Gerblich v Smart World Enterprises Pty Ltd (No 2)
[2012] SASC 5
•23 January 2012
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
GERBLICH v SMART WORLD ENTERPRISES PTY LTD (No 2)
[2012] SASC 5
Reasons of Judge Lunn a Master of the Supreme Court
23 January 2012
CORPORATIONS
Application by a contributory under s 482(1) of the Corporations Act 2001 to terminate or stay a winding up order which had been made after a contested hearing involving issues of an offsetting claim and solvency - held under s 482(1) the Court would not revisit issues already decided against the company - application dismissed.
GERBLICH v SMART WORLD ENTERPRISES PTY LTD (No 2)
[2012] SASC 5JUDGE LUNN:
Reasons on application to stay or terminate the winding up of the defendant
Definitions
In these reasons:
“the plaintiff” is Simon Wayne Gerblich;[1]
“the defendant” is Smart World Enterprises Pty Ltd;[2]
“Benjamin” is Benjamin Gerblich, a brother of the plaintiff;
“the TSC” is The Smart Company Pty Ltd, which is now in liquidation;
“EGR” is Enterprise Global Resources Pty Ltd, and
“the Smart Group” is a group of associated companies, being the defendant, EGR, TSC and four other companies.[3][1] In some of the other actions referred to below he is a defendant.
[2] In some of the other actions referred to below it is a plaintiff.
[3] The term “Group” is not used in its technical sense under the Corporations Act 2001, but merely to describe a number of associated and inter-related companies.
Action SCCIV-09-1819
On 2 December 2009 the Smart Group[4] instituted action SCCIV-09-1819 in this Court against the plaintiff and Benjamin. The plaintiff and Benjamin had previously been employees and/or officers of various companies in the Smart Group, but there had been a major falling out between them and other persons behind the Smart Group. The relief sought were determinations that the plaintiff and Benjamin were no longer officers of any of the companies in the Smart Group and to prevent them from continuing to act as such. No liquidated or unliquidated claims against the plaintiff or Benjamin were included in the Originating Process. There was then a major interlocutory battle concerning a tax refund cheque for $326,781 which the plaintiff and Benjamin were withholding from the defendant, but on 9 March 2010 I ordered that this money be paid to the defendant.[5] As a result of a direction that that action proceed on pleadings, the Smart Group filed a Statement of Claim on 13 April 2010. Its paragraph 16 pleaded:
16.As a consequence of the matters hereinbefore pleaded, the plaintiffs have suffered loss as set out hereafter.
PARTICULARS
16.1 SWE has suffered a loss of use of use[sic] of the ATO refund, full particulars whereof will be adduced at or before trial;
16.2 the plaintiff companies have incurred legal and accountancy costs, full particulars whereof will be adduced at or before trial;
16.3 the plaintiff companies have incurred costs, penalties and other loss as a consequence of the said re-direction of the mail of the plaintiff companies;[6]
[4] The plaintiffs were originally the Smart Group, less TSG, but it was added later as an additional plaintiff.
[5] See my reasons FDN46 in that action.
[6] SWE refers to the defendant. Further particulars of damage have not been quoted as they relate solely to TSC.
No further particulars identifying and quantifying this damage, insofar as it is damage claimed by the defendant, have ever been put onto any file in this Court.[7] A Defence was filed on 12 May 2010.
[7] This is subject to paragraph 13 of the affidavit of John Gogos of 28 November 2011, which is referred to below.
On 24 March 2011 the defendant took out an interlocutory application in action SCCIV-09-1819 (FDN53) seeking to have a Statutory Demand for $3677.50, which had been served upon it by the plaintiff, set aside.[8] An affidavit (FDN51) from John Gogos, the director of the defendant, was filed in support of this application. In its paragraph 15 he deposed:
Further in the alternative SWE has a set-off against the Debt which at this point is not fully quantifiable but which may be equal to or greater to the Debt, but is the subject of these court proceedings and accordingly SWE has a genuine dispute in relation to the Debt.
On 24 May 2011 I delivered reasons (FDN55) holding that the interlocutory application FDN53 was incompetent, and I later dismissed it.
[8] This is not the Statutory Demand which was the basis for the winding up application in the present action and it related to a different debt.
Action SCCIV 1819 of 2009 has not progressed beyond the close of its pleadings. There have been major problems encountered in the parties making disclosure of documents, because of the liquidation of TSC. A settlement conference has been directed to be held in it on 14 February 2012.
Action SCCIV-10-1612
On 23 November 2010 the defendant instituted action SCCIV-10-1612 in this Court seeking to set aside a statutory demand which had been served on it by the plaintiff.[9] That statutory demand was based on a judgment for the plaintiff against the defendant given in the Industrial Relations Court on 23 June 2010 for $103,759.88 (“the Judgment Debt”).[10] The application was supported by an affidavit of John Gogos. The ground of challenge raised in that affidavit was that the judgment was subject to appeal. Of significance is that there was no reference to any alternative ground being relied upon based on any offsetting claim, such as the claim pleaded in SCCIV-09-1819. On 27 July 2011 another Master dismissed the application to set aside this Statutory Demand. (See the reasons (FDN8) in that action.)
[9] In this action the parties were represented by different solicitors from those acting for them in the earlier action.
[10] This is the debt on which the present action is based.
Action SCCIV-11-1403
On 15 September 2011 the plaintiff instituted this action SCCIV-11-1403 in this Court against the defendant seeking its winding up on the grounds of its presumed insolvency under s 459C(2)(a) of the Corporations Act 2011 (“the Act”) by reason of its non-compliance with the Statutory Demand for the judgment debt. On 11 October 2011 the defendant filed an appearance opposing the application on a number of grounds, including that it had a set-off against the judgment debt and that it was solvent. It filed an affidavit (FDN9) of its director, John Gogos, in which he deposed as follows:
6.The Defendant says that it has a set off or counterclaim that far exceeds Debt. The Defendant could not counterclaim and was not permitted to set off or raise any set off it may have had for the amount demanded by the Plaintiff in the Industrial Court in relation to the action in which the Plaintiff was awarded the Debt.
7.The Plaintiff and the Defendant currently are involved in other proceedings in this Honourable Court being Action No 1819 of 2009 (“Court Proceedings”). The Debt and the Defendant’s set off and counterclaim are the subjects of these court proceedings.
An Exhibit JG3 to that affidavit was the accounts of the defendant as at 30 June 2009. No evidence was given about the financial dealings of the defendant since that date. Mr Gogos did not depose to having any qualifications enabling him to express any expert accounting conclusion about the solvency of the defendant. This affidavit was the only evidence adduced by the defendant on the winding up claim on the topic of solvency.
On 15 November 2011 I ordered that the defendant be wound up. I published my reasons (FDN13) in which I stated on the allegation of an offsetting claim as follows:
7 The defendant asserted that it had an offsetting claim against the plaintiff, which is the subject of action SCCIV-09-1819 in this Court. Section 459S of the Act provides:
459S Company may not oppose application on certain grounds
(1) [Where company may not oppose application] In so far as an application for a company to be wound up in insolvency relies on a 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).
(2) [Court must be satisfied of solvency for leave] 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.
8 This offsetting claim was one which was, or could have been, relied upon by the defendant in its application to set aside the statutory demand. Hence, s 459S applies to it. However, it is not necessary to pursue the point further, as any reliance by the defendant upon that offsetting claim is defeated by sub-s (2) of s 459S. The Court can only allow reliance on such a debt where it is the difference between the defendant being solvent and the defendant not being solvent. Here there is not sufficient evidence about the current financial position of the defendant to show that the alleged offsetting claim, or indeed any debt, would make the difference between its solvency and insolvency. Thus, this offsetting claim is to be excluded from my consideration.
On the issue of solvency of the defendant I stated:
5 The defendant’s director in his affidavit asserted that the defendant was solvent. He gave no qualifications to express that conclusion, which is a matter of expertise. The only documents put forward to evidence its solvency were its tax returns as at 30 June 2009. Those documents do not suggest that the defendant satisfied the “cash flow” test of insolvency under s 95A of the Act at 30 June 2009, as it appears that its then current liabilities exceeded its current stated assets. In any event, I am concerned with the solvency of the company as at the date of the hearing in October 2011. The evidence falls far short of that required to establish such solvency.
6 In his submissions, the defendant’s counsel requested that if I was otherwise against him, I should adjourn the matter to give the defendant the opportunity to file further and better evidence of its solvency. I declined to do so. The defendant’s director did not depose to any difficulty in the defendant being able to obtain proper current evidence of its solvency in the time since the originating process was served, or give any indication of its current assets and liabilities which would suggest that there was a reasonable basis to infer that, if further time was given, proper evidence of solvency could be adduced.
At the request of the defendant’s counsel I stayed the operation of the winding up order pending any further application, and it remains stayed pending my decision on the present application.
On 28 November 2011 EGR, as a contributory of the defendant, issued an application under s 482 of the Act seeking to terminate or stay the winding up of the defendant. Section 482 provides:
(1)At any time during the winding up of the company the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.
The application was supported by a further affidavit of John Gogos (FDN15) sworn on 28 November 2011 in which he deposed:
6.I have access to the books and records of the Defendant Company and I am familiar with its day to day operations.
BACKGROUND
7.The Defendant is a company established for the purpose of carrying out research and development of electronic applications. The Defendant has been operating since June 2002. The Defendant is not currently undertaking any research and development projects and is also not trading; however, the Defendant is an instrumental part of new projects which are about to be implemented by and for the benefit of its shareholders as well as part of a number of field projects which have been temporarily delayed as a result of the actions of the Plaintiff but which will begin again in June 2012. These include:
7.1.a project in Greece undertaken with a company called Extel SA;
7.2. a project in Shanghai to be undertaken on behalf of Opalworld Andamooka Australia Pty Ltd; and
7.3. a project with one of the leading financial institutions in Australia which is confidential.
THE WINDING UP ORDER
8.The Plaintiff initiated these wind up proceedings against the Defendant on 15 September 2011 for an unpaid debt in the Industrial Court in the matter of Gerblich Ors v Smart World Enterprises Pty Ltd [2010] SAIRC 31 in the amount of $103,759.88 (‘the Debt’).
9.By the Order the Defendant was to be wound up on the basis that the Defendant failed to tender sufficient evidence before his Honourable Court to establish the solvency of the Defendant.
OPPOSITION TO WINDING UP ORDER
10.I examined books and records of the Defendant’s financial affairs, in particular I examined the Defendant’s draft tax returns and ASIC lodgements for the year 2010 and 2011, through reading those documents I verily believe that the Defendant’s current trading position is solvent. The Defendant is not incurring any debt other than legal costs and has not done so for over 12 months.
11.In the past twelve months the Defendant has not received any demand or summons in relation to any debt or from any creditor other than the Plaintiff and Work Cover, which the Defendant has dealt with. There are no supporting creditors to the Plaintiff’s application to wind up the Defendant despite the application being widely advertised including on a Website run by the Plaintiff.
12.Furthermore, by winding up the Defendant it will significantly damage the Defendant’s ability to utilize and obtain benefits of the projects already initiated as well as those due to commence which will also cause loss to EGR.
13.I seek leave to this Honourable Court to refer an existing Supreme Court proceeding between the Defendant and the Plaintiff with Action Number 1819 of 2009 of Smart World Enterprises Pty Ltd & Ors v Simon Gerblich. It is a complex case in relation to unliquidated monies owed to the Defendant by the Plaintiff for an amount the plaintiff’s in that case including the within Defendant claim to be well excess of $1,000,000.
14.The Defendant seeks to set off any damages it is has incurred by the actions of the Plaintiff as against the Debt.
15.I am further of the belief and understanding that the set off of the Defendant mentioned in Paragraph 13 could not be raised in the Industrial Court Action. Furthermore, the set off was also not a matter that could have been taken into account in the Defendant’s application to set aside the Statutory Demand for the Debt has yet to be crystalized.
16.I say that the Defendant is fearful that if it pays the Debt and the associated legal costs to the Plaintiff then if the Defendant was awarded damages against the Plaintiff in action 1819 of 2009 that the Defendant will not recover any of its damages nor will it recover the amount of any judgement debt because of the Plaintiff has advised this Court in action 1819 of 2009 and other actions that he is impecunious and has made a number of application to this Honourable Court for the remission of fees.
17.I am informed by the director of EGR and verily believe that EGR has the capacity to and will support the Defendant financially and will arrange for the Defendant to pay the sum of $120,000 into this Honourable Court on or before the 7 December 2011 for Supreme Court Action Number 1819 of 2009.
On 7 December 2011 the plaintiff filed a further affidavit (FDN19) disputing the solvency of the defendant and alleging that there were a number of other debts of the defendant which had not been disclosed. On 14 December 2011 Mr Gogos filed a third affidavit (FDN23) in answer to these allegations.
Offer of EGR
As I understood the offer of EGR, as it was articulated in the course of submissions, it was that within a time fixed by the Court after the making of an order to terminate the winding up or stay it until final judgment in action SCCIV‑09-1819, it would pay into Court to the credit of this action the sum of $120,000, being the amount of the judgment debt plus an allowance on account of costs. I reject what was implicit in the submissions for EGR that such a payment into Court would discharge the judgment debt and that the plaintiff would no longer be a creditor of the defendant. A payment into Court does no more than put the monies under the control of the Court, but it does not affect the legal rights of the payer and the claimant to that money.[11]
[11] Civil Procedure South Australia Volume 1 paragraph 6R [187.85].
If the defendant failed to obtain a judgment against the plaintiff in SCCIV-09-1819 for an amount at least equal to what had been paid into Court, it was implicit in the offer of EGR that these monies, or the balance above the amount of any such judgment, would be paid out of Court to the plaintiff. However, if the plaintiff obtained a judgment for more than was paid into Court, it was implicit that the monies would be paid out of Court to EGR. Thus, the effect of what was being proposed was that the plaintiff’s ultimate recovery of his judgment debt should be subject to a setoff for anything recovered against him by the defendant in SCCIV-09-1819, even though the Industrial Court would not permit such a setoff.
The defendant cited no authority for such an payment into Court being treated as a discharge of a judgment debt. It is contrary to my understanding of the legal effect of a payment into Court. Usually a payment into Court is only directed where the creditor has refused to accept a tender of what the debtor says is the full amount owing and the Court holds the money as evidence of the bona fides of the debtor while determining whether the debtor or the creditor is correct about the amount owing. That is not the situation here. Another ground upon which orders are made for payment into Court is to give security, such as security for costs or undertakings for damages or the like, but that is usually part of the terms of a discretionary order, which is not the case here.
The defendant says it should not have to pay the judgment debt to the plaintiff, because there is good reason for it to fear that his financial position is so uncertain that there is a substantial risk that the defendant could not recover it back if it is successful in obtaining a monetary judgment against him in SCCIV‑09-1819. Without determining it, I am prepared to accept that such a fear is well-based, but it does not in law give the defendant or EGR the alternative of payment into Court rather than payment to the plaintiff in order to avoid the consequences of the judgment of the Industrial Court.[12]
[12] As far as I am aware, the defendant has never sought a stay of the enforcement of the Industrial Court judgment pending final judgment in SCCIV-09-1819.
The defendant relied on a number of cases[13] concerning whether a winding up order should be made where the debtor paid, or tendered to the creditor, the full amount of the debt between the expiration of the statutory demand and the commencement of the hearing of the winding up action. Those cases are not analogous to the situation here as the plaintiff’s debt will not be discharged by the proposed payment into Court.
Discretion under s 482(1) of the Act
[13] For example Deputy Commissioner of Taxation v Guy Holdings Pty Ltd (1994) 14 ACSR 580; Deputy Commissioner of Taxation v Visidet Pty Ltd (2005) FCA 830.
Section 482(1) gives this Court a judicial discretion about whether the winding up of the defendant should be terminated or stayed.[14] While it is a broad discretion,[15] the onus is on the applicant to make out a sufficient positive case for its favourable exercise.[16]
[14] Vero Worker’s Compensation NSW Ltd v Ferretti Pty Ltd (2006) 57 ACSR 103.
[15] McAusland v Commissioner of Taxation (1994) 118 ALR 577.
[16] Leveraged Capital Pty Ltd v Moderna Imports Pty Ltd [2010] NSWSC 739 at [13].
What EGR is attempting to do by FDN14 is to reverse the winding up order made on 15 November 2011 upon evidence which either was before the Court on the winding up order, or was available to the defendant but was not adduced for that argument, but with the exception of the offer of EGR to pay $120,000 into Court. Apart from the payment in of the $120,000, it is in essence a re-argument of the winding up proceedings. I am not holding that there may not be some circumstances in which it is permissible to use s 482(1) for this purpose, but other than in exceptional circumstances the discretion under s 482(1) should not be exercised on grounds and arguments, which were available to be put before the Court on the winding up proceedings. In other words, EGR cannot rely under s 482(1) on evidence of solvency or an offsetting claim arising from SCCIV-09-1819 where, if put forward by the defendant on the previous hearing, it would have meant that no winding up order would have been made. No precedent was cited, and I am not aware of any, for s 482(1) being used in such a way to terminate or stay a winding up order. Usually such applications are based on events occurring after the winding up order was made. Here, the only event occurring after the winding up which is relied upon is the offer of EGR to pay the $120,000 into Court. There was no explanation given as to why this offer could not have been made in the course of the winding up proceedings.
The alleged offsetting claim
The alleged offsetting claim arising out of SCCIV-09-1819 was raised in the application to set aside the earlier statutory demand made in SCCIV-09-1819 by FDN53, but it was not raised in SCCIV-10-1612 seeking to set aside the statutory demand for the judgment debt. Section 459S of the Act provides:
(1)Insofar as an application for a company to be wound up in insolvency relies upon a failure by the company to comply with the statutory demand, the company may not, without leave of the court, oppose the application on a ground:
…
(b) that the company could have so relied on, but did not so rely on (whether it made such an application or not)
(2)The court is not to grant leave under sub-section (1) unless it is satisfied the ground is material to proving that the company is solvent.
As I stated in my reasons FDN13, this effectively barred the defendant from raising the offsetting claim as a defence to the winding up application. The Court should not exercise its discretion under s 482(1) of the Act to allow the offsetting claim to be raised under that sub-section, as this would effectively circumvent the operation of s 459S.
Even if s 459S(1)(b) does not bar the offsetting claim being raised under s 482(1) of the Act, the evidence on FDN14 would not be sufficient to satisfy s 459S(2) and thus enable permission to be given under s 459S(1). For s 459S(2) to be enlivened, there must be sufficient evidence about the solvency of the defendant so that the Court can conclude that the difference between solvency and insolvency turns on whether the claim pursued in SCCIV-09-1819 against the plaintiff is an asset of the defendant. As will be stated later, there is no sufficient evidence about the solvency of the defendant to enable s 459S(2) to operate in its favour.
There is insufficient evidence about the alleged offsetting claim in SCCIV‑09-1819 to show that it is not spurious or fanciful and that it merits further investigation[17] and thus it would not be an offsetting claim for the purposes of s 459H of the Act. All that is pleaded in SCCIV-09-1819, quoted above, is that SWE lost the use of $326,781 for a few months and that it, in combination with the other companies in the Smart Group, incurred legal and accountancy costs and have incurred costs penalties and other loss as a consequence of their mail not having been received. There is nothing in the pleadings or in the affidavits about the nature or the quantum of these losses of the defendant. In paragraph 13 of FDN15 Mr Gogos says it is in excess of $1 million.[18] It is highly fanciful, and very likely spurious, that any such loss and damage to the defendant could be more than a few thousand dollars. It is most unlikely to exceed $103,000. Thus, if what is now adduced in evidence in this action about this alleged offsetting claim had been duly adduced in SCCIV-10-1612, there is no prospect that the statutory demand would have been set aside because of it, or even significantly reduced in its amount. It is contrary to the policy of Part 5.4 of the Act that this answer to the statutory demand for the judgment debt should be a factor in an exercise of a favourable discretion under s 482(1) for EGR.
Evidence of solvency of the defendant
[17] The law on such offsetting claims is usefully summarised in 185L6 Pty Ltd v Strata Corporation 07176 Inc, Blue J, 4 October 2011, [2011] SASC 164.
[18] It is unclear from paragraph 13 whether this is the loss of only the defendant or the collective loss of all of the Smart Group, but it can only be the defendant’s individual loss which is relevant here.
The issue which I am primarily addressing here is not that usually encountered in applications under s 482(1) of whether a company which is no longer insolvent should have its winding up stayed or terminated, but whether the discretion under s 482(1) should be exercised where the evidence of solvency does not displace the presumption of insolvency created by s 459C(2)(a). There is no evidence that there has been any material change in the financial position of the defendant between 15 November 2011 and now. As quoted above, in my reasons FDN14 I held that the Flemings had not displaced that presumption of insolvency. Under the relevant authorities it is not sufficient to displace that presumption of insolvency for a director of the defendant company, who is not shown to have any accounting expertise, merely to say that he has examined the defendant’s documents and that he believes that the defendant’s current trading position is solvent. It is no more than his belief and it is not proof of the objective fact of solvency as defined by s 95A of the Act. The Court requires detailed and cogent evidence of solvency,[19] to displace the presumption. To reach this conclusion it has not been necessary to deal with the plaintiff’s contentions that there are a number of other creditors of the defendant whose claims have not been properly brought into account in any assessment of the defendant’s solvency.
[19] Ace Contractors Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728.
At the hearing on the winding up application the defendant’s counsel was refused an adjournment to adduce further evidence of solvency. The effect of that ruling is not to be circumvented by such evidence now being presented in support of FDN14. In any event, even if the affidavit of Mr Gogos of 28 November 2011 had been before the Court on the winding up hearing, the presumption of insolvency would not have been displaced.
For these reasons the Court should exercise its judicial discretion under s 482(1) of the Act to refuse to terminate the winding up or to grant any further stay of it. EGR cannot get by the back door what the defendant failed to get by the front door!
Plaintiff’s evidence of further creditors of the defendant
The defendant’s counsel objected to much of the plaintiff’s affidavit FDN19 on the grounds that what it said about other creditors of the defendant was inadmissible hearsay evidence. I ruled I would receive the evidence de bene esse, as I regarded the application for a stay of the winding up order as being probably interlocutory and therefore allowing information and belief evidence under 6R 162(2) Exception 1. I was unsure about whether the application to terminate the winding up was properly classified as interlocutory or not. This is a difficult area of the law and no authorities were cited to me on it. In the light of the conclusion which I have otherwise reached, it is not necessary for me to pursue it. I need not rule whether the whole of FDN19 was admissible.
In case the matter should go further, I make the following points concerning this evidence:
·Counsel could not point me to any evidence about whether Benjamin also had a judgment in the Industrial Court against the defendant separate from that of the plaintiff. Annexed to the Originating Process is a copy of the affidavit of the plaintiff supporting the Statutory Demand. Annexed to that affidavit are the reasons of the Industrial Court of 27 July 2011 and a copy of the sealed order of that Court concerning interest on the judgment. These are copies of the Record of the Industrial Court of which I am entitled to take judicial notice. They establish that Benjamin has a separate judgment to that of the plaintiff against the defendant for $67,644. There is no evidence that this liability of the defendant was brought into account in any assertions of its solvency.
·In the interlocutory proceedings in SCCIV-09-1819, the defendant was maintaining that it owed about $700,000 to TSC and the plaintiff was denying that there was any such debt. The defendant put forward this debt to TSC as being a reason why it needed the urgent payment of the tax refund of $326,781. However, ironically on FDN14, the parties have reversed their positions and the plaintiff now maintains that there is such a debt to TSC and the defendant disputes it. It is a matter which should be within the knowledge of the defendant and no satisfactory evidence was adduced of either the existence and/or the satisfaction of such a debt.
·There is no evidence on whether if the $120,000 is paid by EGR into Court the defendant will have a liability to EGR for this sum. Nothing has been said about whether this payment would be a gift, a loan, or a contribution of share capital. If it is a loan, or a payment made for the benefit of the defendant at its request, it would be a liability of the defendant which would need to be taken into account in assessing its solvency. It may mean that its liability to the plaintiff for the judgment debt would be substituted for a similar debt to EGR.
FDN14 will be dismissed.
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