Citibank Ltd v Frankston Hi-Tech Park Pty Ltd

[1995] FCA 1155

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY       No VG 3469 of 1995

GENERAL DIVISION

B E T W E E N :

CITIBANK LIMITED
  Applicant

A N D :

FRANKSTON HI-TECH PARK PTY LTD
  Respondent

COURT:    NORTHROP J

PLACE:    MELBOURNE

DATE:     15 NOVEMBER 1995

REASONS FOR JUDGMENT

This is an application brought by the applicant under section 459P of the Corporations Law for an order that the respondent ("the company"), be wound up in insolvency. Section 459A confers jurisdiction on this Court to make an order that an insolvent company be wound up on an application under section 459P. Section 459C refers to certain presumptions that apply for the purposes of an application under section 459P. Subsection 459C(2) is important and I read it:

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

(a)the company failed ... to comply with a statutory demand:  ... "

Subsection 459C(3) is important also and I read it:

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

The purpose of PART 5.4 of the Corporations Law is to enable what is considered to be a fairly simple and straightforward method providing for the winding up of insolvent companies and although, as I have indicated in another case Hornet Aviation Pty Ltd v Ansett International Air Freight  A Division of Ansett Transport Industries (Operations) Pty Ltd, No TG 3005 of 1994, 6 December 1994, the Act is said to be in plain English, many difficulties arise in construing the relevant provisions of the PART.  Its purpose however is clear.  The sections I have referred to, on their face at least, make the position very clear.  If a company on whom a statutory demand has been made fails to comply with that demand, there is a presumption that that company is insolvent and the creditor may seek an order to have that company wound up in insolvency and rely upon that presumption.  In this regard, reference may be made to the meaning to be given to the word "solvency" and "insolvency" when used in the Corporations Law.  Section 95A provides:

"95A(1)   A person is solvent if, and only if, the person is able to pay all of the person's debts, as and when, they become due and payable.

(2)  A person who is not solvent is insolvent.

(3)  ... "

The word person there covers a corporation and in this case the company.
     In the present case the applicant issued a statutory demand against the company on 28 June 1995.  It was served on the same day.  It was a demand for the payment of $1.453 million, in round figures, arising from a loan facility given by the applicant.  The period of the statutory demand expired on 19 July.  The present application was issued on 17 August 1995.  It was directed to come before a Registrar of the Court on a date in September, but for various reasons the matter had to be adjourned from time to time and came on for hearing today.

It is always open at the hearing of an application under section 459P for a company to prove that it is solvent in order to overcome the presumption imposed by sub-section 459C(3). This is so because a company which is solvent in the defined sense is not one which should be wound up. Restrictions, however, apply in cases where a company who has been served with a statutory demand does not take any of the steps referred to in Division 3, of PART 5.4 of the Corporations Law to have that statutory demand set aside.  That Division contains detailed provisions enabling the company on whom the demand is made to apply within the 21 days and, in conformity with the provisions, attempt to have the demand set aside.  If the Court is satisfied of one or both of the specified matters, the Court is empowered to set aside that statutory demand.  The first matter referred to is in substance that there is a genuine dispute between the company and the respondent to the application of the company about the existence or amount of the debt to which the demand relates. 
The second matter is that the company has an off-setting claim. The off-setting claim is defined to mean a genuine claim that the company has against the respondent by way of counter-claim set off or cross-demand (even if it does not arise out of the same transaction or circumstances of the debt to which the demand relates), see generally section 459H.

In the present case, the company did not take steps under Division 3 to have the statutory demand set aside. For present purposes it can be assumed from the material before the Court that at the time that the statutory demand was served on the company the person in effective control of the company did not know of its existence or service until much later, namely when the application for the winding up order had been served, that time being some time in September of this year. However, the failure to have the statutory demand set aside does not prevent the company from proving that it was in fact solvent, in which case the application for winding up would not be granted. However, there is a restriction placed on a company which has not applied to have the statutory demand set aside from relying upon such a ground at the hearing of the application for the winding up order. This is contained in section 459S subsection (1):

"459S(1)  Insofar as an application for a company to be wound up in insolvency relies on the 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 an application or not)."

In other words, what is provided is that a company cannot rely upon any ground which would have been available to seek to have the statutory demand set aside at the time of the hearing of the application for a winding up order without the leave of the Court.

Subsection (2) imposes a fetter on the discretion of the Court to the granting of leave.  I read that subsection:

"(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."

It should be noted that insofar as an application to have the statutory demand set aside is concerned, no question of solvency of the company is relevant. It is not referred to in Division 3. The solvency of the company concerned is immaterial in having the statutory demand set aside. Provided a ground is established the demand should set aside in conformity with the provisions of Division 3.

At the hearing of the application for a winding up in insolvency, different considerations apply. Here the question of solvency is the important issue. By this stage, on the facts of this case, there is a presumption that the company is insolvent. The question for the Court to determine is whether the company is able to rebut that presumption by the calling of evidence to show that it is solvent. If in fact it is able to pay its debts as they became due and payable, without having to rely on anything else, proof of those matters would be sufficient to defeat the application. It is only where a company seeks to rely upon one of the grounds specified in section 459H of the Corporations Law to establish solvency that this issue arises.  What must be proved is that the company is solvent, and in order to do that it must show that it has an off-setting cross-claim or the claim by the applicant is disputed, in which case the matter mentioned may be taken into account in determining whether the company is solvent or not.  But the issue is whether the company is solvent or not.

In the present case this is understood by the draftsman of the notice of intention to appear at the hearing of this matter, which notice dated 9 October 1995, in conformity with Form 79 of Order 71 rule 37 sub-rule (11) of the Federal Court Rules, states the grounds of opposition only two of which are relied upon:  1:  "That the company is solvent."  I leave out other words which have no effect whatsoever, and 2:  "That the company, through its active director, was not aware of the serving of the Creditor's Statutory Demand for Payment of Debt and thereby was precluded from applying to set aside such demand pursuant to section 459G of the Corporations Law."

The crucial ground of opposition is that the company is solvent.  That is what the company has to establish, at this stage, if it desires to succeed in its opposition to the
winding up order.

At this stage it is necessary to make reference to the facts of this case, but before doing so it is fair to say that there is a dearth of information before the Court concerning this company.  There is just nothing to show the Court that it is in fact solvent, or even would be solvent, if what is claimed to be a cross-claim is allowed.  The company was involved in developing land in the Frankston area of Victoria and for this purpose developed a shopping block of some six units at Frankston, obtaining finance from the applicant.  It ran into financial difficulties, some of which were caused by the activities of one of the directors of the company in apparently misapplying moneys received from tenants of some of those units, which should have been paid to the applicant.  But the effect of all this was that in May of 1994, pursuant to the terms of the loan agreement which had been entered into between the company and the applicant, the applicant was appointed controller of those six units in Frankston.  It took possession of those units, and control over the rentals of those premises, some of which were not occupied, they being shopping units.  It is quite obvious from that information itself, which is deposed to by the director of the company, that at that stage, in all probability, the company was insolvent in the defined sense.  It could not pay its debts.

There is no material at all before the Court setting out just what other assets the company has.  There is no material before the Court showing what other liabilities the company
has.  There is just nothing to show, either from balance sheets or statements of account, what the financial position of the company is.  There is nothing to show that it is able to pay its debts as they become due and payable.  All the matters in the affidavits have been concentrated on the question of the actions by the applicant as controller of the six units.  In September of 1994 two of those units were sold by the controller pursuant to the powers conferred upon it.  It is suggested that they were sold below their true value, but the amounts received from that sale are taken into account in reducing the amount of the debt claimed by the applicant to the figure already mentioned of just under $1.5 million.  It is also said that the books of the account, and all the books and records of the company, are in the hands of the Police who are investigating charges against the other director, Mr Stephenson.  It is said on behalf of the company that it is impossible to work out just what is the financial position of the company since the books of account of the company are held by the Police.  But it must be remembered that the shifting onus is on the company to prove that it is solvent.  It must satisfy the Court that it is solvent.

There is nothing to suggest that it is solvent.  The only way it is put is that in various ways the applicant has failed in its duty under the provisions of the Corporations Law to carry out the sale of the units in a proper way and, as a result, the company has suffered loss and it is seeking to claim that loss against the applicant.  To this extent the company has had prepared a statement of claim setting out its
claim, but although there has been ample time to have a writ in the Supreme Court of Victoria issued to support that claim, nothing has been done.  In due course I will refer to this as a factor in considering whether there is a genuine claim or not, but indicate now that in my opinion, it can be so taken into account to detract from a finding that there is a genuine off-setting claim.

But before coming to that matter I come back again to the provisions of the presumption under 459C and the fetter on the discretion of the Court to allow the company to go into the question of the cross-demand by subsection 459S(2). It must be remembered that the company must satisfy the court that it is solvent and in the absence of any evidence at all as to the financial position of the company, with the exception of the six units, the court is unable even to consider the possibility of the company being solvent. There is no evidence to show who are creditors of the company, what assets it has, what its liquidity is, and it cannot be said on any view that it is able to pay its debts as they become due. In this context the question arises, should the Court exercise its discretion to enable the company to raise the question of whether it has an off-setting claim as defined in section 459H of the Corporations Law.  Further there is a dearth of information on this point leading to the position that during the course of the hearing today counsel for the company sought a further adjournment to enable further evidence to be given on this aspect of the matter.  For reasons then given, the Court refused that adjournment and so at the moment the
evidence as it stands is to be considered.  There is just no evidence whatsoever to show that the claim which the company seeks to make against the applicant amounts to the same amount of the claim by the applicant, or to within $2000 below that amount.

The Court is not able to find anything at all in the material to support an off-setting total arising from the off-setting claim for the purposes of section 459H of the Corporations Law. The only view that the Court can take is that on all the material the company is completely and utterly insolvent. All the material before the Court supports that view. There is no material at all to suggest that the company is solvent. That, coupled with the fact that on the material the Court is unable to form a view that any off-setting claim that the company might have would come within $2000 of the claim by the applicant, particularly where a lot of the claims now being made by the company relate to events after the expiration of the statutory notice, namely sales in October. The Court should not, in the exercise of its discretion, allow the company to rely upon a ground referred to in section 459 of the Corporations Law.  This is apart altogether from the fact that the grounds of opposition themselves do not state that it would be seeking leave so to do.  The company has not commenced proceedings in the Supreme Court seeking to enforce its claim despite there being plenty of time within which this could have been done, compare what I said in Hornet Aviation and what was said by Lockhart J in Chadwick Industries South Coast Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR
37 at 40-41.

In the result, I base my decision on the ground that on all the material before the Court there is just no evidence to show that the company is solvent, no evidence to rebut the presumption in favour of the applicant, and therefore the application should be granted.

Order accordingly.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment of The Honourable Justice R.M. Northrop.

Associate:

Date:

ATTACHMENT

Counsel for the Applicant:   Mr P.J. Riordan

Solicitor for the Applicant: Marshalls & Dent

Counsel for the Respondent:  Mr A.D.B. Ingram

Solicitor for the Respondent:     Lardner & Associates

Date of Hearing:            15 November 1995