Workers Compensation Nominal Insurer v Lime Gourmet Pizza Bar

JUDGE: JACOBSON J DATE: 28 FEBRUARY 2014 PLACE: SYDNEY

Introduction 1 In an earlier judgment in this matter given on 10 February 2014 I dealt with a preliminary issue raised by the defendant (the company) in its application to set aside a winding up order made by a Registrar of the Court on 13 December 2013: Workers Compensation Nominal Insurer v Lime Gourmet Pizza Bar (Darby Street) Pty Ltd [2014] FCA 43 ("Lime Gourmet Pizza No 1"). 2 The substantial issue which I dealt with was the validity of an order made by the Registrar on 15 November 2013 under s 459R(2) of the Corporations Act 2001 (Cth) (the Act) extending the period within which the winding up application filed by the plaintiff was required to be determined. I decided that issue in favour of the plaintiff. 3 The remaining issues which arise for determination on the company's application were addressed in written submissions and oral argument on 21 February 2014. 4 The essential argument raised by the company is that the winding up order made on 13 December 2013 was not validly made because the 21 day period for compliance with the statutory demand prescribed by s 459F of the Act had not expired when the plaintiff's Originating Process was filed. Thus, it was submitted on behalf of the company that the statutory presumption of insolvency created by s 459C(2) of the Act was not enlivened and the winding up order was improperly made. 5 The plaintiff and the supporting creditor oppose the company's application. They rely upon a number of matters to which I will refer later. The critical point on which they rely to resist the company's application is that the company has not filed any evidence to support an assertion of solvency. Moreover, they submit that the evidence before the Registrar on 13 December 2013 when the winding up order was made sufficiently established a finding that the company was insolvent as a question of fact.

Background facts 6 The Originating Process was filed on 16 May 2013. The plaintiff applied under s 459P of the Act for an order under s 459A that the company be wound up in insolvency. 7 The plaintiff relied in its application on a failure by the company to comply with a statutory demand. It was therefore required by s 459Q of the Act to set out particulars of service of the demand and the failure to comply, and to attach a copy of the demand accompanied by an affidavit verifying the debt. 8 The particulars specified a statutory demand under s 459E which was served on 22 April 2013. The schedule to the attached statutory demand referred to two judgments entered in favour of the plaintiff against the company in the Local Court giving rise to a total debt of $7,405. The supporting affidavits were to the same effect. 9 On 28 June 2013 District Registrar Wall made an order granting leave to the plaintiff to file an amended Originating Process in the form filed in Court on that day. The Registrar also ordered that the amendment take effect from that day and that it be returnable before the Court on 17 July 2013. 10 The Amended Originating Process referred to in the Registrar's order contained an amendment to the particulars under s 459Q of the Act. The amendment stated that the creditor's statutory demand under s 459E of the Act was served on 30 April 2013, rather than 22 April 2013 as stated in the Originating Process to which I referred above. 11 It is apparent from the amendment to the particulars that since the statutory demand was now said to have been served on 30 April, the 21 day period prescribed by s 459F(2) had not expired when the Originating Process was filed on 16 May 2013. 12 No application was made by the company under s 459G of the Act to set aside the statutory demand. Accordingly, the 21 day period which gave rise to a presumption of insolvency under s 459C(2)(a) and s 459F(2) ran from 30 April 2013, being the date of service of the statutory demand. 13 The form of Amended Originating Process filed in Court on 28 June 2013 did not attach the statutory demand but that defect was addressed by filing a further document on 2 July 2013 which was apparently intended to give effect to the Registrar's order. The Amended Originating Process filed on 2 July 2013 contained the amended particulars under s 459Q and attached a copy of the statutory demand which was identical to the document referred to above. 14 The matter came before District Registrar Wall on 17 July 2013. The Registrar gave leave to Mr Moshos, a director of the company, to represent it. 15 The Registrar heard lengthy argument on 17 July 2013. Ultimately he referred the matter to a Judge for determination in accordance with s 35A(7) of the Federal Court of Australia Act 1976 (Cth) but, very usefully, he set out full reasons for his decision which addressed the submissions made on behalf of the company. 16 One of the company's submissions was that the proceedings should be dismissed as an abuse of process because the presumption of insolvency had not arisen when the Originating Process was filed. A related submission was that the Registrar's order granting leave to the plaintiff to file an Amended Originating Process should never have been made. The company relied upon the decision of Barrett J in Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd [2010] NSWSC 1453 ("TQM"), which was affirmed on appeal in TQM Design and Construct Pty Ltd v KCL Developments Pty Ltd [2011] NSWCA 7, to support these submissions. 17 The Registrar was not persuaded that the Amended Originating Process constituted an abuse of process. He considered that it was filed and took effect after the statutory period had expired in accordance with Workers Compensation Nominal Insurer v Lozito-Strada Pty Ltd [2013] FCA 625 ("Lozito-Strada"). Nor did the Registrar consider that the decision in that case was inconsistent with the principle in TQM or the decision of the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 ("David Grant v Westpac"). 18 The remaining factual steps, including the order made by Registrar Hannigan on 15 November 2013 under s 459R(2) and the winding up order made on 13 December 2013 are set out in the judgment in Lime Gourmet Pizza (No 1), especially at [18]-[20].

The company's evidence 19 Mr Moshos, to whom I gave leave to appear, relied on affidavits sworn by him and filed on 31 December 2013, 20 January 2014 and 4 February 2014. Those affidavits addressed a number of matters but they contained no evidence of the company's solvency. 20 The affidavits addressed four issues which were the subject of submissions by Mr Moshos in this application. 21 The first was the order made by Registrar Hannigan under s 459R(2) on 15 November 2013. Mr Moshos said that the company had not been given notice of the plaintiff's application which resulted in the making of the order. 22 The second was the default judgments which founded the statutory demand. He gave evidence that one of those judgments was set aside by the Local Court on 10 December 2013. 23 The third was referred to in a letter attached to an affidavit. The letter dealt with a number of Mr Moshos' contentions. One of his contentions was that the statutory demand was invalid for the purposes of s 459E and 459A because, "for instance", there was no judgment debt supporting it and it was for less than the statutory minimum amount. 24 The fourth was addressed in a letter to the liquidator. It was that the company's books and records had not been provided to the liquidator pending the determination of the present application. This was apparently relied upon in the present application to negate the force of the affidavit filed by the liquidator which deals with the question of solvency.

The plaintiff's evidence 25 The plaintiff relied on a "Final Affidavit of Debt" in which evidence was given of credit adjustments of $3,268.62 and $1,608.97 to the amount specified in the Originating Process leaving an amount due and payable of $2,528.40. 26 The affidavit was sworn on 12 December 2013 and was filed on 13 December 2013, that is to say, the date on which the winding up order was made. Although it does not refer to the order of the Local Court made on 10 December 2013, it is apparent that the adjustments in the affidavit were referable to the setting aside of one of the Local Court judgments. 27 The plaintiff also relied upon an affidavit filed by the liquidator on 30 January 2014. The affidavit annexed a report by the liquidator of the same date. 28 The liquidator's report stated that Mr Moshos had not provided a Report as to Affairs and had not delivered up the company's books and records pending the outcome of this application. The liquidator was unable to identify the company's assets or to place a value on them. However, he identified taxation liabilities of $34,597 and unsecured creditors of $44,232. 29 The liquidator concluded in his report that "the company appears insolvent": He said that unless the costs of the winding up and sufficient funds were received to permit all creditors to be paid in full, he would oppose the application.

The supporting creditors' evidence 30 The supporting creditors are the former administrators of the company who were appointed on 16 November 2012 and retired on 21 December 2012 when the administration came to an end. 31 They filed an affidavit of their solicitor exhibiting a copy of their report to creditors dated 13 December 2012. The supporting creditors claim to be creditors of the company for their remuneration in an amount of approximately $23,000. 32 The administrators' report to creditors dealt in some detail with the company's profit and loss statements and balance sheets for the years 2011 and 2012. The administrators concluded that the company had insufficient working capital to discharge its liabilities as they fell due in those financial years. 33 The report was prepared for the purposes required by s 439A(4) of the Act. The opinions of the administrators on each of those matters were set out at page 30 of the report. No DOCA proposal was made and accordingly the administrators were not able to make a recommendation as to that course. Importantly, the administrators expressed the view that the administration should not end because the company was insolvent. 34 The administrators' ultimate recommendation, for the purpose of s 439A(4)(b)(iii) was that the company was insolvent and it was in the best interests of the company for it to be wound up. 35 Notwithstanding the administrators' recommendation, the creditors resolved at the meeting that the administration end. The effect of this was that the control of the company was returned to Mr Moshos as the director. 36 In the course of oral argument counsel for the administrators pointed to the attendance register of persons present at the meeting. It supports counsel's submission that Mr Moshos held proxies from a large number of creditors.

Consideration 37 Mr Moshos renewed the submission that he put to me on the preliminary issue that the order of 15 November 2013 was invalid. 38 That issue is no longer open to argument before me because it was fully addressed in my orders in Lime Gourmet Pizza (No 1), especially at [27]. 39 It is true that the declaration I made on 10 February 2014 refers only to the validity of the winding up order but that order encapsulates the arguments put by Mr Moshos against the validity of the order. One of my reasons was that I rejected his submission that the order of 15 November 2013 was invalid. If it was valid, as I held, the statutory dismissal under s 459R(3) was not enlivened and the Deputy Registrar had power to make the winding up order on 13 December 2013. 40 There is no substance in any argument to the contrary and, as I have said, this issue has been determined adversely to the company. 41 Mr Moshos' other principal submission was that the statutory presumption of insolvency created by s 459C(2)(a) was not enlivened because the Originating Process was filed on 16 May 2013, less than 21 days after the service of the statutory demand. However, there are two answers to this submission. 42 The first is that Registrar Wall made an order on 28 June 2013 granting leave to file the Amended Originating Process with effect from that date. In doing so, the Registrar followed the course which I took in Lozito-Strada at [8]. 43 Although I have not had the benefit of full argument on this question, it does not seem to me that to permit the plaintiff to proceed on the Amended Originating Process in accordance with this course is contrary to the decision of Barrett J and the New South Wales Court of Appeal in the TQM case. 44 That case was concerned with the question of whether an application to set aside a statutory demand had been made in accordance with s 459G(3) of the Act for the purpose of determining the period for compliance with the statutory demand under s 459F(2)(a). That question does not arise in the present case. 45 Here, the company made no application under s 459G and accordingly the period for compliance fell to be determined under s 459F(2)(b). That is to say, the expiry date for compliance was 21 days after the demand was served. 46 The statutory demand was served on 30 April 2013. The time for compliance under s 459F(2)(b) was 21 May 2013. The Amended Originating Process took effect on 28 June 2013. Thus, during the three months ending on the day the winding up application was made, the company failed to comply with the statutory demand: see s 459C(2)(a). 47 This approach is not inconsistent with the decision of the High Court in David Grant v Westpac. That case was concerned with the definition of the jurisdiction of the Court under s 459G, and in particular the conditions imposed by that section upon the right to apply to have a statutory demand set aside. 48 In the appeal decision in TQM, Spigelman CJ referred to David Grant v Westpac and to a decision of the New South Wales Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 ("Switz"). The Chief Justice's own observations in the Switz case are apt in the present circumstances. 49 His Honour pointed out in Switz at [50] that there are public interests which underlie the legislative scheme contained in Part 5.4 of the Act. He observed that if a company is not solvent, because the disputed debt is indeed owing, there is a public interest in commencing the process of the winding up sooner rather than later. His Honour went on to say that the fact that commercial injustices may sometimes be caused to a debtor company by the operation of the legislative 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. 50 The second answer to Mr Moshos' submission is that on the evidence before the Registrar on 13 December 2013, it would have been open to her to infer actual insolvency. This is because orders had been made by the Court for the company to file its evidence in opposition to the winding up application within certain stipulated time limits. The company did not require leave under s 459S to seek to establish its solvency, but it did not do so. 51 In any event, the evidence to which I referred above, that is to say the liquidator's report and the report of the administrators are sufficient to establish actual insolvency. It is no answer to say that the liquidator did not have the company's books and records. Nor is the fact that the administrators' opinion was referable to an earlier period any answer to the conclusion that the company was insolvent at the date of the hearing of the winding up application. That was the relevant date for determination of that issue: Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]. 52 The short answer to the present application is that the winding up order made by the Registrar was regularly made. In order to invoke the discretion to set it aside under rule 39.05 of the Federal Court Rules 2011 (Cth), the Court will ordinarily require to be satisfied of the conditions stated by Hodgson J in George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464 ("George Ward Steel"). The principles stated in that case have been applied in this Court on numerous occasions: see for example Workers Compensation Nominal Insurer, in the matter of Deli Glenbrook Pty Limited [2010] FCA 380. 53 Mr Moshos has approached this application as if the only question which arises is whether the winding up order ought to have been made. He has failed to address the matters necessary to enliven the discretion to set it aside. 54 Here, three of the conditions referred to by Hodgson J in George Ward Steel have not been satisfied. Most importantly, the company has not addressed evidence indicating that it is solvent. Indeed, as I have said, the evidence supports a finding that the company is insolvent. 55 Moreover, the plaintiff and the supporting creditors do not consent to the application and the liquidator's position is that he would not consent unless the creditors are paid and his fees are satisfied. No offer has been made to satisfy the debts of creditors or the liquidator's costs. 56 The only other point made by the company addressed the amount of the judgment debt which supported the statutory demand. The statutory demand was for more than the statutory minimum required under s 459E(1). 57 It is true that the amount of the judgment debt outstanding as at 13 December 2013 was reduced to approximately $2,500. However, that amount is more than the statutory minimum for a demand under s 459E and, in any event, that question was not relevant to the power of the Court to exercise the discretion to make a winding up order: FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (1988) 14 NSWLR 643.

Orders 58 It follows from the above that the interlocutory process filed by the company seeking an order under rule 39.05 must be dismissed. 59 I will order the company to pay the costs of the application. It is not appropriate to order Mr Moshos to pay the costs of the application as a condition of the leave granted to him to appear on behalf of the company. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.