Equity Australia v Falgat

PARTIES : Equity Australia Corporation Pty Ltd v Falgat Constructions Pty Ltd

Miss S.A. Mason for plaintiff COUNSEL : Miss V. Culkoff for defendant

Stephen Wawn & Associates for for plaintiff SOLICITORS : Julie Orsini for defendant

• 1 - THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4289/05 - EQUITY AUSTRALIA CORPORATION PTY LIMITED v FALGAT CONSTRUCTIONS PTY LIMITED

1 HIS HONOUR: This is an application to wind up the defendant on the ground of insolvency. The defendant claims that it is solvent and also raises questions of the standing of the plaintiff as a creditor and abuse of process. 2 On 28 October 2004 the plaintiff obtained a judgment in the Local court against the defendant for the sum of $13,606.84. Such judgment was based upon a costs order made in proceedings in this Court between the parties concerned in the setting aside of a statutory demand. 3 An application to issue a writ of execution was filed and a writ of execution was issued. On 21 July 2005 the sheriff issued a notice of non-levy of execution in these terms: "I have not made a levy under the abovementioned Writ of Execution for the following reasons: Execution attempted at 158 Wrights Road, KELLYVILLE, NSW-2155 on 21 July, 2005. Given address is the private residence of Annaliese Gattellaro (papers sighted). Rocco Gattellaro is father who is Director of Judgment Debtor Company. All goods and vehicles at given address are owned by Annaliese Gattellaro (papers sighted). Writ filed pending further instructions." Section 459C(2) and (3) relevantly provided: " 459C(2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made:

(b) execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied; or 459C(3) A presumption for which this section provides operates except so far as the contrary is provided for the purposes of the application.

4 The originating process in this matter was filed on 2 August 2005 and accordingly the presumption of insolvency in s 459C(3) applies. 5 The defendant performs residential construction work and is described as a family business that has been operating since 1968. The directors are Mr Rocca Gattellaro and his wife. The parties in the proceedings have been involved in various pieces of litigation concerning building work performed by the plaintiff for the defendant at premises owned by the defendant at Bronte. The defendant is currently working on a construction site where seven town houses have been built and says that a final claim of $54,540 is due in relation to that work. 6 Before turning to the further detail in relation to the defendant's position, it is useful to refer to some of the law on the question of solvency. 7 In Expile Pty Ltd v. Jabb's Excavations Pty Ltd [2003] NSWSC 96 Barrett J referred to and accepted as useful a summary of authorities governing the operation of s 459C which is set out by Weinberg J in Ace Contractors and Staff Pty Ltd v. Westgarth Development Pty Ltd [1999] FCA 728 in these terms: "The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions:

• The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v. Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v. Simionato Holdings Pty Ltd (1997) 15 ACLC 477 per Mansfield J.

• In order to discharge that onus the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the respondent: Commonwealth Bank of Australia v. Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.

• Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v. JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v. Howship Holdings Pty Ltd (1997)_ 15 ACLC 459 at 463 per Sackville J.

• There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v. Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v. Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v. Howship Holdings Pty Ltd (supra) at 465-466.

• The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v. Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v. Howship Holdings Pty Ltd (supra) at 466; Taylor v. ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.

• The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v. Howship Holdings Pty Ltd (supra) at 466-467.

• It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its right: Elite Motor Campers Australia v. Leisureport Pty Ltd (supra)." 8 Dealing firstly with the asset situation of the defendant, the first thing to note is that there are no audited accounts available for the defendant. The only accounts and balance sheet that are available are draft accounts for the year ended 30 June 2004. Such accounts show net assets of $53,114.60, of which $22,416.32 are plant and equipment. Having regard to the fact that they are unaudited and fifteen months out of date they are of no use in determining the assets of the company, apart from verifying Mr Gattellaro's affidavit evidence that the company owns a work vehicle, machinery, tools, equipment, computer and home office equipment. 9 Mr Gattellaro has sworn to the present assets of the company which appear to be the following:

1. The defendant has a judgment against the plaintiff in the sum of $81,993.89 obtained in the District Court on 5 August 2005. This judgment arises out of an appeal to the Court of Appeal which the plaintiff lost. An order for costs was made against it. 2. In respect of proceedings between the defendant and the company, Masterform Pty Limited, in this Court, the defendant obtained an order for payment of its costs. The amount of these costs have been agreed at $70,000. The agreement provides that that sum is payable as to $20,000 on 20 August 2005, $30,000 on 10 September 2005 and $20,000 on 20 September 2005. None of these payments have been made on the evidence before me. Thus, as there is no evidence as to the position of the company Masterform, there must be considerable doubt as to when and if such funds might be available. 3. In relation to the Masterform proceedings the defendant paid into the Local Court as the price for a stay the sum of $21,833.57. The parties in those proceedings have now signed consent orders providing for that sum to be returned to the defendant. This is obviously an asset which will be available to the defendant in a week or so, if not a shorter time. 4. There are proceedings in the District Court between the parties in which the defendant sues the plaintiff for $441,935.64. This amounts includes a claim of some $200,000 under the Building and Construction (Security for Payment) Act . The claim is contested and is being heard at the present moment before Nelson J. I can form no view as to any prospects of success and, accordingly, take no account of this asset. There is always the chance the defendant will suffer an adverse verdict. 5. There is the final claim of $54,540 but no information as to when that is payable. There is no documentation produced to confirm the claim and its likely payment. 6. The company produces no copies of accounts to prove the state of its current bank accounts. 10 On the question of liabilities Mr Gattellaro has sworn that the company has no liabilities. As it is continuing to trade, I would think that has trade creditors and perhaps some potential liability to its solicitors for costs in respect of the proceedings in which it is engaged in the courts. 11 If one turns to cash flow the evidence is even more sparse. Draft accounts for 30 June 2004 showed an operating profit of $23,723.25 and for the previous year of $8,237.51. There are no management accounts produced, which is surprising as one would think that the company would produce these having regard to its obligations to supply business activity statements. Importantly, Mr Gattellaro does not swear to whether the company is meeting its day-to-day liabilities and trade creditors. There is no evidence of whether it is meeting its tax liabilities. I mention that there was no cross-examination in this matter, which was dealt with urgently last Friday and, thus, I have to determine the matter solely on the affidavit material. 12 The amount outstanding by the defendant to the plaintiff is the sum of $13,606.84 and this is, of course, a valid and immediate claim on the defendant's financial resources, unless, of course, there is an appropriate set-off, in which case the question which arises is whether the plaintiff has standing to bring the proceedings. 13 It will be remembered that the plaintiff has a judgment against the defendant in the Local Court in the sum of $13,606.84, and the defendant has a judgment against the plaintiff in the District Court for $81,993.89. It was submitted that in these circumstances there is a set-off under s 21 of the Civil Procedure Act 2005. This section is in the following terms: " 21 (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set-off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (2) This section extends to civil proceedings in which one or more of the mutual debts is owed by or to a deceased person who is represented by a legal personal representative. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set-off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (5) This section is subject to section 120 of the Industrial Relations Act 1996. (6) In this section, debt means any liquidated claim." 14 As has been pointed out, this reintroduces the statutory right of set-off in New South Wales that used to be in force under the imperial statutes of set-off. However, it will not apply to these proceedings because it only allows a set-off against the plaintiff's claim for debt. 15 In this case the plaintiff does not sue for its debt. All that is necessary for these proceedings is that the plaintiff be a creditor to give it standing under s 462(2) of the Corporations Act. 16 There are two judgments but as the judgments are in different courts s 90(2) of the Civil Procedure Act 2005 will have no application. 17 I return to the question of the defendant's solvency. Plainly this is a case where, in order to discharge the onus upon the defendant, the defendant has not provided the "fullest and best" evidence of the financial position of the defendant. The evidence is silent as to how the defendant is paying its trade creditors and other day to day liabilities. All the defendant seeks to do is to establish its solvency because of its ability to raise funds in the short term to cover debts due in the short term. As has been pointed out, this is, of course, a perfectly acceptable way of establishing solvency. As Barrett J said, reference need only be made to the following observation of Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter (1966) 115 CLR 666 which, although made in relation to a bankruptcy provision, is of equal pertinence here: "Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due." 18 The ability to use its assets to provide cash resources must, of course, have some foundation. Where the assets include, for example, a large amount due by many debtors, then the likelihood of some of these being available must be considered in a common sense way. Where, however, the assets are not usually assets, then more evidence is required. In this particular case this is very important because some assets are entitlements resulting from bitterly disputed litigation. The amount due by Masterform for costs may or may not be recovered in the fullness of time. Having regard to the litigation history between the present parties there would seem to be no prospect that the plaintiff is about to pay the defendant any part of the costs it owes to the defendant. 19 One asset which I assume the plaintiff can recover quickly is the $21,833.57 in the Local Court. It is sufficient to meet the debt to the plaintiff. There is no information on other day to day claims on the defendant, but there is the sum of $54,450 said to be due which provides some buffer against some claims. 20 Before finally deciding that matter I will deal with the abuse of process argument. In Roberts v. Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734 Barrett J usefully summarised the principles in these terms: "54 This conclusion makes it necessary to deal with the possibility that pursuit of the winding up application by the plaintiff may constitute an abuse of process, that being ground of resistance that the High Court left open in the David Grant case (above) despite the strictures of Part 5.4 and the general rule that disputes about the founding debt and the plaintiff's creditor status in a case where non-compliance with a statutory demand is relied upon should be fully played out within the confines of the system for challenging statutory demands. When referring to the exception, Gummow J spoke, at p 279, of winding up proceedings initiated or pursued 'for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz. 55. In Williams v Spautz (1992) 174 CLR 509, Mason CJ, Dawson, Toohey and McHugh JJ emphasises that, unless the interests of the justice demand otherwise, it is the duty of courts to exercise jurisdiction rather than refusing to do so. But, at the same time, a court must preserve its process from being employed for ulterior purposes - that is, purposes beyond those that the process itself offers. The focus is upon the purposes of the party initiating the proceeding. One relevant description is to be found in the judgment of Isaacs J in Varawa v Howard Smith Co Ltd (1911) 13 CLR 35: 'If the proceedings are merely a stalking- horse to coerce the defendant in some way entirely outside the ambit of the legal claim upon which the court is asked to adjudicate they are regarded as an abuse of process for this purpose.' 56. The existence of an unworthy motive is not enough. It is the purpose sought to be effected by the initiating party that is to be considered. The purpose will be improper if it is a purpose of achieving ends other than to which the process is directed. 57. In the kind of company law context with which I am here concerned, it was, before the advent of Part 5.4, an abuse of process to initiate winding up proceedings as a means of attempting to enforce payment of a disputed debt. An early decision to that effect was Cercle Restaurant Castiglione Co v Lavery (1881) 18 ChD 555 the report of which contains, as a footnote, the judgment of Jessel MR in Niger Merchants Company v Capper (1877) 18 ChD 557n where reference was made to an earlier decision of Malins VC in Cadiz Waterworks Co v Barnett (1874) LR 19 Eq 182 in which the pursuant of winding up proceedings was enjoined 'on the ground that it is the object of the Court to restrain the assertion of doubtful rights in a manner productive if irreparable damage'. The principle was stated in these terms by Vaughan Williams J In re a Company [1894] 2 Ch 349: 'In my judgment, if I am satisfied that a petition is not presented in good faith and for the legitimate purposes of obtaining a winding up order, but for other purposes, such as putting pressure on the company, I ought to stop it if its continuance is likely to cause damage to the company. 21 In the present case there is extensive litigation in the District Court which is proceeding as I give this judgment. In addition, there are other proceedings in this Court which are listed before Associate Justice McLaughlin for hearing tomorrow. They are proceedings to set aside a statutory demand. The defendant in these proceedings brings them against the plaintiff to set aside statutory demand which the plaintiff served based upon the same judgment debt used to give the plaintiff standing in the present proceedings. In tomorrow's proceedings there will be maintained, inter alia, an off-setting claim based upon a judgment for the defendant in these proceedings against the plaintiff in these proceedings. 22 In the lead up to the hearing before me there was correspondence between the solicitors in which the defendant offered to set off the amounts under the judgment and asked for payment of the balance remaining. Apart from flagging a possible challenge to the costs judgment, which has not materialised, the plaintiff has ignored these offers and requests by the defendant for payment. 23 Plainly, the situation is that the plaintiff has no intention of paying the amount which, on balance, is due by it to the defendant. In these circumstances the defendant submits that the real purpose of this application is to threaten the defendant into paying a small amount it knows is capable of being off-set against a much larger amount the plaintiff owes to the defendant, with the threat of insolvency of a family company which has operated since 1986 and to, thereby, thwart all current litigation pending between the parties. 24 The evidence before me shows that the defendant in these proceedings made a claim against the plaintiff on the sizeable amount in the District Court. There is no evidence of whether there is a cross-claim but, absent any relevant evidence, I would assume there is not. Plainly, any order today will stifle any claim of the defendant in the District Court proceedings, the merits of which, as I have said, are not before me. 25 When these proceedings were commenced on 2 August 2005 the defendant already had the benefit of costs order in its favour in the Court of Appeal against the plaintiff. The demand proceedings had been running their course and were set down for hearing before Associate Justice McLaughlin on 13 September 2005. The District Court proceedings at that stage were listed for hearing on 10 August 2005. Absent any evidence by the plaintiff in this matter touching on whether there might be an abuse of process, such as obvious faults in the defendant's case in the District Court, it would seem to me that the plaintiff is using these proceedings to achieve ends other than that to which this process is directed. If one puts to one side the assets and liabilities arising out of the litigation between the parties, in my view the defendant is solvent, although only just, and, accordingly, both on the ground of solvency and on the grounds that I think the present proceedings are an abuse of process, I dismiss the proceedings and order the plaintiff to pay the defendant's costs. I order the exhibits be returned.

19/09/2005 - incorrect year of publication now corrected - Paragraph(s) heading

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