Shin v Commodore Hotel Management Pty Ltd
[1999] FCA 771
•11 JUNE 1999
FEDERAL COURT OF AUSTRALIA
Shin v Commodore Hotel Management Pty Ltd [1999] FCA 771
CORPORATIONS – statutory demand – failure to take action to set aside statutory demand – winding up application – motion to stay winding up application – allegation that no debt due to applicant – whether leave under s 459S of Corporations Law is necessary
Corporations Law s 459S
House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527 applied
Mabrouk Pty Ltd, Re (18 March 1996, SC (NSW), McLelland CJ in Eq, unreported) cited
Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 discussedSHIN KYUNG ROK V COMMODORE HOTEL MANAGEMENT PTY LIMITED
NO. V 3034 OF 1999
FINKELSTEIN J
MELBOURNE
11 JUNE 1999
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
V 3034 OF 1999
BETWEEN:
SHIN KYUNG ROK
ApplicantAND:
COMMODORE HOTEL MANAGEMENT PTY LIMITED
RespondentJUDGE:
FINKELSTEIN J
DATE OF ORDER:
11 JUNE 1999
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1. The application to stay or dismiss the proceeding generally be dismissed.
2.The respondent to pay the applicant’s taxed costs of the application to stay or dismiss the proceeding.
3.The application to wind up the respondent be stayed until such time as the applicant pays into Court, or otherwise provides security for, the sum of $10,000 by way of security for the respondent’s costs of the winding up application.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
V 3034 OF 1999
BETWEEN:
SHIN KYUNG ROK
ApplicantAND:
COMMODORE HOTEL MANAGEMENT PTY LIMITED
Respondent
JUDGE:
FINKELSTEIN J
DATE:
11 JUNE 1999
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
The respondent, Commodore Hotel Management Pty Limited (Commodore Hotel), applies to stay or dismiss, or asks for an injunction to restrain the further presentation of, the application made by the applicant, Shin Kyung Rok, under s 459P of the Corporations Law that Commodore Hotel be wound up in insolvency.
Mr Shin has taken an assignment of a debt in the sum of $200,000 alleged to be due to Mr Katsuya Yamamoto by Commodore Hotel. The assignment was made by deed dated 11 December 1998. The deed provides (in clause 3) that it shall take effect from the date upon which notice of the execution of the deed is given to Commodore Hotel and its director, George Nelson Frew.
It is not disputed that written notice of the execution of the assignment of the debt was served upon Commodore Hotel on 16 December 1998. However, there is an issue concerning the precise date upon which the notice was served on Mr Frew. Mr B Hicks, a process server employed by Network Process Service, deposed in an affidavit that he had personally served the notice on Mr Frew at 5.15 pm on 16 December 1998. On the other hand, Mr Frew swore an affidavit in which he said that the notice had not been served until the afternoon on 18 December 1998. The precise time of the service of notice of the execution of the deed of assignment is of some importance because a demand under s 459E of the CorporationsLaw for the payment of the debt of $200,000 was served on Commodore Hotel on 17 December 1998 by Mr Shin and if he was not a creditor of the company on that day, he had no basis for serving the demand.
Mr Hicks was called to give evidence and was cross-examined on the contents of his affidavit. He confirmed those contents. He said that he had a specific recollection of having served the notice on the date mentioned in his affidavit. He produced a statutory declaration that had been sworn on 17 December 1998 before a deputy registrar of the Magistrates’ Court of Victoria at the Frankston Courthouse. In that declaration Mr Hicks swore that he had served the notice on 16 December 1998. Mr Hicks also produced a handwritten invoice book which he kept to record the date on which he had served documents and his fee for effecting service. Each invoice is prepared in duplicate (by carbon paper) and the original is sent to Network Process Service for payment. There was a copy invoice that included the fee charged for the service of documents on Mr Frew. That invoice is dated 17 December 1998. Although Mr Frew was not called to be cross-examined on his affidavit, the evidence leaves me satisfied that service of the notice was effected on him on 16 December 1998 and that Mr Frew must have been mistaken in his recollection that it was served some time thereafter.
The principal ground upon which Commodore Hotel relies to found its application for relief is that the winding up application is brought for an improper purpose, namely to force the company to pay a debt that is not due in order to avoid the risk of a winding up order being made. It is alleged that Commodore Hotel was not indebted to Mr Yamamoto for the debt allegedly assigned to Mr Shin. It is also alleged that if the debt was due the company has a claim in damages against both Mr Shin and Mr Yamamoto totalling $473,924 which can be set-off against the claimed debt so as to eliminate it. If either allegation could be made out, Mr Shin would not have standing to obtain an order for the winding up of Commodore Hotel.
With regard to the alleged debt, Commodore Hotel says that it received the sum of $200,000 from Mr Yamamoto (or perhaps from Mr Yamamoto and Mr Shin in the proportions 1:2) as part of the money that was to be applied towards the purchase of fifty per cent of the capital in Phillip Island Motels Pty Ltd, a company in which Mr Frew’s wife and son held an interest. It is also alleged that Mr Yamamoto (or Mr Yamamoto and Mr Shin) had agreed to take an assignment of a debenture over Phillip Island Motels and that the amount paid was also in part consideration for that assignment. According to Mr Frew, his family had acquired all of the capital in Phillip Island Hotels that it did not hold to be in a position to sell a fifty per cent interest to Mr Yamamoto and Mr Shin. It seems, but it is not altogether clear, that the sum of $200,000 received from Mr Yamamoto (or from Mr Yamamoto and Mr Shin) may have been applied in part payment for the shares and the assignment of the debenture. Thus Mr Frew says that the sum of $200,000 that was received by Commodore Hotel was not a loan made to that company (as Mr Shin alleges) but was money that was to be applied towards the acquisition of the shares and debenture and it was so applied.
Mr Frew says that Mr Shin is indebted to Commodore Hotel in the sum of $112,938 pursuant to a consultancy agreement relating to the refurbishment of a hotel in Korea and that Mr Shin is further indebted to Commodore Hotel in the sum of approximately $35,838 being money paid at the request of Mr Shin for the education and accommodation of Mr Shin’s children. Detailed calculations showing how these amounts have been arrived at are to be found in the evidence.
There is also an allegation that Mr Shin and Mr Yamamoto are liable to make good the losses said to have been suffered as a result of them refusing to go ahead with the purchase of the shares in Phillip Island Motels. Mr Frew says that those losses total approximately $319,647. He attributes this loss to Commodore Hotel but it is by no means clear why that company has suffered any loss if, as is alleged, Mr Shin and Mr Yamamoto failed to honour their obligation to purchase the shares. I say this because, on Mr Frew’s evidence, Commodore Hotel was not a party to the agreement to sell the shares in Phillip Island Motels to Mr Yamamoto and Mr Shin and it seems likely that if Mr Yamamoto and Mr Shin did make such an agreement then someone other than Commodore Hotel has a claim in damages against them. Be that as it may, it is not necessary for me to do more than note that it is Commodore Hotel who claims to have suffered the loss.
The application to wind up Commodore Hotel relies upon the failure by the company to comply with a statutory demand that was served pursuant to s 459E of the CorporationsLaw. That section permits a creditor to serve a demand on a company in respect of a debt that is due and payable to the creditor, requiring the company to pay the debt, or to secure or compound the debt to the creditor’s reasonable satisfaction, within twenty-one days of the service of the demand. If the company fails to comply with the demand, or does not obtain an order that the demand be set aside, the Court is to presume the company to be insolvent on a winding up application under s 459P unless the contrary is proved: see s 459C.
A statutory demand may be set aside for a number of reasons, one of which is that there is a genuine dispute between the company and the person serving the demand about the existence or amount of the debt to which the demand relates (s 459H(1)) and another is that the company has an offsetting claim (s 459H(1)). An offsetting claim is defined in s 459H(5) as “a genuine claim that the company has against the [creditor] by way of counter-claim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstance as [the] debt to which the demand relates)”.
Commodore Hotel did not apply to set aside the statutory demand although it is clear that it had grounds for making that application. Indeed, it was conceded by counsel for Mr Shin that had such an application been made on the material presently filed it would have been successful.
The consequence of failing to apply to have a demand set aside is that the company may not oppose a winding up application on any ground that the company could have relied on to set aside the statutory demand unless it obtains the leave of the Court. This restriction is provided for in s 459S which reads:
“(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.”
Not only is the company not entitled to oppose the application for a winding up on a ground that it could have but did not rely upon to set aside a statutory demand, it is also not entitled to rely upon such a ground in a claim that the winding up application be stayed or dismissed or that its further prosecution be enjoined as an abuse of process without having obtained leave to rely on that ground under s 459S(1). This was decided by Brownie J in House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527. There his Honour said (at 530) that “if a company facing a winding up summons wishes to assert [in an application to dismiss or stay the summons] that the plaintiff lacks the standing of a creditor, the company must now take that point by way of applying to set aside the statutory demand, or [if it has made no such application] must obtain leave under s 459S.” See also Re Mabrouk Pty Ltd (18 March 1996, SC (NSW), McLelland CJ in Eq, unreported).
This is not to say that the Court does not have inherent jurisdiction to stay or dismiss a proceeding as an abuse of process, but it does mean that the circumstances in which such an order might be made in the case of a winding up application are more limited since the enactment of Part 5.4 of the Corporations Law and s 459S in particular. See Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 where Brownie J said that it will be a very rare case indeed where a winding up application will now be stayed as an abuse of process.
It is to be observed that under s 459S(2) the Court can only grant leave in respect of a ground that is material to proving that the company is solvent. In this connection, Commodore Hotel points out that unless it is permitted to challenge the existence of the alleged debt of $200,000, there is a real risk that it will be found to be insolvent. It has put in evidence a balance sheet as at 31 March 1999 that discloses total shareholders equity of $106,981 based on liabilities that do not include a debt owed to Mr Shin or Mr Yamamoto. Hence, Commodore Hotel says that it seeks to challenge the status of Mr Shin as a creditor for the purpose of proving that it is solvent. I think that this is correct, and subject to discretionary considerations, there is no inhibition against an order being made under s 459S(1).
In respect of its application for leave (the application was made orally during the course of the hearing), the company does not put forward any real explanation as to why it failed to make application to set aside the statutory demand. In his affidavit Mr Frew said that the statutory demand was “referred” to the company’s solicitors, Messrs Wilder Moses Bengasino, and that “the company expected that that firm would take whatever steps were necessary to protect the company’s interests”. What instructions the solicitors were given when the demand was “referred” to them are not set out. What advice (if any) was given by the solicitors is not referred to. If there was any discussion about the possibility of making an application to set aside the statutory demand, the contents of that discussion are not the subject of evidence.
Mr John Graham Chambers, a consultant with Wilder Moses Bengasino, did swear an affidavit where some reference was made to the failure to make application to set aside the statutory demand. Mr Chambers said that no such application was made because he took the view that:
“(a)the Demand was an abuse of process as the applicant [Mr Shin] was endeavouring to use a Statutory Process to collect an alleged debt when there was clearly a substantial commercial dispute between the parties, and
(b)The alleged ‘Creditors Statutory Demand for Payment of Debt’ was not a good and proper Demand pursuant to and under the provisions of the Corporations Law, and
(c)the purported Deed of Assignment from Mr Yamamoto to Mr Shin was ineffectual at law.”
Frankly, I do not understand what Mr Chambers means. If he believed that the demand was an abuse because there was a genuine dispute about his client’s indebtedness to Mr Shin, or that the demand was defective, or that the purported assignment was ineffectual, then what Mr Chambers is saying is that there were good reasons to apply to have the demand set aside. Mr Chambers gives no reason why he did not take that step.
I could understand, and be sympathetic towards, a solicitor who believed he could make an application to stay or dismiss a winding up application as an abuse of process without the need to obtain an order s 459S(1) and that was the reason why no application was made to set aside the statutory demand. I might also treat sympathetically an application under s 459S(1) in the case where a solicitor, who had been given a statutory demand by his client, was not aware of the relevant provisions of the Corporations Law and thus did not know the consequence of failing to make an application to set aside the demand. But Mr Chambers does not put forward any explanation along these, or other, lines.
In my view it would be wrong to grant leave under s 459S(1) to oppose the winding up application on a ground that could have been relied upon to set aside the statutory demand when no explanation is forthcoming why that application was not made. To grant leave in such a circumstance would be to wholly ignore the intention of Parliament, as evidenced by the section. It would mean that the restrictions imposed by the legislation would have no practical effect. However, as it is possible that Commodore Hotel may have some good basis for seeking leave, I would permit it to renew its application on further material.
The last matter that I must deal with is the company’s application for security for costs. Mr Shin is not a resident within the jurisdiction and appears to have no assets within Australia. This is a sufficient foundation for making an order.
In his affidavit Mr Chambers has provided an estimate of the present and future party/party legal costs and disbursements of the winding up application in accordance with the scale of costs found in the Second Schedule to the Federal Court Rules. He estimates those costs to be of the order of $24,000. Some of those costs relate to the present (and unsuccessful) application for an order that the winding up application be stayed or dismissed. As that application has been unsuccessful, the costs will be borne by Commodore Hotel in accordance with the orders that I will make in due course. Thus those costs should not be taken into account in any order for security. In due course, they will be set off against any order for costs that may be made in favour of Commodore Hotel. Further, it is appropriate that the costs that I will award in favour of Mr Shin also be deducted from that which would otherwise be an appropriate amount to be ordered by way of security. In the result, I am of the view that it is appropriate to order that Mr Shin should provide security in the sum of $10,000.
Accordingly, I will make the following orders: (1) the application to stay or dismiss the proceeding generally be dismissed; (2) the respondent pay the applicant’s taxed costs of the application to stay or dismiss the proceeding; and (3) the application to wind up the respondent be stayed until such time as the applicant pays into Court, or otherwise provides security for, the sum of $10,000 by way of security for the respondent’s costs of the winding up application.
I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate:
Dated: 11 June 1999
Counsel for the Applicant: Mr R Strong Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: Mr J R Dixon Solicitor for the Respondent: Wilder Moses Bengasino Date of Hearing: 28 April 1999 Date of Judgment: 11 June 1999
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