Topcide Pty Ltd v Deputy Dog Pty Ltd [2008] NSWSC 1323 | Case summary

1 The plaintiff ("Topcide") has instituted proceedings in which it seeks an order for the winding up in insolvency of the defendant ("Deputy Dog"). In doing so, Topcide relies on non-compliance by Deputy Dog with a statutory demand dated 14 July 2008. The statutory demand is based on a District Court judgment debt in the sum of $155,146.90. There has been no application under s 459G of the Corporations Act 2001 (Cth) for an order that the statutory demand be set aside. 2 By its interlocutory process heard today, however, Deputy Dog seeks the leave of the court under s 459S to oppose the winding up application on the ground that the debt the subject of the statutory demand is not due and payable and there is a bona fides dispute regarding the existence of it. More precisely, I think, it is the intention of Deputy Dog to argue on the hearing of the winding up application that the judgment is liable to be set aside and that that constitutes a ground under s 459J(1)(b) for setting aside the statutory demand. An application for an order of the District Court setting aside the judgment is pending. 3 At all events the intention is clear, namely, to seek to resist a winding up order on the basis that there is no liability in respect of the sum of $155,146.90. 4 The pleading in the District Court proceedings in which the judgment was obtained was to the effect that Deputy Dog was a guarantor of indebtedness in respect of a loan made by Topcide to a company called Holstein. The loan is evidenced by a document of 21 March 2007 in which the terms as between Topcide as lender and Holstein as borrower are stated and then, under a section dealing with security, there is reference to a charge over 750,000 units held by Deputy Dog in a particular trust having an estimated value of $187,000. 5 It is said that Deputy Dog was at all material times the trustee of a family trust and that the 750,000 units referred to in the document of 21 March 2007 were part of the property held on trust. 6 Evidence on the trustee status of Deputy Dog is not altogether satisfactory but it is, I think, likely that that is the way matters will appear at a final hearing. 7 Upon the present application under s 459S, the approach to be taken is that stated by Austin J at paragraph [49] of his judgment in Chief Commissioner of Stamp Duties v Palliflex Pty Ltd [1999] NSWSC 15: "In my opinion the exercise of the discretion to grant leave under s.459S(1) involves three considerations, namely: (i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand; (ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and (iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent." 8 The first matter to which Austin J refers is the defendant's basis for disputing the debt that was the subject of the demand. In that respect I have already referred to the pending application for an order setting aside the District Court judgment. 9 It is relevant, in that connection, to note that it is not clear from the document of 21 March 2007 that Deputy Dog was in reality promising to answer for the debt or default of Holstein as distinct from merely making its assets available as security on what might be termed a non recourse basis. If a promise to answer for the debt or default of Holstein was involved, it is not clear what benefit accrued to Deputy Dog (or, if it was a trustee, the trust of which Deputy Dog was trustee). Nor is it clear that the making available of Deputy Dog's property as security entailed any such benefit. 10 These are the matters which in this case call for consideration under the first heading referred to by Austin J. 11 In relation to the second matter referred to by Austin J, and the reasons why there was no application for an order setting aside the statutory demand, it is explained in the affidavit of Mr Dangar, who is the sole director, that he was at the relevant time ill and unable to give proper attention to business affairs. 12 The third matter referred to by Austin J is an investigation whether the dispute about the debt is material to proving that the company is insolvent. Section 459S(2) says that the court is not to grant leave under s 459S(1) unless it is satisfied that the ground is material to proving that the company is solvent. 13 The relevant concept of materiality is that referred to by White J in Radiance (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216: "The question is not whether the debt demanded by Radiancy (Sales) is determinative of Bimat's solvency. The question is whether it is material to proving the company is solvent. If the debt is owed, the company is undoubtedly insolvent. If it is not owed, the company may be solvent if Mr Colosimo's evidence as to the payment of creditors is accepted. Accordingly, s 459S(2) is satisfied in relation to the grounds that Radiancy (Sales) is not a creditor, or that the alleged debt is genuinely disputed." 14 There has been some evidence given about the financial position of Deputy Dog. It appears to have net assets of over $5 million. There is, as I have said, a question whether these are trust assets or assets that the company owns free of any trust and I have said that it may well turn out on a final hearing that they are trust property. 15 If there is no trust, the position is likely to be that Deputy Dog is solvent whether or not it owes the debt of $155,146.90. In that circumstance, therefore, the existence of the debt is not material to proving that the company is solvent. Proof of solvency is likely to be achieved whether the debt exists or not. 16 If there is a trust of which Deputy Dog is trustee, the same position will prevail, that is, the company is likely to be found to be solvent whether or not it owes the debt - provided that its right of indemnity out of the trust assets exists. 17 If there is a trust and Deputy Dog owes the debt but it is not entitled to indemnity out of the trust assets, the company will be found not to be solvent since it will have no assets with which to meet the debt and, on this assumption, the trust assets will be unavailable for that purpose. 18 This last version of the facts as they may ultimately unfold is one under which the existence of the debt will make the difference between a finding of solvency and a finding of insolvency. I have referred to the possibility that, if there is a trust, it may be found that there is no right of indemnity out of the trust assets for any debt because of lack of apparent benefit to the trust in the undertaking of the obligation which resulted in the judgment debt. That possibility appears real. 19 Having regard to the concept of materiality to which I have referred and which can be traced in authoritative terms to the decision of the Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 33 ACSR 723 and was discussed in a useful way in the recent judgment of Perram J in Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd [2008] FCA 1777, I am satisfied that the defendant, Deputy Dog, has shown that the question of the existence of the debt is material to proving that the company is insolvent. I say this because the facts as they may ultimately be found may well be such that the existence of the debt will make the difference between a finding of solvency and a finding of insolvency. 20 For that reason, and having regard to the conclusions I have expressed with respect to the first and second of the matters referred to by Austin J, I will grant the leave sought. 21 Pursuant to s 459S of the Corporations Act, leave is granted to the defendant to oppose the winding up application on the ground that there is a genuine dispute between the defendant and the plaintiff about the existence of the debt to which the statutory demand dated 14 July 2008 relates. 22 The plaintiff will pay the defendant's costs of the interlocutory process. **********

Topcide Pty Ltd v Deputy Dog Pty Ltd

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