Mutton v Living Australia Pty Ltd

1. The operation of Orders 4 and 5 made by the Registrar on 12 June 2019 are, pursuant to s 35A(6) of the Federal Court of Australia Act 1976 (Cth), stayed until the hearing and determination of the Amended Application for Review filed by Living Australia Pty Ltd on 13 June 2019.
2. The question of costs of the application for the stay is reserved.
3. The matter is adjourned to 4:30 pm today for a Case Management Hearing with respect to the conduct of the review.
4. There be liberty to the parties to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 On 12 June 2019, a Registrar made an order, pursuant to s 459A of the Corporations Act 2001 (Cth) that the defendant to these proceedings, Living Australia Pty Ltd (Living Australia), be wound up, together with consequential orders of the usual kind. Immediately after the orders were made, counsel for Living Australia applied for an order staying the operation of the winding up order and the appointment of the liquidator because Living Australia wished to seek review, pursuant to s 35A(5), of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) of the Registrar's exercise of power. The Registrar then stayed the operation of the orders until 18 June 2019. 2 By an interlocutory process filed on 13 June 2019, Living Australia applied for a review of the Registrar's exercise of power and, by the same interlocutory process, sought orders staying the winding up order and staying the appointment of the liquidator. 3 On the afternoon of 14 June 2019, I made an order, pursuant to s 35A(6) of the FCA Act, extending the stay of the operation of the orders made by the Registrar to 4 pm today. The purpose of the extension was to give all the parties the opportunity to prepare for a hearing as to whether the Court should order a stay of the Registrar's orders until Living Australia's application for review has been heard and determined. I have this morning heard the parties' submissions about that issue. 4 The factual matters giving rise to the present application can be summarised briefly. 5 On 25 October 2018, Rans Consulting Group Pty Ltd (Rans Consulting) commenced proceedings against Living Australia in the Magistrates Court of South Australia. It served the proceedings by prepaid post on 26 October 2018 which, under the Magistrates Courts Civil Rules, was deemed to have taken effect on 1 November 2018. Living Australia did not file an appearance or defence to that claim and Rans Consulting obtained a default judgment in the sum of $25,955.42. Attempts by Living Australia to have that default judgment set aside in the Magistrates Court were unsuccessful. It succeeded, however, on an appeal to the Supreme Court of South Australia and the default judgment was set aside: Living Australia Pty Ltd v Rans Consulting Group Pty Ltd [2019] SASC 86. 6 In the meantime, on 20 December 2018, Rans Consulting had issued a Statutory Demand, and that demand went unanswered. On 8 February 2019, Rans Consulting commenced proceedings in this Court seeking winding up orders. 7 On 20 March 2019, a Registrar made programming orders with respect to the filing by Living Australia of a notice of opposition to the winding up, affidavits in support, and the filing of submissions. Rans Consulting's application was then adjourned for hearing on 20 May 2019. 8 However, on 20 May 2019, it was known that Justice Hinton would, on 24 May 2019, deliver his judgment on Living Australia's appeal in the Supreme Court. Living Australia and Rans Consulting then sensibly consented to orders adjourning the hearing of the winding up application until the fate of the appeal was known. At the same time, however, the Registrar made further timetabling orders addressing the potential for another creditor to apply to be substituted as the petitioning creditor. 9 The matter then came on for hearing before a Registrar on 12 June 2019. For reasons which, so far as I am aware, have not yet been explained, Living Australia had not complied with the Registrar's timetabling orders of 20 March 2019 requiring the filing of submissions with respect to the application for a grant of leave under s 459S of the Corporations Act to oppose the winding up, and had not, within the prescribed period, filed a notice of opposition to the making of the winding up order, as required by s 465C. 10 Living Australia sought an adjournment of the hearing on 12 June 2019 so that it could file a further affidavit and, as I understand it, to seek to remedy its own non-compliance with the Court's previous orders. The Registrar refused that application and then refused Living Australia's application for leave to oppose the making of the winding up order. As I understand it, this was essentially because of Living Australia's non-compliance with the Court's orders and because of the absence of affidavit material to support the opposition to the winding up. 11 Because the judgment debt which underpinned the statutory demand of Rans Consulting had been set aside, the present plaintiffs, Mr and Mrs Mutton, applied to be substituted as petitioning creditors. They did so on the basis that they had obtained in the District Court of South Australia a cost order in their favour against Living Australia, although the costs which were the subject of that order have not yet been taxed or otherwise quantified. The Registrar made an order concerning the application for substitution in the following terms: To the extent necessary, leave be granted to Gregory Ralph Mutton and Wendy Anne Mutton to be substituted as Plaintiff, and the title of the proceeding be amended accordingly. 12 The Registrar then made the winding up order to which I referred earlier. 13 The power of the Court to grant a stay of a winding up order in circumstances like the present was not in issue. It is found in s 35A(6) of the FCA Act. The Court is not exercising the power vested in it by s 482 of the Corporations Act: HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169 at [47]. 14 Although the exercise of the power to grant a stay in the present circumstances has some similarity with the exercise of the power to grant a stay pending the hearing and determination of an appeal, there are relevant differences. A significant difference is that on an application under s 35A, the hearing proceeds de novo. The Court is not required to find error before it can make a different order from that made by the Registrar in the exercise of the power: Re Kwiatek (1989) 21 FCR 374. The consequence is that the threshold for a different exercise of the power on the review is less than it would be on an appeal. 15 Matters bearing on the exercise of the discretion to order a stay were considered by French J in HVAC Construction in which his Honour said: [48] The grant of a stay under s 35A(6) or s 23 is a matter for the discretion of the Court in the light of all the circumstances of the case. There is no rule confining the exercise of that discretion which requires special reasons to be shown for its exercise. In the statutory context of Part 5.4 of the Corporations Act however, the power is to be exercised with caution so as not unduly to delay the liquidator or hinder his or her capacity to carry out the duties imposed by the statute. There is therefore a clear onus on the applicant to make out a positive case - Re Warbler Pty Ltd (1982) 1 ACLC 323 at 328. [49] In addition to the general considerations which enjoin caution in the making of such orders, there are specific considerations relevant to the present class of case including: (a) any detriment or risk of detriment to creditors or contributories flowing from a stay; (b) the merits of the proposed review; (c) the current trading position and solvency of the company; (d) the prejudice to the company if a stay is not granted; (e) the legislative policy against delay to the liquidation process. 16 Counsel for Living Australia submitted that the exercise of its right of review will be rendered nugatory if the stay is not granted. I am not prepared to proceed on the basis that that will inevitably be so. There is no reason in principle why the director of a company which is the subject of a winding up order could not pursue the review, even in the absence of an order staying the winding up order. There may of course be prejudice to the company and difficult and inconvenient consequences for the company in the event that the review succeeded. There may also be costs incurred by the liquidator which will not be recoverable. But the prejudice which may result from a refusal of the stay does not mean that the exercise of the right of review will be rendered nugatory. 17 Further and in any event, it cannot be a sufficient justification for the grant of a stay that the review would be rendered nugatory if the stay is refused. Were it otherwise, a party seeking a review in circumstances like the present would invariably be entitled to a stay simply by reason of the filing of the application for the review. 18 The two principal matters on which Living Australia relies for the stay is that it is solvent and the prejudice it will suffer if the winding up continues. For the first of those matters, Living Australia relies upon the affidavit of Mr Gary Olsen, its accountant. In that affidavit, Mr Olsen expresses the bold opinion that Living Australia is solvent, but he does point to some matters to support that view: (a) the financial report for the year ending 30 June 2018 (the most recent period for which a report has been prepared) indicates that Living Australia made a net profit after income tax of $90,484 on gross income of just under $700,000; and (b) Living Australia has net assets of $257,509, including fixed assets of $172,364. 19 Living Australia also points to the evidence that, on 18 March 2019, its solicitor sent to Rans Consulting a bank cheque for $30,000 with a view to satisfying its claim. For reasons which have not been explained so far in the evidence, that bank cheque was rejected by Rans Consulting. 20 On the other hand, as counsel for Mr and Mrs Mutton have pointed out, this is a case in which it cannot be said that Living Australia's balance sheet is strong. Further, although just on 12 months have elapsed since the conclusion of the 2018 financial year, Living Australia has not adduced evidence concerning its current financial position, including a list of its current creditors. 21 In relation to the prejudice to Living Australia should the stay not be granted, Mr Cakar, its sole director, has deposed to Living Australia carrying on a business as management consultant for a number of related entities, including entities engaged in substantial property development ventures and activities. These include the development of the Seaford Homemaker Centre on the corner of Main South Road and Seaford Road. Mr Cakar also deposes to his apprehension that the winding up of Living Australia would damage the Living Australia "brand". 22 I accept that there would be some prejudice and, depending on the time which it would take for the completion of the review, that prejudice could be substantial. 23 Many of the submissions of the parties were directed to the merits of the underlying review. I do not propose to embark upon an analysis of those merits presently. I note in this respect that counsel for Rans Consulting accepted that the formation of conclusions about the ultimate prospects of the review is inapposite on an application for a stay and accepted that the review as presently formulated raises complex questions. 24 Counsel for Mr and Mrs Mutton did not make an express acknowledgement in those same terms but, nevertheless, the submissions made indicate that significant issues may be agitated on the review. 25 I consider it appropriate to proceed on the basis that the matters which Living Australia does wish to agitate on the review should not be regarded at this stage as fanciful or without some prospect of success. 26 To my mind, it is an important consideration that the judgment debt on which the statutory demand of Rans Consulting was based has been set aside and, as I have already noted, the costs to which Mr and Mrs Mutton are entitled by virtue of the District Court order have not yet been taxed. Accordingly, it cannot be said that there is an actual debt due and owing at the present time in respect of that order. Their debt is properly characterised as contingent. 27 Living Australia has proffered to the Court an undertaking that if a stay is granted, it will not during the period of the stay dispose of any assets or incur any liabilities other than on an arm's length basis in the ordinary course of its business. I accept that there may be some limitations on the utility of that undertaking, but nevertheless take it into account. 28 Mr and Mrs Mutton do not point to any particular prejudice which they would suffer if the stay is granted and I take into account that there is authority that the Muttons would not be able at this stage to present a statutory demand, relying as they do on an order for costs which has not yet been taxed: Jarena Pty Ltd v Sholl Nicholson Pty Ltd (1996) 19 ACSR 425; Remuneration Database Pty Ltd v Pauline Goodyer Real Estate Pty Ltd [2007] NSWSC 59. 29 Having regard to all these circumstances, I consider that Living Australia has shown that a stay of the operation of the orders made by the Registrar is appropriate until the review can be heard and determined. I will note Living Australia's undertaking and make an order for a stay. 30 I will hear from the parties with respect to arrangements for the review. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.