Dikwa Holdings Pty Ltd v Oakbury Pty Ltd

[1992] FCA 418

Re: DIKWA HOLDINGS PTY LIMITED
And: OAKBURY PTY LIMITED
No. N G3059 of 1992
FED No. 418
Corporations - Practice and Procedure
(1992) 10 ACLC 925
(1992) 8 ACSR 53
(1992) 36 FCR 274

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.(1)

CATCHWORDS

Corporations - Application for winding up - Debt arising from consent order in Supreme Court of New South Wales - Whether s.460 notice overstated the amount due - Overstatement not fatal to application for a winding up order - Court must be satisfied that the debtor company is unable to pay its debts.

Practice and Procedure - Non-compliance with rule requiring service of winding up Application prior to advertisement - Whether debtor company prejudiced by non-compliance - Court may excuse non-compliance where debtor company not prejudiced.

Corporations Act 1989, s.460.

Federal Court Rules, 0rder 71 r.37(5).

HEARING

SYDNEY

#DATE 22:5:1992

Counsel for the Applicant: A M Gruzman

Solicitors for the Applicant: Williams Palmer Noss

Solicitor for the Respondent: M Ryckmans

Solicitors for the Respondent: Rowlandson and Co

ORDER

THE COURT ORDERS THAT:

1. Pursuant to Order 1 rule 8 of the Federal Court Rules, compliance with order 71 rule 37(5) be dispensed with.

2. Oakbury Pty Limited be wound up by this Court under the provisions of the Corporations Law.

3. John Beresford Harkness of KPMG Peat Marwick, an official liquidator, be appointed the liquidator of the said company.

4. The applicant's costs, including reserved costs, be taxed and reimbursed in accordance with s.466(2) of the Corporations Law.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is the hearing of an application for an order to wind-up Oakbury Pty Limited ("Oakbury"), the respondent. The applicant, Dikwa Holdings Pty Limited ("Dikwa"), was the plaintiff in a proceeding against Oakbury in the Supreme Court of New South Wales which was the subject of a compromise; although not before the matter had been referred to arbitration and arbitrator's fees incurred. These fees were subsequently agreed, as between the parties to the proceedings and the arbitrator, to be $5,000.

1. The consent order in the Supreme Court was made on 30 September 1991. Pursuant to those orders, judgment was entered in favour of Dikwa against Oakbury in the sum of $150,000. It was ordered that the judgment debt be paid by instalments: $20,000 upon the date of the order; $10,000 on 13 December 1991; $20,000 on 28 February 1992; and $16,667.67 on each of six subsequent dates, being at three monthly intervals and finishing on 31 August 1993. The order provided for payment of interest on any overdue instalment at the rate of 15 percent per annum and that the judgment debtor should not be in default in respect of any particular instalment if the instalment was paid within 30 days of the due date and interest was paid. There was no provision for acceleration of the date for payment of the balance of the judgment debt upon any default.

2. It appears that the initial instalment of $20,000 was paid on or about the due date. However, it is common ground that the instalment of $10,000 due on 13 December 1991 was not then paid, and has never been paid, and that the payment due on 28 February 1992 has also not been paid. It appears that, in December 1991, there was some discussion between the solicitors for the parties regarding payment of the arbitrator's fee. At about that time, it was agreed that $5,000 should be paid to him and the solicitor for Oakbury suggested to the solicitor for Dikwa that he should pay this amount to the arbitrator and deduct half of it from the payment due to Dikwa on 13 December. This proposition was accepted. According to Mr J.K. Boxsell, the solicitor for Dikwa, he used the following words in accepting this proposition:
   

"It makes no difference to us, I suppose, as long as we get paid the next instalment due. I will accept that. That means Mr El Khoury (the principal of Oakbury) will pay $7,500 to us on the 13th December and you will pay Mr Langhorn (the arbitrator) $5,000."

1. There is no admissible evidence that the sum of $5,000, or any other sum, was in fact paid to Mr Langhorn. Notwithstanding this, Oakbury takes a point regarding the validity of the s.460 notice which was served on it. The evidence reveals that the s.460 notice was dated 7 February 1992. It required payment of the sum of $10,000 within 21 days, this being the amount due on 13 December. It is common ground that no money was paid pursuant to that notice.

2. Shortly after service of the notice, the solicitor for Oakbury wrote to the solicitor for Dikwa claiming that the notice was invalid. No reason was given, but the solicitor may have thought that the demand should have been for $7,500 - that is, the December instalment of $10,000 less one half of the arbitrator's $5,000 fee - rather than the full $10,000 mentioned in the notice. However, whether or not this was so, there was no offer to pay the $7,500; and no action was taken to restrain any further action by Dikwa. In due course, the February instalment fell due and the affidavit of debt now before the Court refers to a total of $30,000 as being payable.

3. The first ground of opposition taken on behalf of Oakbury is that the s.460 notice is invalid because it demanded payment of more than the correct amount owing. It seems to me that there is no substance in this submission. I think that the highest that the matter can be put, from Oakbury's point of view, is that there was an agreement that Oakbury was free to deduct $2,500 from the payment due in December, provided of course that it ensured that the arbitrator was paid. As I have said, there is no evidence that the arbitrator was in fact paid; so it is not shown that this agreement ever came into application. The respondent does not put a case that it paid, or offered to pay, $7,500 to Dikwa, but merely that it would have been entitled to deduct $2,500 from the $10,000 instalment if it had been paid.

4. Secondly, even if the notice overstated the amount owing, it is legitimate to look at the whole of the circumstances in order to determine the critical issue upon which the application depends: whether or not the company is unable to pay its debts. This is the matter about which the Court must be satisfied before making a winding up order on the ground of insolvency - see s.460(1) of the Corporations Law. Non-satisfaction of a notice issued under s.460(2)(a) of the Law provides evidence of inability to pay debts. But it is not the only way in which that inability may be proved: see s.460(2)(c). In reaching a conclusion on the issue of solvency, the Court is entitled to consider all aspects of the parties' relationship and dealings.

5. As I have pointed out, this is not a case where a debtor has tendered payment of the balance of the moneys owing, after deducting a disputed sum. At no time has Oakbury suggested that it is able to make a payment to Dikwa; and this notwithstanding the fact that there can no longer be any dispute about its liability for payment, other than the sum of $2,500. Given the fact that two instalments have now been missed, despite Oakbury's knowledge of the threat of winding up proceedings, the inference is irresistible that the company is unable to pay its debts. The ground specified in s.460(1) is made out.

6. There is a second ground of opposition to the making of a winding up order. The application was filed on 2 April 1992. It was not served until 6 May 1992. I was told by counsel that the documents were given to a process server and he did not serve them as quickly as expected. The reason does not appear. But the delay had the effect that the application was advertised before it was served. Notice of the application was published in "The Sydney Morning Herald" on 24 April and in "The Commonwealth Gazette" on 5 May 1992. Order 71 rule 37(5) provides:
   

"Unless the Court orders to the contrary, notice of the application in Form 93 must be published in the manner prescribed by rule 104 not earlier than 3 days after the date the application was served on the company and not later than 7 days before the date appointed for directions under Order 4, rule 8."

1. The reason for a provision requiring notice of the application to be published after the date of service is referred to in several authorities to which reference has been made in argument. In Re Signland Limited (1982) 2 All ER 609 Slade J referred to the corresponding United Kingdom rule. He attributed its existence to two considerations:
   

"(1) To give a company served with a winding up petition the opportunity to discharge the debt in question, if it is undisputed, before advertisement takes place, with all the necessarily potentially damaging consequences to the company, and

(2) To enable the company, if it wishes to dispute the debt, to apply to the court to restrain advertisement."

1. In Paterson v Hampton Interiors (1989) 7 ACLC 904 Needham A.J. of the Supreme Court of New South Wales dismissed as an abuse of process an application for a winding up order served after the date of the advertisement. In that case there was a dispute between the parties as to the indebtedness and action had been taken by the alleged debtor company to restrain the prosecution of the winding up application. Needham A.J. referred to the relevant rule of court, which was in a form substantially similar to the rule of this Court, and commented:
   

"The purpose of that rule is well known, that is, in the knowledge that many applications for winding up of companies do involve disputed claims, the rule provides for an opportunity for the company said to be the debtor to make application for an injunction prior to the advertising of the lodgment of the summons. The opportunity given to the company is justified by the damage which can accrue to a company which has had an advertisement placed in the paper and the Government Gazette that an alleged creditor is seeking to have that company wound up. The effect on the company and its business can readily be recognised. That is the purpose of the rule."

1. His Honour went on to note that the rule commenced with the words: "Unless the Court otherwise orders", but he said that this did not enable the Court to excuse a breach of the rule; rather, the qualification was an indication that the Court, upon application by a company which was alleged to be a debtor, might make orders forbidding advertising of the application. Needham A.J. noted that the Court had a general power to excuse compliance with its rules, a power which was frequently used where breaches did not involve any matter of principle or damage to another party; but he said that those circumstances were not present in the case then before him.

2. Shortly after that decision, there were two cases in the Supreme Court of Victoria, heard by Senior Master Mahoney, where the same topic was addressed: see Re D R Electrical and Engineering Pty Limited (1989) 7 ACLC 1058 and Re Hernil Pty Limited (1989) 7 ACLC 1063. Senior Master Mahoney discussed the equivalent Supreme Court of Victoria rule, which was in similar terms to the New South Wales rule. He expressed views compatible with those of Needham A.J. But he took the view that the Court might properly excuse a breach of the rule where there was no application for an injunction and it appeared that no prejudice had occurred. He took that course in each case.

3. The matters referred to by Slade J in Re Signland and by Needham A.J. in Paterson v Hampton Interiors are of considerable importance. The advertising of a winding up application has the potential to do considerable commercial harm to a company named as the debtor. Whenever there is a possible basis for an injunction, it is important that such a company have an opportunity of approaching the relevant court for that purpose. A possible basis will most commonly arise where there is room for dispute about the debt. If the facts of this case were similar to those before Needham A.J., I would have no hesitation in following the course which he took. However, it seems to me that there is a significant difference between the facts of that case and those of the present case. In the present case, perhaps unusually, the debt which is referred to in the s.460 notice and is the basis of the winding up petition is one established by judicial decision. It is true that the decision was not arrived at after a court hearing. But it was entered by consent after the parties had addressed the issues between them, and indeed gone to the stage of having the matter referred to an arbitrator. The judgment stands in a stronger position than a default judgment. It is not liable to be set aside. In the circumstances, there can be no possible contention that Oakbury does not owe the money claimed by Dikwa. There is no basis upon which an injunction might be granted to restrain the presentation of the winding up application or the prosecution of that application.

4. It seems to me that this factual difference with Paterson v Hampton Interiors is of critical importance. It means that, in this case, the non-compliance with the rules caused no prejudice to Oakbury. In saying this, I do not overlook the other justification, mentioned by Slade J: namely to give the debtor company an opportunity to pay its debt. However, in the present case, the evidence shows that the debtor well knew both the fact of the debt and that it was being vigorously pursued by the creditor. There had been exchanges of correspondence between the solicitors regarding the fact that the money was unpaid. Those concerned with the management of Oakbury realised that the claim for payment was being actively pressed and that, in default of payment, winding up proceedings would be taken. They had every opportunity and incentive to pay the debt even before the application was served. This is not a case of a long-standing debt being suddenly enforced by a winding up application, without any recent intimation to the debtor that the claim was active.

5. In the whole of the circumstances, it seems to me that the breach of Order 71 rule 37(5) occasioned no prejudice to the debtor; indeed, the contrary was not submitted. Accordingly, I think that this a case, perhaps a rare one, in which it is proper to exercise the power of the Court to dispense with compliance with that sub-rule. The Court, of course, has a general power of dispensation: see Order 1 rule 8. I propose to exercise that power in the present case.

6. I order pursuant to Order 1, rule 8 of the Federal Court Rules that compliance with Order 71 rule 37(5) be dispensed with. I order that Oakbury be wound up by the Court under the provisions of the Corporations Law and that John Beresford Harkness of KPMG Peat Marwick, an official liquidator, be appointed the liquidator of the said company. I order that the applicant's costs, including any reserved costs, be taxed and reimbursed in accordance with s.466(2) of the Corporations Law.