SY Financial Services Pty Ltd v Risk Business Pty Ltd
[2015] VSC 607
•16 November 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2014 2213
| SY FINANCIAL SERVICES PTY LTD (ACN 112 934 719) | Plaintiff |
| v | |
| RISK BUSINESS PTY LTD (ACN 073 286 978) | Defendant |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 October 2015 |
DATE OF JUDGMENT: | 16 November 2015 |
CASE MAY BE CITED AS: | SY Financial Services Pty Ltd v Risk Business Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 607 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Section 459P Winding up application – Failure to serve s 459G application within time – Section 459S application – Leave granted under s 459S(2) – Winding up application dismissed – Appeal from Associate Judge – Appeal dismissed – Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 referred to.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff/Appellant | AMJ Meagher | Clamenz Evans Ellis Lawyers |
| For the Defendant/Respondent | C R Brown | Behan Legal |
HIS HONOUR:
Introduction
On 4 February 2014 the plaintiff[1] served a statutory demand on the defendant.
[1] Although this is an appeal, I propose to continue to use the words plaintiff and defendant.
On 25 February 2014 the defendant applied to set aside the statutory demand pursuant to s 459G and 459J of the Corporations Act 2001 (Cth) (the Act). The application was not served on the plaintiff within the required 21 days.
As a result, on 19 March 2014 the defendant withdrew its application to set aside the statutory demand and paid the plaintiff’s indemnity costs.
On 8 May 2014 the plaintiff applied, pursuant to s 459P of the Corporations Act 2001, to wind up the defendant for failing to comply with the statutory demand.
On 11 June 2014 the defendant was granted leave to file a further application in relation to the statutory demand and on 29 September 2014 the defendant served a s 459S application on the plaintiff.
The hearing took place before Randall AsJ on 7 October 2014 and on 14 August 2015 judgment was delivered in the defendant’s favour. The plaintiff’s winding up application was dismissed with costs.
Appeal
The plaintiff appeals against the whole of the judgment dated 14 August 2015 pursuant to Rule 77.06.1 of the Supreme Court (General Civil Procedure) Rules 2005.
The specific grounds of appeal as set out in the notice of appeal are:
(a) The Associate Justice erred in finding that the reliance placed by the appellant (plaintiff) on grounds not being raised by the respondent (defendant) in 21 days was misconceived (paragraphs 18 of the judgment).
(b) The Associate Justice erred in finding that the failure to comply with the time limits for service of the affidavit within the time limits of s 459G was not due to the defendant company (paragraph 30 of the judgment).
(c) The Associate Justice erred in finding that there was a seriously arguable case that the appellants claim against the respondent company was extinguished and the failure to make the section 459G application has been appropriately explained (paragraph 33 of the judgment).
(d) The Associate Justice erred in finding that the financial evidence before the court at the time of the hearing of the application was sufficient to determine the solvency of the respondent company (paragraph 47 of the judgment).
(e) The Associate Justice erred in granting leave pursuant to section 459S of the Corporations Act 2001 for the respondent to oppose the appellant’s application to wind up the respondent company (paragraph 50 of the judgment).
(f) The Associate Justice erred in dismissing the winding up application (paragraph 54 of the judgment).
The power of the court, on appeal, is set out in Rule 77.06.9 which is in the following terms —
Powers of Judge of the Court hearing appeal
(1)On an appeal referred to in Rule 77.06, a Judge of the Court shall have all the powers of the Court constituted by an Associate Judge.
(2)The Judge of the Court shall have power to—
(a)receive further evidence upon questions of fact, whether by oral examination in court, by affidavit, or by deposition taken before an examiner;
(b)draw inferences of fact;
(c)give any judgment and make any order which ought to have been given or made; and
(d)make any further or other order as the case may require.
(3)The powers of a Judge of the Court under this Rule may be exercised notwithstanding—
(a)that no notice of appeal has been given in respect of any particular part of the judgment or order of the Associate Judge which is the subject of the appeal or by any particular party to the proceeding before the Associate Judge; or
(b)that any ground for allowing the appeal or for affirming or varying the judgment or order of the Associate Judge is not specified in the notice of appeal.
In order to consider the appeal, it is necessary to consider the merits of the defendant’s application pursuant to s 459S.
The section 459S application
Section 459S is in the following terms —
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.
It is agreed between the parties that the defendant failed to respond to the statutory demand within the requisite 21 day period.
In Chief Commissioner of Stamp Duties v Paliflex Pty Limited[2], Austin J said—
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.[3]
[2][1999] NSWSC 15; (1999) 17 ACLC 467 (‘Paliflex’).
[3] Ibid, [49].
Randall AsJ dealt with the three considerations and in the exercise of his Honour’s discretion granted the defendant leave pursuant to s 459S of the Act and dismissed the winding up application. The plaintiff was ordered to pay the costs on the standard basis.
Each element of Paliflex is discussed below.
Basis for disputing the debt (Appeal ground 3)
The defendant contended, both before me and below, that there was a proper basis for disputing the debt, the subject of the statutory demand, and that the evidence was all the defendant’s way.
First, it was contended that three payments totalling $39,986.04 were not taken into account. Secondly, it was contended that a reconciliation prepared by Susan Kielt, a third party (the Reconciliation), did not reflect the true state of account between the plaintiff and the defendant. This contention was based on Kielt’s evidence. Thirdly, it was contended that an agreement between the parties (called the Transfer Agreement) obliged the plaintiff to forbear from enforcing or claiming any amount owing from the defendant, in consideration for the transfer of certain shares to the plaintiff. The evidence establishes that the defendant performed its part of the bargain.
The three matters referred to as forming the basis of the disputed debt were the subject of affidavit evidence from the defendant. The plaintiff did not file any evidence, other than the required affidavit in support of the winding up application, and did not require any of the deponents to attend for cross-examination.
Finally, the defendant submitted that the requirement of establishing a dispute in relation to the debt is a low hurdle under 459G of the Act. It was submitted that there is clearly a dispute as to the existence and/or the quantum of the debt. Accordingly, the Court should not, it was submitted, rely on the presumption of insolvency purportedly established by the Statutory Demand and consider the solvency material filed by the defendant as conclusive evidence that the Company is, and was at the relevant time, solvent.
The plaintiff submitted, both before me and below, that the defendant did not adduce any evidence to prove the payments alleged, and that the bald assertion to such effect was insufficient.
Other than to assert that the entire amount remained owing and payable, the plaintiff did not adduce any evidence contradicting the defendant’s evidence. Further, as pointed out, the plaintiff did not cross-examine any of the defendant’s witnesses. Finally, no evidence was adduced in relation to the Transfer Agreement. At the hearing of the appeal, the plaintiff made application to rely on an affidavit specifically directed to the Transfer Agreement. The evidence was available at the time of the hearing before Randall AsJ and no explanation was given as to why any such material was not filed at that time. I refused leave.
In finding that there was a seriously arguable case Randall AsJ said —
The first relevant consideration in determining an application for leave under s 459S of the Act is whether there is a serious question to be tried on the ground now sought to be raised by the defendant. This consideration is directed to whether the defendant has a seriously arguable case that the debt is the subject of a genuine dispute. I am not required to make a final determination with respect to the dispute. It is sufficient that I identify whether or not the defendant has a seriously arguable case at this juncture: Vangory Holdings; D.A.G. International Pty Ltd v D.A.G. International Group Pty Ltd; Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1).
It is clear that the plaintiff accepts that the three payments of 29 June 2012 were not taken into account in the reconciliation. It is less clear if there is an acceptance that further sums of $56,500 and $10,750 are conceded. That acceptance reduces the debt claimed by the plaintiff by $39,986 without provision for GST.
Putting that to one side, the plaintiff has simply not addressed the transfer agreement as alleged by Scott. I have made reference to the letter of 19 February 2014. The explanation set out therein does not gel. Albeit, that it might be appropriate for Scott to resign as a director in the event that he was no longer able to devote himself to the business, it simply does not address the issue of the transfer of shares. The searches provided with respect to the plaintiff are corroborative of the contention put by Scott. The plaintiff has not filed any material addressing that issue or explaining why it was necessary to transfer the shares and why the debt claimed by it had not been pursued after the November 2012 meeting. The issue of the shareholding was raised in Scott’s letter of 15 June 2012. There were meetings in October and November 2012. The shares were transferred. The reconciliation was prepared in June 2012 although it is referred to as being finalised in April 2013. I am satisfied that there is a seriously arguable case that the plaintiff’s claim has been extinguished. I am also satisfied that the failure to make the s 459G application has been appropriately explained.[4]
[4]SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, [31] – [33] (the Judgement).
There is no attack on the approach of the trial judge. The correct principle was applied. It was not necessary to resolve the issue. It was sufficient that there was a serious question to be tried. Appeal ground 3 attacks the sufficiency of the evidence. As pointed out, it was submitted that the evidence (or lack of it) did not support a finding or conclusion that there was a serious question to be tried.
I disagree. In my view the evidence was cogent, admissible and sufficient and I respectfully agree with the trial judge in regard to the adequacy of the basis for disputing the debt. It was clearly, viewing the entirety of the evidence, open to the trial judge to make such a finding. The reasons set out above are compelling. The ground in my view is without merit.
Reasons for failing to make application to set aside statutory demand and reasonableness of the defendant’s conduct (Appeal grounds 1 and 2)
The defendant contended, as is the case, that whilst their s459G application was filed within the 21 day period, it was not served on the Plaintiff within 21 days, and as the Court did not in the circumstances have jurisdiction to hear the application, the defendant had no choice but to consent to a summary dismissal of the 459G application. In the circumstances, the defendant was not afforded the opportunity to argue the grounds of dispute in relation to the debt.
Further, the defendant argued that the sole director of the defendant, Marcus Scott, was seriously ill following the receipt of the Statutory Demand, which hampered his ability to give fulsome instructions to the defendant’s solicitors and this impacted on the circumstances leading to the late service of the 459G Application.[5]
[5] See Affidavit of Francis Ruggiero dated 10 June 2014, [4] - [7] and Affidavit of Isaac Szmerling dated 26 August 2014, [4] and Exhibits IS-1 and IS-2.
The defendant submitted that the purpose of s 459S is to discourage the re-venting of issues that were already pursued, or should have been pursued, in the context of a 459G application. The Courts have long recognised, it was submitted, that the deadlines prescribed by the Act in terms of applications under s 459G can be harsh and, accordingly, the Court was requiredto balance the legislative policy of preventing disputes about debts from being raised at the winding up stage, against the potentially harsh effect of the 21 day time limit for challenging a statutory demand.[6] In this sense it was contended that s 459S acts as a safety net.
[6] See Chief Commissioner of Stamp Duties v Palifex Pty Ltd (1999) 149 FLR 179, [40]- [41] and [57]; See also Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962, [65].
Finally the defendant submitted that where an application under 459G has been shut out due to failure to comply with the strict requirements of section 459G, the Court should be more minded to grant leave under section 459S.
The plaintiff contended that despite swearing an affidavit on 29 September 2014 Scott gave no explanation and produced no evidence as to his medical problems that ostensibly prevented him from providing proper instructions to oppose the statutory demand or make a s 459S application within a reasonable time.
Further it was submitted that the defendant’s affidavit material and submissions provided no proper explanation as to:
(a) Why it failed to challenge the statutory demand within 21 days;
(b) Why it failed to bring the s 459S application until 29 September 2014;
(c) Why the defendant had not been able to provide competent instructions and prepare evidence in support of an application to challenge the statutory demand, or to bring a s 459S application, when in contrast it was able to:
(i) Appear by its legal representatives in various hearings throughout 2014, who presumably were competently instructed; and
(ii) Continue to trade under the management of Scott as its sole director throughout 2014 as reflected in the financial statements exhibited to paragraph 6 of the affidavit of Facy, dated 26 September 2014, being exhibits SAF-2 to SAF-4.
The failure of the defendants solicitors to file and serve the requisite affidavit and application within the 21 day period of the statutory demand is not, it was submitted, a proper reason for failing to bring an application to set aside the statutory demand in the relevant time period.[7]
[7] Reference was made to the following cases; In the matter of The Satellite Group Limited [2001] NSWSC 984, 16 – 19 (Santow J); Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282, [42] (Ward J); Re Vangory Holdings Pty Ltd [2015] NSWSC 546, [20] (Black J).
By reason of the matters referred to, in failing to bring an application to set aside the statutory demand within the time allowed, and failing to make a s 459S application within a reasonable amount of time, the conduct of the defendant, it was submitted, was not reasonable.
Randall AsJ held that although the above difficulties did not excuse the failure to serve the 459G application[8] , he found that in circumstances where instructions were provided by the defendant and an application and affidavit filed within time under s 459G, there is nothing more that the defendant could have done to make its application within the 21 day period and therefore should not bear the consequences of failure to do so.[9] His Honour therefore found that the failure to make the 459G application had been appropriately explained.[10]
[8]SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, [22].
[9] Ibid, [30].
[10] Ibid, [33].
Randall AsJ concluded as follows in relation to this aspect —
While I accept the general proposition that abdication of the responsibility to deal with a statutory demand will not afford the company an adequate explanation for the purposes of an application for leave under s 459S of the Act, Santow J in Satellite Group did not exclude a failure on behalf of the company’s solicitors as a grounds for the application. After all, His Honour said, ‘I do not consider it so deficient an explanation as to disqualify the Defendant company at the threshold’.
In Vangory Holdings, Black J found it unnecessary to decide the question given the other circumstances germane to the application, and Ward J in Perpetual Nominee dealt with an application where there had been two prior s 459G applications.
In this application instructions were provided, an affidavit in support was sworn and the application pursuant to s 459G of the Act was filed within time. The s 459G application was not ventilated as it was not served within the 21 day period. In Satellite Group, Santow J declined to consider the explanation further as the company’s then solicitors were not afforded the opportunity to respond to the company’s contentions.
In this application the company’s solicitors have continued to be retained by the company. Affidavits have been sworn by the solicitors dealing with the difficulty in obtaining instructions but the issue of late service has not been addressed by the firm. As I noted before, it is an inescapable conclusion that there was a failure by the firm to adhere to the temporal limits set out in s 459G of the Act. Alternatively, the rhetorical question that I pose to myself, ‘what more could the company have done?’, must be answered in the negative. In those circumstances, I have regard to the proposition put in Kostokanellis v Allen, which, although in a setting aside judgment context, is of assistance. The Full Court said, with respect to the failure to appear which led to judgment:
Secondly, it was argued that, even if as a general rule the client is to be answerable for the default of his solicitor, the omission of the solicitors to do that which he was employed to do, namely attend at or arrange for an attendance on the return of the summons, was an omission beyond the course and scope of the retainer and so was an omission for which the appellant should not have to bear the consequences.[11]
[11] Ibid, [27]-[30].
In my opinion there is no error in the trial judge’s approach and relevant finding based on the evidence. The finding was clearly open to his Honour.
Having filed the application on time and having raised and deposed to the required matters there is nothing more the defendant could have done. Service on the plaintiff, an obvious requirement, was the sole responsibility of the defendant’s solicitor. Although this has had obvious consequences, it does not mean that the explanation is to be ignored. Rather, the requirement is that the explanation and conduct, for not doing that which was required and has led to this point, must be reasonable. In the absence of contrary evidence and cross-examination his Honour was entitled to accept and conclude that the defendant’s explanation was reasonable.
It follows that grounds 1 and 2 will be dismissed.
Solvency (Ground 4)
The defendant submitted that in the circumstances and context of this case the evidence of solvency, although perhaps not the best evidence, was nevertheless sufficient. The defendant contended, by reference to the evidence that it adduced, that it was solvent both on a balance sheet and cash flow analysis. It was submitted that the evidence as a whole clearly pointed to solvency.
In response to a submission that the fullest and best evidence of solvency was not presented, the defendant submitted that the following factors were relevant and important:
(a) The health of the sole director at the time and his ability to give instructions in defence of this application in the circumstances;
(b) The nature of the debt and the dispute in relation to the debt;
(c) That the defendant was and remains a small business with a regular income and little in terms of other liabilities.[12]
[12] See Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones (2008) 219 FLR 422.
The defendant submitted that an important consideration in determining the solvency of a company is the ability of a company to convert its assets into cash in a relatively short period of time so as to pay its debts.[13] Whilst a balance sheet test of solvency is relevant, the key test for the Court it was submitted is a cash flow test. To this extent, the defendant relied at Trial on the most recent bank statements of the Company, which indicated that the Company had close to enough cash to cover the debt. It also had, it was submitted, a consistent regular income on which to rely upon to pay the debt.
[13]Lechmere Financial Corp v Aspermont Ltd [2003] FCA 1138, [19].
The plaintiff submitted that the Court should not place weight on the affidavit of Facy sworn 29 September 2014, because,
(a) A letter from the accountants who prepared the financial reports (exhibit SAF-4) noted that, at paragraph 5, due to the director’s health the company’s income tax return has not been lodged for either 30 June 2013 nor 30 June 2014, and the provision of the statements as at 31 August 2014 is simply for disclosure purposes;
(b) No instructions for the preparation of the accounts were exhibited along with the accounts;
(c) The financial statements exhibited are not audited accounts;
(d) In the circumstances, the financial documents exhibited were nothing more than bald statements;
(e) Further, the balance sheet as at 31 August 2014 recorded a retained profit of $43,921, noting that the profit for 30 June 2014 had been $121,733.
(f) The balance sheet as at 31 August 2014 recorded amounts receivable from other related entities of $567,510, noting that as at 30 June 2014 it had been $617,738;
(g) Note 7 to the financial statements noted the amounts receivable from other related entities were:
(iii) McGain Scott Investment Trust – 2013: $0
(iv) McGain Scott Investment Trust – share purchase: $399,968
(v) McGain Scott Investment Trust – 2014: $113,236
(vi) McGain Scott Investment Trust – 2015: 54,306;
(h) Notably:
(vii) There are no agreements or any other evidence substantiating the rights of the defendant to recover the amounts receivable from related entities recorded in the financial statements;
(viii) On the face of the record, it appears that shares of a value of $399,968 have been issued to a related entity which has not paid consideration for them;
(ix) But for the amounts receivable from related entities, the defendants balance sheet as at 31 August 2014 would have recorded a retained profit of $43,921 minus $567,510, being the sum of -$523,589.
The plaintiff submitted further that the Court should not place weight on the affidavit evidence of Ms Kielt dated 4 September 2014, because:
(a) Ms Kielt is not an officer of the defendant;
(b) Ms Kielt is not an employee of the defendant;
(c) Ms Kielt did not swear she had knowledge of all the financial affairs of the defendant;
(d) Ms Kielt did not hold a position of responsibility in relation to making or keeping the proper books of account of the defendant for the purposes of s 171 of the Evidence Act.
(e) The reconciliation of Ms Kielt was prepared in relation to commissions owed between the parties, not any other debts or payments.
(f) Ms Kielt did not challenge the reconciliation of commissions owing to the plaintiff; and
(g) In the circumstances, Ms Kielt’s evidence was not good evidence of the matters she deposed to.
Despite the plaintiff’s submission, his Honour was satisfied that the defendant had established solvency and said:
I am satisfied that accounts made up to August sufficiently demonstrated the company’s current financial position. I am satisfied that the instructions referred to by Kielt and Facy lend weight to the contention of solvency and assist me more than reliance upon mere assertion by the director or production of the accounts without explanation. In particular, I am assisted by the bank statements and the revenue report which are consistent with what is set out in the accounts and demonstrates sufficient cash to meet liabilities.
Of the submissions made on behalf of the plaintiff, the one of note is the lack of evidence as to the recoverability of the related party liabilities recorded as assets in the balance sheet. However, I note that the major liability is the borrowing from the bank which, by reference to the availability of surplus funds from time to time on the overdraft facility must be within its limits. Otherwise this is a company which relies upon commission trailers as its source of income and has minimal liabilities with respect to the generation of such income. I am satisfied that on a cash flow basis[12] the defendant has sufficient funds to meet its liabilities as and when they fall due. It is strongly arguable that the company is solvent on a cash flow basis irrespective of the debt claimed by the plaintiff. Once that debt is excluded the position is clearer.
…
I grant leave pursuant to s 459S of the Act. Notwithstanding leave is granted, it remains incumbent upon the defendant to demonstrate solvency. I will not repeat the solvency analysis I referred to in paragraphs 34 to 48 above. For the reasons set out in those paragraphs based upon a cash flow test, I am satisfied that the defendant has discharged the onus of demonstrating solvency.[14]
[14]SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, [47]-[48], [53].
The finding as to solvency was open, appropriate and based on the evidence. I do not consider that the trial judge was in error. Although it might be said that the best evidence was not adduced, the evidence in this case was cogent, probative, admissible and sufficient to rebut the presumption of insolvency. No contrary evidence was adduced by the plaintiff and the plaintiff did not seek to cross-examine any of the defendant’s witnesses, whether as to solvency or otherwise. The simple fact is that the Company was able to pay its debts, other than the disputed debt (but perhaps even all or most of it) from its own resources as and when such debts fell due.[15]
[15] The existence of the related party debt and the paucity of information in regard thereto, does not detract from this proposition.
Appeal ground 4 must fail.
Granting leave under s 459S (Ground 5) and dismissing the winding up application (Ground 6)
The defendant submitted that the debt was material to the solvency of the company. The defendant referred to the evidence as to solvency and submitted that based on the cash at hand information (bank statements) it is apparent that the defendant did not have the current cash resources at the time of the Trial to pay the debt in full. Accordingly, it was submitted that the dispute in relation to the debt is material to the solvency of the defendant. Further, if the debt was to stand, the balance sheet would indicate net assets of $95,312.
In dealing with this aspect Randall AsJ said —
What the financial material produced to me demonstrates is that, but for the debt claimed by the plaintiff, the defendant is prima facie solvent. More significantly, is that the defendant has cash at bank and recourse to its overdraft account which is close to sufficient to meet any liability due to the plaintiff.[16]
[16]SY Financial Services Pty Ltd v Risk Business Pty Ltd [2015] VSC 421, [43].
In my opinion the evidence clearly supports such a conclusion and there is no error in the reasoning or conclusion of the trial judge.
Disposition
It follows that, no error having been identified, his Honour’s discretion did not miscarry in relation to the granting of leave. As a consequence the winding up had to be dismissed.
Appeal grounds 5 and 6 must fail.
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