Application for Substitution in Winding Up Dismissed

The Court dismissed an application for substitution as the applicant for winding up a company in insolvency, ruling that the applicant failed to prove its creditor status.

New South Wales Supreme Court

CITATION : [COMPANY] v [COMPANY]; Application of [COMPANY] [2009] NSWSC 687 This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S) : 17/04/09; 22/04/09 Written submissions: 01/05/09; 12/05/09; 29/05/09; 01/07/09

JUDGMENT DATE : 23 July 2009

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Interlocutory process dismissed with costs.

CATCHWORDS : CORPORATIONS - winding up - pending application for winding up in insolvency - application for substitution as plaintiff - whether applicant for substitution is a creditor - turns on own facts

Corporations Act 2001 (Cth), Part 5.3A, ss 459P, 465B, LEGISLATION CITED : Evidence Act 1995, s 75 [NAME] Act 1898

CATEGORY : Principal judgment

CASES CITED : [COMPANY] v [COMPANY] (1989) 18 NSWLR 295 Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527; (2004) 185 FLR 130

[COMPANY] - Plaintiff PARTIES : [COMPANY] - Defendant/Respondent [COMPANY] - Applicant

FILE NUMBER(S) : SC 4570/08

COUNSEL : [redacted] [NAME] - Defendant/Respondent

SOLICITORS : [redacted] [NAME] - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

THURSDAY 23 JULY 2009

4570/08 [COMPANY] v [COMPANY]; APPLICATION OF [COMPANY]

JUDGMENT 1 On 4 September 2008, [COMPANY] filed an originating process by which it sought an order under s 459P of the Corporations Act 2001 (Cth) for the winding up in insolvency of [COMPANY] ("[NAME]"). [COMPANY] relied on alleged failure of [NAME] to comply with a statutory demand. 2 By interlocutory process filed on 30 October 2008, [COMPANY] ("[NAME]") seeks an order that it be substituted as the applicant for winding up. [NAME]'s application is brought under s 465B. [NAME] is itself in liquidation, it is its liquidator who has caused it to make the substitution application. 3 Section 465B is in these terms: "(1) [ADDRESS] 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) [ADDRESS] 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." 4 It may be said at the outset that the question raised by s 465B(2) must be determined favourably to [NAME]. This is because [COMPANY] no longer presses its winding up application. 5 The other issue arising is whether [NAME] is, in terms of s 465B(1) a person "who might otherwise have so applied for the company to be wound up". [NAME] claims to be within that description because it is a creditor of [NAME]. On the authorities, however, substitution will be refused if the claimed debt from which creditor status arises is bona fide disputed: see, for example: [COMPANY] v [COMPANY] (1989) 18 NSWLR 295 and, more recently, Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527; (2004) 185 FLR 130. The rationale was stated by White J in the latter case at [66] – [68]: "Section 459P does not provide that [NAME], or [NAME] claiming to be a creditor, may apply to the Court for a company to be wound up in insolvency. It provides that a creditor (including a secured, contingent or prospective creditor) may make that application. As a matter of power as distinct from discretion, the Court may order a company to be wound up in insolvency where the creditor's debt is disputed if the Court determines that the applicant has standing to bring the application. [ADDRESS] has the power to determine the disputed question and if it determines that the applicant is a creditor it may make an order for winding up. ( Re [COMPANY] [1967] Qd R 218 per Gibbs J at 225; Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455; Brinds Ltd v Offshore Oil NL (1985) 60 ALJR 185 at 188).

As a matter of discretion, where the debt and hence the applicant's standing is disputed, the Court will usually not entertain the application for winding up." 6 White J held (at [81]) that the court could not make an order under s 465B(1) without first determining whether the applicant for substitution is a creditor. The question whether [NAME] is a creditor of [NAME] therefore lies at the heart of the present application. The question is, moreover, to be answered according to circumstances as they now exist, not by reference to some earlier state of affairs. 7 [NAME] maintains that it is a creditor of [NAME] and that there is no ground for finding that there is any bona fide dispute as to the existence of the debt owed to it by [NAME]. [NAME], by contrast, says that there is no indebtedness or, at least, that there is, a bona fide dispute as to the existence of any indebtedness on its part to [NAME]. 8 It will be convenient to begin by examining [NAME] payments, receipts and flows of funds without attempting to characterise their nature, except where the nature is obvious from the circumstances. 9 In the first half of 2005, [NAME] entered into a contract to buy land at Redcliffe in Queensland. The intention was to develop the land by constructing an apartment building. The vendor was [COMPANY] ("[NAME]"). The agreed purchase price was $5.2 million. 10 [NAME] encountered difficulties in raising finance for this purchase. It had no financial substance of its own. 11 [NAME] ultimately entered into a loan agreement with [COMPANY] and [COMPANY] for a total loan amount of $5.11 million. [NAME] associated with [NAME] were to be guarantors. In addition, [NAME], which owned real estate at Waterloo, was to give security over that property to [NAME]'s lenders to secure the loan of $5.11 million to [NAME]. 12 [NAME]'s Waterloo property was, however, already mortgaged to [NAME]. It was necessary for that mortgage to be discharged in order that [NAME] might provide the security required by [NAME]. On settlement of [NAME]'s purchase from [NAME] in July 2005 (and contemporaneous drawdown by [NAME] of the loan from [NAME]), therefore, an amount of $536,917 required to satisfy [NAME]'s debt to [NAME] was, by [NAME]'s direction, paid by [NAME] to [NAME]. The rest of the advance was applied towards the balance of purchase moneys and transaction expenses. 13 [NAME] was persuaded to complete the sale to [NAME] in July 2005 on payment of less than the full balance of purchase moneys. Part was deferred. In December 2005, this balance was satisfied. It amounted to $632,730. That sum was paid to [NAME] by [NAME] out of moneys raised by [NAME] through refinancing the Waterloo property. The lender to [NAME] under the refinancing was [NAME]. 14 Viewed as at the end of 2005, the position was that [NAME] had, almost six months earlier, paid $536,917 to [NAME] for the account and benefit of [NAME] (thereby obtaining release of [NAME]'s Waterloo property from the [NAME] mortgage); and that, upon the subsequent satisfaction of the outstanding balance of purchase moneys due by [NAME] to [NAME] had, in December 2005, paid $637,730 to [NAME] for the account and benefit of [NAME]. 15 Let it be assumed for the moment that, as of July 2005, [NAME] became indebted to [NAME] in the sum of $536,917 and that, as of December 2005, [NAME] became indebted to [NAME] in the sum of $637,730. One would be inclined to think that, after the latter time, there was a net indebtedness of roughly $100,000 by [NAME] to [NAME]. 16 There are, however, arguments that the respective sums of $536,917 and $637,730 came, over time, to be augmented. A suggestion in relation to the $536,917 is that, by early 2006, it was in truth $657,666 after adding a sum for expenses (in essence, the proportion of [NAME]'s expenses of borrowing from [NAME] that $536,917 bore to the total loan), an interest element and [NAME] further advances. A suggestion in relation to the $637,730 is that it grew to something of the order of $805,000 after adding similar items for expenses, fees and interest. 17 These suggestions – as well as the assumption regarding mutual indebtedness – must be assessed in light of the evidence. 18 The only witness who gave direct evidence of contemporary events is [NAME]. His brother, [NAME], was, at relevant times, one of the two directors of [NAME]. The other was [NAME], the wife of [NAME]. There is some hearsay evidence of things allegedly said at the time by [NAME] but, as I have said, [NAME] is the only person who gave direct evidence about what happened when the various transactions were undertaken. 19 [NAME], as well as being a director of [NAME], was the sole director of [NAME]. That company became subject to voluntary administration under Part 5.3A of the Corporations Act in November 2007 and is now in liquidation. 20 The four [NAME] persons I have mentioned – [NAME] and [NAME] – were the guarantors of [NAME]'s indebtedness to [NAME]. 21 [NAME] was not an officer of [NAME], he played an active part in its affairs. Likewise, although [NAME] was not an officer of [NAME], he was active in its affairs. It is reasonable to infer that [NAME] had authority to speak for [NAME] and [NAME] had authority to speak for [NAME]. 22 The fact that [NAME] was the only contemporary participant who gave evidence on the present application means that there is no contemporary account of relevant events from the [NAME] side. One of its liquidators, [NAME], did, however, give evidence about things said to him by [NAME] in November 2007, more than two years after the transaction of July 2005. 23 [NAME] is said to have stated to [NAME] after his appointment in late 2007 that [NAME] had become indebted to [NAME] to the extent of some $805,000 and that it was intended that this be paid out of the proceeds of sales of units at Redcliffe as and when sales were completed; also that [NAME]'s financial problems had arisen from the fact that [NAME]'s sales of units had been slow and that [NAME] had therefore not been able to raise from that source the funds it needed to pay [NAME]. On the basis of what [NAME] had told him, [NAME] alleged that [NAME] had lent the $805,000 to [NAME]. 24 [NAME] gave evidence that the original plan regarding the acquisition of the Redcliffe property was that [NAME] would invest $2 million of its own funds, with $1 million of this being contributed by the [NAME] brothers and $1 million being contributed by Mr and [NAME]. The apparent suggestion is that this $2 million would be provided to [NAME] in the form of equity of some kind. It was understood by [NAME] that the [NAME] contribution would come from [NAME]'s sale of the Waterloo property. Because that sale did not eventuate as expected, it became necessary for the whole of the purchase moneys for the Redcliffe property to be borrowed. 25 The element of the transaction under which [NAME] made its Waterloo property available as security for [NAME]'s borrowing from [NAME] was explained by [NAME] in his affidavit in this way: "A few days before settlement [of [NAME]'s purchase from [NAME]], I received a telephone call from [[NAME]. We had a conversation to the following effect: [NAME]: 'I've just been contacted by [COMPANY] who act as our finance brokers. I thought we could get another mortgage over my property but apparently, we can't. We are going to have to pay out my present mortgagee, [NAME] using some of the funds from [NAME] and [NAME]. Are you OK with that?' Me: 'That's fine but as you know, we have to pay [NAME] the option fee of $1,048,049.00. If we pay [NAME] we are going to be short of at least $500,050.00.' [NAME]: 'Don't worry [NAME] will owe [NAME] the amount paid to [NAME] on Settlement. When we re-finance to get our construction funding, I will re-finance the Waterloo situation and I'll pay the balance to [NAME] as a repayment to [NAME] the amount paid to [NAME].' I agreed to [NAME]'s proposal on behalf of [NAME] and [NAME] subsequently paid out [NAME]'s mortgage with [NAME] of approximately $535,000.00. [NAME] subsequently paid [NAME] approximately half of the $1,048M and [NAME] granted [NAME] a mortgage over its property at Waterloo." 26 There can be no real doubt that $536,917 was applied by [NAME] for [NAME]'s benefit in July 2005 to obtain release of [NAME]'s Waterloo property from the [NAME] mortgage and that $637,730 was applied by [NAME] for [NAME]'s benefit in December 2005 when [NAME] paid that money to [NAME]. But the characterisation of each application of funds raises questions. It is conceivable that each such application was properly regarded as a loan by the paying company to the benefited company. It is also conceivable that each sum was properly regarded as augmented by costs, expenses and interest – so that the indebtedness of [NAME] to [NAME] grew from $536,917 to $657,666 and the indebtedness of [NAME] to [NAME] grew from $637,730 to $805,000. In the end, however, everything depends on the contracts that came into operation between the companies. 27 Looking at the affidavit evidence, the court has before it [NAME]'s statement that [NAME] had said that [NAME] was indebted to [NAME] to the extent of $805,000 – or, more accurately, that [NAME] had said that [NAME] "lent the sum of $805,020.82 to" [NAME] ([NAME]'s hearsay account is admissible under s 75 of the Evidence Act 1995). The basis for concluding that this sum of $805,020.82 was paid wholly by [NAME] is not stated in [NAME]'s affidavit or otherwise discernible from the evidence. In addition, the contention that the payment represented a loan derives no support from [NAME]'s affidavit or anything reportedly said to him by [NAME], although it must be accepted that there is evidence that cheques totalling $805,020.82 changed hands between solicitors when the balance owing by [NAME] to [NAME] was satisfied in December 2005. 28 Except for the hearsay account of [NAME] – which is by way of bald assertion of conclusion rather than explanation – there is no basis in the affidavit evidence for any finding of contractual liability of [NAME] to pay or repay $805,020.82 to [NAME]. 29 The only reference to relevant contractual conduct in the affidavits appears in the section of [NAME]'s affidavit quoted at paragraph [25] above. If that evidence is accepted as establishing a conversation, in the terms stated, between authorised representatives of [NAME] and [NAME], it is clear that [NAME] referred only to "the amount paid to [NAME]", that is, the $536,917. The "amount paid to [NAME]" did not include any of the elements said to have caused the $536,917 to grow to $657,666.68. 30 On this basis, the agreement to which [NAME] deposed (see paragraph [25] above) did not extend to anything beyond $536,917 that [NAME] paid out of the proceeds of the [NAME]/MFS loan to obtain release of [NAME]'s Waterloo property from the [NAME] mortgage. According to the terms stated in [NAME]'s affidavit, [NAME] was to "repay" to [NAME] the amount made available to it out of the proceeds of [NAME]'s [NAME]/MFS loan by itself paying the balance that [NAME] was required to pay to [NAME] by way of deferred purchase price under the sale contract. On that basis, the payment by [NAME] to [NAME], for the benefit of [NAME], of the balance of purchase moneys for the Redcliffe property was to operate as satisfaction of [NAME]'s liability to [NAME] for the moneys earlier provided by [NAME] to obtain release of [NAME]'s Waterloo property from the [NAME] mortgage. 31 In the events that happened, the sum paid by [NAME] to [NAME] in December 2005, in order to discharge the balance of purchase moneys owing by [NAME] to [NAME], was the $637,730 already mentioned. That, of course, was roughly $100,000 more than the $536,917 provided by [NAME] in July 2005 to obtain for [NAME] the release of the Waterloo property from the [NAME] mortgage. According to the agreement as described by [NAME], the payment of $632,730 by [NAME] to [NAME] for the benefit of [NAME] effected "repayment" by [NAME] of the amount [NAME] had provided for [NAME]'s benefit to obtain release of [NAME]'s Waterloo property by [NAME]. 32 On this basis, there was no indebtedness of [NAME] to [NAME] and no indebtedness of [NAME] to [NAME] after the deferred balance of purchase price had been received by [NAME] in December 2005. The $632,730 that [NAME] at that point paid to [NAME] was notionally paid by [NAME] to [NAME] to "repay" – obviously with an in-built element for interest, reward or other additional benefit – the $536,917 that had been owing by [NAME] to [NAME] since July 2005. 33 [NAME], having given in his affidavit the account stated at paragraph [25] above, went on in the affidavit to propound the thesis that [NAME] paid $657,666.68 for the benefit of [NAME]. That, even if true, would be irrelevant to the operation of the agreement created by the conversation. According to that agreement, [NAME] was to owe [NAME] "the amount paid to [NAME] on settlement", that is, $536,917.02. 34 [NAME]'s affidavit next refers to [NAME] paying $632,730.29 to [NAME]. He says that this payment represented part payment of [NAME]'s debt of $657,666.68, so that [NAME] remained indebted to [NAME] to the extent of a residual $24,936.39. This, of course, is also inconsistent with the agreement to which [NAME] deposes. According to that agreement, payment by [NAME] to [NAME] of the balance of $632,730.29 was to clear [NAME]'s indebtedness for the $536,917.02 paid by [NAME] to [NAME] and agreed to be owing by [NAME] to [NAME]. 35 Having regard to the agreement as described by [NAME] in his affidavit, therefore, there was no indebtedness of [NAME] to [NAME] on account of [NAME]'s July 2005 payment to [NAME] for the benefit of [NAME] once [NAME] had paid to [NAME] the balance of $632,730.29 payable by [NAME] to [NAME]. 36 [NAME] was cross-examined on the passage in his affidavit recording the alleged agreement. It is true that, in cross-examination, he at first gave a somewhat different version – apparently to the effect that [NAME] would in due course pay to [NAME] an amount equal to that paid by [NAME] to [NAME], that is, $536,917. Later, however, he clarified and corrected this by saying that the agreement was that when "he" (that is, [NAME], meaning [NAME]) paid [NAME], "that was it, that was done and dusted" – making it clear that he was there referring not to $536,917 but to "600 and something", which he then more precisely identified as "the 632". This is consistent with the version given in his affidavit as set out at paragraph [25] above. 37 In the light of this and in the absence of countervailing evidence, I accept that an agreement was made between the two companies as stated in the extract at paragraph [25] above and that, when [NAME] paid $632,730 to [NAME] in December 2005, the indebtedness of [NAME] to [NAME] for the $536,917 paid by [NAME] to [NAME] was satisfied. There was no loan by [NAME] to [NAME]. 38 At large, therefore, are the allegations about liabilities for fees, expenses, interest and other accretions. There is nothing in the evidence to ground any finding about contractual promises or other bases of indebtedness of either company to the other in respect of these. 39 I should add that if, contrary to my finding in that respect, either [NAME] was not entitled to speak for [NAME] or [NAME] was not entitled to speak for [NAME], the finding that there was a contract between the two companies in terms of the conversation at paragraph [25] above will be insupportable. In that event, there will be no basis on which it is open to the court to characterise any of the payments undoubtedly made as giving rise to indebtedness. 40 Turning to the documentary evidence, it is pertinent to note that what purports to be a balance sheet of [NAME] at 30 June 2006 (some six months after the last of the events examined above), records among current assets: "[COMPANY] $700,487.10". 41 A purported balance sheet of [NAME] as at the same date records among current liabilities: "[COMPANY] $700,487". 42 There is no explanation in either balance sheet or elsewhere in the evidence of the basis on which [NAME] may have been indebted to [NAME] to the extent of $700,487 in June 2006. 43 It is, in any event, not necessary to pursue the matter. A purported balance sheet of [NAME] (but not of [NAME]) as at 30 June 2007 is also in evidence. It contains no record of any liability of [NAME] to [NAME], whether $700,487 or any other amount. Since the question before me is whether [NAME] is now indebted to [NAME], the only conclusion the evidence indicates with respect to any debt of $700,487 apparently owed by [NAME] to [NAME] in June 2006 is that the debt no longer exists. As I said at the start, the relevant question concerns the position today. 44 In summary, the evidence placed before the court does not provide a basis for a finding that any money is at present owing by [NAME] to [NAME]. The agreement to which [NAME] deposed showed that there was indebtedness of [NAME] to [NAME] as from July 2005 and that that was, by the companies' contract, satisfied and extinguished in December 2005. Alternatively, if it is not accepted that there was any such contract, there is no way of determining with any reliability at all the nature of the several payments and whether they gave rise to indebtedness. Finally, while contemporary accounting records of both companies suggest indebtedness of [NAME] to [NAME] to the extent of $700,487 at 30 June 2006, contemporary accounting records of [NAME] show no indebtedness to [NAME] of that or any other amount at 30 June 2007. 45 Counsel for [NAME] submitted that the two companies were, in reality, joint venturers under an arrangement that was a [NAME] within the meaning of the [NAME] Act 1898. It was further submitted that the partners made the various payments for the purposes of and in pursuance of the [NAME] business and that neither could be considered indebted to the other except to the extent that a full accounting between partners might ultimately reveal. Support from the existence of a [NAME] was said to come from the existence of an unexecuted document described as a joint venture agreement. 46 I need not dwell on this matter. The existence of the unexecuted agreement, coupled with the absence of evidence that the companies in fact conducted themselves in accordance with its terms, provides no basis for a finding that a [NAME] relationship subsisted between them. But if there were in truth a [NAME], the submission that the true state of indebtedness (if any) could only be disclosed by a full accounting between the partners would have to be accepted, with the result that [NAME]'s claim to be a creditor would still not be made out on the evidence now before the court. 47 In the result, therefore, [NAME] has not established that it is a creditor of [NAME]. It has therefore not shown itself qualified to have an order that it be substituted as applicant for an order for the winding up of [NAME] in insolvency. [NAME]'s interlocutory process filed on 30 October 2008 is accordingly dismissed with costs. **********

24/07/2009 - Typographical error - Paragraph(s) 45

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