Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd

[2005] NSWSC 1338

CITATION:	Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1338
HEARING DATE(S):	07/11/05, 24/11/05 Written submissions: 10/11/05, 14/11/05, 28/11/05, 30/11/05
JUDGMENT DATE :	20 December 2005
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Interlocutory process dismissed with costs

CATCHWORDS:	CORPORATIONS - winding up in insolvency - winding up application - whether leave should be granted to defendant to rely on grounds that were or could have been relied on in seeking to have statutory demand set aside - failure of defendant to show grounds material to proof of solvency - failure of defendant to show explanation for non-reliance on grounds which statutory demand challenged - application by defendant to join its shareholders as co-defendants - stated intention of shareholders to rely on grounds of defence not open to defendant - application by defendant for stay of winding up application pending determination of appeal against refusal to set aside statutory demand - period for compliance with statutory demand expired - no point in stay
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss.459C, 459F, 459G, 459H, 459S Supreme Court (Corporations) Rules 1999 , rule 2.13(1), (3) Uniform Civil Procedure Rules 2005, rule 6.24
CASES CITED:	Biron Capital Ltd v Velowing Pty Ltd [2003} NSWSC 1181 Braams Group Pty Ltd v Miric (2002) 44 ACSR 124 Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85 Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 Goman v Scope Data Systems Pty Ltd [2004] NSWSC 314 Perpetual Nominees Ltd v Masri Apartments Pty Ltd (2004) 49 ACSR 719 Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723
PARTIES:	Shakespeares Pie Co Australia Pty Limited - Plaintiff Multipye Pty Limited - Defendant
FILE NUMBER(S):	SC 4979/05
COUNSEL:	Mr N.J. Kidd - Plaintiff Mr R.D. Newell - Defendant
SOLICITORS:	PricewaterhouseCoopers Legal - Plaintiff L.C. Muriniti & Associates - Defendant

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUESDAY, 20 DECEMBER 2005

4979/05 SHAKESPEARES PIE CO AUSTRALIA PTY LIMITED
v MULTIPYE PTY LIMITED

JUDGMENT

1 In these proceedings, the plaintiff seeks an order for the winding up of the defendant on the grounds of insolvency. A presumption of insolvency has arisen pursuant to s.459C of the Corporations Act 2001 (Cth) by virtue of non-compliance with a statutory demand. The defendant sought an order setting side the statutory demand. On 11 August 2005, Macready AsJ declined to set aside the demand but reduced the amount from $59,034.54 to $52,776.76.

2 By an interlocutory process filed on 3 November 2005, the defendant seeks (and two non-parties, Mr Thadani and Ms Sit purport to seek) three orders: first, an order that Mr Thadani and Ms Sit be joined as defendants; second, an order that the defendant have leave pursuant to s.459S of the Corporations Act to rely on grounds of defence that were (or could have been) relied on in challenging the statutory demand non-compliance with which has created a presumption of insolvency; and, third, an order staying the winding up application pending determination of an appeal from the decision of Macready AsJ refusing an order setting aside that statutory demand.

3 I heard evidence and argument on 7 November 2005 and directed that written submissions be filed. Thereafter and before all written submissions had been filed, the defendant made a further application. It was heard on 24 November 2005 and was successful only to the extent of a grant of leave to amend the grounds of opposition by adding a further ground.

4 I shall deal first with the application under s.459S.

5 The grounds of defence upon which the defendant wishes to rely (as expanded on 24 November 2005) include an allegation that the relevant debt is disputed on various bases and that the defendant has an offsetting claim or offsetting claims, one of which is the subject of separate proceedings in the Commercial List. These are grounds to which s.459S is relevant:

“ 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.”

6 The grounds of defence to which the defendant’s s.459S application is directed (including the element added on 24 November 2005)are as follows:

Ground 2 : “The alleged debt is not a debt of the kind which properly ought to be the subject of a statutory demand in that it was clear at all material times that the true amount of even the prima facie debt had not been credibly established.”
Ground 3 : “The alleged debt is disputed by the defendant in that:
a) The balance of account upon which the debt alleged by the plaintiff is based is not properly or reliably substantiated and is in many respects shown to be erroneous.
b) The plaintiff has failed or refused to provide commercial documents necessary for the proper reconciliation of the alleged debt.
c) The plaintiff has failed to give credit for substantial sums of money paid to the plaintiff by the defendant (and in particular the sums of $20,000 paid to the plaintiff on 14 August 2003 and a further sum of $20,000 paid to the plaintiff on 26 August 2003, which sums attract interest at court rates if not applied strictly in accordance with mandate.
d) The plaintiff has failed to give credit for very substantial sums of money paid by the defendant to a company controlled by the same interests and/or in joint venture with the plaintiff, under circumstances that the evidence shows that those monies have not been applied in accordance with the terms on which they were paid.
e) Further, the defendant says that it has an offsetting claim against the plaintiff in the sum of $125,000 in that the plaintiff as a party knowingly involved in a breach of trust by Shakespeares Systems Pty Ltd in relation to the said sum is liable to account to the defendant for the said sum.”
Ground 4: “Further or in the alternative the defendant says that it has an offsetting claim against the plaintiff which claim is substantially in excess of any sum which might reasonably be found to be owed by the defendant to the plaintiff by reason of the subject-matter of the varied statutory demand upon which the plaintiff relies (which indebtedness is otherwise denied). The substance of the said claim is set out in Commercial Division summons no. 50148 of 2005 filed in this Honourable Court.”
Ground 6: “The petition is an abuse of process in that the plaintiff has refused despite repeated requests to account for sums certain paid to the plaintiff properly or at all which sums certain would in whole offset the alleged debt or omit it to a sum which be easily paid by the defendant.”
Ground 7: “The plaintiff by its conduct has unreasonably and contrary to customary and proper commercial practice complicated the task of quantifying the alleged prima facie debt the subject of the varied statutory demand such that reliance upon the alleged indebtedness would produce a manifest injustice.”
Ground 8: “The plaintiff should be denied the relief claimed in that the plaintiff claims a debt but has adopted the perverse position that neither it nor a company controlled by the same interests and/or in joint venture with the plaintiff are prepared or have been prepared at any time to account properly or at all for monies paid to them by the defendant.”

7 I am satisfied that each of these grounds of defence involves an argument or contention of the kind with which s.459H is concerned, that is either that there is a general dispute about the existence or amount of the debt or that the company has an offsetting claim.

8 The first matter to which the court must pay attention is the clear statutory directive in s.459S(2): leave must not be granted unless the court is satisfied that the ground on which the company seeks to rely is material to proving that the company is solvent. This matter was the subject of the following observations of Spigelman CJ (with whom Handley JA and Giles JA agreed) in Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723 at p.735:

“53 By the time an application under s459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s459S(2) directs attention, in part, to what it is that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the Court cannot be ‘satisfied’ of the mandatory precondition in s459S(2). An objective element is introduced by the word ‘material’ but that can only be determined after identifying the company’s contentions.

54 If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it ‘proving’ its solvency, cannot be satisfied.

55 The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.

56 It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be ‘satisfied’ in the sense required by s459S(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is ‘material’, let alone whether leave should be granted under s459S(1). On the submissions made to this Court, these issues do not arise. The appeal should be dismissed.”

9 The plaintiff contends that the defendant has not shown the matter that s.459S(2) thus makes essential to the grant of leave under s.459S(1). As Mr Kidd of counsel pointed out on behalf of the plaintiff, despite the large volume of material put into evidence by the defendant, there is not one balance sheet and not one cash flow statement, with the result that there is no evidence from which the court can judge the materiality of the relevant grounds of defence to proof of solvency. Mr Kidd further says that, for all anyone knows, the defendant may be very comfortably solvent whether or not the debt in question is taken into account. Mr Newell on behalf of the defendant says two things in reply. First, he says that non-payment of the debt prima facie threatens the defendant’s ability to pursue the Commercial Division proceedings and that is something which, of its nature, should lead to an inference of inability to pay. Second, he refers to evidence that, apart from the debt, the defendant has no creditors and is paying for supplies on a COD basis, with debts being paid as they fall due – all of which, it is said, shows that the contention that “the grounds on which it seeks to rely make the difference between solvency and insolvency is not implausible”.

10 The statutory directive in s.459S(2) does not entail an inquiry into what is “not implausible”. The court must not grant leave unless it is “satisfied” that the grounds in question are material to proving solvency. The court must be able to make positive findings. As Spigelman J makes clear in Switz v Glowbind, the primary source of information on the solvency of the company must be the company itself. In applying for leave under s.459S(1), therefore, the defendant company must place the court in a position where it can, as to the matter of solvency, make the findings necessary to cause it to be “satisfied” in terms of s.459S. The fact that the particular debt remains unpaid throws no light on the matter, particularly where, as here, the company considers itself not liable. Non-payment, in those circumstances, is consistent with unwillingness to pay as opposed to inability to pay.

11 I turn to the second matter to which Mr Newell refers as relevant to s.459S(2). If, as suggested, there are no creditors other than the plaintiff and payment for supplies is on a COD basis, it might be inferred that that the $52,776.76 is the only outstanding debt. The evidence that debtors are paying promptly might be taken to suggest healthy cash flow. But there is still an insufficient basis for any positive finding about the solvency position and the relevance (or materiality) to it of the $52,776.76 debt. For all one knows, there may be cash resources sufficient to cover it. It is true that the defendant says in the first of its grounds of defence that, but for the debt in question, it is able to meet all its debts as and when they fall due. But that unsupported assertion does not assist the court in reaching, on the basis of evidence, the conclusion required by s.459S(2).

12 On this aspect of the matter, I accept the submissions made on behalf of the plaintiff. The defendant has not presented a case from which the court can be satisfied in the way required by s.459S(2).

13 I proceed nevertheless to consider briefly the defendant’s other contentions relevant to s.459S. In doing so, I adopt what was said by Austin J in Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 at [49]:

“In my opinion the exercise of the discretion to grant leave under s.459S(1) involves three considerations, namely:
(i) a preliminary consideration of the defendant’s basis for disputing the debt which was the subject of the demand;
(ii) 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
(iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent.”

14 I have already dealt with item (iii). I next address (ii).

15 The defendant relies on what Mr Newell’s submissions described as “a number of matters which arise by reason of a change of circumstances between the time that the application was filed to set aside the plaintiff’s statutory demand and the current proceedings to wind up the defendant”. Once changes in circumstances are asserted, it becomes necessary to consider whether there is any need for s.459S(1) leave at all. In speaking of “a ground … that the company could have relied on”, s.459S(1) is concerned not with a ground of a particular kind or description in a generic sense but, rather, with a ground that was actually available to be asserted according to the facts and circumstances existing at the time when it was open to the company to resort to the s.459G procedure: see Biron Capital Ltd v Velowing Pty Ltd [2003} NSWSC 1181, Perpetual Nominees Ltd v Masri Apartments Pty Ltd (2004) 49 ACSR 719, Goman v Scope Data Systems Pty Ltd [2004] NSWSC 314. It follows that, if all the “changes in circumstances” are of such a kind as to make defences on the basis of circumstances grounds that were not available to be asserted upon the s.459G application, leave under s.459S will be refused as unnecessary.

16 It is clear, however, that this is not the case here. Rather, the defendant has made further investigations which caused the following submissions to be made:

“14. Generally, and as is plain from the evidence, the set aside application was approached on the basis of a very general understanding of what is in fact a very complex matter. It is also the case that it was approached on the basis that the affairs of Shakespeares Systems Pty Limited (‘Systems’) and the defendant were mixed in such a way that they were essentially one operation in the nature of a joint venture partners. This notion was contributed to by the dealing generally, the accounting for monies and the form of correspondence.
15. Subsequent to the preparation of the application (see affidavit of Leo Muiriniti sworn 4 November 2005 (‘the Muriniti affidavit’)) considerable investigation work was undertaken in relation to the dealings of the defendant with the Shakespeares Group (‘the SG’). Further, it appeared, though it was not with hindsight clear, that the SG denied being a joint venture.
16. In the course of the investigations, and in particular as a result of the investigations and detailed consideration by counsel, a number of matters became apparent which had a significant bearing upon the adjustment of rights as between the defendant and the SG group. Those matters for the most part appear from the pleading in the Commercial Division Summons (‘LCM6’) prepared on the basis of those investigations and filed on 26 September 2005 in this Honourable Court.”

17 The submissions go on to expand upon this in relation to the several grounds in question. In doing so, however, they make it clear that all the circumstances upon which reliance would be placed had existed at the time when it was possible for the defendant to challenge the statutory demand. It is just that, as to some of them (particularly a question whether a sum of $125,000 had been paid by the plaintiff to a company called Georgy Porgy’s Family Restaurants Pty Ltd), the defendant (effectively, Mr Thadani and his advisers) has now dug more deeply into the previously available material.

18 Against that, the plaintiff points to the fact that, as long ago as November 2004, the defendant’s solicitor wrote to the plaintiff saying that it was in the process of considering and reviewing a large quantity of material with a view to briefing senior counsel to give urgent advice. That was some four months before the statutory demand was served. On 31 January 2005 (two months before the statutory demand was served), the defendant’s solicitor wrote to the plaintiff saying that he had spent a considerable period of time taking instructions and perusing a large quantity of documents and had also briefed senior and junior counsel who were presently analysing the large quantity of material. On 7 February 2005, the defendant’s solicitor wrote to the plaintiff asserting a claim for damages under the Trade Practices Act. That, it may be inferred, was the culmination of the intensive investigation.

19 In these circumstances, I cannot see that there was a justifiable reason why the matters of dispute and offsetting claim upon which the defendant now wishes to rely were not raised in the context of the s.459G application. The investigations no doubt traversed the whole of the parties’ relationship in detail. There is no reason to think that all of the matters in question were not within the defendant’s possession, actually or constructively, at the time relevant to a s.459G challenge. All of them related, after all, to dealings between the parties that were by then completed.

20 My conclusion therefore is that the defendant fails under items (i) and (ii) in the above extract from the Paliflex case. There is accordingly no need to consider item (iii). Leave under s.459S will not be granted.

21 I consider next the defendant’s application for an order that Mr Thadani and Ms Sit be joined as defendants.

22 Provision for the joinder of defendants to a winding up application is made by rule 2.13(3) of the Supreme Court (Corporations) Rules 1999. That rule does not prescribe criteria against which any joinder application is to be assessed. The generally applicable criteria must therefore apply. Having regard to rule 6.24 of the Uniform Civil Procedure Rules 2005, joinder of persons as defendants would be appropriate only if the joinder were “necessary to the determination of all matters in dispute” in the proceedings. The proceedings are winding up proceedings in which the plaintiff seeks a winding up order in respect of the defendant. Mr Thadani and Ms Sit are described in submissions as “the principal creditors of the defendant company” (a proposition which conflicts with an earlier submission that the plaintiff is the only creditor). They are also the persons beneficially interested in the issued share capital.

23 It is in no way essential to the complete and proper constitution of proceedings of this kind that any creditor (or any shareholder or any beneficial owner of shares) become a party. No relief is (or needs to be) sought against them. There is accordingly no basis for the making of the order sought.

24 The court has power to allow a creditor to be heard in a corporations proceeding without become a party: Supreme Court (Corporations) Rules, rule 2.13(1). The requirement of “necessity” arising indirectly through the general rules of court then does not apply. It may be that leave under rule 2.13(1) would be granted to Mr Thadani and Ms Sit if they sought it. One factor, in particular, would be material to the determination of any such application. It has been made clear that Mr Thadani and Ms Sit, if joined as defendants, would seek to agitate the very matters that the defendant would agitate if not precluded by s.459S. Such a course would be contrary to the clear intent of the legislation and the court would not facilitate any such circumvention. These considerations might lead to refusal of leave under rule 2.13(1) or cause any grant of leave to be upon terms preventing the circumvention.

25 The final matter with which I must deal is the application for an order staying the winding up proceedings pending determination of the appeal from the decision of Macready AsJ refusing to set aside the statutory demand but reducing the amount.

26 The proposition that the court should stay the winding up application until determination of the appeal from Macready AsJ is, in its essential substance, the equivalent of the proposition that the court should stay that application because of the existence of a genuine dispute as to the existence or amount of the debt the subject of the statutory demand (or, at least, the residue as found by Macready AsJ) and the existence of an offsetting claim. The objective of the appeal, after all, will be to show that the decision under appeal was incorrect as to its conclusion that there was, in relation to that residue, no genuine dispute and no offsetting claim. The effect of the stay would be to allow the defendant to rely on these matters even though the time for reliance on them under the statutory scheme is well and truly past. Such reliance is impermissible, in light of David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265; and this is so even if an appeal is current in respect of a judgment debt that formed the basis of the statutory demand: Braams Group Pty Ltd v Miric (2002) 44 ACSR 124.

27 The David Grant case makes it clear, in my opinion, that a creditor who has served a statutory demand which remains unsatisfied such that the presumption of insolvency has arisen (whether or not there was an attempt to have the statutory demand set aside) is entitled to initiate and prosecute a winding up application unless that application is within the narrow abuse of process possibility adverted to in the judgment at p.279.

28 That this is so despite the initiation and pendency of an appeal against a refusal to set aside the statutory demand is confirmed by the decision of the Victorian Court of Appeal in Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85. The circumstances examined in that case bear a very close similarity to those presently under consideration. They are described in the first paragraph of the judgment of Phillips JA:

“We have before us three appeals which by agreement are being heard together. Each is an appeal from an order made in the Trial Division on appeal from an order made by the Senior Master in a matter arising under the Corporations Act 2001 in consequence of the service upon the present appellant of a statutory demand by the present respondent. In each an order was made by the Senior Master dismissing an application made under s 459G to have the statutory demand set aside. In each case an appeal to the Trial Division was dismissed on the ground that, by the time the appeal came on for hearing, the time for compliance with the demand had expired, so that without examination of the merits the appeal had to fail. The appellants now contend that in each case the judge erred in concluding that the time for compliance had expired given the institution of an appeal. In my opinion, there was no error in the decision below and these appeals should be dismissed.”

29 The essence of the Court of Appeal’s decision appears from paragraph [9]:

“Application under s 459G to set aside the statutory demand was ‘finally determined’ within the meaning of 459F(2)(a)(ii) when the Master’s order was made on 21 June 2001 and the fact that that order was liable to appeal was nothing to the point. If the company was wishing to appeal it could do so, but unless the appeal was heard and determined before the expiry of the period for compliance otherwise fixed, an extension of the time for compliance had to be obtained. Without it, there could be no point in the continued prosecution of the appeal, for, the period of compliance having ended before the appeal was heard and determined, the consequence prescribed by s 459F(1) attached, with all that followed under the statute. There can be no occasion, in my opinion, for adopting a construction of s 459F(2)(a)(ii) that would require that the consequence prescribed by subs (1), having once attached, should then be undone because of the exercise of some right of appeal. Once that consequence attached, it remained attached (as indeed Gummow, J was disposed to suggest in David Grant , albeit in a slightly different context).”

30 Of particular pertinence here is the observation that, without an extension of time under s.459F “there could be no point in the continued prosecution of the appeal, for, the period of compliance having ended before the appeal was heard and determined, the consequence prescribed by s.459F(1) attached, with all that followed under the statute”. There has been no extension of time under s.459F in this case. For the reason stated by the Court of Appeal, there is accordingly, in this case as there, “no point in the continued prosecution of the appeal”. That being so, there is equally no point in staying the winding up application pending determination of the appeal.

31 All claims in the defendant’s interlocutory process filed on 3 November 2005 are dismissed with costs.

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