Leveraged Capital Pty Ltd v Modena Imports Pty Ltd

LEGISLATION CITED : (CTH) Corporations Act 2001 s 459P, s 436A, s 440A, s 459C(2), s 459F, s 459F(2)(a), s 459G, s 459G(3), s 459P s 459P(3), s 459Q, s 459S, s 459F(2), s 459F(2)(a), s 459F(2)(b), s 459G(3) (NSW) Legal Professional Act 2004

Alati v Wei Sheung & Ors [2000] NSWSC 601 Deputy Commissioner of Taxation v Tixana [2003] NSWSC 968 Dray v Trackmate [2003] NSWSC 482 Graywinter Properties Pty Limited v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 CASES CITED : Gryst v Dromana Estate Ltd [2008] FCA 1148 Lemery Holdings Pty Ltd v Reliance Finance Services Pty Ltd [2008] NSWSC 548 Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 Modena Imports Pty Limited v Leveraged Capital Pty Limited (in liq) [2009] NSWSC 20 NAB Ltd v Market Holdings Pty Limited (in liq) [2001] NSWSC 253 Pacific Islands Express Pty Ltd v Empire Building Development Pty Ltd [2008] NSWSC 576

PARTIES : Leveraged Capital Pty Ltd (Receivers & Managers Appointed) (plaintiff) Modena Imports (Administrators Appointed) (defendant)

COUNSEL : Mr H J A Neal (plaintiff) Mr P J Beazley (sol) (defendant)

SOLICITORS : Deacons (plaintiff) Beazley Singleton (defendant)

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

2035/09 Leveraged Capital Pty Limited (Receivers and Managers Appointed) v Modena Imports Pty Limited (Administrators Appointed) JUDGMENT (ex tempore) 1 HIS HONOUR: The plaintiff Leveraged Capital Pty Limited (Receivers and Managers appointed), claiming to be a creditor or contingent creditor of the defendant Modena Imports Pty Limited, applies for an order that Modena be wound up in insolvency pursuant to Corporations Act s 459P. The issues are, first, whether Leveraged is entitled to rely on the presumption of insolvency arising from the plaintiff's statutory demand served by it on Modena on 7 November 2008 in respect of which an application to set it aside was dismissed on the basis that that application was not made in accordance with Corporations Act s 459G; secondly, if not, whether Modena is nonetheless precluded from disputing the debt claimed in the creditor's statutory demand, and Leveraged's status as a creditor, by operation of s 459S; thirdly, if not, whether Leveraged has otherwise established standing as a creditor; fourthly, if not, whether Leveraged has established standing as a contingent creditor; fifthly, if so, whether a prima facie case of insolvency has been established, and whether, having regard to other relevant discretionary considerations, leave to bring these proceedings should be granted; sixthly, if so, whether the ground of insolvency is established; and seventhly, if so, whether the hearing should nonetheless be adjourned or the proceedings dismissed to permit the voluntary administration of Modena to proceed.

2 On 7 November 2008, Leveraged served on Modena a creditor's statutory demand for a debt of $495,000 said to be owed by Modena to one Mr Blumberg and assigned by him to Leveraged on about 15 October 2008. Within 21 days of service of that demand, Modena filed an originating process, claiming an order setting aside the creditor's statutory demand, together with an affidavit of its director Peter Trad. On 2 February 2009, Barrett J dismissed with costs (on an indemnity basis) Modena's application, on the basis that Mr Trad's affidavit did not meet the minimum requirements to satisfy the description of "an affidavit in support" as required by s 439G, and thus that the application was not made in accordance with s 439G [Modena Imports Pty Limited v Leveraged Capital Pty Limited [2009] NSWSC 20]. Leveraged commenced the present proceedings by filing an orientating process on 24 March 2009 for the winding up of Modena in insolvency pursuant to s 459P.

3 Against that background, the first issue is whether in these proceedings Leveraged is entitled to rely on the presumption of insolvency arising from Modena's failure to comply with the creditor's statutory demand. Section 459C(2) relevantly provides as follows: (2) The court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made: (a) the company failed (as defined by section 459F) to comply with a statutory demand; ...

4 Section 459F provides as follows: When company taken to fail to comply with statutory demand

(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.

5 It will be apparent that the automatic extension provided by s 459F(2)(a) applies only where "the company applies in accordance with s 459G for an order setting aside the demand". Those words reflect the wording of s 459G(3), which provides: (3) An application is made in accordance with this section only if, within those 21 days: (a) an affidavit supporting the application is filed with the Court; and

(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.

6 In Gryst v Dromana Estate Ltd [2008] FCA 1148, Finn J considered circumstances in which no application to set aside the statutory demand had been filed within the relevant 21 day period. His Honour said: [11] It is now well settled that, if a s 459G application and affidavit are not filed and served within the time so specified, the Court has no power to extend the period for the making of such an application: see Aussie Vic Plant Hire at [3]; David Grant & Co Pty Ltd (rec apptd) v Westpac Banking Corporation (1995) 184 CLR 265. In the present matter, the statutory demand was served on Dromana on 29 November 2007. The application to set it aside was filed in the Supreme Court of Victoria on 20 December 2007. It was not served on Mr Gryst until 21 December 2007. In consequence, that application was not one made "in accordance with s 459G" of the Act. The emphatic language of s 459G(3) admits of no other conclusion: see Pinn v Barroleg Pty Ltd (1997) 138 FLR 417; Deputy Commissioner of Taxation v Tixana Pty Ltd (2003) 202 ALR 401; Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd (2008) 26 ACLC 122 at [1]. While counsel for the plaintiff has sought to avoid this conclusion by recourse to "purposive legislation", the Parliament, in my view, has spoken on this matter with unmistakeable clarity. [12] The consequence of no application having been made in accordance with s 459G is that the time for compliance with the statutory demand was the 21 days specified by s 459F(2)(b). The date for compliance was, thus, 20 December 2007. [13] The date the s 459P winding up application was made was 10 June 2008. For the purposes of s 459C(2)(a) the presumption of insolvency could only arise if in the period three months prior to that date, ie on or after 10 March 2008, Dromana failed to comply with a statutory demand. Dromana did not fail to comply with the statutory demand during that period. In consequence, Mr Gryst cannot rely on the presumption of insolvency in prosecuting his winding up application as s 459C(2)(a) has not been enlivened in the circumstances: see Pinn v Barroleg Pty Ltd and Deputy Commissioner of Taxation v Tixana Pty Ltd with which decisions I respectfully agree.

7 In Deputy Commissioner of Taxation v Tixana [2003] NSWSC 968, Austin J observed (at [9]): It is unnecessary for me to decide whether an application which might not comply with s 459G in some other respect (for example, by failing to provide an affidavit which properly supports the application) is, for the purposes of s 459F(2), an application "in accordance with" s 459G.

8 Comparison of the words used in s 459F(2) and those in s 459G(3) makes abundantly clear that the automatic extension provided for by 459F(2)(a) is triggered only by a valid application made in accordance with s 459G - that is to say, one that complies with the requirements of s 459G(3). Cases such as Graywinter Properties Pty Limited v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 establish that an application is not validly made for the purposes of s 459G(3) unless there is a sufficient supporting affidavit, [see also Pacific Islands Express Pty Ltd v Empire Building Development Pty Ltd [2008] NSWSC 576 (Austin J) [7]; and Modena Imports v Leveraged Capital, [13]].

9 That is precisely what Barrett J found in the present case. His Honour dismissed the proceedings on the basis that no valid application under s 459G had been made. In those circumstances, the period for compliance with the statutory demand was not extended by operation of s 459F(2)(a); it follows from s 459F(2)(b) that the period for compliance was 21 days after the demand was served. The present proceedings for the winding up order were not instituted until 24 March 2009, more than three months after that date. 10 In those circumstances, the presumption under 459C(2) is not now available. Although it was submitted that this would be an inconvenient result, because it would potentially require creditors to commence winding up proceedings, if they wished to take advantage of the presumption, before proceedings to set aside the statutory demand had been resolved, it is one that I reach without reluctance. The case law in this area has placed a great deal of emphasis on strict compliance with the requirements of s 459G. It is entirely consistent with the requirement for strict compliance that the period for compliance with the statutory demand only be extended by a valid application, and that a creditor who wishes to take the point that there has been no valid application needs to be vigilant to guard its position and file a winding up application if it wishes to take advantage of the presumption of the insolvency.

11 In light of the point about the "stale demand" having been taken, Leveraged sought and was granted leave to amend, first, to allege insolvency in fact, and secondly, to claim standing as a contingent creditor pursuant to the costs order made by Barrett J in its favour when his Honour dismissed the earlier proceedings. In proving insolvency in fact, it wishes to rely on the failure to comply with the Notice of Demand as part of the evidentiary matrix to found an inference of insolvency, even though the presumption is not available. Modena, on the other hand, seeks to dispute that it is indebted to Leveraged in respect of the debt, the subject of the creditor's statutory demand. Accordingly, the second issue is Leveraged's contention that even if, as I have found, the creditor's statutory demand is stale in the sense that it is not available to found the presumption of insolvency, s 459S nonetheless precludes Modena from disputing the debt without leave, and that such leave could not be granted because Modena is plainly insolvent even if it were not indebted to Leveraged as alleged. 12 Section 459S 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.

13 For the plaintiff, Mr Neal argues that the words "relies on a failure by the company to comply with the statutory demand" involve a concept different from relying on the presumption of insolvency arising from failure to comply with the statutory demand. For the defendant, Mr Beazley's contrary submission is that those words should be construed as referring to reliance on a failure by the company to comply with the statutory demand to found a presumption of insolvency. Thus, Mr Neal argues that one can for the purposes of s 459S rely on a failure to comply with a statutory demand for the purposes of supporting an inference of insolvency in fact, and still obtain the benefit of the protection of s 459S, even where the presumption of insolvency is not available because the demand is stale.

14 Ultimately, two matters tell against Mr Neal's construction of s 459S. The first is that it would be very curious if - which is obviously the case - a creditor could issue a fresh statutory demand for the same debt and the company would then be plainly entitled to make a new application under s 459G in respect of it, disputing the indebtedness; yet the creditor could propound for the lesser purpose of supporting an inference of insolvency the old statutory demand while the debtor was precluded from disputing it. 15 More significantly perhaps, the same formula of words - "relies on the failure by the company to comply with the statutory demand" also appear in s 459Q which prescribes particular requirements for a winding up liquidation which "relies on failure by the company to comply with the statutory demand". It is tolerably clear that s 459Q is directed to the common situation where a creditor applies to the Court for a winding up order in reliance on the statutory presumption of insolvency arising from a failure to comply. This is supported by the frequency and notoriety of such applications, which form the overwhelming bulk of winding up applications made to the Court. Section 459Q was intended to regulate applications of that type, that is to say, applications made in reliance on the presumption of insolvency arising from failure to comply with the statutory demand. 16 Accordingly, in my view s 459S properly construed is concerned with applications for a company to be wound up in insolvency that rely on the presumption of insolvency arising from the failure of the company to comply with a statutory demand. It does not apply where the application relies on the ground of insolvency; in fact, where part of the evidence in support of an inference of insolvency is non-compliance with a statutory demand the presumption of insolvency is not available. 17 Accordingly, as in these proceedings Leveraged is not entitled to rely on the presumption of insolvency arising from Modena's failure to comply, and Modena is not precluded by s 459S from disputing its indebtedness to Leveraged nor disputing Leveraged's status as a creditor in respect of that alleged debt.

18 In respect of the third issue then, namely, whether Leveraged has established standing as a creditor, Leveraged accepted, in my view correctly, that on the evidence adduced before me this was a legitimate dispute as to Modena's alleged indebtedness of $450,000. It, therefore, has not established in these proceedings that it is a creditor of Modena in respect of that debt.

19 When dismissing Modena's previous application to set aside the creditor's statutory demand Barrett J, as I have mentioned, ordered Modena to pay Leveraged's costs, and on an indemnity basis. These costs have not yet been assessed. The next issue, then, is whether by reason of that costs order Leveraged has standing as a "contingent or prospective creditor" of Modena. 20 A person who has a judgment for damages to be assessed is a contingent creditor [Alati v Wei Sheung & Ors [2000] NSWSC 601, [18]]. The beneficiary of a costs order, where those costs have not yet been taxed and assessed, is also a contingent creditor [NAB Ltd v Market Holdings Pty Limited (in liq) [2001] NSWSC 253, [134]].

21 In this case, the amount of Modena's liability to Leveraged under the costs order has not yet been quantified, but the cases to which I have referred make clear that quantification is not necessary for there to be a contingent debt for the purposes of s 459P.

22 A costs order as between party and party is sufficient to make the party in whose favour it is made a contingent creditor. It was faintly argued that this was not so unless the liability of the beneficiary to its own solicitor, on a solicitor/client basis, was first established. I do not agree. The party/party order establishes the existence of a liability, albeit one yet to be quantified. That is the essence of being a contingent creditor. 23 However, because an application for winding up can be made by a person who is a contingent or prospective creditor, only with the leave of the Court, that leads to the fifth issue which is whether such leave should be granted. Section 459P(3) provides that the Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. 24 The report of Modena's administrator - that there are debts of $2.45 million and assets of, on the very most optimistic view, $575,000 and probably very much less than that - plainly establishes a prima facie case of insolvency. 25 While, in exercising the discretion to grant leave under s 459P(3), insolvency is the major and essential factor, there is a residual discretion, even if insolvency is established, to decline leave [Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823, 834; Dray v Trackmate [2003] NSWSC 482]. Those cases show that other relevant considerations include the public interest in ensuring that insolvent companies do not trade and where the applicant is a contributory (as distinct from a contingent creditor) the interests of the contributory in not remaining locked into an insolvent company. Where standing is claimed as a contingent creditor, another relevant consideration would be the remoteness and probability of the relevant contingency arising.

26 Mr Beazley argued that it was a relevant consideration that, in circumstances where the Legal Professional Act provides that proceedings for recovery of legal costs are not to be commenced without prior service of a bill, the defendant has been denied the opportunity to receive a bill, to have it assessed and then to pay it. 27 However, the restriction on commencement of proceedings for recovery of legal costs applies only as between solicitors and client, and not between party and party. So far as the opportunities to proceed to have a bill assessed and paid are concerned, in the context of this case, those opportunities are fanciful, not real. It is simply not apparent how, on the evidence of its financial affairs currently before me, Modena, even if it received the bill and had it assessed, could possibly pay it - except perhaps by engaging in insolvent trading by borrowing further funds while in a condition of insolvency. 28 This seems to me a case in which the relevant contingency is highly probable, and which the public interest in the winding up of insolvent corporations rates high. 29 I therefore grant leave to the plaintiff pursuant to s 459P, nunc pro tunc, to make an application for the winding up of Modena in insolvency by filing the originating process in these proceedings. 30 I have already found that there is a strong prima facie case of insolvency; nothing is advanced to rebut that case. I am therefore satisfied that Modena is unable to pay its debts as and when they fall due, and is insolvent within the meaning of the Corporations Act.

31 That finally raises the question of whether the proceedings should be adjourned or dismissed in order to permit a voluntary administration to proceed.

32 On 27 March 2009, Messrs Hurst and Wily were appointed joint administrators of Modena, pursuant to Corporations Act, 436A. The first creditor's meeting was held on 8 April 2009. The principal of Modena has proposed a Deed of Company Arrangement which, in broad terms, subject to five out of its seven creditors agreeing not to participate, would establish a fund of $50,000 (provided by a third party) to which the plaintiff would be one of the two claimants; and the foreshadowing of proceedings against Mr Blumberg (and the plaintiff as his assignee), the effect of which would be to dispute their indebtedness.

33 In Lemery Holdings Pty Ltd v Reliance Finance Services Pty Ltd [2008] NSWSC 548, Palmer J said (at [11]): Those authorities establish that a clear case must be demonstrated that it is in the best interests of creditors for the administration to continue before the Court will adjourn a winding-up application in conformity with the directive in s 440A(2). The cases show that the mere possibility or hope of a better result for creditors under administration than in liquidation is not enough to justify an adjournment. If a company is insolvent and there is no realistic hope that it can be saved through an administration and Deed of Company Arrangement, then there are strong reasons why it should be wound up as soon as possible. One of those considerations is that the sooner that there is an investigation into matters such as whether there has been insolvent trading or dispositions of assets which may be avoided, the better it will be for creditors. 34 Mr Beazley did not apply for an adjournment under s 440A, but contended that, having regard to substantially the same considerations, the proceedings should be dismissed. If anything, the requirement for a dismissal would be stronger than that for an adjournment. 35 There is no evidence as to how long the prosecution of the cause of action against Mr Blumberg might take; how it will be funded (unless potentially out of the deed fund of $50,000, which would operate to the detriment of the participating creditors); its prospects of success; and whether the defendant - as plaintiff in those proceedings - would be able to provide security for costs, as it almost inevitably would be ordered to do so. The administrators are unable to say whether Mr Blumberg has any or sufficient assets to satisfy any judgment that might be obtained against him. Potential actions against the directors would not be investigated, and this is relevant in circumstances where the administrators have concluded that there is a prima facie case of presumed insolvency arising from the failure to keep adequate books and records, and Mr Trad would be returned to control the corporation - which the administrators opine would not be in the best interests of the creditors. 36 At the highest, the administrators express the view only that it may be in the interests of creditors to execute the proposed deed. That falls far short of a clear case that it is in the best interests of creditors for the administration to continue. In my view, a case for an adjournment, let alone dismissal, of the winding up application, based on the pendency of the administration, is not made out.

37 In circumstances where there is a contest and nothing to be said against the plaintiff's application, ordinarily the Court's practice is to appoint the plaintiff's nominee; as I indicated in the judgment given yesterday, disputes as to the nominated liquidator are to be discouraged. Here there is the additional consideration that Messrs Wily and Hurst, having been appointed administrators, while having had the benefit of having done prior work for the company do as a result have an existing affiliation. It is the Court's preference, where there is dispute, to appoint a different liquidator to those who have the conduct of the voluntary administration.

38 Were I minded to make some costs order other than that which I propose to make, the appropriate order might have excised from the plaintiff's recoverable costs those which were incurred between 28 April 2009 (when notice of opposition was given) and 4 May 2009 (when the amended originating process was filed). The brevity of that period itself tells against making any such order. So too do the facts that, during that period, work was done in the preparation of affidavits - including that of Mr Hurst, ultimately filed on 5 May, and the affidavits of publication and other formal affidavits filed on 1 May, which were necessary regardless of the basis upon which the proceedings were to be determined. 39 In those circumstances I do not think it is appropriate to make any special costs order.

(1) Order that the defendant be wound up in insolvency. (2) Order that Gregory Hall be appointed liquidator of the defendant. (3) Order that the plaintiff's costs be paid out of the defendant's assets. 41 I direct these orders be entered forthwith. **********

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