South East Water Ltd v Kitoria Pty Ltd
[1996] FCA 577
•12 JULY 1996
CATCHWORDS
CORPORATIONS - Winding up - application for substitution as petitioner by supporting creditor - discretion to substitute - solicitor's bill of costs - whether a creditor - whether a genuine dispute as to existence of debt - matters relevant to exercise of discretion on application for substitution
Corporations Law ss 465B, 459J, 459P,
Re Calail Ltd (1982) 1 ACLC 329
Jarpab v Winter 14 ACSR 255
Jarena Pty Ltd v Sholl Nicholson Pty; Leapint Pty v Sholl Nicholson (unreported, Heerey J Federal Court of Australia 27 February 1996)
SOUTH EAST WATER LIMITED (ACN 006 902 547) v KITORIA PTY LTD (ACN 006 314 914)
VG 3053 of 1996
Ryan J
12 July 1996
Melbourne
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY ) No VG 3053 of 1996
)
GENERAL DIVISION )
BETWEEN: SOUTH EAST WATER LIMITED
(ACN 006 902 547)
(Applicant)
AND: KITORIA PTY LTD
(ACN 006 314 914)
(Respondent)
CORAM: Ryan J
DATE: 19 June 1996
PLACE: Melbourne
MINUTES OF ORDER
THE COURT ORDERS:
That the application be dismissed.
That the order made in paragraph 1 be stayed until 10 July 1996.
That the applicant on the motion on notice filed 27 May 1996 should pay the respondent company's costs of that motion, such costs to be taxed.
That there be otherwise no order as to costs.
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 ) No VG 3053 of 1996
)
GENERAL DIVISION )
BETWEEN: SOUTH EAST WATER LIMITED
(ACN 006 902 547)
(Applicant)
AND: KITORIA PTY LTD
(ACN 006 314 914)
(Respondent)
CORAM: Ryan J
DATE: 12 July 1996
PLACE: Melbourne
REASONS FOR ORDER OF RYAN J MADE 19 JUNE 1996
On 31 January 1996 South East Water Limited applied under s.459P of the Corporations Law for the respondent company ["Kitoria"] to be wound up in insolvency. Pursuant to s.459E of the Corporations Law, South East Water Limited served a statutory demand and accompanying affidavit on Kitoria at its registered office on 27 November 1995 specifying a debt in an amount of $29,071.09. That notice was not returned as unclaimed and the respondent did not comply with the statutory demand within the prescribed period.
On 16 April 1996 Keith Sutherland, as trustee of the bankrupt estate of Alwyn Ruta Samuel, filed a notice of intention to appear at the hearing as a supporting creditor. South West Water Limited later withdrew from the proceedings and, in consequence, I made the following orders on 15 May 1996:
1.That the application be adjourned to 29 May 1996 and if Keith Sutherland be not then or at any adjourned hearing substituted as the applicant, the application be dismissed.
2.That the respondent pay to the applicant the sum of $10,732.36 in satisfaction of the applicant's costs including all reserved and previously ordered costs provided, however, that except to the extent that the Court subsequently orders, such costs shall not be reinstated to the applicant out of the property of the company in the event that the company is hereafter ordered to be wound up.
3.That paragraphs 2 and 4 of the Order of Jenkinson J of 8 May 1996 be vacated with effect from 12 May 1996.
4.That the costs of the supporting creditor, Keith Sutherland, of this day be reserved.
Paragraphs 2 and 4 of the Order of Jenkinson J of 8 May 1996 provided that:
2.The respondent and each person who is acting as a director of the respondent be restrained until 16 May 1996 from doing any act towards effecting any disposition of the respondent's interest in the land known as 2-6 James Street, Clayton in the state of Victoria or tending towards encumbrance of any such an interest and from performing any act in performance of any contract for the disposition or encumbering by the respondent of any such an interest.
. . .
4.The costs of Keith Sutherland of this day's hearing be reserved.
By a notice of motion filed on 27 May 1996 Mr Sutherland sought an order pursuant to s.465B of the Corporations Law that he be substituted for South East Water Limited as applicant for the winding up of Kitoria.
Discretion to substitute
The motion pursuant to s.465B asserted that Mr Sutherland was a person who might otherwise have applied for the winding up of Kitoria as provided by s.459P in these terms:
Any one or more of the following may apply to the Court for a company to be wound up in insolvency:
(a) the company;
(b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);
(c) a contributory;
(d) a director;
(e) a liquidator or provisional liquidator of the company;
(f) the Commission;
(g) a prescribed agency.
(2) An application by any of the following, or by persons including any of the following, may only be made with leave of the Court:
(a) a person who is a creditor only because of a contingent or prospective debt;
(b) a contributory;
(c) a director;
(d) the Commission.
(3) The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise.
(4) The Court may give leave subject to conditions.
(5) Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency.
Sub-section 465B(1) confers on the Court a general discretion to make an order for substitution which is qualified by sub-s.465B(2) stipulating:
The Court may only make an order if the Court thinks it appropriate to do so:
(a)because the application is not being proceeded with diligently enough; or
(b) for some other reason.
Courts have traditionally been reluctant to allow the withdrawal of winding up petitions or bankruptcy petitions merely because an accommodation has been reached between the petitioning creditor and the debtor. The interests of other creditors cannot be disregarded. In the present case there is a prima facie case that Kitoria is insolvent because it has
failed to comply with South East Water Limited's statutory demand. However, that company has chosen not to proceed with the winding up application and there is no evidence of the existence of any other creditors save for Mr Sutherland. Kitoria disputes that Mr Sutherland is in fact a creditor.
Debt: Solicitor's bill
In his affidavit sworn 27 May 1996, Mr Sutherland stated that he had consented to act as trustee of the bankrupt estate of Mr Samuel after he became bankrupt on 5 January 1996 on the presentation of a debtor's petition. Before his bankruptcy, Mr Samuel had carried on practice as a solicitor. Mr Sutherland deposed that he had ascertained from the records of Mr Samuel that on or about 8 March 1995 an invoice had been issued to Kitoria claiming the sum of $16,000.00 for legal services. He believed that Kitoria was indebted to him as trustee of the bankrupt estate for $16,000.00 and that the said sum remains outstanding.
The solicitor's bill is exhibit KLS1 to Mr Sutherland's affidavit sworn 27 May 1996. It is in fact a revised bill. An earlier bill had been compiled to claim an amount slightly less than $10,000.00.
The solicitor's bill relied upon by Mr Sutherland has a number of unsatisfactory features. It is not in taxable form. It claims amounts by way of barristers' fees amounting to $9640.00, other disbursements in the sum of $1360.00 and $5,000.00 for "professional charges in respect of all instructions, correspondence, negotiations, attendances, briefing Counsel and conferences 20 matters at $250.00 each". As already noted, the total claimed is $16,000.00.
The earlier bill of costs had been prepared by Mr Samuel on 23 November 1994 but it is claimed that the revised bill was compiled after it had been noticed that the earlier bill had not included additional amounts recorded on office ledger cards as due from persons or entities related to the respondent (including Ms Maher a director of Kitoria) for whom Mr Samuels asserts that he also acted.
In an affidavit sworn 31 May 1996 Ms Maher acknowledges that Mr Samuel had, before his bankruptcy, acted for Kitoria and various members of her family. The affidavit continues to assert that upon examination of the bill of costs, Ms Maher is:
unable to form any view as to what if any liability for costs the company may have as the bill does not contain sufficient detail to form an assessment. I am unable to say from the account whether in fact all of the matters relate to the company or other matters ... Moneys have been paid to Mr Samuel in relation to various matters and I am unable to reconcile those payments with the alleged account ...
Ms Maher further deposed that during the course of acting for the respondent company:
Mr Samuel failed to attend to a number of matters whereby proceedings had to be adjourned and the company suffered costs orders against it. In the matter of Kitoria Pty. Ltd. v. Purdy Kirkham Pty. Ltd. Australia and New Zealand Banking Group Ltd. and the Official Trustee in Bankruptcy in the County Court of Victoria proceeding number MC924671, the proceeding was adjourned out of the list from 21 November 1994 because Mr Samuel lost the file. An order that the plaintiff pay the defendants costs was made, which costs were later taxed.
Paragraph 4 of the Order of his Honour Judge Jones in that matter provided that:
The question of any rights of the Plaintiff pursuant to Order 63 A.23(1) be reserved.
Order 63A.23 of the Rules of the County Court provides for an order to be made against a solicitor in relation to costs incurred where a solicitor for a party, whether personally or through a servant or agent, has caused costs to be incurred improperly or without reasonable cause or to be wasted by undue delay or negligence or by any other misconduct or default.
The inference can be drawn that Kitoria may have a set-off or counterclaim against Mr Samuels which could be asserted in diminution or extinction of its liability on his claim for costs. It is noted that Mr Samuel denies losing the file, but it is inappropriate to investigate in the present proceedings the merits of his claim against Kitoria or any counterclaim which it may have against him.
Ms Moorhouse-Perks who succeeded Mr Samuel as solicitor for Kitoria has deposed in an affidavit sworn 31 May 1996 in relation to the bill of costs:
8.I have now perused the account being exhibit KLS1 to the Sutherland affidavit and I am unable to form a view as to what the company is being requested to pay for. I have attempted previously to clarify these matters with the applicant, who appears to have ignored my requests. The charges claimed in relation to "sundry expenses" cannot be reconciled and, indeed, in my professional opinion, are probably not claimable disbursements. The claim for "professional charges" cannot be related to any particular matter. On 5 April 1995 I paid from funds received from the company $1,312.00 towards a fee of $1,500.00 of Alan Sandbach. Now produced and shown to me marked "KM4" is a copy of the original receipt in my possession.
9.I have been requested by the company to review various matters in which Mr Samuel acted to form a view as to losses suffered by the company by reason of Mr Samuel's failure to attend to matters whilst acting for the company. It appears that, whilst liberty to apply pursuant to o.63A.23(1) has been granted as referred to in exhibit KM3 that order would relate only to costs paid by the company to other parties. Those orders do not take into account costs which may have been charged to the company by Mr Samuel in relation to those matters. The only way by which that issue can be determined is for the applicant to furnish a proper bill of costs.
10.The applicant has now alleged that the company is indebted to him for an amount of $16,000.00. It is clear that the applicant's claim includes some counsel's fees that I have paid for on behalf of the company. I am presently unable to identify what other amounts have been paid due to the failure of the applicant to furnish particulars ...
In reply Mr Samuel has deposed that before his bankruptcy he had conducted a legal practice and that since 7 December 1991 he had acted for Mrs Maher (a director of the respondent company) and a short time later had commenced to act for Kitoria. He ceased to act in or around November 1994 at which time Ms Moorhouse-Perks commenced acting for it. He further deposes in his affidavit sworn 7 June 1996 that:
4.On the 23rd November 1994 I served a bill of costs on the respondent company by posting it to its directors care of Mrs Maher's address at 9 Knight Street, Clayton in accordance with Mrs Maher's instructions. The bill was principally for disbursements (chiefly barristers' fees) incurred by me acting for the respondent. The bill was prepared by me by reference to office ledger cards maintained by me. Now produced and shown by me is a true copy of the said bill of costs dated 23rd November 1994.
After serving the bill of costs of 23rd November 1994 I observed amongst my records disbursements of Counsels' fees incurred in connection with the respondent which I had not included in the bill of costs of 23rd November 1994. These additional amounts were recorded on office ledger cards relating to entities (including Mrs Maher) of the respondent for which I had acted. Consequently, I prepared an (sic) amended bill of costs dated 8th March 1995 a copy of which is annexed to Mr Sutherland's affidavit sworn 27th May 1996 and filed herein....
Submissions
As already indicated, para 459P(1)(b) of the Corporations Law allows "a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor)" to apply to
the Court for a company to be wound up in insolvency. It was submitted by Mr T. Davies for Kitoria that Mr Sutherland was unable to establish himself as a creditor of the company in the sense that the debt on which he relied was disputed on substantial grounds. Mr Davies relied on the judgment of Master Lee QC of the Supreme Court of Queensland in Re Calsil Ltd (1982) 1 ACLC 329.
In Calsil the debt claimed by the petitioning creditor had been paid, secured or compounded and when the petition came on for hearing an adjournment was obtained by consent. There was then an application by Calsil to be substituted under r.27 of the Companies Rules as petitioning creditor. Calsil argued that it was entitled to be substituted as petitioner because it claimed to be a creditor and that the issue of whether any and what amount was owed to it should be left to be resolved at the hearing of the petition. It was found by Master Lee QC that the debt was disputed on substantial grounds.
Rule 27 of the Companies Rules 1963 provided as follows:
When a petitioner is not entitled to present a petition or, whether so entitled or not, where he-
(a)fails to take all the steps prescribed by these Rules preliminary to the hearing of the petition;
(b)consents to withdraw his petition or to allow it to be dismissed or the hearing to be adjourned; or
(c)fails to appear in support of his petition when it is called on in Court on the day originally fixed for the hearing thereof or any day to which the hearing has been adjourned, or if appearing does not apply for an order in terms of the prayer is his petition -
the Court may, upon such terms as it may think just, substitute as petitioner any person who, in the opinion of the Court, would have a right to present the petition and who is desirous of proceeding with the petition.
The issue was whether Calsil had "a right to present the petition". By contrast with the present case, there was evidence that the respondent was unable to pay other debtors who had, however, agreed to allow the respondent time in which to restructure its financial and trading position. Section 221 of the Act provided that a company might be wound up on the petition of "any creditor". Thus to establish a right to present a petition, Calsil had to show that it was a creditor, just as in the present case Mr Sutherland has to demonstrate that the bankrupt estate of Mr Samuel is a "creditor" within the meaning of s.459P(1)(b) of the Corporations Law.
After examining the relevant authorities, Master Lee QC observed at 336:
The above authorities in my opinion in no way detract from the principle that where a debt is prima facie proved, it is not enough for a company merely to say that the debt is disputed, whether on an application for an injunction before or after presentation of the petition, or for a stay, or at the hearing, or indeed in opposition to an application for substitution under r. 27. There must be evidence that the debt is bona fide disputed on substantial grounds: see e.g. Bateman Television Ltd. v. Coleridge Finance Company Limited (1969) N.Z.L.R. 794 and Re Welsh Brick Industries Ltd. (1946) 2 ALL E.R. 197.
...
However, these authorities do not in my opinion support the proposition for the applicant that where a debt is disputed on bona fide and substantial grounds (i.e. as to the existence of the debt itself and as to whether or not the "creditor" has in fact proven its debt) the Court should on an application for substitution under r. 27, conclude that such a "creditor" whose debt is so disputed has "a right to present the petition", thus leaving the question of whether that debt is established to be determined on the ultimate hearing of the petition. Neither do I think the applicant's case is advanced by the proposition that the applicant might simply have presented the petition in the first place without leave of the Court even if its debt was disputed, leaving it to the Company to apply for an injunction restraining either the presentation of the petition if it learnt of the threat, or any further proceedings on the petition.
The learned Master then concluded at 337:
In my opinion the rule itself, and the above authorities show that where a debt of a creditor is disputed on substantial grounds, the creditor has no "right" to present the petition, notwithstanding that the company might be insolvent. In addition, the rule confers a discretion on the Court whether to order substitution or not.
It was further submitted on behalf of Kitoria that in the present case the Court should take a similar approach to that required by s.459H on an application to set aside a statutory demand. In that context I was referred to the judgment of Heerey J in Jarena Pty Ltd v Sholl Nicholson Pty; Leapint Pty v Sholl Nicholson (unreported, 27 February 1996) where his Honour exercised his discretion under sub-s.459J(1)(b) to set aside statutory demands based on debts claimed to be due for the performance of legal work.
Section 459J(1) provides:
On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:
(a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
(b) there is some other reason why the demand should be set aside.
In Jarena the respondent was a firm of solicitors and had served statutory demands on the applicants. The applicants applied to have the demands set aside. Heerey J was satisfied that there was a dispute as to the rate at which the respondent was entitled to charge for the work although it was common ground that the work was to be charged on a time basis.
His Honour at p. 5 of his reasons observed:
Now it is true that there is no "proceeding to recover the costs" in this Court brought by the solicitor within the meaning of s 61(4) (of
the Supreme Court Act 1986 (Vic)). The only proceeding in this Court is one brought by the applicants to set aside the demands. Nevertheless it seems to me that I can and should, for the purpose of exercising my discretion conferred by section 459J(1)(b) of the Law, take into account the policy behind s 61 of the Supreme Court Act, which seems to me that even if a client does not avail himself or herself of the right to request a bill, nevertheless the statute provides a second line of defence should the solicitor take any proceedings. That provision was obviously enacted by the Victorian Parliament with a view to providing protection for clients against solicitors. I think it would be wrong if that protection could be effectively bypassed by utilising winding-up proceedings. I will therefore set aside the demands.
On the existence of a genuine dispute Heerey J noted at p. 7:
Nevertheless, it has to be kept in mind that all the law requires is a genuine dispute, not an establishment on the balance of probabilities that an applicant is more likely than not to proceed.
There was no concession on behalf of the applicant that a genuine dispute had been shown in the present case. Reference was made to Jarpab v Winter 14 ACSR 255 where in assessing the genuineness of a dispute and offsetting claim, in the context of a statutory demand, Santow J at 261 suggested:
(7) McClelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, strikes the proper balance, when recognising the inherent limits on how far a court should go in testing a claim for genuineness, while stopping short of resolving the ultimate dispute.
This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be" not having "sufficient prima facie plausibility to merit further investigation as to [its] truth". (cf Eng Mee Yong v Letchunanan [1980] AC 331 at 341), or "a patently feeble legal argument or an assertion of facts unsupported by evidence": cf South Australia v Wall (1980) 24 SASR 189 at 194.
But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving such a dispute.
Santow J also noted at 261 that:
(3) Lockhart J in Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 36 at 39 reviewed the authorities and stated that:
The notion of a "genuine dispute" in this context suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance.
Thus Lockhart J concluded from a review of the judgments that "a standard of satisfaction which a court requires is not a particularly high one", whilst expressing some caution as to the application of Beazley J's test [in Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 120 ALR 173; 12 ACSR 341] as perhaps being the highest of the thresholds in the various formulations.
In the present case I am satisfied that the dispute raised by Kitoria is genuine in the requisite sense whichever formulation of genuineness is applied.
Conclusion
In my view, the proper exercise of the discretion conferred by s.465B of the Law requires the Court to weigh in the balance two competing policies. The first is that an insolvent company should not be permitted to continue to trade to the detriment of its existing and future creditors but should be wound up as expeditiously as possible. If the achievement of that objective is jeopardised by the inaction or lack of diligence of the petitioning creditor, another creditor should be substituted as contemplated by s.465B(1)(a) to allow the winding up proceedings to continue in the interests of the generality of creditors, some of whom may have refrained from initiating their own proceedings in the knowledge that the original petition had been instituted. On the other hand, the Court should not allow winding up proceedings to be used as a debt-collecting mechanism or an instrument of oppression to be held over the head of a company otherwise trading satisfactorily by a creditor whose debt is the subject of a genuine dispute.
In the present case, Kitoria's non-compliance with the statutory demand served by South East Water Limited creates a presumption that it is insolvent; [Corporations Law s.459C(2)(a)]. No evidence has been adduced to rebut that presumption but it does not extend to establishing the nature and amount of the debts contributing to that insolvency or the identity of the creditors, other than the petitioning creditor, to whom those debts are or were owed. The fact that the petitioning creditor has compounded with Kitoria for its debt and the absence of any other creditor, except Mr Sutherland, are both relevant to the discretion which the Court is called upon to exercise.
I have concluded on balance that Mr Sutherland should not be substituted as petitioning creditor without having first had the existence of the debt which he claims determined in a court of competent jurisdiction. That will enable effect to be given to the policy discussed by Heerey J in Jarena Pty Ltd v Sholl Nicholson Pty (supra) in relation to recovery of amounts claimed by solicitors' bills of costs. It will also permit a proper resolution of the issues raised on the evidence as to payment, at least in part, of barristers' fees and Kitoria's possible counterclaim in negligence or breach of contract. For these reasons, I have concluded that, although the application for winding up is not being proceeded with diligently or at all, it would not be a proper exercise of discretion to allow the trustee of Mr Samuel's bankrupt estate to be substituted as petitioning creditor.
I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment of his Honour Justice Ryan.
Associate:
Date:
Solicitors for Applicant on : Mr M. Galvin
Notice of Motion filed J.M. Smith & Emmerton
27 May 1996
Solicitors for Respondent on : Mr T.P. Davies
Notice of Motion filed Oakley Thompson & Co
27 May 1996
Date of Order : 19 June 1996
Date Reasons for Order : 12 July 1996
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