New South Wales Supreme Court CITATION : McGill v Karren Holdings [2000] NSWSC 907 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 3224 of 2000 HEARING DATE(S) : 28 August and 11 September 2000 JUDGMENT DATE : 11 September 2000 Ian McGill as representative partner of Allen Allen & Hemsley (Plaintiff) PARTIES : Karren Holdings Pty Ltd (First Defendant) John Melluish (Second Defendant) JUDGMENT OF : Windeyer J at 1 COUNSEL : Mr CRC Newlinds (Plaintiff) Mr L J Aitken (Defendants) SOLICITORS : Sally Nash & Co (Plaintiff) Sanfilippo Partners (Defendants) CATCHWORDS : CORPORATIONS - WINDING UP - application to wind up company on ground of insolvency - application by solicitors firm to wind up company based on failure to comply with statutory demand for outstanding legal fees - defendant alleged that the bill for legal fees did not comply with the Legal Profession Act 1987 and the Legal Profession Regulation 1994 - whether application can be opposed on the ground that plaintiff does not have standing because it is not a creditor - whether application can be opposed on the ground that there was no debt "due and payable" Corporations Law s459C, s459C(2)(a), s459E, s459E(1), s459F(1), s459F(2)(ii) s459G, s459P, s459Q, s459S, s459S(2) s461, s467(1)(c), Pt 5.4 LEGISLATION CITED : Legal Profession Act 1987 s192(1) Legal Profession Regulation 1994 s22A Bartex Fabrics Pty Ltd v Phillips Fox (1994) 12 ACLC 462 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 CASES CITED : Orpin Pty Ltd v Layer Pty Ltd (unreported SC of Tasmania, Wright J, 17 March 1998) Re Elgar Heights Pty Ltd [1985] VR 657 Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723 DECISION : See paragraph 17 1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J MONDAY 11 SEPTEMBER 2000 3224/00 IAN McGILL AS REPRESENTATIVE PARTNER OF ALLEN ALLEN & HEMSLEY v KARREN HOLDINGS PTY LTD & ANOR 3225/00 IAN McGILL AS REPRESENTATIVE PARTNER OF ALLEN ALLEN & HEMSLEY v ATIFAME PTY LTD & ANOR 3227/00 IAN McGILL AS REPRESENTATIVE PARTNER OF ALLEN ALLEN & HEMSLEY v MINSKIE HOLDINGS PTY LTD & ANOR JUDGMENT 1 HIS HONOUR: In each of these matters the plaintiff, Ian McGill, as representative partner of the law firm Allen Allen & Hemsley ("Allens") is seeking to have the three defendant companies, Karren Holdings Pty Ltd, Atifame Pty Ltd and Minksie Holdings Pty Ltd (the "defendant companies") wound up on the ground of insolvency under s459P of the Corporations Law. I accept that the requirements of notice and service provided for in s459Q of the Corporations Law have been satisfied. The background facts of this matter have appeared in my earlier judgment in this matter on 24 August 2000 and I will not repeat them in detail. As this judgment will be precisely the same in each action, I will give one judgment covering all actions and put a copy in each of the files. Background 2 Some time in February 1999 the defendant companies, together with Australian Security Estates Pty Ltd instructed the plaintiff, Allens, to act for them in a dispute with Bluecrest Holdings Pty Ltd ("Bluecrest"). By letter dated 26 February 1999, addressed to "The Secretary, Minksie Holdings Pty Ltd, Karren Holdings Pty Ltd, Australian Security Estates Pty Ltd, Atifame Limited", the plaintiff provided a copy of the firm's standard terms of engagement and further information on the cost of their legal services and their role in the transaction. Within the period from 4 May 1999 to 29 September 1999, five statements of account were issued by the plaintiff to Australian Securities Estates Pty Ltd, in which the plaintiff claimed a total amount of $1,065,446.84 in respect of legal fees in relation to the dispute with Bluecrest. Later it seems that copies of the bills were sent to each of the defendant companies. Each of these statements of account were addressed to Australian Security Estates Pty Ltd and referred to the engagement letter dated 26 February 1999 and any updates to it. Attached to the statements were letters detailing the principal matters undertaken to which the respective account related. Also attached to two of the five statements were lists of individuals who had worked on the matter, the number of hours which they had worked and the amount which the plaintiff claimed for those individuals' services; but not the tasks or matters that those persons had undertaken. 3 An amount of $106,789.90 was received by the plaintiff which was credited to the amount claimed to be owed, and an amount of $45,825 was paid directly by one or more of the defendant companies to third parties retained by the plaintiff on behalf of the defendant. It is claimed by the plaintiff that a balance of $912,831.94 remains due to the plaintiff from the defendant companies. 4 On 6 June 2000 the plaintiff served statutory demands for payment of that amount on the defendant companies. The defendant companies brought applications under s459G seeking to set aside the statutory demands and those applications were dismissed by Master McLaughlin on 17 July 2000. The period for compliance with the statutory demands ended seven days after the applications under s459G were finally determined, that being 24 July 2000: s459F(2)(ii). The defendant companies had not complied with the statutory demands by that date and must be taken to have failed to comply with the statutory demands from that time: s459F(1). Presumption of insolvency. 5 These applications are brought under both s459 and s461 of the Corporations Law. However, the plaintiff has based its case on the presumption of insolvency under s459C(2)(a), where the companies have failed to comply with a statutory demand and orders under s461 have not been pursued. Section 459C provides that the presumption operates, except so far as the contrary is proved for the purposes of the application. The defendant companies bear the onus of proving their solvency on these applications. No evidence of solvency has been adduced by the defendants. The three defendant companies passed resolutions on 18 August 2000 stating that they were insolvent or likely to become insolvent and resolved to appoint an administrator. Standing 6 The defendants seek to oppose the applications on the grounds that the plaintiff lacks standing to bring the applications, as the plaintiff was not a creditor, because it had not complied with the requirements of the Legal Profession Act 1987 and its regulations in issuing its bill. The relevant provision of the Corporations Law is as follows: 459P(1) Any one or more of the following may apply to the Court for a company to be wound up in insolvency: (a) the company; (b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor); (c) a contributory; (d) a director; (e) a liquidator or provisional liquidator of the company; (f) the Commission; (g) a prescribed agency. 459P(2) An application by any of the following or by persons including any of the following, may only be made with the leave of the Court: (a) a person who is a creditor only because of a contingent or prospective debt; (b) a contributory; (c) a director; (d) the Commission. 459P(3) The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. 459P(4) The Court may give leave subject to conditions. 459P(5) Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency. 7 In oral submissions by counsel for the defendants, Mr Aitken, primary reliance was placed on two arguments. The first of these was that the plaintiff could not bring proceedings to recover the alleged debt, because there was no relevant "bill" as required under s192(1) of the Legal Profession Act 1987 as the addressee of the document described as "Account", which it was submitted was the relevant bill, was "Australian Security Estates Pty Ltd" and not any of the defendant companies and this document was only copied to the defendant companies. Section 192(1) provides that: Proceedings for the recovery of costs by a barrister or solicitor for providing legal services must not be commenced or maintained against any person unless at least 30 days have passed since a bill for those costs was given to the person in accordance with this division. 8 Secondly, counsel for the defendants said that the bill of costs issued did not provide particulars required by Regulation 22A of the Legal Profession Regulation 1994 made under the Legal Profession Act. The plaintiff did not concede that the bill did not comply with the Legal Profession Act and submitted that particulars required by regulation 22A(1)(d)-(h) did not have to be included because the bill was calculated on the basis of a costs disclosure document and that document was referred to in the bill. Also the plaintiff argues that a list of creditors provided by Mr Melluish of Ferrier Hodgson, the purported administrator ("Exhibit A") which includes Allens in the sum of $912,831.94, constitutes an admission of debt by the defendant companies, those companies having provided the figures. I am not satisfied, however, that the list is a list of creditors rather than merely a list of claimants. 9 It appears from the evidence that, at least on the first point, there is some force in the defendants' submissions. However, it is not necessary for me to decide this point, for reasons which I will address. It should not be thought that this is a statutory demand from "A" issued to a company, "B", which has no relationship whatsoever with the debt claimed. That is entirely contrary to the position in this case. 10 The second step of the defendants' argument is that if the requirements of the Legal Profession Act and its regulations are not complied with, there is no debt "due and payable" as required in s459E(1) and that the process is a nullity because the plaintiff is not a creditor. In support of this position, counsel for the defendant relied on Orpin Pty Ltd v Layer Pty Ltd (unreported, SC of Tasmania, Wright J, 17 March 1998) and Re Elgar Heights Pty Ltd [1985] VR 657, which case was followed by Young J in Bartex Fabrics Pty Ltd v Phillips Fox (1994) 12 ACLC 462. 11 It should be noted that Orpin and Bartex were decisions on applications to set aside a statutory demand under s459G and Re Elgar Heights was a case concerning s364 of the Companies (Vic) Code. None of these decisions required consideration of s459S. That section provides that an application to wind up a company on a failure to comply with a statutory demand may not be opposed on grounds that the company relied on, or could have relied on in an application to set aside the statutory demand, without leave from the Court. The Court is not to grant leave unless it is satisfied that the ground is material to proving that the company is solvent. The question for decision then becomes whether the validity of the statutory demand can be revisited. Section 459S 12 The operation of s459S was considered by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, and by the NSW Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723. In David Grant, Gummow J said at 270: The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts unless they are promptly raised. 13 In the later case of Switz, Spigelman CJ said at 736: The new scheme seeks to avoid disputation at the final hearing of the application for winding up about the genuineness of the debts which were the subject of the applicant's statutory demands. A debtor who disputes the claim made by the creditor in a statutory demand is ordinarily expected to invoke s 459G. The 'safety net' in s 459S is ordinarily expected to be determined before the hearing of the s 459P application. If applications under s 459S are, as a general rule, heard with the winding up summons, this would establish a path permitting the delay of and prolonging the hearing of, such applications. The new scheme sought to change pre-existing practices and ensure that issues of this character would be determined in the main at an early time and on a strict timetable. The objectives of the scheme, including the strict time limit of s 459G(2) would be compromised if s 459S applications were routinely deferred to the time of the hearing of the application. 14 These authorities make clear that Pt 5.4 of the Corporations Law provides a regime for applications for the winding up of companies, an important aspect of which is a restriction on the issues which may be raised at the final hearing of a winding up application. While these provisions may in some cases operate harshly, "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": per Gummow J in David Grant at 279. 15 There has been no application for leave under s459S made by the defendants. Even so, leave may only be granted if the existence of the debt is material to the defendant company's insolvency: s459S(2). This requirement is mandatory in its terms. The defendant companies in this matter have resolved that they are insolvent, or likely to become insolvent and have determined to appoint an administrator. Furthermore, the affidavit of Mr Melluish evidences a shortfall in assets over liabilities in the sum of approximately $1.8 million. It is clear that the existence of the debt purported to be owed to the plaintiff is not material to the solvency or otherwise of the defendant companies, but none of this really matters as there has been no application for leave. 16 The defendant seeks to circumvent this restriction by arguing that the issue of standing under s459P is a basal point which arises at a point prior to that which was considered in David Grant and Switz. That cannot be correct. It is open to a debtor to challenge the statutory demand upon the basis that the person who issued it was not a creditor in a s459G application and in fact such an application was made and dismissed in these matters, albeit on technical grounds. The statements of the High Court and the NSW Court of Appeal in David Grant and Switz make it clear that issues of standing as a creditor must be dealt with within the strict time limits imposed by s459G and, by operation of s459S, cannot be raised at a hearing for winding up without leave. The argument as to basal point fails. 17 It follows from that, the following orders should be made in each case. In each case order: 1. The defendant company be wound up under the Corporations Law. 2. That Martin Green of Grant Thornton, Chartered Accountants, Level 15, 1 Market Street, Sydney, be appointed liquidator of the company. 3. That the plaintiff's costs of the proceedings be paid out of the assets of the defendant company. 4. Exhibit A can be returned, but to be maintained by the solicitors if necessary. (Mr Aitken applied for a short stay with respect to the winding up orders; he submitted his Honour had not dealt with the s459E point. A discussion ensued.) Addendum 18 Counsel for the defendants has suggested that I have not dealt in this judgment with the requirement under s459E(1) that there be a debt due and payable at the time this statutory demand is served. That was an argument put forward on the basis that there was no such debt, because there was no ability to sue for that debt, because the requirements of the Legal Profession Act had not been met. In my view, precisely the same reasons apply to that argument as applied to the other arguments put forward about whether or not the plaintiff was a creditor, because of the failure to comply with the requirements of the Legal Profession Act, and the bill not being addressed to the defendant company. For those reasons my decision would stand. (Mr Aitken sought a stay in relation to the appointment of the liquidator pursuant to s467(1)(c); opposed.) 19 Application has been made by the defendant companies for a stay. I can see no basis for the granting of a stay and I refuse that application. ********** Last Modified: 09/27/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.