Shmee Pty Ltd & Anor v Bresam Investments Pty Ltd [2009] VSC 657

1 By interlocutory process filed 16 February 2009 the Defendant, Bresam Pty Ltd ("Bresam"), seeks to adjourn the further hearing of the Plaintiff's application by originating process filed 23 December 2008 that Bresam be wound up in insolvency until the hearing and determination of an appeal to the Court of Appeal. The appeal is from a judgment obtained by the first named plaintiff, Shmee Pty Ltd ("Shmee") in September 2008 against Bresam and a related company, Melamybek Investments Pty Ltd ("Melamybek"), as well as two individuals respectively associated with those companies, Messrs Johnston and Whittaker. At the hearing of the adjournment application, it was agreed by counsel appearing for the respective parties that the winding application against Melamybek in proceeding No. 10524 of 2008 was identical in all material respects with the application for an adjournment made by Bresam in this case, and that these reasons are appropriate to be applied in the identical application for an adjournment by Melamybek in that case.

2 The proceeding in which the order in favour of Shmee was obtained consisted of a claim by Shmee and a related corporation, INC Corporation Pty Ltd ("INC") for damages pursuant to section 82 of the Trade Practices Act 1974 (Cth) and section 159 of the Fair Trading Act 1999 (Vic) in relation to misleading and deceptive conduct on the part of Bresam. Shmee and INC also made claims for breach of warranties contained in a share sale agreement entered into on 29 November 2002 between Shmee as purchaser and Bresam and Melamybek as vendors and Messrs Johnston and Whittaker. The action was commenced by writ filed on 23 May 2005. The trial before Vickery J commenced on 3 June 2008 and ran for fourteen sitting days.

3 On 8 September 2008, Vickery J made orders that there be judgment for Shmee against Bresam in the amount of $2,160,000 together with damages in the nature of interest pursuant to Statute in the amount of $825,356. Bresam was ordered to pay Shmee's costs including reserved costs. The costs incurred on and from 24 May 2008 until 8 September 2008 were ordered to be paid on an indemnity basis. Vickery J granted a stay of execution of the judgment for thirty days.

4 On 22 September 2008, Bresam and the other defendants filed a Notice of Appeal in the Court of Appeal. It is a lengthy document of some twenty pages articulating several grounds of appeal. The respondents to that appeal, Shmee and INC, filed a Notice of Cross-Appeal on 3 October 2008, but this is of no relevance in the current context.

5 By summons filed 17 October 2008, the Appellants sought a stay of the judgment until the hearing and disposition of the appeal. The stay application was opposed by Shmee and INC.

6 On 20 October 2008, Master Lansdowne (as she then was) made orders for the conduct of the appeal and those orders have, in most respects, been carried out. In its submissions provided to this Court on 17 March 2009, Bresam contended that the appeal is likely to be heard some time between April and June 2009. More recent enquiries of the Court of Appeal Registry reveal that the matter would most likely be listed for hearing in July 2009, although this could not be guaranteed. The appeal has an estimated duration of three days.

7 On 28 November 2008, the Court of Appeal (Kellam and Dodds-Streeton JJA) dismissed the application for a stay and ordered that the Appellants provide $80,000 as security for the respondents' costs of the appeal. The Court of Appeal published its reasons for the dismissal of the stay application and for ordering that the Appellants provide security for costs on 5 December 2008. Security for costs was provided in the amount of $80,000 by 24 December 2008 in compliance with the orders of the Court of Appeal in that regard.

8 The originating process seeking an order that Bresam be wound up relies on the failure by it to comply with the statutory demand served on it by Shmee on 1 December 2008. The statutory demand required payment of $2,985,356 pursuant to the order of Vickery J of 8 September 2008. By reason that there was no application by Bresam to set aside the demand within the time limited for its compliance, Bresam committed an act of insolvency on 22 December 2008.

9 There was no application to set aside that demand apparently because the view was taken that the appeal did not (without more) give rise to a genuine dispute about the existence or the amount of the debt claimed in the demand in absence of a stay of judgment pending the appeal[1]. The application for winding up was filed by Shmee and INC on the day after the period of time for compliance with the demand expired. As I have observed, only Shmee obtained judgment against Bresam and served a statutory demand; INC has no standing to be a plaintiff in the winding up application.

10 Bresam relies on the following affidavits in support of its application for an adjournment:-

(i) Catherine Anne Ballantyne, sworn 13 February 2009;

(ii) Rachelle Terry Better-Johnston, sworn 12 February 2009;

(iii) Catherine Anne Ballantyne, sworn 11 March 2009;

(iv) Catherine Anne Ballantyne, sworn 24 March 2009;

(v) Anna Kokorozis, sworn 24 March 2009.

11 Shmee, in resisting Bresam's application, relies on the following affidavits:-

(i) Gerard John Gleeson, sworn 17 February 2009;

(ii) Gerard John Gleeson, sworn 20 March 2009.

12 In January 2009, Shmee made an application for a freezing order against Bresam, Melamybek and entities and persons associated with them. In the resolution of that proceeding, Bresam, Melamybek and Messrs Johnston and Whittaker and their respective wives and associated companies gave undertakings not to deal with assets to a total value of approximately $4,000,000 until the hearing and determination of the appeal. Those undertakings are set out in orders made by Byrne J on 12 February 2009.

13 In her affidavit, Ms Better-Johnston deposes to the financial position of Bresam. It has net assets of $100. It has no liabilities other than the judgment debt which is under appeal and the order for costs made by the Court of Appeal in favour of Shmee on 28 November 2008. Ms Better-Johnston says that the costs which have been ordered to be paid by the Court of Appeal will be paid by Bresam by means of an advance of funds from her to Bresam. She states in the final paragraph of her affidavit that she has funds available for such purpose, although she does not state whether such a payment by her would be in the nature of a loan to Bresam or a gift.

14 Shmee bases its resistance to Bresam's application principally on the reasons given by the Court of Appeal for the rejection of the application for a stay on 28 November 2008. In addition in his affidavits Mr Gleeson exhibits affidavit material that was relied on by Shmee in support of the application for the freezing order in January 2009. Much of that affidavit material is given over to the conduct of the judgment debtors as regards the allegedly improper disposition of the assets of Bresam and Melamybek.

15 In the Court of Appeal, Dodds-Streeton AJ, in the reasons given for refusal of the stay, observed at [46] after reviewing the various grounds of appeal:-

While the volume and complexity of the judgment evidence, and the grounds of appeal are such that I do not, on a preliminary assessment, conclude that there is no arguable ground of appeal, the appellants largely rely on an attack on findings of fact or credit, and an apparently fine distinction between a case as pleaded and a case as found. The prospects of success do not appear compelling.

At [68], the Court of Appeal concluded in respect of the application for a stay:-

A successful litigant is, prime facie, immediately entitled to the fruits of its judgment, which it may, in the ordinary course, enforce. In circumstances where the appointment of a liquidator or a trustee in bankruptcy would only alter the likelihood that the appeal would be prosecuted, but would not destroy the prospect; the individual appellants could seek an extension of time for compliance with any bankruptcy notices; there is no evidence that the appellants conduct a business or profession which would be terminated, or own assets that would be diminished in value, as a result of any winding up or bankruptcy order; the prospects of success on appeal are not compelling; the appellants retain access (the limits of which were not explained) to the funds of relative recipients of voluntary dispositions of assets, who funded their defence below and will fund the appeal: there are, in my opinion, no exceptional circumstances to justify the exercise of the discretion to stay the execution of judgment pending the hearing and determination of appeal.

16 This application for an adjournment of the winding up proceedings proceeded over three days and occupied two days of Court time. The parties filed written submissions that were supplemented by comprehensive oral argument and reference to case law. Mr Osborne, counsel for Bresam, submitted that as Bresam had no assets and liabilities aside from the judgment debt and did not trade, the winding up would not result in assets becoming available to satisfy the judgment debt. He stated that the funds to satisfy the order for security for costs of the appeal have been provided by third parties and as such the assets of Bresam are not being dissipated by its prosecution of the appeal. He submitted that Shmee's motive in proceeding with the application for winding up was to bring the appeal to an end pre-emptively but as I observed to him in the course of argument, there is no evidence to support that proposition. Shmee is entitled to enjoy the fruits of its judgment and to oppose the application for an adjournment.

17 Mr Osborne also submitted that the appeal is bona fide and is being prosecuted diligently and expeditiously and that it is likely to be heard in the next several months. He states that everything has been done to enable the appeal to be heard. There is no evidence put forward by Shmee that the appeal is not bona fide or that it is not being prosecuted with appropriate expedition.

18 Mr Osborne submitted that assuming the appeal is successful Shmee suffers no prejudice in a relevant sense by delaying the making of a winding up order after the appeal is heard and determined (as opposed to such an order being made at this juncture) for the following reasons:-

(a) Bresam does not trade and there is no aspect of public interest in preventing it from continuing to trade.

(b) Bresam has no other creditors and if the judgment of Vickery J is set aside on appeal it will not be insolvent because its only present creditor, Shmee, will no longer be a creditor or have standing to prosecute the winding up application.

(c) Bresam's resources will not be further depleted by the running of the appeal which is being funded from the resources of third parties.

(d) Bresam has no assets available for distribution to creditors in any event.

(e) If Bresam has participated in voidable transactions which would be recoverable pursuant to the provisions of section 588FF of the Corporations Act, the ability to execute on such judgments will not be endangered by the adjournment. Upon the filing of the winding up application, the relation-back date is fixed and will not be displaced or delayed by any adjournment. In addition, the persons most likely to be the subject of voidable transaction claims by a liquidator appointed to Shmee have given undertakings which have the effect of freezing orders so that their assets remain available to satisfy any judgment obtained in favour of Bresam or a liquidator appointed to it.

19 Counsel for Bresam stated that if the application for an adjournment was refused but the appeal was ultimately successful, the situation will arise whereby Shmee would have obtained a winding up order in circumstances where it will ultimately be found not to be a creditor in the winding up as it will have lost its status as creditor. Conceivably, if that occurred, an application would have to be made for a stay or termination of a winding up pursuant to section 482 of the Corporations Act giving rise to the difficult question of who should pay the costs and remuneration of the liquidator in the event that such an order was made.

20 Both parties, in their respective written submissions and in oral argument, agreed that in exercising its discretion as to whether the winding up application should be adjourned, the Court should apply the principle adopted by the Full Court of the Federal Court in two bankruptcy appeals, Ahern v Deputy Commissioner of Taxation (Qld)[2] and Adamopoulos & Anor v. Olympic Airways SA & Anor[3]. In succinct terms, the Ahern principle, as described by counsel for the Plaintiff, is that a sequestration order should not be made where an appeal is pending against the judgment relied on as the foundation for the bankruptcy proceedings if the appeal is based on genuine and arguable grounds. Both of those decisions involved the question of whether a bankruptcy petition should be proceeded with or adjourned where an appeal is pending against the judgment founding the bankruptcy notice upon which such petition is based.

21 In Ahern, Davies Lockhart and Neaves JJ at page 148 stated:-

It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds ...

These cases rest on the broad principle that before a person can be made bankrupt the Court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petition creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences.

22 In Adamopoulos, Burchett and Gummow JJ stated (at page 531):-

With respect, we do not think this view of the matter is consistent with authority. An appeal against the very judgment which founds the bankruptcy notice is a matter of significance requiring advertence to the possibility that the appeal may be justified. Nor is it realistic to entertain any confidence, in other than a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit. The extremely experienced counsel who appeared for the respondents was unable to recall any instance where such a thing had happened. A much more likely consequence of a sequestration order is the abandonment of the appeal, whatever its merits, and its dismissal for non-prosecution.

... I prefer to express my own view of the principle laid down in Ahern v DCT (Qld) [1987] FCA 312; (1987) 76 ALR 137. It is my opinion that it is necessary to keep firmly in mind that the power to adjourn a bankruptcy petition is one of a discretionary kind. Where an adjournment of the petition is sought on the ground that an appeal has been instituted against the judgment debt underlying the proceedings, a variety of factors may have an important bearing on the exercise of the discretion. It may be influenced by evidence that the judgment debtor is, in any event, insolvent, by the court's forming the opinion that the appeal, although arguable, has little chance of success, by consideration of the possibility that the costs of the appeal may significantly diminish the amount available for distribution to creditors and by other matters.... It would be unfortunate if the general principle stated in Ahern's case were to be applied too rigidly, particularly where execution on the judgment appealed against has not been stayed, so that the judgment creditor may have the debtor's assets sold pending the appeal; there is no general rule that a money judgment is stayed pending appeal.

24 In Farrow Mortgage Services Pty Ltd (in liq) v Stone[4], Emmett J observed:-

It is not the function of this court to attempt to predict the outcome of the appeal. However, if the grounds relied on by the Debtor are reasonable and arguable, he should be given the opportunity of prosecuting the appeal. I have said on an earlier occasion that if I were satisfied that there are reasonable and arguable grounds, then I would adjourn the hearing of the petition to enable the Debtor to prosecute the appeal... On the other hand, if it is the case that the Debtor has no funds, the prosecution of the appeal would not result in any dissipation of funds which might otherwise be available to meet the judgment debt and to be available for creditors generally in the event of a sequestration order. There is in fact no evidence before me at all that there are funds available for creditors which could be dissipated by the prosecution of the appeal. Further, by making a sequestration order I could well deprive the Debtor of the opportunity of prosecuting the appeal. Even if I were to conclude that the prospects of success of the appeal were not strong - and I do not make such a conclusion at this stage - I would be reluctant to deprive the Debtor of the opportunity of prosecuting the appeal if the grounds are nonetheless reasonable and arguable.

25 In Jekos Holdings Pty Ltd v Australian Horticultural Finance Pty Ltd[5], Drummond J of the Federal Court applied Adamopoulos in a corporate context where there was an appeal on foot against the judgment giving rise to the debt upon which the winding up application was based. An adjournment was sought until after the resolution of the appeal. At [19], Drummond J stated:-

...[T]here is nothing else to suggest that AHF's appeal is not bona fide. It raises a ground that is at least arguable. Jekos' standing to apply for the winding up of AHF depends on it successfully resisting that appeal. It does not appear that any significant delay is likely to be involved in the determination of the appeal, for which AHF could be held responsible. AHF is insolvent but has, in response to demands by Jekos and the other respondents, offered a not insubstantial sum of security for their costs of the appeal. This offer has been rejected, but negotiations are continuing.

... I think that in view, firstly, of AHF's diligence since 1992 in pursuing its claims, once Jekos and the other Plaintiffs commenced the Supreme Court proceedings; secondly that the appeal is probably brought bona fide to try to recoup substantial sums AHF alleges to be due to it; thirdly that the appeal is not inarguably hopeless; fourthly, that AHF appears to be prosecuting it with reasonable expedition; fifthly, the lack of utility or winding up now as a means of recouping to Jekos what has been adjudged due to it; and finally, Jekos' probable objective in seeking winding up, to which I have referred, I will order that the hearing of the Jekos application for winding up be adjourned sine die with the intent that it will not be heard until after the Supreme Court appeal is determined.

26 Reference was made in the parties' submissions to several authorities dealing with the meaning of the word "arguable" in similar contexts. In Jakamarra v Krakouer[6], Gummow and Hayne JJ stated at [34]:-

We do not think it useful to fasten upon one verbal formula in preference to all others as a description of the necessary degree of satisfaction. What must be shown is that it is clear that the appeal will fail and in that sense is not "arguable" or not "fairly arguable".

The parties submitted here that the Full Court should have decided whether the appeal was "arguable". It is important to understand what is meant in this context by "arguable". If it means no more than that counsel, acting responsibly, can formulate an argument which can probably be advanced in support of the appeal, the test is too loose; if it is clear that the argument will fail, the appeal should not proceed. To permit it to proceed is to subject the respondent to the many costs of litigation needlessly and is to occupy the courts when they could be occupied more productively. No doubt, as Barwick CJ said in General Steel Industries Inc:

'...great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal.'"

But as he also said:

On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claims. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the Plaintiff is so clearly untenable that it can not possibly succeed.

27 In Dempster v National Companies and Securities Commission (1992)[7], the Full Court of the Supreme Court of Western Australia (Malcolm CJ, Walsh and Anderson JJ) stated (at page 341):-

It was contended on behalf of the appellant that the expression "arguable case" in section 187(1) meant 'capable of being arguable' (see The Shorter Oxford Dictionary). In my opinion, having regard to the context, an arguable case is one that is not merely capable of being argued, but one that is reasonably capable of being argued in the sense that it has an argument which has some prospect of success... The case must be one which has some chance of success: Republic of Peru v Peruvian Guano Co [1887] 36 Ch D 489 at 495.

28 As I have observed, the Court of Appeal, while stating that the prospects of success of the appeal do not appear compelling, did not conclude that there is no arguable ground of appeal. In Liew v JNS Technologies (M) Sdn Bhn[8], Kenny J of the Federal Court of Australia had to consider whether the fact that an appeal is pending in respect of a judgment is sufficient to warrant an extension of time for compliance with a bankruptcy notice. In that instance, the award of an adjournment would delay the commission of an act of bankruptcy and therefore prevent the filing of a creditor's petition. The situation is therefore not completely analogous with the present one. Her Honour reviewed a number of authorities in which the Court assessed the merits of an appeal which was being undertaken. At [13], her Honour referred to Re Geard; Ex Parte Reid[9] where Sheppard J refused an application to extend time for compliance with a bankruptcy notice. Sheppard J stated:-

As earlier stated, the parties have made, both orally and in writing, detailed submissions concerning the issues which arise for determination on the appeal and have invited the Court in effect to express a view, provisional though it may be, on the likely outcome of the appeal. To a degree I have felt obliged to look at the matter for myself, but I think it most undesirable that a judge of this Court should in effect undertake some provisional review to determine the correctness or otherwise of a judgment of another court especially where that judgment is under appeal to the Court of Appeal which has jurisdiction to hear appeals in the normal course... A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition. The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy. That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed. Otherwise the debtor's position will remain unaffected by what the Court does.

The sole basis for these applications is, so counsel for the applicant said, that there is an appeal on foot. It was in this context that counsel for the applicants and counsel for JNST invited me to express a provisional view on the likely prospects of success of the appeal. It is, it seems to me, highly undesirable that I should do so. It is inappropriate that a judge of this Court should express a view one way or another on the correctness of the judgment of another court, particularly when that judgment is under appeal as of right to the Court of Appeal. Subject to the following observations, I do not propose to do so... It is inappropriate for this Court to review her Honour's findings, even provisionally, particularly in light of the extant appeal.

30 The decision of Kenny J in Liew was one dealing with an application for an extension of time for compliance of a bankruptcy notice. In the corporations context, this is analogous to making an order which delays an act of insolvency occasioned by non-compliance with a statutory demand. In the present case, the Plaintiff has proceeded to file an application for a winding up order and as such, the relation-back day, by reference to which voidable transactions are impeached, is already in place. Provided an extension of time is made under section 459R of the Corporations Act, the relation-back day will be preserved pending the hearing of any appeal. By contrast, had Kenny J given an extension of time for compliance in Liew, the creditors would have been disadvantaged by reason of their inability to file a creditor's petition until that extension of time for compliance had expired.

31 Mr Osborne made lengthy submissions about the merits of the appeal but, in my view, it is not appropriate for me to express anything other than a superficial view as to whether the grounds of appeal are arguable. Certainly, his oral submissions and the written submissions filed in the Court of Appeal do not betray that the grounds of appeal are "so clearly untenable that [they] can not possibly succeed"[10]. On 18 December 2008, the Appellants filed written submissions setting out in detail their argument in the appeal. This followed on from a detailed notice of appeal. Nothing which was put to me in submissions by Dr. Bleechmore, counsel for the Plaintiffs, persuaded me to conclude that the appeal is not "arguable" or that it has "very limited prospects of success" or that it is "so clearly untenable that it cannot possibly succeed". However, following on from the comments made by Kenny J in Liew, I do not consider that it is appropriate to express anything other than a relatively superficial assessment of the Defendant's prospects in the appeal.

32 The fact that the appeal appears to be arguable together with the following factors leads me to the conclusion that the winding up application should be adjourned pending the hearing and determination of the appeal.

• First, although the judgment debt is for a considerable sum, if the Court orders that Bresam be wound up prior to the hearing of the appeal and if such appeal is ultimately successful, the liquidator appointed will be winding up a company which has no creditors. Bresam is not otherwise insolvent. This will only become apparent after that liquidator has been in office for some time and significant effort and expenditure has taken place. If an application is required to terminate the winding up, the liquidator's expenses and remuneration will need to be paid for. This course can be avoided by adjournment of the winding up application pending the determination of the appeal.
• Secondly, the interests of creditors are protected by the fact that the winding up petition has been filed and the relation back-day for the avoidance of voidable dispositions has been set.
• Thirdly, the undertakings mentioned in the order made by Byrne J in February have the effect of freezing the assets of those who would most likely be subject of voidable transaction claims.
• Fourthly, the company has no assets and the appeal is funded by those associated with it. As such, the assets of the company are not being dissipated by the prosecution of the appeal.
• Fifthly, the Plaintiffs' costs of the appeal as respondent are protected by the provision of the security for costs by the third parties.
• Sixthly, the appeal is apparently being diligently prosecuted by the Appellants. It is not suggested that it is not bona fide and it will be heard by the Court of Appeal in the next several months_._

33 In the circumstances, I will order that the hearing of this and the associated proceeding involving Melamybek be adjourned to a date after hearing and determination of the respective appeals.

[1] See Midas Management Pty Ltd v Equator Communications Pty Ltd (2007) NSWSC 759 at [12]).

[2] [1987] FCA 312; (1987) 76 ALR 137.

[3] [1990] FCA 280; (1990) 95 ALR 525.

[4] [1998] FCA 884.

[5] [1996] FCA 1611.

[6] [1998] HCA 27; (1998) 153 ALR 276 at 285.

[7] 10 ACSR 297.

[8] [1999] FCA 1428.

[9] Unreported, Federal Court, 11 February 2009.

[10] See Barwick CJ in a slightly different context in General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 referred to by the High Court of Australia in Jackamarra at [1998] HCA 27; (1998) 153 ALR 276 at page 286.