Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd

Basis for disputing the debt claimed by the plaintiff. 7There was no dispute that the plaintiff made a number of payments to the defendant, although the defendant says it has no record of some of the claimed payments. However, the defendant says that the payments were not loans to it, but subscriptions for the issue of shares. It is unnecessary, and would be inappropriate on this application, to decide whether the defendant is indebted to the plaintiff for loan payments as claimed in the statutory demand. Nor is it necessary, or I think desirable, on this application to make a decision as to whether the debt claimed by the plaintiff is genuinely disputed. 8If the debt is genuinely disputed, and if leave is given under s 459S allowing the defendant to dispute the debt on the hearing of the winding-up application, that may itself be a sufficient basis for dismissing the winding-up application. Hence, on the application under s 459S the court is to give what Austin J called a " preliminary consideration " of the defendant's basis for disputing the debt. 9For the reasons which follow, I am satisfied that it is strongly arguable that the claimed debt is genuinely disputed. 10The defendant was incorporated on 20 May 2005. At that time, a Mr David Arnott was the sole director of the defendant and the beneficial owner of at least 100 of the 101 issued shares. On 23 May 2005, a document called Heads of Agreement was entered into between Mr David Arnott, a Mr John Heath and the plaintiff. The Heads of Agreement recited that Mr Arnott had developed a concept of installing helicopter simulators at tourist sites and that Mr Heath and the plaintiff had agreed to invest in a helicopter simulator development at Echo Point, Katoomba, New South Wales. The agreement provided for Mr Heath and the plaintiff to provide funding for the "seeding stage" of $35,000. Clause 7.1 of the Heads of Agreement provided: "Provided the seeding stage demonstrates that the development is financially viable, the Parties agree to enter into agreement to proceed with further stages of the Development. John [Heath] and Ewen [the plaintiff] to have 46% of the equity of the new entity shared equally." 11On 28 June 2005, Mr Arnott wrote to Mr Ewen Stewart of the plaintiff in relation to the proposed development. He said: "My understanding clearly was and is, that I offered you and John a 23% shareholding each in the enterprise to be called 'Blue Mountains Virtual Air Helitours' to be based at Echo Point. The shareholding in the enterprise was in return for you contributing, collectively $250,000 for a collective shareholding of 46%. This cash contribution entitled both you and John to a collective 46% Shareholding in the company and 46% share of profits from the enterprise. Representing the largest shareholder, reasonable control of the enterprise was and is vested with me. The investment was for the Echo Point site only and was not an offer to invest in any other entity other than BMVAH as you specifically declined my offer to be involved in the Holding Company. I believe that this understanding is reflected in all our correspondences and the heads of agreement. " 12Mr Stewart replied on 30 June 2005 saying, in substance, that Mr Arnott's advice clarified the situation. He wrote: "... I fully agree with the position which you have set out and that you can be assured of my full support in this venture for the future." 13On 18 July 2005, Mr Heath and Mr Stewart were appointed as directors of the defendant. Mr Arnott submitted drafts of a proposed shareholder agreement to Mr Stewart. He says that he received no response. In February 2006 Mr Heath sold his shares to the plaintiff. No formal shareholders agreement was entered into. On 16 January 2008, Benetatos White, solicitors for the plaintiff, wrote to the defendant as follows: "We act for Ewen Stewart & Associates Pty Limited and we are instructed by Mr Ewen Stewart. We are instructed that our client has entered into an arrangement with you to develop and ultimately operate the Virtual Air Helitours business from the Echo Point site. We understand that Blue Mountains Virtual Air Helitours Pty Limited ('the Company') has obtained development approval from Blue Mountains City Council to operate the business from the site and has also entered into a lease of the site. We note the agreement, in general terms: (1)requires our client to contribute the sum of $250,000.00 towards the establishment of the business (we are instructed that it has currently contributed $192,000.00 of that amount); (2)50% of the issued capital of the Company will be transferred to our client." 14Benetatos White proposed that they draft a shareholders agreement for Mr Arnott's consideration. They prepared such a document but Mr Arnott did not agree to its details. For example, he did not agree with the proposal that the plaintiff would have a 50 per cent shareholding as he said that the agreement was that the plaintiff would acquire a 46 per cent shareholding on payment of $250,000. 15Mr Arnott deposed that the reason the shares were not issued was because he was waiting for a shareholders agreement to be finalised, and also because the promised shareholders' funds of $250,000 were not fully subscribed. He deposed that there were no discussions and no agreements to the effect that the funds provided by the plaintiff were loans to the company to be repaid. 16The statutory demand curiously describes the payment said to give rise to the debt as "loan funds subscribed to the debtor company". The use of the term "subscribed" supports the defendant's position. 17This evidence shows that it is arguable, at least, that the payments made by the plaintiff to the defendant were not loans, but were part payment of the subscription for capital.

Reasons why issue of indebtedness not raised in an application to set aside the statutory demand 18The reason that the grounds outlined above for disputing the demand were not raised is because the plaintiff was a day late in doing so. That is not necessarily a sufficient reason for granting leave if other requirements are met. 19Part 5.4 of the Corporations Act requires that disputes of claimed indebtedness be raised within 21 days of service of the statutory demand. The time limit is mandatory, although s 459S may operate as a safety net. The question is, why was the plaintiff a day late in bringing its application to set aside the statutory demand? The reason is that Mr Arnott received the statutory demand on 1 June 2010. As I said, the demand had been served on 27 May 2010 at the defendant's registered office, being the office of the defendant's accountant. Mr Arnott wrongly assumed that the document was only served on the defendant company when he received it. In fact, by 1 June 2010, he had ceased to be a director of the defendant, although it seems he continued to play a significant role in the management of its affairs. Merely because Mr Arnott assumed that the document was not served on the company until the day he personally received it, would not be a persuasive explanation for the defendant's failure to bring the application in time. However, there is more to it. 20On 9 June 2010, Mr Arnott wrote on the letterhead of the defendant to Benetatos White. A solicitor with that firm had personally served the statutory demand. Mr Arnott wrote: "[The defendant] confirms it has received a statutory demand on 1 June 2010. Meanwhile, would you please confirm that this is your acknowledged date of service." 21Mr Arnott then set out reasons as to why the demand was disputed. He invited the plaintiff to withdraw the demand by 11 June 2010. There was no response to that letter. Benetatos White did not write to say that the demand was in fact served on 27 May 2010, and that Mr Arnott was acting under a misapprehension. Given the vital importance of the 21-day time limit prescribed by s 459G, the plaintiff's solicitor should have responded by pointing out Mr Arnott's error. The plaintiff led no evidence to explain the absence of a response. Litigation is not a game in which parties or their legal advisers should keep their cards close to their chest to achieve a tactical advantage.

Subsection 459S(2): materiality of disputed debt to solvency 22The third consideration on an application under s 459S is whether the discretionary power under the section is available. It is only available if s 459S(2) is satisfied. To paraphrase the subsection, the Court must be satisfied that the disputed debt is material to proving the defendant's solvency. 23There is an issue in the cases on what is required to establish materiality of a disputed debt to proof of solvency. In Grant Thornton Services (NSW) Pty Limited v St George Wholesale Distributors Pty Limited [2008] FCA 1777, Perram J held (at [19]) that the effect of the decision of the Court of Appeal in Switz Pty Limited v Glowbind Pty Limited is that a defendant seeking leave under s 459S " must demonstrate that if the debt exists then the company will be insolvent, and if the debt does not exist, then the company will be solvent. " 24The plaintiff contends that on the application under s 459S the defendant must prove that it is solvent if the plaintiff's claimed debt is excluded, and must also prove or admit that it is insolvent if the debt is included. The plaintiff submits that the defendant's evidence does not establish solvency even if the debt claimed by the plaintiff is excluded. 25Counsel for the plaintiff referred to the decision of Weinberg J in Ace Contractors and Staff Pty Limited v Westgarth Development Pty Limited [1999] FCA 728 (approved in Expile Pty Limited v Jabb's Excavations Pty Limited (No 2) [2003] NSWCA 163; (2003) 21 ACLC 1354 at [16]). Weinberg J held that to displace the presumption of insolvency arising from non-compliance with the statutory demand, the Court should be provided with the "fullest and best" evidence as to the company's financial position. That is the test applied when hearing an application to wind up a company in insolvency. If applicable to the application for leave under s 459S, then it would not be satisfied in this case. On the meagre evidence on solvency presented on this application, I would not be satisfied that the defendant is solvent, even if it does not owe the claimed debt. 26However, for reasons which follow, I do not accept that on an application under s 459S it is incumbent on the applicant to adduce evidence which, if accepted, would satisfy a court hearing the winding-up application that the existence or non-existence of the plaintiff's debt was determinative of its solvency. 27The defendant did not adduce any evidence from its accountant, or indeed from its current director, as to solvency. Nor did it tender any financial statements. The evidence of the defendant's assets was that it holds a lease of the site near Echo Point, Katoomba, but has been excluded from possession. 28There is evidence that the defendant has a cause of action for damages against the lessor, and that the Administrative Decisions Tribunal has transferred a pending claim for damages to the Supreme Court because the claim exceeds the Tribunal's jurisdiction. Mr David Arnott deposes that the Tribunal has found a prima facie case of unconscionable conduct against the lessor. There is no evidence as to whether the defendant has any other assets other than the lease and this chose in action. 29Mr Arnott deposed that as at 10 December 2010, being the date of his affidavit, the defendant had three creditors, namely, an associated company called Virtual Air Helitours Pty Limited, which had paid licence fees and had provided loans for working capital; its accountant, who was owed fees of $7,425; and a barrister, who was owed fees of $10,465 in respect of proceedings in the Administrative Decisions Tribunal. There was some evidence that Virtual Air Helitours Pty Limited and the defendant's accountant had agreed that no money would be payable to them unless and until the defendant recovered damages against the lessor. There was also evidence from which it could be inferred that the barrister had agreed to accept weekly instalments of his outstanding fees with interest from persons standing behind the defendant. The evidence of these arrangements was not satisfactory for the purposes of a final hearing for winding-up. The correspondence tendered to prove these arrangements referred to other documents which were not themselves tendered. I infer they were not tendered because they were not available at the hearing as the matter proceeded without an adjournment. 30In the case of the agreement between the defendant and Virtual Air Helitours Pty Limited and between the defendant and its accountant, there was no evidence that any consideration was expressly provided for their agreement to postpone and contingently waive payment of their debts. However, such consideration might be found in the implied promise by the defendant to pursue the litigation against the lessor. 31Whether the defendant does owe the debt claimed by the plaintiff is undoubtedly relevant to whether the defendant is solvent. If it does owe the debt, the defendant admits that it is insolvent. Without that admission, I would, in any event, infer that the defendant is insolvent if it owes the debt. If it does not owe the debt claimed by the plaintiff, I would not be satisfied on the evidence adduced on this application that the defendant is solvent. The defendant did not adduce the fullest and best evidence of its financial position. But I accept that further evidence that might be led by the defendant within the parameters of the evidence adduced on this application, might establish solvency. I accept that the defendant might establish that it owes no debts that are currently due and payable, or which will become due and payable, except as may become due and payable from the successful prosecution of litigation against the lessor. 32At the hearing of the winding-up application there may still be a question as to whether the arrangements of the kind apparently negotiated by the defendant with its creditors are indicative of insolvency, or whether the agreement to defer and contingently waive payment establishes solvency. 33I accept that such arrangements, if established at the hearing, might have moved the defendant from having been insolvent to being currently solvent. Those questions are appropriately decided on a winding-up application where solvency is directly in issue. 34In my view, this conclusion is sufficient to establish that the existence or non-existence of the plaintiff's debt is material to proving whether the defendant is solvent within the meaning of s 459S(2). 35What is material to proving solvency is not the same as what is determinative of solvency. This is not inconsistent with the decision of the Court of Appeal in Switz Pty Limited v Glowbind Pty Limited . There the defendant asserted that it was solvent whether or not it owed the debt the subject of the statutory demand. Spigelman CJ, with whom Handley and Giles JJA agreed, held that because the defendant contended that it was solvent whether or not it owed the disputed debt, the ground for disputing the debt was not material to proving the defendant's solvency. Attention was to be focused on the case the defendant advanced and how it intended to prove it (at [53], [54] and [56]). Spigelman CJ did not say that whether the ground for disputing the debt the subject of the statutory demand was material to proving the company's solvency depended on whether it could be seen from the evidence adduced on the s 459S application to be determinative. Rather, his Honour said that the ground would not be material if the company's case was that it was not determinative. His Honour (at [32]) denied that it was necessary to consider the concept of materiality in s 459S(2) in the appeal. That shows that his Honour was not intending his reasons to have a wider significance. 36In Zan Holdings Pty Limited v Bay View Holdings Pty Limited (1997) 15 ACLC 1238, Master Sanderson of the Supreme Court of Western Australia expressed a view as to the effect of s 459S(2) that was quoted in Switz Pty Limited v Glowbind Pty Limited at [27] as follows: "... if by ignoring the debt upon which the statutory demand is based, the company might be found to be solvent, then, and only then, the existence of a bona fide dispute would be a relevant consideration and the discretion ... would exist. In other circumstances s 459S would have no application. ... In circumstances where existence of the debt on which the statutory demand is based is pivotal to a decision of insolvency, then the existence of the debt is a relevant consideration. ..." (emphasis added) 37On appeal, the Full Court of the Supreme Court of Western Australia held that this was too stringent an approach. Steytler J, with whom Ipp and Wallwork JJ agreed, stated, in a passage quoted in Switz Pty Limited v Glowbind Pty Limited (at [29]): "The learned Master said in effect that, merely because the appellant asserted that it was solvent regardless of whether or not the disputed debt was taken into account, it followed that the existence or otherwise of the debt was not determinative of its solvency and therefore material to proving that it was solvent. That approach seems to me, with due respect to the learned Master, to have been wrong. The materiality or otherwise of the disputed debt to the appellant's solvency was required to be assessed having regard for the available evidence as a whole. There will often be the prospect that a company's assertions as to its financial standing will not be made out when the whole of the available evidence is considered (as proved to be the case here). If that prospect is not evaluated at the time of the hearing of the application the court would be left to decide the application on the strength, only, of the applicant's own assertion. That could not have been the intention of the legislature. The court is required by s 459S to be satisfied that the ground sought to be raised is material to proving that the company is solvent, not that it is material on the strength of the applicant's contentions only. Moreover the test, under s 459S(2), is that of whether or not the ground sought to be raised in opposition to the application is "material" to proving that the company is solvent, not that of whether or not it is determinative of the company's solvency. It is not only determinative evidence which is material to proof of solvency. It will often be enough, for the purposes of an application under s 459S, to show that the ground sought to be raised might turn out to be determinative of the applicant company's solvency once all of the evidence has been heard, depending upon what evidence is accepted by the trier of fact." 38In Switz Pty Limited v Glowbind Pty Limited , Spigelman CJ said that the reasoning of the Full Court quoted above should not be followed. His Honour said (at [36]): "In my opinion, although both constructions are open, the construction which focuses on the Defendant's case better serves the purposes of the legislative scheme. The alternative construction has the potential to undermine the achievement of those purposes." 39That must be understood in the context in which his Honour was speaking, namely, that it was the defendant's case that it was solvent whether it owed the debt the subject of the statutory demand or not. 40In the first part of the passage quoted from the Full Court of the Supreme Court of Western Australia, the Full Court advanced the proposition that the existence or non-existence of the debt would be material to proof of solvency, notwithstanding that the defendant's case was that it was solvent irrespective of whether it owed the debt, because the decision as to the company's financial position would only be known when the whole of the available evidence was considered. The reasoning in Switz Pty Limited v Glowbind Pty Limited is that that approach is incorrect where, on focusing on the defendant's case, the existence or non-existence of the debt would not be determinative of its solvency. 41Here, the defendant's case is that the existence or non-existence of the debt is determinative of its solvency. To apply the words of Master Sanderson in Zan Holdings Pty Limited v Bay View Holdings Pty Limited , the company might be found to be solvent if the debt upon which the statutory demand is based is ignored. 42In HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169, French J (as his Honour then was) (at [53]) went no further than did Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd except to observe that s 459S(2) should be construed strictly to minimise the opportunity for delay by ensuring that the disputes about debts do not prolong the hearing of the issue of solvency. That observation is relevant to how the discretion under s 459S should be exercised if the conditions for its exercise are met, as well as to the construction of section s 459S(2). However, it does not warrant reading the words "material to" as meaning the same as "determinative of". Nor was the matter taken further in Web Wealth Pty Ltd v Helimount Pty Ltd [2006] FCA 1376 at [43]-[46]. 43In Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962; (2007) 25 ACLC 1216, I said (at [64]): "The question is not whether the debt demanded by Radiancy (Sales) is determinative of Bimat's solvency. The question is whether it is material to proving the company is solvent. If the debt is owed, the company is undoubtedly insolvent. If it is not owed, the company may be solvent if Mr Colosimo's evidence as to the payment of creditors is accepted. Accordingly, s 459S(2) is satisfied ..." 44In Grant Thornton Services NSW Pty Limited v St George Wholesale Distributors Pty Limited referred to earlier, Perram J adopted what he called the " narrow approach to materiality " and said that if the passage quoted above from Radiancy (Sales) Pty Limited v Bimat Pty Limited accepted a more liberal view, then that view would not be consistent with Switz Pty Limited v Glowbind Pty Limited , or the decisions of French J in HVAC Construction (Queensland) Pty Ltd v Energy Equipment Engineering Pty Ltd or Web Wealth Pty Ltd v Helimount Pty Ltd. 45I adhere to the approach that I expressed in Radiancy (Sales) Pty Limited v Bimat Pty Limited . For the reasons I have given above I do not think it inconsistent with the other cases. 46Whilst in Grant Thornton Service NSW Pty Limited v St George Wholesale Distributors Pty Limited , Perram J said that the defendant had to demonstrate that the existence of the debt is pivotal to the questions of solvency, his Honour acted on the concession of counsel for the defendant that if the debt existed the defendant was insolvent, but contended the position was otherwise if the debt did not exist. His Honour did not find it necessary to examine the evidence to establish whether on the evidence adduced by the defendant, he would have been satisfied that the defendant was solvent if the plaintiff's debt did not exist. This approach was consistent with Switz Pty Limited v Glowbind Pty Limited and is consistent with the approach I have adopted in this case. 47In Hanson Construction Materials Pty Limited v FEC Civil Pty Limited [2009] NSWSC 161 at [28], Barrett J expressed an inclination to the view that "material to proving" is not the same as "determinative of", and that a capacity to have some influence or effect is in general all that is necessary to make something "material to proving". Earlier in Topcide Pty Limited v Deputy Dog Pty Limited [2008] NSWSC 1323, Barrett J found that the question of the existence or non-existence of the debt the subject of the statutory demand was material to proving that the company was insolvent because it might ultimately be found to make a difference. 48In short, the existence or non-existence of the plaintiff's debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company's solvency are to be advanced to the stage at which leave is sought under s 459S, so that the company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2). 49I am satisfied that the question whether the defendant owes the debt claimed by the plaintiff is pivotal in this sense. If it does not owe the debt, it might be found to be solvent. It follows that the conditions for the exercise of the discretion under s 459S are satisfied. 50However, I should be cautious about giving leave under the section, bearing in mind that the safety net provided by s 459S should be used sparingly so as to ensure that disputes about debts are dealt with at an early stage after service of the statutory demand ( HVAC Construction Queensland Pty Ltd v Energy Equipment Engineering Pty Ltd at [52] and [53]). 51In this case, the determining factor in my mind on the exercise of discretion is that the plaintiff was on notice that the defendant thought it had 21 days from 1 June 2010 in which to file and serve its application to set aside the statutory demand, when it knew that the relevant date was in fact 27 May 2010. Good practice and fair dealing demanded that the plaintiff promptly notify the defendant of the defendant's mistake. In those circumstances, I think it appropriate that leave under s 459S be given. 52For these reasons, I make order 1 in the defendant's interlocutory process filed on 28 October 2010. I will hear the parties on costs, and I will make orders so that the winding-up application can be heard. [Parties address on costs] 53I order that the costs of the interlocutory process be the defendant's costs in the proceedings. [Discussion re timetable for evidence on the application; extension of time argument.] 54The delay in dealing with the winding-up application is attributable to the defendant's delays in complying with earlier orders for the service of its evidence on the interlocutory process. It would be unjust if the plaintiff were prejudiced by those delays. I bear in mind that Christmas and the January vacation has intervened, which has further delayed matters. 55On the plaintiff's application, I think that special circumstances justify an extension under s 459R. I extend the period within which the plaintiff's application to wind up the defendant in insolvency is to be determined to 29 April 2011. 56I order that the defendant file and serve any further affidavits to be relied upon in opposition to the originating process by 28 February 2011. I direct that the defendant not be permitted to rely on any affidavits not filed and served by that time unless leave to do so is obtained from the Court. 57I direct that the plaintiff file and serve any affidavits in reply by 21 March 2011. 58I stand the proceedings over to the Corporations List before the Corporations List Judge on 7 March 2011 for directions. 59The exhibits may be returned, but should be retained by the defendant's solicitors until further order in the event that an application for leave to appeal is made.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 March 2011