FEDERAL COURT OF AUSTRALIA Paperlinx Limited v Skidmore [2004] FCA 1624 CORPORATIONS – statutory demand – presumption of insolvency – rebuttable – company solvent – improper purpose Corporations Act 2001 (Cth) ss 459A, 459C(2)(a), 459C(3), 459J(1)(b) Income Tax Assessment Act 1997 (Cth) s 995-1 Taxation Administration Act 1953 (Cth) s 12-85, 16-20, 16-70 Atlas Tiles Limited v Briers (1976) 144 CLR 202 cited Bowes v The Directors of the Hope Life Insurance and Guarantee Company (1865) 11 HLC 389 cited Cadiz Water Works Company v Barnett (1874) 19 LR Eq 182 cited Commissioner of State Revenue of Victoria v The Roy Morgan Research Centre Pty Ltd (1997) 24 ACSR 73 approved Cullen v Trappell (1980) 146 CLR 1 cited David Grant & Co Pty Limited (Receiver Appointed) v Westpac Banking Corporation (1995) 184 CLR 265 referred to Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83 cited K.C Parksafe (Vic) Pty Ltd v Dallbrook Pty Ltd (1998) 87 FCR 509 distinguished Mann v Goldstein [1968] 1 WLR 1091 cited Masters Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC 1025 approved Wheeler v Philip Morris Limited (1989) 32 IR 323 cited William Hockley Ltd, In re [1962] 1 WLR 555 cited PAPERLINX LIMITED V PAUL SKIDMORE V1022 of 2004 FINKELSTEIN J MELBOURNE 10 DECEMBER 2004 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1022 of 2004 BETWEEN: PAPERLINX LIMITED Plaintiff AND: PAUL SKIDMORE Defendant JUDGE: FINKELSTEIN J DATE OF ORDER: 10 DECEMBER 2004 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The defendant pay the plaintiff's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1022 of 2004 BETWEEN: PAPERLINX LIMITED Plaintiff AND: PAUL SKIDMORE Defendant JUDGE: FINKELSTEIN J DATE: 10 DECEMBER 2004 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The plaintiff, Paperlinx Limited is a public company whose shares are listed on the Australian Stock Exchange. It has assets with a book value in excess of $4.7 billion and a current annual turnover of around $6.2 billion from which it derives approximately $109 million in profit. The defendant, Mr Skidmore, obtained judgment in the County Court against the plaintiff in a wrongful dismissal action. The judgment is for $97,013.18 with interest of $21,863.85 and costs. The plaintiff has appealed from the judgment. It sought a stay of execution pending the appeal but the stay was refused by the Court of Appeal. Immediately following the failed stay application, that is to say on the same day, the defendant served a statutory demand requiring the plaintiff to pay the judgment debt. The plaintiff paid the defendant the sum of $87,730.47. As to the balance, the plaintiff says the effect of s 16-20 of the Taxation Administration Act 1953 (Cth) is that by withholding the balance from the defendant for payment to the Commissioner of Taxation, it has discharged its obligation under the judgment. It therefore seeks to have the statutory demand set aside. 2 The problem which confronted the parties in this case came about because of difficulties in assessing damages for loss of earnings in wrongful dismissal actions. The question in such cases is whether in assessing damages account should be taken of income tax notionally payable on income which the plaintiff is assumed to earn from that part of the judgment which is awarded to compensate for his loss of income. In Atlas Tiles Limited v Briers (1976) 144 CLR 202 the High Court held that a sum should not be deducted for income tax that would have been payable by the plaintiff in respect of payments he would have received if he had not been dismissed. In Cullen v Trappell (1980) 146 CLR 1 this decision was overruled. There the law stood until Wheeler v Philip Morris Limited (1989) 32 IR 323. In that case Gray J (at 353) said that changes to the Income Tax Assessment Act 1936 (Cth) following the decision in Cullen v Pullen "dictate that [in a wrongful dismissal action] the recipient of damages should receive them calculated according to rates of gross earnings". As a consequence, so it is said, at least in an action for wrongful dismissal, that part of the judgment which represents notional income is an "eligible termination payment" for the purposes of the Taxation Administration Act 1953(Cth) (for the definition of an "eligible termination payment" see 995-1 of the Income Tax Assessment Act 1997 (Cth)), from which the employer must withhold an amount for tax (s 12-85) and pay that amount to the Commissioner (s 16-70), and so obtain a discharge under s 16-20 of his obligation to pay that amount. 3 What has brought the parties to court is the defendant's refusal to acknowledge that upon his receipt of part of the judgment debt, he was not entitled to act on the statutory demand and move for the plaintiff's winding up. I have examined the correspondence that passed between the parties' solicitors, as well as notes of some of their discussions. It is clear that the defendant wanted to keep his options open, or at least he intended to give the impression that he wanted to keep his options open, in this regard. 4 In fact any application to wind up the plaintiff was bound to fail. I do not say this because I necessarily accept the plaintiff's contention that it has discharged the judgment debt; if the judgment debt had been paid the defendant would not have standing to wind up the plaintiff: In re William Hockley Ltd [1962] 1 WLR 555, 559. Rather the winding up application was doomed to failure because the plaintiff is plainly solvent and the court has no jurisdiction to wind up a solvent company. 5 Under the old procedure, a company was deemed to be unable to pay its debts when it failed to comply with a statutory demand even if it were in fact solvent. The rule, which may be traced back to the House of Lords decision in Bowes v The Directors of the Hope Life Insurance and Guarantee Company (1865) 11 HLC 389, 402 [11 ER 1383, 1389] was that a creditor was prima facie entitled to a winding up order, even against a solvent company, if he could not get paid. The rule was not absolute. The court could, in its discretion, refuse to make the order but it usually exercised its discretion in favour of the unpaid petitioner. 6 The position changed with the introduction in 1993 of the new Pt 5.4 of the Corporations Act. Under s 459A a company may be wound up "in insolvency". There will be a presumption that the company is insolvent if it fails to comply with a statutory demand: s 459C(2)(a). That presumption only operates until the contrary is proved: s 459C(3). If the contrary is proved, the court cannot make an order under s 459A. 7 I think that Mr Scerri QC was aware of his client's difficult position from the outset. When I asked him whether the defendant intended to move for the plaintiff's winding up based on its purported failure to comply with the statutory demand Mr Scerri sensibly acknowledged that his client did not. It would have been better if Mr Scerri's client had said so much earlier. In that event there would not have been any need for this application, the parties time would not have been wasted and legal expenses would have been avoided. Unfortunately that did not happen. The defendant kept alive the threat of winding up proceedings and in the result I have an application to set aside the statutory demand which must now be disposed of. 8 Mr Scerri contended that I could not set aside the statutory demand for two reasons. First he says that I must ignore the plaintiff's solvency for the purpose of deciding what to do with the demand. He referred me to the decision in Masters Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC 1025. That was an application to set aside a statutory demand in part for the reason that the company was solvent. In the course of his reasons Lander J (at 1032) said: "The solvency of the recipient of the statutory demand is not a relevant matter for an application to set aside the statutory demand under s 459G and could not provide some other reason why the demand should be set aside [s 459J]. It would be a very curious result if a company could avoid paying its creditors upon their making a demand by the company simply proving (sic) it could pay its creditors. Moreover it could be quite burdensome for a creditor upon making a demand upon a company, the creditor immediately became embroiled in an argument as to whether the debtor was solvent. The question of solvency therefore is not a question that can be raised in an application to set aside a statutory demand but can always be raised at the time of the application for winding up, whether or not the defendant company did in the time prescribed make application to set aside the statutory demand." Reference might also be made to Commissioner of State Revenue of Victoria v The Roy Morgan Research Centre Pty Ltd (1997) 24 ACSR 73, 77 where Mandie J expressed a similar view. 9 For present purposes, I am prepared to accept that Lander J's statement is generally correct. But it cannot be correct for all purposes. Take the case where it is alleged that winding up proceedings are threatened for a purpose which would constitute an abuse of process. Gummow J recognised such a situation in David Grant & Co Pty Limited (Receiver Appointed) v Westpac Banking Corporation (1995) 184 CLR 265, 279. He said that in those cases appropriate relief, for example an injunction, would be granted. In deciding whether a person is threatening a winding up application for an improper purpose it is quite legitimate, indeed it will often be necessary, to enquire into the solvency of the company. 10 Here I have no doubt that the defendant served the statutory demand for a purpose foreign to the Corporations Act. He could not have intended to rely on non-compliance with the demand to establish insolvency because he knew the company could easily rebut the presumption. Indeed, I am sure that after he had received part payment (if not before then) the defendant never intended to apply for the plaintiff's winding up. Nevertheless, the plaintiff was entitled to bring this application to avoid what, from its perspective, was the risk of having to face a winding up application. 11 This brings me to Mr Scerri's second point. At least two remedies were available to the plaintiff if the defendant had not withdrawn his threatened proceeding. It could have sought an injunction restraining the defendant from making a winding up application. Cadiz Water Works Company v Barnett (1874) 19 LR Eq 182; Mann v Goldstein [1968] 1 WLR 1091; Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83 are examples of cases in which the presentation of a winding up petition has been restrained. Another option, which was the one taken, was to seek to have the statutory demand set aside. It was not really necessary for me to reach any concluded view as to whether this relief was available in this case because there is no longer any threat of winding up proceedings. Mr Scerri referred me to my comments in K.C Parksafe (Vic) Pty Ltd v Dallbrook Pty Ltd (1998) 87 FCR 509, where I said that a statutory demand could not be set aside where the amount demanded had been paid in full. In K.C. Parksafe it was common ground that following payment the demand was "no longer in effect". I said (at 514) that it was doubtful "whether an order can now be made that [it] be set aside". Here the defendant does not concede that his demand has been satisfied. There is still a dispute about that and, at one point, a risk that a winding up application would be instituted. In that circumstance I see no reason in principle why the demand (which may otherwise have some life) could not be set aside: see s 459J(1)(b) according to which a demand can be set aside for any reason. 12 As I have indicated,I will not make any order in respect of the demand. I will however make an order regarding the costs. They should be borne by the defendant. The reason should be obvious. The defendant should consider himself fortunate that the costs will not be assessed on a special basis. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 10 December 2004 Counsel for the Plaintiff: Ms F O'Brien SC Mr B Scheid Solicitor for the Plaintiff: Freehills Counsel for the Defendant: Mr C M Scerri QC Mr R Lancy Solicitor for the Defendant: A.J Macken & Co Date of Hearing: 11 November 2004 Date of Judgment: 10 December 2004