Judgment - EX TEMPORE
(Revised from transcript and annotated; issued 30 May 2022)
[2]
24 May 2022
This is an application by the plaintiff ("Reform") to have the defendant company ("Macarthur") wound up in insolvency. The application is made under s 459P of the Corporations Act 2001 ("CA").
Reform has the benefit of a District Court judgment against Macarthur in the sum of about $150,000. The judgment is unsatisfied. It was the subject of a statutory demand issued in April last year.
Macarthur applied to have the statutory demand set aside. That application was heard by Rees J in August. Her Honour refused the application in December: In the Matter of Macarthur Projects Pty Ltd [2021] NSWSC 1705.
Following her Honour's judgment, Macarthur failed to comply with the statutory demand. It is therefore presumed for the purposes of this application to be insolvent.
The present application was filed in February this year. Initially, it was opposed on the ground that Macarthur was not insolvent. That ground was abandoned in advance of the hearing. A second ground of opposition was that Macarthur had an offsetting claim against Reform. That ground was also abandoned.
The grounds of opposition which have been advanced are discretionary ones. On Macarthur's behalf the Court is asked to dismiss or to adjourn the proceedings so as to allow Macarthur, together with an associated company, to pursue claims against Reform.
The background is set out in the judgment of Rees J and a brief summary will suffice for the purposes of this judgment. The District Court judgment which Reform has obtained arises out of a large building development at Gosford. The project involves construction work valued at approximately $185 million. The land in question belongs to a company called The Gosford Pty Limited ("TGPL"). That company was placed in receivership at the beginning of last year.
The contractual arrangements for the construction and finance of the development are obscure and contain features which Rees J described as "perhaps unsavoury". They are the subject of an unrelated claim in the Commercial List under a stand-by letter of credit with a face value of more than $35 million.
Reform is controlled by Carl Van Selm. Through Reform, he acted as the superintendent for the construction works on the project, or at least those which took place up until late 2020. Reform was retained as superintendent under a contract between it and Macarthur, which was the project manager. Macarthur and TGPL apparently were associated companies: Gregory John Walker, who has made the affidavits on behalf of Macarthur in opposition to the winding up application, is the sole director of both companies.
The District Court judgment was based on an invoice issued by Reform to Macarthur, purportedly pursuant to the agreement under which Reform acted as a superintendent for the construction work. It represents fees which were claimed to be due from Macarthur pursuant to that agreement.
That invoice was subject to an adjudication under the Building and Construction Industry Security of Payment Act 1999. Macarthur did not, in the adjudication proceedings, contest the claim. Nevertheless, on Macarthur's behalf, Mr Walker now claims that Reform issued certificates for works purportedly worth $5 million when only $2.5 million in work had actually been done. The claim is that this conduct was negligent or possibly even fraudulent. The claim is the subject of proceedings in the Common Law Division. In those proceedings the plaintiffs are TGPL and Macarthur; Reform is the defendant.
One of the grounds of the application to set the statutory demand aside which came before Rees J was that Macarthur's claim in the Common Law Division proceedings was an offsetting claim. Her Honour was asked to set aside a statutory demand on that account. She declined to do so. Her Honour noted the relatively low hurdle for a company facing a statutory demand to be able to rely upon a claim against the applicant creditor by way of offset. Nevertheless, she did not think the hurdle had been overcome.
Her Honour analysed the claims made in the Common Law Division proceedings. While satisfied that there might well be an arguable claim by TGPL against Reform, her Honour was not satisfied Macarthur had such a claim, having regard to the contractual arrangements and the nature of the damage which had allegedly been suffered. No doubt Macarthur's failure to contest the adjudication proceedings was also relevant.
The Common Law Division proceedings have not advanced very far towards hearing. No defence has been filed. The most recent procedural step taken in the proceedings was a request for particulars by Reform as defendant, which has not been answered.
Reform has also successfully made an application for security for costs. That has resulted in an order that security be provided in tranches. The first tranche of security was not provided and the proceedings have therefore been stayed. I interpolate that the statement of claim has been amended. This in fact took place after Rees J had heard the application to set the statutory demand aside, but before her Honour delivered judgment.
[3]
Application for winding up order
The grounds for Macarthur's opposition to the application which have been pursued at today's hearing are based on s 467(1)(a) and (b). Those sub-paragraphs provide:
(1) … 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;
(b) adjourn the hearing conditionally or unconditionally;
…
It is common ground that the Court has a residual discretion to dismiss or adjourn a winding-up application even if the company has failed to demonstrate its solvency. That discretion is to be exercised in accordance with the public interest, just as the power to wind up companies is conferred on the Court in the public interest.
Macarthur is admittedly insolvent. There is no suggestion the application does not comply with the applicable formal requirements. Mr Beazley, who appeared for Macarthur, accepted that, for practical purposes, the onus lay on him to persuade the Court not to proceed to winding-up.
Mr Beazley pointed out that on the evidence Macarthur was not engaged in any trading activities. He also pointed out that Macarthur's liability to Reform which underlies the judgment was guaranteed by a number of other parties including TGPL and Mr Walker, yet no debt recovery action has been pursued against them. I am not sure that this has any great significance so far as TGPL is concerned, since, as I have mentioned, the company is in receivership. However, it does appear that, for whatever reason, Mr Van Selm has not caused Reform to pursue a debt recovery claim against Mr Walker personally.
Mr Beazley characterised the application as forming part of a wider dispute between Mr Van Selm and Mr Walker. He submitted that liquidation would mean that there would be little, if any, prospect of Macarthur's claim against Reform being pursued, because a liquidator would be unlikely to take it any further. Mr Beazley submitted that rather than allowing Macarthur's claim to fail by default, the Court should leave the claim to be determined as part of the proceedings in the Common Law Division.
I was referred in the course of argument to two cases in which a winding-up application was adjourned, or effectively adjourned, to allow the company the subject of the application to pursue existing proceedings. The first case was the decision of Austin J in Bungey v Magnate Projects Pty Ltd [2006] NSWSC 734. The second was the decision of Griffiths J in Deputy Commissioner of Taxation v TD Preece Pty Ltd [2013] FCA 1365.
In Bungey, the defendant company was pursuing proceedings in the Commercial List of this Court. Those proceedings had been fixed for hearing which was to begin a matter of weeks after the date on which the winding-up application came on for hearing. If the company succeeded in the proceedings, it would have had sufficient funds to repay its creditors. Those creditors were Mr Bungey, the applicant creditor; the company's solicitor; and the defendant in the Commercial List proceedings. There were no trade or other creditors.
At paragraph 47 Austin J said:
It seems to me that there is a public interest in the court not taking steps that would prevent litigation, which has been prepared for hearing on allocated hearing dates, from being heard. I infer that the practical effect of making a winding up order three weeks before the scheduled commencement of the hearing of substantial and complex commercial litigation would be likely to be that the hearing dates would be vacated, to give the liquidator the opportunity to assess the claim and receive advice.
His Honour considered that the Commercial List defendant might benefit from the liquidation in a practical sense, as it would (at least) disrupt the bringing of the claim against that defendant. But this was a personal forensic advantage of the defendant, rather than a factor of significance in weighing the public interest. In the circumstances of the case the public interest was best served by allowing the claim to go ahead in accordance with the then existing fixture. His Honour stayed the winding up proceedings until the determination of the Commercial List proceedings which, it seems from other orders made by his Honour, was expected to have occurred by December of that year (the application came before his Honour in July).
In Preece, the company was party to proceedings under the Property (Relationships) Act 1984 in this Court. Judgment had been reserved and the delivery of judgment was imminent. The company had been operating a business which had been disrupted by the proceedings in this Court. But the evidence before Griffiths J was that the company had put the disruption behind it and was paying its employees and suppliers out of its trading income. It was not in a position to repay the tax liability which was the subject of the winding up application, but there were plans afoot which would allow that to happen once judgment had been delivered in the proceedings.
Griffiths J, who heard the application in December 2013, intimated that he would make what he described as an additional order for winding up. Under this order, the company would not be wound up if it satisfied the relevant conditions by February 2014. The final form of orders is not included in the published judgment to which I have referred, but presumably the winding up application was adjourned until some point after the relevant date in February.
In the present case, it is true that Macarthur is, on the evidence, not trading in the usual sense of that term. But it should not be forgotten that the conduct of legal proceedings does result in the incurring of costs. Potentially, these would include, in the present case, the incurring of liabilities to third parties such as costs of compliance with subpoenas and court allocation and transcript fees. It is by no means clear to me that subpoenaed parties or the Court would necessarily be entitled to look to Macarthur's solicitors to meet any costs which might be incurred on Macarthur's behalf, but as this issue was not debated I will not pursue it further. [1]
It is I think also important to observe that the making of a winding up order would not necessarily prevent the Common Law Division proceedings from being prosecuted. It would be a matter for the liquidator. Naturally, this may give rise to practical problems if funding cannot be obtained.
On the other hand, it seems to me that the fact that any proceedings would be conducted by an independent liquidator is itself something which has advantages from the point of view of the public interest. A liquidator would be obliged to conduct the proceedings dispassionately and efficiently, for the sole purpose of advancing the interests of Macarthur's creditors. If the liquidator proves unable to obtain funding, either from Mr Walker or from professional litigation funders, then the public interest in the claim being pursued on the instructions of Mr Walker as sole director seems attenuated at best.
Given this, I think it must be rare for the Court to exercise its discretion so as to permit a company which is insolvent to pursue litigation. Griffiths J described Preece as a "most unusual" case. His Honour also relied, by analogy, on authorities where the discretion has been exercised so as to permit a company which is insolvent because of transient financial circumstances to be allowed to "trade out" of those difficulties.
A feature of both Bungey and Preece was that in each case the proceedings were nearly complete (in Preece of course they had in fact been completed and judgment was reserved). That is not the case here. Given that the proceedings have been commenced in the general list of the Common Law Division and no expedition has apparently been sought a hearing would appear to be at least a year away.
Furthermore, it is not clear how the six month period fixed by the Corporations Act for the determination of winding-up applications could be accommodated within an adjournment in the present case. If the Court accedes to Mr Beazley's submission, it could apparently only do so by dismissing this application rather than adjourning or staying it.
There is also the circumstance that the Common Law Division proceedings have been stayed because of the failure to provide security. Mr Walker addressed this in his affidavit. He stated candidly that he had not been willing to provide the security to Macarthur because he did not wish to see a liquidator appointed who could then apply the security to other purposes. He stated, however, that if the Court dismissed or adjourned the application the funding would then be provided.
There was no evidence before me that Mr Walker has the financial wherewithal to meet all of the security that has been ordered. Nor was there any evidence as to the likely costs of prosecuting the proceedings to judgment. But there is a wider point.
Mr Walker is, he says, prepared to fund the conduct of proceedings; but only if he retains control. The risk is that, wittingly or unwittingly, the company may be used as a vehicle to advance Mr Walker's wider commercial interests rather than those of its creditors. I think this underlines the weakness of the argument that it is in the public interest to allow Mr Walker to continue the proceedings.
Against this background, I think the case for dismissal or adjournment is a weak one. But there is a further point which I consider to be decisive. The point arises out of the procedural history in this case. As I have described, there has already been an application to have the statutory demand set aside on the ground that Macarthur has an offsetting claim.
Mr Ratnam, who appeared for Reform, referred to the amendment to the statement of claim in the Common Law Division proceedings. He submitted that the changes made resulted in a claim which is even less substantial than that which was considered inadequate by Rees J. He went on to submit that I should infer from this that the opposition to the winding up order was not genuine or in good faith. But I do not need to go into these submissions.
Macarthur had a full opportunity in the earlier proceedings to persuade the Court that it has an offsetting claim which is of sufficient substance to set aside the statutory demand, which would have had the same result that Macarthur now seeks. The application to set the statutory demand aside was fully argued by senior counsel on Macarthur's behalf.
As I have mentioned, at the hearing, Mr Beazley abandoned the existence of an offsetting claim as a ground of opposition to the application. As he acknowledged, this was a position which was forced on him by CA s 459S, which restricts a company's ability to oppose winding up on a ground which it relied upon, or could have relied upon, in support of an application to set aside the antecedent statutory demand.
In my view, it would come close to nullifying CA s 459S to accede to the request to dismiss or stand over the application for the express purpose of allowing Macarthur to pursue the Common Law Division proceedings to judgment before the winding up application can be dealt with on its merits. This was not a feature either of Bungey or Preece. In those cases the proceedings which resulted in the stay or adjournment were proceedings against a party other than the applicant for the winding-up order.
For these reasons, Reform's winding up application succeeds. I will hear the parties on the terms of the orders to be made.
(Mr Ratnam and Mr Beazley addressed and the proceedings were adjourned overnight for the making of final orders.)
[4]
25 May 2022
At the end of yesterday's hearing, a question arose as to who should be appointed as the liquidator of the company. The plaintiff nominated a particular individual liquidator. I, however, took the view that the Court should follow the usual practice of appointing the next official liquidator on the list maintained by the Court for that purpose. I referred the matter to the Registrar, with the intent that the Registrar would identify who that was and make the order today.
But during the morning a further issue was raised concerning costs. As a result, I decided to vacate the order referring the matter to the Registrar and make the order for the winding-up of the company and the appointment of the next official liquidator on the Court's list myself.
The costs issue arises in this way. According to Reform, it has incurred significant costs in prosecuting what has turned out to be a fully contested winding-up application. Reform is concerned to take advantage of its entitlement to receive its costs under CA s 466. That section relevantly provides:
Payment of preliminary costs etc.
(1) The persons, other than the company itself or the liquidator of the company, on whose application any winding up order is made must, at their own cost, prosecute all proceedings in the winding up until a liquidator has been appointed under this Part.
(2) The liquidator must, unless the Court orders otherwise, reimburse the applicant out of the property of the company the taxed costs incurred by the applicant in any such proceedings.
Costs covered by s 466(2) have priority in the liquidation, which no doubt explains the practical significance of this application to Reform. Reform is, however, keen to avoid, if it can, the cost of a "taxation" (which, Reform's legal representatives assume, would include the procedure now used in this Court for quantifying costs, namely an assessment under the Legal Profession Uniform Law 2014). Counsel for Reform invited me to make a gross sum costs order pursuant to the Civil Procedure Act 2005, s 98(4)(d).
It was not immediately clear to me that the making of such an order would be appropriate, or even whether it would be possible. Section 466(2) speaks of a "taxation". I think it is important to remember that the Corporations Act is federal legislation and these proceedings are taking place in federal jurisdiction.
Section 98(4)(d) is a State provision. It is worded in such a way as to suggest that a lump sum costs order is an alternative to an assessment rather than a type of assessment. For that reason it may be beyond the scope of the term "taxation" even if an assessment would fall within the scope of that term.
Furthermore, one of the general objectives of the Corporations Act is to ensure that, where a company is put into liquidation, creditors' claims are dealt with in a way which, if possible, avoids litigation. It is for this reason that the Act provides that all litigation against a company pending as at the date of its winding-up is stayed. The Court has power to lift the stay, but generally will not do so unless non-curial procedures are likely to be ineffective, or less efficient than the continuation of the proceedings. By "non-curial procedures" I mean, of course, negotiations with the liquidator followed by a formal proof of debt procedure.
Section 466(2) is worded in such a way as to suggest that it confers a statutory right on the applicant creditor and does not require a costs order to be made at all. Although, as I have said, the section refers to "taxed" costs, I think it must be open to the liquidator to fix the amount of costs by agreement with a creditor. In the usual course that is what the liquidator ought to do, rather than requiring some formal assessment or taxation process.
In short, it seemed to me that the appropriate course, rather than the Court fixing a gross sum (if it has power to do so) would be for the creditor's legal representatives to negotiate with the liquidator on the proper quantum of the taxed costs of Reform in these proceedings. If agreement cannot be reached, then an application can be made to the Court.
The orders of the Court are:
1. The defendant be wound up in insolvency.
2. Order that Steven B Kugel, of The Insolvency Experts, Suite 101, 788A Pacific Highway Gordon NSW 2072, be appointed as the liquidator of the company.
[5]
Endnote
Mr Beazley pointed out after I delivered judgment that Macarthur's solicitor would be jointly and severally liable for the court allocation and transcript fees. He did not suggest Macarthur's solicitor would have any personal liability for the expenses incurred in answering subpoenas for which Macarthur would be liable under Uniform Civil Procedure Rules 2005 r 33.11.
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Decision last updated: 30 May 2022