Plaintiff v Defendant

For Better Batt Insulation Pty Ltd (supporting creditor)

For Tommy Construction Pty Ltd (supporting creditor)

For Victorian Workcover Authority (supporting creditor)

For Doug Constable Group Pty Ltd (supporting creditor)

For Victorian Fire Doors Pty Ltd (supporting creditor)

For Pro Air Conditioning & Electrical Contractors Pty Ltd (supporting creditor)

1 Set out below are ex tempore reasons for decision delivered on 6 June 2018 which have been the subject of minor revision.[1] The substance of the reasons remains the same.

2 The circumstances surrounding this matter are unusual. An application was filed on 20 April 2018 by Inter Industrial Services Pty Ltd ("the plaintiff") to wind up Erfanian Developments Pty Ltd ("the defendant") in insolvency. On the first return date of 23 May 2018, there were six supporting creditors who had registered their appearances. Today there are eleven. On the earlier occasion, the legal representative of one of the supporting creditors, Doug Constable Group Pty Ltd ("Doug Constable Group"), had informed the Court that his client had acquired the debt owed by the defendant to the plaintiff and would be seeking to step into the shoes of the plaintiff in order to prosecute this winding up application. Consequently, orders were made by Matthews JR for the filing of material going to the question of the assignment of the plaintiff's debt. Orders were also made for the defendant to file affidavit material concerning its capacity to pay all known creditors.

3 At the further hearing of the application today, Doug Constable Group, in reliance on an affidavit of its director dated 31 May 2018, seeks to be substituted as applicant under s 465B of the Corporations Act 2001 (Cth) ("Corporations Act") and for orders to be made winding up the defendant. Mr Malcolm Howell is sought to be appointed as liquidator in the event that those orders are made.

4 One of the ten additional supporting creditors, Tommy Construction Pty Ltd ("Tommy Construction"), also seeks to be substituted as applicant creditor and puts forward Sam Kaso and Daniel Juratowitch as proposed liquidators.

5 The defendant has failed to comply with the Court's orders for the filing of affidavit material. The defendant's lawyer also informed the Court he could not obtain instructions from his client for today's purposes. The winding up application is therefore unopposed.

6 In assessing an application for substitution, it is important to have regard to the clear language of the statute. Section 465B of the Corporations Act provides:

Substitution of applicants

(1) The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up.

(2) The Court may only make an order if the Court thinks it appropriate to do so:

(a) because the application is not being proceeded with diligently enough; or

(b) for some other reason.

(3) The substituted applicant may be, or the substituted applicants may be or include, the person who was the applicant, or any of the persons who were the applicants, before the substitution.

(4) After an order is made, the application may proceed as if the substituted applicant or applicants had been the original applicant or applicants.

7 To succeed in an application for substitution, a supporting creditor is required to show that it was also a creditor at the time the plaintiff filed its winding up application.[2]

8 The purpose of the substitution procedure in s 465B is to ensure that the winding up application can be continued so that all creditors can take full advantage of the process.[3] There is also a clear policy found in Part 5.4 of the Corporations Act that an insolvent company should be promptly wound up as a matter of public interest.[4] It follows that a winding up proceedings is not ordinary inter partes litigation in which a party may pursue or acquire a debt and prosecute an action to recover a judgment. It is a proceeding brought for the benefit and protection of all creditors of the company, including existing and future creditors.

9 In addition, in exercising discretion to order the substitution of a creditor under s 456B of the Corporations Act, the Court will seek to ensure that the winding up process is not used as a debt collection mechanism.[5]

10 The solicitor for Tommy Construction has also drawn my attention to the decision of Robb J in Re Beechworth Land Estates Pty Ltd (admin appointed) and Ors (No 3)[6] which, among other things, dealt with the question of a person's standing to make applications under ss 447A and 447C of the Corporations Act. His Honour found that the applicant had acquired a debt for a purpose "collateral to the maintenance of the rights of the creditors" of the relevant company.[7] Justice Robb also observed that the Court should "be careful not to encourage parties to acquire debts in insolvent companies for no good commercial purpose, other than to give them some collateral advantage".[8]

Material relied upon by Doug Constable Group as supporting creditor

11 Mr Douglas Constable is a director of Doug Constable Group. In his affidavit of 31 May 2018, he deposes to Doug Constable Group paying the plaintiff $71,513 on 22 May 2018 to acquire the defendant's debt the subject of the relevant statutory demand, together with its costs. The acquisition of the plaintiff's debt was supported by a deed of assignment apparently signed by the relevant parties on the same day. Mr Constable's affidavit makes clear that the assignment only took place after the winding up application had commenced. This, in turn, created real doubt as to the standing of Doug Constable Group to be substituted as applicant. When I raised this concern with the solicitor for the supporting creditor, I was asked to stand the matter down to allow the supporting creditor to attend to the swearing of a further affidavit of its director.

12 Mr Constable's supplementary affidavit sworn today suggests there was a pre-existing debt owed by the defendant to Doug Constable Group in the amount of $27,500 pursuant to an invoice dated 3 March 2018 for accounting services rendered. Apparently a caveat has been lodged to secure the debt and an entry made on the Personal Property Securities Register.

13 In his supplementary affidavit, Mr Constable also confirms that the supporting creditor acquired the plaintiff's debt for full value. This was apparently because the plaintiff would "not negotiate" and because the director of the defendant had stated "he would have the debts [of the defendant] sorted if he obtained an extension of approximately 4 weeks". This has plainly not occurred.

14 Having regard to the further evidence provided today, I accept there appears to be a debt owed by the defendant to Doug Constable Group which pre-dates the filing of the winding up application. Accordingly, Doug Constable Group has standing as a person "who might otherwise have so applied for the company to be wound up" within the contemplation of s 465B(1) of the Corporations Act. However, the Court will only make an order for substitution if it thinks it appropriate to do so.

15 The Court notes that Tommy Construction seeks to be substituted instead of Doug Constable Group. In the present circumstances, it is important to have regard to these two competing claims for substitution in light of all relevant facts and circumstances.

16 On the one hand, while Doug Constable Group has established its standing, I am somewhat perplexed as to its motivation for acquiring the plaintiff's debt in circumstances where it appears to have already been owed an amount of money. That to me suggests the collateral motivation of debt collection as distinct from a motivation more associated with bringing about the timely winding up of this defendant company. However, I make no concluded findings in that regard. Nor do I cast any doubt on the independence of the liquidator who has been nominated by that supporting creditor.

17 On the other hand, there is an application for substitution by Tommy Construction which clearly relies on a debt owed prior to the date of the filing of the originating process. According to the affidavit of Mr Carl Millington, solicitor, sworn 5 June 2018, Tommy Construction served a statutory demand on the defendant for the sum of $113,800 in respect of services provided, invoiced and not paid. The demand was served on 27 February 2018 and has expired unsatisfied. It related to plastering services performed by Tommy Construction for the defendant as a subcontractor.

18 The defendant's non-compliance with Tommy Construction's statutory demand gives rise, of course, to its own presumption of insolvency. However, a supporting creditor would be entitled to rely on the presumption of insolvency which arose as a consequence of the defendant's non-compliance with the plaintiff's statutory demand.

19 I have asked all of the nine remaining supporting creditors in attendance today whether they support the application for substitution by Doug Constable Group or, alternatively, the application for substitution by Tommy Construction. All of those creditors support the application of the latter to be substituted as petitioning creditor in this winding up proceeding. This clear preference should be accorded some weight in the exercise of the Court's discretion under s 465B.

20 On balance, the Court favours the application for substitution made by Tommy Construction.

21 Ordinarily, an application for substitution would be made by way of a formal interlocutory process.[9] However, having regard to:

• the delays that have already occurred in this case;

• the number of supporting creditors who are here today; and

• the fact that the proceeding is undefended and the defendant has failed to comply with Court orders;

it is appropriate that the requirement to file and serve an interlocutory process be dispensed with under s 467(3)(b) of the Corporations Act.

22 On the basis of the material relied upon, Tommy Construction should be substituted as plaintiff and Doug Constable Group's competing application for substitution will stand dismissed.

1. Pursuant to s 467(3)(b) of the Corporations Act the requirement for Tommy Construction Pty Ltd to file an interlocutory application to be substituted as plaintiff under s 465B of the Corporations Act be dispensed with.
2. Tommy Construction Pty Ltd be substituted as plaintiff in the proceeding pursuant to s 465B of the Corporations Act.
3. Erfanian Developments Pty Ltd be wound up in insolvency under the provisions of the Corporations Act.
4. Sam Kaso and Daniel Peter Juratowitch jointly and severally are appointed liquidators for the purposes of the winding up.
5. The remaining supporting creditors' costs including costs reserved on 23 May 2018 (to the extent applicable) with respect to the proceeding are costs in the winding up.
6. The costs of Tommy Construction Pty Ltd as substituted plaintiff, including costs reserved on the 23 May 2018, are costs in the winding up.---

[1] The revisions include minor editing and corrections, some re-ordering of sections of the reasons and the inclusion of other necessary information referred to during the course of the hearing to provide greater context.

[2] See Re Elgar Heights Pty Ltd (No 2) (1985) 3 ACLC 480 and Re Rippon Investments Pty Ltd (1985) 3 ACLC 733.

[3] Re C2C Investments Pty Ltd [2012] NSWSC 1443; (2012) 92 ACSR 266. See also Thomson Reuters, McPherson's Law of Company Liquidation (5th ed), vol 1 (at Update 59) 3.1040.

[4] See Kelly v J Stockland & Co Pty Ltd [2007] NSWSC 214 at [11] (Barrett J) and Equititrust [2012] QSC 206 at [90] (McMurdo J).

[5] South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465.

[6] [2015] NSWSC 733; (2015) 106 ACSR 495.

[7] Ibid 508. See also Perak Pioneer Ltd v Petroliam Nasional Bhd [1986] UKPC 24; [1986] AC 849 where the Privy Council approved the principle found in the earlier decision of Paris Skating Rink Co (1878) 7 Ch D 368 that a Court should not sustain a winding up claim "founded on a debt purchased pendente lite for the very purpose of acquiring the right to petition" for winding up.

[9] Supreme Court (Corporations) Rules 2013 (Vic) r 2.2(1)(b).