New South Wales Supreme Court CITATION : JPQS Pty Ltd v Redpen Developments Pty Ltd; Application of Gamcorp (Waterloo) Pty Ltd [2009] NSWSC 687 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 17/04/09; 22/04/09 Written submissions: 01/05/09; 12/05/09; 29/05/09; 01/07/09 JUDGMENT DATE : 23 July 2009 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Interlocutory process dismissed with costs. CATCHWORDS : CORPORATIONS - winding up - pending application for winding up in insolvency - application for substitution as plaintiff - whether applicant for substitution is a creditor - turns on own facts Corporations Act 2001 (Cth), Part 5.3A, ss 459P, 465B, LEGISLATION CITED : Evidence Act 1995, s 75 Partnership Act 1898 CATEGORY : Principal judgment CASES CITED : CVC Investments Pty Ltd v P&T Aviation Pty Ltd (1989) 18 NSWLR 295 Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527; (2004) 185 FLR 130 JPQS Limited - Plaintiff PARTIES : Redpen Developments Pty Limited - Defendant/Respondent Gamcorp (Waterloo) Pty Limited - Applicant FILE NUMBER(S) : SC 4570/08 COUNSEL : Mr R D Glasson - Applicant Mr J E Thomson - Defendant/Respondent SOLICITORS : Parry Carroll - Applicant Levitt Robinson - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY 23 JULY 2009 4570/08 JPQS PTY LIMITED v REDPEN DEVELOPMENT PTY LIMITED; APPLICATION OF GAMCORP (WATERLOO) PTY LIMITED JUDGMENT 1 On 4 September 2008, JPQS Pty Ltd filed an originating process by which it sought an order under s 459P of the Corporations Act 2001 (Cth) for the winding up in insolvency of Redpen Pty Ltd ("Redpen"). JPQS Pty Ltd relied on alleged failure of Redpen to comply with a statutory demand. 2 By interlocutory process filed on 30 October 2008, Gamcorp (Waterloo) Pty Ltd ("Gamcorp") seeks an order that it be substituted as the applicant for winding up. Gamcorp's application is brought under s 465B. Since Gamcorp is itself in liquidation, it is its liquidator who has caused it to make the substitution application. 3 Section 465B is in these terms: "(1) The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up. (2) The Court may only make an order if the Court thinks it appropriate to do so: (a) because the application is not being proceeded with diligently enough; or (b) for some other reason. (3) The substituted applicant may be, or the substituted applicants may be or include, the person who was the applicant, or any of the persons who were the applicants, before the substitution. (4) After an order is made, the application may proceed as if the substituted applicant or applicants had been the original applicant or applicants." 4 It may be said at the outset that the question raised by s 465B(2) must be determined favourably to Gamcorp. This is because JPQS Pty Ltd no longer presses its winding up application. 5 The other issue arising is whether Gamcorp is, in terms of s 465B(1) a person "who might otherwise have so applied for the company to be wound up". Gamcorp claims to be within that description because it is a creditor of Redpen. On the authorities, however, substitution will be refused if the claimed debt from which creditor status arises is bona fide disputed: see, for example: CVC Investments Pty Ltd v P&T Aviation Pty Ltd (1989) 18 NSWLR 295 and, more recently, Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527; (2004) 185 FLR 130. The rationale was stated by White J in the latter case at [66] – [68]: "Section 459P does not provide that any person, or any person claiming to be a creditor, may apply to the Court for a company to be wound up in insolvency. It provides that a creditor (including a secured, contingent or prospective creditor) may make that application. As a matter of power as distinct from discretion, the Court may order a company to be wound up in insolvency where the creditor's debt is disputed if the Court determines that the applicant has standing to bring the application. The Court has the power to determine the disputed question and if it determines that the applicant is a creditor it may make an order for winding up. ( Re QBS Pty Ltd [1967] Qd R 218 per Gibbs J at 225; Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455; Brinds Ltd v Offshore Oil NL (1985) 60 ALJR 185 at 188). As a matter of discretion, where the debt and hence the applicant's standing is disputed, the Court will usually not entertain the application for winding up." 6 White J held (at [81]) that the court could not make an order under s 465B(1) without first determining whether the applicant for substitution is a creditor. The question whether Gamcorp is a creditor of Redpen therefore lies at the heart of the present application. The question is, moreover, to be answered according to circumstances as they now exist, not by reference to some earlier state of affairs. 7 Gamcorp maintains that it is a creditor of Redpen and that there is no ground for finding that there is any bona fide dispute as to the existence of the debt owed to it by Redpen. Redpen, by contrast, says that there is no indebtedness or, at least, that there is, a bona fide dispute as to the existence of any indebtedness on its part to Gamcorp. 8 It will be convenient to begin by examining certain payments, receipts and flows of funds without attempting to characterise their nature, except where the nature is obvious from the circumstances. 9 In the first half of 2005, Redpen entered into a contract to buy land at Redcliffe in Queensland. The intention was to develop the land by constructing an apartment building. The vendor was Dukest Property and Investments Pty Ltd ("Dukest"). The agreed purchase price was $5.2 million. 10 Redpen encountered difficulties in raising finance for this purchase. It had no financial substance of its own. 11 Redpen ultimately entered into a loan agreement with Perpetual Nominees Ltd and MFS Pacific Finance Ltd for a total loan amount of $5.11 million. Certain natural persons associated with Redpen were to be guarantors. In addition, Gamcorp, which owned real estate at Waterloo, was to give security over that property to Redpen's lenders to secure the loan of $5.11 million to Redpen. 12 Gamcorp's Waterloo property was, however, already mortgaged to Strategic Finance. It was necessary for that mortgage to be discharged in order that Gamcorp might provide the security required by Perpetual and MFS. On settlement of Redpen's purchase from Dukest in July 2005 (and contemporaneous drawdown by Redpen of the loan from Perpetual and MFS), therefore, an amount of $536,917 required to satisfy Gamcorp's debt to Strategic was, by Redpen's direction, paid by Perpetual and MFS to Strategic. The rest of the advance was applied towards the balance of purchase moneys and transaction expenses. 13 Dukest was persuaded to complete the sale to Redpen in July 2005 on payment of less than the full balance of purchase moneys. Part was deferred. In December 2005, this balance was satisfied. It amounted to $632,730. That sum was paid to Dukest by Gamcorp out of moneys raised by Gamcorp through refinancing the Waterloo property. The lender to Gamcorp under the refinancing was Challenger. 14 Viewed as at the end of 2005, the position was that Redpen had, almost six months earlier, paid $536,917 to Strategic for the account and benefit of Gamcorp (thereby obtaining release of Gamcorp's Waterloo property from the Strategic mortgage); and that, upon the subsequent satisfaction of the outstanding balance of purchase moneys due by Redpen to Dukest, Gamcorp had, in December 2005, paid $637,730 to Dukest for the account and benefit of Redpen. 15 Let it be assumed for the moment that, as of July 2005, Gamcorp became indebted to Redpen in the sum of $536,917 and that, as of December 2005, Redpen became indebted to Gamcorp in the sum of $637,730. One would be inclined to think that, after the latter time, there was a net indebtedness of roughly $100,000 by Redpen to Gamcorp. 16 There are, however, arguments that the respective sums of $536,917 and $637,730 came, over time, to be augmented. A suggestion in relation to the $536,917 is that, by early 2006, it was in truth $657,666 after adding a sum for expenses (in essence, the proportion of Redpen's expenses of borrowing from Perpetual and MFS that $536,917 bore to the total loan), an interest element and certain further advances. A suggestion in relation to the $637,730 is that it grew to something of the order of $805,000 after adding similar items for expenses, fees and interest. 17 These suggestions – as well as the assumption regarding mutual indebtedness – must be assessed in light of the evidence. 18 The only witness who gave direct evidence of contemporary events is Mr Guy Castellino. His brother, Mr Joe Castellino, was, at relevant times, one of the two directors of Redpen. The other was Mrs Debbie Gammel, the wife of Mr Michael Gammel. There is some hearsay evidence of things allegedly said at the time by Mrs Gammel but, as I have said, Mr Guy Castellino is the only person who gave direct evidence about what happened when the various transactions were undertaken. 19 Mrs Gammel, as well as being a director of Redpen, was the sole director of Gamcorp. That company became subject to voluntary administration under Part 5.3A of the Corporations Act in November 2007 and is now in liquidation. 20 The four natural persons I have mentioned – Mr Guy Castellino, Mr Joe Castellino, Mr Michael Gammel and Mrs Debbie Gammel – were the guarantors of Redpen's indebtedness to Perpetual and MFS. 21 Although Mr Guy Castellino was not an officer of Redpen, he played an active part in its affairs. Likewise, although Mr Gammel was not an officer of Gamcorp, he was active in its affairs. It is reasonable to infer that Mr Guy Castellino had authority to speak for Redpen and Mr Gammel had authority to speak for Gamcorp. 22 The fact that Mr Guy Castellino was the only contemporary participant who gave evidence on the present application means that there is no contemporary account of relevant events from the Gamcorp side. One of its liquidators, Mr Cussen, did, however, give evidence about things said to him by Mrs Gammel in November 2007, more than two years after the transaction of July 2005. 23 Mrs Gammel is said to have stated to Mr Cussen after his appointment in late 2007 that Redpen had become indebted to Gamcorp to the extent of some $805,000 and that it was intended that this be paid out of the proceeds of sales of units at Redcliffe as and when sales were completed; also that Gamcorp's financial problems had arisen from the fact that Redpen's sales of units had been slow and that Redpen had therefore not been able to raise from that source the funds it needed to pay Gamcorp. On the basis of what Mrs Gammel had told him, Mr Cussen alleged that Gamcorp had lent the $805,000 to Redpen. 24 Mr Guy Castellino gave evidence that the original plan regarding the acquisition of the Redcliffe property was that Redpen would invest $2 million of its own funds, with $1 million of this being contributed by the Castellino brothers and $1 million being contributed by Mr and Mrs Gammel. The apparent suggestion is that this $2 million would be provided to Redpen in the form of equity of some kind. It was understood by Mr Guy Castellino that the Gammel contribution would come from Gamcorp's sale of the Waterloo property. Because that sale did not eventuate as expected, it became necessary for the whole of the purchase moneys for the Redcliffe property to be borrowed. 25 The element of the transaction under which Gamcorp made its Waterloo property available as security for Redpen's borrowing from Perpetual and MFS was explained by Mr Guy Castellino in his affidavit in this way: "A few days before settlement [of Redpen's purchase from Dukest], I received a telephone call from [Michael] Gammel. We had a conversation to the following effect: Gammel: 'I've just been contacted by Castle Partners who act as our finance brokers. I thought we could get another mortgage over my property but apparently, we can't. We are going to have to pay out my present mortgagee, Strategic Finance using some of the funds from Perpetual and MFS Pacific Finance. Are you OK with that?' Me: 'That's fine but as you know, we have to pay Dukest the option fee of $1,048,049.00. If we pay Strategic Finance we are going to be short of at least $500,050.00.' Gammel: 'Don't worry Gamcorp will owe Redpen the amount paid to Strategic Finance on Settlement. When we re-finance to get our construction funding, I will re-finance the Waterloo situation and I'll pay the balance to Dukest as a repayment to Redpen the amount paid to Strategic.' I agreed to Gammel's proposal on behalf of Redpen and Redpen subsequently paid out Gamcorp's mortgage with Strategic Finance of approximately $535,000.00. Redpen subsequently paid Dukest approximately half of the $1,048M and Gamcorp granted Dukest a mortgage over its property at Waterloo." 26 There can be no real doubt that $536,917 was applied by Redpen for Gamcorp's benefit in July 2005 to obtain release of Gamcorp's Waterloo property from the Strategic mortgage and that $637,730 was applied by Gamcorp for Redpen's benefit in December 2005 when Gamcorp paid that money to Dukest. But the characterisation of each application of funds raises questions. It is conceivable that each such application was properly regarded as a loan by the paying company to the benefited company. It is also conceivable that each sum was properly regarded as augmented by costs, expenses and interest – so that the indebtedness of Gamcorp to Redpen grew from $536,917 to $657,666 and the indebtedness of Redpen to Gamcorp grew from $637,730 to $805,000. In the end, however, everything depends on the contracts that came into operation between the companies. 27 Looking at the affidavit evidence, the court has before it Mr Cussen's statement that Mrs Gammel had said that Redpen was indebted to Gamcorp to the extent of $805,000 – or, more accurately, that Mrs Gammel had said that Gamcorp "lent the sum of $805,020.82 to" Redpen (Mrs Gammel's hearsay account is admissible under s 75 of the Evidence Act 1995). The basis for concluding that this sum of $805,020.82 was paid wholly by Gamcorp is not stated in Mr Cussen's affidavit or otherwise discernible from the evidence. In addition, the contention that the payment represented a loan derives no support from Mr Cussen's affidavit or anything reportedly said to him by Mrs Gammel, although it must be accepted that there is evidence that cheques totalling $805,020.82 changed hands between solicitors when the balance owing by Redpen to Dukest was satisfied in December 2005. 28 Except for the hearsay account of Mrs Gammel – which is by way of bald assertion of conclusion rather than explanation – there is no basis in the affidavit evidence for any finding of contractual liability of Redpen to pay or repay $805,020.82 to Gamcorp. 29 The only reference to relevant contractual conduct in the affidavits appears in the section of Mr Guy Castellino's affidavit quoted at paragraph [25] above. If that evidence is accepted as establishing a conversation, in the terms stated, between authorised representatives of Gamcorp and Redpen, it is clear that Gamcorp referred only to "the amount paid to Strategic", that is, the $536,917. The "amount paid to Strategic" did not include any of the elements said to have caused the $536,917 to grow to $657,666.68. 30 On this basis, the agreement to which Mr Guy Castellino deposed (see paragraph [25] above) did not extend to anything beyond $536,917 that Redpen paid out of the proceeds of the Perpetual/MFS loan to obtain release of Gamcorp's Waterloo property from the Strategic mortgage. According to the terms stated in Mr Guy Castellino's affidavit, Gamcorp was to "repay" to Redpen the amount made available to it out of the proceeds of Redpen's Perpetual/MFS loan by itself paying the balance that Redpen was required to pay to Dukest by way of deferred purchase price under the sale contract. On that basis, the payment by Gamcorp to Dukest, for the benefit of Redpen, of the balance of purchase moneys for the Redcliffe property was to operate as satisfaction of Gamcorp's liability to Redpen for the moneys earlier provided by Redpen to obtain release of Gamcorp's Waterloo property from the Strategic mortgage. 31 In the events that happened, the sum paid by Gamcorp to Dukest in December 2005, in order to discharge the balance of purchase moneys owing by Redpen to Dukest, was the $637,730 already mentioned. That, of course, was roughly $100,000 more than the $536,917 provided by Redpen in July 2005 to obtain for Gamcorp the release of the Waterloo property from the Strategic mortgage. According to the agreement as described by Mr Guy Castellino, the payment of $632,730 by Gamcorp to Dukest for the benefit of Redpen effected "repayment" by Gamcorp of the amount Redpen had provided for Gamcorp's benefit to obtain release of Gamcorp's Waterloo property by Strategic. 32 On this basis, there was no indebtedness of Gamcorp to Redpen and no indebtedness of Redpen to Gamcorp after the deferred balance of purchase price had been received by Dukest in December 2005. The $632,730 that Gamcorp at that point paid to Dukest was notionally paid by Gamcorp to Redpen to "repay" – obviously with an in-built element for interest, reward or other additional benefit – the $536,917 that had been owing by Gamcorp to Redpen since July 2005. 33 Mr Guy Castellino, having given in his affidavit the account stated at paragraph [25] above, went on in the affidavit to propound the thesis that Redpen paid $657,666.68 for the benefit of Gamcorp. That, even if true, would be irrelevant to the operation of the agreement created by the conversation. According to that agreement, Gamcorp was to owe Redpen "the amount paid to Strategic Finance on settlement", that is, $536,917.02. 34 Mr Guy Castellino's affidavit next refers to Gamcorp paying $632,730.29 to Dukest. He says that this payment represented part payment of Gamcorp's debt of $657,666.68, so that Gamcorp remained indebted to Redpen to the extent of a residual $24,936.39. This, of course, is also inconsistent with the agreement to which Mr Guy Castellino deposes. According to that agreement, payment by Gamcorp to Dukest of the balance of $632,730.29 was to clear Gamcorp's indebtedness for the $536,917.02 paid by Redpen to Strategic and agreed to be owing by Gamcorp to Redpen. 35 Having regard to the agreement as described by Mr Guy Castellino in his affidavit, therefore, there was no indebtedness of Gamcorp to Redpen on account of Redpen's July 2005 payment to Strategic for the benefit of Gamcorp once Gamcorp had paid to Dukest the balance of $632,730.29 payable by Redpen to Dukest. 36 Mr Guy Castellino was cross-examined on the passage in his affidavit recording the alleged agreement. It is true that, in cross-examination, he at first gave a somewhat different version – apparently to the effect that Gamcorp would in due course pay to Dukest an amount equal to that paid by Redpen to Strategic, that is, $536,917. Later, however, he clarified and corrected this by saying that the agreement was that when "he" (that is, Mr Gammel, meaning Gamcorp) paid Dukest, "that was it, that was done and dusted" – making it clear that he was there referring not to $536,917 but to "600 and something", which he then more precisely identified as "the 632". This is consistent with the version given in his affidavit as set out at paragraph [25] above. 37 In the light of this and in the absence of countervailing evidence, I accept that an agreement was made between the two companies as stated in the extract at paragraph [25] above and that, when Gamcorp paid $632,730 to Dukest in December 2005, the indebtedness of Gamcorp to Redpen for the $536,917 paid by Redpen to Strategic was satisfied. There was no loan by Gamcorp to Redpen. 38 At large, therefore, are the allegations about liabilities for fees, expenses, interest and other accretions. There is nothing in the evidence to ground any finding about contractual promises or other bases of indebtedness of either company to the other in respect of these. 39 I should add that if, contrary to my finding in that respect, either Mr Guy Castellino was not entitled to speak for Redpen or Mr Gammel was not entitled to speak for Gamcorp, the finding that there was a contract between the two companies in terms of the conversation at paragraph [25] above will be insupportable. In that event, there will be no basis on which it is open to the court to characterise any of the payments undoubtedly made as giving rise to indebtedness. 40 Turning to the documentary evidence, it is pertinent to note that what purports to be a balance sheet of Gamcorp at 30 June 2006 (some six months after the last of the events examined above), records among current assets: "Loans – Redpen Developments Pty Ltd $700,487.10". 41 A purported balance sheet of Redpen as at the same date records among current liabilities: "Loans – The Gamcorp Property Trust $700,487". 42 There is no explanation in either balance sheet or elsewhere in the evidence of the basis on which Redpen may have been indebted to Gamcorp to the extent of $700,487 in June 2006. 43 It is, in any event, not necessary to pursue the matter. A purported balance sheet of Redpen (but not of Gamcorp) as at 30 June 2007 is also in evidence. It contains no record of any liability of Redpen to Gamcorp, whether $700,487 or any other amount. Since the question before me is whether Redpen is now indebted to Gamcorp, the only conclusion the evidence indicates with respect to any debt of $700,487 apparently owed by Redpen to Gamcorp in June 2006 is that the debt no longer exists. As I said at the start, the relevant question concerns the position today. 44 In summary, the evidence placed before the court does not provide a basis for a finding that any money is at present owing by Redpen to Gamcorp. The agreement to which Mr Guy Castellino deposed showed that there was indebtedness of Gamcorp to Redpen as from July 2005 and that that was, by the companies' contract, satisfied and extinguished in December 2005. Alternatively, if it is not accepted that there was any such contract, there is no way of determining with any reliability at all the nature of the several payments and whether they gave rise to indebtedness. Finally, while contemporary accounting records of both companies suggest indebtedness of Redpen to Gamcorp to the extent of $700,487 at 30 June 2006, contemporary accounting records of Redpen show no indebtedness to Gamcorp of that or any other amount at 30 June 2007. 45 Counsel for Redpen submitted that the two companies were, in reality, joint venturers under an arrangement that was a partnership within the meaning of the Partnership Act 1898. It was further submitted that the partners made the various payments for the purposes of and in pursuance of the partnership business and that neither could be considered indebted to the other except to the extent that a full accounting between partners might ultimately reveal. Support from the existence of a partnership was said to come from the existence of an unexecuted document described as a joint venture agreement. 46 I need not dwell on this matter. The existence of the unexecuted agreement, coupled with the absence of evidence that the companies in fact conducted themselves in accordance with its terms, provides no basis for a finding that a partnership relationship subsisted between them. But if there were in truth a partnership, the submission that the true state of indebtedness (if any) could only be disclosed by a full accounting between the partners would have to be accepted, with the result that Gamcorp's claim to be a creditor would still not be made out on the evidence now before the court. 47 In the result, therefore, Gamcorp has not established that it is a creditor of Redpen. It has therefore not shown itself qualified to have an order that it be substituted as applicant for an order for the winding up of Redpen in insolvency. Gamcorp's interlocutory process filed on 30 October 2008 is accordingly dismissed with costs. ********** 24/07/2009 - Typographical error - Paragraph(s) 45 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.