FEDERAL COURT OF AUSTRALIA

CORPORATIONS - winding up - failure to comply with statutory demand - guarantee of debt of predecessor company - guarantee allegedly executed after appointment of external administrator - defence of non est factum - director failing to read guarantee or seek legal advice - document not of different nature - director negligent - whether defence precluded by s 164 Corporations Law

Corporations Law - ss 164, 459F, 459S

Whelpton v Braams Constructions (1994) 12 ACLC 881 at 884 mentioned

Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 mentioned

Saunders v Anglia Building Society [1971] AC 1004 applied

Petelin v Cullen (1975) 132 CLR 355 applied

Indrisie v General Credits Limited [1985] VR 251 applied

Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 at 240-1 applied

THE COURT ORDERS THAT:

(i)         JBL Enterprises (WA) Pty Ltd have leave to oppose the winding up application;

(ii)        JBL Enterprises (WA) Pty Ltd be wound up and that Garry John Trevor be appointed liquidator; and

(iii)       the costs of the applicant, including reserved costs, be costs in the winding up.

Note:             Settlement and entry of orders is dealt with in order 36 of the Federal Court rules.

REASONS FOR JUDGMENT

The applicant Citic Commodity Trading Pty Ltd (“Citic”) applies under s 459Q of the Corporations Law for an order that the respondent JBL Enterprises (WA) Pty Ltd (“JBL”) be wound up in insolvency.  Citic relies on JBL’s failure to comply with a statutory demand served on 27 March 1997: s 459C(2).

The statutory demand was based on an alleged debt of $258,423 said to be the balance due under a deed of guarantee of debts of Ranco International Pty Ltd (“Ranco”) made in December 1996 together with a sum of $13,723 for goods sold and delivered by Citic to JBL subsequent to the making of the deed. 

JBL’s grounds of opposition that appear in its notice of intention to appear dated 25 July 1997 are in essence that it is solvent, that the deed concerned payment by Ranco to Citic for goods, namely batteries, supplied by Citic to Ranco, that a liquidator was appointed to Ranco on 2 January 1997 [sic - the correct date is 20 January 1997], that the batteries supplied by Citic to Ranco were defective, that there was a total failure of consideration or breach of warranty by Citic to Ranco giving rise to a right of cross-claim or set-off by Ranco and that JBL as surety  can rely on such defects in reduction or extinguishment of Citic’s claim under the guarantee. 

Section 459F(2)(b) of the Corporations Law stipulates that a company served with a statutory demand has twenty-one days to comply with such an order, and if it does not do so the company “is taken to fail to comply with the demand at the end of that period”:  S 459F(1).  JBL did not apply to have the statutory demand set aside under s 459G.  JBL therefore cannot, without leave of the Court, oppose the winding up application on a ground that it could have relied on had it made an application to set aside the statutory demand:  s 459S(1).

By notice of motion dated 29 July 1997 JBL sought such leave.  The Court is directed not to give leave unless it is satisfied that the ground is material to proving the company is solvent: s 459S(2).  As Tamberlin J said in Whelpton v Braams Constructions (1994) 12 ACLC 881 at 884.

“It is clear that the purpose of s 459 is to provide a ‘safety net’ in relation to grounds of opposition which are material to the solvency or otherwise of the application.”

As a preliminary point, counsel for Citic argued that the question of leave should be determined prior to the hearing of the application to wind up the company:  Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075.  Counsel for JBL contended that the question of leave should be determined at the same time as the winding-up application:  Whelpton.  She argued that the issue of solvency could only be determined by looking at the disputed debt in the context of the case as a whole. 

In the circumstances of  this case, I think the latter is an appropriate course.  All the material that the parties would seek to rely on in the winding up application is before the Court.

The Facts

JBL carries on business under the name “Tiger High Power Batteries” as a retailer of batteries in Perth.  Its sole director is Mr Joseph Lau.  Mr Lau was also a director, together with his wife, of Ranco which carried on a similar business.  Citic supplied batteries to Ranco. 

By the end of November 1996 Ranco owed Citic $319,700 for stock supplied over the preceding year.  Ranco’s operations had been severely disrupted as a result of the appointment of a mortgagee in possession.  On 28 November 1996 the solicitors for Ranco, Messrs Chalmers & Partners of Perth wrote to Citic.  After referring to the outstanding debt and the appointment of the mortgagee in possession they said:

“That situation has now been resolved and has been finalised and Mr Lau has incorporated a new company called JBL Enterprises (WA) Pty Ltd of which he is the sole director and is trading as Tiger High Power Batteries.  Ranco does not dispute its indebtedness to Citic but is unable to continue trading at the present time due to its liquidity crisis.

Mr Lau has instructed me to propose to you the following arrangement in order to resolve the matter of the overdue accounts however, the arrangement he proposes is that in consideration of Citic forbearing from taking any legal action against Ranco International for the overdue accounts until the end of March 1997, JBL Enterprises (WA) Pty Ltd will make the following payments to Citic for

(i)        $15,000 on or before 24 December 1996;

(ii)       a minimum of $30,000 on or before 31 January 1997;

(iii)      a minimum of $30,000 on or before 28 February 1997;

(iv)      a minimum of $30,000 on or before 31 March 1997

with consideration being given in the meantime to supply JBL Enterprises (WA) Pty Ltd with stock.

Mr Lau proposes that it should also be a term of the arrangement that Citic reinvoices JBL for the Citic stock currently on hand at Ranco International Pty Ltd. 

If you would be satisfied with these arrangements we would formalise them by appropriate documentation satisfactory to you.

Please indicate to us or to Mr Lau directly whether an arrangement on this basis would be agreeable.”  (Emphasis added)

Citic replied on 29 November by a letter under the hand of its manager Mr Xin Wang as follows:

“Re:    Overdue Account - Ranco International Pty Ltd trading as Tiger     Batteries

I have discussed with our legal advisers this morning regard the proposed arrangement of payment by Mr Lau to CITIC, and also I referred the telephone discussions I had with Mr Lau, his account Mr Tasso Papaelis and yourself yesterday.  We are concerning deeply of the events Ranco being experienced and certainly we will not consider the further exposition of the debt to this company or any new company which is relevant to Ranco in personal or corporate base unless certain conditions are fulfilled.

We also point out that by the end of March 1997 according to your proposed payment arrangement, we will still have over A$200,000 overdue debt, plus assumed new debt.  We are certainly not in the position to continue that.

We have no objection to Mr Lau’s proposal of new company structure as long as the debt is recovered in due time by CITIC.  Based on Mr Lau’s commitment on the payment he is able to make in December for A$50,000, our reply to your letter is as below:

1.         We will consider to forbear from taking legal action against Ranco and Mr Lau personally under the following conditions:

a.         A$15,000 to be paid before 24 December 1996 to against overdue debt and A$35,000 for current stock purchase.

b.         A$30,000 payment in Jan, Feb and March respectively are against overdue debt and extra capacity in cash will be paid for new stock purchase.

2.         We will not consider the further credit term before the overdue debt is reduced below A$100,000.

3.         We will be happy to supply products to JBL at a long term base as long as Mr Lau personally provide the guarantee to CITIC for the payment.

4.         We will not agree to re-invoice for the stocks we have already sold to Tiger Batteries in past.

We need to have a formal legal biding document to confirm above before 5.00 our time today.”  (Emphasis added)

Our Mr Lau’s instructions Ranco’s solicitors prepared a deed of settlement which was forwarded to Citic by fax on 29 November.  The draft deed was between Citic and Ranco and made no mention of JBL. 

On 6 December, on instructions from Mr Wang, Mr Ian McCubbin a partner in Herbert Geer & Rundle, the Melbourne solicitors for Citic amended the deed of settlement provided to Citic by Ranco’s solicitors and also drafted a document entitled “Guarantee Indemnity and Acknowledgment”.  This latter document is a guarantee by Mr Lau of debts of Ranco and JBL.  It does not contain a guarantee by JBL of Ranco’s debts.  Mr Wang sent the documents to Mr Lau under cover of a fax of 6 December.  The fax included the request:

“Please get advice from your solicitor urgently and let me know  whether you agree or not the conditions.  If you agree, we will prepare a formal draft and sign it and then post it to you. 

Joseph, as I have always said to you, we wish to continue the business relation with you, but this matter must be settled before we sell any more stocks to you.  Please discuss with your legal advisor and let me know as soon as possible.”

On 9 December Mr Wang telephoned Mr Lau who agreed that the documents were acceptable.

On 10 December Mr Wang telephoned Mr McCubbin and told him that Mr Lau had agreed.  On the same day Mr McCubbin attended Mr Wang’s office with two documents, a deed of settlement and a guarantee indemnity and acknowledgment.  

The deed of settlement is between Citic as creditor and Ranco as debtor.  It recites that the debtor is indebted to the creditor in the sum of $319,700, that the creditor has agreed to accept payment by instalments and that the debtor acknowledges that the part payment by instalments does not release the debtor from the obligation to repay the debt in full.  By cl 1 the debtor covenants to pay $15,000 on or before 24 December 1996, $30,000 on or before the 24th of January, February and March 1997 and the balance of the debt then outstanding on or before 24 April 1997.  By cl 2.3 the creditor agrees not to charge interest.  By cl 3 the creditor may, in default of any instalments, issue proceedings for the whole of the debt then outstanding. 

Under the guarantee indemnity and acknowledgment the guarantor (named and described in the schedule as Mr Lau and JBL) guaranties the due and punctual payment of all debts due by the debtor (Ranco) to the covenantee (Citic) and performance by the debtor of the deed of settlement. 

On the same day Mr Wang sent these documents to Mr Lau under cover of a letter which stated: 

“I enclose two copies of each Deed of Settlement and Guarantee Indemnity respectively.  As I said, our solicitor is strongly recommending to add additional clause on default of payment.  Please review it carefully and if you don’t have problem, sign them and return by express post as soon as possible.”

Mr Wang says that on 12 or 13 December he received by express courier the counterparts executed by Ranco applying its seal to the deed of settlement and JBL applying its seal to the guarantee indemnity and acknowledgment.  Mr Wang arranged for a director and the company secretary of Citic to apply the company seal of Citic to both documents.

On 16 December 1996 Mr Glenn Robert Featherby of Dewsbury’s, Chartered Accountants was appointed external administrator of Ranco.

I pause here to note that a further ground relied on by JBL is that the guarantee was purportedly executed by Ranco after the appointment of the external administrator and without his consent and hence was beyond the power of Ranco: s 437C(1).  Mr Lau has given conflicting evidence as to this.  In an affidavit sworn on 28 July 1997 he says that he received the documents in or about late December 1996 and returned them as executed on 31 December.  In his affidavit of 18 August 1997 he says that a search of the records revealed that he forwarded the documents by express post on 19 December.  No corroboration is produced of this. 

The onus is on JBL.  I think it is more likely that Mr Wang’s version is correct.  There is no doubt that the first draft was forwarded by Citic as early as 6 December because Mr Lau himself produces the fax from Citic with the receiving machine’s imprint date of 6 December 1996.  Everybody concerned treated the matter as urgent.  Certainly this was so with Mr Lau, who was anxious to get further supplies.  It is therefore more likely that Mr Wang is correct when he says that the documents were received by him from Mr Lau in executed form on 12 or 13 December.  Also, if they had been executed after the appointment of the external administrator it seems unlikely that Ranco would have retained possession of its common seal.

On 13 December Mr Lau sent to Citic a cheque for $7,500 drawn on JBL.  Further payments were made as follows:

            December 13                            $7,500

            December 31                              7,500

            1997

            January 29                               $15,000

            January 31                               $15,000

            February 28                            $20,000

            March 11                                $10,000

                                                           $75,000

                                                         _______

On 20 January 1997 the administration of Ranco ceased and Mr Featherby was appointed liquidator.

I will now turn to the various grounds relied upon by JBL. 

Guarantee Invalid

For the reasons already mentioned I am not satisfied that JBL has established that the guarantee was executed by Ranco after the appointment of the external administrator.

Non Est Factum

This is also a ground not appearing in JBL’s notice of intention to appear.

In his first affidavit Mr Lau says that upon receiving the documents from Citic he spoke by telephone to Mr Wang and “asked him why the document which I had received was so big” and Mr Wang said it was “because of all the legal terms put in by his solicitors”.  Mr Lau says he asked Mr Wang if the document was to the same effect as to the draft deed which had been prepared by Ranco’s solicitors and forwarded to the applicant in November 1996.  He says that Mr Wang assured him that everything was the same, that if he arranged for the deed to be signed Citic would continue to supply JBL with batteries.  Mr Lau says that he noticed the deed contained provision for Ranco’s company seal and asked Mr Wang how he could use the company seal after an administrator had been appointed and Mr Wang assured him that it would be “OK”.  Mr Wang told him that if he arranged for the deed to be signed by all parties and returned to him Mr Wang would counter-sign it and send back a copy.  Mr Lau says

“I did not read the document because I was assured by Mr Wang that it was to the same effect as the draft deed which Ranco’s lawyers had prepared in November 1966.”

He says that he did not consult with or obtain advice from Ranco’s solicitors.  He says that when he signed the deed he thought it was an agreement for instalment payments up until March 1997 by JBL for goods already supplied by Citic to Ranco and for JBL to pay for the ongoing supply of stock to JBL. 

Mr Wang deposes that he telephoned Mr Lau “every day at the time” urging him to guarantee Ranco’s debts so that arrangements could be made for the supply of batteries.  He explained to Mr Lau that batteries could only be supplied on the condition that he and JBL would guarantee Ranco’s debt to Citic.  He denies that he ever assured Mr Lau that it would be “OK” for him to apply the company seal of Ranco after an administrator had been appointed.

I do not accept Mr Lau’s account of these events. It is inherently unlikely that he would have believed or understood Citic would write off $200,000 of the Ranco debt and continue to supply JBL indefinitely.  Citic’s letter of 29 November 1996 made that clear.

The commercial essence of what Mr Lau was trying to get was a supply of goods to his new company JBL.  Not surprisingly, Citic were not going to agree to that unless JBL guaranteed the existing and long overdue debt of Ranco. 

Moreover, Mr Lau deposes:

“At the time I signed the Deed I thought it was an agreement for instalment payments up until March 1997 by JBL for goods already supplied by the applicant to Ranco and for the company (“JBL”) to pay for the ongoing supply of stock to JBL.”

But even on Mr Lau’s version his mistake was not as to the nature of the document (a guarantee by JBL of Ranco’s debt to Citic) but as to the terms of that document (whether a guarantee of the whole debt or only the instalments to March).

In any case Mr Lau was clearly negligent in not reading the documents and not seeking the advice of his own solicitors:  Saunders v Anglia Building Society [1971] AC 1004, Petelin v Cullen (1975) 132 CLR 355. 

Finally, I am inclined to think that the non est factum argument is defeated by s 164 of the Corporations Law which has the effect that a person dealing with a company is entitled to assume, amongst other things, that a document under seal has been validly sealed and by s 164(3)(f),

“That the directors, the secretaries, the employees and the agents of the company properly perform their duties to the company.”

In witnessing the guarantee and affixing JBL’s common seal without reading the document or getting legal advice Mr Lau was in breach of his duty to act with reasonable care and diligence:  s 232(4).  Someone in the position of Citic would be entitled to assume that a director so acting had read and understood this obviously important document and obtained legal advice if in any doubt. 

Set-off

JBL claims to set-off the amount of $75,775.00.  This sum is said by Mr Lau to be

“not including refunds paid directly to customers and unascertained damages for loss of business profits suffered by JBL as a result of lost goodwill occasioned by the applicant’s defective goods and the damage that has caused JBL and continues to cause JBL on the market place which I calculate to be not less than $350,000 per annum in yearly sales. “

However in its solicitors’ letter of November 1966 Ranco admitted the existence of the debt.  More importantly, it is not open to JBL as guarantor to rely on a cross-claim for damages which may be available to the principal debtor as against the creditor in reduction of or as a defence to its liability under the guarantee:  Indrisie v General Credits Limited [1985] VR 251 at 253, Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 at 240-1.

Solvency

JBL sought to rely on an affidavit by Mr Tasso Papaelias, a partner of Ernst & Young Perth.  Mr Papaelias exhibits unaudited accounts of JBL as at 30 June 1997.  These purport to show JBL with total nett assets of $60,126.  Yet in his own terms the deponent lacks certainty and familiarity with the relevant assets and liabilities.  Mr Papaelias does not state who prepared the accounts or the method of accounting used by JBL or the source and method of valuation of assets.  He states no more than that he has been shown the accounts and has reviewed them and “had made the following findings”, which includes the assertion

“In my opinion the accounts show that JBL Enterprises (WA) Pty Ltd is solvent.”

The major asset of JBL is trade debtors ($174,000).  There is no evidence as to the terms of payment or likelihood of recoverability. 

But in any case once it is accepted that Citic’s debt is due and payable that debt in itself would wipe out any surplus of assets.

Orders

There will be orders that:

(i)         JBL Enterprises (WA) Pty Ltd have leave to oppose the winding up application;

(ii)        JBL Enterprises (WA) Pty Ltd be wound up and that Garry John Trevor be appointed liquidator; and

(iii)       the costs of the applicant, including reserved costs, be costs in the winding up.

JBL be wound-up and that Garry John Trevor be appointed liquidator.

Associate:

Dated:              16 March 1998