Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Ekes v Hyde Page (No 2) [2019] NSWCA 169 Hearing dates: 9 July 2019 Date of orders: 09 July 2019 Decision date: 09 July 2019 Before: Bell P; Payne JA Decision: 1. Application for leave to appeal dismissed with costs; 2. Applicant's motion seeking a stay dated 19 June 2019 dismissed with costs; 3. The Court orders costs be paid by Mr Ekes in a lump sum in the amount of $7,500 under s 98(4) of the Civil Procedure Act. Catchwords: CIVIL PROCEDURE – Court of Appeal – application for leave to appeal – judgment or order of the Court in a Division for the winding up of a corporation – where debt alleged to have been paid prior to appointment of liquidator – application dismissed Legislation Cited: Civil Procedure Act 2005 (NSW), s 98 Corporations Act 2001 (Cth), ss 95A, 459A, 459C Legal Profession Uniform Law (NSW) Supreme Court Act 1970 (NSW), s 101 Taxation Administration Act 1953 (Cth), s 8AAZLGA, Sch 1 s 255-5 Cases Cited: Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85 Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 Deputy Commissioner of Taxation v Guy Holdings Pty Ltd [1994] TASSC 126; 116 FLR 314; 14 ACSR 580 Deputy Commissioner of Taxation v De Simone Consulting Pty Limited [2007] FCA 548 Distinctive FX 9 Pty Ltd v Statewide Developments Pty Limited [2012] NSWCA 393 Expile Pty Limited v Jabb's Excavations Pty Limited [2003] NSWCA 163; 45 ACSR 711 Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; [2008] HCA 32 Huang v Hua Cheng International Group Pty Ltd [2019] NSWCA 155 In the matter of Day & Night Online Transport Pty Ltd (in liq) [2018] NSWSC 796 Penson v Titan National Pty Ltd [2015] NSWCA 165 Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150 Zervas v Burkitt [2019] NSWCA 112 Category: Principal judgment Parties: Paul Ekes (Applicant) GHS Safety Products Australia Pty Ltd (in liq) (First Respondent) John Hyde Page (Second Respondent) Representation: Counsel: Ms T Wong (Applicant) Mr J Hyde Page (Second Respondent) Solicitors: Gardner Ekes Lawyers (Applicant) File Number(s): 2019/193026 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity - Corporations List Citation: [2019] NSWSC 668 Date of Decision: 6 June 2019 Before: Rees J File Number(s): 2018/387725 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Judgment 1. THE COURT: This is an application under s 101(2)(n) of the Supreme Court Act 1970 (NSW) for leave to appeal from a decision of Rees J in the Equity Division: In the matter of GHS Safety Products Australia Pty Ltd [2019] NSWSC 668. The applicant, Mr Paul Ekes, is the former sole director and a shareholder of the company in liquidation. Relevant facts 1. The facts found by her Honour in ordering, pursuant to s 459A of the Corporations Act 2001 (Cth), that GHS Safety Products Australia Pty Ltd be wound up in insolvency may be summarised as follows. The company was incorporated in 2005 and allegedly engaged in research and development activities concerning new control systems for the mining industry. Until the events directly relevant to this proceeding, the company had 200 ordinary shares held by GIM Investments (NCLE) Pty Limited, Ce Tan, Australian Centre Study Agency Pty Limited and Parmasivan Moodley. Mr Paul Ekes became a shareholder and was issued with 26,000 shares in the company on 24 May 2019. 2. Initially, Messrs Mark and Gilbert Leishman were directors of the company. On 10 April 2014, they ceased to be directors and Kim Leishman became a director. On 27 April 2016, Mr Ekes became a director of the company. On 23 November 2016, Kim Leishman ceased to be a director and Mr Ekes became the sole director of the company. 3. There was a paucity of material before the primary judge about the activities of the company, but her Honour found, on the basis of material submitted by the company to the Australian Taxation Office (ATO), that the company claimed deductions in the 2015 and 2016 income years in the amount of $773,318. Her Honour found that the company did not own any assets and had no asset registers. The expenses it claimed were, rather, an allocation of 35% of expenses incurred by other parties who operated a factory in which the company allegedly conducted its research and development activities. The assets used in the business were owned by other parties and were either on loan to the company or formed part of its rent expenses. 4. On 24 March 2017, the company lodged a Research and Development Tax Incentive Application with the Commonwealth Department of Industry, Innovation and Science in the sum of $1,106,075. In April 2017, the ATO notified the company that it was conducting a high risk refund review in relation to this claim. 5. On 13 June 2017, 1 Loan Pty Ltd entered into a Loan Agreement with Kathleen and Gilbert Leishman. At the same time, 1 Loan Pty Ltd entered into a Deed of Guarantee and Indemnity with the company. The deed was executed on behalf of the company by Mr Ekes. Under the Deed of Guarantee and Indemnity, the company guaranteed repayment of the loan by Kathleen and Gilbert Leishman. 6. In July 2017, the ATO advised the company that the research and development claim would be escalated to a formal comprehensive review and that the ATO would retain the monies associated with those claims under section 8AAZLGA of the Taxation Administration Act 1953 (Cth) until such time as the ATO no longer considered the outstanding issues to be a risk to revenue. In August 2017, the ATO commenced a formal comprehensive review of the income tax affairs of the company for the 2015 and 2016 income years, in addition to the outstanding research and development claim. 7. On 15 December 2017, the ATO issued a position paper stating that it considered that the company was neither eligible for the research and development claim of $1,106,075, nor tax deductions for expenses of $2.5 million it had claimed gave rise to the research and development claim. 8. The ATO considered that there was not sufficient evidence to substantiate that research and development activities were actually being carried out or that research and development expenditure was in fact incurred. 9. The ATO also found that the company had derived assessable income of $276,642 which it had not declared. The ATO proposed to make adjustments for the income years ended 30 June 2015 and 30 June 2016 with the result that: (a) for the financial year ended 30 June 2015, the company's taxable income would increase from zero to $244,142; and (b) for the financial year ended 30 June 2016, the company's taxable income would increase from zero to $32,500. 1. In January 2018, Mr John Hyde Page of counsel was retained to advise the company about its taxation affairs. Mr Hyde Page rendered two accounts for that taxation advice. Only the first was paid. 2. Her Honour found, on the basis of material before her, but which the applicant chose not to put before this Court, that in mid-2018 amended income tax assessments were issued to the company reflecting the ATO's disallowance of the deductions referred to in the position paper. Whilst the taxpayer's objections to those amended assessments were still to be determined, it is clear that the issue of the amended assessment gave rise to an immediate liability to pay the amount of the assessment: Taxation Administration Act 1953 (Cth) in particular, Sch 1, s 255-5; Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; [2008] HCA 32. 3. Whilst not putting before her Honour any of the primary documents, the company relied on a printout of the ATO portal showing a credit of $1,106,175.25. Her Honour concluded on the evidence before her that "the R&D claim remains credited, presumably until the company's objection to the amended notices of assessment has been determined. It does not indicate, it seems to me, that whatever tax has been assessed under the amended notices of assessment is not due and payable." 4. Her Honour found, on the balance of probabilities, that the amended tax assessments were in the form proposed in the ATO's position paper and that, as a consequence, the company had a taxable income of $276,642 for the 2015 and 2016 years and was immediately obliged to pay tax at the company rate on that amount. This finding was challenged by the Applicant in this Court, without tendering any evidence relevant to the question other than a bald assertion in Mr Ekes' affidavit that the company had no creditors. 5. In September 2018, the company ceased to trade. The company has not adduced any evidence about why that was so, other than a bald assertion in Mr Ekes' affidavit that the company existed only to obtain a payment from the ATO. 6. On 6 November 2018, a certificate of determination by a costs assessor was issued in respect of Mr Hyde Page's second (and unpaid) invoice for taxation advice in the amount of $23,000. The certificate was filed with the Court under the relevant provisions of the Legal Profession Uniform Law (NSW) and on 16 November 2018, judgment was entered against the company in that amount. 7. On 20 November 2018, Mr Hyde Page issued a statutory demand to the company based upon that judgment debt. On 22 November 2018, Mr Ekes (on behalf of the company) acknowledged receipt of the statutory demand. An application to set aside the statutory demand was filed late and dismissed for that reason. It need not be further considered. 8. On 1 April 2019, a Costs Review Panel which had been requested by the company reviewed the assessment of the barrister's fees and allowed $25,300, apparently adding GST to the initial assessment which the first assessor had omitted. Decision of the primary judge 1. Her Honour found that there was a presumption of insolvency by reason of the company's failure to comply with the statutory demand issued in respect of the barrister's unpaid fees. As such, her Honour found that the onus was on the company to prove to the contrary: Corporations Act, s 459C(3). Section 95A(1) of the Corporations Act provides that: "A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable." 1. Her Honour found that a company must put forward "the fullest and best" evidence of its financial position in order to establish solvency: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 at 1081 per Hayne J; Deputy Commissioner of Taxation v De Simone Consulting Pty Limited [2007] FCA 548 at [14]. As Santow JA (with whom Meagher and Handley JJA agreed) explained in Expile Pty Limited v Jabb's Excavations Pty Limited [2003] NSWCA 163; 45 ACSR 711 at [16]: "Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J." 1. Her Honour was not satisfied that the company had demonstrated that it was solvent: "[35] The company's evidence in respect of solvency falls far short of this requirement. There is no explanation by the company, apart from what I could glean from the ATO's position paper and the company's submissions to the ATO, as to what the company's activities were, why the company ceased trading, what the company's assets and liabilities were and how those assets and liabilities have changed to the present position." 1. Her Honour was not prepared to accept the bald assertions, repeated in an affidavit filed in this Court by Mr Ekes, that the company was solvent. Her Honour found that that "assertions as to solvency fall far short of 'the fullest and best' evidence of the company's financial position." Her Honour said, having reviewed the 385 pages of documents exhibited to Mr Ekes' first affidavit (which were not before this Court) that "I am reluctant to accept his assertions without supporting evidence of the kind described in the authorities." 2. The only other matter her Honour needed to be satisfied of was that the petitioning creditor, at the time of the hearing, remained a creditor of the company. Her Honour so found. She was correct to do so. Making every assumption favourable to Mr Ekes, it is clear that at the time of the hearing the company had not paid the barrister an invoice for $25,300 rendered 15 months prior. Even accepting the relevance of the belated attempt after the hearing to pay Mr Hyde Page's account, the evidence established no more than that by the evening of 7 June 2019, 2 days after the hearing and the day after the orders appointing the liquidator were made, "funds should be in [Mr Hyde Page's] account". 3. On the morning of 6 June 2019, in the face of the evidence described immediately above, her Honour was not prepared to adjourn the proceedings and made the orders appointing a liquidator. Her Honour found: "[50] Most significantly, however, the payment of the barrister's fees 'at the heel of the hunt' does not alter the conclusion I had formed as to the company's solvency. Indeed, the fact that the company's bank account has been emptied after the hearing rather supports the conclusion I had reached. Adopting Zeeman J's language, there is a positive reason for ordering that the company be wound up going beyond the mere deemed insolvency arising from the company's failure to comply with the barrister's statutory demand. There is evidence that the company has unpaid tax assessment notices of unknown amount but probably some $80,000, was about to receive a demand for payment of over $1 million in respect of a guarantee and has no funds to pay these amounts, nor anyone standing by who is ready, willing and able to do so." 1. The reference to "Zeeman J's language" was a reference to the decision of his Honour in Deputy Commissioner of Taxation v Guy Holdings Pty Ltd [1994] TASSC 126; 116 FLR 314; 14 ACSR 580 where his Honour said (at [19]): "It is implicit from De Montford that in a case such as the present, there must be some positive reason for ordering that the respondent be wound up going beyond the mere deemed insolvency. … [W]here the debt the subject of the statutory demand has been paid after the filing of the application, the application ought to be dismissed unless there is established some positive reason that a winding up order ought to be made …" Application for leave to appeal 1. Counsel for Mr Ekes, Ms T Wong adopted the written submissions signed by her predecessor, Mr Allen, to the following effect: 1. The primary judge ought to have dismissed the Originating Process because the company had "paid" what the creditor pressed to be paid, being the amount claimed in the Statutory Demand; 2. even (if) dismissal was in the discretion of the Court, and payment of the debt claimed in the statutory demand was insufficient reason to exercise the discretion in favour of dismissal, the discretion miscarried because no consideration was given to other matters favourable to exercising the discretion in favour of dismissing the proceedings with appropriate orders for costs: 1. no weight was given to the fact that the debt had been paid, and the circumstances in which it had been paid; 2. no weight was given to the plaintiff inducing payment by, the Applicant contends, indicating that if he was paid then the Originating Process ought be dismissed, then resisting the dismissal of the Originating Process; 3. no weight was given to evidence from the applicant that the Company had "no debts" other than owed to the plaintiff; 4. the following matters were asserted: 1. an erroneous finding by the primary judge that there was debt due and payable to the ATO. There was no evidence of any demand for payment by the ATO of any sum, and in fact the ATO's documents showed that the Company was in credit whilst the claim for a tax refund was determined; 2. there was evidence from the applicant that the Company had "no debts" other than owed to the plaintiff; 3. there was evidence that the Company's only purpose was to claim the "tax refund" from the ATO and for that reason was not incurring any further debt; and 4. the claim on the guarantee had not been made and there was no evidence of the amount which was to be claim beyond the belief of a solicitor for the creditor and his belief was irrelevant on the question of how much was to be demanded, if anything. 1. Ms Wong, who we infer was only briefed to appear very recently, in oral submissions sought to put a number of additional matters not appearing in the written submissions and consideration of which required reference to evidence which was not before the Court. After a number of such issues were raised, Ms Wong was instructed to seek a 14 day adjournment to permit additional evidence to be led. This matter had been listed with considerable expedition by Payne JA following an application by Mr Ekes on Monday 24 June 2019. Payne JA sought and extracted assurances from counsel appearing for Mr Ekes on that day that specific consideration had been given to the content of the white folder and the submissions filed and that Mr Ekes did not seek to add to either. The Court refused the adjournment and gave separate reasons. 2. Mr Hyde Page also appeared on the application for leave. He made written and oral submissions the effect of which was that the evidence of "payment" led before the primary judge was too late and should not have been received. He submitted that, in any event, her Honour's discretionary decision to appoint a liquidator was correct, and that leave to appeal should be refused. 3. The liquidator of the company did not appear. Consideration 1. The Corporations Act, s 198G(1) provides that while a company is under external administration, an officer of the company must not perform or exercise a function or power of that office. "External administration" in s 198G has the same meaning as in Sch 2 to the Corporations Act: s 198G(9). In Sch 2, being the Insolvency Practice Schedule, s 5-15 provides that "external administration" includes when a liquidator has been appointed in relation to a company. The prohibition in s 198G(1) may be relaxed where, relevantly, the officer of the company obtains the written approval of the external administrator of the company or the Court: s 198G(3)(b). By reason of s 198G, Mr Ekes is not entitled to continue to prosecute an action on behalf of the company: In the matter of Day & Night Online Transport Pty Ltd (in liq) [2018] NSWSC 796; Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85. [1] Leave was sought under s 198G(3)(b) in writing but not pursued orally. 2. The proceeding is being prosecuted in Mr Ekes' name. Mr Ekes thus required leave under s 471B of the Corporations Act to bring these proceedings against the company in liquidation. In Distinctive FX 9 Pty Ltd v Statewide Developments Pty Limited [2012] NSWCA 393 at [13], Beazley JA held that the commencement of an appeal (or an application for leave to appeal), triggered the leave requirement contained in s 471B with respect to a winding up in insolvency. As recently noted by Gleeson JA in Zervas v Burkitt, [2019] NSWCA 112 at [14], and the Court in Huang v Hua Cheng International Group Pty Ltd [2019] NSWCA 155 at [21], Distinctive FX 9 has been followed consistently by this Court. An application was made orally by Ms Wong for leave to proceed under s 471B nunc pro tunc. It is unnecessary for the reasons which follow to address this issue. If it were necessary to decide there would be difficult issues raised, not least being that Payne JA raised this issue at a directions hearing with counsel then appearing for Mr Ekes and no application under s 471B was then made or notified to the liquidator. 3. In addition, s 101(2)(n) of the Supreme Court Act provides that leave to appeal is specifically required in this case. That section provides: (2) An appeal shall not lie to the Court of Appeal, except by leave of the Court of Appeal, from: … (n) a judgment or order of the Court in a Division for the winding up of a corporation, 1. In Penson v Titan National Pty Ltd [2015] NSWCA 165, Ward JA (Leeming JA agreeing) said: "[38] As to the proposed appeal from the decision of Black J, the grounds of appeal identified by Ms Penson make clear that her complaint in substance is that his Honour concluded that Aquaqueen was in fact insolvent in circumstances where she had proffered an undertaking that she would satisfy the company's liability from her own resources by way of loan to the company and had resources from which she could do so. [39] His Honour noted at [29] that there are circumstances in which an undertaking, even if not legally enforceable, by a director or third party to provide financial support to a company may support its solvency. His Honour was not, however, satisfied that Ms Penson would take any steps to place the company in funds to pay the judgment debt or other debts owing to the substituted creditors, even if she has the personal means to do so, having concluded that she was unlikely to utilise her personal funds to pay the company debts generally as opposed to only such debts as she chose to pay ([29]-[30]). His Honour reached that conclusion having regard to the history of the matter and to the way in which her statements of intention were couched (see [28]). … [43] The other matter to take into account on this application is the public policy in relation to insolvent companies. In circumstances where his Honour's conclusion as to insolvency is challenged largely by reference to the import of the undertaking proffered by Ms Penson, to stay the ongoing liquidation of the company would be at the risk of permitting an insolvent company to continue to trade. That factor not only speaks against any further stay but against the grant of leave to appeal." 1. Applying those principles to this case, the public policy against permitting an insolvent company to continue to trade tends strongly against the grant of leave. 2. The primary judge concluded, on the basis of a vast amount of evidence which Mr Ekes chose not to put before this Court, that the company was clearly insolvent. None of the attacks upon her Honour's reasoning are persuasive: 1. The company had not "paid" the amount claimed in the statutory demand. As set out at [23] it is clear that at the time of the hearing that the company had not paid the barrister an invoice for $25,300 rendered 15 months prior. In any event, no error was shown in her Honour's finding that "there is a positive reason for ordering that the company be wound up going beyond the mere deemed insolvency arising from the company's failure to comply with the barrister's statutory demand." 2. The complaint that it is somehow relevant that Mr Hyde Page induced "payment" to him by forwarding a page from an insolvency text is risible. No arguable error was made by her Honour in relation to that matter. 3. Her Honour was correct to give little weight to the bald assertions from Mr Ekes that the company had "no debts" in circumstances where her Honour had abundant evidence available to her that this assertion was simply not correct. 4. Her Honour's finding that the company had a debt due and payable to the ATO was attacked in this Court but no evidence or sufficiently cogent argument was advanced to cause us to think, even arguably, that her Honour had erred. Her Honour's treatment of the so-called "credit" from the ATO does not give rise to any arguable error. 5. No error was shown in relation to the way her Honour dealt with the guarantee given by company, particularly in light of her Honour's unchallenged finding that the "assertions as to solvency fall far short of 'the fullest and best' evidence of the company's financial position." 6. We are not satisfied that grounds have been shown to doubt her Honour's conclusion that the company was insolvent. The submission that Mr Hyde Page's debt was paid before the hearing or the orders appointing the liquidator were made cannot be accepted. There was no error of discretion in her Honour refusing an adjournment given the inadequate state of the evidence before her. No arguable miscarriage of justice occurred. 1. Before leaving this case there is one final issue to address. In a directions hearing Payne JA was informed that the liquidator has incurred fees of about $30,000. No offer to pay those fees was forthcoming from Mr Ekes. If, as was submitted on Mr Ekes' behalf orally, circumstances have changed and cogent evidence could be marshalled proving the various assertions made in this Court, no doubt a further application could be made under relevant provisions of the Corporations Act. If, for example, it could be demonstrated by cogent evidence that: 1. the liquidator's fees have been paid; 2. the liquidator is prepared to advise the Court that there are no creditors of the company or other irregularities which need to be investigated; 3. ASIC has no objections; and 4. the Commissioner of Taxation had issued further amended assessments in effect allowing the company's various claims, no doubt an application could be made to the Corporations List judge under s 482 of the Corporations Act on the basis of those changed circumstances. 1. The order of the Court on the application for leave to appeal is that leave to appeal is dismissed with costs. 2. It follows that the applicant's motion dated 19 June 2019 seeking a stay of the orders made by Rees J must also be dismissed with costs. 3. In relation to costs, Mr Hyde Page submitted that a lump sum costs order in the sum of $10,000 for costs of preparation including detailed written submissions and an appearance should be made in his favour as a self-represented barrister based on the Chorley exception: Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150. It is to be noted that special leave to appeal was granted in that matter and the decision of the High Court is reserved. 4. We accept, as Mr Hyde Page submitted, that we should approach the case on the basis that Pentelow represents the law in this State and should not speculate about the outcome of the High Court proceedings. Having regard to the issues in the case, the length of the hearing, and the evidence as to Mr Hyde Page's professional rates, we are satisfied that the sum of $7,500 is reasonable in the circumstances as a lump sum. The Court orders costs be paid by Mr Ekes in a lump sum in the amount of $7,500 under s 98(4) of the Civil Procedure Act. ********** Endnote 1. Formerly s 471A of the Corporations Act. 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: 09 July 2019