MUDGMENT No, 1292 «2, CATCHWORDS CORPORATIONS - application to wind up - whether leave under s 459S Corporations Law to oppose an application to wind up should be determined as a preliminary question to the hearing of the application. Corporations Law s 4598, s 459E Re Vaportec International Pty Ltd; Re Parktec International Pty Ltd (1994) 12 ACLC Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 Topfelt Pty Ltd v State Bank of NSW Ltd (1994) 12 ACLC 15 Texel Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACLC 1059 KEVIN WHELPTON v BRAAMS CONSTRUCTIONS PTY LIMITED (ACN 003 767 020) No. NG 3050 OF 1994 Tamberlin J Sydney 20 September 1994 RECEIVED 20 SEP 1994 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. NG 3050 of 1994 GENERAL DIVISION Sa BETWEEN : KEVIN WHELPTON Applicant AND: BRAAMS CONSTRUCTIONS PTY LIMITED (ACN 003 767 020) Respondent CORAM : TAMBERLIN J PLACE : SYDNEY DATED : 20 SEPTEMBER 1994 MINUTES OF ORDER IHE COURT ORDERS THAT : 1. The application to determine the question of leave under s 459S as a preliminary matter be dismissed. 2. The costs of the application and the hearing of the application be reserved. 3. The hearing of the application for leave be stood over for hearing in conjunction with the application for winding up. NOTE : Settlement and entry of orders 1s dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3050 of 1994 ) GENERAL DIVISION ) BETWEEN : KEVIN WHELPTON Applicant AND: BRAAMS CONSTRUCTIONS PTY LIMITED (ACN 003 767 020) Respondent CORAM : TAMBERLIN J PLACE : SYDNEY DATED : 20 SEPTEMBER 1994 INS FO In this matter the respondent seeks leave under s 459S of the Corporations Law to oppose an application to wind up the respondent on the ground of presumed insolvency arising from failure to comply with a statutory demand. The stated basis for seeking leave 1s that the company is solvent and that there is a genuine dispute between the respondent and the applicant about the existence or amount of the debt to which the demand relates. The respondent contends that the ground is material to proving that the company is solvent. It relies on an affidavit from Mr Potter, a chartered accountant, to the effect that he has prepared the accounts of the respondent on information supplied by Mr Braams, a director, and has sighted the records of the company and prepared the accounts from information supplied. He states that he is aware that the amount of $94,000 1s claimed by the applicant from the company. He further states that apart from the claim by the applicant which has not been taken up in the accounts, the financial accounts of the company show that the company 1s solvent. He annexes to his affidavit a copy of the financial accounts for the year ended 30 June 1994 which show the net assets of the company as $10,192 with receivables of $59,660 and the operating profit as $873. There is an accountant's disclammer in the accounts to the effect that the accounting records of the company have not been audited nor have the accounts and that no opinion is expressed as to whether the accounts present a true and fair view of the position of the client or of the year's trading. Mr Clay, for the respondent, submits that the question whether leave should be granted under s 459S should be determined at the hearing of the application to wind up, at which tyme the court will have the opportunity to consider all the evidence placed before it and then be in a better position to make a decision as to whether leave should be granted. He submits that the question of leave under s 459S should not be determined as a preliminary question, prior to the hearing of the application to wind up. Mr Studdy for the applicant submits that the question whether leave should be granted should be decided as a preliminary matter prior to the hearing of the winding up application and submits that based on the history of the matter to date it is clear that the application for leave should not be granted, and that the Court should refuse leave and then proceed to make a winding up order upon such refusal. Such a course, it 1s said, will save time and expense. BACKGROUND The material events relied on by the applicant are as follows. On 18 August 1993 the applicant, Mr Whelpton, wrote to Mr Braams, the Managing Director of the respondent, stating that he was seeking payment from the respondent. The letter stated that he presumed that he would receive a telephone call but, should he not hear within ten days from the date of the letter, his solicitor would be instructed to institute legal proceedings without further notice. No response was received to this letter. On 9 November 1993 Mr O'Brien, solicitor for Mr Whelpton, wrote to Mr Braams Stating that by an agreement made on 6 November 1992 between the respondent, Mr and Mrs Whelpton, and a Mr David Codling, (a director of North Shore Constructions Pty Ltd - "North Shore") the respondent had assumed both the benefit and obligations under a building contract with North Shore. It was stated that one such obligation was Mr and Mrs Whelptons' right to a refund for all payments which had been made to suppliers and sub-contractors on behalf of North Shore amounting to $94,600. Details of the amount were set out in a Schedule of Payments annexed to the letter of 9 November. The letter goes on to state that pursuant to the agreement of 6 November, Mr and Mrs Whelpton demand payment from the respondent of the sum of $94,600 within fourteen days from the date of the letter failing which formal proceedings would be commenced by way of notice under the Corporations Law to wind up the company. Again there was no response to this letter by the respondent. On 10 December 1993 a statutory demand under s 459E was served on the registered office of the respondent. There was no response to this statutory demand. On 17 February 1994 an application was filed in the Federal Court by the applicant to wind up the respondent. On 24 February 1994 the solicitor for the respondent, Mr Koffel, wrote to the solicitor for the applicant stating that he had been instructed to represent the respondent to oppose the application to wind up the company. The letter stated that the respondent did not understand the basis of the amount claimed in the creditors Statutory demand and did not understand how the liability arose or why the claim was stated to be a liquidated amount. It stated that the respondent considered that the applicant owed money to the respondent. A request was made to supply documents. It went on to state that the respondent's solicitor was instructed to move the Federal Court to seek an injunction restraming the advertising of the petition unless an undertaking was given not to advertise. It 1s then suggested in the letter that it would be preferable if the applicant abandoned the winding up proceedings to enable the dispute to be litigated in the District Court and placed m the Building and Engineering Lust. By letter dated 25 February 1994 to Mr Koffel the solicitors for the applicant referred to s 4598 of the Corporations Law and expressed the view that leave would be refused and that any evidence as to the existence of a genuime dispute between the parties was not admissible 1n seeking to oppose an application for winding up in the light of certain decisions referred to in the letter. On 28 February 1994 the solicitor for the respondent replied to the above letter asserting that the respondent was solvent and that evidence of dispute was admissible, with leave, providing it goes to solvency. There was then some further correspondence between the solicitors. On 24 March 1994 the respondent filed a Notice of Intention to appear at the hearing and to oppose the application. The grounds of opposition were that the respondent was solvent and that the debt, the subject of the statutory demand, was in dispute. These grounds were verified on affidavit by Mr Braams. On 15 April 1994, the respondent filed an affidavit by Mr Braams which stated that he is the Managing Director of the respondent and that it carried on the business of building and construction principally in the area of residential construction. He referred to an annexed copy of the financial accounts as at 30 June 1993 and asserted that the company was able to pay its debts as and when they fell due. He referred to the claim by the applicant and stated that he was not aware of the amounts in the Schedule and denied that the respondent ordered the items in the Schedule or used any of the materials or services described. He stated that in August 1992 he became aware of difficulties North Shore was having with its licensee and the Building Services Corporation such that it was going to be required to leave the Whelpton job at Turramurra. He referred to a meeting in October 1992 at which the applicant was present and sets out the terms of discussion in relation to finishing the project and getting the applicant into hus home before Christmas . He said he Suggested to the applicant that the respondent should continue to work on the landscaping contract and complete the building contract in unison. He said he stated that the respondent should get its costs paid with no margin along the way and any excess in progress claims on the landscape contract should be paid against any shortfall from the building contract. He asserted that Mr Whelpton agreed to this and guaranteed to pay costs only on a weekly basis. He said that there was no mention of any reimbursement of any monies to the applicant. He deposed that on about 6 November 1992 he attended a meeting with Mr Whelpton at which a document, which he was informed was an assignment of contract, was signed by himself and Mr Whelpton and Mr Codling of North Shore. He stated that prior to signing the document he did not read it and had not read the building contract and landscaping contract. He said that the assignment document was signed in reliance on the above statements made by Mr Whelpton. He asserted that there 1s a shortfall owing to the respondent of $25,100 as a result of work carried out on the property. He said that he met with the applicant in about January 1993 and that the applicant agreed not to proceed with any claims against the respondent if the certain items of work were finished off. He said the respondent agreed to do this and stated that the respondent was able to complete the items required by the applicant. He said that when he received the statutory demand he did not understand why there was any claim against the respondent and intended to pass it to North Shore to deal with. He said that he had already given the letter of demand of 9 November 1993 to Mr Codling. He forgot to give the statutory demand to North Shore and the time in the demand expired before he obtained legal advice. He stated that he does not believe the respondent is indebted to the applicant and that the applicant owed the respondent about $25,100. He later said that he did not read through the whole of the statutory demand and that he did not realise that if he did not take any action the respondent could be wound up. If he had known he would have made an application to set aside the statutory demand. The applicant filed an affidavit dated 21 April 1994, m which he refers to a meeting in October 1992 with Mr Braams. In effect he said that he made it clear that the respondent would be liable for payments made to North Shore which had not been paid to sub-contractors and that future payments would have to allow for a set-off of various payments already made by the applicant. He said in effect that Mr Braams agreed to this. It was on that basis, he said, that his solicitors were to prepare an assignment of the construction contract. There was a meeting on 6 November 1992 and prior to the assignment he said that it 1s important that everyone understood the effect of the assignment before signing and that Mr Braams read the assignment in his presence before signing it. He said that at no stage during the meeting or at any other time did Mr Braams or Mr Codling discuss with him any arrangements concerning the obligation the respondent assumed under the assignment. He denied significant parts of the October 1992 conversation. He denied that any monies are owing to the respondent by himself or his wife. He agreed that the January 1993 conversation took place wherein he said "I won't proceed with any claims against Braams if you finish off certain items." However, he denied that the work required by him to finish the parts of the construction contract discussed were completed and then in general terms denied that any of the allegations contained in the affidavit by Mr Braams were ever raised with him. In his affidavit of 25 July 1994 Mr Braams dened certain aspects of the conversations with Mr Whelpton. He said that he did not believe that the assignment constituted the whole agreement and relied on assurances from Mr Whelpton set out in the conversations and he said that the work was agreed with Mr Whelpton in January 1993 to be carried out, was carried out and he annexed a draft copy of the final accounts for the respondent as at 30 June 1994 and stated that they showed a true and fair picture of the financial position at 30 June 1994. These draft accounts show an operating profit before tax of $873 and net assets of $10,865 for the year ended 30 June 1994. It is clear that the purpose of s 459S 1s to provide a "safety net" in relation to grounds of opposition which are material to the solvency or otherwise of the corporation. In the present application for a preliminary determmation of the matter Mr Studdy relies on two decisions. The first is Re Vaportec International Pty Ltd; Re Parktec Intemational Pty Ltd (1994) 12 ACLC 123. In that case the companies had failed to comply with statutory demands and an application was made for them to be wound up. One of the grounds on which the companies opposed the application was that the company was not indebted to the applicant. The creditor argued that the opposition based on there being no debt could have been raised on an application to set aside the demand and it was necessary to obtain leave to raise the issue to oppose the winding up. Ryan J. held that in order to rely on the lack of indebtedness to oppose an application for a winding up it was necessary to obtain the leave of the Court and that on the particular facts in that case there were no grounds for granting such leave. I do not think that this case has any relevance to the present circumstances as it turned on its own particular facts. The affidavits in that case so far as one can tell from the report appear simply to have asserted solvency and denied indebtedness and claimed there was no documentary evidence of debt. The second decision referred to by Mr Studdy was Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075. In that case the question whether there was a bona fide dispute between the bank and the company Texel about the debt owed to the bank was not matenal to proving that Texel was msolvent. Once again that case turned on its own particular facts and the ground relied on did not go to solvency. At p1082 of the judgment Hayne J says: "Accordingly, the question of whether there 1s a bona fide dispute between the bank and Texel about the debt owed by Texel to the bank is not material to proving that Texel is solvent Even if Texel owes nothing to the bank, it 1s, in my view, insolvent because of the position that obtains as between Rediock and it. Accordingly leave 1s refused for Texel to rely on the ground that there is a genuine dispute between it and the bank about the existence or amount of the debt on which the bank rehes to establish that is a creditor If that is so, it follows inevitably, in my view, that there should be orders for winding up of Redlock and of Texel" I have considered the detailed examination of the changes made to Part 5.4 of the Corporations Law carried out by Lockhart J in Topfelt Pty Ltd v State Bank of NSW Limited (1994) 12 ACLC 15 and particularly the references to s 4598S. I have also considered the judgment of Hayne J in Texel Pty Lid v Commonwealth Bank of Australia (1993) 11 ACLC 1059 where His Honour said at p1061 : "... It is to be noted that there 1s power under s 459S to grant leave to rely on grounds that could be used to set aside a statutory demand. As the Act says, that leave 1s not to be granted unless the ground 1s material to proving that the company is solvent, but clearly there 1s as counsel for the bank put it, a safety net provided by s 4598 in the sense that there are cases in which a dispute as to the existence of the debt may be litigated at the time of the application for winding up in insolvency, even if there has no been no application under s 459G. Now in the case of an alleged debt as large as this one it would seem probable that the question whether the debt is due would likely bear upon the company's solvency but that 1s a matter for another day and I say no more about it." In the circumstances of the present case in my opinion it is not appropriate to determme the question of whether leave ought to be granted under s 459S as a preliminary question to the hearing of the application. I agree with the submission made by Mr Clay for the respondent that this question 1s best dealt with at the time when the application for winding up is being heard. There are clear conflicts of fact arising from the affidavit material and there will no doubt be a dispute as to the legal significance of these facts. 1 disagree with the submission made by Mr Studdy to the effect that it is plain from simply reading the chronology in the light of the affidavit material that the leave ought to be refused at this stage and that the matter ought to proceed to a final hearing on the basis that leave is not granted. It does seem to me that there is sufficient evidence of a genuine dispute to warrant the hearing of the application for leave at the same time as the application for winding up and not to shut out the respondent from making out its case on the hearing of the application. At that stage I will be m a much better position to consider the force of the respondent's case and to make a decision on whether leave ought to be given in all the circumstances under s 459S. Accordingly, I dismiss the application to determine the question of leave under s 459S as a preliminary matter, and I direct that hearing of the application for leave be stood over for hearing in conjunction with the application for winding up. I order that the costs of the application and hearing before me be reserved. I certify that this and the preceding eleven (11) Pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Tamberlin. Associate : FSo\ Bow SV Date : 20 September 1994 Counsel for Applicant : Mr D B Studdy Solicitors for Applicant: Gilbert & Tobin Solicitors Counsel for Respondent: Mr P R Clay Solicitors for Respondent: Ross Koffel Solictors Date of Hearing : 12 September 1994 Date Judgment Delivered : 20 September 1994