Supreme Court New South Wales Medium Neutral Citation: Wang v ABC Homes (NSW) Pty Ltd [2018] NSWSC 1624 Hearing dates: 18 October 2018 Date of orders: 26 October 2018 Decision date: 26 October 2018 Jurisdiction: Equity - Corporations List Before: Parker J Decision: The Court grants leave to the defendant to rely on grounds 1 to 4 of the Grounds of Opposition to Winding Up specified in its notice dated 1 June 2018. Catchwords: CORPORATIONS – winding up – winding up in insolvency – winding up on the basis of non-compliance with statutory demand – opposition to winding up – Corporations Act 2001 (Cth), s 459S – "material to proving that the company is solvent" – broad and narrow interpretations of s 459S CORPORATIONS – winding up – winding up in insolvency – winding up on the basis of non-compliance with statutory demand – opposition to winding up – Corporations Act 2001 (Cth), s 459S – exercise of discretion – exercise of discretion where application to set aside statutory demand not served within time due to a mistake or lack of understanding of legal procedures relating to companies – exercise of discretion where applicant's mistake caused no prejudice to party seeking to wind up company Legislation Cited: Corporations Act 2001 (Cth), ss 459G, 459S Evidence Act 1995 (NSW), s 55 Cases Cited: Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) (2011) 29 ACLC 11-006; [2011] NSWSC 113 Geoffrey W Hill & Associates v King (1992) 27 NSWLR 228 Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd (2008) 26 ACLC 1,462; [2008] FCA 1777 Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962 Re Vangory Holdings Pty Ltd [2015] NSWSC 546 Re Yuan Tong Investments Pty Ltd [2017] NSWSC 910 Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466 Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37 Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; [2004] NSWSC 527 Tony Innaimo Transport Pty Ltd v Skyroad Logistics Pty Ltd [2018] FCA 1134 Category: Principal judgment Parties: Hai Ling Wang (Plaintiff) ABC Homes (NSW) Pty Ltd (Defendant) Representation: Counsel: MK Condon SC/J Nathan (Plaintiff) MW Young SC (Defendant) Solicitors: Contracts Specialist Pty Ltd (Plaintiff) Vatandoust Laywers (Defendant) File Number(s): 2018/139645 Publication restriction: Nil Judgment 1. In these proceedings the plaintiff, Hai Ling Wang, applies to have the defendant, ABC Homes (NSW) Pty Ltd ("ABC") wound up in insolvency. The application is based on failure to comply with a statutory demand under Part 5.2 of the Corporations Act 2001 (Cth). 2. ABC has filed grounds of objection, asserting that the debt the subject of the statutory demand is the subject of genuine dispute. In order to raise these grounds, the defendant needs leave under s 459S of the Act. This judgment concerns ABC's application for the necessary leave. 3. ABC carries on business as a builder. The statutory demand which is the subject of this application arises out of a building job undertaken by ABC for Ms Wang on a residential property she owns in Chatswood. Ms Wang now lives at the property with her de facto partner, Nyuk Win (known as "Laurence") Hiew. 4. The sole director and secretary of ABC is Marco Fathabadi. He is a licensed builder. In January 2017 Ms Wang, as owner, entered into a contract with ABC, as builder, for construction and renovation works on the property. Ms Wang paid a ten per cent deposit in mid-January and a further ten per cent progress payment in mid-February. Work began at about the time of the second payment. Ms Wang obtained finance for the remainder of the building cost from the National Australia Bank ("NAB"). 5. In mid-March, ABC submitted the next progress claim, which was for $229,625. This claim remained outstanding for more than three months. By late June, Mr Fathabadi needed funds to continue the work. On 26 June, at Mr Fathabadi's request, Ms Wang advanced ABC $140,000. On 21 July she made a further advance of $50,000. At the end of July, the NAB approved $194,465 of the claim and paid it to ABC. 6. At this point, ABC had received a net advance of $154,840 ($190,000 paid in June and July less the shortfall between the progress claim and the amount paid by NAB of $35,160). The work continued and, in October, ABC issued a further payment claim for $137,775 which was approved by the NAB. 7. Further trouble then arose. On 11 December ABC issued a fifth payment claim in the sum of $183,700. On 19 December, NAB declined payment of this claim, on the basis that the works were incomplete. 8. By late February 2018, the works were still incomplete and the parties fell into dispute concerning the subcontractors and their payment. A notice was served on behalf of ABC purporting to suspend the works because Ms Wang was allegedly dealing directly with subcontractors without ABC's consent. On 9 April solicitors for Ms Wang wrote to ABC purporting to terminate the building contract. 9. Meanwhile, on 5 April Ms Wang's solicitors served the statutory demand upon which these proceedings are based. The demand was for $154,840 (apparently a transposition error for $154,480, the net amount advanced following the payment by NAB in late July 2017: see above). The description of the debt was: Debts due and payable pursuant to loan agreement between Hai Ling Wang as lender and ABC Homes (NSW) Pty Ltd as borrower. 1. Ms Wang's affidavit in support stated: 1. I am the creditor ("the creditor") in respect of a debt of $154,840 owed by ABC Homes (NSW) Pty Ltd [ACN 108 764 521] (the "debtor company"). 2. I loaned the debt to the debtor company. 3. The debt mentioned in paragraph 1 of this affidavit is due and payable by the debtor company. 4. I believe that there is no genuine dispute about the existence or amount of the debt. 1. The statutory demand was sent by Ms Wang's solicitors both by email and registered post. It was apparently received by email by Mr Fathabadi on 5 April. Thus the twenty-one day period specified in the statutory demand expired on 26 April. 2. On 26 April, the last day of the twenty-one day period, Mr Fathabadi filed an application in this Court to have the statutory demand set aside. The application itself was completed in handwriting by Mr Fathabadi on a Court form. Under "Details of Application" Mr Fathabadi wrote (quoted verbatim): Application (459G) having jurisdiction under Corporation Act 2001 for an order setting the demand aside (demand made by Ms Hai Ling Wang). 1. Mr Fathabadi attached a typewritten affidavit which stated (again, quoted verbatim): 1. I am the Director and point of respond for my Company named ABC Homes nsw pty ltd with ACN 108764521. 2. I confirm that my company did not received any money from Ms Hai Ling Wang as she claims as "loan to ABC homes nsw pty ltd" in her statement. 3. I confirm my company has received as progress payments from her and her bank (NAB) as progress payments of existing MBA building contract between parties to carry building work – as per contract's NAB progress payments table, to be adjusted at the end of project against extra carried variation work cost, the above mentioned contract has been cancelled later – some time on early April 2018 By Ms Hai ling Wang, unlawfully. 4. So, as above paragraphs 2, 3, Her Statutory letter of demand for $154,840 which serviced to ABC Homes nsw pty ltd dated 5th April 2018 is not a valid Demand and not complies with rules. 1. It is clear from the form of these documents that they were prepared by Mr Fathabadi without legal assistance. Although the application was filed in time, Mr Fathabadi did not take steps to serve it until later. As a result, the application did not comply with the requirements of s 459G(2) and it was subsequently dismissed for this reason. 2. On 3 May the Originating Process was filed in these proceedings, based on the failure to comply with the statutory demand. On the same day, proceedings were commenced on Ms Wang's behalf against ABC in the District Court pursuant to the building contract. The Statement of Claim alleged numerous breaches of the contract, involving both incomplete and defective works. Although the claim would seem to be one for unliquidated damages, the specific sum of $434,020 was claimed. 3. The sum claimed was particularised in the Statement of Claim by reference to a building defects report obtained by Ms Wang's solicitors in late April 2018. According to the report, the cost to repair the defects and complete the works was $646,580, against which was credited the sum of $212,560, representing the difference between the contract price of $918,500 and the amount that the author of the report was instructed had been paid to the builder of $705,940. That figure included the $154,840 advance to which I have referred. Thus, in effect, that sum was being allowed as a credit against ABC's alleged liabilities in the District Court proceedings. 4. ABC has filed a defence to the District Court claim, which is proceeding towards hearing. 5. Mr Fathabadi has filed two affidavits in these proceedings. For the purposes of the leave application, he gave some short supplementary evidence and was cross-examined. For the plaintiff, a number of affidavits of Ms Wang and Mr Hiew were read on the leave application, together with a formal affidavit from Ms Wang's solicitor. These affidavits were read so as to show the nature of the evidentiary contest between the parties, and on the understanding that the Court would not resolve the underlying dispute on this hearing. On this basis, there was no cross-examination on any of the plaintiff's affidavits. 6. Mr Fathabadi's cross-examination covered two main areas. The first was the circumstances in which the abortive application to set aside the statutory demand was made. The second was ABC's financial position. 7. In Mr Fathabadi's affidavit, which was sworn in early July, he referred to the set-aside proceedings and said: Unfortunately I did not take legal advice when commencing these proceedings, and although the application was filed on the last day of the 21-day period after service of the demand, it was not served within that period. That occurred because I was unaware at the time that service also had to be effected within the same 21-day period. 1. In his oral evidence, Mr Fathabadi added various details to this account. He said that in the period leading up to 26 April his wife had been sick. He acknowledged that he was aware of the requirement that the application had to be served as well as filed within the twenty-one day period. He said that he thought that the Court would do this. He also said that after filing the application on 26 April he checked the internet and only later became aware of the requirement for service within twenty-one days. 2. Counsel for Ms Wang criticised Mr Fathabadi's evidence on this point. Counsel put to Mr Fathabadi in cross-examination that his oral evidence was inconsistent with his affidavit and he was making his evidence up. 3. There is force in these criticisms. Counsel for ABC suggested that Mr Fathabadi's oral evidence had merely "rounded out" his affidavit evidence, but if it was a "rounding out", it was a very convoluted one. Mr Fathabadi did not really address the differences between his affidavit and his oral evidence satisfactorily, although counsel for Ms Wang in cross-examination gave him a fair opportunity to do so. 4. Overall, I do not find Mr Fathabadi's evidence on this question very persuasive. But it is clear that, on behalf of ABC, he was trying, however ineptly, to challenge the statutory demand. The filing fee paid when the application was lodged was over $3,000. Mr Fathabadi cannot have intended that such a payment would be futile. I think that if he had truly appreciated that service was required by 26 April he would have attempted to effect service. Mr Fathabadi presented as lacking sophistication and, perhaps, as also lacking a high level of proficiency in English; and the application and supporting affidavit he filed in the abortive set-aside application confirm that impression. I suspect that Mr Fathabadi made the application in a rush, and that despite an apparent concession in cross-examination, was unaware of, or did not turn his mind to, the service requirements until it was too late. I am satisfied that, on ABC's behalf, he wished to challenge the statutory demand on the ground that the amount claimed was to be credited against the amount due to ABC under the building contract, and that there was no separate debt agreement with respect to that amount. I am also satisfied that it was through inadvertence or lack of understanding that the application was not served in time. 5. Mr Fathabadi's affidavit of early July also referred to ABC's financial position. Annexed to the affidavit was a financial report described as a "detailed balance sheet" for ABC as at 31 May 2018. The balance sheet was in the usual form one sees produced from accounting software, but in the affidavit Mr Fathabadi said that he had prepared it himself. It showed current assets of $264,000 (all figures are rounded to the nearest thousand dollars) made up of cash on hand and at bank of $104,000 and trade debtors of $160,000. Against that were current liabilities totalling $93,000 consisting of debts to suppliers and contractors of $70,000, a credit card liability of $15,000 and current tax liabilities of $8,000. Non-current assets were made up of plant and equipment, office equipment and motor vehicles. The initial cost of the equipment was shown as $20,000 but this had been fully depreciated. The initial cost of the motor vehicles was shown as $46,000 with accumulated depreciation of $21,000, resulting in non-current assets of $25,000. Non-current liabilities were a bank loan of $19,000 and a loan from Mr Fathabadi of $50,000. The result was net assets of $127,000. 6. Counsel for Ms Wang objected to this evidence. In my view, as a matter of substance the evidence was no different in principle from Mr Fathabadi saying, from his personal knowledge of ABC's affairs, how much money the company had in the bank, how much its trade creditors were and so forth. In my view, evidence of that character coming from the sole director of a small company such as ABC is admissible, although it is not the best evidence and the Court may ultimately decline to act on it at a subsequent hearing as to ABC's solvency. I therefore overruled the objection. Below I consider further the nature of the factual inquiry undertaken by the court in an application for leave under s 459S. The conclusions I reach there further support the admissibility, at this point, of the evidence in question. 7. As it happened, in cross-examination Mr Fathabadi stated that the balance sheet had in fact been prepared by ABC's accountant at his request. He also gave some further evidence about changes in ABC's financial position since 31 May. He said that as a result of the commencement of the winding up proceedings, he had lost his home warranty insurance and could no longer deal with contractors. He said that the amount due to contractors shown as at 31 May ($42,000) had been paid out and he was now doing the work himself. He said that net assets of the company had reduced to approximately $100,000 from the figure of $120,000 as at 31 May. Requirement of materiality 1. Section 459S provides: Company may not oppose application on certain grounds (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. 1. Because of s 459S(2), ABC cannot obtain leave to raise the objection that there is a genuine dispute about the debt claimed in the statutory demand unless that ground is "material to proving" it is solvent. Counsel for Ms Wang argued that the evidence was insufficient to permit the Court to determine what ABC's current financial position was. In those circumstances, counsel argued the Court could not be satisfied that any dispute about the debt claimed in the statutory demand was material. 2. I was referred to a number of authorities concerning the test of materiality under s 459S. Counsel for both parties proceeded on the basis that the authorities had identified two views, referred to as the "narrow view" and the "broad view", of the materiality requirement. 3. The narrow view derives from the decision of Perram J in Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd (2008) 26 ACLC 1,462; [2008] FCA 1777, referred to below. In turn, Perram J relied on the decision of the Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37. In that case, the defendant company applied under s 459S to contend that the debt the subject of the statutory demand was genuinely in dispute. The application was refused by Austin J. Subsequently, Hodgson CJ in Eq made orders extending the time within which the application was to be determined, but on certain conditions. The plaintiff sought leave to appeal to challenge Hodgson CJ in Eq's decision. The defendant made a cross-application to appeal from the decision of Austin J. 4. In evidence before Austin J, the defendant company relied on an expert report which stated that, on the balance of net current assets against net current liabilities, the company had a surplus of $2.6 million. This exceeded the $1.3 million the subject of the statutory demand. Austin J concluded that the company would be solvent whether or not the debt was taken into account and refused the application under s 459S on this basis. In the Court of Appeal, the defendant pointed to subsequent affidavits put forward on behalf of the plaintiff which disputed the defendant's expert's calculations and resulted in a net current asset figure that was considerably lower. On the plaintiff's expert's analysis, the $1.3 million debt in the statutory demand would have made the difference between solvency and insolvency. 5. After referring to the purpose of the 1992 reforms which introduced the current version of the statutory demand procedure, Spigelman CJ, who gave the leading judgment in the Court of Appeal said (at [52]-[56]): [52] The Court should be slow to adopt a construction that permits the kind of spectacle to which the Court has been subjected on this occasion, in which each party seeks to rely, for tactical advantage, on the expert evidence adduced by the other party, being evidence which each intends vigorously to contest in the principal proceedings and which, in the case of the plaintiff with respect to the report of the defendant's expert, was only admitted into evidence over the plaintiff's objection. [53] By the time an application under s 459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s 459S(2) directs attention, in part, to what it is that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the Court cannot be satisfied of the mandatory pre- condition in s 459S(2). An objective element is introduced by the word material but that can only be determined after identifying the company's contentions. [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. [55] The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself. [56] It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be satisfied in the sense required by s 459S(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is material, let alone whether leave should be granted under s 459S(1). On the submissions made to this Court, these issues do not arise. The appeal should be dismissed. 1. In Grant Thornton Perram J said (at [19]) that the authorities, and in particular Switz, showed that: …"material" means that an applicant, under s 459S, must show that the debt in respect of which it is seeking leave is pivotal to the question of solvency. That is, the defendant must demonstrate that if the debt exists then the company will be insolvent and if the debt does not exist, then the company will be solvent. 1. In Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) (2011) 29 ACLC 11-006; [2011] NSWSC 113, White J (as his Honour then was) considered the question in some detail. His Honour said (at [35]): What is material to proving solvency is not the same as what is determinative of solvency. This is not inconsistent with the decision of the Court of Appeal in Switz Pty Limited v Glowbind Pty Limited. There the defendant asserted that it was solvent whether or not it owed the debt the subject of the statutory demand. Spigelman CJ, with whom Handley and Giles JJA agreed, held that because the defendant contended that it was solvent whether or not it owed the disputed debt, the ground for disputing the debt was not material to proving the defendant's solvency. Attention was to be focused on the case the defendant advanced and how it intended to prove it (at [53], [54] and [56]). Spigelman CJ did not say that whether the ground for disputing the debt the subject of the statutory demand was material to proving the company's solvency depended on whether it could be seen from the evidence adduced on the s 459S application to be determinative. Rather, his Honour said that the ground would not be material if the company's case was that it was not determinative. His Honour (at [32]) denied that it was necessary to consider the concept of materiality in s 459S(2) in the appeal. That shows that his Honour was not intending his reasons to have a wider significance. 1. His Honour emphasised that in Switz the defendant's case was that it was solvent whether the debt the subject of the statutory demand was payable or not. His Honour said that the decision had to be understood in that context. His Honour acknowledged that the background to the 1992 reforms showed that s 459S(2) should be construed strictly so as to minimise the opportunity for delay by ensuring that disputes about debts do not prolong the hearing of the issue of solvency. His Honour said (at [42]): That observation is relevant to how the discretion under s 459S should be exercised if the conditions for its exercise are met, as well as to the construction of section s 459S(2). However, it does not warrant reading the words "material to" as meaning the same as "determinative of". 1. His Honour (at [43]) repeated, and adhered to, what he had said in his earlier decision in Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962 at [64]: 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… 1. In Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466, Wigney J referred to the difference between the narrow view and the broad view. His Honour said he did not need to decide the question in that case, although he "would incline to" the broader view. He said (at [40]-[41]): [40] The additional observation that I would make is that, in my view, at the s 459S stage, the company that is seeking leave must adduce sufficient evidence concerning solvency to satisfy the Court that the existence or otherwise of the debt will be material to the conclusion as to the company's solvency - that is, that the existence or otherwise of the debt is relevant to, or has the capacity to influence, or have an effect on, that conclusion. If, at the s 459S stage, the company contends and intends to prove that it is solvent if it does not owe the disputed debt, it must lead evidence of its financial position which, if accepted, is capable of satisfying the Court of that fact. It is doubtful that the Court could be so satisfied on the basis of mere assertion. Nor should the Court be required to speculate about what evidence of solvency might be led at the final hearing of the winding up application. [41] Whilst it may be that at the s 459S stage the company is not required to lead the "fullest and best evidence" of its solvency (cf. Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]…; Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081…; Ewen Stewart at [25]-[26]), in my opinion it is unlikely that the materiality requirement in s 459S(2) can be satisfied by mere assertions of solvency, or by conjecture about what further evidence concerning solvency might be led at the hearing of the winding up application. The Court must be satisfied that the ground is material to the company's solvency or otherwise, not that it might be if further or better evidence is adduced at the hearing of the winding up application. To the extent that White J expresses the contrary view in Ewen Stewart at [31], I respectfully disagree, though his Honour's observations and findings to that effect might have been directed to the particular facts and circumstances of that case. 1. The difference between the broad and narrow view was also referred to by Black J in Re Vangory Holdings Pty Ltd [2015] NSWSC 546 and Re Yuan Tong Investments Pty Ltd [2017] NSWSC 910 but his Honour did not find it necessary to decide which view is preferable. I refer further to those decisions below. On the other hand, Griffiths J in the Federal Court recently stated that he should follow the narrow view expressed by Perram J in Grant Thornton on the basis that it was not clearly wrong: Tony Innaimo Transport Pty Ltd v Skyroad Logistics Pty Ltd [2018] FCA 1134 at [7]. 2. So far as authority in this Court is concerned, the decision of White J in Ewen Stewart was a considered one which analysed the narrow view and rejected it. His Honour expressly addressed the decision in Switz but concluded that it was consistent with the view which he expressed. I would, as a matter of comity, prefer White J's interpretation of Switz to that of Perram J unless there is a compelling reason to depart from his Honour's views. 3. I see no compelling reason to depart from White J's view in Ewen Stewart. On the contrary, I think, with respect, that there is much to be said for it. An application under s 459S is an interlocutory application in the main winding up proceeding. It may be, and often is, heard separately and in advance of the hearing on the winding up application itself. Although there is a six month limit (which can be extended) on the hearing of the winding up application, and winding up applications are usually dealt with well within that period, an application under s 459S could be heard weeks, or even months, before the winding up application itself. At the winding up application extensive evidence may be given as to solvency and there may even be expert evidence (as in Switz). The s 459S application may thus be heard at a time when the evidence is not complete and the nature of the forensic contest concerning insolvency is not fully defined. 4. In my view, the phrase "material to proving" must be construed in that context. The "proving" of which s 459S speaks is a forensic process which will not culminate until the winding up application is itself heard. In my view, this strongly supports the test of materiality stated by White J. 5. In Soundwave Wigney J observed that the term "material" was a synonym for "relevant". In the Evidence Act 1995 (NSW), relevance is defined (s 55) in terms of what "could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue", not material which, if accepted, would rationally affect that assessment. That too supports White J's test of materiality. 6. In Geoffrey W Hill & Associates v King (1992) 27 NSWLR 228, McLelland J was dealing with a contest about the admissibility of evidence in an application for an interlocutory injunction. He said (at 229-230): It is necessary to bear in mind that in an application for an interlocutory injunction the court is not called upon to make any final decision on any question of fact. What the court is relevantly required to do is to determine whether there is a serious issue to be tried at the final hearing. … It seems to me that the proper principle to be applied is this: that evidence which would be objectionable as hearsay on the issue as to whether an alleged fact is true may, nevertheless, be admitted on the issue (1) whether there is a case for investigation as to whether that alleged fact is true, (2) whether there is a real prospect of that alleged fact being found to be true at a final hearing, or (3) whether there is a serious question to be tried at a final hearing as to whether that alleged fact is true. Since on such an application as the present it is the third of these matters which is raised for decision, it seems to me that the court has a discretionary power to permit material to be adduced, which on a final hearing would be excluded from admissibility as evidence of the fact on the ground of it being hearsay. That is not to say that the court will necessarily permit that to be done: the ambit of inquiry in an application for an interlocutory injunction is within the control of the court, and much will depend on the circumstances of the particular case, the nature of the evidence or material which is tendered to the court and the practicability and convenience, or otherwise, of more direct evidence on the particular matter being adduced. 1. Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; [2004] NSWSC 527 involved, among other things, an application to set aside a statutory demand on the grounds that there was a genuine dispute about the debt claimed. White J referred to part of the passage from Geoffrey W Hill & Associates quoted above. He continued (at [22]): Although the mere assertion that a debt is denied will be insufficient, evidence in the form of conclusions as to primary facts which would be inadmissible as proof of the relevant facts either pursuant to the opinion rule in s 76 of the Evidence Act 1995 (NSW), or under s 135 of the Evidence Act, may be admissible as evidence that there is a dispute as to the existence or amount of the debt, and as to whether that dispute is genuine. 1. This statement was approved by the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [38]. 2. In my view, similar considerations apply in the present case. In an application under s 459S, the Court's focus is different from the focus on the hearing of the winding up application itself. On an application under s 459S, the Court is not determining any facts concerning solvency. What the Court is doing is determining whether a contention is "material to proving" solvency and that brings into play the type of distinction which McLelland J and White J were drawing. 3. The subsequent decisions by Black J to which I have referred above are not inconsistent with this analysis. In Vangory, the critical issue for insolvency was going to be whether the defendant company could rely upon support from its shareholders as a means of demonstrating its solvency. The shareholders had sufficient assets to meet the claim which was the subject of the statutory demand as well as the company's other liabilities. In those circumstances, a dispute about the debt could not be relevant. In Yuan Tong Investments, the evidence on insolvency at the s 459S stage was so uninformative that it was impossible to make any judgment about the materiality of the dispute concerning the debt the subject of the statutory demand. 4. In the present case, in written submissions prior to the hearing counsel for Ms Wang argued that on ABC's case, it was solvent even allowing for payment of the debt the subject of the statutory demand. While the 31 May balance sheet did show an excess of current assets over current liabilities of $167,000, which is slightly more than the $155,000 claimed in the statutory demand, it would leave a buffer of less than 5 per cent of current assets. In any event, Mr Fathabadi's evidence suggests that the net asset figure has now narrowed by $20,000 which would mean that, taking the debt in the statutory demand into account, ABC would be insolvent on a balance of assets against liabilities. 5. The evidence of Mr Fathabadi and the May balance sheet are far from the best evidence which could have been presented concerning ABC's financial position. If nothing is done to shore that evidence up at the hearing, the Court may not be prepared to receive it. But I think it is sufficient to show that the financial affairs of ABC are such that unless the debt the subject of the statutory demand can be excluded from consideration at the solvency hearing, it is at least doubtful whether ABC would be able to establish its solvency. For these reasons, I consider that the materiality requirement in s 459S(2) is satisfied. Discretion 1. It has been stated many times that the discretion under s 459S should be sparingly exercised and that the defendant/applicant seeking the exercise of the court's discretion in its favour must show that there is a prima facie case that the debt is disputed and an adequate explanation for failing to apply to have the debt set aside. Counsel for both parties were content to argue the question of discretion on this basis. 2. The evidence shows that the debt the subject of the statutory demand has been allowed as a credit against a contested claim in the District Court. On the evidence, no application has been made to the District Court to strike out ABC's defence. In fact, the amount is not even pleaded in the District Court Statement of Claim as a separate debt, which is the way it is asserted in the statutory demand. I do not have to consider at this stage whether there is in fact a genuine dispute about the debt; all I need to decide is whether there is a sufficient prima facie case that such a dispute exists. I have no doubt on the evidence that such a prima facie case exists. 3. The authorities suggest that merely to ignore or overlook a statutory demand could rarely, if ever, amount to a sufficient explanation of failure to challenge it. In this case, the evidence shows that Mr Fathabadi, on behalf of ABC, did in fact make an application. The problem was that the application was fatally flawed by the failure to serve it in time. As I have said, I am satisfied that this was a mistake and resulted from Mr Fathabadi's lack of understanding of the requirements for making a set-aside application and, perhaps, a more general lack of familiarity with legal procedures as they apply to companies. None of this was the fault of Ms Wang and her legal advisers, but it must have been obvious to them within a matter of days of the expiry of the twenty-one day period that Mr Fathabadi, on behalf of ABC, wished to dispute the debt the subject of the statutory demand. Ms Wang suffered no prejudice in the meantime. In my view there is a sufficient reason to exercise the discretion in ABC's favour so as to allow it to raise a dispute about the debt in answer to the winding up application. Conclusions and orders 1. For these reasons, ABC's application under s 459S succeeds. I will hear the parties on consequential directions for the further conduct of the winding up proceedings and on costs, if that is necessary. 2. The orders of the Court are: 1. Order that the defendant have leave to rely on grounds 1 to 4 of the Grounds of Opposition to Winding Up specified in its notice dated 1 June 2018. 2. Direct that, within 7 days, the defendant bring in proposed orders for the further conduct of the proceedings, and dealing with costs; if there is a dispute concerning those orders, the matter is to be the subject of a further hearing to be arranged on a date, and in accordance with directions, to be fixed by arrangement with my Associate. ********** 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: 26 October 2018