FEDERAL COURT OF AUSTRALIA International Entertainment Corporation Pty Ltd v Soccer Australia Ltd [2002] FCA 879 INTERNATIONAL ENTERTAINMENT CORPORATION PTY LTD (ACN 091 532 660) v SOCCER AUSTRALIA LTD (ACN 008 540 770) N 3020 OF 2002 EMMETT J 11 JUNE 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 3020 OF 2002 BETWEEN: INTERNATIONAL ENTERTAINMENT CORPORATION PTY LTD APPLICANT AND: SOCCER AUSTRALIA LTD RESPONDENT JUDGE: EMMETT J DATE OF ORDER: 11 JUNE 2002 WHERE MADE: SYDNEY THE COURT NOTES THE FOLLOWING UNDERTAKINGS TO THE COURT: 1. That the applicant shall not file or institute any proceedings for the winding up or other form of external administration of the respondent up to 4 pm on 3 July 2002; and 2. That each party will, up to and including 3 July 2002, use its best endeavours to resolve all disputes by mediation. THE COURT ORDERS THAT: 1. the application for leave to proceed pursuant to s 459P(2) of the Corporations Act 2001 (Cth) be refused at this stage; 2. the matter (including the respondents' application for injunctive relief) be stood over for directions before Emmett J on 3 July 2002 at 9.30 am; and 3. costs be 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 N 3020 OF 2002 BETWEEN: INTERNATIONAL ENTERTAINMENT CORPORATION PTY LTD APPLICANT AND: SOCCER AUSTRALIA LTD RESPONDENT JUDGE: EMMETT J DATE: 11 JUNE 2002 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me an application under s 459P(2) of the Corporations Act 2001 (Cth) ("the Act"), for leave to commence an application to wind up Soccer Australia Limited ("the Company"). Section 459A of the Act provides that, on an application under s 459P of the Act, the Court may order that an insolvent company be wound up in insolvency. Section 459P(1)(b) provides that a creditor (even if the creditor is only a contingent or prospective creditor) may apply to the Court for a company to be wound up in insolvency. However, s 459P(2) provides that an application by a person who is a creditor only because of a contingent or prospective debt may only be made with the leave of the Court. Section 459P(3) provides that the Court may give leave if satisfied there is a prima facie case that the company is insolvent but not otherwise. 2 The Company is the national body for soccer in Australia endorsed as such by the Fédération Internationale de Football Association("FIFA"). The Company coordinates all national soccer programs, high performance institutes, coaching and referee bodies, and numerous affiliated federations and associations spread across Australia. It is primarily responsible for organising Australian national teams for soccer competitions at both senior and junior levels. It is also primarily responsible for organising the national soccer league, which is the premier soccer competition in Australia. 3 The Company is a company limited by guarantee. Its members are state soccer federations. The Company is controlled by its executive committee, who are, for the most part, elected by the members. There are approximately 400,000 players registered with the Company and its member associations. According to the latest census material published by the Australian Bureau of Statistics, approximately 515,000 players participate in organised soccer games in Australia. The Company depends on the support of various organisations to be able to meet its operating costs. Those organisations include its members, major sponsors, the Australian Sports Commission and FIFA. 4 The applicant is a party to several arrangements with the Company, which are evidenced by a number of separate agreements. As a result of those arrangements, the applicant claims that the Company is indebted to it in a sum in excess of $3,000,000. The Company disputes those claims and also asserts claims of its own against the applicant. The applicant has formulated, for the purposes of this application, some thirteen different claims that are not properly characterised as contingent or prospective. It has also formulated a claim that is the basis for its application to the Court. 5 An application under s 459P(2) relevantly raises three issues. The first is whether an applicant can be said to be a creditor, albeit a contingent or prospective creditor. The second is whether the applicant can satisfy the Court that there is a prima facie case that the Company is insolvent. The third issue is whether the Court should exercise the discretion to give leave, even if satisfied that there is a prima facie case that the Company is insolvent. 6 I consider that there is an inter-relationship between the first and the third of those questions. If a dispute is straight-forward and simple, it may be appropriate to resolve such a question in the course of an application. However, it would be inappropriate in most applications of this nature, where there was a dispute as to whether or not an applicant is a contingent or prospective creditor, to resolve that question. 7 The applicant claims to be a contingent or prospective creditor of the Company as a result of certain entitlements that it has under an agreement entered into between the applicant and the Company on 17 February 2002 ("the NSL Agreement"). 8 By clause 2.1 of the NSL Agreement, the Company appointed the applicant to act, during "the Term [as defined] as its sole and exclusive representative for the development, negotiation and organisation of opportunities for the commercial exploitation of the Rights" [as defined]. "[T]he Rights" are defined by reference to other defined terms, namely, "Available Rights" and "Conditional Rights". "Available Rights" are defined as meaning: "all of the rights in respect of the Competitions and New Competitions including but not limited to those rights as set out in Schedule One but excluding the Conditional Rights." 9 "Conditional Rights" means the rights listed in Schedule 3. The term "Competition/s" is defined as meaning "the National Soccer League and the National Youth League". The "National Soccer League" is in turn defined as meaning "the premier national league of male soccer matches organised by Soccer Australia in the [Commonwealth of Australia and New Zealand] and known prior to the commencement date of the agreement as the "National Soccer League" or the "Ericsson Cup" including the Final Series". The "Final Series" is defined as meaning: "the series of Matches between the highest placed Teams in the Competitions and New Competitions in the final weeks of the Season to determine the winner of the respective Competitions and New Competitions." 10 The expression "term" is defined by reference to other defined terms being the "Initial Term" and the "Additional Term". The "Initial Term" means: "the period commencing on the Commencement Date and ending immediately prior to the first day of the 2002/2003 Season Competition." "Competition" means "the National Soccer League and the National Youth League", which, as I have said, are defined by reference to the league of matches. 11 The applicant agrees under clause 5.1 to pay to the Company a sum of money in consideration for the appointment of the applicant under the NSL Agreement. Under clause 5.2 in consideration of the applicant performing services under the NSL Agreement, the Company agrees to pay the applicant a fee for the applicant's services under the NSL Agreement in each year of the initial term. The fee is calculated as a proportion of revenue as defined. Revenue is defined as meaning "all income, received by Soccer Australia…as a result of the exploitation of the Available Rights and the Conditional Rights". 12 On 16 February 2001, the Company entered into an agreement with Qantas Airways Limited ("Qantas"). By clause 4.1 of that agreement, in consideration of certain benefits to be provided by the Company and associated organisations to Qantas, Qantas agreed to pay to the Company the sum of one million dollars no later than 1 July 2002. The applicant claims that any such payment would constitute revenue within the meaning of the NSL agreement. That question is not in dispute. 13 The applicant contends that it is a contingent creditor in respect of the sum of one million dollars together with any goods and services tax that might be payable in respect of the receipt, the contingency being the receipt by the Company of that sum from Qantas. The Company however, contends that, although that sum might be revenue within the meaning of the NSL agreement, if it is received by the Company, it will not be received in a year of the initial term. If it is received in a year of the initial term, then it would fall to be brought to account as revenue. Whether or not it would be received within a year of the initial term turns on the meaning of that expression. 14 The Company refers to the definition of season in the NSL agreement, which is defined as meaning "the twelve month period which encompasses a specific preseason period and the season of Matches in the Competition and/or New Competitions up to and including the weekend on which the grand final… is played". The grand final of the competition for the 2001/2002 season was played on 12 May 2002. The Company contends that the initial term ended on that day, in effect being the day immediately prior to the first day of the 2002/2003 season. 15 There is little contention concerning the period of a season. That is to say, it is probably clear that the first day of the 2002/2003 season would be the day after the weekend on which the grand final was played. However, the definition of initial term does not refer to the first day of the 2002/2003 season but to the first day of the 2002/2003 season competition. As I have said, the term "competition" is defined by reference to a league of matches. The evidence suggests that such matches for the 2002/2003 season have not yet begun to be played and would not in the ordinary course begin until September or October 2002. 16 The applicant contends that the initial term will end immediately prior to the first day on which matches are played for the competition to be conducted during the 2002/2003 season. As a matter of language, the definition of "Initial Term" shows there is considerable substance in that contention. There would be a rationale for making the term coincide with a season: "Season" is clearly defined as a twelve-month period. It is difficult to see a rationale for providing for a term with revenue being derived for a part of the season being the subject of the applicant's entitlement but not for the balance of a season. 17 One question is whether it is desirable for me to determine that question in the course of this application. I should say something about the circumstance in which the application has been brought on. The matter came before me for the first time only last week, when I was informed by the parties that the matter was of some urgency. I therefore indicated that I would hear the matter last Friday, but on the basis that the matter would have to be completed on that day because of a commitment I have to leave the country tomorrow. 18 In the event, by 5pm last Friday the matter was not completed. Whilst I am not intending to offer criticism of any person for that, it is a circumstance that has to be taken into account. I therefore stood the matter over to today and resumed the hearing at 8 am. Again, because of my commitment to leave the country tomorrow, it was necessary for me to adjourn at about 11.30 am and I could not resume until 4 pm. The hearing then proceeded until about 8.15 pm tonight when I adjourned for a brief time before resuming to give judgment. 19 It is in a sense unfortunate that the parties have been subjected to such hours, but as I have said, it is a consequence of my having taken on the hearing of the matter in the belief that it would finish in a day. The limited time available and the limited nature of this application, I think, is a relevant consideration in determining whether I should resolve an issue where it is bona fide in dispute. 20 Added to that consideration are two matters. The first arises out of clause 12 of the NSL agreement, which deals with mediation as follows: "12.1 If any dispute arises in relation to this Agreement, the parties must endeavour to first settle the dispute by discussions between their nominated representatives. 12.2 If the dispute is not resolved within 14 days…the party may refer the dispute to mediation to be conducted in accordance with the Australian Commercial Dispute Centre mediation guidelines…. 12.3 If the dispute has not been settled within 28 days after the appointment of the mediator, then a party may take whatever action it chooses to enforce its rights." 21 The matter has, in fact, been referred to mediation and there has been considerable correspondence relating to the willingness of the parties to engage in mediation. At this stage, while neither party has said that it will not engage in mediation, for various reasons a mediation has not been completed. Clause 12.3 would, of course, be no impediment to the resolution of a dispute. However, the existence of that clause and of at least provisional arrangements for mediation are a relevant consideration. 22 The second matter to which I wish to refer is the general principle that, where an applicant to the Court for a winding-up order in respect of a company is a party to a dispute as to the indebtedness claimed against that company, or where that company establishes that a set-off or cross-action could be supported on substantial grounds the Court may, in its discretion, restrain a winding up application or dismiss an application once made. Alternatively, the Court may adjourn the winding up application pending resolution of the dispute between the parties. The rationale for such a principle is clear. A winding up application is not the appropriate proceeding to determine a genuine dispute between the parties as to the indebtedness of a company to an applicant. It is only if a dispute is within small compass that it may be possible to resolve that dispute on a winding up application in an appropriate case. 23 The question of whether or not the initial term of the NSL agreement has expired is essentially one of construction, although there may well be background material that is relevant to that question. I shall come back to the question of whether or not I can form a view as to whether the applicant is a contingent creditor of the Company. 24 The financial position of the Company is not entirely clear. As I have said, under s 459P(3), the Court may only give leave if satisfied that there is a prima facie case that a company is insolvent. Under s 95A of the Act, a person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. In order to determine whether a company is solvent at a given time, it would be relevant to consider a number of matters as follows: 1. all of that company's debts as at that time: in order to determine when those debts are due and payable; 2. All of the assets of that company as at that time: in order to determine the extent to which those assets are liquid or are realisable within a time frame that would allow each of the debts to be paid as and when it became payable; 1. that company's business as at that time: in order to determine its expected net cash flow from the business by deducting from future revenue the cash expenses that would be necessary to generate that revenue. 2. finally, arrangements between that company and prospective lenders or sources of revenue, such as bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings that could be repayable at a time later than the debts. 25 It is often accepted as a rule of thumb that a company would be regarded as insolvent if its current liabilities exceed its current assets. However, that is no more than a rule of thumb. Further, a deficiency of total assets to total liabilities is not conclusive as to insolvency. 26 There is considerable financial material before me relating to the Company. It begins with the Director's Report and financial statements for the period ended 30 June 2001. The material indicates that total liabilities exceeded total assets as at 30 June 2001 by some $1,735,883 dollars. 27 The notes to the financial statements include the following, under the heading "Going Concern": "Notwithstanding the deficiency of net assets, the financial report has been prepared on a going concern basis, which assumes continuity of normal business activities and the realisation of assets and liabilities in the ordinary course of business. For the period ended 30th June 2001, the company operated at a loss of $1,730,516 and, as at this date, current liabilities exceeded current assets by an amount of $2,290,521. The directors considered that the company will retain the ongoing support of their bankers and creditors, despite cash flow pressures. The company is attempting to source alternative finance arrangements, as well as entering into extended payment arrangements with outstanding creditors. Significant cash flow benefits would arise from the successful qualification of the senior national team for the World Cup, to be held in Japan and Korea in 2002. The directors further believe that the going concern basis is appropriate given the following: · negotiations with potential and current sponsors are progressing, and · budgetary measures that have been implemented, including agreement from some suppliers to enter into delayed payment programs, will assist with the short-term cash flow pressures. Should the company be unsuccessful in renegotiating/obtaining sponsorship contracts, and/or not receiving on-going support from its bankers and creditors and/or obtain alternate funding support, there is significant uncertainty regarding the ability of the company to continue as a going concern. Should the company be unable to continue as a going concern, it is unlikely that it will realise its assets and extinguish its [sic] in the normal course of business and the amounts stated in the financial statements." 28 The Directors' Declaration in connection with those financial statements includes a statement to the following effect: "In the directors' opinion there are reasonable grounds to believe that the company would be able to pay its debts as and when they become due and payable. As detailed in Note 1, this statement is dependant on the company successfully negotiating new sponsorships, renewing existing sponsorships, and retaining support from its bankers and creditors, to alleviate the current liquidity pressures." The Auditor's Report in respect of the financial statements includes the following: "INHERENT UNCERTAINTY REGARDING CONTINUATION AS A GOING CONCERN: Without qualification to the opinion expressed above, attention is drawn to the following matter. As described at Note 1, the future financial position of the company is dependant upon the continued support of the company's bankers, creditors and the successful negotiation of naming the right sponsor. Should the financial support not continue and should the negotiation of naming right sponsor be unsuccessful, there is significant uncertainty regarding the ability of the company to continue as a going concern. Should the company be unable to continue as a going concern, it is unlikely that it will realise its assets and extinguish its liabilities in the normal course of business and the amounts stated in the financial statements." 29 It is an unfortunate fact that Australia did not qualify for the World Cup presently being played in Japan and South Korea. Had Australia won the play off last year, this application no doubt would not have been brought. 30 The financial information before me is conflicting and confusing. There is a profit and loss and balance sheet prepared as a draft in April 2002. It shows a loss in the year to date of $1,271,000, against a budget profit or surplus of $891,000. It shows current liabilities of $7,244,000 against current assets of $6,064,000. A consolidated balance sheet projection, prepared as at 30 May 2002, shows continuing deficiency of net assets through to June 2003. A cash flow, prepared at 30 May 2002, shows an improving position. While it records a net cash outflow for May 2002, it shows a net cash inflow of $2,506,000 for June and $2,534,000 for July. 31 That cash flow, however, makes assumptions that there will be receipts during June of, inter alia, $840,000 for national registration fees and $2,575,000 for grants from the Australian Sports Commission. It also projects further receipts for similar items for July and then further receipts of registration fees in August. The cash flow also projects outgoing by way of distributions of Australian Sports Commission grants of $180,000 in June and a total of $1,525,000 during the year ended 30 June 2003. 32 The evidence relating to those items is unsatisfactory. The registration fees represent charges made to players throughout Australia. The juridical basis for the charges is by no means clear, although the evidence indicates that the charges have been levied for at least the years 2000 and 2001, although the level for those years is significantly lower than the levels included in the cash flow. 33 It appears that at a meeting of the directors of the Company on 31 January 2002, a resolution was passed setting the registration fee for the 2002 season. However, there is also evidence indicating some considerable dissatisfaction among member organisations with the increased level. I am not be confident, on the material before me, that the projected receipts in the cash flow would necessarily materialise at the times indicated. 34 The Australian Sports Commission grants are more dubious. According to the financial statements for the period ended 30 June 2001, for the period of nine months ended on that day, government grants of $167,847 were received. In the period of twelve months prior to the commencement of that period, grants of $1,328,195 were received. The cash flow assumes receipts of in excess of $2,800,000, of which as I have said, $2,575,000 are provided for in June 2002. The only evidence for that is a letter of 22 May 2002 from the Australian Sports Commission which relevantly says as follows: "The Commission recognises that there may be a shorter-term cash-flow issue for SA until the new capitation fees flow into SA during 2002-3 and 2003-4. On the basis of written confirmation from SA's members to the payment of increase capitation fees, including anticipated levels and timing of payments to SA during these two years, the Commission agrees to release grant monies, not due to be paid to SA until April 2003, in July 2002 and then to again review this situation in February 2003. This arrangement will provide SA with access to up to $500,000 as advance on grants for cash-flow purposes. We would, of course, need to agree to conditions associated with this earlier access. Similarly, the release of any of the Commissions 2002-3 grant moneys to SA is depended on the above-sought written confirmation from SA's members relating to capitation fees. These grants total $2.315 million in 2002-3." 35 On the basis of that, none of the grants will be receivable in June 2002. Indeed, it is by no means clear that the advance of up to $500,000 would be receivable in July, since that was to be conditional upon written confirmation from the members to the payment of the increased capitation fees. The correspondence is, in some cases, equivocal as to the support of those fees. 36 Those two matters indicate to me that the cash flow projection is by no means reliable. 37 I also have before me schedules of creditors and debtors as at 31 May 2002. There have been two versions of the creditors due as at that date. The schedule of creditors indicates total creditors of $823,565 but that does not include the applicant. The table is not entirely clear, since it has two columns headed "current" and two columns headed "30 days". 38 There is no reason to doubt, however, that all of the creditors, apart from those in respect of those whom some payment plan has been made, are creditors to whom money is presently due and payable. Some seven or eight substantial creditors have entered into arrangements for their debts to be paid during June, July and September. Nevertheless, there are still many hundreds of thousands of dollars worth of creditors whose debts appear to be payable now. A schedule of debtors as at 17 May 2002 indicates total debts of $3,984,176. That includes moneys said to be payable by way of national registration fee. A number of the creditors are also included in the list of debtors. 39 The claims by the applicant, apart from the claim to which I have already referred, total in excess of $2.5 million. The Company disputes most of that amount as I have indicated. In addition, the Company claims to have counter claims against the applicant for amounts in excess of $9 million. As I have said, the parties have agreed to refer to mediation a number of disputes arising under the NSL Agreement and other agreements pursuant to which the applicant claims to be entitled to moneys payable by the Company. 40 The question is whether the Court is satisfied that there is a prima facie case that the Company is insolvent. The evidence is not in a satisfactory state to enable me to reach a firm conclusion. The question, though, is whether there is a prima facie case, in the sense that, if the evidence remains as it is, there is a probability that, at the trial, the applicant would establish that the Company is insolvent. It is not appropriate for the Court to undertake a preliminary trial of that issue in an application such as this. It is sufficient if the applicant has a fair chance of success. What will be required, of course, will vary from case to case. Insolvency is not something to be inferred lightly and a finding of insolvency is one that could have grave consequences for the Company. 41 It has been asserted on behalf of the Company, by its acting Chief Executive Officer, that if the Company were wound up a number of consequences would result as follows. · FIFA endorsement would be removed, prohibiting Australia's national teams from competing internationally; · FIFA would withdraw its grants; · FIFA regulations would prohibit recognition of a replacement soccer organisation in Australia for at least three years; · the Australian Sports Commission would cease funding the Company, resulting in the loss of involvement of the Australian Institute of Sport; · sponsorship from corporate entities would cease; · the National Soccer League would cease; and · all of the Company's coaching and refereeing programs would cease. 42 Those considerations are perhaps not directly relevant to the question of the degree of certainty with which I should find, if I do, that a prima facie case of insolvency has been established. They are, however, relevant to the third question that has to be determined, namely, whether the Court should, in the exercise of its discretion, grant leave to the applicant to file a winding up application. I would be disposed to conclude that there is a reasonable prospect that the applicant could establish, on the material before me, that the Company is insolvent. There is also, as I have indicated, a reasonably cogent argument in favour of the conclusion that the applicant is a contingent creditor of the Company. 43 However, I am, at present, not persuaded that, in the exercise of the Court's discretion, I should give leave at this stage for a winding up application to be made. I reach that conclusion because I am satisfied that there is genuineness in the disputation between the parties as to various of the issues to which I have adverted. I am mindful of the manner in which this application has been brought on, although I would like to think that an application under s 459P(2) ought not to take as long as this to be resolved. That is not a criticism, as I say, of any of the parties, but is perhaps simply a recognition of the complexity of the arrangements between these two parties. 44 Most importantly, I am concerned that there is the prospect of a mediation that would resolve many of the disputes between the parties. I therefore propose to give the applicant a choice. It may have the application dismissed at this stage, without prejudice to its entitlement to bring a further application after any mediation has been undertaken. Alternatively, I will simply to adjourn this application part heard, on the basis that I would give leave to the parties to adduce further evidence. The difficulty with the latter course is that I will not be able to resume the hearing for three weeks, which may not be satisfactory to either party. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 12 July 2002 Counsel for the Applicant: Mr P. Wood Solicitor for the Applicant: Blake Dawson Waldron Counsel for the Respondent: Mr B. Coles QC & Mr Ashurst Solicitor for the Respondent: Deacons Lawyers Date of Hearing: 7 & 11 June 2002 Date of Judgment: 11 June 2002