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[2025] NSWSC 290
General information, not legal advice.
Supreme Court of NSW
2025-03-31
Nixon J
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Medium Neutral Citation: In the matter of Kong & Kong Property Investment Pty Limited [2025] NSWSC 290
Hearing dates: 26 March 2025
Date of orders: 31 March 2025
Decision date: 31 March 2025
Jurisdiction: Equity - Corporations List
Before: Nixon J
Decision: (1) The Interlocutory Process filed by the Defendant on 13 February 2025 is dismissed.
(2) The Defendant is to pay the Plaintiffs’ costs of the Interlocutory Process filed on 13 February 2025, as agreed or assessed.
Catchwords: CORPORATIONS – winding up – winding up in insolvency – application for leave under s 459S of the Corporations Act – where company seeks to rely on dispute as to the existence of the debt the subject of a statutory demand – whether requirements for leave under s 459S are satisfied
Legislation Cited: Corporations Act 2001 (Cth) ss 459G, 459S
Cases Cited: David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265; [1995] HCA 43
Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113
Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161
House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527
In the matter of NA Investment Holdings Pty Ltd; Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282
In the matter of Yuan Tong Investments Pty Ltd [2017] NSWSC 910
Kay Investment Holdings Pty Ltd v North East Developments Pty Ltd (in liq) [2011] NSWSC 1121
L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180
Owners — Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412
Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962
Re New View Windows Pty Ltd (t/as Narellan Windows and Glass) [2020] NSWSC 1905
Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466
Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37
Vangory Holdings Pty Ltd [2015] NSWSC 546
Category: Principal judgment
Parties: Wen Min Dai ATF S & S Superannuation Fund (First Plaintiff)
Hai Hong Huang ATF S & S Superannuation Fund (Second Plaintiff)
Kong & Kong Property Investment Pty. Limited (Defendant)
Representation: Counsel:
A W Smith / I Tam (Plaintiff/Respondent)
S V Shepherd (Defendant/Applicant)
Solicitors:
JLT Lawyers (Plaintiff/Respondent)
Finn Roache Lawyers (Defendant/Applicant)
File Number(s): 2024/00318774
By an Interlocutory Process filed on 13 February 2025, the Defendant, Kong & Kong Property Investment Pty Limited, seeks leave pursuant to s 459S of the Corporations Act 2001 (Cth) (the Act) to oppose a winding-up application on grounds which it could have relied on for the purposes of an application to set aside the Plaintiffs’ statutory demand.
By way of overview, the Plaintiffs served a creditor’s statutory demand on Kong & Kong, demanding payment of the amount of a default judgment which had been entered against Kong & Kong in the District Court of New South Wales. Kong & Kong did not take any steps to set aside that statutory demand. The Plaintiffs then commenced the current proceeding, seeking an order that Kong & Kong be wound up in insolvency. Subsequently, orders were made by consent in the District Court setting aside the default judgment, and requiring pleadings to be filed in respect of the Plaintiffs’ claim. Kong & Kong wishes to contend, on the winding up application, that the Plaintiffs are not creditors of Kong & Kong and there is a genuine dispute about the debt claimed by them, such that the winding up application is an abuse of process. However, by operation of s 459S(1) of the Act, Kong & Kong may not, without the leave of the Court, oppose the winding up application on those grounds, by reason that those grounds could have been (but were not) relied on in an application to set aside the statutory demand. By the present application, Kong & Kong seeks such leave. As is the usual practice, this application for leave is brought in advance of the hearing of the winding up application, which is listed on 11 April 2025.
On 1 May 2024, the Plaintiffs commenced proceedings against Kong & Kong in the District Court, seeking the recovery of moneys said to be owing pursuant to a written loan agreement dated 19 July 2019 (the 2019 Loan Agreement).
On 16 July 2024, the Plaintiffs obtained default judgment against Kong & Kong in the sum of $188,481.18 (the Default Judgment).
On 23 July 2024, the Plaintiffs served a Creditor’s Statutory Demand on Kong & Kong (the Demand). The Demand stated that Kong & Kong owed the Plaintiffs the amount of $188,481.18, and the Schedule to the Demand identified that the amount claimed was the amount of the Default Judgment.
Kong & Kong did not comply with the Demand and did not, within the time period specified in s 459G of the Act, take any step to set aside the Demand.
On 28 August 2024, the Plaintiffs commenced this proceeding, seeking an order that Kong & Kong be wound up in insolvency. The Originating Process identified that the Plaintiffs relied on Kong & Kong’s failure to comply with the Demand.
On 28 October 2024, orders were made in the District Court, by consent, setting aside the Default Judgment, and setting a timetable for the filing of pleadings by the parties in relation to the Plaintiffs’ claim in respect of the 2019 Loan Agreement. The District Court proceeding is currently stayed pending the determination of the winding up application.
Kong & Kong disputes the Plaintiffs’ claim in respect of the 2019 Loan Agreement, and in particular, contends that the signature of its principal, Mr Geoffrey Kong, has been forged on that agreement. Each of the Plaintiffs has sworn affidavits in which they depose that the loan agreement by which the funds were initially advanced was signed by Mr Kong in their presence.
Various submissions were made about the loan claim, which do not need to be addressed here. In circumstances where the Default Judgment has been set aside, pleadings have been filed, and the claim in respect of the 2019 Loan Agreement will (subject to the determination of the Plaintiffs’ winding up application) be proceeding to a contested hearing, I have approached the current application on the basis that there is a genuine dispute as to the existence of the debt that is the subject of the Demand. In those circumstances, it is neither necessary nor desirable to make any further remarks regarding the strength of any of the contentions or evidence advanced by either party in respect of the Plaintiffs’ loan claim.
Kong & Kong relied on McLelland J’s observations in L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183 that proceedings by a person as creditor for the winding up of a company in insolvency will ordinarily be held to be an abuse of process where, relevantly, the application is made for some improper purpose (such as seeking to use the proceeding to coerce the company into paying an alleged debt without affording it a reasonable opportunity to ascertain or have it established that the debt is properly payable), or if issues will arise in the winding up proceeding of a kind inappropriate for determination in such proceedings (such as a substantial contest regarding the existence of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose).
Kong & Kong seeks to rely on those principles in opposition to the winding up application and, in particular, seeks to contend that the Plaintiffs are not creditors of Kong & Kong and that there is a genuine dispute about the existence of the debt, which should properly be resolved in the District Court.
Those are matters which Kong & Kong could have relied on in an application to set aside the Demand. However, no such application was brought. It follows that Kong & Kong cannot rely on those grounds to oppose the winding up application unless it obtains leave pursuant to s 459S of the Act.
In House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527, Brownie J held that a company could not avoid the operation of s 459S by contending that the winding-up application was an abuse of process because the debt of the person claiming to be a creditor was genuinely in dispute.
Where the ground relied on as giving rise to an abuse of process is a ground which could have been availed of to have a statutory demand set aside, s 459S precludes the ground being raised unless leave is obtained under that section: Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 at [20] (White J). It would defeat the purpose of Pt 5.4 of the Act if a company which has failed to set aside a statutory demand could, as a matter of right, dispute the plaintiff’s standing as a creditor on the hearing of the winding up application. Hence, it has been decided that, unless leave is given pursuant to s 459S, a company which has not applied under s 459G to set aside a statutory demand cannot dispute the applicant’s standing as a creditor: ibid at [21].
There was no dispute as to the relevant principles.
When a company is served with a statutory demand, it may apply to set that demand aside on the basis that, inter alia, there is a genuine dispute as to the existence of the debt. However, section 459G of the Act provides that an application to set aside a statutory demand may only be made within “the statutory period”, that is, within 21 days after the demand is served. The Court has no power to extend the time for such an application: David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265; [1995] HCA 43.
Section 459S of the Act provides as follows:
Company may not oppose application on certain grounds
(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.
In In the matter of Vangory Holdings Pty Ltd [2015] NSWSC 546 at [10], Black J observed that the matters relevant to an application for leave under s 459S are as follows:
whether there is a serious question to be tried on the ground sought to be raised;
the sufficiency of any explanation as to why that ground was not raised in an application to set aside the creditor’s statutory demand; and
whether the Court is satisfied that the relevant ground is material to proving whether the debtor is solvent.
His Honour commented (at [10]) that the discretion conferred by s 459S of the Act is to be exercised cautiously and sparingly and with regard to the purpose of Part 5.4 of the Act to provide for determination of any objections to a creditor’s statutory demand by an application under s 459G of the Act, rather than at the time of the winding up application.
As regards the first of the matters identified in Vangory, I have approached this application on the basis that there is a serious question to be tried regarding whether or not Kong & Kong is indebted to the Plaintiffs pursuant to the 2019 Loan Agreement.
As regards the second of those matters, the reasonableness of a debtor's conduct may be taken into account in considering the sufficiency of the reason why the ground was not raised earlier: Kay Investment Holdings Pty Ltd v North East Developments Pty Ltd (in liq) [2011] NSWSC 1121 at [73] per Ward J.
As regards the third of those matters, both parties referred to and relied on the statement of principles by Black J in In the matter of Yuan Tong Investments Pty Ltd [2017] NSWSC 910. The summary below is largely drawn from his Honour’s decisions in Vangory and Yuan Tong.
There are two approaches to the requirement in s 459S(2), which have been described as the “strict” approach and the “broader” approach.
The decision of the Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37 is considered the origin of the “strict” approach. In that case, Spigelman CJ (with whom Handley and Giles JJA agreed) observed (at [53]–[56]) that:
“By the time an application under s 459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s 459S(2) directs attention, in part, to what is it that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the court cannot be ‘satisfied’ of the mandatory precondition in s 459S(2). An objective element is introduced by the word ‘material’ but that can only be determined after identifying the company's contentions.
…
The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information as to the solvency of the company must be the company itself.”
In Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161 at [28], Barrett J appeared to favour a broader approach, formulating the test of materiality under s 459S(2) as requiring that the matter have “a capacity to have some influence or effect”. As Black J observed in Yuan Tong at [13], even that broader formulation requires that a finding of a genuine dispute in respect of the relevant debt would have an effect on a company's solvency, in the sense that it would make it less likely that the company was insolvent, or more likely that the company was solvent, if that debt was not owed.
In some cases, including In the matter of NA Investment Holdings Pty Ltd; Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282 (Ward J), judges at first instance have preferred the strict approach.
In other cases, including Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113, judges at first instance have taken a broader approach. In Ewen Stewart at [48], White J observed as follows:
“In short, the existence or non-existence of the plaintiff's debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company's solvency are to be advanced to the stage at which leave is sought under s 459S, so that the company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2).”
“There appears to be a dispute in the authorities concerning s 459S(2) about the appropriate test to be applied in determining whether the relevant ground (the dispute concerning the debt) is relevant to the solvency of the company seeking to oppose the winding up application. On the one hand, there are various authorities which are said to adopt a strict or narrow approach … This approach is said to require an applicant for leave under s 459S to prove that for a dispute concerning the debt to be material, it must be ‘the difference between solvency and insolvency’, or ‘pivotal’, ‘crucial’ or ‘determinative’ of solvency. That would require proof that if the disputed debt exists then the company will be insolvent, and that if the debt does not exist then the company will be solvent.
On the other hand, there are authorities that are said to favour a broad or less strict approach … This approach is said to be that the disputed debt need not be determinative of the company’s solvency. Rather, materiality will be established if there is evidence that the company would undoubtedly be insolvent if the debt was owed, as well as evidence that it ‘might be’ solvent if the debt is not owed.”
The discretion under s 459S must be exercised with the policy of Pt 5.4 of the Act firmly in mind. Even where the existence of the debt is material to the proof of solvency, sufficient reason must be shown as to why leave should be given for the company to be able to raise the dispute about the debt on a winding-up application when the scheme of Pt 5.4 provides that such disputes, in the ordinary course, be resolved on an application under s 459G: Radiancy at [65].
In the present case, Mr Kong, who is the sole director of Kong & Kong, acknowledged that he received the Demand. He gave the following explanation for his failure to cause Kong & Kong to make an application to set aside the Demand:
“When I received the Statutory Demand, I did not understand what I was supposed to do with it, because I had never received any documents prior to the Statutory Demand and I did not understand why Kong & Kong was being asked to pay $188,481.18.”
There are two elements to this explanation: first, that Mr Kong did not understand the basis for the Plaintiffs’ claim, having “never received any documents” prior to the Demand; and secondly, that Mr Kong did not understand what “to do with” the Demand.
As regards the first matter, Mr Kong had received communications from both the Plaintiffs and the Plaintiffs’ solicitor, prior to the issue of the Demand, regarding the grounds on which the Plaintiffs were demanding payment from Kong & Kong. In particular:
On 16 November 2023, the First Plaintiff, Mr Wen Min Dai, sent a text message to Mr Kong stating that:
“up to July 2023, the loan is $189,790.38, Wen Min dai & hai hong Huang Superfund between kong & kong property investment P/L”
This message referred to the amount then claimed to be outstanding; identified the basis of the claim (namely, a loan); and named the parties to the loan (the Plaintiffs and Kong & Kong). Mr Kong replied to this message, stating: “I will do my best to help you solve this problem”.
“According to the [2019] Loan Agreement, the terms of the Agreement include the following:
a. our clients to lend Kong & Kong the sum of $129,629.00 (‘principal sum’);
b. Kong & Kong to pay our clients interest in the sum of $12,629.00 (‘interest’);
c. Kong & Kong to repay the principal sum and interest on 18 July 2020;
d. Kong & Kong to pay our clients interest calculated on the principal sum at 10% pa in the event that Kong & Kong failed to repay our clients the principal sum and interest by 18 July 2020.
We are further instructed [by] our clients that Kong & Kong failed to repay our clients the principal sum and interest by 18 July 2020.
We are also instructed that despite our clients’ previous demands for payment of the principal sum and interest, Kong & Kong failed to repay the same [to] our clients to date and satisfactory settlement agreement regarding the same has not been reached.
Accordingly, our clients have no alternative but to commence legal proceedings against Kong & Kong for damages resulting from the breach of the Loan Agreement unless the total sum of $142,592.32, being the principal sum and interest, is received in full within seven (7) days.”
Mr Kong acknowledged that he received this letter. He plainly read it and understood its contents, as he deposed that he “responded to [the Plaintiffs’ solicitor] about three or four days later” (although the Plaintiffs’ solicitor gave evidence that no such response was received).
I accept Mr Kong’s evidence that he was not aware that the District Court proceeding had been commenced. However, in light of the matters set out above, I do not accept his evidence that, when he received the Demand from the Plaintiffs’ solicitor, “I did not understand why Kong & Kong was being asked to pay $188,481.18.” Having regard to his prior communications with the Plaintiffs, he was well aware of the basis on which the Plaintiffs asserted that Kong & Kong was indebted to them.
As regards Mr Kong’s evidence that he “did not understand what [he] was supposed to do with [the Demand]”, the sufficiency of this explanation for his failure to take any step in response to the Demand must be assessed in light of the following matters:
There was no evidence to the effect that Mr Kong has any difficulty reading or understanding English. Each of his affidavits was prepared in English and was not translated. His Counsel conceded that Mr Kong was capable of understanding the Demand “to the same extent [as] any layman uninformed in these matters”.
The Demand was in the prescribed form, including the following statements:
“4. The Creditors may rely on a failure to comply with this demand within the period for compliance set out in subsection 459F(2) as grounds for an application to a Court having jurisdiction under the Corporations Act 2001 for the winding up of the company.
5. Section 459G of the Corporations Act 2001 provides that a company served with a demand may apply to a Court having jurisdiction under the Corporations Act 2001 for an order setting the demand aside. An application must be made within the statutory period after the demand is served and, within the same period:
(a) an Affidavit supporting the application must be filed with the court; and
(b) a copy of the application and a copy of the Affidavit must be served on the person who served the demand.
| A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.” |
It must be inferred that Mr Kong read and understood those statements.
The Demand was served on 23 July 2024. In that same month, Mr Kong had engaged solicitors to represent Kong & Kong in other proceedings in this Court. Mr Kong did not offer any explanation as to why, if he had any difficulty in understanding the basis for the claim made in the Demand or “what [he] was supposed to do with” the Demand, he did not raise this issue with the solicitors which Kong & Kong had retained at around the same time as the Demand was received.
The question of Kong & Kong’s failure to respond to the Demand needs to be addressed in the context that the Demand itself emphasised the serious consequences that might follow from a failure to respond to it, including that Kong & Kong might be placed in liquidation: Vangory at [21], referring to Soundwave at [30]. As Wigney J observed in Soundwave at [33], if “inattention, want of care, inactivity and lack of urgency … could provide a satisfactory explanation for a failure to comply with or set aside a statutory demand, the statutory scheme in relation to statutory demands would be significantly undermined”. Accordingly, the evaluation of the sufficiency of Mr Kong’s explanation as to why an application was not made to set aside the Demand on the ground now asserted involves an evaluation of the reasonableness of Kong & Kong’s conduct in the period when such an application might have been made: Kay Investment Holdings at [73]; Vangory at [10].
In circumstances where:
Mr Kong was aware of the basis on which the Plaintiffs were asserting that Kong & Kong was indebted to the Plaintiffs;
Mr Kong received and read the Demand, including the statements set out above regarding the consequences of not taking any step in response to the Demand; and
Mr Kong had, at the time the Demand was served, retained lawyers to represent Kong & Kong in other proceedings;
I do not consider that it was reasonable for Kong & Kong simply to ignore the Demand.
The fact that the Demand was based on the Default Judgment, which has now been set aside, does not mean that the presumption of insolvency, which arose (pursuant to s 459C(2) of the Act) on failure to comply with the Demand, ceases to apply.
In Owners — Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412, a statutory demand was issued on the basis of a default judgment in the Local Court, which the company neither complied with nor set aside. The creditor brought a winding up application. At the time of the hearing of that application, there was an appeal pending in the District Court from the Local Court’s decision not to set aside the default judgment. Austin J explained (at [28]) that even if the default judgment had been set aside prior to the winding up application, that would not have been relevant to the application before him:
“It seems to me that the setting aside of the default judgment of the Local Court, if it were to occur now, just before my decision, would make no difference to the determination I have to make. The defendant would still have failed to seek to set aside the statutory demand and the presumption of insolvency would still have arisen, even if the foundation of it had been undermined. Once the presumption of insolvency has arisen and the hearing of the winding up application has begun, the focus of the court’s attention must be on whether the presumption of insolvency has been rebutted, that is whether it has been shown that the company is solvent. …”
“It seems to me that, where a winding up application is brought on the basis of a debt arising from the supply of goods or services, that debt is the subject of a default judgment, and that default judgment is later set aside, the presumption of insolvency has still arisen from a failure to comply with a creditor’s statutory demand and the focus in the application should be on the company’s solvency.”
Accordingly, although the Default Judgment has now been set aside, it remains the case that there is a presumption of insolvency by reason of Kong & Kong’s failure to comply with or set aside the Demand, and that Kong & Kong will have the onus, at the hearing of the winding up application, of rebutting that presumption.
As Spigelman CJ observed in Switz at [53], section 459S(2) directs attention, in part, “to what it is that the company intends to prove [in order to rebut the presumption of insolvency] and how it intends to prove it”: the objective element “introduced by the word ‘material’ … can only be determined after identifying the company’s contentions”.
Kong & Kong has not filed any expert evidence in defence of the winding up application. Instead, Kong & Kong relies on the evidence of Mr Kong in seeking to rebut the presumption of insolvency.
The key propositions which Kong & Kong advances, in reliance on Mr Kong’s evidence, are as follows.
Leaving aside the amount claimed by the Demand, and other alleged debts which are the subject of pending proceedings in this Court, “the only other debt” of Kong & Kong is the amount of around $4.118m which is owed to National Australia Bank (NAB) and is secured by a mortgage over eleven properties owned by Kong & Kong (the K&K Properties). Kong & Kong has never missed any mortgage payments to NAB.
Kong & Kong earns rental income of approximately $24,400 per month from ten of the K&K Properties, and Kong & Kong has received an offer to rent the remaining K&K Property for $3,200 per month.
The K&K Properties have a total estimated value in the range of $8.108m to $9.017m (that is, some $4m-$5m above the amount of the NAB debt). Mr Kong took steps in November 2024 to put six of the K&K Properties on the market and his real estate agent has been in negotiations with a potential buyer.
Mr Kong has the capacity to loan money to Kong & Kong if it is ever in a position where it requires assistance to pay its debts, including because:
(a) he owns a property worth approximately $1.127m to $1.35m, in respect of which a sum of $960,000 is owing to NAB; and (b) he is sole director and shareholder of Cantonese Trade Fair Australia Pty Ltd (CTF), which owns properties which have a total estimated value in the range $3.106m to $3.937m. Those properties are mortgaged to NAB, with the balance presently owing being around $1.487m. CTF does not otherwise have any other debts.
In setting out those propositions, I express no view on whether any of those propositions will be established at the hearing of the winding up application, or on the admissibility or weight of the evidence advanced in support of those propositions. Those are matters for determination on the winding up application.
The question for present purposes is whether, having regard to the contentions which Kong & Kong intends to advance and establish on the winding up application, the matters which it now seeks leave to raise on that application are “material to proving that the company is solvent”: s 459S(2) of the Act.
The proposition that Kong & Kong’s only debt (leaving aside the amount claimed in the Demand and claims disputed in pending proceedings) is its debt to NAB depends, in part, on establishing that Kong & Kong’s financial statements, which were signed by Mr Kong, are incorrect.
In particular, the financial statements of Kong & Kong for the financial year ending 30 June 2024, which were signed by Mr Kong on 9 November 2024, reported that Kong & Kong had two “current liabilities” as at 30 June 2024, namely:
a “Mortgage Loan”, being the loan from NAB, in the amount of $4,118,125; and
a “Private Loan” in the amount of $2,066,687.50.
In signing the financial statements, Mr Kong declared that those statements “presented fairly the company’s financial position as at 30 June 2024 and its performance for the year ended on that date in accordance with the accounting policies described in Note 1 to the financial statements”.
In his affidavit of 28 November 2024, Mr Kong stated that he had searched through the Kong & Kong company files for information relating to the “Private Loan”; that he “cannot locate any evidence that Kong & Kong borrowed those funds”; that he had no recollection of those funds being borrowed; and that he believed the inclusion of the “Private Loan” to be an error. He further deposed that, although Kong & Kong’s accountant was informed of Mr Kong’s view that this was an error, the accountant was “not comfortable in removing this entry” from the 2024 financial statements, in circumstances where it had appeared in previous financial statements. In his affidavit of 13 February 2025, Mr Kong stated that he was retaining a new accountant for Kong & Kong in order to resolve this issue, and that he disputes the loan of $2,066,687.50.
Counsel for Kong & Kong submitted that the evidence set out above established that “the $2m debt is an illusory debt, that it’s not there”.
I do not express any view on whether the evidence set out above is sufficient to prove that Kong & Kong does not have a current liability in the amount of $2,066,687.50. That is an issue for the hearing of the winding up application.
As regards the propositions set out above regarding Kong & Kong’s assets, Kong & Kong’s ability to realise those assets, and Mr Kong’s capacity to loan money “if Kong & Kong is ever in a position where it requires assistance to pay its debts”, it is difficult to see, in the light of those propositions, the basis on which it is contended that any dispute about the debt claimed in the Demand “is material to proving that [Kong & Kong] is solvent”: s 459S(2) of the Act. This was also acknowledged by Counsel for Kong & Kong:
“HIS HONOUR: The suggestion is the company has an ability to realise these properties, and I should take those into account in solvency. And also the company has the support of its sole director, and that he has capacity. Then either those matters will be found and establish solvency, or they won't. But it is just hard to see how the $200,000 debt makes a difference.
[COUNSEL FOR DEFENDANT]: I take your Honour's point.”
The thrust of the propositions which Kong & Kong proposes to advance in order to rebut the presumption of insolvency is that, having regard to its debt position (which is said to exclude the “Private Loan” of around $2.066m), its assets, its income, and the capacity and willingness of Mr Kong to support the company, Kong & Kong is solvent regardless of whether or not the debt claimed by the Plaintiffs is owed. Where a company claims it is solvent, even if it owes the debt in question, the existence or non-existence of the debt is not material to proving that the company is solvent: Ewen Stewart at [48]; Hanson Construction at [30].
The “strict” approach to s 459S has been said to require that the applicant for leave prove that the debt is the “difference between solvency and insolvency”, or that it is “crucial” to or “determinative” of solvency, such that if the disputed debt exists then the company will be insolvent, and if the debt does not exist then the company will be solvent: Soundwave at [36]. No such proposition was advanced by Kong & Kong.
In its written submissions, Kong & Kong referred to and relied on White J’s observation in Radiancy at [64] that materiality will be established if there is evidence that the company “is undoubtedly insolvent” if the debt was owed, as well as evidence that it “may be solvent” if the debt is not owed. This has been described as an expression of the “broader” view of s 459S(2) (see Soundwave at [37] per Wigney J).
However, in submissions, Counsel for Kong & Kong frankly acknowledged that no proposition was advanced to the effect that Kong & Kong “is undoubtedly insolvent” if the debt is owed:
“HIS HONOUR: … I am just going to the way you put it …. in your submissions, paragraph six, the materiality of the alleged debt is established if the [company] is undoubtedly insolvent if [the debt was owed], and may be solvent if the debt is not owed.
[COUNSEL FOR KONG & KONG]: Yes, your Honour.
HIS HONOUR: I mean, you are not putting to me any proposition that the company is undoubtedly insolvent if the debt is owed.
[COUNSEL FOR KONG & KONG]: No, your Honour. …”
“…the point we seek to make is that the way the company runs at the moment with the cash flow that it needs to meet its debts and liabilities when it falls due, Mr Kong is able to assist the company. And to support that contention, Mr Kong has property that can be called on. Mr Kong effectively supports the company for those purposes. If, however, the company were to get a debt out of the ordinary, such as a $200,000 liability arising from loan agreements which are being hotly contested, the company without that support of the individual might not be able to meet its debts and liabilities. That is simply the point, your Honour.”
This underlines that, having regard to the manner in which Kong & Kong puts its case on solvency, what is material to solvency is not the existence of the debt claimed by the Plaintiffs, but rather the willingness and capacity of Mr Kong to support the company.
A similar situation arose in Yuan Tong. In that case, the company (YTI) contended that it was solvent because of the support of its current director (Ms Yang), her husband (Mr Yuan) and associated entities, whether or not the debt claimed in the statutory demand was owed. Black J held that, in those circumstances, the question of whether or not the claimed debt was owed was not material to proving solvency, on either the “strict” or “broader” approach to the test in s 459S. His Honour said (at [15]-[16]):
“In order to succeed, YTI must satisfy the Court that the grounds on which it disputes the claimed debt… are material to proving that it is solvent, for the purposes of s 459S of the Corporations Act. I am not satisfied of that matter because it seems to me that YTI's solvency depends wholly on the adequacy of financial support to it by Mr Yuan, Ms Yang and associated entities. If that support is sufficient to establish solvency, as evidence led by YTI seeks to establish, then YTI is solvent even if the debt claimed in the Demand is owed. Indeed, Ms Yang specifically leads evidence to that effect. If that support is not sufficient, then YTI is likely insolvent irrespective of whether the debt claimed in the Demand is owed. The necessary consequence of that analysis, on which I will expand below, is that the question whether the debt is owed … is immaterial to YTI's solvency, since YTI would either be solvent, or insolvent, having regard to the adequacy of its directors’ and associated entities’ support for it, irrespective of whether that debt is owed.
Mr El-Hage submits that the existence of the debt to Radcliffe Lane may affect the ability of YTI to establish its solvency, in the sense that it would more readily establish solvency if the debt is not owed. That submission does not reflect YTI's case, as articulated in the evidence, which is that it could repay the debt claimed by Radcliffe Lane and all other debts owed by it with the support of Mr Yuan, Ms Yang and its associated entities. If the narrower approach in Switz v Glowbind above were adopted, that would also not be sufficient to establish materiality for the purposes of s 459S(2) of the Act, where YTI contends it is solvent in any event. However, even on the broader approach, it does not seem to me that that matter would lead to a finding that the debt is material to YTI’s solvency.”
For the reasons set out above, Kong & Kong has not established that any dispute about the existence of the debt claimed in the Demand is material to proving the solvency of Kong & Kong. It follows, pursuant to s 459S(2) of the Act, that its application for leave must be refused.
Even if Kong & Kong had established materiality, I would not, in the exercise of the discretion under s 459S(1) of the Act, have granted leave to Kong & Kong having regard to my findings that its conduct in failing to take any step in response to the Demand was unreasonable and that no sufficient explanation has been given for its failure to make an application to set aside the Demand.
Accordingly, I make the following orders.
The Interlocutory Process filed by the Defendant on 13 February 2025 is dismissed.
The Defendant is to pay the Plaintiffs’ costs of the Interlocutory Process filed on 13 February 2025, as agreed or assessed.
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David Grant & Co Pty Ltd
Westpac Banking Corp
(1995) 184 CLR 265
(2000) 48 NSWLR 661