Aquatown Pty Ltd v Holder Stroud Pty Ltd

[1996] FCA 532

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION  No VG 3557 of 1995

BETWEEN:  AQUATOWN PTY LIMITED  Applicant

AND:  HOLDER STROUD PTY LIMITED  Respondent

COURT:         NORTHROP J
DATE: 25 JUNE 1996
PLACE:         MELBOURNE

REASONS FOR JUDGMENT

The application before the Court has been brought by Aquatown Pty Ltd, as applicant, against Holder Stroud Pty Ltd, as respondent, seeking an order that the respondent's statutory demand dated 1 September 1995 and served on the applicant on 11 September 1995 be set aside. This is a type of case which comes quite frequently before this Court under Part 5.4 of the Corporations Law.  This Part of the Corporations Law makes provision for the winding up of corporations.  Section 459A provides:

"459A.On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency."

Paragraph 459P(1)(b) provides:-

"459P(1)Any one or more of the following may apply to the Court for a company to be wound up in insolvency:

(a) ...
           (b)       a creditor ...
           (c)       ..."

Jurisdiction is conferred on the Court by section 459A to make a winding up order in insolvency on an application brought by a creditor.  Paragraph 459C(1)(a) provides:

"459C(1)This section has effect for the purposes of:

(a)an application under section ... 459P ...; or

(b)       ..."

A company may be wound up if the company can be proved to be insolvent.  Sub-section 459C(2) provides for presumptions of insolvency.  For present purposes, the relevant parts of sub-section 459C(2) are set out:-

"(2)     The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application is made:

(a)the company failed (as defined by section 459F) to comply with a statutory demand; or

(b)execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied; or

(c)..."

Sub-section 459C(3) provides:-

"3.       A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the application."

Division 2 of Part 5.4 relates to statutory demands. Under section 459E a person is empowered to serve on a company a demand relating to a single debt or a number of debts which amount in all to at least a statutory minimum which is $2000. The section provides for the contents of the demand and sub-section (3) requires that the demand, unless it is a judgment debt, be accompanied by an affidavit that verifies that a debt or the total of the amount of the debts is due and payable by the company and complies with the requirements of the legislation. Provision is then made that if there is a failure to comply with the statutory demand, the presumption arises and, except in special circumstances, if an application to wind up is based on that presumption of insolvency the company affected is not permitted to question the demand or the amount owing in the statutory demand; see sections 459F and 459S.

Section 459G enables the company to apply to the Court for an order setting aside a statutory demand served on the company.  The application and the supporting affidavit must be filed and served within 21 days.  Section 459H is most important.  Sub-section (1) provides:-

"459H.(1)   This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

(a)that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

(b)that the company has an off-setting claim."

Sub-section 459H(2) requires the Court to calculate the substantiated amount of the demand in accordance with the formula which is then set out.  The sub-section makes reference to "admitted total" and "offsetting total".  Sub-section 459H(3) provides:-

"(3)     If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand."

Sub-section 459H(4) provides:-

"(4)If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:

(a)varying the demand as specified in the order; and

(b)declaring the demand to have had effect, as so varied, as from when the demand was served on the company."

Sub-section 459H(5), provides that the phrases, "admitted amount" and "offsetting claim" in relation to a debt, have the following meanings:-

"admitted amount":

"(a)If the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or

(b)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or

(c)otherwise - the amount of the debt."

"offsetting claim":

"... a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)."

Reference should be made also to sub-section 459(J):

"459J(1)On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

(a)because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

(b)there is some other reason why the demand should be set aside."

Section 459K provides:

"459K  A statutory demand has no effect while there is in force under section 459H or 459J an order setting aside the demand.

This is the statutory framework for statutory demands.  The purpose of the provisions is to enable a creditor of a company, where there is no genuine dispute between the creditor and the company as to amounts owing to the creditor, to obtain a speedy method of obtaining a presumption of insolvency on the part of the company as a step towards having the company wound up.  As has been said in many cases, the provisions of section 459G and 459H make it clear that the Court is not entitled to consider and decide whether the claim for the debt would succeed or that the offsetting
claim would succeed.  The word "genuine" shows that any dispute about the existence or amount of the debt or the offsetting claim, as the case may be, must be genuine.  The issue is whether the dispute or offsetting claim is in fact genuine in the sense of being real or true and not merely spurious.  That is something that must be kept in mind at all times.  That is one aspect of this legislation which, I think, all authorities have agreed upon. 

We come then to the facts of this case.  The statutory demand is contained in exhibit PRS1 to the affidavit of Paul Robert Sproule, a director of the applicant.  It appears to be in compliance with the prescribed form of the regulations.  It has annexed to it an affidavit by John Leonard Stroud verifying the amount of the claim.  The claim is that the company owes Holder Stroud Proprietary Limited trading as Stroud Pool and Spa Equipment of 65 Parramatta Road, Auburn, the creditor, the amount of $8305.60, being the amount of the debt described in the schedule.  The statutory demand sets out the various options open to the company which are three:  To make an application to have the demand set aside; to pay the amount or to do nothing.  The claim made is set out in the schedule to the statutory demand and is as follows:-

"Description of the debt  Amount of the debt

Goods provided to the Debtor Company
           from 28 August, 1990 to 24 September, 1990 -  $3,936.37

Goods provided to the Debtor Company
           from 8 March, 1993 to 6 June, 1994  $4,369.23
           TOTAL DEBT OWING -  $8,305.60"
  =====

The application seeks to have the statutory demand set aside.  The application is supported by affidavit material.  It is here, in my opinion, that the case, to a large extent, got out of hand and out of control.  The issues to be determined on an application of this kind can be any of a number.  First, there can be an attack on the validity of the statutory demand.  That has not been done in this case.  If the demand is valid, it is necessary to show whether there is a genuine dispute or a genuine offsetting claim of the type of which I have indicated.  One thing that is apparent from all the affidavits which have been filed, and there have been a very large number extending over a large period of time, the last of which were filed this morning, together with a large number of exhibits to most of those affidavits, is that even before the date of the statutory demand there was a dispute between the applicant and the respondent concerning what amount, if any, was owing by the applicant to the respondent.  This involved a history over many years, commencing before 1990.  The dispute related to the question of goods sold and delivered by the respondent to the applicant, being goods essentially connected with parts of swimming pools and fixtures attached to them.  There were allegations of a contract or an agreement between the parties; questions of sole distributorship were raised; questions of display equipment were involved; questions of defective goods were raised; questions of return of goods were raised.  On any view, it could not be said that the statutory demand, expressed as it is for goods sold and delivered over the period 28 August to 24 September 1990, and 8 March 1993 to 6 June 1994, was a true picture of what the demand was all about.  It appears, on any view and on all the material, that credits had been given from time to time.  Disputes have arisen, and still arise, in relation to the amounts of those credits, whether there have been breaches of the various agreements between the parties, whether return of goods has been in accordance with the terms of the agreement and matters of that kind.  The only view I can form from looking at all of the affidavits is
that under the guise of a statutory demand and application to set it aside, the applicant initially, and then the respondent, have attempted to treat this application as if it were a hearing by a court to determine the amount of any debt that one party may owe to the other.

The issues raised by the affidavits involve not only the claim for the goods sold but also the amounts of credits to be given for various claims being made by the applicant with respect to offsetting claims.  This is the very thing which a court will not do when considering an application to set aside a statutory demand.  During the course of submissions I expressed a view that in a case like this where the amount being claimed is just over $8000, it is very unwise for a creditor to serve a statutory demand with all that flows from that in circumstances where it should have been obvious to the creditor that there was a dispute between the parties as to the existence of the debt and the amount of the debt as well as offsetting claims.  This is apparent, if for no other reason, from the fact that the statutory demand, although it is not expressed to do so, does take into account credits which were given by the respondent to the applicant.  There is much to be said for the view, particularly in cases where there is a relatively small amount, as in this case, an amount which normally would be determined by a Magistrate's Court, that a creditor should not adopt the process of trying to get a statutory presumption of insolvency, but should test the matter in a court of appropriate jurisdiction.  Such a course would enable the court, in the exercise of its powers in that regard, to determine what in fact was owing one way or the other.  Once a judgment has been obtained that could be used for the purposes of a statutory demand, or even possibly to support an application without a statutory demand on the basis of proving that the company was in fact insolvent.

In relation to a different type of case, what has been said to be a building case where presumably much greater amounts were involved, Young J of the Supreme Court of New South Wales suggested that this may well be an appropriate view for the Courts to take and to set aside a statutory demand pursuant to the power conferred by paragraph 459J(1)(b) of the Corporations Law, which I read again:-

"459J(1)On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

(a)...; or

(b)       there is some other reason why the demand should be set aside."

The case in which his Honour made that comment was John Holland Constructions v Kilpatrick Green (1994) 12 ACLC 716. This approach is particularly appropriate in this case where the amount in dispute is small. It should have been obvious to the respondent that the applicant was in fact disputing both liability and amount and that the dispute was genuine. It is completely inappropriate for this Court in these circumstances to be asked to determine the amount owing under the guise of setting aside a statutory demand.

In any event in addition to exercising the power conferred by paragraph 459J(1)(b) the Court is satisfied that there is a genuine dispute between the applicant and the respondent about the existence of the debt, as to the amount of the debt and that there is a genuine offsetting claim as referred to in section 459H. The Court has spent much time looking at affidavit material and exhibits, and hearing submissions going to minute detail as to the dealings between the parties over a long period of time. There have been
attempts to set out a reconciliation of the different views between the parties which highlights the differences between them as to amounts.  There is also correspondence suggesting that the respondent allowed credits for other amounts which somehow do not appear in its current figures showing the amount being claimed.  It was argued on behalf of the respondent that the applicant had not verified the details of the amounts of the offsetting claim, particularly in relation to returned goods and that the amount claimed has not been substantiated in detail.  But the moment the Court must go into that type of exercise the Court is getting very close to determining what the amount of the claim is, what the amount of the offsetting claim is, the very thing which the Court should not do under this provision of the Corporations Law.

Looking at all of the evidence, the Court is satisfied that over a long period of time there have been disputes between the parties relating to the amounts owing by the applicant to the respondent, there have been disputes as to credits that the applicant should have set off against those amounts for goods sold and delivered, and that in addition there may well be claims based on breaches of contract, the sole distributorship contract and other grounds.  The Court is satisfied, although not able to give any realistic estimate of the amount, that they equal if not exceed the amount of the claim made by the respondent.  The Court is satisfied that the dispute and offsetting claim are genuine.

In these circumstances the Court again agrees, with respect, to what was said by Young J in the John Holland case.  This all goes to the question of not going into detail of the amount of the claims but looking at the material to determine whether the claims are genuine and whether the substantiated amount is greater than the $2000 referred to as the minimum amount for a statutory demand.  The whole of the correspondence and
dealings between the parties, including meetings and conversations as well as correspondence suggests to me that this is a genuine demand on behalf of the applicant and that the respondents should have known it was genuine. In addition to relying upon paragraph 459J(1)(b) the Court also is satisfied that the substantiated amount owing, if any, is less than the statutory minimum. In those circumstances the Court must by order set aside the demand.

Accordingly, in all the circumstances the application will be allowed and the statutory demand dated 1 September 1995, and served on the applicant on 11 September 1995, is ordered to be set aside.

The applicant has sought an order that the respondent pay the applicant's costs of the applicant on an indemnity or solicitor and client basis. This is a power which the Court has under the power contained in section 43 of the Federal Court of Australia Act 1976. It is a power which is not exercised except in exceptional circumstances. It has been suggested that there must be an abuse of the process of the Court. That may be stating it a bit too extremely. But the way in which the power is exercised is that if a proceeding is commenced on grounds that are completely unjustified where this should have been obvious to the person bringing the claim, then, as a matter of justice, the opposing party should not be at risk of having to pay the difference between party and party costs and solicitor and client costs.

There is much to be said in the present case that here the respondent should not have given the statutory demand but rather should have sued in the appropriate court to determine the liability of the applicant.  But as opposed to that, in my reasons, I indicated that in my opinion the way the case has proceeded in this Court has been on a false basis by trying to establish the reality of the position and the amount of the offsetting claim and matters of that kind.  As a result, I formed the view that there had been far greater costs incurred than should have been incurred as a result of the action of both parties, not only in the giving of the statutory demand but in the way the applicant proceeded and in the way in which the material was put to the Court in support and opposition to the application to have the statutory demand set aside.

Under normal circumstances I would be tempted to make an order for solicitor and client costs but in this case, having regard to the fact that the legal costs incurred by both parties in all probability, greatly exceed the amount of the debt being claimed by the respondent, it is not appropriate to make an order for solicitor and client costs.  This is so particularly having regard to the way in which the applicant, as it were, set the stage for what then developed into a type of litigation for which the provisions of the Corporations Law did not make provision.

Accordingly the motion for the solicitor client costs is refused, but an order is made that the respondent pay the applicant's costs.

I certify that this and the preceding thirteen (13) pages
are a true copy of the Reasons for Judgment of The Honourable
Justice R.M. Northrop.

Associate:

Date:

ATTACHMENT

Counsel for the Applicant:                 Mr D. Flynn
Solicitors for the Applicant:               Darrer Muir Fleiter

Counsel for the Respondent:             Mr V. Ruta
Solicitors for the Respondent:           McBride Harle & Martin

Date of Hearing:  25 June 1996