Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Ltd

Federal Court of Australia|2009-05-27|Before: Perram J

REASONS FOR JUDGMENT 1 The plaintiff ("Grant Thornton") applies to wind up the defendant ("St George") on the ground that it is insolvent. It relies upon a failure to comply with a statutory demand. St George contends that there is a genuine dispute about the existence of the debt demanded and that the application should be dismissed.

Background 2 Grant Thornton is one of the corporate vehicles for a firm of accountants by the same name. For a number of years Grant Thornton were the accountants to a group of companies known as the "Paul's Warehouse" group. Paul's Warehouse at one stage operated 19 warehouse clearance stores in New South Wales, the Australian Capital Territory, Victoria and Tasmania. That group was, in effect, owned by members of the family of Mr Paul Dwyer and, in practice, operated by Mr Dwyer himself. Grant Thornton provided accounting, taxation and advisory services to Mr Dwyer, his family and the group for a period of between five and eight years. 3 St George is a member of the Paul's Warehouse group. On 31 January 2008, 29 February 2008 and 10 April 2008 Grant Thornton issued invoices to St George totalling $91,305.50. Those invoices were not paid. On 15 July 2008 Grant Thornton issued a creditor's statutory demand to St George requiring payment within 21 days. Payment was not received within that period nor was an application made to a court to set aside the statutory demand on the basis that there was a genuine dispute about the existence of the debt. 4 On 18 September 2008 Grant Thornton commenced the present proceeding seeking to wind up St George in insolvency. Shortly thereafter, on 14 October 2008, St George applied for leave to oppose the application for winding up on the ground that the debt claimed by St George was subject to a bona fide dispute. Section 459S(1)(b) of the Corporations Act 2001 (Cth) prevents a company from defending an application for winding up based upon a failure to comply with a statutory demand on a ground which the company could have relied upon in an application to set aside that statutory demand even if such an application was not, in fact, made. 5 That the debt claimed by Grant Thornton was subject to a genuine dispute was a ground which could have been relied upon to set aside the statutory demand: s 459H(1)(a). Necessarily, therefore, leave was required. 6 Section 459S(2) provides: 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.

7 The application for leave was heard by me on 7 November 2008. During the course of that hearing counsel for St George conceded that the existence of the debt claimed by Grant Thornton was material to the solvency of St George in the sense that if the debt existed then St George was insolvent, but if it did not, it was solvent. In light of that concession, I granted leave to St George to argue that the amount claimed by Grant Thornton was subject to a bona fide dispute: Grant Thornton Services (NSW) Pty Limited v St George Wholesale Distributors Pty Limited [2008] FCA 1777. Grant Thornton did not ultimately oppose that grant of leave. 8 There is some uncertainty about the nature of a winding up application where there has been a grant of leave under s 459S. That provision speaks of a party opposing a winding up application on a ground that could have been relied upon in an application to set aside the statutory demand, but, of course, it is difficult to see, at least at first blush, how it is that such a ground has any immediate relevance to a winding up application. Where the Court grants leave under s 459S it does not become seised of an application to set aside the statutory demand and if the ground be made out the statutory demand cannot be set aside. Ex hypothesi, the time for compliance with the statutory demand has passed and the corporation is already deemed to be insolvent by the operation of s 459C(2)(a). The demonstration by the corporation that it can make out a ground which would have justified the setting aside of the statutory demand does not undo that presumption. 9 That proposition demonstrates that the field of discourse in a situation where leave has been granted pursuant to s 459S is necessarily one which is concerned with solvency. It is true that s 459S does not itself provide any express guidance as to what is to happen once such a ground is established. Austin J said in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 at [41] that s 459S had "some semantic problems" a proposition with which I respectfully agree. His Honour thought that the issue which arose following a grant of leave under s 459S was not whether there was a genuine dispute about the existence of the debt but whether the dispute about that debt affected the plaintiff's standing or the ultimate question of whether the company was solvent: [41]. 10 Reasoning from first principles, it would seem that where a respondent establishes that there is a genuine dispute about the existence of the debt upon which the statutory demand is premised, there must, therefore, be a genuine dispute as to whether the applicant is a creditor. So too, where it has been established, by reason of the grant of leave under s 459S, that the debt is material to proving the solvency of the respondent, it must also follow that, where a genuine dispute about the existence of that debt is established, there is also a genuine dispute about the solvency of the respondent. 11 These conclusions, however, throw no direct light upon what is to happen when those matters are established. Prior to the introduction of Pt 5.4 there was a well-developed, if cumbersome, jurisprudence about the relationship between statutory demands and winding up proceedings. There was no application which corresponded with the present application to set aside a statutory demand contemplated by s 459G. Instead, where a genuine dispute about the existence of a debt underpinning a statutory demand was shown to exist, an injunction might issue to restrain the presentation of a winding up petition. If a petition were presented, there was authority that the proper course was to dismiss the petition because the applicant had no standing: Mann v Goldstein [1968] All ER 769 at 773 per Ungoed-Thomas J; Stonegate Securities Ltd v Gregory [1980] Ch 576 at 580 per Buckley LJ. 12 Other cases have suggested that such a circumstance may render winding up proceedings an abuse of process. In L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 McClelland J said (at 183): Proceedings by a person as creditor for the winding up of a company on the ground that it is unable to pay its debts will ordinarily be held to be an abuse of process:

(1) if the winding up proceedings are bound to fail eg if it is clear that the applicant will not be able to prove that he is a creditor within the meaning of s 363(1)(b) of the Code, or will not be able to prove that the company is unable to pay its debts within the meaning of s 364(1)(e);

(2) if the application is made for some improper purpose eg if the applicant is seeking to use the winding up proceedings to coerce a company into paying an alleged debt without affording the company a reasonable opportunity to ascertain or have it established that the debt is properly payable; or

(3) if issues will arise in the winding up proceedings of a kind inappropriate for determination in such proceedings eg a substantial contest as to the existence or enforceability of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose.

13 There are some difficulties in incorporating this kind of analysis into a situation where Pt 5.4 expressly permits a winding up application to be made when a statutory demand has not been complied with. In the present situation the proceeding could not have been an abuse of process at its commencement or at any time immediately prior to the grant of leave under s 459S. Despite that, the decision of White J in Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 at [75] shows that notions of abuse of process continue to be relevant where leave is granted pursuant to s 459S. His Honour thought (at [81]), and I respectively agree, that the continuation of a winding up proceeding where the debt is genuinely disputed may be an abuse of process after a grant of leave pursuant to s 459S. The question then is whether the debt is genuinely disputed.

Is there a genuine dispute about the existence of the debt? 14 During 2007 the Paul's Warehouse group was interested in restructuring its affairs. Grant Thornton was retained to assist in that endeavour. The companies, partnerships and individuals comprising the economic endeavour in the Paul's Warehouse group number in excess of 30. It would appear that up until December 2007 all, or most of, the invoices from Grant Thornton were rendered to Mr Dwyer himself or to Paul's Retail Pty Ltd as trustee for the Paul's Warehouse Discretionary Trust regardless of the identity of the member of the group using Grant Thornton's services. 15 There was a degree of urgency about the restructuring work because the Paul's Warehouse group was suffering from severe liquidity problems and was struggling to meet its obligations to creditors. Part of the restructuring involved placing two members of the group - Paul's Retail Pty Ltd and Blue Geko Pty Limited - into administration and, thence, if possible, under a deed of company arrangement. The principal financier to the group was GE Commercial Corporation (Australia) Pty Ltd ("GE") and the work included negotiations with it to secure its support for the restructuring. When it became apparent that GE did not wish to be involved Grant Thornton sought to secure finance from other quarters. During this period the possibility that GE would exercise its security rights was in the background. There seems little doubt that by mid-December Grant Thornton had become concerned about its own exposure to the Paul's Warehouse group. On 17 December 2007 there was a series of internal emails at Grant Thornton dealing with the position of how much money was held in trust and the likely extent of future billings. 16 Mr Field alleges that on or about 19 December 2007 he had a telephone conversation with Mr Sender, chief financial officer of the Paul's Warehouse group, in which the following was allegedly said: Mr Field: Neville, as you know we can't keep continuing to bill Dwyer or Paul's Warehouse for our services. Paul has no money and Paul's Warehouse is going to be placed in administration. Assuming you and Paul want us to continue to assist you through the restructure, I would propose to bill St George Wholesale Distributors Pty Limited as we know that it has positive net assets, is solvent and will not be part of the proposed administrations. Are you happy with this?

Mr Sender: Yes we need your help. Go ahead and bill St George Wholesale Distributors Pty Limited.

17 Mr Sender was not called by either party to the current proceeding. However, a solicitor - Mr Christopher Wilkinson - gave evidence of a discussion which he had had with Mr Sender in which Mr Sender told Mr Wilkinson that, whilst he was happy to speak with Grant Thornton's solicitors, he was not happy to provide a written statement without an indemnity from any claim that Mr Dwyer might want to make against him personally. I accept that this conversation took place in the terms deposed to by Mr Wilkinson. 18 Relevant also to whether the conversation alleged by Mr Field took place is another conversation which was alleged to have taken place between Mr Field, Mr Dwyer and another solicitor, Mr Wijesinghe. Mr Wijesinghe is the solicitor with the day to day carriage of the matter for St George. Mr Field's evidence was that he informed Mr Dwyer of the discussion he had previously had with Mr Sender and Grant Thornton's consequent need to bill St George. Mr Dwyer's response - according to Mr Field - was: That's fine, I don't care who you bill as long as you get me through this.

19 Mr Field says that he said: Paul we have to be paid. We are happy to wait until you get control of the business when the DOCA is approved, but we have to get paid.

20 Mr Field says that Mr Dwyer responded: Okay.

21 During cross-examination Mr Field changed his evidence so that the discussion with Mr Field took place on 18 December 2007 before the discussion with Mr Sender. Mr Field also gave evidence of another discussion he had had with Mr Sender in January 2008 in which Mr Sender apparently acquiesced in the existence of an arrangement to bill St George. 22 Mr Dwyer's evidence, on the other hand, was directed to establishing two propositions: first, that in December 2007 no agreement was reached with Grant Thornton about the identity of the company which would receive the bills; secondly, that in any event, the agreement between him and Grant Thornton was that its bills would only be payable in the event that it secured a refinancing arrangement for the group. 23 Mr Field gave evidence that the identity of St George was mentioned in his discussion with Mr Dwyer. He also said that the discussion took place after he had had the discussion with Mr Sender. As I have said he accepted under cross-examination that the discussion took place before his discussion with Mr Sender. 24 On the other hand, Mr Dwyer denies that St George was mentioned at all. Mr Wijesinghe, who was present during the discussion, denies that St George was mentioned. The situation then is that two witnesses, Mr Field and Mr Wijesinghe, say St George was not mentioned and Mr Field says that it was. 25 It is difficult to avoid the conclusion that there is a genuine dispute about that matter. That, of course, directly impacts on the question of whether the discussion with Mr Sender took place in the terms alleged or at all. 26 Mr Dwyer gave evidence that he believed that the arrangement was subject to the contingency of Grant Thornton successfully arranging for the group to be refinanced. It is clear that on several occasions Mr Dwyer said that if the refinancing occurred then Grant Thornton would be paid. It is not difficult to see how that statement might be understood as meaning to Mr Dwyer that the refinancing was subject to a contingency and to Mr Field as meaning that it was subject to timing. 27 The question which immediately arises is whether there is a genuine dispute about the debt. There is no reason to think that that question is to be answered according to a different standard in the context of s 459S than in an application to set aside a statutory demand under s 459G. The threshold, of course, for a conclusion that a dispute is genuine is a low one and not difficult to satisfy: Roadships Logistics Ltd v Tree [2007] NSWSC 1084 at [24] per Barrett J. I have little trouble in concluding in this case that there is a genuine dispute as to the existence of the debt. Applying the approach indicated by White J in Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 it follows that the application should be dismissed because it is an abuse of process. 28 There are two further matters which however deserve comment. First, St George submitted that I should decide the question of whether the debt was actually due. Support for this approach was said to be found in Brinds Ltd v Offshore Oil NL (1985) 63 ALR 94 at 99 per Lord Brightman. Grant Thornton did not oppose this course and made specific reference to Re QBS Pty Ltd [1967] Qd R 218 at 225 per Gibbs J and Ocean City Ltd v Southern Ocean Hotels Pty Ltd (1993) 10 ACSR 483 at 486 per French J. However, as was explained by White J in Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527 at [72] and [82] the winding up jurisdiction is not ordinarily to be used to resolve disputed debts. 29 Before me Mr Dwyer, Mr Field and Mr Wijesinghe were cross-examined. Extensive written submissions were received on who should be believed. However, the critical witness, Mr Sender, was not available. There is, it seems to me, an air of unreality in deciding whether the debt exists without Mr Sender's assistance. He was the chief financial officer for the group and was clearly involved in an intimate way with its accounting affairs. The evidence before me indicated that Mr Sender did not wish to give evidence but was available. It is plain that if Mr Sender gave evidence most of the issues in the case would readily be resolved. I do not think that this Court should embark upon an analysis of what happened between the parties in the absence of Mr Sender. Either party could have issued a subpoena ad testificandum to him; neither did. 30 There will be occasions when it is appropriate to determine a disputed debt. However, the exercise of that power should be informed by an appreciation of the difference between a winding up proceeding, which is concerned with status and into which questions of public interest intrude, and private suits for debts into which the public interest does not. Where a court determining winding up proceedings is asked to ascertain whether a particular debt exists, it is important that that question be determined correctly and not as the result of tactical manoeuvres between the parties. Here, so it seems to me, I could not be confident about the correctness of the outcome without Mr Sender's evidence. 31 There was some evidence before me that Mr Sender told Mr Field that he had no recollection of the relevant discussions. At the time that evidence was elicited I indicated that I was minded to admit it subject to a direction that its use be limited to proving only that that was what Mr Sender had said. I so direct. 32 In all those circumstances, I do not think it appropriate to determine whether the debt exists. That conclusion may serve to emphasise that once leave is granted under s 459S a creditor is in much the same position, tactically, as it is once an application is made against it under s 459G. Once such an order is made the creditor is exposed to the risk posed by the low threshold necessary to show the existence of a genuine dispute under s 459G. The manner in which this proceeding has unfolded serves to illustrate those problems. It may well be very difficult for a creditor to prevail once leave has been granted under s 459S for that grant of leave will usually carry with it an implicit positive assessment of the prospects of a genuine dispute being established. 33 It was said by Grant Thornton that I should, in any event, conclude that St George was insolvent. Having concluded that there was a genuine dispute about the debt that is sufficient to dispose of Grant Thornton's standing to seek those orders: Tokich at [77]. However, quite apart from that, a necessary corollary of my decision to grant leave under s 459S was that the existence of the debt was pivotal to the question of St George's solvency. St George proffered an admission during that leave application that if the debt did exist it was insolvent and if the debt did not exist it was solvent. Of course, I accept that it was not possible for St George to admit its way into solvency. However, Grant Thornton did not oppose the grant of leave under s 459S once St George had proffered that admission. 34 It would, in my opinion, be an abuse of process for Grant Thornton now to be permitted to say that, in fact, the existence of the debt was not material to the solvency of St George. The time for it to make that submission was at the time that the application for leave pursuant to s 459S was made. Leave having been granted the case cannot go forward on a basis inconsistent with that grant of leave. This is not to apply principles of issue estoppel or res judicata - clearly inapplicable in an interlocutory context - rather, it is to give effect to the principle that a party is bound by the way it conducts its case. St George conceded that the debt was material to solvency; Grant Thornton conceded that leave should be granted. If a creditor wishes to submit that a defendant is insolvent come what may it must first seek a revocation of the grant of leave under s 459S. Where, as here, the grant of leave under s 459S was not opposed this may be difficult. The ordinary principles by which interlocutory orders may be revoked will be pertinent. Change of circumstance, no doubt, will have its part to play. Mere change of mind by a creditor does not. 35 The application is dismissed with costs. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate: Dated: 27 May 2009 Counsel for the Plaintiff: Mr HWD Stowe

Solicitors for the Plaintiff: Brown Wright Stein Lawyers

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