Bingham v Iona Corporation Pty Ltd
[1995] FCA 221
•11 APRIL 1995
CATCHWORDS
CORPORATIONS - winding up - application by director of company for leave to apply for winding up in insolvency - whether prima facie case established that company is not able to pay its debts as and when they become due and payable.
Corporations Law ss 459A, 459B and 459P.
Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.
World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181.
MARK HENRY DE COURCY BINGHAM v IONA CORPORATION PTY LIMITED
No NG 3071 of 1995
Lindgren J
Sydney
11 April 1995
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3071 OF 1995
GENERAL DIVISION )
IN THE MATTER OF: IONA CORPORATION PTY LTD
AUSTRALIAN COMPANY NO: 060 160 545
BETWEEN:
MARK HENRY DE COURCY BINGHAM
Applicant
AND:
IONA CORPORATION PTY LIMITED
RespondentIONA CORPORATION PTY LIMITED
Cross-Claimant
AND:
MARK HENRY DE COURCY BINGHAM
Cross-Respondent
CORAM:Lindgren J
PLACE:Sydney
DATE:11 April 1995
MINUTE OF ORDERS
THE COURT:
Directs that the proceedings stand over to 13 April 1995 at 2.15 pm for the making of formal orders and acceptance of an undertaking to the Court by Lance George Melbourne.
Directs that at that time the parties bring in agreed form of short minutes of orders, and if agreement has not been reached, the forms of short minutes of orders for which they respectively contend, the form (or forms) of short minutes of orders to include the form of undertaking to the Court by Lance George Melbourne.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3071 OF 1995
GENERAL DIVISION )
IN THE MATTER OF: IONA CORPORATION PTY LTD
AUSTRALIAN COMPANY NO: 060 160 545
BETWEEN:
MARK HENRY DE COURCY BINGHAM
Applicant
AND:
IONA CORPORATION PTY LIMITED
RespondentIONA CORPORATION PTY LIMITED
Cross-Claimant
AND:
MARK HENRY DE COURCY BINGHAM
Cross-Respondent
CORAM:Lindgren J
PLACE:Sydney
DATE:11 April 1995
REASONS FOR JUDGMENT
NATURE OF PROCEEDINGS:
The applicant ("Bingham") is a director of the respondent ("Iona"). He seeks to have it wound up. First he seeks to have it wound up in insolvency under ss 459A and 459P of the Corporations Law ("the Law"). In the alternative, according to his application he applies under s 459B, and in this respect apparently he relies on ss 260, 461 and 462 of the Law.
Section 459A empowers the Court on an application under s 459P to order that an insolvent company be wound up in insolvency. Sub-section 459P (2) provides that an application by, inter alia, a director of a company for it to be wound up in insolvency may only be made with the leave of the court.
On 24 March 1995, Bingham's application for such leave came before me as Duty Judge. It is only that application for leave to apply that is before me at this stage. Also on 24 March 1995, Iona filed in Court a cross-claim which is not of present relevance.
RELEVANT PROVISIONS OF THE LAW:
The relevant provisions of ss 459A, 459B and 459P of the Law are as follows:
"459AOn an application under section 459P, the Court may order that an insolvent company be wound up in insolvency.
459BWhere, on an application under section 260, 462 or 464, the Court is satisfied that the company is insolvent, the Court may order that the company be wound up in insolvency.
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) ...; (c) ...;
(d)a director;
(e)...; (f) ... (g) ...
459P(2)An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court:
(a)...; (b) ...;
(c)a director;
(d)....
459P(3)The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise.
459P(4)The Court may give leave subject to conditions.
459P(5)Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency."
Sub-section 459P (5) makes it clear that if leave is refused in respect of the application in so far as it is made under ss 459A and 459P, the applicant cannot, notwithstanding s 459B, circumvent the requirement of leave.
In the Australian Law Reform Commission's Discussion Paper 32, General Insolvency Inquiry, (August 1987), the reason for a requirement of the Court's leave in the case of an application for a winding up in insolvency made by a member or director was stated to be to prevent mischievous and possibly harmful applications. The Commission referred to this in its Report No 45, General Insolvency Inquiry, vol 1, at para 142, and recommended that "Leave of the court in such cases should only be granted if the court is satisfied that a prima facie case has been established that the company is unable to pay its debts". The Explanatory Memorandum to the Corporate Law Reform Bill 1992 contributes nothing further to an understanding of the background to sub-s 459P (2).
In the event, sub-s 459P (3) utilised not the expression
"unable to pay its debts" but the word "insolvent". The meaning of "insolvent" is, however, explicated in generally similar terms in s 95A of the Law. Sub-sections 95A (1) and (2) are as follows:
"(1)A person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable.
(2)A person who is not solvent is insolvent."
Plainly an applicant for leave under sub-s 459P (3) bears the onus of satisfying the court that prima facie the company is not able to pay all its debts as and when they become due and payable.
The meanings of "prima facie" and "prima facie case" have been discussed often and in different contexts, for example, the granting of leave to serve originating process outside the Commonwealth (cf Order 8 r 2 (2) (c) of the Federal Court Rules and cases decided on it). In the context of sub-s 459P (3), the first question to arise is whether the evidence relied on by the applicant, if accepted on a final hearing, would establish insolvency. A further but related question may arise as to how countervailing evidence relied on by the respondent company is to be treated. Clearly, the determination called for by the threshold hurdle of sub-s 459P (3) is of a preliminary nature and is to be distinguished from the determination called for on a final hearing.
In Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 ("Beecham"), the High Court granted an interlocutory injunction and said that a plaintiff seeking such relief was required to make out a prima facie case "in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief" (at 622). In World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 (FCA/FC) ("World Series Cricket") at 186, Bowen CJ, after referring to this passage, said:
"The strength of the [prima facie] case which the plaintiff must make out will depend upon the nature of the right which he is seeking to assert, and the consequences which will flow from the making of the interlocutory order. However, where the facts are seriously in dispute, the court will not undertake a preliminary trial of the action in order to forecast a probable result, but rather, if the plaintiff has a fair chance of success (and what will be required will vary according to the nature of the case), the court will proceed to look to the balance of convenience."
These cases concerned applications for interlocutory injunctions prior to the adoption in Australia of the "serious question to be tried" formula in preference to that of a "prima facie case". To a generally similar effect in the context of a statutory "prima facie case" threshold are WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 (FCA/FC) at 476 (Beaumont J); Merpro Montassa Limited v Conoco Specialty Products Inc (1991) 28 FCR 387 (FCA/Heerey J) at 390; Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 (FCA/French J) at 109-110; Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 (FCA/Wilcox J) at 35-36 and Trade Practices Commission v The Gillette Company (No 1) (1993) 45 FCR 366 (FCA/Burchett J) at 371.
The word "may" in sub-s 459P (3) indicates that the court has a residual discretion whether to grant leave, even if it is satisfied that there is a prima facie case of insolvency (I need not stay to discuss the kinds of circumstances, if any, in which a director might properly be refused leave notwithstanding that the court is so satisfied). It follows that the applicant for leave must satisfy the court both that there is a prima facie case of insolvency and that leave should, as a matter of discretion, be granted.
A question may arise as to whether particular factors are appropriately considered as relevant to the application of the "prima facie case" test or to the subsequent exercise of discretion. The making of an application for winding up in insolvency, the publicity given to it (see s 465A of the Law, Corporations Law Form 519; Federal Court Rules Order 71, r 37 (9), Form 93) and the allegation by a director or member of a company that the company is insolvent are all serious matters. But insolvent trading by a company is also a serious matter, particularly for its directors (see ss 588G - 588U of the Law). In many cases involving a threshold test similar to that posed by sub-s 459P (3), it is a relevant consideration that the test falls to be applied before interlocutory procedures of discovery and interrogatories and perhaps a full range of subpoenas to produce documents have been available to the party bearing the onus of satisfying the court. These considerations do not apply with the same force where an applicant for leave under sub-s 459P (3) is a director, since a director has a right of access to the company's records (obstruction of the exercise of that right, as is alleged in the present case, may reduce the weight to be accorded to this factor).
In summary, the considerations to which I have referred do not point clearly to any particular approach to be adopted in the application of the prima facie case test under sub-s 459P (3), either generally or in the particular circumstances of the present case.
I think it appropriate to apply that test in conformity with the passages quoted earlier from Beecham and World Series Cricket.
FACTS:
Pursuant to an agreement dated 4 February 1994, a company named Relativity Pty Ltd ("Relativity"), of which Bingham is a director, entered into an agreement with Iona, Lance George Melbourne ("Melbourne"), Coachland Pty Ltd ("Coachland"), and Bad Dog Entertainment Corporation Pty Limited ("Bad Dog"). Melbourne was and is a director of Iona, Coachland and Bad
Dog. At that time Bingham was not a director of Iona. Pursuant to the agreement, Relativity was to advance to Iona funds to finance the fitting out and renovation of a restaurant at 27 Military Road Watsons Bay known as "The Gap Tavern Restaurant", a cafe or coffee shop at 18-20 Military Road, Watsons Bay known as the "Bad Dog Cafe" and a restaurant/night club at Milsons Point. Coachland, Bad Dog and Melbourne guaranteed performance by Iona of its obligations to Relativity and gave securities. The land at 27 Military Road, Watsons Bay is the subject of a lease from Victor Berk and Manapo Pty Ltd to Iona for five years commencing on 1 January 1994 and terminating on 31 December 1998 with two options of renewal of five years each. Bingham became a director of Iona on 22 August 1994.
The agreement dated 4 February 1994 was varied by a handwritten "HEADS of AGREEMENT" apparently entered into on 15 November 1994 and a typed document entitled "ADDENDUM TO 4 FEBRUARY 1994 AGREEMENT AND SECURITIES FOR IT" dated 16 December 1994. I need not explore in detail all aspects of the contractual arrangement between Relativity and Iona, Melbourne, Coachland and Bad Dog.
By the Addendum dated 16 December 1994, Relativity's advances were "allocated" to Iona, Coachland and "Notewest/Lance Melbourne" (Notewest Pty Ltd was another company of Melbourne's) according to the venues to which an advance by Relativity had been or was to be applied. In relation to
Iona, it was agreed that monies advanced be expended to ensure that The Gap Tavern Restaurant opened as quickly as possible. (I was told that it was due to open or to re-open on the very day of the hearing before me). It was also agreed that the existing securities be amended to ensure that each venue was mortgaged to secure only the separate advance allocated to that venue.
Work has taken place on the premises at 27 Military Road, Watsons Bay with a view to the opening of The Gap Tavern Restaurant. Apparently there has been an escalation of the costs and there has been disputation between Bingham and Melbourne as to whether Relativity is obliged to advance further funds. The evidence suggests that at least at one stage, Iona was not making available records to Bingham for his inspection notwithstanding his entitlement as a director to see them. On one occasion, when Bingham attended The Gap Tavern Restaurant and the Bad Dog Cafe, Melbourne caused the police to be called, apparently to remove him.
Counsel for Iona submitted that the case was one of a partnership-type dispute to be resolved by reference to the "just and equitable" ground of winding up rather than the insolvency ground. While the case does have the flavour of a falling out between "partners", in my opinion this does not, without more, exclude the possibility that leave should be granted to a director to apply to have the company wound up in insolvency. A person must be concerned if a company of which
he or she is a director is prima facie insolvent and is continuing to trade: see ss 588G-588U of the Law. Indeed, a difference of views as to whether a company is solvent and should continue to trade is apt to be a source of partnership-type disputation in a closely held proprietary company.
The evidence on which Bingham relied to establish the prima facie insolvency of Iona lay within narrow compass. Bingham sought to prove that Iona was prima facie insolvent by reason of the fact that it did not have funds adequate to pay its present debts. It is convenient to deal with the various items of debt and of available funds as they were usefully addressed in a schedule prepared by Bingham's solicitor.
Debts:
Rent
It was common ground that there was a debt of $21,666.65 owed by Iona for rent of the premises at 27 Military Road, Watsons Bay. The commencement date for the purposes of payment of rent was 8 November 1994. Rental of $4,333.33 per month fell due on 7 December 1994, 7 January 1995, 7 February 1995 and 7 March 1995 and was to fall due on 7 April 1995, totalling $21,666.65. Melbourne deposed that this amount would be paid before 7 April 1994 [sic 1995] and that Iona had the necessary funds to pay it. Although the parties spoke in terms of an amount of $21,666.65, as at the time of the hearing on 24 March, only $17,333.32 had fallen due, although the figure was to become $21,666.65 on 7 April 1995.
Land Tax
It is common ground that land tax of $2,483.00 is payable by Iona as lessee and that this has been demanded by the solicitors for the lessors.
Legal Fees
Bingham claims that Iona owes $8,000.00 for legal fees to Anderson Hicks, solicitors, in respect of legal fees paid by Anderson Hicks to Back Schwartz Vaughan, solicitors, for legal services provided in connection with the obtaining of a liquor licence for The Gap Tavern Restaurant. Bingham relies upon a memo of costs and disbursements of Back Schwartz Vaughan dated 17 November 1994. This memo of fees is addressed to "Lance Melbourne, 26 Chuter Street, McMahons Point" and begins "Dear Lance". It is headed "Memorandum of Costs and Disbursements Gap Tavern Restaurant - Liquor Licence". It commences, "To our professional costs in acting on your behalf for the period from 20th August, 1994 to 10th November, 1994". The total amount of the memo is $9,150.00.
Although the work referred to in the memo appears to have been, at least in substantial part, for the benefit of Iona and its proposed business of The Gap Tavern Restaurant, the fact that it is addressed to Melbourne in person suggests that he may have accepted responsibility to pay the solicitors for their services. Of course, the possibility suggests itself that if Melbourne pays the account he may acquire a right of reimbursement against Iona. But there is at present no evidentiary basis for a finding of existing indebtedness on that ground and it was not raised in submissions. There is no evidence that Melbourne has paid the solicitors and has been seeking reimbursement from Iona.
The handwritten "HEADS of AGREEMENT" document provided that Relativity would advance to Coachland a further $300,000.00, as to "$100,000.00 as soon as practical and preferably within one week [to] ... be expended as follows:-
Austin Q.C.$12,000.
Schwartz 8,000.
Corrs 20,000.
Kanjian 15,000.
Anderson Hicks 15,000.
70,000."
Melbourne apparently denied (and apparently denies) the correctness of the amount of $8,000.00 as representing the amount owed to the solicitors.
The position regarding the alleged indebtedness of Iona of $8,000.00 is confusing. I am not to decide, in this preliminary inquiry, between inconsistent evidence for the purpose of determining whether there is a prima facie case. The memo of fees relied on by Bingham is not addressed to Iona; there is no other relevant evidence from the solicitors; and there is no evidence that the solicitors have been making demands on Iona. I do not think that a prima facie case of Iona's indebtedness to the solicitors for the amount of $8,000.00 (or $9,150.00) has been made out on the existing evidence. It is, however, possible that with the benefit of more evidence, an indebtedness of Iona for that amount or for some part of it will be proved.
Interspace Design Pty Ltd
Bingham asserts that Iona owes $2,170.00 to Interspace Design Pty Limited for steelwork carried out at The Gap Tavern Restaurant in about April and May 1994. But Jorgen Hansen, the managing director of Interspace Manufacturing Pty Limited, has deposed that he received instructions from Melbourne to manufacture steelwork for The Gap Tavern Restaurant at 27 Military Road, Watsons Bay, that purchase orders for the job were through Bad Dog, that all invoicing was forwarded to Bad Dog, and that he regards the debt as that of Melbourne and not of Iona. He has given evidence that on or about 1 March 1995 Bingham telephoned him requesting that he forward an invoice addressed to Iona for the debt. He did not accede to the request.
I am not satisfied that prima facie Iona owes this sum of $2,170.00 to Interspace Design Pty Ltd or to Interspace Manufacturing Pty Ltd. Again, it is possible that if Bad Dog pays this amount, Bad Dog will acquire a right to be reimbursed by Iona. But there is no evidence to support a finding of present indebtedness of Iona on that basis, and there was no submission that I should make such a finding. So far as the evidence goes, the debt is simply that of Bad Dog.
Security deposit for lease of office above cafe
Bingham relies upon the terms of a statement of claim which was filed on behalf of Melbourne as first plaintiff and Iona as second plaintiff against Victor Berk as first defendant, Manfred Kersch as second defendant and Apolonia Kersch as third defendant in the Equity Division of the Supreme Court of New South Wales No 1304/95 on 10 February 1995. This litigation which was, notwithstanding Bingham's directorship of Iona, commenced without his knowledge or authority, related to the premises at 18-20 Military Road, Watsons Bay (the Bad Dog Cafe). More particularly, the proceedings related to negotiations in or about December 1993 between Melbourne on behalf of Iona with the owners of the premises for a lease of an office above the cafe, and to representations allegedly made by them. As well, Bingham relies upon a letter dated 3 March 1995 from Kalfus, Newhouse Pozniak, the solicitors for the owners, to Corrs Chambers Westgarth demanding payment of $6,600.00 "on account of the security deposit for the office pursuant to Part/Item 13 of the office lease." But the letter was headed "Berk & Kersch v Lance Melbourne", suggesting that Melbourne may have been treated as the person liable.
The statement of claim pleads that in or about the middle of January 1994 Melbourne negotiated with the owners for a lease (or leases) of the cafe and of office space within level 1 situated directly above the cafe. It pleads that Iona entered into a lease of the cafe and that in reliance on certain representations it entered into an agreement to lease the office premises above, and designed the interior of both the Bad Dog Cafe and of The Gap Tavern Restaurant without providing for office space in those premises on the basis that such space would be available above the cafe. It is pleaded further that in reliance on the representations, Melbourne and Iona entered into possession of the office premises above the cafe, but that the defendants could not give Melbourne and Iona title to occupy them (because of "breach of planning and conveyancing legislation"). Iona and Melbourne seek a wide range of relief including rectification of the lease of the cafe which was not in evidence before me.
Again, it may be that there will ultimately be support for the owners' claim through their solicitors that $6,600.00 is owing to them by Iona, but the evidence at this stage does not permit me to say that this is so even on a prima facie basis. The particular indebtedness is not referred to in the statement of claim, and no other basis of an admission by Iona that it owed the amount was suggested.
Insurance deposit paid 15/3/95 $2,898.37
The case here seems to be that Melbourne paid $2,898.37 as a deposit on a premium payable to insurance brokers. It may be that this is an amount for which Iona is liable to reimburse Melbourne but the existing evidence does not satisfy me, even on a prima facie basis, that this is so.
Notewest
Melbourne controls Notewest and on 17 March 1995 an application to wind up Notewest was filed in the Equity Division of the Supreme Court of New South Wales No 1652 of 1995 by Commercial Food Appliances (Manufacturing) Pty Limited. Annexed to that summons was a copy of a statutory demand for $31,715.00. Bingham relies on a statement which Melbourne made to him shortly after 4 February 1994 as follows:
"All of the companies which I control are interlocked. If any of the companies was to fail, my business reputation would suffer greatly."
Clearly, however, the sum of $31,715.00 does not count as a debt of Iona's.
Conclusion as to debts
The result of the foregoing is that I am satisfied on a prima facie basis that Iona owes the following:
Rent $17,333.32 (becoming $21,666.65
on 7 April).
Land tax 2,483.00
$19,816.32 (becoming $24,149.65 on 7 April).
Available funds:
Iona's bank account
It is common ground that there is in The Gap Tavern trading account number 2-364 64 249 0558 at the National Australia Bank, Milsons Point, a credit balance of $20,000.00. Apparently this amount was deposited on 13 March 1995. The evidence does not reveal its source. Whether there is a correlative indebtedness by Iona to someone in the same amount is not touched upon by the evidence. The existence of this credit balance alone was sufficient, although only barely sufficient, to cover the debts of $19,816.32 which existed as at the date of the hearing. Apart from the further amount of $4,333.33 which was to fall due on 7 April 1995, I do not know what further income and outgoings, or assets and liabilities, have come into existence since the hearing.
Melbourne's bank account
It is common ground that there is in Melbourne's account at the National Australia Bank at Milsons Point number 2-364 28 216 5953 a credit balance of $50,893.81. This is not the property of Iona, but Melbourne has proffered an undertaking to the Court that this amount will not be used otherwise than in payment of debts of Iona. This aspect of the case raises several questions but I do not find it necessary to deal with them.
CONCLUSION:
I am not satisfied on the evidence before me at this stage that Bingham has made out a prima facie case that Iona is insolvent. Neither party relied on evidence of estimated likely future income and expenditure. As noted earlier, The Gap Tavern Restaurant was to open or re-open on 24 March, the day of the hearing before me. If the evidence remains as it was on 24 March, I do not think that Bingham has a fair chance of establishing Iona's insolvency on a final hearing. This conclusion obviates the necessity of my considering discretionary matters which would arise under sub-s 459P (2) if I had decided favourably to Bingham on the insolvency issue.
Notwithstanding the conclusion which I have reached as stated above, I think that leave should be reserved for Bingham to restore his application for leave under sub-s 459P (2). The reason is that Iona's solvency status may become clearer prior to the final hearing of these proceedings. It may become clear that Iona is liable in respect of some or all of the debts relied on by Bingham. For that matter, evidence may become available of other matters probative of Iona's insolvency. There will be leave for Bingham to restore his application in so far as it contains para (1), upon his giving three days' notice.
RESULT:
There will be an order refusing the grant of the relief sought in para 1 of the application at this stage. The undertaking of Melbourne in relation to the sum of $50,893.81 will need to be formalised. There will be leave for Bingham on three days' notice, to restore his application for leave under sub-s 459P (2). There will be an order that Bingham pay Iona's costs to date of Bingham's application for leave.
The proceedings will be listed for the making of formal orders and acceptance of Melbourne's undertaking to the Court. The parties (I include Melbourne for this purpose) should attempt to agree on the form of those orders (including the terms of Melbourne's undertaking). If they do not agree, they must both bring in the respective forms of orders for which they will contend. The orders will include directions for the further conduct of the proceedings.
I certify that this and the preceding 18 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.
Associate:
Dated:11 April 1995.
Heard: 24 March 1995
Place: Sydney
Decision: 11 April 1995
Appearances: Mr R B Schneider, solicitor, of Webeck Farland Pender, solicitors appeared for the applicant.
Mr D Pritchard of counsel instructed by Corrs, Chambers Westgarth, appeared for the respondent.
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