Williams v Calivil Park Holstein Pty Ltd [2009] NSWSC 389 | Case summary

1824/2009 Williams v Calivil Park Holstein Pty Ltd JUDGMENT 1 HIS HONOUR: These reasons deal with the defendant's application under section 459S of the Corporations Act 2001 for an order granting leave to argue the validity of the Statutory Demand. 2 The underlying relationship between the parties was a lease dated 1 October 2002 from the plaintiffs to the defendant of two dairying properties "Glengarry" and "Eureka" at Blighty near Deniliquin, New South Wales, originally for about three years to 20 September 2005. The defendant's obligations were guaranteed by its then directors, Mr Dennis Culton and Mrs Susan Culton. 3 In October 2005 the lease was extended, with variations set out in a written document, terminable on 60 days notice. The plaintiffs terminated the lease with effect on 31 August 2007. The defendant did not give up possession and the plaintiff commenced Common Law proceedings number 11467 of 2008 on 3 April 2008 claiming possession, arrears of rent, damages for mesne profits, moneys payable to the plaintiffs under various provisions of the lease, and a number of other claims. It was ordered that the question of possession be determined separately from questions about damages, and on 7 July 2008 the Common Law Division (Rothman J) made orders, to which the parties agreed, giving the plaintiffs judgment for possession, staying issue of the Writ for Possession, and imposing terms, which included requirements for the defendants to pay sums of money to the plaintiffs. 4 In the interim a Registrar had on 2 June 2008 made an order by consent that the defendant pay some charges relating to irrigation water. The terms relating to the stay of the Writ were not complied with, and the Writ was issued by leave on 2 September 2008 and enforced by the Sheriff's officers on 9 October 2008. The Sheriff's officers escorted Mr and Mrs Culton senior off the property and delivered occupation to the plaintiffs. 5 Mr Dennis Culton and Mrs Susan Culton were directors of the company from 2002 until they ceased to be directors on 7 June 2007, at or about the time they became bankrupt. Mr Jason Culton, their son, has been a director since 2001 and since 7 December 2007 he has been the only director. He was joined as a defendant in the Common Law proceedings as an occupant of the property, and his occupancy too was determined by the Sheriff. 6 The plaintiffs sought enforcement of the Registrar's order and the terms imposed by Rothman J requiring payment of money and, after an adjournment, they obtained orders, again by Rothman J on 4 December 2008, for payment of sums of money. These orders related to three different sums and interest, but their effect was that the defendant was ordered to pay the plaintiffs $102,280.18 on 18 December 2008, and to pay interest at $26.66 per day from 18 December 2008 until payment. None of this has ever been paid. 7 The plaintiffs made a Statutory Demand for payment, and the Demand was posted on 13 January 2009 by the plaintiffs' solicitor in Finley, New South Wales, to the defendant's registered office, the office of accountants in Cobram, Victoria. I infer that it arrived there about two days later, that is about 15 January 2009. The Demand, in the usual form, clearly specified the steps required and the time available for compliance and warned of the consequences of failure to respond. The defendant made no payment in response to the demand. 8 The plaintiffs limited their demand to the money payable under the Court's order of 4 December 2008. They have other claims against the defendant, and those claims are also pending in the same Common Law Division proceedings and have not been adjudicated. The defendant has a cross claim, which it commenced on 19 February 2009 after having, with difficulty, obtained leave to do so out of time. The cross claim too has not been adjudicated. 9 The order of 4 December 2008 clearly required payment to be made on 18 December 2008. By that order the Court finally disposed of the claims with which the order deals. There was no contemplation that there might be further consideration of those claims, and there is no provision for staying enforcement after 18 December 2008. That adjudication was completed finally and there is no prospect of those claims being re-opened by the Court. 10 The Statutory Demand in some way came into the hands of Mr Jason Culton, who lives at Blighty, Deniliquin. He gave no evidence explaining what he did during that period of 21 days after the Demand was served. I infer that he did not consult or instruct the lawyers who were then acting for the defendant and himself in the Common Law Division proceedings, and did not consult the accountants whose office was the site of the company's registered office. 11 His first action of which evidence speaks was that he took the Statutory Demand to Mr Neil Fleming at his house at Cobram on 3 February 2009. Mr Fleming gives his occupation as "a senior retired business and finance consultant." He says he ceased operating his business full-time in 2008. He has prepared some accountancy documents for the defendant. He worked with the directors of the defendant in 2006 on preparing cash flows, negotiating with various creditors and negotiating with various lenders. 12 On 3 February 2009 Mr Fleming was unable to arrange for the defendant's solicitor, Mr S Lowe, to attend to the Statutory Demand. Mr Fleming prepared and Mr Culton signed an affidavit, a copy of which is exhibit A in this application. 13 In the affidavit Mr Culton said that he was a director, that to the best of his knowledge the company did not owe the amount in the Statutory Demand, and that there were currently proceedings in the Supreme Court. He asserted that the defendant was owed in excess of $150,000 by the plaintiffs and "I ask that the Demand be set aside pending completion of the Supreme Court proceedings." The document was (at least according to its terms) an affidavit in proceedings in the Supreme Court. 14 I admitted a copy of the affidavit in evidence on terms which exclude its use to prove the facts asserted in it, its relevance being that it showed the defendant's response to the Statutory Demand. Mr Fleming's evidence is that on 3 February 2009 he sent by way of facsimile a copy of the affidavit to the Supreme Court, a copy of the affidavit to Mr Lumley solicitor, posted an original affidavit by express post to Mr Lumley's firm, and mailed another original signed affidavit to the Registrar of the Supreme Court by express post. 15 Mr Lumley, the plaintiff's solicitor in Finley, gave evidence by affidavit of 9 April 2009 that no response to the Statutory Demand had been received by him or by the plaintiffs. He denied receiving a facsimile message or an original affidavit such as Mr Fleming referred to. 16 At the hearing before me on 29 April 2009 counsel for the plaintiff actually had in her possession an original signed affidavit; no evidence explains this fact. Plainly the faxed copy and the affidavit which Mr Fleming said were sent to the Registrar were not treated as an application to the Court. They should not have been, as there was no Originating Process, payment of the filing fee, or any associated step. 17 No evidence suggests that the defendant instructed solicitors or anyone else to take up the application and do anything further with it after what Mr Fleming did on 3 February 2009. Sending the affidavit off was no more than an ineffective gesture towards making an application to the Court relating to the Statutory Demand. 18 As his evidence, which was not challenged, states, Mr Lumley received no response. Mr Lumley filed Originating Process on 6 March 2009 seeking the winding up on the ground of insolvency under section 459P. He also filed supporting affidavits showing the ground of the claim in the judgment of 4 December 2008, but not dealing with the whole controversy. He served the process and related affidavits on the defendant by posting them by pre-paid post on 13 March 2009, again posting from Finley to the registered office at Cobram. I infer that the documents arrived at the registered office in Cobram on or about 16 March. The Originating Process was returnable before Registrar Musgrave on 16 April 2009. 19 The parties appeared; the defendant was represented by a solicitor and produced a document entitled "Amended Notice of Appearance and Opposition" which does not bear a file stamp but was treated as having been filed on or as of 6 April 2009. (See order 3 of orders of the Court of 21 April 2009). 20 The document said that the defendant intended to appear, gave the address of solicitors in Sydney and stated grounds of opposition to the effect that the defendant was solvent, that the defendant sought leave to dispute that claim in the Statutory Demand and to rely on a set-off, that there were defects in the Statutory Demand, and that the debt was genuinely disputed and there was an offsetting claim subject to the cross-claim in the Common Law proceedings. 21 The defendant did not comply with the time for serving evidence directed by the Registrar. The proceedings came before Barrett J on 21 April when his Honour made procedural directions including leave to the defendant to file Interlocutory Process and an appointment for hearing of the Interlocutory Process on 29 April. That Interlocutory Process, with which these reasons deal, was filed on 20 April 2009. It seeks leave under section 459S to argue the validity of the Statutory Demand and offsetting claim. The Interlocutory Process refers to supporting affidavits, but none were filed with it or before it. As the terms of section 459S show, the defendant must seek the Court's leave to oppose the winding up application on a ground that the defendant could have relied on for the purpose of an application for the Statutory Demand to be set aside. When I asked counsel for the defendant to state what that ground was, he said to this effect: "The debt claimed in the Statutory Demand is not owing by reason of an offsetting claim. The defendant relies on discretionary considerations which are not available without leave under section 459S." 22 The grounds on which the Court can act, and hence on which the company could rely if it had applied for the Statutory Demand to be set aside, appear from section 459H (1). 23 There is in my opinion no possible room for there to be a genuine dispute about the existence or amount of the debt to which the Demand relates, because those matters are established by the terms of the Court's order of 4 December 2008. Of the grounds which could have been available, the only ground to which leave under section 459S could relate is "(b) that the company has an offsetting claim". 24 No suggestion that there was a formal defect in the Statutory Demand has been debated in the application before me and in my understanding it could not have been. In my understanding the reference to an offsetting claim invokes the procedural law relating to set-off as a plea or defence against the claim on which a Statutory Demand is founded, that is a plea or defence in hypothetical litigation in which that claim was put forward. 25 The reference to an offsetting claim is not, in my opinion, a completely general reference to any counter-claim which the recipient of the notice might have against the giver of the notice. The reference is not to another claim or to a countervailing claim, and the choice of the word "offsetting" limits the concept of an offsetting claim to a claim which could be raised by way of set-off. 26 Set-off is now regulated by section 21 of the Civil Procedure Act 2005, the terms of which do not extend to a claim which has not been adjudicated which a judgment debtor has against a judgment creditor who has obtained a judgment or order for payment of money. The subjects with which section 21 deals have no application to a judgment debt on which the Court has adjudicated. There is no procedural opportunity to raise a cross claim or set-off off against the judgment debt. 27 In my understanding, in Alam v Quest Enterprises [2006] NSWSC 752 White J acted on this view. His honour said at page 39: "It is unarguable that Quest Enterprises is liable to the plaintiffs for the judgment debt. Even if it is assumed that its cross-claim against the plaintiffs is well-founded, its cross-claim would not operate as a set-off against the judgment debt." 28 Counsel contended that the defendant's position is "a set-off situation" because of what he contended was a close relationship between the claims on which the judgment was based and the cross-claim which the defendant has now brought in the Common Law proceedings. In my opinion there is not in fact a very close relationship amongst the claims; they all relate to legal rights arising out of the defendant's occupation of the two leased properties, but the claims on which the judgment was based arise out of contractual obligations in the lease and obligations imposed on the defendant by interlocutory arrangements made while the possession proceedings were pending so as to maintain the position before disposition: whereas the cross claims are based or principally based on an alleged contract and misleading or deceptive conduct which occurred in relation to proposed repair or replacement on the water bore on the land and the provision of pumping capacity at a stated rate. 29 There is, in my opinion, no close relation between these claims and those of the plaintiff's claims on which the order was made; nor (if it were material) the plaintiff's claims which remain for adjudication in the Common Law Division, which relate to unpaid rent and mesne profits for continuing occupation after termination of the leasehold entitlement to occupation. 30 I see no reason to doubt that it is appropriate to put these forward in a cross claim, but there is no such close relationship between the claim and cross-claim as is necessary for categorisation of the claim as not merely a cross-claim but also as a set-off. 31 The significance of a set-off as distinct from a counter-claim in winding up proceedings has been an established characteristic of legislation dealing with company liquidation for a long time. In this regard I was referred to passages in texts which reflect this: The Law of Set-off SR Derham 3rd ed 2003 at [1.02] and Meagher Gummow & Lehane Equity Doctrines and Remedies 4th ed (2002) at [37-075]. It could not be said that the judgment debt and cross-claim were so closely connected that it would be inequitable if the plaintiff were to be permitted to proceed with its claim, that is with enforcement of each judgment, without making allowance for the defendant's claim against it: see Roadshow Entertainment Pty Ltd v ACN 053006269 Pty Ltd (1997) 42 NSWLR 462 at 481-484. These passages show the close connection required if there is to be a set-off between these two claims. 32 Counsel referred me to D Galamos & Sons Pty Ltd v McIntyre (1974) 5 ACTR 10 (Woodward J) and to consideration at pages 15 and following of the case law on set-off. At one time set-off related to only debts or liquidated demands. 33 The subject has a remarkable legal history. Set-off originated in statutory provisions enacted in the time of Queen Anne and at first enabled a debtor to plead debts owed by the plaintiff as a defence to debt claims, whereas under the procedural law of the time before there were cross claims, debtors would have to bring altogether separate proceedings. At first it was Parliament's object to assist debtors to escape from the debtors' prison and join the army. 34 After the old Statutes were repealed, and after the law of New South Wales took several turns described in Ritchie's Uniform Civil Procedure at paragraph [21.5] page 2283, a statutory set-off again exists under section 21 of the Civil Procedure Act 2005, but it relates only to mutual debts and has no application in the present facts, where the defendant cross-claims damages at Common Law. 35 Equitable set-off, which did not have a statutory basis, seems to have developed from the recognition in Equity of assignments of debts and causes of action and the injustice of allowing an assignee to enforce a debt without facing some other claim which the debtor had against the assignor. When debts become assignable at law by Statute the right of set-off was made available, as it would have been for an equitable assignment. 36 Where insolvency legislation uses the concept of an offsetting claim the same approach is taken when testing the relationship between the claims as was taken for claims offset against assigned debts. It no longer appears to be the modern law that equitable set-off is limited to equitable claims. 37 A close relationship between the sources of the claims on each side is essential. In my opinion on the present facts there is not such a close relationship, as the claims upon which judgment was founded were claims arising out of covenants in the lease and orders made for the purpose of securing just interlocutory arrangements while the claim for possession was pending, whereas the cross-claim relates to what are alleged to be contracts and misleading and deceptive conduct relating to construction and capacity of works for handling bore water on the property, allegedly made orally in January 2007, and relating only to the last few months of the parties' leasehold relationship. 38 The relationship between the two claims could not, in my opinion, reasonably be thought to lead to a conclusion that it would be inequitable to allow one to be determined without determining the other. Indeed, I would be of the same view with respect to the claims which remain to be determined at Common Law and the cross-claim; they are no more than cross-claims. There is no close relationship or common source of the various claims. Whilst it is no doubt appropriate that there be a cross claim, there is no set-off. The judgment is of itself a new foundation and origin for the debt which it creates and the claims on which it was based no longer exist but are merged in it. 39 Counsel for the defendant made particular claims for assistance for his position in the decision of Romilly MR in Smith v Parkes (1852) 16 Beavan 115, 51 ER 720. That decision is difficult to follow because it was made in a procedural system in which equitable debts and legal debts were enforced in different Courts. In my understanding Parkes had a legal claim against Smith arising out of a bond given in settlement of disputes relating to the dissolution of their partnership, while Smith had claims against Parkes arising out of the partnership itself; that is to say, equitable claims not enforceable in a Court of Common Law. Litigation was pending in both Courts, by assignees representing Park's interest at Common Law and by Smith in the Court of Chancery. 40 Before the Chancery proceedings were decided Parkes' assignees obtained judgment at Common Law, but Lord Romilly MR held that Parkes was entitled to set-off the net position, and restrained enforcement of the Common Law judgment pending decision. No such difficulty could arise at the present time and Smith v Parkes is in no way an authority for any general proposition to the effect that there can be a set-off, or offsetting claim, against a judgment debt. 41 In my opinion the defendant's cross-claim cannot be an offsetting claim within the meaning of section 459H, and cannot be a ground upon which the Statutory Demand could have been set aside in an application made in due time. 42 The observations of Austin J in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 149 FLR 179, [1999] NSWSC 15 at [49] relate to the exercise of the Court's discretion under section 459S. This, of course, is not the whole field of matters to be considered on an application under section 459S: it is necessary that the Court be satisfied of the matters referred to in subsection (2). It can, however, be understood from the observations of Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 that this is not a demanding requirement. 43 Counsel for the plaintiffs accepted that if the defendant loses its challenge to the Statutory Demand, the defendant is insolvent. This concession was plainly correct on the evidence. There is, in my opinion, no room for doubt that the Court should be satisfied in terms of subsection (2); the ground put forward, whether the debt in that Statutory Demand is not owing by reason of an offsetting claim, is material to a determination of the question of solvency. It is no less material because it is my opinion that it could not succeed. However, there are discretionary considerations which I regard as an overwhelming. 44 Mr Fleming produced in evidence some accounting documents which he had prepared. Counsel reviewed decisions on the nature of accounting material required on which differing judicial views have been expressed. I do not regard it as necessary for me to review these decisions on the view I take of the facts. I do not regard Mr Fleming's documents as altogether satisfactory but this is not a basis on which I decide the proceedings against the defendant. They are the only significant material in evidence which tends to show the defendant's whole position. 45 One document Mr Fleming produced was a statement of the defendant's financial position as at 1 April 2009. This shows a very marked change in the company's affairs at that date when compared with its position as at 30 June 2000. There was a great reduction in current assets, an enormous reduction in property, plant and equipment and non-current assets, a very great reduction in total non-current liabilities, and the disappearance of non-current liabilities. I take it that these changes are associated with the termination of the dairying business in October 2008 when the defendant was ejected by the Sheriff. 46 In the Statement of Financial Position the net assets, and also the total equity as at 1 April 2009, are shown at $35,907 99, markedly different and markedly improved on the negative position as at 30 June 2008 when there was a deficit in equity of $982,828 61. (There is an anomaly in this figure; it may be negative $928,828 61.) 47 Mr Fleming also produced a Cash Flow Forecast which reflects an almost complete ending of business activities as at October 2008, after which there is very little activity. The Forecast shows collection for two months after that of money due from contracting; collection in June 2009 of $110,000 (which I was told related to an insurance claim for stolen cattle), other relatively minor transactions, and a payment to the Australian Taxation Office of $50,000. However, counsel told me that this was an error and the payment was in fact to be $100,000. With an adjustment for this, the cash flow forecast would produce a positive cash flow balance of $35,014, roughly, as it happens, the same as the net assets as at 1 April 2009 in Mr Fleming's statement. 48 However counsel told me and on behalf of the defendant admitted that there was also a liability for Goods and Services Tax of $83,000, with which Mr Fleming has not dealt, and that Trade Creditors are $352,000. Mr Fleming shows them as $145,549 78. It is not clear whether the amount of the judgment debt is in account, although I should assume regularity and suppose that it is. 49 If an adjustment is made for the projected payment to the Australian Taxation Office to be $100,000 and not $50,000, the positive equity in the Statement of Financial Position disappears. If an adjustment is made to bring into account the liability for GST and a further sum in excess of $200,000 trade creditors, the company's position is completely drowned in debt and is manifestly insolvent, no matter what happens in its dispute with the plaintiff. 50 I regard this as an overwhelming discretionary consideration adverse to making the order claimed. My view that there is no offsetting liability within the meaning of section 459H is also an independently overwhelmingly adverse discretionary consideration. 51 I further say that, in my view, the defendant's conduct of the application, and generally its conduct of the litigation at earlier stages is very adverse to its position. 52 The defendant has been schooled in winding-up proceedings, as the company search in evidence shows that in recent years it has been involved in three earlier winding up applications, the outcomes of which were no doubt favourable, but should have furnished valuable instruction on what is involved in such litigation, and on the necessity for prompt attention. 53 Further, the plaintiffs gave the defendant another Statutory Demand for another obligation with which it complied, although out of time, in September 2008. So that documents of this kind, and the attention they require, cannot have been unfamiliar. 54 Further, the defendant did not respond appropriately to service of the present Statutory Demand. It was not taken to Mr Fleming until close to the last day available for action; it was not appropriate to take it to Mr Fleming as legal advice was required; Mr Fleming did not respond appropriately, not surprisingly as he was not skilled in the conduct of legal business, and no application was made to the Court in time or out of time to set aside the Statutory Demand until more than one month after the winding up proceedings had been served. 55 The defendant's participation in advancement of its interests has been slow. It has presented the plaintiffs with difficulties and sources of doubt in the conduct of affairs, and has not been consistent with a wholehearted view that resistance to the plaintiff's claim was appropriate. 56 There was an earlier history of procedural defaults in the Common Law proceedings, a low point being that possession was yielded only when the Sheriff's Officer attended. 57 This unsatisfactory conduct of proceedings is adverse to the defendant's application, although compared with the other overwhelming considerations I have mentioned it can take no more than a small part in my decision. This is not, in my opinion, an occasion where the discretion under section 459S should be exercised in favour of the defendant. 58 Orders:

Williams v Calivil Park Holstein Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (15 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)

Cited By (2)