Timms v Dellaplus Pty Ltd - [2007] SASC 236

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
TIMMS v DELLAPLUS PTY LTD
[2007] SASC 236
Judgment of Judge Withers a Master of the Supreme Court
26 June 2007
CORPORATIONS
Corporations Act 2001 s 459S, referred to.
Powell & Anor v Fryer & Anor (2001) 37 ACSR 589; Web Wealth Pty Ltd v Helimount Pty Ltd [2006] FCA 1376; Switz Pty Ltd v Glowbind Pty Ltd (1999-2000) 33 ACSR 723, applied.
ACE Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728; ACP Syme Magazines Pty Ltd v Tri Automotive Components Pty Ltd [1997] 362 FCA; Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181; Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711, considered.

TIMMS v DELLAPLUS PTY LTD
[2007] SASC 236
Civil

JUDGE WITHERS. On 11 January 2007 the plaintiff issued an Originating Process seeking that the defendant be wound up. The relief sought was based on the failure of the defendant to respond to a statutory demand forwarded to its registered office by ordinary prepaid post on 17 November 2006. In particular no application to set aside the statutory demand had been issued and served within the required 21 day period after service of the Notice of Demand. The statutory demand was for the amount of $34,299.55, which as best I understand it was for a principal loan of $30,000.00 comprised of two payments on 2 February 2005 and 2 March 2005 ($20,000.00 and $10,000.00 respectively) and interest thereon.
The plaintiff then took the normal and necessary steps to satisfy the requirements of the Corporations Act and Rules and on the documents established his entitlement to such an order.
On 12 February 2007 the defendant filed a Notice of Appearance in which it set out its grounds of opposition to a winding up order. Those grounds were:
1.The defendant is not insolvent.
2.The defendant is not indebted to the plaintiff.
3.The defendant has counterclaim against the plaintiff.
That Notice of Appearance was supported by a joint affidavit of John Neville Rosenzweig and Teverley Deanne Rosenzweig. They attested that they are the directors of the defendant and authorised to swear the affidavit on its behalf. While no formal interlocutory application has been filed, it is clear on the material and submissions that the defendant company in its opposition to the application to wind up the company is seeking leave pursuant to s 459S of the Corporations Act (“CA”) to rely on a ground that falls within the provisions of s 459S(1)(b).
Section 459S of the CA provides as follows:
459S(1)     [Demand may not ground opposition]    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).
459S(2)     [Ground material to solvency]              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.
The learned author of Ken Robson’s Annotated Corporations Act 2002 in commenting on s 459S of the CA says at p 702:
The question of leave must be determined as a preliminary issue: Switz Pty Ltd v Glowbind Pty Ltd (No 1) (2001) 19 ACLC 532 33 ACSR 723 …
Leave is not given automatically. The court must be satisfied that there is some evidence of solvency before leave is given. A good excuse as to why the evidence was not put forward at the sec 459G stage must be given: Kekatos v Holmark Construction Co Pty Ltd (1995) 13 ACLC 1,581, 18 ACSR 199 … Leave cannot be given unless the company adduces evidence to prove its solvency. … If the company can prove (1) that it is solvent, (2) that either it genuinely disputes the claim or it has an offsetting claim, and (3) that there is a good reason why a sec 459G application was not made or failed, then the sec 459P application must fail. If the company fails to establish any evidence that it is solvent, then the sec 459P application must succeed: …
If the debt is the difference between solvency and insolvency, then leave may be given to dispute it, even though that dispute was or could have been brought under sec 459G. If the debt does not make that difference as to solvency, then leave cannot be given to dispute it and the company must prove solvency or be wound up: Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC 1,025 …; Switz Pty Ltd v Glowbind Pty Ltd (No 1).
In considering what is meant by the “solvency” of a company, the Full Court of South Australia in Powell & Anor v Fryer & Anor (2001) 37 ACSR 589 said (at pp 600-601):
(1)Whether or not a company is insolvent at a given point in time is a question of fact to be determined by the trial judge. Expert evidence may be of assistance, but it is not conclusive: Sandell v Porter (1966) 115 CLR 666 [at 670-671] (Sandell).
(2)The conclusion of insolvency must be derived from a proper consideration of the company’s financial position, in its entirety, based on commercial reality. Generally speaking, it ought not to be drawn simply from evidence of a temporary lack of liquidity: Sandell Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651. Regard should be had not only to the company’s cash resources immediately available, but also to moneys which it can procure by realisation by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of, it. It is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due which indicates insolvency: cf Sandell at 670; ….
(3) …
(4)It is not appropriate to base an assessment on the prospect that the company might be able to trade profitably in the future, thereby restoring its financial position. The question is whether it, at the relevant time, is able to pay its debts as they become due – not whether it might be able to do so in the future, if given time to trade profitably: Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 at 769 [Bank of Australasia v Hall (1907) 4 CLR 1514-1528].
The Honourable Justice Besanko in the Federal Court of Australia in Web Wealth Pty Ltd v Helimount Pty Ltd [2006] FCA 1376 cited with approval a decision of Weinberg J in ACE Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728. In that matter Weinberg J said (excluding from the citation the authorities to which he referred):
The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions:
The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: …
In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: …
Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: …
There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: …
The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: …
The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: …
It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: …
Besanko J noted that that foregoing statement of principles had been accepted as the relevant principles by the New South Wales Court of Appeal in Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711. He commented that where a statutory demand has been served and not answered then the company is presumed to be insolvent until the contrary is proved.
In the Web Wealth matter with which his Honour was dealing the company provided material that it asserted demonstrated its solvency. There was evidence as to its profit and loss and trading performance over a number of years. It had put forward evidence as to its assets and liabilities. The company was a trustee of a family trust. Evidence was provided as to the financial performance of the family trust for two financial years. However, his Honour criticised the fact that:
·    No attempt was made to give any detailed evidence of the company’s trading performance over a reasonable period of time prior to the issue of the statutory demand.
·    There was no explanation of the circumstances surrounding a significant loan transaction in which the company was debtor.
·    There had been a transfer of assets shortly before winding up orders had been made.
·    There was “very little cogent and clear evidence of … financial position and his ability to meet his liabilities to the ANZ”.
At paragraph 53, Besanko J:
I am not satisfied that Helimount’s assets exceed its liabilities and that any temporary cashflow or liquidity problems can be overcome by borrowing. For the reasons given earlier [which I have paraphrased earlier in these reasons] I am not satisfied that Helimount has put forward the ‘fullest and best’ evidence of its financial position. The presumption of insolvency that arises is reinforced by the company’s inability to repay the debt to Web Wealth and has not been rebutted by any evidence adduced by Helimount.
His Honour therefore found that he had not been persuaded that the company was solvent and dismissed an application for review of the winding up order.
His Honour also had to consider in that case whether the explanation put forward by the company for its failure to apply under s 459G to set aside the statutory demand was satisfactory. The explanation in that case was that the director had not been aware of the service of the statutory demand until the time for a challenge had passed. There were allegations that the company director had suffered ill health and there was a break down in communication with solicitors. His Honour found the company’s explanation for not applying to set aside the statutory demand to be “inadequate, confusing and unsatisfactory”.
Even if the debt in a statutory demand has been paid that does not necessarily mean that an application for winding up should be dismissed. In the matter of ACP Syme Magazines Pty Ltd v Tri Automotive Components Pty Ltd, [1997] 362 FCA, Spender J in the Federal Court said:
The fact that it is sufficient to decide if there is a bona fide dispute and that it is not necessary on a winding-up application to decide whether the applicant or substituted applicant is in truth a creditor, indicates in my opinion that, if on an application for winding up there is a bona fide dispute as to the existence of the debt claimed by the applicant, (or in this case the substituted applicant), that is not determinative of the matter. There is still a discretion in the court to order that a company be wound up where the evidence establishes that the company is insolvent notwithstanding the finding that there is a bona fide dispute as to that debt.
The Full Court of New South Wales had cause to consider s 459S of the Corporations Act in the matter of Switz Pty Ltd v Glowbind Pty Ltd (1999-2000) 33 ACSR 723. In that matter Spigelman CJ reviewed s 459S and the authorities at the time. He says in paragraphs 53-56 of his judgment, with which the other members of the Court agree:
[53] By the time an application by s 459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s 459S(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 s 459S(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 the 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 s 459S(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 s 459S(1)…
In the circumstances in which the defendant finds itself in this particular matter it is for the defendant to establish to a satisfactory degree that it is solvent. To avoid the consequences of s 459S(2) it must establish to the satisfaction of the Court that the ground for which it seeks leave is “material to proving that the company is solvent”. It is the obligation of the defendant to establish that there is a satisfactory reason for it not having filed a challenge pursuant to Section 459G to the statutory demand. Finally, it is for the defendant to establish that it has a genuine offsetting claim.
I turn now to the evidence provided by the defendant.
The Rosenzweigs in their affidavit describe a relationship with the plaintiff from early 2004. He provided assistance to them in their pork business. They describe some arrangements with the plaintiff by which they had paid him some monies and suggested that they had entered into a long term arrangement with him to pay him $860.00 per week inclusive of GST in consideration of which he would provide them with some 20-22 hours work per week. They say in paragraph 21 of their affidavit filed 12 February 2007 (FDN 8):
21.As the business being commenced by the defendant was in its infancy, the defendant relied on borrowed funds for cash flow.
In paragraphs 23 to 26 they describe the arrangements with the plaintiff as to the loan monies. They say as follows:
23.In about February 2005 the plaintiff offered to lend money to the defendant.
24.We agree that on 2 February 2005 the sum of $20,000.00 was advanced to the defendant and that on 2 March 2005 a further advance of $10,000.00 was made making the total advance $30,000.00 (“the advance”).
25.The agreement with the plaintiff was oral and consisted of a conversation with us that the plaintiff would help us out.
26.There was no agreement to pay interest and no agreement as to when the loan would be repayable, the plaintiff’s words about repayment being “don’t worry about it, that’s my problem”.
The Rosenzweigs then attested to various matters which they say provides them with a genuine set-off against the monies due to the defendant. The set-off consisted of payments that they made or are liable to make in respect of a motor cycle which was provided for the plaintiff and some various other incidental matters. In any event they assert that the defendant has a genuine set-off for an amount in excess of the amount claimed in the statutory demand served by the plaintiff.
As to solvency the evidence provided is as follows:
48.At this point in time the defendant has no trade creditors at all.
49.The only one claiming on the defendant for monies due is the plaintiff and that liability is denied.
The Rosenzweigs say in paragraphs 50, 51, 52, 53 and 54 of their affidavit that the defendant has liabilities to the ANZ Bank secured by a first ranking debenture over its assets upon land they own and upon their personal guarantees. They record liabilities to Esanda which they say are fully secured over the defendant’s chattels and by their personal guarantees. They record the liability to pay the motor cycle finance payments. They record a liability to B & P Professional Finance and say that all payments are being made as they fall due. That liability is secured by a chattel mortgage over their farm equipment and personal guarantees. They note that the defendant also has an unsecured liability to them for funds advanced by them but that their agreement with the defendant is that such funds will not become due and payable until the “pork product business of the defendant is up and running and the defendant is in a position to repay us”. In paragraph 55 they say that the defendant has no other liabilities or contingent liabilities.
No balance sheet is exhibited. There is no statement of the assets of the defendant and no statement of the liabilities setting out when the same need to be met. There is no profit and loss information. There is no evidence as to the defendant’s cash flow or its trading history. To the extent that the Rosenzweigs act as guarantors of the defendant’s debt there is no evidence provided as to the Rosenzweigs’ capacity to satisfy those guarantees whatever they may be and whenever that requirement may occur.
The plaintiff subsequently filed an affidavit which challenged a number of issues raised by the defendant in relation to the motor cycle and challenged any claimed set-off. He said that the defendant had not fully disclosed all its liabilities and its ability to deal with those liabilities. Importantly at paragraph 23.2 of his affidavit filed 21 March 2007 he says:
23.2Secondly, when I previously requested repayment of this money, I received an open letter from the Defendant’s solicitors, dated 9th November, 2006 and at paragraph 7 (page 2) of the letter, it reads “…You have raised an issue of $30,000 which was lent to Dellaplus Pty Ltd. On our instructions the company is not in a position to repay this sum at this point in time and is unlikely to be for some time…”.
The letter was not exhibited. However, that asserted component was not challenged.
In a further joint affidavit of the Rosenzweigs they provided material from the ANZ Bank, from Esanda and from Business and Professional Finance confirming that payments were being made on the various loans – see FDN 10. Those letters were exhibited. In my respectful view that does not establish the solvency of the defendant. All it does is establish that its contingent liabilities to those creditors are currently being met.

Yet a further affidavit of the Rosenzweigs was filed on 5 April 2007 denying various assertions that had earlier been made by the plaintiff that more monies were due by the defendant to him. Further material was put forward as to the motor cycle arrangements. They say at paragraphs 19 and 20:
19.In respect to paragraph 24 [probably a wrong reference and should have been paragraph 29] of the plaintiff’s affidavit we say that we are servicing the liabilities from our private resources and that the plaintiff has always been aware of that.
20.In respect to paragraph 25 of the plaintiff’s affidavit we say that the company does not have an up to date balance sheet and profit and loss statement but the plaintiff has always fully understood the financial position of the defendant and has always known that the defendant is solvent.
With respect the plaintiff’s knowledge of the defendant’s solvency or otherwise is at this stage irrelevant. What is important is what information has been provided to the Court to enable it to make its assessment as to the defendant’s solvency.
Finally, a further affidavit was filed by the plaintiff on 24 April 2007 in which he continued to challenge the defendant’s assertions about the motor cycle and asserted that the only asset of the defendant company known to him was $510.00 in issued share capital – see paragraph 9 of FDN 12.
In my view the defendant’s application fails in two respects.
Firstly, I am not satisfied that the defendant has established that it is solvent. Insufficient material has been put before the Court. The information that has been provided could by no stretch of the imagination be described as the “fullest and best” material that is required in accordance with Weinberg J’s judgment in the ACE Contractors case (supra).
It is not possible to say on the material provided whether or not the debt allegedly due by the defendant to the plaintiff for the amount in the statutory demand affects or is material to the solvency of the defendant company. It is not possible because the defendant has not put before the Court satisfactory evidence as to its assets, liabilities, profit and loss, trading history, and cash flows sufficient for the Court to be able to assess its solvency and any effect that the claimed debt might have on that. For that reason alone in my view the defendant’s application for leave to adduce evidence under Section 459S must fail. The requirements of s 459S(2) have not been met.
Secondly, I am not satisfied that an acceptable excuse has been provided for the failure by the defendant to issue an application under Section 459G within the 21-day period. The excuse put forward at argument and in the supporting affidavit was that the Rosenzweigs were unsophisticated farmers not aware of their legal obligations, that they did not believe the plaintiff was genuine in the issue of the statutory demand, and that they were endeavouring to arrange meetings with him and their solicitors to discuss the matter to see whether it could be sorted out. However that excuse in my view falls away in light of the plaintiff’s uncontested assertion that he received a letter from the defendant’s solicitors dated 9 November 2006 which related at least in part to the very debt that formed the basis of the statutory demand that was issued about a week later. In my view no satisfactory excuse has been provided for the failure to issue an application pursuant to Section 459G within time and, accordingly, that requirement is also not met.
As to the third requirement that the defendant has a genuine set-off, it is my view that there is sufficient material to enable a Court to find a genuine off-setting claim that would have likely led to the statutory demand being set aside if an application had been issued in time. However, that time has passed. I record my findings about the genuine off-setting claim in the event that I am found to be wrong in respect of the other two aspects.
For the foregoing reasons the application of the defendant company pursuant to Section 459S for leave to rely on the grounds that would have been available on a Section 459G application is refused.
A further issue was raised by counsel for the defendant in the course of argument. He argued that one of the grounds sought to be relied on was that the plaintiff was not in fact a solicitor or accountant as the defendant had been wrongly led to believe. They had paid him a substantial amount of money under a misapprehension. They had a reasonable prospect of recovering that money. This ground he said was available to them whether or not Section 459S leave was granted because it was not a ground that had been available at the time that a Section 459G application could have been issued. The defendant’s counsel relied on the matter of Biron Capital Ltd v Velowing Pty Ltd, Supreme Court of New South Wales [2003] NSWSC 1181, in support of that assertion.
It is not necessary or appropriate for the Court at this time to determine or comment on that argument. It is not relevant to whether or not leave should be granted under s 459S. An application for leave under s 459S of the CA on an application for winding up should be determined as a preliminary issue – Switz v Glowbind (supra).
The application for leave is refused. I reserve the question of costs. I will adjourn further consideration of the application to wind up to the Companies List.