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Judgment - ex tempore

1. By oral application made in these proceedings the Defendant, Yuan Tong Investments Pty Ltd ("YTI") seeks leave under s 459S of the Corporations Act 2001 (Cth) to oppose a winding up application brought by the Plaintiff, Radcliffe Lane Pty Ltd ("Radcliffe Lane") on a ground that YTI could have, but did not, rely on in an application to set aside a creditor's statutory demand ("Demand") previously issued by Radcliffe Lane. It is common ground that YTI did not bring such an application to set aside the Demand, issued on 15 April 2016, at least within the 21 day period specified in s 459G of the Corporations Act.
2. The application under s 459S of the Corporations Act is made in proceedings in which Radcliffe Lane seeks an order winding up YTI in insolvency, relying on YTI's non-compliance with the Demand, which had claimed an amount of $240,702.86 alleged to be the balance of the purchase price for a property situated in Kings Cross, New South Wales.
3. I have been assisted in this matter by comprehensive written submissions, and have heard able oral submissions of Mr El-Hage, who has, if I may say so, put YTI's case as well as it could have been put. I have not, however, found it necessary to hear from Mr Afshar in oral submissions, given the view which I have formed in respect of the application of s 459S of the Corporations Act in these circumstances, ultimately on a relatively narrow basis. The parties' comprehensive submissions were, regrettably, not accompanied by a chronology, which would have been of considerable assistance given the relatively complex factual history in this matter. It is nonetheless possible to summarise the key events from the extensive affidavit evidence and documentary evidence, and I will do so below.
4. I should first note that, in the application under s 459S of the Corporations Act, YTI relied on the affidavit of Mr Jian Yuan dated 17 October 2016. Mr Yuan is a former director of YTI and is currently the project manager of another entity, YTO Constructions Pty Ltd. YTI also relied on an affidavit also dated 17 October 2016 of Mr Yuan's wife, Ms Li Yang, who is now the director of YTI; a further affidavit of Mr Yuan dated 18 January 2017; an affidavit of Ms Yang dated 19 January 2017; and a further affidavit of Ms Yang dated 3 February 2017. Those affidavits go, in the case of Mr Yuan, primarily to the relevant events and, in the case of Ms Yang, primarily to YTI's financial position. YTI also tendered several documents. Radcliffe Lane did not lead affidavit evidence in the application under s 459S of the Corporations Act but also tendered several documents.
5. I should set out a broad, but significantly simplified, chronology of the relevant events. There is a substantial element of dispute as to aspects of those events, including conversations between the parties, which it is neither necessary nor possible to resolve in an application of this kind. YTI is the trustee of the Yuan Tong Investments Trust. It appears that discussions took place, in September 2014, between Mr Yuan on the one hand and Mr Leeming, who was associated with Radcliffe Lane, on the other, as to the possible purchase by YTI of a property at Kings Cross. It appears that those discussions proceeded on the basis that YTI did not itself have funds available for such a purchase, and would need to borrow funds for the purchase, from a lender which was known to both parties, and that those discussions also contemplated that YTI would borrow a significantly larger amount of funds from that lender at the same time for other purposes. In the event, those other funds for other purposes were ultimately not made available to YTI by that lender.
6. YTI and Radcliffe Lane entered a contract dated 27 November 2014 for purchase of the property for a stated purchase price of $680,000. The contract had at least one unusual feature, namely that it provided for a deposit payable of $1. A second unusual feature of the transaction is that settlement did not take place until nearly seven months later, on 26 June 2015, when YTI paid $402,049, leaving an apparent shortfall of $280,702 on the stated purchase price. There is evidence that at least raises the possibility that YTI or Mr Yuan paid an amount of about $31,000, in two separate amounts, to interests associated with Radcliffe Lane immediately before and after the entry into the contract, and YTI raises a dispute as to status of those payments and whether they ought to be credited against amounts due under the contract. At the point of settlement, the amount paid to Radcliffe Lane's lender from the purchase price appears to have been reduced from an amount of $320,686 to $39,963, a reduction which may reflect the amount of the apparent shortfall in the purchase price paid by YTI. It is common ground that YTI has since paid a further amount of $40,000, reducing the balance claimed by Radcliffe Lane to $240,702.86, which is in turn the amount claimed in the Demand.
7. Mr El-Hage has drawn attention, in the course of submissions, to correspondence between the parties and the lender to YTI (Exs A85, A86), which, at the least, raises a significant possibility that the lender had contributed an amount of $160,000 at settlement, reducing the amount that would be owing to Radcliffe Lane from $280,000 to a shortfall of $120,000 (excluding the additional amount of $31,000 to which I referred above), but potentially creating a liability to the lender in place of that which would otherwise have existed to Radcliffe Lane, initially of $160,000 but subsequently reduced to $120,000 by a further payment of $40,000 by YTI. YTI relies on this matter to identify a genuine dispute in respect of the Demand, and contends that a substantial amount of that claimed in the Demand is not due to Radcliffe Lane but instead to the lender. There is subsequent correspondence in which YTI also emphasised the lender's failure to extend the other loan that had been contemplated and the parties contemplated, but did not complete, a sale of the relevant property.
8. As I have noted above, it ultimately seems to me that this application should be determined on relatively narrow grounds, although I will also address, relatively briefly, the matters raised by Mr El-Hage in order to address discretionary factors which might, had I reached a different view, have arisen.
9. I turn now to the scope of the statutory regime. It is important to refer first to s 459G of the Corporations Act which provides that a company may apply to the Court for an order setting aside a creditor's statutory demand served on the company. That section expressly provides that that application may only be made within 21 days after the demand is served. That is a critical feature of the statutory regime, and that period is not able to be extended, such that an application to set aside a creditor's statutory demand may not be brought after that period has expired.
10. Section 459S of the Corporations Act in turn creates a relatively narrow exception to that time limit, so far as it permits matters that could have been, but were not raised, in an application to set aside a creditor's statutory demand to be raised in a winding up application. That section relevantly provides that: 459S(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:... b. that the company could have relied on, but did not rely on (whether it made such an application or not) 459S(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.
11. The legislature could have, but did not, provide a wider exception to the time limit in s 459G, for example, an ability to raise grounds to set aside a creditor's statutory demand at the point of a winding up application, if those grounds were perceived by the court as strong grounds. The legislature did not do so, presumably because that would have undermined the purpose of the relevant regime, to ensure that disputes as to creditor's statutory demands are raised in an application filed promptly under s 459G of the Corporations Act and not at the point of the winding up application. The exception is a narrower one, which prohibits the court from granting such leave unless it is satisfied that the ground to be relied on is material to proving that the company is solvent. The case law has emphasised that the power to grant leave under the section is to be used cautiously and even sparingly given the overall policy of Part 5.4 of the Act: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 149 FLR 179 at [40].
12. I turn now to the question raised in such an application, by reason of the prohibition in s 459S(2) of the Act, whether the grounds raised by YTI are material to establishing its solvency. There is appellate authority in New South Wales that the court will not grant leave to dispute a particular debt in a winding up application, on a basis that could have been raised in an application to set aside a creditor's statutory demand, if the company contends it is solvent irrespective of whether the debt is due, so the status of that debt is not determinative of the company's solvency: Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661; 33 ACSR 723. In that case, Spigelman CJ (with whom Handley and Giles JJA agreed) summarised the materiality required in s 459S of the Act (at [53]-[55]) as follows: "By the time an application under s459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s459S(2) directs attention, in part, to what is it that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the court cannot be `satisfied' of the mandatory precondition in s459S(2). An objective element is introduced by the word "material" but that can only be determined after identifying the company's contention. The process of proving solvency is not some kind of forensic game. Solvency is a matter particularly within the knowledge of the company. The primary source of information as to the solvency of the company must be the company itself."
13. The case law has considered issues as to the scope of the test identified in Switz v Glowbind above. I have also considered those issues in my decisions in Re Vangory Holdings Pty Ltd [2015] NSWSC 546 and Re Pioneer Cryogenics Pty Ltd [2015] NSWSC 1202; (2015) 108 ACSR 461. There are two approaches to the requirement under s 459S(2) of the Corporations Act, and the approach in Switz v Glowbind above is from time to time described as the "strict" or narrow approach, and an alternative approach is identified as a "broad" approach which looks to the company's overall financial position. In some decisions, including Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161 at [28], the appropriate threshold has been expressed in somewhat broader terms, as requiring that a matter have "a capacity to have some influence or effect". However, even that broader formulation requires that a finding that the debt claimed is genuinely disputed would have an effect on a company's solvency, in the sense that it would make it less likely that the company was insolvent, or more likely that the company was solvent if that debt was not owed.
14. In some cases, including Perpetual Nominee Limited v NA Investment Holdings Pty Ltd [2011] NSWSC 282, judges at first instance have preferred the narrower approach. In other cases, including Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113, judges at first instance have taken a possibly broader approach. I indicated something of a preference for the broader approach, without finding it necessary to ultimately decide the issue, in Re Vangory Holdings Pty Ltd above. In this case, for reasons that I will explain below, the question of which approach is applied is ultimately of no significance, because either approach would lead to the same result.
15. In order to succeed, YTI must satisfy the Court that the grounds on which it disputes the claimed debt, in respect of the balance claimed for the sale price of the property, are material to proving that it is solvent, for the purposes of s 459S of the Corporations Act. I am not satisfied of that matter because it seems to me that YTI's solvency depends wholly on the adequacy of financial support to it by Mr Yuan, Ms Yang and associated entities. If that support is sufficient to establish solvency, as evidence led by YTI seeks to establish, then YTI is solvent even if the debt claimed in the Demand is owed. Indeed, Ms Yang specifically leads evidence to that effect. If that support is not sufficient, then YTI is likely insolvent irrespective of whether the debt claimed in the Demand is owed. The necessary consequence of that analysis, on which I will expand below, is that the question whether the debt is owed to Radcliffe Lane is immaterial to YTI's solvency, since YTI would either be solvent, or insolvent, having regard to the adequacy of its directors' and associated entities' support for it, irrespective of whether that debt is owed.
16. Mr El-Hage submits that the existence of the debt to Radcliffe Lane may affect the ability of YTI to establish its solvency, in the sense that it would more readily establish solvency if the debt is not owed. That submission does not reflect YTI's case, as articulated in the evidence, which is that it could repay the debt claimed by Radcliffe Lane and all other debts owed by it with the support of Mr Yuan, Ms Yang and its associated entities. If the narrower approach in Switz v Glowbind above were adopted, that would also not be sufficient to establish materiality for the purposes of s 459S(2) of the Act, where YTI contends it is solvent in any event. However, even on the broader approach, it does not seem to me that that matter would lead to a finding that the debt is material to YTI's solvency.
17. It also does not seem to me that whether the debt is owed to Radcliffe Lane has any significant impact on YTI's solvency, because YTI also has other liabilities by way of recurrent expenditures, including interest, rates and other expenditures in respect of the property, and has substantial liabilities of about $184,000 to associated parties. One of those associated parties, Eighty Eight Constructions Pty Ltd, is owed an amount quantified by Ms Yang as $31,000 and is in liquidation and presumably under the control of a liquidator. Those loans are shown as current in the draft financial accounts of the Yuan Tong Investments Trust on which YTI relies in this application, although I recognise that that only indicates that those loans would be due or payable within the next financial year. Ms Yang accepts in her evidence that YTI has no income from which payments of recurrent expenditures or of the amounts due to associated entities could be made. There is no evidence that the proceeds of sale of the Kings Cross property would be sufficient to generate amounts sufficient to repay those loans and other liabilities of YTI within the relevant period, and YTI's access to the proceeds of sale would depend upon a right of indemnity against trust assets which has not been addressed in the evidence or submissions. I do not draw the inference, as Mr El-Hage invites me to do, that these loans are not due and payable, at least within the current period indicated in the draft accounts, where Ms Yang has not led evidence to that effect.
18. It seems to me that, where YTI has no income, its interest in the property is not immediately available to meet recurrent expenditures and those debts, the amount available to discharge those debts on the sale of the property is uncertain and one of those debts is owed to an entity which is under the control of a liquidator and not under the control of Ms Yang, then YTI's solvency depends wholly on the adequacy of support for it by Mr Yuan, Ms Yang and associated entities. It may be solvent if that support is adequate, whether the amount owed by it is $184,000 plus recurrent expenditures as they fall due, or whether it owes a further amount of $240,702 to Radcliffe Lane, and it is likely not solvent if that support is not adequate, even if it does not owe the amount of $240,702 to Radcliffe Lane. In those circumstances, I am unable to be satisfied that the dispute as to the debt owed to Radcliffe Lane is material to proving that YTI is solvent, either on the narrow test or the broad test in the sense referred to in the case law to which I have referred above.
19. I should, however, refer to other issues which have been the subject of detailed submissions, although I do not need to address them in the detail in which they were addressed in submissions, given the view I have formed above. Those other issues related to a number of other factors which will be relevant to determining whether to grant leave under s 459S(2) of the Corporations Act if, contrary to the view that I have formed, a ground of opposition to the claimed debt is material to proving that the company is solvent. Those other issues include whether there is a serious question to be tried as to the ground of opposition to the debt sought to be raised and the sufficiency of any explanation as to why that ground was not raised in an application to set aside a creditor's statutory demand, involving an evaluation of the reasonableness of the debtor's conduct.
20. Mr El-Hage submitted that there was a serious question to be tried as to whether the debt is owed by YTI to Radcliffe Lane. The first basis on which that submission was put was a suggestion that the contract for the purchase of the property was varied, at the point of settlement, by the somewhat complex dealings between the parties which occurred in the context of the shortfall of payment by YTI to which I referred above. It seems to me doubtful that a serious question to be tried would be established as to that matter, because it is doubtful that the conversations and correspondence to which YTI refers could amount to anything more than an acceptance of a part payment of the amount due under the contract, as distinct from a variation of the contract that would extinguish the balance of the amount due. It seems to me, however, that a serious question might well have been established as to whether the amount due to Radcliffe Lane was substantially less than the amount claimed by it, by reason of the transactions involving the lender to which I referred above, and the evidence that suggests that the lender may itself have paid part of the purchase price in a manner that may have reduced the liability of YTI to Radcliffe Lane and substituted a liability of YTI to the lender. That is a matter that might have had some significance had an application to set aside the creditor's statutory demand issued by YTI been brought, where the identity of the particular creditor and the amount owed to it would be of considerable significance. It may be of less practical significance in a winding up application, brought after no application to set aside the Demand was made, a presumption of insolvency had already arisen, and the question of solvency will be determined by reference to the debts owed by YTI to its creditors generally and not only to Radcliffe Lane which applies for its winding up. The furthest that argument goes is to suggest that the total debt claimed, which originated as an amount owed by Radcliffe Lane, is now owed partly to Radcliffe Lane and partly to the lender, which ultimately would not affect the total amount of that debt or YTI's ability to meet it when due.
21. Mr El-Hage also submitted that the Demand would have been liable to have been set aside under s 459J of the Corporations Act, by reason of a suggested non-compliance with r 5.2 of the Supreme Court (Corporations) Rules 1999 (NSW). It seems to me that that argument would have faced substantial difficulties, because that rule contemplates that a creditor's statutory demand may be verified, as this Demand was verified, by a person who claimed to be authorised by the creditor to do so. I accept that, as Mr El-Hage points out, Mr Leeming had claimed to be a director and shareholder of Radcliffe Lane, and it appears his wife was, and he was not, the director and shareholder of Radcliffe Lane. However, the affidavit in terms asserts, as r 5.2 requires, that Mr Leeming was authorised to swear the affidavit on behalf of Radcliffe Lane, and there is no evidence to the contrary. It seems to me that Mr El-Hage's further submission that, to the extent the affidavit was sworn on behalf of a creditor, it had to be sworn by an officer or director of the creditor by reason of r 2.5 of the Supreme Court (Corporations) Rules, faces the possibly fatal difficulty that the Courts have long recognised that, at least in some circumstances, persons other than directors and officers of a creditor, including the creditor's solicitor, may swear such an affidavit verifying a creditor's statutory demand so long as they have knowledge of the relevant facts. For these reasons, I am doubtful that a serious question to be tried would be established in respect of this submission, although it is ultimately not necessary to determine that question given the view that I have formed on other grounds.
22. The final question is whether YTI's conduct in not moving to set aside the Demand could be treated as reasonable at that time. The Demand itself plainly drew attention to the significant consequences of non-compliance with a creditor's statutory demand. On the other hand, Mr El-Hage refers, with some force, to a history of dealings between YTI and Radcliffe Lane and the lender, which involved initially the contract, then settlement after a significant delay, then the lodgement of a caveat, then a letter of demand and the service of the creditor's statutory demand. Mr El-Hage also refers to Mr Yuan's evidence that he was told by Mr Leeming, at the time of service of the Demand, that he should "not worry about it"; that the lender had insisted on that step being taken to bring about a sale of the property; and that the sale of the property would solve the problem and keep the lender happy. There is a question as to the cogency of Mr Yuan's evidence, which may be inconsistent with evidence of an earlier communication that the property was for sale, raising a question why it would have been necessary for Radcliffe Lane to serve a creditor's statutory demand to bring about a sale process that was already under way, and a further difficulty that the tone of the conversation to which Mr Yuan refers does not appear to be consistent with the other communications between the parties at the time, following apparent discontent by Radcliffe Lane and the lender about non-payment by YTI and the letter of demand. On the other hand, Mr Yuan was not cross-examined about that conversation, and it has not been put to him that it was an invention.
23. On balance, if it were necessary to determine this question, I am inclined to think that the Court should not accept that, where a creditor's statutory demand contained clear warnings as to the serious implications of non-compliance with it, it would be reasonable for a creditor to take no step to set aside that creditor's statutory demand, because it claimed to have been told not to worry about it, at least without obtaining confirmation of that position in writing or taking some step to secure the withdrawal of the creditor's statutory demand. It seems to me that any different view would potentially subvert the statutory regime, so far it has the potential to encourage disputed claims that debtors had been told not to worry about such demands, raised after no application to set aside the creditor's statutory demand had been made and a winding up application was brought. It is ultimately not necessary to determine that question, given the views which I have formed on other grounds.
24. For these reasons, and notwithstanding the force of the submissions put by Mr El-Hage for YTI, I have concluded that I am not permitted by s 459S(2) of the Corporations Act to grant leave to YTI to rely on the matters not previously raised in opposition to the Demand, because they are not material to proving that YTI is solvent. For that reason, the application for leave under s 459S(2) of the Corporations Act is dismissed.