Nick Scali Ltd v JSK Logistics Pty Ltd [2008] NSWSC 597 | Case summary

HIS HONOUR: In this matter the plaintiff seeks to wind up the defendant following failure of the defendant to meet a statutory demand served upon the defendant on 18 January 2008. In support of the application to wind up the plaintiff relies on an affidavit of debt of Dominic Chiera of 29 May 2008; affidavit of service of proceedings, advertisement and search of 29 May 2008; an affidavit of service of demand and search dated 14 April 2008. The application is made pursuant to originating process filed in this court on 16 April 2008. There is also a consent of liquidator, Mr Murray Roderick Godfrey, dated 19 February 2008. The demand which was served by the plaintiff sought the payment of $52,375.83 based upon a judgment debt obtained in the Sutherland Local Court in October 2007 but reduced by an amount to take into account an amount accepted as due by the plaintiff to the defendant. The defendant took no action to set aside the demand. The defendant resists the winding up on the basis that it did not, in fact, receive notice of the Local Court claim or the statutory demand because, although served on the registered office of the defendant which was the office of the defendant's former accountants, they had moved without changing the registered address. Whilst it accepts that $16,000 approximately of the amount claimed by the plaintiff is due, it asserts that it has a cross-claim for monies owed to it, including for an alleged breach of a distribution agreement said to have been entered into by the plaintiff with the defendant. The breach, it is asserted, will yield damages far in excess of the plaintiff's claim against it. Mr Papadopoulos, solicitor, who appears for the defendant, sought to rely on his affidavit of 22 May 2008 to which were also annexed the affidavits of James Lee Kianou of 5 May 2008 and Sonny John Kianou of the same date, both directors of the defendant company. Mr Prowse, solicitor, who appeared on behalf of the plaintiff, objected to the affidavits on the basis that the material advanced by the defendant cannot be relied on, by virtue of section 459S of the Corporations Act (Cth) 2001 ("the Act"). Section 459S is in the following terms: "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." The evidence discloses that at least by 17 December 2007 the defendant was on notice of the fact that judgment had been entered against it for $62,916.53 and also implicitly that the Local Court claim had been served on the defendant company: see exhibit 2 and see paragraphs 12 to 17 of Mr James Kianou's affidavit of 5 May. The affidavits of the defendant's witnesses point to arguments that the defendant would wish to advance in support of its cross-claim and by which it says not all of the debt claimed by the plaintiff is owing and, when the cross-claim is taken into account, that on balance no monies would be owing. They are matters which could and should have been advanced in answer to the statutory demand and were not. Mr Papadopoulos argued that the reason why the defendant had not advanced these arguments before was that the defendant had not, in fact, received the statutory demand and had only become aware of it on 20 May 2008. In Chief Commissioner of Stamp Duties v Paliflex Pty Limited (1999) 149 FLR 179, also 17 ACLC 467; [1999] NSWSC 15 Austin J stated at paragraph 49: "The exercise of the discretion to grant leave under section 459S(1) involves three considerations, namely: (i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand; (ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and (iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent." Subpara (iii) picks up subparagraph 2 of section 459S. In Perpetual Nominees v Masri Apartments; Perpetual Nominees v Aus Constructions [2004] NSWSC 551; (2004) 49 ACSR 719 one of the issues with which the court was concerned was whether the defendant could seek to undermine the existence of a debt in respect of which no attempt had been made to set aside a statutory demand pursuant to section 459G in circumstances where the explanation for the failure to seek to set aside the service of the statutory demand was that it had not come to the notice of the directors of the company. The company had argued that service of the demand was not effective, but in an earlier decision Austin J had rejected that argument. In the later case Austin J reiterated the legislative policy behind the section, which he described as: "That the provisions relating to the setting aside of a statutory demand are to be a complete code for the resolution of disputes about the subject matter of the demand, thereby preventing disputes about the underlying debt from being contested at the hearing of the winding up application". He referred to Switz Pty Limited v Glowbind Pty Limited (2000) 48 NSWLR 661 and David Grant & Co Pty Limited v Westpac Banking Corporation (1995) 184 CLR 265, but he saw that policy as one which: "assumes that the debtor company has the opportunity to make an application, within the prescribed time limit, to set the demand aside. Such an opportunity will exist if the statutory demand is both properly served and comes to the notice of the company's directors in a timely fashion. Arguably, the opportunity will also exist if, although the directors did not in fact discover the existence of the statutory demand within the time limit, they would have done so if they had acted reasonably in the superintendence of the collection of mail from the company's registered office. Where, however, it is established on the evidence that the directors of the company did not become aware of the existence of the statutory demand until after the expiration of the 21-day period, and they have acted reasonably with respect to superintendence of the collection of mail from the company's registered office, the case is one where the company could not, in a factual sense, have relied on any of the grounds available to challenge the demand within the time period. In such a case, fairness requires that the company be permitted to raise those issues at the only hearing available to it, namely the final hearing of the application for winding up, even though to that extent one reverts to the old practice which the Harmer reforms were intended to reverse." In Masri the company had sent notice of a change of address to ASIC at the same time as the demand addressed to the old address had been posted, so the timing was critical. The approach taken in Masri might be thought to dent the scheme of certainty that the statutory demand provisions are intended to provide, but accepting for present purposes that non-receipt of the demand correctly served on the registered office of a defendant can be a basis for permitting leave under section 459S, in my view, it could only be in very limited circumstances of the type that were present in Masri that would permit leave to be granted on the basis that documents validly served on the registered office of the company had not come to the attention of the directors. Failure to act reasonably in respect of superintendence of the collection of mail from the company's registered office and/or failure to take steps to ensure that changes in the registered office were advised to ASIC would, in my view, preclude the grant of leave. I do not think that the evidence here justifies a grant of leave, even accepting that non-receipt of a demand could be a sufficient basis. First, the affidavits of the defendant's directors say nothing about non-receipt of the statutory demand. Mr James Kianou says that his accountants had informed him that they did not receive the statement of claim, see paragraph 12. The prospect that by that time the defendant was not aware that there was a problem with the registered address is remote indeed. Second, the defendant knew about the proceedings in the Local Court by early September 2007. It has known about the judgment since December last year. It has not taken any action to set aside the judgment until May of this year. Third, it has done nothing to ensure that its registered office was changed, even after it became aware that judgment had been entered in the Local Court. Fourth, the amount of time which has passed; that is, from at least early September 2007 to January 2008, being the time of the statutory demand, was sufficient time for the defendant to have taken action to ensure that its address was corrected. There is a further significant matter. The defendant has provided no evidence to establish that it is solvent. To establish solvency it is necessary that the defendant present the fullest and best evidence of its financial position, see Evans and Tate Premium Wines Pty Limited v Australian Beverage Distributors Pty Limited [2005] NSWSC 186; BC-200501193. By its failure to provide any information about its assets and liabilities the court has no means of determining whether the debt the subject of the demand is material to proving the company to be insolvent, so 459S(2) precludes leave being granted: see Switz, [42] to [44] and [53] to [56]. Mr Papadopoulos had a further argument. He drew attention to the fact that the originating process had referred to an amount of $62,916.53 (the amount of the judgment debt), whereas the demand referred to $52,375.83. Mr Prowse explained that the amount of the judgment debt was reduced by the plaintiff in recognition of a credit due to the defendant. The originating process wrongly referred to the amount of the judgment debt and not to the amount of the statutory demand. Mr Prowse sought leave to amend the originating process to reflect the amount of the statutory demand. Mr Papadopoulos resisted this. He pointed out that there was confusion because the statutory demand was even less than the debt referred to in exhibit 1, but the reality is that the plaintiff has demanded less than the judgment debt, thereby allowing for a credit. The demand is less than the judgment debt and there has been no prejudice to the defendant in the plaintiff claiming a lessor amount in the statutory demand, or even less than it asserted was due in the letter of 17 December 2007, exhibit 2. The originating process's erroneous reference to the judgment debt rather than the amount of the demand, has caused no prejudice or substantial injustice to the defendant, and hence by virtue of section 457A that is not a ground for dismissing the application. If leave is required to amend the originating process by inserting the amount referred to in the demand I would grant that leave. Mr Papadopoulos also sought a stay under section 467(7) of the Act, which is in the following terms: "At any time after the filing of a winding up application and before a winding up order has been made, the company or any creditor or contributory may, where any action or other civil proceeding against the company is pending, apply to the court to stay or restrain further proceedings in the action or proceeding, and the court may stay or restrain the proceedings accordingly on such terms as it thinks fit." Mr Prowse drew my attention to a decision of Austin J, Bungey v Magnate Projects [2006] NSWSC 734, in which his Honour stayed the winding up because there were on foot proceedings by the debtor company against a third party which proceedings were about to be heard in the Commercial Division of this court and in which the debtor had a claim for a substantial amount of money. His Honour granted a stay on the winding up proceedings on the basis of section 467(1), not section 467(7). In my view, section 467(7) can have no application to the present situation because it is dealing with an action or proceedings in another court and a stay of those other proceedings, which is not what is sought here. However, even if I treat the application as one under section 467(1) I do not think that Bungey offers any assistance because, in effect, what is relied on here are the same grounds that fall foul of section 459S. To permit a stay of the winding up by virtue of section 467(1) to permit the application to be made to the Local Court would be to circumvent the effect of section 459S and would provide a means to avoid section 459S(2). As Chief Justice Spigelman, (in whose judgment Handley and Giles JJA concurred, in Switz), see [78], said: "Section 459S(2) strongly suggests that the procedure under section 459S is intended to operate to the exclusion of other provisions which employ general words and which may impinge upon the subject matter of section 459S" and see also [46] to [52] of Switz. Mr Papadopoulos sought to argue that the court ought ameliorate the effect of part 5.4 of the Act. In the absence of proven irregularities in the demand or in service or demonstration that the application is an abuse of process, there is no basis for amelioration of the strict requirements other than by a grant of leave under section 459S, which, for reasons I have given, ought not be given here.

Nick Scali Ltd v JSK Logistics Pty Ltd

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