Macks v Valamios Produce

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

5299/03 - PETER IVAN MACKS AS TRUSTEE FOR EFSTRATIOS VALAMIOS & ANOR v VALAMIOS PRODUCE PTY LIMITED JUDGMENT 1 The plaintiff is the trustee under the Bankruptcy Act 1966 (Cth) of the estates of Efstratios Valamios and Constantina Valamios whom I shall call "the parents". On or about 18 August 2003, the plaintiff served a statutory demand under s.459E of the Corporations Act 2001 (Cth) on the defendant, Valamios Produce Pty Limited, a company of which the shareholders and directors are George Valamiou and Chris Valamiou, sons of the parents. The statutory demand relates to an alleged debt of $3,208,536.40 said to be for money lent to the defendant by the parents in the period March to July 2003. 2 The evidence shows that, in the period referred to in the statutory demand, moneys accruing due to the parents in respect of their fruit and vegetable business carried on at the Flemington Markets was paid into the defendant's bank account. One of two consequences appears to have followed: either the defendant held the moneys on trust for the parents or the defendant became indebted to the parents in an equivalent sum. 3 The defendant says - or, at least, one of the sons, Mr George Valamiou, gave evidence - that, at the parents' request, the defendant has paid out sums the equivalent of those paid to it, so that any debt or liability to account owed to the parents has been satisfied. This, however, is not confirmed by any documentary evidence. To the extent that there are in evidence documents that purport to be listings of payments out by the defendant at the direction or for the benefit of the parents, those listings deal with sums which, in the aggregate, are some $200,000 short of the total paid to the defendant at the behest of the parents. In those circumstances, I proceed on the footing that, while the full $3,208,536.40 referred to in the statutory demand may not at this stage be the subject of any debt or equitable obligation to account on the part of the defendants, there is a sum of the order of $200,000 which is the subject of such a debt or obligation. (I interpolate that an equitable obligation of a trustee to account to his beneficiary is recognised as a debt for the purposes with which I am here concerned.) 4 It is relevant to record at this point that, while the defendant apparently took some steps towards making an application under s.459G for an order setting aside the statutory demand, no such application was eventually pursued. As a result, the presumption of insolvency has arisen under s.459C and, subject to the outcome of the defendant's present application (to which I shall come in a moment), the plaintiff is in a position to pursue an application for a winding up order on the basis of the unsatisfied statutory demand. To that end, the plaintiff filed an originating process on 15 October 2003. 5 By an interlocutory process filed on 22 October 2003, the defendant seeks an order restraining the plaintiff from advertising or otherwise publishing the commencement or existence of the winding up proceedings, a declaration that the plaintiff is not a creditor of the defendant and an order that the winding up proceedings be stayed or dismissed. The plaintiff's contention is that the winding up proceedings represent an abuse of process because of the existence of certain proceedings in the Federal Magistrates Court brought by the plaintiff, as the parents' trustee, seeking orders under the Bankruptcy Act for the avoidance of certain dispositions by the parents. The relevant application was filed in the Federal Magistrates Court on 8 October 2003. Among the relief sought is:

(a) a declaration that the sons hold on trust for the plaintiff as the parents' trustee "amount of $3,208,536.40 in the 459E Demand of the moneys of the bankrupts from Sydney Markets Credit Services and creditors of the bankrupt";

(b) alternatively, an order that the transfer of $3,208,536.40 by the parents to the present defendant is a void transfer and declarations that the present defendant pay that sum to the trustee; and

(c) alternatively, judgment for money due and owing. 6 These are part of wider claims to the general effect that the sons and the defendant became the transferees of various assets of the parents, including their fruit and vegetable business and certain real property, in circumstances activating Bankruptcy Act provisions concerning avoidance of fraudulent dispositions. 7 The Federal Magistrates Court proceedings were commenced, as I have said, on 8 October 2003. A week later, on 15 October 2003, the plaintiff filed the originating process in these proceedings to which I have already referred. A week after that, on 22 October 2003, the defendant filed the interlocutory process with which I am now dealing, its contention being that the winding up proceedings represent an attempted pre-empting or forestalling of the Federal Magistrates Court proceedings. The evidence adduced by the defendant in support of its interlocutory process includes evidence of an accountant, Mr Gooley, about the financial position of the defendant, including an expression of opinion by Mr Gooley that the defendant is solvent. 8 The plaintiff's position is quite simple. He says (and it cannot be disputed) that a presumption of insolvency has arisen for the purposes mentioned in s.459C(1) by reason of the failure to comply with the statutory demand. The plaintiff also says that, on the hearing of the winding up application, because of s.459S, it will not be open to the defendant to rely on any dispute concerning the debt alleged in the statutory demand without the leave of the court and that leave will not be capable of being granted unless the ground asserted is material to proving solvency. There is in any event no application for such leave either on foot or foreshadowed. In the plaintiff's submission, the question of solvency will be of paramount importance when the winding up application comes to trial and is also of paramount importance now. It is further submitted that the evidence of Mr Gooley, viewed at the close of his cross-examination, does not warrant any finding that the defendant is solvent but, rather, leads to a clear and unambiguous conclusion that it is insolvent and, to the extent that the court might otherwise be minded to exercise its discretion in favour of the plaintiff upon the interlocutory process with which I am now dealing, that factor alone means that favourable exercise of the discretion should be withheld. 9 It is necessary to refer to Mr Gooley's evidence. His affidavit of 24 October 2003 has annexed to it a report prepared by him which begins by referring to the material to which he had regard and the assumptions he made in preparing his report. The documents to which Mr Gooley had regard are said by him to be a computer disc containing the accounting records of the defendant on MYOB software commencing 16 June 2003 and ending 3 October 2003, profit and loss statements printed by him from that MYOB file for the two weeks to 30 June 2003 and for the three months 1 July 2003 to 3 October 2003 and reports as to accounts payable and accounts receivable printed by him from the MYOB file. Mr Gooley's report refers to two assumptions: first, an assumption that accounting records maintained on MYOB software as supplied by the sons "are an accurate and complete reflection of tax invoices generated by the defendant on its customers and tax invoices received from suppliers"; and, second, an assumption that values for trading stock as at 30 June 2003 and 3 October 2003, as advised by the sons, were accurate. 10 On the basis of the material to which he thus had regard and the two assumptions, Mr Gooley stated two conclusions in his report, namely, that the defendant is currently able to meet its obligations as and when they fall due as evidenced by an excess of accounts receivable over accounts payable and that the defendant "is operating at a substantial level of profitability which underlies continuation of this situation". In the affidavit to which the report is annexed, Mr Gooley deposed: "For the reasons disclosed in my report and on the basis of my experience and investigations I have concluded that the Company is not insolvent now and it has been solvent and able to pay its debts as and when they fall due since the date it was first registered and it is unlikely to become insolvent or unable to pay its debts as and when they fall due in the future."

The reference here to the date of the defendant's registration is a reference to 16 November 2001. Mr Gooley thus expressed in his affidavit an opinion not only of current solvency but also of continuous solvency since that date. 11 Mr Gooley was cross-examined briefly but incisively by Mr Johnson. There emerged in the course of the cross-examination a number of matters which may fairly be said to have caused Mr Gooley's report and the opinion expressed in his affidavit to become devoid of all capacity to demonstrate solvency of the defendant. Mr Gooley had not participated in any stocktake or seen any written records of stocktake. He was "just given a figure". He had seen no documents of prime entry and had no knowledge of the original source information from which he prepared his report. He had taken no steps to test or verify the content of the MYOB records given to him on the disc. He did not know whether GST or PAYE instalments had been paid by the defendant or were required to be paid. And I infer that he had not inquired into the practices, systems and procedures used to compile the MYOB records. In short, as he conceded, he had proceeded entirely on the basis of what he was told by the sons, taken uncritically and at face value. 12 Mr Gooley left entirely out of account matters of great significance involving the defendant's relationship with the ANZ Bank. In fact, it is clear that he was not informed of vital matters concerning that relationship. Mr Gooley had not seen a letter by which the ANZ Bank had, in March 2003, approved three distinct but related financing facilities for the defendant totalling $2,150,000, which loans had been drawn down. Mr Gooley had not asked whether those loans had been drawn down. He did not take account of the monthly interest payments due in respect of the loans. Mr Gooley was not aware that, on 8 September 2003, the ANZ Bank notified the defendant in writing of the unilateral termination of the banking relationship by it because of events of default, with a statement that enforcement action would be deferred for thirty days to provide an opportunity to refinance. Nor was Mr Gooley aware that, on 9 October 2003, solicitors for the ANZ Bank served on the defendant a demand for immediate payment of a total of $2,198,862.63. 13 Faced with these matters, Mr Gooley was forced to concede in the witness box that the defendant could not be regarded as solvent unless there were in place clear arrangements for refinancing of the ANZ facilities in an appropriate way. Mr Gooley said he was not aware of any refinancing arrangements. Mr George Valamiou, one of the sons, was cross-examined about plans to refinance. He said that replacement financing had been arranged. Mr Johnson called for the documents evidencing the approval of the refinancing by the refinancier. The response was that there was nothing to produce. Mr George Valamiou was asked the identity of the lender from whom the finance approval was held. He responded, "Eric …. Eric Munro". He was unable to produce any documentary evidence that "Eric Munro" or anyone else had agreed to make available virtually immediately $2,198,862.63 or more. 14 I have mentioned these matters relevant to solvency because of their pertinence to the jurisdiction the defendant seeks to invoke, that is, the jurisdiction to enjoin a creditor from advertising its winding up application and to stay winding up proceedings. Mr Newton of counsel, who appeared for the defendant, referred to a passage in McPherson's "The Law of Company Liquidation", 4th edition (1999) by Andrew Keay at pp.89-90 as follows: "The court's power to grant an injunction restraining the filing and advertising of winding-up proceedings flows from its jurisdiction to prevent an abuse of process. It has been held that the court does have the power to restrain the advertisement of an application once the application has been filed. The jurisdiction to grant injunctions restraining the filing or advertising of winding-up applications is used sparingly and is incumbent on the applicant for an injunction to establish that there are clear and persuasive grounds for the order sought. However, courts have been at pains to indicate that they will be sensitive to a misuse of a statutory right in order to stop both a company's business being harmed and the improper use of court process. To secure an injunction the company must establish the ordinary elements needed to obtain such an order. In considering an application for an injunction the court will examine the balance of convenience and will take into account the extent of damage likely to be suffered by the company to prove that it is likely to suffer significant damage from a winding-up application being filed. It is only solvent companies that can do that and, hence, if a company is in a parlous financial state an injunction is unlikely." 15 A noteworthy point about this passage, it seems to me, is that the various cases referred to in the footnotes (which I have not reproduced) all involved winding up legislation or circumstances not directly comparable with the present situation where the winding up application is based on failure to comply with a statutory demand served under Part 5.4 in the form in which it has existed since June 1993. Those cases were all decided in a statutory context that did not include ss.459H, 459G and 459S the effect of which is to confine challenges to a statutory demand very largely to a phase which should be completed before the hearing of the winding up application. 16 This leads to a consideration of the extent to which it can be said that, under the provisions as they have existed since June 1993, it is an abuse of process for a party by whom an unsatisfied statutory demand has been served to pursue a winding up application on the strength of the non-compliance even though there is a dispute as to the existence of the alleged debt. It is clear that pursuit of such an application by such a creditor is capable of being an abuse of process even under the present provisions. So much was expressly recognised by Gummow J in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265: "No doubt, in some circumstances, the new Pt 5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz [(1992) 174 CLR 509]. However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction." 17 But it is also clear that the pendency of other proceedings which may result in a determination that the applicant for a winding up order is not in truth a creditor "goes little distance" to establishing an abuse of process in the sense referred to by Gummow J. In saying that, I adopt words used by Stein JA (with whom Mason P agreed) in Braams Group Pty Ltd v Miric (2002) 44 ACSR 124. For such a conclusion to be warranted, the applicant for the winding up order must be seen, as Stein JA said, to be "seeking to obtain something other than a result which the law provided". 18 The plaintiff's case before me is that it is seeking, in these proceedings, no more than a result for which the law provides. The evidence shows, and I find, that the defendant is insolvent, quite apart from the presumption created by s.459C. Implicit in this are two findings which, to avoid doubt I state clearly, namely, that the evidence about the demand by the ANZ Bank sets at nought Mr Gooley's positive opinion on solvency and that, despite Mr George Valamiou's reference to the otherwise unexplained source of refinancing in "Eric Munro", the defendant has shown no reasonable or probable expectation of an ability to refinance to meet the ANZ demand. 19 This finding of insolvency puts out of the picture entirely, in my view, any prospect of the defendant's relying on the principles referred to in the extract from "The Law of Company Liquidation" set out above and expressly recognised and preserved in the passage I have quoted from the judgment of Gummow J in David Grant. His Honour referred specifically to the possibility that an abuse of process may occur if a winding up application is threatened or made "in respect of a solvent company"; and, as Mr Johnson emphasised, the last sentence of the text book extract is: "It is only solvent companies that can do that [ie, show that significant damage will flow from pursuit of a winding up application] and, hence, if a company is in a parlous financial state an injunction is unlikely" 20 I am not here dealing with a solvent company and the equity that such a company may have to obtain protection from the consequences of due advertising of a winding up application and due progress of that application to trial. This case is, rather, one in which a winding up application is sought to be pursued in respect of a company shown to be insolvent. Due advertising and other progress of the winding up application are, in this context, a result for which the law clearly provides and there is no basis on which the restraints the defendant seeks should be imposed. 21 The defendant's interlocutory process filed on 22 October 2003 is dismissed with costs, except as to paragraph 9 which is stood over to the Corporations List Judge at 10 am on 10 November 2003. **********

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