Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd; KCL Developments Pty Ltd v TQM Design and Construct Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - insolvency - presumption of insolvency arising from failure to comply with statutory demand - period for which presumption available to found winding up application - where company made application purporting to be under s 459G - where court found that no valid or effectual application under s 459G had been made - company's application dismissed - whether failure to comply with demand occurred seven days after dismissal or 21 days after service of statutory demand

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 459C(1)(a), 459C(2)(a), 459F, 459G, 459H, 459J, 459P, 459Q, 467A

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265 Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd [2010] NSWSC 1279 Leveraged Capital Pty Ltd v Modena Imports Pty Ltd [2009] NSWSC 509 CASES CITED : Long Nominees Pty Ltd v Roandale Holdings Pty Ltd [2009] NSWSC 932 Missing Link Network Integration Pty Ltd v Keene Consulting International Pty Ltd [2007] NSWSC 1377 Pinn v Barroleg Pty Ltd (1997) 138 FLR 417 Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 239 FLR 339

(1) Golden Plantation Pty Limited - Plaintiff PARTIES : TQM Design and Construct Pty Limited - Defendant (2) KCL Developments Pty Limited - Plaintiff TQM Design and Construct Pty Limited - Defendant

FILE NUMBER(S) : SC (1) 2010/379538; (2) 2010/379523

COUNSEL : Mr J T Johnson - Plaintiff Ms V Culkoff - Defendant

SOLICITORS : Proctor Phair Lawyers - Plaintiff Julie A Orsini - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/379538 GOLDEN PLANTATION PTY LIMITED v TQM DESIGN AND CONSTRUCT PTY LIMITED 2010/379523 KCL DEVELOPMENTS PTY LIMITED v TQM DESIGN AND CONSTRUCT PTY LIMITED JUDGMENT 1 The main question for decision is whether TQM Design and Construct Pty Ltd ("TQM") now has the benefit of presumptions of insolvency under s 459C(2)(a) of the Corporations Act 2001 (Cth) upon which it may rely in initiating a winding up application under s 459P in respect of Golden Plantation Pty Ltd ("GP") and a winding up application under s 459P in respect of KCL Developments Pty Ltd ("KCL"). 2 That question arises in each of two separate proceedings commenced on 15 November 2010. In one of those proceedings, GP seeks an order restraining TQM from initiating winding up proceedings against it under s 459P. In the other, a corresponding application is made by KCL against TQM. 3 Relevant factual background appears from my judgment of 4 November 2010 in earlier proceedings: Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd [2010] NSWSC 1279. On 20 May 2010, TQM served two statutory demands, each bearing that date. One was served on GP, the other on KCL. Each related to a separate debt said to be owing, due and payable by the particular company to TQM. 4 On 10 June 2010, GP as first plaintiff and KCL as second plaintiff filed an originating process expressed to embody an application under s 459G and seeking the following order as against TQM: "An order that the statutory demands, copies of which are annexed hereto, dated 20 May 2010 served by the defendant on the first plaintiff and the second plaintiff, be set aside." 5 It was common ground in the earlier proceedings that the statutory demands referred to in that claim were those of 20 May 2010 I have just mentioned. 6 For reasons stated in the judgment of 4 November 2010, I concluded that a valid and effectual application under s 459G had not been made in relation to either statutory demand by the originating process of 10 June 2010. The order made on 4 November 2010 was that the originating process be dismissed with costs. 7 Against this background, it is not in dispute that TQM served a statutory demand on each of GP and KCL on 20 May 2010 and that each of those companies failed, in the s 459F sense, to comply with the statutory demand. Nor is it disputed that, by reason of that failure to comply, a presumption of insolvency arose, for the purposes of any s 459P application, in respect of the company concerned. There is, however, a dispute as to when the presumption of insolvency arose and whether it continues to be available as a foundation for the initiation of s 459P proceedings. 8 Each of GP and KCL says that the presumption of insolvency affecting it arose and commenced to operate upon the expiration of the period of 21 days after service of the statutory demand on 20 May 2010. TQM's contention is that the presumption arose and commenced to operate seven days after the making of the order of dismissal on 4 November 2010. 9 Section 459C has effect for the purposes of a winding up application initiated in respect of a company under any of several provisions, including s 459P (see s 459C(1)(a)). The section provides (s 459C(2)(a)): "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: (a) the company failed (as defined by section 459F) to comply with a statutory demand." 10 The "application" thus referred to is, relevantly for present purposes, a s 459P application for a winding up order. 11 Section 459F is in these terms: "(1) If, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.

(2) The period for compliance with a statutory demand is: (a) if the company applies in accordance with section 459G for an order setting aside the demand: (i) if, on hearing the application under section 459G, or on an application by the company under this paragraph, the Court makes an order that extends the period for compliance with the demand - the period specified in the order, or in the last such order, as the case requires, as the period for such compliance; or (ii) otherwise - the period beginning on the day when the demand is served and ending 7 days after the application under section 459G is finally determined or otherwise disposed of; or (b) otherwise - 21 days after the demand is served." 12 The significance of the difference of opinion noted at paragraph [7] above is illustrated by a hypothetical example. Assume that a s 459P winding up application in respect of GP or KCL is made by the filing of an originating process by TQM on 1 January 2011. The period of three months ending on the day of the making of that application will be the period that began on 1 October 2010. Having regard to the opening words of s 459C, therefore, there will be an available presumption of insolvency if failure to comply with the statutory demand occurred seven days after dismissal of the application in respect of the statutory demand (which occurred on 4 November 2010) but not if the failure occurred 21 days after service of the statutory demand (which occurred on 20 May 2010). 13 The contention that failure to comply with the statutory demand occurred seven days after 4 November 2010 will be correct if two conditions are satisfied: first, that, because of the initiation of the proceedings determined on 4 November 2010, the company on which the statutory demand was served is properly regarded as having applied "in accordance with section 459G for an order setting aside the statutory demand"; and, second, that the order of dismissal of 4 November 2010 is properly regarded as one by which "the application under section 459G" was "finally determined or otherwise disposed of". 14 The second proposition cannot be controversial, at least to the extent that the order of dismissal on 4 November 2010 "finally determined or otherwise disposed of" the application filed on 10 June 2010. That leaves the first matter and the question whether, because of the filing of that application, the situation was one in which, in the opening words of s 459F(2)(a), "the company applies in accordance with section 459G for an order setting aside the demand". That question also goes to the nature of the subject of the dismissal. If the application filed on 10 June 2010 and dismissed on 4 November was not in truth an "application under section 459G"so that the order of dismissal did not cause any "application under section 459G" to be "finally determined or otherwise disposed of", s 459F(2)(b) will dictate the conclusion that failure to comply with the statutory demand occurred 21 days after service of the demand on 20 May 2010. 15 As to the nature of the application dealt with by the order of 4 November 2010, it is pertinent to set out paragraphs [13] and [14] of the reasons of 4 November 2010: "13. In the light of s 459G(1), a company on which a statutory demand has been served may apply for "an order setting aside" that statutory demand. In this case, GP does not seek an order setting aside the statutory demand served on it by TQM; nor does KCL seek an order setting aside the statutory demand served on it by TQM. Both plaintiffs claim a single order, being an order operating upon and in relation to both statutory demands.

14. The approach the plaintiffs have seen fit to take does not contemplate the setting aside of one statutory demand independently of the other. The claim is an all or nothing claim in respect of both statutory demands." 16 Reference was then made to a number of decided cases. Then followed paragraphs [16] to [18]: "16. The cases allow very little scope indeed for the pursuit of two or more setting aside claims in a single proceeding. To the extent that such an approach might be found to comply with s 459G, it is necessary at the very least (and I do not say this is the only requirement) that there be a separate claim in respect of each statutory demand so that one originating process is, as I put it in Remo Constructions Pty Ltd v Dualcorp Pty Ltd [[2008] NSWSC 1172; (2008) 222 FLR 375] at [34], the vehicle by which each of several distinct applications is made.

17. In other words, a conforming application in respect of one statutory demand might possibly be advanced by an originating process which also advances a conforming application in respect of another statutory demand; but the separateness of the applications so that each application, as it relates to a single and particular statutory demand, has a distinct existence and relates to that demand alone is crucial to compliance with the scheme of s 459G.

18. The distinct existence of each of several applications is not achieved by the originating process in this case. My conclusion therefore is that the plaintiffs did not, by means of the originating process filed on 10 June 2010, make a valid and effectual application under s 459G in respect of either statutory demand and that the court therefore has no jurisdiction to set aside either demand. This case is, in that respect, the same as Filaria Pty Limited v Carlisle [[2004] ACTSC 95]." 17 The clear conclusion was that the filing of the originating process by which both GP and KCL sought, as against TQM, the single order set out at paragraph [4] above did not amount to the making of an application under s 459G by either of them. Indeed, it was that conclusion that led to the dismissal of the originating process without attention having been directed to the question of genuine dispute to which the evidence went. 18 This makes relevant the following observations of Brereton J in Leveraged Capital Pty Ltd v Modena Imports Pty Ltd [2009] NSWSC 509 at [8] - [9]: "Comparison of the words used in s 459F(2) and those in s 459G(3) makes abundantly clear that the automatic extension provided for by 459F(2)(a) is triggered only by a valid application made in accordance with s 459G - that is to say, one that complies with the requirements of s 459G(3). Cases such as Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 establish that an application is not validly made for the purposes of s 459G(3) unless there is a sufficient supporting affidavit, [see also Pacific Islands Express Pty Ltd v Empire Building Development Pty Ltd [2008] NSWSC 576 (Austin J) [7]; and Modena Imports v Leveraged Capital , [13]]. That is precisely what Barrett J found in the present case. His Honour dismissed the proceedings on the basis that no valid application under s 459G had been made. In those circumstances, the period for compliance with the statutory demand was not extended by operation of s 459F(2)(a); it follows from s 459F(2)(b) that the period for compliance was 21 days after the demand was served. The present proceedings for the winding up order were not instituted until 24 March 2009, more than three months after that date." 19 The basis for the earlier dismissal of an application by which the company had attempted to resort to s 459G was described by Brereton J as follows: "On 2 February 2009, Barrett J dismissed with costs (on an indemnity basis) Modena's application, on the basis that Mr Trad's affidavit did not meet the minimum requirements to satisfy the description of "an affidavit in support" as required by s 459G, and thus that the application was not made in accordance with s 459G [ Modena Imports Pty Ltd v Leveraged Capital Pty Ltd [2009] NSWSC 20]." 20 Returning to the present case and applying the reasoning adopted by Brereton J, it is, to my mind, clear that the condition set out at the start of s 459F(2)(a) ("if the company applies in accordance with section 459G for an order setting aside the demand") was not satisfied in relation to either statutory demand, with the result that the order of 4 November 2010 was not one by which an "application under section 459G" was "finally determined or otherwise disposed of". In the result, therefore, s 459F(2)(a) did not apply and s 459F(2)(b) (which begins "otherwise") did apply. 21 I do not, in this respect, accept the submission of Ms Culkoff of counsel, who appeared for the defendant in each proceeding, that the sole requirement or characteristic embodied in the words "applies in accordance with section 459G" and "application under section 459G" is that created by s 459G(2) and s 459G(3) with respect to the time within which steps are to be taken. That this is the sole requirement or characteristic is said to be indicated by the following passage in the judgment of Gummow J (with whom Brennan CJ, Dawson J, Gaudron J and McHugh J agreed) in David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265 at CLR 279: "If an application for an order setting aside a statutory demand has not been made within 21 days after service of the demand, there is no application under Pt 5.4 before the court." 22 It does not follow from this observation that, if an application for an order setting aside a statutory demand has been made within the 21 day period, the court has before it an application under s 459G. The application must also accord with s 459G in respects other than those concerning timing. The fact that the statement in the David Grant case referred only to the matter of timing is unsurprising, given that the question there before the court went to the susceptibility of the 21 day period to extension by court order. 23 Ms Culkoff further submitted that the application disposed of by the court on 4 November 2010 was made "in accordance with" or "under" s 459G, albeit irregularly or in a defective way. The thesis advanced on behalf of TQM is thus, in effect, that s 459F(2)(a) should be read as if the opening words were: "if the company applies (whether or not in an irregular or defective way) in accordance with section 459G . . . "

and as if the words "(whether or not irregular or defective)" appeared in each of s 459F(2)(a)(i) and s 459F(2)(a)(ii) immediately after "the application". 24 The concept of an irregular or defective s 459G application is anomalous and unhelpful. The references in s 459F to an application "in accordance with" or "under" s 459G do not accommodate irregularity or defect. They direct attention to one question only, that is, whether the steps that have been taken are steps for which the section makes provision taken in the way for authorised or provided by the section. The only available answer is a simple "Yes" or "No". If the steps that have been taken are consistent with s 459G in some respects (for example, because the originating process identifies s 459G as the provision under which the application is advanced) but not in others (for example, because taken after the 21 days have elapsed or because the affidavit filed within that period is not, in truth, "an affidavit supporting the application"), the answer is "No". It is not, "Yes, but with irregularity or defect." The "in accordance with" and "under" criterion is an all or nothing matter. The existence of s 467A, which merely regulates the court's actions in a case where an irregular or defective application is before it, does not alter this. 25 The event on which the applicability of s 459F(2)(a) depends is described in clear terms that refer only to an application that is "in accordance with" s 459G, while the references in each of s 459F(2)(a)(i) and s 459F(2)(a)(ii) are to an application "under" s 459G. The words "in accordance with" and "under" make it plain that the only application that can play a part under s 459F(2)(a) is one that is advanced in the way authorised or provided for by s 459G. 26 The ultimate finding in the judgment of 4 November 2010 was stated thus: "My conclusion therefore is that the plaintiffs did not, by means of the originating process filed on 10 June 2010, make a valid and effectual application under s 459G in respect of either statutory demand and that the court therefore has no jurisdiction to set aside either demand." 27 The absence of a valid and effectual application under s 459G meant that there was no application under s 459G, not that there was an application under s 459G and that it was irregular or defective. 28 Where, as here, the particular application was advanced in a way not authorised or provided for by s 459G (that being the finding of 4 November 2010), it is s 459F(2)(b), not s 459F(2)(a), that fixes the period for compliance. The result produced by s 459F(2)(b) is that the period for compliance with the statutory demand was 21 days after service of the demand on 20 May 2010. 29 Ms Culkoff pointed out that it was not established until the judgment of 4 November 2010 that what purported on its face to be an application under s 459G was not, in truth, an application under s 459G. That being so, it is said, the application should be regarded as having been, until 4 November 2010, an application within the part of s 459F(2)(a) consisting of the words "if the company applies in accordance with section 459G for an order setting aside the demand". Otherwise, it is said, a dilemma arises for the creditor. I quote from Ms Culkoff's written submissions: "The dilemma that arises is: what is a vigilant creditor to do if the three month period is due to expire before determination of the s 459G application? Does it commence winding up proceedings in any event and expose itself to indemnity costs as occurred in Long Nominees ? Or is the court to be inundated with applications for urgent determination of the s 459G application within the three month period?" 30 The case referred to in this passage in counsel's submissions is Long Nominees Pty Ltd v Roandale Holdings Pty Ltd [2009] NSWSC 932 where it was held to be an abuse of process (warranting indemnity costs) for a creditor to commence winding up proceedings based on failure to comply with a statutory demand where a s 459G application in relation to the demand had been filed but not determined. 31 As Palmer J pointed out in Woodgate v Garard Pty Ltd [2010] NSWSC 508; (2010) 239 FLR 339, a creditor petitioning for winding up on the basis of non-compliance with a statutory demand is required by s 459Q(a) to set out in the originating process "particulars of . . . the failure to comply with the demand", with the result that it is impermissible to file an originating process on that basis until the failure has occurred and particulars of it can be stated. I respectfully agree with his Honour that, to the extent that Pinn v Barroleg Pty Ltd (1997) 138 FLR 417 and Missing Link Network Integration Pty Ltd v Keene Consulting International Pty Ltd [2007] NSWSC 1377 suggest otherwise, they do not recognise the effect of s 459Q(a) and should not be followed (this observation applies also to the course of action suggested in Leveraged Capital Pty Ltd v Modena Imports Pty Ltd (above) at paragraph [10]). As Palmer J also observed, a presumption of insolvency arising under s 459C(2)(a) from failure to comply with a statutory demand after filing of the winding up application is, however, available to the plaintiff in cases where the winding up application, when filed, is based otherwise than on such failure. 32 The dilemma posed by Ms Culkoff is not fanciful. But it need not be insurmountable. The creditor does not have to await the hearing of the purported s 459G application to test the proposition that there is, in truth, no s 459G application. Whether or not there is will most often turn on relatively straightforward and short questions about service, the time of service and the form of the documents, being, as Mr Johnson of counsel pointed out on behalf of the plaintiffs, questions that lend themselves to a summary dismissal application, without any need to deal with the merits of whatever case the company seeks to advance under s 459H or s 459J. 33 It is an abuse of process for a plaintiff to bring a winding up application where that plaintiff is incapable of succeeding as a matter of law or through absence of supporting evidence. Because failure to comply with the statutory demand of 20 May 2010 ceased to be available as a foundation for s 459P proceedings in August 2010, any future winding up application founded on failure to comply with that statutory demand will be an abuse of process. 34 A permanent injunction is therefore warranted in each proceeding. Having regard to the scheme of s 459Q, the injunction will be as follows: "Order that the defendant be permanently restrained from relying on failure by the plaintiff to comply with a statutory demand dated 20 May 2010 served on the plaintiff by the defendant to commence proceedings for the winding up of the plaintiff in insolvency." 35 The plaintiff in each proceeding should also have an order that the defendant pay its costs of the proceedings.

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