Re Islamic Society Of Melbourne Eastern Region Inc
[2025] VSC 66
•28 February 2025
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2024 04856
IN THE MATTER of ISLAMIC SOCIETY OF MELBOURNE EASTERN REGION INC.
(Registration No A0000943U)
BETWEEN:
| RR GROUP OF COMPANIES PTY LTD. (ACN 605 576 252) as Trustee for the RR FAMILY TRUST | Plaintiff |
| v | |
| ISLAMIC SOCIETY OF MELBOURNE EASTERN REGION INC. (Registration No A0000943U) | Defendant |
---
JUDGE: | Steffensen AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 December 2024 |
DATE OF RULING: | 28 February 2025 |
CASE MAY BE CITED AS: | Re Islamic Society Of Melbourne Eastern Region Inc |
MEDIUM NEUTRAL CITATION: | [2025] VSC 66 |
---
INCORPORATED ASSOCIATIONS – Winding up application under ss 459P and 459A of the Corporations Act 2001 (Cth) – Leave sought to also make the application to wind up pursuant to s 126 of the Associations Incorporation Reform Act 2012 (Vic) – Whether the Corporations Act 2001 (Cth) applies to winding up of incorporated association – Declared applied Corporations legislation matter – Held Parts 5.4 and 5.4B of the Corporations Act 2001 (Cth) apply to applications to wind up an incorporated association – No prejudice to defendant if leave to amend granted – Associations Incorporation Reform Act 2012 (Vic) ss 126, 144, 150 – Corporations (Ancillary Provisions) Act 2001 (Vic) Part 3, ss 14, 15, 16 – Corporations Act 2001 (Cth) ss 5F, 9, Parts 5.4 and 5.4B.
INCORPORATED ASSOCCIATIONS – WINDING UP – Statutory demand for judgment debt – Presumption of insolvency enlivened – Judgment subsequently set aside – Insufficient evidence to rebut presumption of insolvency – Alternative application under s 459S for leave to oppose winding up on grounds the judgment has been set aside and debt is genuinely disputed and plaintiff does not have standing – Whether serious question to be tried as to genuine dispute – Whether the defendant’s conduct in not setting aside the demand was reasonable – Whether debt is material to proving solvency– s 459S application dismissed – Whether to exercise discretion to order winding up – Supporting creditor – Where discretionary factors do not outweigh failure to rebut presumption of insolvency and existence of supporting creditor – Corporations Act 2001 (Cth) ss 95A, s 459A, 459C, 459P, 459S, 467(1)(a) – Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15, applied – Re Kornucopia Pty Ltd (No 4) [2020] VSC 7 and Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No. 2) [2011] NSWSC 113, considered, Re Brooklyn Park & Co Pty Ltd [2024] VSC 611, Re Gladstone Mortgagee No 1 Pty Ltd [2015] NSWSC 1551 and Mutton v Living Australia Pty Ltd [2020] FCA 739; (2020) 145 ACSR 82, considered.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | D McCredden, solicitor | White Cleland |
| For the Defendant | J Catlin | Princeton Legal |
TABLE OF CONTENTS
A.. Introduction
B.. Key Issues for Determination
C.. Does the Corporations Act apply to an application to wind up an incorporated association?
C.1Should leave be granted to amend the originating process to refer to s 126?
D.. Has the presumption of insolvency been rebutted?
D.1 Applicable principles
D.2 Defendant’s submissions
D.3 Plaintiff’s submissions
D.4 Consideration
E... Should leave be granted to the defendant under s 459S?
E.1 Applicable Principles
E.2 Is there a serious question to be tried as to genuine dispute?
E.3 Why was the dispute not raised in an application to set aside the demand?
E.4 Is the dispute about the debt material to proving that the defendant is solvent?
E.5 Conclusion
F... Should the Court exercise its discretion to order the defendant be wound up?
F.1 Applicable principles
F.2 Consideration
G.. Orders
HER HONOUR:
A Introduction
This is an application to wind up the defendant, Islamic Society of Melbourne Eastern Region Inc, in insolvency following the defendant’s failure to comply with a statutory demand. The statutory demand was for a County Court of Victoria judgment which was entered in default of appearance on 25 July 2025. The judgment was $257,199.61, being a debt of $204,159.62, together with interest and costs. The judgment is in respect of seven unpaid invoices issued between January and March 2022 for services provided by the plaintiff to the defendant. After this proceeding was commenced, the judgment was set aside by consent. The defendant has filed a defence in the County Court proceeding, which remains on foot.
The originating process seeks winding up orders pursuant to ss 459A and 459P of the Corporations Act 2001 (Cth) (‘Corporations Act’). However, the defendant is not incorporated under the Corporations Act. Rather, it is an incorporated association governed by the Associations Incorporation Reform Act 2012 (Vic) (‘AIR Act’). The plaintiff seeks leave to amend its originating process to state that it also makes this winding up application under s 126 of the AIR Act, in addition to the above provisions of the Corporations Act. Section 126 gives the Court the power to wind up an incorporated association.
The plaintiff relies upon three affidavits in support of the originating process of its director, Thejaswini Kempaiah, filed on 13 September 2024, 13 November 2024 and 29 November 2024. In addition, the plaintiff relies upon the affidavit of service of the statutory demand of Hayley Karen Palmer filed on 1 October 2024, the affidavit of Alexandra Margaret Taylor filed on 3 October 2024 addressing the lodgement of notice of this application to Consumer Affairs Victoria, and the memorandum of advertisement filed on 3 October 2024. The plaintiff also relies upon written submissions filed on 22 November 2024. There is one supporting creditor.
The defendant opposes the winding up on three grounds:
(a)first, on the basis that the relevant provisions of the Corporations Act do not apply to incorporated associations. The defendant opposes the plaintiff’s application to amend the originating process on the ground that it would cause the defendant to suffer prejudice;
(b)secondly, on the basis that the defendant is solvent;
(c)thirdly, in the alternative to its argument that the defendant is solvent, by interlocutory process filed on 4 November 2024, the defendant seeks leave pursuant to s 459S of the Corporations Act to oppose the winding up application on a ground that the judgment debt on which the statutory demand is based has been set aside. That is, that the demanded debt is genuinely disputed for the reasons raised by the defendant in its defence in the County Court proceeding; and
(d)lastly, if these grounds are not successful, the defendant asks the Court to exercise its discretion to refuse to order that the defendant be wound up.
The defendant relies upon two affidavits of its president, Foaud Hassan filed on 14 October 2024 and 2 December 2024 (which I will refer to as ‘Hassan 1’ and ‘Hassan 2’ respectively), and submissions filed on 26 November 2024 and 2 December 2024.
B Key Issues for Determination
This proceeding raises the following key issues for determination:
(a)Does the Corporations Act apply to an application to wind up an incorporated association? If so, should the plaintiff be granted leave to amend its originating process to refer to the application being made under s 126 of the AIR Act, in addition to ss 459A and 459P of the Corporations Act?
As addressed in Part C, Parts 5.4 (Winding up in insolvency) and 5.4B (Winding up in insolvency or by the Court) of the Corporations Act do apply to Victorian incorporated associations, and it is appropriate to grant the plaintiff leave to amend its originating process given the lack of prejudice to the defendant.
(b)Has the defendant rebutted the presumption of insolvency?
As addressed in Part D, on the evidence before the Court, the presumption of insolvency has not been rebutted. The evidence as to the ability of the defendant to pay its debts as and when they fall due is inadequate. The audited financial statements show a net deficiency in current assets, and no current cash flow information has been adduced which demonstrates the defendant’s ability to pay its debts when they fall due. The defendant has adduced evidence of a document entitled ‘guarantee’ which was submitted to be by Isomer Mosque Incorporated (‘Isomer Mosque’) in favour of the defendant. It was submitted that the defendant was solvent as it could call upon Isomer Mosque to provide it with financial accommodation if required. However, the purported guarantee is not effective. It does not give rise to a contractual obligation upon Isomer Mosque to guarantee debts incurred or owing by the defendant. Accordingly, it does not assist in demonstrating that the defendant is solvent.
(c)Should the defendant be granted leave under s 459S of the Corporations Act to oppose the winding up on the ground that the demanded debt is genuinely disputed?
As addressed in Part E, I am satisfied that there is a reasonable question to be tried on whether the majority of the debt is genuinely disputed. This is because the judgment debt has since been set aside. However, the defendant has failed to satisfy the Court that the disputed debt is material to solvency, and accordingly, the Court must not grant leave under s 459S.
(d)Should the Court exercise its discretion to order that the defendant be wound up?
As addressed in Part F, I have determined that it is appropriate for the defendant to be wound up. There are strong factors which favour a winding up order, namely the failure of the defendant to rebut the presumption of insolvency, and the existence of the supporting creditor. Whilst the fact that the judgment debt has been set aside by consent is a factor which might favour a refusal of the winding up, given the inadequate evidence of the defendant’s solvency, and the existence of the supporting creditor, this does not provide a good reason to allow the insolvent defendant to continue to trade.
C Does the Corporations Act apply to an application to wind up an incorporated association?
It is not disputed that an application to wind up an incorporated association such as the defendant should be made under s 126 of the AIR Act. This section provides that this Court may order the winding up of an incorporated association if the association is unable to pay its debts.0F[1] An application to wind up under s 126 may be made by a creditor of the association.1F[2]
[1]AIR Act s 126(1)(c).
[2]Ibid s 126(2)(c).
The question for this proceeding is whether the Corporations Act provisions relating to windings up also apply to incorporated associations.
To answer this question, it is necessary to have regard to Part 3 of the Corporations (Ancillary Provisions) Act 2001 (Vic) (‘Ancillary Provisions Act’), which addresses the application of Commonwealth Corporations legislation to State matters. The pertinent provisions within Part 3 of the Ancillary Provisions Act are ss 14, 15 and 16:
(a)s 14 provides that Part 3 applies to a provision of law of the State if the provision ‘declares a matter to be an applied Corporations legislation matter’ for the purposes of Part 3;2F[3]
(b)s 15 provides that the effect of a declaratory provision is that ‘the provision or provisions specified by the declaratory provision applies or apply in relation to the matter as if it or they were a law or laws of the State’;3F[4] and
(c)s 16 addresses modifications to Commonwealth Corporations legislation that has been declared to apply as law of the State. Relevantly, it provides that the application of the Corporations legislation is subject to modifications, including those specified in the declaratory provision itself.4F[5]
[3]Ancillary Provisions Act s 14(1).
[4]Ibid s 15(1)(c).
[5]Ibid s 16(1)(a).
Accordingly, the Corporations Act will apply to windings up of incorporated associations to the extent that there is a provision of the law of the State of Victoria which declares the matter to be an ‘applied Corporations legislation matter’ for the purpose of Part 3 of the Ancillary Provisions Act.
This is referred to in s 150 of the AIR Act which states exactly that in relation to Parts 5.4 and 5.4B of the Corporations Act, subject to certain modifications. It is convenient to set s 150 out in full:
150 Winding up by the court
The winding up of an incorporated association by the court under section 126 is declared to be an applied Corporations legislation matter for the purposes of Part 3 of the Corporations (Ancillary Provisions) Act 2001 in relation to the provisions of Part 5.4 (Winding up in insolvency) and Part 5.4B (Winding up in insolvency or by the court) of the Corporations Act, subject to the following modifications—
(a)the modifications referred to in section 145;
(b)any applicable modifications referred to in section 154;
(c)any other modifications (within the meaning of Part 3 of the Corporations (Ancillary Provisions) Act 2001 prescribed by the regulations.
The modifications to Parts 5.4 and 5.4B of the Corporations Act referred to in s 150(a) to (c) of the AIR Act include:
(a)that a reference to a company is to be read as a reference to an incorporated association;5F[6]
(b)that a reference to a document in the prescribed form is to be read as a reference to a document in the corresponding form prescribed under the Corporations Act with all necessary modifications;6F[7] and
(c)certain modifications referred to in s 154 of the AIR Act which relate to offences under the applied provisions. The offences are not relevant to this proceeding.
[6]Ibid s 145(1)(a).
[7]Ibid s 145(1)(j).
The plaintiff submits that the effect of ss 150 and 126 of the AIR Act is that the winding up regime provided for in Parts 5.4 and 5.4B of the Corporations Act applies to incorporated associations. I accept these submissions. Section 150 of the AIR Act states this clearly, by declaring that the winding up of an incorporated association by the court under s 126 is declared to be an applied Corporations legislation matter within the meaning of Part 3 of the Ancillary Provisions Act. The effect of this declaration, as provided for in s 15 of the Ancillary Provisions Act, is that Parts 5.4 and 5.4B of the Corporations Act apply to incorporated associations as if they were laws of the State of Victoria, subject to the modifications set out in s 150(a) to (c) of the AIR Act and s 16 of the Ancillary Provisions Act.
The defendant submits that s 144 of the AIR Act gives rise to an ambiguity as to whether that is the case. Section 144 states:
144 Incorporated association excluded from Corporations legislation
(1)An incorporated association is declared to be an excluded matter for the purposes of section 5F of the Corporations Act in relation to the whole of the Corporations legislation other than to the extent referred to in subsection (2).
(2) Subsection (1) does not apply—
(a)if the incorporated association is a company under the Corporations Act—to the extent necessary for an association to be deregistered as a company under that Act;
(b)if the incorporated association is authorised or directed under Part 8 to become registered as a company under that Act—to the extent necessary for an association to be registered as a company under Chapter 5B of that Act;
(c)for the purposes of Division 5 of Part 5.7B of the Corporations Act and in respect of the definition of corporation applying for the purposes of that Division.7F[8]
[8]None of the exclusions provided for in s 144(2) are applicable to the defendant.
Section 5F of the Corporations Act provides that ‘Corporations legislation’ does not apply to matters declared by State or Territory law to be an excluded matter. ‘Corporations legislation’ is defined to include the Corporations Act.8F[9] Section 144 of the AIR Act is a declaration by State law excluding Victorian incorporated associations from the operation of the Corporations Act, as is contemplated by s 5F of the Corporations Act.
[9]Corporations Act s 9.
The defendant argues that ss 144 and 150 are directly inconsistent, in that s 144 provides that the whole of the Corporations legislation does not apply to incorporated associations, whereas s 150 seeks to apply certain Parts of the Corporations Act to applications to wind up incorporated associations. As I understand it, the defendant argues that given this inconsistency, it is unclear whether s 150 has the effect of applying to an application to wind up an incorporated association as if they were laws of Victoria. The defendant did not make submissions as to the effect of s 150, other than to point out this asserted inconsistency.
As the learned authors of Statutory Interpretation in Australia summarise:
Where there are two provisions in a single piece of legislation which initially appear to be in conflict, since it is ‘improbable that the framers of legislation could have intended to insert a provision which has virtually no practical effect, one should look to see whether any other meaning produces a more reasonable result’[.]9F[10]
[10]Dennis C Pearce, Statutory Interpretation in Australia (LexisNexis Butterworths, 10th ed, 2024) at [2.44] citing Minister for Resources v Dover Fisheries Pty Ltd (1993) 43 FCR 565 at 574; 116 ALR 54 at 63 per Gummow J (accessed on Lexis Advance on 14 February 2025).
In my view, there is no inconsistency between ss 144 and 150 that cannot be reconciled. Section 144 of the AIR Act provides that the whole of the Corporations legislation is an excluded matter. ‘Corporations legislation’ is broadly defined to include the Corporations Act, the Australian Securities and Investments Commission Act 2001 (‘ASIC Act’) and associated rules of court.10F[11] The effect of s 144 of the AIR Act therefore is to entirely exclude an incorporated association from the operation of the Corporations Act, the ASIC Act and associated rules of court. However, s 150 of the AIR Act provides that only specific parts of the Corporations Act apply to an application to the court to wind up an incorporated association. On the defendant’s submission, s 144 operates on its terms, but s 150 would have no practical effect. This cannot be the legislative intention. Rather, given the broader scope of s 144, this must be interpreted as being subject to the more specific provision of s 150, where particular Parts of one piece of ‘Corporations legislation’ is declared to apply to a particular provision of the AIR Act.
[11]Ancillary Provisions Act s 13; Corporations Act Part 1.1A and s 9.
Accordingly, the effect of ss 150 and 126 of the AIR Act is that:
(a)a creditor may serve a statutory demand in the prescribed form (subject to necessary modifications) on an incorporated association under s 459E of the Corporations Act for debts above the statutory minimum;
(b)if that demand is not complied with, the Court must presume the incorporated association is insolvent under s 459C of the Corporations Act;
(c)the regime in s 459G and s 459H of the Corporations Act for applying to set aside a statutory demand served upon an incorporated association applies; and
(d)s 459S of the Corporations Act applies in respect of applications to wind up an incorporated association based on a failure of an incorporated association to comply with a statutory demand, such that an incorporated association requires leave of the Court to oppose the application on a ground that they could have relied upon for the purposes of an application by it for the demand to be set aside.
C.1 Should leave be granted to amend the originating process to refer to s 126?
I do not accept the defendant’s submission that it would suffer prejudice if leave were given to the plaintiff to amend its originating process to refer to s 126 of the AIR Act.
(a)First, throughout this proceeding up until the final hearing, the defendant has proceeded on the basis that Parts 5.4 and 5.4B of the Corporations Act apply to incorporated associations. No complaint was raised in the defendant’s notice of appearance or their evidence opposing the winding up. The defendant has issued an interlocutory process seeking leave under s 459S of the Corporations Act, without any suggestion that s 459S had no application to this proceeding. In that application, the defendant did not raise grounds of opposition that related to the AIR Act or the applicability of Parts 5.4 and 5.4B of the Corporations Act to incorporated associations.
(b)I do not accept the defendant’s submission that this matter was raised with the plaintiff prior to the hearing. In this regard, the defendant’s counsel pointed to a letter from the defendant’s former solicitor dated 25 January 2024. However, the complaints raised therein relate to a different demand, and do not raise any contention that Parts 5.4 or 5.4B of the Corporations Act do not apply to incorporated associations.
(c)The defendant has not pointed to any particular prejudice that it will suffer if leave is granted. The defendant did not submit that it would have done anything differently had the originating process included a reference to s 126 of the AIR Act from the outset. The defendant also did not submit that it would need to adduce any further evidence or require further time for submissions in the event leave to amend is granted.
(d)In circumstances where the relevant provisions of the Corporations Act referred to in the originating process apply to incorporated associations, it is difficult to see what prejudice the defendant could suffer from granting the plaintiff leave to amend their originating process to also refer to s 126 of the AIR Act.
I will therefore grant the plaintiff the leave they seek to amend its originating process to refer to s 126 of the AIR Act.
D Has the presumption of insolvency been rebutted?
On the basis that Part 5.4 of the Corporations Act applies to incorporated associations, the defendant did not dispute that the defendant’s failure to comply with the statutory demand gives rise to the rebuttable presumption provided for under s 459C of the Corporations Act that the defendant is insolvent.
The issue before the Court was whether, on the basis of the defendant’s evidence, the presumption of insolvency has been rebutted.
D.1 Applicable principles
The question of solvency is assessed as at the date of the hearing. In order to discharge the onus of proving solvency, the Court should be provided with the ‘fullest and best’ evidence of the financial position of the defendant.11F[12] Bald assertions of solvency are normally insufficient to prove solvency, even if they are made by qualified accountants who have detailed knowledge of the accounts.12F[13] The test for solvency pursuant to s 95A of the Corporations Act is a cashflow test. Establishing a surplus of assets over liabilities can be indicative of solvency, where the defendant can establish that it is in a position to realise those assets to meet liabilities in a relatively short period of time.13F[14] In determining solvency, the Court has regard not only to the company’s immediately available cash resources, but also to moneys which it can procure by realisation by sale, borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of it.14F[15]
[12]Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075, 1081 (Hayne J); 11 ACSR 609, 617.
[13]Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232.
[14]Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, [44].
[15]Farid Assaf, Assaf’s Winding Up in Insolvency (Lexis Nexis Australia, 3rd Edition 2021), [11.14] (‘Assaf’s Winding Up in Insolvency’), citing Powell v Fryer (2001) 37 ACSR 589 at [75], which was cited with approval in Australian Securities and Investments Commission (ASIC) v Merlin Diamonds Limited (No 3) [2020] FCA 411; 143 ACSR 426.
D.2 Defendant’s submissions
The defendant submits that the presumption of insolvency is rebutted by the evidence it has adduced. The defendant relies upon its audited financial statements for the year ended 30 June 2024, and in particular:
(a)the auditor’s opinion that the defendant is a going concern;
(b)the entity’s cashflows, which show net cash inflows from operating activities of $395,539, and substantial payments to employees and suppliers exceeding $4.5 million during the course of the financial year;
(c)the defendant’s cash holdings – which as at 30 June 2024 were $2,262,124;
(d)the defendant’s revenue for last financial year of $5,149,031, which increased from the previous year by approximately $1.8 million; and
(e)the fact that the majority of the company’s revenue comes from government subsidies, which the defendant submits is a reliable and continuing source of income.
The defendant also relies upon:
(a)a letter from its auditors dated 10 September 2024 which states:
We are the appointed auditors to [the defendant] and in our opinion, which is based on the financial statements as at 30 June 2024, [the defendant] is a going concern and can pay its debts as and when they fall due.
The [defendant] had reported positive net assets of $2,844,558 as at 30th June 2024 and was up to date with all their statutory obligations.15F[16]
(b)a guarantee dated 9 September 2024 by which the defendant submits that a related entity, Isomer Mosque, has guaranteed the defendant’s debts.16F[17] The defendant also relies upon an extract of the financial statements of Isomer Mosque as at 30 June 2024 which shows it has assets valued at $13,829,005, $3.8 million of which is cash and cash equivalents, and no liabilities.17F[18]
[16]Letter from defendant’s auditors dated 10 September 2024, Exhibit FH-1 to Hassan 1, 207.
[17]Guarantee, Exhibit FH-2 to Hassan 2, 4-22.
[18]Isomer Mosque financial statements extract, Exhibit FH-2 to Hassan 2, 23.
D.3 Plaintiff’s submissions
The plaintiff submits that having regard to the defendant’s trading loss in the previous two financial years, and its deficit of current assets to current liabilities, the defendant has not adduced sufficient evidence to establish that it is in a position to pay its debts as and when they fall due. The plaintiff is critical of the defendant for not adducing additional evidence of solvency, such as a formal solvency opinion, cashflow projections as to the future expected income and expenses of the defendant, and documents verifying ownership of assets.
In addition, the plaintiff submits that there are grounds to believe that the defendant’s revenue will soon cease. In this regard, the plaintiff refers to the affidavit of Thejaswini Kempaiah filed on 29 November 2024 (‘Kempaiah 3’), which gives evidence that:
(a)according to an email from the Aged Care Quality and Safety Commission which was sent to Ms Kempaiah in error on 25 November 2024, the accreditation of the defendant’s aged care facility is due to expire on 12 May 2025. The email notes that re-accreditation was due to be applied for by 18 November 2024, and that no application had yet been received. It requests that any application be submitted by 29 November 2024;18F[19]
(b)when Ms Kempaiah rang the Commission to have her email address removed as the contact person for the defendant, the representative of the Commission said words to the effect that the defendant was not seeking accreditation as an aged care facility;19F[20]
(c)if the defendant does not renew its accreditation, it will not be able to operate as an aged care facility, and will be required to refund all of the refundable accommodation deposits it holds on behalf of the current residents of the facility;20F[21] and
(d)the defendant has not responded to the plaintiff’s solicitors who raised this issue with the defendant by letter dated 27 November 2024.21F[22]
[19]Email from Aged Care Quality and Safety Commission to Kempaiah dated 25 November 2024, Exhibit TK-2 to Kempaiah 3, 4.
[20]Kempaiah 3, [7].
[21]Ibid [8].
[22]Ibid 12.
In response to this, the defendant’s counsel offered to give an undertaking to the Court that the defendant will file responding evidence addressing the steps it has taken to ensure that its accreditation will be renewed.22F[23]
[23]Transcript of Proceedings, In the matter of Islamic Society of Melbourne Eastern Region Inc. (Registration No A0000943U) (Supreme Court of Victoria, S ECI 2024 04856, Steffensen AsJ, 2 December 2024) 47:11-17 (‘Transcript’).
D.4 Consideration
The quality of the defendant’s evidence as to solvency is far less than one would expect.
It is of great assistance to have audited financial statements, which give the defendant’s financial position as at 30 June 2024. However, solvency is assessed as at the date of the hearing, and 5 months have passed since the 30 June 2024 financial statements. In an attempt to address this, the defendant has provided a short letter from its auditors which is dated 10 September 2024. However, this further opinion is expressly based upon the audited financial statements as at 30 June 2024. It does not consider any more current information as to the defendant’s financial situation and its capacity to pay its debts as and when they fall due.
The defendant has not adduced a cash flow analysis that identifies the timing of its income and obligations, so as to identify the means by which it will pay its debts as and when they fall due. Such evidence would have been very helpful. Similarly, there is no aged creditor analysis, or evidence addressing the ease with which the defendant may realise its assets in order to pay its debts.
The following matters indicate that the defendant may be able to pay its debts as and when they fall due:
(a)the audited financial statements show that the defendant had significant positive cash flows from its operating activities;
(b)the trade and other payables as at 30 June 2024 totalled $518,977. The financial statements do not address average days taken to pay creditors. However, note 10 to the financial statements states that these liabilities are unsecured, non-interest bearing, and normally settled within 30 days;
(c)the audited financial statements show a cash balance as at 30 June 2024 of $2.26 million, which is a significant sum relevant to the trade and employee creditors then outstanding. However, as I will come to, once the financial liability in respect of resident bonds is taken into account, the defendant has a deficit of current assets to current liabilities;
(d)there is one supporting creditor, which is an entity related to the plaintiff. No other creditors support this application to wind up the defendant, which supports the contention that other than in respect of the debt claimed by the plaintiff and its related entity, the defendant is paying its other creditors within terms; and
(e)the defendant’s statement of financial position shows a net asset position of $2,844,558 for 2024 (down from $3,145,083 for 2023).
The following raises concerns as to the defendant’s solvency:
(a)While the company has a significant amount of cash as at 30 June 2024 ($2,262,125), $1,894,430 of this is resident bond money, which is listed as a current liability. The evidence does not contain any analysis of the nature of this liability or the timing of when it is due.
(b)This obligation, together with the trade and other payables, and employee liabilities identifies that the defendant has a deficit of current assets to current liabilities in the amount of $416,468. This is particularly concerning given the cashflow test for insolvency.
(c)The defendant has suffered trading losses for the past two financial years (2024: $300,525; 2023: $416,346). However the reconciliation of net income to net cash identifies that for the 2024 financial year, this is largely made up of depreciation and amortisation.
(d)The defendant has retained a deficit of $2,480,223 as at 30 June 2024, and its retained deficit at the end of the 2023 financial year was $2,179,698, indicating that the defendant may have traded at a loss for quite some time.
If it were effective, the guarantee by Isomer Mosque would have the potential to provide comfort as to the defendant’s solvency, and in particular its ability to call upon Isomer Mosque to provide financial accommodation if required.
However, the guarantee is in an unusual form. It seems to have been drawn from a precedent without the benefit of an experienced lawyer’s drafting skills. It includes many references to precedent drafting notes and drafting alternatives in italicised font.
The guarantee has the following notable features:
(a)It bears the title ‘guarantee’ and is between Isomer Mosque and ‘ISOMER Aged Care Incorporated ABN 36 974 270 612’. The latter appears to be a reference to the defendant, as the ABN listed is the defendant’s ABN, however, I note that the entity name does not exactly match that of the defendant.
(b)It is expressed to be an agreement, yet it is not apparent that any consideration was received by Isomer Mosque in exchange for the guarantee. The commercial benefit to Isomer Mosque in giving a guarantee is not apparent.
(c)The operative provision of the guarantee is clause 2, which addresses a guarantee by the Guarantor in favour of the Beneficiary in respect of, amongst other things, the Borrower’s obligations. Interpreting this clause is made all the more difficult because the capitalised terms of Guarantor, Beneficiary and Borrower are not defined in the Guarantee.
(d)There is some evidence, by reference to the signature clause and Mr Hassan’s evidence, that Isomer Mosque is the Guarantor and the defendant is the Beneficiary.23F[24] However, the term ‘Borrower’ is not defined anywhere in the document. Further, there is no clarity as to whom the Borrower owes monetary or other obligations that are the subject of the Guarantee. One might infer that the Borrower owes the Beneficiary money, and the Guarantor is guaranteeing due payment of that money to the Beneficiary. However, the defendant submitted that the defendant is both the Borrower and the Beneficiary.24F[25] This interpretation is very difficult, if not impossible to understand. This is because, if the Beneficiary and the Borrower are one and the same, which of the defendant’s obligations, and to whom, are guaranteed?
[24]Hassan 2, [5].
[25]Transcript, 41:3-7.
The extract from Isomer Mosque’s financial statements as at 30 June 2024 indicates that Isomer Mosque may have the financial capacity to meet any commitments to the defendant it may have pursuant to the guarantee. The limited extract exhibited to Hassan 2, indicates that Isomer Mosque is in a strong financial position, with current assets of $3,905,133, which include cash and cash equivalents of $3,825,758. Its non-current assets total $9,923,872 (largely property, plant and equipment). Importantly, against this strong asset position, the balance sheet records that Isomer Mosque does not have any liabilities whatsoever as at 30 June 2024. Thus, this evidence, albeit an imperfect extract, gives rise to the inference that Isomer Mosque has more than sufficient cash resources to financially support the defendant if required.
In light of the cash flow test dictated by s 95 of the Corporations Act for solvency, there is insufficient evidence from which the Court might positively conclude that the defendant is solvent. Considering the failure to adduce evidence as to the nature and timing of the resident bond liability, the timing of anticipated revenue receipt as against when expenses become due and payable, the ownership of the residential bonds included in the cash balances or the ability to realise non-current assets, I am not in a position to conclude that the company is solvent. Whilst financial support from Isomer Mosque would assist in demonstrating the defendant is solvent, the guarantee does not assist, as it does not provide any certainty as to any obligation upon, or intention, by Isomer Mosque to ensure that the defendant is in a position to pay its debts as and when they fall due. Accordingly, I am not satisfied that the presumption of insolvency has been rebutted by the evidence adduced by the defendant.
In relation to the suggestion from Kempaiah 3 that the defendant’s revenue may soon cease given a failure to renew its accreditation for its facility with the Aged Care Quality and Safety Commission, the defendant submitted that this was not the case, and offered to give an undertaking to file an affidavit as to the steps taken to ensure it remains registered.25F[26] If I were otherwise satisfied that the presumption of solvency had been rebutted, save for the need for confirmation of accreditation, I would have given the defendant an opportunity to adduce this further evidence.
E Should leave be granted to the defendant under s 459S?
[26]Transcript, 47:11-17.
E.1 Applicable Principles
Section 459S provides:
459S Company may not oppose application on certain grounds
(1)In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without 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.
The Court’s discretion to grant leave pursuant to s 459S of the Corporations Act is guided by the principles outlined in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (‘Paliflex’). The factors to be considered are:
(a)a preliminary consideration of the defendant’s basis for disputing the debt which was the subject of the demand;
(b)an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party’s conduct at that time; and
(c)an investigation of whether the dispute about the debt is material to proving that the defendant is solvent.26F[27]
[27][1999] NSWSC 15, [49].
The preliminary consideration of the defendant’s basis for disputing the debt has been described as consideration of whether there is a serious question to be tried on the ground sought to be raised.27F[28] Where the ground sought to be raised is that the debt is genuinely disputed, this leads to a somewhat curious question to be determined. This is because the serious question to be tried test is also applied by the Court when determining whether a debt is genuinely disputed. For genuine dispute, the applicant is required to establish that there is a ‘plausible contention requiring investigation’ of the existence of a dispute as to the debt.28F[29]
[28]Re Vangory Holdings Pty Ltd [2015] NSWSC 546 [10] (Black J), citing inter alia, Paliflex with approval.
[29]Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liquidation) [2015] VSCA 330, [48] (Kyrou, Ferguson and Kaye JJA).
If leave is granted under s 459S, the Court’s task is to deal with the proceeding for winding up, with the overall question of solvency being the critical issue.29F[30] The demonstration by a defendant that it can make out a ground which would have justified the setting aside of the statutory demand does not undo the presumption of insolvency that arises by operation of s 459C(2)(a) of the Corporations Act.30F[31] Nor does it permit a company to litigate, at the winding up stage, an application to set aside the statutory demand. Rather, the Court will address whether the dispute about the debt affects the plaintiff’s standing or the ultimate question whether the company is solvent.31F[32]
[30]Paliflex, [48]. Cited with approval in Braams Group Pty Ltd v Miric [2002] NSWCA 417, [36] (‘Re Braams’).
[31]Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Ltd (No 2) [2009] FCA 557, [8] (‘Grant Thornton Services’); Re Braams (n 30).
[32]Paliflex, [41].
As explained by Austin J in Paliflex, where an application is made under s 459S, a three stage enquiry is undertaken:
(a)first, the Court will address whether leave should be granted to permit the company to dispute the debt upon which the demand was based;
(b)secondly, if leave is granted, the Court will address whether the plaintiff has standing as a creditor under s 459P. In doing so, the plaintiff will not have standing if the Court is satisfied that there is a genuine dispute in relation to the existence or the amount of the debt, which question is to be answered to the same standard as an application to set aside a statutory demand;32F[33] and
(c)thirdly, if the plaintiff has standing, the Court will consider whether the company is solvent, taking into account the dispute about the debt.33F[34]
[33]Assaf’s Winding Up in Insolvency [11.33], citing Paliflex and Grant Thornton Services (n 31).
[34]Paliflex, [41]. Grant Thornton Services (n 31) [33], citing Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527, [77].
This three stage enquiry is apt where an application under s 459S is addressed as a preliminary issue prior to the final hearing of the application to wind up the company in insolvency, which is the ordinary course.34F[35]
[35]Assaf’s Winding Up in Insolvency [11.33].
However, where a s 459S application is made in the alternative to solvency, it is regularly addressed at the hearing of a winding up application (which is the procedure adopted in this proceeding). This can be in the interests of efficiency, as it enables the question of solvency to be addressed comprehensively, and allows the proceeding to be finally resolved in one hearing, rather than two.35F[36] In such cases, the Court will first address whether the defendant’s evidence of solvency displaces the presumption of insolvency. If the presumption is displaced, the winding up application will ordinarily be dismissed, and it will not be necessary for the Court to address the alternative s 459S application.
[36]See for example, Bibby Financial Services Australia Pty Ltd v Wolf Industries Australia Pty Ltd [2004] NSWSC 134; (2004) 49 ACSR 45, [29] (Austin J).
Where, like here, the Court has found that the presumption as to insolvency has not been displaced, it is left to the defendant to satisfy the Court that leave ought to be granted under s 459S to oppose the winding up on a ground that the debt is genuinely disputed.
Critically, s 459S(2) of the Corporations Act provides that the Court is not to grant leave under s 459S(1) unless it is satisfied that the ground is material to proving that the company is solvent. Therefore, leave to dispute the applicant’s standing as a creditor will only be granted if the alleged disputed debt is material to proving solvency.
As discussed in Re Kornucopia Pty Ltd,36F[37] the Courts have adopted differing views as to the meaning of materiality to proving that a company is solvent, with ‘strict’ and ‘more lenient’ approaches being applied.37F[38] The strict approach requires the company to establish that the disputed debt is the difference between the company being solvent and insolvent.38F[39] Under the more lenient approach, the threshold will be reached where the debt will make a significant difference, on any view of the evidence, to the company’s ability to prove that it is solvent.39F[40]
[37]Re Kornucopia Pty Ltd (No 4) [2020] VSC 7 (‘Kornucopia’).
[38]Ibid [224]–[229].
[39]Ibid [225]–[226].
[40]Ibid [227]–[228].
As explained in Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No. 2),40F[41] the more lenient approach is referable to the stage at which a s 459S application is made. That is, the lenient approach is appropriate where the s 459S application is addressed as a preliminary issue without the benefit of the full breadth of evidence as to solvency that would be adduced at the final hearing. White J said:
In short, the existence or non-existence of the plaintiff’s debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company’s solvency are to be advanced to the stage at which leave is sought under s 459S, so that the company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2).41F[42]
[41][2011] NSWSC 113.
[42]Ibid [48] (emphasis added).
However, under either approach, where a company claims to be solvent irrespective of the debt, the differences between these two approaches is not engaged, because if the company is solvent irrespective of the debt, the debt cannot be ‘material’ to solvency.42F[43] Similarly, if a company does not adduce evidence of its financial position, regardless of the size of the debt, the Court cannot gauge what the effect on solvency would be if the debt were not taken into account, and thus, s 459S(2) will not be satisfied.43F[44]
[43]Kornucopia (n 37) [229].
[44]Ibid [230].
In my view, the difference between the strict and more lenient approaches is also of no consequence where the application under s 459S is made in the alternative to opposition to the winding up on the grounds of solvency, and is heard concurrently with the final hearing of the winding up proceeding. This is because the critical question for the Court at the winding up hearing is whether the company is solvent. At a final hearing, the Court has the benefit of the width and breadth of evidence adduced by the parties on the question of solvency, which it will assess on a final basis. The Court is therefore in a position to determine conclusively whether the disputed debt is material to solvency, applying the strict approach. This is in contrast to the evidence that might be adduced in support of materiality to solvency in respect of a stand-alone s 459S application, where the question of solvency is considered on a more preliminary basis.
E.2 Is there a serious question to be tried as to genuine dispute?
The defendant submits that there is a serious question to be tried as to whether the debt is disputed because the default judgment has been set aside, and the defendant has a range of defences to the plaintiff’s debt claim in the County Court, as set out in its defence which was served on 8 August 2024. The defendant argues that while the plaintiff was a creditor at the time that the proceeding was commenced, given that the judgment has been set aside, there is a serious question to be tried as to whether the plaintiff continues to have standing to pursue this proceeding.
In its defence to the County Court proceeding, the defendant pleads that there were two successive service agreements between the parties. The defendant claims that the first agreement dated 3 June 2021 (‘June Agreement’) is not binding upon the parties, as it was entered into by an agency nurse without the defendant’s actual or apparent authority. The June Agreement provides for a commission payable to the plaintiff for funding uplifts successfully procured by the plaintiff for the defendant’s aged care residents. On the basis that the June Agreement is not binding, the defendant:
(a)disputes $89,236 is owing, on the basis that the amounts claimed are in respect of commissions;44F[45] and
(b)claims $74,223 by way of set off amounts, being amounts mistakenly paid by the defendant in respect of commissions in respect of invoices issued between June 2021 to January 2022 which the defendant pleads are repayable.45F[46]
[45]Defendant’s Defence in County Court Proceeding dated 6 August 2024, Exhibit FH-1 to Hassan 1, 134 [3(d)-(f)], [10].
[46]Ibid [3(g)], [11]–[13].
The defendant claims that the June Agreement was succeeded by an agreement dated 18 October 2021 (‘October Agreement’).46F[47] The October Agreement provides for the plaintiff to be paid on an hourly basis and does not provide for commissions. The defendant admits the October Agreement is binding, but in relation to the plaintiff’s claim for invoices issued under the October Agreement, the defendant:
(a)does not admit the amounts claimed by reason of a failure to comply with an implied contractual term to provide timesheets in support of the invoices;47F[48]
(b)claims that two of the invoices issued were overcharged in breach of the October Agreement, leading to a set off of $28,957;48F[49] and
(c)claims a set off of $31,809 arising from an alleged breach by the plaintiff of the October Agreement, giving rise to a loss of opportunity to obtain greater funding for a particular aged care resident.49F[50]
[47]Ibid [3(d)-(f)].
[48]Ibid [3(j)].
[49]Ibid [3(k)].
[50]Ibid [4]–[7].
At paragraph 14 of the defence, the defendant claims a total set off of $163,459, however, this figure appears to be an arithmetic error, as the total set off pleaded is $134,989.50F[51] The defendant’s counsel submitted that the difference between the claimed set off and the plaintiff’s claim was owing by the defendant, but had not been paid by reason of a genuine dispute.51F[52] This is consistent with the pleaded defence, which makes clear that in addition to the set off, the defendant does not admit invoices for hourly rates in the absence of timesheets, and further disputes the amount of $89,236 charged in respect of commissions.
[51]Being the sum of the amounts pleaded in the following paragraphs: [7] ($31,809), [8] ($28,957) and [13] $74,223.
[52]Transcript, 31–32:10.
The defendant has additional evidence which supports that the dispute is genuine, including the expert report and the factual matters referred to in Mr Hassan’s affidavit in support of the application in the County Court to set aside the judgment, which addresses disputes as to the charges levied by the plaintiff for commissions, unanswered requests for clarification of the basis on which the invoice charges have been calculated, and evidence that the relevant personnel from the plaintiff were not on site for the time periods agreed pursuant to the October Agreement.
The plaintiff contends that there is no serious question to be tried as to whether the June Agreement is valid and enforceable, such that the only genuinely disputed debt is that which concerns disputed charges and set off in respect of the October Agreement, which are pleaded in the defence to total $60,777. The plaintiff argues that the $143,382.62 balance of the demanded debt is not genuinely disputed.
In support of its arguments that there is no serious question to be tried as to whether the June Agreement is valid and enforceable, the plaintiff disputes that the agency nurse did not have apparent authority to enter into the June Agreement, as she identified herself as the general manager of the aged care facility. Further, the plaintiff refers to the defendant’s conduct in paying previously-issued invoices for commissions and correspondence from Mr Hassan in 2022 promising payment of the outstanding invoices.52F[53] The plaintiff further argues that by reason of the defendant’s conduct, it is estopped from denying that the June Agreement is valid and binding.
[53]Affidavit of Thejaswini Kempaiah filed on 13 November 2024, 4 [19]-[21].
However, the fact remains that the plaintiff considered that proceedings were necessary in order to determine the debt owing to it. This is demonstrated by the fact that prior to the commencement of the County Court proceeding, the plaintiff issued a statutory demand dated 11 January 2024 to the defendant in respect of the debt said to be owing. After the demand was served, the plaintiff received correspondence from the defendant’s previous lawyers alleging defects in the demand and that the debt is genuinely disputed, including on the basis that the June Agreement was not binding. Following this correspondence, the demand was withdrawn by the plaintiff. Some months later, the County Court proceeding was commenced. This action in commencing proceedings for the full amount of the debt illustrates the plaintiff’s acceptance that the debt is genuinely disputed.
On 30 September 2024, the defendant sought to file a summons in the County Court proceeding seeking to set aside the default judgment, together with a supporting affidavit of Sarah Hinchliffe sworn on 26 September 2024. That application was listed for hearing on 19 November 2024. The judgment was subsequently set aside by consent. On this basis alone, there is a serious question to be tried as to whether the winding up may be opposed on the basis that the plaintiff no longer has standing.
While the plaintiff asserts that there is no genuine dispute with respect to a portion of its claim, it did not oppose the application to set aside the judgment on the grounds that the defendant did not have a prima facie defence on the merits as to any portion of the claim. The plaintiff submitted, without reference to authority, that under the County Court Civil Procedure Rules 2018 (Vic), a judgment will only be set aside in full.53F[54] However, r 21.07 of the County Court Rules expressly provides that the County Court may set aside or vary any judgment entered in default of appearance or defence under Order 21. The factors relevant to the Court’s exercise of its discretion to set aside or vary a default judgment include whether the defendant has a prima facie defence on the merits.54F[55] The discretion to vary a judgment may be exercised where the defendant has established a prima facie defence with respect to only part of the claim.55F[56] However, this was not a path pursued by the plaintiff, rather the plaintiff consented to an order setting aside the whole of the judgment.
[54]Transcript, 54:17-22.
[55]David L Bailey, Daniel D Nguyen and Nicolas C Dour, LexisNexis, Civil Procedure Victoria, vol 1 (at Service 334) [I 21.07.15].
[56]See, for example, Linkenholt Pty Ltd v Quirk [2000] VSC 166.
While the defendant did not act quickly to apply to set aside the judgment within the 21 day period, and did not seek to apply to set aside the statutory demand, it did act quickly to finalise its defence and expert evidence upon receipt of notification of the judgment. The defence was served six days after the defendant became aware that judgment had been entered. The application to the County Court to set aside the judgment was made shortly after this proceeding was commenced. These matters also support the contention that the defendant is treating the plaintiff’s claim seriously, and that it is genuinely disputed.
For these reasons, I do not accept that the material before the Court as to genuine dispute does not meet the low threshold for the purpose of an application under s 459S. The defendant has articulated its defence and adduced evidence in support of its defence, including expert evidence. The defendant has articulated the legal and factual basis for which it says that the June Agreement is not binding. The plaintiff disputes those facts, and may ultimately succeed at trial, but that does not render the defendant’s contentions not to be plausible or requiring investigation.
E.3 Why was the dispute not raised in an application to set aside the demand?
The defendant’s evidence as to why an application to set aside the statutory demand was not made is somewhat limited.
The defendant’s evidence demonstrates in April and May 2024, the defendant was taking steps to advance a defence to the plaintiff’s foreshowed claim through the engagement of an expert to prepare an opinion as to the charges levied by the plaintiff. The defendant’s evidence also addresses the steps taken to engage counsel to draft a defence with the benefit of the expert opinion received. However, the defendant’s evidence does not explain why the defendant did not make an application under s 459G of the Corporations Act to set aside the statutory demand upon the demand coming to the attention of the defendant and its solicitors.
On 2 August 2024, the defendant’s solicitor, Ms Hinchliffe, became aware of the judgment, and exchanged correspondence with the plaintiff’s solicitors. Ms Hinchliffe advised the plaintiff’s solicitors that she expected the defence to be settled within 48 hours, and invited the plaintiff to withdraw the judgment and the statutory demand. In response, the plaintiff’s solicitors said that they are ‘prepared to consider withdrawing the demand if [the defendant] can satisfy us…that it has a genuine dispute or offsetting claim which would reduce the debt to an amount less than the statutory minimum’.56F[57]
[57]Letter from plaintiff’s solicitor to defendant's solicitor dated 2 August 2024, Exhibit FH-1 to Hassan 1, 85.
Ms Hinchliffe says that she understood from the plaintiff’s solicitors’ letter dated 2 August 2024 that the plaintiff was prepared to set aside the statutory demand.57F[58] Ms Hinchliffe does not otherwise explain why the defendant did not make an application to set aside the demand.
[58]Affidavit of Sarah Hinchliffe sworn on 26 September 2024, Exhibit FH-1 to Hassan 1, 11 [27].
An explanation for the failure to apply to set aside the statutory demand may be found in a letter from the defendant’s solicitors dated 19 September 2024, that is, after this proceeding had been commenced. In this letter, the defendant’s solicitors state that there was ‘confusion’ as to the current status of the default judgment and that they were ‘surprised that the default judgment has not been formally set aside’ in light of the plaintiff’s correspondence.
I do not accept that there is any basis for the asserted confusion as to the plaintiff’s willingness to withdraw the statutory demand, as the three letters from the plaintiff’s solicitors dated 2, 14 and 23 August 2024 pursued payment of a debt greater than the statutory minimum for a statutory demand.
The plaintiff’s correspondence of 2 August 2024 merely indicated that it would consider withdrawing the statutory demand if it was satisfied that there are grounds to set it aside.
While the plaintiff’s letter dated 14 August 2024 engaged with the pleaded defence, it made no representation as to whether it would consent to judgment being set aside. To the contrary, it noted that no affidavits, supporting evidence or other allegations substantiating the defence had been provided. Further, it expressly asserted that $143,382.62 of the demanded debt was not genuinely disputed, indicating that absent payment on the terms proposed by the plaintiff, an application to set aside the demand would be required. The defendant did not respond to this correspondence.
On 23 August 2024, the plaintiff’s solicitors sent a further letter stating that they were instructed that unless the plaintiff receives payment within 7 days of the full amount of the debt set out in the statutory demand ($257,199.61), winding up proceedings would be commenced. The defendant’s solicitors did not respond to this letter. Three weeks later, on 13 September 2024, this winding up proceeding was commenced.
It may be that there is an explanation for the defendant’s conduct in not making an application to set aside the statutory demand despite receiving the correspondence on 14 August 2024 which asserts that there is no genuine dispute as to the majority of the demanded debt. For example, there may be an explanation grounded in assumptions or misapprehensions as to the applicable law. Conversely, the 19 September 2024 letter might indicate that the defendant made an informed decision not to apply to set aside the statutory demand, in the knowledge of the relevant risks.
However, the Court does not have evidence which provides any such explanation. It is left to guess. Ms Hinchliffe was acting for the defendant throughout the relevant period, and by reference to her email dated 2 August 2024, was aware of the statutory demand and the 21 day period from at least that date. Yet she has not provided an explanation on oath as to the defendant’s conduct. Mr Hassan has also not provided an explanation. Without an explanation, it is also not clear whether the responsibility for this conduct falls at the feet of the defendant or its solicitors.
It was incumbent upon Ms Hinchliffe and the defendant to provide a frank explanation for their conduct. Their failure to do so has resulted in the Court not being in a position to assess the reasonableness of the defendant’s conduct in light of any explanation for it. I am therefore unable to conclude that the defendant’s conduct in failing to bring an application to set aside the statutory demand was reasonable.
E.4 Is the dispute about the debt material to proving that the defendant is solvent?
The defendant’s submissions as to whether the dispute was material to proving solvency were somewhat hedged by reference to the defendant’s primary case that it is solvent. That is, solvent irrespective of whether the demanded debt is owing. As explained above, if a company is solvent irrespective of the demanded debt, then leave must not be granted under s 459S.58F[59]
[59]Paragraphs 49-52 above.
For the purpose of the defendant’s application under s 459S, the defendant submits the dispute about the debt is material to proving solvency. However, the defendant’s written and oral submissions did not squarely address the issue of how the demanded debt is material to proving solvency. The defendant made no attempt to draw a connection between the quantum of the debt and the financial position of the defendant, and the consequential effect on the defendant’s solvency. Rather, it was submitted that the dispute was material to proving solvency ‘simply by way of amount’59F[60] and that the Court ‘may well find from your own analysis of the accounts that the amount is material’.60F[61]
[60]Transcript, 25:30.
[61]Ibid 42:18-21.
The plaintiff submits that there is no evidence upon which the Court can form a view as to whether the claimed debt is material to the defendant’s solvency.
I accept the plaintiff’s submission for the following reasons:
(a)First, the defendant’s financial statements do not expressly refer to the debt demanded by the plaintiff, so its impact on the defendant’s reported financial position is not known. In this regard:
(i)It may be that the liability is recorded as part of the ‘Contingencies’ addressed in Note 15 to the defendant’s financial statements. This note states:
The [defendant] is in negotiations with a previous supplier. The contingent liability of this action is determined to be approximately $143,781 at the date of the audit report.61F[62]
(ii)However, it is not clear whether this is a reference to the debt referred to in the statutory demand, as the name of the suppler is not disclosed, and the quantum of the liability does not match the quantum of the debt demanded by the plaintiff. Regardless, there is no evidence which addresses the impact upon the defendant’s solvency if the contingent liability is ultimately found to be due and payable.
(b)Secondly, there is also no evidence from which the Court may conclude whether the $257,200 disputed debt is recorded as part of the defendant’s $518,977 current liability for trade payables reported in its audited financial statements. Such that the impact of the disputed debt will be either to worsen the net current asset position from negative $416,46862F[63] to $673,668, or alternatively reduce it to negative $159,268. On the limited evidence available, this indicates that irrespective of the disputed debt, the defendant is insolvent, and that the disputed debt is not the difference between whether the defendant is insolvent or solvent; and
(c)Finally, in light of my finding that there is insufficient evidence from which to conclude that the defendant is solvent, it follows that there is also insufficient evidence from which the Court may determine whether the disputed debt is material to solvency.
[62]Financial Statements, Exhibit FH-1 to Hassan 1, 202.
[63]See paragraph 34(b) above.
I am therefore not satisfied that the disputed debt is material to proving solvency. Subsection 459S(2) provides that the consequence of this is that leave must not be granted to the defendant under s 459S(1).
E.5 Conclusion
For these reasons, I will dismiss the defendant’s application for leave pursuant to s 459S to oppose the winding up on the ground that the demanded debt is genuinely disputed.
F Should the Court exercise its discretion to order the defendant be wound up?
F.1 Applicable principles
Winding up relief is a discretionary remedy. It is well established that the Court has a wide discretion under s 459A of the Corporations Act (and by extension, s 126 of the AIRAct) which may be exercised on any ground that is not extraneous to the scope and purposes of the Act.63F[64] The presumption that a company is insolvent does not require that the company be wound up in insolvency. The Court retains a discretion to refuse to order that a company be wound up, and this is expressly contemplated by s 467(1)(a).64F[65]
[64]Deputy Commissioner of Taxation v Swoosh Hand Car Wash Pty Ltd [2014] FCA 73, [10] (Jacobson J) (‘Swoosh’).
[65]ASIC v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1. See also DCT v Guy Holdings Pty Ltd (1994) 14 ACSR 580, 584 (‘Guy Holdings’); Re Brooklyn Park & Co Pty Ltd [2024] VSC 611, [68] (‘Re Brooklyn Park’).
In exercising this discretion, the Court has regard to the guiding principle that an undisputed and unsatisfied creditor of an insolvent company has a right to have the company wound up, and the public interest, which normally requires that an insolvent company be wound up to prevent it from incurring further debts.65F[66]
[66]IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 11 ALR 417, 427 (Gibbs J, Stephen and Jacobs JJ agreeing). See also Deputy Commissioner of Taxation v Club Culture Pty Ltd [2017] FCA 338, [19]; Swoosh (n 64) [11].
Where the presumption of insolvency has arisen, but the demanded debt is paid prior to the hearing of the winding up application, generally, there must be some positive reason for the Court to exercise its discretion to order that the company be wound up beyond the mere presumption of insolvency.66F[67] Examples include where relief has been refused where there is no evidence of other debts due and owing to the applicant or other creditors, and no other creditor has applied to be substituted for the applicant.67F[68] These cases have been described as ‘exceptional circumstances’ where good reason has been shown to allow an insolvent company to carry on its business.68F[69]
[67]Swoosh (n 64) [5], [12]. See also Guy Holdings (n 65) 583-585.
[68]De Montfortv Southern Cross Exploration NL (1987) 17 NSWLR 468; Guy Holdings (n 65).
[69]Swoosh (n 64) [11]; Guy Holdings (n 65) 584.
Where the presumption of insolvency has arisen through failure to comply with a statutory demand for a judgment debt, the fact that a default judgment was subsequently set aside after the commencement of the winding up proceeding generally is not significant in determining whether the defendant should be wound up. This is because:
(a)the plaintiff’s standing as a creditor does not disappear when the default judgment is set aside. This is because the plaintiff’s standing as a creditor is not dependent upon the default judgment, but rather the supply of goods or services the subject of the proceeding in which the default judgment was obtained;69F[70] and
(b)the presumption of insolvency having already arisen, the focus of the application is whether the defendant is solvent.70F[71]
[70]Re Wetherill Park Holdings Pty Ltd [2021] NSWSC 282, [9]–[14] (Rees J) (‘Wetherill Park’); Re New View Windows Pty Ltdtrading as Narellan Windows and Glass [2020] NSWSC 1905, [3] and [8] (Black J) (‘New View Windows’); Re Brew Still Pty Ltd (admin apptd) [2023] NSWSC 256, [31] (Black J). This stands in stark contrast to the approach taken on an application under s 459G to set aside a statutory demand on the basis that the default judgment the subject of the demand has been set aside. There, the demand will be set aside, and the presumption of insolvency will never arise: Wetherill Park [7]–[8].
[71]The Owners – Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412, [28] (Austin J), cited with approval in, inter alia, Wetherill Park (n 70) and New View Windows (n 70).
However, in appropriate circumstances it will be a factor that is material to the exercise of the Court’s discretion to refuse a winding up order.71F[72] This can be so even where leave has not been granted pursuant to s 459S to oppose the winding up on the grounds that the debt is disputed and that thereby the plaintiff does not have standing.72F[73]
[72]Re Living AustraliaPty Ltd (2020) 145 ACSR 82; [2020] FCA 739 (‘Re Living Australia’); Re Brooklyn Park (n 65).
[73]Re Brooklyn Park (n 65) [81]–[82], citing Re Structural Projects Pty Ltd [2015] NSWSC 1859 at [19].
Factors which may be relevant to the exercise of the discretion in these circumstances include:
(a)The circumstances in which the judgment debt arose. In Re Brooklyn Park & Co Pty Ltd (‘Re Brooklyn Park’), a relevant factor was that the judgment had been irregularly obtained, as at the time it was set aside, the statement of claim was also struck out for failing to properly inform the defendant of the claim it was to meet.73F[74] In Re Living Australia Pty Ltd (‘Re Living Australia’), the plaintiff’s failure to provide the solicitors acting for the company with a copy of the claim in addition to effecting service upon the company’s registered office was considered.74F[75]
(b)Whether there are other creditors who support the winding up.75F[76] In Re Brooklyn Park, the Court considered that the absence of supporting creditors to be a powerful discretionary factor favouring dismissal of the winding up application.76F[77]
(c)The quality of the evidence adduced to rebut the presumption of insolvency. In Re Gladstone Mortgagee No 1 Pty Ltd, Black J notes that the Court may be prepared to exercise its discretion not to wind up the company where the question of whether the presumption of insolvency has been rebutted is finely balanced.77F[78] In Re Living Australia¸ the Court granted the winding up application in light of the meagre evidence adduced in support of solvency, which, rather than rebutting the presumption of insolvency, suggested a significant net asset deficiency, and significant long-outstanding creditor liabilities.78F[79]
[74]Re Brooklyn Park (n 65) [60].
[75]Re Living Australia (n 72) [94(4)].
[76]Re Brooklyn Park (n 65), Re Braams (n 30), Re Living Australia (n 72).
[77]Re Brooklyn Park (n 65) [87].
[78][2015] NSWSC 1551, [67].
[79]Re Living Australia (n 72) [111].
Of course, if leave were obtained under s 459S to oppose the winding up on the basis that the judgment debt is genuinely disputed and that therefore the plaintiff does not have standing, the fact the default judgment was set aside would be a significant factor to the winding up application. As in that scenario, the defendant is in a position to oppose the winding up on the basis that the plaintiff does not have standing.79F[80]
F.2 Consideration
[80]See paragraphs 44-45 above.
F.2.1 Discretionary factors favouring winding up
The failure of the defendant to rebut the presumption of insolvency is concerning and weighs heavily in favour of a winding up order. The defendant is legally represented and has been given every opportunity to adduce compelling evidence to rebut the presumption of insolvency and it has not done so. The question of whether the presumption has been rebutted is not what I would describe as ‘finely balanced’. No attempt was made to adduce evidence which addresses the nature and timing of the defendant’s cashflows as compared to its debt obligations, which is squarely the question that must be answered by the Court under s 95A of the Corporations Act.
The existence of the supporting creditor, Comficare Pty Ltd (‘Comficare’), an entity related to the plaintiff, is also a significant factor which weighs in favour of winding up the company. Comficare’s notice of appearance states that it is owed $1,103,836.61. This is a significant sum relative to the defendant’s financial position. The defendant’s counsel submitted that this debt was genuinely disputed, and in this regard, took the Court to correspondence from the defendant’s solicitors dated 17 April 2024. This letter states that there are ‘a range of disputed or opaque matters’ as between the defendant and the plaintiff and Comficare. However, as no application has yet been made by Comficare for leave to be substituted as the petitioning creditor, the question of whether Comficare would have standing to petition for the defendant’s winding up is not presently before the Court.
F.2.2 Discretionary factors relied upon by the defendant
Against these significant factors which favour a winding up, the defendant points to the following matters which it submits justify refusing to wind up the defendant.
The fact the judgment has been set aside
While the fact that the plaintiff is no longer a judgment creditor does not affect the presumption of insolvency, I agree that it is a factor that weighs in favour of refusing to order that the defendant be wound up. This fact is strengthened by the plaintiff’s conduct in consenting to the judgment being set aside upon receipt of the defendant’s evidence in support of its set aside application. For reasons that I have already explained, this conduct is consistent with an acceptance on the part of the plaintiff that the entirety of its claim is genuinely disputed.
However, the defendant did not take any steps which would have precluded the statutory presumption of insolvency arising, and as I have addressed in Part E.3 above, the reasons for this have not been explained. The setting aside of the default judgment by the County Court had no effect on the presumption of insolvency,80F[81] and the plaintiff has standing to bring and continue this proceeding given leave has not been granted under s 459S.81F[82] That said, had leave been granted under s 459S, for the reasons addressed in Part E.2 above, I would have concluded that the plaintiff’s debt is genuinely disputed, and found that it no longer had standing to pursue a winding up. However, this would not have brought this proceeding to an end, given the supporting creditor. The Court would then need to consider any application by Comficare to be substituted as the petitioning creditor.
Circumstances of the default judgment
[81]Re Living Australia (n 72) [71]–[78].
[82]Ibid [79]–[84].
The defendant submits that the Court should have regard to what it considers to be defects in the plaintiff’s statement of claim in the County Court proceeding for failing to plead the contractual basis for the plaintiff’s claim. However, the defendant was able to plead to the plaintiff’s claim, such that the magnitude of any defect (if there is one) did not prevent the defendant from understanding the nature of the claim sufficient to draft its defence.
Further, I reject the defendant’s suggestion that the plaintiff or its solicitors engaged in unprofessional conduct in slapping on a judgment without first notifying the defendant’s solicitors of its intention to enter judgment in default.
At the time the plaintiff entered judgment on 25 July 2024, no correspondence had been received from the defendant’s solicitors since 17 April 2024. In particular, the defendant’s solicitors did not respond to the plaintiff’s letter dated 18 April 2024. This letter said that the plaintiff would commence recovery proceedings and enquired as to whether the solicitors had instructions to accept service on behalf of the defendant. The plaintiff also did not receive a response to their letter dated 28 June 2024 which provided the defendant’s solicitors with a copy of the County Court Writ which had been served on the defendant.
In these circumstances, it was reasonable for the plaintiff to enter judgment without further warning to the defendant’s solicitors. This is because it was not clear to the plaintiff that they continued to act. I therefore do not consider that the circumstances of the entry of the default judgment is a factor which assists the defendant’s opposition to this proceeding.
Payment of the plaintiff’s debt
The defendant’s counsel submitted that the Court could consider refusing the winding up order on terms that included payment to the plaintiff.82F[83] However, no substantive submissions were made in this regard, and no explanation as to why, if the defendant is willing to pay the debt owed to the plaintiff, it has not yet done so. Further, the defendant’s counsel did not address how such a course would affect the defendant’s rights in the County Court proceeding.
[83]Transcript, 46:5-12.
In any event, if this application were refused on the condition that the defendant pay the plaintiff’s debt, this would not resolve the proceeding in light of the supporting creditor. On the one hand, I have a creditor with standing who has the benefit of the presumption of insolvency which the defendant has failed to rebut. On the other hand, I have a supporting creditor, who, if they have standing, will be permitted to rely upon that presumption of insolvency even if the plaintiff’s debt has been subsequently paid. In light of the failure to rebut the presumption of insolvency, the winding up of the defendant would then ordinarily follow any substitution of the petitioning creditor.
Nature of the defendant’s business
The defendant submits that a relevant consideration is the not-for-profit nature of the defendant’s business. The defendant operates an aged care home with 35 residents, where a considerable source of income is government subsidies, which the defendant submits is a safe and reliable source of ongoing income. The defendant submits that the Court should be slow to wind up such an entity. However, there was no evidence before the Court which showed that the government subsidies were safe and reliable, as there was no evidence as to how the income was earned, or the circumstances in which it would continue to be paid. Further, even had the Court been satisfied that the income source was safe and reliable, this must be balanced against the failure to rebut the presumption of insolvency and the public interest in ensuring that insolvent entities are not permitted to trade and incur further debts, no matter the nature of their business or operations.
F.2.3 The defendant should be wound up
As the authorities make clear, the focus of the Court’s attention must be on the question of solvency. The evidence adduced by the defendant on the question of solvency was inadequate and failed to address the cashflow test the Court is required to apply. For the reasons that I have explained, the discretionary factors pointed to by the defendant as warranting the Court to exercise the discretion to refuse a winding up do not outweigh the failure of the defendant to prove that it is solvent. Whilst the fact that the judgment debt has been set aside by consent is a factor which might favour a refusal of the winding up, given the inadequate evidence of the defendant’s solvency, and the existence of the supporting creditor, this does not provide a good reason to allow the insolvent defendant to continue to trade. Similarly, the balance of the discretionary factors relied upon by the defendant do not give rise to exceptional circumstances or a good reason that would support refusing to wind up the defendant.
G Orders
I will therefore make the orders that:
(a)The plaintiff have leave to amend the Originating Process filed on 13 September 2024 to state that the application is also made under s 126 of the Associations Incorporation Reform Act 2012 (Vic).
(b)The defendant’s interlocutory process filed on 4 November 2024 is dismissed.
(c)Islamic Society of Melbourne Eastern Region Inc. (Registration No A0000943U) be wound up pursuant to s 126 of the Associations Incorporation Reform Act 2012 (Vic) and the provisions of the Corporations Act 2001 (Cth).
(d)Manuel Hanna is appointed liquidator for the purposes of the winding up.
(e)The time for lodgement with the Victorian Office Of Consumer Affairs of notice of the filing of the proceeding is extended to 4.08 pm on 16 September 2024.
(f)The plaintiff’s costs, including any reserved costs, are costs in the winding up.
0
32
0