HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd

REASONS FOR JUDGMENT Introduction 1 On Friday 6 December 2002, the District Registrar made an order that Energy Equipment Engineering Pty Ltd (EEE) be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth). On Monday 9 December 2002, Mr James Kwok, a director of EEE, filed a motion for review of the District Registrar's decision and for a stay of his orders pending determination of the review. I heard argument on the motion for approval for Mr Kwok to bring the application on behalf of the company and for a stay of the winding up on 9 December. Argument was concluded at 5.15pm and, after reviewing the materials, I made orders at 8.30am on 10 December 2002. I now publish the reasons for those orders. Factual Background 2 EEE is a company incorporated in New South Wales on 10 March 1998. At some time prior to April 2002 it entered into a contract with EnviroStar Energy Limited (EnviroStar) relating to the installation of a power plant at Yatala in Queensland. 3 On 2 April 2002, EEE made a contract with HVAC Construction Pty Ltd (HVAC) for the supply, manufacture and installation of all major equipment in connection with the project for a total price of $1,180,000. The two companies fell into a dispute over payments due under the contract. On 2 September 2002, solicitors acting for HVAC served on EEE a Creditors Statutory Demand pursuant to s 459E of the Corporations Law for payment of a debt said to be $526,659.03. This amount was described in the following way in a schedule to the Demand: "The debt is the sum of $526,659.03, being for construction work carried out by the Creditor for and on behalf of the Debtor at the Yatala Power Station site in Queensland, pursuant to an agreement between the Creditor and the Debtor made on or about April 2002 by the Debtors Purchase Orders YAT-070 and YAT-071 respectively, full particulars of which debt are set out in Annexure A to this Demand." The notice required payment within 21 days. No payment being made as required by the Demand and no action having been taken to set it aside, HVAC, on 17 October 2002, filed an application for the winding up of EEE on the ground of insolvency in that it had failed to comply with the Statutory Demand. 4 On 2 December 2002, EEE filed a notice of appearance and set out the grounds of its opposition to the winding up application in the following terms: "1. The defendant is able to pay its debts as and when they fall due, and is thereby solvent. 2. To the extent necessary, the defendant seeks leave under section 459S of the Corporations Act 2001(Cth) to rely on a genuine dispute as to part of the alleged debt the subject of the plaintiff's statutory demand dated 28 August 2002 as follows: (a) by the plaintiff's statutory demand the plaintiff claimed the defendant owed it the sum of $526,659.03; (b) the defendant admits it owes the plaintiff the sum of $286,920.70; (c) the defendant disputes the balance claimed of $239,738.33 and says there is a genuine dispute as to that amount." 5 The application was supported by an affidavit of Gary William Massey, the solicitor for EEE. It was based upon information given to him by James Kwok and Bill Lamont, the Manager Technical and Operations with EEE, who was said to have been personally involved in the matters the subject of the HVAC claim. This affidavit was superseded by an affidavit sworn by Mr Kwok and filed on 5 December. In that affidavit he admitted his company's indebtedness to HVAC in the sum of $286,920.70 but disputed the balance claimed of $239,738.33. He said: "The reason the admitted part of that claim has not yet been paid is that the defendant has been attempting to reach agreement as to the entire dispute and because the plaintiff retains the defendants' equipment and refuses to release that equipment until it is paid the full amount claimed. The defendant will pay the plaintiff the admitted sum of $286,920.70 within 7 days of the plaintiff agreeing to release the equipment upon the sum being paid." He said EEE had been paying the plaintiff pursuant to the contract to date on all undisputed amounts totalling approximately $410,000. 6 On 16 August, HVAC gave EEE a Notice of Default and Termination of the contract. As to the substance of the dispute, Mr Kwok said he was informed by Mr Lamont, and believed, that Mr Lamont required any demand by HVAC to be substantiated before payment was made. Mr Lamont had had several telephone conversations with Stephen Lazarakis, a director of HVAC, and required substantiation of his company's claims. In particular, he sought substantiation of the value of work completed and still in HVAC's workshop or delivered to site and erected on site. Site meetings were eventually arranged and held at Yatala on 11 and 19 September. On 11 September, Mr Lamont inspected works done by HVAC at its workshop. He did an assessment of the HVAC work and determined, using the pricing structure in HVAC's initial tender document, that the amount of the outstanding payment due to HVAC was $286,920.70. According to Mr Kwok's affidavit, Mr Lamont believed that his request to HVAC to substantiate its claim and subsequent meetings and discussions fulfilled EEE's obligations to comply with the Statutory Demand on the basis that the sums claimed had to be substantiated before payment could be made. 7 Mr Lamont emailed HVAC's project manager in Perth, Mr Gerachi, on 19 September and two weeks later telephoned Mr Lazarakis and asked why he had not received a reply. Mr Lazarakis phoned him back and told him Mr Gerachi had been instructed by Mr Zurhaar, a director of HVAC in Perth, not to reply because EEE had not responded to the Statutory Demand. Mr Kwok, in his affidavit, expressed the view that this explained why EEE did not apply to set aside the Statutory Demand and that it was reasonable for it not to do so in the circumstances. 8 Mr Kwok's affidavit also addressed the solvency of EEE. This was done largely by reference to the position of a related company, Energy Equipment Australia Pty Ltd (EEA), of which he is also sole director and shareholder. EEA was said to own substantial assets and funds in Australia. Its assets include two unencumbered pieces of land in Western Australia and New South Wales purchased in January 2002 and June 2001 for $770,000 and $68,090.91 respectively. It has an office in Parramatta and an apartment in Sydney which provide security for overdraft facilities of $400,000 and $450,000 respectively currently drawn to a total of $350,000. It has cash in the bank of $61,000 and "substantial plant and equipment valued at approximately $938,000." 9 EEA was said by Mr Kwok to be able to advance moneys to EEE to enable it to pay any debts owed by it including that part of the debt admitted to be owing to HVAC and, to the extent it might be payable, the balance of the debt claimed by HVAC. 10 EEE is said to be owed $5.4 million by EnviroStar. The latter company however is in voluntary administration. EEE's own assets, according to a "draft balance sheet" as at 1 April 2002, were said to be $8,186,238.03 with liabilities of $3,739,044.89. A profit and loss statement for EEE indicated total income for the year ended 30 June 2002 of $3,846,434 against expenses of $548,683, leaving a net profit of $3,297,751. 11 Notwithstanding the affidavits filed on behalf of EEE, on hearing the winding up application, the District Registrar did not consider that EEE should have leave, under s 459S of the Corporations Act, to oppose the application by reference to grounds upon which it could have applied to set aside the Statutory Demand. He found, in any event, that the affidavit material did not provide clear evidence of EEE's solvency. He held that by reason of its non-compliance with the Statutory Notice of Demand, EEE was deemed to be insolvent. He also observed that it appeared that it was actually insolvent by reference to its inability to pay the admitted part of HVAC's claim for many months. The District Registrar made the following orders on Friday, 6 December 2002: "1. Energy Equipment Engineering Pty Ltd (ACN 081 914 543) be wound up in insolvency under the provisions of the Corporations Act 2001. 2. Scott Darren Pascoe, an official Liquidator of Sims Lockwood, Level 24, Australia Square, 264 George Street, Sydney, be appointed as Liquidator for the purposes of the winding up. 3. The plaintiff's costs of the application be taxed and reimbursed in accordance with sub-section 466(2) of the Corporations Act 2001." 12 On the following Monday, 9 December, Mr Kwok, purporting to act on behalf of EEE, filed an urgent motion for review of the District Registrar's decision and for a stay of his orders pending determination of the review. The orders sought on the first return of the motion were: "1. James Kwok do have leave under section 471A(1)(d)(sic) of the Corporations Act 2001 to apply on behalf of the defendant herein for review by the Court or a Judge of the orders made by Registrar Jan on 6 December 2002, and for a stay of those orders pending determination of such application or until further order. 2. The time for service of this notice of motion be abridged. 3. The orders made by Registrar Jan on 6 December 2002 be stayed until 5.00pm on ______ December 2002. 4. This application be adjourned to _____am/pm on ____ December 2002. 5. The costs of today be reserved. 6. There be liberty to apply." The reference to s 471A(1)(d) should be a reference to s 471A(1A)(d). 13 The motion was supported by a further affidavit sworn by Mr Kwok. In that affidavit he claimed to have spoken to Alfred Wong, the Chairman of Greater Pacific Finance Pty Ltd, a substantial funds manager which was prepared to advance to the Energy Equipment Group the sum of $316,973.32 within forty-eight hours. That is now said to be the undisputed part of HVAC's claim. That money, according to Mr Kwok, would be paid to his solicitors' trust account with instructions that they pay it to HVAC's solicitors forthwith. A further sum of $209,685.71 would be advanced to the Energy Equipment Group by Greater Pacific Finance to be held in the trust account of EEE's solicitors for payment into court pending determination of the review. 14 Mr Kwok listed EEE's creditors, other than HVAC. According to his affidavit they are: (a) Jord Engineering $482,000 (b) Prior Industries $50,036 (c) Pegler Beacon $14,312 (d) Valveco $24,000 (e) Dynapumps $12,545 (f) Yokogawa $69,000 (g) RCR Tomlinson $72,000 (h) Northline $28,543 (i) AirEng $89,000 Mr Kwok undertook on behalf of EEA to pay them and to provide security for HVAC's costs. 15 Mr Kwok asserted that there is a genuine dispute as to the balance of the debt claimed by HVAC. He also said that the value of the equipment belonging to EEE but retained by HVAC is $289,000, being the value of the work done in fabricating that equipment by HVAC. He said that there would be prejudice to EEE if it were wound up. The prejudice appeared largely to relate to the position of EnviroStar and EEE's employees and subcontractors. 16 EnviroStar, as it turns out, is in voluntary administration. Mr Kwok says that he, on behalf of EEE, has arranged for funding of $4,500,000 to be provided to EEE by Investec Bank. He has presented a proposal to the administrators of EnviroStar which would see EEE borrow the $4,500,000 from Investec Bank and pay out the creditors of EEE and EnviroStar so that the power plant project could proceed to completion. He claimed that an order has been made in the Equity Division of the Supreme Court of New South Wales giving the administrators until 10 January 2003 to either accept the proposal or present an alternative to the creditors. If the winding up is not stayed, then the funding of the payment of the creditors of EnviroStar and the completion of the project will almost certainly not proceed. At the hearing of the motion for leave for Mr Kwok to apply for review on behalf of EEE and for a stay of the winding up, the Court was told by counsel for EEE that the undisputed part of the claim could be paid within forty eight hours and the disputed balance paid into court within two weeks. Mr Kwok offered no personal undertaking in relation to HVAC's costs of the proposed proceedings. Statutory Framework - The Corporations Act 2001 17 Part 5.4 of the Corporations Act relates to the winding up of companies in insolvency. Section 459A authorises the Court, on an application under s 459P "… order that an insolvent company be wound up in insolvency". Persons who may apply for such an order under s 459P(1) include "a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor)" (s 459P(1)(b)). Contingent or prospective creditors may only apply with leave of the Court (s 459P(2)(a)). 18 The condition on the power conferred on the Court to wind up a company in insolvency is that the company be insolvent. By operation of s 459C(2), which applies to applications under s 459P by force of s 459C(1), the Court must presume that a company is insolvent if one of a number of sufficient conditions is fulfilled. The first such condition, set out in s 459C(2)(a) is that "the company failed (as defined by section 459F) to comply with a statutory demand". The presumption, if applicable, "operates except so far as the contrary is proved for the purpose of the application" (s 459C(3)). 19 Section 459E provides that a person may serve on a company a demand relating to a debt or debts that are due and payable and which in total amount to at least the statutory minimum. The demand must specify the debt or debts and their amount or total amounts and must require the company to pay the amount or total amounts, or to secure or compound for that amount or total to the creditors reasonable satisfaction within twenty one days after service of the demand. It must be in writing and in a prescribed form and signed by or on behalf of the creditor (s 459E(2)). Except in the case of a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt or debts are due and payable by the company and that complies with the rules (s 459E(3)). 20 Section 459F specifies the circumstances in which a company is taken to fail to comply with a statutory demand. That section provides: "459F(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." A company may apply to the Court for an order setting aside a statutory demand served on it, but such application can only be made within twenty one days after the demand is served (s 459G(1) and (2)). 21 Section 459H applies to the case in which the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates and/or that the company has an offsetting claim (s 459H(1)). There is provision for the calculation by the Court of the substantiated amount of the demand having regard to any offsetting claim (s 459H(2)). Where the substantiated amount after deducting the offsetting total from the admitted total is less than the statutory minimum, the Court must set aside the demand (s 459H(3)). 22 Of importance in the present case is s 459S which provides: "459S(1) In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground: (a) that the company relied on for the purposes of an application by it for the demand to be set aside; or (b) that the company could have so relied on, but did not so rely on (whether it made such an application or not). (2) 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." 23 When a company has been wound up in insolvency or by the Court, there are disabilities affecting its officers which explain the application by Mr Kwok for leave to bring the present application on behalf of the company. Section 471A relevantly provides: "471A(1) While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company. (1A) Subsection (1) does not apply to the extent that the performance or exercise, or purported performance or exercise, is: (a) as a liquidator appointed for the purposes of the winding up; or (b) as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made; or (c) with the liquidator's written approval; or (d) with the approval of the Court." Subsections (2) to (4) of s 471A are not relevant for present purposes. 24 There is a specific power conferred on the Court by s 482 of the Corporations Act to stay or terminate a winding up. The relevant provisions for present purposes are: "482(1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. (1A) An application may be made by: (a) in any case - the liquidator, or a creditor or contributory, of the company; or (b) in the case of a company registered under the Life Insurance Act 1995 - APRA." Subsections (2) to (5) are not relevant for present purposes. Statutory Framework - The Federal Court of Australia Act 1976 and the Federal Court Rules 25 The power of the Registrar to make a winding up order is derived from s 35A(1) of the Federal Court of Australia Act 1976 (Cth) read with r 16.1 of the Corporations Law Rules. Section 35A provides, inter alia: "35A(1) Subject to sub-section (2), the following powers of the Court may, if the Court or a judge so directs, be exercised by a Registrar: . . . (h) a power of the Court prescribed by Rules of Court. . . . (5) A party to proceedings in which a Registrar has exercised any of the powers of the Court under sub-section (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the court to review that exercise of power. (6) The Court may, on application under sub-section (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised." 26 Rule 16.1 of the Corporations Law Rules provides: "16.1(1) For the purposes of paragraph 35A(1)(h) of the Federal Court of Australia Act 1976, if the Court or a Judge so directs, a Registrar may exercise a power of the Court: (a) under a provision of the Law mentioned in column 2, or a provision of these Rules mentioned in column 3, of an item in Part 1 of Schedule 2; or (b) under a provision of the ASICLaw mentioned in column 2, or a provision of these Rules mentioned in column 3, of an item in Part 2 of Schedule 2; (2) A decision, direction or act of a Registrar made, given or done under these Rules, may be reviewed by the Court or a Judge. (3) An application for the review of a decision, direction or act of a Registrar made, given or done under these Rules, must be made within: (a) 21 days after the decision, direction or act complained of; or (b) any further time allowed by the Court." Schedule 2 to the Rules in Item 48 thereby confers upon the Registrar power to make orders in relation to winding up applications including orders under s 461. 27 It is to be noted that the Corporations Law Rules continue to refer to the corporations law notwithstanding its replacement by the Corporations Act 2001. However the transitional provision, s 1407 of the Act provides: "1407(1) Subject to subsection (2), a reference in, or taken immediately before the commencement to be in, an instrument, other than: (a) an Act of a State, the Australian Capital Territory, the Northern Territory or Norfolk Island; or (b) an instrument made under such an Act; to: (c) an Act, or to regulations or some other instrument, that is part of the old corporations legislation (whether the reference is in general terms or in relation to a particular State or Territory in this jurisdiction); or (d) to a provision or group of provisions of such an Act, regulations or other instrument; is taken, after the commencement, to include a reference to the corresponding part, provision or provisions of the new corporations legislation (unless there is no such corresponding part, provision or provisions)." Whether Approval of the Court is Required Before a Director May Seek Review of a Winding Up Order made by a Registrar 28 In this case Mr Kwok invokes the power of the Court to review the decision of the District Registrar under s 35A(5) of the Federal Court Act. As appears from the motion it was assumed on his behalf, and no contention to the contrary was advanced, that he required leave of the Court, strictly the approval of the Court, to bring the application for review on behalf of EEE. Whether such approval is necessary depends upon the construction of s 471A. Much of the authority in that respect relates to appeals against the making of winding up orders. It is desirable first to consider that authority before turning to the question of an application for review under s 35A. 29 Prior to 23 June 1993 it was accepted that the directors of a company had power, in the name of the company, to institute and pursue an appeal against an order that the company be wound up. The power subsisted in spite of the otherwise disabling provisions of the companies legislation - Re Diamond Fuel Company [1879] 13 Ch D 400; Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd (No 2) (1987) 12 ACLR 331; Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365 at 383. 30 Section 471A of the Corporations Act as it now stands first appeared in the Corporations Law by amendment in 1992, which came into effect on 23 June 1993. The section disables officers of a company being wound up by the Court from performing or exercising any powers in that company. The term "officers of the company" is subsumed in the definition of the term "officers of the corporation" in s 57A(1)(a). That definition extends to the directors and the secretary of a company. 31 Following the enactment of s 471A there was a number of decisions which lent support to the view that, notwithstanding its terms, the directors retained a residual power after a winding up order was made to appeal against it in the name of the company - Aetna Properties Ltd (in liq) v GA Listing & Maintenance Pty Ltd (1994) 13 ACSR 422; Emanuele v Australian Securities Commission (1995) 63 FCR 54 and Object Design Inc v Object Design Australia Pty Ltd (1997) 78 FCR 60. 32 Young J in Aetna did not refer to s 471A. His Honour referred to the decision of Muirhead J in Arafura Finance Corporation and said he would follow that case and the authorities there relied on "… for the proposition that even after a winding up order has been made the directors have residual power to appeal against the orders and so to seek a stay of the order pending the appeal in the company's name" (Aetna at 424). The decision in Arafura however predated the enactment of s 471A. The case cannot therefore be regarded as authority for the effect of s 471A upon the residual powers of directors. 33 In Emanuele a number of companies which had been subject to winding up orders had previously been in administration and had executed deeds of company arrangement so that the directors could not, in the names of those companies, oppose the original winding up application. The primary judge had ordered that the directors be served with the winding up applications so they could appear and be heard as representing the boards of the companies. The Full Court approved this course and accepted that the directors had standing to appeal in their own names against the orders. In some cases the directors were not disabled from opposing the applications at first instance because their companies had not executed deeds of arrangement. In some of these cases provisional liquidators were appointed. The directors sought leave to appeal against those decisions, they being interlocutory in nature. Holding that the directors could have opposed the relevant applications and applied for leave to appeal in the names of the companies, the Court said at 61: "However, the fact that the appellants as directors have sought to exercise the rights of the companies in applying for leave to appeal is a procedural irregularity that could be readily cured by allowing the substitution of the companies as applicant if the applications on their merits would otherwise succeed." Their Honours did not refer to s 471A. It was not relevant to the standing of the directors to appeal and to apply for leave to appeal. Had any of the companies been substituted as parties after the granting of leave to appeal then no doubt s 471A could have been relevant. However it did not arise at the time of the Full Court's decision. It may be noted that the High Court dismissed an appeal from the decision of the Full Court, which appeal was taken on other matters - Emanuele v Australian Securities Commission (1997) 188 CLR 114. Like the decision in Aetna, the decision of the Full Court in Emanuele has nothing to say about the operation of s 471A in relation to the residual powers of directors. 34 Object Design, a judgment of Heerey J delivered in August 1997, decided that s 471A should not be read as excluding the long established residual power of directors to appeal in the name of the company against a winding up order "… the need for which is obvious as a matter of justice" (at 62). However the weight of subsequent authority is to the contrary. In Re Rock Bottom Fashion Market Pty Ltd (in liq) (2000) 2 Qd R 573, which was decided in November 1997, the Queensland Court of Appeal held that the section deprived directors of a company being wound up of any residual power they might previously have had to appeal against the decision. That decision was followed by the Court differently constituted in Vynotas Pty Ltd v Mystic Crystals Franchises (Aust) Pty Ltd [1999] QCA 473. Object Design was expressly considered but not followed by Owen J in Walker v Midlink Nominees Pty Ltd (2000) 22 WAR 318. Barrett J in Brolrik Pty Ltd v Sambah Holdings Pty Ltd (2001) 164 FLR 91 at 94-96 agreed with Owen J and the Queensland Court of Appeal in the Rock Bottom decision. In Rodgers v CJS Panels Pty Ltd [2001] VSC 470, Warren J followed Rock Bottom and Walker saying: "Having considered the authorities, it seems to me very clear that the position is that before an appeal against a winding up order can be determined, it is necessary for any appellant or prospective appellant to make application under s 471A of the Corporations Act." 35 In Helljay Investments Pty Ltd v Deputy Commissioner of Taxation (Cth) (1999) 74 ALJR 68, Hayne J dismissed an application by a director of Helljay Investments Pty Ltd to remove into the High Court an appeal from a winding up order against the company made by a Registrar of the Supreme Court of the Australian Capital Territory. The application was made on constitutional grounds not relevant for present purposes. In dismissing the application, his Honour referred to s 471A(1) of the Corporations Law (now s 471A(1A) of the Corporations Act 2001) and said at 73: "None of the exceptions mentioned in 471A(1) applies in this case. It follows that no director of Helljay has authority to prosecute the application brought in the company's name." And in Dooney v Henry (2000) 74 ALJR 1289 at 1295, Callinan J, in ordering a permanent stay of proceedings in which he had struck out the statements of claim, said: "There are other serious defects in the respondent's claims and action. The action has been brought by a natural person, a director, in order to seek relief in favour of, that is, effectively on behalf of, a company in liquidation. A director is not a proper party in any such proceedings. If there is to be any challenge to the winding up order it must be made by the company itself with leave pursuant to s 471A of the Corporations Law. 36 The decision in Object Design appears, with respect, to have been overtaken by later cases including the two decisions of the Queensland Court of Appeal, the decisions of single Judges of the Supreme Courts of New South Wales, Victoria and Western Australia and the observations made by Hayne and Callinan JJ in the two cases mentioned in the original jurisdiction of the High Court. In my opinion, it is clear that where a company has been the subject of a winding up order a director of the company seeking to appeal against it requires the approval of the liquidator or of the Court under s 471A to do so. In so holding, I do not exclude the possibility that the directors of a company may themselves have standing to appeal against a winding up order in their own names although the observations of Callinan J in Dooney v Henry seem inimical to that proposition. 37 In making the orders that I did in this case, I proceeded on the assumption that the requirement of the Court's approval is not affected by the character of the proceedings as an application for review of the Registrar's decision. The relationship between s 35A(5) of the Federal Court Act and s 471A of the Corporations Act was not explored in argument. 38 In Harris v Caladine (1991) 172 CLR 84, it was held that the Parliament could validly authorise a Federal Court to delegate the exercise of its judicial powers to an officer of the Court. It is a necessary condition of the validity of such a delegation that the control and supervision of the Court over the exercise of such delegated powers be real and effective so that they be seen to be an exercise of the jurisdiction and powers of the Court. Mason CJ and Deane J (at 95) posited two necessary conditions upon the valid delegation of some part of the jurisdiction powers and functions of a federal court (in that case the Family Court) to its officers. First, the delegation must not be so extensive that it could no longer be said, that as a practical as well as a theoretical matter, the judges constitute the court. Second, the delegation must not be inconsistent with the obligation of the court to act judicially. The decision of the officers of the court in the exercise of their delegated jurisdiction of powers and functions must be subject to review or appeal by a judge or judges of the court. Of the latter condition, their Honours said: "The importance of insisting on the existence of review by a judge or an appeal to a judge is that this procedure guarantees that a litigant may have recourse to a hearing and a determination by a judge. In other words a litigant can avail him or herself of the judicial independence which is the hallmark of the class of court presently under consideration." The nature of a review in such a case was considered by Dawson J who said at 125: "Upon a hearing by way of review of the decision of a Registrar the court is exercising its own discretion. There are not the same restrictions which exist when there is an appeal from a judge to whom a discretion is confided, rather than delegated…." Gaudron J made similar observations at 150-151, as did McHugh J at 163-164. Brennan and Toohey JJ dissented. 39 In Official Trustee in Bankruptcy v Nedlands Pty Ltd (In Liquidation) (2000) 99 FCR 554, Finn J considered the exercise by a registrar of this Court of the delegated power under s 35A of the Federal Court Act to wind up a company pursuant to the provisions of the Corporations Law. The case concerned a decision which the Court did not have jurisdiction to make for the reasons set out by the High Court in Re Wakim, Ex parte McNally (1999) 198 CLR 511. That case held that the purported conferral of jurisdiction on the Federal Court to deal with matters arising under the Corporations Laws of the various States was unconstitutional. The question before Finn J in Official Trustee in Bankruptcy v Nedlands Pty Ltd was whether the registrar's winding up order was void or, as a judicial decision merely voidable. His Honour held the latter to be the case. In concluding that the registrar's order was judicial his Honour said: "The Registrar, doubtless, had no actual power to make the order in question. Nonetheless in making it, he was purporting to exercise the original jurisdiction of the Court under a scheme of delegation that did not itself infringe the Constitution and which allowed for his decision in the very matter to be reviewed by a judge. . . . Where, as in the present case, the Registrar was purporting to exercise the Court's original jurisdiction subject to review by the Court and the order made purported to be one of the Court, I can see no reason for not giving like effect to that order as to an order made by a judge acting without jurisdiction." See also Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447. 40 The winding up order made by the District Registrar in the present case was made pursuant to delegated jurisdiction conferred on the Court by the Corporations Act 2001 which is a law of the Commonwealth made pursuant to referral of power by the States under s 51(xxxvii) of the Constitution to overcome the difficulties identified in Re Wakim. 41 There may conceivably be a question whether s 471A could validly restrict the power of an officer of the company, in the name of the company, to seek review by a judge of a registrar's order winding up the company. No such contention was advanced in this case and I am inclined to think that, given the power conferred on the Court by s 471A to approve the exercise by a director of such functions as are necessary to apply for review, the combined effect of s 35A and s 471A does not compromise the constitutionally required degree of judicial supervision and control of the registrar's delegated jurisdiction. I accept, however, that that constitutional imperative may be a relevant consideration in determining whether approval should be granted. 42 I have proceeded on the basis that approval of the Court is necessary for a director of a company to apply for review of a registrar's order winding up the company as it is to an appeal against a judge's order to that effect. Whether the Court Should Approve the Director's Application for Review of the Registrar's Winding Up Order 43 An appeal against a winding up order brought on behalf of a company by one of its directors may, if unsuccessful, expose the company to a costs order which will prejudice the position of creditors - Rodgers v CJS Panels Pty Ltd (supra). In Lane Cove Council v Geebung Polo Club Pty Ltd (Green as liq) (No 2) (2002) 41 ACSR 15 at 18, Barrett J regarded the protection of the resources of the company as "an indispensable requirement in any exercise of the court's discretion under s 471A(1A)(d)…". However proof of solvency of the company was not the only way of doing this: "Another possibility is for the court to sanction, as a condition of the grant of s 471A(1A)(d) approval, arrangements to ensure that the relevant costs are to be borne by the applicant for approval… on the basis that there will be no recourse to the assets of the company for reimbursement unless and until the winding up comes to an end." Plainly the protection of the assets of the company is a relevant factor which the Court is required to take into account. The weight to be given to that consideration and the mechanisms for minimising the risk to creditors will vary according to the circumstances of each case. It would be a mistake to encrust the Court's discretion with one-size-fits-all rules for the conditions that must attach to any approval given by the Court. In this case the application is made without prior approval but seeks such approval, albeit expressed in terms of leave, in the motion. That procedure provides no practical difficulty in my opinion as Court approval may be given nunc pro tunc after the lodging of an application - Brolrik Pty Ltd v Sambah Holdings Pty Ltd at 97-98 (Barrett J). 44 In considering whether approval should be given to a director to apply for review of a registrar's winding up order, the Court may have regard to the same factors as those to which it would have regard in relation to an appeal. However, a relevant factor in favour of the grant of leave in such a case is that the director seeks to invoke not the appellate jurisdiction of the Court but its original jurisdiction, that being a jurisdiction conferred pursuant to the constitutional imperative discussed by Finn J in Official Trustee in Bankruptcy v Nedlands Pty Ltd. 45 In the present case, and having regard to the urgency of the interlocutory application, I thought it appropriate to grant approval under s 471A(1A)(d) limiting it to that which was necessary to allow Mr Kwok to apply for the stay order in the name of the company. The Power to Grant a Stay Order 46 The motion sought a stay of the winding up order pursuant to O 37 r 10 of the Federal Court Rules. That rule provides simply: "The Court may stay execution of a judgment or order." However in the context of an application for review of a decision of the Registrar, a stay order is authorised under s 35A(6). In Trustees of the Franciscan Missionaries of Mary v Weir at 460 the Full Court, after referring to s 35A(6) said: "The last portion of this subsection is in unqualified terms, and we construe it as authorising the Court, if it thinks fit, to grant a stay order, in a bankruptcy case as in other cases, pending the completion of its review, as an appropriate order 'with respect to the matter with respect to which the power was exercised'." Their Honours also went on to agree with the view of Tamberlin J in Australian Guarantee Corporation Ltd v Collard (unrep Federal Court Tamberlin J No VG7397 of 1997, 30 September 1997) that s 23 of the Federal Court Act is adequate for the purpose. 47 The power conferred by s 35A(6) is incidental to the review process. In a sense it renders the power conferred by s 23 otiose in its application to review proceedings. However the latter power is itself an incident of the Court's jurisdiction. Section 482 of the Corporations Act is a general power to institute proceedings for a stay or termination which is not incidental to other proceedings. It is conditioned, in subs 482(1), upon an application being made to the Court. Section 482(1A) appears to limit applications for the exercise of that general power to applications by liquidators, creditors or contributories or, in the case of insurance companies, to APRA. The directors of a company seeking a stay of a winding up order pending review or appeal, and subject to approval under s 471A of the Corporations Act, may apply under s 35A(6) or s 23 of the Federal Court Act as the case may be. 48 The grant of a stay under s 35A(6) or s 23 is a matter for the discretion of the Court in the light of all the circumstances of the case. There is no rule confining the exercise of that discretion which requires special reasons to be shown for its exercise. In the statutory context of Part 5.4 of the Corporations Act however, the power is to be exercised with caution so as not unduly to delay the liquidator or hinder his or her capacity to carry out the duties imposed by the statute. There is therefore a clear onus on the applicant to make out a positive case - Re Warbler Pty Ltd (1982) 1 ACLC 323 at 328. 49 In addition to the general considerations which enjoin caution in the making of such orders, there are specific considerations relevant to the present class of case including: (a) any detriment or risk of detriment to creditors or contributories flowing from a stay; (b) the merits of the proposed review; (c) the current trading position and solvency of the company; (d) the prejudice to the company if a stay is not granted; (e) the legislative policy against delay to the liquidation process. Whether a Stay of the Winding Up Order should be granted. 50 The interests of the creditors and contributories, the solvency of the company and the merits of the company's application for review are necessarily linked in determining whether a stay should be granted. The merits of the application in this case fall under the shadow of the company's failure to either comply with or apply to set aside the Statutory Demand. The reasons advanced for that failure are unconvincing, namely that the company was attempting to reach agreement as to the entire dispute and because HVAC retained its equipment and refused to release that equipment until paid the full amount claimed. The company and its directors must have been aware of the consequences flowing from standing by, in the face of the demand, in the hope or expectation that the matter could be resolved by negotiation. In the circumstances, their assumption of the risk of non-compliance with the demand may be taken as indicative of a desire to delay reflecting an incapacity to marshal the resources necessary to meet even the undisputed portion of the debt. 51 The approach taken by EEE to the Statutory Demand was at odds with the scheme of Part 5.4 of the Corporations Act. That is "a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts unless they are raised promptly." - David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 270. It provides for a dispute about the existence of a debt to be resolved in an application to set aside the statutory demand based upon the debt. As Austin J said in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467 at 479, referring to the introduction of the statutory scheme in 1992: "The purpose of the reform was to reduce the occasions when disputes would arise about the debt at the hearing of the winding up application: Explanatory Memorandum to the Corporate Law Review Bill 1992 para 685. To that end, the provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands: Explanatory Memorandum, para 688. The scheme 'provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading up to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed) at an early stage, rather than after winding up proceedings have commenced': Explanatory Memorandum para 689." See also House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 14 ACLC 1,536. 52 Consistently with the legislative purpose the discretion under s 459S, which EEE tried to invoke before the District Registrar, must be exercised cautiously and sparingly notwithstanding that it is there as a "safety net" in the sense that there are special cases in which a dispute as to the existence of the debt may be litigated at the time of application for winding up in insolvency even if there has been no application to set aside the statutory demand under s 459G - Paliflex at 480. 53 Leave is not to be granted under s 459S(1) unless the ground which the company seeks to advance is material to prove that the company is solvent. This requirement has been interpreted variously. It has been interpreted as requiring that the debt upon which the statutory demand is based represents the difference between solvency and insolvency - Zan Holdings Pty Ltd v BayView Holdings Pty Ltd (1997) 15 ACLC 1238, a decision of Master Sanderson not approved (albeit obiter) by the Full Court of the Supreme Court of Western Australia in BayView Holdings Pty Ltd v Zan Holdings Pty Ltd (unrep 10/10/98). The observations of the Full Court were not followed by the New South Wales Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2001) 19 ACLC 532 at 539-560. It is not necessary for present purposes, which are concerned with the grant of a stay, to address those differences of view. I do, however, accept the force of the observations by Spigelman CJ in Switz where his Honour (with whom Handley JA and Giles JA agreed), referring to the balance of interests in the process adopted for resolution of disputed debts under Part 5.4 said (at 541-542): "The legislature has adopted a particular scheme which causes the balance to be drawn in a specific way. The circumstance that commercial injustices may, on some occasions, be caused to the debtor company by the operation of that scheme, may be offset by the commercial injustices that the continued operation of an insolvent company may cause to existing and, if permitted, increased or future creditors of such a company." The Chief Justice characterised the 1992 reforms as intended to minimise the opportunity for delay by ensuring that disputes as to debts were determined at an early stage and would not delay or prolong the hearing of the issue of solvency. Section 459S(2) should be given a strict construction in order that the purpose of the legislative scheme could best be served. 54 To the extent that EEE needs, on review, to rely upon s 459S to advance its challenge to the winding up order, its case is not strong. As observed earlier, its explanation for failing to comply with, or to apply to set aside, the Statutory Demand does not arm it with any strong ground for applying for leave under s 459S. 55 The evidence which EEE relies upon to establish solvency is not encouraging. It appears to depend largely on the asset position of a related company and a debt owed to it by another company in administration. In relation to that administration Mr Kwok has submitted a proposal to the administrators of EnviroStar which is dependent upon an advance from a third party. The terms upon which counsel for Mr Kwok proposed payment of the now undisputed portion of the debt and payment into Court of the balance indicated a significant difficulty in cashflow as the latter portion could not be paid before eleven days, albeit the first portion could be paid within forty eight hours. The source of the proposed funding had changed. In the affidavit in opposition to the winding up application Mr Kwok said EEA would be able to advance moneys to EEE to enable it to pay any debts owed by it including that part of the debt admitted to be owing to HVAC and, to the extent it might be payable, the balance of the debt owed to HVAC. On the whole of the material EEE has not disclosed, to this point, a strong case of solvency. 56 The interests affected by the stay application would include those of other creditors apart from HVAC which are listed earlier in these reasons and which total in excess of $309,000. 57 In my opinion, no case has been made for the stay order which is sought. Such an order, even if accompanied by the appointment of a provisional liquidator to protect the assets of the company, is likely to involve additional delay and expense in the administration of the winding up. Moreover there is at this point no personal indemnity offered in relation to the costs of the proposed review proceedings. In my opinion the stay should be refused and Mr Kwok should be required to pay HVAC's costs of the motion for the stay forthwith. The approval granted to Mr Kwok to make the present application in the name of the company will be revoked and the motion for review dismissed unless by 13 December 2002 he has lodged with the Registrar a bank guarantee in the sum of $10,000 by way of security for HVAC's costs of the motion, including costs incurred in respect of the claim for interlocutory relief. The motion will be set down for further directions on that day. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French .

Acting Associate: Dated: 9 January 2003 Counsel for the Plaintiff: Ms S Edwards

Solicitor for the Plaintiff: Tottle Christensen

Solicitor for the Defendant: Gary Massey & Associates

Date of Judgment: 10 December 2002 Date of Publication of Reasons: 9 January 2003