Reported Decision : 57 ACSR 131 New South Wales Supreme Court CITATION : Double Bay Newspapers v The Fitness Lounge [2006] NSWSC 226 HEARING DATE(S) : 24/03/06 JUDGMENT DATE : 24 March 2006 JURISDICTION : Equity Division JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 03/24/2006 DECISION : 1. Order that the orders made on 17 March 2006 that the defendant be wound up under the Corporations Act, that Mr Worrell be appointed liquidator of the defendant, and that the defendant pay the plaintiff's costs, be set aside. 2. Order that the originating process be dismissed, with no order as to costs. CATCHWORDS : CORPORATIONS – As a result of a misunderstanding, plaintiff sought winding-up orders in breach of compromise reached with the defendant company – Winding-up orders made in absence of defendant company – Whether winding-up orders obtained through fundamental irregularity – Discretion to set aside winding-up orders – Section 482 of the Corporations Act 2001 (Cth) – Rules 36.15 and 36.16 of the Uniform Civil Procedure Rules 2005 (NSW) – Whether applicant entitled to have winding-up orders obtained through fundamental irregularity set aside as of right – Whether applicant obliged to show solvency or arguable case of solvency to have winding-up orders obtained through fundamental irregularity set aside. Corporations Act 2001 (Cth) LEGISLATION CITED : Uniform Civil Procedure Rules 2005 (NSW) Companies Act 1961 (NSW) Re Elvi Pty Ltd; Re Fullin Enterprises Pty Limited (1983) 1 ACLC 910 Re GT Motor Inns Pty Limited & the Companies Act (1980) 4 ACLR 881 Re Rick Wilson Pty Limited & the Companies Act (1982) 7 ACLR 354 George Ward Steel Pty Ltd v Kizkot Pty Limited (1989) 15 ACLR 464 CASES CITED : Registrar of Aboriginal Corporations v Murnkurni Women's Aboriginal Corporation (in liq) (1995) 58 FCR 125 Labraga v Pomfret [2005] NSWSC 654 Craig v Kanssen [1943] 1 KB 256 Cameron v Cole (1944) 68 CLR 571 Taylor v Taylor (1979) 143 CLR 1 Double Bay Newspapers Pty Ltd & Ors PARTIES : v The Fitness Lounge Pty Ltd FILE NUMBER(S) : SC 1458/06 COUNSEL : Plaintiff: G George Defendant: Ex Parte SOLICITORS : Plaintiff: David R Purvis & Co Solicitors Defendant: N/A - 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Friday, 24 March 2006 1458/06 Double Bay Newspapers Pty Ltd & Ors v The Fitness Lounge Pty Ltd JUDGMENT 1 HIS HONOUR: This is an application to set aside orders made on 17 March 2006 that the defendant company be wound up under the Corporations Act 2001 (Cth), and that a liquidator be appointed to the defendant company. Somewhat unusually, the application is made by the plaintiffs who sought the winding-up orders. 2 The issue to be determined is whether the fact that the orders were obtained in breach of an agreement reached between the parties and in the absence of the defendant company, where the defendant's non-appearance was through no fault of its own, is a sufficient ground for setting aside the orders and thereby terminating the winding-up; or whether there must also be proof of the defendant's solvency, or at least evidence indicating an arguable case of solvency. 3 The background to the present application is as follows. On 11 January 2006, the plaintiffs served a statutory demand under s 459E of the Corporations Act on the defendant. The demand was for a debt of $6,050. The demand was not complied with within the stipulated period of twenty-one days. 4 On 15 February 2006, the plaintiffs filed originating process seeking orders for the winding-up of the defendant. The originating process was duly served and advertised. It was returnable on 17 March 2006. 5 On 21 February 2006, an agreement was reached between the plaintiffs, acting through their solicitor, and the defendant. It was in the following terms: "We confirm our agreement that: (a) The amount of $1,500.00 will be paid into our client's account tomorrow and a further payment of $1,500.00 in cleared funds shall be paid into our client's account on or before 16 March 2006; (b) The remaining outstanding amount being $8,16.00, (scil $8,160) less the $3,000.00 payments detailed above shall be paid by monthly instalments of $1,000 each month thereafter on the 16th of each month; (c) Our client's account details are as follows: … Please note as discussed that should any payment not be paid in accordance with the above timetable we are instructed to proceed without further notice." 6 The first two payments stipulated in the letter were duly made to the plaintiffs' bank account. 7 As I understand the plaintiffs' position, they accept that it was either an unrecorded express term of the agreement, or an implied term, that as a result of the agreement having been made and the payments due before 17 March having been duly made, the originating process should have been dismissed on its return date of 17 March 2006. That did not happen because of a failure of proper communications between the plaintiffs' credit manager and their solicitor. 8 The credit manager deposes that he was unaware of the agreement having been reached between the plaintiffs' solicitor and the defendant. He was not aware that payment had been made directly to the plaintiffs' bank account. On or about 16 March 2006 he advised the solicitor that no payments had been made by the defendant company to reduce the debt owing to the plaintiff. He instructed the solicitor to proceed on the winding-up application. 9 The plaintiffs' solicitor presumably believed that the defendant had failed to honour the agreement reached on 21 February 2006. On 17 March 2006, the winding-up orders were made on the plaintiff's application in default of appearance by the defendant. 10 Recognising its mistake, the plaintiffs have now brought the present application to set aside the orders obtained on 17 March. 11 The liquidator has no objection to the termination of the liquidation and does not seek any payment for his costs. 12 The interlocutory process identified three provisions as the source of the jurisdiction to make the orders sought. The application is said to be made pursuant to s 482 of the Corporations Act. Orders were also sought pursuant to rr 36.15 and 36.16 of the Uniform Civil Procedure Rules 2005 (NSW). Sub-section 482(1) of the Corporations Act provides: "At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order." 13 Rule 36.15 of the Uniform Civil Procedure Rules provides: "36.15 General power to set aside judgment or order (cf DCR Part 13, rule 1, Part 31, rule 12A; LCR Part 11, rule 1, Part 26, rule 3) (1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith. (2) A judgment or order of the court in any proceedings may be set aside by order of the court if the parties to the proceedings consent." 14 Rule 36.16 of the Uniform Civil Procedure Rules provides in part: "36.16 Further power to set aside or vary judgment or order ... (2) The court may set aside or vary a judgment or order after it has been entered if: … (b) the judgment or order has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order … ... (4) Nothing in this rule affects any other power of the court to set aside or vary a judgment or order. " 15 At the commencement of the hearing, counsel for the plaintiff indicated that he did not rely upon s 482 of the Corporations Act today. After I refused to order a separate trial of issues, counsel indicated that s 482 would not be relied upon. 16 The difficulty that the plaintiffs face in relying upon s 482 of the Corporations Act is that it is well established that on an application under that section the court will not terminate a winding up unless it is satisfied as to the company's solvency. This appears to be the position even where there has been an irregularity in obtaining the winding-up order (see Re Elvi Pty Ltd; Re Fullin Enterprises Pty Limited (1983) 1 ACLC 910 at 912; and Re GT Motor Inns Pty Limited & the Companies Act (1980) 4 ACLR 881 at 881-882). Re GT Motor Inns Pty Ltd was a case under s 243 of the Companies Act 1961 (NSW), being the predecessor to s 482. The winding-up petition had not been properly served, as it was not served at the registered office of the defendant. In making an order staying the winding-up pursuant to s 243 of the Companies Act, Needham J observed that the evidence before him indicated that the company was solvent and able to pay its debts as they became due. However, his Honour did not decide that in no circumstance can a winding-up order obtained irregularly be set aside without evidence of solvency. 17 The issue in the present case arises because the making or the setting aside of a winding-up order does not affect only the interests of the parties, but also the interests of the company's existing and potential creditors. 18 In Re Rick Wilson Pty Limited & the Companies Act (1982) 7 ACLR 354, McLelland J indicated that where an application was made to stay a winding-up and to set aside the winding-up order following an ex parte hearing, the preferable procedure to adopt was not an appeal from the order but application under Pt 40 r 9(3) of the Supreme Court Rules 1970 (NSW). That rule was the equivalent to what is now UCPR r 36.16(2)(b). 19 The question whether there must be evidence of solvency on an application made under a rule equivalent to UCP r 36.16 to set aside a winding-up order made in the absence of a defendant has been considered in a number of cases. 20 In George Ward Steel Pty Ltd v Kizkot Pty Limited (1989) 15 ACLR 464, Hodgson J (as his Honour then was) was asked to make an order by consent setting aside a winding-up order which had been made in the absence of the defendant and entered. His Honour said (at 465): "In my view, if an order winding up a company is made in the absence of the defendant company, and an application is brought promptly by the company, with notice being given to the liquidator, to the plaintiff and to any creditor who appeared at the hearing; and if the evidence shows an explanation for the non-appearance at the hearing and indicates solvency of the company ; and if there is consent to setting aside, or at least non-opposition; and if the liquidator indicates that nothing in his investigations to date shows a reason for the company to be stopped from trading, then the court will normally set aside the order." (emphasis added). 21 There is no suggestion that in George Ward Steel Pty Ltd v Kizkot Pty Ltd the order had been irregularly obtained. 22 In Registrar of Aboriginal Corporations v Murnkurni Women's Aboriginal Corporation (in liq) (1995) 58 FCR 125 a winding-up order had been made in the absence of the respondent. Orders for substituted service had been made. Again, there was no question of the winding-up order being irregular. It was in that context that R D Nicholson J said (at 128) that it was necessary for the respondent to show an arguable defence and therefore necessary that there be evidence to show that solvency was arguable. 23 In Labraga v Pomfret [2005] NSWSC 654, McDougall J referred to the fundamental principle that those who may be affected by court orders have a right to be heard. His Honour said that Supreme Court Rules Pt 40 r 9(3)(b) sought to give effect to that principle, (at [41] and [42]). His Honour continued (at [44]): "The relevant considerations will depend on the facts of the particular case. In the cases to which I have referred, the effect of the application, if successful, would have been to restore the company to the control of its directors, free to carry on its ordinary (or indeed any other permitted) activities without the constraint of external administration. Thus, given the importance of protecting existing or potential creditors, it is understandable why in each case the Court considered that it was relevant to look at the solvency of the company. Equally, if the evidence as to (for example) solvency at the hearing of the application under Pt 40 r 9 (or its equivalent) showed that on any view the company was hopelessly insolvent, so that it was inevitable that even after the affected parties were given a chance to be heard, the order would be made, then it might be thought to be a pointless exercise of discretion to postpone the inevitable by setting aside the existing winding up order." 24 These cases might be thought to suggest that in all applications under r 36.16 of the Uniform Civil Procedure Rules for the setting aside of a winding-up order made in the absence of appearance by the defendant, it is necessary for the applicant to show that it is at least arguable that the company is solvent. 25 If it were necessary to adduce evidence of solvency then the current application would fail. The defendant's failure to comply with the statutory demand gave rise to a presumption of insolvency. Whilst it later compromised the claim to the plaintiffs' satisfaction, the terms of the compromise do not indicate that the defendant is solvent. I do not conclude that the defendant company is insolvent. There may be many reasons why an agreement was made to pay the debt by instalments. However, there is no evidence to indicate that the company is solvent. 26 Rule 36.16(2)(b) of the Uniform Civil Procedure Rules and its predecessor in Pt 40 r 9 of the Supreme Court Rules cover a range of cases. The court may act under those rules where the defendant merely fails to appear, although there has been no failure in allowing the defendant the opportunity to be heard. The rule may also apply where there has been a fundamental failure to afford the defendant the opportunity to be heard. 27 This distinction is adverted to in a number of authorities where judgment has been wrongly entered because the defendant was not served and was not given the opportunity to defend which the court's procedures require. 28 In Craig v Kanssen [1943] 1 KB 256 Lord Greene MR described an order obtained where the defendant was not served and had had no opportunity to defend the claim as a nullity, which the defendant was entitled ex debito justitiae to have it set aside. His Lordship said (at 262-263): " Those cases appear to me to establish that a person who is affected by an order which can properly be described as a nullity is entitled ex debito justitiae to have it set aside. … The question, therefore, which we have to decide is whether the admitted failure to serve on the defendant the summons on which the order of January 18, 1940, was based was a mere irregularity, or whether it gives the defendant the right to have the order set aside. In my opinion, it is beyond question that failure to serve process where service of process is required, is a failure which goes to the root of our conceptions of the proper procedure in litigation. Apart from proper ex parte proceedings, the idea that an order can validly be made against a man who has had no notification of any intention to apply for it is one which has never been adopted in this country. It cannot be maintained that an order which has been made in those circumstances is to be treated as a mere irregularity and not as something which is affected by a fundamental vice. " 29 Whilst it is not correct to describe an order of a superior court as a nullity there is, nonetheless, a difference between fundamental and non-fundamental irregularities (Cameron v Cole (1944) 68 CLR 571 at 591). In Cameron v Cole Rich J said (at 589): "It is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person who is affected is entitled, ex debito justitiae , to have any determination which affects him set aside; and a court which finds that it has been led to purport to determine a matter in which there has been a failure to observe the principle has inherent jurisdiction to set its determination aside … In such a case there has been no valid trial at all." 30 In Taylor v Taylor (1979) 143 CLR 1 Mason J (as his Honour then was) said (at 16): " A jurisdiction to set aside its orders is inherent in every court unless displaced by statute. In my opinion the jurisdiction extends not only to the setting aside of judgments which have been obtained without service or notice to a party ( Craig v Kanssen [1943] KB 256 at 262–263) but to the setting aside of a default or ex parte judgment obtained when the absence of the party is due to no fault on his part ." (See also Hosking v Van Den-Braak (1998) 48 NSWLR 290.) 31 Here the irregularity was fundamental. The defendant had no reason to appear on the return of the originating process because of the agreement reached with the plaintiffs. Both rr 36.15(1) and 36.16(2)(b) are engaged. However, it is not the source of the power to set aside the order which is important, but the nature of the irregularity which gives rise to the power to have the order set aside. 32 I have no doubt in this case that the plaintiffs' solicitor and the plaintiffs' credit manager were both acting in good faith. However, it would be a breach of good faith if the plaintiffs sought to rely on the orders, as they recognise by bringing this application to set them aside. 33 The reason for the defendant's non-appearance on 17 March 2006 was the agreement which the defendant had reached with the plaintiffs. The orders were obtained in breach of that agreement. Had the defendant appeared, I infer that the originating process would have been dismissed. Certainly it should have been dismissed, as it would be an abuse of process to leave the originating process unresolved as a threat hanging over the defendant to compel its adherence to the compromise. 34 It does not appear that in any of the cases for the setting aside of a judgment under the Supreme Court Rules, or the Federal Court Rules, where the courts have required at least an arguable case of solvency, that there was a fundamental irregularity in the obtaining of the judgment. 35 If an order setting aside the orders of 17 March were refused in the interests of existing or potential creditors in the absence of evidence as to solvency, it could not be said that defendant was entitled as of right to have judgment set aside. 36 It is important to maintain the principle that judgments obtained through fundamental irregularity should be set aside ex debito justitiae, as this principle protects the integrity of the Court's processes. 37 I am of the view that the defendant is entitled as of right, and not merely as a matter of discretion, to have the judgment set aside and that, accordingly, such an order should be made on the plaintiff's application. I do not think that this conclusion is contrary to George Ward Steel Pty Limited v Kizkot Pty Limited, or Registrar of Aboriginal Corporations v Murnkurni Women's Aboriginal Corporation, or the observations of McDougall J in Labraga v Pomfret. In this case, unlike those cases, it is not necessary for the defendant to show an arguable defence. 38 If it be appropriate to consider also the interests of creditors generally, it is relevant that no creditor appeared on the return of the originating process on 17 March 2006. To set aside the orders then made and to dismiss the originating process would leave creditors in no different position from that in which they would have been this time last week, if the plaintiffs' lines of communications had not failed. I do not think that injustice will be done by putting the creditors in the same position as they would have been in on 17 March 2006 if orders had been made by consent for the dismissal of the originating process. 39 For these reasons, I order that the orders made on 17 March 2006 that the defendant be wound up under the Corporations Act, that Mr Worrell be appointed liquidator of the defendant, and that the defendant pay the plaintiff's costs, be set aside. 40 I order that the originating process be dismissed, with no order as to costs. ****** 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.