State Bank v Tela [2002] NSWSC 20 | Case summary

HIS HONOUR: 1 The plaintiff, State Bank of New South Wales (which I shall call "the Bank"), applies under s.459P of the Corporations Act 2001 (Cth) for an order that the defendant, Tela Pty Limited ("Tela"), be wound up on the grounds of insolvency. The Bank has proved service of a statutory demand and accompanying affidavit in accordance with s.459E(3) and it is not disputed that Tela has not complied with that demand. Nor is it disputed that no steps were taken by Tela to seek an order setting aside the statutory demand. Relying on the presumption of insolvency created by s.459C(2)(a) and having proved all incidental procedural matters, the Bank has shown an entitlement to the relief it seeks, subject to any defence Tela may establish within the limits allowed to it upon an application of this kind. 2 Tela opposes the making of a winding up order. It does so on the footing that, in the particular circumstances, the winding up proceedings are an abuse of the process of the Court. Tela frames its opposition in that way by reference to the reality that, in light of the nature of the statutory demand process as recognised by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, the scope for questioning at this stage the debt upon which an unsatisfied and unchallenged demand is based is very limited. The whole thrust of Part 5.4 of the Corporations Act 2001 is directed towards confining such challenges within the procedure provided for in Division 3, headed "Application to set aside statutory demand". Provision is there made for disputes about the existence or amount of the debt and questions of off-setting claim to be resolved and disposed of before the application for winding up is heard: see the analysis made by Sheller JA (with whom Priestley and Powell JJA agreed) in Re J & E Holdings Pty Ltd (1995) 36 NSWLR 541. That an application for winding up in a case such as this may be opposed only on limited grounds is confirmed by s.459S(1): " (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)." 3 The Court's power to grant such leave is restricted by s.459S(2): "(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." 4 It is thus made plain that, in a case of this kind, proof of solvency (or, to put it another way, displacement of the presumption of insolvency which, by s.459C(2)(a), results from failure to comply with the statutory demand) will normally be the only avenue of resistance available to the company upon the hearing of the application for winding up. 5 Mr Darvall of counsel, who appeared for Tela, sought to oppose the Bank's application in a different way. He relied upon the following passage in the judgment of Gummow J (with whom Brennan CJ, Dawson, Gaudron and McHugh JJ agreed) in David Grant which reflects an approach approved by the members of the Court of Appeal in Re J & E Holdings: "No doubt, in some circumstances, the new Pt 5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz [(1992) 174 CLR 509]. However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction [ Bryanston Finance v de Vries (No 2) [1976] Ch 63 at 78, 79-80; L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183; Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 at 289; 12 ACLC 5 at 6-7 ; Re J & E Holdings Pty Ltd (1995) 36 NSWLR 541 at 547-548]."

(As is confirmed by the decision of Brownie J in House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527, the abuse of process exception thus identified may be relied upon despite s.459S.) 6 Mr Darvall submitted that the winding up application in this case is made for an improper purpose amounting to an abuse of process in the way referred to by Gummow J and that a winding up order should therefore not be made. This submission is based on the existence and nature of other unresolved proceedings between Tela and the Bank to which it is now necessary to turn. 7 The proceedings in question are No. 2573 of 1997 in this Division between Tela as plaintiff, the Bank as first defendant and a solicitor as second defendant. I shall refer to them as "the 1997 proceedings". In so far as they concern Tela and the Bank, the 1997 proceedings arise out of the sale by the Bank, as mortgagee, of real property which stood as security for Tela's indebtedness to the Bank. The property was sold at auction for $615,000 which was insufficient to cover that indebtedness. There are, in substance, two claims by Tela against the Bank. The first is a claim for damages based on s.42 of the Fair Trading Act 1987 and an allegation that, relying on representations by the Bank that it would make available further financial accommodation, Tela, to its detriment, declined an offer of $1.6 million for the property in question. The second claim is a claim for the equitable remedy of account in consequence of alleged breach by the Bank of the obligations to which a mortgagee exercising power of sale is subject. 8 It is, of course, not possible for the Court at this point to form any view about the merits of Tela's claims in the 1997 proceedings. But it can be said that, even if those claims were fully made out, they would not call in question the existence or amount of the debt the subject of the Bank's statutory demand, although they would constitute an off-setting claim. Tela's claims in the 1997 proceedings are of such a nature that they could have been ventilated by way of application to set aside the Bank's statutory demand under the procedure created by Division 3 of Part 5.4. But as that course was not taken, s.459S precludes assertion of the claims by way of defence at this stage unless they somehow justify relief under the abuse of process exception recognised and preserved in David Grant. 9 It is important to recognise that Gummow J's formulation refers to "an abuse of process in the technical sense of that term …". This, coupled with the reference in the following sentence of his Honour's judgment to injunctive relief, makes it clear that the jurisdiction concerned is the inherent jurisdiction of the Court to stay proceedings which are an abuse of process. Mr Darvall's attempt, on Tela's behalf, to resist the making of a winding up order on the basis of an alleged abuse of process must therefore be approached from the same perspective as if it were an application to stay the winding up proceedings on that ground. 10 The essence of an abuse of process in a context such as the present is some improper purpose on the part of the applicant or plaintiff (here, the Bank). There will be an abuse of process if the Bank's purpose in bringing the winding up proceedings "is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers": Williams v Spautz (1992) 174 CLR 509 per Mason CJ, Dawson, Toohey and McHugh JJ; see also Carson v Legal Services Commissioner [2000] NSWCA 308. 11 The scheme of the legislation makes it clear that a creditor who has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Part 5.4. It is now abundantly clear that, unless the Division 3 process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist. 12 It was submitted on behalf of Tela that the Bank's application for a winding up order should be seen to be motivated by a purpose on the Bank's part of freeing itself from the continuing threat or apprehension of disadvantage to it represented by the 1997 proceedings. A liquidator, it was said, might decide not to pursue those proceedings, particularly if there was a shortage of funds. Assertion of a purpose of becoming free from or stifling those proceedings in that way lay at the centre of Tela's case based on abuse of process. I do not accept Tela's submissions. A liquidator will, in accordance with his duty, assess the viability and strength of Tela's claims in the 1997 proceedings. If the prospects are good so that prosecution of the proceedings is in the interests of creditors and contributories, there is every likelihood that a liquidator will continue the proceedings and will find ways of obtaining necessary funding. There is also the point that if Mr Harris, who I understand to be effectively the sole controller and owner of Tela, believes the claims to be viable and pursuit of them to be to his advantage, he may himself seek to assist a liquidator in prosecuting them. 13 I had occasion in Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171 (17 December 2001) to quote with approval the following passage in the judgment of Palmer J in Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867: "Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by service a notice of demand under s.459E in order to invoke the procedures of Pt 5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s.459G. That is the risk that the creditor takes in serving the notice of demand. But if the debtor company fails to substantiate the dispute in the manner which is required by Pt 5.4 and, in particular, by S.459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s.459C, s.459Q and s.459S. This is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts. Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor's purpose in seeking the winding up is not to collect payment of its debt or, in default to have 'the company wound up', but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality." 14 This passage recognises the abuse of process exception identified by Gummow J in David Grant. Cases within the exception, Palmer J says, "would be extremely rare in reality". That is, to my mind, an accurate statement of the position. Tela has not shown that this is one of those extremely rare cases. Its opposition framed in terms of abuse of process is really opposition on the now excluded basis of the assertion of an off-setting claim. For reasons already given (and notwithstanding what was said by Hamilton J in Gramwick Investments Pty Ltd v Advanced Underpinning Pty Ltd (2001) 19 ACLC 593), I consider that the basis of opposition asserted by Tela cannot be sustained in the present context. In relation to the supposed abuse of process, I regard as entirely applicable to this case the following observations of Tamberlin J in Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411: "In my view, no such improper purpose has been shown in the present case. Indeed, the purpose which emerges from the evidence, is that Liverpool [here, the Bank] seeks to recover the moneys allegedly owed to it, which, it seems to me, is not only proper but is the purpose for which the statutory demand was issued. There is no suggestion of threats of undue pressure, extortion, or commercial duress. Nor is there any suggestion that the demand was a charade in that it was not intended to be pursued to its conclusion." 15 It is noteworthy that Tela has not made any serious attempt to put before the Court evidence of its solvency. When I inquired of Mr Darvall whether it was asserted by Tela that it was solvent, he said that such an inference might be drawn from the following paragraph of the affidavit of Mr Harris filed in these proceedings: "It [ie Tela] has no liabilities other than the alleged liability to the State Bank and associated legal costs relating to State Bank matters and costs for filing fees outstanding to the ASIC. The only asset of the Company is its present claim against the Defendants in proceedings 2573 and the prospects of recovery of costs orders." 16 I do not draw the inference Mr Darvall has suggested. Rather, this statement by Mr Harris tends, to my mind, to call seriously into question Tela's solvency, given that it has apparently not been able to pay even its ASIC filing fees. That impression is strengthened by Mr Harris's description in an affidavit filed in the 1997 proceedings of Tela's inability, through shortage of funds, to maintain legal representation, not to mention the fact that a subpoena served by the Bank in these proceedings about a month ago seeking Tela's financial records for the period 1 July 1993 to 31 December 2001 has apparently brought to light only an annual return of January 1994. The matter of solvency which, in light of s.459S, is, in normal circumstances, the only matter which may relevantly be asserted in the face of an application of the present kind has therefore not been addressed in any way which might conceivably constitute a defence to the application for winding up. 17 The appropriate course is that Tela be wound up. The consent of Mr Marsden to act as liquidator has been produced. The orders of the Court are as follows:

State Bank v Tela

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Judgment (9 paragraphs)

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