Reavill Farm Management Pty Ltd v Ashford Properties Pty Ltd

CATCHWORDS : PROCEDURE - notice to produce - UCPR 21.10(1)(b) - power of court to set aside in whole or in part - need for "specific document" to be "clearly defined" by notice - categories not permitted - whether "financial accounts" of a company for a given year satisfies "clearly defined" requirement - need for document sought relevant to a fact in issue - CORPORATIONS - winding up - winding up in insolvency - application for order setting aside statutory demand - alleged genuine dispute - defendant requires production of documents going to state of plaintiff's financial health - whether that is relevant to a fact in issue - held relevant to genuineness of asserted dispute

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 295(1), 295(2), 459G, 459H(1)(a) Uniform Civil Procedure Rules 2005, rules 21.10(1)(b), 21.11(1), 33.4

Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 17 ACSR 678 Leda Developments Pty Ltd v Orion Consolidated Pty Ltd [2001] QSC 400 CASES CITED : Norris v Kandiah [2007] NSWSC 1296 Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869 Zan Holdings Pty Ltd v Bayview Holdings Pty Ltd (1997) 15 ACLC 1238

PARTIES : Reavill Farm Management Pty Limited - Plaintiff Ashford Properties Pty Ltd - Defendant

COUNSEL : Mr A J Bulley - Plaintiff Mr J M White - Defendant

SOLICITORS : Argyle Lawyers Pty Ltd - Plaintiff Kemp Strang - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/107119 REAVILL FARM MANAGEMENT PTY LIMITED v ASHFORD PROPERTIES PTY LTD

1 I am dealing with an interlocutory application by the plaintiff in proceedings brought under s 459G of the Corporations Act 2001 (Cth). 2 In those proceedings, the plaintiff claims an order setting aside a statutory demand served on it by the defendant. It does so on the ground made available by s 459H(1)(a), that is, that there is a genuine dispute as to the existence or amount of debt or alleged debt to which the statutory demand applies. The debt is said to be for money lent. 3 The plaintiff's interlocutory application now before me is expressed to be advanced under rule 33.4 of the Uniform Civil Procedure Rules 2005 and seeks, in terms, an order that paragraphs 1 to 7 of a notice to produce served on the plaintiff by the defendant be set aside. 4 The defendant does not now press or seek to rely on the notice to produce in respect of several of the paragraphs to which the plaintiff objects. As a result, the plaintiff's application is, in practical terms, confined to paragraphs 2 and 4: "2. Tax returns of the plaintiff for the financial years ended 30 June 2008, 30 June 2009 and 30 June 2010. … 4. The financial accounts of the plaintiff for the years ended 30 June 2008, 30 June 2009 and 30 June 2010." 5 The central issue in the s 459G proceedings goes to the existence of a dispute between the parties as to whether the alleged debt is due and payable and to the genuineness of any such dispute. It appears to be the position of the plaintiff that some form of instalment arrangement was made precluding a finding that the debt is due and payable or at least giving rise to a genuine dispute in that respect. 6 As I have said, the plaintiff has, in its interlocutory process, invoked rule 33.4. That rule deals with subpoenas and the setting aside of subpoenas. The defendant says that, since the notice to produce is, by its terms and having regard to its form and content, a notice under rule 21.10(1)(b), there is no scope for the application of rule 33.4 and the court cannot make an order under that provision setting aside the notice to produce. 7 That submission is clearly correct insofar as it goes to the scope and operation of rule 33.4. But it does not follow that a rule 21.10(1)(b) notice to produce cannot be set aside by the court in whole or in part. Indeed, this is recognised by rule 21.11(1) which begins with the words, "Unless the court orders otherwise" and goes on to require production in accordance with the notice to produce. 8 The power of the court thus recognised is, in my view, to be exercised according to the same general principles or at least according to the same general approach as the power to set aside a subpoena in whole or in part. 9 The plaintiff's first basis of attack on each of paragraphs 2 and 4 is that the paragraph does not comply with the rule 21.10 (1)(b) requirement that a "specific document" be "clearly identified". This requirement, it is said, precludes resort to categories or generic description. Both counsel referred to paragraph [11] of the judgment in Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869: "It is thus clear that, in rule 21.10, the combination of 'specific document' and 'clearly identified' means that a notice can relate only to a document describe by means of characteristics peculiar to itself, such as a letter of a given date written by X to Y, or the minutes of a meeting of directors of Z Limited held on a given date. A notice relating to all letters written by X to Y in 2008 or the minutes of all meetings of the directors of Z Limited held in 2008 would not be permitted because referring to a class of document as distinct from what Harrison AsJ in Douglas Corporation v Currico Nominees [2007] NSWSC 113 termed 'the individual document sought' is not a permissible course." 10 In light of this aspect of rule 21.10(1)(b), counsel for the defendant indicated at the hearing that the words "including all journal entries and general ledgers" in paragraph 4 were not pressed and that that paragraph should, therefore, be approached as if it referred only to "the financial accounts of the plaintiff" for the three specified years. 11 The plaintiff continued to press its objection to both paragraph 2 and paragraph 4 on the footing that, even with the amendment I have mentioned, there was specification by category or generic description, not specification of a document; and, in the case of paragraph 4 as amended, that the specification even of documents was not an intelligible or meaningful specification. 12 To the extent that the submission as to category versus specific document is based on the fact that each of the relevant paragraphs refers to three years, I do not accept the submission. The form of words that describes a document and then refers to three years is not objectionable. It clearly indicates the particular document for the first year, the particular document for the second year and the particular document for the third year. Three specific documents are identified despite all being covered by a single paragraph. 13 In the case of paragraph 4, however, this is subject to the plaintiff's next submission which is that "financial accounts for" a given year is not a description lending itself to precise identification of what is sought and, therefore, does not satisfy the "specific document" and "clearly identified" requirement. 14 It was observed in the course of submissions that there is no legislative requirement that a company prepare anything called "financial accounts". As a result, it is said, there is necessarily doubt about what the expression covers - a doubt that does not arise in relation to "tax returns". 15 The Corporations Act contains definitions of "financial records" and "financial report", as follows: "'financial records' includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements.

'financial report' means an annual financial report or a half-year financial report prepared under Chapter 2M." 16 Section 295(1), a provision within Chapter 2M, describes the "financial report" of a company for a financial year: "The financial report for a financial year consists of: (a) the financial statements for the year; and (b) the notes to the financial statements; and (c) the directors' declaration about the statements and notes." 17 Section 295(2) then says what the "financial statements" for the year are:

"The financial statements for the year are: (a) unless paragraph (b) applies--the financial statements in relation to the company, registered scheme or disclosing entity required by the accounting standards; or (b) if the accounting standards require the company, registered scheme or disclosing entity to prepare financial statements in relation to a consolidated entity--the financial statements in relation to the consolidated entity required by the accounting standards." 18 Nowhere is there a reference to "financial accounts". Nor was I taken to any accounting standard of the kind referred to in s 295(2) that might give meaning to the "financial accounts" concept. Financial accounts, in loose general parlance, might refer to several different things. Indeed, the "including" words in paragraph 4 of the notice to produce, now abandoned by the defendant, might suggest a meaning more akin to the Corporations Act's "financial records" concept. 19 I am therefore of the opinion that, as the plaintiff submits, paragraph 4, even shorn of the "including" words at the end, lacks the specificity required by rule 21.10(1)(b). It is, therefore, only in relation to paragraph 2 that I must consider the last matter on which submissions were made. 20 The plaintiff contends that the paragraph 2 documents are not as described in rule 21.10(1)(b) "relevant to a fact in issue" (that submission is also made incidentally in relation to paragraph 4). 21 The facts in issue are seen by the plaintiff as, in essence, confined to those surrounding the incurring of the alleged debt, and the discussions and other events relevant to the alleged instalment arrangement. Implicit in what the plaintiff says is that the financial position of the plaintiff and the state of its assets and liabilities and profitability are not relevant to any finding on those matters; nor, is it said, is the question of the plaintiff's solvency or insolvency relevant to a fact in issue. These, of course, are matters about which information would be obtained from the category 2 and, if applicable, category 4 documents. 22 On this application, the defendant bears at least a forensic onus of identifying how the documents called for by the notice are said to be relevant to a fact in issue. This is the formulation of Brereton J in Norris v Kandiah [2007] NSWSC 1296. 23 The defendant accepts that solvency is not a ground on which a statutory demand may be set aside in the sense that the company served with the demand will succeed in its attempt to have it set aside merely by showing that it is solvent. This is undoubtedly true as many cases show. 24 But the defendant says that the financial position and state of solvency or otherwise of a plaintiff seeking to have a statutory demand set aside on the genuine dispute ground is nevertheless relevant to the question whether a genuine dispute exists. The defendant refers in this respect to an observation of Lindgren J in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 17 ACSR 682 where his Honour said: "It may be easier to conclude that a dispute about a debt or an offsetting claim is 'genuine' when raised or made by a solvent company than in other cases." 25 Counsel also referred to a similar observation of Mullins J in Leda Developments Pty Ltd v Orion Consolidated Pty Ltd [2001] QSC 400. Her Honour said [at 3]: "Although solvency of the applicant is not itself a ground for setting aside a statutory demand, it may be easier to conclude that a dispute about a debt or an offsetting claim is genuine when it is raised by a solvent company." 26 Mullins J referred to the observation of Lindgren J in the Chippendale case. Reference may also be made in this respect to the judgment of Master Sanderson in Zan Holdings Pty Ltd v Bayview Holdings Pty Ltd (1997) 15 ACLC 1238. 27 The thinking at work here is that a company which is insolvent or nearing insolvency is much less likely to be willing to shoulder the burden of proving solvency in any winding up proceedings that follow on from failure to comply with a statutory demand and that such a company will make strenuous efforts to avoid being put into that predicament. The company will be, in a sense, more desperate than a financially stable company in it attempts to avoid winding up proceedings in which it is put to proof of solvency and, therefore so the theory goes, more prone to latch on to and embrace tenuous or even illusory disputes about the amount or existence of the relevant debt in an attempt to ensure that the statutory demand is set aside. 28 There is cogency in this thinking. Evidence going to the financial state of a plaintiff company that seeks to rely on the s 459H(1)(a) ground is capable of contributing to an assessment of the genuineness of the asserted dispute and to the weighing up of the probability that the belief in the existence of the dispute is genuinely held as distinct from contrived. 29 The matter just mentioned militates in favour of upholding both paragraph 2 and paragraph 4 of the notice to produce. However, for the reasons related to the "financial accounts" description, paragraph 4 will be disallowed and only paragraph 2 will be upheld. 30 The order I make is that the plaintiff is not required to comply with paragraph 4 of the defendant's notice to produce for inspection dated 20 August 2010.

[Submissions on compliance with the notice] 31 I note the indication of the plaintiff through its counsel that, to the extent that the tax returns called for by paragraph 2 are in existence, they will be produced in accordance with the requirements of the notice by 5pm on 5 October 2010.

[Submissions on costs] 32 The plaintiff seeks an order for costs. It says that it has substantially succeeded by reason of the concessions made by the defendant after filing of the interlocutory process (including the concession made in the course of submissions today narrowing paragraph 4) and the outcome of the hearing itself. 33 The defendant's position is that there has been a mixed result. 34 That, I must say, is my assessment of the situation. In the course of the hearing only paragraphs 2 and 4 were ventilated. The plaintiff succeeded in relation to one and failed in relation to the other. 35 The outcome, therefore, is that there will be no order as to costs in respect of the interlocutory process. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.