Kapeleris, Theo & Ors v Bytenet Pty Ltd [1997] FCA 856

FEDERAL COURT OF AUSTRALIA COMPANIES - winding up - statutory demand for payment of debt - whether the legislative scheme of Pt 5.4 of the Corporations Law permits a defence of estoppel to be raised - whether proceedings by a creditor to wind up a company were an abuse of process - whether litigation prosecuted for a legitimate forensic purpose. Corporations Law Pt 5.4 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 - cited. David Grant & Co Pty Limited v Westpac Banking Corporation (1995) 184 CLR 265 - cited.

THEO KAPELERIS, CHRISTOPHER JOSEPH MILLEDGE,

IAN FRANCIS NAPIER, BRUCE MICHAEL WOOD and DESMOND GARRY LEE

v

BYTENET PTY LIMITED

NG 3126 of 1997

JUDGE: BEAUMONT J

DATE: 5 AUGUST 1997

PLACE: SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 3126 of 1997

BETWEEN: THEO KAPELERIS, CHRISTOPHER JOSEPH MILLEDGE,

IAN FRANCIS NAPIER, bruce michael wood AND desmond garry lee

Applicants

AND: BYTENET PTY LIMITED

Respondent

JUDGE: BEAUMONT J

DATE: 5 AUGUST 1997

PLACE: SYDNEY

THE COURT ORDERS: 1. Application stood over to 4 September 1997. 2. Costs reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 3126 of 1997

BETWEEN: THEO KAPELERIS, CHRISTOPHER JOSEPH MILLEDGE,

IAN FRANCIS NAPIER, BRUCE MICHAEL WOOD and

DESMOND GARRY LEE

ApplicantS

AND: BYTENET PTY LIMITED

Respondent

JUDGE: BEAUMONT J

DATE: 5 AUGUST 1997

PLACE: SYDNEY

REASONS FOR JUDGMENT (ON THE APPLICATION FOR WINDING UP) This is an application to wind up a company, the background of which I have partly mentioned in my earlier reasons for judgment on the question of the proper parties to the proceedings. Before the Court is an amended application, filed in Court on 1 August 1997, in which the three applicants there mentioned, together with the two nominal applicants ordered to be joined under my reasons for judgment on the question of parties, claim an order that Bytenet Pty Limited ("Bytenet") be wound up by reason of the failure by it to comply with a statutory demand made upon it in the following terms: "Paragraph 459(2)(e) FORM 509h Corporations Law CREDITOR'S STATUTORY DEMAND FOR PAYMENT OF DEBT TO: BYTENET PTY LIMITED ('the company') ACN: 050 213 404 OF: 80 Kitchener Parade, Bankstown NSW 2200 1. The company owes Theo Kapeleris and Bruce Wood formerly trading as Baker & Company ('the creditor') the amount of $251,572.26 being the total of the amounts of the debts described in the schedule. 2. Attached is the affidavit of Theo Kapeleris dated 7 May, 1997, verifying that the amount is due and payable by the company. 3. The creditor requires the company, within 21 days after service on the company of this demand: (a) to pay to the creditor the total of the amounts of the debts; or (b) to secure or compound for the total of the amounts of the debts, to the creditor's reasonable satisfaction. 4. The creditor may rely on failure to comply with this demand within the period for compliance set out on sub-section 459(2) as grounds for an application to a court having jurisdiction under the Corporations Law for the winding up of the company. 5. Section 459G of the Corporations Law provides that a company served with a demand may apply to a court having jurisdiction under the Corporations Law for an order setting the demand aside. An application must be made within twenty one (21) days after the demand is served and, within the same period: (a) an affidavit supporting the application must be filed with the court; and (b) a copy of the application and a copy of the affidavit must be served on the person who served the demand. 6. The address of the creditor for service of copies of any application and affidavit is C/- Messrs Birch Partners, 1st Floor, 13 Marion Street, Bankstown NSW 2200 SCHEDULE DESCRIPTION OF DEBT AMOUNT OF DEBT Professional, accounting and secretarial services supplied by the creditor to the company for the period November, 1993 to August, 1995 - balance due and payable by the debtor. See reconciliation attached hereto Total Amount $251,572.26 DATED: 7 May 1997 Signed: Sgd T. Kapeleris Capacity: Theo Kapeleris Principal of Dissolved Partnership Baker & Company NOTES: 1. The form must be signed by the creditor or the creditor's solicitor. It may be signed on behalf of a partnership by a partner, and on behalf of a corporation by a director or by the secretary or an executive of the corporation. 2. The amount of the debt, or if there is more than one debt, the total amounts of the debts, must exceed the statutory minimum of $2,000.00. 3. Unless the debt, or each of the debts, is a judgement debt, the demand must be accompanied by an affidavit that: (a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and (b) complies with the rules. 4. A person may make a demand relating to a debt that is owed to the person as assignee. BIRCH PARTNERS Telephone (02) 9793-7111" The statutory demand was verified by an affidavit sworn by Mr Kapeleris on 7 May 1997 as follows: "On the 7th day of May, 1997 I, Theo Kapeleris of 80 Kitchener Parade, Bankstown, in the State of New South Wales, Accountant, say on oath: 1. I am one of the former partners who traded as Baker & Company Accountants of 80 Kitchener Parade, Bankstown, in the said State. 2. That partnership was dissolved on 4 October, 1995 by a Deed of Dissolution dated 4 October, 1995. 3. The debt owed by the debtor is a debt owed to the former partnership of Theo Kapeleris and Bruce Wood trading as Baker & Company. 4. I believe the sum of $251,572.26 being the total of the amount of debts specified on the accompanying demand, is due and payable by the debtor to the creditor. 5. The debt arises out of professional accounting and secretarial services provided by the creditor to the debtor over the period November, 1993 to August, 1995. 6. I believe there is no genuine dispute about the existence or amount of the debts referred to in paragraph 2. SWORN at BANKSTOWN ) before me: ) Sgd T. Kapeleris Sgd P. Edgehill Justice of the Peace" The grounds of opposition by the company are stated in its notice of opposition, dated 31 July 1997, as follows: "The first Respondent intends to oppose the Amended Application on the grounds that: 1. The Amended Application should be dismissed because the Applicants have no standing for the purposes of bringing an application against the First Respondent pursuant to s.459A of the Corporations Law. Further or alternatively to the above: 2. The amended application should be dismissed because the effect of the joinder by Kapeleris of his former partners as co-applicants and co-respondents to the application to wind up the First Respondent is to raise for determination by the Court issues of a kind not appropriate to be determined in winding up proceedings. 3. The First Applicant is estopped from claiming the relief he seeks in this application, at least until November of 1997, as a consequence of representations he made to certain Directors and secured creditors of the First Respondent on the 14th May, 1997. By virtue of the same representations the applicants are estopped from relying upon the provisions of s.459C(2) in so far as such reliance is based upon the First Respondent's failure to comply with the statutory demand. 4. If the Court does not accept the existence of the estoppel asserted by the First Respondent or if the Court takes the view that the decision of the High Court in David Grant & Co Pty Limited -v- Westpac Banking Corporation [1994-1995] 184 CLR 265 precludes such a finding then it is submitted that this case comes within the reserved category of circumstances adverted by Gummow J. in David Grant. 5. It is submitted that there is nothing in the judgment of Gummow J. in Grant's case which fetters the Court's general discretion, in an appropriate case, to grant injunctive relief to a company in winding up proceedings. Abuse of process is just one instance or example of where it might be appropriate. It is submitted that other instances would include conduct giving rise to an estoppel where it would be unconscionable to permit a party to depart from an assumption adopted by the other party as the basis of some act or omission which would operate to that other party's detriment if the assumption be not adhered to: Commonwealth of Australia -v- Verwayen (1990) 170 CLR 394 per Mason CJ at 413, Brennan J. at 422, Deane J. at 444-6. 6. In any event in the present circumstances of the negotiations being conducted between the First Respondent and the prospective purchaser of its Vietnamese assets the Court would give effect to the unanimous view of the creditors of the First Respondent (with the exception of the Applicants). Relief Sought 1. Amended Application dismissed. 2. Order that the Applicants by themselves, their servants and agents, be restrained from commencing or causing to be commenced any proceedings seeking an order that the First Respondent be wound up in insolvency, based upon the alleged failure by the First Respondent to comply with the statutory demand served on the First Respondent dated 7th May, 1997. 3. The Applicants to pay the First Respondent's costs. 4. Alternatively to the above an order that the amended application be adjourned for hearing to the 14th November, 1997." It is convenient to deal with these grounds of opposition in turn. 1. It must follow from my reasons on the question of the proper parties to the proceedings that this ground should fail. As matters now stand, there are before the Court as applicants, either as actual or nominal parties, each of the partners of the creditor firm of accountants. 2. It must further follow that this ground should also fail by reason of my conclusions and orders made in my reasons on the question of the proper parties to the proceedings. 3. On the question of estoppel, there is a threshold issue, namely, whether the legislative scheme of Part 5.4 of the Corporations Law permits such a defence to be raised. In David Grant & Co Pty Limited v Westpac Banking Corporation (1995) 184 CLR 265, Gummow J, with the agreement of Brennan CJ, Dawson, Gaudron and McHugh JJ, said (at 279): "No doubt, in some circumstances, the new Pt 5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz (1992) 174 CLR 509 at 518-522, 532-537. However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction (L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183)." His Honour referred to the possibility of an abuse of process in this area and I will return to this matter later. However, ground three appears to be directed to a different doctrine, that is, estoppel, presumably in the sense explained in Commonwealth v Verwayen (1990) 170 CLR 394. I am prepared to accept, without deciding the point, that, for present purposes, it may be open to the company resisting an application for winding up, to attempt to set up a defence of estoppel, of a promissory kind, by pleading the unconscionable conduct of the applicant. That is to say, I am prepared to assume in favour of the company, that Pt 5.4 would allow the company, in appropriate circumstances and apart from any issue of abuse of process, to resist the winding up application upon the footing that the creditor, by his conduct, had led the company to believe that the creditor would not insist upon his legal right to seek a winding up order, where the creditor was otherwise entitled to obtain payment. Were the matter a purely private dispute arising between parties and of concern to them but to no others, it could be accepted that the possibility of an estoppel or something similar could arise. However, the present proceedings are not, of course, merely private litigation, they are insolvency proceedings, or more precisely, alleged insolvency proceedings, and the general body of creditors, both secured and unsecured, has a real interest in their outcome. It is possible that this aspect of the litigation, which takes it out of the usual pattern of adversarial proceedings, may constitute a reason why a private law doctrine, such as that of estoppel, may not be available. There is a further question whether, as I have noted, the right to raise a defence of estoppel is consistent with the legislative scheme of Part 5.4. However, I need not resolve this difficult question of law, because I have come to the view that the company has not satisfied me, on the facts, that the conduct of the applicants has been unconscionable in the relevant sense. It has been stated, in the third ground of the grounds of opposition, that the company relies in this connection upon representations alleged to have been made by Mr Kapeleris at a meeting held with the directors and secured creditors of the company on 14 May 1997. It is common ground that this meeting proceeded over some hours and that in the course of it, Mr Kapeleris was asked to sign, but declined to sign, a deed by which he would undertake not to proceed with the winding up application for a period of six months. However, there is a substantial dispute between the parties and between the witnesses called on either side, in this connection, as to what Mr Kapeleris said at the meeting. According to Mr William Kevin Hardy in his affidavit sworn 16 June 1997, Mr Kapeleris said: "I give my word that I will not be proceedings with the winding up. My action in serving the notice was only done to obtain information abut what was happening. I do not wish to endanger Ron Clark's sale negotiations." Mr Kapeleris denies this version of the meeting. He says, inter alia, that when Mr Lee asked him to sign the draft deed, Mr Kapeleris replied: "I can't talk on behalf of Ian [Napier] and Chris [Milledge] but I am sure they won't sign it - simply because they don't trust you anymore - however, within two weeks, if you can provide me with details regarding the sale or call a unit holders meeting to put forward the sale and I am convinced the sale is genuine, then I won't take any action even if it takes six months - but I would like to reserve my rights by not signing this deed." As I have said, it is common ground that the discussion at the meeting proceeded for some hours. It is perhaps not surprising that those present had different recollections of what was said. Clearly, many matters of detail must have been discussed and it is not reasonable to expect that any of the witnesses would now have a clear recollection of the terms of this verbal dialogue. I do, however, have regard to the objective circumstances surrounding the meeting in endeavouring to make an assessment of what had actually happened. The objective circumstances were that, at the time the meeting was held, the partnership had been dissolved since the middle of 1995; the debt owed to the partnership by the company was some years old; and there had been real difficulty experienced in collecting the debt, given especially the circumstance that a receiver and manager had been appointed to the assets of the company by a secured creditor in July 1996. Given that context, and given the maturity and experience of all those involved, in my view it is unlikely that any of the parties concerned would have been prepared, on that occasion, to give an open-ended commitment. In particular, it is, in my opinion, inherently unlikely that a person of the experience of Mr Kapeleris, who was well aware of the deadlock that had occurred in the process of the winding up of the partnership and was well aware of the circumstance that Mr Lee had more than one interest in the matter (that is, Mr Lee was a member of the firm of accountants and also chairman of the Board of the company), would have been prepared to give an open-ended undertaking to take no action in connection with the debt for a period as long as six months. Mr Kapeleris has, in the passage I have quoted, acknowledged that he did give an indication that, because he wished to consider the matter further and perhaps discuss it with Messrs Napier and Milledge, he might not take any action for two weeks, pending his further consideration. He went on to acknowledge, as has been seen, that if he were convinced that the proposed sale was "genuine", then he would wish to reserve his rights, but would not take any action for six months. Whilst we have Mr Kapeleris' acknowledgment that he made the statement I have quoted, I am not satisfied that he gave an unconditional verbal undertaking not to take any action in connection with the debt for a period as long as six months. It seems to me that, in the circumstances I have mentioned, it is inherently unlikely that Mr Kapeleris would do this and there was no reason for him to do so. It was also suggested in the evidence called on behalf of the company, and in particular in the passage I have quoted from the evidence of Mr Hardy, that Mr Kapeleris said words to the effect that his purpose in serving the statutory demand was merely to obtain information about what was happening. Again, I have difficulty accepting that this was inherently probable. I can readily accept that Mr Kapeleris may well have indicated, as Mr Hardy says, that Mr Kapeleris did not wish to endanger the sale negotiation but there was no real purpose in Mr Kapeleris obtaining information for its own sake. True, Mr Kapeleris would have been interested, and clearly was interested, in any relevant information which would assist him in assessing whether the sale was, as he put it, "genuine". But that was an incidental matter. I am satisfied that Mr Kapeleris' real motive in these discussions, and in the bringing of the present proceeding, was to achieve a payment by the company to the firm of what was owed. I should add at this stage, that it is common ground that at all material times, the firm has been owed at least the sum of $90,037.21. As has been seen, a larger amount was claimed in the statutory demand. On behalf of the company, it is said that a sum of $161,535.05 is owed, not by it, but by Bytenet Holdings Pty Limited. It is not necessary, as I indicated in argument, for me to resolve the question whether the additional sum of $161,535.05 is owed by the company or by Bytenet Holdings Pty Limited. It is sufficient for my purposes to note that the company accepts that it is indebted to the firm in the amount of at least $90,037.21. It is also said in ground four of the grounds of opposition that the present circumstances fall within the "reserve category" of circumstances adverted to by Gummow J in David Grant. I will deal later in ground five with the question of abuse of process, but I am prepared to accept in the company's favour, as I have already indicated, that, under the modern doctrine of estoppel, a party can rely upon any form of conduct which a court determines to be "unconscionable". However, accepting this, the reasons I have given for rejecting ground three are equally applicable to ground four. It appears that this ground raises the issue of abuse of process and I accept that, in principle, such a matter is open to argument. In Pacific Communication Rentals Pty Ltd v Walker (1993) at 12 ACSR 287, Brownie J referred to a statement by McClelland J in L & D Auto Acoustics Pty Ltd v Pioneer Electronics Australia Pty Limited (1982) 7 ACLR 180 at 181, that proceedings by an alleged creditor to wind up a company on the ground that it is unable to pay its debts will ordinarily be an abuse of process in three types of cases: "(1) if the proceedings will fail, because the applicant will not be able to prove that he is a creditor, or will not be able to prove that the company is insolvent; (2) if the application is made for some improper purpose, for example, to coerce the company into paying the alleged debt, without affording the company a reasonable opportunity to ascertain or have it established that the debt is not properly payable; or (3) if issues will arise of a kind not appropriate to be determined in winding up proceedings, for example substantial issues as to the existence of the supposed debt." I will deal with these three possible cases in turn, but will do so upon the footing that I accept that the doctrine of abuse of process could be invoked in factual circumstances where it could be demonstrated that litigation is prosecuted for a purpose other than a legitimate forensic one. It is, however, convenient in the present context, without at all confining the inquiry, to consider the matter within the framework of the three types of cases mentioned. As to the first type of case, it is true that in the present case, the creditor, in its initial documentation of its claim, proceeded on the basis that the debt was owed not to the original firm but to certain members only of it. For instance, in his affidavit verifying debt sworn 5 June 1997, Mr Kapeleris said: "The debt owed by the company is a debt owed to the former partnership of Theo Kapeleris and Bruce Wood trading as Baker & Company." However, in that instance and in other instances in this connection, Mr Kapeleris went on to make it clear that the debt referred to was the full amount of $251,572. It is also true that in a letter dated 11 June 1997 Mr Kapeleris wrote to Mr Jack Hardy at Metropolitan Civil Contractors Pty Limited, a secured creditor of the company, as follows: "Dear Jack, I have given a lot of consideration to the matter regarding Bytenet. I have sat back and listened to everybody regarding a possible sale etc. I am yet to be convinced that in the wash up I, as a unitholder will get any monetary benefit at all. I am concerned that interest and administration costs are escalating thereby reducing my equity. It is my personal belief that even if a sale is to occur it would be partial sale and there will be very little (if any) going back to the unitholders and there will be no option available to a unitholder to sell outright unless another unitholder is prepared to purchase their equity. If this is the case, it is not acceptable to me, as I have already waited seven years for a return. As I am owed a large sum of accountancy fees and disbursements and have partners that I should be responsible to I have been instructed to pursue with our actions for recovery and have today instructed my Solicitor to lodge documents with the Federal Court. My legal advice is that I am not required to advertise my application to wind-up Bytenet Pty Ltd in the Commonwealth Government Gazette and the Sydney Morning Herald until three days have elapsed from the date of my filing the application with the Court. Therefore I urge you to discuss this letter with the Receiver and organise a meeting with me and provide me with information regarding the possible sale, the terms, conditions etc. to convince me and eliminate the doubts that I have (ie there is nothing there for me in this sale nor in the near future). Alternatively you may be interested in buying our share of the debt. Your prompt reply would be appreciated." It will be seen that in this letter, Mr Kapeleris raises as an alternative proposition that Mr Hardy or his company might be "interested in buying our share of the debt". It is said, on behalf of the company, that this is an indication that Mr Kapeleris was not interested in the firm's recovering the full amount of the debt and that his only interest was in his share of it. I cannot accept such a submission. In the statutory demand and in the application for winding up itself, Mr Kapeleris has always sought payment of the full amount of the debt and he must have appreciated that such amount could be payable to the firm only and that he had no entitlement to be paid a proportion of the debt in any individual capacity. It is consistent with this approach that he should say to Mr Hardy, who, of course, was a third party, that if any arrangement in the nature of a factoring transaction were to be embarked upon, then it was only realistic to expect that the company's secured creditor would, having regard to the existing receivership and apparent insolvency of the company, be interested in any deal with Mr Kapeleris and Mr Napier in the minimum amount possible. It was in that context, I think, that the alternative proposal was advanced. It was a proposed transaction with a party who stood outside the relationship between the company and the accounting firm. I am therefore of the view that the present case does not fall within the first type of case. As to the second type of case, there is no basis here for any such suggestion. The company has had several years to ascertain whether the debt is owed to the firm. It is true that it is possible to read a part of the statutory demand and a part of the affidavit verifying the debt, in a way that would suggest perhaps that Mr Kapeleris was not claiming that the full amount of the debt was due to the firm. However, in my view, when the statutory demand and the affidavit verifying are read as a whole, it emerges with sufficient clarity that it is demanded that the full amount of the debt be paid and that it be paid to the firm, albeit to a firm in the process of being wound up. As to the third type of case, again I do not think the present case falls within this class or within this description, essentially for the reasons I have just given in dealing with the second type. I have already indicated that I do not see any basis for confining the doctrine of abuse of process to any particular factual circumstances and I have dealt with these three types of cases as a convenient framework by which to proceed in these reasons. Looking at the matter more broadly, I do not see any evidence that this litigation has been brought for a purpose other than a legitimate forensic one. As Gibbs J said in IOC Australia Pty Limited v Mobil Oil Aust. Ltd (1975) 49 ALJR 176 (at 182): "The authorities show that as a general rule a creditor who cannot obtain payment is, as between himself and the company that owes the debt, entitled to a winding-up order as a matter of right." His Honour had previously pointed out in that case that there was no evidence that Mobil's decision to seek a winding up order against the appellant was actuated by any motive other than a desire to avail itself of one of the remedies open to a creditor of a company, which cannot pay its debts. The same comments could, I think, be made in the present case. It is true that the secured creditors and other creditors of the company, with the exception of the applicants, have agreed that the present application be deferred This is, no doubt, an important discretionary consideration, but it is not a decisive one. A creditor does have a right to a winding up order where, as here, the debt is not disputed and has been outstanding for a long time. It is appropriate here, in my view, to draw an analogy between the real origins of the present dispute, which arises out of the dissolution of a partnership, regrettably deadlocked in the process of its winding up, and the circumstances where an application has been brought to wind up a company where the management of that company is in deadlock, in which case the making of the order to wind up is deferred for a short period to provide a final opportunity to the parties to reconsider their respective positions before the making of a winding up order (see, e.g., Re Cumberland Holdings Ltd 1 ACLR 361 at 380). Applying this analogy here, I propose, having considered all the circumstances, to permit the parties a further period of one month in which, hopefully, the matter can be finally resolved; if not, I will then make a winding up order. I am further of the view, as canvassed in argument, that, given the manner in which, in part at least, the claim to the debt was made, and, in particular, the errors in the documentation presented by the applicants, it is appropriate that this should be recognised and reflected in any order I make as to costs. In my reasons on the question of the proper parties, I made an order in the company's favour for the costs up to 4 July 1997, save for certain costs reserved by Einfeld J. The costs involved since that date are the costs of the preparation for this hearing incurred after that date, and the costs of this hearing itself. No doubt those costs were substantial and this is to be regretted but, the fact is, they have been incurred. In the exercise of my discretion, as I have indicated, I think it is proper that I deprive the applicants of their costs since 4 July. Whilst, in substance, the applicants have succeeded to some extent, I think the proper order is that I make no order as to costs at this stage.