SWITZ PTY LTD v GLOWBIND PTY LTD GLOWBIND PTY LTD v SWITZ PTY LTD

Court of Appeal (NSW)|2000-03-10|Before: Spigelman CJ, Handley JA, Giles JA, Hodgson CJ, Austin J, Re J

48 NSWLR 661 Reported Decision : 155 FLR 282 (2000) 33 ACSR 723 (2001) 19 ACLC 532

CITATION : SWITZ PTY LTD v GLOWBIND PTY LTD GLOWBIND PTY LTD v SWITZ PTY LTD [2000] NSWCA 37 revised - 15/03/2000 FILE NUMBER(S) : CA 40115/00; 40117/00 HEARING DATE(S) : 08/03/00 JUDGMENT DATE : 10 March 2000

PARTIES : Switz Pty Ltd Glowbind Pty Ltd JUDGMENT OF : Spigelman CJ at 1; Handley JA at 78; Giles JA at 79

LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT 3407/99 FILE NUMBER(S) : LOWER COURT Hodgson CJ in Eq; Austin J JUDICIAL OFFICER :

COUNSEL : B A J Coles QC / J K Chippindall (Switz) J B Simpkins (Glowbind) SOLICITORS : Clayton Utz (Switz) Price Waterhouse Coopers (Glowbind) CATCHWORDS : CORPORATIONS LAW - winding up in insolvency - opposition to winding up - leave to oppose on certain grounds "material to proving the company is solvent" Corporations Law s459S - CORPORATIONS LAW - period in which application to wind up in insolvency must be determined - extension of period - validity of "condition" Corporations Law s459R(4) LEGISLATION CITED : Corporations Law Corporate Law Reform Act 1992 (Cth) ABB Power Plans Limited v Electricity Commission (NSW) 35 NSWLR 596 Anthony Hordern & Sons Ltd v Amalgamated Clothing & Allied Trades Union of Australia (1931-32) 47 CLR 1 Australian Capital Television Pty Ltd v The Commonwealth (1992) 177 CLR 106 Bayview Holdings Pty Ltd (In Liq) v Zan Holdings Pty Ltd (Supreme Court of Western Australia, 19 October 1998, unreported) BHP Steel (JLA) Pty Ltd v Eagle Steel Holdings Pty Ltd [1999] WASC 187 Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467 CASES CITED: David Grant & Co Pty Ltd (Receiver appointed) v Westpac Banking Corporation (1994-95) 184 CLR 265 John v Federal Commissioner of Taxation (1989) 166 CLR 417 Leon Fink Holdings Pty Ltd v Australian Film Commission (1979) 141 CLR 672 PMT & Partners (in Liq) v Australian National Parks & Wildlife Service (1995) 184 CLR 301 R v Wallis (1949) 78 CLR 529 Re J & E Holdings Pty Ltd (1995) 36 NSWLR 541 Saraswati v R (1991) 172 CLR 1 Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 Zan Holdings Pty Ltd v Bayview Holdings Pty Ltd (1997) 15 ACLC 1238 DECISION : Proceedings CA 40117 of 2000; 1 Extend time to apply and grant leave to appeal; 2 Appeal dismissed with costs; Proceedings CA 40115 of 2000; 1 Grant leave to appeal; 2 Appeal allowed with costs; 3 Vary the order of Hodgson CJ in Eq by deleting the condition

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40115/00 CA 40117/00 SPIGELMAN CJ HANDLEY JA GILES JA

Friday 10 March 2000 SWITZ PTY LTD v GLOWBIND PTY LTD (CA40115/00) GLOWBIND PTY LTD v SWITZ PTY LTD (CA 40117/00) JUDGMENT 1 SPIGELMAN CJ: Switz Pty Limited ("the Plaintiff") seeks, in accordance with Pt 5.4 of the Corporations Law (the "Act"), to wind up Glowbind Pty Limited ("the Defendant"), on the basis of the Defendant's failure to comply with a statutory demand for payment of a debt. 2 The Plaintiff seeks leave to appeal from a decision of Hodgson CJ in Eq of 25 February 2000, in which his Honour made orders pursuant to s459R of the Corporations Law, extending, on the Plaintiff's motion, the period within which the application for winding up must be determined, but doing so on certain conditions which the Plaintiff seeks to contest. 3 The Defendant seeks leave to appeal from a decision of Austin J of 24 December 1999, in which his Honour dismissed the Defendant's application for leave, under s459S of the Corporations Law, to oppose the application for the company to be wound up in insolvency on grounds contesting the debt. 4 The Plaintiff alleges that it was entitled to payment of certain monies, pursuant to a contract for the provision of consulting services to the Defendant with respect to a real estate development. The Plaintiff asserts that it was entitled to an amount of $800,000 by way of a consultant's fee together with what it contends is an additional sum of $500,000 for failure to deliver a bank guarantee for the amount of $800,000. It appears that a bank guarantee in that amount was not able to be procured on the security of the real estate owned by the company which was contaminated land. 5 Neither party contended for a construction of the contract that the fee of $800,000 was to be secured by the bank guarantee, and, in lieu of security, an advance of $500,000 was to be paid. The Plaintiff contended that it was entitled to both amounts. The Defendant contended that it has an arguable case to dispute the obligation to pay each amount. In the case of the amount of $500,000, the Defendant asserted that it was an additional amount and sought to challenge it as a penalty. That contention would not have been open if the $500,000 had been an advance on the amount of $800,000, which advance became payable upon the Defendant's failure to provide security. It is understandable why, in the context of the present proceedings, neither party would put forward this available, and at first sight sensible, construction of the contract. This may not always be the case. 6 The Plaintiff served a creditor's statutory demand upon the Defendant for the two amounts of $800,000 and $500,000. It seeks to wind up the Defendant on the basis of failure to comply with that demand.

Chronology 7 The chronology of events is as follows: (i) 25 May 1999 - statutory demand served, specifying the Plaintiff's solicitors as the address of the creditor for service of any application.

(ii) 7 June 1999 - the Defendant, by its solicitor, wrote to the solicitor for the plaintiff disputing the debt.

(iii) 11 June 1999 - the Defendant, by summons, sought an order pursuant to s459G of the Corporations Law that the statutory demand be set aside. The summons was served on that day at the Plaintiff's usual place of business, not at the solicitor's office, as specified in the demand, nor at its registered office.

(iv) 25 June 1999 - the Plaintiff's solicitors filed a Notice of Appearance in the proceedings referred to in (iii).

(v) 15 July 1999 - the Plaintiff's solicitors advised the Defendant's solicitors that their client would, inter alia, put in issue the validity of service at the hearing of the summons set down for 19 July 1999.

(vi) 19 July 1999 - acting on legal advice to the effect that it was bound to lose by reason of incorrect service, the Defendant agreed, by consent, to an order that the summons be dismissed without costs.

(vii) 2 August 1999 - the Plaintiff, by summons, sought an order that the Defendant be wound up under the Corporations Law .

(viii) 27 August 1999 - a Notice of Appearance on behalf of the Defendant was filed in the proceedings referred to in (vii). (ix) 30 August 1999 - affidavit by the Defendant's expert accountant on the issue of solvency filed.

(x) 31 August, 12 October, 18 November, 25 November 1999 - the proceedings were listed before the Registrar for directions.

(xi) 28 October 1999 - the Defendant notified the Plaintiff of a change of solicitors.

(xii) 25 November 1999 - affidavit of the Plaintiff's expert on the issue of solvency filed.

(xiii) 2 December 1999 - the Defendant by Notice of Motion sought an order under s459S for leave to oppose the application on grounds that the debt was disputed.

(xiv) 3 December 1999 - the Plaintiff, by Notice of Motion sought an order under s459R extending the time in which the application is to be determined by six months, to 2 August 2000.

(xv) 9 December 1999 - Notices of Motion referred to in pars (xiii) and (xiv) heard by Austin J.

(xvi) 24 December 1999 - judgment of Austin J rejecting the Plaintiff's application under s459S, extending time under s459R to 2 March 1990 and standing the proceedings into the Corporations List on 31 January 2000.

(xvii) 31 January 2000 - the proceedings were placed in the Expedition List on 25 February 2000.

(xviii) 7 February 2000 - the Defendant filed its notice under s465G stating that it intends to oppose the summons on the ground that "the company is not insolvent". (xix) 9 February 2000 - the Plaintiff filed an application for orders that the proceedings be expedited or, alternatively, for an order under s459R extending time until 2 August 2000.

(xx) 16 February 2000 - a further affidavit sworn by the Defendant's expert on the issue of solvency.

(xxi) 25 February 2000 - judgment of Hodgson CJ in Eq extending time under s459R until 3 April 2000, subject to conditions. The conditions required that the Plaintiff make an election by 2 March 2000.

(xxii) 2 March 2000 - Hodgson CJ in Eq extends time for the Plaintiff to make an election until 10 March 2000.

(xxiii) 2 March 2000 - the Plaintiff seeks leave to appeal from the decision referred to in (xxi). (xxiv) 3 March 1999 - the Defendant seeks leave to appeal from the decision referred to in (xvi). 8 In the proceedings before Austin J only the Defendant's expert's affidavit of 30 August 1999 (subpar 7(ix) above) was in evidence. Both parties agreed that this Court should hear the appeals on the basis that the further expert affidavits of 25 November 1999 and 16 February 2000 (subpars 7(xii) and 7(xx) above) were before the Court.

Leave 9 In both matters, the argument proceeded on the basis that leave to appeal was required. 10 The judgment of Austin J was delivered on 24 December 1999. Given that date, some delay before applying for leave to appeal was justifiable. However, given the nature and urgency of the matter, the delay until 3 March 2000 was not justifiable and no attempt was made to justify it. In the ordinary case, this would be enough to refuse leave. 11 The issues sought to be raised by the Plaintiff in the appeal from Hodgson CJ in Eq raise important issues as to the exercise of a power by one first instance judge in a manner which impinges on an earlier judgment of another first instance judge. It also has significant implications for the practice of the Court with respect to a major aspect of commercial activity. Leave should be given in CA 40115/00. 12 Some of the issues that arise in the two matters overlap. Furthermore, Hodgson CJ in Eq makes some observations about the reasoning of Austin J. It is appropriate for the Court to grant leave and any necessary extensions of time in CA 40117/00 in the unusual circumstances of this case. 13 Legislative Scheme The relevant provisions of the Act are: "459A On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. … 459C(1) This section has effect for the purposes of: (a) an application under section 246AA, 459P, 462 or 464; or (b) an application for leave to make an application under section 459P. (2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made: (a) the company failed (as defined by section 459F) to comply with a statutory demand; or … 459F(1) If, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period. … 459G(1) A company may apply to the Court for an order setting aside a statutory demand served on the company. (2) An application may only be made within 21 days after the demand is so served. … 459P(1) Any one or more of the following may apply to the Court for a company to be wound up in insolvency:

… (b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);

… 459R(1) An application for a company to be wound up in insolvency is to be determined within 6 months after it is made. (2) The Court may by order extend the period within which an application must be determined, but only if: (a) the Court is satisfied that special circumstances justify the extension; and (b) the order is made within that period as prescribed by subsection (1), or as last extended under this subsection, as the case requires. (3) An application is, because of this subsection, dismissed if it is not determined as required by this section. … 459S(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). (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."

Appeal from Austin J 14 Austin J refused to grant leave under s459S to the Defendant so as to permit the Defendant to dispute the Plaintiff's debt in the winding up proceedings. This was a discretionary decision with which this Court will not interfere, save on long established and well known grounds. 15 By force of s459S(2), the Court "is not to grant leave … unless it is satisfied that the ground is material to proving that the company is solvent". Austin J was not so satisfied. The mandatory terms of this subsection are such that, unless the Defendant can successfully challenge his Honour's decision in this respect; it must fail. Only if it succeeds in this respect, will it be necessary to consider the other alleged defects in his Honour's reasoning. 16 In the course of his judgment Hodgson CJ in Eq referred to the application in the present case by Austin J of the three grounds stated by Austin J in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467 at 481, as considerations for determining an application under s459S. Hodgson CJ in Eq said at [4]: "His Honour did not say that the failure in respect of either issue 2 or issue 3 was such that the application would have been dismissed if that was the only failure. It seems to me that a fair reading of the judgment is that it was based squarely on the inadequacy, as his Honour saw it, in relation to both issues 2 and 3. That is, I do not think it is a fair reading of his Honour's judgment to say that the application would have been dismissed even if there had been no inadequacy in relation to issue 3." 17 Issue 3 was expressed by Austin J in the following terms: "An investigation of whether the dispute about the debt is material to proving that the company is solvent." 18 This "issue" is a paraphrase of s459S(2). The decision on the issue must lead to a dismissal of the application for leave if, to use the terminology of Hodgson CJ in Eq, there had been an "inadequacy" leading to an absence of satisfaction on the part of the Court in relation to that "issue". Subsection 459S(2) is in mandatory terms. 19 The Defendant submitted that Austin J erred in two related respects. 20 First, it was submitted that his Honour applied the wrong test by asking whether, on the evidence, the company would be solvent even if the debt was owing. His Honour, it was submitted, applied the reasoning of Master Sanderson in Zan Holdings Pty Ltd v Bay View Holdings Pty Ltd (1997) 15 ACLC 1,238 at 1,241, which reasoning had been disapproved in, admittedly obiter but, it was submitted, persuasive remarks on appeal in the Full Court (Bayview Holdings Pty Ltd (In Liq) v Zan Holdings Pty Ltd (Supreme Court of Western Australia, 19 October 1998, unreported, at p5). 21 Secondly, the Defendant submitted that the word "material" in s459S(2) meant that the disputed amount had significance for the assessment of solvency. The amount of $1.3 million was significant even if not determinative. This appeared, it was submitted, from the evidence of the Defendant's expert which was before Austin J. Furthermore, it was submitted, his Honour was aware that the Plaintiff had put forward expert evidence challenging the Defendant's expert, including a challenge to his conclusion on solvency. This factor was reinforced if this Court had regard to the actual report of the Plaintiff's expert which was not tendered before his Honour but which this Court could and should consider. That report included calculations which suggested that the amount in dispute could make the difference, even though that expert expressed the opinion that the company was insolvent even if it did not owe the disputed debt. 22 The relevant passages of Austin J's judgment are pars [38], [39] and [40]. His Honour referred to the report of the Defendant's expert which was before him and said: "38 The report includes an estimated balance sheet as at 20 August 1999 from which it appears that the equity in the company is $858,047. This report does not take account of the $1,300,000 debt which the plaintiff claims. Nor does it adjust the value of current assets to take into account the valuation of the Erskineville property to which I have referred. 39 If the valuation were taken into account then the equity in the company would rise by substantially over $1 million and in that event total equity would be significantly higher than the debt claimed by the plaintiff. In those circumstances, given that this is the defendant's evidence, my opinion is that the defendant here is in the same position as the defendant in Zan Holdings Pty Limited v Bayview Holdings Pty Limited (1997) 15 ACLC 1238. In that case leave was refused because the Master concluded that the company would be solvent even if the disputed debt was owing. 40 On the defendant's own evidence, it seems to me the same conclusion should be drawn in this case. While in a sense a debt of the order of $1.3 million is material, it does not seem to me, given the valuation evidence, that a dispute about the plaintiff's debt would be material to the Court's conclusion that the company is or is not solvent, if the facts at the hearing of the winding up summons are as presented by the defendant now." 23 In its submissions, the Defendant referred to its expert's report to which Austin J had referred and noted that under the general heading of "Financial Position as at 20 August 1999" the expert had set out the information provided to him by the company including draft accounts as at 30 June 1999 together with supplementary information, and on that basis estimated the company's current balance sheet as at 20 August 1999. That showed net current assets of $2.236 million and net current liabilities of $1.067 million, for a net current asset position of $1.169 million. This difference, counsel for the Defendant noted, was less than the amount of $1.3 million which was the subject of the statutory demand. 24 The Defendant's expert had, however, expressly rejected the computation to which I have just referred as an appropriate basis for assessing the solvency in the company. In his report he said: "However in the circumstances I do not believe that this basis of accounting accurately reflects the present realisable value of the company's current assets. On a likely realisable value/cash flow basis the net current asset position is significantly higher than that represented on the historic cost basis." 25 The expert went on to compute the net current asset position as at 20 August 1999 in an amount of $2.56 million. This, according to the evidence before Austin J, was the case propounded by the Defendant. The fact that the Plaintiff challenged this position to the degree of drawing a conclusion that the company was insolvent whether or not the amount of the statutory demand was owing, does not alter the nature of the case propounded by the Defendant. That case, before Austin J and in this Court, was that the Defendant was solvent whether or not the debt was owing to the Plaintiff. 26 This raised an issue of construction of s459S(2). The Defendant contends that the phrase "material to proving that the company is solvent" means 'of significance in the Court's determination of solvency'. The Plaintiff contends that the phrase refers, at least in part, to the company's (Defendant's) case in relation to solvency. On this basis, if a company does not contend that the disputed debt is "material" to proving its solvency, the Court cannot be satisfied within s459S(2). I do not understand the Plaintiff to submit that a company's contention is in any way determinative. The word "material" introduces an objective element. However, the absence of a relevant contention on the part of the company is determinative. 27 As can be seen his Honour referred to the decision of Master Sanderson in Zan Holdings Pty Ltd v Bay View Holdings Pty Ltd. This was a case in which an application under s459S was heard together with the application to wind up the company. In the course of his reasoning Master Sanderson said at 1241: "In my view it is necessary for a corporation to show that the debt upon which the statutory demand is based is the difference between actual solvency and insolvency before leave under subsection (1) can be granted. In effect, if by ignoring the debt upon which the statutory demand is based, a company might be found to be solvent then, and only then, the existence of a bona fide dispute would be a relevant consideration and a discretion … would exist. In other circumstances s459S would have no application. The end result is that the section operates as a safety valve. In circumstances where existence of the debt on which the statutory demand is based is pivotal to a decision on solvency, than the existence of the debt is a relevant consideration. What the section seems designed to avoid is companies against which an application for winding up based on a statutory demand is pending, challenging the standing of the applicant late in the day." 28 On appeal to the Full Court of the Supreme Court of Western Australia the appeal was dismissed on the basis of the first ground of appeal: the Full Court held that the appellant had, as the Master found, completely failed to discharge the onus cast upon it of establishing its solvency. This finding disposed of the principal application. Accordingly the second ground of appeal, whether or not the Master erred in refusing to grant leave under s459S, did not arise. Nevertheless, the Full Court did make observations about the proper construction of the section. (Bayview Holdings Pty Ltd (in Liq) v Zan Holdings Pty Ltd (Supreme Court of Western Australia, Full Court, 19 October 1998, unreported)). 29 Steytler J, with whom Ipp and Wallwork JJ agreed, said at p5: "The learned Master said in effect that, merely because the appellant asserted that it was solvent regardless of whether or not the disputed debt was taken into account, it followed that the existence or otherwise of the debt was not determinative of its solvency and therefore material to proving that it was solvent. That approach seems to me, with due respect to the learned Master, to have been wrong. The materiality or otherwise of the disputed debt to the appellant's solvency was required to be assessed having regard for the available evidence as a whole. There will often be the prospect that a company's assertions as to its financial standing will not be made out when the whole of the available evidence is considered (as proved to be the case here). If that prospect is not evaluated at the time of the hearing of the application the court would be left to decide the application on the strength, only, of the applicant's own assertion. That could not have been the intention of the legislature. The court is required by s459S to be satisfied that the ground sought to be raised is material to proving that the company is solvent, not that it is material on the strength of the applicant's contentions only. Moreover the test, under s459S(2), is that of whether or not the ground sought to be raised in opposition to the application is "material" to proving that the company is solvent, not that of whether or not it is determinative of the company's solvency. It is not only determinative evidence which is material to proof of solvency. It will often be enough, for the purposes of an application under s459S, to show that the ground sought to be raised might turn out to be determinative of the applicant company's solvency once all of the evidence has been heard, depending upon what evidence is accepted by the trier of fact." 30 Although it is important in the administration of the Corporations Law that decisions in one jurisdiction should be followed in other jurisdictions, the observations of the Full Court as set out above, are expressly obiter. 31 In the present case Austin J did not express the reservations about the reasoning of Master Sanderson in Zan Holdings Pty Ltd v Bay View Holdings Pty Ltd that he had earlier expressed in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd supra at 480-481, where after setting out part of the above extract from Master Sanderson his Honour said at 480-481: '"With respect, those observations seem to set the materiality threshold too high. The court considers the materiality question before deciding whether to grant leave to the company to dispute the debt. It has not at that stage, reached a conclusion about the company's overall solvency, and may not have heard all the relevant evidence. It is not in a position to decide, at that stage, whether the debt in question is the difference between solvency and insolvency. Further, Master Sanderson's formulation tends to substitute 'decisive' for 'material' in subsection (2). In other contexts, 'material' is taken to refer to a likelihood or significant propensity to affect an outcome, or even a mere possibility of doing so: see Fords Principles of Corporations Law (loose leaf) par 23.371 and cases there cited." 32 His Honour was there referring to authorities relating to "material information" for purposes of a Part A Statement. The concept of what is "material" will take colour from its context. On the view I take, it is not necessary to consider the concept of 'materiality' in the context of s459S(2) in the present proceedings. 33 Master Sanderson has subsequently had occasion to acknowledge the reasoning of the Full Court on appeal in Bayview Holdings Pty Ltd v Zan Holdings Pty Ltd and of Austin J in Chief Commissioner of Stamp Duties v Paliflex in BHP Steel (JLA) Pty Ltd v Eagle Steel Holdings Pty Ltd [1999] WASC 187 esp at pars [4] - [9]). 34 It does not appear to me that Austin J in the present case applied the reasoning of Master Sanderson in Zan v Bay View, which he had expressly criticised in Paliflex. Rather, his Honour referred to that case by way of factual analogy. 35 Of particular significance for the disposition of the present proceedings, is whether the Defendant's contention as to the construction of s459S is correct. If the mandatory condition in s459S(2) is directed in part to the company's case, rather than to the court's decision-making process, then this Court would not interfere with the decision of Austin J. The Defendant has maintained throughout, including in this Court, that it is solvent whether or not it owes the debt claimed by the Plaintiff. 36 The Defendant's contentions are supported by the obiter remarks of the Full Court in Bayview Holdings Pty Ltd v Zan Holdings Pty Ltd. With respect, I have come to the conclusion that the Full Court's reasoning should not be followed. In my opinion, although both constructions are open, the construction which focuses on the Defendant's case better serves the purposes of the legislative scheme. The alternative construction has the potential to undermine the achievement of those purposes. 37 The basic authority on s459S is David Grant & Co Pty Ltd (Receiver appointed) v Westpac Banking Corporation (1994-1995) 184 CLR 265. In the course of delivering his reasons, with which all the members of the Court agreed, Gummow J said at 270: "The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts, unless they are raised promptly." 38 Justice Gummow also made reference to some observations of Sheller JA in Re J & E Holdings Pty Ltd (1995) 36 NSWLR 541 at 548 and said at 279: "Sheller JA also referred to various examples where it might be thought that, upon the construction he preferred, which I also have accepted, Pt 5.4 might operate harshly. In particular, reference was made to the drastic commercial consequences which may follow the issue of process for winding up and to the inability of a company, which for good reason had been late in filing or serving an application to set aside a statutory demand, to prevent the issue of that winding up process. The damage to the commercial reputation of the company in the meantime might not be answered by the eventual success of the company in defeating the application to wind it up as insolvent. Further, default clauses in securities given by the company may have been so drawn as not to take full account of the new statutory scheme, with the consequence that floating charges may have crystallised and the whole of the principal and interest become payable. 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." 39 In David Grant Gummow J referred to the Explanatory Memorandum for the Corporate Law Reform Bill 1992, which introduced the new scheme. The Explanatory Memorandum included the following: "685 The Division will implement the Harmer Report's recommendation in connection with the setting aside of statutory demands. The Harmer Report considered that the existing, largely unregulated, procedure in relation to notices of demand too often produces disputes about the debt at the hearing of a winding up application. The Report further noted that companies presently often need to bring injunction proceedings where a debt claimed in this demand is disputed. The Report took the view that the legislation should specifically provide for the determination of disputed debt issues and other disputes in respect of a statutory demand. … 688 The provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands, and to do so on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies. In particular it is intended to remove the present difficulties which are experienced where difficulties in estimating the extent of a debt may lead to an invalidating of the statutory demand on the basis of a minor overstatement of the amount due … 689 This proposed Division, together with proposed Division 4, also provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed) at an early stage, rather than after winding up proceedings are commenced." 40 Furthermore, with respect to s459S the Explanatory Memorandum said: "717 The rules in this section will penalise debtor companies who do not give early notice of all the issues they have with the statutory demand, since needless delay and expense will occur if those issues are raised only at the winding up hearing." 41 The paragraph reinforces what Gummow J said in David Grant with respect to the scheme "operating harshly". 42 Subsection 459S(1) directs attention to facts and matters upon which the company wishes, if granted leave, to oppose an application to wind it up. Subsection (2) imposes a mandatory condition that the Court must be satisfied that the ground which the company wishes to use in this way is "material to proving that the company is solvent". 43 The words are not "material to solvency" or "material to finding solvency" but "material to proving" solvency. The use of the word "proving", a present participle in the active voice, indicates that the test is to be applied to a process then under way, or in contemplation, before the Court. Subsection 459S(1) makes it clear that that process of "proving" is being conducted by the company. 44 The statutory context is as follows:

(i) A "creditor" may apply to the Court for a company to be wound up in insolvency (s459P(1)).

(ii) Upon receipt of such an application the Court is empowered to order that "an insolvent company be wound up in insolvency" (s459A).

(iii) A company is insolvent if it is not able "to pay all (its) debts, as and when they become due and payable" (s95A).

(iv) Where, as here, the company has failed to comply with a statutory demand, the Court "must presume that the company is insolvent" (s459C(2)).

(v) The presumption referred to in (iv) "operates except so far as the contrary is proved for the purposes of the application" (s459C(3)), relevantly, the application under s459P for a company to be wound up in insolvency (s459C(1)). 45 The phrase which falls for consideration in the present case from s459S(2) - "the ground is material to proving that the company is solvent" - relates back to the process envisaged in s459C(3) - "except so far as the contrary is proved". 46 The purpose of the longstanding statutory demand procedure is to minimise the transaction costs which the law imposes on creditors seeking to enforce debts. The threat of winding up is often effective to ensure that a recalcitrant debtor does not seek to exploit the delays and costs that legal disputation may impose on commercial transactions. That threat is rendered ineffective to the degree to which such delays and costs are permitted to intrude into the statutory procedure itself. 47 The 1992 reforms which introduced the new Pt 5.4 were designed to minimise the delay and attendant legal costs which were a common feature of the battle of tactics in insolvency practice under the pre-existing scheme. 48 Furthermore, the Corporate Law Reform Act of 1992 (Cth) which inserted the new Pt 5.4 into the Corporations Law, also inserted the new Pt 5.7B which, inter alia, reformed the law with respect to insolvent trading. The new Part made new, and in many respects more stringent, provision for civil and criminal liability in the case of directors who permit a company to incur a further debt while insolvent. It also imposed liability on a holding company which fails to prevent insolvent trading by subsidiaries. A new system was established for voidable transactions. The legislative purpose to prevent, as soon as possible, an insolvent company incurring debts, is clear. 49 There are many ways in which an obligation to pay an amount of money can be contested in legal proceedings. There are ways in which an amount paid notwithstanding a denial of an obligation to do so, can be recovered. The practical effect of the operation of Pt 5.4 may very well be that companies will be obliged to actually make payments in circumstances in which they deny the obligation to do so. The fact that one party in a commercial context, rather than another, thereby receives the commercial and legal advantages of being in possession of a sum of money which is in dispute, raises no issue of principle and causes no injustice of a necessarily irremediable character to the party which is not in possession of the funds, even if it once were. 50 The position may be otherwise if the necessity to make the payment causes an otherwise solvent company to be subjected to the costs and disadvantages of a process of winding up. There is a public interest in avoiding that consequence. On the other hand, if the company is not solvent, because the disputed debt is indeed owing, there is a public interest in commencing the processes of the winding up sooner rather than later. These are offsetting public interests. The legislature has adopted a particular scheme which causes the balance to be drawn in a specific way. The circumstance that commercial injustices may, on some occasions, be caused to the debtor company by the operation of that scheme, may be offset by the commercial injustices that the continued operation of an insolvent company may cause to existing and, if permitted, increased or future creditors of such a company. 51 The 1992 reforms were intended to minimise the opportunity for delay by ensuring that disputes as to debts are determined at an early stage and do not delay or prolong the hearing of the issue of solvency. The strict requirements of s459G are subject only to s459S, which Hayne J has called the "only safety net". (Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 at 300-301). However, the scheme did not confer on the Court a general discretion. A mandatory precondition was introduced in s459S(2). The purpose of the legislative scheme is best served by giving that subsection a strict construction. 52 The Court should be slow to adopt a construction that permits the kind of spectacle to which the Court has been subjected on this occasion, in which each party seeks to rely, for tactical advantage, on the expert evidence adduced by the other party, being evidence which each intends to vigorously contest in the principal proceedings and which, in the case of the Plaintiff with respect to the report of the Defendant's expert, was only admitted into evidence over the Plaintiff's objection. 53 By the time an application under s459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s459S(2) directs attention, in part, to what it is that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the Court cannot be "satisfied" of the mandatory precondition in s459S(2). An objective element is introduced by the word "material" but that can only be determined after identifying the company's contentions. 54 If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it "proving" its solvency, cannot be satisfied. 55 The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself. 56 It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be "satisfied" in the sense required by s459S(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is "material", let alone whether leave should be granted under s459S(1). On the submissions made to this Court, these issues do not arise. The appeal should be dismissed.

The Appeal from Hodgson CJ in Eq 57 The matter before Hodgson CJ in Eq was the Plaintiff's Notice of Motion for an order seeking expedition or, alternatively, if the proceedings may not have resulted in a final determination prior to 2 March 2000, an extension under s459R for a further period to 2 August 2000. 58 His Honour said: "What has troubled me about the plaintiff Switz's application for an extension of time is that it appears, from the material before me, that at the hearing at which the only issue will be whether the defendant Glowbind establishes that it was solvent at the relevant time, the plaintiff Switz now proposes to rely on evidence the apparently clear effect of which is that Glowbind is insolvent if the debt is owing but solvent if it is not owing. It seems to me it would be most unsatisfactory if a Defendant such as Glowbind is shut out of disputing the debt on the basis that this is not material to solvency, and yet at the final hearing was found to be insolvent solely because of the existence of the debt. Yet that is the position that may well emerge if the Plaintiff is now unconditionally given the extension of time that it seeks."

59 His Honour identified this as an injustice and proposed to extend time only on a condition which would prevent that injustice. If this be an injustice, then it is inherent in the legislative scheme that that is precisely what may occur. This may, in particular circumstances, constitute the kind of harsh operation to which Gummow J expressly referred in David Grant. 60 The condition his Honour imposed on the extension of time under s459R of the period for determining the Plaintiff's application for winding up the Defendant was that the Plaintiff consent to leave being granted under s459S for the Defendant to rely on matters disputing the debt or, alternatively, that the final hearing on the issue of solvency is determined on the assumption that the debt is not owing. 61 There is a difficulty with the first alternative in the condition his Honour imposed. Leave under s459S(1) cannot be granted on the basis of consent. It may be that, in the ordinary course, the Court will exercise its discretion under s459S(1) where the parties agree. However, s459S(2) is a mandatory precondition which cannot be satisfied by consent. On the construction of s459S(2) which I have adopted above, that subsection is not satisfied. On that basis the condition imposed by his Honour cannot stand. 62

In the course of his reasons, his Honour said: "However, the circumstances of this case do starkly raise the question whether it is appropriate to deal with questions of leave under s459S as an interlocutory matter rather than as part of the hearing of the case. It seems to me that what has happened in this case suggests strongly that it really should be treated as part of the final determination, and that a separate hearing on the question of leave should occur only if a ground is made out for a hearing of a separate issue under Pt 31 of the Rules." 63 In my opinion, such an approach would contradict the legislative policy which underlines Pt 5.4 of the Corporations Law to which I have referred above. 64 The situation before the reforms that took effect in 1993 was much as Hodgson CJ in Eq envisaged in the above passage. Disputes about debts tended to arise at the final hearing of an application to wind up a company in the course of submissions by the company asserting that the applicant lacked standing or was abusing the process of the Court by seeking to wind up the company on the basis of a disputed debt. This was the very situation which the reforms set out to change. 65 The new scheme seeks to avoid disputation at the final hearing of the application for winding up about the genuineness of the debts which were the subject of the applicant's statutory demands. A debtor who disputes the claim made by the creditor in a statutory demand is ordinarily expected to invoke s459G. The "safety net" in s459S is ordinarily expected to be determined before the hearing of the s459P application. If applications under s459S are, as a general rule, heard with the winding up summons, this would establish a path permitting the delay of, and prolonging the hearing of, such applications. The new scheme sought to change pre-existing practices and ensure that issues of this character would be determined in the main at an early time and on a strict timetable. The objectives of the scheme, including the strict time limit of s459G(2) would be compromised if s459S applications were routinely deferred to the time of the hearing of the application. 66 Hodgson CJ in Eq exercised the power under s459R(4) to impose conditions on an order extending the period within which an application must be determined in such a manner as to impinge upon the subject matter of s459S. The alternatives between which the Plaintiff is obliged to elect include, specifically, a condition for it to consent to leave being granted under s459S or, in the absence of such consent, a condition that the final hearing is conducted on a particular basis which, in its practical operation, has the effect, not only that the Defendant has proved that there is a dispute about the debt but, indeed, that it has successfully contended that there was no debt. 67 It is neither necessary nor desirable to determine in any general way the permissible scope of conditions that may be imposed under s459R(4). However, in my opinion, a condition of the character which Hodgson CJ in Eq imposed in the present case is not permissible. The express provision in s459S, and in particularly in s459S(2), is intended to be a comprehensive statement of the circumstances in which leave to oppose a winding up application could occur. 68 Subsection 459S(2) strongly suggests that the procedure under s459S is intended to operate to the exclusion of other provisions which employ general words and which may impinge upon the subject matter of s459S. Such general words, including those in s459R, should be read down by application of the principle expressum facit cessare tacitum. This principle has been variously expressed. 69 In R v Wallis (1949) 78 CLR 529 at 550 Dixon J said: "… an enactment in affirmative words appointing a course to be followed usually may be understood as importing a negative, namely, that the same matter is not to be done according to some other course. This applies especially when the power or duty affirmatively conferred or imposed is qualified by some condition, limitation or direction." 70 This passage has frequently been applied. (See eg ABB Power Plans Limited v Electricity Commission (NSW) (1995) 35 NSWLR 596 at 599, 601; PMT & Partners (in Liq) v Australian National Parks & Wildlife Service (1995) 184 CLR 301 at 322). 71 In my opinion, s459S(2) constitutes a "condition, limitation or direction" in this sense. 72 To similar effect are the observations in Anthony Hordern & Sons Ltd v Amalgamated Clothing & Allied Trades Union of Australia (1931-32) 47 CLR 1 at 7, where Gavan Duffy CJ and Dixon J said: "When the legislature explicitly gives a power by a particular provision which prescribes the mode in which it shall be exercised and the conditions and restrictions which must be observed, it excludes the operation of general expressions in the same instrument which may otherwise have been relied upon for the same power." (See also at 20-21 per McTiernan J). 73 This passage has also been frequently applied: see eg John v Federal Commissioner of Taxation (1989) 166 CLR 417 at 434; Saraswati v R (1991) 172 CLR 1 at 23-24; Leon Fink Holdings Pty Ltd v Australian Film Commission (1979) 141 CLR 672 at 678; David Grant supra at 276. See also Australian Capital Television Pty Ltd v The Commonwealth (1992) 177 CLR 106 at 213. 74 In my opinion the express terminology of s459S(2) imposes a 'condition and restriction which must be observed' on the operation of s459S which "excludes the operation of general expressions in …", relevantly, s459R(4). 75 In my opinion, the power to impose conditions exercised by Hodgson CJ in Eq did not permit the imposition of conditions which had the effect of overturning the decision of Austin J. 76 In his judgment of 24 December 1999, Austin J extended time under s459R until 2 March 2000. He stood the matter into the Corporations List on 31 January 2000, expecting that the matter could be determined during the month of February. The matter was stood over until 25 February, in large part, in order to enable the Defendant to put on additional evidence on the issue of solvency. There was no reasonable basis on which a further extension on 25 February could have been denied. 77 Hodgson CJ in Eq was correct to extend time. His Honour erred in imposing the condition. The orders I propose are:

Proceedings CA 40117 of 2000 1 Extend time to apply and grant leave to appeal. 2 Appeal dismissed with costs.

Proceedings CA 40115 of 2000 1 Grant leave to appeal. 2 Appeal allowed with costs. 3 Vary the order of Hodgson CJ in Eq by deleting the condition. 78 HANDLEY JA: I agree with the Chief Justice. 79 GILES JA: I agree with the Chief Justice.

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.

Corporations Law Corporate Law Reform Act 1992(Cth)

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (43 paragraphs)

Legislation Cited (1)

Cases Cited (9)

Cited By (20)