In the matter of Kisimul Holdings Pty Limited

[2014] NSWSC 422

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Kisimul Holdings Pty Limited [2014] NSWSC 422

Hearing dates:

Thursday, 10 April 2014

Decision date:

10 April 2014

Before:

Brereton J

Decision:

1. In each matter, pursuant to Corporations Act, s 459F(2)(a)(ii), the time by which the plaintiff must comply with the statutory demand the subject of these proceedings be extended to:

a. 5:00pm on 11 April 2014 or

b. if by that time an application for leave to appeal has been filed, then until seven days after the determination of that application or further order of this court or of the Court of Appeal.

2. Costs of the present applications be costs in the application for leave to appeal

Catchwords:

CORPORATIONS - winding up - winding up in insolvency - application to extend time for compliance with creditors statutory demand following dismissal of application to set aside demand pending appeal from such dismissal - whether arguable appeal demonstrated - where primary judge applied prerequisite of substantial injustice to application to set aside for "other reason" under s 459J(1)(b) - held, arguable appeal - where the appeal would be rendered nugatory unless extension is granted - whether security should be required for debt and/or for costs of appeal - held, security, not required.

Legislation Cited:

(Cth) Corporations Act 2001, s 459E, s 459F, s 459G, s 459J, s 1335

Cases Cited:

Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd [2004] NSWSC 877, (2004) 50 ACSR 544
B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433
Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302
In the matter of Britten-Norman Pty Ltd [2013] NSWSC 424
In the matter of Kisimul Holdings Proprietary Limited [2014] NSWSC 338
Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229
Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452
Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226; (1993) 12 ACSR 381

Category:

Interlocutory applications

Parties:

2013/299293
Kisimul Holdings Pty Ltd (plaintiff)
Clear Position Pty Limited (defendant)
2013/326171
Kisimul Holdings Pty Ltd (plaintiff)
Clear Position Pty Limited (defendant)

Representation:

Counsel:
C D Wood w D Krochmalik (plaintiff)
D R Stack (defendant)
Solicitors:
Hilton Lawyers (plaintiff)
ERA Legal (defendant)

File Number(s):

2013/299293; 2013/326171

judgment (EX TEMPORE)

1. HIS HONOUR: On or about 16 September 2013 the defendant Clear Position Proprietary Limited served on the plaintiff Kisimul Holdings Proprietary Limited a statutory demand dated 11 September 2013, for a sum of $58,579. Subsequently, on or about 8 October 2013, the defendant served on the plaintiff a second statutory demand, for a sum of $36,300. By originating process filed in each of the proceedings presently before the court, respectively on 4 October and 29 October 2013, the plaintiff sought orders setting aside the statutory demands, relying both on the ground referred to in Section 459H that there was a genuine dispute as to the indebtedness, and the ground referred to in section 459J(1)(b) that the demand should be set aside for "some other reason", in this case the absence from the affidavit verifying each demand of the "no genuine dispute" clause to be included in that affidavit. Other grounds were also relied on, but it is necessary for present purposes to refer only to those two.

1. The applications were heard by Stevenson J on 13 March 2014, and his Honour gave judgment on 26 March 2014 [In the matter ofKisimul Holdings Proprietary Limited [2014] NSWSC 338]. His Honour found that there was no genuine dispute, and that while the affidavit verifying each demand was defective in the manner that I have described, that did not in the particular circumstances of this case provide any "other reason" why the demands should be set aside. Accordingly, his Honour dismissed each originating process, but ordered, pursuant to (Cth) Corporations Act 2001, s 459F(2)(a)(ii), that the time by which the plaintiff must comply with each demand be extended to 5pm on 10 April 2014.

1. On 7 April the plaintiff obtained leave to file an interlocutory process seeking a further extension of that time, and it is that application which comes before the court this morning. The further extension is sought in aid of an application for leave to appeal to the Court of Appeal from his Honour's judgment. Although the summons for leave to appeal has not yet been filed, a draft of it, together with a draft notice of appeal, is before the Court, and the Court has been advised that it will be filed by tomorrow, which is amply within time allowed for an application for leave to appeal.

1. On an application of the present kind, the approach of the Court is as described by Black J in In the matter of Britten-Norman Pty Ltd [2013] NSWSC 424: the Court considers first the prospect of success in the appeal and whether an arguable appeal has been demonstrated; secondly, whether the appeal would be rendered nugatory unless the extension is granted; and thirdly, the prejudice that the respective parties would suffer in the alternative eventualities that the extension to be granted or refused.

1. Turning to the first of those considerations, the plaintiff submits that it has two well-arguable grounds of appeal. The first is said to relate to the primary judge's supposed failure to deal with what was described before me as the plaintiff's "best point" in respect of the alleged genuine dispute, namely that the true creditor, if there was one, was not the defendant but an individual associated with the defendant. It appears correct that this argument was not addressed in his Honour's judgment. However, the recipient of the s 459G affidavit which was served with the application as required by the Act, would have been entirely unalerted by that affidavit to the circumstance that that was an issue at all. In my view, the prospects of the plaintiff surmounting the so-called Graywinter principle, so as to have required the trial judge to consider this issue at all, are ultimately so remote that this cannot be regarded as a seriously arguable ground of appeal.

1. The other matter, however, is in quite a different category. Moreover, it is a question of law, or at least in part a question of law, and one of principle of the kind that may well attract a grant of leave to appeal.

1. The primary judge referred at length to many authorities in which statutory demands have been set aside for omission from the verifying affidavit of the "no genuine dispute" clause (at [90] through [103] of his Honour's judgment). Indeed, I am not aware of any case, prior to the present, in which the absence of such a clause from the affidavit verifying has not resulted in the setting aside of the demand. This is essentially because of the view referred to by McLelland CJ in Eq in B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 at 436 o the effect that the express requirement that the person making the affidavit depose to a belief that there is no genuine dispute is a significant and important mechanism for filtering out cases where there is in fact such a dispute, so as to prevent them from reaching the courts on an application such as the present. To that might be added, consistent with the observation of Lockhart J in Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226; (1993) 12 ACSR 381, that it is not asking too much that creditors who issue statutory demands and who wish to have the benefit of the presumption of insolvency at least comply with the obligations or pre-conditions imposed on them. It is a fundamental aspect of the scheme of s 459E and s 459F that before a company is required to raise a genuine dispute in order to have a demand set aside, the creditor must first depose to the absence of such a dispute.

1. His Honour gave two reasons for finding that this case was different from all the others, namely, the unsatisfactory and unpersuasive manner in which a genuine dispute had been advanced by the company, and that the absence of the no genuine dispute clause could not have made any difference to the response. But it seems to me at least arguable that this the first may overlook the proposition that there was no need to propound the existence of a genuine dispute at all in the absence of a prior sworn assertion that there was none; and as to the second, that the requirement that a demand not be set aside on account of a defect unless failure to do so would cause substantial injustice applies only in respect of a defect in the demand referred to in s 459J(1)(a), and not where the application is made "for any other reason" - including a defect in the affidavit, as distinct from in the demand - as referred to in s 459J(1)(b).

1. While in Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229, the Court of Appeal said (at [26]) in the context of a s 459J(1)(b) application that substantial injustice had been confirmed by case law as a criterion for setting aside the statutory demand, the case law cited for that proposition, namely Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302, and Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, were both cases which illustrated the distinction in that respect between an application under s 459J(1)(a), where substantial injustice is a prerequisite; and one under s 459J(1)(b), where it is not.

1. It seems unlikely, having regard to the authorities that it cited, that the Court of Appeal was intending in Meehan to hold that substantive injustice was a pre-condition to setting aside a demand where reliance was placed on s 459J(1)(b) as distinct from s 459J(1)(a). At least, so much is arguable.

1. For those reasons, it seems to me that the plaintiff has in this respect a very seriously arguable ground of appeal. I have examined this in perhaps more detail than would normally be the case on an application of this kind, and with great respect to his Honour and the Court of Appeal, because the apparent strength of this ground of appeal is a very important factor to be weighed when it comes to counterbalancing the rather strong discretionary factors that might be thought to point in the opposite direction.

1. As to whether the appeal will be rendered nugatory unless the extension is granted, the evidence establishes that the financial position of the company is such that it could not satisfy the demand and would, therefore, be deemed to be insolvent with the likelihood of winding up proceedings being instituted, thereby defeating the whole purpose of the appeal.

1. Accordingly, failure to extend time would render the appeal nugatory: if time is not extended, the presumption of insolvency that the proceedings were sought to avoid will arise.

1. As to prejudice to the respective parties, the prejudice to the plaintiff if the extension is not granted is that it will, for all practical purposes, lose a seriously arguable right of appeal. The defendant will suffer no greater prejudice than the deferment of the arising of any presumption of insolvency and the opportunity to commence winding up proceedings founded on it.

1. There is, as Mr Stack for the defendant has urged, a further public interest consideration, which is not without importance. The evidence tendered on the application indicates that the plaintiff is in a very poor financial position. It may well be that it is insolvent, although that cannot be said with certainty on the limited material put before the Court, and it is true that the Court should not countenance insolvent companies remaining in trade. However, the way in which they are put out of business by winding up if necessary, on the ground of insolvency. And if the company is insolvent, quite apart from any presumption of insolvency arising from failure to comply with the statutory demand, then there is nothing preventing a creditor from bringing winding up proceedings and proving insolvency rather than having it presumed.

1. It does not seem to me that the arguable insolvency of a company should be allowed to interfere with its ability to impugn a statutory demand, any more than its arguable solvency bears on its ability to have a demand set aside.

1. Argument also addressed whether security should be given, either for the amounts of the demands, or for the costs of the proceedings before the primary judge and/or the appeal. However, cases of the present kind, in which an extension of time to comply with a demand is sought pending an appeal following dismissal of an application to set aside the demand, are entirely distinguishable from cases in which an application is made under s459J to set aside a demand on the basis that an appeal is pending from a judgment which determines the indebtedness of the debtor.

1. In the latter type of case the court ordinarily, if not invariably, requires that, in order to establish some "other reason" for setting aside the demand, the amount of the judgment be secured and an arguable appeal be shown. But this is not such a case: in a sense, it is really a continuation of the application to set aside the demand quite independently of whether or not the underlying debt exists. In those circumstances, and consistent with the approach adverted to by Black J in Britten-Norman (at [9]) and taken by Barrett J, as his Honour then was, in Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd [2004] NSWSC 877, (2004) 50 ACSR 544 (at [16]), security for the amount of the debts claimed should not be required.

1. As to whether security for costs should be required, reference was made to Corporations Act, s 1335. It is likely that, if there were an application made under that section, a court would find that there were reasonable grounds to suppose that the company would not be able to pay the costs of the appeal. Whether security would be ordered would depend upon, inter alia, whether making an order for security would stultify the appeal and in turn on whether those standing behind the company could meet an order for security.

1. It would not be reasonable in the present circumstances where the question of requiring security for the costs of the appeal has been raised as a response to the application for an extension of time, to decide the question of security without affording the plaintiff an opportunity to address the stultification argument and adduce evidence relevant to it. Such an application, in connection with an appeal to the Court of Appeal is properly made in the Court of Appeal in the appeal proceedings. Accordingly, I do not accept that conditions of the kind suggested should be attached on the extension that I otherwise propose to grant.

1. In each matter, the Court orders that:

(1)   Pursuant to Corporations Act, s 459F(2)(a)(ii), the time by which the plaintiff must comply with the statutory demand herein or the subject of these proceedings be extended to:

(a)   5:00pm on 11 April 2014; or

(b)   If by that time an application for leave to appeal has been filed then until seven days after the determination of that application or further order of this court or of the Court of Appeal.

(2)   Costs of the present application be costs in the application for leave to appeal.

(3)   These orders are to be entered forthwith.

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Decision last updated: 24 July 2014