Simatis v Walgenup Aboriginal Corporation

Federal Court of Australia|2023-04-13|Before: Colvin J

Pursuant to s 459S of the Corporations Act 2001 (Cth) there be leave for Walgenup Aboriginal Corporation to oppose the winding up application by the applicant on the ground that the alleged debt the subject of the statutory demand dated 18 November 2022 is disputed.
By 27 April 2023 the plaintiff file and serve any further affidavit evidence.
By 5 May 2023 the defendant file and serve any further affidavit evidence in response.
By 19 May 2023 the plaintiff file and serve an outline of submissions.
By 26 May 2023 the defendant file and serve an outline of submissions in response.
The winding up application be listed for hearing at 10.15am AWST on 6 June 2023.
On or before 9am on 6 June 2023 each party do file and serve a statement of the legal costs incurred in the conduct of the winding up proceedings including expected costs of the hearing on 6 June 2023. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J: 1 Mr George Simatis seeks orders winding up Walgenup Aboriginal Corporation (WAC) in insolvency pursuant to Division 526 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act). Division 526 applies the provisions of the Corporations Act 2001 (Cth) concerned with winding up in insolvency to corporations incorporated under the CATSI Act: s 526.35. 2 WAC carries out activities for charitable purposes. It is the registered proprietor of a property known as Pemberton Farm Chalets (Chalets). 3 Mr Simatis caused a statutory demand to be served on WAC on 21 November 2022. The statutory demand claimed a debt of $307,801.61 (Debt). The debt was said to be owed pursuant to cl 3.7 of a deed of lease dated 27 January 2016 between Mr Simatis and WAC in respect of the Chalets (Deed of Lease). The winding up application was brought on 21 December 2022. It relies upon a failure by WAC to meet the statutory demand. 4 WAC sought leave under s 459S of the Corporations Act to challenge the existence of the Debt on the hearing of the winding up application. It needed leave to do so because it did not apply within the statutory time limit to set aside the statutory demand on the basis that the existence of the Debt was challenged. 5 At an interlocutory hearing on 13 April 2023 I determined that leave should be given. Orders were made granting leave and timetabling the hearing of the winding up application. At the time of making those orders I indicated that I would provide my reasons for doing so. These are my reasons.

The circumstances in which leave my be given 6 The Court is not to grant leave unless it is satisfied that the ground (of challenging the existence of the Debt) 'is material to proving that the company is solvent'. 7 On the present state of the authorities, there is some uncertainty as to what is meant by the term 'material': see, in this Court, the summary of relevant authorities by Griffiths J in Tony Innaimo Transport Pty Ltd v Skyroad Logistics Pty Ltd [2018] FCA 1134 at [5]-[7] where his Honour extracted relevant principles and the consideration of the correct approach by Banks-Smith J in Owen-Pearse v Lander Land Company Pty Ltd [2018] FCA 2077 at [109]. 8 As to the quality of proof required, there must be a sufficiency of evidence as to solvency to establish materiality if that evidence is ultimately accepted by the Court: Soundwave Festival Pty Limited v Altered State (W.A.) Pty Limited (No 1) [2014] FCA 466 at [40] (Wigney J). 9 I will proceed on a view of the state of the law that is most favourable to Mr Simatis, namely: (1) the discretion conferred by s 459S is to be exercised cautiously and sparingly; (2) in order to meet the materiality requirement, the Debt must be the difference between solvency and insolvency; (3) the Court must be satisfied that if the Debt was not owing then there is a sufficiency of evidence if ultimately accepted at the hearing of the winding up application that WAC will be solvent; and (4) in considering whether to grant leave the Court must be satisfied that there is sufficient merit in the alleged basis for disputing the debt and that there is a reasonable explanation as to why the debt was not disputed at the statutory demand stage. 10 Nevertheless, it must be noted that once the Court is satisfied that the relevant ground (in the present case, challenging the existence of the Debt) is material, then the Court has a statutory discretion to grant leave. It is not conditioned in any other way. Discretions of that kind are to be exercised in the interests of justice having regard to the particular circumstances of the case. 11 The three principle matters in issue between the parties were: (1) Whether, if the Debt was not owing, there was sufficient evidence to show that WAC will be solvent (that is, the materiality question). (2) Whether there is sufficient merit in the alleged basis for disputing the Debt. (3) Whether there is a reasonable explanation as to why the Debt was not disputed at the statutory demand stage.

Issue (1): Material to proving solvency 12 As to solvency, WAC relies on evidence from current directors as to the activities of WAC as well as a report from Mr Kirkness, a chartered accountant. 13 As to the activities of WAC, the evidence is to the effect that the only activity of WAC is to act as landlord of the Chalets. Its only source of income is rent from the Chalets. It does not undertake any other commercial activity and its ongoing expenses are confined to a modest insurance cost, a small fee to an internet service provider and bank fees. Its directors act on a voluntary basis. It has no employees. Its assets are the Chalets and its current bank balance (which at the time of hearing was about $37,000). It has no liabilities other than those arising from its dealings with Mr Simatis. In particular, there is no suggestion that there are any borrowings and the interest of WAC in the property is the subject of a caveat that would prevent any such borrowings being secured over the Chalets without the consent of the caveator. The caveat relies upon the terms of a purposes agreement between WAC and the Aboriginal and Torres Strait Islander Commission dated 4 February 1997. 14 Mr Simatis remains in possession of the Chalets. It is unclear as to the basis upon which he remains in possession. He may be holding over. On any view he is liable to continue paying rent. The rent provided for the Deed of Lease is not substantial ($12,000 per annum subject to indexation). WAC claims that Mr Simatis is in arrears to the extent of about $11,000. 15 For Mr Simatis it was submitted that WAC is not solvent even if the Debt is not owing and therefore it cannot be said that a question as to the liability of WAC for the Debt is material to its solvency. The submission was made by reference to evidence as to costs that have been incurred by WAC in consequence of having to respond to the winding up application. Those costs are $18,700 for the report of Mr Kirkness and ongoing legal costs with MDS Legal which, as at 26 February 2023, were for the total sum of $47,612.55. 16 As to the legal costs, Mr McCallum a director of MDS Legal has deposed that the directors of MDS Legal have resolved that if the defendant is not able to pay any invoice from its cash reserves then it will not call on the debt until (a) the resolution of the proceedings; (b) cash becomes available to the defendant as a consequence of any successful funding application; or (c) a sale of the Chalets, whichever is the earlier. 17 Submissions were advanced for Mr Simatis to the effect that there was no agreement between MDS Legal and WAC that it would not seek payment of legal fees otherwise than in the terms of the resolution. It is a question of fact as to whether there is a present liability to pay. In circumstances where MDS Legal are on the record for WAC and the resolution of the directors is advanced by them to support the application, it should be taken to be evidence for present purposes to the effect that steps would not be taken by MDS Legal to require payment of legal fees in circumstances where that would jeopardise the solvency of WAC. In context that is the obvious purpose of the resolution and there is no reason to reach a contrary conclusion from the evidence. It is not necessary for the position to be reduced to an agreement between the parties. It is enough that there is a formal forbearance by MDS Legal that has been communicated to WAC which has the consequence that there is no need for WAC to apply its cash reserves to the meet the liability. 18 It follows, that there is sufficient evidence from the directors of WAC to show that WAC would be solvent but for the alleged liability to pay the Debt. This is not evidence of mere assertion of solvency. It is direct evidence as to the state of the financial affairs of WAC supported by a separate valuation report as to the value of the Chalets (see below). 19 WAC also obtained a report from Mr Kirkness upon which it relied. For Mr Simatis submissions were advanced that sought to impugn the reliability of the report. In written submissions some emphasis was placed upon the fact that the report was not based upon audited accounts. In oral submissions it was accepted that there was no requirement for accounts to be audited. The real question was whether, in all the circumstances, the evidence supported that which had been given by the directors. 20 The report from Mr Kirkness relied upon various materials including reports for the financial years ended 30 June 2015 and 2016 prepared by Mr Mark Jennings, a bookkeeper. Mr Jennings provided an affidavit in which he explained how in 2015 and 2016 the financial data for the business conducted by Mr Simatis as lessee of the Chalets and the financial data of WAC was kept in a single accounting software record. It appears that this may be a consequence of the fact that Mr Simatis was originally employed as a manager of the Chalet business which was conducted by WAC. However, after the resolution of various disputes between the parties it was agreed that Mr Simatis would become a tenant and would pay an annual rental of $12,000 (subject to indexation). 21 In any event, Mr Kirkness explains how he was provided, as part of his original brief, with balance sheet and profit loss statements for 2015 and 2016 that had been prepared by Mr Jennings. He also explains how he was then given a supplementary brief in which Mr Jennings had extracted information relating to the financial affairs for WAC from that relating to the operation of the Chalet business by Mr Simatis to produce separate reports for each of them. Mr Kirkness explains in his report that on review the information did not reconcile with the operating profit from the previous reports. He then explains that he was provided with 'revised splits of income and expenses between the Corporation and the chalet activities'. He explains how he has used these revised reports from Mr Jennings. He also refers to the bank account records that he has relied upon and the fact that he has used a valuation report for the land and buildings comprising the Chalets that was provided by Herron Todd Whyte. The report was also in evidence and it valued the Chalets at $920,000. 22 The report of Mr Kirkness explains certain assumptions that were made and how an unaudited balance sheet as at 31 December 2022 and cash flow assessment was prepared for WAC. 23 Mr Kirkness provided two affidavits concerning his report. The first affidavit of Mr Kirkness produced a report in which he set out a table showing the net liquid asset position of WAC as at 31 December 2022 as being $47,921 and the net illiquid assets as being $920,000. The creditors totalled $3,360. Underneath the table was the following notation: The above net asset position indicates the Corporation is unable to meet all if its liabilities using liquid assets. In order to do so, the Corporation will need to consider other options to raise sufficient funds to meet its liabilities. These options are listed at paragraph 22. 24 The report also stated that the calculation of net assets did not include the costs incurred for his own fees of $9,900 or the legal costs of $47,613 which were relevant to the cash flow analysis. Those amounts were referred to in the cash flow analysis. 25 Mr Kirkness also referred in his report to the fact that 'as instructed in his supplementary brief' (that is, the additional information from the bookkeeper Mr Jennings) he had removed an amount of $85,132 shown in the balance sheet as at 30 June 2015 as an amount that was a receivable described as 'G.Simatis loan account'. Yet, the unaudited financial statements as at 31 December 2022 produced with the report showed non-current liabilities of $85,132, being a loan to Mr Simatis. 26 The cash flow information showed a deficiency on the basis that there was a liability to meet the legal fees of MDS Legal and the fees for the report of Mr Kirkness. 27 By a supplementary affidavit Mr Kirkness deposed to errors in these documents which he said had occurred through inadvertence and produced corrected documents. The changes made were as follows: (1) The notation to the table was changed to read as follows: The above net asset position indicates the Corporation is able to meet its liabilities using liquid assets. (2) The financial statement was replaced with what was said to be the correct version which had been prepared to take into account information from Mr Jennings. 28 It was submitted for Mr Simatis that these changes meant the reports could not be relied upon and reflected an unexplained change of position on the part of Mr Kirkness. I do not accept that submission. An explanation has been given. On the face of it, the explanation is credible. That is especially so in circumstances where the financial information in the two versions of the reports are the same. That aspect is consistent with the figures having been updated to reflect the information from Mr Jennings, but through inadvertence the notation and the attachment were not correct. 29 In those circumstances, the report of Mr Kirkness together with the evidence of Mr McCallum are sufficient evidence to support the conclusion reached on the basis of the evidence of the directors of WAC as to solvency. It is not necessary for present purposes to make final findings as to solvency or whether the report of Mr Kirkness might ultimately be accepted on any final hearing of the application for orders winding up WAC.

Issue (2): Genuine dispute as to the Debt 30 As to whether there is a genuine dispute as to the Debt, the submission advanced for Mr Simatis was that it was far from certain that WAC will be able to establish a genuine dispute as to all of the invoices that formed the alleged basis for the Debt. It was submitted that Mr Simatis only needed to succeed in demonstrating a small part of the liability in order to demonstrate insolvency because of the limited cash reserves of WAC. 31 The statutory demand claimed that the Debt was owed to Mr Simatis under cl 3.7 of the Deed of Lease. It referred to an affidavit of Mr Simatis which referred to two provisions of the Deed of Lease, namely cl 3.9 and cl 3.7. The affidavit stated that WAC was obligated to provide written approval or rejection of a request for capital expenses and that if WAC did not do so within the time specified it would be deemed to have approved the request. The affidavit also stated that WAC was obligated to pay capital expenses associated with the Chalets. It claimed that Mr Simatis 'has incurred $307,801.61 of capital expenses pursuant to the Deed'. It then set out a schedule identifying 12 items by brief description and appended many pages of copies of various documents many of which appeared to be invoices with dates stretching back over a number of years. 32 For WAC, the following matters were identified as to the basis upon which it was claimed that the Debt was not due: (1) although it was not sensible to undertake a review for the purposes of the leave application of every one of the invoices, it was apparent on the face of many of them that they were not for capital expenses within the meaning of that expression in the Deed of Lease; (2) on the face of other invoices they appeared to relate to maintenance costs being costs that Mr Simatis was required to bear under the terms of the Deed of Lease; (3) notice had not been given in accordance with the terms of the Deed of Lease in respect of many of the expenses; (4) invoices in respect of amounts totalling $7,591.10 had been paid by WAC; and (5) some of the invoices were so old as to be statute barred. 33 Submissions were also advanced to the effect that information in many of the attached documents was insufficient to form any view as to what the documents related to in terms of expenses. 34 It is first necessary to refer to the relevant terms of the Deed of Lease. The Deed defines the term 'Business' to mean the Pemberton Farm Chalets and all matters incidental to the running of the farm stay. 35 Under cl 3.4, the tenant must pay all charges connected with the land and the premises for utilities. They are specified (and include electricity) and then include in addition 'those costs incurred in the day to day operations of the Business which are not Capital Expenses'. Capital Expenses are those defined in cl 3.7. 36 Under cl 3.7, the landlord must pay all capital expenses associated with the land and the premises: … including but not limited to the costs of replacement of buildings or extensions, structural and other improvements such as driveways, gates, fences, walls, earthworks, fixtures and fittings, roofs, window frames (but not glass), doors, floors, gutters and pipes, play areas and landscaping (Capital Expense). 37 There is provision for part of the rent to be paid into a capital expense account to be applied to meet Capital Expenses, but the landlord's obligation is not limited to the amount in that account. 38 Under cl 3.8 it is the responsibility of the tenant to arrange the required work for Capital Expenses. Approval will be sought by the tenant from the landlord before any expense is incurred, except in cases of emergency. 39 Under cl 3.9 and cl 3.10 there is provision about how the approval is to be sought and obtained and provision that the landlord shall not unreasonably reject or not approve a request. 40 Clause 4 provides for the extent of the tenant's obligation to maintain, replace, repair and keep the land and the premises in substantial repair and condition. 41 On the evidence for WAC, issues arise as to whether particular amounts alleged to form part of the Debt were expenses incurred in the day to day operation of the business that were not Capital Expenses or were expenses incurred in meeting the maintenance obligation of the tenant. Issues also arise as to whether requests were made for approval of any of the expenses as Capital Expenses before they were incurred and whether, in any case, the requirement for approval did not apply because there was a case of emergency. In particular, there is evidence of the forms that were provided by WAC for the purpose of notifying claims, there is no evidence in the materials in support of the statutory demand of any such notification being given and there is no statement in the affidavit of Mr Simatis in support of the statutory demand that notification was given. Evidence for WAC is to the effect that notification did not occur. 42 There are 12 categories of expenditure listed in the statutory demand. Taking the largest items: (1) Item 5 is for diesel fuel for the electrical generator used primarily to power electric hot water systems in the amount of $185,929.63. It is arguable that this is a business expense which is not a Capital Expense. (2) Item 9 is for electrical and lighting installation said to have been carried out in units and sheds in the amount of $53,823.99. The invoices begin in 2018 and contain items which, on the face of them, arguably relate to repair and maintenance. (3) Items 11 and 12 are for a total amount of just over $20,000 for the installation of a limestone wall on the property. The expenditure is said to have been incurred more than 6 years ago and therefore any claim for the expense is said to be out of time. 43 For present purposes it is not necessary or appropriate to go through each and every item. The contentions raised by WAC appear to apply to many if not most of them. Therefore, there is a reasonable basis demonstrated upon which to dispute them. I am satisfied that there are issues which arise from the terms of the Deed of Lease as to whether the items claimed are due and payable. They have been incurred over a number of years. There is no explanation as to why there was no earlier claim. There is no evidence of approval being sought. There is evidence to the effect that some of the claims relate to amounts that were rejected. 44 To the extent that it is said that some of the invoices contained information to support a contention that they were incurred in an emergency situation the amounts involved are quite small in the scheme of things and certainly within the capacity of WAC to pay if established to be due under the terms of the Deed of Lease. 45 For those reasons there is a reasonable basis to dispute the Debt.

Issue (3): Reasonable explanation 46 The evidence establishes the following matters: (1) WAC is operated as a charitable not for profit organisation with voluntary directors and no employees; (2) there is a long history of dealings between Mr Simatis and WAC; (3) in August 2022, Mr Simatis made a request for a three year extension of the lease of the Chalets; (4) immediately after his request for an extension was not entertained he instructed solicitors to send a letter of demand for the Debt which threatened the commencement of proceedings if the Debt was not paid; (5) the Debt relates to claims that go back many years which appear to have been raised for the first time when the demand for the Debt was made; (6) there is evidence to the effect that directors of WAC felt threatened by the demand for the Debt and believed that they may be personally liable if the Debt was not paid and those matters caused stress on the part of those directors; (7) there was an event in which Mr Simatis made a report to police which directors of WAC also found to be intimidating; (8) the long standing chair of WAC resigned in August 2022; (9) the long standing treasurer of WAC suffered from health problems that were stress related arising from her concern that she may be personally liable for the Debt claimed; (10) Ms Eacott, a director who received the statutory demand has deposed that she did not understand the document as she had not seen anything like it before and because it contained all of the invoices she thought it was a restatement of the same demands that had been made by the lawyers for Mr Simatis; and (11) WAC did not obtain legal advice until after the time to apply to set aside the statutory demand had expired. 47 This is not a case where it is said simply that the person did not know the significance of a statutory demand or put it to one side without explanation. Rather, the explanation provided is to the effect that the statutory demand was raised in the context of Mr Simatis seeking an extension of the lease of the Chalets in circumstances where those involved for WAC felt threatened by the course of events. It is the associated stress that has contributed to the failure to respond. 48 In all the circumstances, I was satisfied that there has been sufficient explanation given. In considering the reasonableness of the explanation given, it was also relevant to have regard to the merits of the matters raised to support the claim that there is an arguable basis for claiming that the Debt is not due and the fact that much of the expenses said to give rise to the Debt were incurred a number of years ago and appear only recently to have been the subject of any demand. It was also relevant that the management of WAC was in the hands of people who were acting on a voluntary basis and were not involved in the conduct of any business or significant undertaking by WAC. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.

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