New South Wales Supreme Court CITATION : Goman v Scope Data Systems Pty Ltd [2004] NSWSC 314 HEARING DATE(S) : 17 March 2004 & 22 March 2004 JUDGMENT DATE : 23 April 2004 JURISDICTION: Equity Corporations List JUDGMENT OF : Campbell J DECISION : Defendant to pay costs of plaintiff CATCHWORDS : CORPORATIONS - winding up - failure to comply with statutory demand - whether presumption of insolvency rebutted - debt subject of statutory demand paid after contested hearing, and judgment reserved - PROCEDURE - costs - after judgment reserved one party submits completely to demand of other party - effect on appropriate cost order LEGISLATION CITED : Corporations Act 2001 (Cth) Biron Capital v Velowing [2003] NSWSC 1181 CASES CITED : Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 Scope Data Systems v BDO Nelson Parkhill [2003] NSWSC 137; (2003) 199 ALR 56 PARTIES : David Goman as Representative of the Partnership of BDO Nelson Parkhill - Plaintiff Scope Data Systems Pty Limited - Defendant FILE NUMBER(S) : SC 6360/03 COUNSEL : J T Johnson - Plaintiff P A Parsons - Defendant SOLICITORS : Sally Nash & Co - Plaintiff Gregory Falk & Associates - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST CAMPBELL J 23 APRIL 2004 6360/03 GOMAN V SCOPE DATA SYSTEMS PTY LTD JUDGMENT HIS HONOUR: Nature of the Application 1 This matter was fully argued before me as a contested application to wind up Scope Data Systems Pty Ltd ("Scope Data"). After I had reserved judgment the debt on which the application to wind up was based was paid, and other events occurred, as a consequence of which the only live issue is that of costs. Circumstances Leading to the Winding Up Application 2 The plaintiff sues as a representative of members of a partnership which conducts an accountancy practice, BDO Nelson Parkhill ("BDO"). Years ago, Scope Data engaged BDO to act as an expert witness for it in a dispute which Scope Data had with its landlord. BDO produced a report on loss of profits sustained by Scope Data, in consequence of an alleged breach of an obligation of the landlord. Scope Data did not pay BDO all the fees which BDO claimed. In consequence, BDO sued Scope Data, by proceedings begun in January 2000 in the Local Court, seeking the fees it said remained unpaid. That litigation resulted, on 23 November 2001, in BDO obtaining an order against Scope Data for payment of $8,681.15. 3 On 29 July 2002 Magistrate Dillon in the Local Court, made a costs order in favour of BDO against Scope Data concerning those proceedings. 4 BDO issued a statutory demand against Scope Data, concerning the amount (other than costs) ordered to be paid. Scope Data sought to set aside that statutory demand on the basis that it had appealed against the order to the Supreme Court, and that there was a stay of execution of the judgment debts arising, by statute, whenever such an appeal was validly instituted. On 13 March 2003 Barrett J declined to set the statutory demand aside: Scope Data Systems v BDO Nelson Parkhill [2003] NSWSC 137; (2003) 199 ALR 56. Broadly, his Honour held that the institution of the appeal was not enough to stop the judgment debt from being owing, even though institution of an appeal operated as a stay of execution of the judgment. The existence of the appeal, by itself, did not demonstrate that there was a genuine dispute as to the existence of the judgment debt. A stay of execution pending appeal could, however, provide a discretionary reason to set aside a statutory demand, under section 459J(1)(b) Corporations Act 2001 (Cth), by providing "some other reason why the demand should be set aside". In the case before him, however, the appeal had not been instituted within time, and so the statutory provisions for a stay pending appeal had not been triggered. Barrett J ordered Scope Data to pay the costs of the proceedings before him. 5 On 14 March 2003 Master Malpass dismissed the purported appeal from the decision of Magistrate Dillon, with an order for indemnity costs. 6 On 25 September 2003 Mr Peter Johnstone, costs assessor, issued an assessment of the costs which Magistrate Dillon had ordered, on 29 July 2002, to be paid by Scope Data to BDO. That assessment was, on 7 October 2003, registered in the Local Court, giving rise to a judgment debt of Scope Data in favour of BDO in the sum of $25,024.13. 7 On 20 October 2003 BDO served by post a statutory demand against Scope Data, concerning that sum of $25,024.13. The statutory demand was received on 22 or 24 October 2003. 8 On 23 October 2003 Scope Data filed an application with the Costs Review Panel for review of the costs determination of Mr Johnstone. On 5 November 2003 Scope Data filed a Notice of Motion in the Local Court, seeking orders including a stay of enforcement of the judgment which had been entered on 7 October 2003. That Notice of Motion was listed for hearing on 15 January 2004. At the time of filing, 5 November 2003, the registrar of the Local Court granted Scope Data an ex parte stay of proceedings on that judgment until 15 January 2004. 9 On 17 December 2003 the Originating Process was filed in the present proceedings, whereby BDO sought to wind up Scope Data. The basis of that application was insolvency, arising from failure to comply with the statutory demand. At the hearing, BDO also sought to rely on being entitled to orders for costs under the order of Barrett J made 13 March 2003, and the order made by Master Malpass on 14 March 2003. BDO recognise that in relation to those orders for costs it was only a contingent creditor, because bills of costs had been submitted for assessment, but not yet been assessed. 10 On 15 January 2004 in the Local Court, Scope Data's Notice of Motion was stood over until 18 March 2004, and the stay was extended until that date. 11 On 21 January 2004 the Costs Review Panel issued its decision affirming the determination of costs made by Mr Johnstone on 25 September 2003, and stating "the Panel ends the suspension of the Determination of the Costs Assessor pursuant to Section 208KE of the Legal Profession Act". In fact there is a small difference between the amount which the Costs Review Panel determined to be fair and reasonable, and the amount of the judgment entered in the Local Court based on Mr Johnstone's certificate, but nobody seeks to make anything of that, and it might be attributable to costs of entering the judgment. 12 Agostini Jarrett Pty Ltd acted for Scope Data in three sets of proceedings – Local Court proceedings 9308 of 2002, the Supreme Court application to set aside the statutory demand determined by Barrett J on 13 March 2003, and the purported appeal from Magistrate Dillon determined by Master Malpass on 14 March 2003. It has claimed against Scope Data costs of $3,077.00, $14,886.00, and $22,083.00 respectively for acting in those three sets of proceedings. None of the bills of costs relating to those claimed costs had, by the time of the hearing before me, been assessed. 13 The court is told little about proceedings number 9308 of 2002 in the Local Court. However, it appears that in those proceedings a solicitor, Mr Beilby, was on 25 August 2003 ordered to pay the costs of Scope Data of yet another set of Local Court proceedings (number 157704 of 2000), as well as the amount of $3,077.00 claimed by Agostini Jarrett. 14 Concerning the order for costs made by Barrett J on 13 March 2003 BDO claims the amount of $10,040.71. Concerning the order for costs made by Master Malpass on 14 March 2003, BDO claims the amount of $15,969.50. As mentioned earlier, each of those bills of costs has been submitted for assessment, and the results of the assessment are not yet to hand. 15 On 9 February 2004 Agostini Jarrett Pty Ltd, claiming to be a creditor of Scope Data for $25,160.60, filed a Notice of Intention to Appear in these present proceedings. 16 On 18 February 2004 Scope Data filed a Summons in the Supreme Court seeking to set aside the costs determination of Mr Johnstone, and the determination of the Costs Review Panel made on 21 January 2004. That Summons was returnable on 5 March 2004. The evidence does not disclose what happened to that Summons on 5 March 2004. 17 Scope Data made no application to set aside the statutory demand on which the present proceedings before me is based. On 23 February 2004 it filed a Notice of Appearance in these proceedings, stating its grounds of opposition to the winding up. There were, essentially, two of them – that while the stay of execution of the Local Court judgment on which the statutory demand was founded remained on foot, no winding up should occur, and in any event the company was solvent. 18 The hearing before me proceeded on 17 March 2004. At the conclusion of the hearing I reserved judgment. 19 The matter was restored by the parties on 22 March 2004. On that occasion, I was informed that, on 18 March 2004, in the Local Court, the stay of execution of the judgment was not extended. On 19 March 2004 the solicitor for Scope Data delivered to the solicitor for BDO a bank cheque for the amount of the statutory demand. The covering letter stated that payment was: "… without prejudice to our client's rights in relation to the appeal currently before the Supreme Court of NSW at Sydney an assessment of costs that are the subject of the appeal. In the event our client succeeds in the appeal we are instructed our client requires your client to account to it for any surplus." 20 On 22 March 2004 I was told of these facts, and that BDO accepted the cheque which had been proffered in satisfaction of the judgment debt. It was accepted on both sides that I should dismiss the winding up summons. I made an order dismissing it on 22 March, though reserving the question of costs. 21 On that day Mr Merewether appeared for Agostini Jarrett. He did not seek to have Agostini Jarrett substituted as a creditor. He sought an order for costs against Scope Data. 22 On 29 March 2004 Mr Merewether wrote to my Associate, with a copy to the solicitors for BDO and for Scope Data, stating that Agostini Jarrett Pty Ltd had withdrawn its three Supreme Court applications for assessment of costs against Scope Data. Costs Between Agostini Jarrett Pty Ltd and Scope Data 23 Agostini Jarrett was only a contingent creditor. Thus, pursuant to section 462(4) Corporations Act 2001, it could not be heard on an application to wind up unless, and until: "(a) such security for costs has been given as the Court thinks reasonable; and (b) a prima facie case for winding up the company has been established to the Court's satisfaction." Security for costs was never proffered. As well, there would inevitably have been a significant dispute as to the liability of Scope Data for the costs of Agostini Jarrett. Those costs were, in large part, costs incurred in acting for Scope Data in the proceedings which Barrett J dismissed on 13 March 2003, and the proceedings which Master Malpass dismissed on 14 March 2003. The fundamental reason for dismissal of each of those proceedings was that the appeal from the decision of Magistrate Dillon had been started too late. There would be bound to be a plausible contention requiring investigation concerning whether that disentitled Agostini Jarrett to the costs of acting in those proceedings, or required it to indemnify Scope Data against any loss Scope Data suffered in launching and seeing through to judgment those two pieces of litigation. The conduct of Agostini Jarrett in withdrawing its claims for assessment is a significant admission by conduct that (stating the matter as highly as it needs to be for present purposes, which is not necessarily the only implication which might be drawn in other contexts) its claim for those fees was questionable. 24 Scope Data did not seek any costs against Agostini Jarrett, but confined itself to submitting that Agostini Jarrett should not have costs against Scope Data. 25 I decline to make any order giving Agostini Jarrett Pty Ltd costs against Scope Data. Costs Between BDO and Scope Data 26 Under section 459S Corporations Act 2001 Scope Data could not, without the leave of the Court, oppose the winding up application on a ground that it could have relied on for the purpose of an application by it for the demand to be set aside. However if a matter arises, of a type which could justify the demand being set aside, but arises after the 21 day period fixed by section 459G(2) after service of a statutory demand for the bringing of an application to set the statutory demand aside, that matter is not a ground which the company could have relied on in an application to set the statutory demand aside; hence it may be relied upon in opposition to the winding up: Biron Capital v Velowing [2003] NSWSC 1181 per Barrett J. In the present case the stay of proceedings of the Local Court judgment was granted initially on 5 November 2003, within 21 days after service of the statutory demand. Thus it is a matter which could have been relied upon to set aside the statutory demand. Thus, even though the stay was still on foot on 17 March 2004, when the matter was argued, it does not provide a ground for dismissal of the winding up application. 27 When the winding up application was brought less than three months after the day of service of the statutory demand, section 459C(2)(a) Corporations Act 2001 has the effect that the Court must presume that Scope Data is insolvent. Scope Data bore the onus of displacing that presumption. In Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 Santow JA said, at [16]: "However, it must be emphasised that proper verification of assets and liabilities is critical to rebut the presumption of insolvency. What occurred fell well short of that, as I explain. The relevant principles requiring proper verification are not in question. The trial judge expressly adopted the statement of these from the judgment of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, which I repeat below. The first three propositions are of cardinal importance for the present case: "The authorities which govern the operation of s459G of the Corporations Law seem to me to establish the following propositions: · The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J. · In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J. · Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J. · There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466. · The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J. · The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467. · It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd (supra)." 28 Scope Data is a service provider. Its most recent accounts, those as at 30 June 2003, show it as having incurred a loss of a little more than $40,000 during the year ended 30 June 2003, and a loss of a little less than $30,000 during the year ended 30 June 2002. At 30 June 2003 it had a deficiency of assets of a little more than $44,000. Its current assets were $1,640, while its current liabilities were a little more than $24,000. While it had some plant and equipment, and a motor vehicle, those assets had been fully written off for tax purposes, and no attempt has been made to prove that they have a sale value. 29 While the accounts state that they have been prepared on an accruals basis, the man who effectively controlled the company, Mr Gorczynski was of the view that the accounts were prepared on a cash basis. As at 30 June 2003 he had received invoices from Beilby Poulden Costello, solicitors, for some thousands of dollars, which were not reflected in those accounts. As at 30 June 2003 he had received invoices from Agostini Jarrett which were not paid, he was aware of the claim of BDO for $25,024.13, and was aware that debts, in some quantum, would be owing to BDO concerning the costs orders made by Barrett J and Master Malpass, because he knew the costs orders had been made. He did not mention these liabilities to the accountant who drew up the accounts, because he thought the accounts were prepared on a cash basis. The accounts are not audited. 30 The practice of the company is to do a significant amount of its work on the basis that the client pays in advance. Some clients are accorded credit, and debtor's lists are kept on a computer. As at 10 March 2004 the total debtors were $4,308.32. A list of creditors is not kept on the computer, but rather they are "kept in a tray on the windowsill, we have very few". 31 If one leaves aside amounts which might be owing by Scope Data to Beilby Poulden Costello, Agostini Jarrett, and BDO, it seems likely that Scope Data is able to pay other creditors as they fall due. However the means of doing this itself provides cause for concern. Mr Gorczynski has made some advances to the company to assist in paying its debts. Over the period 8 May 2003 to a date in February 2004 Mr Gorczynski has advanced the company $62,800. Those amounts are, it seems, repayable on demand. There was no offer to subordinate, or capitalise, those loans. 32 In all these circumstances, I am not persuaded that Scope Data has discharged its onus of proving solvency. 33 A further significant admission by conduct, in my view, is that Scope Data paid the debt the subject of the statutory demand after there had been full evidence and argument before me on 17 March 2004 concerning its solvency. Payment of the debt in those circumstances is, in my view, a significant admission by conduct which strengthens the conclusion to which I would otherwise have come, that Scope Data had not discharged its onus of proving solvency. 34 I order Scope Data to pay the costs of BDO of these proceedings. ********** Last Modified: 05/17/2004 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.