Admin Communications Services Pty Ltd v Teledata World Services Pty Ltd

[2000] WASC 20

ADMIN COMMUNICATIONS SERVICES PTY LTD -v- TELEDATA WORLD SERVICES PTY LTD [2000] WASC 20

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2000] WASC 20
Case No:	COR:235/1999	Heard:	13 DECEMBER 1999
Coram:	MASTER SANDERSON	Delivered:	8/02/00
No of pages:	11	Judgment Part:	1 of 1
Result:	Leave to adduce evidence under s 459S granted Company wound up
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Parties:	ADMIN COMMUNICATIONS SERVICES PTY LTD (ACN 062 493 583) TELEDATA WORLD SERVICES PTY LTD (ACN 076 676 583)
Catchwords:	Corporations Law Application to wind up company in insolvency Application to adduce evidence which could have been used to set aside statutory demand Test of solvency
Legislation:	Corporations Law, s 95A(1), s 459P and s 459S
Case References:	Bayview Holdings Pty Ltd (In Liq) v Zan Holdings Pty Ltd, unreported; FCt SCt of WA; Library No 980585; 19 October 1998 Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467 Leslie v Howship Holdings (1997) 15 ACLC 459 Re Mike Electric (Australia) Pty Ltd (In Liq) (1983) 1 ACLC 758 Sandell v Porter (1966) 115 CLR 666 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1,013 Levi v Guerlini (1997) 15 ACLC 913 Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 Newark Pty Ltd (In Liq); Taylor v Carroll (1991) 9 ACLC 1,592 RHD Power Services Pty Ltd (1991) 9 ACLC 27 Spencer Constructions v Aldridge (1997) 24 ACSR 353

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION : ADMIN COMMUNICATIONS SERVICES PTY LTD -v- TELEDATA WORLD SERVICES PTY LTD [2000] WASC 20 CORAM : MASTER SANDERSON HEARD : 13 DECEMBER 1999 DELIVERED : 8 FEBRUARY 2000 FILE NO/S : COR 235 of 1999 MATTER : Section 459S of the Corporations Law BETWEEN : ADMIN COMMUNICATIONS SERVICES PTY LTD (ACN 062 493 583)

Applicant

AND

TELEDATA WORLD SERVICES PTY LTD (ACN 076 676 583)
Respondent

Catchwords:

Corporations Law - Application to wind up company in insolvency - Application to adduce evidence which could have been used to set aside statutory demand - Test of solvency

Legislation:

Corporations Law, s 95A(1), s 459P and s 459S

(Page 2)

Result:

Leave to adduce evidence under s 459S granted

Company wound up

Representation:

Counsel:

Applicant : Mr K L Christensen
Respondent : Mr A R Heaver

Solicitors:

Applicant : Tottle Christensen
Respondent : Clayton Utz

Case(s) referred to in judgment(s):

Bayview Holdings Pty Ltd (In Liq) v Zan Holdings Pty Ltd, unreported; FCt SCt of WA; Library No 980585; 19 October 1998
Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467
Leslie v Howship Holdings (1997) 15 ACLC 459
Re Mike Electric (Australia) Pty Ltd (In Liq) (1983) 1 ACLC 758
Sandell v Porter (1966) 115 CLR 666

Case(s) also cited:

Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785
Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1,013
Levi v Guerlini (1997) 15 ACLC 913
Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411
Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823
Newark Pty Ltd (In Liq); Taylor v Carroll (1991) 9 ACLC 1,592
RHD Power Services Pty Ltd (1991) 9 ACLC 27
Spencer Constructions v Aldridge (1997) 24 ACSR 353

(Page 3)

1 MASTER SANDERSON: This is an application to wind up the respondent. The respondent opposed the application and sought leave under s 459S to oppose the application on grounds that it could have relied upon if it had made an application to set aside the statutory demand. Section 459S reads as follows:

"459S(1) [Demand may not ground opposition] In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:

(a) that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b) that the company could have so relied on, but did not so rely on (whether it made such an application or not).

459S(2) [Ground material to solvency] The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent."

2 For very good practical reasons and by agreement between the parties, the question of whether or not the respondent should be permitted to rely upon matters it could have raised in an application to set aside statutory demand and the question of the solvency of the respondent were argued together. But it is apparent that in determining the applications it is the question of the grant of leave under s 459S which must be decided first. Austin J considered this question in Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467. His Honour said (at 480):

"In my opinion, s 459S operates by allowing the Court to grant leave to the company to oppose the application to wind it up on a ground relevant to the winding up application. It does not permit the company to litigate, at the winding up stage, an application to set aside the statutory demand. Where the question of indebtedness is raised in the winding up proceedings, the question is not whether there is a genuine dispute about the existence of the debt, but rather whether the dispute about the debt affects the plaintiff's standing or the ultimate question whether the company is solvent. The matter must be addressed in three stages: the first is whether leave should be granted to permit the company to dispute the debt upon which the demand was based, and the second (which

(Page 4)

arises if leave is granted) is whether the plaintiff has standing as a creditor under s 459P; and the third is whether the company is solvent, taking into account the dispute about the debt."

3 In this case no issue was raised about the standing of the applicant to bring the winding up application. The two questions to be decided then, are whether leave should be granted to permit the company to dispute the debt upon which the demand was based and, if leave is so granted, whether the company is solvent, taking into account the dispute about the debt.

4 In relation to the grant of leave, Austin J said (at 481):

"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."

5 This formulation of the test is consistent with what was said by the Full Court in Bayview Holdings Pty Ltd (In Liq) v Zan Holdings Pty Ltd, unreported; FCt SCt of WA; Library No 980585; 19 October 1998. However, it does seem to me that the test postulated requires one qualification. The wording of s 459S(1) requires that the debt be material to proving that the company is solvent. Thus, if the discretionary considerations under the first and second limb of the test favoured the grant of leave but the debt was not material to proving the company was solvent, then leave could not be granted. That is the clear wording of the section. Equally, if the debt is shown to be material and discretionary considerations under the first two limbs were against the grant of leave, leave would still have to be granted.

6 As to when a debt should be regarded as "material" for the purposes of s 459S(1) Steytler J, delivering the judgment of the court in the Bayview Holdings' case, put the position as follows (at 8):

(Page 5)

"The materiality or otherwise of the disputed debt to the appellant's solvency was required to be assessed having regard to the available evidence as a whole. There will often be the prospect that the company's assertions as to its financial standing will not be made out when the whole of the available evidence is considered (as proved to be the case here). If that prospect is not evaluated at the time of the hearing of the application the court would be left to decide the application on the strength, only, of the applicant's own assertions. That would not have been the intention of the legislature. The court is required by s 459S to be satisfied that the ground sought to be raised is material to proving a company is solvent, not that it is material on the strength of the applicant's contentions only.

Moreover the test, under s 459S(2) is that of whether or not the ground sought to be raised in opposition to the application is 'material' to proving that the company is solvent, not that of whether or not it is determinative of the company's solvency. It is not only determinative evidence which is material to proof of solvency. It would be enough, for the purposes of an application under s 459S, to show that the ground sought to be raised might turn out to be determinative of the applicant company's solvency once all of the evidence has been heard, depending upon what evidence is accepted by the trier of fact."

7 The basis upon which the respondent disputes the debt is set out in the affidavits of Reeder Glenn Nichols ("Nichols") sworn, respectively, 15 October 1999, 27 October 1999, 24 November 1999 and 10 December 1999. Taken together, these affidavits comprise the evidence filed on behalf of the respondent. (The applicant took objection to certain paragraphs in various of the affidavits of Nichols. During the course of the hearing I made orders striking out certain paragraphs of the affidavit of 10 December 1999. Insofar as objections are raised to other paragraphs of other affidavits, I have not found it necessary to finally determine these questions because I have not placed reliance on any of the paragraphs in question.)

8 The position that emerges from Nichols' affidavits can be summarised in the following way. The respondent was incorporated in late 1996 and became a telecommunications service provider. Its principal business activity was the marketing of telephone card services to the tourist industry in Australia and internationally. It was also involved in the installation and maintenance of regional and remote

(Page 6)

telecommunications services. In May 1998 the respondent contracted to provide temporary telephone services to construction camps in northern Queensland. As part of this project the applicant was contracted to supply satellite communications and telephone switching equipment for the project. By facsimile message dated 20 July 1998 the applicant offered to supply certain equipment at a specified price and to assist with the installation and programming of that equipment at an hourly rate of $75 per hour. A copy of this facsimile message appears as Annexure "NR1" to the affidavit of Neville Robb ("Robb") sworn 24 November 1999 and filed in opposition to the application. Appearing as part of Annexure "NR1" is a copy of a letter from the respondent to the applicant agreeing to the applicant's terms and conditions. This exchange of correspondence forms the basis of the contractual arrangement between the parties.

9 Nichols and Robb went to north Queensland in July 1998 to install the equipment. Some difficulties arose with the installation and Robb spent a total of 34 days on the installation project. During this period certain payments were made by the respondent to the applicant totalling some $26,000. By December 1998 it became apparent that the installation was not successful and the respondent withdrew equipment from the project. The failure of the project generally led to financial difficulties for the respondent. This, in turn, led to Nichols and Robb discussing the contractual position between the parties in December 1998. Correspondence followed which appears to have been directed at varying the contract. The thrust of the negotiation was that equipment which had been supplied by the applicant would be returned to it and sold. That would reduce the amount owing by the respondent to the applicant pursuant to the contractual arrangement. It appears, however, that there was no meeting of the minds between Robb and Nichols. In particular, Nichols assumed that there would be either a reduction in the amount paid to the applicant for the time Robb spent on the installation or that any amount due and payable had already been paid. Nichols took a different view. Correspondence which appears as Annexure "NR10" to Robb's affidavit of 24 November 1999 makes it plain that by early February 1999 there had been a break down in the relationship between the parties. The applicant says that it is owed $21,401 by the respondent. The respondent appears to acknowledge that it is indebted to the applicant but says it is unable to quantify that indebtedness.

10 It is not necessary for me to conclude, for the purposes of this application, whether or not there is a bona fide dispute between the parties. That would have been a matter to be considered had application

(Page 7)

been made to set aside the statutory demand. However, for the purposes of considering whether or not leave ought be granted under s 459S(1), it is apparent that there is a basis upon which the respondent can dispute the debt. It may well be the case that as a result of the discussions and correspondence passing between the parties in January and February 1999 that there was a variation of the contract entered into in July 1998. As a result, the amount owing to the applicant may not be the full amount claimed in the statutory demand. It is not possible to say with any certainty what amount might be owing but, based upon the evidence led by the respondent, it is clear that some amount is owing.

11 As to the question of why no steps were taken to set aside the statutory demand, this is addressed in par 20 through to par 24 of Nichols' affidavit of 15 October 1999. Nichols mistakenly believed that the failure of the statutory demand to specify a return address in the state or territory in which the demand was served was fatal to the demand itself. Clearly, that was not the case and if Nichols had taken advice from solicitors he would have been quickly put right. In addition, Nichols was travelling during the relevant period and was for some time indisposed. It must be said that, taken in the overall, the reasons for not taking action to set aside the statutory demand are unconvincing.

12 Turning to the financial position of the respondent, appearing as Annexure "RGN2" to Nichols' affidavit of 15 October 1999 are the unaudited financial statements for the respondent. These accounts are for the period 1 July 1999 to 28 September 1999. The current assets are shown as being $265,708. The notes to the account provide no hint of how the assets are made up. The liabilities are said to stand at $103,756. Once again, the notes provide no indication of what is contained in the liabilities. Nichols, in his affidavit, explains the accounts in the following way (at par 13):

"13. The entry of $265,707 in the assets column of the balance sheet represents an invoice in relation to the liquidated portion of a claim by Teledata in the Supreme Court of South Australia against Australian Satellite Services. Of the $103,755 in the liabilities portion of the balance sheet, $80,658.41 represents invoiced amounts being part of a counter claim by Australian Satellite Services in those proceedings."

13 I have some hesitation about the way in which the accounts treat as an unqualified asset proceeds to be derived from litigation. The action in

(Page 8)

the Supreme Court of South Australia may or may not be successful. Put at its highest, the claim is surely a contingent asset - the contingency being the obtaining of a judgment in the court proceedings. Equally, any liability should be seen as a contingent liability - although including the amount in the accounts on an unqualified basis suggests an admission of liability. Leaving the liability to Australian Satellite Services to one side, the liabilities comprise three other amounts. $12,726 is claimed by a firm known as Hire Intelligence. That sum is the subject of local court proceedings and liabilities still to be determined. The sum of $5,371.20 was owing to a firm known as Carrington Distributors Pty Ltd. This claim has now been settled and a notice of discontinuance in local court proceedings has been filed. No liability now attaches to the respondent for any part of this debt (see par 5(b) of the affidavit of Nichols sworn 10 December 1999). An amount of $5,000 was owed by the respondent to a firm of solicitors, Corsers. That claim has now been settled and, once again, no liability attaches to the respondent: see par 5(c) of Nichols' affidavit of 10 December 1999. That would mean that as at the date of the hearing the only asset of the respondent is the claim against Australian Satellite Services and the only liability was the counterclaim. The respondent is not presently trading.

14 The cessation of trading by the respondent occurred in late September 1999. By agreement dated 28 September 1999 the respondent sold its business to a company associated with Nichols on certain terms and conditions. A copy of that agreement appears as Annexure "RGN1" to the affidavit of Nichols sworn 15 October 1999. Pursuant to this agreement, the third party paid only $10 for the respondent's business but it took over trade creditors and liabilities in an amount of just over $1,300,000. The result was to leave the respondent a non-trading shell.

15 It is against that background that it falls to be determined whether or not the dispute about the debt owed by the respondent to the plaintiff is "material". In my view it is. If that debt is put to one side all that can be said is that the respondent has contingent assets and contingent liabilities. It is only when the debt claimed by the applicant is taken into account that it can possibly be said the respondent cannot meet its debts as and when they fall due. That being so, I am of the view that when the solvency of the respondent is considered, the dispute about the debt ought be taken into account.

16 The remaining question then is whether or not the respondent is solvent. In determining the question of solvency of the respondent there are four applicable principles:

(Page 9)

(1) Section 95A(1) of the Corporations Law states a "cash flow test" rather than a "balance sheet test" of solvency. It follows that the mere fact that the company's assets exceed its liabilities does not establish solvency.

(2) The adoption of a cash flow test does not mean the extent of the company's assets are irrelevant to the inquiry.

(3) The resources of the company requiring consideration include the credit resources in the sense of terms of credit available to it.

(4) The question of solvency must be assessed at the date of hearing. This does not mean that future events are to be ignored.

17 These principles emerge, I think, from the detailed consideration of this question provided by Sackville J in Leslie v Howship Holdings (1997) 15 ACLC 459 as approved by the Full Court in Bayview Holdings (supra). In this case the respondent has no cash flow. It has no income producing assets, its business having been transferred to a third party. However it must have an ongoing liability to fund the South Australian Supreme Court proceedings. This issue is nowhere addressed in the evidence filed on behalf of the respondent. Furthermore, there is the undoubted liability of the respondent to the applicant, whatever the extent of that liability might be. The question of the provision of necessary funds to the respondent is dealt with by Nichols in his affidavit of 15 October 1999. He says (at par 15):

"15. Should the situation arise that the disputed debts are resolved and monies are immediately payable by Teledata and Teledata has insufficient funds to meet any such debts, I and my associates in the United States and United Kingdom will support Teledata by immediate payment of such debts. To date my associates (Mr Tony Toms and Mr Peter Kutell) and I have paid $2.7 million in trade creditors and absorbed $900,000 of debt. I am informed by Mr Toms and verily believe that they remain prepared to support Teledata and to inject sufficient capital into the company to allow Teledata to continue to pay its debts as and when they fall due. I am aware that the net assets of each of Mr Toms and Mr Kutell greatly exceed the liabilities of Teledata. I also intend to support Teledata and, with Mr Kutell and Mr Toms meet the debts of all creditors with legitimate claims against Teledata."

(Page 10)

18 That evidence is uncontested. Although the question of the funding of the South Australian litigation is not directly addressed, it is reasonable to assume that any liabilities associated with that court action will be met by Nichols and his associates. It is to be noted, however, that while Nichols' intentions and those of his associates as at the date of the swearing of the affidavit are not to be doubted, no-one is under any legal obligation to support the respondent. Nichols and his associates may at any time have a change of heart. If that were to occur, it is clear the respondent would collapse. In other words, the ability of the respondent to pay its debts as and when they fall due is entirely dependent upon the continued support of Nichols and his associates.

19 The question of what amounts to insolvency in circumstances where a third party undertakes to provide funds was considered by the High Court in Sandell v Porter (1966) 115 CLR 666. Barwick CJ (with whom the rest of the court agreed), put the position as follows (at 670):

"Insolvency is expressed in s 95 [of the Bankruptcy Act] as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from the consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency."

20 In this case it is the reliance upon Nichols and his associates which is said to be the difference between solvency and insolvency. But any cash that may be available from a third party cannot be described as "the debtor's own money". This issue was considered by Rath J in Re Mike Electric (Australia) Pty Ltd (In Liq) (1983) 1 ACLC 758. In that case evidence was led by a Mr Bickley that from time to time he would contribute to the company to allow it to meet its debts. This, it was argued, meant that there were no debts presently due and owing and that such debts as fell due could be met by the company. His Honour said (at 763):

(Page 11)

"Even if, contrary to my view, Mr Bickley would have been willing and able to assist the company to pay its debts, the availability of such assistance would not have put the company in the position of being able to pay its debts as they became due from its own money. Finance so obtained could not be described as the company's own money. There was no evidence that Mr Bickley would make a gift of money to the company, or that any money lent by him to the company would or could be adequately secured."

21 That is precisely the position which applies in this case. There is no question of the respondent meeting any debt from its own assets. It has nothing that it could realise in the short term. Even if its debts were paid by Nichols or his associates, they could not be said to be paid from the company's own money. The position might well have been different if the evidence indicated that there was an agreement whereby Nichols and his associates were to advance funds to the company to allow it to progress its South Australian Supreme Court action and to meet other debts as and when they fell due, subject, perhaps, to pre-emptive rights to any funds recovered as a consequence of the legal proceedings. There would exist a legally enforceable agreement between Nichols and others and the company. The access to funds provided by Nichols would then be a relevant consideration in deciding whether or not the respondent was solvent. However in my view, in the present circumstances, the respondent has not discharged the onus of showing that it is not insolvent and it should therefore be wound up. Subject to hearing further submissions from the parties, I would propose making orders in terms of the minute filed by the applicant.