In the matter of Vitamin Co Pty Ltd (ACN 614 680 367)
[2019] VSC 540
•23 August 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 01756
IN THE MATTER of VITAMIN CO PTY LTD (ACN 614 680 367)
| HEALTHY HAB PTY LTD (ACN 167 119 431) | Plaintiff |
| v | |
| VITAMIN CO PTY LTD (ACN 614 680 367) | Defendant |
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JUDICIAL REGISTRAR: | Hetyey JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 June 2019 |
| SUPPLEMENTARY WRITTEN SUBMISSIONS FILED: | 11 July 2019 and 19 July 2019 |
DATE OF JUDGMENT: | 23 August 2019 |
CASE MAY BE CITED AS: | In the matter of Vitamin Co Pty Ltd (ACN 614 680 367) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 540 |
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CORPORATIONS – Corporations Act 2001 (Cth) – s 459P – Winding up application – Non-compliance with statutory demand – s 459C(2)(a) – Presumption of insolvency – s 459D(1) – Treatment of alleged contingent liabilities – Whether for liquidated sums – Whether statutory presumption rebutted – Attempted tender of debt refused by plaintiff – Subsequent payment into Court – Abuse of process – Whether improper purpose in maintenance of winding up proceeding – ss 459A and 467(1) – Relevance of separate proceedings brought by defendant company against plaintiff – Whether winding up proceeding should be dismissed as a matter of discretion.
CORPORATIONS – Supreme Court (Corporations) Rules 2013 (Vic) – Non-compliance with rr 2.4(2) and 5.4 – Problem with currency of affidavit in support of winding up application and company extract – Corporations Act 2001 (Cth) – s 467A – No substantial injustice – Dispensation with strict compliance with rules.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Comlaw Barristers and Solicitors | |
| For the Defendant | Mr J Sleight | Balfe & Webb |
JUDICIAL REGISTRAR:
Introduction
This is an application by Healthy Hab Pty Ltd (“the plaintiff”) under s 459P of the Corporations Act 2001 (Cth) (“the Corporations Act”) to wind up Vitamin Co Pty Ltd (“the defendant”) on the basis of insolvency. A presumption of insolvency arises from the defendant’s failure to comply with a statutory demand dated 25 February 2019.[1]
[1]See s 459(C)(2)(a) of the Corporations Act.
A striking feature of this case is the quantum of the debt claimed in the statutory demand. It is for the mere sum of $2,372.36, which is only slightly higher than the prescribed statutory minimum.[2] Despite this fact, the parties have raised numerous issues for the Court’s determination which, on an initial impression, seem disproportionate to the relatively trivial amount in question.
[2]The statutory minimum is $2,000 - see ss 459E(1) and 9 of the Corporations Act.
Background
The statutory demand is for monies owing by the defendant to the plaintiff pursuant to a franchise agreement dated 7 December 2017 (“the Franchise Agreement”).[3] Under the Franchise Agreement, the plaintiff was designated as franchisor and the defendant as franchisee. The Franchise Agreement concerned the operation of a takeaway food store in Mosman, New South Wales, trading under the franchise network name “Healthy Habits”. The sum claimed under the demand is in respect of “internal administrative costs”, unpaid royalties and further items set out in an accompanying statement issued on the same date.
[3]See exhibit SG-6 to the affidavit of Stanley Gordon affirmed 18 June 2019 (“Plaintiff’s 18 June Affidavit”).
The winding up application was commenced on 23 April 2019. On 17 May 2019, the defendant filed a notice of appearance opposing the application on the following grounds:
(a)Non-compliance by the plaintiff with the Supreme Court (Corporations) Rules 2013 (Vic) (“Corporations Rules”);
(b)An alleged dispute about the existence of the debt;
(c)The alleged solvency of the defendant;
(d)The defendant had sought to pay the debt, notwithstanding the dispute; and
(e)The winding up of the defendant would deprive it of a substantial and actionable claim against the plaintiff.
The matter was initially listed on 22 May 2019. At that hearing, the Court was informed that the defendant had sought to tender payment of the amount in the statutory demand but that the plaintiff declined to accept payment because of a concern that the defendant was insolvent. Orders were made for the filing and service of any further affidavit material by the parties, together with written submissions.
The matter was listed for hearing as a special fixture on 26 June 2019. The question of tender emerged as a distinct basis upon which the defendant resisted the making of a winding up order. The last ground of opposition referred to above was also re-worked by the defendant to encompass an argument about abuse of process.
At the conclusion of the hearing, orders were made granting the defendant leave to pay the amount the subject of the statutory demand into Court. Orders were also made requiring the defendant to file a further affidavit for the purpose of formally introducing into evidence certain documents sought to be relied upon by the defendant at the hearing and allowing the parties to file short supplementary submissions.
I will deal with each ground raised in opposition to the winding up in turn.
Non-compliance with Corporations Rules
When a winding up application is made, it must be accompanied by a supporting affidavit. Rule 5.4 of the Corporations Rules essentially provides that the affidavit in support must verify service of the demand on the defendant company and the company’s failure to comply with that demand. It must also state whether and, to what extent, the debt to which the demand relates remains due and payable by the company at the time the affidavit is made. Critically, the affidavit must be made within seven days of the originating process being filed.
Rule 2.4(2) of the Corporations Rules requires the plaintiff to annex to its supporting affidavit a current and historical extract of the records of the Australian Securities and Investment Commission (“ASIC”) pertaining to the defendant. The currency of the ASIC extract is important so that the plaintiff and the Court can be made aware of any critical matters pertaining to the status of the defendant company. For example, it may be that the company was recently placed into external administration, deregistered or is the subject of a competing winding up application initiated by another creditor of the company.
There is a problem with the plaintiff’s supporting affidavit and accompanying ASIC extract in that they are each dated more than seven days prior to the filing of the proceeding on 23 April 2019 (the affidavit is dated 15 April 2019 and the ASIC extract is dated 12 April 2019). Accordingly, the documents do not strictly conform with the relevant rules. The plaintiff submits that the issue arose because of the Easter holiday period which presumably resulted in the proceeding being filed eight days after the date of the supporting affidavit.
Section 467A of the Corporations Act relevantly provides that a winding up application:
must not be dismissed merely because of…a defect or irregularity in connection with the application ... unless the [c]ourt is satisfied that substantial injustice has been caused that cannot otherwise be remedied (for example, by an adjournment or an order for costs).
Here, upon becoming aware of the problem, the plaintiff attended to the filing of a fresh ASIC extract bearing the same date as the originating process. Further, there is nothing before the Court to suggest that the matters deposed to in the supporting affidavit concerning service of the statutory demand, the defendant’s non-compliance with the demand and the amount of the underlying debt were inaccurate at the time the originating process was filed. I am not satisfied that any substantial injustice has been caused by the stale affidavit in support and outdated ASIC extract. Even if some form of injustice arose, it has substantially been remedied by the filing of a supplementary ASIC extract.
Section 467(1)(c) of the Corporations Act allows the Court, on the hearing of a winding up application, to “make any interim or other order that it thinks fit”. Strict compliance with rules 2.4(2) and 5.4 will therefore be dispensed with pursuant to this provision of the legislation.
Dispute about existence of the debt and offsetting claim
As previously mentioned, in its notice of appearance, the defendant opposed the winding up on the basis of an alleged dispute about the existence of the relevant debt in the statutory demand. This ground was not well articulated or developed in any affidavit material or in the defendant’s submissions. Instead, the defendant made reference to a far more extensive dispute between the parties arising from the Franchise Agreement.[4]
[4]See affidavit of Leslie Abboud sworn 6 June 2019, paras [15] – [25] (“First Abboud Affidavit”).
The statutory demand was preceded by three notices of breach of the Franchise Agreement served by the plaintiff on the defendant on or about 31 January 2019, 12 February 2019 and 20 February 2019, respectively.[5] Mr Stanley Gordon, the director of the plaintiff, says that it was the failure of the defendant to remedy those notices of breach which necessitated the issuing of the statutory demand on 25 February 2019.[6] Under cover of a letter dated 20 March 2019 from its then solicitors, the defendant then served a notice of dispute in response to the plaintiff’s earlier notices of breach.[7] In the notice of dispute, the defendant complained about certain pre-contractual representations allegedly made by the plaintiff in relation to the financial sustainability of the Healthy Habits franchise and the level of assistance the defendant would receive as a franchisee. In addition to claiming compensation from the plaintiff, the defendant’s notice of dispute sought a release from all obligations under the Franchise Agreement.
[5]See exhibits SG-8, SG-9 and SG-10 to the Plaintiff’s 18 June Affidavit.
[6]Plaintiff’s 18 June Affidavit para [15].
[7]See exhibit “LA-8” to the First Abboud Affidavit.
The 20 March 2019 letter also stated that the statutory demand was “wholly disputed” upon the grounds set out in the notice of dispute. However, the defendant never made an application to set aside the statutory demand under s 459G of the Corporations Act within 21 days of service.
This broader franchise dispute has most recently taken the form of a proceeding filed by the defendant against the plaintiff in the Federal Court of Australia on 24 June 2019 (“the Federal Court Proceeding”).[8] In the Federal Court Proceeding, the defendant claims it has suffered significant loss as a result of, among other things, alleged misleading representations by the plaintiff about the profitability and performance of the franchise. It is said that this claim would have constituted an offsetting claim had it been raised in an application to set aside the statutory demand. The defendant also alleges that the plaintiff breached an obligation to act in good faith by serving the statutory demand and filing the winding up proceeding in circumstances where it “knew or ought to have known there was a dispute as to the existence of monies claimed to be owing pursuant to the Franchise Agreement”.[9]
[8]See originating process and statement of claim in Vitamin Co Pty Ltd v Healthy Hab Pty Ltd filed in the Federal Court of Australia on 24 June 2019 as proceeding NSD 1021/2019 at exhibit LA-5 to the affidavit of Leslie Abboud sworn 5 July 2019.
[9]Ibid at para [12] of the statement of claim filed in the Federal Court Proceeding.
Despite accepting the existence of a broader dispute between the parties, I do not consider the defendant has a legitimate basis to dispute the debt the subject of the plaintiff’s statutory demand. As already observed, the defendant did not take the step of applying to set aside the statutory demand, despite its correspondence of 20 March 2019 which asserted the debt was “wholly disputed”. More critically, the defendant has not sought leave pursuant to s 459S of the Corporations Act to oppose the winding up on a ground it may have relied upon in an application to set aside the statutory demand, such as a genuine dispute or an offsetting claim. Accordingly, this ground of opposition need not be considered further.
Solvency
As already noted, the defendant argues that the Court should refuse a winding up order on the basis that it is solvent.
Legal principles
The test for solvency found in s 95A(1) of the Corporations Act is whether a company can pay its debts “as and when they become due and payable”.[10] Section 95A(2), in turn, provides that a company which “is not solvent is insolvent”.
[10]Corporations Act 2001 (Cth) s 95A(1).
In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[11] Weinberg J (as he then was) summarised the following principles governing the assessment of solvency of a debtor company and most relevant to the present application:
[11] [1999] FCA 728 at [44] (“Ace Contractors”).
· [In the event of non-compliance with a statutory demand] [t]he respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd (1997) 15 ACLC 477 per Mansfield J.
· In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
· Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (above); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
· There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210 ; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (above); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (above) at 465–6 .
· The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (above) at 466 ; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
· The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (above) at 466–7.
…
In Crema Pty Ltd v Land Mark Property Developments Pty Ltd,[12] Dodds-Streeton J (as she then was) cited with approval the above passage from Ace Contractors and confirmed that s 95A of the Corporations Act “enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business”.[13]
[12] (2006) 58 ACSR 631, 651-2 [140] (“Crema v Land Mark”).
[13]Ibid 652. See also Tru Floor Service Pty Ltd and Ors v Jenkins and Anor (No 2) (2006) 232 ALR 532, 543 (Sundberg J) and C&O Voukidis Pty Ltd (in Liq) v Break Fast Investments Pty Ltd [2014] FCA 1000 at [3] (Davies J).
In the earlier case of Sandell v Porter,[14] Barwick CJ explained that while:“[i]nsolvency is expressed…as an inability to pay debts as they fall due out of the debtor’s own money…the debtor’s own moneys are not limited to his cash resources immediately available [and]…. extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time”.[15]
[14](1966) 115 CLR 666.
[15] Ibid 670.
There is also authority for the proposition that, in determining solvency, commercial realities will be relevant in assessing what resources are available to a company to source income from which to meet its liabilities.[16] Further, in C&O Voukidis Pty Ltd (in Liq) v Break Fast Investments Pty Ltd,[17] Davies J explained that: [18]
… the assessment as to whether a company is solvent involves an element of “looking forward“ and it is material to consider not only the company’s capacity to pay debts currently due, but also its capacity to pay debts that will, or might, become due: Australian Beverage Distributors v Redrock Co (2008) 26 ACLC 74 at [157].
[16]See Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 188 ALR 114; Australian Beverage Distributors v Redrock CoPty Ltd (2008) 26 ACLC 74 (“Redrock Co”).
[17] [2014] FCA 1000 (Davies J).
[18] Ibid at [3].
This principle is also reflected in s 459D(1) of the Corporations Act which provides that for the purposes of determining whether a company is solvent, the Court “may take into account a contingent or prospective liability of the company”. Such a liability may arise when a defendant has a legal obligation to pay a sum of money in the future, that is contingent on certain events occurring.[19] A recognised example of a contingent or prospective liability is where a defendant company gives a guarantee.[20]
[19]Michael Murray and Jason Harris, Keay’s Insolvency: Personal and Corporate Law and Practice (Thomson Reuters, 10th ed, 2018) 1.165.
[20]Hawkins v Bank of China (1992) 26 NSWLR 562 at 569G and Box Valley Pty Ltd v Kidd [2006] NSWCA 26 at [15] (Bryson JA), [61] (Basten JA) and [69]-[71] (Gzell J).
Finally, the question of whether a company is able to pay its debts as and when they fall due is a question of fact.[21]
Defendant’s evidence on solvency
[21]Lewis v Doran (2004) 208 ALR 385, 408-9 [108] (Palmer J), approved by the New South Wales Court of Appeal in Lewis v Doran (2005) 219 ALR 555. See also Stone v Melrose Cranes & Rigging Pty Ltd (in Liq) (No 2) [2018] FCA 530 ( [146] (Marcovic J).
Turning to the evidence at hand, Mr Leslie Abboud, a director of the defendant and solicitor, has sworn affidavits of 6 June 2019 and 5 July 2019 which are relied upon in support of the contention that the defendant is solvent. The pertinent matters emerging from those affidavits are as follows:
(a) The defendant is not incurring debts and is no longer trading;
(b) Other than the $2,372.36 claimed in the statutory demand, the defendant owes no other debts;
(c) As at 29 May 2019, the defendant had cash at bank of $22,397.53.[22] This amount largely comprises a $20,000 deposit from Nick Abboud into the defendant’s account on 27 May 2019.[23] According to the defendant’s written submissions filed 25 June 2019, the defendant instructed its lawyers that it is beneficially entitled to the money in its account;[24]
[22]See defendant’s bank statement at exhibit LA-2 to the First Abboud Affidavit.
[23]Ibid.
[24]Defendant’s written submissions filed 25 June 2019 [9].
(d) An unaudited and unsigned balance sheet dated 31 May 2019, discloses no liabilities and suggests the defendant has net assets of $24,015.18;[25]
(e) In the Federal Court Proceeding, the defendant claims damages against the plaintiff for losses in excess of $511,000, together with interest and costs. The defendant is being represented in that proceeding on the basis that it “will not incur legal costs without a successful outcome”;[26] and
(f) By his supplementary affidavit sworn 5 July 2019 (“Second Abboud Affidavit”), Mr Abboud deposes that the defendant acts as trustee for the Vitamin Co Unit Trust (“the Trust”).[27] The defendant’s written submissions filed 25 June 2019 suggest that the defendant only traded in its capacity as a trustee of the Trust.
[25]Exhibit LA-3 to the First Abboud Affidavit.
[26]First Abboud Affidavit para [25].
[27]Second Abboud Affidavit para [3].
As a matter of law, the Trust does not have a separate solvency status to the defendant because it is not a separate legal entity.[28] Further, whilst the defendant is liable for debts incurred as corporate trustee, it is entitled to be indemnified (whether by recoupment or exoneration) out of the assets of the Trust against such liabilities and therefore has a beneficial interest in those assets.[29]
[28]Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20 (“Carter Holt”) at [24] (Kiefel CJ, Keane and Edelman JJ).
[29]Ibid [28]–[29] (Keifel CJ, Keane and Edelman JJ), [80] (Bell, Gageler and Nettle JJ), [130]–[132] (Gordon J). See also Octavo Investmnets Pty Ltd v Knight (1979) 144 CLR 360, 367 (Stephen, Mason, Aickin and Wilson JJ).
In practical terms, this means that, with the possible exception of the recent funds provided by Nick Abboud into the defendant’s account, the defendant has no assets in its own capacity but has a right to be indemnified from the assets of the Trust in meeting any liabilities incurred in the conduct of the relevant business.
I do not accept that the Federal Court Proceeding has any bearing on the question of solvency. As a chose in action, it is not a readily realisable asset of the defendant. It was only recently commenced. Further, litigation is an inherently uncertain exercise. Even assuming the defendant achieves a measure of success, it will be some time before the litigation is capable of delivering to it any financial benefit.
Treatment of other alleged debts owed to plaintiff
The plaintiff submits that the defendant’s material on solvency is incomplete. Considerable significance is said to attach to the fact the balance sheet fails to include two further “contingent” liabilities purportedly owed to the plaintiff in respect of:
(a) Technology fees for the period 24 February 2019 to 27 November 2024 in the sum of $8,250; and
(b) Weekly royalty fees for the period 24 February 2019 to 27 November 2024 in the sum of $41,427.
Because the Franchise Agreement had a seven year term commencing from 27 November 2017, these amounts relate to fees which would have fallen due during the balance of that term.
For the following reasons, I do not regard the amounts for additional royalty and technology fees as being relevant to the question of the defendant’s solvency.
Firstly, there is a question of whether the defendant is liable to the plaintiff for these amounts. This may turn on the circumstances surrounding the termination of the Franchise Agreement. Both parties have purported to terminate the Franchise Agreement at various times. In an email dated 30 January 2019,[30] Nick Abboud wrote to the plaintiff and contended that the defendant had terminated the Franchise Agreement on the basis of a breach by the plaintiff. He reiterated that position in a subsequent email dated 11 February 2019.[31] In its notice of dispute dated 20 March 2019,[32] the defendant sought an acknowledgement from the plaintiff that the Franchise Agreement had been “duly terminated” on 11 February 2019. The plaintiff declined to accept the termination of the Franchise Agreement in its responsive document dated 8 April 2019[33] and refuted the allegations raised in the defendant’s notice of dispute. Then, the defendant, through its lawyers, again purported to terminate the Franchise Agreement by written notice dated 17 April 2019[34] in reliance upon the matters raised in its earlier notice of dispute. The exchanges culminated in the plaintiff serving its own notice of termination dated 18 June 2019.[35] The plaintiff alleged the defendant breached the Franchise Agreement by abandoning the business.
[30]See exhibit LA-4 to First Abboud Affidavit.
[31]See exhibit LA-6 to First Abboud Affidavit.
[32]See exhibit LA-8 to First Abboud Affidavit.
[33]See exhibit LA-9 to First Abboud Affidavit.
[34]See exhibit LA-10 to First Abboud Affidavit.
[35]See exhibit SG-12 to the Plaintiff’s 18 June Affidavit.
The defendant submits that because it accepted the plaintiff’s repudiation of the Franchise Agreement, it was entitled to treat it as being at an end. If the defendant had valid grounds to terminate the Franchise Agreement, the plaintiff may not have the right to seek additional royalty and technology fees for the balance of the term.
Secondly, assuming the plaintiff had a valid basis to terminate the Franchise Agreement, either by reason of the defendant’s abandonment of the business or because the defendant repudiated the contract by wrongfully seeking to terminate it,[36] this may result in a claim by the plaintiff for damages for breach of the Franchise Agreement. But it would not seem to give rise to a claim in debt.
[36]See generally Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 453 and DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431–2.
Importantly, for present purposes, s 95A of the Corporations Act uses the term “debts” and not “claims”. While the term “debt” is not defined in the legislation, it may be regarded as a “liquidated sum” in money, presently due, owing and payable by a debtor to a creditor.[37] A liquidated sum was explained in Spain v Unionship Co of New Zealand Ltd[38] as being “an amount to which a plaintiff is entitled …[which] can be ascertained by calculation or fixed by any scale of charges or positive data”.[39] Put simply, it is a debt of a precise amount.[40]
[37]Rothwells Ltd v Nommack (No 100) Pty Ltd [1990] 2 Qd R 85, 86 (McPherson J), in the context of a statutory demand under earlier but analogous legislation.
[38](1923) 32 CLR 138.
[39]Ibid at 142 (Knox CJ and Starke J, quoting the then current edition of Odgers on Pleading).
[40]Murray and Harris (n 19).
However, in prescribing the test of solvency, s 95A is not concerned with unliquidated claims made upon a debtor company.[41] In Box Valley Pty Ltd v Kidd,[42] the New South Wales Court of Appeal confirmed that an unliquidated claim for damages for breach of contract was not a debt for the purposes of the provision.[43]
[41]Box Valley Pty Ltd v Kidd [2006] NSWCA 26 at [15] (Bryson JA), [61] (Basten JA) and [69]-[71] (Gzell J).
[42][2006] NSWCA 26 (“Box Valley”).
[43]Ibid [61] (Basten JA); [73] (Gzell J).
The plaintiff relies upon the decision of Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd[44] in support of the contention that the royalty and technology fees constitute debts because they relate to a promise to pay specific or readily calculable sums under the Franchise Agreement. However, Hansmar, which concerned an application to set aside a statutory demand, does not appear to support that proposition. In his decision, White J relevantly held:
…where, under a contract, a person promises to pay a specific or readily calculable sum which does not depend upon an assessment, albeit that the sum is payable as liquidated damages for breach of contract, the person’s contractual liability is properly characterised as giving rise to a debt in that sum.[45] [emphasis added]
[44](2007) 61 ACSR 321 (“Hansmar”).
[45]Ibid 332 [55].
The relevant contractual provision in Hansmar allowed the vendor of a property to claim for liquidated damages against a defaulting purchaser. There is no similar clause in the Franchise Agreement.
Instead, the future amounts for royalty and technology fees are, in all likelihood, unliquidated claims for breach of the Franchise Agreement by the defendant. The fact that they have been expressed by reference to dates and set amounts (and, in the case of the royalty fees, by reference to average past royalty fees) does not automatically render them liquidated in nature. The claims will still require assessment by a court. Relevant considerations may include the plaintiff’s ability to mitigate its loss and the potential for a discount to be imposed to reflect the accelerated payment to the plaintiff of sums that had not fallen due at the time of termination.[46] In considering a similar claim by a franchisor for damages against a franchisee for future loss of an opportunity (or loss of a bargain) to earn royalty and marketing fees, Nicholas J in Otrava Pty Ltd & Ors v Mail Boxes Etc (Australia) Pty Ltd[47] noted that the Court had a wide discretion, unconstrained by narrow limitations.[48] In assessing the franchisor’s claim for damages, his Honour allowed for various vicissitudes and contingencies to reflect the chance that factors unconnected with the termination may have prevented the franchisee from conducting the business and remitting fees for the balance of the term.[49]
[46]See Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1439; W & J Investments Ltd v Bunting [1984] 1 NSWLR 331; Park Air Services PLC; Christopher Moran Holdings Ltd v Bairstow [2000] 2 AC 172 and J W Carter, Contract Law in Australia (LexisNexis Butterworths, 7th ed, 2018) [36-16].
[47][2004] NSWSC 1066 (“Otrava”).
[48] Ibid at [121], citing State of NSW v Moss [2000] NSWCA 133 at [87] (Heydon JA) (as he then was).
[49] Otrava at [122].
Thirdly, whilst a contingent or prospective liability may be relevant in assessing a defendant’s solvency in accordance with s 459D(1) of the Corporations Act, it is unclear what event the royalty and technology fee liabilities are contingent upon. More importantly, a contingent or prospective liability must still be for a liquidated amount rather than an unliquidated claim for damages.[50] As already explained, I am not satisfied that the future royalty and technology fees can be properly characterised as liquidated in nature.
[50] Hawkins v Bank of China (1992) 26 NSWLR 562 at 569 and Box Valley at [15] (Bryson JA), [61] (Basten JA) and [69]-[71] (Gzell J).
Fourthly, even if I am wrong and the royalty and technology fees do represent liquidated sums and therefore debts, it is unclear how they are said to be presently due and payable. As a general rule, unless a contract contains provision for accelerating time for payment, a plaintiff will need to wait until the payment or an instalment payment falls due before bringing a claim in debt.[51] I have not been directed to any clause of the Franchise Agreement which provides for the immediate payment of all future amounts falling due to the plaintiff on the occurrence of some specified event. The fact that the defendant’s obligations to make periodic payments under clause 11 of the Franchise Agreement survives termination by virtue of clause 20.7 does not appear to assist.
[51]See Workman Clark & Co Ltd v Lloyd Brazileno [1908] 1 KB 968; The C & J [1984] 2 Lloyd’s Rep 601; Zea Star Shipping Co SA v Parley Augustsson (Invest) A/S [1984] 2 Lloyd’s Rep 605 and Carter (n 46) [37-02].
Fifthly, having regard to the quantum of the Federal Court Proceeding, the defendant’s claim may, depending on its ultimate disposition, have the practical effect of offsetting the further amounts alleged to be owed to the plaintiff.
Finally, it is difficult to see how questions about the parties’ respective liabilities in connection with the Franchise Agreement are capable of being resolved in the absence of a contested hearing on the merits. However, the winding up procedure is not a vehicle for resolving commercial disputes.[52]
[52]NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359, 365-6 (Finkelstein J).
Accordingly, it is not appropriate to take into account the future royalty and technology fees in assessing the defendant’s solvency.
Other matters relevant to solvency
The plaintiff also points to other deficiencies in the defendant’s material on solvency. Certain perceived discrepancies, such as the number of the defendant’s issued shares and the slightly different figures referred to in its bank statement and balance sheet, do not appear to be material.
The plaintiff also says that the recent injection of funds into the defendant’s account by Nick Abboud should properly give rise to a corresponding liability in the defendant’s balance sheet. Nick Abboud was identified as the manager of the defendant’s business in the Franchise Agreement.[53] He also may have an indirect interest in a number of the units of the Trust.[54] For those reasons, and in the absence of any other evidence, I am prepared to infer that the payment to the defendant by Nick Abboud was on terms favourable to the defendant and does not give rise to a debt presently due and payable by it.
[53]See item 19 in the Schedule to the Franchise Agreement at exhibit SG-6 to the Plaintiff’s 18 June Affidavit.
[54]One of the unitholders is identified as LMA Investments Pty Ltd (ACN 614 680 367) “ATF NL Abboud Trust”. See the Trust deed at exhibit LA-1 to the Second Abboud Affidavit.
However, other matters emerging from the defendant’s material are of greater concern. In particular:
(a)The balance sheet refers to retained earnings of -$183,628.91 as at 31 May 2019.[55] This item is not properly explained but suggests cumulative losses over multiple periods. It also denotes negative shareholder equity.
(b)The defendant’s unaudited and unsigned profit and loss statement for 1 July 2018 to 31 May 2019 reveals a gross profit of $37,788.23, total operating expenses of $130,720.75 and a significant net loss of -$387,826.01 as at 31 May 2019.[56] This net loss incorporates an extraordinary item described as “[b]usiness cessation exp” which is recorded as $294,999.47. Accepting the defendant’s evidence that it presently has no debts other than the amount the subject of the statutory demand, I am prepared to infer that the defendant at least partially covered these expenses by drawing down on and selling current assets which, according to the balance sheet for the previous financial year, included over $100,000 in cash on hand and almost $90,000 in inventory. Of course, the defendant alleges in the Federal Court Proceeding that the plaintiff is responsible for its trading losses. Nevertheless, the profit and loss statement suggests the defendant has been historically insolvent from a cash flow perspective.
(c)According to its balance sheet, as at 31 May 2019, the defendant has issued $585,066.70 worth of convertible notes. In simple terms, a convertible note is a legal instrument which: (a) acknowledges the existence of a loan to a company; (b) may confer the right on the holder of the note to receive interest periodically; and (c) grants the holder an option, at some future point in time, to convert that liability into another class of securities, such as shares.[57] In this case, there is no evidence before the Court as to the circumstances surrounding the issue of these convertible notes by the defendant, whether they entail the payment of interest and when the note holders may exercise their options to convert their notes into equity. In the circumstances, it is appropriate to regard the convertible notes as representing contingent or prospective liabilities of the defendant.
(d)The balance sheet shows the defendant recorded liabilities in respect of GST and other taxes for the financial year ending 30 June 2018. However, no provision has been made for tax liabilities in the subsequent financial year, despite the defendant earning income for at least some of that period. Further, it does not appear that the defendant submitted tax returns for the two financial years during which it traded. The defendant argues that it had no obligation to lodge tax returns because it did not achieve a profit. That reasoning seems erroneous.
(e)In the absence of tax returns or audited or signed accounts, it is difficult to assess the reliability of the financial statements which have been proffered by the defendant. In his supplementary affidavit of 5 July 2019, Mr Abboud deposes that the statements are accurate and “reflect the financial affairs of [the defendant]”. Whilst Mr Abboud is a director of the defendant, the basis upon which he has verified the accounts is not stated. He is not identified in the Franchise Agreement as the manager of the business and, as a practising solicitor, his level of involvement in the day-to-day operation of the defendant is unclear.
[55]See exhibit LA-5 to the Second Abboud Affidavit.
[56]Ibid.
[57]See generally s 82L of the Income Tax Assessment Act 1936 (Cth). See also Christopher Viney, Financial Institutions, Instruments and Markets (McGraw-Hill Australia, 7th ed (revised), 2012) 185 in which the author describes a “convertible note” as a “hybrid debt instrument, issued for a fixed term and paying a stated rate of interest for the term of the note. The holder of the note has the right to convert the note into ordinary shares in the issuer company at a specified future date”.
It must be said that the defendant’s material on solvency is incomplete and under-developed. Whilst on its face, it does not suggest that the defendant is hopelessly insolvent, it is certainly not the “fullest and best” evidence of the defendant’s current financial position. Having regard to the totality of this material, I cannot be satisfied that the defendant has discharged its onus of displacing the statutory presumption of insolvency.
Notwithstanding the defendant is presumed to be insolvent, it remains for determination whether the Court should refuse to make a winding up order on the basis of the other grounds of opposition relied upon by the defendant.
Tender of amount in statutory demand
On 17 May 2019, the solicitors for the defendant wrote to the plaintiff’s solicitors confirming that they held an amount referable to the statutory demand in their trust account. They also stated that they were instructed to pay that amount to the plaintiff in satisfaction of the debt on the basis that: (a) the debt remained disputed; and (b) “[t]he payment is made under protest and will be the subject of recovery proceedings for damages in due course”.[58]
[58]See exhibit LA-1 to the First Abboud Affidavit.
As previously noted, on 28 June 2019, the defendant sought and was given leave to pay the relevant funds into Court. It then did so on 2 July 2019.[59]
[59]See receipt at exhibit LA-7 to the Second Abboud Affidavit.
The defendant’s tender and subsequent payment into Court give rise to the following questions:
(a)Was the tender valid?;
(b)Did the plaintiff act reasonably in refusing to accept the tender?; and
(c)Does the tender, coupled with the payment into Court, suggest the Court should, as a matter of discretion, decline to make a winding up order?
Was the tender valid?
On an appeal from a winding up order, the New South Wales Court of Appeal in Australian Mid-Eastern Club v Yassim[60] relevantly held that:
There is ample authority that the proffering of cash or its equivalent in the full amount demanded constitutes a valid tender, even if proffered “without admissions” or “under protest”, provided only it is unconditional: see Scott v Uxbridge and Rickmansworth Railway Co(1866) LR 1 CP 596; Sweny v Smith(1869) LR 7 Eq 324; Greenwood v Sutcliffe[1892] 1 Ch 1 and Burnham v Carroll Musgrove Theatres Ltd (1928) 41 CLR 540 at 558 per Isaacs J….If a valid tender be made, a refusal of that tender (whether for good or bad reason, or for no reason at all) does not eliminate the debt in question. The relationship of creditor and debtor still subsists. The tender is no answer to a claim for the debt unless (as did not happen here) there is a continued readiness to pay, coupled with an actual payment into court: see Halsbury's Laws of England, vol 8, 3rd ed, Butterworths, para 289, p 169.[61]
[60](1989) 1 ACSR 399.
[61]Ibid 403. See also Alcatel Australia Ltd v PRB Holdings Pty Ltd (1998) 27 ACSR 708, 713.
As I noted in [i]n the matter of HGC Properties Pty Ltd [2019] VSC 202:
The object of a tender is not to end all controversy between the parties but to “throw the risk of further controversy upon the other party [Greenwood v Sutcliffe [1892] 1 Ch 1 (”Greenwood v Sutcliffe”) at 10 (Lindley LJ), followed in Burnham v Carroll Musgrove Theatres Ltd (1928) 41 CLR 540 (“Carroll Musgrove Theatres”) at 558 (Isaacs J)].” So long as a defendant is able to show that he or she was willing to unconditionally pay the entirety of an amount falling due, then tender will be effective [Dixon v Clark (1855) 136 ER 919; Greenwood v Sutcliffe at 10; Carroll Musgrove Theatres at 558].
The plaintiff submits that the defendant’s tender was ineffective because it was not unconditional in nature. Reliance is placed on the language used in the communication from the defendant’s lawyers dated 17 May 2019, with specific attention drawn to the fact the payment was sought to be made “under protest and [would] be the subject of recovery proceedings for damages in due course”.[62]
[62]See email from the defendant’s lawyers to the plaintiff’s lawyers dated 17 May 2018 at exhibit LA-1 to the First Abboud Affidavit.
The fact that the defendant disputed the debt and sought to make payment under protest does not, having regard to the above authorities, mean that the tender was ineffective. Nor am I convinced that the tender was conditional because of the reference to payment being the subject of separate proceedings for damages. Whilst that aspect of the communication was inelegantly worded, I accept the defendant’s submission that it simply evinces an attempt to reserve the defendant’s rights, including in respect of the matters set out in the defendant’s notice of dispute dated 20 March 2019 and in the Federal Court Proceeding. It may be that the defendant intended to include the payment in its calculation of loss and damage for the purposes of the Federal Court Proceeding.
I accept that the tender was validly made.
Did the plaintiff act reasonably in refusing tender?
As previously mentioned, at the initial hearing of the matter on 22 May 2019, the plaintiff suggested it was disinclined to accept the defendant’s tender because of a concern that the defendant was insolvent.
In Re Denham Constructions Pty Ltd,[63] Black J considered an attempted tender by a defendant and held that because of the potential for the payment to constitute a voidable transaction, the applicant for substitution had not acted unreasonably in refusing it.[64]
[63][2016] NSWSC 948.
[64]Ibid [9]-[10]; See also Occidental Life Insurance Co of Australia v Life Style Planners Pty Ltd (1992) 38 FCR 444.
A contrary view was expressed by Barrett J in Nationwide Produce Holdings Pty Ltd (in Liq) v Franklins,[65] a case which involved an application by a creditor for the appointment of a provisional liquidator to a defendant company. There, his Honour said as follows:
The plaintiff says that it was proper for it to decline to accept payment because of a fear that it would be receiving what turns out to be a preference. That is for the plaintiff to decide. It would be in no worse position if it accepted and was later forced to disgorge. There is nothing compelling a creditor somehow to remain pure by shunning a payment in respect of which there exists some theoretical future possibility of its proving to be preferential. A normally motivated creditor would be inclined to accept such a payment conscious of any risk of disgorgement, and with fingers crossed to the extent indicated by the circumstances.[66]
[65][2001] NSWSC 1120 (“Nationwide Produce”).
[66]Ibid [9].
I respectfully agree with Barrett J’s observations in that case. I do not regard the plaintiff’s stated concern about the defendant’s solvency to constitute a sufficient basis for refusing tender.
Effect of tender and payment into Court
The parties disagree as to the legal consequences of the defendant’s tender and subsequent payment into Court. At the hearing, the defendant suggested the plaintiff had lost its status as creditor.[67] The plaintiff rejects that analysis and submits that the tender and payment into Court are simply matters relevant to the exercise of the Court’s discretion to make a winding up order.
[67]This was at odds with the position adopted in the defendant’s written submissions filed 25 June 2019.
In Nationwide Produce, the tender and payment of an amount into Court by the defendant was sufficient for Barrett J to conclude that the plaintiff had likely lost its standing as creditor.[68]
[68]Nationwide Produce [8].
Justice Barrett’s conclusion in that regard was doubted by Austin J in Redrock Co. Instead, his Honour preferred the analysis that tender and payment into Court constitutes a defence to an action in debt, thereby protecting the debtor from a claim for interest or damages, but does not eliminate the debt itself.[69] Justice Austin further observed that “[i]f the debt is not eliminated, the creditor’s status as creditor is preserved notwithstanding the payment into court”.[70] I respectfully agree with that analysis.
[69]Redrock Co. See also LexisNexis, Halsbury’s Laws of England, vol 22 (at March 2019) 524 Contract, ‘8 Discharge of Contractual Promises’ [538]-[539].
[70]Redrock Co at [28].
The weight of the authorities suggest that if the amount of a statutory demand is paid after winding up proceedings have commenced, the question of whether a winding up order should be made or whether the proceeding should be dismissed is a matter of discretion.[71]
[71]See De Montfort v Southern Cross Exploration NL (1987) 17 NSWLR 468, 471 (Needham J); Australian Beverage Distributors Pty Ltd v The Red Rock Co Pty Ltd (2007) 213 FLR 450, 458-9 (White J); Timms v Dellaplus [2008] SASC 61 (“Timms v Dellaplus”) (Burley J) [47].
The case of Australian Beverage Distributors Pty Ltd v Red Rock Co Pty Ltd[72] involved an application for a stay or summary dismissal of a winding up proceeding. The debt in question was also for a paltry sum ($2,113.66). In that case White J relevantly held as follows:
It does not follow that the Court will make a winding-up order at the instance of a creditor who unreasonably refuses to accept payment….However, the power to make a winding-up order is discretionary. Where the winding-up application relies on the presumption of insolvency arising from non-compliance with a statutory demand, the Court may, in the exercise of its discretion, refuse to permit a creditor to proceed with a claim for winding-up where the debt claimed in the statutory demand has been paid, albeit that payment outside the allowed 21-day period does not oust the statutory presumption of insolvency [De Montfort v Southern Cross Exploration NL at 471; Braams Group Pty Ltd v Miric at 461 [77]–[79]; 135 [77]–[79]]… Equally, the discretion could be exercised against an applicant who unreasonably refused to accept the proffered tender of the debt where the tender was accompanied by a payment into court.[73]
[72](2007) 213 FLR 450.
[73]Ibid 458 [33].
Further, in Timms v Dellaplus Pty Ltd, Burley J found that there was no material distinction between: (a) payment of the amount of a statutory demand before a winding up order is made; and (b) payment of the amount of a statutory demand into Court coupled with a continued willingness to pay the same in discharge of the indebtedness.[74]
[74]Timms v Dellaplus [47].
I am satisfied that the defendant has demonstrated valid tender in respect of the amount of the statutory demand. That amount has been paid into Court and the defendant remains willing to discharge the debt. These are matters which strongly weigh in favour of the Court exercising its discretion to refuse to make a winding up order.
Abuse of process
The last ground advanced by the defendant in opposition to the winding up is abuse of process.
The defendant submits that the Court should exercise its discretion to dismiss this application because a winding up order would have the effect of stultifying the Federal Court Proceeding and therefore constitute an abuse of process. The plaintiff does not accept that a winding up order would necessarily frustrate the Federal Court Proceeding because a liquidator may well elect to continue that proceeding.
It is clear on the evidence, and it was conceded, that the defendant cannot discharge the heavy onus of demonstrating an abuse of process in the “technical sense” as articulated by the High Court in Williams v Spautz,[75] namely that the proceeding was instituted for the predominant purpose of obtaining a collateral advantage outside the proper purpose for which a proceeding is designed. The statutory demand was issued following multiple notices of default under the Franchise Agreement, the defendant did not seek to set aside the statutory demand and the Federal Court Proceeding was commenced after the filing of the winding up proceeding.
[75]Williams v Spautz (1992) 174 CLR 509.
However, the defendant also maintained that following the payment into Court, it is appropriate to inquire as to whether this proceeding is being maintained for an improper purpose, namely the frustration of the Federal Court Proceeding.
Given the circumstances which led to the commencement of the winding up proceeding and the defendant’s very recent initiation of the Federal Court Proceeding, I am not prepared to infer that the plaintiff is improperly continuing this winding up proceeding for the suspected improper purpose. The evidence, taken as a whole, does not support the making of any such inference.
The defendant also places reliance on the decision of McLelland J in L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd[76] where his Honour indicated that an application by a creditor to wind up a company in insolvency may be held to be an abuse of process in certain circumstances, including where “issues...arise in the winding up proceedings of a kind inappropriate for determination in such proceedings eg a substantial contest as to the existence or enforceability of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose.”[77]
[76] (1982) 7 ACLR 180 (”L & D Acoustics”) (McLelland J).
[77]Ibid at 183.
The category of abuse of process identified by McLelland J in L & D Acoustics seems to reframe an earlier expression of the principle stated by McGarvie J in Fortuna Holdings Pty Limited v Deputy Federal Commissioner of Taxation.[78] His Honour in that case said that the Court could intervene to restrain a winding up where there was a more suitable alternative means of resolving a disputed claim against the defendant company.[79]
[78] [1978] VR 83 (”Fortuna Holdings”).
[79]Ibid 93. The New South Wales Court of Appeal recognised the application of that principle in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374, 387 [57] per Beazley JA (with whom Hodgson and Santow JJA agreed).
However, there is real doubt as to whether the principle set out in Fortuna Holdings (and by extension L & D Acoustics), continues to apply in light of the regime established by Part 5.4 of the Corporations Act, especially where the winding up application is brought for non-compliance with a statutory demand and where a presumption of insolvency arises under s 459C(2)(a).[80]
[80]See AG Coombs Pty Ltd v M & V Consultants Pty Ltd (in liq) (2018) 55 VR 513, 527-8 [46]-[49] (Sloss J) citing Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1, 14-5 [28]-[32], among other authorities.
The ground of abuse of process is not made out.
Discretion to decline winding up order
In considering the relevance of the Federal Court Proceeding, it is more appropriate to have regard to the Court’s discretion found in ss 459A and 467(1) of the Corporations Act.
Source of discretion
Section 459A of the Corporations Act provides that “[o]n an application under section 459P, the Court may order that an insolvent company be wound up in insolvency” (emphasis added).
In Deputy Commissioner of Taxation v Swoosh Hand Car Wash Pty Ltd,[81] Jacobson J held it was “well-established that the Court has a wide discretion under s 459A of the [Corporations Act] which may be exercised on any ground that is not extraneous to the scope and purpose of the [legislation]”.[82]
[81][2014] FCA 73 (”Swoosh Hand Car Wash”).
[82]Ibid at [10] citing Deputy Commissioner of Taxation v T.D. Preece Pty Ltd [2013] FCA 1365 at [18] (Griffiths J) and FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (No 2) (1988) 14 NSWLR 643, 660.
Section 467(1) of the Corporations Act further provides:
… on hearing a winding up application the Court may:
(a) dismiss the application with or without costs, even if a ground has been proved on which the Court may order the company to be wound up on the application; or
(b) adjourn the hearing conditionally or unconditionally; or
(c) make any interim or other order that it thinks fit.
In Bungey v Magnate Projects Pty Ltd[83] Austin J explained the operation of s 467(1) as follows:
The terms of the subsection make it clear that the applicant for winding up is not entitled to an order once the grounds are made out, and the court always has a discretion: Expile Pty Ltd v Jabb's Excavations Pty Ltd[2003] NSWSC 699 at [57] per Campbell J. The court's attention will be directed to the public interest, which normally requires that an insolvent company be wound up to prevent it from incurring further debts. Counsel for Magnate referred me to two decisions where a winding up order was refused partly on the basis that the order would not achieve anything for the creditors, as there were insufficient funds even to pay for the costs of liquidation, although there were valuable income-producing assets (Re St Thomas' Dock Company(1876) 2 ChD 115 and Re Chapel House Colliery Company(1883) 24 ChD 259). But the circumstances of those cases were unusual. Normally the court exercises its discretion to wind up a company in insolvency once insolvency is proved or a presumption of insolvency is established and not rebutted - but nevertheless, the discretion remains and is available to be exercised in an appropriate case.
[83] [2006] NSWSC 734 at [44].
The Court’s discretion under s 467(1) must be exercised judicially, taking into account all relevant considerations, including the interests of justice, fairness to the parties and the interests of creditors.[84]
Relevance of Federal Court Proceeding
[84]T-S Capital Partners LLC v Paltar Petroleum Limited (administrators appointed); In the matter of Paltar Petroleum Limited (No 1) [2019] FCA 635 (Stewart J) [55].
In the event a winding up order is made, a liquidator may well elect to continue the Federal Court Proceeding. However, it is equally likely that he or she may not. It is therefore possible that the defendant will be denied the opportunity to prosecute its claim against the plaintiff and the broader dispute between the parties will not be capable of being properly determined.
There is also a clear overlap between this matter and the Federal Court Proceeding. As previously noted, the defendant alleges in the Federal Court Proceeding that the plaintiff breached an obligation to act in good faith by serving the statutory demand and filing the winding up proceeding in circumstances where it knew or ought to have known there was a dispute about monies claimed under the Franchise Agreement. The Federal Court Proceeding also goes to a much wider dispute between the parties, including in respect of alleged misrepresentations by the plaintiff prior to the parties entering into the Franchise Agreement.
In my view, the Federal Court Proceeding is the most appropriate vehicle for the resolution of all disputes between the parties. This is a factor which tends against a winding up order.
Conclusion on exercise of discretion
Whilst, as a general rule, a creditor of an insolvent company can expect, as a matter of legal right, to have the company wound up once it has complied with the requirements of Part 5.4 of the Corporations Act, there are exceptional cases in which the court will refrain from making an order.[85] This is one such case.
[85] Deputy Commissioner of Taxation v Huon Foam Pty Ltd [2000] TASSC 99 at [8]-[9] (Blow J) and the authorities cited therein. See also Swoosh Hand Car Wash at [11] (Jacobson J).
Even though the defendant has failed to displace the statutory presumption of insolvency, it is no longer trading or incurring further debts and it is not hopelessly insolvent. It has also validly tendered the amount claimed in the statutory demand (which is exceedingly small), paid that amount into Court and remains willing to discharge the debt. No further sum is presently payable by the defendant to the plaintiff and there are no other creditors who have sought to support the plaintiff’s winding up application. Moreover, the parties are clearly embroiled in a broader commercial dispute which is the subject of proceedings in another jurisdiction. To some extent, that proceeding overlaps with the present proceeding. To wind the defendant up would be potentially disruptive to the orderly determination of that matter. Taking into account all of these matters, together with the interests of justice and the need to afford fairness to the parties, I exercise my discretion under ss 459A and 467(1) of the Corporations Act to decline to make a winding up order.
The statutory minimum
There is one further matter that warrants mention but which is not relevant to the determination of the proceeding. I earlier observed that this case is unusual because the debt claimed by the plaintiff is for a relatively trivial sum ($2,372.36). It is only slightly more than the “statutory minimum” which is set at $2,000 by combined operation of s 459E of the Corporations Act and the relevant definition contained in s 9 of the legislation.
Having regard to the history of those provisions and their legislative antecedents, it is apparent that the statutory minimum has remained frozen at this level for more than a quarter of a century.
The Corporations Act replaced the Corporations Act 1989 (Cth), and repealed a uniform legislative scheme (“the Corporations Law”)[86] that came into operation in 1991.[87] Section 459E was originally inserted into the Corporations Law by s 57 of the Corporate Law Reform Act 1992 (Cth) (“the 1992 Act“). That provision was in substantially the same terms as the current version of s 459E. The 1992 Act also introduced the definition of the “statutory minimum” and the amount of $2,000.
[86]Comprising a national scheme with the Corporations Act 1989 (Cth) incorporating the Corporations Law, and with each State enacting legislation to apply the Corporations Law. For example, s 7 of the Corporations (Victoria) Act 1990 (Vic) provided for the application of the Corporations Law through reference to s 82 of the Corporations Act in force at the time (ie: the Corporations Act 1989 (Cth)).
[87]TimeBase, Corporations Law Point-in-Time Service, Corporation Law Historical Background 1989–Present (online at 19 July 2019).
The Australian Law Reform Commission’s 1988 General Insolvency Inquiry Report[88] (”the Harmer Report”) is referred to at length in the explanatory memorandum to the Bill which preceded the 1992 Act. The Harmer Report recommended the key integers of the current statutory demand regime found in Part 5.4 of the Corporations Act.[89] In considering at what level to set the statutory minimum, the Commission was of the view that the ”amount should not be so high that it precludes small creditors from initiating a claim, but it should be high enough to remove the likelihood of trivial claims.“[90] In the event, it arrived at $2,000.[91] Interestingly, the Commission also recommended that the statutory minimum ”should be fixed by regulation so that it may be increased without the necessity for amendment by legislation”.[92] That further recommendation was not ultimately adopted.
[88] Law Reform Commission, General Insolvency Inquiry (Report No 45, 1988) vol 1.
[89]See Harmer Report (Report No 45, 1988) vol 1, 71 [145] (footnote omitted).
[90]Ibid [146].
[91]Ibid [147].
[92]Ibid.
No changes to the statutory minimum have been made since the commencement of the 1992 Act. As a consequence, the statutory minimum has not been adjusted to reflect economic growth or changes in the consumer price index. This may be contrasted with the position under the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). The current minimum amount of $5,000 for bankruptcy notices[93] and creditor’s petitions[94] was increased from the previous sum of $2,000 by the Bankruptcy Legislation Amendment Act 2010 (Cth).[95] One of the justifications for the increase was to ”lessen the opportunity to use bankruptcy procedures as a debt collection process“.[96]
[93]s 41(1) Bankruptcy Act.
[94]Ibid s 44(1).
[95] See schedule 4, part 1, items 1 and 2 of the Bankruptcy Legislation Amendment Act 2010 (Cth). The amount of $2,000 was earlier set by schedule 1, item 120 of the Bankruptcy Legislation Amendment Act 1996 (Cth), replacing the previous minimum amount of $1,500. Initially, the 2010 amendment contemplated the amount being increased to $10,000, however, this was reduced to $5,000 by Government amendment - see Replacement Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2009 (Cth) 23 [135] and Supplementary Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2009 (Cth), under ”General Outline”.
[96]Replacement Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2009 (Cth) 22–3 [133]. See also, Senate Legal and Constitutional Affairs Legislation Committee, Parliament of Australia, Bankruptcy Legislation Amendment Bill 2009 (Report, February 2010) 4–5 [2.7].
There is a clear policy mandate found in Part 5.4 of the Corporations Act that insolvent companies should be promptly wound-up as a matter of public interest.[97] At the same time, statutory demands and winding up proceedings should not be used as mechanisms for debt collection[98]. A winding up proceeding is not ordinary inter partes litigation in which a party may pursue a debt and recover a judgment.[99] Rather, it is a proceeding brought for the benefit and protection of all creditors of the company, including existing and future creditors.[100] Contested winding up proceedings can be complex, time consuming and costly. So are applications to set aside statutory demands. The consequences of a winding up order are also significant and can affect the rights and interests of a company’s creditors, employees, shareholders, directors, customers and suppliers.
[97] See Kelly v J Stockland & Co Pty Ltd [2007] NSWSC 214 at [11] (Barrett J); Equititrust Limited v Willaire Pty Ltd [2012] QSC 206 at [90] (McMurdo J). See also the majority of the High Court said in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd (2008) 232 CLR 314, 323 [14] (Gleeson CJ, Hayne, Crennan and Kiefel JJ).
[98]South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465 (“Kitoria”) at 472 (Ryan J) and Moutere Pty Ltd v Deputy Commissioner of Taxation (2000) 34 ACSR 533, 543 [54] (Austin J).
[99]In the matter of Erfanian Developments Pty Ltd [2018] VSC 342 (“Erfanian”) at [8].
[100]Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523, 527 (Heerey J); Kitoria 472 (Ryan J) and Erfanian at [8].
On one view, a company that is unable to comply with a statutory demand for $2,000 is arguably just as much (or more) insolvent than a company which cannot pay a debt for a far larger sum. However, it is equally possible that the company may be experiencing a temporary lack of liquidity. During periods of economic downturn and constrained availability of credit, companies experiencing short-term cash flow problems may be more exposed to winding up proceedings for smaller debts than in more prosperous times. Further, a low statutory minimum may render the statutory demand and winding up regime more susceptible to being abused as a debt collection process.
There is also a potential tension between the current statutory minimum and the objectives of the Civil Procedure Act 2010 (Vic) (“the Civil Procedure Act”). That legislation provides for “an overarching purpose in relation to the conduct of civil proceedings to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.”[101] The Court “is directed to give effect to the overarching purpose in the exercise of any of its powers, or in the interpretation of those powers”.[102] Parties and legal practitioners are, in turn, required to comply with certain overarching obligations set out in Part 2.3 of the legislation.[103]
[101]Civil Procedure Act 2010 (Vic) s 1(1)(c). See also s 7 of the Civil Procedure Act which further articulates this overarching purpose. See further similar provisions in s 56(1) Civil Procedure Act 2005 (NSW), s 37M(1) Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”), r 5(1) Uniform Civil Procedure Rules 1999 (Qld) and r 3 Supreme Court Civil Rules 2006 (SA) (“Supreme Court Civil Rules”).
[102]Civil Procedure Act s 8.
[103]Ibid s 10.
One of the overarching obligations parties and their lawyers are bound to observe is found in s 24 of the legislation[104] which is in the following terms:
A person to whom the overarching obligations apply must use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to—
(a) the complexity or importance of the issues in dispute; and
(b) the amount in dispute.
[104]See also s 37M(2)(e) of the Federal Court Act and s 3(e) of the Supreme Court Civil Rules.
It is clear from a plain reading of ss 3 and 4 of the Civil Procedure Act that winding up proceedings and applications to set aside statutory demands are caught by the definition of “civil proceedings”. The overarching obligation of proportionality in s 24 therefore has application to these types of cases. Parties and practitioners may be challenged in meeting the obligation of proportionality in winding up proceedings which relate to debts of only slightly more than the statutory minimum. Where the matter proceeds unopposed, there may be no difficulty. However, where the application is contested, the difficulty may be more pronounced.
In light of these matters, there may be an appropriate occasion for Parliament to review the current statutory minimum for statutory demands and the method by which it is set. Fixing the amount by reference to regulation may increase the ease by which it can be adjusted in the future to keep pace with the value of money.
Conclusion
For the reasons provided, the plaintiff’s winding up proceeding will, as a matter of discretion, be dismissed. Orders will also be made to facilitate payment to the plaintiff of the monies paid by the defendant into Court.
I will hear the parties on the question of costs.
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