Brolrik Pty Ltd v Sambah Holdings Pty Ltd

[2001] NSWSC 1171

Reported Decision: 40 ACSR 361
(2003) 21 ACLC 1045

New South Wales

Supreme Court

CITATION:	BROLRIK v SAMBAH [2001] NSWSC 1171
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4254/01
HEARING DATE(S):	03/12/01, 06/12/01, 14/12/01
JUDGMENT DATE:	17 December 2001
PARTIES :	Brolrik Pty Limited - Plaintiff Sambah Holdings Pty Limited - First Defendant Natural Essential Pty Limited - Second Defendant Progress & Securities Management Pty Limited - Third Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr M.R. Aldridge SC/Mr J.T. Johnson - Plaintiff Mr M. Ashhurst - Defendants Mr D. Massey (Solicitor) - Creditor Mr R. Bretag (Solicitor) - Liquidator
SOLICITORS:	Sally Nash & Co - Plaintiff Kemp Strang - Defendants Massey Bailey - Creditor Henry Davis York - Liquidator
CATCHWORDS:	CORPORATIONS - winding up - whether directors retain residual power to cause company to appeal against winding up order - s.417A excludes such residual power - court's approval of such action by directors may be given nunc pro tunc - CORPORATIONS - winding up - termination of winding up on application of contributories - need for solvency and financial stability to be shown - order made on undertakings of related creditors not to call up debts while money owing to external creditors
LEGISLATION CITED:	Corporate Law Reform Act 1992 Corporations Act 2001
CASES CITED:	ACE Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 Aetna Properties Ltd v G A Listing & Maintenance Pty Ltd (1994) 13 ACSR 422 Re Allebart Pty Ltd [1971] 1 NSWLR 24 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Robert H Barber & Co Ltd v Simon (1914) 19 CLR 24 Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466 Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491 Re Country Traders Distributors Ltd [1974] 2 NSWLR 135 Re Data Homes Pty Ltd [1971] 1 NSWLR 338 Re Diamond Fuel Co (1879) 13 ChD 400 Doonan v Henry (2000) 74 ALJR 1289 Emanuele v Australian Securities Commission (1995) 63 FCR 54 (Full Federal Court) Emanuele v Australian Securities Commission (1997) 188 CLR 11 Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 Hamilton v BHP Steel (JLA) Ltd (1995) 13 ACLC 1548 Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523 Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411 Re Mascot Home Furnishers Pty Ltd [1970] VR 93 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 National Mutual Fire Insurance Co Ltd v Commonwealth [1981] 1 NSWLR 400 Re Nature Springs Pty Ltd (1994) 13 ACSR 50 Object Design Inc v Object Design Australia Pty Ltd (1997) 78 FCR 60 Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867 Rock Bottom Fashion Market Pty Ltd v H R & C E Griffiths Pty Ltd [2000] 2 Qd R 573 (7 November 1997) Rock Bottom Fashion Market Pty Ltd v H R & C E Griffiths Pty Ltd [1998] QCA 33 Helljay v Deputy Commissioner of Taxation (1999) 74 ALJR 68 King of Hanover v Bank of England (1869) LR 8 Eq 350 Vynotas Pty Ltd v Mystic Crystals Franchises (Australia) Pty Ltd [1999] QCA 473 Walker v Midlink Nominees Pty Ltd (2000) 34 ACSR 210 Woods Bagot Pty Ltd v Poppy Lodge Pty Ltd (1995) 65 SASR 583 Young v Queensland Trustees Ltd (1956) 99 CLR 560
DECISION:	Refer paragraph 52

21

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

MONDAY, 17 DECEMBER 2001

4254/01 – BROLRIK PTY LIMITED v SAMBAH HOLDINGS PTY LIMITED & ORS

JUDGMENT

Background

1 On 13 November 2001, a Registrar of the Court made an order for the winding up in insolvency of Sambah Holdings Pty Limited (to which I shall refer as “Sambah”) on the application of Brolrik Pty Ltd (“Brolrik”). This followed Sambah’s failure to satisfy a statutory demand served by Brolrik. The Registrar’s power to make such an order derives from Pt 61 r 1(1) of the Supreme Court Rules, having regard to item 28(ba) of Part 2 of Schedule E to those Rules. In the course of the hearing on 13 November 2001, the Registrar made two decisions which are relevant for present purposes. First, he did not accede to an application by Sambah that the hearing of the winding up application be adjourned. Second, he made the winding up order as sought by Brolrik.

2 Immediately after the Registrar had pronounced the order, Sambah filed an interlocutory process seeking a stay of the winding up until further order of the court. That application came before Young CJ in Eq on the afternoon of the same day, 13 November 2001. His Honour directed that the winding up order not be entered until further order of the court unless certain conditions were satisfied. The conditions were, first, that the applicants file an undertaking by Mr Tibor Balog and Mr Peter David Wright that until the disposal of the proceedings they would only permit Sambah to trade in the ordinary course of its ordinary business and, second, that there be paid into court the sum of $175,000 on a without prejudice and without admissions basis. That sum was later paid into court by Sambah. The winding up order has not been entered.

3 Non-entry of the order did not affect its efficacy or force. Pt 40 r 3(3) of the Supreme Court Rules states that an order made in court takes effect on the day on which it is made. The fact that an order has not been entered when an application to set it aside is filed means that the power to set aside under Pt 40 r 9(3) is available in addition to any other relevant power.

The present proceedings

4 Currently before the court are a notice of appeal under which Sambah appeals from the decision of the Registrar on three grounds: first, that the Registrar erred in refusing Sambah the adjournment it sought; second, that the Registrar erred in making an order winding up Sambah; and, third, that Sambah is and was at all material times solvent. By that notice of appeal, Sambah seeks orders that the winding up order be set aside and that the proceedings be returned to the Registrar for hearing. Also before the court is an amended interlocutory process by which Sambah and two other companies, Natural Essential Pty Ltd and Progress & Securities Management Pty Ltd, seek orders staying or terminating the winding up and dismissing the application for winding up. Natural Essential Pty Ltd and Progress & Securities Management Pty Ltd are the shareholders of Sambah.

5 The challenge to the Registrar’s decision to refuse an adjournment is initiated under Pt 61 r 3(1) of the Supreme Court Rules which provides that the court may review any direction, certificate, order, decision or other act of a Registrar in proceedings. The challenge to the Registrar’s making of the winding up order proceeds under r 16.1 of the Corporations Law Rules which makes specific provision for an appeal to the court from a winding up order made by a Registrar. The application for an order staying or terminating the winding up is founded on s.482 of the Corporations Act 2001.

6 A threshold issue in relation to Sambah’s proceedings under Pt 61 r 3(1) of the Supreme Court Rules and r 16.1 of the Corporations Law Rules is that of standing. When the notice of appeal and amended interlocutory process came before me for hearing on 6 December 2001, I raised with Mr Ashhurst, counsel for Sambah, the question whether, in light of the making of the winding up order on 13 November 2001, Sambah could be put in motion by its directors to initiate and prosecute these proceedings. By arrangement, argument on that matter was deferred and became the subject of subsequent written submissions by Mr Ashhurst and also by Mr Aldridge SC and Mr Johnson who appeared for Brolrik.

Do the directors have a residual power to appeal against winding up ?

7 Under the Corporations Law and predecessor statutes as they stood before the reforms effected by the Corporate Law Reform Act 1992, it was accepted that, despite the making of an order for winding up, the directors of the company concerned retained a residual power to cause that company to appeal against or otherwise challenge the winding up order. Such a principle arose in a context where no statutory provision dealt explicitly with the question of the status and powers of the directors after a winding up order had been made. The general presumption was that, upon the making of the order, the powers of the directors ceased: see, for example, the discussion of the matter by Mahoney J in Re Country Traders Distributors Ltd [1974] 2 NSWLR 135. The exception allowing directors to initiate the company’s appeal against the order itself seems to be traceable to the decision of the English Court of Appeal in Re Diamond Fuel Co (1879) 13 ChD 400. The residual power was recognised by the High Court in Robert H Barber & Co Ltd v Simon (1914) 19 CLR 24, although without reference to Diamond Fuel.

8 Since 23 June 1993, the matter has been the subject of express statutory provision. On that date, s.471A of the Corporations Law came into operation. It is now replicated in the corresponding section of the Corporations Act 2001. Section 471A(1) says that, subject to certain exceptions, a person “cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of” a company which is being wound up in insolvency or by the court. Similar provision is made in s.471A(2) in relation to a company in provisional liquidation. The exceptions, insofar as they are relevant to the performance and exercise of functions and powers of directors of the company, arise where the written approval of the liquidator or the approval of the court has been obtained.

9 After s.471A had come into operation, there were at least three cases in which the residual power of the directors to cause the company to appeal against or otherwise challenge the winding up order was expressly recognised as continuing. In the first two, Aetna Properties Ltd v G A Listing & Maintenance Pty Ltd (1994) 13 ACSR 422 (Young J) and Emanuele v Australian Securities Commission (1995) 63 FCR 54 (Full Federal Court), the residual power was acknowledged without reference to the significance of s.471A which was apparently not raised. In the third, Object Design Inc v Object Design Australia Pty Ltd (1997) 78 FCR 60, Heerey J expressed the opinion that s.471A(2), dealing with provisional liquidation, should not be read as excluding the long-recognised residual power of directors “the need for which is obvious as a matter of justice”.

10 The operation and effect of s.471A in the particular context now under consideration received the attention of the Queensland Court of Appeal in Rock Bottom Fashion Market Pty Ltd v H R & C E Griffiths Pty Ltd [2000] 2 Qd R 573 (7 November 1997). That case concerned an order for winding up made on 24 April 1997. About a month later, a director (Mr Innes), purporting to act on behalf of the company, filed a notice of appeal against the winding up order. The court itself raised the s.471A issue. It was submitted, in support of the appeal (and consistently with Object Design), that s.471A, properly construed, was not intended to change the pre-existing law in any relevant respect. The court did not accept that submission. It was noted that the legislation in force at the time of Diamond Fuel and at all subsequent stages up to the enactment of s.471A had not dealt specifically with the extent of the powers of exercisable by directors after winding up and that the perceived existence of the residual power was really no more than an implication from the statutory description of the powers of a liquidator. The court continued:

“The principle of Re Diamond Fuel Co has been consistently applied, under various schemes of company legislation: see for example Robert H Barber & Co Ltd v Simon (1914) 19 CLR 24 at 28, and Re Rick Wilson Pty Ltd (1982) 7 ACLR 354 at 355-6. An appeal against a winding up order has been treated as a special exception; the general rule was that a company in liquidation is not entitled to act by its directors: Gosling v Gaskell [1897] AC 575 at 587-8. Kennedy J in Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365 at 383, described the directors’ right to appeal in the company’s name against a winding up order as follows:
‘That clearly is an exceptional right and, it might be thought, it derives from necessity, otherwise the company would be unable to challenge such an order.’
There is no necessity for the Diamond Fuel rule now, since the court is given power under s.471A to approve the performance or exercise of a function or power as an officer of the company; Mr Innes did not apply for such approval.”

11 More recent discussion of this matter may be found in the judgment of Owen J in Walker v Midlink Nominees Pty Ltd (2000) 34 ACSR 210. The company involved in that case was in provisional liquidation. The directors afterwards took action by which they purported to procure the appointment of administrators under Part 5.3A of the Corporations Law. The provisional liquidator applied to the court for a declaration that that purported appointment of administrators was invalid and, in so doing, advanced the proposition that, in light of s.471A, there existed no residual power for the directors to act. Owen J considered in detail the decision in the Object Design case and commented as follows:

“The reasoning in Object Design was based on three propositions. First, that the directors of a company retain a residual power to appeal against the appointment of a provisional liquidator and to oppose the winding up application and that there was nothing in s.471A(2) that was inconsistent with the continuation of these residual powers. While it is not expressly stated, I think his Honour had in mind that this residual power would likewise extend to the exercise of functions necessary to enable the company to appoint an administrator. Second, and in any event, the appointment was the act of the company and the director was not “performing or exercising a function or power as an officer of the company”. Third, a limitation on the company’s power to appoint an administrator would be inconsistent with a s.437C(1) and (4) which contemplates that an administrator could be appointed while a provisional liquidator is in office. In my view the proper construction of the statutory provisions can be arrived at by testing them against those three propositions.”

12 His Honour examined the development of the case law recognising the directors’ residual powers and the recommendation of the Harmer Report which had led to the enactment of s.471A. He quoted the following paragraph from that report:

“From the commencement of winding up all creditors and members are bound and, unless the liquidator determines otherwise, all powers, functions and duties of officers are terminated.”

13 Owen J then proceeded to consider the Rock Bottom Fashion case and continued:

“There is no doubt, therefore, that s.471A changed the law, at least in some respects. … I am aware that Rock Bottom does not say that the concept of residual powers has been entirely at nought [sic]. But the rationale behind the finding that power to institute an appeal against a winding up order has not survived implementation of s.471A(1) is the existence of the jurisdiction residing in the court by virtue of s.471A(1)(d) to approve the exercise of powers or functions by directors.”

14 Later in his judgment, Owen J dealt with an argument that the appointment of the administrators was the act of the company and did not involve an exercise by the director of a power or function of his office. His Honour took the view that, while the act of appointment was an act of the company, that stage could not have been reached without some conduct of the officers of the company which would inevitably be characterised as the performance or exercise of a function or power as an officer of the company, the reality being that the company could not act at all unless set in motion by its officers.

15 I should also refer to Helljay v Deputy Commissioner of Taxation (1999) 74 ALJR 68 in which Hayne J was called upon to determine an application to remove winding up proceedings into the High Court in circumstances where an order for winding up had already been made. After setting out the terms of s.471A(1), his Honour said:

“None of the exceptions mentioned in s.471A(1) applies in this case. It follows that no director of Helljay has authority to prosecute the application brought in the company’s name. No other application for removal has been made. The fact that the liquidator does not seek to prosecute the application for removal is very probably reason enough to dismiss it.

16 A subsequent reference to the effect of the section may be found in the judgment of Callinan J in Doonan v Henry (2000) 74 ALJR 1289:

“The action has been brought by a natural person, a director, in order to seek relief in favour of, that is, effectively on behalf of, a company in liquidation. A director is not a proper party in any such proceedings. If there is to be any challenge to the winding up order it must be made by the company itself with leave pursuant to s.417A of the Corporations Law” [emphasis added].

17 The point made in the italicised part of this passage is also made at the end of the above extract from the joint judgment in Rock Bottom Fashion and in the last of the quoted extracts from the judgment in Owen J Walker v Midlink Nominees. In each case, the important distinction between the current statutory scheme and its predecessors is identified. The rationale for the decision in Diamond Fuel was that the powers of the directors should be treated as suspended only if the winding up order had been properly and validly made and that, if the liquidator was the only person capable of activating the company to agitate that question, he or she was put in the odd position of seeking to overturn the very order from which the office of liquidator arose. Under the present system, that oddity is avoided not by recognising a general residual power of the directors to challenge the winding up order but by an express statutory provision confiding to the court the discretion to decide whether it is appropriate for the directors to be permitted to take that step. That is the effect of s.471A(1)(d) in the particular context.

18 I am here dealing with Commonwealth legislation (the Corporations Act 2001) in the light of decisions on an identical provision of predecessor legislation which operated nationally as part of a uniform scheme adopted by the Commonwealth and the States. Relevant, therefore, is the statement of Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 that a single judge should not depart from an interpretation placed on the legislation by an Australian intermediate appellate court unless convinced that that interpretation is plainly wrong. On the question of the existence of a general residual power of directors to cause the company to seek to overturn a winding up order, I am therefore constrained to follow Rock Bottom Fashion – a course with which I am, in any event, entirely comfortable as I consider that decision to be plainly right. I may leave to one side the decision of the Full Court of the Federal Court in Emanuele since, although such a residual power of directors was there acknowledged as existing after 23 June 1993, the effect of s.471A never became an issue with which the court was asked to deal.

19 In the absence of the approval of the liquidator under s.471A(1)(c) or of the court under s.471A(1)(d), the directors of Sambah did not effectively cause it to proceed by way of the notice of appeal and amended interlocutory process filed herein.

Retrospective approval

20 It is next necessary to consider whether the absence of s.471A(1)(d) approval is a deficiency which could be cured by an appropriate order nunc pro tunc or, on the other hand, makes the proceedings irretrievably incompetent, so far as the participation and role of Sambah are concerned.

21 As is emphasised in the judgments of members of the High Court in Emanuele v Australian Securities Commission (1997) 188 CLR 114, such a question always turns upon the construction of the particular statute, the possibilities being those identified by Glass JA in National Mutual Fire Insurance Co Ltd v Commonwealth [1981] 1 NSWLR 400, namely, that:

“the proceeding is either a complete nullity or else it remains valid irrespective of whether or not leave is subsequently granted or else it continues in a state of suspended validity which will come to an end if leave is not obtained within an unspecified time.”

22 In the present context, the aim of s.471A(1) must be accepted as being to ensure that the liquidator takes control of the property and affairs of the company free from any possibility of concurrent action by the officers who previously exercised that control. The liquidator displaces those officers in all decisions concerning the company. As the Queensland Court of Appeal recognised in the second Rock Bottom Fashion Market Pty Ltd v H R & C E Griffiths Pty Ltd [1998] QCA 33, questions about pursuit of litigation by a company in liquidation should be decided by the liquidator:

“A court will not lightly interfere in such matters, nor will it generally permit officers of the company to do so.”

23 At the very least, therefore, one might expect that the view of the liquidator should be known before a court makes a decision whether to approve the pursuit of particular litigation by the company at the behest of the directors. This is an indication that the s.471A(1)(d) power is one which should normally be exercised prospectively, with the result that actions taken by directors without prior leave are of no effect.

24 It seems to me, however, that special considerations apply where the matter at hand is a challenge to the winding up order. There, as I have said, the liquidator is in the odd position of having to decide whether to challenge the order which effected his or her appointment. That difficulty was previously resolved by reference to the residual power of directors but is now dealt with through s.471A(1)(d). It follows, in my judgment, that action by directors to have the company appeal against the winding up order or otherwise to seek to have it overturned is not something to which the liquidator’s primary decision making function is intended to apply. The court may therefore proceed to decide whether to approve such action by directors without being concerned that the views of the liquidator are not before it.

25 Whatever may be the effect of s.471A in other contexts, I regard a matter such as the present as within the third class referred to by Glass JA in National Mutual Fire Insurance (above). If the directors cause the company to initiate an appeal against or other challenge to the winding up order, the application is in a state of “suspended validity” which may be resolved by the grant of s.471A(1)(d) approval nunc pro tunc. Indeed, I note that, in Vynotas Pty Ltd v Mystic Crystals Franchises (Australia) Pty Ltd [1999] QCA 473, an application for s.471A(1)(d) approval was entertained after an appeal by the company against the winding up order had reached the Court of Appeal.

Approval in this case

26 No application under s.471A(1)(d) had been made when I heard the proceedings on 6 December 2001. Had there been before me an application made on the footing that funds of Sambah would be used to finance the challenge to the winding up order, I would have refused it. It is clear from the evidence that Sambah is the trustee of a trading trust and that the whole of its assets are trust property. That being so, there is a question as to the extent of the powers of a liquidator of the company to deal with those assets. It may be that the liquidator should apply to the court for an appointment of new trustees (by analogy with the case where a corporation is actually dissolved: King of Hanover v Bank of England (1869) LR 8 Eq 350) or a receiver should be appointed to the trust property. The latter course was regarded as appropriate by Austin J in Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466 where it was also observed that a liquidator of a company acting as trustee will not be entitled to recoup out of trust property expenses of administering the trust which are not properly regarded as costs and expenses of the winding up and recoverable accordingly on principles approved by McLelland J in Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158. But the application of trust property in financing a challenge to the order winding up the trustee is another matter altogether. I see no cogent basis on which the court would think it appropriate to sanction such a course. The position would, of course, be different if an application for s.471A(1)(d) approval was made on the footing that the directors or shareholders would bear the costs.

27 When the proceedings came back before me on 14 December 2001 following my consideration of written submissions on the s.471A issue, I informed counsel of my view that, in the absence of s.471A(1)(d) approval, the applications by Sambah itself were incompetent, although an application for approval nunc pro tunc would be entertained. I also stated, however, that, having considered the evidence, I was prepared (on the basis outlined later in these reasons) to make an order under s.482 terminating the winding up subject to certain undertakings being given to the court. No application for approval under s.471A(1)(d) was made. I therefore proceed to deal with the s.482 application made by Natural Essential Pty Ltd and Progress & Securities Management Pty Ltd. They are contributories and have undoubted standing under s.482(1A).

Considerations relevant to s.482

28 The most important question upon the application for an order under s.482 terminating the winding up is that of Sambah’s solvency. If it can be seen that Sambah is now solvent, the principal concern will be resolved.

29 It is also necessary, in s.482 cases, to consider the position of the liquidator. Here, however, the liquidator has not yet taken control of the assets or begun to execute his office. This is a result of the orders made by Young CJ in Eq on 13 November 2001 and a direction made by me on 6 December 2001. There is therefore nothing arising from the situation of the liquidator requiring attention in the s.482 context.

30 Next, there arise for consideration the interests of the contributories. In this case, the contributories are Natural Essential Pty Ltd and Progress & Services Management Pty Ltd, the parties which actually seek termination of the winding up. There is thus a clear statement by them of what they see as being in their best interests.

31 Finally, the court must consider the public interest. The main component of that interest in cases such as the present is that companies not shown to be solvent and financially stable should be left in liquidation so as to avoid risk and prejudice to those with whom they in future do business: Re Mascot Home Furnishers Pty Ltd [1970] VR 93; Re Data Homes Pty Ltd [1971] 1 NSWLR 338. There are also components which concern themselves with the possibility of breach of the law having been committed which a liquidator, as an officer of the court, would be bound to investigate (Re Allebart Pty Ltd [1971] 1 NSWLR 24), but there is no suggestion of any such factor here.

32 I have omitted from this list of relevant considerations Sambah’s allegation that Brolrik is not in truth a creditor and was not entitled to serve the statutory demand on the basis of which the winding up order was made. That, on the evidence, is a matter of which those in charge of the affairs of Sambah were aware from the very beginning. It was, in fact, canvassed in correspondence between the respective solicitors after the statutory demand had been served. The appropriate course would have been to attempt to have the demand set aside. That is the proper avenue for raising issues about the genuineness of the debt claimed by the party moving for winding up. This is borne out by the discussion of the authorities by Palmer J in Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867. His Honour favoured the approach taken by Tamberlin J in Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411 over that of Heerey J in Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523. I respectfully adopt what was said by Palmer J in the following passage:

“Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by service 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.”

33 The affidavit of the solicitor representing Sambah says that action to challenge the statutory demand was overlooked through administrative error in her firm. That, while unfortunate, is not a ground on which a dispute about the genuineness of the debt the subject of the demand could have been ventilated even upon the hearing of the winding up application. Once the statutory presumption of insolvency has arisen through non-compliance with a statutory demand which has not been set aside under the regime specifically designed to resolve disputes about the debt underlying the demand, that presumption stands unless, of course, rebutted by evidence. The importance of keeping such disputes within their appropriate forum and context is emphasised in the observations of Palmer in Redglove Holdings quoted above.

Solvency

34 Against that background, I turn to the central issue of solvency. In doing so, I remind myself of the task faced by a company seeking to resist a winding up order in consequence of non-compliance with a statutory demand. Although the s.482 aspect of this case does not call directly for the application of those principles, certain of them are nevertheless instructive. They were enumerated thus by Weinberg J in ACE Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728:

“· There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of the company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings pty Ltd (1997) 15 ACLC 459 at 465-466.
· The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
· The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.

35 Evidence about Sambah’s financial position was given by Mr Balog, a director (and the effective controller), Mr Wilcox, its internal accountant, and Mr Singleton, a chartered accountant and Official Liquidator engaged to express an expert opinion as to solvency. A report by Mr Singleton is annexed to his affidavit. It examines the position at 13 November 2001, the date of the winding up order. Mr Singleton and Mr Balog were both cross-examined. The evidence must be understood in the context of Sambah’s activities. It is the developer of a residential building at Hurstville and is engaged in marketing of the units constructed on its site.

36 Certain pertinent matters deposed to in Mr Balog’s affidavit should be mentioned. The position he described prevailed at the date of that affidavit, 23 November 2001. First, Mr Balog confirmed that Sambah had a total of $1,400,000 in term deposits with the National Australia Bank, with a further $83,741.89 in its current account. While the term deposits are theoretically not available until the end of the term, I accept the practical reality that the funds may be assessed at any time subject only to a reduction in interest. It is common ground that, on 14 November 2001, a sum of $175,000 was paid into court in these proceedings, representing the debt of some $42,000 claimed by Brolrik and a debt of some $132,000 claimed by a supporting creditor, R B Plumbing Services Pty Ltd. The balance of $83,741.89 to which I have referred remained after that payment of $175,000. There were thus, on Mr Balog’s account, cash resources of some $1,658,741, inclusive of the sum paid into court. Mr Singleton reduced the amount of the cash resources by $350,000 (to $1,208,741) because one of the bank deposits stands as security for the National Australia Bank bill facility about to be mentioned and therefore cannot be regarded as representing available cash.

37 Mr Balog further deposed that there were trade debts of some $44,000 for which invoices had been received. He obviously excluded from this the debts claimed by Brolrik and R B Plumbing, no doubt because he does not regard them as either due or owing by Sambah. Mr Singleton’s report refers to a somewhat expanded list of trade creditors totalling $113,148. He also includes disputed creditors of $350,000 including the $175,000 covered by the payment into court. Mr Singleton, as a conservative precaution, has also treated as a current liability deposits of $152,605 forfeited by defaulting buyers of units in Sambah’s development, even though the greater likelihood is that those purchasers have no valid claim for repayment.

38 Another liability of Sambah identified by both Mr Balog and Mr Singleton is a debt of $4,000,000 to National Australia Bank under a bill facility. The facility agreement is in evidence. It shows that the facility has a term which will expire in August 2002 and that the right to create bills and have them accepted and discounted will continue until that time. Finally, Mr Balog referred to sums of $2,462,686.48, $575,040.73, $5,263,265.94 and $4,294,957.86 owing by Sambah to four entities which are related to it in the sense that, like it, they are controlled by Mr Balog. The total of these is $12,595,951.01. Mr Singleton put the indebtedness to related entities at the somewhat higher figure of $13,105,831.

39 Leaving to one side these related entity debts (as well as the NAB bill facility debt which I am satisfied is not due) and adopting the more conservative basis shown by Mr Singleton’s report, debts of Sambah which could be said to have been due or near due as at 13 November 2001 were:

Trade creditors $ 113,148

Disputed creditors (including those
covered by payment into court) 350,000
Forfeited deposits $ 152,605
$ 615,753

Resources immediately available to meet those debts on 13 November 2001 amounted, on the most conservative basis, to $1,208,741, with the result that, if the total of $615,753 is accepted as the total of debts then due, Sambah had more than sufficient cash and liquid assets to meet those debts. The evidence given by Mr Balog and Mr Singleton on 6 December 2001 warrants an inference that the position now is not materially different from that which was thus presented as having existed on 13 November 2001.

40 This leads to a consideration of the related entity debts and the crucial question whether they too should be regarded as due. Mr Singleton said quite clearly in cross-examination that if the related entity debts were due and payable, Sambah would be insolvent. The core issue is thus clear.

The related entity debts

41 Some time was spent at the hearing on the related entity debts. Each of them is the subject of a letter dated 26 October 2001 sent by the related entity to Sambah. The letters are all in the same terms, save for the name of the related entity and amounts of debt and interest. One of the related entities is Progress & Securities Management Pty Ltd. Its letter to Sambah reads as follows:

“Dear Sirs

RE: ADVANCE BY PROGRESS & SECURITIES MANAGEMENT PTY LTD TO SAMBAH HOLDINGS PTY LIMITED

As you know, Progress and Securities Management Pty Limited has advanced funds to you as follows:

Date of Advance Amount of Advance
As per schedule $4,294,957-86

As you agreed, at the date of each advance, to make repayments in relation to the above advances as follows:

Due Date for repayment Amount of repayment
You have not made repayments in accordance with our agreement. Interest in the amount of $277,958.00 has accrued in relation to the outstanding advance. You are in breach of your agreement to make repayments on the due dates.
Without prejudice to our position, we propose not to take immediate steps to enforce our rights under the agreement, provided:
1. You grant a mortgage over the properties [as fully described].
2. You agree to make future repayments of principal and interest in accordance with the enclosed schedule.
Please confirm your acceptance of the above proposal by signing and dating the duplicate copy of this letter. On receipt of your acceptance, we will arrange for mortgage documentation to be immediately forwarded to you for execution by you.”

42 The confirmation sought in the last paragraph was given in each case. A curious thing about the letters is that none of them was in fact accompanied by an enclosure setting out a payment schedule as envisaged by the numbered paragraph 2. As a result, both offeror and offeree accepted a position where the outstanding balance was acknowledged as owing but no provision was made as to a due date or due dates for payment. In those circumstances, I believe the appropriate finding is that the balance from time to time owing is payable on demand by the creditor: Woods Bagot Pty Ltd v Poppy Lodge Pty Ltd (1995) 65 SASR 583. I did not understand counsel on either side to contend otherwise.

43 Also exhibited to Mr Balog’s affidavit is a copy of an undated and unstamped mortgage of the properties referred to in the letters. The mortgagee is expressed to be the four related entities as “tenants in common in” shares roughly corresponding with their debts. There are some odd features about the mortgage, not the least of them the naming of Sambah as both mortgagor and debtor and the description of “guarantor” as “not applicable”, although Mr Balog has signed as guarantor in the presence of Mr Wilcox. Impressions of common seals of Sambah and the four related entities are affixed, with the signatures of both Mr Balog and Mr Wilcox appended against each, although without any designation of office.

44 The other aspect involving the four related entities is a document asserted to be a deed dated 30 November 2001 between Sambah and those entities whereby they purport to covenant with Sambah for the benefit of each of its creditors from time to time that, upon its winding up in insolvency, the related entities’ debts will rank after other creditors’ debts and the entities will prove for their debts only as so ranking. Although this document did not exist on 13 November 2001 and such effect, if any, as it may have would have been disregarded in judging solvency at that date, it is relevant to the current assessment for s.482 purposes.

45 For reasons I have mentioned, each sum owing to one of the relevant related entities must, as a matter of law, be regarded as payable on demand. The obligation to pay therefore does not arise for performance until after demand is made by the relevant related entity upon Sambah, whether by the instituting of recovery proceedings or otherwise: Young v Queensland Trustees Ltd (1956) 99 CLR 560. In addition, a reasonable time for the meeting of the demand must have elapsed. The latter element is supported by the decision of the High Court in Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491. It follows that the time at which the debt owing to each related entity will become due will be determined solely by that related entity.

46 This is a significant consideration when it comes to assessing “the commercial reality with which the court has to deal” in cases where solvency is in issue: Hamilton v BHP Steel (JLA) Ltd (1995) 13 ACLC 1548. The related entities, like Sambah, are owned and controlled by Mr Balog. He has shown himself anxious to save Sambah from liquidation. Before the winding up order was made, he caused the related entities to re-schedule overdue interest owing to them by Sambah and to put the whole of each related entity’s debt on to an “on demand” basis. Since the making of the winding up order, he has initiated steps aimed at causing the related entity debts to be subordinated in any winding up of Sambah, although the efficacy of those steps, for present purposes, is open to serious question. In the first place, the supposed deed was entered to by decision of company officers without approval of the liquidator or the court, so that s.471A again presents a serious problem. Second, there is the point that the subordination, if effective, is contractual and might be undone as easily as it was done (Re Nature Springs Pty Ltd (1994) 13 ACSR 50), although the elements which purport to create a trust might cut across that in this case. Third, even an effective subordination causing an on demand debt to be deferred in a distribution to creditors upon winding up says nothing about the creditor’s right to call up the debt at will in the meantime. For all these reasons, the supposed subordination should be regarded as illusory in the present assessment of solvency.

47 It is plain that the key to Sambah’s future solvency lies entirely in Mr Balog’s hands in that it is open to him to cause the related entities, or any of them, to demand payment by Sambah at any time. It is here, I think, that the “commercial reality” aspect of this kind of inquiry comes to the fore. There is a need to choose between two possibilities in making the necessary forward looking assessment. On the one hand, it might be thought, as in Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, that, despite the indications I have mentioned, there remains a reasonable possibility that the related entity debts will be called up in the short term. Alternatively, the situation may be, as in Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61, one in which the related entities are seen as contributing liquidity and the common controller’s interest in ensuring the survival of all his companies may be regarded as the predominant factor.

48 I am influenced by the fact that, as I have said, Mr Balog has shown himself anxious to save Sambah from liquidation. He took the steps I have described in relation to the related entity debts in an obvious attempt to reduce their impact on Sambah’s solvency. But when the matter came back before me on 14 December, he had not taken the decisive step of ensuring that the related entities would not be called while anything remains owing to external creditors, despite Mr Singleton’s erroneous understanding that this was the effect of the subordination arrangements. I indicated to counsel on that occasion that if a suitable regime of that type were in place, the court could proceed with confidence on the footing that all the interests which must be shown to be accommodated to justify termination of winding up had been duly and adequately accommodated; but in the absence of such a regime, an unacceptable element of risk of financial instability would continue to exist by virtue of the possibility that the related entity debts could be called up at any time.

49 With these considerations in mind, I said at the conclusion of proceedings on 14 December:

“I foreshadow now that an order will be made in chambers on Monday, 17 December 2001 terminating the winding up of Sambah Holdings Pty Ltd as of 18 December 2001 if, by 3 pm on 17 December 2001, there are filed (by delivery to my Associate) the following:

(a) a separate written undertaking to the court by each of Progress & Securities Management Pty Ltd, Suninvest Pty Ltd, JAG International Property Consultants Pty Ltd and Progress & Securities Pty Ltd that it will not make demand for, sue for or in any other way seek to recover any part of the debt owing to it by Sambah Holdings Pty Ltd (as referred to in its letter dated 26 October 2001 to Sambah Holdings Pty Ltd and the appended form of acceptance of Sambah Holdings Pty Ltd dated 30 October 2001) or interest in future accruing thereon while any sum remains owing by Sambah Holdings Pty Ltd to any of its creditors other than those four companies (the undertaking being executed in each case in such a way as to make it a binding obligation of the company concerned); and

(b) a written undertaking to the court by Tibor Balog that none of the companies by which an undertaking referred to in paragraph (a) is given will be procured or permitted to breach that undertaking (the undertaking being personally signed by him).

I direct that a copy of my current remarks be furnished by Sambah’s solicitors in these proceedings to each of the companies mentioned in paragraph (a) and to Tibor Balog by 3 pm today so that they may all be aware, first, of what has been said about them in the context of possible undertakings to the court and, second, that if any of them gives an undertaking to the court as I have outlined and fails to honour and perform the undertaking, punishment for contempt of court may result. Such an undertaking should not be given lightly or without due care and consideration.

If the undertakings I have outlined are not given by 3 pm on Monday, 17 December 2001, there will be no alternative but to conclude that the solvency and financial stability of Sambah Holdings Pty Ltd have not been shown sufficient to justify termination of the winding up, with the result that all the applications before the court will be dismissed, in which event the liquidator will be bound to act promptly to move into control of the assets of Sambah Holdings Pty Ltd.”

Disposal of these proceedings

50 Written undertakings of the kind I outlined were tendered by the four related entities and by Tibor Balog before the time I nominated. An order terminating the winding up may therefore be safely made.

51 Mr Aldridge submitted on 14 December 2001 that the funds paid into court by Sambah on a without prejudice and without admissions basis in respect of Brolrik’s alleged debt should be paid out to that company. Because that debt is clearly disputed, it would not be appropriate to make such an order. Mr Aldridge next submitted that the funds should remain in court pending resolution of the dispute about the debt, subject to a condition that appropriate proceedings be initiated within a specified time. Mr Massey, who appeared for R B Plumbing on both 6 and 14 December 2001 sought a similar outcome in relation to money in court in respect of his client’s disputed debt, although without the condition since proceedings have already been commenced in the District Court. Sambah has asked that the proceedings be relisted so that both the fate of the moneys in court and the question of costs may be further argued.

52 The orders of the court are as follows:

1. Order that the applications purportedly made by Sambah Holdings Pty Ltd by the notice of appeal and amended interlocutory process herein be dismissed.

2. Upon Progress & Securities Management Pty Ltd, Suninvest Pty Ltd, JAG International Property Consultants Pty Ltd, Progress & Securities Pty Ltd and Tibor Balog giving to the court the written undertakings tendered by them today, order, pursuant to s.482 of the Corporations Act 2001, that the winding up of Sambah Holdings Pty Ltd be terminated on 18 December 2001.

53 The question of costs and the disposition of the moneys in court will be dealt with separately at a later date.

**********

Last Modified: 12/18/2001