Perpetual Nominees Ltd v Masri Apartments Pty Ltd

[2004] NSWSC 551

Reported Decision: 49 ACSR 719
(2004) 22 ACLC 975

Supreme Court

CITATION:	Perpetual Nominees v Masri Apartments; Perpetual Nominees v AUS Constructions [2004] NSWSC 551
HEARING DATE(S):	7 & 21 June 2004
JUDGMENT DATE:	24 June 2004
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Orders to be made for winding up and appointment of liquidator
CATCHWORDS:	CORPORATIONS - winding up - insolvency - statutory demand served but not received - whether for purposes of s 459S, company "could have" relied on genuine dispute as to debt and formal defects in demands, when it did not receive them within time - whether plaintiff's debt due and payable - whether court should decline relief on discretionary grounds where administrator supports a vague proposal for a deed of company arrangement
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss 459A, 459C, 459G, 459J, 459S, 461 Corporations Regulations, Sch 2 Form 509H Supreme Court (Corporations) Rules 1999, rule 5.2
CASES CITED:	B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181 Daewoo Australia v Suncorp Metway (2000) 48 NSWLR 692 David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265 Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 25 ACSR 675 Lane Cove Council v Geebung (No 2) [2002] NSWSC 118 Mann v Goldstein [1968] 1 WLR 1091 Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 177 FLR 330
PARTIES :	2513/04 Perpetual Nominees Ltd (P) Masri Apartments Pty Ltd (D) 2514/04 Perpetual Nominees Ltd (P) AUS Constructions Pty Ltd (D)
FILE NUMBER(S):	SC 2513/04, 2514/04
COUNSEL:	D McIntosh (Sol) (P) J Chippindall (D)
SOLICITORS:	Gadens Lawyers (P) M D Nikolaidis & Co (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

THURSDAY 24 JUNE 2004

2513/04 PERPETUAL NOMINEES LTD V MASRI APARTMENTS PTY LTD
2514/04 PERPETUAL NOMINEES LTD V AUS CONSTRUCTIONS PTY LTD

JUDGMENT

HIS HONOUR:

The proceedings

1 The plaintiff in each of these two cases ("Perpetual") seeks orders for the winding up of the defendant company ("Masri Apartments" in one case and "AUS Constructions" in the other), and for the appointment of a liquidator. The winding up orders are sought on either the ground of insolvency (s 459A of the Corporations Act) or the just and equitable ground (s 461(1)(k)). Perpetual was custodian for two loans made by MFS Premium Income Fund (formerly MFS Capital Insured Income Fund) to AUS Constructions, guaranteed by Masri Apartments. The responsible entity for the MFS Premium Income Fund is McLaughlins Financial Services Ltd ("MFS").

2 The two companies, AUS Constructions and Masri Apartments, are connected through their controllers, Lawrence DeBono and Samir Masri. They acquired control of AUS Constructions through share transfers and resignations of the former directors, which apparently have not yet been registered with ASIC. Masri Apartments has acquired a development site at 16-18 George Street Liverpool, and AUS Constructions is the developer, for the construction of a 9 storey residential home unit building comprising 45 units. MFS Premium Income Fund was the financier for the project, and now seeks to wind up the two companies because they have defaulted under their loan agreements and failed to meet statutory demands.

3 The final hearing of the winding up applications took an unusual course. The hearing was set down before the Registrar for 24 May 2004. On 21 May 2004 Mr Hugh Wily was appointed administrator of both companies, by their directors. The Registrar stood the proceedings over to 7 June 2004, and on the latter day he referred the files to me as Corporations List Judge. I then considered an oral application by the defendants for an adjournment of the hearings under s 440A, but I declined the adjournment, delivering ex tempore reasons for that decision. Essentially I was not satisfied that it would be in the interests of the companies' creditors for the companies to continue under administration rather than liquidation, because there seemed to be no concrete or comprehensible proposal for deeds of company arrangement.

4 Counsel for the defendants then informed me that he wished to contend that the statutory demands upon which Perpetual relied had not been properly served. Having regard to the other demands on the court's time in a busy Corporations List, I decided it would be appropriate to hear evidence and submissions on that point and defer the taking of other evidence until the point had been resolved. The parties concurred in this course. I did not formally make orders under Part 31 rule 2.

The presumption of insolvency

5 Having completed the hearing to that extent on 7 June, I delivered written reasons for judgment on 9 June 2004 ([2004] NSWSC 500). I reached the conclusion that the statutory demands had been properly served by posting them on 10 March 2004 to the addresses of the registered offices of the two companies as recorded in ASIC's records, even though notices of change of the addresses of the registered offices were lodged before and processed by ASIC shortly after the statutory demands were posted. I accepted unchallenged evidence on behalf of the two companies that the statutory demands had not been received, but I pointed out (citing authority) that non-receipt is not sufficient to prove non-delivery. My reasoning is consistent with the reasoning of Barrett J in Lane Cove Council v Geebung (No 2) [2002] NSWSC 118, although that decision was not cited to me by the legal representatives of the parties and is not referred to in my judgment of 9 June.

6 Subject to one qualification, the consequence of my conclusion as to proper service, coupled with the failure of the companies to comply with the demands (as defined in s 459F), was that Perpetual thereafter had (and continued to have, until completion of the final hearing) the benefit of the presumption of insolvency arising under s 459C(2)(a). The qualification is that, for reasons I shall explain, I have allowed the defendants to challenge the statutory demands by alleging formal defects, notwithstanding s 459S. Had those challenges succeeded (they do not, as will be seen), the presumption of insolvency would not have arisen.

Section 459S

7 Section 459S(1) states that, insofar as an application for a company to be wound up in insolvency relies on the company's failure to comply with a statutory demand, the company may not, without the leave of the court, oppose the application on a ground that it could have, but has not, relied on for the purposes of an application by it for the demand to be set aside (whether it made such an application or not). I expressed the opinion in my reasons for judgment (at [19]) that s 259S(1) did not apply so as to prevent the companies from complaining of improper service of the statutory demands. My reasoning took into account the fact that the companies and their directors did not receive or become aware of the statutory demands until service of the originating process for winding up, and the fact that they lodged notices of change of address of registered offices prior to 4 March 2004. In these circumstances, in my view, the defendant companies could not have made applications for winding up within the 21-day time period set by s 459G(2). A fortiori, in a factual sense they could not have raised the issue of incorrect service for the purposes of any such application.

8 It follows from that reasoning that the defendant companies were equally unable, within the timeframe prescribed by s 459G, to establish a genuine dispute about the existence or amount of the debts claimed by Perpetual, or a genuine cross-claim, or to draw attention to any formal defects in the statutory demands. Therefore s 459S does not prevent the companies from raising these matters at the final hearing of the winding up applications. Counsel for the defendants told the court that he had instructions to make an application under s 459S(1) for leave to contend that there was a genuine dispute about the debts claimed by Perpetual, and to contend that the statutory demands and the affidavits supporting them were not in proper form, but I ruled that, having regard to the reasoning in paragraph [19] of my earlier judgment, such an application was unnecessary. I proceeded to hear evidence and submissions on those issues.

9 My reasoning with respect to s 459S warrants some elaboration. The central proposition in my reasoning is that the words "a ground ... that the company could have ... relied on [in an application to set aside the statutory demand]" in s 459S(1)(b) direct the attention of the court to whether, having regard to the facts, the company was in a position, at any time during the 21 day period specified by s 459G(2), to raise the relevant grounds in an application to set aside the demand. In the present case, the evidence indicates that the demands, though properly served by posting, were not received until after service of the originating processes, well after the end of the 21 day period beginning at the time of service. The directors of the defendant companies passed resolutions to rectify ASIC's records of the registered offices of the companies, on 20 February 2004. Notices of change of addresses of registered offices were posted by one of the directors to ASIC on about 1 March 2004. There is no evidence as to whether the directors made any arrangements for receipt of mail addressed to the old registered offices after that time, but it seems to me implausible to contend in the present case that they were under any specific duty to do so. There is nothing in the facts to suggest, and it has not been submitted, that the directors of the defendants deliberately timed their notifications to ASIC so as to thwart Perpetual's attempts to serve the statutory demands. The problem that arose was essentially a problem caused by the transition from one registered office to another, and it is not to the point that the defendants might have been more prompt in notifying their change of registered office to ASIC.

10 The legal representatives of the parties have not cited any case directly in point. There is, however, an analogy between the facts of the present case and the facts of Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181. In that case the defendant wished to raise, in opposition to a winding up application, the contention that the debt asserted in the statutory demand had been reduced in consequence of a receiver's sale, and that the defendant had an offsetting claim because of the alleged inadequacy of the sale price. The receiver's sale occurred well after the expiry of the 21 day time limit for challenging the statutory demand.

11 Barrett J held that leave under s 459S was not required. He reasoned that the grounds introduced by the defendant could not have been relied on by it in making an application to set aside the statutory demand, because the relevant facts occurred after the expiry of the 21 day period. He added the following observations (at [10]), with which I respectfully concur:

"Implicit in what I have just said is the proposition that, in speaking of 'a ground … that the company could have relied on', s 459S is concerned not with a ground of a particular kind or description in a generic sense but, rather, with a ground that was actually available to be asserted according to the facts and circumstances existing at the time when it was open to the company to resort to the s 459G procedure."

12 In my opinion, to construe s 459S(1)(b) in the way that I have outlined is not to contradict or undermine the legislative policy standing behind the section, as explained by Gummow J in David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265 and by Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661. The legislative policy is that the provisions relating to the setting aside of a statutory demand are to be a complete code for the resolution of disputes about the subject matter of the demand, thereby preventing disputes about the underlying debt from being contested at the hearing of the winding up application: Switz, at 672 [39]. But that policy assumes that the debtor company has the opportunity to make an application, within the prescribed time limit, to set the demand aside. Such an opportunity will exist if the statutory demand is both properly served and comes to the notice of the company's directors in a timely fashion. Arguably, the opportunity will also exist if, although the directors did not in fact discover the existence of the statutory demand within the time limit, they would have done so if they had acted reasonably in the superintendence of the collection of mail from the company's registered office. Where, however, it is established on the evidence that the directors of the company did not become aware of the existence of the statutory demand until after the expiration of the 21-day period, and they have acted reasonably with respect to superintendence of the collection of mail from the company's registered office, the case is one where the company could not, in a factual sense, have relied on any of the grounds available to challenge the demand within the time period. In such a case, fairness requires that the company be permitted to raise those issues at the only hearing available to it, namely the final hearing of the application for winding up, even though to that extent one reverts to the old practice which the Harmer reforms were intended to reverse.

13 The present case falls within this last category, having regard to the matters of fact to which I have referred. That is why I ruled, on 21 June 2004, that it was open to the defendants to adduce evidence to show that there was a genuine dispute as to the debts claimed in the statutory demands, and to make submissions challenging the statutory demands and supporting affidavits for formal defects.

Alleged formal defects in statutory demands

14 The defendants make two formal challenges to the validity of the statutory demands, namely that they failed to give an address for service in New South Wales, and the supporting affidavits did not comply with the rules. They submit that because of these defects, no presumption of insolvency has arisen. I disagree, for the reasons set out below.

No address for service within the jurisdiction

15 The prescribed form for a statutory demand (Form 509H) requires an address of the creditor for service of copies of any application and affidavit to be within the State or Territory in which the demand is served. Under s 459J, on an application under s 459G, the Court may by order set aside the demand if it is satisfied that (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside.

16 In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, the Full Federal Court held that a demand is to be set aside for a defect in the demand itself, only if a substantial injustice would otherwise be caused for the purposes of s 459J(a). In Daewoo Australia v Suncorp Metway (2000) 48 NSWLR 692, 705 I applied Spencer Constructions, holding (at 706-707) that a failure to supply a New South Wales address did not cause any substantial injustice in that case.

17 The defendants challenge the demands, on the ground that they did not contain an address for service in New South Wales. They provided an address in Victoria. However, both parties appeared before the court in New South Wales and it was not contended that there was any inconvenience or disadvantage to the defendants caused by the defect in the demands. There could not have been, as they did not receive them.

18 In my view, the absence of an address for service would not have led to the setting aside of the demands if timely applications had been made, and it can have no significance now.

Affidavit defective in form

19 Rule 5.2 of the Supreme Court (Corporations) Rules 1999 (NSW) provides that

“For the purposes of subsection 459E(3) of the Act, the affidavit accompanying a statutory demand relating to a debt, or debts, owed by a company must:
(a) be in accordance with Form 7 and state the matters mentioned in that Form; and
(b) be made by the creditor or by a person with the authority of the creditor or creditors…”

20 A deficiency in an affidavit accompanying a statutory demand is not a “defect in the demand” to be dealt with under s 459J(1)(a), but could be “some other reason” why the demand should be set aside under s 459J(1)(b): B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433; Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 177 FLR 330; 14 ACSR 565; Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300.

21 The defendants attack the affidavits on two bases. They say that the affidavits do not comply with Form 7, and that they are not sworn by a director of the creditor, but rather by a director of the responsible entity for MFS Premium Income Fund, McLaughlins Financial Services Ltd.

22 The submissions did not specifically identify which aspect of Form 7 was not complied with. Non-compliance with Form 7 is to be decided having regard to all the circumstances of the case and there is no iron-clad rule that a defect in the affidavit will mandate the setting aside of the demand: Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 25 ACSR 675, 695.

23 On the present facts, each of the affidavits identifies the deponent’s position in relation to the debt; states that he is authorised to make it; states that he has inspected the records of the creditor; verifies the amount of the debt; and refers to the demand itself for details of the debt. The affidavit does not fully state the source of the deponent’s knowledge of the matters stated in the affidavit in relation to the debt, although the deponent says he is a director of the responsible entity and he has inspected the business records of the creditor. In my view the contents of the affidavit are more than substantially in accordance with the Form, and there would be no reason to set the demands aside on this basis, if timely applications had been made.

24 Rule 5.2(b) of the Supreme Court (Corporations) Rules states that the affidavit accompanying the statutory demand must be made “by the creditor or by a person with the authority of the creditor or creditors.” The creditor is Perpetual. Mr King says in his affidavits that he is a director of McLaughlins Financial Services Limited, the responsible entity for the MFS Premium Income Fund, of which Perpetual is the custodian and creditor, and that he is authorised by the creditor to make the affidavits. These statements were not challenged. They constitute compliance with the requirement in rule 5.2(b).

Evidence with respect to solvency

25 The evidence before me includes reports to creditors of the two companies by Mr Wily as voluntary administrator, dated 9 June 2004. The reports deal with the current financial position of the companies. The evidence in this part of the reports has not been challenged and I accept it.

26 Mr Wily reported that the only asset of Masri Apartments is its land in Liverpool, valued by the directors at $3.6 million. He said that he had received an appraisal value of the land from a real estate agent, in the range of $2.925 to $3.5 million. He concluded that in a best-case scenario the property could be sold for $3.5 million. The only asset of AUS Constructions is a debtor listed at $250,000. The debtor is the builder for the development, who has received that amount as a prepayment for the construction of the units.

27 The Liverpool property and the assets of the two companies are secured by registered mortgages and floating charges in favour of Perpetual as custodian for the MFS Premium Income Fund. At the time of Mr Wily's appointment on 21 May, the secured creditor's debt according to its proof of debt stood at approximately $3.59 million. Realisation of the assets of the companies may produce just enough to pay out the secured creditor, but there would be little or nothing left for unsecured creditors.

28 Mr Wily reported that Masri Apartments has eight unsecured creditors totalling $293,227, including three related creditors totalling $1,030. Its profit and loss statement for the year to 30 June 2003 disclosed a net loss of over $13,000 and expenses of over $28,000 including interest of over $21,000.

29 AUS Constructions is said to have 15 unsecured creditors totalling about $2.55 million, including eight related creditors totalling $2.128 million. Mr Wily reported that the directors told him they had not made a demand for repayment of any of the related entity loans, and that the loans would be repaid after completion of the construction of the units. The company's profit and loss statement for the year to 30 June 2003 showed a net loss of over $7,000, and expenses of over $6,700 including interest of just over $6,000.

30 Under s 95A, the insolvency of a company depends upon whether it is able to pay all its debts, as and when they become due and payable. Putting to one side the question whether the secured debt has become due and payable, Mr Wily's reports show that Masri Apartments has external unsecured debts of over $290,000, and AUS Constructions has external unsecured debts of over $400,000. There is no direct evidence as to the terms of repayment of those debts, and therefore nothing to show directly whether they are now due and payable and whether the creditors are demanding payment. But the inference is available that they are due and payable in the short term, having regard to the nature of the companies’ business. Whether for valid reasons or not, the secured creditor regards the companies as in default and is not prepared to provide any more money to them. Those facts would imply that the companies are insolvent within the definition in s 95A, without taking into account the very large debt claimed by the secured creditor.

31 As far as I can see from the evidence, the only way of resisting that conclusion would be for the companies to argue that they have recourse to refinancing, which could produce funds, in a sufficiently timely fashion, to meet the demands of creditors. But that contention would need to be supported by evidence. The evidence includes a letter from the solicitors for the companies dated 26 March 2004, which encloses a letter from Donovan Oates Hannaford Mortgage Corporation Limited approving an application for a mortgage advance of $10.4 million subject to many conditions. But there is no evidence to show that this available source of finance remains, or that the conditions can be met. One would have expected that if finance were available in March 2004, after the secured creditor had issued notices of demand under its mortgages, it would have been taken up by now, and therefore it seems to me more likely than not that the offer has expired.

32 I therefore conclude that the companies have not rebutted the presumption of insolvency, even if one puts to one side Perpetual's claim that the secured debt has become due and payable. Indeed, on the evidence as a whole, insolvency is established on the balance of probabilities without recourse to any presumption, and without taking into account Perpetual's claim to immediate payment of the secured debt. However, since much of the evidence and submissions at the hearing on 21 June was directed to the status of Perpetual's claims, it is necessary to give attention to that question.

The debts claimed by Perpetual

33 Perpetual made two loans to AUS Constructions, supported by guarantees by Masri Apartments and others, by first and second mortgages over the Liverpool land, and corporate charges. The first loan was made under a loan agreement dated 17 September 2003, for an amount not exceeding $10,078,000. The second loan was made under a loan agreement bearing the same date, for an advance not exceeding $2,028,400. It was at a higher interest rate than the first loan, secured by second-ranking securities. But on the matters material to this case, its provisions were the same as the provisions of the first loan agreement.

34 The first loan agreement provided for an initial drawdown amount and subsequent drawdowns for approved purposes, relating to the acquisition of the Liverpool property and the construction of a 9 storey apartment building on it. By clause 8A the borrower was required to provide the lender with certified copies of not less than 15 complying contracts (as defined in) within 60 days of the first drawdown. Clause 7, dealing with events of default, said that the borrower shall, at the option of the lender, be immediately in default in upon the occurrence of any of a list of events of default. That list included the following:

"7.18 If a caveat or other encumbrance is registered against the Security Property without the Lender's consent."
7.21 If the Borrower fails to provide the Lender with certified copies of at least fifteen (15) Complying Contracts within 60 days of the Advance Date."

I should also note "7.13 If in the opinion of the Lender there is a material adverse change in the financial condition of the Borrower".

35 By clause 8, the lender was empowered, at any time after default, to cancel the facility and require payment of the debt (defined as the sum of all advances together with interest calculated under the instrument).

36 Deeds of guarantee and indemnity in respect of each of the two loans were entered into by Masri Apartments and others on 17 September 2003. Under clause 3 of those deeds, Masri Apartments guaranteed payment of the "guaranteed sums" (broadly defined, in clause 5, to include all amounts owing and payable by AUS Constructions to the lender) "when they are due", and it undertook to pay the guaranteed sums to the lender "on demand if they are not paid by [AUS Constructions]".

37 Two mortgages were executed on 17 September 2003 to secure the loans, and were subsequently registered. They are in identical terms, so far as relevant to this case, except that they apply to the two different loans.

38 Each mortgage contained covenants by Masri Apartments as mortgagor to pay the secured money on demand by the mortgagee unless otherwise agreed in writing (clause 2), "secured money" being defined to include money owing under the guarantee in respect of the loan to AUS Constructions as debtor. Clause 14 provided that if anyone lodges a caveat against the property, the mortgagor must do everything it can and everything the mortgagee requires to remove the caveat. Clause 16.1 defined events of default to include

"(2) if default occurs under any Agreement, this Mortgage or a Collateral Security;"
"(11) if the Mortgagor or, where the Mortgagor is a corporation, a Related Entity of the Mortgagor creates or purports to create, assumes or permits any Encumbrance over any of its assets without the Mortgagee's prior written consent;" ["Encumbrance" is defined in to include a caveat]
"(17) if there is a material, adverse change to the Mortgagor's or the Debtor's assets, financial position or business that, in the Mortgagee's reasonable opinion, might affect the ability of the Mortgagor or the Debtor to comply with its obligations under the Mortgage or a Collateral Security."

39 By clause 17.1 the mortgagee's powers, if an event of default occurs, include the power to demand the immediate payment of the secured money.

40 On 3 March 2004 MFS posted "notices of termination and demand to borrower" to AUS Constructions in respect of each of the two loans, and notices of demand to guarantor and notices under s 57(2)(b) of the Real Property Act 1900 (NSW to Masri Apartments, also in respect of each of the two loans. Although that correspondence was directed to the "old" registered offices, like the subsequent statutory demands, the notices were in fact received by the companies, receipt being acknowledged by their solicitor in a letter dated 26 March 2004, which asked for time to complete a refinancing.

41 As previously noted, statutory demands were posted to the companies at their old registered offices, with covering letters, on 10 March 2004. The amount claimed against AUS Constructions as borrower and Masri Apartments as guarantor was $2,820,628.90. According to the statutory demands, this is the amount of the advance so far made, together with interest and a default fee. The defendant companies do not deny that a substantial advance has been made, and has been used for the purpose of acquiring the Liverpool property. They have not made submissions challenging the calculation of the amount demanded.

42 The principal dispute between the parties relates to whether there has been any default entitling Perpetual to demand repayment of the full amount owing. Perpetual has commenced an action for recovery of possession in the Common Law Division Possession List of this court. The position of the defendants can be conveniently identified by considering their defence to Perpetual's statement of claim. Perpetual relies on three events of default, each of which is denied by the defendants.

The requirement for complying contracts

43 Perpetual claims that the defendants defaulted by failing to provide Perpetual with certified copies of at least 15 complying contracts within the required time limit, which expired on 23 December 2003. The defendants say that the parties agreed in October 2003 to vary the provisions of the loan agreements by requiring only 10 complying contracts. Perpetual denies that the discussions that took place about reducing the required number of complying contracts ever led to a concluded agreement.

44 According to Mr Masri's affidavit, he had discussions with Robert Collins on behalf of MFS Premium Income Fund as a result of which, by 3 October 2003 Mr Collins told him that the lender would accept a reduction to 10 complying contracts, and Mr Masri agreed. Mr Masri says that by the second week in December, 11 complying contracts had been made.

45 Affidavit evidence was given on behalf of the defendants by John Khall, the general manner manager Pacific Mortgage Group Pty Ltd. He participated in discussions between representatives of the defendants and of the MFS group in August 2003, before the loan documentation was signed. He gave evidence that Mr Collins, representing the MFS Group, told Mr DeBono in about mid-August 2003 that he was "confident" that the number of complying contracts would be reduced at a later time, and he urged the defendants to sign the documents. This evidence does not entirely support the defendants' case. Mr Khall's evidence implies that the defendants were well aware that the loan documentation, which they subsequently signed, contained a condition requiring 15 complying contracts. His evidence indicates that Mr DeBono understood the distinction between what would be legally binding under the documentation, and what Mr Collins would be prepared to recommend to the decision-makers of the lender as a subsequent variation.

46 Mr Khall gave evidence of a telephone conversation he had with Mr Collins on 12 January 2004. He said that Mr Collins told him the lender had reduced the number of complying contracts to 11. The conversation was not directly denied by Mr Collins in his affidavit, but Mr Collins' evidence about the decisions of the MFS Credit Committee implies that he would deny making any such categorical statement. In any case, Mr Khall's evidence of the conversation signifies nothing more than a belief on the part of Mr Collins, which proved to be incorrect, about what the Credit Committee decided.

47 The defendants have put into evidence a series of e-mails over the period from October 2003 to January 2004 which, they say, confirm that an agreement was reached to reduce the number of complying contracts from 15 to 10. The e-mails before late November are unhelpful, even though it is alleged that the variation was agreed in October. Beginning on 25 November, there is a string of e-mails between Mr DeBono and Mr Collins, the gist of which is that Mr DeBono was pressing Mr Collins to permit a construction drawdown on the finance facility, and Mr Collins asked for and received a price list for the units. On 19 December Mr DiBono send an e-mail to Mr Collins confirming that contracts had been exchanged for six units, and he was expecting contracts for a further five or six units to be exchanged that day; and he inquired again about the timing of the first construction drawdown. There is no record of any reply.

48 Then there are some e-mails in January 2004 between Mr DeBono and Rachel Werner, of the MFS group. From those e-mails it appears that Ms Werner asked for and received copies of the 11 complying contracts, and put them to the lender's solicitors to confirm that they were satisfactory. On 19 January Ms Werner wrote an e-mail saying that the contracts appeared to be "fine", although confirmation was required with respect of the payment of deposits. On 20 January 2004 the defendants' solicitors wrote a letter setting out confirmation of payment of deposits in respect of the 11 contracts. Mr DeBono continued pressing for the first construction drawdown, and eventually there was an exchange of e-mails in which he provided banking details so that the money could be paid into an AUS Constructions account.

49 The e-mail correspondence before January 2004 seems to me ambiguous as to whether there was any agreement to reduce the requirement for complying contracts from 15 to 10 or 11. The e-mails between Mr DiBono and Ms Werner in January 2004 seem to me to show that Ms Werner was proceeding on the basis that 11 complying contracts would be acceptable to the lender. Even so, the e-mails would be as consistent with the interpretation that the lender had not finally made a commitment to accept 11 complying contracts, as to the interpretation that a committed arrangement had been made.

50 The financing unravelled when, on 2 February 2004, Mr Collins wrote to AUS Constructions attaching amended terms of offer regarding the loan facilities, which proposed to reduce the requirement for complying contracts to 11, to prescribe a requirement for a further 11 complying contracts by 31 July 2004, to impose an "exit fee" of $500,000, and also (in the event that the additional 11 complying contracts were not achieved by 31 July) to impose a risk participation fee of $500,000. The defendants were not prepared to accept the revised offer and subsequently, the loan was placed in default.

51 In his affidavit Mr Collins denied ever having told Mr DeBono or Mr Masri that the lender had agreed to reduce the number of complying contracts from 15 to 10 or 11. He said he did not have the authority to do so, and that the authority to make such a decision rested with the MFS Credit Committee, of which he was not a member. He said that he referred the request for a reduction in the number of complying contracts to the MFS Credit Committee, and in late November 2003 the Committee told him they were prepared to allow AUS Constructions an extension of one month to reach the required number. That meant that the relevant date for compliance became 23 December 2003. Mr Collins said that AUS Constructions did not satisfy the requirements of the loan agreements by 23 December, and in January 2004 the defendants again sought a reduction in the number of complying contracts, and he again referred the request to the MFS Credit Committee. He said that his facsimile of 2 February 2004, offering amended terms including an exit fee and a risk participation fee, reflected the Committee's decision.

52 Mr Collins' evidence is consistent with the series of e-mails and fills in some gaps, by identifying Credit Committee decisions at relevant times. Neither Mr Collins to Mr Masri was cross-examined. It is difficult to reach a firm conclusion on the rather scanty evidence. My view, however, is that it is implausible that a senior lending manager of a lender would have firmly committed to an alteration of terms expressly reflected in the loan documentation that had been approved by the lender, and on the other hand plausible that such a person would have told the borrower that he would recommend an amendment to the relevant decision-making authority. It is plausible, also, that the borrowers, under great pressure to move the project forward, would have attributed too much significance to the lending manager's support for the amendment, and would even have convinced themselves that the lending manager's support was tantamount to agreement on the part of the lender.

53 If it were necessary for me to make a decision on the balance of probabilities, I would conclude from the evidence as a whole that there was no agreement between the defendants and the lender to reduce the number of complying contracts required under the loan agreements from 15 to 10 or 11.

Lodgement of caveats

54 In its statement of claim in the Possession List proceeding, Perpetual contends that caveats were lodged against the Liverpool land on 2 and 6 February 2004, in breach of the loan agreements, and that Masri Apartments has failed to do everything it could to remove the caveats, in breach of the mortgages. In their defence, the defendants admit that two caveats were lodged against the property. They say that the caveators did not have caveatable interests. They say that the first caveat was withdrawn immediately upon it being challenged. They say that the second caveat was lodged by Perpetual's finance broker as a result of Perpetual failing to pay the broker's fees from the loan, and the broker had no caveatable interest.

Material adverse change

55 In its statement of claim Perpetual contends that the caveats and any interests they claim in the land, constitute a material adverse change in Masri Developments Apartments' assets, financial position or business that, in Perpetual's reasonable opinion, affects the ability of Masri Apartments to comply with its obligations under the mortgages. The defendants deny this claim, presumably on the basis that the caveats do not disclose caveatable interests and are not sustainable.

Disputed debts

56 As I have said, in the unusual circumstances of this case it is permissible for the defendants to raise at the hearing of the winding up application matters which, in other cases, could only be raised in an application to set aside a statutory demand. They are therefore able to contend that there is a genuine dispute as to whether the amount claimed in the two statutory demands is due and payable. It is not necessary for the defendants to prove that the amount claimed by Perpetual is in fact due and payable, since there is a broad general principle that a winding up order will not, as a matter of discretion, been made on a debt which is bona fide disputed, provided that the dispute is based on some substantial ground: A Keay, McPherson's Law of Company Liquidation (4th edition, 1999), citing Mann v Goldstein [1968] 1 WLR 1091.

57 In Mann v Goldstein, Ungoed-Thomas J observed (at 1098) 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 the creditor is established as a creditor he is it not entitled to present the petition and has no locus standi". He added (at 1099) that "to invoke the winding-up jurisdiction when the debt is disputed (that is on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court."

58 In the present case, although it seems to me unlikely, on the balance of probabilities, that the court would find that there was any variation of the loan agreements with respect to the number of complying contracts that were required, I can see from the evidence that there is a ground for concluding that there is a genuine dispute between the parties on that matter. Applying the approach described by Ungoed-Thomas J, I should not resolve that issue. Therefore, to the extent that Perpetual relies on the defendants' failure to provide 15 complying contracts within the requisite period, I should not proceed on the basis that Perpetual was right to do so.

59 But Perpetual relies on two other events of default. The lodgement of each of the two caveats, without the lender's consent, was itself an event of default under clause 7.18 of the loan agreements, entitling the lender to require the borrower and the guarantor to pay all advances and interest. It seems to me plain beyond argument, from the language of clause 7, that it is the very lodgement or "registration" of the caveat that gives rise to the default, regardless of whether the caveat might be open to removal or other challenge. That construction is hardly surprising, since a commercial lender is likely to be more concerned about the fact that there is a caveat on the title to the secured property than that the caveat might at some future time, perhaps after litigation, be removed. To the extent that Perpetual relies upon lodgement of the caveats as a default entitling it to require payment of all advances and interest, I cannot see that there is any substantial basis for disputing its claim.

60 I am not able to reach the same conclusion with respect to the "material adverse change" ground under the mortgages. Clause 16.1(17) of the mortgages seems to require that the mortgagee form a reasonable opinion that there has been a real change in the assets, financial position or business of the mortgagor. The mere fact that caveats have been lodged would not, in my opinion, form a reasonable basis for the mortgagee to form this opinion, without some inquiry as to whether the caveats were sustainable.

61 My conclusion is that the amount claimed by Perpetual in the two statutory demands is an amount which cannot be disputed on any substantial ground, having regard to the effect of lodgement of the two caveats under the terms of the loan agreements. No challenge has been made to the calculation of the amounts in the statutory demands. Taking into account Perpetual's claim, the conclusion that the defendant companies are insolvent becomes irresistible. But as I have said, I would have reached that conclusion even if Perpetual's claim were disregarded.

Discretion

62 Mr Wily's reports referred to a proposal received by the directors of the companies for a deed of company arrangement. Under the proposed deed, the directors would fund the legal costs of obtaining an opinion on whether there may be a claim against the secured creditor in relation to the damage that the companies may have suffered due to alleged changes made to the funding agreement during the course of the funding. Under the deed proposal, funding would be provided for litigation if the legal advice was that there was a sustainable claim against the secured creditor. The proceeds of any recovery would be made available for the benefit of the companies' creditors. In his reports, Mr Wily expressed the opinion that it would not be in the creditors' interests for the company to be wound up, and that it would be in the interests of the creditors for the companies to execute deeds of company arrangement as proposed.

63 In my opinion orders should be made for the winding up of the two companies, notwithstanding Mr Wily's opinion. Liquidation will not prevent the companies from obtaining legal advice, and then pursuing any claims they may have against Perpetual or the MFS Group, providing that funding can be obtained. If the directors are not prepared to fund the process, it will be open to the liquidator to seek other kinds of funding including, if there is a good enough prima facie case, litigation funding.

64 I am sceptical about the deed proposal. It does not identify the cause of action which is to be investigated. The nature and source of the funding for the litigation is not specified. Nor is it clear how the proceeds of litigation would be made available to the creditors. By any standard, the deed proposal is extremely and unsatisfactorily vague. The directors have had ample time to put forward a more specific proposal, and every indication that they should do so, after my rejection of the s 440A application on 7 June. I do not see any adequate discretionary basis for declining to make winding up orders.

The just and equitable ground

65 Although Perpetual relied, in final submissions, on this ground as well as the insolvency ground, it seems to me that the arguments advanced related to the discretionary considerations that arise once the insolvency ground is established, rather than to the separate just and equitable ground. In my opinion the facts would not support the making of an order on the just and equitable ground, if the insolvency ground were not available.

Conclusions

66 I am persuaded by the evidence that the two companies are clearly insolvent, and therefore that I should make orders winding them up on the ground of insolvency.

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Last Modified: 06/25/2004