D.A.G. International P/L v D.A.G. International Group P/L

JUDGMENT (ex tempore) (revised 21 October 2005) 1 HIS HONOUR: On 31 May 2005 the plaintiff D.A.G. International Pty Limited (in liquidation), to which for the sake of convenience I shall refer to as "the creditor", served a creditor's statutory demand under Corporations Law s 459E on the defendant D.A.G. International Group Pty Limited, to which for the sake of convenience I shall refer to as "the debtor", claiming a sum of $24,452.75. 2 On 21 June 2005, being the 21st and last day for compliance with the creditor's statutory demand, the debtor filed an originating process claiming an order setting aside the creditor's statutory demand. However, the debtor failed to serve that originating process on the creditor until two days later. The creditor taking the point, the debtor accepted that it was irretrievably out of time to proceed with that application: see David Grant and Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. Accordingly, that application was, on the application of the debtor, dismissed on or about 22 July 2005. 3 On 26 August 2005, the creditor filed an originating process claiming an order winding up the debtor in insolvency pursuant to s 459A, and or on the just and equitable ground pursuant to s 461(1)(k). The originating process and the evidence filed in support of it, however, relies only on non-compliance with the creditor's statutory demand, and the consequent presumption of insolvency arising from the operation of s 459C. That presumption, of course, is rebuttable, operating only except so far as the contrary is proved for the purposes of the relevant application (see s 459(3)). In the present context, the relevant application is the winding up application. 4 By interlocutory process filed on 7 September 2005, which was made returnable pursuant to an abridgment of time on 8 September 2005, the debtor now seeks leave, under s 459S, to rely in defence of the winding up application on grounds on which it could have relied but did not on an application to set aside the creditor's statutory demand: namely, that the debt claimed in the creditor's statutory demand is the subject of a bona fide dispute. 5 On an application for leave under s 459S the essential issues are:

Whether the ground now sought to be raised in defence of the winding up - that the debt is the subject of a bona fide dispute - is material to proving that the debtor is solvent. 6 This identification of the issues is adopted from the exposition of Austin J in Chief Commissioner of Stamp Duties v Paliflex Pty Limited (1999) 149 FLR 179; [1999] NSWSC 15, [49]. 7 I turn, therefore, to the first of those issues, which involves a preliminary examination of the contention that there is a bona fide dispute. The debt in question has three components. The first component is an amount of $5,920. In correspondence as early as 8 June 2005, after the creditor's statutory demand had been served but well before it expired, and then in an affidavit sworn in connection with the present application, the debtor asserts and deposes that this amount relates to furniture and fixtures purchased by the creditor and used by the creditor for the purposes of its business, once installed in premises in Chippendale, at a time when the creditor was occupying and operating from those premises. Mr Goldberg, the principal of the debtor, also deposes that throughout the period of installation the directors of the creditor were in the premises, and that when installation was complete those directors all expressed satisfaction with the new furniture and used it in the ordinary course of the creditor's then business. 8 The second component is of mobile telephone bills amounting to some $3,294.99. Once again, both in correspondence as early as 8 June 2005 and in Mr Goldberg's affidavit sworn in these proceedings, the debtor asserts that these were legitimate business expenses incurred by Mr Goldberg in connection with duties performed by him on behalf of the creditor, and that these accounts all related to his work for the creditor and had nothing to do with the debtor. 9 The third component is a sum of $30,000. (I interpolate that, although the total of the three components exceeds the amount of the statutory demand, that is because credit has been given for other payments made by the debtor to the creditor.) Yet again, both in the letter of 8 June 2005 and in his affidavit evidence in these proceedings, Mr Goldberg, on behalf of the debtor, asserts that this sum was paid to the creditor by a third party on 24 October 2003 and disbursed by the creditor to Warwick Susskind on 18 December 2003, and that there was no benefit to the debtor nor involvement of the debtor in that transaction. 10 I do not overlook that by letter dated 17 June 2005 NOT Lawyers, for the creditor, make different assertions about these amounts. However, the evidence of Mr Goldberg, if accepted, would show, or at least tend to show, that these were not debts of the debtor or for which the debtor would be responsible. Mr Gallant, in his capable submissions, has not made any submission to the effect that there is not evidence sufficient to give rise, at least at this stage, to a seriously arguable proposition that there is a bona fide dispute. Accordingly, on the first issue I am satisfied that there is a sufficiently arguable case that there is a bona fide dispute to warrant consideration of the other issues. 11 I turn then to the second issue which, in short, is the sufficiency of any explanation for the proposed defence not being raised in an application to set aside the creditor's statutory demand. 12 The solicitor for the debtor, Mr Mallos, frankly concedes in correspondence and in his affidavit evidence that it was due to an oversight in his office that, although an application to set aside the demand was filed within time, albeit on the last day, it was not served until two days later. Once again, Mr Gallant, for the creditor, has not made any submissions on this issue, and responsibly so. But were it to be suggested that a party in the position of the debtor should be left to any remedy it might have against its solicitor, the short answer would be that, particularly in the context of winding-up proceedings, a cause of action against a solicitor is a very poor substitute indeed for the original right to defend the winding up proceedings. In any event, it is difficult to see why the consequences of an oversight, if they can be avoided by a grant of leave so that justice can be done between the principal parties, should be visited on a third party such as the solicitor in this case, rather than resolved between the principal parties. 13 It is also significant, in considering this issue, that this is not a case in which it can be suggested that raising the dispute was a last minute development occurring only after the winding up proceedings were commenced. The dispute was raised in terms substantially the same as are now advanced, in the letter of 8 June 2005, after the notice of demand was served. It is not as if no attempt was made to set aside the creditor's statutory demand: as I have said, an application was filed for that purpose, albeit that it was not served in time. I am amply satisfied that there is sufficient explanation for the proposed defence of bona fide dispute not having been raised on an application to set aside the creditor's statutory demand. 14 That brings me to the third and most difficult issue, which is the question of the materiality of the assertion that the debt is disputed to proof of solvency. 15 Corporations Law, s495S(2) has the effect that the Court is prohibited from granting leave unless it is satisfied "that the ground is material to proving that the company is solvent". This provision directs attention to what it is that the company intends to prove, and how it intends to prove it [Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723, 735 [53]]. 16 In the present case, what the company intends to prove is that it is solvent, notwithstanding the statutory presumption of insolvency. Its allegation that there is a bona fide dispute as to the claimed debt is relevant to that contention on two bases. The first basis is that it intends to prove that it is not indebted as alleged in the creditor's statutory demand; if so, its assets exceed its liabilities. The second basis is that it intends to refute the suggestion that an inference of insolvency should be drawn from non-payment of a debt, by showing that it has a very good reason for not paying it: namely, that it genuinely disputes it. 17 In Switz v Glowbind the Court of Appeal considered the circumstances which needed to be established where a company intended to prove solvency, when relying on the contention that its assets exceed its liabilities. The Court of Appeal held that in such a case, if the company maintained that it was solvent, regardless of whether or not the debt in question was due, and was not prepared to contemplate the possibility that its assertion of solvency was subject to qualification, then it would not be possible to establish the mandatory precondition in s 459S(2) [Switz v Glowbind, [53]]. But where the company contended that its solvency depended on whether or not the particular debt was owing, then the existence of that particular debt might well be material to proof of solvency [Switz v Glowbind, [56]]. 18 I do not understand the Court of Appeal to have held that that is the only possible way in which a "defence" which might have been relied on in an application to set aside a creditor's statutory demand might later be material to proof of solvency in answer to a winding up application. The second basis, to which I have referred above, was not apparently relied on in Switz v Glowbind. But it is, in my opinion, another basis upon which the existence of a bona fide dispute might be material to proving that a company is solvent, because it tends to refute the inference that non-payment of a debt is due to inability to pay. 19 Mr Gallant fairly points out that the evidence of the financial position of the company in this case is less comprehensive than might be expected. However, Mr Goldberg deposes that, other than a sum of $20,787 due now for goods purchased and due to leave the country on 10 September 2005, the company has no other immediately due and payable creditors; it has $13,674 in its bank account, $10,264 in an account with Scottish Pacific Finance, and a book debt of $14,296 (which, in the ordinary course of its business would be factored for about $10,000, although while the winding up proceedings are pending this is not possible). 20 While on one view the $13,674 immediately available is obviously less than the $20,000 immediately due, evaluation of solvency is not undertaken in disregard of other resources to which the company might have access and or might be able to obtain access in the short term. I do not think on an application of this sort the possibility that the company will be able, in the relatively short term, though not necessarily immediately, to access the $10,000 with Scottish Pacific Finance or to factor the $14,000 for $10,000, should be disregarded in assessing the likely impact of the debt claimed in the creditor's statutory demand on its solvency. On the figures deposed to by Mr Goldberg, the existence or non-existence of the debt the subject of the creditor's statutory demand would make the difference between solvency and insolvency, at least on the current assets against current liabilities test. 21 On that basis it is unnecessary that I express a concluded view on the second basis to which I have referred, but in the context of current liabilities and current assets in the order of those set out in Mr Goldberg's affidavit, the availability of an explanation for not paying a sum of $30,000 when demanded must be material to the strength of any inference of insolvency, and conversely to the rebuttal of any such inference in order to prove solvency. 22 Accordingly, I am satisfied that the issue whether there is a bona fide dispute as to the existence of the debt claimed in the creditor's statutory demand is material to the case which the debtor seeks to make out in proving that it is solvent in answer to the winding up application, and in rebutting the inference of insolvency which arises from the creditor's statutory demand. 23 Accordingly, I make the following orders: (1) Pursuant to Corporations Act s459S(1), order that the defendant D.A.G. International Group Pty Limited have leave to oppose the application that it be wound up brought by the originating process filed on 26 August 2005, upon the ground that the debt claimed in the creditor's statutory demand dated 25 May 2005 and served 31 May 2005 is the subject of a bona fide dispute, notwithstanding that it could have but did not rely on that ground in an application to set side the creditor's statutory demand. (2) Order that the costs of the application be costs in the proceedings. (3) Grant leave to amend the notice of appearance by withdrawing the statement of submission contained in it. (4) Order that the originating process be adjourned to 19 September 2005 at 10am before the Corporations Judge.

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