Nasrawi Group of Companies Pty Ltd v Byrne Earthmoving & Engineering Pty Ltd [2005] QSC 2

CORPORATIONS - WINDING UP IN INSOLVENCY - FAILURE TO COMPLY WITH STATUTORY DEMAND - Disputed debt - No application to have statutory demand set aside within time-limit - Ability of company to seek a declaration that the statutory demand was not such a demand.

PRACTICE AND PROCEDURE - ABUSE OF PROCESS - Whether creditor's reliance on disputed judgment debt in winding up proceedings constituted an abuse of process.

Corporations Act 2001 (Cth), Pt 5.4, ss 459G, 459S

Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 171 FLR 449, applied.

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, applied

Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235, applied

Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd [1994] FCA 1059; (1994) 13 ACSR 525, distinguished

L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180, distinguished

NT Resorts Pty Ltd v The Deputy Commissioner of Taxation [1998] FCA 255; (1998) 153 ALR 359, considered

Mandarin International Developments Pty Ltd v Growthcorp (Australia) Pty Ltd (1998) 143 FLR 408, applied

Topfelt Pty Ltd v State Bank of New South Wales Ltd [1993] FCA 589; (1993) 12 ACSR 381, distinguished

Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287, considered

Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72, applied

Sindea Trading Co Pty Ltd v Asia Pacific Glass Pty Ltd [2003] QSC 406, applied

Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509, applied

[1] DOUGLAS J: Originally this was an application to set aside a statutory demand made against the applicant company. It was not filed and served within the 21 day time limit from the service of the demand prescribed by s.459G(3) of the Corporations Act 2001 (Cth). It is not possible to extend the time permitted for making such an application; see David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265. That being the case, the applicant applied for further or other relief, namely a declaration that the statutory demand it had originally sought to set aside was not a statutory demand within the meaning of the Act.

[2] The immediate problem it faces there is that s.9 of the Act defines a statutory demand to mean, amongst other things, "a document that is, or purports to be, a demand served under section 459E". There has been some speculation in a decision of Finkelstein J that a demand specifying as the debt owed one that was not due and payable may not be a statutory demand at all; NT Resorts Pty Ltd v The Deputy Commissioner of Taxation [1998] FCA 255; (1998) 153 ALR 359, 367. See also Topfelt Pty Ltd v State Bank of New South Wales Ltd [1993] FCA 589; (1993) 12 ACSR 381, 393 and Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd [1994] FCA 1059; (1994) 13 ACSR 525, 530. The latter decisions, Topfelt and Kalamunda, dealt with deficiencies in the form of the demands. The only deficiency in the form of the demand relied on here is its failure to include the words in the heading "Paragraph 459E(2)(e)", an omission which I would treat as a mere irregularity.

[3] The criticism the applicant directs at the debt claimed under the statutory demand is that it has been calculated by reference to variation and other claims under a contract, by which the respondent was to perform bulk earthworks for the applicant's property development, less an "allowance for rectification and liquidated damages" of $160,000 referred to, not in the demand but in an invoice referred to in the schedule to the demand. The affidavits of Mr Watson for the respondent show that there is a dispute as to the reason for the need for rectification work on the development site. He attributes it to a direction to his company by the applicant to use the wrong sized rock as compacting fill. The figure of $160,000 is criticised by the applicant as having been "plucked from the air" and is said not to be an accurate measure of the costs of rectification of the respondent's work the applicant says it has been required to perform. The applicant also submits that the respondent's claims for variations have been rejected by the superintendent appointed under the contract so that the claims do not relate to funds due and owing under the contract.

[4] The submission for the applicant is that, properly characterised, the respondent's claims are claims for damages for breach of contract on account of the applicant's alleged failure to require the superintendent to act reasonably in assessing the applicant's claims, that such claims are unliquidated in nature and that the demand is therefore not based upon a debt or debts and is not a demand within the meaning of the Act. The allegedly arbitrary discount of $160,000 is also said to lead to the same consequence that the amount claimed is not a liquidated demand.

[5] Those submissions may well be accurate but it seems to me that they are the sorts of matters that should have been raised in a timely application to set aside the statutory demand and which may be the subject of an application for leave under s.459S when and if a winding up application is made. In those circumstances should the declaration sought be granted? Does the case fall into the category described by Finkelstein J as one where the demand specifies as the debt owed one that was not due and payable and, if so, is that sufficient to characterise this purported demand as not a demand at all?

[6] The origin of the procedure for applying to set aside statutory demands prescribed by Part 5.4 Division 3 of the Act in the "Harmer Report" is referred to in David Grant & Co Pty Ltd v Westpac Banking Corporation at 269-270 in the decision of Gummow J. The passages from the Explanatory Memorandum referred to by his Honour illustrate why he there described that Part of the Act as "a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts, unless they are raised promptly". When one bears in mind that "statutory demand" is defined to mean a document that purports to be a demand and considers the form of the document relied upon in this case, which clearly purports to be a demand on its face, it is my view that it would be wrong for me to exercise the jurisdiction of the court to grant the declaration sought unless there has been an abuse of process in issuing the demand; see David Grant & Co Pty Ltd v Westpac Banking Corporation at 279 and Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509, 518-522, 526-527, 532-537.

[7] An abuse of process was said to arise, in an earlier statutory context, in L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 by McLelland J at 183:

"(1) if the winding up proceedings are bound to fail eg if it is clear that the applicant will not be able to prove that he is a creditor within the meaning of s 363(1)(b) of the Code, or will not be able to prove that the company is unable to pay its debts within the meaning of s 364(1)(e);

(2) if the application is made for some improper purpose eg if the applicant is seeking to use the winding up proceedings to coerce a company into paying an alleged debt without affording the company a reasonable opportunity to ascertain or have it established that the debt is properly payable; or

(3) if issues will arise in the winding up proceedings of a kind inappropriate for determination in such proceedings eg a substantial contest as to the existence or enforceability of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose."

[8] Mr Franco submitted that, at least where an application had been made to set aside the statutory demand, that statement was still good law even in the new context created by Part 5.4 of the Act and could be relevant to the exercise of any discretion to grant the declaration his client seeks. The authorities suggest, however, that, although there remains a discretion to restrain the institution of a winding up application where there has been an abuse of process, the grounds relied on by McLelland J are not consistent with the structure of the present statute if no application to set aside the demand has been made in time. When no application to set the demand aside has been made, the other circumstances where the bringing of a winding up application would be treated as an abuse of process are extremely rare. One example of such a rare case occurred in Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 where Brownie J enjoined proceedings based upon a failure to comply with a statutory demand where the creditor had, without justification, removed the company's financial records, thus preventing the company from assessing the creditor's claim within the 21 day period.

[9] The reasons of the Court of Appeal of New South Wales in Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 171 FLR 449; 44 ACSR 124 at [28]- [47], [79]-[86] make it clear why the introduction of Part 5.4 has narrowed the scope for the grant of equitable relief where no application has been made to set aside the statutory demand. See also, in particular, Spender J in Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235, 238-240 and Santow J in Mandarin International Developments Pty Ltd v Growthcorp (Australia) Pty Ltd (1998) 143 FLR 408, 421 where their Honours discuss the current relevance of McLelland J's approach in L & D Audio Acoustics Pty Ltd.

[10] The following passage in Braams, from Stein JA's reasons at 171 FLR 455-456, [32]-[37], expresses the philosophy underlying the current Act clearly:

[32] In Chief Commissioner of Stamp Duties v Paliflex (1999) 41 ATR 309, Austin J considered a claim that the plaintiff was not a creditor and had no standing under s 459P to apply to wind up the defendant in insolvency. It was his Honour's opinion that where an application for winding up relies on the failure of the company to comply with a statutory demand, and no application had been made to set the demand aside, the plaintiff's argument could not be run unless the Court granted leave under s 459S(1).

[33] His Honour said that if it were possible to raise the issue of indebtedness by challenging standing under s 459P after it had become too late to set the demand aside, the underlying policy of the 1992 reforms to the Corporations Law would be undermined.

'In my opinion, the scheme contemplates that disputes about the existence of debts are to be resolved through the process of applying to set aside the statutory demand which relies on the debt. The purpose of the reform was to reduce the occasions when disputes would arise about the debt at the hearing of the winding up application: explanatory memorandum to the Corporate Law Review Bill 1992 (par 685). To that end, the provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands: explanatory memorandum (par 688). The scheme `provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading up to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed at an early stage, rather than after winding up proceedings have commenced': explanatory memorandum (par 689). The construction for which the defendant contends would fly in the teeth of the legislative intention so revealed.'

[35] His Honour agreed with Brownie J's assessment in the House of Tan of the limited room left for the Court's general powers relating to abuse of process.

[36] Austin J made a telling point about leave under s 459S. That is that the provision does not lead to the setting aside of the statutory demand and does not remove the presumption of insolvency under s 459C(2)(a). His Honour added (at 321):

' ... Having granted leave, the Court's task is to deal with the proceedings for winding up, rather than cutting away the demand which is their substratum. The overall question of solvency is the critical issue. If it emerges that the debt upon which the applicant has relied is not owing, the Court may grant leave to a creditor to be substituted as applicant, and if that happens the new applicant may be able to take advantage of the presumption of insolvency which arose out of non-compliance with the initial demand. As Gummow J said in the David Grant case (at 234), Pt 5.4 may appear to operate harshly, but that is a consequence of the legislative scheme which has been adopted, and in an appropriate case the applicant for winding up may be restrained on the ground of abuse of process.' (Emphasis added.)

[37] In my opinion Paliflex correctly states the law and the effect of Pt 5.4 and s 459S."

[11] The evidence in this case does not lead me to conclude that the statutory demand was made in circumstances where I should conclude that there has been an abuse of process of the type referred to in David Grant or Williams v Spautz. The differences between the parties about the nature of the demand reflect factual differences about the cost of rectification and how much of any such cost should be sheeted home to the respondent. The most that can be said against the respondent is that it formulated a demand based on an invoice it rendered taking into account an amount it conceded should be deducted for rectification and liquidated damages. That does not seem to me to amount to sufficient evidence that the process was one affected by an improper purpose but rather leads me to conclude that it was designed to seek payment of what the respondent claimed it was owed. That the claim may be properly characterised as one for unliquidated damages would not, of itself and in the absence of other evidence, lead me to conclude that the respondent was engaging in an abuse of process in the sense that it was seeking to achieve, not payment of the money it claims, but some entirely collateral end; see Palmer J in Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72, 77-78, approved in Braams at 171 FLR 456-457, [41]-[42].

[12] As Mackenzie J said in Sindea Trading Co Pty Ltd v Asia Pacific Glass Pty Ltd [2003] QSC 406 at [27]:

"The facts that there remain a dispute over the debt or that there is an assertion of solvency do not of themselves cause commencement of proceedings to be characterised in that way. The reasoning in cases such as Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 20 ACLC 304 ; State Bank of New South Wales v Tela Pty Ltd (No 2) [2002] NSWSC 20, and Braams is applicable. There is no evidence before me of the kind which fits the definition of abuse of process in [1992] HCA 34; (1992) 174 CLR 509, 526."

[13] Nor would these facts prevent the demand from purporting to be a demand under the statutory definition.

[14] That being the case, it is my view that it would be inappropriate for me to grant the declaration sought. An injunction is not sought and there is little evidence on which to base a view that there would be irreparable injury to the applicant if a winding up application were to be made against it. It claims to be solvent and has lead evidence to that effect and could only ask me to infer that potential purchasers from the applicant may be deterred from entering into contracts with it if a winding up application were made.

[15] The grant of a declaration in a situation like this would undermine the regime established by the Act for applying to set aside a statutory demand by creating a fresh opportunity to dispute the existence of a debt when the statutory scheme is designed to ensure that such disputes should be raised within the period prescribed by the Act. There is also another appropriate occasion where the applicant may seek leave, pursuant to s. 459S of the Act, to advance its arguments about the character of the debt claimed and, more importantly, to assert its solvency, namely at the hearing of any winding up application.

[16] Accordingly the application is dismissed. I shall hear the parties as to costs.