Elconnex Pty Ltd v Gerard Industries Pty Ltd

[1992] FCA 556

JUDGMENT No. %-

VICTORIA DISTRICT REGISTRY	IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION No. VG 3161 of 1992
IN THE MATTER of MAYFAIR VIEW PTY LTD (A.C.N. 050 278 370)
B E T W E E N :

CLAYTON UTZ (a firm)

Applicant

- and -

MAYFAIR VIEW PTY LTD

Respondent

Coram:	Olney J
Place:	Melbourne
Date :	3 August 1992

REASONS FOR JUDGMENT

THE APPLICATION

request of the respondent, the applicant acted as solicitors	asserts that between 17 April 1991 and 9 April 1992, at the
for the respondent in connection with a proceeding in the Supreme Court of Victoria. It is said that the respondent is indebted to the applicant in the sum of $82,173.65 for legal costs and disbursements in connection with the proceeding.
The applicant claims to be a creditor of the respondent and seeks the winding-up order on the ground that the respondent is unable to pay its debts.
It is common cause that on 7 April 1992 the applicant served on the respondent written demand signed on behalf of the applicant, requiring the respondent to pay the sum of $30,582 claimed to be due to the applicant and that the respondent, for 3 weeks after service of the demand, failed to pay the sum claimed or to secure or compound for it to the reasonable satisfaction of the applicant.
The total claimed indebtedness of the respondent to the applicant is the sum of 5 invoices for costs and disbursements
rendered in respect of the proceedings in the Supreme Court on
the dates and for the amounts following:

By application filed 1 June 1992 the applicant sought an order that the respondent be wound-up under section 460(1) of the Corporations Law.

An affidavit in support of the application sworn on 1 June 1992 by Christopher Antony Dale, a partner in the applicant

27 November 1991 24 December 1991 31 January 1992

27 January 1992
7 April 1992

The amount of the demand made and served on the respondent on 7 April 1992 represents the total of the first four of these invoices.

On 6 July 1992 an affidavit of David Joseph McGinnes sworn 6
July 1992 was filed on behalf of the respondent.

The application and supporting affidavit were duly served and the other procedural requirements of the Corporations Law and Rules appear to have been complied with.

On 7 July 1992 directions were given for the filing of further affidavits, and the matter came on for hearing on 29 July 1992.

The provisions of section 460 of the Corporations Law are well known but can usefully be repeated, to the extent they are presently relevant.

460(1) The Court may order the winding up of a company
that is unable to pay its debts.

(2)	For the purposes of an appllcatlon that is made in relation to a company on the ground provided for by subsection (l), the company shall be deemed to be unable to pay its debts if:
(a) a creditor by assignment or otherwise to whom the company is indebted Ln a sum exceeding $1,000 then due has served on the company a demand, signed by or on behalf of the credltor, requiring the company to pay the sum so due and the company has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to . the reasonable sat~sfaction of the credltor .
(b) ...
( C ) .. .

2.    THE EVIDENCE

The following affidavits were relied upon by the parties, namely affidavits of Christopher Antony Dale (Dale) sworn 1 June 1992 and 17 July 1992 (filed on behalf of the applicant) and of David Joseph McGinnes (McGinnes) sworn 6 July 1992 and 24 July 1992 (filed on behalf of the respondent).

In addition, at the request of the applicant, McGinnes was made available for cross-examination.

I propose to summarise those parts of the several affidavits relied upon by the parties which touch up facts which are relevant to the issues under consideration. There is a substantial amount of irrelevant material in some of the affidavits.

(a) Dale's affidavit sworn 1 June 1992:

Reference has already been made above to the contents of this affidavit which is largely formal and except to the extent that it alleges that the applicant is a creditor of the respondent there is nothing contentious in it.

(b) McGinnes's affidavit sworn 6 July 1992:

McGinnes is a director of the respondent and confirms that the applicant acted as the respondent's solicitors in Supreme Court proceedings (the proceedings) which were brought by the respondent against one Hodgson and others. The applicant remained as solicitor on the record in the proceedings until 9 April 1992. It is said in paragraph 6 of the affidavit that after commencement of the proceedings the respondent instructed the applicant to join 2 further defendants namely Australia and New Zealand Banking Group (ANZ) and one Richmond-Smith, and this was done. McGinnes says that the instructions to the applicant, and counsel instructed by the applicant, Mr William Lally (Lally), were to include ANZ as a defendant on two grounds, first that ANZ had entered into a contract with the respondent and had breached such contract and second, that Hodgson acted as agent for ANZ and that ANZ had induced Hodgson, Crestwin Corporation

Limited (Receiver and Manager Appointed) and P.S.I. Equities Pty Ltd to breach contracts which it was alleged

each of those parties had entered into with the
respondent.

The proceedings were set down for trial in the Supreme Court on 31 October 1991 but did not proceed on that day. The trial subsequently commenced on 2 March 1992.

McGinnes says that, in his opening address, counsel for the respondent (the plaintiff in the supreme Court proceedings) opened the case on a basis contrary to the respondent's instructions to counsel and the applicant. Put briefly the complaint is that counsel opened the case on the basis that Hodgson had not acted as agent for ANZ and further that the respondent was not claiming that there was a contract with ANZ. In the event, the trial was adjourned after the luncheon adjournment on 3 March 1992 when it became necessary to seek an adjournment to facilitate amendments to the statement of claim to accord with the case which McGinnes says should have been put. The proceedings were settled on 16 April 1992, after the applicant had ceased to act for the respondent, on terms negotiated between the respondent and the defendants in the proceedings.

Between April and October 1991 the applicant had rendered various accounts to the respondent which were paid.

McGinnes queried accounts rendered on 24 December 1991,

31 January 1992 and 27 February 1992 and says that he has not yet received a satisfactory explanation of the calculation of the sums claimed by the applicant. Immediately prior to the commencement of the trial the applicant requested the respondent to provide $80,000 on account of costs and disbursements. The respondent made arrangements for the advance of funds from a third party, Woodmech ~nternational Pty Ltd (Woodmech) and the funds were deposited in the applicant's trust account pursuant to an arrangement made between the applicant and Woodmech. The money was subsequently refunded to Woodmech after a dispute as to the applicant's entitlement to retain same. McGinnes says that in the period intervening between adjournment of the trial and the refund of the money to Woodmech (which he said under cross-examination was 31 March 1992), he informed the applicant that its dispute with Woodmech had placed the directors of the respondent in a position where they could take no further action on behalf of the respondent until the matter was resolved and further that the applicant's actions were prejudicing both the respondent's ability to raise funds to continue the action and its standing in the eyes of its business associates.

On 25 March 1992 the applicant wrote to the respondent claiming payment of $30,582 and threatening winding-up

proceedings. The respondent replied by letter on 30

March 1992 in which it asserted, inter alia, that as a direct consequence of the negligence of the applicant and of counsel, the respondent had received no benefit from the work referred to in the accounts dated 27 November 1991, 24 December 1991, 31 January 1992 and 27 February 1992, for which liability was denied, and in addition, it was asserted that the respondent had a claim for damages which more than offset the sums claimed.

McGinnes further asserts that as a consequence of the negligence and actions of the applicant and the negligence of Lally, the respondent was placed in a position where it was unable to continue with the proceeding and was forced to settle same on a basis unfavourable to the respondent. Terms of settlement were signed on 16 April 1992, after the applicant had withdrawn as solicitor on the record for the respondent. The terms of settlement are not referred to in the affidavit but McGinnes said under cross-examination that judgment was entered for the defendants by consent and that a total of $10,000 held in trust by way of security for the defendants' costs was paid out to the defendants.

(c) Dale's affidavit sworn 17 July 1992

Dale's response to paragraph 6 of McGinnesls affidavit is largely based upon hearsay information obtained from Lally and one Annetta, a solicitor employed by the

applicant. Both Lally and Annetta have sworn affidavits confirming the accuracy of Dale's statements and neither

were called for cross-examination. It is appropriate therefore that Dale's affidavit, based upon information and belief, be accepted as evidence of the facts asserted.

On behalf of the applicant it is said that on 21 May 1991 a conference attended by Lally, Annetta, McGinnes and one McCormack (who was then a director of the respondent) took place at Lally's chambers. The purpose of the conference was for Lally and Annetta to take a proof of evidence from McCormack and to obtain instructions from McGinnes and McCormack so that Lally could draw an amended statement of claim. At the conference those present discussed the advantages and disadvantages of asserting in the proposed amended statement of claim that ANZ had entered into a contract with the respondent, and had breached such contract, as an alternative to a claim by which the respondent asserted that the respondent had entered into a contract with certain other parties and that ANZ had induced a breach of such contract. Lally expressed his view that as the respondent sought to prove the existence of a contract, it would detract from its case to assert alternative potential parties to the contract. He advised that in the particular circumstances of the case, to plead alternative contractual parties would detract from the respondent's

concluded agreement as there was uncertainty as to the case and expose it to a finding that there was no

parties. After discussing and considering the advantages and disadvantages of asserting that ANZ was the primary contracting Party McGinnes accepted Lally' S recommendation and instructed Lally to draw the amended statement of claim without alleging that ANZ was a primary contracting party. An amended statement of claim was then drawn by Lally in accordance with those instructions and a draft of it sent to McGinnes, who is a qualified solicitor, for his comment and approval. After McGinnes had approved the form of the amended statement of claim it was filed and served.

Dale's response to McGinnes's assertions concerning the querylng of accounts rendered after 31 October 1991 is that a request for clarification of certain aspects of some accounts was made by McGinnes on 12 February 1992 at a conference attended by McGinnes, Annetta and Dale. McGinnes requested that Dale check that there was no overlap of the fees charged in the accounts for the months of October 1991 and November 1991. He also requested an explanation of the account for the month of January 1992 and in particular an explanation of the photocopying charges. The applicant provided a response by letter dated 17 February 1992. McGinnes did not subsequently seek any further clarification of the accounts in question.

(d) ~c~innes's affidavit sworn 24 July 1992

McGinnes takes issue with several points raised in Dale's response to paragraph 6 of his first affidavit. In particular he denies that either he or the respondent accepted Lally's recommendation that the statement of claim be amended wlthout alleging that ANZ was a primary contracting party.

3 .    THE LEGAL PRINCIPLES

It is trite that a failure to make a timely response to a demand served pursuant to paragraph 460(2)(a) will only amount to a deemed insolvency if the demand has been served by a creditor of the company, and without in any way attempting to oversimplify the issues, it is fair to say that the respondent's answer to the winding-up application is that the applicant is not, nor was at the time of serving the demand, a creditor, and this for the reasons first that the respondent has a counter-claim against the applicant for a sum in excess of the amount said to be owing and second because (it is said) no sum is owing to the applicant as there has been a total failure of consideration for the amount claimed.

The decision of the Supreme Court of Victoria in re K.L. Tractors Ltd (1954) VLR 505 contains an authoritative statement, consistent with authority, of the main legal principle relevant to this proceeding.

At p. 509 of the report, the trial judge (O'Bryan J) said:

The general proposition that a winding-up order will not be made on a debt that is bona flde disputed by the company must be read subject to this that the Court must see that the d~spute is based on a substantlal ground. It is not enough to show slmply that the company believes ~t has a defence or a set-off or even that it has obtained leave to defend the action for enforcement of its alleged debt (see Re Welsh Brlck Industries Ltd); it must also show that its dispute is based on a substantlal ground.

And at pp. 510-11 his Honour repeated the same principle:

The cases to which I have referred show that, if the company's omission to pay the debt is because the company bona fide dlsputes its indebtedness, its omission to pay does not amount to a neglect to pay its statutory demand. But in such a case the Court must see that the dispute is based on substantial grounds. I have been referred to no case in which the company's omission or refusal to pay a debt based upon a bona fide counter-claim for an amount equal to or in excess of an adm~tted debt has been held not to amount to "neglect to pay" the debt with sec. 167(a) (except the reference to such a counterclaim in Re The Imperial Hydro Hotel Co., Blackpool, Ltd. (supra)). Assuming that such a counter-clam is to be treated by way of analogy to a bona fide dispute of the debt itself, it must surely be a counter-claim which the Court can see is based on a substantial ground.

4.    THE FINDINGS

There is evidence that in February 1992 the respondent queried some details of accounts which had been rendered by the applicant. No assertion is made that at that time there was no debt owing in respect of those accounts, and indeed, it would appear beyond dispute that following the applicant's written response on 17 February 1992, the matter was not pursued further. It would be fair therefore to conclude that as at 2 March 1992 when the Supreme Court trial commenced, there was a substantial debt due by the respondent to the applicant, and this notwithstanding that on 2 March 1992

$80,000 was paid into the applicant's trust account by a third

party as security for the costs of the trial. As it happened,
the applicant obtained no benefit from that payment.

The reason for the trial being adjourned on 3 March 1992 is beyond dispute, namely, the respondent (or more particularly McGinnes) objected to the manner in which the case was being opened by counsel. Clearly the case as it was being put by counsel was in accordance with the pleadings, otherwise there would have been no need to adjourn to allow the statement of claim to be further amended. It is equally clear that the statement of claim as it then stood had been drafted by counsel after a conference with McGinnes. At issue is whether the pleading reflected McGinnes's instructions. It is said on behalf of the applicant that a draft of the amended statement of claim was sent to McGinnes for his comment and approval and that it was in fact approved by him prior to it being filed and served. Something has been made of the fact that McGinnes is a qualified solicitor and although not currently practising, he did in fact practice for a period of some 14 years until 1989. This is not the case of an ordinary lay litigant to whom a draft pleading may well be quite meaningless. McGinnes's affidavit of 24 July 1992 is completely silent on this question. It is therefore open for me to draw the inference that he does not dispute the allegation that he approved of the pleading which formed the basis of the case as presented by counsel in his opening

address.

For the respondent it is said that the adjournment of the trial on 3 March 1992 was occasioned by the negligence of both the applicant and of counsel, and further that as a result the respondent was forced into the position of having to settle its claim on disadvantageous terms. Whether or not the respondent can maintain a cause of action against counsel in the circumstances of' this case is a question which is unnecessary for me to decide, but even assuming (in spite of decisions such as Giannarelli v. Wraith 165 CLR 543 and Keefe

v. Marks (1989) 16 NSWLR 713) that such an action is

maintainable it has not been made to appear how such a claim, even if successful, could be pleaded in answer to a debt owed to the applicant. The fact that fees paid to counsel are said to be included in the accounts rendered to the respondent is quite beside the point. It has not been argued, nor ever suggested, that counsel fees are not properly included in the applicant's accounts nor that any such fees were not properly payable by the applicant to counsel nor indeed that the applicant acted beyond its authority in engaging counsel.

The respondent has asserted that it has a claim for damages against the applicant but has not particularised its claim either as to what breaches of duty are alleged nor as to the quantum o f its claim apart from the bold assertion that the claim would exceed the amount of any liability the respondent may be under to the applicant. It is quite impossible on the

whether the alleged damages claim is based on substantial	material before the Court to reach any conclusion as to	grounds.
The final aspect of the respondent's case is that it asserts that there has been a total failure of consideration in respect of all of the costs and disbursements paid to and claimed by the applicant in respect of the Supreme Court proceedings. presumably, although it is not spelt out in detail, the argument is that because the proceedings were settled on a basis which did not yield any return to the respondent, no costs should be payable. Such an assertion involves a number of propositions namely, that i was
inevitable that the respondent would succeed in the Supreme Court had the case been pleaded as McGinnes says it should have been pleaded, that the case would inevitably have failed if it had been run on the basis of the amended statement of claim as at the date of trial and that in some way or other (as yet unspecified) some act or default of the applicant
undermined the whole basis of the respondent's claim so that it had no alternative but to withdraw as best it could. No
evidence or argument has been advanced to support any of these propositions.
5. CONCLUSION
It has not been demonstrated in these proceedings that the debt the subject of the demand served on the respondent on 7
respondent has advanced a number of mere assertions which are April 1992 is disputed on some substantial ground. The
not supported by evidence of sufficient cogency to entitle the Court to conclude that the respondent's omission to pay the debt claimed in response to the demand was because it bona fide disputed its indebtedness. Pursuant to section 460(2) of the Corporations Law the respondent is deemed to be insolvent.
The respondent has a paid up capital of $2. It has no assets

other than its alleged claims for damages against the applicant and Lally. Apart from its liability to the applicant, it has a number of minor liabilities in the nature of directors' fees and rent which are not presently payable and can be ignored. It is appropriate in the circumstances that the respondent be wound-up.

I certify that this and the preceding 15 pages are a true copy of the Reasons for Judgment of the Honourable Mr. Justice olney

Associate :='A$&.

Dated :  3 August 1992

Counsel and solicitors for

the applicant:	Dr P. Buchanan and Mr S.P. Gardiner instructed by Clayton Utz
Solicitors for the respondent:	Mr C. Bolden instructed by Oakley Thompson & Co.

I	Date of Hearinq:	29 July 1992
Place:	Melbourne
Date of Judqment:	3 August 1992