Farrow Mortgage Services P/L v GH Dodds Nominees P/L

[1992] FCA 900

JUDGMENT No .% ........ .... ........ -W m

IN THE FEDERAL COURT OF AUSTRALIA	) )
VICTORIA DISTRICT REGISTRY	) No VG 3258 of 1992
1
GENERAL DIVISION	1

BETWEEN:  FARROW MORTGAGE SERVICES PTY LTD [IN LIOUIDATIONL A.C.N. 005 125 757

(Applicant)

AND :

GH DODDS NOMINEES

PTY LTD

(Respondent)

: m a % Ryan J

Place: Melbourne

Date : 02 December 1992

MINUTE OF ORDERS

THE COURT ORDERS:

1. That the application be dismissed.

2.   That the applicant pay the respondent's costs of the application.

the Federal Court Rules.

Settlement and Entry of Orders is dealt with in Order 36 of

IN THE FEDERAL COURT OF AUSTRALIA	) )
VICTORIA DISTRICT REGISTRY	1 No VG 3258 o t 1 9 9 2
1
GENERAL DIVISION	)

BETWEEN:	FARROW MORTGAGE SERVICES
PTY LTD [IN LIOUIDATION)

( A p p l i c a n t )

AND :

GH DODDS NOMINEES

PTY LTD

( R e s p o n d e n t )

-:	Ryan J
Place:	Melbourne
Date:	02  December 1 9 9 2

REASONS FOR JUDGMENT

Rvan 3:  T h e applicant seeks a n order under s . 4 6 0 of the

C o r p o r a t i o n s Law t h a t t h e respondent be wound up. On 4 May

1992 t h e so l ic i tors f o r t h e appl icant posted by pre-paid m a i l

t o t h e registered of f ice of t h e respondent a no t i ce i n t he

f o l l o w i n g terms:

"TAKE NOTICE t h a t FARROW MORTGAGE SERVICES PTY LTD	( I N LIQUIDATION)
(ACN 005 125 757) of Level 18, 535 Bourke S t r e e t , Melbourne l n t h e

s t a t e of V i c t o r i a ( t h e "Creditor") HEREBY DEMANDS from t h e Company

payment t o t h e Credi tor of t h e sum of $133,126.45 being t h e amount

due t o t h e Cred i to r a s a t 30th Aprl l 1992 f o r moneys owing under an Instrument of Mortgage dated t h e 5 th day of January 1990 a s var ied by a Supplemental Deed dated 5 th Ju ly 1991 given by t h e Credi tor t o t h e company.

AND TAKE NOTICE t h a t t h e Company s h a l l be deemed by v l r t u e of Sect lon

460(2) ( a ) of t h e Corporations Law t o be unable t o pay i ts debts i f

f o r 3 weeks a f t e r t h e s e r v i c e of t h i s Demand t h e Company f a i l s t o pay

t h e sum due o r t o secure o r compound f o r it t o t h e reasonable

s a t r s f a c t i o n of t h e Creditor; AND f u r t h e r Sect ion 460(1) of t h e

Corporations Law provides t h e Court may order t h e winding-up	of a
company t h a t a s unable t o pay	i ts debts;

AND FURTHER TAKE NOTICE it is t h e ln t en t ion of t h e Credi tor t o apply

t o t h e Court f o r an Order t h e Company be wound up and a l i q u i d a t o r

appointed fo r thwi th upon t h e exp i ra t ion of t h r e e weeks a f t e r t h e

se rv ice of t h i s Notice of Demand."

~t is conceded on behalf of the applicant that the amount of $133,126.45 specified in the notice was in excess of the amount contended by the applicant to have been then due to it from the respondent. As calculated by Counsel for the applicant, the correct amount was $132,841.72.

It will be seen therefore that this application raises directly at the outset the question decided by Heerey J in Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 29 FCR 564 of whether the respondent should be deemed to have been unable to pay its debts by virtue of its non-compliance with a demand for an amount conceded by the applicant to be in excess of the amount then due to it from the respondent.

In Ataxtin his Honour reviewed the divergent lines of authority on this point in different English-speaking jurisdictions and concluded that non-compliance with a notice which claims more than the amount actually due when it is served is ineffective to raise the statutory presumption created by s.460(2)(a) that the recipient company is unable to

prefer that view.	pay its debts. For the reasons given by his Honour, I also
The question essentially turns on the proper construction of s.460 which provides:

"(l) The Court may order the winding up of a company that is unable

to pay its debts.

(2) For the purposes of an application that is made in relation to

a company on the ground provlded 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 andebted in a sum exceeding $1,000 then due has served on the company a demand, sagned by or on behalf of the creditor, requiring the company to pay the sum 50 due and the company has, for 3 weeks after the servace of the demand, faaled to pay the sum or to secure or compound for it to the reasonable satasfaction of the credrtor.
(b)	execution or other process rssued on a judgment, decree or order of any court an favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c)	the Court, after taking rnto account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debts."

Since sub-s.2(a) relieves an applicant of the evidentiary onus implicit in s.460(1) I consider that an intention is to be imputed to the legislature that an applicant invoking the facility which it affords should comply strictly with its terms. In this respect I adopt the approach taken by Waddell J in Processed Sand Pty Ltd v Thiess Contractors Pty Ltd

[l9831 1 NSWLR 384 at 389 which conforms with that suggested

in e.g. In Re Hodges (1873) LR 8 Ch. App. 204.

I was pressed by Counsel for the applicant to prefer the conclusion of the Full Court of the Supreme Court of Victoria in Re Fabo Pty Ltd [l9891 VR 432 to that reached by Heerey J

consideration as I have been able since I indicated a	in Ataxtin. However, having given the authorities as much
tentative view at the conclusion of the argument, I have not been persuaded to revise that view. I make the following comments on the five factors enumerated by the Victorian Full Court in Fabo at 435-6, in favour of an interpretation of s.460(2) (a) other than that indicated by a literal construction of its actual words.
(a) The literal interpretation does not compel the Court not to make a winding-up order, provided that there is evidence, including that of non-compliance with a defective notice, from which the Court is prepared to infer that the company is unable to pay its debts. Such an inference was, in fact,
drawn by Heerey J in A t a x t i n .
(b) It is open to a company to avoid a winding-up order by proving its own solvency, irrespective of whether a basis for the order is sought to be erected under paragraph (a), (b) or (c) of s.460(2). The availability of that defence does not illuminate the question of whether the ability of an applicant to invoke what I have called the statutory presumption afforded by paragraph (a) should be strictly or benevolently construed.
(c) The exercise of the undoubted discretion reposed in the Court by s.460(1) arises only when the applicant has established by one or other of the means indicated by s.460(2) that the company is unable to pay its debts. For the reason
discretion does not tell for or against a strict indicated in respect of factor (b), the existence of that
interpretation of s.460(2)(a).
(d) As Heerey J pointed out in Atax t in , it is not only a small discrepancy between the amount specified in the notice and the amount of the actual debt which has to be disregarded if the Court departs from a strict interpretation of s.460(2)(a). That a strict interpretation does not entail the consequence that an understatement of the debt in the notice renders that paragraph unavailable is made clear by Wichita Pty Ltd v IXL Ltd (1990) 8 ACLC 704. In that case the New South Wales Court of Appeal held that an applicant who had served a notice in which the amount of the debt was understated was entitled to rely upon the provisions of S. 364 (2) (a) of the Companies (New South riales) Code. However Gleeson CJ, with whom Samuels and Handley JJ.A. agreed, did not regard that conclusion as requiring the Court to overrule Processed Sand Pty Ltd v Thiess Contractors Pty Ltd (supra) and the line of authority of which that case forms part. The learned Chief Justice observed, at 905:

"Alternatively, it was made clear that, if necessary, the respondent would call in question the correctness of the decision in Processed Sand Pty. Ltd. In that regard the respondent referred to the decision of the Full Court of the Supreme Court of Victorra in Re Fabo Pty Ltd (1989) 7 ACLC 19; (1989) V.R. 432 where Processed Sand Pty. Ltd was not followed. It should be mentioned that the decision in Processed Sand Pty. Ltd. has been followed in a number of cases by ludges at first rnstance in the Supreme Court of New South Wales and at least two of those judges, McClelland and Needham JJ., have expressed agreement with the decrsion of the Chief Judge in Equity.

In my view it is unnecessary to embark upon a consrderatron of the respondent's alternative submissron."

(e) In this paragraph the members of the Victorian Full Court

suggested that: 

"In this context care must be taken to drstinguish between cases where a genuine dispute as to the fact of indebtedness in respect of an amount satisfying the statutory requirement may exist and those in which, whatever may be the s~tuation m respect of some part of the sum claimed, there is clearly an outstanding debt of such an amount."

However, as indicated above the deemed inability of the company to pay its debts arises on non-compliance with the

notice and, logically, before any genuine dispute as to the fact of indebtedness has been identified which would require the court to be satisfied in terms of s.460(2)(c).

(f) In my view, the passage from Butterworths Company Law Bulletin No 4 of 1988 para [69] quoted by their Honours was concerned with the approach to be taken to the application of s.460 as a whole. It was not concerned, as this case is, with whether a notice concededly overstating the amount of the debt can give rise to the statutory presumption created by s.460(2)(a) where that is invoked by an applicant as the sole and exclusive means of proving the company's inability to pay its debts.

It should be noted that the interpretation to be accorded to the counterpart of s.460 has also been considered by a Full Court of the Supreme Court of Western Australia in Hassgill Investments Pty Ltd v Neman Air Charter Pty Ltd (1991) 9 ACLC 883 which was decided after Heerey J reserved his decision but

before he delivered judgment in Ataxtin. Malcolm CJ at 897-

without examining s.364(2)(a) of the Companies (Western	898 preferred the views expressed in Re Fabo Pty Ltd but
Australia) Code in isolation. Rowland J favoured the conclusions reached by Heerey J and myself, saying, at 901:

"In the end, the guestion to be answered by the Court is whether the company is unable to pay its debts so that it should be wound up. Failure to Comply wlth a statutory notice is one method of establishing a prima facie case. In my view a prima facie case is not established if the notlce seeks more than the amount which is due. To that extent in order to obtaxn the benefit of the deeming provialon it must be established that the amount clamed in the notice must be due. If that is not established then the statutory

requirement	i s not m e t and	i f t h e p e t i t i o n does not plead f a c t s whrch
w i l l o therwise lead t o a	f inding t h a t t h e company	i s unable t o pay

~ t s debts , then f a i l i n g a re levant amendment t h e p e t l t r o n must be

dismissed."

Nicholson J was content to leave the question open and observed at 903:

"When t h e matter i s argued before t h e Master it may be t h a t he w i l l be c a l l e d upon t o decide whether he 1s t o follow t h e decis ion of t h e

F u l l Court of Vic to r i a i n Re Fabo P t y Ltd (1989) 7 ACLC 19; [l9891 VR

432. That was not an i s s u e which was c e n t r a l t o t h e argument i n t h i s

appeal and t h a t i s a f u r t h e r reason influencrng me towards remittance

of t h e matter t o t h e Master. The authorities not followed i n t h a t

decision, including r n p a r t i c u l a r Processed Sand P t y Ltd v T h ~ e s s

con t rac to r s P t y Ltd (1983) 1 ACLC 1,069; [l9831 1 NSWLR 384 and R e Wildtrek Ltd (1987) 12 ACLR 398, a l s o emphasrse t h e importance of strict const ruct ion of s.364(2) and a r e f u r t h e r reason t o give t h e

opportunity f o r t h e amended p e t i t i o n t o be m e t by	argument	before t h e
Master.
Inasmuch a s t h e Master may	be ca l l ed upon t o reach h l s own	decisron

whether o r not t o follow R e Fabo (supra) o r t h e o t h e r a u t h o r i t i e s

r e fe r red t o , I do not express any concluded view on t h a t issue."

It will be apparent that I have not found anything, with respect, in the reasoning of Malcolm CJ in Hassgill

Investments to cause me to depart from the tentative

conclusion which I reached at the end of Counsel's submissions in this matter. Since Mr McIntosh of Counsel for the applicant conceded that there was no other evidence on which

he could rely save for that of non-compliance with the	statutory demand, it follows for the reasons given above that
the application must be dismissed with costs.

I certify that this and the preceding six (6) pages are a true copy of the reasons for judgment of his Honour

Mr Justice Ryan

Associate: ,W&

Date :  3 &

Counsel for the Applicant:  Mr A McIntosh

Solicitor for the Applicant: Molomby and Molomby

Counsel for the Respondent:  Miss J E Richards

Solicitor for the Respondent: Linacre Dillon