Plaintiff v Defendant

2 On 25 October 2019, the company filed an interlocutory process under s 459S of the Corporations Act 2001 ('the Act'). The relief sought was:

(a) the winding up application be dismissed as an abuse of process; or

(b) alternatively, the company have leave pursuant to s 459S to oppose the winding up application on the ground that it disputed the debt claimed in the statutory demand.

3 Subsequently, I gave leave to permit the company to amend the interlocutory process to include the following additional grounds:

(a) alternatively, the demand be set aside for some other reason pursuant to s 459J(1)(b) of the Act;

(b) alternatively, the proceeding be dismissed on the ground that the company is not insolvent; and

(c) alternatively, the Court exercise its discretion pursuant to s 467(1)(a) of the Act to dismiss the proceeding.

4 The plaintiff's material is in order and, but for the determination of the company's interlocutory process, a winding up order would be made in the normal course. Accordingly, the issues arising for determination are as follows:

(a) is the winding up application an abuse of process;

(b) should leave be granted pursuant to s 459S of the Act;

(c) alternatively, should the demand be set aside for other reason pursuant to s 459J(1)(b) of the Act;

(d) alternatively, should the proceeding be dismissed on the ground that the company is not insolvent; and

(e) alternatively, should the Court exercise its discretion under s 467(1)(a) of the Act to dismiss the proceeding.

5 Section 459S of the Act provides as follows:

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.

6 Section 459J(1)(b) of the Act provides as follows:

Setting aside demand on other grounds

(1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

...

(b) there is some other reason why the demand should be set aside.

(2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

7 Section 467(1)(a) of the Act provides as follows:

Court's powers on hearing application

(1) Subject to subsection (2) and section 467A, on hearing a winding up application the Court may:

(a) dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application; or

(b) adjourn the hearing conditionally or unconditionally; or

(c) make any interim or other order that it thinks fit.

8 Section 95A of the Act provides as follows:

Solvency and insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

9 The company carried on the business of property development. The plaintiff was a builder.

10 Works commenced at the Doncaster property in early 2015. In or about January 2018, a non‑related company ('Belgravia') commenced as the third builder at the Doncaster property. In October 2018, Belgravia abandoned works at the Doncaster property. At that time, the plaintiff commenced construction services. On 27 December 2018, the plaintiff rendered a 'payment claim' to the company for works performed at the Doncaster property. In August 2019, the plaintiff rendered a tax invoice to the company for the sum of $231,797.58 owing pursuant to the payment claim. Subsequently, the plaintiff served a statutory demand for that amount on 3 September 2019.

11 The statutory demand, together with the affidavit in support, was hand delivered to the company's registered office being the company's accountants' office on 3 September 2019. Louie Kortesis, a director of the company's accountants, contended that he had not been made aware of the existence of the statutory demand and, if he had been made so aware, he would have immediately forwarded it to Mr Chiodo (the director of the company) for steps to be taken to set aside the statutory demand or otherwise deal with it.

12 The date for the expiration for compliance with the statutory demand was 24 September 2019.

13 The originating process for the winding up application and material in support were served by hand delivery on 4 October 2019 at the company's registered office.

14 On or about 7 October 2019, the company's solicitors wrote to the plaintiff's solicitors, relevantly setting out as follows:

We are advised by our client that the statutory demand issued by Mr Nadinic was never provided to Mr Chiodo and he was, therefore, deprived of the opportunity to deal with the statutory demand in a timely manner.

Additionally, we are instructed that our client has had no contractual dealings with your client in relation to the [Doncaster property].

Our client has a contract with Belgravia Projects Pty Ltd.

Our client is presently negotiating with Belgravia Projects Pty Ltd in respect of a progress claim under its contract. The amount being sought in the progress claim is similar to the amount which your client is seeking to claim from our client.

It is clear from email correspondence (see attached) between your client and Mr Craig Douglas that some form of dispute between them exists.

It appears that your client is seeking to embroil our client in that dispute.

We are instructed to bring an urgent application to set aside the application to wind up our client's company.

15 On or about 9 October 2019, the company's solicitors wrote to the plaintiff's solicitors which relevantly set out:

It would be helpful however if you were to provide any documents by which your client asserts that it had a contractual relationship with [the company]. Additionally it would be helpful if your client could provide us with copies of all invoices, letters of demand etc relating to the amount claimed in the statutory demand.

16 Mr Paul Chiodo, director of the company, contended that he was not aware that the statutory demand dated 3 September 2019 had been prepared on behalf of the plaintiff or that it had been served at the registered address of the company until he received the documents on 4 October 2019. The documents received on 4 October 2019 were the winding up application and the supporting affidavit.

17 By October 2019, the four townhouses constructed at the Doncaster property had been sold. Two of the four sales settled before October 2019. The remaining two were due for settlement on 29 November 2019 and 20 January 2020. At that time it was estimated that the balance of purchase funds to be received at settlement was $657,000 and $630,000 respectively.

18 In October 2019, the company had been negotiating with Belgravia with respect to a progress claim concerning variations which had been submitted by Belgravia. The amount was $240,000.

19 Mr Chiodo contended that the company had not entered into any contract with the plaintiff nor otherwise engaged the plaintiff. He contended that the company had never received any tax invoice or account from the plaintiff, nor received any request for payment or a demand from the plaintiff.

20 Mr Chiodo contended that the plaintiff had not complied with s 31 of the Domestic Building Contracts Act 1995 (Vic) (major domestic building contracts to be in writing) or with pt 9 div 3 of the Building Act 1993 (Vic) (relating to insurance). He contended that any work carried out by the plaintiff was carried out for and on behalf of Belgravia pursuant to their arrangements.

21 The company contends that the winding up application is an abuse of process because the debt upon which the statutory demand was based did not exist.

22 The company contends that it had no contract with the plaintiff. The company contended that the email exchanges relied upon support the inference that the plaintiff was looking to the company for payment as it apprehended that payment from Belgravia, the third party with which the company had contracted, might not be forthcoming.

23 Further, there was a reliance upon the provisions of the Building Act 1993 (Vic). The contention was that the plaintiff was not a registered builder and therefore was not entitled to carry out the building work pursuant to s 169F.

24 The company relied upon Williams v Spautz:[1]

Proceedings are brought for an improper purpose, and thus constitute an abuse of process, where the purpose of bringing them is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers...[2]

25 The company also relied upon R H Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd[3] where Barrett J said:

The situation is thus one in which the defendant resorted to the statutory demand procedure for a purpose for which the law does not allow. The legislation works on the basis that a creditor to whom a debt is owing due and payable may seek, by serving a statutory demand, to achieve the benefit of a presumption of insolvency for the purposes of pursuing winding up proceedings. The legislation does not countenance the obtaining of the benefit of such a presumption by a person to whom a debt is not owing, due and payable by the company, who has no more than some imperfectly articulated claim for damages and who knows that the person's position is as just described. For such a person deliberately to resort to the statutory demand procedure in respect of such a claim, having made it clear to the company concerned that the claim is, to the person's knowledge, of that nature, is a perversion of the statutory process.[4]

26 Notwithstanding the contentions put on behalf of the company, counsel for the company quite properly recognised two facets. Firstly, that a person alleging abuse of process bears a heavy onus[5] and, secondly, that the decision of Sifris J in Re Kornucopia Pty Ltd (No 4)[6] may cause some difficulty in maintaining the abuse of process ground in the absence of leave.

27 The company maintained that there was compelling evidence of the basis for disputing the debt. As to the failure to set aside the demand, it was contended that 'the [d]emand was overlooked; that there has been an administrative oversight. Chiodo states that if he had been made aware of the Notice he would have acted on it'. The company submits that is a satisfactory explanation for the failure to set aside the demand.

28 As to solvency, counsel recognised that the onus is on the company to prove it is solvent and it must present the 'fullest and best' evidence of its financial position. The company submits that the evidence is sufficient to establish, on the balance of probabilities, that it is not insolvent. Any requirement for audited accounts would impose an unreasonable and expensive burden on the company. If no debt is owed by the company to the plaintiff, then the company is solvent.

29 In addition to the s 459S matters, the company also submits that there was, on a set aside application, some other reason to set aside the statutory demand. Reliance is placed upon s 459J(1)(b) to contend that the Court has a discretion or wide import to prevent a statutory demand being 'used as some kind of commercial lever to extract favourable settlement of disputed debts'.[7] The company contends that the section will operate where a person serving a statutory demand 'has engaged in conduct that was unconscionable or an abuse of process or had given rise to substantial injustice'.[8]

30 In any event, the company contends that even if it is determined to be insolvent, the Court has an overall discretion to dismiss the winding up application.

31 The supplementary submissions by the company were confined to the provisions and the effect of the relevant building legislation in accordance with my direction. The gravamen of those submissions is that as the plaintiff had conceded that it is not a registered building practitioner, the fact that its director may have been a registered building practitioner 'is relevant only to the extent that one would expect such a practitioner to have some familiarity with the relevant building legislation'. It is submitted that the plaintiff acted in breach of the Domestic Building Contracts Act 1995 (Vic) and a consequence is that the plaintiff is barred from recovery, save to the extent that a claim for the quantum meruit excluding the claimant's profit and labour may be permitted. It is contended that it is not the function of this Court to attempt any calculation of that amount. It is submitted that:

A finding that there is a debt owed by [the company] to the plaintiff in these circumstances would be tantamount to a court sanction of clear breaches by the plaintiff of the building legislation.

32 As to solvency, the company produced a statement of financial position as at 30 June 2019:

STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2019

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2019

Property - Lot 1, 1 Reedy Creek Lane, Dinner Plain

33 The company also produced accounts for the period ending 14 February 2020:

STATEMENT OF FINANCIAL POSITION

AS AT 14 FEBRUARY 2020

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 14 FEBRUARY 2020

Property - Lot 1, 1 Reedy Creek Lane, Dinner Plain

34 In addition to the statement of financial position as at 30 June 2019 and as at 14 February 2020, the company also produced a statement of financial position as at 13 December 2019. That statement was presented as it was said that the sale of the townhouses at the Doncaster property had settled. It was of note that in the December 2019 statement, there was no provision for non-current liabilities. The loan from Sam Chiodo had disappeared and did not reappear until the February 2020 statement.

35 The company did not produce any statements of financial performance (profit and loss statement) for any period. In support of the statement of financial position, Mr Paul Chiodo contended that the directors of the company placed additional funds into the company accounts as and when such funds were needed. In addition, the company is the registered proprietor of two blocks of land at Dinner Plain. Mr Chiodo said that on 21 February 2020 he had been advised by Mr John Castran, of Castran Real Estate, that each of the Dinner Plain lots could be sold in the current market for approximately $115,000 each.

36 Further, Mr Chiodo said that the claim by Belgravia had been reduced by offsets by the company to arrive at a payment schedule amount of $0. Mr Chiodo said that he had not heard from Belgravia since late last year.

37 It is clear that the company's contention that the winding up application has been brought as an abuse of process is confined to the contention that the plaintiff has no standing as a creditor to bring the application. It has contended that the application has been brought to seek payment from the company in circumstances where Belgravia, and not the plaintiff, was the contracting party.

38 Sifris J in Re Kornucopia Pty Ptd (No 4)[9] considered the concept of abuse of process and whether that concept had been impacted upon by the introduction by pt 5.4 of the Corporations Act 2001 (Cth).

Prior to the commencement of Part 5.4 of the Act, the weight of the authority supported the existence of three bases upon which a debtor-company was permitted to assert that a winding up application constituted an abuse of process. These were:

(a) that the winding up application was bound to fail (where, for example, the plaintiff could not prove that it possessed standing as a creditor, or that the company was insolvent); [10]

(b) where the winding up application is made for an improper purpose, according to the principles set out by the High Court in Williams v Spautz;[11] and

(c) where there is a substantial contest as to the existence or enforceability of a debt relied upon by the plaintiff or the existence of a cross-claim or offsetting claim, which should properly be resolved in separate proceedings. This is the 'disputed debt' principle, as referred to above and below.[12]

The third ground is supported by the following authorities. In Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq), White J said:[13]

The preponderance of authority is that a company may not be wound up on the application of a person claiming to be a creditor whose debt is disputed unless that dispute is resolved. Otherwise the applicant will not establish its standing to apply for the company's winding up. Because the winding up jurisdiction should not be used to resolve disputed questions of debt, it may be an abuse of process for an alleged creditor, whose debt is disputed, to apply to wind up the company.

In CVC Investments Pty Ltd v P & T Aviation Pty Ltd, Cohen J said:[14]

The authorities seem almost unanimously to agree that where a claimed debt is bona fide disputed on substantial grounds and there is no basis for regarding the claimant as a contingent or prospective creditor then that claimant has no standing to bring proceedings to wind up the company, and if he does so the bringing of those proceedings is an abuse of process. The fact that there is a ground for winding up in existence does not give that claimant any greater standing. There are a number of grounds under s 364 upon which the court may make an order for the winding up of a company. The most common one relied upon is that the company is unable to pay its debts. Nevertheless the Code gives only a limited number of persons a right to have the company wound up on that or any other ground. It is an abuse of process if a person in bringing proceedings assumes a standing which it does not have and seeks orders to which it is not entitled.

In Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation (Fortuna Holdings),[15] McGarvie J set out what his Honour described to be the 'second branch' of abuse of process. That is the third ground set out above. His Honour said:[16]

The second branch applies in cases where a petitioner proposing to present a petition has chosen to assert a disputed claim, by a procedure which might produce irreparable damage to the company, rather than by a suitable alternative procedure. It may apply in cases where the petition, if presented, has a chance of success. In some cases both the first and the second branches of the principle apply.

...

The second branch applies to cases where there is more suitable alternative means of resolving the dispute involved in a disputed claim against the company. They are not necessarily cases in which, as a matter of law or through absence of evidence, there is an inherent incapacity of success. They may be cases where the petitioner is entitled to present the petition, the ground is sufficient in law and there is evidence to support the ground. They are cases, though, where, due to the availability of the more suitable alternative remedy, the court hearing the petition would in the circumstances, in the exercise of its discretion, decline to make a winding up order, at least while the circumstances remain as they are at the time of the application for an injunction. Thus the second branch applies where, because of the availability of a suitable alternative procedure, the petition is unlikely to succeed in the circumstances existing at the time.

In Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd,[17] Beazley JA (with whom Hodgson and Santow JJA agreed) discussed the principles engaged in Fortuna Holdings.[18] Her Honour said:[19]

I agree that those principles still apply. The court retains a discretion to make an order in the circumstances discussed by McGarvie J in Fortuna Holdings under the 'second branch' ...

These decisions, however, and the principles relating to the 'broader' grounds or 'second branch' of abuse of process they stand for are no longer good law. In 1992, Part 5.4 of the Corporations Law was introduced.[20] Under Part 5.4, an application may be made under s 459G to set aside a statutory demand within 21 days after service. Section 459C provides for a presumption of insolvency upon expiry of a statutory demand. Section 459S(1) provides that in an application that relies upon a failure to comply with a statutory demand, the company may not, without leave of the Court, oppose the application on any ground it could have relied on to set aside the demand. Section 459S(2) provides that the Court is not to grant leave unless it is satisfied that the ground is material to proving the company is solvent. The Explanatory Memorandum to the Corporate Law Reform Bill 1992 states:[21]

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, and to do so on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies. (emphasis added)

Notwithstanding that Part 5.4 is a 'code', the Court retains a discretion to stay or dismiss a proceeding as an abuse of process, as made plain by the words of s 459A or 467(1). However, the effect of the enactment of Part 5.4 is that disputes which fall within the first and third 'categories' of abuse of process must now be dealt with under the provisions of Part 5.4.[22] Where a winding up application relies upon the failure of a company to satisfy a statutory demand, a presumption of insolvency arises as an automatic consequence pursuant to ss 459C(2)(a) and 459E of the Act. That consequence is unlike that which occurred under the predecessor legislation, where the existence of a dispute 'explained why the demand was not complied with "and so rebuts the presumption of insolvency which would otherwise arise".'[23] If the presumption had not invoked, there was no evidence of insolvency, and the company was able to establish that the debt was bona fide disputed upon some substantial ground, it followed that there was no reason not to stay or dismiss the winding up application. The Court would not, however, stay or dismiss the application in the case of an insolvent company.

The starting point under the present regime is that the company is presumed to be insolvent. It follows that the old practice and principle cannot be applied and the company must first displace that presumption. Mere assertions that the plaintiff lacks locus standi as a creditor, or that the debt is disputed and that this was the reason why the company did not satisfy the statutory demand, will not suffice. A debtor may argue that a debt is bona fide disputed on substantial grounds, and while the Court retains discretion as to whether it should make orders under ss 459A or 461, it will not stay or dismiss the application in the absence of evidence of solvency. Where the presumption has not been displaced, the existence of a genuine dispute does not give rise to a predisposition of the Court in favour of a stay or dismissal of the application.

Accordingly, where the company asserts a substantial dispute, it must first displace the presumption. It may do so by adducing evidence that it is solvent and in the ordinary course that would lead to the application's dismissal with the dispute then able to be determined in some other forum or proceeding. If the company seeks to argue that it would be solvent if the debt were not taken into account, or that it would affect the solvency position in a manner favourable to the company, then it must in most cases make an application under s 459S, which in turn requires the Court to be satisfied that the dispute is material to the question of solvency.[24] Axiomatically, that too requires evidence of solvency.

While the second category alleging that an application is brought for an 'improper purpose' according to the principles of Williams v Spautz[25] is said to fall outside of the regime imposed by Part 5.4, and may still be raised, it is affected by the provisions of Part 5.4. A company may allege that the application has been 'used for the improper purpose of compelling a solvent company to pay a disputed debt',[26] but to establish that improper purpose, it remains necessary for the company to adduce evidence of solvency, given that the starting point is the presumption of insolvency.[27] The short point is that where the company is presumed to be insolvent, and there is no evidence of solvency, the existence of a genuine dispute is largely irrelevant to the Court's discretion. The company ought to have raised the dispute prior to the final hearing of the winding up application, by an application made under either ss 459G or 459S, as contemplated by the regime imposed by Part 5.4. That is the case regardless of how the company frames the abuse of process it relies upon. The common law doctrine of abuse of process cannot be employed in a manner that would undermine the intention of Parliament that disputes as to the existence or enforceability of a debt be dealt with under the provisions of the Act.

Part 5.4 has been observed by this Court on countless occasions to have the potential of operating harshly, but that is the only way that the regime could effectively function. Were a genuine dispute surrounding a debt a legitimate basis to have a winding up application dismissed as an abuse of process, the s 459G procedure would be rendered ineffective. A company's failure to comply with a statutory demand provides the creditor with various benefits. They include the presumption of insolvency and the barrier erected by s 459S of the Act. Those two matters preclude the company from distracting attention from the central question of solvency or asserting unsubstantiated disputes which they ought to have raised in an application to have the statutory demand set aside. That application is to be made by the company promptly. The overarching aim of Part 5.4 is to provide for a 'speedy resolution of applications to wind up in insolvency' and to minimise the risk that an insolvent company may be permitted to continue trading in the public arena, incurring debts which it might not be able to satisfy.[28] Matters of public policy defeat cases of individual hardship which may be faced by a company as a result of its own carelessness or negligence in not promptly addressing a statutory demand issued upon it. The preconditions for leave required by s 459S of the Act finely balance the maintenance of an efficient, timely and effective regime for the winding up of insolvent companies and the Court's ability to do justice in appropriate cases. As the Explanatory Memorandum to the Corporate Law Reform Bill 1992 states, in relation to s 459S of the Act:[29]

The rules in this section will penalise debtor companies who do not give early notice of all the issues they have with the statutory demand, since needless delay and expense will occur if those issues are raised only at the winding up hearing.

That exposition of the law is borne out from, and expanded upon, in the following authorities.

In State Bank of New South Wales v Tela Pty Ltd (No 2) (Tela), Barrett J set out the differences between the regime enacted by Part 5.4, and that which previously subsisted:[30]

The scheme of the legislation makes it clear that a creditor who has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Part 5.4. It is now abundantly clear that, unless the Div 3 [of Part 5.4] process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist.

In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Lanepoint),[31] ASIC applied to the Federal Court for leave to seek orders, pursuant to s 459P of the Act, to have Lanepoint Enterprises wound up. The application relied upon a presumption of insolvency pursuant to s 459C(2)(c) of the Act. At first instance, Gilmour J considered that certain transactions which the company relied upon to establish its solvency were ineffective to reduce its indebtedness. It could not rebut the presumption of insolvency. On appeal, the majority of the Full Court held that the application 'was an inappropriate vehicle for the determination' of the validity and effect of those transactions.[32] The majority set aside the winding up order and considered the proceeding ought to be stayed pending the determination of proceedings relating to those identified inter-group transactions, however even then, such proceedings had not been commenced.

The High Court (Gummow, Heydon, Crennan, Kiefel and Bell JJ) unanimously set aside the orders of the Full Court and restored the orders of Gilmour J. Their Honours recognised that the principle relied upon by the Full Court was the 'disputed debt' principle, which is the same principle the Companies now rely upon. Their Honours said:[33]

Where a creditor sought to prove a company's insolvency by relying upon a debt owed by it, but without resort to the procedure of statutory demand, the court, as a general principle, would not order winding up where a debt was bona fide disputed upon some substantial ground. The principle informed the court's discretion whether to dismiss the application. McPherson says that, although the principle may have had some basis in the court's concerns as to the status of the applicant for winding up as a creditor where there was a genuine dispute about the debt, the principal reason for it was that the court would not permit an application for winding up to be used for the improper purpose of compelling a solvent company to pay a disputed debt. It followed that it had no application in the case of an insolvent company.

The power given to the court to order a winding up of a company was expressed in permissive terms, as it is now. Subject to two express limitations, the court could dismiss the application. And the court might refuse to make an order for winding up even if a creditor proved a debt, although the discretion to do so was regarded as one to be exercised according to defined principles. More pertinent to the present case was the practice of the court to dismiss an application for winding up where a debt was the subject of a genuine dispute on substantial grounds. The practice is explained by the principles discussed above. An order for dismissal would not be made in the case of an insolvent company.

However, the High Court recognised that the principle would only apply where an evidentiary presumption of insolvency under s 459C of the Act is not relied upon. The starting point, where the presumption applies, is evidence of solvency:

Under the present statutory scheme, where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption. This may be contrasted with the position which formerly pertained, where the presumption that a company was unable to pay its debts could not arise if the debt the subject of the demand was shown to be the subject of a genuine dispute of substance. (emphasis added).

Their Honours held that the Full Court had erred by applying a principle which could not therefore apply in circumstances where ASIC, rather than a creditor, had made the application, and in circumstances where the application relied upon a presumption of insolvency:[34]

More relevant to the reasons of the majority in the Full Court is the principle applied by the court in winding up proceedings brought under the former legislation, where the statutory demand process was not invoked. It will be recalled that the principle was based upon the potential abuse, by creditors, of the winding up process to compel a solvent company to pay a genuinely disputed debt. ... More fundamentally, because the principle has no application in the case of an insolvent company, it cannot apply in the context of the current Pt 5.4, where the statutory presumption of insolvency operates.

The majority in the Full Court were therefore wrong to conclude that the general principle could apply to ASIC's application or that it continues to apply to creditors' proceedings, given the presumption provided by s 459C. The current statutory scheme provides no basis for an assumption in favour of a dismissal or stay of proceedings where a company disputes the existence or amount of a debt.

The High Court did, however, appear to leave open the possibility that in limited or exceptional circumstances and cases, the Court could, in its discretion, stay or dismiss a winding up application which relies upon a debt which is disputed. In those few cases, it might be desirable to defer the winding up application to a later time, once the controversy surrounding the debt has been resolved:[35]

There is a policy evident in the current statutory scheme that disputes concerning a statutory demand should, where possible, be determined prior to the determination of the winding up application and therefore separately from that application. The requirement of leave, to raise an objection at the hearing of that application which could have been taken in an application to set aside a demand, confirms this. But such a policy says nothing about what is to occur if there remains an issue about a debt at the time the application for an order for winding up in insolvency is heard. Sections 459A and 467(1)(c) make plain that the court retains a discretion to stay proceedings on an application to wind up a company in insolvency. (emphasis added).

That proposition must, however, be qualified and read against the remainder of the decision. Whenever a creditor seeks to raise a genuine dispute (as a ground of abuse of process) in relation to the debt upon which the winding application is based, in circumstances where a presumption of insolvency applies, the starting point is to adduce evidence of solvency. Only when faced with such evidence, will the Court entertain whether it is appropriate to stay or dismiss a winding application, and direct that any anterior dispute in relation to the debt be separately determined. It follows, that in a case where there is no evidence of solvency (such as the present case), the existence of a genuine dispute goes nowhere. The Court must presume the company is insolvent and is unable to determine how far removed that dispute is to the central question of solvency. The High Court (Gummow, Heydon, Crennan, Kiefel and Bell JJ) said:[36]

The court may consider that although such a dispute may affect a conclusion as to solvency, the dispute may be more conveniently resolved in other proceedings which have been, or will be, brought for that purpose. Much may depend upon the nature of the dispute, and the extent to which it is removed from the central question of solvency. In this regard the court will bear in mind that the question of solvency, which it is required to determine upon an application for winding up in insolvency, is affected by the statutory presumption. The starting point, where the presumption operates, is that the onus is on the company to rebut the presumption, by proof of its solvency. And when considering whether to separate out a dispute from the winding up proceedings, the court will also bear in mind the statutory objective, that such applications are to be determined within 6 months, subject only to extensions granted in special circumstance. (emphasis added).

The conclusions reached above are supported by various recent decisions of this Court which have analysed Lanepoint.[37] In A G Coombs Pty Ltd v M & V Consultants Pty Ltd (A G Coombs),[38] the company sought injunctive relief to restrain the creditor from making a winding up application. The company contended that there was a genuine dispute about the amounts claimed in a statutory demand, there were offsetting claims exceeding the amount of the demands, the company was 'unquestionably solvent', and the filing of a winding up application would cause the company to suffer irreparable damage. The company relied upon the 'second branch' of abuse of process, set out in Fortuna Holdings,[39] that is, a scenario where there is a more suitable means, alternative to a winding up proceeding, of resolving the disputed claim. That alternative means was said here to be 'conventional litigation'. Sloss J extensively reviewed the authorities and considered that this ground, in light of Lanepoint,[40] may no longer available to the plaintiff:[41]

It is clear that the regime established by Pt 5.4 of the Corporations Act does not preclude allegations of an abuse of process where the abuse is alleged to be the institution of proceedings for an improper purpose. There is, however, some uncertainty as to the extent to which the abuse of process principles decided under the previous winding up regime continue to apply today, particularly in the context where a winding up application is brought based on non-compliance with a statutory demand. When the decision of the High Court in Lanepoint is viewed against the background of the Court's rejection of the approach taken by the majority in the Full Federal Court below, it seems unlikely that any scope remains for the continued application of the 'second branch' of Fortuna Holdings type of abuse of process, particularly in a case where an application for winding up is pursued on the basis of presumed insolvency.

...

For the reasons outlined earlier, it seems unlikely that any scope remains for the continued application of the 'second branch' of Fortuna Holdings type of abuse of process, particularly in cases where an application for winding up is pursued on the basis of presumed insolvency. If, in the face of the Pt 5.4 regime and following the decision of the High Court in Lanepoint, it nevertheless remains available, the plaintiffs contend that the particular facts of this case manifest an abuse of process. That is because, in the plaintiffs' view, conventional litigation is the appropriate avenue for determining the existence (and quantum) of the disputed indebtedness, in circumstances where the defendant previously threatened the plaintiffs with litigation in relation to the debts the subject of the statutory demands, before withdrawing that threat in March 2017. Since, contrary to its earlier position, the defendant now contends that there is an amount due and owing to it, the plaintiffs submit 'it is plain that conventional litigation is the appropriate course', particularly given that other litigation may in any event be pursued in relation to the alleged indebtedness for the additional $7.5 million, being a claim raised by the liquidator following an investigation and assessment of all of the defendant's claims against the plaintiffs.

Insofar as the debts the subject of the statutory demands are concerned, the defendant has embarked on the Pt 5.4 process in a manner consistent with the statutory scheme. The liquidator has given sworn evidence that there was a proper basis for serving the statutory demands (in his earlier role as administrator), there was opportunity for the plaintiffs to dispute the debts, and upon their failure to do so, the statutory presumption of insolvency was enlivened. As the High Court observed in Lanepoint, '[t]he evident policy of Pt 5.4 is that there be a speedy resolution of applications to wind up in insolvency'. In my view, it would be contrary to that policy to deviate from the statutory process so as to enable the plaintiffs to dispute the debts in satellite litigation, simply for the reason that they may well be solvent_. In Australian Beverage Distributors, Beazley JA described the second branch of Fortuna Holdings as applying to cases where there is 'a more suitable alternative means of resolving a disputed claim against the company sought to be wound up'. In the present case, if the solvency of the plaintiffs is as clear-cut as they contend, it will remain open to them to dispute the debts underlying the statutory demands at a later point._ It is only if they are unable to demonstrate their solvency to the requisite standard that they will be foreclosed from disputing the debts any further, and while that outcome may seem harsh, it is one envisaged by the statutory regime. As such, I do not consider that the plaintiffs have established that there is a more suitable alternative means of resolving the dispute as to the debts pursued by the defendant by way of the statutory demands. (emphasis added)

In Vitamin Co,[42] Hetyey JR similarly expressed doubt with respect to the 'second branch' of abuse of process articulated in Fortuna Holdings.[43] Hetyey JR said:[44]

However, there is real doubt as to whether the principle [in Fortuna Holdings] continues to apply in light of the regime established by Part 5.4 of the Corporations Act, especially where the winding up application is brought for non-compliance with a statutory demand and where a presumption of insolvency arises under s 459C(2)(a).

In Zeninvest Pty Ltd v Altus Development Pty Ltd (No 2) (Zeninvest),[45] the company contended the application was an abuse of process, on the basis that the debt was genuinely disputed. Efthim AsJ rejected this argument and said:[46]

Senior Counsel for the defendant submits that Fortuna remains good law and that the decision in Lanepoint can be distinguished because the applicant was ASIC and it was not a case involving a statutory demand. He asserts that the application was made under a different regime and the applicant had a different standing.

In my view, after considering Lanepoint and AG Coombes, Lanepoint cannot be distinguished on that basis. It is a decision that I am bound to follow. It is not an abuse for the plaintiff to bring an application to wind up the defendant even though a debt was disputed because the defendant was presumed insolvent as it had not satisfied the statutory demand.

In AXF Entertainment Pty Ltd v AXF Group Pty Ltd (No 2) (AXF Entertainment), Efthim AsJ again had the opportunity to consider Lanepoint and repeated the view his Honour had earlier set out in Zeninvest,[47] in relation to a scenario where there is a genuine dispute:[48]

It is the principle applied by the Court in winding up proceedings brought under the former legislation where the statutory demand process was not invoked. It was based on an abuse of process where a debt was genuinely disputed and that a company should not be compelled to pay it. That principle, according to the High Court, has no application to an insolvent company. It cannot apply where there is a statutory presumption of insolvency.

Kornucopia relies upon the decision of Black J in Re Huizhong Investment Group Pty Ltd,[49] where, it was contended, Black J relied upon the 'broader concept' of abuse of process. That decision does not assist them. Black J identified that the circumstances there were 'somewhat exceptional'.[50]

His Honour remarked that 'it may constitute an abuse of process to serve a creditor's statutory demand in respect of a debt that is plainly known to be disputed' and that 'the winding up application would at least be an abuse of process within the "second branch" identified in Fortuna'.[51] Each of these matters were sufficient to support the declaration of abuse of process sought.[52] The debt was owed in relation to a loan agreement which had been entered into seven years previously, and his Honour considered that it would be difficult to see how that debt could ever form a proper basis to issue a statutory demand. The creditor's claim was 'convoluted'.[53] That is a far cry from the present case. Fundamentally, however, Black J was not referred to the decision of the High Court in Lanepoint,[54] and did not consider whether there was evidence that the company was solvent. It is perhaps further distinguishable as a case where the convoluted nature of the creditor's claim entirely justified the applying exception from the general rule articulated in Lanepoint.[55]

Kornucopia also relies upon the decision of Banks-Smith J in Owen-Pearse v Lander Land Co Pty Ltd,[56] in which the plaintiff sought review of a decision to refuse an application brought under s 459P of the Act on the basis that it comprised an abuse of process. His Honour did not consider Lanepoint, however, his Honour said:[57]

In most circumstances, the only matter which may relevantly be asserted by a company where there has been no application to set aside a demand is solvency, or displacement of the presumption of insolvency: State Bank of New South Wales v Tela Pty Ltd (No 2) [2002] NSWSC 20; (2002) 188 ALR 702 at [4] (Barrett J).

...

However, it is clear from the cases that abuse is more difficult to establish since the enactment of Pt 5.4: House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527 at 529-530 (Brownie J); Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867; (2001) 165 FLR 72 at [26] -[29] (Palmer J); Tela at [13]-[14]; 2020 Construction Systems Pty Ltd v Dryka & Associates Pty Ltd [2010] WASC 22 at [57] -[61] (Beech J).

His Honour went on to quote the passage from the Judgment of Barrett J in Tela, which I have referred to above.[58]

His Honour found that there was 'no suggestion in the evidence that the company lacked the financial capacity to pay the debt'. To the contrary, other than the creditor's claim, 'the company has no outstanding liabilities due and payable'.[59] The Court was 'satisfied as to the company's solvency'.[60] The decision is consistent with what I have said above. The company adduced material capable of displacing the presumption of insolvency meaning that it was open for the Court to stay or dismiss the application on account of a genuine dispute relating to the debt. The decision does not assist Kornucopia.[61]

40 In this instance, I am not satisfied that the claim for abuse of process has any independent existence to the claim by the company that the debt relied upon by the plaintiff is disputed in circumstances where a statutory presumption of insolvency applies when a statutory demand has been served and not set aside.[62] Accordingly, leave is required before the issue can be ventilated further.

Section 459S

41 In Re Kornucopia Pty Ltd (No 4),[63] Sifris J also reviewed and tied together the authorities relating to s 459S. His Honour said as follows:

Leave is not required for a company to adduce evidence that they are solvent as evidence of solvency is not a ground for having a statutory demand set aside.[64] Leave is, however, required for grounds that could have been raised under ss 459H or 459J in an application made pursuant to s 459G of the Act to set aside the statutory demand. These include 'a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates' or 'an offsetting claim' (s 459H). Leave may also be required for a ground which alleges that the winding up application is an abuse of process, if that ground could have been raised to have the statutory demand set aside.[65] That will be so if the ground constitutes 'some other reason' (s 459J) that was in existence at the time an application could have been made under s 459G and which could have been raised to have the statutory demand set aside.

Section 459S is expressed in mandatory terms. The Court must not grant leave unless it is satisfied that the ground that the company could have relied upon to set aside the statutory demand under s 459G, 'is material to proving that the company is solvent.'

In Re Vangory Holdings Pty Ltd (Vangory Holdings),[66] Black J referred to Chief Commissioner of Stamp Duties v Paliflex (Paliflex),[67] and set out the following three matters which the Court should have regard to:[68]

(a) whether 'there is a serious question to be tried on the ground sought to be raised';

(b) 'the sufficiency of any explanation as to why that ground was not raised in an application to set aside the creditor's statutory demand involving an evaluation of the reasonableness of the debtor's conduct at the time when the application might have been made'; and

(c) 'whether the court is satisfied that the relevant ground is material to proving whether the debtor is solvent'.

Black J went on to say:[69]

The discretion conferred by s 459S of the Corporations Act is to be exercised cautiously and sparingly and with regard to the purpose of Pt 5.4 of the Corporations Act to provide for determination of any objections to a creditor's statutory demand by an application under s 459G of the Corporations Act, rather than at the time of the winding up application.

The onus is on the companies seeking leave to place relevant material before the Court on the question of its solvency.[70]

Serious question to be tried

The test under s 459S is not dissimilar to the requirement that there be a 'serious question to be tried' when one applies for an interlocutory injunction. In Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1), Wigney J said:[71]

A 'preliminary' consideration of the nature and basis of the dispute concerning the existence of the debt that the defendant wishes to raise in opposition to the winding up application does not involve a final determination of whether there is in fact a genuine dispute, or a final determination of whether the debt actually exists. To approach s 459S in that way would defeat the very purpose of the statutory scheme of which s 459S is a part (as to which see Switz at [46]-[51]). Rather, the preliminary consideration is directed to a consideration of whether the defendant (the applicant for leave under s 459S) has a seriously arguable case that the debt is the subject of a bona fide dispute: D.A.G. International Pty Ltd v D.A.G. International Group Pty Ltd [2005] NSWSC 1036 at [5].

In Re Pioneer Cryogenics Pty Ltd (Re Pioneer Cryogenics), Black J said:[72]

... it would set too high a standard to require that affidavit evidence prove the facts that raise the ground in an initial affidavit to set aside a creditor's statutory demand, and that all that was required was to establish that there was a plausible contention requiring evaluation.

In Macleay Nominees v Belle Property East Pty Ltd, Palmer J observed that the offsetting claim in that case was arguable on the basis of facts that were asserted 'with sufficient particularity to enable the court to determine that the claim is not fanciful.'[73]

The authorities make clear that the Court is not to approach the question of whether to grant leave by conducting a 'trial within a trial'. The winding up application is an inappropriate vehicle for the final determination of whether a debt to which the statutory demand relates is, in fact, owing or whether a company can make good its offsetting claim. The nature of the leave application is not dissimilar to the court's summary jurisdiction. It is generally undesirable to engage in a detailed assessment of the credit of relevant witnesses (particularly on matters that are not directly relevant to the applications) or to determine whether the evidence of one witness, which contradicts that of another, should be preferred.

However, the Court is entitled to look at the claim in order to determine whether it is 'seriously arguable', or 'plausible', or conversely, whether it may be characterised as 'fanciful' or 'spurious'. The Court does not need to blindly accept all evidence put before it, but rather, is entitled to scrutinise it within permissible limits. If the evidence is an obvious fabrication, or so ludicrous, spurious or implausible that accepting it would run contrary to the interests of justice, the Court is entitled to reject it. Furthermore, the Court is entitled to determine a disputed question of law, especially if it would be dispositive of the dispute or contended offsetting claim. The Judge hearing the winding up application is in as good of a position to determine a question of law which does not bear upon the acceptance or rejection of evidence, as any other Judge would be on the hearing a trial of the dispute or offsetting claim. The Court might find that even if it accepts the company's evidence, the claim is frivolous, vexatious or does not disclose a valid cause of action. It might be, for instance, that the documents which evidence the debt speak for themselves, contrary to uncorroborated and undocumented assertions of the company's officers or, for instance, that the facts and circumstances which make up the company's offsetting claim were not causative of any loss suffered by it.

Grounds the Companies could have relied upon

The words 'could have so relied' gives the section a temporal element. Namely, grounds which the company 'could have relied upon', are grounds which were in existence and could have been relied upon at a time when the company could have brought an application under s 459G of the Act. If the ground was actually available according to the facts in existence at the time the company could have applied under s 459G, then it will require leave under s 459S to raise that ground in opposition to the winding up application. If those facts were not in existence at that time, with the consequences that the ground could not have been raised, then leave is not required to raise that ground.

In Roberts v Wayne Roberts Concrete Constructions Pty Ltd, Barrett J said:[74]

In a case such as the present where a statutory demand is served and there is no application under s.459G for an order setting it aside, the barrier erected by s 459S is one that pays attention to grounds on which the defendant company 'could have' relied had it made a s 459G application. It follows that any ground which was not available during the period when such an application could have been instituted but, because of some change in circumstances, has subsequently become available may be relied on in opposition to the winding up application even though it is of a kind or character that ss 459H or 459J makes relevant to an application under s 459G: Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181; BC200307633.

In Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd, Barrett J said:[75]

Once changes in circumstances are asserted, it becomes necessary to consider whether there is any need for s 459S(1) leave at all. In speaking of 'a ground ... that the company could have relied on', s 459S(1) is concerned not with a ground of a particular kind or description in a generic sense but, rather, with a ground that was actually available to be asserted according to the facts and circumstances existing at the time when it was open to the company to resort to the s 459G procedure: see Biron Capital Ltd v Velowing Pty Ltd Perpetual Nominees Ltd v Masri Apartments Pty Ltd [2004] NSWSC 551; (2004) 49 ACSR 719; Goman v Scope Data Systems Pty Ltd [2004] NSWSC 314. It follows that, if all the 'changes in circumstances' are of such a kind as to make defences on the basis of circumstances grounds that were not available to be asserted upon the s 459G application, leave under s 459S will be refused as unnecessary.

The company seeking leave under s 459S should provide a reasonable, legitimate and sufficient reason as to why it did not raise the ground in an application under s 459G of the Act to set aside the statutory demand. One explanation may be that the company did not become aware of the statutory demand until the expiration of the 21 day period within which it could have made that application. In some cases, that will be a sufficient explanation and in others it will not. The conduct of the company's officers will be relevant, and in particular, whether they acted carelessly on the one hand, or reasonably on the other. That inquiry is directed to whether the statutory demand would have come to the notice of the company acting reasonably. In this case, I have found that the officers acted unreasonably, such that it is an insufficient explanation.

Material to solvency

Section 459S(2) requires that leave must only be granted where 'the ground is material to proving that the company is solvent'. The company bears this onus. Two approaches (one strict, and one somewhat more lenient) have arisen in relation to the meaning of the phrase, 'material to proving the company is solvent'.

Switz illustrates the 'strict' view. The New South Wales Court of Appeal (Spiegelman CJ, with Handley and Giles JJA agreeing) stressed the words of the statute are not 'material to solvency' or 'material to finding solvency', but rather that the ground is 'material to proving solvency'.[76] Spiegelman CJ said:[77]

If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it 'proving' its solvency, cannot be satisfied.

...

It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be 'satisfied' in the sense required by s459S(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is 'material', let alone whether leave should be granted under s 459S(1). On the submissions made to this Court, these issues do not arise. The appeal should be dismissed.

In other words, the company must show that the debt demanded by the creditor if found not to be due and payable, or the offsetting claim alleged by the company if established, is the difference between the company being solvent and insolvent. As the learned authors of Ford, Austin & Ramsay's Principles of Corporations Law said:[78]

If by ignoring the debt demanded, the company might be found to be solvent, then, and only then, the existence of a bona fide dispute would be a relevant consideration and a discretion to grant leave would exist.

In Paliflex, Austin J preferred a more 'lenient' approach and said:[79]

... The Court considers the materiality question before deciding whether to grant leave to the company to dispute the debt. It has not, at that stage, reached a conclusion about the company's overall solvency, and may not have heard all the relevant evidence. It is not in a position to decide, at that stage, whether the debt in question is the difference between solvency and insolvency.

In Re Pioneer Cryogenics, Black J preferred this view and said:[80]

It seems to me that, as a matter of the language of the section, and consistent with the cases which have subsequently adopted a somewhat less strict approach, it is not possible to say that the existence of a debt is not material to proving the company is solvent, where it will make a significant difference, on any view of the evidence, to Pioneer's ability to achieve proof of that matter. If I were required to choose between the strictest and the less strict approach, a choice which many of the cases in this area have sought to avoid, I would on balance adopt the less strict approach, albeit I should also note that that difference between the two tests may be a false dichotomy, where what is involved is a question whether the Court is satisfied, or not, of materiality of the debt to the proof of solvency in the particular circumstances. (emphasis added)

However, where the company contends that it is solvent in any event or irrespective of the debt, the difference between these two approaches is not engaged. If the company is solvent irrespective of the debt, the debt could not, on any view, be 'material' to solvency. White J explained this, with reference to Switz, in Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2):[81]

What is material to proving solvency is not the same as what is determinative of solvency. This is not inconsistent with the decision of the Court of Appeal in Switz Pty Limited v Glowbind Pty Limited. There the defendant asserted that it was solvent whether or not it owed the debt the subject of the statutory demand. Spigelman CJ, with whom Handley and Giles JJA agreed, held that because the defendant contended that it was solvent whether or not it owed the disputed debt, the ground for disputing the debt was not material to proving the defendant's solvency. Attention was to be focused on the case the defendant advanced and how it intended to prove it (at [53], [54] and [56]). Spigelman CJ did not say that whether the ground for disputing the debt the subject of the statutory demand was material to proving the company's solvency depended on whether it could be seen from the evidence adduced on the s 459S application to be determinative. Rather, his Honour said that the ground would not be material if the company's case was that it was not determinative. His Honour (at [32]) denied that it was necessary to consider the concept of materiality in s 459S(2) in the appeal. That shows that his Honour was not intending his reasons to have a wider significance.

...

In short, the existence or non-existence of the plaintiff's debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company's solvency are to be advanced to the stage at which leave is sought under s 459S, so that the company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2).

The same is true if the company does not adduce evidence of the financial position of the company. Regardless of the size of the debt, if there is no evidence of the overall asset and liability position, the Court cannot gauge what the effect on solvency would be if the debt were not taken into account. It cannot assess whether the ground is material to the question of solvency, as required by s 459S(2) and must not grant leave to raise the ground. That is the case here, and for that reason I do not need to analyse the 'strict' and 'lenient' views any further.[82]

Whether there is a serious question to be tried on the grounds sought to be raised

42 If an application had been made pursuant to s 459G, most likely I would have set aside the statutory demand on the grounds that a genuine dispute had been made out. I make that observation notwithstanding that there is real doubt as to the veracity of Mr Chiodo with respect to his position. Contentions that the plaintiff has no contractual relationship with the company and that payment is due (if to anyone) to Belgravia are not consistent with contemporaneous documents.

43 The emails passing between the plaintiff and the company demonstrate a commercial arrangement between the two companies. Further, there is an inference that the company required time to pay rather than denying the liability. That is borne out by the response to the payment claimed by the plaintiff on 14 January 2019 and the dealings with ANZ, the funder of the construction. Further, Mr Chiodo's claims that only Belgravia had a relationship with the company are not borne out by the company's payment schedule with respect to claims by Belgravia which was dated in September 2019. The grounds to resist any claim by Belgravia include that Belgravia had abandoned the contract in October 2018.

44 Further, there is an issue as to whether non-compliance with the Domestic Building Contracts Act 1995 (Vic) precludes recovery of all or part of the claim by the plaintiff. The plaintiff resisted the notion that there was evidence before the Court on which it could be found that the plaintiff had breached s 136 of the Building Act 1993 (Vic) as alleged. The plaintiff relied upon the evidentiary onus placed upon the company pursuant to a s 459S application. The plaintiff contended that in any event, relying upon Dover Beach Pty Ltd v Geftine Pty Ltd[83] where Ashley JA noted that if breaches of the Building Act 1993 or Domestic Building Contracts Act 1995 did render any contract void, the builder would not be prevented from bringing a restitutionary claim for quantum meruit against the owner. However, albeit that such a claim would include the reasonable costs for performing the contracted works, usually an allowance for the claimant's own labour and profit would not be included.

45 The plaintiff contends any breaches of each act ought to be considered in the context that:

(a) prior to 1 July 2018, a builder which was a corporation did not need to be separately registered if one of its directors was registered. Mr Nadinic was, at all times, registered;

(b) there was a pre-existing working relationship between Mr Nadinic and Mr Chiodo with respect to other concurrent developments;

(c) the works performed to complete the development at the Doncaster property at the company's request followed Belgravia's abandonment of the project; and

(d) works were mostly remedial in nature.

46 If I had been deciding an s 459G application, I would have determined that the issues referred to required further investigation. Using the test applied by Sifris J, I conclude that there is 'a serious question to be tried'.

Sufficiency of any explanation as to why the ground was not raised in an application to set aside the creditor's statutory demand involving an evaluation of the reasonableness of the debtor's conduct at the time when the application might have been made

47 I conclude that there is no sufficient explanation as to why the company did not seek to set aside the creditor's statutory demand.

48 The statutory demand was served at the registered office of the company on 3 September 2019. Bree Garoni signed an acknowledgement of receipt at 1:24 pm.

49 I am satisfied that the statutory demand was appropriately served. All that is deposed to by Louie Kortesis is:

I have made enquiries of my staff member, Bree Garoni, and have been informed and verily believe that she has no recollection of receiving the statutory demand, however, the signature on the document which is Exhibit B to the Affidavit of Mr Nadivic [Mr Nadinic] affirmed 4 October 2019 appears very similar to Ms Garoni's signature.

Had I been made aware of the existence of the Statutory Demand, I would have immediately forwarded it to Mr Chiodo for him to take steps to set aside the Statutory Demand or otherwise deal with it.

50 It is telling that the company has not sought to adduce evidence from Bree Garoni, nor has any explanation been provided for procedures to be adopted when statutory demands are served upon the registered office for the attention of various companies. Further, there is no explanation as to why the statutory demand seems to have fallen through the cracks, whereas the material in support of the winding up application was provided in a timely manner to Mr Chiodo. Accordingly, I reiterate that I am not satisfied that there is any explanation or any cogent explanation as to why the company did not act upon the statutory demand in a timely manner.

51 Counsel for the company sought to distance the company from the neglect by the accountants. However, where an external office is appointed for the receipt of service, the company is impressed with the actions or inactions of those it nominates to receive the document on its behalf.

52 In Re Vangory Holdings Pty Ltd,[84] the registered office was at the home of the business consultant of the company. The business consultant had failed to bring the statutory demand to the attention of the company's officers. Black J said:

FDL submits, and I accept, that the reasonableness of Vangory's conduct can be taken into account in assessing the sufficiency of the explanation to raise a ground of opposition to the Demand in time and that leave is less likely to be granted where there is some default on the part of Vangory or its advisers in that regard: Re Satellite Group Ltd [2000] NSWSC 984 ... Mr Orlizki seeks to distinguish the decision in Re Satellite Group Ltd above on the basis that the director had there seen the statutory demand, before passing it to his solicitor, whereas Mr Dawson had here not seen the statutory demand. However, it does not seem to me that distinction assists where a company does not have arrangements in place to ensure that a director will see the statutory demand. It seems to me that, as FDL submits, the same reasoning must apply where Vangory's directors have apparently placed the responsibility of dealing with mail delivered to Vangory's registered office in the hands of Mr Huxley, a consultant to and not a director of Vangory, and he has failed to do so for whatever reason. Mr Goodridge, who appears for Ms McDonagh and McDonagh Management, also submits that Vangory at least failed to take any reasonable steps to draw the attention of the Demand to its other director (and possibly its sole director, for reasons noted below), Mrs Huxley. As I noted above, she was no longer in occupation of the residential property where Vangory's registered office was located in September 2014 and was apparently not communicating with Mr Dawson in respect of Vangory's affairs.

The question of Vangory's failure to respond to the Demand needs to be addressed in the context that the Demand itself emphasised the serious consequences that might follow from a failure to respond to it, including that Vangory might be placed in liquidation; Wigney J similarly noted the relevance of that matter in Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) above at [30]. It is scarcely likely that Mr Huxley was ignorant of that matter, particularly where he took steps to respond to another creditor's statutory demand issued by Mr Photios in the same month. Notwithstanding Mr Huxley's evidence of his depression and of the other demands arising from the other proceedings in which Vangory was involved, it seems to me that, as Wigney J also noted in Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) above (at [33]), inattention and inactivity cannot provide a satisfactory explanation for a failure to comply with or set aside a statutory demand, since otherwise the statutory scheme in relation to statutory demands would be significantly undermined.

It does not seem to me that the matters to which Mr Dawson and Mr Huxley refer amount to a reasonable explanation for Vangory's failure to bring any application to set aside the Demand within the 21 day period specified in s 459G of the Corporations Act. It was open to Vangory to put in place adequate arrangements to ensure that any creditor's statutory demand delivered to its registered office was addressed, despite Mr Huxley's known health issues and known commitments in respect of the other proceedings involving Vangory. It would not have been difficult to do so, so that Mr Huxley would not be left to bear the additional burden of dealing with such demands if his circumstances would not allow him adequately to do so, and a creditor which served a creditor's statutory demand would not be exposed to the costs of an application of this kind or left to meet any contest as to the debt claimed in the winding up application rather than in the manner contemplated by s 459G of the Corporations Act.

For these reasons, I am not satisfied that the matters referred to by Mr Dawson and Mr Huxley provide a sufficient explanation for Vangory's failure to take steps to set aside the Demand within the 21 day period specified by s 459G of the Corporations Act.[85]

53 In Commissioner of Fines Administration v Wise & Young Pty Ltd,[86] Rees J considered the adequacy of the explanation for the failure to make an application to set aside statutory demands in circumstances where at least one statutory demand was served at the registered offices. One of the registered offices in question was the company's solicitors' office. Rees J said:

If companies implement a method of monitoring and superintending the collection of mail from their registered office which leaves open the prospect of mail not coming to the attention of the companies, that non-receipt cannot enliven the granting of leave under s 459S of the Corporations Act: Nick Scali Ltd v JSK Logistics Pty Ltd [2008] NSWSC 597 per Rein J, cited with approval by Farrell J in Hadley v BetHQ Pty Ltd [2016] FCA 1263 at [41]. On Mr Dimitriou's own admission, these companies failed to maintain a system whereby mail addressed to their registered office would be properly attended to. This failure has the consequence described by Black J Re Vangory Holdings Pty Ltd [2015] NSWSC 546 at [21]:

... inattention and inactivity cannot provide a satisfactory explanation for a failure to comply with or set aside a statutory demand, since otherwise the statutory scheme in relation to statutory demands would be significantly undermined.[87]

Whether the Court is satisfied that the relevant ground is material to proving the debtor is solvent

54 I cannot be satisfied that the company is solvent or but for the claim by the plaintiff, it would be solvent.

55 The plaintiff in its submissions pointed out a number of inconsistencies and inadequacies in the balance sheets. However, I prefer a more simplistic approach.

56 No statement of financial performance has been provided for any particular financial year. In the absence of statements of financial performance, it cannot be said that the 'fullest and best' evidence has been put before the Court. I note the following:

(a) in each of the balance sheets there is no provision for accounting and legal fees;

(b) each of the lots is encumbered by a statutory change in favour of East Gippsland Region Water Corporation. The charge was notified by a caveat lodged 26 June 2019; and

(c) there is no provision for holding costs of the Dinner Plain lots, including for rates or other holding expenses. Such omission leads me to doubt the veracity of the accounts in any event.

57 There is no explanation for the increase by more than 100% in the value of each lot from the financial year ending June 2018 to June 2019. Mr Chiodo has deposed that he had a conversation on 21 February 2020 with John Castran of Castran Real Estate with respect to the value for which each could be sold in the current market. Even if hearsay evidence was admissible on an application such as this, clearly valuation evidence is opinion evidence and, thus, hearsay evidence as to opinion is not admissible. In any event, no opinion is offered as to how readily realisable each of the lots would be. No time frame of any disposition is given.

58 Further, Mr Chiodo does not refer to the caveat lodged by Salvatore Chiodo with respect to Lot 7. The caveat dated 8 December 2017 sets out the grounds of the claim to be pursuant to an agreement with the registered proprietor. The date of the agreement is 20 August 2017. The estate or interest claimed is a freehold estate and the prohibition on dealing with the lot is 'unless I/we consent in writing'.

59 No explanation is provided. I do not know whether the company has any equity whatsoever in Lot 7 or if it is free to dispose of the same.

60 Accordingly, I cannot, even on a balance sheet basis, determine that the company is solvent, even without taking into account the claim by the plaintiff. Further, none of the balance sheets include any provision for the claim by the plaintiff, or even the claim by Belgravia. I can only assume that Mr Chiodo's statement that provision has been made with respect to Belgravia is on the basis that no amount is recognised as being owing.

61 In the absence of any material which demonstrates that the company is able to pay its debts when the same fall due, I am required to consider the February 2020 balance sheet in isolation with respect to the question as to whether or not the company has demonstrated solvency.

62 In determining whether a corporation is insolvent for the purposes of s 95A, regard is had to 'commercial realities'.[88] This encompasses consideration of whether the corporation can realise funds from its assets in order to pay its debts as and when they become due and payable.[89] That is:

... if that property is in such a position as to title and otherwise that it could be realized in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys. In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied.[90]

63 A key consideration in determining whether an asset is realisable is the time within which funds would be made available. That is, there is a temporal limit on whether an asset can be considered realisable.[91] Although resources other than cash may be considered on the question of solvency, creditors are not required to accept that, although the debtor is asset rich, it will pay them in due course when assets are realised. As Young J stated in Kekatos v Holmark Construction Co Pty Ltd,[92] '[i]t is not sufficient that the debtor given time to realize its assets would be able to pay 100 cents in the dollar'.[93]

64 Consequently, the time in which realisations are achievable is a relevant consideration.[94] In this regard reference has been made to realisation of assets occurring within a 'relatively short time',[95] 'reasonable time',[96] 'relatively quickly'[97] and 'as the claims mature'.[98] The Queensland Court of Appeal has stated that 'the degree of immediacy has always been incapable of precise definition and has been subject to varying emphasis'.[99]

65 In Sandell v Porter, Barwick CJ phrased the temporal limit as follows:

... the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor.[100]

66 These statements echoed those that his Honour had made earlier in Rees v Bank of New South Wales:

It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business.[101]

67 Drawing upon the comments of Isaacs J in Bank of Australasia v Hall,[102] in an often cited statement Palmer J addressed the issue as follows in Hall v Poolman:

An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency - indeed, it is the opposite - to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency 'if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature'.[103]

68 There, although a company was selling certain bulk wine assets and retaining others, it was considered unable to pay its debts as they fell due.[104] The comments of Palmer J suggest that his Honour viewed five months as too long, and he expressly referenced a period of 'ninety days'.[105]

69 In Re Northridge Properties Ltd (in liq),[106] Richardson J reasoned that '[t]here must be a substantial element of immediacy in the ability to provide cash from non-cash assets', noting that 'if convertibility extends beyond two or three weeks, a businessman is likely to be faced with another set of debts falling due from a previous month's operations'.[107] In the circumstances of the case, properties owned by a company in the business of property development were not considered realisable within a relatively short time.

70 In Jingellic, within the context of an application for winding up, a realisable asset was recognised. There, a company purchased an interest in an oil field in the US, paid in part with funds from a syndicated cash advance facility agreement ('SCAF') involving Jingellic Minerals NL and others. On the basis of the SCAF, Jingellic later demanded payment of funds from the company, plus interest. A heads of agreement for payment was entered into, however, after making three payments the company gave notice that it was unable to make the fourth. Jingellic then filed a summons in the Supreme Court of South Australia to wind up the company. At first instance Zelling AJ determined that there was not a bona fide dispute and that the company was insolvent. These findings were overturned upon appeal.

71 On the issue of insolvency, the Court of Appeal (Matheson J, Mohr and Mullighan JJ agreeing) determined that funds were available through a bank loan to pay the debt in question, a sum of approximately $5.08 million. Although the bank required security, such security would be able to be provided as in paying out the debt to Jingellic, Jingellic's security would be released. Additionally, the company had three primary assets - an interest in an oil exploration in Queensland ($6-7 million), an interest in the oil field in the US ($15 million) and an interest in a Timor Sea exploration permit ($1.5 million). Based upon documentary and oral evidence, the assets were considered saleable and the Queensland interest, for example, typically would take 'a few months' to sell.[108] In this regard the Court of Appeal determined that the company had readily saleable assets that could be used to pay debts if need be.

72 Ultimately, whether the time period required to realise the asset is reasonable depends upon the circumstances of the case,[109] and the Court should remain cognisant that the focus remains upon the text of s 95A. On this point Bryson AJ has reasoned:

My primary concern is to give effect to s 95A in accordance with its terms, which clearly relate to ability to pay by the due date, not to the ability to cope with the debtor's commercial situation in such a way as to extricate himself from difficulty. The concept of surmountable temporary illiquidity referred to in Palmer J's third proposition is frequently raised and from time to time relied upon judicially to support a finding against insolvency. I regard it as important to approach questions of illiquidity, whether temporary or endemic, in a way which does not depart from the terms of s 95A(1) and its reference to ability to pay all debts as and when they become due and payable; ability to raise money from assets and pay a debt before the creditor's patience is exhausted is not enough, in my opinion.

There have frequently been references to observations of Barwick CJ in Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210 at 218 and in Sandell v Porter (1966) 115 CLR 666 at 670-671. Barwick CJ spoke in relation to s 95 which referred to a debtor as being 'unable to pay his debts as they become due from his own money'; there are no words corresponding to 'from his own money' in s 95A. For an exposition of s 95 it was, of course, important to say as Barwick CJ said in Rees at 218:

It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realisable assets.

In neither of these cases did Barwick CJ, to my reading, say to the effect that a process of realising assets, however readily realisable, could extend the time when debts become due to which s 95 refers.[110]

73 Switz Pty Ltd v Glowbind Pty Ltd[111] involved an application under s 459P regarding a company in the business of property development. On the issue of solvency as defined in s 95A, the company submitted that it could rely upon the realisation of funds from its principal asset, the property that was to be the subject of development.[112] On this point Hodgson CJ accepted the submissions of the plaintiff, finding that even if the property:

... were put on the market immediately, there is no evidence as to when it could be sold and when the proceeds of sale could be expected; and I could not use judicial notice to come to a conclusion that the proceeds of sale could be received any earlier than about three months from now. Furthermore, as submitted by [counsel for the plaintiff], this is not in fact intended, and would be inconsistent with the course actually being undertaken of developing the site and selling units from the completed development. Plainly, that process will take much longer than three months: again there is no evidence, but I could not take judicial notice that the proceeds of that process would be available any earlier than about one year from now. Again, as submitted by [counsel for the plaintiff], the immediate sale of the property would be akin to the realisation of stock-in-trade otherwise than in the ordinary course of business, as discussed in the cases of Russell, Timbatec and Reese.

In my opinion, that situation cannot be regarded as a mere temporary lack of liquidity.[113]

74 The company has apparently ceased trading. Accordingly, its only activity is to hold the Dinner Plain lots. If the Dinner Plain lots are saleable on whatever timeframe which may be realistic, about which no evidence has been adduced, the substratum of the company will disappear.

75 At times, however, courts have concluded that assets key to the conduct of the business were readily realisable. In Re Adnot Pty Ltd,[114] for example, a company the subject of a winding up petition was found to be solvent on the basis of sale or the intended sale of a shopping centre and certain sources of funds in the interim. The main purpose of the company's venture was to construct the shopping centre, and it was not 'trading in the sense of turning over stock'. There was evidence that any shortfall in capital could be covered by further mortgage on the property and funds from a related company, and although further construction was required to avoid a forced sale, the property had significant value. It is apparent that in the circumstances, while the asset was key to the purpose of the company, that purpose was almost achieved and there were adequate funds in the interim to avoid insolvency. That is not the case here. There is no admissible evidence as to the value of the lots. The revalued lots in the 2019 account are remarkably similar to the plaintiff's claim. Any amount which may be realised on sale will be reduced by the deduction of sale costs, any allowance for capital gains if appropriate and amounts owing to caveators.

76 Taylor v Carroll[115] was a case involving a claim of unfair preferences against a company that traded as a tile merchant. A key issue was whether it was correct to consider sale of the company's building as an asset realisable in a relatively short time. Thomas J (with whom Derrington and Moynihan JJ agreed) noted that this came down to 'question of fact involving questions of circumstance and degree'.[116] In the circumstances at hand, a decision had been made to sell the property and use the money to enhance the trading capital of the company, and there was evidence that prior to entering receivership the property had been advertised and there were two prospective purchasers. The company could also borrow upon its own security. As such, the picture was said to be one of 'a company close to insolvency but with sufficient assets to remain solvent, currently involved in the process of selling a major asset the realisation of which would restore a proper balance to its trading liquidity'.[117]

77 I note that, although Mr Chiodo deposed that the directors had injected funds into the company when required, there is no evidence of a willingness or capacity to do so since the company ceased its principal activity. Accordingly, I discount the possibility that the directors could or would assist the company to meet the plaintiff's claim. Further, given the caveats over each Dinner Plain lot, I cannot consider that the company could readily raise any funds utilising the Dinner Plain lots as security.

78 Arguably, Jingellic also provides an example of circumstances in which a key asset of a company was considered to be realisable, albeit in the context of a summons for winding up. There, the company was presumably in the business of oil exploration and production. The Supreme Court of South Australia accepted a submission by the company that it could have drawn upon funds from sale of its three major assets, which were interests in oil fields. Evidence of valuations and potential buyers was before the court, and in the context of a liability of approximately $5 million disputed on the grounds of fraud, the total value of the assets was around $27.5 million.

79 Further, perhaps overlapping with the temporal limit, courts have considered how 'saleable' the property is, in the sense of whether there are prospective buyers and previous attempts to sell the asset. In Re Ashington Bayswater Pty Ltd (in liq)[118] (unfair preferences and uncommercial transaction) it was noted that the company had had difficulty selling the properties previously; in Taylor v Carroll (unfair preference) there were two prospective buyers; in Re Northridge Properties Ltd (unfair preference) there were difficulties selling the properties previously; in Re Adnot Pty Ltd (winding up) there was an identified buyer; and in Jingellic (winding up) there had been recent sale interests of other companies.

80 It is of note that courts have discussed any steps that the party has taken, or lack thereof, toward realising the asset. In Re Northridge Properties Ltd, for example, after referring to Sandell v Porter and Rees v Bank of NSW, Richardson J reasoned:

It seems to me to follow, and as a prudent commercial consideration, that the possibility of converting a non-cash asset into a cash asset should not be taken into account for the purpose of assessing solvency unless realisation of the asset in that way was in contemplation by the debtor at the time.[119]

81 In this proceeding, there is no evidence of any step taken to realise the Dinner Plain lots.

82 His Honour later went on to note that the test of insolvency is an objective one, such that presumably the reference to 'in contemplation by the debtor' would rely upon objective evidence. In the circumstances, even though a director of the company had stressed the need to sell properties, they were not considered to be convertible to cash in a relatively short time.

83 Similar views as to the intention of the company were expressed in Taylor v ANZ, albeit the approach in that case as to unsecured loans has since shifted. There, in relation to submissions that a company could have continued to trade rather than winding up its financial affairs, McGarvie J stated:

In my opinion the answer to this is that there is no suggestion in the evidence that this company ever intended to trade on after the sale of its business and in fact it did not. I am satisfied that it never intended to do so. It would hardly be an application of commercial reality in deciding whether a company was unable to pay its debts as they became due, to have regard, not to the course the company intended to follow but to some other course which it never intended to follow and never followed.[120]

84 In Treloar Constructions Pty Ltd v McMillan,[121] a claim pursuant to s 588G, the Court of Appeal of New South Wales also discussed evidence surrounding the proposed realisation of an asset. On the question of insolvency, an issue that arose on appeal were comments of the trial judge that an expert report failed to take into account the ability of the corporate group to sell a certain franchise. In response to this, the Court of Appeal stated:

[T]here was no evidence that the sale of the franchise was ever actually contemplated. More importantly, Volkswagen Finance held security over the whole franchise business for its provision of floor plan finance. As events transpired, the receivers appointed by Volkswagen eventually sold the franchise in circumstances leaving no surplus for the McMillan Group. These factors tend against any suggestion that the Volkswagen franchise was as a matter of commercial reality, a realisable asset available to McMillan Prestige.[122]

85 Again, in Wimpole Properties Pty Ltd v Beloti Pty Ltd (No 3), which concerned an application for winding up, there was no 'credible plan or reasonable prospect for asset sales'.[123]

86 In relation to evidence surrounding the possible sale of an asset, in Hall v Poolman, a distinction was drawn between an unwillingness to pay a creditor, and a commercial decision not to realise an asset. The notion of unwillingness relates to a recalcitrant debtor, as discussed by the full Federal Court in Sarina v Council of the Shire of Wollondilly:

If a debtor is able to pay his debts but is recalcitrant, his creditors may resort to the remedies otherwise afforded by the law such as execution against his property and garnishee proceedings. The words 'able to pay his debts' in s 52 (2) of the Act do not mean 'willing and able' to do so.[124]

87 xThat is, the focus is on the ability of a debtor to pay debts rather than any unwillingness. In Hall v Poolman, in response to the submission that a company had bulk wine assets such that it was solvent, Palmer J said:

Mr Irving submits that Vineyards could have sold additional bulk wine so as to receive a total of $5M in cash in rolling amounts by 4 August 2003 ... The ability of Vineyards to sell bulk wine generating that amount by August 2003 is disputed but Mr Irving's submissions are, in any event, hypotheses which are based on reports of experts obtained after the collapse of the Group.

The reason that all the bulk wine was not sold to pay outstanding trade debts during the Period was given by Mr Martini, whose frank and helpful evidence I accept ...

What Mr Martini was saying, in effect, was that the other asset resources which might have been available to produce cash were not so assured or readily realisable as the bulk wine: if all of the bulk wine was sold and the proceeds exhausted in payment to creditors before the companies had successfully resolved their dispute with the ATO and thereby regained their ability to refinance and raise further cash, then the companies would have had nothing at all left with which to pay creditors ... if the companies had sold all the bulk wine to pay outstanding debts, they would have run out of cash more quickly. They were therefore selling as much as was needed to pay 'essential creditors' and deferring payment to other creditors more and more.

This strategy did not demonstrate unwillingness to use an asset to pay creditors, in the sense discussed in Sarina: rather, it demonstrated an inability to pay creditors if the companies were to avoid 'burning all their bridges behind them' by exhausting their most readily available resource when the ability to realise other resources was so uncertain.

...

Mr Martini gave a second reason for not selling all bulk wine as soon as possible. Mr Irving wished to avoid selling large quantities of bulk wine quickly, resulting in sales at below book value ...

In any event, Mr Hall, the Liquidator, had doubts about whether a quick sale of virtually all of the bulk wine stocks was commercially realistic if the companies were to have any future as a going concern ... It seems to me that these considerations also could lie behind the Directors' decision not to sell all bulk wine within the Period. Doing so could have spelt the end of the companies.[125]

88 A similar point was discussed in Smith v Boné,[126] where the submission that the company was 'unwilling' rather than 'unable' to pay a certain debt was rejected in part because the director said it was 'a question of trying to pay everybody as much as possible from the funds that [were] available'.[127]

89 In Hall v Poolman, Palmer J expressly considered the context of a holding company and a subsidiary, and the ability of assets of the subsidiary to assist the holding company as follows:

It is trite that the test of solvency of a company under CA s 95A is, first and last, a question of fact and that the Court approaches that question as a matter of commercial reality. If one member of a group of companies has, as a matter of commercial reality, ready recourse to the assets of another member of the group for payment of the first company's debts as they fall due, and that recourse will not result in the insolvency of the second company or in merely delaying the insolvency of the first, then the Court may have regard to that fact in assessing whether the first company is able to pay its debts as they fall due: Lewis v Doran [2004] NSWSC 608; (2004) 184 FLR 454 at [116].

It is beyond question in the present case that whatever cash and asset resources were available to Wines were regarded by the Boards of Wines and Vineyards as available to Vineyards for the payment of its debts, and vice versa. Even Mr Irving, in his submissions, takes the same approach. In Exhibit 2D1, which are hypothetical worked examples put forward by Mr Irving in an endeavour to show that Wines and Vineyards had sufficient asset resources to meet their respective liabilities as they fell due, assets such as the Quandong property, bulk wine sales and debt finance are treated as producing cash for both companies, regardless of which company actually owned the particular asset.

If commercial reality requires the Court, in assessing the solvency of company A in a group, to have regard to the assets of assets in company B in the group, commercial reality will also require the Court to look at the liabilities of company B. Company B's liabilities may be such that it cannot use its assets to assist company A without becoming insolvent itself. In such a case, company B's assets cannot be regarded as available to pay company A's debts: the law does not condone robbing Peter to pay Paul.[128]

90 Courts have had regard to what happened to the asset in the circumstances. That is, in Treloar Constructions,[129] McLellan v Carroll,[130] and Taylor v ANZ,[131] for example, reference was made to whether sale of the asset eventuated and for what price. While this accords with the comments of Palmer J in Lewis v Doran as to assessing insolvency retrospectively,[132] in the appeal of that case Giles JA stated:

Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight. There must of course be 'consideration ... given to the immediate future' ... , and how far into the future will depend on the circumstances including the nature of the company's business and, if it is known, of the future liabilities. Unexpected later discovery of a liability, or later quantification of a liability at an unexpected level, may be excluded from consideration if the liability was properly unknown or seen in lesser amount at the relevant time.[133]

91 As such, it appears that whether consideration can be afforded to how the property in question was dealt with in the circumstances may be limited.

92 It is clear that the analysis as to whether an asset was realisable at the relevant time turns upon the financial position of the company as a whole and the commercial realities at hand. It is not a 'mechanical'[134] process, limited to the identification of an asset that hypothetically could have been sold within a defined time. Rather, consideration encompasses the financial position of the company, including the nature and size of the debts, the nature of the asset in question, particularly whether it is key to ongoing business or is income producing, the timeframe in which the asset may be realised, whether realisation was contemplated in the commercial context, whether the asset was in a position as to 'title and otherwise' that it could have been realised, and in a limited sense, what then occurred in relation to that asset as events unfolded.

93 As the company is not trading, it has no income from which to pay debts as and when they fall due. The company must demonstrate that it has a realisable asset with which to meet the liabilities. On this facet, there is a complete failure to adduce any evidence whatsoever.

Section 459J of the Act

94 Sifris J also considered the application of s 459J in Re Kornucopia Pty Ltd (No 4).[135] His Honour said:[136]

Further, in Jarena and Callite, the statutory demands were set aside on 'public interest grounds'. The same cannot occur here. Those decisions concerned applications under s 459G. The statutory demands were set aside under s 459J(1)(b) and the broad discretion conferred on the Court to set aside the statutory demand, on whatever reason it deems fit. There is no equivalent provision when it comes to winding up applications. Further, as they were applications to set aside statutory demands, the presumption of insolvency had not yet been invoked.

Applying the reasoning of Jarena and Callite here seeks to adjourn, dismiss or stay the winding up applications as being contrary to public policy and in the exercise of the Court's discretion, or in other words, as an abuse of process. In light of decision in Lanepoint,[137] and for the reasons recited earlier in these reasons, that cannot be done.[138] Here and unlike those decisions, the presumption of insolvency has been invoked and there is no evidence of solvency to displace it. There is accordingly no reason to adjourn, stay or dismiss the winding up application as a matter of discretion or public policy.[139]

95 As I have previously set out, the presumption of insolvency has not been displaced, and s 459J is not available.

(a) there is insufficient evidence of the overall asset and liability position of the company to gauge whether the company is solvent;

(b) the company has not displaced the presumption of insolvency;

(c) as the balance sheet does not make any provision for the claim by the plaintiff, it follows that given what I have set out in (a) hereof, I am unable to gauge the effect on solvency even if the claim by the plaintiff were not taken into account;

(d) I am not satisfied that any sufficient explanation has been given as to the reason for not making an application to set aside the creditor's statutory demand; and

(e) accordingly, the finding that there is a serious question to be tried on the grounds sought to be raised with respect to a genuine dispute is, in isolation, irrelevant. Alone, such finding does not enliven the exercise of the discretion to give leave under s 459S.

97 Accordingly, the application pursuant to s 459S is dismissed.

98 Insofar as leave is required to maintain the claim that the winding up application is an abuse of process, I decline to give leave to maintain that contention. In the event that leave is not required, that part of the interlocutory process is dismissed.

99 If s 459J(1)(b) were available in a winding up proceeding, I would decline to exercise any powers pursuant to that section.

100 Likewise, I decline to exercise any power pursuant to s 467 to dismiss or stay the proceeding.

1 The company's interlocutory process, as amended, is dismissed.

2 Donchiod Pty Ltd (ACN 601 212 300) be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth).

3 Craig Bolwell be appointed the liquidator for the purposes of the winding up of Donchiod Pty Ltd.

4 The plaintiff's costs, including reserved costs, be costs in the winding up.

[1] [1992] HCA 34; (1992) 174 CLR 509.

[3] [2011] NSWSC 298.

[5] A G Coombs Pty Ltd v M & V Consultants Pty Ltd (in liq) (2018) 55 VR 513, 539 [80] (Sloss J).

[6] [2020] VSC 7.

[7] Verimark Pty Ltd v Passiontree Velvet Pty Ltd [2019] NSWSC 455, [75].

[8] K Young Trading Pty Ltd v Tjoi [2009] NSWSC 260, [11].

[9] Re Kornucopia Pty Ltd (No 4) (n 6).

[10] Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] VicRp 9; [1978] VR 83, 88, 93 (McGarvie J) ('Fortuna Holdings'); L & D Audio Acoustics Pty Ltd v Pioneer Electronics Aust Pty Ltd (1982) 1 ACLC 536, 538 (McLelland J) ('L & D Audio').

[11] Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509; L & D Audio (1982) 1 ACLC 536, 538 (McLelland J).

[12] Fortuna Holdings [1978] VicRp 9; [1978] VR 83, 93, 95-96 (McGarvie J); L & D Audio (1982) 1 ACLC 536, 538 (McLelland J).

[13] [2004] NSWSC 527 [72] (White J).

[14] (1989) 18 NSWLR 295, 302 (Cohen J).

[15] Fortuna Holdings [1978] VicRp 9; [1978] VR 83, 88, 93 (McGarvie J).

[17] [2007] NSWCA 57; (2007) 69 NSWLR 374.

[18] [1978] VicRp 9; [1978] VR 83.

[19] Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374 [57] (Beazley JA).

[20] Corporate Law Reform Act 1992 (Cth).

[21] See the Explanatory Memorandum to the Corporate Law Reform Bill 1992 at [688]-[689] and the discussion in David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, 279 (Gummow J).

[22] In Pacific Communication Rentals Pty Ltd v Walker (1994) 12 ACLC 5, Brownie J said at 289: 'The submissions accepted that the intention of the drafters of Pt 5.4 was to establish a code, and that disputes in the first and third of these categories were now to be dealt with under Pt 5.4. However, the argument is that disputes, or at least some disputes in the second category are not covered by Pt 5.4.'

[23] Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Recs and Mgrs Apptd) [2011] HCA 18; (2011) 244 CLR 1, 10 [15] (Gummow, Heydon, Crennan, Kiefel and Bell JJ) ('Lanepoint').

[24] In Lanepoint [2011] HCA 18; (2011) 244 CLR 1, the High Court arguably left open (at 15 [32]-[33]) the possibility that in some cases a winding up application should be stayed or dismissed due to some dispute relating to the debt that still exists at the time the application reaches the final hearing. The Court indisputably retains discretion under ss 459A and 467(1) of the Act to do exactly that. However, their Honours said (at 15 [33]) that 'the current statutory scheme that disputes concerning a statutory demand should, where possible, be determined prior to the determination of the winding up application'. The Court made plain that before entertaining any such dispute there must be some evidence that would permit the Court to ascertain the solvency position of the debtor company. To this, I would add that the High Court's comments should not be misconstrued. In the ordinary course, a genuine dispute relating to the debt is to be determined within the parameters of an application made under s 459S of the Act. A company cannot circumvent the provisions of Part 5.4 (and the preconditions for leave under s 459S) by instead raising the dispute within the sphere of abuse of process. In exceptional cases, it may be necessary to determine the dispute outside of the s 459S framework (see eg Re Huizhoug Investment Group [2018] NSWSC 390). There must be some cogent why the s 459S procedure was not followed. I would imagine that nothing short of impossibility of doing so should suffice. Any other conclusion would invite back the types of disputes which the High Court warned against entertaining at the final hearing of the winding up application. In this case, there is no reason why the s 459S procedure has not been followed.

[25] [1992] HCA 34; (1992) 174 CLR 509.

[26] Lanepoint [2011] HCA 18; (2011) 244 CLR 1, 10 [16] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).

[27] See eg Owen-Pearse v Lander Land Co Pty Ltd [2018] FCA 2077 ('Owen-Pearse'). It should further be noted that in the absence of commercial duress, undue pressure, extortion or some other improper conduct on the part of a creditor, an improper purpose is unlikely to be found. See Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) (1996) 19 ACSR 411, 416-7 (Tamberlin J) ('Liverpool Cement').

[28] Lanepoint [2011] HCA 18; (2011) 244 CLR 1, 13 [27] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).

[29] See the Explanatory Memorandum to the Corporate Law Reform Bill 1992 at [717].

[30] [2002] NSWSC 20; (2002) 188 ALR 702 [11] (Barrett J) ('Tela').

[31] Lanepoint [2011] HCA 18; (2011) 244 CLR 1.

[32] Ibid 8 [11] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).

[34] Lanepoint [2011] HCA 18; (2011) 244 CLR 1, 14 [29]-[30] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).

[37] [2011] HCA 18; (2011) 244 CLR 1.

[38] (2018) 55 VR 513.

[39] [1978] VicRp 9; [1978] VR 83.

[40] [2011] HCA 18; (2011) 244 CLR 1.

[41] A G Coombs (2018) 55 VR 513, 527 [46], 540-1 [82]-[83] (Sloss J).

[42] [2019] VSC 540.

[43] [1978] VicRp 9; [1978] VR 83.

[44] Vitamin Co [2019] VSC 540 [79] (Hetyey JR).

[45] [2019] VSC 450.

[47] [2019] VSC 450.

[48] [2019] VSC 753 [38] (Efthim AsJ) ('AXF Entertainment').

[49] [2018] NSWSC 390.

[50] Ibid [36] (Black J). His Honour also made a declaration that the statutory demand had not been served. See [20] and [22]-[26].

[54] [2011] HCA 18; (2011) 277 ALR 243.

[55] [2011] HCA 18; (2011) 244 CLR 1.

[56] [2018] FCA 2077.

[57] Owen-Pearse [2018] FCA 2077 [69] and [73] (Banks-Smith J).

[61] Re Kornucopia Pty Ltd (No 4) (n 6) [80]-[106] (emphasis in original).

[62] See discussion with respect to Lanepoint [2011] HCA 18; (2011) 244 CLR 1.

[63] Re Kornucopia Pty Ltd (No 4) (n 6).

[64] Aust Yieh Stainless Pty Ltd v Horans Steel Pty Ltd [2000] NSWSC 244.

[65] Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 [20] (White J) ('Radiancy (Sales)').

[66] [2015] NSWSC 546 ('Vangory Holdings').

[67] [1999] NSWSC 15; (1999) 149 FLR 179, 193 [49] (Austin J) ('Paliflex').

[68] Vangory Holdings [2015] NSWSC 546 [10] (Black J).

[69] Vangory Holdings [2015] NSWSC 546 [10]. See also Paliflex [1999] NSWSC 15 [40] (Austin J).

[70] Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWSC 96 [4] (Barrett J) ('Expile'); Re OCNR (Australia) Pty Ltd [2014] QSC 102 [16]-[17] (Mullins J).

[71] [2014] FCA 466 [10] (Wigney J).

[72] [2015] NSWSC 1202; (2015) 108 ACSR 461, 46 [9] (Black J).

[73] Macleay Nominees v Belle Property East Pty Ltd [2001] NSWSC 743 [18] (Palmer J).

[74] [2004] NSWSC 734; (2004) 208 ALR 532, 535-6 [11] (Barrett J).

[75] [2005] NSWSC 1338 [15] (Barrett J).

[76] [2000] NSWCA 37; (2000) 33 ACSR 723, 733 [43] (Spiegelman CJ).

[78] Ford, Austin & Ramsay's Principles of Corporations Law at [27.062.12].

[79] [1999] NSWSC 15; (1999) 149 FLR 179, 192 [44] (Austin J).

[80] [2015] NSWSC 1202; (2015) 108 ACSR 461, 465 [12] (Black J).

[81] [2011] NSWSC 113 [35] and [48] (White J).

[82] Re Kornucopia Pty Ltd (No 4) (n 6) [210]-[230] (emphasis in original).

[83] [2008] VSCA 248; (2008) 21 VR 442.

[84] [2015] NSWSC 546.

[85] Ibid [20]-[23] (citations omitted).

[86] (2019) 141 ACSR 439.

[88] Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555, 576 [93], quoting Southern Cross Interiors Pty Ltd v Deputy Comissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213, 224 [54] ('Southern Cross Interiors').

[89] Southern Cross Interiors (n 88) 224.

[90] Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514, 1543.

[91] McLellan v Carroll [2009] FCA 1415; (2009) 76 ACSR 67; Sandell v Porter (1966) 115 CLR 666; Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124.

[92] (Supreme Court of New South Wales, Young J, 24 November 1995).

[93] Ibid 5, citing Re Attiwill (1932) 5 ABC 54. See also Re Tweed Garages Ltd [1962] Ch 406, 410: 'A company may be at the same time insolvent and wealthy.'

[94] Southern Cross Interiors (n 88) 224.

[95] Sandell v Porter (n 91) 670; Jingellic Minerals NL v Beach Petroleum NL [1991] SASC 3099; (1991) 56 SASR 532 ('Jingellic').

[96] Re Pacific Projects Pty Ltd (in liq) [1990] 2 Qd R 541, 547.

[97] Taylor v Australia & New Zealand Banking Group Ltd (1988) 13 ACLR 780, 784 ('Taylor v ANZ').

[98] Bank of Australasia v Hall (n 90) 1543, quoted in Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820, 837 ('Expo v Chant'); Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243, 285 [187].

[99] Taylor v Carroll (1991) 6 ACSR 255, 261.

[101] Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210, 218 ('Rees v Bank of NSW').

[102] Bank of Australasia v Hall (n 90) 1543.

[103] Hall v Poolman (n 98) 285 [187] (emphasis in original).

[106] (High Court of New Zealand, Richardson J, 13 December 1977).

[109] Hall v Poolman (n 98); Rees v Bank of NSW (n 101).

[110] JTS Property & Investments No 1 Pty Ltd (in liq) v Sadri [2010] NSWSC 1384, [48]-[50].

[111] [2000] NSWSC 222; (2000) 18 ACLC 343.

[113] Ibid 347-8 [39]-[40], citing Ex parte Russell [1882] UKLawRpCh 45; (1882) 19 Ch D 588, 601; Re Timbatec Pty Ltd (1974) 24 FLR 30, 36-7; Rees v Bank of NSW [1964] HCA 47; (1964) 111 CLR 210, 218.

[114] (1982) 7 ACLR 212.

[118] [2013] NSWSC 1008.

[119] Re Northridge Properties Ltd (in liq) (n 106) 28.

[121] [2017] NSWCA 72; (2017) 318 FLR 58 ('Treloar Constructions').

[123] [2012] VSC 219, [116].

[124] [1980] FCA 138; (1980) 32 ALR 596, 599 ('Sarina').

[125] Hall v Poolman (n 98) 286-7 [189]-[195] (emphasis added).

[126] [2015] FCA 319; (2015) 104 ACSR 528.

[128] Hall v Poolman (n 98) 258-9 [64]-[66].

[129] Treloar Constructions (n 121) 86 [144].

[130] McLellan v Carroll (n 91) 95 [132].

[132] Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385, 408-9 [107]-[113]. See also the comments of White J in New Cap Reinsurance Corporation Ltd (in liq) v Grant [2008] NSWSC 1015; (2008) 221 FLR 164, 176-7 [47]-[52] ('New Cap').

[133] Lewis v Doran (n 88) 578 [103] (emphasis added) (citations omitted).

[134] Eykamp v Deputy Commissioner of Taxation [2010] FCA 797, [5].

[135] Re Kornucopia Pty Ltd (No 4) (n 6).

[137] [2011] HCA 18; (2011) 244 CLR 1.

[138] [See Re Kornucopia Pty Ltd (No 4) [2020] VSC 7, [0]-[0] and related discussion in that judgment.]

[139] See Re Bitar Pty Ltd [2015] NSWSC 2158 [10]-[13] (Brereton J).