Starr Investments (Australia) Pty Limited v Mecafree Pty Limited [1999] NSWSC 938

New South Wales Supreme Court CITATION : Starr Investments (Australia) Pty Limited v Mecafree Pty Limited [1999] NSWSC 938 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 2809/99 HEARING DATE(S) : 14 September 1999 JUDGMENT DATE : 16 September 1999

PARTIES : Starr Investments (Australia) Pty Limited (P) Mecafree Pty Limited (D) JUDGMENT OF : Acting Master Berecry

COUNSEL : Mr. M. Green (P) Mr. W. Marler (D) SOLICITORS : Bruce & Stewart (P) Jack Rigg (D) CATCHWORDS : Winding up proceedings; Strike out; Abuse of process; Collateral purpose; Solvency. Bank of Boston Conneticut v European Grain and Shipping [1989] 1 AC 1056 CASES CITED : Popular Homes Limited v Circuit Developments Limited [1979] 2 NZLR 642 Hunter v Chief Constable for the West Midlands Police [1982] AC 529 DECISION : See paragraph 21

SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

ACTING MASTER BERECRY

Thursday, 16 September 1999

2809/99 STARR INVESTMENTS (AUSTRALIA) PTY LIMITED -v- MECAFREE PTY LIMITED JUDGMENT

1 ACTING MASTER: These proceedings are one in a number of proceedings in a number of Courts between the two parties. Some background is required in order to understand the current relationship of the two parties and, therefore, the defendant's notice of motion which was filed on 27 July 1999. 2 That notice of motion sought three orders although, at the commencement of the hearing of the motion, Counsel for the defendant advised that he would no longer be pressing for order 3 in the motion. 3 The notice of motion seeks an order that the proceedings be dismissed on the ground that they are an abuse of process or alternatively that proceedings be stayed pending the determination of common law proceedings 10722 of 1999. 4 On 28 February 1997 a contract of sale was executed between the plaintiff and the defendant whereby the defendant purchased Lot 102, 16 Bermill Street, Rockdale. The price was $500,000. On 11 April 1997 vendor finance was provided by the plaintiff to the defendant in the amount of $135,000 and secured by way of second mortgage over the property. On 11 July 1997 the loan was due and payable and, together with interest, totalled $139,050. In January 1999 the plaintiff served a statutory demand on the defendant. That demand was served on 14 January. Thereafter a number of proceedings have been commenced in the Local Court and the Supreme Court. In March 1999 the defendant commenced proceedings in the Local Court for recovery of money alleged to be owed by the plaintiff in relation to supervision and certification of works performed by the defendant and in relation to (it would seem but it is not clear) payments made by the defendant to various companies and tradespeople for work performed during 1997 on the property. 5 On 9 March 1999 the defendant in proceedings 1628 of 1999 sought to set aside the statutory demand. On 28 March 1999 the plaintiff commenced proceedings in the Common Law Division in proceedings 10722 of 1999 seeking possession of the property and the repayment of the amount due under the mortgage. Subsequently on 4 May 1999, by consent, proceedings 1628 of 1999 were dismissed. On 17 May 1999 Giles Woodgate was appointed receiver of the property. On 18 June 1999 the plaintiff commenced the current proceedings to wind up the company. Shortly thereafter on 2 July 1999 the defendant commenced proceedings in matter 2967 of 1999 seeking interim injunctions against the plaintiff and the receiver from exercising the power of sale and an order for the removal of the receiver. Those proceedings were heard before Mr Justice Young on 19 July 1999 and his Honour made orders restraining the receiver from selling the property on the condition that the defendant pay into Court $89,000 by 26 July and amend its summons or pleading in the Common Law Division. The defendant was unable to raise the $89,000 pursuant to the order of Mr Justice Young. On 9 August those proceedings were dismissed. 6 In his Honour's judgment, Mr Justice Young made a number of observations. He noted that it was alleged by the mortgagor that it was a condition of the mortgage that no principal or interest was to be paid until certain building works were done and completed. Secondly, that it had an equitable set off for building works that were done as part and parcel of the same transaction to which the mortgage was granted. Mecafree submitted its equitable set off was in the order of $230,000 and certainly at least $160,000. The amount claimed by the mortgagee, Starr Investments, was $135,000 for principal and approximately $4,300 for interest. 7 So far as the precondition to the mortgage that moneys would only become payable if certain things came about, his Honour appeared to be of the opinion that, as the evidence presently constituted, Mecafree's position was rather weak. In his Honour's view the material that was proffered was rather nebulous and nowhere near the material which, if accepted at the trial, would form the basis for a claim that no money was payable until all the building works were done. His Honour accordingly considered that there is no prima facie case so far as that part of the application is concerned. However, his Honour held a different view so far as equitable set off was concerned. The view expressed at page 4 is as follows: The question of equitable set off, however, is one where there is material which, if accepted by the trial Court, may amount to a valid claim 8 His Honour noted the argument by Counsel for Starr Investments that there appeared to be some inconsistencies in the evidence by the principal witness for Mecafree that no invoices had been put into evidence. However, his Honour then went on to say: It does seem to me that if the evidence of the plaintiff mortgagor (Mecafree) is accepted that there is a situation where there could be offsetting transactions which should in Equity be set off against the mortgage debt. 9 Subsequently, in matter 10722 of 1999 Mecafree filed its defence. The defence filed on 26 July 1999 puts in issue a liability of Mecafree to pay any moneys for principal and interest on the mortgage. Paragraph 2 of the defence pleads the condition that his Honour referred to in his judgment. Paragraph 8 of the defence pleads an equitable set off although it would appear to be a quantum meruit claim. The particulars set out by way of description of work, invoices and amounts what Mecafree alleges is owing to it pursuant to the work formed in relation to the property. 10 A defence of equitable set off will exist where it would be inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the defendant's claim against it: Roadshow Entertainment Pty Limited v CAN 053 006 269 Pty Limited [1997] 42 NSWLR 462. An equitable set off is available as a defence where it impeaches the plaintiff's title. There is some doubt as to whether it can be raised as a defence where the plaintiff's title is not directly impeached: Re KL Tractors Limited [1954] VR 505. However, that appears to be a narrow definition of availability of the equitable set off. In modern times courts appear to have taken a broader approach to equitable set off. A number of authorities favour a wider basis for the defence and would regard it as available whenever two claims arise out of the same transaction and are inseparably connected: Bank of Boston Conneticut v European Grain and Shipping [1989] 1 AC 1056. Similarly, in Popular Homes Limited v Circuit Developments Limited [1979] 2 NZLR 642 the court permitted the plaintiff/purchaser/mortgagor to set off against secured indebtedness to the defendant/vendor/mortgagee. Its claim against the defendant for damages for breaching a covenant to lend further money which would have enabled the completion of the building development on the land and the sale thereof to produce funds to repay all outstandings. 11 In determining what the test for equitable set off is it would appear that the relevant circumstances that the Court considers are, firstly, the nature of the claim; secondly, the nature of the connection between them; thirdly, the conduct of the parties. For example, delay by a defendant pursuing a cross-claim. 12 It would appear that, therefore, arguably the defendant does have a defence of equitable set off. Certainly on the material before Mr Justice Young he formed a preliminary view that that may be the case. The plaintiff, Starr Investments, has not in the Common Law proceedings, sought to have the defence and, in particular, paragraph 8 of the defence, struck out. That defence has been on foot now for some six weeks. On winding up proceedings it is not my role to determine the substance of whether or not the defence is made out. 13 For the plaintiff it is said that the notice of motion should be dismissed and that the winding up application should proceed. The bases for this submission are, firstly, that there is a current debt owed by the defendant to the plaintiff. Secondly, that there is no suggestion that there are collateral purposes for bringing these proceedings. The common law proceedings involves not only the parties in these proceedings but also another party. Thirdly, that there is no evidence of solvency. If the company is in fact insolvent, it is submitted that it can never be an abuse of process to bring proceedings to wind the company up. 14 For the defendant it is said that it is not appropriate to determine the winding up proceedings before the common law proceedings have been determined. There is adequate protection for the plaintiff should it ultimately proceed. The plaintiff is a secured creditor. There has been a receiver appointed to the property. The winding up would not realise more to the secured creditor. Therefore, the purpose of bringing the winding up proceedings is to coerce the defendant to pay the disputed debt. There has been no evidence that there are any other creditors of the company and in any event the company is not a trading company. Its only activity is in relation to the Rockdale property. 15 It is submitted on behalf of the plaintiff that the company is seeking to avoid the requirements of section 459H and 459S by seeking to have the proceedings dismissed or stayed on the basis that the proceedings are an abuse of process. It is put that it could never be an abuse of process where a company is insolvent and proceedings are commenced to wind the company up notwithstanding other proceedings are on foot. In the present proceedings it is conceded by both parties that the time for bringing an application for setting aside a statutory demand has well and truly passed. It is also conceded by both parties that the presumption of insolvency under section 459C has expired. 16 One matter that would need to be considered when determining whether or not an order should be made in accordance with either paragraph 1 or paragraph 2 in the notice of motion is the question of solvency. As matters stood before me reliance on the statutory demand for the presumption of insolvency could no longer be maintained by the plaintiff. A statutory demand is never evidenced on actual insolvency. It merely creates a presumption. The period which the plaintiff can rely on that presumption has now expired. Nevertheless, there still is a notice. The plaintiff would only be able to succeed on the winding up summons if it can establish actual insolvency of the defendant. 17 The plaintiff, on the question of insolvency, relies on a number of matters. Firstly, the evidence of the director of the defendant company. The defendant does not have $89,000 in liquid assets. That, of course, is a reference to the order made by Mr Justice Young. The only other evidence put on by the defendant is contained in the director's affidavits. He deposes the fact that the financial position of the defendant is such that there is a surplus of assets over liabilities and that it is paying its creditors currently although the tenants are paying to the receiver in lieu of Mecafree. There is no direct evidence on that last point. As far as the first statement concerning the surplus of assets over liabilities there is no evidence in relation to that. There is no independent evidence by an accountant disclosing what the true financial position of the company is. There is no evidence concerning annual financial statements for the company either audited or unaudited over the last two years. There is no material before me which establishes that the defendant is solvent. 18 If the company were to be wound up it would be a matter for the liquidator to determine whether he should continue the defence of the common law proceedings. To that extent the creditors and shareholders of the defendant company will not be prejudiced by the appointment of a liquidator. Such an appointment, of course, would be a person other than Mr Woodgate. 19 I am not satisfied that the actions of the plaintiff could be regarded as an abuse of process. Whilst it is true that the common law proceedings were commenced before the winding up proceedings and, in fact, commenced some three months beforehand the defendant was on notice that winding up proceedings would, in all probability, be commenced. The fact that the notice of demand was served in January and in non-compliance with that save as to an order by the Court setting aside the demand would, in all probability, be the trigger for the summons seeking the winding up of the company to be filed. The common law proceedings are for possession of land and the payment of a sum of money. The winding up proceedings are based on the failure by the defendant to pay in accordance with the mortgage. The fact that there is no evidence which supports the position that the defendant is solvent coupled with the fact that the amounts that the defendant claims by way of set off are, according to the various invoices, amounts which were invoiced between August 1997 and July 1998, but nothing done to recover those sums or to put them in issue until the matter came before Mr Justice Young indicates that if the dispute is genuine that is a matter that the liquidator can take on board. Perhaps if there was a serious issue in relation to these invoices the defendant would not have delayed up to two years before articulating a defence/cause of action against the plaintiff. It was always open to the company to bring proceedings against the plaintiff for recovery of those sums. In Hunter v Chief Constable for the West Midlands Police [1982] AC 529, at page 536, Lord Diplock said: The inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of the procedural rules, would nevertheless be manifestly unfair to a party to litigation before it or would otherwise bring the administration of justice into disrepute among right thinking people. 20 In the present case I find it hard to accept that on the material that has been before me that it could be said that it would be manifestly unfair to the defendant to allow the winding up proceedings to proceed when there is concurrently in the Common Law Division other proceedings between the same parties. True it is that the basis of the proceedings have their genesis in the mortgage. However, I do not see that it would be manifestly unfair to proceed on the winding up application and if the plaintiff were able to establish insolvency of the defendant for there to be a liquidator to be appointed. It would then be a matter for the liquidator who, in all probability, would be far more objective than the parties to determine whether or not the defence to the common law proceedings should be maintained. 21 Therefore, on the defendant's notice of motion, I decline to make the orders sought. The notice of motion is dismissed. The defendant to pay the plaintiff's costs of the motion.