Re Sterling & Freeman Advisory Pty Ltd
[2023] VSC 709
•30 November 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2023 03013
IN THE MATTER of STERLING & FREEMAN ADVISORY PTY LTD (ACN 606 745 340)
BETWEEN:
| STERLING & FREEMAN ADVISORY PTY LTD (ACN 606 745 340) | Plaintiff |
| v | |
| CALLISI PTY LTD (ACN 077 538 106) | Defendant |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 14 November 2023 |
DATE OF JUDGMENT: | 30 November 2023 |
CASE MAY BE CITED AS: | Re Sterling & Freeman Advisory Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 709 |
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CORPORATIONS — Application to set aside a statutory demand pursuant to s 459J(1)(b) of the Corporations Act 2001 (Cth) — Creditor served demand relying upon judgment given in the Supreme Court of Victoria after inter partes trial — Application for leave to appeal judgment not yet determined and no order staying execution of judgment – Plaintiff contended that there was ‘some other reason’ why the demand should be set aside, pointing to circumstances surrounding the subject transaction – Application to set aside the demand under s 459J(1)(b) refused – Application dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Evans KC | Blue Rock Law (Melb) Pty Ltd |
| For the Defendant | Mr P Fary SC | Davies Moloney |
TABLE OF CONTENTS
Factual background........................................................................................................................... 1
The prior proceeding......................................................................................................................... 3
Sterling’s submissions...................................................................................................................... 7
Callisi’s submissions....................................................................................................................... 13
Consideration.................................................................................................................................... 20
HIS HONOUR:
By an originating process filed on 10 July 2023, the plaintiff, Sterling & Freeman Advisory Pty Ltd (ACN 606 745 340) (‘Sterling’) makes application under s 459G of the Corporations Act 2001 (Cth) (‘Act’) to set aside or vary a statutory demand dated 16 June 2023 (‘demand’) which had been served on it by the defendant, Callisi Pty Ltd (ACN 077 538 106) (‘Callisi’), on 19 June 2023.
The demand claims Sterling owes Callisi $830,375.00 in respect of a judgment given against Sterling in favour of Callisi by M Osborne J of this Court on 6 June 2023 (‘judgment’) in proceeding number S ECI 2021 04840, in which Callisi was the plaintiff and Sterling was the first defendant (‘prior proceeding’).
Sterling’s application claims relief under ss 459H and 459J(1)(b) of the Act. The application under s 459H, which was ultimately not pressed, relied on a contention that Sterling has a genuine offsetting claim against Callisi arising from two untaxed costs orders that it obtained against Callisi in the prior proceeding. The application under s 459J(1)(b) relies on the existence of an application for leave to appeal filed by Sterling in the Victorian Court of Appeal on 18 July 2023 in respect of the judgment in the prior proceeding, together with what are contended to be several particular circumstances surrounding the transaction which gave rise to the judgment, which, when considered together, warrant the exercise of the discretion in the subsection to set aside the demand.
Sterling’s application is supported by the affidavits of David Leggatt sworn 10 July 2023, 16 August 2023 and 8 November 2023. Callisi relies upon an affidavit of its solicitor, Colman Moloney, sworn 8 November 2023.
The application has been made within the time prescribed by s 459G(3) of the Act.
Factual background
The facts and legal principles the subject of M Osborne J’s judgment are complex and what follows is a somewhat superficial summary of the background for the purposes of the current context.
Sterling is the trustee of a wholesale managed investment scheme, Oakhill High Income Fund (‘Oakhill’). Oakhill has 14 investors who have provided funds to Sterling to invest in mortgage securities. Sterling advances funds to borrowers for commercial purposes with such advances being secured by mortgages over residential properties.
In June 2017, SM Kelly Pty Ltd (‘SM Kelly’) entered into two loan agreements with Permanent Mortgages Pty Ltd (‘Permanent’) in respect to properties in Toorak (‘Toorak property’) and on St Kilda Road, Melbourne (‘St Kilda Road property’) (collectively, the ‘properties’).[1] Permanent held a registered first mortgage over each of the properties and those mortgages were cross collateralised over the properties.[2]
[1]Callisi Pty Ltd v Sterling & Freeman Advisory Pty Ltd [2023] VSC 300 [26]–[27].
[2]Ibid [28].
Permanent assigned its rights in the loans and mortgages to Perpetual Corporate Trust Limited (‘PCT’) who, in turn, assigned its rights in the loans and mortgages, together with a default judgment against SM Kelly, to Sterling on 24 October 2019.[3] After Sterling paid out the mortgages, Sterling held the first ranking mortgages over the properties.[4]
[3]Ibid [42].
[4]Ibid [15].
Callisi held a second ranking mortgage over the Toorak property.[5]
[5]Ibid [15].
Sterling had also advanced another loan to SM Kelly which was secured by a second ranking mortgage over the St Kilda Road property.[6]
[6]Ibid [27].
On 30 October 2021, Sterling entered into a contract to sell the Toorak property as mortgagee in possession for $3,250,000.00.[7] All of the net proceeds of sale were exhausted paying out the mortgage held by Sterling over that property,[8] rendering the security under Callisi’s second ranking mortgage over the Toorak property valueless.
[7]Ibid [45].
[8]Ibid [53].
On 13 March 2019, Sterling appointed a receiver to the property of SM Kelly and took possession of the St Kilda Road property.[9] On 28 February 2022, the St Kilda Road property was sold by the receiver for $1,180,000.00.[10] The settlement of that sale occurred on 29 August 2022.[11] At the time, Sterling was owed in excess of $2.3 million under its mortgages over the St Kilda Road property, which exhausted the proceeds of that sale; Callisi did not receive any sale proceeds from the sale of the St Kilda Road property.
[9]Ibid [40].
[10]Ibid [48].
[11]Ibid [56].
The prior proceeding
The prior proceeding was commenced on 20 December 2021. On 22 December 2021, Callisi filed a summons seeking an interlocutory injunction restraining Sterling from, amongst other things:
(a) marshalling or tacking debts to its mortgage over the Toorak property;
(b) paying itself more than the monies owing under its loan and mortgage over the Toorak property, alleged by Callisi to be $1,543,592.32, plus accrued interest and costs; and
(c) registering a transfer without complying with s 77(3) of the Transfer of Land Act 1958 (Vic).
On 13 January 2022, M Osborne J dismissed Callisi’s summons and made an order for costs in favour of Sterling (‘first costs order’). Mr Leggatt, the director of Sterling and a commercial litigation solicitor, estimates in his affidavit of 10 July 2023 that the first costs order will, after taxation, amount to an approximate sum of $35,000.00.
On 15 November 2022, Callisi filed a Further Amended Statement of Claim in the prior proceeding in which, for the first time, it invoked the equitable doctrine of marshalling of securities. Callisi sought the following relief, amongst other things:
(a) a declaration that Callisi was entitled to be subrogated to the rights of Sterling (as first mortgagee of the Toorak property) into the first mortgage over the St Kilda Road property; and/or
(b) a declaration as to an entitlement from the proceeds of the sale of the St Kilda Road property of each of Callisi, as mortgagee of the second ranking mortgage over the Toorak property, and Sterling, as mortgagee of the second St Kilda Road mortgage; or
(c) an account of the amount due to each of Callisi and Sterling from the proceeds of the sale of the St Kilda Road property.
Sterling denied the doctrine of marshalling had application in the circumstances on the following bases:
(a) Callisi had security over both properties;
(b) marshalling by apportionment would prejudice Sterling as the holder of the highest ranking security over both properties; and
(c) the mortgage to which Callisi sought to be subrogated had been discharged.
On 6 June 2023, M Osborne J found that Callisi was entitled to call on apportionment and the doctrine of marshalling and found in its favour. He ordered that Sterling pay Callisi $830,375.00 (‘judgment debt’), which is claimed in the demand and is the subject of this application.
On 13 June 2023, M Osborne J made costs orders in favour of Sterling (the ‘second costs order’) in respect of a discovery application by Sterling on 16 September 2022 in the prior proceeding and confirmed the first costs order. In his affidavit of 10 July 2023, Mr Leggatt contends the second costs order will, upon taxation, be allowed in the sum of approximately $12,000.00.
On 18 July 2023, Sterling filed an application for leave to appeal the judgment of M Osborne J in the prior proceeding in the Victorian Court of Appeal.
In his affidavit of 10 July 2023, Mr Leggatt states he has practiced as a solicitor in commercial litigation for over 30 years and cases involving the law as to apportionment and marshalling by apportionment are not common. He states the judgment of M Osborne J is the first superior court judgment on these issues in many years. He contends the appeal has good prospects of success.
Mr Leggatt states that although Sterling is capable of meeting its trading debts in the ordinary course of its business, it is not presently in a position to pay the judgment debt. He states that when he reviewed the loan book after the acquisition of Sterling in September 2022, it was clear the money recovered from the sale of the properties had been applied in making loan advances to new borrowers which were secured by second mortgages.
In his affidavit of 10 July 2023, Mr Leggatt states those loan advances were then in default and the secured properties had been placed on the market for sale by the first mortgagee. He states the realisation of those properties, which should recover approximately $1.5 million after expenses, was likely to take six months. He states this delay was, in part, caused by unfavourable economic conditions whereby the increase in interest rates reduced the demand for the assets the subject of these advances.
In his affidavit of 8 November 2023, Mr Leggatt states the sale of those properties is now unlikely to produce a return to Sterling by reason of the deteriorating property market, the amounts owing to the first mortgagee and complexities concerning the enforcement of Sterling’s security rights.
Mr Leggatt states Sterling is in the process of realising the sale of another property in Port Douglas, Queensland (‘Port Douglas property’), which was the subject of an advance by Sterling to it of $7.5 million. Again, the sale of that property has been delayed by unfavourable economic conditions. In his 8 November affidavit, Mr Leggatt states an agreement has been reached to sell the Port Douglas property for $3.625 million with settlement to occur on 25 January 2024. However, the agreement is not yet the subject of an executed contract of sale and any such contract will be subject to a 28 day due diligence period. Mr Leggatt estimates that, after various deductions, Sterling will receive $2 million from the sale of the Port Douglas property.
Mr Leggatt also states he is presently involved in negotiations with the previous director of Sterling for the recovery of assets to recapitalise the fund administered by Sterling, but this recovery process is likely to take a further six months.
Mr Leggatt concludes by stating if Sterling is able to realise its assets in an orderly fashion, it will be able to return all amounts invested to its investors as well as pay the judgment debt and costs should the appeal be unsuccessful.
In his affidavit of 16 August 2023, Mr Leggatt exhibits the documents which have been lodged in respect of the application for leave to appeal. Those documents were filed with the Court of Appeal on 18 July 2023 and served on Callisi on the same day. In his affidavit of 8 November 2023, Mr Leggatt states he has been informed by the Court of Appeal that it intends to list the hearing of the application for leave to appeal on 28 February 2024.
Mr Leggatt concludes by stating that if Sterling should be deemed to have committed an act of insolvency for failing to comply with the statutory demand,[12] it would constitute a breach of its Australian Financial Services License (‘AFSL’) and consequently cause it to be in breach of the various finance arrangements into which it has entered.
[12]i.e. a presumption of insolvency arising from non-compliance with the demand as mentioned in s 459C of the Act.
In his affidavit filed 8 November 2023, Mr Moloney, the solicitor for Callisi, deposes he has been in practice for 38 years. He exhibits a bill of costs which he has prepared consisting of 1,015 items which totals $209,601.72. He has prepared a summons for taxation of costs that has been issued by the Costs Court. He states that in the usual course, the Costs Court will tax a certain amount off the bill of costs and if 10% is taxed off, which he believes to be a reasonable estimate, the bill of costs will be reduced to $188,641.54.
Significantly in the current context, he contends the amount which will be allowed for this bill on taxation is likely to be substantially in excess of the two costs orders obtained in favour of Sterling.
Sterling’s submissions
Sterling describes its offsetting claim as consisting of the two costs orders it has in its favour which, on the evidence of Mr Leggatt, total $47,000.
Upon the commencement of the hearing of this application on 15 November 2023, senior counsel for Sterling, Mr Evans KC, stated that after considering Callisi’s submissions in respect of Sterling’s alleged offsetting claim and, in particular, their reference to the decision of Finkelstein J in Eiros Pty Ltd v St George Bank Ltd[13] (‘Eiros’), he did not press that ground. I think this was an appropriate course as I consider that if the analysis of Finkelstein J in Eiros is applied to the circumstances of this case, Sterling’s contention that there is an offsetting claim is untenable.
[13](2008) 68 ACSR 202 [20] (Finkelstein J).
Callisi’s submissions were accordingly directed solely to the ground based on s 459J(1)(b). Section 459J(1)(b) states:
(1)On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:
(a) …
(b) there is some other reason why the demand should be set aside.
Sterling’s submissions observe s 459H(6) of the Act provides that s 459H has effect, subject to s 459J: that is, if the Court is satisfied that an order should be made setting aside the demand under s 459J, it need not consider s 459H. After making reference to the existence of the appeal, which in Mr Leggatt’s opinion is considered to have good prospects of success, the submissions observe that neither the judgment nor its enforcement are the subject of a stay by the Court of Appeal or the trial judge. As such, Sterling accepts that notwithstanding the lodgement of the application for leave to appeal, the judgment debt is presently due and payable by Sterling to Callisi. Sterling says, however, the facts in these circumstances give rise to the existence of ‘some other reason’ which would justify the Court exercising its discretion to set aside the demand under s 459J(1)(b).
In this regard, reference was made to the consideration in a number of authorities of the power of the Court on an application under s 459J(1)(b) of the Act to set aside a demand based on a judgment debt where the judgment is being appealed but has not been stayed.
The question is whether, in the particular circumstances of the case before the Court, the power should be exercised. If that is so, it must be asked whether that should be subject to the imposition of conditions under s 459M of the Act which provide that an order under ss 459H or 459J may be made subject to conditions.
Sterling accepts that the existence of a pending appeal against the judgment on which the demand is founded is not of itself a sufficient circumstance to justify the exercise of the power to set aside the demand under s 459J(1)(b).
Sterling contends, however, the particular circumstances of this case justify the exercise of the power. The first of these circumstances is that the proposed appeal has substantial merit. Sterling will contend, in particular, that the judgment was given contrary to existing legal principles.[14]
[14]Sterling & Freeman Advisory Pty Ltd, ‘Applicant’s Written Case,’ Submission in S EAPCI 2023 0074, 18 July 2023, [16]–[22].
Secondly, it was contended that, in a related circumstance, the judgment in this case arose because, and only because, the Court applied the doctrine of marshalling by apportionment to a receipt of funds by Sterling as the mortgagee of the St Kilda Road property, over which Callisi only had a lower-ranking security interest. This was not the basis upon which the proceeding in which judgment was eventually obtained was originally framed by Callisi against Sterling. By the time the Court was first invited to consider the question between the parties as one of marshalling by apportionment in November 2022, Sterling – which acts as a trustee of a managed investment scheme as a secured lender and is, as such, required to seek to deploy the funds under its control by making loan advances. By then it had already applied the proceeds received by it from the sale of the St Kilda Road property to the new loan advances and it would require an estimated period of six months from July 2023 to recover the monies. It is contended Sterling legitimately and responsibly changed its position (in respect of its ability to pay a proportion of those proceeds to Callisi) at a time where it did not have notice of the basis upon which Callisi ultimately obtained its first instance judgment.
Thirdly, it was contended that it is highly likely that if Sterling is given the time to recover the amounts referred to in paragraph 40 above, the judgment debt will be able to be paid by Sterling in full if the appeal is unsuccessful. The issue is only one of timing as to the payment of the judgment debt, not whether the debt will ever be paid.
Fourthly, it was contended the consequence borne by Sterling, should it fail in its application to set aside the demand in circumstances where (by operation of s 459F of the Act), is that Sterling will, in all likelihood, fail to comply with the demand. This will give rise to the presumption of insolvency under s 459C of the Act, such that Sterling will be in breach of its AFSL and the terms of financing arrangements it has with its creditors. Such an outcome has obvious harmful ramifications for Sterling.
Sterling contends that, in combination, those factors justify the Court ordering that the demand be set aside or, in the alternative, proposes the Court make orders under s 459F(2)(a)(i) of the Act extending the period for compliance until either:
(1)in the event that the application for leave to appeal, or the appeal, in proceeding no. S EAPCI 2023 0074 is dismissed, the date 7 days after the date on which that occurs; or alternatively
(2)to a date 6 months after 10 July 2023 (by reference to the circumstances in the Leggatt affidavit of 10 July 2023 – i.e. an interval to allow for the sale of the properties over which Sterling holds security in respect of the loans advanced after receipt of the proceeds from the Toorak and St Kilda road properties); or
(3)the later of those two dates.
Mr Evans explained the rationale for the first date as being that if the appeal is dismissed, Sterling would have seven days thereafter to pay the debt pursuant to the operation of s 459F(2)(a)(ii) before a presumption of insolvency came into existence. If the appeal succeeds, then the judgment debt the subject of the demand will be expunged. It was indicated that second date can now be identified as 1 February 2024 because the anticipated settlement date of the sale of the Port Douglas property is 25 January 2024.
Mr Evans anticipated and responded to the submissions of Mr Fary SC, counsel for Callisi, in which reliance is placed on the decision Rectangular Pty Ltd v Mae Cardaci ATF Marco Cardaci Testamentary Trust (‘Rectangular’) of Lundberg J of the Supreme Court of Western Australia.[15] The relevant passages of that decision are considered in some detail below. Mr Evans observed there was nothing in the Rectangular decision nor in any of the authorities dealing with the application under s 459J(1)(b) in circumstances involving an appeal or an application for leave to appeal on foot. It was submitted this limits the way in which the Court can exercise its discretion by reference to whether an application for a stay of the judgment has been sought or obtained before the relevant Court of Appeal.
[15][2023] WASC 13 (Lundberg J) (‘Rectangular’).
Mr Evans contends the references to Rectangular relied upon by Mr Fary go no higher than to indicate that the appropriate course ‘may’ be for the recipient of the statutory demand to apply to the Court which entered judgment for a stay; there is no requirement placed upon the Court that it only exercise the power under s 459J(1)(b) in circumstances where an application for a stay has been sought and presumably obtained.
Mr Evans accepted in his oral submissions that the mere existence of a reasonably arguable appeal will not, of itself, constitute ‘some other reason’ within the meaning of s 459J(1)(b) and that something more is required. However, he says in these circumstances, there is that ‘something more’. Mr Evans placed some emphasis on the fact that here, the judgment debt arose in specific and unusual circumstances, being more particularly identified as the application by the Court of the principle of marshalling by apportionment. As mentioned, the prior proceeding was on foot when the proceeds from the sale were received in August 2022. Callisi had not, at that point, made its amendment claiming relief under that doctrine; that did not occur until 15 November 2022. Sterling, with no notice of the basis of Callisi’s claim in the prior proceeding upon which it ultimately succeeded, received the proceeds of sale and advanced those funds to new borrowers. This was done pursuant to its obligations as trustee of a mortgage fund to deploy those funds in order to realise a return for the beneficiaries of the trust.
Mr Evans emphasised that this is not a circumstance of Sterling having divested itself of the capacity to pay the judgment debt for all time, and that the reasons for it not having the capacity to meet the judgment when it was handed down are explicable. Sterling contends it is in a position where it can say with confidence that, in time, it will have the capacity to pay the judgment debt.
Mr Evans also emphasised the prejudicial effects arising from the presumption of insolvency under s 459C in the event Sterling’s application is dismissed. In this regard, he referred to the evidence of Mr Leggatt that the presumption of insolvency, which arises upon the failure to comply with the demand, would amount to a breach of the AFSL held by Sterling. It would also cause it to be in breach of the various arrangements which it has in place with its investor beneficiaries in Oakhill.
Mr Evans contended this is not a situation where Sterling comes to Court and indicates it will never be able to pay the judgment debt; rather, it is said that if it is given sufficient time, it is highly likely Callisi’s judgment can in fact be satisfied in full. The issue becomes one of timing as to the payment of the judgment debt, not whether it will ever be paid.
On the question of the absence of an application for a stay, I took Mr Evans to a passage of Rectangular where Lundberg J refers to the decision of Brereton J in Re John Farlow Pty Ltd.[16]In the passage of John Farlow referred to by Lundberg J, Brereton J states:
I do not suggest that the absence of an application for a stay or even the refusal of a stay is necessarily fatal to an application to set aside a creditor’s statutory demand. Ultimately, the Court has a discretion in that respect. However, the cases indicate that where a stay has not been sought or where a stay has been refused, that is a highly influential and often decisive consideration.[17]
[16][2015] NSWSC 939 (Brereton J) (‘John Farlow’), referred to in Rectangular at [97].
[17]John Farlow [16].
I asked Mr Evans as to why Sterling had not made an application for a stay. He responded that in these circumstances, the mechanism adopted by Callisi to seek enforcement of its rights was to serve a statutory demand. He stated that applying to set aside the statutory demand while refraining from simultaneously applying for a stay to the Court of Appeal was considered by Sterling to be the appropriate course. Mr Evans contended it was undesirable to expect a judgment debtor to attack the enforcement of the judgment debt on multiple fronts and incur the costs of doing so if there is no reason for that to be done. Even if Sterling had sought a stay from the Court of Appeal, it would have still needed to apply to set aside the statutory demand to prevent a presumption of insolvency coming into existence. He contended the Civil Procedure Act 2010 (Vic) discourages multiplicity of proceedings and that not requiring a party dealing with a statutory demand as the mechanism of enforcement to also seek a stay from the Court of Appeal is consistent with both the overarching obligations and the overarching purpose.
He accepted that if Sterling had gone to the Court of Appeal and been awarded a stay, the judgment debt would not then be due and payable and the demand would be set aside. He submitted, however, that this would involve a multiplicity of proceedings and applications with all the attendant costs.
Mr Evans also contended Brereton J’s decision in John Farlow should not be followed in this state.
Callisi’s submissions
Callisi’s submissions addressed the remaining contention by Sterling that there was ‘some other reason’ within the meaning of s 459J(1)(b) of the Act that the Court should exercise the discretion to set aside the demand by reason of the existence of a pending appeal coupled with the facts of the circumstances in which the claim arose.
At the outset, Callisi observed that there is presently only an application for leave to appeal and not an appeal. I do not consider there to be much force in that submission; the provisions of s 14A of the Supreme Court Act 1986 (Vic) provide that any civil appeal to the Court of Appeal requires leave to appeal to be obtained from the Court of Appeal. Sterling is required to seek such leave under the procedural regime for appeals to the Court of Appeal and has merely adopted the required approach.
As foreshadowed above, Mr Fary SC, senior counsel for Callisi, made reference to the decision of Rectangular which identified what were said to be the orthodox principles applicable to the operation of s 459J(1)(b) of the Act in the context of a pending appeal from a judgment that is the subject of a statutory demand.
In Rectangular, the plaintiffs made application relying on s 459J(1)(b) of the Act to set aside statutory demands served on them in respect of judgment debts. The basis of the application was that the Court should set aside the demands as the Court orders underlying the judgment debts were presently the subject of appeals to the Court of Appeal of the Supreme Court of Western Australia, soon to be heard and said to be reasonably arguable. In addition to this, the plaintiffs suggested the statutory demands were ‘infected’ with some collateral purpose, which was either to stultify the appeals or coerce a third party to put the plaintiffs in funds so that the demands could be met.
As Rectangular collects the relevant principles, it is convenient to extract the relevant passages. At paragraphs 42 and onwards Lundberg J identified the principles to be applied by reference to the relevant authorities. He stated:[18]
[18]Authorities referred to have been footnoted.
The statutory language employed within s 459J(1)(b) of the Act undoubtedly requires the court to exercise a discretion – the court ‘may’ set aside the statutory demands. The existence of ‘some other reason’ does not require the court to necessarily accede to the application. The discretionary nature of the power in s 459J(1) represents an important difference between the grounds in s 459H(1)(a) and s 459J(1). It confers a wide discretion.[19] Indeed, it has been said that the power in s 459J(1)(b) exists to:
[19]Midas Management Pty Ltd v Equator Communications Pty Ltd [2007] NSWSC 759 [1] (Hammerschlag J) (‘Midas’).
maintain the integrity of the process provided under Part 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but not by reference to subjective notions of fairness.[20]
[20]Re Mio Amico Pty Ltd [2013] NSWSC 1292 [8] (Black J).
So understood, an application to set aside a statutory demand in reliance on s 459J(1)(b) of the Act requires that the whole of the circumstances of the matter be considered, in order to determine whether the court can be satisfied there is some other basis (beyond those in s 459H(1) and s 459J(1)(a) of the Act) which justifies an order being made that precludes the use of the statutory procedure. The relative positions of both sides must be examined, not merely the party which is the subject of the demand, having regard to the objectives of pt 5.4 of the Act.[21]
The operation and application of s 459J(1)(b) of the Act in the context of a pending appeal against a judgment debt, has been addressed in numerous decisions. In those instances, Australian courts have been alive to the possibility that the application to set aside a statutory demand may operate as a de facto stay of the judgment debt…[22] The appropriate course may be for the recipient of the statutory demand to apply for a stay to the court which entered judgment.[23]
Further, where there is a pending appeal against a judgment debt which is reasonably arguable, it is not inconsistent with the structure of pt 5.4 of the Act for a party which has the benefit of the underlying judgment debt (which has not been either stayed or set aside) to rely upon it for the presumption of insolvency that follows when a statutory demand is served and payment is not made.[24]
It must be remembered that a failure to comply with a statutory demand does not automatically lead to the winding up of a company, and there remains a discretion whether, if a winding up application is ultimately filed, to proceed with the application or adjourn the matter while the underlying judgment is challenged. These processes must not be conflated. It is thus not necessary to set aside a statutory demand merely because there is a challenge underway to the underlying judgment or orders. The statutory demand process will not, of itself, impair the company’s ability to challenge the judgment, whether through an appeal or otherwise.
In the absence of a stay, the mere existence of a reasonably arguable appeal will therefore not constitute ‘some other reason’ for the purposes of s 459J(1)(b) of the Act.[25]
As Smith AJ noted in Professional Services of Australia Pty Ltd v Lean [2018] WASC 28 [66], citing Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235:
Yet, an existing appeal on reasonable and arguable grounds against a judgment debt if successful, that expunges the judgment debt, in itself, in the absence of a stay, is not a circumstance that will constitute ‘some other reason’ why the demand should be set aside.[26]
(emphasis added)
[21]Meehan v Glazier Holdings Pty Limited [2005] NSWCA 24 [52] (Santow JA, with Tobias JA and Young CJ agreeing) (‘Meehan’).
[22]Wilden Pty Ltd v Greenco Pty Ltd (1995) 13 ACLC 1039 (Master Adams); Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454, 460 (Emmett J) (‘Eumina’); Cranney Farm Pty Ltd v Corowa Fertilizers Pty Ltd [2011] NSWSC 9 [34] (Ward J) (‘Cranney Farm’); Body Corporate Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSC 435 [80] (Randall AsJ).
[23]Eumina 460; John Farlow [15]–[16].
[24]Meehan [51] (Santow J); Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd; Oaklands Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 [24]–[25] (Barrett J) (‘Timberland Property Holdings’); Re JKAM Investments Pty Ltd [2015] NSWSC 2032 [17] (Black J).
[25]Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235, 239 (McLelland CJ) (‘Barclays’); Cranney Farm [34]–[42]; Timberland Property Holdings [24]–[25]; Re A.C.E.S. Sogutlu Holdings Pty Ltd [2014] NSWSC 140 [20] (Brereton J).
[26][2018] WASC 28 [66] (Smith AJ) (‘Professional Services of Australia’) citing Barclays.
At paragraph 49, Lundberg J referred to an additional circumstance that is often identified for the purposes of establishing the ‘some other reason’ required by s 459J(1)(b) of the Act is:[27]
[T]he payment into court of the sum demanded, or for the applicant to secure that sum to the satisfaction of the judgment creditor. This outcome is typically achieved by exercising the power in s 459M of the Act to impose a condition on an order setting aside the relevant statutory demand…[28] The demands of justice, and the interests of both sides, may then be met. In that scenario, the judgment creditor will be assured of the existence of the funds to meet the judgment debt in the event the pending appeal succeeds, although questions may arise as to the judgment creditor’s relative entitlement to those funds if the debtor falls into liquidation.
[27]Rectangular [49].
[28]Professional Services of Australia [67]; Eumina; Midas; Timberland Property Holdings.
At paragraphs 95 and following,[29] Lundberg J described his reasons for rejecting the application. In summary, these were as follows:
[29]Rectangular [95]–[96].
(a) the statutory demands were based on judgment debts obtained by the defendant after a lengthy trial on the merits before the Court and not on a default judgment or summary judgment obtained in the absence of a merits hearing. The defendant, in that matter, should be entitled to the fruits of her litigation, weighing in favour of dismissing the application; and
(b) an application for a stay of the judgments was made, and refused by the Court of Appeal. Reference was made to the decision of Brereton J in Re John Farlow Pty Ltd in the context of the existence of a stay refusal.[30] Brereton J had observed that the cases therefore establish:
[30]John Farlow.
…that where a stay has not been sought or where a stay has been refused, that is a highly influential and often decisive consideration.
…
Companies who wish enforcement of judgments against them to be stayed pending an appeal must understand that their proper course is to apply for a stay, rather than to wait until a creditor's statutory demand is issued and then apply to have it set aside. The Court readily entertains applications to set aside demands where a stay has been granted, even after the creditor's statutory demand has been served, because while such a stay does not otherwise deprive the demand of effect at the date it was made, it indicates that the proper court has decided that it is appropriate that it not be enforced in the meantime.[31]
[31]Ibid [16].
Lundberg J concluded his analysis of this factor by observing that the refusal of the stay application by the Court of Appeal in that case was a highly influential factor, stating:
It further emphasises the nature of these Applications as attempts to seek de facto stays of the judgment and orders imposed … following trial.[32]
[32]Rectangular [98].
(c) there had been no offer to pay into Court the amount of the judgment debts pending the outcome of the appeals, or an offer otherwise to provide some form of security to the judgment creditor’s satisfaction. Lundberg J, adopting the view of Brereton J in John Farlow observed that the existence of such an offer is a relevant factor in assessing the existence of ‘some other reason’ in regards to s 459J(1)(b);[33]
[33]Ibid [99].
(d) the position of the plaintiffs was that they had insufficient assets to meet the judgments debts, and given the parlous financial position of the companies, the lack of an offer from the plaintiffs to pay the judgment debt into Court was hardly surprising. Lundberg J stated the financial position of the companies meant it was proper that he give consideration to the interests of potential creditors of the entities, including the judgment creditor; and
(e) Lundberg J considered there to be no likely prospect of the statutory demand procedure impairing the hearing of the appeals and the close proximity of the hearings reduced the force of the plaintiffs’ contention that the appeals might be stultified.[34]
(f) The other factors referred by Lundberg J do not, in my view, have direct relevance in the present context.
[34]Ibid [103].
Callisi contended that, on an application of those principles to the present case, little more than the pendency of the application for leave to appeal which is asserted to have ‘good prospects of success’ is relied upon in support of the application under s 459J(1)(b) of the Act. It was submitted that this feature, without more, does not constitute ‘some other reason’ for the purpose of the provision.
Addressing Sterling’s contentions at paragraphs 39 to 42 above, which noted there are particular circumstances of this case warranting the exercise of the discretion in Sterling’s favour, Callisi responded in respect of each in turn that:
(a) the Court should not attempt to embark upon a determination of the merits of the proposed appeal, save to satisfy itself that the appeal is reasonably arguable. It was accepted Sterling’s application for leave to appeal met this threshold for the purposes of the present context;
(b) the matters set out in paragraph 40 do not detract from Callisi’s entitlement as judgment creditor. Sterling is liable to Callisi for the reasons set out in the judgment of M Osborne J and the possibility that the order that was made should have been anticipated;
(c) the matters referred to in paragraph 41 should have properly been raised in an application for a stay of the judgment to the Court of Appeal, not by way of an application to set aside the statutory demand; and
(d) what are described as the ‘harmful ramifications’ referred to in paragraph 42 are simply the consequences of Sterling’s apparent insolvency, a matter appropriately dealt with in accordance with the provisions of Part 5.4 of the Act which are concerned with the statutory mechanism for winding up in insolvency.
Mr Fary emphasised in his oral submissions that a judgment debt cannot be the subject of a genuine dispute. Unless and until the judgment is set aside on appeal, it operates as res judicata, which determines the judgment debtor’s liability. Further, Mr Fary contended the very purpose of the scheme embodied in Part 5.4 is to deal with insolvent companies, and the evidence filed in the proceeding demonstrates that whatever be its position in respect of the statutory demand, Sterling is insolvent. On 6 June 2023, it was ordered to pay $830,375.00 together with costs. That judgment has not been stayed and cannot presently be paid.
Mr Fary responded to an observation by me that, to establish solvency, a company is not required to have cash at hand to satisfy debts and resort can be had to other readily realisable assets to satisfy debts. In response, Mr Fary observed that the property in Port Douglas, now said to be the source of Sterling’s ability to satisfy the judgment debt, is not yet the subject of an executed contract but is subject to a condition, being the 28 day due diligence period. Mr Fary contended the material in respect of Sterling’s financial position would not satisfy a Court of its solvency. There is no evidence of audited accounts for Sterling evincing its true financial position; Mr Leggatt’s own evidence is that while Sterling is capable of meeting its trading debts in the ordinary course, it is not presently in a position to pay the judgment debt. Mr Fary observed that, in respect to the operation of Part 5.4 of the Act and the purpose of the power contained under s 459J, it would be strange if one could, in the context of an application under s 459J, adduce evidence that falls well short of satisfying the Court of solvency in other contexts (such as s 459S) and yet that same evidence would be sufficient to compel the Court to postpone the presumed insolvency of a company under a statutory demand.
Mr Fary then went on to elaborate on his critique as to the circumstances identified in Sterling’s submissions upon which the Court should be persuaded to exercise the discretion in its favour.[35] The first of these is the existence of the application for leave to appeal. Mr Fary suggested this was not a significant factor as the Court’s appraisal of the merits of an appeal in an application such as this is quite superficial. Equally, he submitted that it goes no further than an appraisal that such an application is reasonably arguable.
[35]See [39]–[42] above.
Mr Fary then elaborated on the criticism of the second matter identified by Sterling; when Sterling received the sale proceeds and advanced them to new borrowers, it did not anticipate being held liable to Callisi in the proceeding and, as a consequence, proceeded to advance money which would have otherwise been available to satisfy the judgment. Mr Fary contended this cuts across neither Callisi’s right to receive payment nor Sterling’s obligation to make that payment. He contended Sterling ought to have retained sufficient funds so as to be in a position to repay the amount now owing under the judgment. Rather, it took the risk that the litigation by Callisi would not succeed. He submitted this did not elevate the application above that of an ordinary judgment creditor with a pending application for appeal or leave to appeal.
Mr Fary then moved to the third matter identified by Sterling, that it is highly likely it will be able to pay the debt if the appeal is unsuccessful and that the matter was only one of timing. Mr Fary contended this is apparently an attempt to raise the question of solvency, or ‘near solvency’, but under a different guise. It amounts to a submission that Sterling is contending it is able to pay its debts, including the judgment debt, but just requires a short period of time. Mr Fary again submitted this feature does not elevate the application over that of an ordinary judgment debtor who is unable to pay its debts in accordance with its obligations. Mr Fary contends this is a matter which ought to have been addressed by Sterling on application for a stay to the Court of Appeal, not by way of an application to set aside the statutory demand.
As to the fourth matter relied upon by Sterling, that there are what are described as ‘harmful ramifications’, Mr Fary submitted the Court has not been informed by Sterling as to the terms of its AFSL or its financing arrangements with its investor creditors. Mr Fary speculated it was likely the relevant prohibition was factual insolvency, whereas a failure to comply with the statutory demand gives rise to a presumption of insolvency, but not otherwise. Mr Fary contended it is not a purpose of Part 5.4, more specifically of s 459J(1)(b), to save a debtor from the natural consequences of its own inability to satisfy a judgment debt.
Consideration
In my opinion, Sterling’s application should be dismissed for the reasons which follow.
I do not consider that the circumstances identified by Sterling are such to attract the exercise of the discretion that there is ‘some other reason’ within the meaning of s 459J(1)(b) of the Act as to why the demand should be set aside in its favour under that provision. While s 459J(1)(b) vests a broad discretion, the power under the provision exists so as to prevent an attempted subversion of the statutory scheme not, as has been emphasised, by reference to subjective notions of fairness.
Callisi has a judgment debt obtained several months ago after a contested hearing. Sterling finds itself in unfortunate circumstances for the reasons it has described, but there are no relevant factors present which, to my mind, justify the prevention of Callisi from enjoying the fruits of that judgment by reliance on the provisions of the Act entitling it to serve a statutory demand. The Court cannot deploy the discretion under s 459J(1)(b) in aid of Sterling to assist it in its current, and as it says, temporary predicament by reason of some perceived unfairness or injustice arising from the circumstances leading to the adverse judgment. It could not be said that, by adopting the statutory demand regime to recover the judgment debt, Callisi would in any way be engaged in subverting the statutory scheme.
To my mind, a prominent feature of the matter is that Sterling made no application to stay the judgment in the Court of Appeal which, as indicated by the authorities to which reference has been made, is an appropriate course in these circumstances. It is said Sterling should not have to both set aside the demand and apply for a stay, but in my view the circumstances in which Sterling finds itself required such a course. While it may be accepted, for the purposes of the current context and as Sterling contends, that the application for leave to appeal enjoys reasonable prospects of success, there are no other features of the matter which warrant the exercise of the discretion to set aside the demand or to extend the time for compliance with it until the occurrence of the events proposed by Sterling in its submissions.
The dismissal of the application to set aside the statutory demand will in no way impede the process of Sterling’s application for leave to appeal to the Court of Appeal. Further, non-compliance with the demand does not affect the exercise of the discretion of a Court considering a winding up application which may ensue from adjourning the application until Sterling has been able to complete the appeal process (or raise the funds to pay the judgment debt if its appeal is unsuccessful).
If, in accordance with what Sterling contends, the time for compliance with the demand was extended until the hearing of the appeal as to enable the sale of properties over which Sterling has security, this would amount to a de facto award of a stay, which I consider to be an inappropriate exercise of the power under s 459F(2)(a)(i).
I will order that the plaintiff’s application be dismissed. I will hear the parties on the question of whether the ordinary rule that costs follow the event should be followed in this case.
SCHEDULE OF PARTIES
| S ECI 2023 03013 | |
| BETWEEN: | |
| STERLING & FREEMAN ADVISORY PTY LTD (ACN 606 745 340) | Plaintiff |
| - v - | |
| CALLISI PTY LTD (ACN 077 538 106) | Defendant |
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