In the matter of West Homes Australia Pty Ltd
[2023] VSC 732
•8 December 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2023 02730
IN THE MATTER of WEST HOMES AUSTRALIA PTY LTD (ACN 004 964 185)
BETWEEN:
| HINDS BLUNDEN PTY LTD (ACN 073 330 588) | Plaintiff |
| v | |
| WEST HOMES AUSTRALIA PTY LTD (ACN 004 964 185) | Defendant |
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JUDGE: | Irving AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 9 November 2023 |
DATE OF JUDGMENT: | 8 December 2023 |
CASE MAY BE CITED AS: | In the matter of West Homes Australia Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 732 |
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CORPORATIONS – Winding up – Application for winding up by court – Defendant’s application under s 459S of the Corporations Act 2001 (Cth) for leave to oppose winding up application – Whether there is a genuine dispute about the debt – Whether the defendant is solvent – Where statutory demand was served on the defendant’s registered address however defendant claims that the statutory demand was not received – Application refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S Clement | Macpherson Kelley |
| For the Defendant | Mr A Schlicht | Alexander Law |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
The parties’ materials........................................................................................................................ 1
Solvency of West Homes.................................................................................................................. 2
Evidence......................................................................................................................................... 2
Principles........................................................................................................................................ 3
Consideration................................................................................................................................ 5
The existence and quantum of the debt........................................................................................ 6
Evidence......................................................................................................................................... 6
Submissions................................................................................................................................... 9
Consideration.............................................................................................................................. 10
Service and receipt of the statutory demand.............................................................................. 11
Evidence....................................................................................................................................... 11
Principles...................................................................................................................................... 12
Submissions................................................................................................................................. 13
Consideration.............................................................................................................................. 13
Conclusion......................................................................................................................................... 14
HIS HONOUR:
Introduction
The plaintiff has filed an application under s 459P of the Corporations Act 2001 (Cth) (Act) seeking an order that the defendant, West Homes Australia Pty Ltd (West Homes), be wound up in insolvency. The plaintiff relies upon West Homes’ failure to comply with a statutory demand served on West Homes at its registered office.
West Homes seeks leave, pursuant to s 459S of the Act, to oppose the plaintiff’s winding up application. The grounds of opposition are that there is no debt owing by West Homes to the plaintiff and other grounds set out in the affidavits of Leigh Chiavaroli (Chiavaroli), West Homes’ sole director and shareholder, and John Beattie (Beattie), the accountant for West Homes and other associated companies. The grounds raised by those affidavits were that West Homes disputes the existence and quantum of the debt. The affidavits assert West Homes is solvent and that while the plaintiff’s statutory demand was served on West Homes’ registered office, Chiavaroli did not receive it such that it was not possible for West Homes to have raised the disputes about the debt earlier.
For the reasons that follow I have decided not to grant West Homes the leave sought.
The parties’ materials
The defendant has filed the following material in opposition to the winding up application:
(a) the affidavit of John Beattie sworn 25 July 2023;
(b) the affidavit of Chiavaroli sworn 25 July 2023 (first Chiavaroli affidavit);
(c) the affidavit of Chiavaroli affirmed 18 August 2023, exhibiting the financial reports for West Homes and the WHA Trust for the year ending 30 June 2023 (second Chiavaroli affidavit);
(d) the affidavit of Chiavaroli affirmed 4 October 2023 (third Chiavaroli affidavit);
(e) the affidavit of Chiavaroli affirmed 8 November 2023 (fourth Chiavaroli affidavit); and
(f) written submissions dated 16 October 2023.
In addition to the materials filed prior to 2 August 2023, the plaintiff has filed:
(a) the affidavit of Dominique Halloran (Halloran) affirmed 13 September 2023; and
(b) written submissions dated 30 October 2023.
Solvency of West Homes
Evidence
Beattie’s evidence was that West Homes is a dormant company that has no creditors. Chiavaroli’s said that West Homes does not trade and is ‘essentially a dormant company’. He said that apart from the debt alleged by the plaintiff, West Homes is solvent.
The second Chiavaroli affidavit exhibited a financial report for West Homes for the year ending 30 June 2023. The statement of financial position shows total current assets of $400. The report contains a profit and loss statement showing no activity for the year. The notes to the financial statements included in the report state:
The director has prepared the financial statements on the basis that the company is a non-reporting entity because there are no users dependent on general purpose financial statements. The financial statements are therefore special purpose financial statements that have been prepared in order to meet the needs of the member.
Chiavaroli, as director, signed the declaration accompanying the report, declaring the report fairly presents the company’s financial position and that, in his opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. Chiavaroli’s declaration was signed on 18 August 2023.
Beattie signed a compilation report accompanying the financial report. That report states:
The director of [West Homes] is solely responsible for the information contained in the special purpose financial statements, the reliability, accuracy and completeness of the information and for the determination that the significant accounting policies used are appropriate to meet the director’s needs and for the purpose that the financial statements were prepared.
…
Since a compilation engagement is not an assurance engagement, we are not required to verify the reliability, accuracy or completeness of the information provided to us by management to compile these financial statements. Accordingly, we do not express an audit opinion or a review conclusion on these financial statements.
The special purpose financial statements were compiled exclusively for the benefit of the director who is responsible for the reliability, accuracy and completeness of the information used to compile them. We do not accept responsibility for the contents of the special purpose financial statements.
The plaintiff informed the Court that West Homes was the second plaintiff in a related Supreme Court proceeding. In a judgment[1] issued on 13 October 2023 dismissing that proceeding, Stynes J noted that on 1 March 2023 Barrett AsJ ordered the plaintiffs to pay the defendant’s costs in relation to subpoena objections on an indemnity basis, to be taxed immediately in default of agreement.
[1]Pentridge Village Pty Ltd (in liq) v Capital Finance Australia [2023] VSC 605.
Principles
Section 459S of the Act provides:
Company may not oppose application on certain grounds
(1)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 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)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.
In considering whether to exercise its discretion to grant leave under s 459S(1), the Court must:
(a) give preliminarily consideration to the defendant’s basis for disputing the debt which was the subject of the statutory demand;
(b) examine the reason why the issue of indebtedness was not raised in an application to set aside the statutory demand and the reasonableness of the party’s conduct at that time; and
(c) investigate whether the dispute about the debt is material to proving the company is solvent.[2]
[2]Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 149 FLR 179, [49] (Austin J).
In Australian Securities and Investments Commissions v Lanepoint Enterprises Pty Ltd (receivers and managers appointed),[3] the High Court noted:
The evident policy of Pt 5.4 [of the Corporations Act] is that there be a speedy resolution of applications to wind up in insolvency. To that end, a challenge to a statutory demand is to be made promptly, before the application for the order for winding up in insolvency is determined and, where possible, disputes are to be resolved on the application to set aside the demand. Section 459S provides that where an application to wind up in insolvency relies upon a failure by the company to comply with a statutory demand, the company may not, without leave, oppose the making of an order on a ground which (a) it relied on in an application to set aside the demand or (b) it could have relied on but did not (whether or not it in fact made the application). That leave is not to be granted unless the court is satisfied that the ground is material to proving the company is solvent. Thus if leave is sought on the basis that the debt is disputed, the existence or amount of that debt must be relevant to a conclusion as to the company’s solvency. This requirement of s 459S is consistent with the operation of the presumption of insolvency under s 459C, which applies even if leave is granted to raise a ground of opposition. It applies because there has been a failure to comply with a demand which remains in effect.
[3][2011] HCA 18, [27] (per Gummow, Heydon, Crennan, Kiefel & Bell JJ) (citations omitted).
In Re Kornucopia Pty Ltd (Kornucopia),[4] Sifris J, after considering the authorities, stated that where, in circumstances where a presumption of insolvency applies, a company seeks to raise a genuine dispute in relation to the debt upon which the winding up application is based:
…the starting point is to adduce evidence of solvency. Only when faced with such evidence, will the Court entertain whether it is appropriate to stay or dismiss a winding [up] application, and direct that any anterior dispute in relation to the debt be separately determined. It follows, that in a case where there is no evidence of solvency...the existence of a genuine dispute goes nowhere. The Court must presume the company is insolvent and is unable to determine how far removed that dispute is to the central question of solvency.
[4][2020] VSC 7, [98].
The Court must be provided with the ‘fullest and best’ evidence of solvency.[5] 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.[6] In some circumstances, for example, a small, viable company with no creditors, the Court may not require evidence of an external accountant who has analysed the company’s books and records.[7] The fact that a company does not need to lead evidence of an external accountant to establish solvency does not mean that it does not need to lead admissible, and sufficient, evidence to rebut a presumption of insolvency.[8]
[5]Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609, 617 (Hayne J).
[6]Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 463 (Sackville J).
[7]Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones Pty Ltd (2008) 219 FLR 422, [29].
[8]Re Sails Corp Pty Ltd [2021] NSWSC 1046, [17].
Consideration
West Homes is presumed insolvent unless it proves, to the requisite civil standard, that it is able to pay its debts as and when they become due and payable. On the evidence before the Court I am not satisfied that West Homes has demonstrated its solvency.
West Homes’ financial reports exhibited to the second Chiavaroli’s affidavit are explicitly not verified by Beattie, West Homes’ accountant. They are prepared solely from information provided by Chiavaroli, West Homes’ sole director and shareholder. As has been said before, the Court is unlikely to be persuaded to act on the evidence of a single director or shareholder without external confirmation.[9]
[9]QBE Workers’ Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128, [26] (White J).
While I accept that West Homes is not trading, it is clearly not a dormant company. As recently as 13 October 2023 it was a plaintiff in a Supreme Court proceeding in which interlocutory costs orders were made against it. While final orders in that proceeding remain to be made, the proceeding was dismissed on the application of the defendant. In such circumstances there is at least a very real risk of a further costs order being made against West Homes. The financial reports provided make no reference to the costs order. They contain no historical information at all that would explain when and in what circumstances West Homes ceased trading.
The absence of any reference in the financial reports to the costs order made in the related proceeding is not answered by an assertion that another of Chiavaroli’s companies has agreed to fund that proceeding on West Homes’ behalf. This is particularly the case where the evidence West Homes relies upon to prove the funding agreement is a reference to a conversation said to be about West Homes’ funding arrangements in a different Supreme Court proceeding.
The financial reports in evidence in this case are not sufficient to rebut the presumption of West Homes’ insolvency.
The existence and quantum of the debt
Evidence
In issuing the statutory demand upon which the winding up application is based, the plaintiff relied on a debt of $192,984. The plaintiff said West Homes owed that sum for services provided as requested and invoiced. Those services, in summary, involved the preparation of an expert report (Report) for use by West Homes in a Supreme Court proceeding.
West Homes’ case disputing the existence of the debt consisted of two planks. First, that the invoices were made out to Howard Bear Legal Consulting Services (Howard Bear) and not West Homes. Howard Bear acted for West Homes and Mr Chiavaroli in the relevant proceeding. Second, that Chiavaroli signed the service agreement issued by the plaintiff for the work the subject of the invoices in his capacity as a director of LCRE Legal Pty Ltd (LCRE). LCRE was registered on 13 February 2020. Until 1 March 2023, Chiavaroli was the sole shareholder, sole director and secretary.
Halloran’s evidence was that on 21 August 2020 the plaintiff received a letter of instruction from Mr Howard Bear (Bear) which stated that Howard Bear acted for West Homes and Chiavaroli and that Bear had instructions to engage the plaintiff to provide an expert opinion. The letter of instruction stated that West Homes and Chiavaroli would not pay for unsolicited work.
Halloran said that on 12 October 2020 the plaintiff received a second letter of instruction from Bear referring to the first letter of instruction, confirming Howard Bear acted for West Homes and Chiavaroli. The second letter of instruction required the plaintiff to follow the ongoing requirements set out in the first letter of instructions as to unsolicited work.
On 14 January 2021, the plaintiff received a third letter of instructions from Bear again requiring the plaintiff to follow the requirement not to engage in unsolicited work contained in the first letter of instructions. On 1 February 2021 Mr Watson (Watson), on behalf of the plaintiff provided Bear with an estimate of between $300,000–$400,000 for preparation of the Report.
Halloran deposed that Watson met with Murray Nugent (Nugent) and Damien Chiavaroli (D Chiavaroli) on behalf of West Homes on 5 February 2021. At that meeting Nugent and D Chiavaroli advised Watson that much of the documentation required to prepare the Report had already been collated and reconciled and could be provided to Howard Bear by the end of February 2021. Accordingly, on 15 February 2021, the plaintiff amended its estimate to between $200,000 and $250,000. On 16 February 2021, Watson sent Bear a schedule of the plaintiff’s fees with terms of engagement contained in a service agreement.
On 17 February 2021, Bear sent Watson a signed service agreement. The acceptance of the service agreement was signed by Chiavaroli, “Director LCRE”.
Halloran’s evidence was that in her experience as managing partner of the plaintiff, it is common practice for the plaintiff, as an independent expert in court proceedings, to be engaged by companies and individuals through a solicitor.
Chiavaroli’s evidence was that West Homes instructed Howard Bear to act for it in Supreme Court proceeding S CI 2016 02556, Pentridge Village Pty Ltd (in liq) & Ors v Construction, Forestry, Maritime, Mining and Energy Union & Ors (Proceeding). In the third Chiavaroli affidavit, Chiavaroli deposed that from February 2020 LCRE funded West Homes in relation to the Proceeding with funds advanced by a litigation funder, PDF1 Pty Ltd and that accordingly LCRE engaged the plaintiff.
Chiavaroli deposed that he, as director of West Homes and LCRE, instructed Howard Bear to write to the plaintiff seeking a fee estimate for the preparation of an Report intended to be used in the Proceeding. His evidence largely accorded with the evidence of Halloran on the provision of the three letters of instruction and the 5 February 2021 meeting. Chiavaroli’s evidence was that during the course of discussions between Watson, Nugent and D Chiavaroli, Watson was told that ‘the maximum amount we could pay for the Report was $200,000 “full stop”’.
Chiavaroli’s third affidavit exhibited a copy of Watson’s email of 15 February 2021 containing the revised estimate of between $200,000–$250,000. In that email Watson stated the revised estimate:
…assumes that information is provided efficiently and in a timely manner, and we would aim through this process to keep it at the lower end of the estimate.
Chiavaroli agreed that, on the basis of the revised estimate, he signed the service agreement. His evidence was that West Homes was in receivership between 17 July 2014 and 6 November 2020 and could not contract or enter into legal relationships without the approval of the appointed receiver and that this was the reason LCRE was the client under the agreement. The fourth Chiavaroli affidavit exhibited the email from Bear to Watson on 17 February 2021 attaching the signed service agreement. The substance of that email stated:
Please find the Hinds Blunden Professional Services Agreement signed by Leigh Chiavaroli in his capacity as Director of LCRE Legal Pty Ltd.
Chiavaroli’s evidence was that despite the plaintiff’s revised estimate of $200,000–$250,000, the plaintiff had rendered invoices in the amount of $360,640.50, of which LCRE had paid $167,656.50.
Halloran’s evidence was that despite assurances given to Watson at the meeting on 5 February 2021, information was not provided promptly or efficiently and the plaintiff continued to receive documents throughout March, April and May 2021. As a result Halloran said additional work was undertaken and the revised estimate was not applicable.
Submissions
West Homes’ counsel submitted that the Court was required to give only preliminary consideration to West Homes’ basis for disputing the existence and quantum of the debt. West Homes’ counsel said the following factors were enough for the Court to find, on a preliminary consideration, that there was a genuine dispute:
(a) West Homes was in receivership until November 2020 and so could not enter into a contract without the agreement of the appointed receiver;
(b) The earliest invoices relied upon by the plaintiff dated back to August 2020;
(c) LCRE engaged the plaintiff and was responsible for payment of the fees;
(d) The plaintiff knew that LCRE was paying the fees and that it would not spend more than $200,000;
(e) The service agreement was signed by Chiavaroli in his capacity as director of LCRE;
(f) Paragraph 5 of the service agreement required the plaintiff to send invoices to the client and the invoices were sent to Howard Bear;
(g) Paragraph 1 of the service agreement required the plaintiff to inform Howard Bear if there was a significant change to the costs estimate which it never did.
The plaintiff submitted that the terms of a contract are to be determined objectively and not by the subjective intentions of the parties. Here, the plaintiff submitted, the service agreement named West Homes and Chiavaroli as the clients, not LCRE. The work was prepared for the benefit of West Homes, not their litigation funder. The plaintiff submitted that LCRE is not named in the service agreement other than in Chiavaroli’s signature and that LCRE’s role had not been raised before Chiavaroli signed the service agreement.
The plaintiff submitted that there was no genuine dispute over the quantum of the debt. Paragraph 1 of the service agreement stated costs would be calculated based on a schedule of fees for the individuals involved in the preparation of the Report and explicitly stated that the cost may exceed the estimate. The plaintiff said that it had issued invoices monthly and so West Homes was aware of the costs as they were accruing. Despite this, the plaintiff said, West Homes did not dispute the invoices and continued to instruct the plaintiff to prepare the Report.
Consideration
As I have found that West Homes has not discharged its burden of proving solvency such as to displace the presumption of its insolvency, it is strictly unnecessary for me to decide whether there is a genuine dispute about the existence or quantum of the debt. In the event I am wrong on the issue of solvency, I am not satisfied that there is a genuine dispute about the existence or quantum of the debt.
I accept the plaintiff’s submission that the terms of the agreement are to be determined objectively. The service agreement names West Homes and Chiavaroli as the client. LCRE is not mentioned in the agreement other than in Chiavaroli’s signature. Even if I assumed there was some ambiguity and had recourse to Bear’s email, it does no more than restate what Chiavaroli has written in executing the agreement. It does not set out the purported reason why Chiavaroli signed the document in that capacity, ie the fact of West Homes’ receivership. It does not explain the continuing reference to West Homes as the client in the body of the agreement and nor does it provide any evidence of agreement by the plaintiff to LCRE being the contracting party. Neither Chiavaroli’s signature nor the covering email, in my view, form a credible basis when viewed against the terms of the agreement for disputing that West Homes and Chiavaroli were the clients.
Other than the bare fact of West Homes’ receivership there was simply no evidence before the Court about any communications or lack of communications between Chiavaroli and the receivers. More would be required before the Court could be satisfied, even on a preliminary basis, that West Homes’ receivership was a basis for disputing the validity of the service agreement.
Further, the service agreement on its face provided that the costs of the Report would be determined by reference to the schedule of fees, not a fixed sum, and that the costs may exceed the estimate. There was no suggestion that West Homes was unaware of the plaintiff’s invoices. Nor was there evidence of West Homes having raised issues about the quantum of the invoices before this application.
I am not satisfied, even on a preliminary basis, that West Homes have identified a basis for disputing the existence or quantum of the debt.
Service and receipt of the statutory demand
Evidence
Beattie, an accountant at the firm MVA Bennet, deposed that MVA Bennet’s office is the registered office of West Homes.
Beattie said that on 10 March 2023 he received a statutory demand from the plaintiff’s solicitors addressed to West Homes. Beattie’s evidence was that he forwarded the statutory demand by mail to the business address of West Homes but was advised by Chiavaroli that he never received the statutory demand. Beattie said that Chiavaroli informed him that he only received the Originating Process on 21 July 2023.
Beattie said he checked through Australia Post’s online tracking facility whether his letter had been delivered and his affidavit exhibited a copy of the result of his search. The tracking report exhibited to Beattie’s affidavit indicates that as at 25 July 2023, delivery was pending and that the parcel had not yet been scanned into the Australia Post tracking system. The tracking report also contains the statement:
It looks like this parcel hasn’t been scanned into our tracking system yet.
Or maybe you’re using an old tracking number? If so, keep in mind that parcels are archived after 2 months of inactivity.
Chiavaroli’s evidence was that he first saw the statutory demand when he received the Originating Process on 21 July 2023. He said that the statutory demand emailed to him on 3 July 2023 used an old and defunct email address and so he did not receive it.
Principles
There was no dispute between the parties that the statutory demand had been served on West Homes at its registered address. There was some dispute about whether the Masri principle[10] remained good law. The Masri principle, in summary, is that where it is established on the evidence that the directors of a company did not become aware of the existence of the statutory demand until after the expiration of the 21-day period for the filing of an application to set aside a statutory demand, and they have acted reasonably with respect to the collection of mail within their registered office, fairness requires the company be permitted to raise a ground available to challenge the demand. In Kornucopia,[11] Sifris J, after carefully examining the authorities and the scheme of Pt 5.4 of the Act, decided that the Masri principle is no longer good law.
[10]Perpetual Nominees Ltd v Masri Apartments Pty Ltd (2004) 49 ACSR 714, 717 [19] (Austin J).
[11][2020] VSC 7, [182].
Submissions
West Homes’ counsel argued that the facts in this case were similar to those in Commonwealth Broadcasting Corp Pty Ltd v Pacific Mobile Phones Pty Ltd (Pacific Mobiles),[12] in which, counsel said, a change of the company’s address was sufficient to satisfy the condition of why the dispute about the debt had not been raised earlier.
[12](2008) 219 FLR 422.
In Pacific Mobiles, the statutory demand had not been served on the debtor company’s registered address and had been returned by Australia Post to the sender. In fact the company had attempted to change its registered office about six months before the demand was sent, but ASIC had informed the company by letter sent to the old address that further documentation was required. The company did not receive the letter from ASIC. The demand sent to the old registered address was returned to the creditor, marked address unknown. The debt the subject of the demand was a judgment debt that the company was seeking to set aside. The creditor was aware, at the time it filed its winding up application that the company had applied to set aside the judgment, and, through court documents, that the company’s address had changed.
Consideration
I do not agree that the facts of Pacific Mobiles are analogous to the facts of this case. Here there is no dispute the statutory demand was served on West Homes at its registered address. On West Homes’ evidence and submissions, the failure of the demand to come to Chiavaroli’s attention is to be attributed solely to Australia Post. I do not accept that.
While Chiavaroli gave evidence he did not receive the statutory demand from Beattie, I am not satisfied that the tracking evidence West Homes relied on was sufficient to prove non-delivery. The tracking advice, on its face, could not be relied upon because of the lapse of time between when the demand was sent and when Beattie checked the Australia Post tracking service.
It appears to me that, in deciding to forward the statutory demand to Chiavaroli by post only, Beattie has not acted reasonably. An accountant would know well that a statutory demand involves strict timeframes for response and potentially very significant consequences for a company. It is simply not credible to suggest that an accountant would not have used some other means, perhaps in addition to post, to alert the sole director of a company to the existence of a statutory demand, or having sent it by post, followed up with the sole director to ensure it was received.
In my view the Masri principle is no longer good law and, even if it were, on the facts of this case the mail collection system at the registered office was not reasonable.
Conclusion
For the reasons given above I will not grant West Homes application for leave under s 459S of the Act.
Having declined to grant leave it remains for the Court to determine the winding up application. The matter will be relisted at 9:30 am on 15 December 2023 for the hearing of the plaintiff’s winding up application.
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