Reported Decision : [2000] 35 ACSR 565 New South Wales Supreme Court CITATION : Consolidated Constructions P/L ; In the matter of The Satellite Group Limited [2000] NSWSC 984 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3508/00 HEARING DATE(S) : 20 October 2000 JUDGMENT DATE : 20 October 2000 PARTIES : Consolidated Constructions Pty Limited ACN 008 699 330 (Plaintiff/Respondent) The Satellite Group Limited ACN 087 721 079 (Defendant/Applicant) JUDGMENT OF : Santow J J M Ireland, QC (Plaintiff/Respondent) COUNSEL : I M Wales, SC/P B Walsh (Defendant/Applicant) P M Wayne (Solicitor) (two Supporting Creditors) Baker & McKenzie (Plaintiff/Respondent) SOLICITORS : Someville & Co (Defendant/Applicant) Peter M Wayne & Associates (two Supporting Creditors) CATCHWORDS : CORPORATIONS — s459S of Corporations Law — Threshold requirement of s459S(2) whereby the relevant debt must be pivotal to solvency — Whether company solvent in particular case — Other discretionary factors in giving or withholding leave. LEGISLATION CITED : Corporations Law s459S Home Building Act 1989 (NSW) s6(2), s10, and Regulation 6(b) CASES CITED : Pavey & Mathews Pty Limited v Paul (1987) 162 CLR 221 Switz Pty Limited v Glowbind Pty Limited (2000) 48 NSWLR 661 DECISION : Defendant's application fails. Leave pursuant to s459S(1) of Corporations Law declined. Costs in favour of Respondent. IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 3508/00 In the matter of The Satellite Group Limited ACN 087 721 079 Consolidated Constructions Pty Limited ACN 008 699 330 Plaintiff The Satellite Group Limited ACN 087 721 079 Defendant JUDGMENT — ex tempore 20 October 2000 INTRODUCTION 1 This is a matter of some complexity which has been dealt with urgently in the Duty List. The proceedings essentially concern whether leave should be granted pursuant to s459S of the Corporations Law which is in the following terms: " 459S (1) [Grounds disallowed without leave] In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground: (a) that the company relied on for the purposes of an application by it for the demand to be set aside; or (b) that the company could have so relied on, but did not so rely on (whether it made such an application or not). 459S (2) [No leave unless ground material to solvency] The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent. [s459S insrt Act 210 of 1992 s57, eff 23 June 1993 (see ss1382-1383)]" 2 The Applicant, being the Defendant in the principal proceedings, proceeds upon an Amended Notice of Motion filed in Court to-day. However the history of the proceedings were that on the 6 September 2000 the Defendant filed the original version of the Notice of Motion seeking leave under s459S of the Corporations Law. While the Defendant has had six weeks to prepare its application and its supporting evidence to rebut insolvency, it has, as emerges, surprisingly little to show for it. 3 As the Court of Appeal in Switz Pty Limited v Glowbind Pty Limited (2000) 48 NSWLR 661 affirmed under s459S of the Corporations Law, the onus is squarely placed upon the Defendant to rebut the presumption of insolvency that follows from an unmet statutory demand not set aside. Furthermore, in order to satisfy the threshold requirement of a court granting leave under s459S(2) the court must be satisfied that the ground, here that the debt upon which the statutory demand is based, is pivotal to the Defendant company's solvency. If the Defendant company would be insolvent, irrespective of whether the debt were payable or not, clearly that threshold condition for leave is not satisfied. 4 In the present case, the company asserts that it is solvent if the disputed debt were not owing but would be insolvent if the disputed debt were owing. As Switz Pty Limited (supra) affirms, if the Defendant company is able to make that proposition out, it satisfies the initial sine qua non in s459S(2) to obtaining leave. But it must still satisfy the Court that it should give leave. That arises in circumstances where the Defendant company advances a ground "that the company could have so relied on [for the purposes of an application by it for the demand to be set aside], but did not so rely on …", having not made any application to set aside the demand; see s459S(1)(b). MATERIAL FACTS 5 I set out below a statement of facts which can be taken to be agreed for present purposes, though needing amplification in certain respects covered subsequently. 6 The Defendant ("Satellite") received a statutory demand made by the plaintiff ("Consolidated Constructions") on 14 July 2000 in the amount of $1,030,300.85. On 18 July 2000, a copy of that statutory demand was sent by fax to Abbott Tout, the then solicitors for Satellite. However, no application to set aside the demand was made within time. 7 Consolidated Constructions performed certain building work at a site at Harold Park for Satellite Group (Harold Park) Pty Ltd ("Harold Park"). The building work remains incomplete and its present position is indicated in photographs which have been tendered. 8 Until early July 2000, Harold Park was a wholly owned subsidiary of Satellite. In early July 2000, the shares in Harold Park were transferred to a third party. 9 There was no written agreement between Harold Park and Consolidated Constructions in respect of the building work. 10 The Harold Park project involved the refurbishing of the Harold Park Hotel and the construction of 49 apartments. A strata plan is to be registered in which one lot is the existing hotel and the other 49 lots are the apartments. 11 The project contemplated that the 49 apartments were to be sold to individual investors and managed by an operator on behalf of their owners. The apartments were to be used to provide accommodation for periods of up to 90 days: see the terms of Council consent. 12 The 49 apartments were studio apartments or one, two, or three bedroom apartments. Each was self-contained with its own kitchen and bathroom. 13 On 7 February 2000 Consolidated Constructions and Harold Park entered into a loan agreement. On the same date, Harold Park executed a mortgage of the Harold Park site as security for its obligations under the loan agreement. That mortgage has not been registered. On 4 February 2000, Satellite and Consolidated Constructions executed a document entitled "Deed of Guarantee and Indemnity". 14 Harold Park did not pay the amount said to be due under the loan agreement. The statutory demand purports to require Satellite to pay that amount, as a consequence of the terms of the Deed of Guarantee and Indemnity. RESOLUTION OF ISSUES 15 It is convenient that I deal with any further relevant facts in dealing with the issues before me. Those issues are essentially agreed and are set out below. (1) Whether (to the extent it may be material) the applicant has explained satisfactorily why the point now raised was not raised in opposition to the statutory demand. (2) Whether the work performed by the respondent was "residential building work" within the meaning of the Home Building Act , and Regulation . (3) Whether the loan agreement between the respondent and Satellite Group (Harold Park) was effective, for all purposes, to transform its claim for a progress payment into a debt. (4) Whether, in any event, it would be appropriate to abide the outcome of proceedings between the respondent and Satellite Group (Harold Park). (5) Whether the applicant would be solvent if it were not required to pay the debt claimed by the respondent. 16 Taking the first issue, what reason does the Defendant company give for why these grounds are only now raised, being the grounds in (2) to (4) above? They go to whether the demand would have been set aside, if raised on the basis of a genuine dispute. That reason given is that the Defendant company's solicitors, Abbott Tout who were charged with the responsibility of dealing with the statutory demand failed in their performance of that task. 17 While I will accept that proposition as having been advanced as an explanation for the purposes of the present proceedings I emphasise that I make no finding to that effect. This is in fairness to Abbott Tout who have been given no opportunity to deal with that allegation and give no evidence confirming it. 18 I do not in any event consider that the explanation greatly assists the Defendant company's application. But I do not consider it so deficient an explanation as to disqualify the Defendant company at the threshold. However, its lack of cogency, weighed with other factors, tells against the application. 19 It lacks cogency, because even believing it, it is not to be assumed that companies can simply ignore a perfectly comprehensible statutory demand requiring action within twenty-one days on the basis that this has been left to the solicitor to worry about. Solvency 20 It is convenient that I turn now to the threshold issue, that of solvency, dealt with as issue (5) above. I here consider the circumstances which may ultimately bear upon solvency. Some of these bear also on issues (2) to (4) above, though they need to be kept distinct. 21 The evidence advanced by the Defendant company as to solvency, remembering that the onus is squarely placed upon it to rebut the presumption of insolvency, was not presented with any real degree of plausibility. It was based upon belated affidavits filed for the first time to-day and in circumstances where the Defendant company has had since 6 September 2000 to marshal the necessary evidence. 22 In particular, one would have expected the following items to have been before the Court but were not: (i) Management accounts, reasonably up-to-date for the Defendant company. The Court was told by Mr Markos, the Chief Executive, that monthly management accounts do not exist, itself no great assurance as to reliable financial information, but that there were management accounts as at 30 June 2000 though these were not placed before the Court. (ii) An aged debtors ledger with accompanying analysis. Not only were none before the Court but there was no explanation for that omission. (iii) Substantiation from an independent auditor as to the debts of the Defendant company totalling no more than $19,000 as asserted by the financial controller, Mr Lapidot; see paragraph 13 of his affidavit of 18 October 2000. This was in circumstances where at least one supporting creditor has put in an appearance, namely Harbour Radio Pty Limited trading as Radio 2GB and claiming $33,120. The only matter put in refutation of that debt was a denial of any debt, as asserted by the Chief Executive Mr Markos and Mr Lapidot without independent substantiation. A tax invoice statement was produced, but it was for two other radio stations, being Radio 2SM and Radio 2UE Sydney Pty Limited (DX6) and totalled a quite different amount. (iv) While the source of the Defendant company's access to liquidity was said by Mr Lapidot (para 9 of his affidavit) to include "a sum of approximately $25 million owed to Satellite by Treasury "[a subsidiary of The Satellite Group, (Treasury Pty Limited)] … with Treasury having a sum of approximately $190,000 in its bank account, "upon with Satellite is entitled to draw", no evidence was given as to Treasury's other creditors or whether they would have prior or equal claim on the bank account, the only evidence being that Treasury had used the net $22 million raised (Mr Markos unaccountably thought the figure $24 million) on various investments in property and the like of unknown liquidity. 23 In evidence, Mr Lapidot referred to an indebtedness that he said was disputed claimed by the company's auditors Ernst & Young, of some $187,000, being some twelve months old. The dispute was said to relate to whether the accounting services exceeded a quoted figure. But no such specific figure was cited. It was also suggested as a further reason for there being no debt, that some part of the accounting services charged for were, without authority, performed for the personal benefit of certain officers of the Defendant company. It was said that the debt was currently disputed in Court proceedings. But no evidence such as the court documents was put before the Court beyond that assertion. Nor was there any evidence substantiating the earlier assertion about the basis for disputing the debt. 24 Clearly, if the $187,000 were payable, then otherwise accepting the Defendant company's inadequate evidence advanced in favour of solvency, the Defendant company would be insolvent once the admitted current debts totalling $19,000 were taken into account. It is simply not good enough to invite the Court to draw an inference that Treasury would have access to other sources of liquidity which, without intervention of creditors of Treasury, could be called upon by its parent, the Defendant company, to pay its creditors. It is not good enough because the onus lies upon the Defendant company to rebut the presumption of insolvency. 25 If one turns to the debt relied upon as underlying the statutory demand, taking the Defendant's case at its highest, the Defendant still faces a quantum meruit claim once the hotel is completed by the Plaintiff builder, or earlier if the Plaintiff builder is wrongfully precluded from doing so; see Pavey & Mathews Pty Limited v Paul (1987) 162 CLR 221 at 225, 228, 230, 232, 240, 243, 247, 250, 253 and 255. Concededly a debt of the order of $1 million is presently the broad figure which would be sought. There is no evidence before me to indicate that any lesser figure would be appropriate. On any view of the Deed of Guarantee and Indemnity given by the Defendant company in favour of the Plaintiff builder, it would, on its terms, apply to that amount. That amount is thus on the Defendant's best case a prospective liability payable on completion, or earlier if the Plaintiff builder is wrongly precluded from doing so. 26 While, as the Defendant says, it is possible that the then value of the completed building may be substantial, that is not an asset of the Defendant nor is the owner of that building a subsidiary of the Defendant. Rather the building, presently incomplete, belongs to a company Satellite Group Harold Park Pty Limited ("Harold Park") that has been disposed of earlier in June 2000. There is no evidence as to whether Harold Park could meet the $1 million payment at that stage. Nor whether Treasury would at that stage have the wherewithal to repay its indebtedness to the Defendant in the corresponding amount of $1 million. This would be so as to put the Defendant in funds to pay the plaintiff that amount under the Deed of Guarantee and Indemnity if Harold Park failed to do so. But the onus for adducing that evidence is clearly upon the Defendant. While it may be that such evidence could not be conclusive, a vacuum is no substitute for at least some supporting evidence on that score. 27 In these circumstances, I am not able to be satisfied as to the threshold requirement under s459S(2) that the ground sought to be relied upon would be material to proving that the Defendant is solvent. This is because I am not satisfied that the presumption of insolvency has been rebutted. Nor am I satisfied that, disregarding the demand debt, the Defendant would be solvent. 28 It remains to deal briefly with the other issues going to discretion. Though if I am right in my earlier conclusion they do not arise as I have no discretion; I must simply decline the leave sought. Discretion 29 The essential ground relied upon by the Defendant for resisting the conclusion that the Guarantee and Indemnity makes the Defendant liable for the progress payment claimed of $1 million is that the Home Building Act 1989 (NSW) ("the Act") was not complied with. That it is said renders this building contract unenforceable by virtue of s10 of that Act. It is then contended that the terms of the Guarantee and Indemnity are such that, notwithstanding the apparent position that the indemnity applies irrespective of the underlying guaranteed obligation being enforceable, the Indemnity as a matter of its proper construction simply places the Defendant in the shoes of the debtor. Since its debt is unenforceable so there is no corresponding amount payable under the Indemnity. 30 Were such an argument raised in the context merely of establishing a genuine dispute under s459G, it is just conceivable that it might have succeeded. As against that, the Plaintiff puts a number of cogent arguments not only as to the proper construction of the Indemnity but also that the Act does not apply where, as here, the construction relates to the residential parts of an hotel; see Regulation 6(b) and s10(2) read with s6 (2) of the Act. While the matter is of some complexity, it is conceivable that the Defendant's arguments might have risen to the level of "plausible contentions requiring further investigation". However, the case for so concluding is not particularly strong, really borderline. 31 But in any event the Plaintiff has a clear answer, when one looks at the matter simply in terms of solvency. Clause 3.3 requires the guarantor and indemnifier immediately on demand to pay at the direction of the Plaintiff any amount certified as payable or due under Clause 3.1 of the Deed of Guarantee and Indemnity. While it is true that the statutory demand was not apparently preceded by those steps, they could readily now be taken. Once taken, the company would then on any view be insolvent, unless as a matter of construction it could succeed in the difficult contention that Clause 3.3 did not then operate as its clear terms indicate. That proposition appears untenable. 32 In the circumstances, I simply observe as to issue 3 that at the modest level of a genuine dispute the argument the Defendant puts may (just) suffice. But that bare sufficiency does not pre-empt my discretion still to withhold leave under s459S(1) and I would do so given all the factors I have identified. Similarly, the answer to issue 4 is pre-empted by the very different considerations that weigh upon the granting of leave. CONCLUSION 33 The Defendant's application fails and I decline leave pursuant to s459S(1) of the Corporations Law. 34 I formally dismiss the Amended Notice of Motion with costs in favour of the Respondent. 35 Without opposition from the Respondent, I adjourn the remaining part of the proceedings relating to the winding-up of the Applicant to 10 am 6 November 2000 in the Corporations List. ********** 1 Last Modified: 11/01/2000 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.