Yurra Pty Ltd v DHB Civil Contracting Pty Ltd

[2024] WASC 441

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   YURRA PTY LTD -v- DHB CIVIL CONTRACTING PTY LTD [2024] WASC 441

CORAM:   HILL J

HEARD:   29 OCTOBER 2024

DELIVERED          :   27 NOVEMBER 2024

FILE NO/S:   COR 140 of 2024

BETWEEN:   YURRA PTY LTD

Plaintiff

AND

DHB CIVIL CONTRACTING PTY LTD

Defendant

Catchwords:

Corporations - Insolvency - Application to wind up defendant on just and equitable grounds - Standing of plaintiff to bring application - Whether plaintiff is an actual or contingent creditor of the defendant - Turns on own facts

Legislation:

Corporations Act 2001 (Cth) s 461, s 462

Result:

Plaintiff does not have standing to bring originating process
Originating process dismissed

Category:    B

Representation:

Counsel:

Plaintiff	:	D P Butler
Defendant	:	J E Scovell

Solicitors:

Plaintiff	:	Murcia Pestell Hillard
Defendant	:	Cullen Macleod Lawyers

Case(s) referred to in decision(s):

BE Australia WD Pty Ltd (subject a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336

Commissioner of Taxation v Simionato Holdings Pty Ltd [1997] FCA 125

Community Development Pty Ltd v Engwirda Construction Co [1969] HCA 47; (1969) 120 CLR 455

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89

Federal Commissioner of Taxation v Gosstray [1986] VR 876

Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (No 2) (1996) 39 NSWLR 311

Smith v Sandalwood Properties Ltd [2019] WASC 109

Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525

Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318

HILL J:

1. On 11 September 2024, the plaintiff filed an originating process seeking orders, pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) (Act), for the winding up of the defendant on just and equitable grounds.

2. On 16 October 2024, at a directions hearing, the court raised a question as to the plaintiff's standing to bring the application for winding up.  Both parties were given the opportunity to file submissions and the originating process was adjourned until 29 October 2024.

3. The plaintiff says that it is an actual creditor of the defendant, alternatively, a contingent creditor.  The defendant denies this is the case and says the plaintiff does not have standing to bring this application.  On this basis, the defendant says that the originating process should be dismissed with the plaintiff paying the defendant's costs.

4. For the reasons set out below, I am not satisfied the plaintiff is an actual or contingent creditor of the defendant or, as a result, that it has standing under s 462 of the Act to bring an application to wind up the defendant. On this basis, the originating process should be dismissed and costs should follow the event.

Evidence on the application

1. In support of its application, the plaintiff relied on the following affidavits:

   (a)three affidavits of Liam Michael Wilson: an open affidavit filed 12 September 2024, and two confidential affidavits filed 11 September 2024 and 12 September 2024; and

   (b)an affidavit of Mark Daniel Williams filed 29 October 2024.

2. A number of objections were filed in relation to the affidavits of Mr Wilson.  Ultimately, for the reasons set out below, it has not been necessary for me to resolve these objections.  In my view, the application can be determined on the uncontroverted facts.

3. The defendant also objected to the affidavit of Mr Williams being read in support of the plaintiff's position.  This was on the basis that the affidavit was filed on the morning of the hearing, without the defendant having an opportunity to consider or respond to it.  Similarly, in light of the conclusions I have reached, it was not necessary for me to refer to this affidavit in reaching my decision.  Had this been required, I would have granted leave to the plaintiff to refer to this affidavit as the defendant would have an opportunity to respond to the affidavit before the final hearing of the originating process.

4. The defendant filed one affidavit on the question of the plaintiff's standing, being an affidavit of David James Bradley filed 24 October 2024.  This affidavit annexed a writ issued by the plaintiff on 16 October 2024 against Mr Bradley personally.

Factual background

1. Broadly speaking, the issue between the parties arises from the following matters.  These facts are not in dispute.

2. Until September 2024, the directors of the defendant, Mr Bradley and Milan Dragic, were employees of the plaintiff.  Each was employed under a written contract of employment.  The employment contracts required each of them to devote the whole of their time to their work and not engage in any activities which conflicted with the business interests of the plaintiff.  Written consent of the plaintiff was required to engage in any other business other than in the course of their employment with the company.  The contracts also included a term governing the use of the company's confidential information.[1]

   [1] Confidential affidavit of Liam Michael Wilson filed 11 September 2024, 'LMW-08', 'LMW-09'.

3. On 21 March 2024, when both Mr Bradley and Mr Dragic were employed by the plaintiff, the defendant was incorporated.  Its three directors are Mr Bradley, Mr Dragic and James MacAuliffe.  Mr Bradley and Mr Dragic each own 10 of the 30 shares on issue.

4. The plaintiff contends that its now former employees breached the terms of their written employment contracts by establishing the defendant without its written consent and, in relation to Mr Bradley, by diverting opportunities away from the plaintiff and to the defendant.

5. On 16 October 2024, the plaintiff commenced proceedings in this court against Mr Bradley, a director of the defendant.  No proceedings have been commenced against Mr Dragic.  No proceedings (other than these proceedings) have been commenced by the plaintiff against the defendant.

Does the plaintiff have standing to bring the application?

1. The plaintiff seeks to wind up the defendant on just and equitable grounds pursuant to s 461(1)(k) of the Act. Section 462 of the Act sets out the parties who have standing to apply for an order to wind up a company. These include relevantly 'a creditor (including a contingent or prospective creditor) of the company'.[2]

   [2] Corporations Act 2001 (Cth) s 462(2)(b).

2. Pursuant to s 462(4) of the Act, the court must not hear an application to wind up a company by a person who is a contingent or prospective creditor of the company for an order to wind up the company unless and until:

   (a)such security for costs has been given as the court thinks reasonable; and

   (b)a prima facie case for winding up the company has been established to the court's satisfaction.

3. Section 462(5) of the Act expressly provides that, except as permitted by this section, a person is not entitled to apply for an order to wind up a company.

Who is a contingent creditor?

1. The question as to what is required to be a contingent creditor has been the subject of significant debate over the years.  It has been observed that 'a contingent creditor, like an elephant, is rather easier to recognise than to define'.[3]  It is accepted that a contingent claim is one that arises from an existing obligation out of which, on the happening of a contingency which may or may not occur, there will be present liability to pay.[4]  The issue and contest on the authorities is whether a party with a claim for unliquidated damages is considered to be a contingent creditor. 

   [3] Federal Commissioner of Taxation v Gosstray [1986] VR 876, 878 cited with approval by Vaughan J in Smith v Sandalwood Properties Ltd [2019] WASC 109 [118].

   [4] Community Development Pty Ltd v Engwirda Construction Co [1969] HCA 47; (1969) 120 CLR 455, 459, 461 (Kitto J & Owen J). See also Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525 that these observations remain good law for the purposes of s 553(1) and s 444D(1) of the Act: BE Australia WD Pty Ltd (subject a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 [90], [200] ‑ [201].

2. In Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (No 2),[5] Santow J expressed the view that, on a winding up application, it was necessary for an applicant to establish a debt.  Where there is a bona fide dispute of substance as to the existence of the debt, it cannot be said that the claimant is a creditor who has the right to bring proceedings for the winding up of the company.[6]  His Honour expressly rejected the view that 'an arguable claim' against the company is sufficient to give a creditor standing to seek the winding up of a company.[7]  This was on the basis that the potentially fatal power to trigger winding up was not intended to be vested in those with merely arguable claims as these claims could eventually be considered to be without foundation, yet the company may have been destroyed or injured with no redress.

   [5] Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (No 2) (1996) 39 NSWLR 311.

   [6] Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (No 2) (317).

   [7] Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (No 2) (318).

3. In Commissioner of Taxation v Simionato Holdings Pty Ltd,[8] Mansfield J, after discussing the differing views of single judges of the courts, including those expressed by Santow J, reached a different view.  His Honour noted that there were a number of safeguards in the legislation to guard against the concerns referred to by Santow J.  His Honour did not agree that any distinction should be drawn between those classes of person who can prove in a liquidation from those who can trigger a liquidation.  His Honour expressed the view that:[9]

   if uncertainty as to whether any entitlement to money may ever arise, it is necessary to confine the circumstances which might give rise to a liability to those which might arise from an existing contract, or certain types of transaction, as distinct from some other types of transaction.  The focus is on the potential liability, not the source of the potential liability.

   [8] Commissioner of Taxation v Simionato Holdings Pty Ltd [1997] FCA 125.

   [9] Commissioner of Taxation v Simionato Holdings Pty Ltd (135).

4. His Honour concluded that it was possible for a party with an arguable claim for unliquidated damages to qualify as a contingent creditor.  Relevantly, in that case, a writ had been issued in the Supreme Court of South Australia against the defendant and five other companies in which substantial damages were sought.  In addition, the claim was acknowledged by the defendant not to be frivolous.

5. In Treadtel International Pty Ltd v Cocco,[10] Barrett AJA reviewed the authorities, including both of these decisions.  His Honour (with whom Gleeson and Leeming JJA agreed) concluded that:[11]

   The view to be taken of a contingent or prospective creditor will, in my opinion, differ according to the purpose for which the creditor's position is under consideration.  Recognition as someone qualified to be heard on another applicant's winding up petition or as someone whose claim should be taken into account in judging solvency is one thing.  Recognition as someone who may initiate winding up proceedings is another.  It is a well-established rule of practice that a person who claims to be a creditor but whose debt is disputed on genuine grounds will not be permitted to initiate or pursue a winding up application.  The report of the decision of Jessel MR in Cercle Restaurant Castiglione Co v Lavery contains, as a footnote, that judge's judgment in Niger Merchants Co v Capper where reference was made to an earlier decision of Malins V-C in Cadiz Waterworks Co v Barnett in which the pursuit of winding up proceedings was enjoined 'on the ground that it is the object of the Court to restrain the assertion of doubtful rights in a manner productive of irreparable damage'. As Ungoed-Thomas J said of the winding up jurisdiction in his influential judgment in Mann v Goldstein:

   I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of process of the court.

   The rationale of the several decisions I have mentioned concerning contingent and prospective creditors is, it seems to me, that such a creditor will not be permitted to apply for winding up unless there is an existing obligation of the company (as required by the decision in Community Development Pty Ltd v Engwirda Construction Co), which obligation can be viewed with a high degree of assurance as a source of financial liability.  Thus, in a case such as Re PMC Investments Pty Ltd, a defaulting purchaser under a conveyancing transaction may be seen to be subject to a relevant obligation where the standard contractual position is uncontroversial and the value of the property is shown to be such that the default has occasioned loss to the vendor, even though no proceedings for damages have crystallised that liability.  But the position is otherwise where, as in Thomas v Mackay Investments Pty Ltd, the existence of the obligation, as well as the quantification of any damage, is dependent on the resolution of disputed or otherwise unclear legal rights and duties by means of proceedings for damages brought against the company.

   [10] Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318.

   [11] Treadtel International Pty Ltd v Cocco [57] ‑ [58].

6. As a decision of an intermediate appellate court on the proper construction of the term 'contingent creditor' in Commonwealth legislation, I should not depart from this decision unless I think it is plainly wrong,[12] which I do not.

   [12] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 [135].

7. On this basis, I consider it is necessary, in order for the plaintiff to have standing to bring the application for winding up, that there is an existing obligation owed by the defendant to the plaintiff where there is a high degree of assurance that it will give rise to a financial liability.

Is the plaintiff an actual or contingent creditor of the defendant?

1. The plaintiff contends it is an actual or contingent creditor of the defendant.  At [8] of its submissions, the plaintiff set out the basis for this contention.  Of the 15 matters referred to, only three specifically concern the defendant.  The remaining matters set out the basis for the claims against Mr Bradley and Mr Dragic.

2. Specifically, these paragraphs contend that the plaintiff's claim against the defendant arises from the following matters:

   (a)breaches by Mr Bradley and Mr Dragic of the terms of their employment agreements with the plaintiff and the diversion of opportunities by Mr Bradley away from the plaintiff to the defendant;

   (b)by reason of the fact that Mr Bradley and Mr Dragic are directors of the defendant, the defendant was involved in a fraudulent and dishonest design; and

   (c)the defendant has received the benefit of repairs to a piece of equipment, as well as pre-delivery works and improvements to a different piece of equipment.  The amounts of these benefits are said to be less than $35,000.

3. These claims by the plaintiff are not the subject of any existing proceedings against the defendant, other than these proceedings.  The evidence before the court is that, at present, the plaintiff has only issued a writ against Mr Bradley.  In those proceedings, the plaintiff alleges that Mr Bradley has breached the terms of his employment contract with the plaintiff, the statutory duties under s 181 and s 182 of the Act he owed to the plaintiff, as well as his obligations of confidence.  The plaintiff is seeking damages, the return of its books and records, and an account.

4. It is evident from the indorsement of claim that the allegations raised in those proceedings arise from the same factual matrix as the matters raised by Mr Wilson in his affidavits in these proceedings.  It is notable that this claim is advanced against Mr Bradley only.  No claim is advanced against or concerning the defendant at all.

5. For the following reasons, I do not accept that the plaintiff is an actual or contingent creditor of the defendant.

6. First, a creditor is a person to whom a debt is owed.[13]  At present, there is no evidence that there is any debt owed by the defendant to the plaintiff nor is this alleged by the plaintiff in its submissions.  The amounts referred to by the plaintiff in its submissions are not sums of money that are presently due and payable by the defendant to the plaintiff.

   [13] BE Australia WD Pty Ltd (subject a Deed of Company Arrangement) v Sutton [133].

7. Second, the plaintiff's summary of its claim against the defendant does not refer to any existing obligation owed by the defendant to the plaintiff.  In order for the plaintiff to succeed in a claim against the defendant, it will be necessary for the plaintiff to prove three matters: first, that Mr Bradley and Mr Dragic have breached their obligations to the plaintiff; second, that the defendant was 'involved in a fraudulent and dishonest design'; and third, that the defendant is liable to repay the plaintiff any benefit it has received.  In this regard, it is notable that no particulars have been provided as to what is said to be the 'fraudulent and dishonest design'.

8. Third, there is, at present, no existing writ or other claim that has been issued by the plaintiff against the defendant for any amount.  Any cause of action the plaintiff may have against the defendant, as well as the quantification of any damage, is dependent on the resolution of contested legal rights and duties.  This can only occur through proceedings brought against the defendant which seek to establish the plaintiff's entitlement to be paid any amount by the defendant.  At present this has not occurred.

Conclusion

1. Given my finding that the plaintiff is not, at present, either an actual or contingent creditor of the defendant, the plaintiff does not have standing to bring any application to wind up the defendant.

2. On this basis, the plaintiff's application should be dismissed.  In my view, costs should follow the event and the plaintiff should pay the defendant's costs of the action to be taxed if not agreed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

KC

Associate to the Honourable Justice Hill

27 NOVEMBER 2024