ACN 076 673 875 Limited (in liq) v Semco developments Pty Ltd
[2010] VSC 647
•15 October 2010 (revised 18 October 2010)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
S CI 2009 8201
| ACN 076 673 875 LIMITED (in liq) and MARK WILLIAM PEARCE (as liquidator of ACN 076 673 875 LIMITED) | Plaintiffs |
| v | |
| SEMCO DEVELOPMENTS PTY LTD (ACN 090 890 529) | Defendant |
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JUDGE: | Gardiner AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 May 2010 | |
DATE OF JUDGMENT: | 15 October 2010 (revised 18 October 2010) | |
CASE MAY BE CITED AS: | ACN 076 673 875 LIMITED (in liq) & anor v Semco developments Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 647 | |
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EXTERNAL ADMINISTRATION – Application for winding up and insolvency based on non‑compliance with a statutory demand – Whether audited accounts are required in circumstances of this case to demonstrate solvency of the defendant – Application of s 467(1) for the Court to exercise discretion to dismiss application for winding up and insolvency – Winding up order made.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J. Richardson | Maurice Blackburn Commercial |
| For the Defendant | Mr J. Evans | Rudd & Co |
HIS HONOUR:
The plaintiffs (collectively “Nomad”) seek an order that the defendant, Semco Developments Pty Ltd (“Semco”) be wound up in insolvency under the provisions of the Corporations Act2001 (Cth).
There were a number of adjournments of the proceeding and the period of time for the determination of the application was extended to 7 May 2009 pursuant to s 459R of the Corporations Act2001 (Cth) (“the Act”), by an order made on 11 December 2009. On 4 May 2010, there was a further extension of the time for determination of the proceeding to 4 November 2010.
The ground for the application is Semco’s failure to comply with a statutory demand dated 6 July 2009 which was served on it by Nomad on 9 July 2009. An application pursuant to s 459G of the Act to set that demand aside was filed and served on 31 July 2009. The basis of that application was that there was a genuine dispute as to the existence of the debt. The application was supported by an affidavit of the sole director of Semco, Simone Semmens, sworn 31 July 2009.
Semco’s application was filed and served one day outside the 21 day limit prescribed by s 459G(3) and was ultimately discontinued. Nomad issued this proceeding on 7 August 2009 relying on the presumption of insolvency arising by s 459C(2)(a) of the Act resulting from the failure by Semco to comply with the statutory demand of 6 July 2009.
The schedule to the statutory demand describes the debt as follows:
Aggregate of loan facility owing by the company to William Dean Trafford Cowan as at 21 August 2008, and assigned by the said Mr Cowan to the creditor by Deed dated 21 August 2008 (a true copy of which is Exhibit MWP‑1 to the affidavit of Mark William Pearce sworn 6 July 2009 which accompanies this demand).
The statutory demand claims that $1,448,120.00 is owing by Semco to Nomad.
A copy of the deed of assignment referred to in the schedule was exhibited to the affidavit of Mark William Pearce which accompanied the demand. The deed of assignment’s recitals (referred to as “background” in the deed) state that the debtor (defined in the deed as Semco) is indebted to the assignor (Mr Cowan) and that Mr Cowan agrees to assign to Nomad his legal and beneficial right title and interest in the debt. Clause 2.2 of the document provides that upon collection of the debt by the assignees (Nomad), they shall apply the proceeds in satisfaction of Mr Cowan’s obligations under a document entitled “Deed of Settlement and Release” dated 20 September 2009.
The ASIC extract in respect of Semco states that Mr Cowan was a director from 13 December 1999 until he resigned on 1 September 2008. The extract also states that the sole director of the company is Simone Semmens, his estranged wife, who was appointed as a director on 13 December 1999. Ms Semmens and Mr Cowan are each recorded as being the holder of one share in the company.
The proceeding was adjourned on several occasions after initial directions were made on 9 September 2009. On 2 September 2010, Semco filed a notice of opposition to the application which stated that it opposed the application on the grounds that it was solvent, that there was a genuine dispute as to the debt which was material to Semco’s solvency, that the application was an abuse of process and that there was other reason why the Court should exercise its discretion not to wind up Semco.
On 28 October 2009, Semco sought and was granted an extension of time for the filing of affidavit material in opposition to the application because of difficulties in serving a subpoena filed on 9 September 2009 on Mr Cowan to produce documents. Those documents were ultimately obtained and released to Semco by an order made on 28 October 2009. The proceeding was set down for trial on 11 December 2009 but on that date it was adjourned to 18 February 2010.
Shortly before, on 2 December 2009, Semco had filed an interlocutory process seeking dismissal of the proceeding as an abuse of process by reason of Mr Cowan’s connection with and involvement in Semco and because Mr Cowan had retained the books and records of Semco until the time that he did, he had deprived Semco of the ability to prepare audited financial statements for Semco for the purpose of rebutting the presumption of insolvency. Alternatively, Semco sought an order that the trial of the proceeding be adjourned for several weeks and that directions be given to allow further affidavits to be filed on the issue of the solvency of Semco. In addition, the interlocutory process sought leave pursuant to s 459S of the Act to oppose the application on the basis that there was a genuine dispute as to the existence of the debt the subject of the demand and such issue was material to Semco’s solvency. Such leave was required as it was not otherwise possible to agitate a dispute in respect of the debt the subject of the demand because of the provisions of s. 459S(1).
On 11 December 2009, I adjourned the hearing of the interlocutory process to 18 December 2009 and set down the further hearing of the originating process to 18 February 2010.
On 18 December, on return of the interlocutory process, I made orders that the documents produced to the Court by Mr Cowan pursuant to the subpoena filed 14 December 2009 be released to the solicitors for Semco. The interlocutory process was adjourned for hearing with the originating process, initially to 16 March 2010. That hearing date was subsequently vacated on 19 February 2010. On that date, the hearing of the originating process and the interlocutory process was set down for hearing on 4 May 2010 when the trial of the matter ultimately proceeded.
In addition to the formal affidavit material required, Nomad relied on an affidavit of Steven Mark Foale sworn 9 December 2009. Semco relied on two affidavits of Ms Semmens, sworn 2 December 2009 and 28 April 2010.
Mr Foale’s affidavit exhibits 31 documents.
The first named plaintiff (then called Nomad Communications Limited) was wound up by order of the Supreme Court of Queensland on 22 January 2001. Mr Graham Bendeich was appointed liquidator but on 12 September 2005 he resigned and the second-named plaintiff, Mr Pearce, was appointed in his stead.
In September 2002, Mr Bendeich conducted examinations pursuant to s 596A and 596B of the Act and Mr Cowan was summonsed to be examined. Subsequent to the examinations, Mr Bendeich commenced a proceeding against, among others, Mr Cowan in the Supreme Court of New South Wales making allegations of insolvent trading. That proceeding was subsequently transferred to the Supreme Court of Victoria as proceeding No. 7040 of 2005 (“the insolvent trading proceeding”). In the insolvent trading proceeding, Mr Cowan and others were accused of insolvent trading under s 588G of the Act as well as breaches of their statutory and fiduciary duties as directors.
In late August 2007, the insolvent trading proceeding was settled at a mediation. The terms of that settlement were recorded in the deed of settlement dated 20 September 2007 referred to above. Under its terms, Mr Cowan agreed to pay Nomad the sum of $1.25m by 30 June 2008 and to grant mortgages to the first-named plaintiff over two properties of which he was the registered proprietor at Armadale and Buxton in Victoria. There was a default provision in the deed which provided, among other things, that in the event of a default, Mr Cowan would assign his interest in the “Semco debt”, which was defined as the amount owing by Semco to Mr Cowan from time to time, to Nomad.
Mr Cowan did not comply with the deed of settlement, thereby actuating the default provisions.
As contemplated by the deed of settlement, Nomad entered judgment against Mr Cowan in the insolvent trading proceeding in the sum of $1,368,032.79 on 19 August 2008. On 21 August 2008, Mr Cowan assigned the Semco debt, which subsequently became the subject of the demand, to Nomad. On 5 September 2008, a statutory demand was served on Semco by Nomad but was withdrawn by agreement on 26 September 2008. In addition, a bankruptcy notice was served on Mr Cowan, which was not complied with. However, Nomad has not proceeded to seek a sequestration order against Mr Cowan.
On 28 January 2009, Nomad applied for and was granted orders to conduct examinations of Mr Cowan and Ms Semmens under Part 5.9 Division I of the Act pursuant to s 596A and 596B. Mr Cowan and Ms Semmens were required to attend for examination and produce the documents specified in the schedules to their summonses. The documents produced by Mr Cowan include accounts for Semco for the years from 2001 to 2007.[1] The accounts are, for most part, in MYOB format and were apparently prepared by Mr Cowan. Ms Heather Crossley of Arthur Roe & Associates Pty Ltd, Chartered Accountants, prepared the “formal” accounts from those documents. The first document, headed “Analysis of Semco Annual Accounts‑ Semmens and Cowan loans” was produced by Arthur Roe & Associates. It states that the balance of the debt owing by Semco to Mr Cowan as at 30 June 2007 was $1,418,635. That amount is also recorded under the current liabilities segment of the 30 June 2007 accounts as owing to Mr Cowan. The same document records the balance owing by Ms Semmens at that date to Semco as being $945,570 but notes that the accounts were not complete and that “Semmens will owe additional for payment of 188 Kooyong Road - $2,934,603 plus GST – not including other movements”. The top of the document bears the notation “Update: February 17, 2009”.
[1]The documents produced by Mr Cowan to the examination are exhibit SMF-9 to the affidavit of Mr Foale sworn 9 December 2009.
There are no notes to the accounts which assist as to how the amounts in respect of the assets and liabilities appearing were comprised. Provision was made for Ms Semmens and Mr Cowan to sign the accompanying directors’ declarations, although the exhibited copies are not signed.
Exhibit SS10 to Ms Semmens’ affidavit of 2 December 2009 is a bundle described as “Semco FY2008 documents”, which contains a substantial number of financial documents provided to Ms Semmens by Arthur Roe & Associates. The first of the documents exhibited is a MYOB document purportedly recording transactions on Semco’s bank account. There are a number of entries with the narrative “William Cowan – new loan” in which several thousand dollars in rounded amounts are credited to Semco’s NAB account. A company with which Mr Cowan is associated, Stradis Pty Ltd, is recorded as having advanced funds to Semco, albeit of smaller sums.
The next series of documents in the exhibit are copies of NAB statements for Semco’s account (ending in the numbers 3689), which is described as a business cheque account. They appear to reflect advances by Mr Cowan to Semco into its cheque account for that year. A number of transactions, totalling $59,000, are recorded as advances by Mr Cowan to Semco.
The next document in the bundle is a two-page spreadsheet headed “Semco BOMCMA transfers and bank fees – FY2008”. Under the heading “Bill Cowan to BOM” are two sub-headings entitled “M1” and “Stratus”. Under the “M1” heading are a number of transactions, totalling $59,000, apparently advances by Mr Cowan to Semco. There is a total of $32,975 advanced by Stratus to Semco in the same category. There is then a MYOB spreadsheet entitled “Bank register Semco Developments Pty Ltd 1 July 2007 to 13 April 2009” noting this total. The next series of documents in the bundle are a series of Westpac bank statements for an account in the name of Semco (ending in the numbers 2480). These statements record numerous advances by Mr Cowan into that account of rounded sums of several thousand dollars on each occasion.
In her affidavit of 28 April 2010, Ms Semmens exhibits a bundle of documents of a similar nature to that contained in Exhibit SS10 to her earlier affidavit but for the financial year ending 2009. The first document is headed “General Ledger (Summary)” made up to 30 June 2009 which records advances by Mr Cowan to Semco of $96,524 and overleaf is a document headed “Bank Register” noting a number of advances by Mr Cowan to Semco over the course of the financial year. In that affidavit, she voices complaints about Mr Cowan’s continued operation of Semco’s accounts despite his resignation as a director. Ms Semmens observes that Mr Cowan continued to use Semco’s accounts to meet payments for financial obligations in respect of his BMW motor vehicle. She observes that Semco does not appear to have any existing liabilities to the Australian Taxation Office nor are there any unsatisfied demands for payments by creditors in any of the documents made available to her.
Ms Semmens states that Semco does not presently trade and has no creditors “other than the plaintiff’s, and possibly Bill Cowan or entities associated with him”. She states that the debts said to be owing to those persons are not presently due and payable.
Ms Semmens says that Semco’s accounts have not been audited and to do so would cost in the vicinity of $80,000 to $100,000. She says that Semco is essentially a dormant company caught up in the dispute as to the existence and payability of debts between herself and her ex-husband, Mr Cowan and his assignees. She states that the only purpose of such an audit would be to potentially satisfy the Court as to the solvency of Semco but that she is not willing to engage in this expenditure, as it would be a significant waste of money. There is nothing in my view in her affidavits which persuades me that the accounts should not be accepted as being accurate. She indicates that, if Semco does have small creditors totalling less than $20,000, she would be prepared to lend it money to satisfy those creditors on deferred repayment basis.
I observe at this juncture that the proceeding was adjourned on several occasions. The purpose of such adjournments was to enable Ms Semmens to pursue production of documents by subpoena from Mr Cowan. Complaints were voiced that the difficulty in obtaining production of those documents was impeding Semco’s ability to obtain audited accounts in order for it to defend this application. Ultimately, documents were produced but Ms Semmens has decided not to commission an audit of the accounts and such basis for the dismissal of the proceeding falls away. Further, Semco has not availed itself of the opportunity given to it to impeach the accounts as being inaccurate.
As I have observed, Nomad’s application relies on the presumed insolvency of Semco arising from its failure to comply with the statutory demand dated 9 July 2009 within the time prescribed by the Act. Semco concedes that no application was made within time and that it is therefore presumed to be insolvent by operation of s 459C(2)(a) of the Act. The hearing of the application proceeded by Nomad reacting to Semco’s application by interlocutory process.
As part of the relief claimed in the interlocutory process, Semco seeks leave pursuant to s 459S of the Act to agitate the matters which it would otherwise have argued in the application to set aside the statutory demand in July 2009. In so doing, Semco, which bears the burden of establishing that it is solvent in the light of the presumed act of insolvency, contends that the debt which is the subject of the statutory demand is disputed. It says that the debt is “material” to its solvency and that leave should be given to raise such dispute in its defence to this application.
The principles to be applied in the exercise of the discretion to grant leave under s 459S(1) of the Act are considered in the decision of Austin J of the Supreme Court of New South Wales in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd[2] where his Honour stated:
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 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.
[2](1999) 17 ACLC 467.
Assuming the above criteria are satisfied, Semco is required to prove by reference to the “fullest and best” evidence that it is solvent.[3] Semco bears the onus of establishing that it is solvent.[4]
[3]See generally Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 21 ACLC 684. On the issue of the meaning of the expression “material” to prove that the company is solvent see Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661.
[4]Ace Contractors and Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728.
Nomad submits that despite the passage of time and the opportunity to do so, Semco has declined to provide audited accounts so as to discharge the onus which it bears of proving solvency or that the debt is material to Semco’s solvency. Other than the assertion by Ms Semmens that she does not know what Semco’s financial position is, nothing else has been put forward to discharge this onus or to convince me that the accounts produced ought not to be accepted.
Nomad contends that Semco has failed to produce any other evidence from either its own accountants or from any other source that might impeach the MYOB accounts or the formal accounts prepared by Arthur Roe & Associates. As such, Nomad says Semco has adduced no evidence to discharge its burden of demonstrating that the disputed debt is “material” to proving solvency as required by the Court of Appeal of New South Wales in Switz v Glowbind[5]. In the absence of such evidence, the Court has no jurisdiction to embark on an enquiry concerning the alleged dispute about the debt the subject of the demand and Semco cannot be given leave to agitate the disputed debt because it has not made out the threshold matter of establishing “materiality” mentioned in s 459S.
[5][2000] 48 NSWLR 661.
Nomad submits that even if it is established on a proper basis that the debt the subject of the demand is “material” to Semco’s solvency, the accounts of Semco, which have not been successfully impeached, state that as at 30 June 2007 the debt owing by Semco to Mr Cowan which was the subject of the subsequent assignment and demand was $1,418,634.91. In this regard, reference was made to the transcript of the examination of Mr Cowan as to how that debt owing to him arose.[6]
[6]Mr Richardson, counsel for the plaintiffs referred to the transcript at p.37, 38, 51-55 of Mr Cowan’s transcript which is Exhibit SMF10 to Mr Foale’s affidavit.
In the examination conducted of him, Mr Cowan stated[7] that he would enter the transactions into MYOB some time after the end of the relevant financial year, in fact any time up to one year later. He would keep all the accounts, invoices and payments, and do the entries himself. The accounting material for the years subsequent to 2007 referred to above show movement in Mr Cowan’s loan account increasing the balance.
[7]Transcript pp.8-10 and 12.
Nomad submits that, even if it is assumed that Semco has established that the debt is material to its solvency and leave is given to agitate the issue, having regard to the evidence of Mr Cowan as to how the debt accrued, the onus is still upon Semco to demonstrate that there is a genuine dispute about the debt and it is not enough merely to assert the existence of such a dispute; it must be demonstrated that the debt is disputed on some substantial ground.[8] Mr Richardson submitted that in discharging this onus, the provisions of s 1305 on the Act are applicable. Section 1305 provides:
(1)A book kept by a body corporate under a requirement of this Act is admissible in evidence in a proceeding as prima facie evidence of any matter stated or recorded in the book.
(2)A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in sub‑s(1).
[8]See Re QBS Pty Ltd [1967] QdR 218 and KL Tractors Limited [1954] VLR 505.
Reference was made by Mr Richardson to the following evidence of Ms Semmens in her affidavits:
(i)Mr Cowan was responsible for the maintenance and preparation of Semco’s financial records prior to his resignation as a director on 2 September 2008.
(ii)Ms Semmens is not able to assess whether the debt allegedly owed by Semco and Mr Cowan is owing because she does not have the documents to critically assess the position.
(iii)Ms Semmens states that she has “doubts about the accuracy of some of the entries in the MYOB accounts”.[9]
(iv)Between 2000 and September 2008 (when Mr Cowan resigned as a director of Semco) Ms Semmens left the day to day financial aspects of her affairs very much in Mr Cowan’s hands. She gave Mr Cowan authority to operate her and Semco’s bank accounts. She gave him her credit card statements and he would attend to payment. She did not know that Mr Cowan was recording any or all of these transactions through Semco, i.e. paying funds into Semco, discharging her debts and raising loan accounts in respect of such transactions.[10]
(v)Ms Semmens did not know that Mr Cowan was purporting to record all of the moneys which he paid to her and on her behalf as loans by Semco to her and she never authorised this.[11]
(vi)Despite denying that Mr Cowan ever loaned money to Semco, Ms Semmens agreed with Mr Cowan that any such loan would become payable only after their daughter finished her education.[12]
(vii)Ms Semmens denies the existence and knowledge of a debt owed by her to Semco in respect of Kooyong Road.[13]
[9]Semmens affidavit 2 December 2009, para 14.
[10]Semmens affidavit 2 December 2009, para 19.
[11]Semmens affidavit 2 December 2009, para 20.
[12]Semmens affidavit para 35, Semmens affidavit 30 March para 25.
[13]Semmens affidavit para 16.
Mr Richardson submits that Ms Semmens’ affidavit, in particular where reference is made to Mr Cowan’s loan to Semco, does not go beyond assertion and generic complaint and does not descend into the required factual specificity. She makes denials in respect of such matters but puts up no material facts in support of such denial. I agree with these observations.
Mr Richardson contended that notwithstanding these matters, even those unsupported assertions lack credibility. First, Ms Semmens cannot be heard to say that on the one hand she left everything to Mr Cowan yet complain of the acts which took place pursuant to that delegation. Further, Ms Semmens executed a number of documents relating to Semco’s financial affairs and specifically in relation to the loan which is now the subject of the current controversy. Reference was made to Exhibits SMF30 and SMF31 to Mr Foale’s affidavit in that regard. SMF30 are minutes of a meeting of the directors of Semco of 20 February 2003 resolving to execute documentation in respect to loans to Ms Semmens by Semco and loans by Mr Cowan and Stradis to Semco. The minutes and the agreements are signed by Ms Semmens and Mr Cowan. SMF31 is a bundle of documents concerning the financial affairs of Semco which are signed by Ms Semmens. The documentation includes memoranda of resolutions of Semco, which resolved after reviewing the result of the company for the previous year, reviewing the cash flow budgets for the ensuing year and considering the ability of the company to realise assets that the company would be able to pay its debts as and when they fell due. Ms Semmens signed the memoranda for the years 2004 to 2008. The final document was a signed minute of a meeting of the directors of Semco held on 24 January 2007 dealing with properties being developed by Ms Semmens including the 188 Kooyong Road project.
Mr Richardson also criticised Ms Semmens in regard to her failure to put up evidence to impeach the existence of the debt the subject of the assignment. He stated that the evidence was that Ms Semmens had known of the debt and assignment since September 2008; she had been the sole director of Semco since that time, had been the subject of examinations about this matter since October 2008 and had access to Semco’s bank accounts throughout this period. Despite this, she made no attempts to obtain the prime entry documentation until September 2009, and has now decided not to have the accounts audited. Some 20 months after the debt owing by Semco to Mr Cowan was first raised, she has yet to substantiate doubts in respect of any of the entries.
Mr Richardson says first, that Ms Semmens’ allegations that she did not approve of any loans from Mr Cowan to Semco can be demonstrated to be unsustainable, pointing to the fact that Ms Semmens executed the loan agreement and the minutes resolving that Semco enter into the loan agreement.[14] Secondly, Ms Semmens signed the 2003 and 2004 accounts of Semco which noted the loan to Mr Cowan as a current liability[15] and she has made no reference to or taken issue with these documents in her affidavits. Thirdly, Ms Semmens initially contended that the debt owed by Semco to Mr Cowan was not payable pursuant to an agreement that repayment was only to occur when their daughter had finished her education. An agreement of 18 November 2002 was produced that purported to record this arrangement and, Mr Richardson observed, there was initially no denial of the loan as there now is and that that agreement does not in any event touch on loans made by Mr Cowan to Semco. On the one hand, she denies both the knowledge and existence of the loan by Mr Cowan to Semco, while on the other hand, she contends that it was governed by the earlier agreement.
[14]Exhibit SMF30 to Mr Foale’s affidavit.
[15]Mr Foale’s affidavit para 16.
Referrence was made to Ms Semmens’ evidence that she was oblivious to any debt incurred by her to Semco in relation to the renovations to the Kooyong Road property. However, Ms Semmens signed minutes of a meeting of Semco in February 2007 which stated:
The directors noted that the settlement date for 188 Kooyong Road was January 31 2007. The directors agree that Simone will be billed progressively by Semco for the work involved in constructing the house.[16]
[16]Exhibit SMF31.
In conclusion, Mr Richardson says by way of summary that this application was commenced a considerable time ago and Semco has been given several adjournments and the benefit of orders for production of documents to enable it to put up evidence in regard to the accuracy of the accounts, to have those accounts audited to persuade the Court of its solvency and of the materiality of the debt. It has not done so and seeks to rely on the sparseness of its evidence to discharge the burden of proving solvency.
Nomad submits that scant material put up by Semco that there is a genuine dispute about the debt was not developed beyond mere assertion. Even if Semco could establish by appropriate evidence that the subject debt was “material” to its solvency, and it has not, it has not overcome the burden of establishing that there is a genuine dispute.
Finally, Mr Richardson says that the circumstances are not such as to attract an appropriate case for the exercise of the Court’s discretion under s 467 in favour of Semco to dismiss the application.
Semco seeks the leave of the Court pursuant to s 459S to agitate the matters that it sought to raise in the abortive application to set the demand aside, that is, that the debt is genuinely disputed. Alternatively, it says if the Court is not satisfied that the whole of the debt is genuinely disputed as to its existence, that it was not due and payable as at 6 July, the date of the demand.
Section 459S of the Act provides as follows:
(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 purpose 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 sub-s(1) unless it is satisfied that the ground is material to proving that the company is solvent.
The operation of s 459S was the subject of detailed consideration by the Court of Appeal of the Supreme Court of New South Wales in Switz Pty Ltd v Glowbind Pty Ltd.[17]
[17](2000) 48 NSWLR 661.
At para [44] Spigelman CJ stated:
The statutory context is as follows:
(i)A ‘creditor’ may apply to the Court for a company to be wound up in insolvency: (s 459P(1)).
(ii)Upon receipt of such an application the Court is empowered to order that ‘an insolent company may be wound up in insolvency’: (s 459A).
(iii)A company is insolvent if it is not able ‘to pay all (its) debts, as and when they become due and payable’: (s 95A).
(iv)Where, as here, the company has filed to comply with a statutory demand, the Court ‘must presume that the company is insolvent’: (s 459C(2)).
(v)The presumption referred to in (iv) ‘operates except so far as the contrary is proved for the purposes of the application’: (s 459C(3)), relevantly, the application under s 459P for a company to be wound up in insolvency: (s 459C(1)).
[45]The phrase which falls for consideration in the present case from s 459S(2) – ‘the ground is material to proving that the company is solvent’ – relates back to the process envisaged in s 459C(3) – except so far as the contrary is proved’.
…
[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 s 459G are subject only to s 459S, which Hayne J has called “the only safety net”: Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 at 300-1. However, the scheme did not confer on the Court a general discretion. A mandatory pre‑condition was introduced in s 459S(2). The purpose of the legislative scheme is best served by giving that subsection a strict construction. …
[53]By the time an application under s 459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s 459S(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, the Court cannot be ‘satisfied’ of the mandatory pre‑condition in s 459S(2). An objective element is introduced by the word ‘material’ but that can only be determined after identifying the company’s contentions.
Mr Evans, counsel for Semco, contended that this means in the context of the present case that Semco must demonstrate that, putting Nomad’s alleged debt to one side, it is solvent. Some of the authorities have expressed the view that for the ground to be material it must be" pivotal", "crucial" or determinative of solvency.[18] As part of this process, in my view it is required to put on what the authorities describe as the fullest and best evidence of its financial position.
[18]See cases referred to in MacPherson’s Law of Company Liquidation para[3.1255] at footnote 11
In my view, audited accounts are required in these circumstances to demonstrate the solvency of the company and to enable an analysis to be presented that the debt the subject of the demand is “material” to proving its solvency. Establishment of the materiality of the debt cannot in my view be side‑stepped by Semco by an assertion that the compilation of the company’s accounts was left to another director, in this case Mr Cowan, and that it would be too expensive to have now the accounts audited. The situation is akin to that which would apply if Semco defended this application by contending that it was solvent. In order to discharge the onus that it would bear in those circumstances, the Court would be required to have presented to it the “fullest and best evidence of the company’s financial position.[19]
[19]See Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
In Ace Contractors and Staffv Westgarth Development Pty Ltd[20], Weinberg J held that where a company is presumed to be insolvent because of the non‑compliance with a statutory demand, the company in those circumstances had failed to rebut the presumption which arose by proving to the requisite civil standard that it was able to pay all its debts as and when they became due and payable. At para [44] his Honour observed, among other things, that:
“… unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared. … “[21]
[20][1999] FCA 728.
[21]See also Crema Pty Ltd v Landmark Property Developments Pty Ltd (2006) 58 ACSR 631 per Dodds-Streeton J at [140]; Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711 at [16], following Ace Contractors.
I would reject the application by Semco for leave pursuant to s 459S. The basis of its application that the subject debt is material to its solvency has not been established. Semco, aside from assertion and complaint about the compilation of the accounts by Mr Cowan, has not sought to establish its solvency and the materiality of the debt. Further, I do not consider that the statutory presumption afforded by operation of s 1305 of the Act has been displaced.
My view in this regard is confirmed when one looks to Ms Semmens’ affidavit of 31 July 2009 sworn in support of the application to set aside the demand in order to carry out a preliminary consideration of Semco’s basis for disputing the demand.[22] In that affidavit, Ms Semmens deposes, as she has in her recent affidavit material, that Mr Cowan was responsible for the maintenance and preparation of Semco’s financial records from 1999 until September 2008. She states that she does not know how the alleged access debt of $1,448,120 is calculated and describes an expectation as to how it might have been arrived at. She states that as matters presently stand she “is unable to say whether Mr Cowan is in fact owed any money by Semco”. That is to say, Semco, which bears the onus in these circumstances, does not know whether the debt which is the subject of the assignment and the demand in this application is owed by Semco. She asserts there is a genuine dispute as to the existence of any debt owed by Semco to Mr Cowan by reason that he appears to have recorded all his and her dealings via Semco despite not having her approval as a director of Semco to have done so.
[22]Chief Commissioner of Stamp Duties v Paliflax (1999) 47 NSWLR 382.
I also refer to the last two exhibits of Mr Foale’s affidavit referred to above. Ms Semmens states that she did not authorise Mr Cowan to handle the recording of Semco’s financial matters and arrange for the preparation of financial statements. Her evidence at the examination conducted of her and her affidavits make it clear that she was prepared to delegate all such matters to Mr Cowan. She goes on to say that she did authorise Mr Cowan to handle the financial recording of Semco’s financial matters and arranged for the preparation of financial statements but hedges this by saying that she did not authorise him to do more than this and did not authorise him to record what she describes as “non-Semco transactions” through Semco.
Semco submits that even if leave is not granted pursuant to s 459S that the Court should dismiss the proceeding as a matter of discretion. Section 467(1) of the Act provides:
(1)Subject to sub-s(2) and s 467A, on hearing a winding-up application the Court may:
(a)dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application; or
(b)adjourn the hearing conditionally or unconditionally; or
(c)make any interim or other order that it thinks fit.
Semco raises seven grounds as to why the Court should exercise its discretion to dismiss the application. The first 3 grounds are as follows:-
(i)the knowledge by Nomad of the allegations made by Ms Semmens in her affidavit sworn in support of the abortive application to set aside the statutory demand.
(ii)The fact that Nomad issued the winding-up application with that knowledge.
(iii)The fact that an application was made pursuant to s 459G of the Act in respect of the statutory demand that was served one day late due to a misapprehension as to the date of service of the demand.
I am not persuaded that these three factors operate in favour of the exercise of the discretion to dismiss the application. Nomad served the statutory demand which was not complied with, giving rise to the statutory presumption of insolvency. The fact that the application was not made within the time prescribed by s 459G meant that under the regime of the Corporations Act, Semco was entitled to resort to the provisions of s 459S and provided it could establish the necessary materiality, it could agitate the matters which were the subject of the application to set aside the demand. For the reasons given, I have not granted leave pursuant to s 459S. As I have said, the material which was filed in support of the application to set aside the statutory demand sworn by Ms Semmens did not in my view successfully confront the prima facie presumption arising by s 1305 of the Act that the entries in Semco’s books were prima facie correct.
Fourthly, Semco submits that the fact that Nomad’s alleged debt is one assigned to it by Mr Cowan, who is the creator of the entries in the books of account of Semco and which are now the subject of challenges by Semco now that the debt has been asserted, is a basis for dismissing the application. I disagree. As I have said, Semco has been given considerable latitude and opportunity to impeach the prima facie presumptions arising by operation of s 1305. It has chosen not to have the books of account audited and its attack now amounts to nothing more than a generic criticism of the compilation of the accounts and their author, Mr Cowan. Ms Semmens herself admits that she knew very little about the financial affairs of Semco and the daily task of keeping the accounts fell to her former co‑director, Mr Cowan. The criticisms which she makes and the surrounding circumstances do not in my view displace the prima facie presumption of s 1305.
Fifthly, Semco submits that the fact that the proceeding is one where insolvency is a matter of presumption, not actual insolvency is a factor in favour of the exercise of the discretion that I should dismiss the application. Such a submission in my view seeks to put to one side the legislative scheme of the Corporations Act dealing with statutory demands. Presumed acts of insolvency can be displaced by resort to s 459S but the onus is on Semco to displace that presumption. The evidence that it relies on in my view does not achieve this.
Sixthly, Semco contends that the fact that the ability to rebut the presumption of insolvency by further or better evidence would involve the incurring of significant expenditure by Semco in circumstances where it is effectively dormant but for the claims of Mr Cowan and his related entities and assignees. Those conducting their affairs through corporate entities have significant advantages which also carry with it certain responsibilities. Semco has chosen not to go down the path of establishing solvency by production of the fullest and best evidence. Ms Semmens admits that she knows nothing as to how the debt was accrued. She makes generic complaints about how the transactions with which she was involved with Semco and Mr Cowan were depicted in the books of account but as I have said, those criticisms are not such in my view to displace the presumption under s 1305. Authorities such as Ace Contractors referred to above and Expile take the view that Semco should produce audited accounts. It is not to the point that Semco is dormant; what is relevant in the current application is whether it can pay its debts if and when they fall due and whether the debt which is disputed is material to its solvency.
Semco says that Nomad have not sought to rebut the evidence or address the matters raised by Ms Semmens in her affidavits of 2 December 2009 and 20 April 2010, particularly by obtaining evidence from Mr Cowan. I reject this submission. Semco bears the onus of impeaching the presumption arising by the failure to comply with the statutory demand and it has not discharged that onus or raised matters which in my view transfer the evidentiary onus in some way to Nomad. The evidence by Ms Semmens in her affidavit amounts to little more than a generic criticism of the accounts. She herself admits she knew little if anything of the financial affairs of Semco. She was content for Mr Cowan over the years to keep the books of the company and paid no heed to the day to day financial affairs as reflected in its books.
I am not persuaded that the winding up application should be dismissed in an exercise of my discretion under s 467A of the Act.
In the circumstances, I will make an order that Semco Developments Pty Ltd (ACN 090 890 529) be wound up in insolvency under the Corporations Act and that David James Lofthouse and Richard John Cauchi be jointly and severally appointed liquidators in the winding up.
Nomad’s costs of this application including reserve costs are costs in the winding up.
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