Master Paving Pty Ltd v Heading Contractors Pty Ltd (Appellant) No. Scgrg-96-2380 Judgment No. 6250 Number of Pages 10 Corporations

[1997] SASC 6250

IN THE SUPREME COURT OF SOUTH AUSTRALIA

LANDER, J

Corporations - companies - winding up - winding up by court - application to wind up a company in insolvency following the failure by that company to comply with a statutory demand - company did not apply to set aside the statutory demand - Court must presume the company was insolvent - application by the company for leave to oppose the winding up on three grounds - leave could not be granted unless the ground was material to proving the company's solvency - the existence or otherwise of the debt was a ground material to proving the company's solvency - ground was also arguable - compnay advanced sufficient explanation for its failure to bring the ground forward to set aside the statutory demand - appeal allowed. Corporations Laws95A, 459C, E, F, G, H, J, P, Q, S, 465C, referred to. Sandell v Porter (1966) 115 CLR 666; David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 131 ALR 353, applied. Kekatos v Holmark Construction Pty Ltd (1995) 18 ACSR 225, discussed.

ADELAIDE, 2 July 1997 (hearing), 22 July 1997(decision)

#DATE 22:7:1997

#ADD 28:7:1997

Appearances:

Appellant:

Counsel: Mr J P Keen

Solicitors: Elston & Gilchrist

Respondent:

Counsel: Mr J Wilkinson

Solicitors: Lynch & Myer

Order: appeal allowed.

LANDER, J:

On 19 December 1996 Master Paving Pty Ltd (subject to Deed of Company Arrangement) applied to this Court for an order for the winding up of the defendant Heading Contractors Pty Ltd.

The plaintiff claimed the defendant was indebted to it in the sum of $27,473.

A statutory demand dated 20 October 1996 under s459E of the Corporations Law was served upon the defendant demanding the sum of $69,000. A part payment of $41,527 was made by the defendant. The plaintiff claimed the balance of $27,473 was unpaid and due and payable.

The Notice under s459E was exhibited to the affidavit of Bruce Neil Mulvaney who was the Deed Administrator of the Deed of Company Arrangement executed by the plaintiff.

The notice was in the form provided by the Corporations Law [Form 509H]. No application of any kind was made by the defendant pursuant to s459G for an order setting aside the statutory demand. Because the defendant did not pay the whole amount claimed in the statutory demand and did not apply to set the statutory demand aside the defendant therefore failed to comply with the statutory demand. (Section 459F) The application to wind up was brought pursuant to s459P. The plaintiff applied to wind up the defendant relying on the failure by the defendant to comply with the statutory demand [s459Q]. A Court must presume a company is insolvent if during or after the three months ending on the day when an application for winding up is made the company failed to comply with a statutory demand [s459C(2)(a)]

A company may not, without leave of the Court, oppose the application unless, within the time prescribed by the rules, the company has filed and served, on the applicant, notice of the grounds upon which the company opposes the application and an affidavit verifying the matters in the notice [s465C].

On 30 January 1997 the defendant applied, pursuant to s459S of the Corporations Law for an order:-

"To the extent necessary the Defendant be given leave in opposing the application to wind up the Defendant to rely upon grounds of opposition that it could have relied upon to set aside the Statutory Notice of Demand dated the 30th day of October, 1996."

Section 459S of the Corporations Law provides: "(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 the leave of the Court, oppose the application on a ground:

(a) that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b) that the company could have so relied on, but did not so rely on (whether it made such an application or not).

(2) 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."

Peter Heading, a director of the defendant, deposed that the company carried on business at premises situated at Olympic Dam in the State of South Australia. On 23 February 1996 the company entered into a contract with Transfield Constructions Victoria Pty Ltd (Transfield) to carry out as contractor certain civil works at the Olympic Dam pipeline. The contract price was for $251,000 plus variations. On 11 February 1996 the company sub-contracted with T J Lomman and Son of Newton in the State of South Australia (Lomman) to carry out some of the work under the head contract with Transfield. The subcontract with Lomman was priced at $189,000 plus variations.

A term of the subcontract was that Lomman would be entitled to payment subject to the company itself receiving payment from Transfield. Mr Heading deposed that this is not an unusual arrangement between the company and subcontractors particularly in large jobs.

Work was carried out between March and August 1996. During the performance of the contracts Mr Heading became aware that Master Paving Pty Ltd (Master Paving) was carrying out some of the work at the direction of Lomman. In April 1996, a Mr Tom Lomman of T J Lomman & Son instructed Mr Heading that money payable to Lomman in respect of the first claim should be paid to Master Paving because of a further subcontract arrangement between Lomman and Master Paving.

It was Mr Heading's evidence that no contract of any nature was ever entered into between the company and Master Paving.

On 17 July 1996 the company lodged a variations claim with Transfield which included variations sought at the behest of Lomman.

On 8 August 1996 the company received a letter from the administrator of Master Paving claiming a contract existed between Master Paving and the company. Mr Heading said that, because he disputed the assertion that a contract existed, he spoke to Mr Tom Lomman who said he would get in touch with his accountant, who was also the accountant of Master Paving.

On 17 September 1996 Transfield responded to the company's variation claim rejecting the majority of that claim but accepting that there was a sum owed for variations of $14,177.

On 19 September 1996 Master Paving's accountant and a director of Master Paving attended at the company's premises seeking to know when final payment would be received from Transfield. Mr Tom Lomman was present at this meeting. All of those persons impressed upon Mr Heading that Master Paving was anxious to get paid as soon as possible due to financial difficulties. Mr Heading told the director of Master Paving and its accountant that he would contact Transfield to find out when payment could be expected and that they ought to come back later that morning.

When they returned he told them that Transfield had only accepted variations to the extent of $14,177. He said that if they accepted Transfield's offer of $14,177 they would be

paid much sooner. The director and accountant of the company advised him that any compromise of the variations claim was up to Tom Lomman as "it was his money".

Mr Heading then met with Mr Tom Lomman who advised him that he would agree to the variations claim so that Master Paving could be paid as soon as possible.

Mr Heading met again with the accountant and director of Master Paving and advised them that Mr Lomman was prepared to compromise a variations claim. The accountant and director then agreed that they would compromise their claim against Lomman for a final payment of $41,527.

Mr Heading said, at that stage, he did not believe that he was compromising any proceedings against the company because he did not believe the company had any liability to Master Paving at all. He believed he was simply negotiating on behalf of Mr Tom Lomman with Master Paving in respect of Lomman's liability to Master Paving.

He said that at that meeting either the director or the accountant said to him "can we get the money within fourteen days". He said that he responded "I'll ask for it to be paid as soon as possible but we all know about Transfield". He did not understand that the consent of Master Paving to accept $41,527 was conditional upon payment being made within fourteen days.

He said that the company then signed a Deed of Release with Transfield foregoing any further claim for variations. On 28 October 1996 the company received a cheque from Transfield in the sum of $26,752.64 which included the sum of $14,177 for variations.

On 1 November 1996 the company forwarded a cheque to Master Paving in the sum of $41,527 being the final payment due to Lomman. On that same day the company received the statutory demand and the affidavit dated 30 October 1996 claiming the greater sum of $69,000 rather than the sum of $41,527.

Mr Heading deposes that after service of that demand he was informed by his mother, also a director of the company, that she had contacted Master Paving disputing the debt and told Master Paving that it had been paid pursuant to the arrangement of 19 September 1996. There was no response to that assertion and Mr Heading believed that the matter had "gone away".

He said in his affidavit that he was not aware that the failure to respond to a statutory demand would deem the company insolvent or that the company could be prevented from raising arguments disputing the alleged debt, if it did not make an application to set aside the demand.

On 9 January 1997 the company received a letter from the solicitors for the plaintiff dated 19 December 1996 together with a summons and supporting affidavits to wind up the company. Mr Heading then, for the first time, obtained legal advice by retaining Elston and Gilchrist to act on behalf of the company in relation to the winding up application.

Mr Heading exhibited to his affidavit a balance sheet of the company and a list of its creditors.

The balance sheet of the company as at 30 June 1996, shows total assets of $547,507 including current assets of $319,373. The balance sheet discloses total liabilities of $373,605 including $299,180 of current liabilities. The company's assets exceed its liabilities by $173,903. More particularly the company's current assets exceed its current liabilities by in excess of $20,000.

Also exhibited was a list of the creditors of the company for January 1997, November 1996 and October 1996. It appears from that list of creditors, which also includes information as to the due date of the debt and the date paid, that the company was meeting its debts as and when they became due and payable over that period. On the face of the balance sheet, although the notes to the balance sheet are not attached, and the list of creditors, the company may well be solvent although that will be a matter to be determined in due course according to principle: Sandell v Porter (1966) 115 CLR 666 per Barwick CJ at 671; s95A(1) Corporations Law.

Mr Thomas Lomman swore an affidavit and confirmed the subcontracting arrangements between the defendant company and Lomman. He deposed that at the time that subcontract was entered into he was also employed as a supervisor by Master Paving Pty Ltd in addition to the running of his own business. Because he did not have sufficient employees and equipment to do the subcontracting work agreed to be done by Lomman he sought assistance from Master Paving. He said he subcontracted out the work to Master Paving. He said he did not inform Mr Peter Heading of the arrangement between Lomman and Master Paving apart from directing the defendant company to transfer the payment, to which his business was entitled under the contract, to Master Paving.

In conclusion he said this:

"There was no contract entered into between Master Paving and the Company in relation to any work carried out by Master Paving. Master Paving did the work only because of the subcontract it entered into between Lomman and Master Paving. The payments received by Master Paving were payments which I directed the company to forward because of the agreement I reached with Master Paving. I did this because I considered it more convenient for me if the money could be forwarded by the Company to Master Paving directly as there would be savings in administration as well as bank fees and government charges."

An affidavit was sworn by Kathleen Heading, a director and the office manager of the defendant company. She said that in or about April 1996 Lomman sent its first invoice to the company in respect of its subcontract. She marked the invoice as an exhibit to her affidavit. After receiving that invoice she was instructed by her son Mr Peter Heading that payment of Lomman's invoice should be made to Master Paving Pty Ltd because of an arrangement between Lomman and Master Paving. The invoice was for $100,000 and she deposited $99,000 to the account of Master Paving.

She said that in mid May 1996 the company received a further invoice from Lomman in the further sum of $100,000. For a period of about four weeks in about late May 1996 she received approximately four phone calls per day from a director of Master Paving seeking to know when the company would be receiving its next payment from Transfield. In order to stop, as she put it, the director's harassment, she forwarded by post a second cheque together with an undated note, stating that the company expected to receive a further payment from Transfield in mid June 1996 and that a payment of $75,000 would be forwarded then to Master Paving pursuant to the arrangement with Lomman.

In due course, $59,400 was sent to Master Paving and $600 sent to the Australian Taxation Office on Master Paving's behalf. The total sum of $60,000 was paid in lieu of the sum of $75,000 because Transfield did not pay to the defendant company the full amount of the defendant company's invoice to Transfield.

Mrs Heading then deposed to the circumstances giving rise to the payment of $41,527 to Master Paving Pty Ltd which were in accordance with the circumstances deposed to by her son, Mr Peter Heading.

She said in early November 1996 she spoke, by telephone, to Andre Strazdins, an employee of the administrator. In that telephone conversation she advised Mr Strazdins that the company's contract was with Lomman and that payment pursuant to the compromise of 19 September 1996 had been sent to Master Paving. She told Mr Strazdins that they had requested Transfield to pay the final account within fourteen days but that had not occurred. Mr Strazdins advised her that because payment had not been made within fourteen days, the 19 September 1996 compromise would be disregarded.

She said that she had never seen a statutory demand before and did not understand the consequences of not complying with it. She said her son spoke to Mr Tom Lomman about the matter and was told by Mr Tom Lomman that Mr Peter Heading had "nothing to worry about".

She said in her affidavit that the company had never received any invoice from Master Paving and in particular it had not received an invoice which would entitle Master Paving to payment of the sum claimed in the statutory demand.

Lastly she exhibited a copy of the accounts of the company prepared for the year ended 30 June 1996.

Apart from the balance sheet which had previously been exhibited, she exhibited a profit and loss statement. The profit and loss statement for the year to 30 June 1996 shows a trading profit of $1,220,286 and an operating profit before income tax of $35,337. The notes to the balance sheet were again not included.

A further affidavit of Mr Peter Heading was filed deposing to the matter stated by Mrs Heading in her affidavit in relation to the conversation between Mr Peter Heading and Mr Tom Lomman.

The defendant's application for leave pursuant to s459S came before a Master on 21 April 1997. The defendant company sought leave pursuant to s459S(1)(b). Because the plaintiff relied upon the failure of the company to comply with the statutory demand the defendant company could not, without leave of the Court, oppose the application on a ground that the company could have relied on but did not so rely on in setting aside the statutory demand.

The defendant sought leave from the Master to rely upon three grounds to oppose the winding up. First that it was never indebted to the plaintiff, the contractual arrangements were between Lomman and the plaintiff. Secondly that if it was indebted the debt was compromised in the 19 September 1996 compromise. Thirdly upon the ground that the defendant company was solvent.

The plaintiff did not tender any evidence in opposition to the evidence adduced by the defendant. Particularly the plaintiff tendered no evidence to contradict the defendant's financial statements from which it may be inferred that the defendant was and is solvent. The matter had to be considered therefore on the uncontested evidence of Mr Heading his mother and Mr Lomman.

On 7 May 1997 the Master refused the application for leave. In his reasons His Honour recited briefly the facts relied upon by the applicant and after reference to the section upon which the application was made he said this:

"The company has relied on affidavits of its directors, Peter Heading and Kathleen Heading and Thomas Lomman, the proprietor of Lomman. These affidavits, however, do not raise any matter which the company could have relied upon in an application to set aside the statutory demand."

He then discussed some authorities on this section and concluded:

"I am not satisfied that the apparently harsh effect of the law in this case justifies me exercising my discretion in favour of the company by granting leave under s459S. I consider that the application should be dismissed."

He did so and ordered the defendant to pay the plaintiff's costs of the application.

The defendant has appealed against the decision of the Master and for completeness I set out each of the grounds of appeal. "1. The learned Master erred in finding that the affidavits of Peter Heading, Kathleen Heading and Thomas Lomman (the said affidavits) did not raise matters that the Defendant could have relied upon in an application to set aside the statutory demand of the Plaintiff.

2. That the learned Master erred in coming to a finding, contrary to the finding in paragraph 1 above, that there was nothing in the material contained in the said affidavits that could not have been relied upon in an application to set aside the statutory demand.

3. The learned Master ought to have found that the material in the said affidavits raised a genuine dispute as to the Plaintiff's debt and could have been relied upon in an application to set aside the statutory demand.

4. The learned Master failed to consider the uncontested evidence of the Defendant's solvency contained in the affidavits of Peter Heading and Kathleen Heading ("the Heading affidavits").

5. The learned Master failed to consider that pursuant to Section 459C(3) of the Corporations Law noncompliance with a statutory demand merely raised a presumption of insolvency which could be rebutted by contrary evidence.

6. The learned Master failed to consider that, if the Defendant was granted leave to rely upon the grounds it could have relied upon in an application to set aside the statutory demand, the defendant would have been able to rebut the presumption of insolvency raised by noncompliance with the statutory demand, and further the Defendant would have been able to prove that it was solvent due to the uncontested evidence of the Defendant's solvency contained in the Heading affidavits.

7. The learned Master erred in failing to consider that the purpose of the winding up provisions of the Corporations Law is that insolvent companies should be wound up.

8. The learned Master failed to consider the attempts of the Defendant to challenge the statutory demand and Peter Heading's enquiry of Lomman.

9. The learned Master failed to consider that time was not of the essence in respect of the compromise accepted by the Plaintiff for its debt.

10. The learned Master failed to consider that the said affidavits raised a genuine dispute based on substantial grounds in respect of the Plaintiff's debt claimed in the statutory demand.

11. The learned Master failed to consider the Defendant's lack of appreciation of the effect of not complying with a statutory demand.

The Appellant seeks the following orders on the appeal:- "1. That the appeal be allowed.

2. That the judgment and orders of Judge Bowen Pain made on the 7th May 1997 be set aside.

3. That the Defendant be given leave in opposing the application to wind up the Defendant to rely upon grounds of opposition that it could have relied upon to set aside the statutory demand dated 30 October 1996.

4. That the Respondent pay to the Appellant the costs of and incidental to the Appellant's application dated the 30th January 1997 and of this appeal."

The consequences of a failure to respond to a statutory demand in the time prescribed under the Corporations Law are most serious. A Court must presume that a company which has not made application to set aside a statutory demand, is insolvent if an application is made to wind up that company within three months of the failure of the company to comply with the statutory demand s459C(2). The time limit imposed to apply to set aside a statutory demand cannot be extended. David Grant & Co Pty Ltd v Westpac Banking Corporation
(1995) 131 ALR 353.

The grounds now put forward would have been relevant and indeed apposite to any application to set aside the statutory demand under s459G.

The affidavits, which are unanswered, do disclose facts upon which it might be said that there is a genuine dispute between the company and the respondent about the existence or the amount of the debt. In an application under s459G the defendant would have simply had to satisfy the Court that a genuine dispute existed. The defendant not only claims there is a genuine dispute it claims that the plaintiff is not a creditor and not entitled to the benefit of a statutory demand or to bring any proceedings for winding up.

The circumstances in which a statutory demand will be set aside or varied are provided for in s459H and s459J. In the circumstances of this case the defendant could have maintained upon the factual basis now asserted that there was a genuine dispute between the defendant and the plaintiff about the existence or the amount of the debt and sought to have the statutory demand set aside: s459H(1)(a). Its failure to do so means that it is not entitled to maintain that defence in the winding up.

The defendant can still oppose the application for winding up by proving that it is solvent. Section 459C(3) provides:

"A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the application."

That section clearly contemplates that where the presumption of insolvency has arisen by reason inter alia of a failure by the company to comply with a statutory demand [s459C(2)(a)] the company can still bring evidence to rebut the presumption of insolvency. I think that section contemplates that it is only at the stage of the winding up application that the defendant company may bring forward evidence of its solvency. In so far as Young J said otherwise in Kekatos v Holmark Construction Co Pty Ltd (1995) 18 ACSR 199, I cannot, with respect, agree.

The scheme of Part 5.4 is to provide a creditor with a procedure whereby the creditor can make a demand upon a company. The company can, if it applies within the time prescribed, set aside that statutory demand upon the ground that there is a genuine dispute about the existence of the debt or the amount of the debt, or that the company has an offsetting claim or because of a defect in the notice, substantial injustice will be caused unless the demand is set aside, or there is some other reason why the demand should be set aside.

In my opinion Part 5.4 does not envisage that the recipient of a statutory demand would be entitled to set that statutory demand aside under the Part on the ground of the company's solvency. The statutory demand does not call into question the company's solvency. It simply makes demand for a debt which is due and payable at the time of the statutory demand [s459E].

It would be inappropriate, in my opinion, for a company to say, in response to that statutory demand, that it need not pay because it is solvent. That would be an inappropriate response. The solvency of the recipient of the statutory demand is not a relevant matter for an application to set aside the statutory demand under s459G and could not provide some other reason why the demand should be set aside [s459J]. It would be a very curious result if a company could avoid paying its creditors upon their making a demand by the company simply proving it could pay its creditors. Moreover it could be quite burdensome for a creditor if, upon making a demand upon a company, the creditor immediately became embroiled in an argument as to whether the debtor was solvent. The question of solvency therefore is not a question that can be raised in an application to set aside a statutory demand but can always be raised at the time of the application for winding up, whether or not the defendant company did in the time prescribed make application to set aside the statutory demand.

If the company does not make an application to set aside the statutory demand or if the application is dismissed, and an application is made by any of the persons provided for in s459P (with leave when leave is required), within the time provided for in s459C(2), a court must presume that the company is insolvent. However the company may, without leave of the court, oppose the application on the ground that it is solvent. It may also, with leave of the court, oppose the application on a ground that it relied upon, unsuccessfully, for the purpose of an application to set aside the statutory demand or could have relied upon but did not so rely whether or not an application was made. However the Court will only give leave to oppose on such a ground if the ground is material to proving that the company is solvent. That may mean that the Court will grant leave to oppose a winding up application upon the ground that the debt the subject of the statutory demand is not due and owing by the company to the creditor. That would be in circumstances where the debt was material to the solvency or otherwise of the company. A Court could not grant leave to oppose upon the ground that there was a defect in the statutory demand, because that ground could never be material to the solvency of the company.

Whilst the defendant company can without leave of the Court oppose the application for winding up upon the ground that it is solvent, it cannot raise any other grounds in answer to the application for winding up unless it obtains leave of the Court; and the Court is not to grant leave under s459S(1) unless it is satisfied that the ground is material to proving that the company is solvent.

A defendant company does not need leave to oppose a winding up on the ground that it is solvent. What ground or grounds could s459S(2) then have in mind?

There is no doubt that leave cannot be granted under s459S unless the ground is material to proving that a company is solvent. The existence or otherwise of the debt alleged in the statutory demand will often be material to proving whether the company is solvent. In many cases the debt will be the difference between insolvency and solvency. If that is the case the Court may grant leave to the company to oppose the application for winding up on the ground that there is a genuine dispute between the company and the respondent about the existence or amount of the debt or upon the basis that the debt is not owed by the company even though, as s459S contemplates, the ground could have been relied upon, but was not, in an application to set aside the statutory demand.

If the debt in the statutory demand is small and the company's assets far exceeded its liabilities and it is able to pay its debts as and when they become due and payable then the existence or otherwise of the debt will not be material to the company's solvency and leave will not be granted. There is no hardship to the defendant company in that because it will have a complete defence to the winding up application in any event because it is unquestionably solvent.

The scheme therefore contemplates that the hearing of the winding up application will be confined to matters relevant to the solvency of the company. The scheme when understood that way means that it is only when it is a matter that it is important for the resolution of the question of the defendant company's solvency that the court is called upon, on an application for winding up, to determine whether the debt is due to the creditor.

There is a public interest, as Young J observed in Kekatos v Holmark Constructions Co Pty Ltd (supra), that solvent companies do not get wound up so that the company, its contributories and its creditors are not put to the expense of an administration in insolvency.

The defendant company claims that it is solvent. It has exhibited its Balance Sheet and Profit and Loss Statement.

Moreover it claims that it is not indebted to the plaintiff because there was no contractual relationship between it and the plaintiff but in any event the debt, if there was a debt, was paid in full in accordance with an agreement between it and the plaintiff on 19 September 1996.

I believe the existence or otherwise of the debt is a ground material to proving the defendant company's solvency. That is so because the amount disputed is greater than the difference between the company's current assets and current liabilities. If this debt was recognised as a liability then that would be a material matter in a consideration of this defendant company's solvency.

A further matter which needs to be considered is some assessment of the strength of the ground sought to be put in opposition. I would have thought that the defendant company would need to establish that the ground was arguable before it could benefit by the order. It must be remembered that the company is seeking a statutory indulgence. If it had a good ground to set aside the statutory demand it should have advanced it at the appropriate time and before the creditor was put to the cost of the application for winding up.

I would therefore be entitled to make an order in favour of the defendant company pursuant to s459S. However whether or not the order ought to be made must involve some consideration of why the ground or grounds were not advanced in opposition to the statutory demand. I am mindful of course that the section contemplates the making of an order where an application has been made unsuccessfully under s459G. Whether or not an order should thereafter be made under s459S would involve different considerations.

In this case the directors believed that the company had fully discharged the debt and the company paid a sum of money consistent with the agreement it had reached on 19 September 1996. The directors also believed that the company had, as Tom Lomman told them, "nothing to worry about". Whilst this is a matter of lesser importance they were also not familiar with a statutory demand.

I am satisfied that the ground is material to the company solvency and I am satisfied that the ground is arguable. I am also persuaded that the company has advanced sufficient explanation for its failure to bring this ground forward to set aside the statutory demand.

I therefore would allow the appeal and set aside the order of the Master and in lieu thereof make the following order:

That pursuant to s459S the defendant be given leave to oppose the application to wind up the defendant on the ground that the defendant could have so relied on but did not so rely on to set aside the statutory demand, i.e. on the ground that the company is not indebted to the plaintiff.