Supreme Court New South Wales Medium Neutral Citation: Earthwave Corporation Pty Ltd v Starcom Group Pty Ltd [2011] NSWSC 694 Decision date: 24 June 2011 Before: White J Decision: Refer to para [29] of judgment. Catchwords: CORPORATIONS - winding up in insolvency - application to be substituted as plaintiff in application that defendant be wound in insolvency under s 465B, Corporations Act 2001 (Cth) - whether bona fide dispute about debt claimed by applicant - only evidence as to dispute about debt statement of claim annexed to affidavit - statement of claim not evidence of the facts asserted - defendant failed to show clear and persuasive grounds, or substantial grounds, for the dispute about debt claimed - applicant substituted as plaintiff Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: South East Water Limited v Kitoria Pty Limited (1996) 14 ACLC 1328 Beverage Holdings Pty Ltd v Greater Pacific Investments Pty Ltd (1990) 3 ACSR 743 Tokich Holdings Pty Limited v Sheraton Constructions (NSW) Pty Limited (in liq) [2004] NSWSC 527; (2004) 22 ACLC 955 Australian Securities and Investments Commission v Lanepoint Enterprises Pty Limited (Receivers and Managers Appointed) [2011] HCA 18 Bhagat v Global Custodians Limited [2002] FCA 223 ICM Agriculture Pty Limited v Young [2009] FCA 109 Williamson v Scarano [2010] NSWSC 975 Category: Interlocutory applications Parties: Earthwave Corporation Pty Ltd (Applicant) Starcom Group Pty Ltd (Defendant/Respondent) Representation: J T Johnson (Applicant) D Parish (Defendant/Respondent) Sally Nash & Co (Applicant) Tabitha Ponnambalam (Defendant/Respondent) File Number(s): 2011/100340 Judgment 1HIS HONOUR : The applicant, Earthwave Corporation Pty Limited ("Earthwave"), applies under s 465B of the Corporations Act 2001 (Cth) to be substituted as plaintiff in an application that the defendant be wound up in insolvency. An originating process was filed by Avnet Pacific Pty Ltd against the defendant on 29 March 2011. That application was made under s 459A of the Corporations Act and seeks an order for the winding-up of the defendant in insolvency. 2The plaintiff in the originating process relied on the failure of the defendant to comply with a statutory demand. That demand was served on 4 February 2011 and claimed a debt owed by the defendant to the plaintiff in an amount of $10,685.02. The statutory demand was not complied with within the period of 21 days and thus there arose a presumption of insolvency under s 459C. That presumption applies to the extent provided for in s 459C(1). Section 459C(1) provides that the section has effect for the purposes of, inter alia , s 459P, or an application for leave to make an application under s 459P. 3After the filing of the originating process the defendant paid the debt demanded by the plaintiff in the statutory demand. On the first return date of the originating process the plaintiff was excused from further attendance and directions were given for the filing of any interlocutory process for an applicant to be substituted as the applicant for winding-up, pursuant to s 465B. Section 465B provides: " Substitution of applicants (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. " 4Earthwave submits it is entitled to be substituted because it is a creditor who could have applied for the winding-up of the defendant when the plaintiff filed its originating process. There does not seem to be any dispute that Earthwave has provided services to or at the direction of, or for the benefit of, the defendant. Earthwave, through its director, Mr Minassian, says it conducted a project for the defendant, being the provision of managed security and telephone support. This appears to be support for a computer network system in respect of which the defendant supplied services to an entity called Macquarie Generation. 5Earthwave says its debt arises from two tax invoices for January and February 2011, both in the sum of $37,441.10. The invoices are for work described as provision of managed security services as per a " Managed Services Initiation SOW for Security Network Refresh Project. " 6Although the invoices state that the due date for payment is 31 January 2011 and 3 March 2011 for the January and February invoices respectively, Mr Minassian deposes that the defendant's obligation was to pay those invoices within seven days of the defendant's being paid for associated invoices by its customer. Earthwave served a notice to admit facts. The defendant admits that the applicant performed work requested on its behalf, but denied it had received payment in respect of the applicant's invoices. 7There is very little evidence on this application in relation to that question. The defendant did not adduce evidence that its invoices to its customer for the same work that it subcontracted to Earthwave had not been paid. Mr Minassian asserted that he had received emails from the defendant's employees confirming payment to the defendant of the Earthwave invoices, but the emails he annexed to his affidavit did not substantiate that assertion. 8Mr Minassian also gave evidence that he spoke to the defendant's " accounts staff " and was told that the defendant had billed its customer for the two outstanding Earthwave invoices and that the defendant had been paid. He did not say to whom he spoke or when the conversation occurred. Nor did his evidence of the conversation specifically identify as the two outstanding invoices the invoices upon which Earthwave now claims to be a creditor. 9Slight though that evidence is, I think in the absence of denial by the defendant and in the absence of any evidence from the defendant on the question, it is proper to conclude on this application that the defendant both owes the two amounts claimed in the invoices and that the debts had become due and payable. Subject to a matter with which I will deal later in these reasons, that establishes that Earthwave has standing to be substituted as an applicant for winding-up. 10Even if the defendant has not been paid by its customer for the work in respect of which Earthwave has delivered the invoices, Earthwave would still be a contingent or prospective creditor. In that capacity it would have had standing to apply for the winding-up of the defendant if it had first obtained leave pursuant to s 459P(2). The court could not give leave unless it were satisfied there is a prima facie case that the defendant is insolvent. But for the purposes of an application under s 459P, such a prima facie case would be established by the presumption of insolvency under s 459C, unless that presumption were rebutted. 11Notwithstanding that s 459C(1) does not refer to an application under s 465B, I accept the submission for Earthwave that as s 459C has effect for the purposes of an application under s 459P, an applicant for substitution can rely on the presumption where the question is whether the applicant is a person who might otherwise have so applied under s 459P for the company to be wound up. Discretionary considerations that would arise under s 459P(2) are of the same kind as the discretionary considerations that now arise under s 465B. Accordingly, even if Earthwave's debt is not presently due and payable, I accept it has standing to apply to be substituted pursuant to s 465B. 12I should add that the evidence on this application does not rebut the presumption of insolvency arising under s 459C. It amounts to little more than evidence that the debt the subject of the statutory demand has been paid. There is no evidence that costs that would be payable by the defendant to the plaintiff have been paid. 13The principal ground of opposition to the application is that the defendant says it has a claim for damages against Earthwave for breach of a subcontract agreement between it and Earthwave and has a claim for equitable compensation for alleged breach by Earthwave of fiduciary duties said to be owed to the defendant. 14Mr Rajan, the director of the defendant, deposes that the defendant has contracted with Earthwave to provide IT services to the defendant's customer, Macquarie Generation. He deposes that he believes and alleges that Earthwave " wrongfully appropriated the Defendant's contract with it's [sic] customer Macquarie Generation causing the Defendant significant losses to the value of many hundreds of thousands of dollars. " That assertion was read without objection, but is a conclusion. Mr Rajan did not depose to any facts said to give rise to the claim against Earthwave for damages or equitable compensation. He annexed to his affidavit a statement of claim filed in this court on or about 14 June 2011. 15In the statement of claim the defendant alleges that it entered into an agreement with Earthwave for Earthwave to provide services that the defendant was obliged to provide under its agreement with Macquarie Generation ("Mac Gen"). The statement of claim alleges that between December 2010 and March 2011 agents, servants or officers of Earthwave informed, either expressly or by implication, agents, servants or officers of Mac Gen that the defendant was not meeting its payment obligations to Earthwave under the subcontract and that the defendant added no value to the Mac Gen contract as Earthwave undertook all the IT services under the Mac Gen contract. 16It is alleged that Mac Gen terminated the Mac Gen contract because it believed Earthwave could complete the project without the defendant, and that the defendant added no value to the project. It is alleged that Earthwave breached various conditions of the subcontract by discrediting the defendant to Mac Gen and is liable for damages as a result. 17It is said that the subcontract imposed fiduciary obligations on Earthwave which were breached. It is also alleged that Earthwave intentionally interfered with the business relationship between the defendant and Mac Gen, although it is not entirely clear whether this is a free-standing allegation of a claim in tort for damages for inducing breach of contract. 18The statement of claim is verified by Mr Rajan, who deposed, " I believe that the allegations of fact in the statement of claim are true. " There is no other evidence on this application of the facts alleged in the statement of claim. 19Counsel for the defendant submitted that the defendant had a bona fide claim against the plaintiff and that this was a sufficient reason for refusing the application for substitution. 20Counsel submitted that by parity with the reasoning of Ryan J in South East Water Limited v Kitoria Pty Limited (1996) 14 ACLC 1328 at 1334, Earthwave should not be substituted as a petitioning creditor unless and until the existence of the debt which it claims and the counterclaim (in fact, the claim made by statement of claim that the defendant has against Earthwave) is determined in a court of competent jurisdiction. 21I proceed on the basis that if there is a bona fide dispute about the debt claimed by Earthwave, it would be inappropriate to substitute Earthwave as the applicant for winding up. (See Beverage Holdings Pty Ltd v Greater Pacific Investments Pty Ltd (1990) 3 ACSR 743 at 749; and Tokich Holdings Pty Limited v Sheraton Constructions (NSW) Pty Limited (in liq) [2004] NSWSC 527; (2004) 22 ACLC 955 at [60]-[82]. These authorities may require reconsideration in the light of the High Court's judgment in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Limited (Receivers and Managers Appointed) [2011] HCA 18 at [16], but no argument was advanced in relation to that on the hearing of this application and that question can await another day.) 22In Beverage Holdings Pty Limited v Greater Pacific Investments Pty Limited , the Full Court of the Supreme Court of Western Australia said that to show that there is a bona fide dispute about the debt claimed by the applicant for substitution, the onus is on the company to show there are clear and persuasive grounds, or substantial grounds, for the dispute (at 747 and 749). 23Here, the only support for the claim is the annexing of the statement of claim referred to earlier in these reasons. 24The statement of claim is not itself evidence of the facts asserted. Counsel for Earthwave referred to the decision of the Full Court of the Federal Court in Bhagat v Global Custodians Limited [2002] FCA 223 at [53] where it was said: " [53] Counsel for Global submitted, quite correctly, that the mere production of a statement of claim in an action that pleads facts which, if proved, would support a claim, has long been held to be insufficient: ' [a] statement of claim is no evidence of anything ' : In re Foster, Ex parte Basan (1885) 2 Morr 29 at 33 per Brett MR: see also Re Cox (supra) at 101 and Re Verma; Ex parte Deputy Commissioner of Taxation (1985) 4 FCR 181 at 187. It is not even sufficient for a debtor to file an affidavit which merely propounds a claim and states how the debtor proposes to establish it: Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 at 350. There is an obligation on the debtor to adduce evidence that provides reasonable grounds for the institution of proceedings Vogwell v Vogwell (supra) at 85 per Lathan CJ. The task that Mr Bhagat faced was an onerous task. He has raised serious allegations but has not placed before the Court the material (if indeed such material exists) that would justify a Bankruptcy Court from interfering with the judgment that founded the Bankruptcy Notice. " 25Counsel for the defendant relied on the affidavit verifying the statement of claim. However, the affidavit verifying the statement of claim is not capable, by itself, of giving rise to a serious question to be tried for the reasons given by Lindgren J in ICM Agriculture Pty Limited v Young [2009] FCA 109 at [76]. His Honour said: " [76] If an attempt had been made to read the affidavit as evidence of any facts under the heading 'Claim for relief' , there would have been an objection and the affidavit would have been rejected. First, the affidavit was nothing more than a statement of Mr Young's ' belief ' ; his state of belief was not evidence of any of the primary facts, and was not able to satisfy the test discussed in Glew (set out at [67] above and [79] below). Second, and more importantly, if Mr Young had sworn that the allegations of fact in the statement of claim were true, his affidavit would still have been inadmissible because of the nature of the material in the statement of claim. It was an amalgam of conclusions, rather than a statement of facts. " (See also Williamson v Scarano [2010] NSWSC 975 at [13]-[16].) 26The affidavit of Mr Rajan, that he " believes " that the allegations of fact in the statement of claim are true, is not evidence that those allegations are true. Nor would an affidavit that merely deposed that the allegations of fact in the statement of claim were true have been admissible to establish the truth of those matters, as the allegations in the statement of claim are an amalgam of conclusion and fact; and mostly conclusion. 27In the absence of evidence to support the allegations made in the statement of claim, it is unnecessary to consider whether the claim propounded by the defendant against Earthwave would be capable of giving rise to an equitable set-off to impeach Earthwave's claim to the debt. In my view, in the absence of such evidence, the defendant has not established a bona fide dispute as to the debt claimed by Earthwave. 28I do not consider that the mere fact that the defendant has brought such a claim is a sufficient reason to exercise the discretion under s 465B adversely to the applicant. 29For these reasons, I will make orders substantially in accordance with the interlocutory process filed by Earthwave on 11 May 2011, subject to any submissions counsel may have as to the precise form of the orders sought in that interlocutory process. I will hear the parties on 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. Decision last updated: 07 July 2011