Supreme Court New South Wales Medium Neutral Citation: In the matter of Smithfield Cellarbrations Pty Limited [2012] NSWSC 1085 Hearing dates: 13 July 2012 Decision date: 13 July 2012 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Parties to bring in short minutes to give effect to judgment. Catchwords: CORPORATIONS - Winding up - Termination - Application to terminate winding up - Whether it is established that the order is appropriate even where the liquidator consents to that order - Attitude and interests of creditors, whether debts of the company have been discharged, company's current trading position, explanation for any non-compliance by directors with statutory duties and circumstances leading to winding up. PRACTICE AND PROCEDURE - Judgment obtained through fundamental irregularity - Right of a party to proceedings before the court to be heard - Whether winding up order should be set aside. Legislation Cited: - Corporations Act 2001 (Cth) ss 286, 482, 459S, 530A-530B, 530B, 588G - Uniform Civil Procedure Rules 2005 (NSW) rr 36.15, 36.16 Cases Cited: - Anderson v Palmer [2002] NSWSC 192 - Cameron v Cole (1944) 68 CLR 571 - Double Bay Newspapers Pty Ltd v The Fitness Lounge Pty Ltd [2006] NSWSC 226; (2006) 57 ACSR 131 - Labraga v Pomfret [2005] NSWSC 654 - Midland Imports Pty Ltd v Asia Pacific International Pty Ltd [1999] NSWSC 12 - Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 - Re Yelin Group Pty Ltd [2012] NSWSC 74 - Re Warbler Pty Ltd (1982) 6 ACLR 526 - Workers' Compensation Nominal Insurer v Teca Pty Ltd [2011] NSWSC 686 Texts Cited: - Ritchie's Uniform Civil Procedure NSW Category: Interlocutory applications Parties: ATM Solutions Australasia Pty Limited (Plaintiff) Smithfield Cellarbrations Pty Limited (in liquidation (Defendant) Debbie Mudaliar (Applicant) Representation: Counsel: J.T. Johnson (Applicant) A. Karras (Liquidator) Solicitors: Yates Beaggi Lawyers (Applicant) Surry Partners (Liquidator) File Number(s): 12/124675 Judgment - EX TEMPORE 1By interlocutory application dated 21 June 2012, Ms Debbie Mudaliar, who is a shareholder in Smithfield Cellarbrations Pty Limited (in liquidation) ("Company") applies for an order under s 482 of the Corporations Act 2001 (Cth) that the winding up of the Company by order dated 1 June 2012 be terminated. For reasons which I will indicate below, that application also falls to be determined under rr 36.15 and 36.16 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). 2The application was brought three weeks after the appointment of a liquidator by the Court and is not opposed by the liquidator. Consent orders were handed up which provided for Ms Mudaliar to pay the liquidator's fees and costs, for the deposit of a specified amount into the company's liquidation account for distribution to specified unsecured creditors and noting that Ms Mudaliar had indemnified the liquidator in respect of any additional pre-appointment unsecured creditors of the Company arising after termination of the winding up. Following submissions before me this morning, minor amendments will need to be made to those orders and the parties should have an opportunity to make those amendments. 3The Court's power to make an order terminating a winding up under s 482 of the Corporations Act is discretionary and a person who seeks such an order must establish that the order is appropriate even when the liquidator consents to that order. Relevant factors include the attitude and interests of creditors including future creditors whose interest might be prejudiced if the Company were released from winding up; whether all the Company's debts have been discharged; the Company's current trading position and general solvency; and any explanation for any non-compliance by directors with their statutory duties and of the circumstances leading to the winding up: see, for example Re Warbler Pty Ltd (1982) 6 ACLR 526: Anderson v Palmer [2002] NSWSC 192 at [6]; Re Yelin Group Pty Ltd [2012] NSWSC 74 at [8]-[11]. In Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24], Bergin CJ in Eq observed that: "in determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to, solvency". 4Proof of solvency is necessary in an application under s 482 of the Corporations Act even where there has been an irregularity in obtaining the winding up order: Double Bay Newspapers Pty Ltd v The Fitness Lounge Pty Ltd [2006] NSWSC 226; (2006) 57 ACSR 131 at [16]. 5There is, however, an alternative basis to set aside a winding up order which is obtained through a fundamental irregularity, for example where a default judgment was entered in a party's absence and without fault on its part: Double Bay Newspapers Pty Ltd v The Fitness Lounge Pty Ltd above. In that situation, the Court has jurisdiction to set aside a winding up order under UCPR r 36.15, which allows it to set aside a judgment or order of the Court if it was made, inter alia, irregularly, and jurisdiction under UCPR r 36.16 to set aside a judgment or order after it has been entered if the judgment or order was made in the absence of a party, whether or not the absent party had notice of the relevant hearing or the application for the judgment or order. These provisions are directed to protecting the fundamental right of a party to proceedings before the court to be heard (Cameron v Cole [1944] HCA 5; (1944) 68 CLR 571 at 589; Labraga v Pomfret [2005] NSWSC 654) and to protecting the integrity of the court's processes (Double Bay Newspapers at [36]). Where a judgment is obtained through a fundamental irregularity it should be set aside ex debito justitiae, in order to protect the integrity of the Court's processes. I agree with, and would follow the view expressed by White J in Double Bay Newspapers that such an order can and should be set aside without requiring proof of solvency in that situation. On the other hand, where an order was regularly obtained, although in the absence of an appearance by the company, it should only be set aside on proof of solvency: Labraga v Pomfret above at [44]; Workers' Compensation Nominal Insurer v Teca Pty Ltd [2011] NSWSC 686. 6These principles are relevant to the present case because winding up orders were made on 1 June 2012 in the Company's absence, and in circumstances that Ms Mudaliar's uncontested evidence is that she had sent a facsimile to the applicant for the winding up order, ATM Solutions Australasia Pty Limited ("ATM Solutions") on 28 May 2012 advising that her father, who was a resident of Fiji, had passed away and that she was flying to Fiji on 29 May 2012 to attend to his funeral and family related matters. ATM Solutions has not appeared on this application and there is no evidence challenging Ms Mudaliar's evidence that that facsimile had in fact been sent and that she had in fact travelled to Fiji in the manner that she had indicated. 7Mr Luke Mitchell, solicitor, who appeared for ATM Solutions when the winding up order was made on 1 June 2012, has given evidence that his firm was instructed as agent for a Victorian firm of solicitors in the application and that he had reviewed his firm's file prior to appearing and does not recall seeing a copy of Ms Mudaliar's facsimile on that file. Mr Mitchell has made enquiry of the firm of Victorian solicitors who have advised that they had not seen Ms Mudaliar's facsimile until 20 June 2012, several weeks after the winding up orders were made. It appears that no further inquiry has been made of ATM Solutions as to its knowledge of that facsimile prior to 1 June 2012. There is no suggestion that letter was drawn to the Registrar's attention when the winding up order was made. Mr Mitchell, properly, acknowledges that, had he been aware of that letter, he would have brought it to the Registrar's attention on that occasion. There should be no criticism of Mr Mitchell's conduct given the then state of his knowledge. 8Whether the Registrar would have adjourned the winding up application in the relevant circumstances is unknown, because the matter was not drawn to the Registrar's attention and the Court had no opportunity to exercise its discretion in that regard. In my view, Ms Mudaliar's absence overseas and the reasons for that absence was a significant factor for the exercise of that discretion. It may be that the Company would have had considerable difficulty in avoiding a winding up order, even if a short adjournment had been given on 1 June 2012. It appears that the Company had not filed an application to set aside the relevant statutory demand within the 21 day period available to do so and the demand was itself based on a default judgment of the Local Court of New South Wales in favour of ATM Solutions, which the Company had also not sought to set aside. A possibility exists that the Company could, in the circumstances, have sought and obtained leave under s 459S of the Corporations Act to oppose the making of a winding up order on the basis that the debt owed to ATM Solutions was material to its solvency. It did not have the opportunity to do so, where the winding up order was made in its absence, in circumstances that a relevant mater had not been drawn to the Registrar's attention, and it was not afforded a hearing on the merits. 9I would therefore set aside the winding up order under UCPR rr 36.15 and 36.16. I would do so to preserve the integrity of the Court's process and the Company's right to a hearing and in the interests of justice. In my view, proof of solvency is not required in that situation. 10Having said that, I should nonetheless refer to the evidence of its solvency before me. Ms Mudaliar's evidence is that the Company is up-to-date with its taxation reporting lodgements, including Business Activity Statements to 14 June 2012. Ms Mudaliar has also arranged to deposit funds in payment of moneys due to creditors, the Plaintiff's cost of the winding up application and costs incurred in relation to this application. 11A representative of the liquidator has filed an affidavit disclosing that the Company (in its capacity as trustee of a family trust) may be in a positive asset position between approximately $19,000 and $112,000. That affidavit refers to several possible indications of insolvency and indicates that director related offences under ss 286, 530A-530B and 588G of the Corporations Act may be reported to the Australian Securities and Investments Commission ("ASIC"). The liquidator also indicates that he is presently unable to express an opinion that the Company is solvent. Those matters require closer scrutiny, notwithstanding the views which I have expressed above. In my view, those statements may somewhat overstate any issues as to the company's solvency for reasons which will emerge below. 12The liquidator notes that the books and records in the company's premises were incomplete and refers to advice that other books and records were with the Company's accountant. The liquidator requested production of books and records from the Company's accountant but they were not produced. The liquidator raised the possibility of reporting contraventions of ss 286 and 530B of the Corporations Act to ASIC, in respect of a failure to keep adequate financial records and failure to provide books and records to the liquidator. It seems to me that these observations may have resulted from something of a misunderstanding as to the manner in which the company had maintained its books and records which, while probably not ideal, reflected the relatively simple character of the business it conducted and, in particular, a misunderstanding as to whether additional books and records were in fact in the accountant's possession. Ms Mudaliar has affirmed an additional affidavit which clarifies these matters. She indicates that her process for management of the business was to keep a folder of invoices in chronological order of due date for payment and that there were only ten or twelve creditors to manage at any particular time. Her accountant would then prepare a business activity statement from those invoices and from the Company's bank statements at regular intervals and would prepare further financial information and tax information by reference to those materials and the source materials at the Company's premises. It appears that, contrary to the assumption made by the liquidator, the accountant does not retain substantive other records, other than presumably copies of the Company's tax returns. 13Ms Mudaliar properly concedes that she did not previously use accounting software which was available at the Company's premises given the limited number of creditors and invoices which were involved in the Company's business. She properly accepts that she should maintain creditor information which can be accessed by herself, her staff and her accountant and that she will in future use and maintain the accounting software already installed on the computer at the Company's business premises. This acknowledgement is appropriate and it would be desirable if Ms Mudaliar takes appropriate professional advice as to the records which the Company should in future maintain. 14The liquidator indicates that the Company was profitable in the years 30 June 2010 and 30 June 2011, although the profit in each of those years was small. The position for the 2012 financial year is not in evidence. The liquidator raises the possibility that creditors were paid outside terms, but that this appears to be a possibility rather than a matter arising from the evidence, in circumstances that a creditors' ledger is not available for the reasons I have indicated. The liquidator points to the Company's failure to respond to the statutory demand served by ATM Solutions, which was based upon a default judgment, but I would not regard this as an indicator of insolvency given the circumstances in which that judgment was obtained and the possibility that it could have been set aside had the Company acted more diligently in that regard. 15The liquidator also raises the possibility of pressure on the Company's solvency if Mr Mudaliar is to be paid moneys in respect of a family law settlement, but this is a matter to be addressed by the Company at the time at which it arises and is not an indicator of present insolvency. 16In these circumstances I am satisfied that the Court should set aside the winding up orders under UCPR rr 36.15 and 36.16 and accordingly no occasion to terminate the winding up order arises under s 482 of the Corporations Act. I have been provided with a consent order as to payment by Ms Mudaliar of the liquidator's fees and costs. That order recognises the relevance of the liquidator's interest in an application of this kind. Ordinarily, a court will make consent orders requested by competent parties within the court's jurisdiction: Ritchie's Uniform Civil Procedure NSW at [36.1A.5]; Midland Imports Pty Ltd v Asia Pacific International Pty Ltd [1999] NSWSC 12 at [14]. I do not see anything in that consent order which would have the result that the order should not be made as between the parties to the proceedings, with such amendment as the parties may consider necessary, and amending order 1 to provide that the winding up orders are set aside rather than the winding up terminated under s 482 of the Corporations Act. 17The only direction I need presently make is an order that the parties provide to my Associate an agreed form of orders to give effect to my judgment, and I will then make orders to give effect to this judgment in Chambers. I direct that a draft of those orders be sent to my Associate by email by 4pm on Monday 16 July 2012. ********** 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: 19 September 2012