Braams Group Pty Ltd v Miric

[2002] NSWCA 417

Reported Decision: (2003) 44 ACSR 124

New South Wales

Court of Appeal

CITATION:	Braams Group Pty Ltd v Miric [2002] NSWCA 417
FILE NUMBER(S):	CA 40701/01
HEARING DATE(S):	29 November 2002
JUDGMENT DATE:	20 December 2002
PARTIES :	Braams Group Pty Limited (Appellant) Peter Miric (Respondent)
JUDGMENT OF:	Mason P at 1; Stein JA at 2; Ipp JA at 66

LOWER COURT JURISDICTION :	Supreme Court
LOWER COURT FILE NUMBER(S) :	SC 3393/01
LOWER COURT JUDICIAL OFFICER :	Young CJ in Eq

COUNSEL:	C Stevens QC/K Eassie (Appellant) T G R Parker (Respondent)
SOLICITORS:	Etheringtons (Appellant) Boskovitz & Associates (Respondent)
CATCHWORDS:	CORPORATIONS LAW 2001, Part 5.4 - winding up in insolvency - statutory demand pertaining to disputed judgment debt - effect of failure to lodge application to set aside within prescribed time limit - no abuse of process for creditor to exploit rebuttable presumption of insolvency to recover disputed debt under current statutory scheme - ND
LEGISLATION CITED:	Corporations Law 2001, Pt 5.4, ss 459C(2)(a), P, G, S
CASES CITED:	Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 De Montfort v Southern Cross Exploration NL (1987) 5 ACLC 709 House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 14 ACLC 1536 House v The King (1936) 55 CLR 499 Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867 Re J & E Holdings Pty Limited (1995) 36 NSWLR 541 State Bank v Tela Pty Ltd (No 2) [2002] NSWSC 20 Texel Pty Ltd v Commonwealth Bank (1993) 11 ACSR 535 Williams v Spautz (1992) 174 CLR 509
DECISION:	Appeal dismissed with costs

CA 40701/01
SC 3392/01

MASON P
STEIN JA
IPP JA

Friday, 20 December 2002

BRAAMS GROUP PTY LTD v Peter MIRIC

Facts:

Mr Miric, an alleged creditor of Braams Pty Ltd, served a statutory demand on the company relying on a judgment debt. The company failed to either satisfy the demand or apply to have the demand set aside within the 21-day time limit specified in s 459 G of the Corporations Law.

The judgment debt of $744, 792.30 was awarded by Foster AJ in proceedings in the Supreme Court. After winding up proceedings had been initiated in accordance with s 459P of the Corporations Law the appellant sought a stay in the proceedings pending the determination of an appeal against the decision of Foster AJ. Young CJ in Eq held that the Pt 5.4 of the Corporations Law was structured so as to inhibit him from granting a stay in the circumstances. While Young CJ in Eq was in no doubt about the inherent power in the Court to regulate its own processes, he found that the company had failed to rebut the presumption of insolvency. The evidence did not persuade his Honour that the company was solvent, notwithstanding the disputed debt, and this was fatal to its cause. His Honour made a winding up order but stayed it to permit the company to pursue its appeal to the Court of Appeal, which was subsequently successful.

The appellant alleges that Mr Miric sought to have the company wound up for a collateral or improper purpose and that the use of the statutory winding up mechanism in the context of a disputed debt constitutes an abuse of process. Consequently the appellant contends that the winding up order should be set aside.

Held: Stein JA, Mason P, and Ipp JA agreeing,
1) Section 459S(1) of the Corporations Law operates to inhibit the appellant from relying on the existence of a disputed debt in order to have the winding up proceedings dismissed after the expiration of the 21 day period because it was a matter which could have been raised in order to have the statutory demand set aside within the time period.

2) Further, s 459S(2) stipulates that leave to challenge a disputed debt will only be granted if the ground relied upon is material to proving solvency. Unrebutted evidence that the company was insolvent, notwithstanding the disputed debt, was before the court. Section 459S(2) thus prevents the court from staying the winding up proceedings pending the appeal of the judgment debt. \

3) While the Court retains its ability to regulate its own processes, the structure of Pt 5.4 of the Corporations Law dictates against interference in situations such as this where the injustice complained of by the appellant is largely a result of its own failure to act appropriately. Given that the appellant’s dilemma stems from its own failure to seek a stay of the judgment, or apply to have the statutory demand set aside within the period provided by the Act, and that it was not solvent in any event, the appeal should be dismissed. There was no abuse of process.

Orders:

Appeal dismissed with costs.

CA 40701/01
SC 3392/01

MASON P
STEIN JA
IPP JA

Friday, 20 December 2002

BRAAMS GROUP PTY LTD v Peter MIRIC

Judgment

1 MASON P: I agree with Stein JA and Ipp JA.

2 STEIN JA: In proceedings in the Equity Division (2930/97) the respondent, Peter Miric, sued Garry Braams and the Braams Group Pty Ltd, together with other defendants, over a restaurant project at Balmoral. Garry Braams is a director and principal shareholder in the Braams Group Pty Ltd, the present appellant. Miric’s Statement of Claim sought a money judgment against Braams personally, as well as unspecified damages. The only relief sought against the appellant company was an order that it do all things necessary to transfer the title in 1000 units in a trust to Miric. However, it appears that this claim was abandoned at the hearing.

3 On 23 April 2001 Foster AJ delivered judgment in favour of Miric against Braams and the appellant company in the sum of $744,792.30 including interest. His Honour granted a stay of the judgment for 7 days. No application was made to extend that stay. On 2 May 2001, after the stay had expired, a Notice of Appeal Without Appointment was filed as a holding appeal. No application was made to the Court of Appeal for a stay of the judgment and order.

4 On the basis of the judgment debt a creditor’s statutory demand for $744,792.30 was served by the respondent upon the appellant on 21 May 2001. The demand made reference to the right of the company under s 459G of the Corporations Law to seek to set aside the demand but only within 21 days after service. No such application was made by the appellant.

5 On 4 July 2001 the respondent filed originating process in the Equity Division under s 459P of the Corporations Law seeking the winding up of the appellant on the ground of insolvency based upon the failure of the company to comply with the statutory demand.

6 Some 20 days after the winding-up proceedings had been instituted, and on 24 July 2001, solicitors acting for the appellant wrote to the respondent’s solicitors. The appellant’s solicitors claimed that Foster AJ had made on obvious error in making an order against the appellant company. They suggested that the statutory demand was an abuse of process and should be set aside, although it was conceded that no application had been made to set it aside within the 21 day limitation. The solicitors invited the respondent to withdraw the statutory demand or threatened proceedings on the basis that the winding up petition was instituted for an improper purpose and was an abuse of process.

7 Miric’s solicitors responded on 27 July 2001 saying that no error was apparent in the judgment against the company; that no issue had been suggested for 2 months after service of the demand, nor any application made to set it aside. The demand was based on a judgment validly obtained and entered. They declined to withdraw the statutory demand.

8 On 2 August 2001 the appellant filed a Notice of Appeal with Appointment against the judgment of Foster AJ. However, still no application was made to the Court of Appeal for a stay.

9 The winding up proceedings were adjourned for hearing on 17 August 2001. The company filed a Notice of Motion seeking a stay (or an adjournment) of the proceedings pending determination of its appeal against the judgment of Foster AJ; leave to oppose the winding up on the basis of a genuinely disputed statutory demand or an order that the proceedings be dismissed.

10 The winding up application and the appellant’s Notice of Motion came before Young CJ in Eq on 20 August 2001.

11 We have a transcript of the proceedings on 20 August 2001. However, it is an incomplete one and does not record all that was said on the day. His Honour first heard the appellant’s Notice of Motion. He then gave his decision on the motion, which comprises paras 1 – 15 of the judgment. Before coming to his Honour’s judgment, I think that it is fair to say that a reading of the transcript of the hearing (incomplete as it is) makes it difficult to understand precisely what the appellant was seeking. It seems that counsel for the company, Mr Eassie, was putting three alternative options to the court. First, that the proceedings be stayed or adjourned until the appeal was determined. This was claimed to be an order sought in the inherent jurisdiction of the court. Second, to dismiss the proceedings in the discretion of the court and the third was to stay the winding up order if it was made.

12 In para 4 of the judgment his Honour noted that the company claimed that the judgment of Foster AJ against the company was clearly wrong. His Honour said that there was ‘something to be said for that point of view’ but continued by saying that the judgment may stand. In para 5 his Honour noted that no protest was made to Foster AJ (when he pronounced the orders) and no application for a stay was made to the Court of Appeal.

13 Young CJ in Eq recited the giving of the statutory demand on 21 May 2001 with no application being made to set it aside under s 459G. His Honour continued:

8 There is no doubt that there is an inherent power in the Court to police its own process and to stay winding up proceedings which are an abuse of process, including cases where there is a bona fide disputed debt: see L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180, 181 and Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287, 289. However, that discretion and power has to be exercised bearing in mind the general scheme of Pt 5.4 of the Corporations Act : see House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 14 ACLC 1536, 1538-9.
9 The evidence filed by the company includes evidence which shows that the company is a trustee company and that apart from its right to indemnity against the beneficiaries or the assets, it has no assets and it has debts for legal fees in the proceedings before Foster AJ and accounting fees which it would not seem to be able to meet from its assets. The company does not appear to have current accounts, the reason being according to Mr Braams, it has not traded in the current financial year. It would appear, accordingly, as Mr Parker for the plaintiff submits, that the company is insolvent in any event. However, it may be that the present plaintiff is not a creditor.
10 The question on this motion is whether I should adjourn the proceedings for a period of say, three weeks, so that the company can obtain a stay from the Court of Appeal.
11 In favour of that view is that the company would seem to have an arguable appeal and that if the appeal succeeds the present petitioner would not be a creditor who would be entitled to pursue winding up proceedings.
12 Against that view is that the company cannot, because of s 459S of the Corporations Act , oppose the application for winding up on a ground that it could have relied upon for the purposes of an application to set aside the statutory demand.

13 The question of the debt is a matter which is covered by s 459S and it seems to me that that must also carry with it the fact that the debt is owing to the person who made the statutory demand. Accordingly, under the statute, as the company would appear to be insolvent on the evidence, and because of s 459S, the winding up order, assuming that the appropriate evidence has been presented to the Court, would have to be made notwithstanding what Mr Eassie has put up.

14 Is there then any substantial reason for postponing the evil day? I cannot really see sufficient reason. Indeed, that view is reinforced by the fact that Pt 5.4 of the Act envisages a more or less mechanical process whereby if a statutory demand is not challenged in the appropriate way within 21 days, then the Court should not be particularly free with exercising its inherent power or discretion to prevent the process. It does not seem to me that the instant case demonstrates circumstances where I should intervene and, accordingly, I will dismiss the present motion with costs.

14 It can be seen from the above that his Honour found the company to be insolvent although he considered that the appellant would seem to have an arguable appeal. If the appeal succeeded the present petitioner would not be a creditor and not entitled to pursue the winding up. Nonetheless, the effect of Pt 5.4 of the Corporations Law, and in particular s 459S, was that the company could not oppose the winding up upon a ground that it could have relied on to set aside the statutory demand. Since the company was insolvent on the evidence, and because of s 459S, the winding up order should be made.

15 The hearing of the winding up application then proceeded. It appears that counsel for the company made an alternative submission. First, relying on the materials already before the court, it was submitted that the winding up application should be dismissed. Alternatively, if the order was made, it should be stayed to permit the appeal to proceed.

16 His Honour then gave judgment on the winding up application (paras 16 -25). His Honour said (para 20) that because of the structure of Pt 5.4 and the reasons he had already given, he would not in his discretion dismiss the proceedings. However, it was appropriate to stay the winding up order to ‘allow the company as controlled by the directors one last opportunity to make an application to the Court of Appeal for a stay of Foster AJ’s judgment’.

17 On 31 January 2002 the Court of Appeal made orders by consent allowing the company’s appeal against the judgment by Foster AJ and set aside the judgment against the appellant.

18 The case for the appellant is essentially two-fold. First, the statutory demand and the application for the winding up were an abuse of process because the demand was solely based upon a windfall judgment to which the respondent plainly believed he was not entitled. Young CJ in Eq should have concluded that the proceedings were being brought for an improper purpose and were unjustifiably oppressive. The arguable abuse of process should have led his Honour to either dismiss the proceedings or grant an adjournment.

19 Alternatively, it is submitted on behalf of the appellant by Mr Stevens QC that his Honour’s discretion miscarried. His Honour was wrong to find that the company was insolvent and that his discretion miscarried in failing to dismiss, adjourn or stay the proceedings.

20 Counsel for the respondent, Mr Parker, places significant reliance on Pt 5.4 of the Corporations Law, inserted by the 1992 amendments. It is submitted that the circumstances fell far short of establishing an abuse of process. The appellant had every opportunity to seek to obtain a stay of the judgment and/or to seek to set aside the statutory demand. It is not an abuse of process to commence winding up proceedings even where it is known that the debt is disputed (Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 20 ACLC 304). Counsel also submits that there is no mechanism in the legislation for winding up orders to be avoided or annulled by reason of subsequent events.

21 Emphasis is placed by the respondent on the question of insolvency and the presumption of insolvency in s 459C(2)(a). It was for the appellant to rebut the statutory presumption of insolvency and this it failed to do. Mr Parker also supports his Honour’s decision not to adjourn the proceedings maintaining that his Honour’s decision was discretionary and did not miscarry in terms of House v The King (1936) 55 CLR 499 at 504 – 505.

22 A relevant starting point for consideration of the appeal is the decision of the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. All members of the Court agreed with the judgment of Gummow J.

23 His Honour noted that the then new Pt 5.4 constituted ‘a legislative scheme for quick resolution of the issue of insolvency’ without the interposition of disputes about debts unless promptly raised (at 270). His Honour set forth the salient provisions of the scheme.

24 Gummow J noted that the scheme contained specific provisions relating to the power of the court to extend time.

25 His Honour referred to examples which Sheller JA had given in Re J & E Holdings Pty Limited (1995) 36 NSWLR 541 at 551 where Pt 5.4 might operate harshly. Gummow J said:

In particular, reference was made to the drastic commercial consequences which may follow the issue of process for winding up and to the inability of a company, which for good reason had been late in filing or serving an application to set aside the statutory demand, to prevent the issue of that winding up process. The damage to the commercial reputation of the company in the meantime might not be answered by the eventual success of the company in defeating the application to wind it up as insolvent. Further, default clauses in securities given by the company may have been so drawn as not to take full account of the new statutory scheme, with the consequence that floating charges may have crystallised and the whole of the principal and interest become payable. [at 279.5]

26 His Honour accepted that in some circumstances there was no doubt that Pt 5.4 may appear to operate harshly. However, this was a consequence of the legislative scheme adopted to deal with perceived defects in the procedures which hitherto had related to statutory demands. Importantly to this appeal his Honour added:

It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz . However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction. [at 279.9]

27 A number of first instance decisions of the Supreme Court have dealt with the relevant statutory context.

28 In House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 14 ACLC 1536 Brownie J did not doubt the power of the court to dismiss or stay winding up proceedings as an abuse of process, citing Williams v Spautz and David Grant. There was however a question of the effect of s 459S on this power. This did not arise for consideration in David Grant.

29 The provision in s 495S is 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 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 application or not).
(2) 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.

30 In House of Tan Brownie J said:

In my judgment, the defendant does require the leave of the Court, under section 459S, if it is to litigate the issue. Part 5.4 was enacted to change a branch of the law that was perceived to be unsatisfactory. That branch of the law included a multitude of cases that proceeded on the basis that a company, faced with winding up proceedings, might effectively defend itself by asserting that the alleged creditor was not in truth a creditor, in that the supposed debt was disputed, so that the supposed creditor had no standing to bring the winding up proceedings. The plain intention of the drafters of the legislation, and of the Parliament, was to replace that body of law with the new procedure provided for in Part 5.4. [at 1538]

31 Brownie J’s opinion was that the power of courts to stay proceedings that are an abuse of process was effectively limited by Pt 5.4. His Honour accepted that the jurisdiction or power will still exist, although its instances of application would be few in number. In short, a company which asserts that a creditor lacks standing must seek to set aside the statutory demand within the time provided or must obtain leave under s 459S. Further, the ground relied on for leave must be one material to proving solvency (s 459S(2)).

32 In Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467 Austin J considered a claim that the plaintiff was not a creditor and had no standing under s 459P to apply to wind up the defendant in insolvency. It was his Honour’s opinion that where an application for winding up relies on the failure of the company to comply with a statutory demand, and no application had been made to set the demand aside, the plaintiff’s argument could not be run unless the court granted leave under s 459S(1).

33 His Honour said that if it were possible to raise the issue of indebtedness by challenging standing under s 459P after it had become too late to set the demand aside, the underlying policy of the 1992 reforms to the Corporations Law would be undermined.

34 Austin J added:

In my opinion, the scheme contemplates that disputes about the existence of debts are to be resolved through the process of applying to set aside the statutory demand which relies on the debt. The purpose of the reform was to reduce the occasions when disputes would arise about the debt at the hearing of the winding up application: Explanatory Memorandum to the Corporate Law Review Bill 1992, para 685. To that end, the provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands: Explanatory Memorandum, para 688. The scheme “provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading up to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed at an early stage, rather than after winding up proceedings have commenced”: Explanatory Memorandum para 689. The construction for which the defendant contends would fly in the teeth of the legislative intention so revealed. [at 479]

35 His Honour agreed with Brownie J’s assessment in the House of Tan of the limited room left for the court’s general powers relating to abuse of process.

36 Austin J made a telling point about leave under s 459S. That is that the provision does not lead to the setting aside of the statutory demand and does not remove the presumption of insolvency under s 459C(2)(a). His Honour added, at 481:

… Having granted leave, the Court’s task is to deal with the proceedings for winding up, rather than cutting away the demand which is their substratum. The overall question of solvency is the critical issue . If it emerges that the debt upon which the applicant has relied is not owing, the Court may grant leave to a creditor to be substituted as applicant, and if that happens the new applicant may be able to take advantage of the presumption of insolvency which arose out of non-compliance with the initial demand. As Gummow J said in the David Grant case (at ACLC 1,579; ACSR 234), Part 5.4 may appear to operate harshly, but that is consequence of the legislative scheme which has been adopted, and in an appropriate case the applicant for winding up may be restrained on the ground of abuse of process. [Emphasis added]

37 In my opinion Paliflex correctly states the law and the effect of Pt 5.4 and s 459S.

38 The next case is Redglove, a decision of Palmer J delivered on 3 October 2001. The company had failed to apply to have the statutory demand set aside within the time provided by s 459G. However, it sought an order that the creditor be restrained from commencing winding up proceedings, alleging that there was a genuine dispute about the debt, and that it was solvent. It relied on the inherent jurisdiction of the court to prevent a threatened abuse of process.

39 Palmer J considered Gummow J’s reference in David Grant to ‘an improper purpose which amounts to an abuse of process in the technical sense of that term as explained in Williams v Spautz’.

40 His Honour said that the majority in Williams v Spautz (1992) 174 CLR 509 at 526 said that ‘an abuse of process occurs when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or for some collateral advantage beyond what the law offers’. The onus, which is a heavy one, is on the party alleging the abuse of process.

41 Palmer J acknowledged that prior to issue of the statutory demand, the defendant knew that the debt was disputed. This did not make it an abuse of process because, as his Honour said, at 308:

… at the heart of the scheme imposed by Pt 5.4 is the legislative intent that debtors wishing to dispute debts should not be permitted merely to protest in general terms and for an indefinite period; they must particularise the grounds of the dispute upon affidavit and they must do so quickly . By this means, many spurious attempts to delay payment of just debts will be defeated, either because the debtor company cannot support the existence of a genuine dispute when called upon to do so on affidavit or because the grounds of the dispute, once sufficiently exposed, simply do not stand up to the Court’s scrutiny. [Emphasis added]

42 His Honour further explained at 308 - 309:

Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by serving a notice of demand under s. 459E in order to invoke the procedures of Pt 5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s. 459G. That is the risk that the creditor takes in serving the notice of demand. But if the debtor company fails to substantiate the dispute in the manner which is required by Pt 5.4 and, in particular, by s. 459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s. 459C, s. 459Q and s. 459S. This is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts . Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor’s purpose in seeking the winding up is not to collect payment of its debt or, in default to have the company wound up, but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality . [Emphasis added]

43 Finally, there is a recent unreported decision of Barrett J (State Bank v Tela Pty Ltd (No 2) [2002] NSWSC 20, 1 February 2002). In this case the bank sought to wind up the company on the grounds of insolvency based on an uncomplied with statutory demand, and relied on the presumption of insolvency.

44 The company opposed the winding up alleging that the proceedings were an abuse of the process of the court. Applying Gummow J in David Grant, and s 459S, Barrett J said that it was plain that displacement of the presumption of insolvency will normally be the only avenue available to a company upon the hearing of an application for winding up.

45 His Honour said that the essence of an abuse of process in the present context was some improper purpose on the part of the applicant in bringing the proceedings, the purpose being not to prosecute the proceedings to a conclusion but to use them for some collateral advantage for which they were not designed.

46 Barrett J said:

The scheme of the legislation makes it clear that a creditor has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Part 5.4. It is now abundantly clear that, unless the Division 3 process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist. [at p of 5]

47 His Honour expressly approved of Palmer J’s statement in Redglove cited above. He said that this passage recognised the abuse of process exception identified in David Grant but that it would in reality be an extremely rare exception.

48 The judgment of Young CJ in Eq under appeal should be approached on the basis of the evidence before the court on 20 August 2001 and not with the benefit of hindsight that the judgment of Foster AJ was set aside by consent on 30 January 2002.

49 On behalf of the respondent, Mr Parker submits that no abuse of process argument was put below, either in support of a dismissal or an adjournment of the summons. An examination of the transcript generally supports his submission. Certainly, it is likely that the submission was not squarely put to the court.

50 It is plain however that his Honour accepted that the court had inherent power to stay winding up proceedings which are an abuse of process (para 8). However, having acknowledged the power, his Honour accepted that the power and discretion had been circumscribed by the scheme in Pt 5.4. His Honour referred to the House of Tan.

51 The fact that his Honour acknowledged that the company had an arguable appeal and that, if it succeeded, Mr Miric would not be a creditor, goes little distance to establishing an abuse of process in the manner explained by Gummow J in David Grant by reference to Williams v Spautz. There was no evidence before the court which could have led his Honour to conclude that Mr Miric was seeking to obtain something other than a result which the law provided. The fact that Mr Miric knew that the judgment debt he relied on in the statutory demand was disputed did not make it an abuse of process for him to proceed to seek the winding up of the company for non-compliance with the statutory demand (Redglove). No application had been made to set aside the statutory demand. No application had been made to Foster AJ to extend the 7 day stay and no application had been made to the Court of Appeal for a stay between the judgment on 23 April 2001 and the hearing on 20 August 2001, a period of almost 4 months. It is plain that, viewed as at the date of the hearing before his Honour, the evidence fell short of establishing an abuse of process.

52 I turn then to consider whether his Honour should have granted an adjournment and/or stayed the winding-up proceedings.

53 This involves a consideration of s 459S. Under this provision the company would have needed to be granted leave to dispute the debt since it was a matter which could and should have been raised in an application to set aside the statutory demand and made within 21 days of its service. In addition, s 459S(2) meant that the court could only grant leave if the ground was material to proving solvency. As Austin J said in Paliflex, the critical issue is the question of solvency.

54 Again, it is difficult to deduce from a reading of the transcript that an application for leave under s 459S was pressed. Although his Honour dismissed the company’s motion, he did not expressly refer to any application for leave. Mr Stevens acknowledged that his Honour is to be taken as having refused leave.

55 It is important to record that his Honour made a positive finding that the company was insolvent ‘in any event’ (para 9). His Honour found that the company had no assets apart from a right of indemnity against the beneficiaries of the trust or assets. It had debts for legal fees and it owed accounting fees, which it did not seem able to meet from its assets.

56 The appellant challenges his Honour’s findings regarding the limited nature of the assets of the company. However his Honour was perfectly entitled to reject Mr Braams’ evidence as to the value of the units. Mr Braams was no expert and the value of the units in the Trust needed to be established by appropriately qualified expert evidence. There was no other persuasive evidence before the court that the value of the units was other than nominal. There was no evidence that the units had any readily realisable value to meet the liabilities of the company. The units were not listed and had no ready market.

57 Failure to comply with the statutory demand raised the presumption of deemed insolvency. The onus was on the company to rebut this presumption. It failed to do so. It follows that his Honour was entitled to find that the appellant was in any event insolvent. The issue of insolvency was critical, see Paliflex.

58 In the circumstances, what would be the point of adjourning the winding up application? Even if the appellant had every possibility of ultimately having the judgment against it set aside, this could not alter the solvency problem it faced under s 459S as at 20 August 2001 when his Honour heard the winding up application. The appellant could not oppose the winding up if the ground relied on did not establish that the company was solvent (s 459S(2)). On the finding of his Honour that the company was, on the evidence, insolvent, the judgment debt could not be contested in the proceedings. On the evidence the insolvency finding was one which was properly available to his Honour. The statutory demand simply could not be set aside in the winding up proceedings.

59 In declining to grant an adjournment for 3 weeks, to enable a stay application to be made to the Court of Appeal, his Honour spoke of the ‘more or less mechanical process’ under Pt 5.4 when a statutory demand is not challenged within 21 days. The appellant is critical of his Honour’s approach. However, it seems to me to be consistent with Pt 5.4 and the authorities to which I have earlier referred.

60 In any event, his Honour said that Pt 5.4 meant that the court ‘should not be particularly free with exercising its inherent power or discretion to prevent the process’ (para 14). Again, this is consistent with the authorities discussed earlier. His Honour added that the case did not demonstrate circumstances in which the court should intervene. This seems to be a perfectly proper exercise of the discretion or power and one untainted by error.

61 In David Grant Gummow J accepted that the rigour of Pt 5.4 had the capacity to operate harshly but that there was the safety valve of abuse of process in the technical sense of Williams v Spautz. On one view it may be thought, especially with the benefit of hindsight, that an injustice might have been done by his Honour proceeding to the winding up. However, his Honour stayed the order to allow the company one last chance to appeal (which it took). Notwithstanding, no abuse of process is apparent. Nor was the other safety net of leave under s 459S really activated (see Hayne J in Texel Pty Ltd v Commonwealth Bank (1993) 11 ACSR 535), and it could not have been because of the finding of the court as to the insolvency of the company in any event.

62 All this leads me to conclude that his Honour was not in error in refusing the adjournment. It would have been futile since his Honour had found the company to be insolvent notwithstanding the disputed judgment. Indeed, in these circumstances it would probably have been inappropriate to have granted an adjournment. The question should always be, does the ground relied on go towards proving solvency?

63 Any injustice to the appellant was brought about by its own inaction over a period of almost 4 months. It had all of that time to seek a stay of the judgment but failed to do so. It could have contested the statutory demand within the 21 days of its currency but did not do so. That meant that it was faced with the presumption of insolvency. To rebut this it was necessary to demonstrate its solvency. It failed to do so.

64 The appellant did nothing to seek to protect its position until it was too late. Moreover, its liabilities exceeded the value of its assets on the evidence before his Honour. If the units had a real marketable value it was for the appellant to place acceptable evidence of that before the court. Again, it failed to do so.

65 In my view, the appeal should be dismissed with costs.

66 IPP JA: I have had the benefit of reading the draft reasons of Stein JA. I agree with his Honour’s reasons and conclusions and would add the following comments of my own.

67 On 21 May 2001 the respondent served the statutory demand on the appellant. The demand asserted in effect that the appellant owed $744,792.30 to the respondent by reason of the judgment delivered on 23 April 2001 by Foster AJ.

68 On 4 July 2001 the respondent filed originating process seeking the winding-up of the appellant on the ground that the latter had failed to comply with the statutory demand. By then the 21-day period relating to the setting aside of the statutory demand had expired.

69 On 2 August 2001 the appellant filed a notice of appeal against the judgment of Foster AJ. Thereafter, the appellant filed a notice of motion seeking, amongst other things, a stay or adjournment of the winding-up proceedings pending determination of its appeal against that judgment.

70 On 20 August 2001 the respondent’s winding-up application and the appellant’s notice of motion was heard by Young CJ in Eq.

71 On 31 January 2002, the Court of Appeal, by consent, set aside the judgment of Foster AJ.

72 At the hearing before Young CJ in Eq, the appellant contended that, if its appeal against the judgment of Foster AJ succeeded, the respondent would not be a creditor under s 459P and would not be entitled to pursue winding-up proceedings. The appellant argued that, for those reasons, the winding up application should be adjourned as it was likely that that judgment would be overturned.

73 His Honour said in this regard:

“The question of the debt is a matter which is covered by s 459S [of the Corporations Act]”.

And proceeded:

“Accordingly, under the statute, as the company would appear to be insolvent on the evidence, and because of s 459S, the winding-up order, assuming that the appropriate evidence has been presented to the court, would have to be made notwithstanding what [counsel for the appellant] has put up”.

His Honour concluded that there was no “reason for postponing the evil day”.

74 Relevantly, s 495S(1) prevents a company, without the leave of the Court (to be given on limited grounds relating to solvency only), from opposing an application for winding up on any ground that the company could have relied on in making an application (within the prescribed period of 21 days) to set aside the statutory demand (even if it made no such application).

75 Young CJ in Eq relied on s 495S in holding, in effect, that adjourning the application for winding up - on the basis that the Court of Appeal might later overturn that judgment - would be futile. The futility, his Honour held, lay in the fact that the appellant would be precluded, by s 495S, from relying on the Court of Appeal’s judgment in opposing the winding up. It is the latter point on which this appeal turns.

76 The crucial question, it seems to me, is whether, before Young CJ in Eq, the appellant was raising a ground for opposing the winding up (in support of its application for an adjournment) on which it could have relied in making an application (within the prescribed period of 21 days) to set aside the statutory demand. If the answer to this question is in the negative, then it would not have been futile to grant the adjournment.

77 Take, for example, the situation that arises when a debtor pays a creditor in full after the expiry of the statutory 21-day period. In my view the following principles, enunciated by Needham J in De Montfort v Southern Cross Exploration NL (1987) 5 ACLC 709 (at 711) must govern the position:

“I should have thought that, while the effect of the s 364 notice undoubtedly continues so as to allow another creditor to become substituted for the original plaintiff, that principle could not possibly apply to a case where it is the plaintiff itself who claims to continue the proceedings after being paid out the only amount which he has claimed in those proceedings. It would, I think, be quite unacceptable for a creditor to serve a notice upon a debtor specifying a sum in that notice, then, when the debtor failed to comply with that notice, take proceedings, be paid the full amount claimed, and then seek to wind the defendant up nonetheless”.

78 In the context of s 495S, the payment of the judgment debt after the expiry of the statutory 21-day period would be a ground on which the defendant debtor could not have relied in attempting to set aside or stay the statutory demand. Hence, it seems to me, there would be no reason why the defendant could not rely on such payment in opposing the winding up.

79 Assume then, instead of a subsequent payment in full, that - after the statutory period has expired and before the winding up application is made - a judgment is delivered that establishes that the defendant is not indebted to the purported creditor. In these circumstances, I think it readily arguable that it would be “quite unacceptable” for the winding up to proceed. That would be simply on the basis that there could be an abuse of court in an applicant proceeding as a creditor when there is a judgment of the court to the effect that it is not.

80 In expressing the views in the preceding paragraph, I have recognised that a judgment of the court is to be accorded special status. Under the present statutory regime there would be no abuse merely by proceeding with the winding up application (after the expiry of the statutory 21-day period) in the knowledge that there was a genuine dispute about the debt. The authorities to which Stein JA has referred demonstrate this.

81 Nothing I have said above is intended to be in conflict with Chief Commissioner of Stamp Duties v Paliflex (1999) 17 ACLC 467. In Paliflex the defendant contended that the debt, the subject of the statutory demand, was not owing having regard to the Commonwealth Places(Mirror Taxes) Act 1998 (Cth), and consequently the plaintiff was not a creditor of the defendant. It was contended that, in those circumstances, the plaintiff had no standing under s 459P to apply to the Court for the defendant to be wound up in insolvency. The argument was rejected. As appears from the remarks of Austin J (at 481 to 483), the defendant could have raised the argument based on the Commonwealth statute at the time the statutory demand was served. Paliflex was not a case where, at the time the application for winding up was made, a judgment of the court was in existence that established that the applicant for winding up was not a creditor. It is distinguishable from the case postulated in paragraph 79 above.

82 Importantly, the case postulated in paragraph 79 above also differs from the situation with which Young CJ in Eq was confronted. The difference lay in the fact that, before his Honour, there was no judgment in existence setting aside the judgment of Foster AJ. In my opinion, this difference is determinative of this appeal.

83 Young CJ in Eq accepted that the appellant had “an arguable appeal”. In other words, at that stage the appellant was able to establish that the judgment debt, on which the statutory demand was based, was disputed on genuine grounds. In my opinion, those grounds are indistinguishable, in practical terms, from the argument that the appellant now raises before this Court (that is, that due weight has to be accorded to the fact that the Court of Appeal subsequently overturned the judgment of Foster AJ). The ground that Foster AJ had erred was a genuine ground on which the appellant could have relied in applying to set aside the statutory demand, and that ground, in practical terms, is no different from the argument based on the fact that the Court of Appeal has since given judgment setting aside the judgment of Foster AJ.

84 Were it to be held otherwise, there would be good reason to stay an application for winding up on the ground that there was a genuine dispute about the debt and a court might later give judgment in favour of the debtor (which judgment would defeat the creditor’s rights to proceed with the winding up). That, indeed, is what the appellant in effect now contends Young CJ in Eq should have done. But that would run counter to the scheme of the new legislation as construed in David Grant & Co Pty Ltd vWestpac Banking Corporation (1995) 184 CLR 265, Paliflex, Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867, and State Bank v Tela Pty Ltd (No 2) [2002] NSWSC, to which Stein JA has referred.

85 In my view, there was no difference in principle between the case before Young CJ in Eq and cases such as Paliflex, Redglove and State Bank v Tela Pty Ltd (No 2). In those cases, the debtors disputed the debts, the subject of the statutory demands, on genuine grounds. Before Young CJ in Eq, the appellant also disputed the judgment debt on genuine grounds. But, the appellant had not sought to set aside or stay the statutory demand, and therefore, in such proceedings, had not disputed the judgment debt. Thus, the position of the appellant was no different, in principle, to that of the debtors in the cases mentioned.

86 In my view, once the 21-day period had expired without an application having been made to set aside the statutory demand, and there being (at that stage) no judgment of this court establishing that the respondent was not a creditor (there being – at best for the appellant – only a genuine dispute about the debt), s 495S was of application and there was no abuse of court. Thus, it was not material that the appeal was arguable. The only grounds on which the appellant could rely in opposing the application for winding up were those that complied with s 495S. The ground that Foster AJ had erred was not such a ground.

87 Accordingly, I agree with the orders proposed by Stein JA.

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