvency.
I have referred above to the structure of the expert evidence led in this case. It is plain that Pioneer seeks to establish that it is solvent, irrespective of whether the relevant debt is owed, although Mr Cook also accepted, in reply submissions, in a manner that seems to me to be consistent with the evidence which Pioneer leads, that it recognised the probability that it would be more difficult to establish its solvency if the debt was in fact owed. If the view expressed by Spigelman J in Switz v Glowbind were to be treated as though it were a statutory test, then Pioneer would not satisfy the test expressed in paragraph [54] of that decision, in the sense that it intends to prove that it is solvent whether or not a debt is payable, with the significant qualification that it accepts it would be much more difficult to prove that matter if the debt is owed than if it is not.
However, as I noted above, it does not seem to me that that observation can be treated as a statutory test. The statutory test is that which is found in s 459S(2) of the Corporations Act, namely, whether the Court is satisfied that the ground is material to proving that the company is solvent. It seems to me that, as a matter of the language of the section, and consistent with the cases which have subsequently adopted a somewhat less strict approach, it is not possible to say that the existence of a debt is not material to proving the company is solvent, where it will make a significant difference, on any view of the evidence, to Pioneer's ability to achieve proof of that matter. If I were required to choose between the strictest and the less strict approach, a choice which many of the cases in this area have sought to avoid, I would on balance adopt the less strict approach, albeit I should also note that that difference between the two tests may be a false dichotomy, where what is involved is a question whether the Court is satisfied, or not, of materiality of the debt to the proof of solvency in the particular circumstances.
On balance, although not without hesitation, I have concluded that the question whether the debt claimed by Cryeng is owed is material to prove that Pioneer is solvent and the elements of s 459S of the Corporations Act are satisfied. In expressing that view, I should nonetheless recognise, if what I have said above does not already make it clear, that this issue was very finely balanced and the submissions which were put to the contrary raised serious matters for consideration. For those reasons, I consider that I ought grant leave under s 459S of the Corporations Act for the Defendant to rely on the existence of a genuine dispute between the Defendant and the Plaintiff about the existence of the debt referred to in the creditor's statutory demand dated 11 December 2014 in opposition to the Plaintiff's application to wind up the Defendant.
Accordingly, I grant leave in the terms set out in paragraph 1 of the Defendant's interlocutory process dated 29 May 2015. Given the time of day, and the possible relationships between this issue and the ultimate fate of a winding up application, I am presently inclined to reserve the costs of this application and to deal with it together with the costs of any winding up application.
[3]
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Decision last updated: 02 September 2015