Ocean City Ltd (Receiver & manager appointed) v Southern Oceanic Hotels P/L

[1993] FCA 314

Re: OCEAN CITY LIMITED (RECEIVER AND MANAGER APPOINTED)
And: SOUTHERN OCEANIC HOTELS PTY LTD
No. G3017 of 1993
FED No. 314
Number of pages - 4
Corporations
(1993) 10 ACSR 483

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J(1)

CATCHWORDS

Corporations - winding up - no case submission - whether bona fide disputed debt - inquiry into existence of debt - appropriate principles - no case submission rejected.

Cadiz Waterworks Co. v. Barrett 19 Eq 182

In re Great Britain Mutual Life Assurance Society (1880) 16 Ch D 246

Mann v. Goldstein (1968) 2 All ER 769

Stonegate Securities Ltd v. Gregory (1980) 1 Ch 576

In re K.L. Tractors Ltd (1954) VLR 505

Derby Motorplus Pty Ltd v. Swan Building Society (1990) 2 ACSR 239

Re Welsh Brick Industries Ltd (1946) 2 All ER 197

In re QBS Pty Ltd (1967) Qd R 218

Offshore Oil NL v. Acron Pacific Ltd (1984) 2 ACLC 8

Brinds Ltd v. Offshore Oil NL (1985) 63 ALR 94

Bateman Television (In Liquidation) v. Coleridge Finance Co. Ltd (1971) NZLR 929

Avery v. Worldwide Testing Services Pty Ltd (1990) 8 ACLC 1043

HEARING

PERTH, 4, 5, 9 March 1993

#DATE 11:3:1993

Counsel for the Applicant: Mr J. Chaney

Solicitors for the Applicant: Minter Ellison Northmore Hale

Counsel for the Respondent: Mr W. Martin

Solicitors for the Respondent: Freehill Hollingdale and Page

JUDGE1

FRENCH J The applicant's case depended at the threshold upon the existence of a debt by way of unpaid rent in excess of $5 million owed to it by the respondent under the terms of a lease made in June 1988. The applicant has tendered evidence of the terms of the lease and the amount of unpaid rent based upon an examination of its own accounting records, including those relating to a loan account between the applicant and the respondent. It has also disclosed the existence of a deed between the applicant and the respondent purporting to vary the terms of the lease and releasing the respondent from all arrears of rent and providing prospectively that payment of rent should be dependent upon the operating profit of the respondent. The deed is called the Second Supplemental Deed. The variation effected by it did not purport to extinguish all liability for payment under the lease. The obligation to pay Aggregate Outgoings appears to have been preserved and if not preserved, to have been revived by a subsequent deed of Ratification Confirmation and Rectification. The Second Supplemental Deed was purportedly executed on behalf of both applicant and respondent by the one person, an employee of Ferrier Hodgson and Co, appointed as attorney for both. The applicant has tendered evidence which suggests that the power of attorney under which that person acted was not authorised by the directors or a committee of the directors as required by the company's articles. Beyond the contention that there should be a presumption of regularity, there is no evidence to rebut the inference of invalidity which is open on the material presently before the Court. That material includes a notice of a meeting of the directors of the applicant for 22 November 1992 to ratify, after the event, the granting of the power of attorney to execute the Second Supplemental Deed. The meeting was not held, no doubt being overtaken by the event of the appointment of Mr Coates as receiver on 18 November 1992.

1. It is well established that if there be a dispute on substantial grounds as to the existence of the debt relied upon by the party seeking a winding up order and this is able to be established in limine, then generally speaking the application should not proceed because the applicant is not a creditor within the meaning of s.460 of the Corporations Law. In its origins the principle seems to have been based, at least in part, upon the proposition that the court should restrain the assertion of doubtful rights in a manner productive of irreparable damage - Cadiz Waterworks Co. v. Barrett 19 Eq 182 per Malins VC followed by Jessell MR in Niger Merchant Co. v. Capper. The latter case was decided in 1877 but remained unreported until footnoted to the report of In re Great Britain Mutual Life Assurance Society (1880) 16 Ch D 246. The possibility that the presentation of a petition might do unfair and irreparable damage to a company when based upon a disputed debt was adverted to by Ungoed-Thomas J in Mann v. Goldstein (1968) 2 All ER 769 at 775. In that case, which concerned the question whether a petition could proceed on a disputed debt where the company was insolvent, his Honour preferred to base the power to dismiss the proceedings on the uncomplicated foundation of statutory construction:
   

"For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds) since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the companies court;"

That statement was adopted by Buckley LJ in Stonegate Securities Ltd v. Gregory (1980) 1 Ch 576 at 580. Buckley LJ went on to say that:

"In my opinion a petition founded on a debt which is disputed in good faith and on substantial grounds is demurrable for the reason that the petitioner is not a creditor of the company within the meaning of section 224(1) (Companies Act 1948) at all, and the question whether he is or is not a creditor of the company is not appropriate for adjudication in winding up proceedings."

The universality of the last proposition is controversial in the light of other authority. Even so, the exposition of principle in Mann v. Goldstein leaves to the judge in the winding up proceedings the task of determining whether there is or is not a bona fide dispute on substantial grounds. The question then arises how far the inquiry into that issue may go and what happens in the event that it can also lead to a convenient and economic determination of the merits of the dispute. This is a point to which I shall return below.

1. The respondent says that the existence of the Second Supplemental Deed disclosed in the applicant's own evidence leads to the conclusion that there is a dispute as to the existence of the debt and that that dispute is based on substantial grounds. I do not accept that submission. The applicant has set up a case for the existence of a debt and the invalidity of the Second Supplemental Deed which is unanswered by evidence, albeit reliance is placed, from the bar table, upon the existence of a presumption of regularity. It is well established that the mere denial of the existence of a debt or indeed the assertion of a defence or set off does not establish a dispute. If there is a dispute, it must be demonstrated that it is based upon a substantial ground - In re K.L. Tractors Ltd (1954) VLR 505 at 509. The company which seeks to demonstrate such a ground must bring forward a prima facie case which satisfies the Court that there is something to be tried - In re Great Britain Mutual Life Assurance Society (1880) 16 Ch D 246 at 253; Derby Motorplus Pty Ltd v. Swan Building Society (1990) 2 ACSR 239 at 241 per Nicholson J (Pidgeon and Rowland JJ agreeing). In the latter case, the Full Court of the Supreme Court of Western Australia held that a Master of that Court had not erred when he said in the course of winding up proceedings, that it was for the respondent company to satisfy him that the petitioner's claims were the subject of a bona fide dispute on substantial grounds. Nor had he mistaken the test he had to apply when he found that the respondents had not shown a prima facie case establishing an agreement between them and the petitioner. Lord Greene said in Re Welsh Brick Industries Ltd (1946) 2 All ER 197 at 198 that the winding up Judge must go into the matter himself and consider whether or not the dispute is a bona fide dispute or, putting it another way, whether or not there is some substantial ground for defending the action. In In re QBS Pty Ltd (1967) Qd R 218 at 225, Gibbs J left open the possibility that the Judge in winding up proceedings might, in an appropriate case, determine the merits of a disputed debt:
   

"It seems to me that in every case it becomes necessary for the court to exercise its discretion as to how far it will allow the question whether or not the dispute is bona fide to be explored. In some cases it may be very easy to decide this question on the petition and affidavits in reply. In other cases however it may be difficult to determine whether or not the dispute is bona fide without determining the merits of the dispute itself. In some such cases convenience may require that the court decide the question whether or not a debt exists, but in other such cases it may appear better to allow that question to be determined in other proceedings before the petition for winding up is heard."

I must say, with respect, that I find that approach more attractive and consistent with modern notions of seeking the most economic and efficient use of judicial time than a more rigid approach which would mandate in every case of disputed debt the splitting off of the dispute however easily determined and the stay or dismissal of winding up proceedings pending its determination. It was the approach also adopted by Needham J in Offshore Oil NL v. Acron Pacific Ltd (1984) 2 ACLC 8, where his Honour said:

"Although the defendant submitted that these proceedings should be dismissed, as there exists a bona fide dispute between the parties as to the liability of the defendant, and the proceedings to resolve that dispute have already been commenced, it seems to me that, the only issue between the parties in these proceedings being the proper construction of the deed of 25 November 1982, so far as it regulates the relationship between the plaintiff and the defendant, the question at issue can be resolved as easily in these proceedings as in those commenced by the defendant. The defendant has conceded that the only defence it has to offer against the claim of the plaintiff to wind it up is the assertion it makes as to the proper construction of the deed."

1. The passage quoted from the judgment of Gibbs J in In re QBS Pty Ltd was expressly approved by the Privy Council in Brinds Ltd v. Offshore Oil NL (1985) 63 ALR 94 at 99. It accorded with reasoning adopted by their Lordships in an earlier decision on appeal from New Zealand, namely Bateman Television Ltd (In Liquidation) v. Coleridge Finance Co. Ltd (1971) NZLR 929 at 932 where it was said:
   

"One matter argued before their Lordships can be dealt with very shortly. It was argued that as the debts in question were disputed debts no winding up order should have been made, and for this purpose their Lordships are prepared to assume that the debts were genuinely disputed debts.

In such cases the general rule is, no doubt, that no order will be made on a petition founded on such debts. But each case must depend upon its own circumstances and it is a question for the discretion of the Judge; a discretion to be exercised judicially, which is not open to review unless it is shown to be exercised on some wrong principle, or that the Judge relied on some fact irrelevant for the purpose, or omitted consideration of a relevant fact or finally that he was wholly wrong."

In that case the disputed questions of indebtedness had been fully investigated in a lengthy hearing before the Judge with oral and documentary evidence and he had held that both appellant companies were insolvent. It should also be said however, that neither side had ever suggested to the Judge that the petitions should be dismissed or stayed on the ground of disputed debts pending the bringing of appropriate proceedings at law to determine those matters. And in Avery v. Worldwide Testing Services Pty Ltd (1990) 8 ACLC 1043 at 1045, Seaman J (with whom Pidgeon and Wallwork JJ agreed) accepted that the court is required to exercise its discretion as to how far it will allow the question whether or not a dispute is bona fide to be explored and cited in that respect in In re QBS Pty Ltd and Brinds.

1. The evidence of the applicant supports an inference that the Second Supplemental Deed was not validly executed. No substantial answer has yet been advanced to that contention. In my opinion it cannot be said at this stage that the question of the substantiality of the dispute has been resolved or that the standing of the applicant as a creditor has been impugned. It is still in the hands of the respondent to decide if it will bring evidence on this issue. Whether the case is one which can accommodate an inquiry beyond the question of the existence of a bona fide dispute on substantial grounds, will depend upon that evidence. I should add that the sums payable under the lease included Aggregate Outgoings which do not appear to have been affected by the Second Supplemental Deed. If that conclusion be open, and I think it is on the present state of the evidence, then even if there be a bona fide dispute in relation to the rent, the Deed may not affect the position with respect to the outgoings.

2. I am not prepared to dispose of the application at this stage on the basis that the applicant lacks standing as a creditor in respect of rent due under the lease. I should emphasise however, that I do not regard the question of standing as a creditor as necessarily concluded by this ruling. It will be open to the respondent to submit at the close of its case that I should conclude either that there is no debt or that there is a bona fide dispute on substantial grounds as to the existence of the debt.

3. The question could then arise whether the applicant is, in any event, a contingent creditor by reason of its conditional entitlement to rent under the terms of the lease as varied by the Second Supplemental Deed. Assuming that the applicant may have to fall back upon a claim that it has status as a contingent creditor, the respondent submits that no prima facie case for winding up has been made as required by s.462(4)(b) of the Corporations Law. The point is made that the contingency upon which the applicant becomes entitled to be paid under the Second Supplemental Deed is one in which the respondent trades at a profit. That is not to say that such a situation is inconsistent with the existence of a just and equitable ground for winding up or indeed inconsistent with insolvency. Of course the posited validity of the Second Supplemental Deed would considerably diminish the applicant's case. In my opinion, however, the question whether the applicant is forced to fall back upon its status as a contingent creditor is at this stage a hypothetical one. It will depend on the view I ultimately form of its claim to creditor status based upon the unpaid rent. As to the question generally whether there is a case to answer on solvency and the just and equitable grounds, there is, in my opinion, sufficient evidence to support argument that the necessary inferences can be drawn. That is not to say that the case is a strong one on the evidence as it presently stands or that in the absence of answering evidence, the necessary inferences would be drawn.

4. In all the circumstances, in my opinion, the application should now proceed and the respondent should, if it elects to do so, call its evidence.