Alternative Engine Technologies Pty Limited v Kruger Ventures Pty Limited (No 2)

[2010] SASC 60

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

ALTERNATIVE ENGINE TECHNOLOGIES PTY LTD v KRUGER VENTURES PTY LTD (No 2)

[2010] SASC 60

Reasons of Judge Lunn a Master of the Supreme Court

18 March 2010

CORPORATIONS

Application to wind up for presumed insolvency based on non compliance with statutory demand - evidence of both due posting but non receipt of statutory demand - held proof of due service by virtue of statutory presumption - held Magistrates Court judgment existing at time of service of demand was proper basis for the demand even though it was subsequently set aside - s 459S of Corporations Act operated to prevent defendant from relying on the subsequent setting aside of the judgment - held defendant had not displaced the presumption of its insolvency as it had not put before the Court all of its financial affairs relating to a trust of which it was the trustee - order for winding up.

ALTERNATIVE ENGINE TECHNOLOGIES PTY LTD v KRUGER VENTURES PTY LTD (No 2)
[2010] SASC 60

Reasons on contested winding up application.

1. JUDGE LUNN:

   Background.

2. The plaintiff, Alternative Engine Technologies Pty Ltd (“Alternative”), is a company of which Benjamin Hodgson (“Mr Hodgson”) is the director.  The defendant, Kruger Ventures Pty Ltd (“Kruger”), is a company of which Martina Kruger (“Mrs Kruger”) is a director and shareholder.  There is a long history of complicated dealings between the parties, but these reasons are confined to those relevant to what I have to decide in this action.

   Kruger’s statutory demand.

3. On 4 May 2009 Kruger served on Alternative a statutory demand under s 459E of the Corporations Act 2001 (“the Act”) for $485,000.  It claimed the balance of moneys due under a loan agreement.  On 22 May 2009 Alternative instituted action no 786/09 in this Court seeking to set aside that statutory demand.  On 10 August 2009 I set aside that demand on the grounds that there was a genuine dispute about the debt and/or that Alternative had an offsetting claim against Kruger.  As a condition of this order, Alternative gave an undertaking to prosecute diligently an action in the District Court concerning this dispute and offsetting claim.  I reserved the question of costs.  On 26 November 2009 an appeal by Kruger against my order was dismissed with costs.

4. On 6 July 2009 Alternative had instituted an action, 1212/09, against Kruger in the District Court claiming damages for misrepresentation and breach of contract.  On 16 July 2009 Kruger applied in that action for an order for security for its costs of $53,600.  On 15 January 2010 Master Norman in that action ordered that Alternative provide security of $30,000 within 28 days.  In assessing the amount of the security at $30,000 Master Norman took into account that Kruger was liable to Alternative for costs ordered in the Supreme Court action, 768/09.  Those costs had not been quantified, but Master Norman in effect gave a credit for them of $15,000.  Alternative had not complied with this order for security as at the last hearing before me on 23 February 2010.  Kruger had not applied to stay or strike out the District Court proceedings for such non compliance.

   Magistrates Court action.

5. On 2 July 2009, and before the District Court action had been instituted, Mr Hodgson, on behalf of Alternative, had instituted an action in the Adelaide Magistrates Court, 4322/09, against Kruger claiming $18,330.10 relating to an engine supplied by Kruger to Alternative which “blew up” and which was “not fit for its purpose”.  Until recently neither party has been legally represented in this Magistrates Court action and that has probably been the cause of a number of the difficulties which have arisen.  On 28 September 2009 Mr Gumpl SM entered a default judgment for Alternative in that action for $18,549.  On 9 December 2009, Mr Gumpl SM set aside that judgment and gave leave to Kruger to file a defence within 14 days.  Kruger did not file a defence and on 22 January 2010 Mr Gumpl SM again entered judgment for Alternative for $18,549 plus costs.  Subsequently, Kruger has applied to set aside this judgment and Mr Gumpl SM has reserved his decision on this application.

   Statutory demand by Alternative.

6. On 29 September 2009 Alternative posted a statutory demand to Kruger, demanding payment of the judgment sum in the Magistrates Court. Kruger made no response to that demand and did not apply to set it aside. On 6 November 2009 Alternative instituted this action, 1755/09, seeking the winding up of Kruger on the basis of its presumed insolvency under s 459C of the Act based on its non compliance with the statutory demand of 29 September 2009. Kruger filed an appearance opposing the winding up on grounds that it was solvent, it had not been served with the statutory demand, there had been non compliance with some of the Corporations Rules 2003 and the judgment on which the statutory demand was based had been set aside on 9 December 2009.  The matter was initially argued before me on 11 February 2010.  After counsel for Alternative had made submissions about the inadequacy of some of the evidence put forward by Kruger about its solvency, I granted Kruger a short adjournment to file a further affidavit from Mrs Kruger.  The argument was completed on 23 February and I reserved my decision.

   Whether the statutory demand was duly served.

7. Affidavits filed by Alternative have established that on 29 September 2009 Alternative’s agent posted by ordinary pre-paid post the statutory demand in an envelope addressed to Kruger at its then registered office of 181 Old Mount Barker Road, Aldgate, SA 5154.  Alternative has deposed that the statutory demand has not been returned to it. 

8. Mrs Kruger deposed that the statutory demand has never been received by the defendant.  The registered office is her home.  Her inquiries with Australia Post were to the effect that all mail addressed to that address on and after 28 September 2009 had been delivered and no mail was held or had been held at the Post Office. 

9. Alternative calls in aid the presumption in s 29(1) of the Commonwealth Acts Interpretation Act 1901 that service by post is deemed to have been effected by properly addressing, prepaying and posting a letter.  It was not disputed that the prerequisites for the operation of s 29(1) had been satisfied.  There is no evidence of any circumstance which may have indicated that the statutory demand was not delivered by Australia Post to Kruger’s registered office.

10. On the evidence, and by virtue of the presumption from s 29(1) of the Acts Interpretation Act, Alternative has established delivery of its statutory demand to Kruger’s registered office shortly after 28 September 2009. Mrs Kruger’s affidavit says that it was not received. However, mere evidence of non receipt is not sufficient to displace the evidence of delivery and the presumption in s 29(1) of the Act: Deputy Commissioner of Taxation v Meredith (2007) 245 ALR 150; Perpetual Nominees Ltd v Masri Apartments Pty Ltd (2004) 49 ACSR 714. Thus, Alternative has established the due service of the statutory demand.

    Effect of the Magistrates Court judgment being set aside.

11. Under s 459E(1) of the Act the subject matter of a statutory demand has to be a debt. “Debt” is not defined in the Act. The claim of Alternative as pleaded in the Magistrates Court was probably unliquidated, but once it was quantified by the judgment of the Magistrates Court on 28 September 2009 it became a judgment debt which is a debt for the purposes of s 459E(1): Pearl Bay Corp Pty ltd v Lodur Pty Ltd (2001) 19 ACLC 982. It remained a judgment debt until after the statutory demand had expired. The fact that the judgment was subsequently set aside did not operate retrospectively to mean that there was no judgment debt during the period of the operation of the statutory demand: Moore v De Biasi (1975) 10 SASR 128. Kruger also argued that the claim in the Magistrates Court action duplicated part of the claim in the District Court action. This would not invalidate the judgment in the Magistrates Court. It would merely mean that Alternative would be put to its election to have that claim stayed in one or other of the Courts:  Caloundra Boat Yard Pty Ltd v The Almonta [1968][ SASR 325.

12. If Kruger had applied to set aside the demand doubtless one of the grounds relied upon would have been that there was no debt within s 459E(1) of the Act. This in turn would have raised whether there was a judgment debt. The usual practice would have been to have adjourned the application to set aside the demand for the Magistrates Court to deal with an application to set aside the judgment. Under s459S(1)(b) of the Act Kruger is precluded from now relying upon such a ground which it could have relied upon if it had made an application to set aside the demand. It did not seek leave under s 459S(1) to rely on such a ground. Hence any subsequent setting aside of the judgment cannot be relied upon by Kruger in answer to the winding up application.

    Insolvency.

13. There is a presumption under s 459C(2)(a) of the Act that Kruger is insolvent. Under s 459C(3) of the Act the onus is on Kruger to prove that it is solvent. The authorities place a high onus on a company to produce all relevant evidence on matters relevant to its solvency: Ace Contractors Ltd v Westgarth Developments Pty Ltd, Weinberg J, Federal Court of Australia, [1999] FCA 728; Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711.

14. The only evidence put forward by Kruger as to its solvency were the two affidavits of Mrs Kruger.  To the first of those affidavits she exhibited unaudited financial statements for Kruger for the year ended 30 June 2009 prepared by its professional accountants, but containing riders that they were prepared on information provided by the directors and that the accountants did not accept responsibility for the contents of the report to any persons other than the directors or the members of Kruger.  During the first hearing counsel for Alternative pointed out that these accounts, and the first affidavit of Mrs Kruger, did not refer to the loan of $485,000 which had been the subject of the statutory demand served by Kruger on Alternative or to Kruger’s contingent liability for costs ordered against it in action 768/09.  I granted an adjournment to Kruger to file a further affidavit on these matters.

15. The second affidavit of Mrs Kruger revealed that Kruger was the trustee of the Kruger Family Trust.  In that capacity it had borrowed $500,000 from Jurgen Klein Investments Pty Ltd (“Klein”) which was the source of the $485,000 which it had on-lent to Alternative.  Paragraph 9 of this affidavit states:

    ….. The financial accounts of the Defendant do not account for the loan of $500,000 from (Klein) as this liability was incurred by (Kruger) in its capacity as trustee of the Kruger Family Trust and has been agreed with (Klein) not to be a personal liability of (Kruger).

16. Exhibited to the second affidavit of Mrs Kruger was a letter dated 17 February 2010 (the day before the affidavit was sworn) from Klein to Kruger which read:

    17 February 2010

    …..

    I write to confirm the arrangements between Kruger Ventures Pty Ltd (“Kruger”) and Jurgen Klein Investments Pty Ltd (“Investments”) in relation to the liability of Kruger to Investments in respect of certain amounts.

    Pursuant to a Principal Agreement dated 10 April 2006, Investments lent to Kruger in its capacity as trustee of the Kruger Family Trust the amount of $500,000.  This amount together with any interest charged thereon is repayable in accordance with the terms of that Agreement and the repayments of this amount and any other amounts payable under that Agreement is secured by a registered charge over the assets of Kruger in its capacity as trustee of the Kruger Family Trust (but including Kruger’s right of indemnity against the trust fund).

    In addition to advancing the loan moneys, Investments has agreed to pay various costs and expenses on behalf of Kruger in its capacity as trustee of the Klein Investment Trust, including all legal fees and court ordered costs incurred in defending or appealing various actions brought by Alternative Engine Technologies Pty Ltd against Kruger. …..

    …..

    I confirm that Investments has agreed that the liability of Kruger to pay any amounts owing under the Principal Agreement and all legal fees and court costs referred to above, including future fees and costs to be incurred in relation to these matters, is a liability of Kruger in its capacity as trustee of the Kruger Family Trust, not a personal liability of Kruger.  Accordingly, I confirm that the only personal asset of Kruger to which Investments in its capacity as trustee of the JK Investments Trust may have recourse in respect of these amounts is the right of indemnity that Kruger has for these liabilities against the trust assets of the Kruger Family Trust.

17. This letter does not make complete sense.  In the third paragraph it refers to Klein in its capacity as trustee of the Klein Investment Trust, but in the last sentence it refers to Klein in its capacity as the trustee of the JK Investments Trust.  No documents constituting or evidencing this alleged arrangement between Klein and Kruger were put in evidence and there was no affidavit filed from anyone authorised to speak on behalf of Klein.  It is unclear whether the arrangements spoken about are supported by valuable consideration.  The authorities mentioned above required that Kruger should have adduced proper evidence on the contents of this letter, but it has not.

18. I infer from the affidavits of Mrs Kruger that the accounting for the affairs of the Kruger Family Trust, of which Kruger is the trustee, has been kept separate from the accounts of Kruger. While this may be a matter of accounting convenience, it means that all of the financial affairs of Kruger, on which its solvency under s 95A of the Act is to be assessed, have not been put before the Court. The liabilities incurred by a trustee in its capacity as a trustee are personal liabilities of the trustee subject to any rights of indemnity against the trust assets which depend on the express terms of the trust: Westpac Banking Corp v Garrett, White J, 6 September 2004, [2004] SASC 265 at [40-41]; Moyes v J & L Developments Pty Ltd No 2 (2007) 250 LSJS 61; Deputy Commissioner of Taxation v Barroleg Pty Ltd, Young J, Supreme Court of New South Wales, 24 September 1997 [1997] NSWSC 428. No information about the financial affairs of the Kruger Family Trust have been adduced by Kruger. It is unknown what liabilities Kruger has incurred in its capacity as trustee and what, if any, rights it has to be indemnified against those liabilities out of the trust assets. In the absence of such evidence it is impossible for Kruger to show that it is solvent. On these grounds alone I find that Kruger has not displaced the presumption of its insolvency under s 459C(2)(a) of the Act.

19. It is not necessary to go into the interesting question of whether the failure to bring into account the contingent liability for costs under the Order in action 768/09 affects the proof of solvency.  While Master Norman gave some credit to Alternative for those costs in his order for security for costs I doubt that it amounts to a satisfaction of the liability for the costs.

20. Any failure of Kruger to comply with Rules 5.4(4) and 2.4(2) of the Corporations Rules 2003 (South Australia) have been remedied and are not of sufficient import to preclude an order for the winding up of a company which is deemed to be insolvent.

21. Accordingly, there will be an order for the winding up of Kruger Ventures Pty Ltd.