New South Wales Supreme Court CITATION : Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161 HEARING DATE(S) : 10/03/09 JUDGMENT DATE : 18 March 2009 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Leave under s 459S refused. CATCHWORDS : CORPORATIONS - winding up - alleged insolvency through non-compliance with statutory demand - defendant intends to prove solvency - application for leave to defend on grounds that could have been asserted on application to have statutory demand set aside - relevant considerations examined LEGISLATION CITED : Corporations Act 2001 (Cth), ss 459C(2)(a), 459G, 459S CATEGORY : Principal judgment Chief Commissioner of Stamp Duties v Paliflex [1999] NSWSC 15; (1999) 149 FLR 179 Deputy Commissioner of Taxation v Neo Rock Pty Ltd [2009] FCA 129 CASES CITED : Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd [2008] FCA 1777 Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216 Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 PARTIES : Hanson Construction Materials Pty Ltd - Plaintiff FEC Civil Pty Ltd - Defendant FILE NUMBER(S) : SC 5765/08 COUNSEL : Ms P A Conway - Plaintiff Mr D A Hassall - Defendant SOLICITORS : Oliveri Lawyers - Plaintiff S & T Lawyers - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J WEDNESDAY 18 MARCH 2009 5765/08 HANSON CONSTRUCTION MATERIALS PTY LTD v FEC CIVIL PTY LTD JUDGMENT 1 These are winding up proceedings in which the plaintiff relies on the insolvency ground and has the benefit of a presumption of insolvency under s 459C(2)(a) of the Corporations Act 2001 (Cth) because of the defendant's non-compliance with a statutory demand dated 7 October 2008 which was served on or soon after that day. 2 In opposing the winding up application, the defendant wishes to rely on grounds which it acknowledges to be unavailable to it because of s 459S(1) of the Corporations Act unless it obtains the court's leave under that section. Section 459S is as follows: "(1) 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). (2) 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." 3 The Court of Appeal said in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 at 676 that an application for leave under s 459S is ordinarily expected to be determined before the hearing of the winding up application. Spigelman CJ (with whom Handley JA and Giles JA agreed) added: "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." 4 It was for this reason that I directed that the defendant's s 459S application be separately argued when the matter came before me on 10 March 2009. 5 On that occasion, Ms P A Conway appeared for the plaintiff and Mr D A Hassall appeared for the defendant. Ms Conway opposed the grant of leave under s 459S sought by the defendant. 6 The principal ground on which the defendant proposes to defend the winding up application is that it is solvent. Additional grounds are formulated as follows: "2. The Defendant Company has an Offsetting Claim against the Plaintiff in the amount of some $320,000 being a genuine claim against the Plaintiff by way of a counterclaim, set-off or cross demand, arising from the Plaintiff's supply to the Defendant company of sub-standard concrete to at least four building project sites; and the Defendant Company seeks the leave of this Honourable Court, under Section 459S of the Corporations Act 2001 (Commonwealth), to oppose the Plaintiff's application herein on the further ground of that Offsetting Claim, as that ground is a ground material to proving that the company is solvent, inasmuch as in view of that offsetting claim, the debt claimed by the Plaintiff offset by a countervailing claim by the Defendant for an amount not only equal to, but well exceeding, the amount claimed and relied upon the Plaintiff. 3. The Defendant Company is moving the District Court of New South Wales for leave to file, out of time, an application to set aside the default judgment obtained by the Plaintiff upon which it relies in respect of the debt claimed and the Statutory Demand and upon which it relies herein; and the Defendant Company likewise seeks the leave of the Court herein; 4. The Plaintiff's said claim and Statutory Demand did not come to the attention of the Defendant Company until such time as it was too late for the Defendant Company to have an opportunity to be heard to oppose the said claim in the District Court and to move to set aside the Statutory Demand; and that, in view of the said Offsetting Claim referred to in Ground 2 (above) and the other matters and circumstances deposed to in the Affidavit of Francesco Barbaro, sole Director of the Defendant, (which Affidavit accompanies this Notice), the said Default Judgment ought to be set aside and judgment entered for the Defendant Company upon its said Counterclaim against the Plaintiff for an amount equal to the difference between the Plaintiff's claim and the said offsetting claim; and that the Defendant Company has good grounds and reasonable prospects of obtaining such leave and judgment from the District Court; and the Defendant Company likewise seeks the leave of this Honourable Court." 7 An application for leave under s 459S relates to these additional grounds. It must be approached by reference to three considerations identified by Austin J in Chief Commissioner of Stamp Duties v Paliflex [1999] NSWSC 15; (1999) 149 FLR 179 at [49]: "In my opinion the exercise of the discretion to grant leave under s459S(1) involves three considerations, namely: (i) a preliminary consideration of the defendant's basis for disputing the debt which was the subject of the demand; (ii) an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party's conduct at that time; and (iii) an investigation of whether the dispute about the debt is material to proving that the company is solvent." 8 It is convenient, in this case, to begin with the second matter (item (ii)) referred to by Austin J. First, however, it is necessary to outline the factual background. 9 The plaintiff is a supplier of concrete. The defendant, a contractor, purchased from the plaintiff concrete for use in projects on which it was engaged. 10 The debt on which the statutory demand is based is a judgment debt in the sum of $70,982.90. On 29 September 2008, the plaintiff recovered judgment for $68,786 plus costs of $2,196.90 (a total of $70,982.90) in the District Court against the defendant and Mr Barbaro, its sole director. The debt was for goods (concrete) supplied. The judgment was a default judgment. 11 A statutory demand based on the judgment debt was later served, as noted above. Mr Barbaro has deposed in his affidavit of 9 February 2009 that the statutory demand did not come to his knowledge until late November 2008. The statutory demand was served at the defendant's registered office. The registered office is at Mr Barbaro's home. He says in his affidavit that in the period July to December 2008 he was "required to attend hospital on several occasions" for treatment and, during the periods of treatment, "was not well enough to be fully involved with company matters". He further says that his wife told him in November 2008 of a number of documents that had been delivered to the premises and put by her in a drawer. 12 Mr Barbaro further gave evidence that, in about early August 2008, he engaged Projectum Pty Ltd to assist him in the management of the defendant's business. His adult children also helped in the business. There is in evidence email correspondence between Mr Boyd of Projectum and Mr Nolan, a licensed commercial agent retained by the plaintiff. Mr Boyd emailed Mr Nolan on 11 August 2008 asking whether the amount owed by the defendant to the plaintiff was $63,764.48. He also said that there were "a couple of disputes that exist in relation to the quality and performance of concrete supplied to the company" (that is, the defendant), adding: "However, as I also stated to you, this in itself is not a reason to withhold payment of moneys due." 13 The email concluded: "It is FEC Civil's intention to offer a plan for settlement of the account shortly, when we are in a position to do so. At this stage I expect this to be in the next week." 14 Mr Nolan replied by email to Mr Boyd on 19 August 2008 confirming the amount of $63,764.48 and adding: "Keep in mind the Statement of Claim Filed under plaint 3752/08 is for a total $69,861.62." 15 At the same time, Mr Nolan sent to Mr Boyd a copy of an internal memorandum of the plaintiff referring to a number of matters concerning cracks in a slab laid by the defendant using concrete supplied by the plaintiff. The memorandum suggested that actions of the defendant and its subcontractor caused the cracking. 16 Mr Nolan deposes that he received a telephone call on 3 November 2008 from Mr Fitzgerald, a solicitor, who said that Mr Barbaro had left the statutory demand with him "a few weeks ago". Mr Fitzgerald also said that Mr Barbaro had "been overseas". Mr Fitzgerald asked for "an extension of time". Mr Nolan emailed Mr Fitzgerald on 7 November 2008 saying, "we will hold from proceeding to creditors petition for 7 days". The email concluded: "We are instructed however if no suitable resolution is reached by close of business 14.11.08 we are to proceed in this regard." 17 The defendant has not sought to adduce medical evidence about Mr Barbaro's condition at relevant times. There is no basis on which it can be found that he was unable, on any long-term or continuing basis, to devote himself to the affairs of the defendant. But even if he was, that of itself cannot be enough to warrant any conclusion that the defendant was precluded from dealing appropriately with the statutory demand. Persons who choose to adopt the form of corporate structure now available under which a single person can be sole director, sole secretary and sole shareholder of a company do not thereby put themselves into some privileged position of isolation. If for some reason such a person is unable to devote sufficient time of their own to the company's affairs – or apprehends that such a position may arise – the person is duty bound to put in place delegations and contingency measures to ensure that the rest of the world can find, communicate with and deal with the company and the company itself can fulfil its responsibilities. 18 In the present case, Mr Barbaro put such measures in place by calling on his adult children for help and having the defendant retain the services of Projectum. It is clear that Mr Boyd of Projectum was active in the affairs of the defendant from early August 2008, some two months before the statutory demand was served. Mr Boyd communicated thereafter with the plaintiff's representative, Mr Nolan, about the defendant's indebtedness to the plaintiff. At a later stage, Mr Fitzgerald, a solicitor apparently retained by the defendant and given the statutory demand, was in communication with Mr Nolan. 19 Returning to item (ii) in the passage in the judgment of Austin J in Chief Commissioner of Stamp Duties v Paliflex (see paragraph [7] above), I am bound to say that there is no convincing evidence of any good reason why the defendant did not resort to a s 459G application to ventilate any allegation it could properly make of genuine dispute as to the existence of the debt the subject of the statutory demand or of offsetting claim for faulty concrete supplied. Projectum was acting for the defendant at the relevant time in relation to its commercial relationship with the plaintiff. Furthermore, it appears that Mr Fitzgerald, a solicitor retained by the defendant, may well have received the statutory demand from Mr Barbaro some time around mid-October 2008. 20 In short, the defendant could have taken the ordinary course of making an application under s 459G had it had a real desire to rely on the offsetting claim and genuine dispute grounds in respect of which it now seeks leave under s 459S. It simply failed to do so. That is a powerful consideration against the grant of leave. 21 I nevertheless proceed to item (i) in Austin J's formulation at paragraph [7] above and a preliminary consideration of the defendant's grounds for disputing the debt the subject of the statutory demand and maintaining an offsetting claim. 22 The basis for the contention that there is a genuine dispute about the existence of the debt is scarcely articulated. The debt is a judgment debt. The judgment was a default judgment. There is (or is proposed) an application to have the judgment set aside. But that of itself does not establish the existence of a genuine dispute about the existence of the debt. In addition, the exchange of emails between Mr Nolan and Mr Boyd (see paragraphs [12] to [14] and [16] above) is consistent with the entire absence of any such dispute. 23 As to the foreshadowed offsetting claim, the position is essentially the same. A draft District Court pleading does no more than assert breach of a contractual term (presumably implied) as to the quality of concrete to be supplied by the plaintiff and a right to damages "in the sum of at least $320,000.00". The draft pleading does nothing to show the basis for the claim or the quantification. 24 In summary, the matters the defendant would have put, upon a s 459G application, do not indicate that there would have been a strong case for setting aside the statutory demand. 25 I proceed to item (iii) in Austin J's formulation and the question posed by s 459S(2), that is, whether the ground on which the defendant seeks to rely is material to proving that the defendant is solvent. The approach to that question was authoritatively prescribed by the Court of Appeal in Switz Ltd v Glowbind Pty Ltd (above). 26 The Court of Appeal noted that a decision whether a particular ground of defence is "material" to proving that the defendant company is solvent can only be made in the light of the contentions the company proposes to make in support of the proposition that it is solvent. The principal judgment (that of Spigelman CJ) continued (at [54]): "If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it "proving" its solvency, cannot be satisfied." 27 In Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962; (2007) 25 ACLC 1216 at [64] White J referred to the significance of the words "material to proving": "The question is not whether the debt demanded by Radiancy (Sales) is determinative of Bimat's solvency. The question is whether it is material to proving the company is solvent. If the debt is owed, the company is undoubtedly insolvent. If it is not owed, the company may be solvent if Mr Colosimo's evidence as to the payment of creditors is accepted. Accordingly, s 459S(2) is satisfied in relation to the grounds that Radiancy (Sales) is not a creditor, or that the alleged debt is genuinely disputed." 28 The observation that "material to proving" is not the same as "determinative of" may not sit happily with approaches under which the relevant test has been taken to be whether the ground of defence "represents the difference between solvency and insolvency" (HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169 at [53] or "is pivotal to the question of solvency" (Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd [2008] FCA 1777 at [19]; Deputy Commissioner of Taxation v Neo Rock Pty Ltd [2009] FCA 129 at [9]). For reasons to be mentioned presently, I do not need to reach a conclusion on any difference of emphasis or approach that may emerge from the cases, although my inclination is to think that "material to proving" is not the same as "determinative of" and that a capacity to have some influence or effect is, in general, all that is necessary to make something "material to proving". 29 The reason why I do not need to come to a concluded view about the meaning of "material to proving" is that this case is precisely of the kind referred to at paragraph [54] of Spigelman CJ's judgment in Switz Pty Ltd v Glowbind Pty Ltd (see paragraph [26] above). 30 Counsel for the defendant clearly and candidly stated that, on the defendant's case, it is solvent even if the supposedly disputed debt of $70,982.90 is taken into account as a liability immediately due and payable and the alleged offsetting claim is left out of account in assessing assets. It was thus made clear that proof that the debt is disputed or that the offsetting claim exists will, on the defendant's own case, have no effect one way or the other on the decision whether the defendant is solvent. 31 The defendant has thus failed to show any basis on which the court could, consistently with s 459S(2), grant the leave now sought. 32 The defendant's application for leave under s 459S is dismissed with costs; and the defendant's grounds of defence are confined to the ground that it is solvent. ********** 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.