John Shearer Limited v Gehl Company

REASONS FOR JUDGMENT HIS HONOUR: The applicant, Eumina Investments Pty Ltd ("the Company") is indebted to the respondent, Westpac Banking Corporation ("Westpac"), in the sum of $42,000. That sum ("the Debt") is owing pursuant to an order of this Court made on 28 October 1997 by Beaumont J. His Honour ordered the Company to pay Westpac's costs of proceedings commenced in the Court in 1994. The proceedings were dismissed with costs but without prejudice to the Company's right to bring fresh proceedings as so advised. It is common ground that that order has not been satisfied. On 30 April 1998, Westpac served on the Company a demand pursuant to section 459E of the Corporations Law ("the Law") requiring the Company to pay the sum of $42,000 within 21 days of service or to secure or compound for that amount to Westpac's reasonable satisfaction. The Company has applied to the Court for an order under section 459G(1) setting aside that demand. It is desirable to state briefly the legislative framework within which that application comes to the Court. Section 459P(1)(b) of the Law provides that a creditor may apply to the Court for a company to be wound up in insolvency. Under section 459A, on an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. Under section 459C, where such an application is made, the Court must presume that the company is insolvent if, during or after the three months period ending on the day when the application was made, the company failed, as defined by section 459F, to comply with a statutory demand. Under section 459F 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. Under section 459F(2), the period for compliance with a statutory demand is 21 days after the demand is served unless the company applies, in accordance with section 459G, for an order setting aside the demand. If a company applies in accordance with section 459G and the Court makes an order that extends the period for compliance with the demand, the period for compliance is the period specified in the order. Otherwise, the period for compliance is the period ending seven days after the application under section 459G is finally determined or otherwise disposed of. Under section 459K, where there is in force an order setting aside the demand, the statutory demand has no effect. Thus, if an order is not made setting aside the statutory demand of 30 April 1998, the Company will be taken to have failed to comply with that statutory demand seven days after this application is finally determined or otherwise disposed of. Section 459H(1) of the Law relevantly provides that section 459H applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence of a debt to which the demand relates; (b) that the company has an offsetting claim. If section 459H applies, the Court must, under section 459H(2), calculate whether the admitted amount of the debt to which the demand relates, after deducting any offsetting claim, is less than the sum of $2000. If so, under section 459H(3), the Court must set aside the demand. In addition, section 459J provides that the Court may set aside a demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. Under section 459L, where, on an application under section 459G, the Court does not make an order under section 459H or section 459J, the Court must dismiss the application. The term "offsetting claim" is defined in section 459H(5) as meaning: a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates). The Company contends that it has a genuine claim against Westpac which far exceeds the amount of the Debt. The claims which were the subject of the proceedings dismissed by Beaumont J were subsequently reasserted in proceedings brought in the Commercial Division of the Supreme Court of New South Wales. Those proceedings were commenced on 21 February 1997. They were heard in June 1997 by Rolfe J who, on 20 June 1997, dismissed the proceedings with costs. The Company subsequently lodged an appeal to the Court of Appeal of New South Wales. On 18 March 1998, the Court of Appeal dismissed the appeal and ordered that the Company pay Westpac's costs of the appeal. Thus, on the basis of the result of the proceedings between the Company and Westpac to date, there is a determination by the Supreme Court of New South Wales, both at first instance and on appeal, that the Company has no claim against Westpac. However, on 22 April 1998, the Company lodged an application for special leave to appeal to the High Court of Australia from the decision of the Court of Appeal. The primary question before me is whether, in those circumstances, it can be said that the Company has a genuine claim against Westpac within the meaning of section 459H(5) of the Law. In order to show that the Company's claim is genuine, it must be shown to be put forward in good faith and there must be something more than a mere assertion (see John Shearer Limited v Gehl Company (1995) 60 FCR 136 at 143). The references in section 459H to the Court being "satisfied" that there is a "genuine" dispute or that the Company has a "genuine" claim have been the subject of considerable judicial consideration as summarised by Lindgren J in Chase Manhattan Bank Australia Limited v Oscty Pty Limited (1995) 17 ACSR 128 at 135-6. As Lindgren J observed, their meanings have been illuminated by analogies found in applications for injunctions to restrain the commencement, advertisement or prosecution of winding up proceedings predating the enactment of section 459G. They have been further illuminated in the opposing of a notional application by the person who served the statutory demand for summary judgment against the company, the subject of the demand. Lindgren J concluded, consistently with the cases to which he referred, that the question involves considering whether the Court was satisfied that there is a "serious question to be tried" or an "issue deserving of a hearing" as to whether or not the relevant company has a claim. Lindgren J, however, was not considering the circumstances which have arisen in the present case. That is to say, in the cases considered by Lindgren J, there had been no judicial determination of the question as between the company and the maker of the demand as to the existence of the alleged debt. That question, however, was considered by McLelland CJ in Eq. in Barclays Australia (Finance) v Mike Gaffikin Marine (1996) 21 ACSR 235. The circumstances of that case were similar to those presently under consideration except that the issue was whether there was a genuine dispute about the existence of a debt. In that case an order for the payment of costs had been made against the relevant company and another party. While the company relevant had not lodged an appeal against that order, the other party had. The company contended before McLelland CJ in Eq. that, because of the possibility that on the hearing of the appeal by the other party the order against the company might be set aside, there was a genuine dispute as to the existence of the debt. As in the present case, the debt which was the subject of the demand before McLelland CJ in Eq. was one arising from an order for the payment of costs made by a superior court. In the present case, however, the Company does not suggest that there is any dispute as to the existence of the Debt because there has been no appeal from the order made by Beaumont J nor any application for a stay of that order. Unless I were convinced that the decision of McLelland CJ in Eq. was wrong, I would follow his decision if it is appropriate (see Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 492). In any event, I respectfully agree with the views expressed by McLelland CJ in Eq. While McLelland CJ in Eq. was concerned with the expression "genuine dispute" and I am concerned with the expression "genuine claim", the notion of "genuineness" must be the same in both expressions. Accordingly, notwithstanding the distinction between the case before McLelland CJ in Eq. and that before me, I consider that the observations of McLelland CJ in Eq. are apposite to the question before me. The effect of the determination of the Court of Appeal in dismissing the appeal from the decision of Rolfe J dismissing the Company's claim against Westpac is that, as at the date of service of the demand, as at the date of commencement of these proceedings and as at today, it has been determined that the Company has no claim against Westpac. It is not open to the Company to contend to the contrary because of the doctrine of res judicata since a superior court has conclusively determined that the Company has no claim (see Spencer Bower, Turner & Handley, Res Judicata, 3rd Ed., Butterworths, 1996, paragraph 167, page 76). Thus, until the order of Rolfe J dismissing the Company's claim has been set aside, it is not open to any other court to entertain that claim. Nor, as at any of the three times referred to above, could the Company bona fide maintain as against Westpac that it has such a claim. The only bona fide claim which the Company has against Westpac is its claim for special leave to appeal from the decision of the Court of Appeal dismissing its appeal. Westpac contends that the Company has little or no prospect of success in obtaining special leave or succeeding in any appeal if leave were granted. Emphasis is placed by Westpac on the fact that the decision of the Court of Appeal was unanimous. It is asserted that the factual findings made by the Court of Appeal and Rolfe J are overwhelming in establishing that there was no breach of trust as alleged by the Company in the proceedings. However, assuming, contrary to that contention, that the Company's application for special leave has reasonable prospects of success and that the Company has reasonable prospects of succeeding on appeal if leave were granted, that would establish only that the claim for special leave might be characterised as a genuine claim. The determination of Rolfe J, however, conclusively determines, as between the Company and Westpac, that there is no money recoverable by the Company from Westpac arising out of the subject matter of the proceedings before Rolfe J. For those reasons, I consider that the Company does not have a genuine claim against Westpac. It would follow that section 459H(1) does not apply and, unless there is some other basis for setting the demand aside, the Court is bound by section 459L to dismiss the application. The only other possible basis for setting the demand aside is section 459J(1). There is no suggestion that section 459J(1)(a) has any relevance. However, section 459J(1)(b) appears to me to have relevance in the present context. It may be that "some other reason" within the meaning of section 459J(1)(b) is something other than defect in a demand, the existence of a genuine dispute or the existence of an offsetting claim. The language of section 459J(1)(a) indicates that section 459J is concerned with the possibility of injustice if a statutory demand is permitted to stand with the consequence of the presumption of insolvency which is then compelled by section 459C(2). However, the discretion under section 459J(1) may be exercised in favour of a company even without showing that substantial injustice would otherwise be caused (see the observations in Hoare Bros Pty Ltd v DCT (1996) 135 ALR 677 at 691). One circumstance where it may be unjust for a demand to stand, in my opinion, is where there is a judgment or order which precludes a contention that there is a genuine dispute or an offsetting claim but there is on foot a bona fide appeal from that judgment or order. In those circumstances, the Court may, if justice requires, and subject to the possibility of imposing conditions as contemplated by section 459M, set aside a demand which is based on the judgment or order which is subject to appeal or in respect of which, if an appeal succeeds, there would be an offsetting claim. A statutory demand can be likened to a bankruptcy notice. However, one significant difference is that it is open to a court of bankruptcy to go behind a judgment not only in considering a bankruptcy notice but also on the hearing of a petition. However, the effect of section 459S of the Law is that, in so far as an application for a company to be wound up in insolvency relies on a failure 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). That provision is designed to ensure that any question as to the existence of a genuine dispute or an offsetting claim is determined before any winding up application is lodged. It is, in my opinion, appropriate for a Court to exercise the discretion conferred by section 459J(1)(b) where the Court is satisfied that there is an appeal based on reasonable and arguable grounds which, if successful, would result in the existence of an offsetting claim. The expression "reasonable and arguable grounds" is suggested by the decision of the Full Court in Ahern v DCT (1987) 76 ALR 137 at 148. In Barclays Australia v Mike Gaffikin Marine Pty Limited McLelland CJ in Eq. expressed the view that dependency of the appeal in that case would not of itself provide any sufficient reason for setting aside the demand under section 459J(1)(b). His Honour cited Hoare Brothers Pty Ltd v D.C.T. (1995) 16 ACSR 213 and Wilden Pty Ltd v Greenco Pty Ltd (1995) 13 ACLC 1039 as support for that conclusion. His Honour, however, did not give any detailed reasons for that view. In Hoare Bros, Olney J of this Court observed (at page 219) that the general flavour of section 459J is one of a section which gives the Court a discretion to set aside a statutory demand when the justice of the case demands that a company which is otherwise likely to become deemed to be insolvent should be relieved of that possibility. The debt in question in that case was one arising from the issue of an assessment under the Income Tax Assessment Act 1936 (Cth). Questions remained unresolved in relation to the company's objection to one year's assessment and questions remained unresolved in relation to the Commissioner's decision to reject an objection lodged out of time in respect of another year's assessment. Even the objection which was under consideration had been lodged out of time and the company's argument that there was a genuine dispute depended upon both objections being entirely successful. No attempt had been made to object to one of the assessments until after the statutory notice was served. In those circumstances, his Honour did not consider that the Commissioner's conduct in serving the statutory demand was in any way unconscionable or an abuse of process or that it had given rise to substantial injustice that warranted the Court setting aside the statutory demand. His Honour concluded, therefore, that there was nothing special about the circumstances of that case which called for the Court's intervention. The Full Court dismissed an appeal (135 ALR 677) but left open the possibility of a fairly wide discretion under section 459J if "some appropriate reason" is shown (at 691). In the present case, the proceedings in the Commercial Division were commenced prior to the making of the order by Beaumont J. Further, the application for special leave was lodged on 15 April 1998, some two weeks before the service of the statutory demand. I have been asked to draw an inference that the purpose of the service of the demand some six months after Beaumont J's order was to frustrate the prosecution of the application for leave to appeal. I do not consider that such an inference should be drawn on the evidence presently available to me. Nevertheless, there is, in that sequence of events, a basis for concluding that the circumstances of this case are to be distinguished from those which arose before Olney J. In Wilden, a notice of appeal had been filed on behalf of the relevant company in respect of the judgment on which a statutory demand was based. The appeal had also been argued. Master Adams of the Supreme Court of Western Australia considered that to seek to set a statutory demand aside in those circumstances was, in effect, asking for a stay. Master Adams observed that there is a proper way in which the Company could seek a stay of proceedings and in fact had an outstanding application which had not been heard. In those circumstances Master Adams considered that the pending appeal did not assist the Company. The application, based on section 459J(1)(b) was therefore dismissed. However, in an application under section 459J(1)(b), it may be appropriate to draw a distinction between the relevance of an appeal to a genuine dispute and the relevance of an appeal to an offsetting claim. Where there is an appeal against a judgment debt which gives rise to the statutory demand and there is no stay, whether or not the stay has been sought, there may be some substance in the conclusion that setting aside the statutory demand is a de facto stay. The appropriate course, in such a case, may be for the company to apply for a stay to the court which entered judgment. Where, however, there is an appeal from a decision dismissing a possible offsetting claim, there is no dispute as to the debt which gives rise to the statutory demand as is the case here. There may be no basis for seeking a stay of the order made by Beaumont J. On the other hand, no application for a stay could be made in respect of the order of Rolfe J or the order of the Court of Appeal. There is, therefore, no mechanism available to the Company in the present circumstances, other than section 459J(1), to prevent the consequences of the presumed insolvency which would follow from non-compliance with the statutory demand. In accordance with the Rules and practice directions of the High Court, the Company and Westpac have filed summaries of argument. I have in evidence before me the Company's summary of argument in support of its application for special leave and Westpac's summary of argument in opposition to that application. Clearly, I should not presume to predict the outcome of the application for special leave or the outcome of any appeal if leave were granted. However, it is appropriate for me to give consideration to whether or not those summaries demonstrate that the application is and any appeal would be based on reasonable and arguable grounds. The Company's summary of argument indicates that the Company was a joint trustee with a Mr Renshaw of the Julia Beatrice Crawford Trust Settlement ("the Trust"). Mrs Renshaw was, but Mr Renshaw was not, an eligible beneficiary under the Trust. By the end of 1986, Mr and Mrs Renshaw were indebted to Westpac in a sum in excess of $1 million. At that time, the trustees had borrowed from Mrs Renshaw, at call, the sum of $700,000. That sum had then been placed on deposit with Westpac by way of investment. In November 1986, a meeting took place between Mr and Mrs Renshaw and a manager of Westpac at which the manager encouraged Mr and Mrs Renshaw to apply the deposit in reduction of the indebtedness of Mr and Mrs Renshaw to the Bank. While there was evidence that documents were executed by Mr and Mrs Renshaw at the meeting, no documents were in evidence at the trial. After the deposit of $700,000 was applied in reduction of the indebtedness of Mr and Mrs Renshaw to the Bank, the Company, as trustee, sought to recover those moneys from Westpac, as a knowing recipient of monies applied in breach of trust, on the basis of the first limb of the principle in Barnes v Addy (1874) LR Ch App 244. Rolfe J held that the deposit of $700,000 was not an asset of the Trust. However, the Court of Appeal held that at the relevant times the deposit did constitute an asset of the Trust but concluded that the moneys ceased to have the character of trust investments at the time they were received and applied by the Bank in reduction of the personal debt of Mr and Mrs Renshaw. The Court of Appeal reached that conclusion upon the footing that the case constituted a "classic example" of the principle of Spargo's Case (1873) 8 Ch App Cas 407. The Company contends further that the approach of the Court of Appeal worked a significant injustice to the Company because the application of the principle in Spargo's Case was not a matter of submission to the Court, nor raised in argument at first instance before Rolfe J. Westpac, in its summary of argument, contends that there are good legal answers to the contentions concerning the application of Spargo's Case. Westpac also contends that the possible application of Spargo's Case was fairly raised in argument in the Court of Appeal. As I have said, it is not for this Court to presume to predict the outcome of the application for special leave. Nevertheless, having considered the competing summaries of argument, I consider that the application is based on reasonable and arguable grounds. Thus, the basis on which the Court of Appeal reached its conclusion was different from that upon which Rolfe J at first instance reached his conclusion. Further there is the possible difficulty that arises from the application of the principle in Spargo's Case in circumstances where that was not contended for before Rolfe J. In those circumstances I would be disposed to conclude that there is "some other reason" within the meaning of section 459J why the demand should be set aside. Of course, it would still be open to a liquidator to pursue the Company's application for special leave and to prosecute any appeal, if leave were given, if the liquidator was so advised. That is not, in my opinion, a consideration which would preclude a conclusion that there is "some other reason" within section 459J(1) for setting the statute demand aside. However, I have no evidence as to the financial state of the Company. Further, there is no suggestion that Westpac would not be able to pay the amount which would be recovered if the Company succeeds in its appeal. In the circumstances, I consider that it would be appropriate to require, as a condition of setting the demand aside, that the Company either pay the amount of the debt into Court or otherwise secure the amount of the Debt. Two further matters arise. The first is the amount which should be paid into Court or for which security should be provided. The second is the time within which payment into Court should be made or security provided. Under Order 62 rule 45(6) of the Federal Court Rules, every award of costs under a judgment of the Court is to carry interest calculated in accordance with Order 35 Rule 8 from the date of the certificate of taxation quantifying the same. I have before me an order that the Company pay the sum of $42,000 to Westpac. That order was made on 28 October 1997 pursuant to the assessment procedures provided for in Order 62 Rule 46. In the circumstances, I consider that I should treat that as a certificate of taxation quantifying the amount of the costs for the purposes of Order 62 Rule 45(6). In addition, I propose to order the Company to pay Westpac's costs of the application before me since it is clear that Westpac has been substantially successful in resisting the application. In other words, although I propose to make an order pursuant to which the statutory demand could be set aside, I will do so only if the Company either pays a sum into Court or provides for security for that sum. No offer was made to that effect on behalf of the Company and a condition to that effect was resisted by the Company. For those reasons, I propose to order the Company to pay the costs of the application before me. Westpac contends that the amount which should be the subject of the order should provide for those costs. I am disposed to accept that contention. It is common ground that the costs would not be less than $5,000. In the circumstances, it seems to me to be appropriate that the amount which should be paid into Court or for which security should be provided should include an amount for the costs and interest. I therefore propose to make it a condition of setting aside the statutory demand that the Company pay into Court the sum of $47,500 or provide security for that sum to the satisfaction of the Registrar. The further question arises concerning the time within which that should be done. Westpac contends that the order provide for payment within 14 days. On behalf of the Company, it was suggested that 28 days would be appropriate. There is no evidence before me to indicate that there would be any greater difficulty for the Company in paying within 14 days rather than 28 days. I consider that 14 days is appropriate. Accordingly, I make orders in accordance with the short minutes, which have been signed by counsel for Westpac and the solicitor for the Company, which I have initialled, dated with today's date and placed with the papers.