Plaintiff v Defendant

1 Slodyczka & Farren Pty Ltd ('the defendant' or 'the Company') was first registered on 14 December 2015. In response to the COVID-19 pandemic, it commenced a business in March 2020 for the manufacture and sale of face masks, trading under the name 'Australian Face Masks'. Between April 2020 and August 2020, Lion & Horn Pty Ltd ('the plaintiff') provided the defendant with marketing services in relation to the sale of its masks. In early February 2021, the plaintiff purportedly served the defendant with a statutory demand dated 3 February 2021, which claimed the sum of $36,091.77 in relation to an outstanding invoice dated 28 August 2020 for its marketing services ('the statutory demand' or 'the demand'). The defendant did not comply with the demand within the 21-day statutory period.[1] By originating process filed on 11 April 2021, the plaintiff now seeks the winding up of the defendant pursuant to ss 459A and 459P of the Corporations Act 2001 (Cth) ('Corporations Act'). The plaintiff relies upon the statutory presumption of insolvency contained within s 459C(2)(a) of the Corporations Act which arises as a result of the defendant's failure to comply with the statutory demand.

2 The defendant opposes the winding up application on the following alternative bases:

(a) service of the statutory demand was defective;

(b) the defendant is solvent and can displace the statutory presumption of insolvency;

(c) the defendant should be given leave pursuant to s 459S of the Corporations Act to oppose the winding up application on a ground or grounds it could have relied on for the purpose of an application to set the demand aside. The grounds now sought to be raised are that: (i) there is a genuine dispute about the amount of the debt claimed in the statutory demand in accordance with s 459H(1)(a); (ii) the defendant has an offsetting claim for the purpose of s 459H(1)(b) of the Corporations Act; and (iii) the demand is defective and a substantial injustice will be caused to the defendant if the demand is not set aside pursuant to s 459J(1)(a) of the Corporations Act; and

(d) pursuant to s 467(1)(a) of the Corporations Act, the Court should dismiss the plaintiff's application as a matter of discretion.

Procedural history and issues for determination

3 The plaintiff's originating process was first returnable before the Court on 12 May 2021. The Court listed the winding up application for hearing on 7 July 2021. The Court's orders also made provision for the defendant to file an interlocutory process seeking leave to oppose the winding up application under s 459S of the Corporations Act, together with the filing of any further affidavit material in support. The plaintiff was also given the opportunity to file any further affidavit material, and both parties were required to file and serve a written outline of submissions prior to the hearing of the winding up application.

4 However, the matter was not heard on 7 July 2021 as scheduled. On 6 July 2021, the plaintiff's former solicitor sent to the Court an urgent unfiled summons and unsworn supporting affidavit seeking leave to cease acting pursuant to r 20.03(3)(b) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic). Later that day, a notice of change of solicitor was filed by Aitken Partners on behalf of the plaintiff, thereby overtaking the application for leave to cease acting. The parties then provided the Court with consent orders seeking to adjourn the hearing of the matter in addition to making provision for the plaintiff to attend to the filing and service of a number of affidavits and other material required to be filed for the purpose of the winding up application. Orders to that effect were made and the hearing was adjourned to 27 July 2021.

5 When the matter came on again for hearing on 27 July 2021, the Company then made an application for an adjournment in order to put forward better evidence on the question of its solvency. The plaintiff had submitted that the material relied upon by the defendant was not the fullest and best evidence of solvency. Given that solvency is a critical issue in the proceeding, and having regard to the fact there had already been an adjournment of the hearing due to the late change of the plaintiff's solicitors, I considered it to be in the interests of justice that the matter be further adjourned to enable the filing of supplementary material and for the parties to better frame the real issues in dispute. Orders were made permitting the defendant to put on supplementary material on the question of solvency, including the preparation of audited accounts for the last two financial years and the collation of recent bank statements disclosing current bank balances. The plaintiff was also permitted to file supplementary material on the question of service of the statutory demand. The hearing was subsequently listed for final hearing on 9 September 2021 and heard via videoconference technology. At the conclusion of the hearing, I reserved judgment and made an order under s 459R(2) of the Corporations Act extending the time for the determination of the winding up application to 7 February 2022.

6 In support of its winding up application, the plaintiff relies upon: the consent of the liquidator, Liam Bellamy dated 14 March 2021; the affidavit and exhibits of Rashid Alshakshir affirmed 11 April 2021; the affidavits and exhibits of service of the originating process of Bekir Cetinkaya affirmed 20 July 2021 ('the first Cetinkaya affidavit') and 29 July 2021 ('the second Cetinkaya affidavit'); the affidavits and exhibits of Sam Merrylees affirmed 21 July 2021 ('the first Merrylees affidavit') and 26 July 2021 ('the second Merrylees affidavit'); and the written submissions of the plaintiff dated 21 July 2021.

7 The defendant places reliance upon: the affidavits and exhibits of James Farren affirmed on 7 May 2021 ('the first Farren affidavit') and on 25 June 2021 ('the second Farren affidavit'); the affidavit of Juanita Allen affirmed 7 May 2021 ('the first Allen affidavit'), together with its exhibit which is a solvency report for the Company; and the affidavit of Juanita Allen affirmed 18 May 2021 ('the second Allen affidavit'), along with an exhibited amended solvency report; the interlocutory process of the defendant dated 17 May 2021; the affidavits and exhibits of James Anglicas affirmed on 25 June 2021 and 26 July 2021, respectively; the affidavit of Glen Klein affirmed 24 August 2021 ('the Klein affidavit'), together with its exhibit which comprises a set of audited accounts and an opinion on the solvency of the defendant; and written submissions dated 30 June 2021.

8 The quantum of the debt claimed by the plaintiff in its statutory demand and winding up application is $36,091.77, which is derived from an invoice dated 28 August 2020. Whilst the amount is relatively modest, the proceeding is not without complexity and, as can be seen, has been delayed in proceeding to final hearing.

9 Having regard to the material filed by the parties and the way in which the application was argued at the hearing, the following questions arise for determination:

(a) was service of the statutory demand effective?

(b) is the defendant solvent?

(c) should the Court grant the defendant leave pursuant to s 459S(2) of the Corporations Act to oppose the winding up application on one or more grounds that the defendant could have relied upon in seeking to set aside the demand, but did not so rely? Further, is such a ground material to proving the Company is solvent?; and

(d) should the Court dismiss the plaintiff's application under s 467(1)(a) of the Corporations Act as a matter of discretion?

10 It is convenient to firstly address the question of whether service of the demand was effective. In the absence of evidence of proper service of the demand, no statutory presumption of insolvency applies in respect of the Company for the purpose of s 459C(2)(a) of the Corporations Act.

11 Pursuant to s 109X(1)(a) of the Corporations Act, a document, including a statutory demand, may be served on a company by leaving it at, or posting it to, the company's registered office.

12 Section 29 of the Acts Interpretation Act 1901 (Cth) ('Acts Interpretation Act') is in the following terms:

(1) Where an Act authorises or requires any document to be served by post, whether the expression "serve" or the expression "give" or "send" or any other expression is used, then the service shall be deemed to be effected by properly addressing, prepaying and posting the document as a letter and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post.

(2) This section does not affect the operation of section 160 of the Evidence Act 1995.

13 Section 160 of the Evidence Act 2008 (Vic) relevantly provides:

(1) It is presumed (unless evidence sufficient to raise doubt about the presumption is adduced) that a postal article sent by prepaid post addressed to a person at a specified address in Australia or in an external Territory was received at that address on the seventh working day after having been posted.

14 As explained by the learned author of the text Assaf's Winding Up in Insolvency,[2] there are two limbs to s 29(1) of the Acts Interpretation Act - the 'deemed service limb' and the 'presumed time of service limb'.[3] The author elaborates that the 'effect of the first limb of s 29(1) is that service of the statutory demand is deemed to be effected by the act of posting a statutory demand and accompanying affidavit by prepaid mail to a company's registered office if the address on the envelope was the company's registered office at the time when the letter was posted.'[4]

15 To establish service, and therefore enliven the presumption under s 29(1) of the Acts Interpretation Act, an applicant for a winding up order must prove the following matters either by way of direct evidence or by inference:

(a) the envelope bore the correct name and address;

(b) the envelope enclosed the relevant document to be served;

(c) the correct cost of postage was used to send the envelope; and

(d) the envelope was placed in the post.[5]

16 In order to negate the statutory presumption of service, a defendant company must adduce admissible evidence to establish non-delivery of the demand.[6]

17 In the matter of Kornucopia Pty Ltd (No 1) ('Kornucopia (No 1)'),[7] Sifris J (as his Honour then was) explained the evidentiary burden faced by a defendant company once the presumption of service under s 29(1) of the Acts Interpretation Act has been successfully invoked:

The Company bears the onus of establishing 'proof to the contrary' pursuant to s 29(1) of the AIA Act [RE AXF Group [2019] VSC 671 [42]]. It does so by proving non-delivery of the statutory demand to the premises of the company's registered office, or delivery to some address other than the registered office. If the company successfully proves alternative delivery or non-delivery, the presumption does not apply, and proof of non-delivery is effective as proof of non-service [That is, unless the plaintiff can then establish service on the company by alternative means without relying on the presumption, such as through effective informal service by email or some other means]. However, 'if there is no evidence of actual delivery or non-delivery, then the presumption will apply and the item will be deemed to be delivered in the ordinary course of post' [Formosa House Pty Ltd v Chang [2010] VSC 474 [11] (Ferguson J) (Formosa House)].

In a case recently before me where a demand had been sent to a registered office by post, Re AXF Group [[2019] VSC 671], the only piece of evidence tending to suggest whether or where a statutory demand had been delivered was the absence of a notice from Australia Post indicating that the statutory demand had been returned to the plaintiff marked 'undelivered', 'returned to sender', or 'not at this address'. I referred to A/S Cathrineholm v Norequirement Trading Ltd [[1972] 2 QB 314, 320-2 (Lord Denning) citing London Country Quarter Sessions Appeals Committee, Ex parte Rossi [1956] 1 QB 682, 694 (Salmon LJ)], and Fancourt v Mercantile Credits Ltd [(1983) [1941] ArgusLawRp 85; 48 ALR 1, 7 (Mason, Murphy, Wilson, Deane and Dawson JJ) (Fancourt)], where the postal articles had similarly not been returned to the serving party [See also von Risefer v Mainfreight International Pty Ltd [2009] VSCA 179; (2009) 25 VR 366, 374 [21] (Ashley JA)], which could be distinguished from CGU Workers' Compensation [(1999) [1999] VSC 227; 151 FLR 270, 278 [74]-[77]] and Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd [(2008) [2008] QSC 210; 219 FLR 422, 423 [1], 425 [11], 429 [23] (White J) (Commonwealth Broadcasting Corporations)], where the statutory demands had been returned by Australia Post to the serving party marked 'return to sender' or 'left address' [See discussion of authorities in Re AXF Group [2019] VSC 671 [67]-[86]. See also Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988; (2019) 137 ACSR 411, 425-6 [54] (Colvin J) (Melking Holdings)]. As I observed in Re AXF Group, 'the absence of a notice from Australia Post marking the Demands as undeliverable is a significant indication as to whether or not delivery had occurred' [[2019] VSC 671 [84]]. To this, I would add the observation of Colvin J in Melking Holdings:

it is a question of fact in each case whether the circumstances indicate that there has been non-delivery at the relevant place (as distinct from an unwillingness to receive the documents at the place where they were delivered or a failure for the documents to be brought to the attention of a particular person despite being delivered to that place) [(2019) [2019] FCA 988; 137 ACSR 411, 426 [56].

Furthermore, as Colvin J also said in Melking Holdings, '[t]he registered office of a company must be a location that accommodates the possibility of service by post [Ibid 425 [52]]. In Partners of Piper Alderman v Sharjade Pty Ltd, Barrett J said there is, implicit in the statutory regime, 'an expectation that there will be in place at the registered office a system for the safe and secure reception of documents delivered by post' [[2011] NSWSC 6 [18]]. In that case, the defendant company's mailbox was located outside the confines of the registered office itself and of the relevant building, such that it were accessible by anyone passing by and that 'anything might happen to documents put into a letter box situated on the public walkway' [Ibid [19]]. Non-receipt of the statutory demands would not, therefore, have been a solid foundation upon which an inference of non-delivery could have been drawn. The demand might not have been delivered, or it might have been and then removed from the letter box by any person passing by. There were there, as I said in relation to the scenario in Re AXF Group, 'an infinite number of possibilities' and each of which was 'equally likely' [Re AXF Group [2019] VSC 671 [83]]. Where there are numerous such possibilities, but no evidence tending to suggest which is most likely, the Court may inevitably hold that service (that is, delivery) has been effective, for that is the default position by virtue of the presumption, and no evidence has been adduced to suggest that it has not occurred.

I reiterate that it is incumbent on the company to adduce proof of non‑delivery. If there is only proof that the statutory demands have not been received by the Company, the presumption is not displaced and service has been effective according to s 29(1) [Ibid [42]]. While proof of non-receipt does not prove non-delivery [Fancourt (1983) HCA 25; (1983) 154 CLR 87, 96-7; Re Rustic Homes Pty Ltd (1988) 49 SASR 41, 44; Dwyer v Canon Australia Pty Ltd [2007] SASC 100 [8]-[9] (Debelle J); Deputy Commissioner of Taxation v Contract Synergies Administration Pty Ltd [2011] FCA 743 [5]-[18] (Jacobson J)], proof of non-receipt at a place by its occupant, as distinct from non-receipt by a person who is not an occupant, may prove non-delivery at that place for the purpose of s 29(1) of the AIA Act [Scope Data Systems Pty Ltd v Goman [2007] NSWSC 278; (2007) 70 NSWLR 176, 188 [49] (White J). That is, however, subject to what was said by McKerracher J in Josway:

while mere denial of non-receipt by the addressee would scarcely, if ever, suffice to prove 'non-delivery', evidence of non-receipt at a place by an appropriate occupant, depending on the cogency of the evidence, may be sufficient to create a doubt for the purposes of s 160 of the Evidence Act. While such evidence needs to be sufficient to create a 'doubt' it does not need to be proof to the civil standard of fact finding at trial as to actual non-delivery. A 'doubt' ought not to be assimilated with proof or demonstration [Josway [2018] FCA 466 [2] (McKerracher J) citing Deputy Commissioner of Taxation v Manta's on the Beach Pty Ltd [2012] FCA 417; (2012) 88 ATR 193, 196 [12] (Logan J)].

Is service of the statutory demand effective?

18 The plaintiff claims to have effected service of the statutory demand upon the defendant in accordance with s 109X(1)(a) of the Corporations Act by sending it to the defendant's registered office by ordinary post. It submits that it has adduced sufficient evidence to engage the statutory presumption of service under s 29(1) of the Acts Interpretation Act. In this regard, the plaintiff relies on the evidence given by its former solicitor, Mr Bekir Cetinkaya, to establish service of the statutory demand. In the first Cetinkaya affidavit, Mr Cetinkaya says on 4 February 2021 he posted the demand in an envelope affixed with a stamp to the registered office of the defendant, being 7 Capital Place Carrum Downs, Victoria. This address corresponds with the registered office of the defendant identified in an Australian Securities and Investments Commission extract. Subject to evidence to the contrary, in accordance with s 160(1) of the Evidence Act 2008 (Vic), the demand is taken to have been received at the defendant's registered office on 15 February 2021.

19 However, the first Cetinkaya affidavit does not specifically confirm that the registered office was in fact the address stated on the envelope containing the statutory demand. Nor does it exhibit a copy of the envelope containing the demand or any letter accompanying the demand. The second Cetinkaya affidavit clarifies that the envelope containing the demand was addressed to the defendant at its registered office and that Mr Cetinkaya wrote that address on the envelope. Mr Cetinkaya also states he 'did not receive any notification or communication from Australia Post that the envelope was not delivered to the address of the registered office of the [d]efendant'.

20 Whilst the plaintiff has not produced a copy of any letter accompanying the demand and/or a photocopy of the envelope in which it was enclosed, Mr Cetinkaya has given unequivocal evidence that the demand and affidavit in support were placed into an envelope addressed to the defendant at its registered office and posted in the ordinary course, and that the documents were not returned to him. He was not cross-examined on these points. On the totality of its evidence, I am satisfied that the plaintiff has put forward sufficient material, either by way of direct evidence or by inference, to raise the presumption of service of the statutory demand under s 29(1) of the Acts Interpretation Act. This was ultimately conceded by the defendant at trial. The real issue then is whether the defendant is able to displace the statutory presumption of service having regard to the principles set out in the authorities.

21 The defendant contends it never received the statutory demand within the statutory period for compliance. Specifically, Mr James Farren, a director of the defendant, has given evidence that he did not receive the statutory demand at any time prior to service of the winding up application and accompanying documents on or about 20 April 2021. He deposes that the defendant's registered office is a factory with an attached office area located at 7 Capital Place, Carrum Downs, Victoria. In the second Farren affidavit, Mr Farren explains the following process by which mail is received and sorted at the defendant's registered office:

(a) in the course of its business, the defendant routinely receives mail at its registered office through a mailbox located behind the front gate of the premises;

(b) the mail is retrieved from the mailbox by the defendant's office manager, Ms Leeanne Williams, or Mr David Farren, and is taken into an office at the premises;

(c) once taken to this office, Mr James Farren sorts through and reviews the mail. He is the only person who performs this task;

(d) the defendant receives mail at its registered office at least once per week;

(e) '[s]pecifically, during April 2020 [sic], ... [he] recall[s] undertaking the above weekly. At no time did the mail box [sic] receive the Statutory Demand.'

22 Whilst deposing to the defendant's system of mail in general terms, Mr Farren is simply unable to say whether or not the statutory demand was collected from the defendant's mailbox and taken to the relevant office for sorting. That is because he is not one of the employees of the defendant who is tasked with regularly checking the mailbox. Neither of those two nominated employees have given evidence in this proceeding about whether they checked for mail throughout February 2021 (when the statutory demand was purportedly sent by prepaid mail). Nor do they give direct evidence of whether or not they sighted the envelope containing the statutory demand during this time.

23 Moreover, there is no evidence as to whether the defendant's usual process of sorting its mail was adhered to during the relevant period in which the demand was purportedly served, being February 2021. In this regard, it seems that Mr Farren's evidence is directed to a later period in time, being April 2021, when the plaintiff's winding up application and associated documentation were served.

24 Having regard to the defendant's evidence on the question of service, I conclude that it has failed to rebut the presumption that the demand was served at its registered office. In particular, it is unable to establish non-delivery of the demand to the registered office which would involve the drawing of an improbable inference on the available evidence. A more likely possibility is that the statutory demand was delivered to the registered office but not brought to the attention of Mr Farren. Taken at its highest, the defendant's affidavit material only establishes the statutory demand was not received at the registered office. But it has not adduced sufficiently cogent evidence of non-delivery.

25 On the balance of probabilities, I find that the statutory demand was delivered to the defendant's registered office in the ordinary course of post by no later than 15 February 2021. It follows that the plaintiff is able to rely upon the statutory presumption of insolvency found in s 459C(2)(a) of the Corporations Act by virtue of the defendant's non-compliance with the demand.

26 Independent of the question of service of the statutory demand, the defendant seeks to establish that it is solvent and able to pay its debts as and when they fall due.

27 Section 459C(2)(a) of the Corporations Act essentially provides that a company is presumed to be insolvent if, during or after the three months ending on the day when an application for winding up was made, the company failed to comply with a statutory demand. According to s 459C(3), that presumption operates unless the contrary is proved. If the presumption is rebutted, the Court cannot make a winding up order under s 459A of the legislation.[8]

28 The test for solvency found in s 95A(1) of the Corporations Act is whether a company can pay its debts as and when they become due and payable. Section 95A(2), in turn, provides that a company which is not solvent is insolvent.

29 In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[9] Weinberg J (as he then was) summarised the following principles governing the assessment of solvency of a debtor company:

• [In the event of non-compliance with a statutory demand], [t]he respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd [1996] FCA 951; (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. [1997] FCA 125; (1997) 15 ACLC 477 per Mansfield J.
• In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
• Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd [1997] FCA 133; (1997) 15 ACLC 459 at 463 per Sackville J.
• There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466.
• The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
• The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.

30 The above passage from Ace Contractors was cited with approval by Dodds-Streeton J (as her Honour then was) in Crema Pty Ltd v Land Mark Property Developments Pty Ltd.[10] Her Honour also confirmed that s 95A of the Corporations Act 'enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business'.[11]

31 In the seminal case of Sandell v Porter,[12] Barwick CJ explained that insolvency is determined from a consideration of the debtor's financial position in its entirety and, 'generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity'.[13] His Honour further observed that while '[i]nsolvency is expressed... as an inability to pay debts as they fall due out of the debtor's own money. ... the debtor's own moneys are not limited to his cash resources immediately available [and].... extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time'.[14]

32 Further, in determining solvency, commercial realities will be relevant in assessing what resources are available to a company to source the income necessary to meet its liabilities.[15]

33 The question of whether a company is able to pay its debts as and when they fall due is ultimately a question of fact.[16] The onus of displacing the statutory presumption of insolvency and establishing solvency resides with the debtor company and is determined on the balance of probabilities.[17]

34 In seeking to establish its solvency, the defendant places reliance upon the first Allen affidavit and the second Allen affidavit and their respective exhibits, together with the Klein affidavit, along with audited accounts and a solvency opinion expressed by Mr Klein, which are contained in the exhibit to the Klein affidavit.

35 Ms Allen is a certified practising accountant of more than 20 years' experience and managing partner of CGA Accounting. On 6 May 2021, she completed a solvency report in relation to the defendant which is exhibited to the first Allen affidavit. In the second Allen affidavit, Ms Allen exhibits an amended copy of the solvency report for the Company dated 18 May 2021. The principal change contained within the amended solvency report is a reference to the Expert Witness Code of Conduct as required by r 44 of the Supreme Court (Civil Procedure) Rules 2015 (Vic). In her amended solvency report, Ms Allen reviews the Company's then unaudited financial statements[18] and observes that:

(a) the profit and loss statements for the defendant show profit before tax of $716,212 for the period ended 6 May 2021 and $204,878 for the year ended 30 June 2020;

(b) based on her analysis of the defendant's balance sheets and following the making of certain adjustments to accommodate realisable assets and liabilities of the Company, the working capital position of the Company as at 6 May 2021 is $255,835.15. Those adjustments include: the relevant debt claimed by the plaintiff; a refund of the Company's rental bond in the sum of $10,725 on the expiry of its lease on 1 July 2021; the reduction of the value of finished goods and raw materials from approximately $276,000 to nil on the basis that they are unlikely to be sold in the short term; the reduction of the fair market value of fixed assets from approximately $182,000 to $98,250.85 in accordance with advice of the Company's directors; and provision for income tax payable for the financial year ended 30 June 2021, calculated as 26% of current year earnings before tax and having regard to an instant asset write off available;

(c) she has obtained verification of the Company's bank balances of $260,498.15 in its online saver account and $74,076.32 in its business transaction account, as at 6 May 2021;

(d) putting to one side the debt claimed by the plaintiff, the Company can meet its current debts and will have minimal, if any, ongoing liabilities due to the cessation of its manufacturing operations;

(e) because the Company has access to sufficient funds to pay its current liabilities, it is solvent at the date of her amended solvency report.

36 As previously stated, the defendant also relies on the Klein affidavit to establish its solvency. Mr Klein is a registered auditor who undertook an audit of the Company's accounts on or about 21 August 2021 for the financial years ended 30 June 2020 and 30 June 2021. The audited accounts are exhibited to the Klein affidavit together with other supporting documentation, including bank statements and a statement issued by the Australian Taxation Office. Accompanying the audited accounts are audit reports for each relevant financial year. Each audit report concludes, among other things, that the Company's financial statements for the relevant financial year give 'a true and fair view of the [C]ompany's financial position'.

37 As part of the audit, Mr Klein prepared an adjusted balance sheet as at 20 August 2021 which shows the Company to have a net asset position of either $283,114.83 or $155,258.44 (depending on whether certain director loans amounting to approximately $128,000 are removed from the calculations) and assigns a nil value to raw materials, finished goods, the rental bond and fixed assets such as plant and equipment. This net asset position assumes payment of all tax liabilities of the Company, which amount to almost $94,000 and include GST and income tax. The asset position of the Company is substantially explained by the balance of its bank accounts. As at 20 August 2021, there was $247,402.03 in the defendant's business transaction account and $12,661.29 in its business online saver account. On the basis of figures in the adjusted balance sheet, Mr Klein expresses the opinion that the defendant is solvent. The only qualification expressed by Mr Klein in his audit reports is in respect of the opening balances for the year ended 30 June 2020, on the basis that he did not audit the accounts for the year prior.

38 Further, the audited financial statements exhibited to the Klein affidavit confirm the Company had:

(a) total income of $991,983 for the financial year ended 30 June 2021 and $330,031 for the financial year ended 30 June 2020;

(b) a profit before tax of $507,327 in respect of the financial year ended 30 June 2021 (which is less than the position reported by Ms Allen as at 6 May 2021) and $204,878 for the financial year ended 30 June 2020 (as initially reported by Ms Allen);

(c) a net profit after tax of $426,053 for the financial year ended 30 June 2021 and $145,651 for the financial year ended 30 June 2020;

(d) a sum of $250,818 in the Company's bank accounts as at 30 June 2021 and $92,039 as at 30 June 2020; and

(e) a net surplus of assets of $438,516 for the financial year ended 30 June 2021 and $150,197 for the financial year ended 30 June 2020.

39 Whilst the plaintiff accepts the Company's audited accounts are admissible as evidence in the proceeding pursuant to s 1305(1) of the Corporations Act, it submits that this evidence is not unimpeachable. As explained by Austin J in Australian Securities and Investments Commission v Rich,[19] whilst s 1305(1) allows a company's books to be admitted into evidence without any authentication by a witness, and for the books to be relied on to prove transactions recorded in them, 'it does not elevate matters contained in the books to a plane of probative value that requires the Court to disregard the context in which the matters relied on appear in the tendered document'.[20] For example, if there is doubt about whether a particular transaction is recorded in a book of the company because of uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.

40 Mr Klein was cross-examined about what documents he was provided in undertaking the audit, what documents he attached to his audit report, how long he took to finalise the audit after receiving the documents, the methodology he employed in sampling particular transactions by reference to source documents and the preparation of the audit on a going concern basis.

41 I am satisfied that Mr Klein was provided with all documents necessary for him to properly carry out his audit of the Company's accounts for the financial years ended 30 June 2020 and 30 June 2021. In addition to receiving the relevant end of year financial statements, he was also given access to: the Company's general ledger for the relevant financial years via its Xero accounting software (although, regrettably, it appears the general ledger for the 2019/2020 financial year was not made available to the plaintiff during the course of the proceeding); accounts receivable, accounts payable and payroll reports through Xero; Company bank statements for the period 1 April 2020 to 20 August 2021; a Business Activity Statement for the June 2021 quarter and various supporting documentation for income and expenditure (such as invoices). In my view, it was reasonable for Mr Klein to have only attached the most relevant documents to his audit report. He explained that he received some documents shortly after his engagement on 2 August 2021, along with additional documents on or around 13 August 2021 and further documents a day or so prior to completing his report. This is not a reason for me to question the completeness of the work undertaken by Mr Klein. He sampled transactions by reference to the general ledger (including a wide selection of large and small items) and interrogated the source documents underpinning certain entries (such as invoices), weighing his sample having regard to the size of the transactions. His approach to sampling appears to be reasonable in the circumstances.

42 I also consider that it was appropriate for Mr Klein to have prepared the audit on a going concern basis given there is no evidence that the defendant has ceased trading. Mr Klein stated that his inquiries revealed the Company had outsourced its manufacturing activities, which was consistent with its lease ending on 1 July 2021, but that it continued to operate as a going concern. The bank statements for the Company also show regular income received by it from 1 July 2021 until at least 21 August 2021 which reinforces the conclusion that the Company is continuing to trade, albeit without rented factory premises. Further, in addition to trading under the business name 'Australian Face Masks', there is evidence that the defendant also operated a business called 'Revenue Labs' and entered into a sales agreement with the plaintiff dated 5 September 2019 using this business name. There is no evidence that the defendant required a factory from which to operate the Revenue Labs business or that the income of this particular aspect of its operations was dependent on the manufacture of face masks.

43 Whilst Mr Klein did not prepare a cash flow projection for the Company, he says he paid particular regard to the large bank balance held by the Company at the relevant time, which was capable of being utilised to pay future liabilities. At any rate, the audited accounts clearly show the Company to be cash flow positive for both the 2019/2020 financial year and the 2020/2021 financial year. As earlier noted, the Company earned total income of $991,983 for the 2020/2021 financial year, resulting in a net profit after tax of $426,053.

44 In his cross-examination, Mr Klein was taken to a number of significant transactions concerning the Company's bank accounts. In particular, on 16 August 2021, a few days prior to the completion of the audit, there was a transfer into the Company's business transaction account for the sum of $200,000 bearing the description 'solvency'. Mr Klein gave evidence under cross-examination that he did not seek an explanation for that transaction. He also conceded that the money in the Company's bank account was its largest asset and were it not for the $200,000 transfer, the Company would have been self-evidently worse off. In re-examination, he stated that he assumed the movement of large sums in and out of the Company's bank accounts related to directors' drawings or directors' loans.

45 Mr Klein accepted that the audited accounts did not include the $36,091.77 debt claimed by the plaintiff and disputed by the defendant in this proceeding, or a $16,500 offsetting claim by the defendant against the plaintiff (referred to later in these reasons). In my view, the audited accounts ought to have included these amounts. However, given the Company's overall net asset position of either $283,114.83 or $155,258.44 (depending on the recoverability of director loans), I do not regard these omissions as material. A more important issue pertaining to the Company's solvency is the movement of funds in and out of its bank accounts and, in particular, the characterisation of the $200,000 transfer into the Company business transaction account on 16 August 2021.

46 The plaintiff submits that the timing of the $200,000 payment into the business transaction account, some five days before the completion of Mr Klein's audit is noteworthy and that the description of the transaction as pertaining to 'solvency' is curious. It is also submitted by the plaintiff that although Mr Klein considered the payment of the $200,000 to be likely related to directors' drawings or directors' loans, it was not recorded in the financial statements as such. It is argued that the defendant has provided no explanation for the $200,000 transfer. Counsel for the plaintiff observes that a full set of Company bank statements has not been appended to Mr Klein's affidavit but only statements for what is effectively the last quarter of the 2019/2020 financial year and for the period June 2021 to 21 August 2021. In essence, the plaintiff suggests there is no evidence the $200,000 belongs to the Company.

47 In considering the significance of the $200,000 transaction of 16 August 2021 to the question of the Company's solvency, it is important to assess the transaction in its proper context. On the basis of the bank statements I have available to me, I have set out in the table below a sample of transactions from the Company's bank statements which show the movement of funds in and out of the Company accounts:

48 The transactions detailed in the Company's bank account statements, including those in the table above, reveal an historical movement of funds as between the Company's business transaction account and its business online saver account. These transactions occurred both prior to and following the commencement of the winding up proceeding. At the same time, the bank statements show significant credits into the Company's business transaction account from various third parties, including PayPal Australia, Shopify and Afterpay, which appear to relate to online sales by the Company. As at 1 June 2021, there was $240,500.30 in the Company's online saver account.[21] On 30 June 2021, $191,168 of this money was transferred into the business transaction account. The following day, this same amount was transferred from the business transaction account to an unknown bank account ending in the numbers 4355. A further sum of $100,000 was transferred to this same unknown account on 12 July 2021. On 16 August 2021, the $200,000 was then transferred into the business transaction account from an unknown account. It is uncertain whether the $200,000 emanated from the unknown bank account ending in the numbers 4355.

49 On the basis of the above, the Company had at least $240,000 in cash as at 1 June 2021. It is reasonable to proceed on the basis that this sum was at least partly derived from the Company's total income of $991,983 for the 2020/2021 financial year. I therefore infer that the $240,000 in the Company's bank account as at 1 June 2021 was the Company's funds. Whilst the sums of $191,168 and $100,000 ($291,168 in total) were transferred into the unknown account ending in the numbers 4355 on 1 July 2021 and 12 July 2021, I do not regard these payments as representing payment of any liability of the Company as no such liability is disclosed in its audited accounts. I am prepared to infer that the money that left the company accounts on these days was also the Company's money.

50 In relation to the ownership of the $200,000 paid to the Company on 16 August 2021, the position is not as clear. The defendant, who bears the onus of proving solvency, ought to have addressed this issue directly in its evidence. The timing and circumstances of the payment and the identity of the party making the payment are not clearly explained. No one from the defendant has gone on oath to specifically confirm that the $200,000 is the defendant's money. Instead, the defendant essentially asks the Court to draw an inference that the $200,000 payment to the Company on 16 August 2021 represents a part-repayment of the $291,168 transferred to the unknown account ending in numbers 4355 and that the $200,000 belongs to the Company.

51 Ultimately, the evidence in relation to the $200,000 payment is equivocal. There is an absence of proper explanation as to its provenance. On the other hand, in undertaking his audit, Mr Klein has treated the funds as Company property. There is nothing to suggest the money was received on a conditional basis or has been treated as a loan to the Company. Mr Klein's suggestion that the $200,000 payment may represent the return of director drawings or the repayment of a director loan is not implausible. Further, it was never squarely put to Mr Klein during cross-examination that it was unreasonable for him to proceed on the basis that the $200,000 belonged to the Company. On balance, I consider it appropriate to draw an inference that the Company is entitled to use the $200,000 as its own asset.

52 At all events, I am satisfied that the defendant has ultimately rebutted the statutory presumption of insolvency. The Company was cash flow positive for both the 2019/2020 financial year and the 2020/2021 financial year (reporting a net profit after tax of $426,053 for the latter year). It has a net asset position of at least $155,258.44 as at 20 August 2021 and the evidence suggests it was continuing to trade up to that time. It is reasonable to assume the Company will continue to operate as a going concern through at least one of its businesses. Even if the Company ceases to trade in the near future, there are sufficient liquid assets available to pay all of its creditors (including the plaintiff). Although some aspects of the defendant's evidence on solvency ought to have been presented with greater clarity (particularly as regards the current trading position of its business and the characterisation of the $200,000 transfer on 16 August 2021), the nature of the evidence, including the audited accounts and the bank statements, enables the Court to draw appropriate inferences in the circumstances. Further, no contrary evidence on the question of solvency was adduced by the plaintiff. It is clear that the Company is able to pay its debts (including the debt claimed by the plaintiff) as and when they fall due. It follows that the winding up proceeding must be dismissed on this ground of opposition.

Leave of the Court under s 459S

53 Despite my finding about solvency, for the sake of completeness I will consider the defendant's interlocutory application for leave under s 459S of the Corporations Act.

54 Section 459S of the Corporations Act provides:

(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.

55 In an application to wind up a company in insolvency for failure to comply with a statutory demand, s 459S of the Corporations Act operates to preclude a defendant company from challenging the plaintiff's standing as a creditor or disputing the debt relied upon[22] by creating a statutory estoppel as regards those matters.[23] The provision reflects the policy objectives underpinning Part 5.4 of the Corporations Act to ensure:

(a) strict compliance with the provisions of Part 5.4, including the making of any objections to a statutory demand within the statutory period rather than at the time of a winding up application;[24] and

(b) the efficient and prompt winding up of insolvent companies as a matter of public interest.[25]

56 In Re Kornucopia Pty Ltd (No 4),[26] Sifris J (as his Honour then was) further explained the function and rationale of s 459S in this way:

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.[27]

57 Whilst s 459S of the Corporations Act provides a 'safety net' to defendant companies against the potentially harsh operation of the statutory demand regime,[28] the discretion afforded by the section should be exercised cautiously and sparingly.[29]

58 The question of leave under s 459S is often dealt with prior to the final hearing of the application to wind up the company in insolvency as a preliminary issue.[30] Here, for reasons of efficiency, and having regard to the quantum of the debt in issue, the parties have proceeded on the basis that the defendant's application under s 459S should be heard and determined at the same time as the other matters raised in opposition to the plaintiff's winding up application.

59 For reasons which will become apparent, I consider that the grounds now sought to be advanced by the Company are grounds which were in existence and capable of being relied upon at a time when the Company could have brought an application under s 459G of the Corporations Act. Leave under s 459S will therefore be necessary.

60 In Chief Commissioner of Stamp Duties v Paliflex Pty Ltd ('Paliflex'),[31] Austin J observed that the exercise of discretion to grant leave under s 459S of the Corporations Act requires the Court undertake:

(i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand;

(ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and

(iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent.[32]

61 In Re Vangory Holdings Pty Ltd (No 1),[33] Black J referred to the test set out in Paliflex with approval, although his Honour described the first stage of the inquiry in terms of 'whether there is a serious question to be tried on the ground sought to be raised'.[34] This is also how the parties have approached the application of s 459S in the present case.

62 As with an application for an interlocutory injunction, an assessment of whether there is a serious question to be tried does not involve a final determination of the claim sought to be raised.[35] Instead, the Court undertakes a preliminary 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 or offsetting claim.[36]

63 As previously explained, the grounds the defendant now seeks leave to raise are that: there is a genuine dispute about the amount of the debt claimed in the statutory demand in accordance with s 459H(1)(a) of the Corporations Act; the defendant has an offsetting claim for the purpose of s 459H(1)(b) of the Corporations Act; and the demand is defective and a substantial injustice will be caused to the defendant if the demand is not set aside pursuant to s 459J(1)(a) of the Corporations Act.

64 The defendant relies on the existence of two documents in support of its contention that its claims are bona fide and made in good faith: a marketing agreement entered into between the parties on or about 17 April 2020 ('the Marketing Agreement') and a sales agreement entered into between the parties on or about 5 September 2019 ('the Sales Agreement').

65 The Marketing Agreement is the purported contractual basis for the amount claimed in the statutory demand (the amount of $36,091.77) and is said to be recorded in a series of WhatsApp messages exchanged between the defendant's director, Mr Farren and the plaintiff's director, Mr Rashid Alshakshir, on 17 April 2020. It entailed the plaintiff conducting marketing services for the sale of the defendant's face masks via social media for which the defendant would pay the plaintiff $1.00 for each mask sold through various social media platforms. According to the defendant, the parties agreed that they would track sales via Google Analytics. The defendant claims it paid the plaintiff $3,300 under the Marketing Agreement on 17 April 2020. However, it contends there is a genuine dispute as to the amount now claimed by the plaintiff in its statutory demand.

66 It is the evidence of Mr Farren that the plaintiff's calculation of the debt owing under the Marketing Agreement does not rely on Google Analytics as the tool for measuring sales but instead appears to be calculated using Facebook Analytics data. He asserts that the plaintiff's calculation of masks sold is incorrect and that the number of sales made by the Company on both Facebook and/or Instagram as at 28 August 2020 are either 2,626 masks calculated using Google Analytics data or 6,815 masks if calculated using Shopify metrics. Mr Farren calculates that the amount owing to the plaintiff is either $8,140.60 (being $1.00 per mask, multiplied by 2,626, multiplied again by 3.1 being the average masks sold per transaction, plus GST) using Google Analytics or $23,361.91 (being $1.00 per mask, multiplied by 6,815, multiplied again by 3.1 being the average masks sold per transaction, plus GST) using Shopify.

67 On 24 August 2020, Mr Alshakshir sent Mr Farren an email seeking to discuss an accounting of matters between the parties. Mr Farren's response was contained within a video which he recorded and emailed to Mr Alshakshir on 28 August 2020. The video has been transcribed. In the video, Mr Farren referred to the online sales data captured by Google Analytics and the multipliers set out above. He provided a figure for online sales (2,631), which is close to the figure given in his affidavit evidence. Mr Farren used strong and emotive language in the video to express his disagreement with the plaintiff's calculation of the defendant's indebtedness. Mr Alshakshir gave his reply by email on 28 August 2020 in which he asserted, among other things, that Mr Farren's tracking of online sales data was incorrect and that the total online sales made during the operation of the Marketing Agreement was over 11,000. He stated that the defendant owed the plaintiff $35,888.70 less $3,078 (in respect of a sales system provided by the defendant) with a resulting amount of $32,810.70, and purported to attach an invoice for that amount. Mr Farren says that Mr Alshakshir was referring in his email to Facebook Analytics data, as opposed to Google Analytics data. All of these communications are undisputed contemporaneous documents which provide an evidentiary foundation for the alleged genuine dispute well prior to the issuing of the statutory demand on 3 February 2021.

68 In addition, the defendant observes that in Mr Alshakshir's 28 August 2020 email, it is stated that the defendant actually owes the plaintiff $32,810.70. This amount can be contrasted with the amount of $36,091.77 claimed in the statutory demand. It is submitted that this discrepancy is unexplained and gives rise to a genuine dispute at least in respect of the difference between the two figures.

69 The ground sought to be advanced under s 459J of the Corporations Act is dealt with in the defendant's written submissions, but lacks clarity. It is expressed as a substantial injustice arising from: the improper service of the statutory demand; the demand being made for improper purposes; and because the defendant is plainly solvent. Section 459J(1)(a) of the Corporations Act, of course, relevantly provides that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside. The s 459J ground was later refined during the course of the hearing by the defendant's counsel. In essence, it is now put that the demand suffers from a defect because it claims a sum plus GST, whereas the Marketing Agreement assumes a price per unit which is GST inclusive. The GST component of the total debt claimed by the plaintiff is $3,281.07.

70 As a general principle, s 459J of the Corporations Act should not be used to ventilate a dispute about the existence or amount of the debt claimed in a statutory demand.[37] The defendant's counsel agreed with my suggestion that the argument about GST might be more appropriately described as another aspect of the genuine dispute ground rather than a defect for the purpose of s 459J(1)(a) of the legislation. Regardless, it is apparent that this subsidiary argument about GST is at odds with the defendant's initial calculations of the alternative amounts owing to the plaintiff of either $8,140.60 or $23,361.91, which were expressed to be exclusive of GST.

71 The offsetting claim ground sought to be advanced relates to the Sales Agreement, which concerned the provision of services by the defendant (through its business Revenue Labs) to the plaintiff in exchange for payment, including on account of sales commissions. The scope of those services included: handling inbound leads, securing customers and designing and building an 'end to end sales system that will close the highest percentage of leads into profitable customers.' The defendant states that it completed the required services and has been paid by the plaintiff the amount of $29,370 (including GST) with a remaining amount of $16,500 (including GST) still outstanding. The outstanding sum is said to comprise half of the amount of the fee for building the sales system ($7,500 plus GST) and outstanding commission payments ($7,500 plus GST). The defendant relies on WhatsApp messages passing between Mr Farren and Mr Alshakshir on 3 June 2020 in which Mr Farren stated, among other things, that the defendant owed $7,500 for the sales system, in response to which Mr Alshakshir apparently gave his agreement. Mr Farren also exhibits to the first Farren affidavit a bundle of invoices generated between 6 September 2019 and 9 January 2020 which record the charges made by the defendant to the plaintiff under the Sales Agreement.

(a) the correct amount owing by the Company under the Marketing Agreement (either $8,140.60 or $23,361.91 - depending on whether Google Analytics or Shopify sales metrics are used);

(b) whether either of these amounts are inclusive or exclusive of GST;

(c) the $3,300 already paid to the defendant under the Marketing Agreement; and

(d) the $16,500 offsetting claim;

the $36,091.77 claimed in the statutory demand would either be reduced to as little as $3,561.91, or the statutory demand would be reduced to nil and the plaintiff would in fact be indebted to the defendant in the sum of $11,659.40.

73 The plaintiff elected not to lead any evidence to contradict the defendant's account of a genuine dispute and offsetting claim. Nor did the plaintiff seek to cross-examine Mr Farren whose evidence addressed those matters. Counsel for the plaintiff did, however, quite properly concede that there was probably sufficient material to raise a serious question to be tried. On the basis of the circumstances and material filed in this matter, it is evident that there is a serious question to be tried on the grounds sought to be raised by the defendant in relation to the statutory demand.

Why issue of indebtedness not previously raised?

74 I will briefly deal with the requirement for the defendant to proffer an explanation of why the issue of indebtedness was not raised in an application to set aside the demand, and whether its conduct is reasonable. As already stated, despite failing to displace the statutory presumption of service of the demand, the defendant's evidence, at its highest, demonstrates non-receipt of the statutory demand. Mr Farren, an officer of the defendant, deposes that he never saw the document. He was not challenged under cross-examination. If the demand was not received by the defendant, that would explain a failure to act upon it within the 21-day statutory period. Further, as I said earlier, there is a real possibility that the statutory demand was delivered to the registered office but not brought to the attention of Mr Farren. This may have occurred due to mischance, inadvertence or incompetence. However, there is simply insufficient evidence for the Court to form a concluded view as to why an officer of the Company did not receive the demand. But the evidence before the Court does not go so far as to clearly establish that the defendant and its officers or employees have acted unreasonably or carelessly in relation to the management of the defendant's mail system or as regards the demand itself.

Whether material to proving Company is solvent?

75 I come now to the materiality requirement of s 459S of the Corporations Act. The Court is unable to grant leave under s 459S(2) unless it is satisfied that the ground is 'material to proving that the company is solvent'. This, of course, requires a defendant company to adduce some evidence of solvency.[38] The defendant has done so here. However, there is a divergence of authority as to what is meant by 'material' in the context of s 459S(2).[39] One line of authority adopts a narrow or strict interpretation of the term so that a ground will only be material if is 'pivotal' or 'crucial' to or 'determinative' of solvency.[40] The other line of authority endorses a more liberal or broader approach so that a ground will be material to proving a company is solvent if it has a capacity to have some influence or effect in proving a company is solvent.[41] An example of the narrow approach can be found in the decision in Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd[42] where Perram J said 'if the debt [in respect of which leave is sought] exists then the company will be insolvent and if the debt does not exist, then the company will be solvent.'[43] In colloquial terms, the question is whether the relevant debt will sink the company. The broader approach is exemplified by the decision of White J in Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2)[44] where his Honour held that '[w]hat is material to proving solvency is not the same as what is determinative of solvency'.[45] In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Recs and Mgrs Apptd),[46] the High Court relevantly observed that 'if leave is sought on the basis that the debt is disputed, the existence or amount of that debt must be relevant to a conclusion as to the company's solvency'.[47] This statement has been interpreted as tending to endorse a broader view of the term 'material'.[48]

76 Ultimately, it is unnecessary in this case to elect between the narrow or the broad interpretation of the term 'material' as used in s 459S(2) of the Corporations Act. As Sifris J (as his Honour then was) said in Kornucopia (No 4): '[i]f the company is solvent irrespective of the debt, the debt could not, on any view, be "material" to solvency.'[49] Here, I have found that the Company has rebutted the statutory presumption of insolvency by proving its solvency under s 95A of the Corporations Act. The existence of $247,402 cash within the Company's bank account as at 20 August 2021 means the grounds sought to be raised in respect of the plaintiff's debt are not material to proving solvency. However, in the event I am wrong about the ownership of the $200,000 paid into the Company's bank account on 16 August 2021, it is likely that the plaintiff's debt could be 'material' to proving solvency on either the narrow or the broader view of the term. By removing the $200,000 from the Company's adjusted balance sheet, the Company would only have a net asset position of either $83,114.83, or -$44,742 (depending on whether the director loans in the order of $128,000 are included as recoverable assets). Whether the Company would be in a position to pay the debt of $36,091.77 claimed by the plaintiff, would depend on its ability to sustain its positive cashflow in the short to medium term, and the precise timing of when other liabilities fall due, including at least $99,000 owing to the Australian Taxation Office.

77 It follows that had the defendant failed to establish solvency under s 95A of the Corporations Act, I would ultimately have granted it leave under s 459S to raise the grounds concerning the plaintiff's debt. The consequences of granting such leave are not made explicit by the legislation. Whilst it would not logically result in the statutory demand being set aside or undo the statutory presumption of insolvency arising under s 459C(2)(a) of the Corporations Act,[50] the grant of leave carries with it an 'implicit positive assessment' of the prospects of a genuine dispute and offsetting claim being established.[51]

78 Had it been necessary, I would have also found that the evidence in this case established a genuine dispute as to the amount of the debt the subject of the statutory demand, along with a genuine offsetting claim. The grounds for alleging the existence of both the dispute and the offsetting claim are bona fide, real and 'not spurious, hypothetical, illusory or misconceived'.[52] The offsetting claim also appears to be advanced 'in good faith, for an amount claimed in good faith'.[53] Having regard to the Company's calculations as previously set out, this would have necessarily resulted in the plaintiff's debt being disregarded in its entirety or potentially only allowed for on an adjusted sum of $3,561.91. Under the first scenario, the plaintiff would lose its standing as a creditor under s 459P of the Corporations Act. Under the second scenario, having regard to the available evidence, I would not hesitate to conclude the Company was solvent. In either case, the application would stand dismissed.

Discretion under s 467(1)(a) of the Corporations Act

79 The last issue identified in this case is whether the Court should dismiss the plaintiff's application under s 467(1)(a) of the Corporations Act as a matter of discretion. The Company raised this argument for the first time at the hearing itself. As I understood it, the Company appeared to contend that the winding up application should be dismissed because the quantum of the demand was overstated and that such overstatement constituted a defect resulting in substantial injustice. Following objection by the plaintiff about a lack of notice, I ultimately declined to allow the defendant to pursue the argument. I also formed the view that issues concerning the calculation of the debt the subject of the statutory demand were more appropriately dealt with under the rubric of s 459S of the Corporations Act. Given my conclusions in relation to the other contentions advanced by the Company, it is unnecessary for me to deal with this aspect of the case any further.

80 For the reasons provided, the plaintiff's winding up proceeding will be dismissed. I will hear the parties on the question of costs.

[1] The statutory period for compliance with a statutory demand is set by ss 459E(2) and 459G(2) of the Corporations Act 2001 (Cth), and Form 509H found in Schedule 2 of the Corporations Regulations 2001 (Cth), and is and defined in s 9 of the Corporations Act 2001 (Cth) as: '(a) if a period longer than 21 days is prescribed--the prescribed period; or (b) otherwise--21 days'.

[2] Farid Assaf, Assaf's Winding Up in Insolvency (3rd ed, Lexis Nexis, 2021) ('Assaf's Winding Up in Insolvency').

[3] Ibid [4.67] citing Lindgren J in Deputy Commissioner of Taxation v Trio Site Services Pty Ltd [2007] FCA 776 [20] and other cases.

[4] Ibid citing Perpetual Nominees Ltd v Masri Apartments Pty Ltd [2004] NSWSC 500; (2004) 49 ACSR 714 and Deputy Commissioner of Taxation v ABW Design & Construction Pty Ltd [2012] FCA 346; (2012) 203 FCR 70, 78 [27] (Logan J).

[5] See Northumbrian Ice Cream Co Ltd v Breakaway Vending Pty Ltd [2006] NSWSC 1216 [12] (Brereton J); Pearlburst Pty Ltd v Summers Resort Group Pty Ltd; Landmark Leisure Group Pty Ltd v Summers Resort Group Pty Ltd [2007] NSWSC 1126 and the authorities cited in that case_; Deputy Commissioner of Taxation v Clear Blue Developments Pty Ltd_ [2010] FCA 1223 [24] (Logan J); Brown v Bluestone Property Services Pty Ltd [2010] NSWSC 869 [13] (Barrett J); Renegade Rigging Pty Ltd v Hanlon Nominees Pty Ltd [2010] VSC 385 [22] (Ferguson J, as her Honour then was); In the matter of Kornucopia Pty Ltd (No 1) (2019) 59 VR 305, 316 [42] (Sifris J, as his Honour then was).

[6] Assaf's Winding Up in Insolvency [4.83] citing Fancourt v Mercantile Credits Limited (1983) HCA 25; (1983) 154 CLR 87, 95‑7; CGU Workers' Compensation (Vic) Ltd v Carousel Bar Pty Ltd [1999] VSC 227; (1999) 151 FLR 270, 278 [73]-[77] (Gillard J); and Re AXF Group [2019] VSC 671 [67]-[77] (Sifris J) ('Re AXF Group').

[8] Paperlinx Ltd v Skidmore [2004] FCA 1624; [2004] 51 ACSR 614, 616 [6] (Finkelstein J).

[9] [1999] FCA 728 [44] ('Ace Contractors') (emphasis added).

[10] [2006] VSC 338; (2006) 58 ACSR 631, 651-2 [140] ('Crema v Land Mark').

[11] Ibid 652 [141]. See also Tru Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632; (2006) 232 ALR 532, 543 [43] (Sundberg J) and C & O Voukidis Pty Ltd v Break Fast Investments Pty Ltd [2014] FCA 1000 [3] (Davies J).

[12] (1966) 115 CLR 666 ('Sandell v Porter').

[13] Ibid 670. See also Crema v Land Mark Property 652 [142] (Dodds-Streeton J); Bell Group Ltd (In liq) v Westpac Banking Corporation (No 9) and (No 10) (2008) 39 WAR 1, 145 [1090] (Owen J); Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; (2009) 76 ACSR 404, 406-7 [12] (Maxwell P, Byrne and Williams AJA).

[15] See Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 188 ALR 114 and Australian Beverage Distributors v The Redrock Co [2008] NSWSC 3; (2008) 26 ACLC 74.

[16] Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385, 408-9 [106]-[108] (Palmer J), approved by the New South Wales Court of Appeal in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR 555. See also Stone v Melrose Cranes & Rigging Pty Ltd, Re Cardinal Project Services Pty Ltd (in liq) (No 2) [2018] FCA 530 [146] (Markovic J).

[17] See Assaf's Winding Up in Insolvency [11.13] citing Bibby Financial Services Australia Pty Ltd v Wolf Industries Australia Pty Ltd [2004] NSWSC 134; (2004) 49 ACSR 45, 50 [21] (Austin J) ('Bibby Financial Services v Wolf Industries'); Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 [7] (Finkelstein J); Ace Contractors [44] (Weinberg J); Coates Hire Operations Pty Limited v D-Link Homes Pty Limited [2011] NSWSC 1279 [66] (White J); Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd [2012] FCA 363 [60] (Robertson J); Platinum Construction (Vic) Pty Ltd v Lin Tiger Plastering Pty Ltd [2019] VSC 274 [46 (Efthim AsJ).

[18] Which are attached to the initial solvency report of 6 May 2021.

[19] [2009] NSWSC 1229; (2009) 236 FLR 1.

[21] According to the audited accounts, there was a total of $250,818 in the Company's accounts as at 30 June 2021.

[22] Re Vangory Holdings Pty Ltd [2015] NSWSC 1809 [10] (Brereton J) ('Re Vangory Holdings (No 2')) citing Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 44 ACSR 124, 130 [37] (Stein JA, Mason P and Ipp JA agreeing) ('Braams Group v Miric'); Bibby Financial Services v Wolf Industries [22] (Austin J); Cedars Concrete Services v Maatouk [2006] NSWSC 884 [41] (Campbell J); Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962 [21] (White J) ('Radiancy v Bimat').

[23] Re Vangory Holdings (No 2) [10] (Brereton J).

[24] Re Vangory Holdings Pty Ltd [2015] NSWSC 546 [10] (Black J) ('Re Vangory Holdings (No 1)'); Perpetual Nominees Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282.

[25] See Kelly v J Stockwell & Co Pty Ltd [2007] NSWSC 214 [11] (Barrett J); Equititrust Limited v Willaire Pty Ltd [2012] QSC 206 [90] (McMurdo J). See also the decision of the majority of the High Court in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited [2008] HCA 9; (2008) 232 CLR 314, 323 [14] (Gleeson CJ, Hayne, Crennan and Kiefel JJ).

[26] [2020] VSC 7 ('Kornucopia (No 4)').

[28] See Assaf's Winding Up in Insolvency [11.23] citing 640 The Esplanade Pty Ltd v Splash Bay Pty Ltd (No 2) [2017] FCA 89; (2017) 247 FCR 519, 543 [101] (Markovic J). Chief Justice Spigelman in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 33 ACSR 723, 736 [65] ('Switz v Glowblind') also described the provision as representing a 'safety net', adopting the earlier characterisation used by Hayne J (as his Honour then was) in Texel Pty Ltd v Commonwealth Bank of Australia [1994] VicRp 62; [1994] 2 VR 298, 300-1.

[29] Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 [40] (Austin J) ('Paliflex'); Re Vangory Holdings (No 1) [10] (Black J).

[30] Switz v Glowbind 736 [60]-[65] (Spigelman CJ); Timms v Dellaplus Pty Ltd [2007] SASC 236 [36] (Withers M); Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No. 2) [2011] NSWSC 113 [3] (White J) ('Ewen Stewart'); TQM Design & Construct Pty Ltd v Golden Plantation Pty Ltd [2011] NSWSC 438; Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466 [4] (Wigney J) ('Soundwave Festival'). See also Assaf's Winding Up in Insolvency [11.33]. Cf the approach taken by Austin J in Bibby Financial Services v Wolf Industries [29] where his Honour stated '[i]n the interests of efficiency, any application under s 459S should be considered at the hearing of the winding-up application, so the question of solvency can be addressed comprehensively and the proceeding can be finally resolved without any duplication of hearing time'.

[31] [1999] NSWSC 15.

[33] [2015] NSWSC 546.

[35] Kornucopia (No 4) [215] (Sifris J, as his Honour then was).

[36] See D.A.G. International Pty Ltd v D.A.G. International Group Pty Ltd [2005] NSWSC 1036 [5] (Brereton J); Soundwave Festival [10] (Wigney J); Re Vangory Holdings (No 1) [11] (Black J).

[37] See Hoare Bros Pty Ltd v deputy Commissioner of Taxation (Cth) (1995) 16 ACSR 213, 219 (Olney J); Re Bendigo Central Pharmacy Pty Ltd [2017] VSC 419 [57]-[59] (Randall AsJ).

[38] Re Tomic Industries Pty Ltd [2012] NSWSC 1478 [35] (White J); Kornucopia (No 4) [230] (Sifris J, as his Honour the was).

[39] See the extensive discussion in Assaf's Winding Up in Insolvency [11.27]-[11.32] and the authorities referred to therein.

[42] [2008] FCA 1777 [19]-[27] (Perram J).

[44] [2011] NSWSC 113.

[46] [2011] HCA 18; (2011) 244 CLR 1.

[47] Ibid 14 [27] (Gummow, Heydon, Crennan, Kiefel and Bell JJ) (emphasis added).

[48] See Assaf's Winding Up in Insolvency [11.31].

[50] Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Ltd (No 2) [2009] FCA 557 [8] (Perram J) ('Grant Thornton (No 2)'). See also Paliflex 384 [48] (Austin J) and Braams Group v Miric 130 (Stein JA, with Mason P and Ipp JA agreeing); Radiancy v Bimat [2007] NSWSC 962 [21] (White J).

[51] Grant Thornton (No 2) [32] (Perram J).

[52] Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452, 464 (Northrop, Merkel and Goldberg JJ), cited with approval by the Victorian Supreme Court of Appeal in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 [49] (Kyrou, Ferguson and Kaye JJA).

[53] Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 [18] (Palmer J). See also Edge Technology Pty Ltd v Lite-On Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181, 186 [29] (Santow J).