FEDERAL COURT OF AUSTRALIA

Khoury v Rosemist Holdings Pty Ltd

[1999] FCA 458

CORPORATIONS LAW - application to wind-up corporation - presumption of insolvency arising from failure to comply with statutory demand - application for leave to oppose application on ground that corporation has offsetting claim against applicant - whether corporation has discharged onus of demonstrating solvency.

Corporations Law ss 95A, 459A, 459C, 459D, 459F, 459G, 459H, 459S

David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265

Leslie & Anor v Howship Holdings Pty Ltd [1997] FCA 133

Liverpool Cement Renderers Pty Ltd v Landmarks Constructions Pty Ltd (NG 3064 of 1996)

Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC

Sandell v Porter (1966) 115 CLR 666

Taylor v Australian and New Zealand Banking Group Ltd (1988) 6 ACLC 808

KHOURY v ROSEMIST HOLDINGS PTY LTD

W3004 of 1999

BOON JR

PERTH

15 APRIL 1999

THE COURT ORDERS THAT:

1                     Rosemist Holdings Pty Ltd be wound up.

2                     Ronald Derek Gamble of BDO Nelson Park Hill, 267 St George’s Terrace Perth, an official liquidator, be appointed the liquidator of the company.

3                     The applicant’s costs be taxed and reimbursed out of the property of the company.

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

REASONS FOR JUDGMENT

1                     By an application filed 19 January 1999, the applicant, Mr Khoury, seeks the following orders:

(a)        an order pursuant to Section 459A of the Corporations Law that the Respondent, Rosemist Pty Ltd (Rosemist), be wound up;

(b)        an order that Ronald Derek Gamble of BDO Nelson Parkhill 267 St George’s Terrace Perth, an official liquidator, be appointed the liquidator of Rosemist; and

(c)        an order that Mr Khoury’s costs be taxed and reimbursed out of the property of Rosemist in accordance with section 466(2) of the Corporations Law.

Background

2                     Rosemist owes Mr Khoury the sum of $13,800.00 in respect of a judgment obtained in the Western Australian Industrial Relations Commission held in Perth on 7 October 1998.

3                     On 17 November 1998 a statutory demand was served on Rosemist, requiring payment of the sum of $13,800.00.  Rosemist has failed to comply with this statutory demand and, as at the date of the hearing of this application, the whole of the debt remains unpaid.

4                     After the application was filed on 19 January 1999, a directions hearing was listed for 15 February 1999 before District Registrar Jan.  On 12 February 1999 the solicitor for Rosemist filed a notice of intention to appear at hearing and of grounds of opposition to a winding-up application.  The notice stated that the grounds of opposition to the application were as follows:

(a)        that the company is solvent; and

(b)       that the company has offsetting claims which are admitted by the Applicant.

5                     Rosemist was incorporated in 1995.  At that time, the directors of Rosemist were Mr Khoury and Mr Naji Jabbour.  Mr Jabbour and Mr Khoury were initially the shareholders of Rosemist, which traded for a period of two and a half years under the name of Jabkah Foods.  Its principal business was as a food wholesaler.  Mr Jabbour and Mr Khoury worked in the business. 

6                     Mr Khoury resigned in February 1998 and sold his shareholding to Mr Jabbour at that time.  It is apparent that there was a falling out between Mr Khoury and Mr Jabbour. They have engaged in litigation in the Western Australian Industrial Relations Commission (which resulted in Mr Khoury obtaining the judgment against Rosemist which is the basis of this application), in the Supreme Court of Western Australia, in the District Court of Western Australia and now in this Court.  Further details of the District Court litigation will be set out further on in these reasons for decision. 

7                     Mr Jabbour gave evidence that Rosemist ceased trading on 30 June 1998.  On that date it was sold to the Jabbour Family Trust.  According to Mr Jabbour, the sale was from Rosemist in its personal capacity to Rosemist in its capacity as trustee for the Jabbour Family Trust.  In October 1998 Rosemist ceased acting as trustee of the Jabbour Family Trust, and  Redrunner Pty Ltd (Redrunner) took over as trustee.  Mr Jabbour is the sole director of Redrunner.  Mr Jabbour and members of his family are the beneficiaries of the Jabbour Family Trust. 

The Legislative Framework

8                     Section 459A of the Corporations Law states that on an application under s 459P, the Court may order that an insolvent company be wound up in insolvency.  Under s 459P(1) a creditor (amongst others) may apply to the Court for a company to be wound up in insolvency. 

9                     Under s 459E, a creditor may serve on the company a statutory demand relating to a debt that the company owes to the person, that is due and payable.  That section states that the statutory demand must specify the debt and its amount, and must require the company to pay the amount of the debt within 21 days after the demand is served on the company.  It is apparent from the documents filed in this matter, and it is not in issue, that the formal requirements of s 459E have been met in relation to the statutory demand served by Mr Khoury on Rosemist in this matter.

10                  Under the provisions of s 459G, a company may apply to the Court for an order setting aside the statutory demand served on the company only within 21 days after the demand is served.  In this case, no such application was made within the 21 day period.  Because of this, Rosemist is precluded from applying pursuant to s 459G to set aside the statutory demand: see David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. 

11                  Section 459C states in subsection (1) that that section has effect for the purposes (inter alia) of an application for leave to make an application under s 459P.  Subsection (2) of s 459C states amongst other things that the court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made the company failed (as defined by s 459F) to comply with the statutory demand.  Subsection (3) of s 459C states that a presumption for which that section operates except so far as the contrary is proved for the purposes of the application.  In this case, the application was made on 19 January 1999.  Rosemist therefore has the onus of proving that it is not insolvent. 

12                  Because of the definition in s 95A(1) a company is solvent if, and only if, it is able to pay all of its debts, as and when they become due and payable.  A company which is not solvent is insolvent (s 95A(2)). 

13                  Rosemist is seeking leave to oppose the application for winding up on the ground that it has an offsetting claim which is admitted by Mr Khoury.  Section 459H allows the court, if it is satisfied that the company has an offsetting claim against the applicant, to set aside the statutory demand.  However, s 459S precludes Rosemist from, in the winding up proceedings, relying on any ground that could have been relied on for the purposes of an application to set aside the statutory demand, except with the leave of the court.  Subsection (2) of s 459S states that the Court is not to grant leave unless it is satisfied that the ground is material to proving the company is solvent.

14                  A summary of the scheme of the legislation is set out in the case Leslie & Anor v Howship Holdings Pty Ltd (Federal Court NG3449 of 1996, Sackville J, unreported, Sydney 28 February 1997). 

15                  Because of the failure by Rosemist to comply with the statutory demand or to apply within 21 days of the serving of the statutory demand to have it set aside, the primary issues in this case are as follows:

            (1)        Whether Rosemist should be wound up on the ground that it is insolvent.  Rosemist has the onus of proving that it is solvent.

(2)               Whether leave should be granted to Rosemist to oppose the winding up application on the ground that it has an offsetting claim against Mr Khoury. Leave can only be granted if the offsetting claim is material to proving solvency.

Rosemist is further submitting that this Court should, in any event, exercise its discretion and refuse to order winding up in any event.

The Evidence

16                  Affidavits were filed on behalf of Mr Khoury which show that the formal requirements of the statutory demand and winding up application processes have been complied with.  Rosemist does not allege that there have been any defects in the application process.  Mr Khoury did not give any verbal evidence. 

17                  Affidavits were also filed on behalf of Rosemist.  Mr Jabbour swore affidavits on 12 and 23 February 1999 which go to the substance of the application.  Rosemist filed a further affidavit by Elenor Louise John dated 24 February 1999.  Ms John is Rosemist’s accountant and prepared the draft financial statements for Rosemist for the financial year ended 30 June 1998. 

18                  Notices were served on Rosemist on behalf of Mr Khoury that Mr Khoury wished to cross-examine both Mr Jabbour and Ms John.  Mr Jabbour was present at court and gave evidence.  Ms John did not appear.  Counsel for Mr Khoury, Mr Schapper, opposed Ms John’s affidavit going into evidence because she was not present to be cross-examined.  As Ms John’s evidence goes to the main issue in the proceedings, namely, the solvency or otherwise of Rosemist, I excluded her affidavit from the evidence.  I invited counsel for Rosemist, Mr Stavrianou, to seek an adjournment until Ms John could be called.  This was because it appeared that Ms John was away on annual leave.  Mr Stavrianou indicated however that his instructions were not to ask for an adjournment and that Mr Jabbour wished to have the hearing proceed.  In these circumstances the only evidence given on behalf of Rosemist was that of its director, Mr Jabbour.

19                  In his affidavit sworn 12 February 1999, Mr Jabbour states that on 16 November 1998, the day before the statutory demand was served on Rosemist, he instructed his solicitor to file the documents required to initiate an appeal against the Industrial Relations Commission’s order that Rosemist pay Mr Khoury the sum of $13,800.00.  On 24 November 1998, an application to extend the time within which to make the application to extend time, and an application to extend the time within which to appeal, and an appeal against the Industrial Relations Commission’s order were filed.  On 25 January 1999 the Western Australian Industrial Relations Commission dismissed the applications to extend time, and accordingly the appeal could not proceed.

20                  Mr Jabbour states in his affidavits;

“Given that I was attempting to challenge the whole basis for the statutory demand served on the Respondent on 17 November 1998, that is, the Industrial Relation Commission’s order, I did not instruct my solicitor to investigate the possibility of challenging the statutory demand itself”.

21                 Mr Jabbour goes on to state in that affidavit that he was informed that his solicitor spoke to Ms John on 12 February 1999 who informed his solicitor that “there is net equity in the business”.  That is of course hearsay evidence and will be given weight accordingly.

22                  Mr Jabbour states that Rosemist has not traded since 30 June 1998.  He had personally met Rosemist’s obligations and thereby ensured that it was solvent, and stated that he would continue to do so.  Mr Jabbour states in the affidavit :

“I do so because I want it to be able to proceed with its counter claim against Mr Khoury in the District Court Action and I also wanted to appeal the Industrial Relations Commission’s order.”

23                  Mr Jabbour said that on 25 January 1999, when it became clear that he could not proceed with the appeal in the Industrial Relations Commission, he instructed his solicitor to arrange a meeting with a barrister, Mr Stavrianou, to see if anything could be done to oppose the application to wind up. 

24                  According to Mr Jabbour, on 2 February 1999 his solicitor telephoned and said that there were offsetting claims which could be used to oppose the winding up application if Rosemist was solvent.  On 5 February 1999 Mr Jabbour’s solicitor telephoned him and asked if financial statements could be prepared as a matter of urgency.  Mr Jabbour instructed his solicitor to contact Ms John and find out whether this was possible.  Ms John sent Mr Jabbour a facsimile on 5 February 1999 requesting further information.  Mr Jabbour states that he spent the weekend of 6 and 7 February finding the information requested by Ms John, and he delivered it to her on 8 February 1999.  On 12 February 1999 Mr Jabbour’s solicitor received a facsimile copy of the draft financial statements of Rosemist for the year ended 30 June 1998.

25                  In a further affidavit sworn 23 February 1999, Mr Jabbour described how he provided information required by Ms John in her facsimile dated 5 February 1999.  Mr Jabbour states in that affidavit as follows :

“I verify that to the best of my knowledge the draft financial accounts for the Respondent for the year ended 30 June 1998 are an accurate description of the Respondent’s financial circumstances as of 30 June 1998.  I cannot be absolutely certain that the draft financial accounts for the Respondent for the year ended 30 June 1998 are an accurate description of the Respondent’s financial circumstances as of 30 June 1998 because on 13 October 1998 the Federal Police executed a search warrant on the Respondent and seized most of its financial records”. 

26                  Mr Jabbour goes on to state in his affidavit that by a Sale of Business Agreement dated 1 July 1998 the business of Rosemist, known as Jabkho Foods, was sold to Rosemist Holdings Pty Ltd as trustee for the Jabbour Family Trust.  The Sale of Business Agreement specified that the purchase price was a total of $237,173.00.  Payment of the purchase price was in large part effected by the Jabbour Family Trust paying the trade creditors of Rosemist as at 30 June 1998.  The trade creditors of Rosemist as at 30 June 1998 was reckoned to be the sum of $223,276.00.  Despite the sale of the business agreement specifying that the purchase price was a total of $237,173.00, the Jabbour Family Trust paid a total of $245,888.14.  The payment of the additional $8,715.14 was to creditors who had provided goods or services to Rosemist on or before 30 June 1998 who had not rendered an invoice by that date.  By paying the additional sum of $8,715.14, the Jabbour Family Trust ensured that all trade creditors of Rosemist were paid in full.

27                  Mr Jabbour said in his affidavit that the Jabbour Family Trust, and not himself, had met the financial obligations of Rosemist since 1 July 1998.  A list of the payments made by the Jabbour Family Trust on behalf of Rosemist since 1 July 1998 was annexed to his affidavit.  Since 11 August 1998, the date the payments under the sale of the business agreement were completed, tens of thousands of dollars had been paid by the Jabbour Family Trust on behalf of Rosemist. 

28                  In his verbal evidence, Mr Jabbour acknowledged that the trust had paid approximately $50,500.00 on behalf of Rosemist on top of the monies due under the sale agreement and the $8,000.00 in addition already referred to.  Mr Jabbour also acknowledged that the trust was still advancing money to Rosemist to enable it to pay its obligations such as loans to the company. 

29                  Mr Jabbour was cross-examined about the source of the money used to pay Rosemist’s debt.  Mr Jabbour said that he paid the money, either from the family trust’s money, or his own, his children’s and his wife’s money.  He had even used his Mastercard to pay some of Rosemist’s debts.  When asked whether if Mr Jabbour hadn’t paid it, Rosemist would not have been able to pay the debts, Mr Jabbour said that that was not correct but he paid it so the debts were paid straight away.  However, Mr Jabbour admitted further on in the cross-examination that Rosemist would not have been able to pay the debts itself.  At present Rosemist did not even have any bank accounts, for it ceased having an account on the 1 July 1998.  Any income Rosemist received, such as a recent $735.00 Taxation Office refund, Mr Jabbour has signed over to the family trust’s fund.  Rosemist had no other cash but only money owed to it.  Mr Jabbour said that he had sold all of Rosemist’s assets and that the only asset it had was what Mr Khoury allegedly owed it.  The trust was still advancing money to Rosemist to pay its obligations.  These were loans made to Rosemist.  When asked to confirm that Rosemist could not meet its obligations to its solicitors, the accountant, and the Australian Taxation Office unless Mr Jabbour or the trust lent it money, Mr Jabbour answered

“IfMr Khoury paid the money he owed it would not be in a financial problem”.

30                  When Mr Jabbour was taken through the draft financial statements of Rosemist during cross-examination, he stated that some of the items in the financial statement were not correct.  For example, a $5000 debt to a family friend had been paid, even though the money was still shown on the financial statement as owed by Rosemist.  Mr Jabbour stated

“These are working copies of the financial statements - there have been a couple of changes”.

31                  Mr Jabbour said that the financial statements were drafts only and that they had only had a few days in which to prepare them. 

32                  Mr Jabbour stated that the trust was still paying money for the company and that the easiest way out would be to let in the liquidator.  However, Mr Jabbour stated that Mr Khoury owed the company a lot more than the company owed Mr Jabbour, and he was not prepared to pay the $13,800.00 to Mr Jabbour.  Although Mr Jabbour acknowledged that the company had a legal obligation to pay the debt, he felt that it would not be moral for him to pay it as he did not think that the company owed the money to Mr Khoury. 

The District Court Proceedings

33                  In November 1997 Mr Khoury instituted proceedings in the District Court against Mr Jabbour and Rosemist.  The claim by Mr Khoury is based on a deed dated 11 February 1998 executed by Mr Khoury, Mr Jabbour and Rosemist.  The deed recited that Mr Khoury and Mr Jabbour had held shares in and were directors of Rosemist and that a dispute had arisen between them as a result of which proceedings had been instituted in the Supreme Court by Mr Khoury against Mr Jabbour and Rosemist.  The deed was a deed of compromise in that the parties had agreed to settle the action.  The deed recited that as part of the settlement Mr Khoury had agreed to sell to Mr Jabbour his shares in Rosemist; that Mr Jabbour was indebted to Mr Khoury in the sum of $32,000.00 in respect of past loans; and that Rosemist was indebted to Mr Khoury in an amount of $48,000.00 in respect of past loans.  By the deed of compromise it was provided that the shares would be sold for $5 with settlement on or before 12 February 1998, and Mr Jabbour would pay Mr Khoury $20,000.00 on the settlement date with a balance $12,000.00 within four weeks, whilst Rosemist would pay the amount of $48,000.00 within four weeks of settlement.  Mr Khoury was to deliver to Mr Jabbour any other documents relating to Rosemist which were in his possession or control. 

34                  It was common ground in the District Court proceedings that settlement occurred, that Mr Khoury transferred his shares in Rosemist to Mr Jabbour and that Mr Jabbour paid the sum of $20,000.00 to Mr Khoury.  Mr Jabbour has however not paid the sum of $12,000.00, being the balance due under the deed, and Rosemist had not paid the sum of $48,000.00 as required by the deed.  Mr Khoury claimed against Mr Jabbour and Rosemist the relevant sums together with interest. 

35                  On 12 August 1998 a Deputy Registrar of the Court held that Mr Khoury was entitled to summary judgment against Mr Jabbour in the sum of $12,000.00 and to judgment against Rosemist in the sum of $20,405.87, with leave to defend the balance of Mr Khoury’s claim brought against Rosemist.  The matter went on appeal and on 27 November 1998 his Honour Judge MacKnay DCJ set aside the summary judgments and gave leave to Mr Jabbour and to Rosemist to defend Mr Khoury’s action. 

36                  Mr Jabbour is alleging in the District Court Action that the deed had been executed by both Mr Jabbour and Rosemist as a consequence of economic duress from Mr Khoury.  Further and in the alternative it is alleged that if the deed remained on foot Mr Khoury was in breach of it as he had failed to return to Rosemist all documents in his possession.

37                  In the pleadings as they currently stand, Mr Khoury is claiming $12,000 plus interest against Mr Jabbour, and $48,000.00 plus interest against Rosemist.  In a counter claim, Rosemist is claiming from Mr Jabbour the following amounts:

1                    $20,000.00 paid to Mr Khoury after execution of the deed;

2                    the return of books held by Mr Khoury which is allegedly preventing Rosemist from meeting its liabilities;

3                    The sum of $1213.13 being monies allegedly misappropriated by Mr Khoury;

4                    The sum of $26,381.00 allegedly advanced by Rosemist to Mr Khoury; and

5                    The sum of $30,695.00 paid by one of Rosemist’s debtors to Mr Khoury and allegedly applied by Mr Khoury for his own use. 

In the proceedings Mr Jabbour is counter claiming against Mr Khoury the following;

1                    The sum of US $14,000.00 allegedly lent by Mr Jabbour to Mr Khoury; and

2          The sum of $35,500.00 allegedly due and owing by Mr Khoury to Mr Jabbour for accommodation and meals.

38                  In his affidavit sworn 23 February 1999, Mr Jabbour states that when going through Rosemist’s financial records he found a handwritten list in the handwriting of Mr Khoury which records cash payments made by Mr Khoury, supposedly on behalf of Rosemist, some of which were not authorised by Rosemist.  Mr Jabbour has instructed his solicitor to apply to amend the counter claim in the District Court to include a claim against Mr Khoury in respect of these payments.  The monies involved amount to approximately $4000.  Mr Jabbour states

“I have instructed my solicitor to make the applications referred in this paragraph as soon as possible and then enter the matter for trial as soon as possible because I would like all matters between the parties resolved once and for all”. 

39                  In his verbal evidence Mr Jabbour stated that he was the one who had instructed his solicitor to hurry up the proceedings as he wants to finalise these matters.  His solicitor had advised him that it would be at least five months before the matter could be heard.

Discussion of Evidence

40                  As I have already indicated, Rosemist did not seek to cross-examine any of Mr Khoury’s witnesses.  Mr Khoury therefore did not give evidence.  Neither Mr Jabbour nor Rosemist is challenging the basis upon which Mr Khoury is applying for Rosemist to be wound up.  The only issue was whether Rosemist was solvent.

41                 In contrast, Mr Jabbour gave verbal evidence.  I did not gain a favourable impression of his credibility in the course of that evidence.  As an example of his lack of credibility, when asked whether he had made the decision to replace Rosemist as trustee of the Jabbour Family Trust with Redrunner, Mr Jabbour answered “no, the family trust made the decision”.  Mr Jabbour had however already acknowledged that he was the sole director of Redrunner and the sole director and a beneficiary of the Jabbour Family Trust.  It was then put to him again that he had made the decision to put Redrunner in as trustee.  Mr Jabbour answered  “you would have to ask Redrunner.  The family trust made the decision to appoint Redrunner”. 

42                  It also became apparent during the course of the proceedings that Mr Jabbour consistently confused his personal interests with those of both Rosemist and the Jabbour Family Trust.  This is hardly surprising, as Mr Jabbour seemed to be the person who had the sole responsibility of running both Rosemist and the Jabbour Family Trust, and his personal finances were very closely linked to both of those entities. 

The Solvency of Rosemist

43                  Because of the definition in s 95A of the Corporations Law, Rosemist is solvent if, and only if, it is able to pay all of its debts as and when they become due and payable.  On behalf of Mr Khoury it was submitted that the principles that should be applied in resolving the question of fact of solvency are conveniently set out in Leslie v Howship Holdings Pty Ltd [1997] FCA 133 at pages 9-11.  In that case Sackville J stated that the mere fact that the company’s assets exceed its liabilities does not establish solvency.  Several authorities were quoted by Sackville J in that case to the effect that a company may be insolvent at the same time as being wealthy.  If the company does not have assets available to meet its current liabilities it is commercially insolvent.  However, the adoption of the cash flow test does not mean that the extent of the company’s assets are irrelevant to the enquiry.  Sackville J referred to dicta of Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter (1966) 115 CLR 666 at 670 as follows:

“Insolvency is expressed in s 95 [of the Bankruptcy Act 1924 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money.  But the debtor’s own moneys are not limited to his cash resources immediately available.  They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor.  The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.  It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.”

44                  The authorities indicate that the question of whether a company is unable to pay its debts as they fall due is to be decided as a matter of commercial reality in all the circumstances.  On behalf of Rosemist it was submitted that the company is solvent and that the application must be dismissed.  It is stated that from Sandell v Porter (supra) it is clear that the debtor’s own monies are not limited to cash resources immediately available, and the mere fact of non payment of a debt does not of itself lead to conclusion of insolvency.  Barwick CJ in Sandell (supra) said at page 672

“However much it may lead to a suspicion that the debtor is not merely unwilling but in fact unable to pay it, the continuance of the unpaid debt of itself does not establish the fact of that inability; in particular, it does not establish that fact at any particular time…” 

45                  Rosemist submits that in this case the evidence establishes that the company was at the date of hearing solvent.  It is submitted that the balance sheet of the company as at 30 June 1998 shows an excess of assets over liabilities of $24,525.00.  That sum is based inter alia upon inventories of $203, 879.00 and creditors of $223,726.00.  It was submitted that the purchase price was paid by the trust paying the trade creditors of the company as at 30 June 1998.  The trade creditors paid totalled $245,888.14 and the result was that all trade creditors were paid in full.  It was further submitted that if one accepts the evidence of Mr Jabbour then the only creditor of the company is Mr Khoury; the company has a significant claim against Mr Khoury for a sum greater than that sought to be recovered by the applicant; the company is not trading and has not done so since 30 June 1998; payments on behalf of the company have been made by the trust since 30 June 1998; the company intends to maintain its proceedings against Mr Khoury. 

46                  On behalf of Mr Khoury it is submitted that the Court ought to find that Rosemist is insolvent because Rosemist has no cash; it has no income; it has no identified asset which is readily realisable so as to allow the debt to Mr Khoury to be paid; it does not trade and therefore has no prospect of generating any income; it has not paid Mr Khoury the undisputed debt owed to him; many of Rosemist’s debts have been paid by Mr Jabbour or Mr Jabbour’s family trust; more particularly the amount owed by Rosemist but paid by the trust over and above payment of the purchase price appears to be $50,507.49.  Added to the $245,818.14 the trust has thus paid a total of $296,395.63 to or in respect of Rosemist; thus if Mr Jabbour is to believed, $50,507.49 of Rosemist’s debts have been paid by the trust and this means that the only unpaid debt of Rosemist is the debt to Mr Khoury of $13,800.00; subject to the terms of the trust, the Jabbour Family Trust is free to pay Rosemist’s debts if it so chooses, but the fact that the trust is paying the debts demonstrates that Rosemist is unable to do so and it is therefore insolvent; it may be that Rosemist has a liability to the trust in the amount paid by the trust in respect of Rosemist’s debt (s 459D); and the fact, if it be a fact, that the respondent has an excess of assets over liabilities does not establish solvency in the circumstances of this case (see Leslie v Howship Holdings Pty Ltd (supra)). 

47                  I have already indicated that I have doubts about the credibility of Mr Jabbour.  Even if Mr Jabbour is to be believed, however, his evidence indicates that at best the financial statements sought to be relied upon by Rosemist are inaccurate to some extent. Rosemist has no cash, bank accounts or assets other than a possible contingent asset in the form of a defended counter claim against Mr Khoury.  Rosemist is unable to pay its debts as they arise out of its own monies; and Mr Jabbour, his family trust and his relatives have paid Rosemist’s debts for it as and when they have fallen due at least since 1 July 1998.  In these circumstances, it appears to me that despite the fact that Rosemist may have an excess of assets over liabilities (although this is far from clear to me at this stage), it is clearly unable to pay its debts as and when they fall due.  Thus, the surrounding circumstances point to Rosemist having been insolvent for a considerable period of time within the meaning of s 95A of the Corporations Law and within the dicta of Barwick CJ in Sandell v Porter (supra). 

48                  Rosemist has therefore failed to discharge its burden of proving that the company is solvent.

The Offsetting Claim

49                  Rosemist is seeking leave pursuant to s 459S to oppose the winding up application on the ground that it has offsetting claims which are admitted by Mr Khoury.

50                  In clarification of the point raised by counsel for Mr Khoury at the hearing, it is not alleged by Rosemist that Mr Khoury admits that he owes it money.  Rather, Mr Khoury admits that Rosemist has made a counter claim against him in the District Court action and it appears from McNay DCJ’s judgment that there are triable issues between the parties.

51                  It is submitted on behalf of Rosemist that there is good reason why no application was made to set aside the statutory demand: namely, that an application to extend time to appeal the judgment of the Industrial Relations Commission had been made seven days after the statutory demand had been served.  It was submitted that a successful challenge to the judgment of the Industrial Relations Commission would have resulted in the disappearance of the basis of the winding up application.

52                  It was further submitted that the re-amended defence and counter claim dated 9 December 1998 particularises a counter claim in excess of Mr Khoury’s claim in the District Court proceedings. 

53                  It was further submitted that pursuant to s 459S(2) the Court must not grant leave unless it is satisfied that the ground is material to proving solvency.  It was said that in this case the offsetting claim would significantly increase the excess of assets over liabilities and is therefore material to proving solvency.  It was said that “offsetting claim” is defined in s 459H of the Corporations Law as

“a genuine claim that the company has against the respondent by way of counter claim, set off or cross demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).”

54                  It was submitted that in view of Mr Khoury’s admission it is clear that the company has a genuine offsetting claim. 

55                  On behalf of Mr Khoury it is submitted that Rosemist’s claim is strongly denied by Mr Khoury, and Rosemist cannot rely on the District Court claim to defeat the present application because no application pursuant to s 459H was made (David Grant & Co Pty Ltd v Westpac Banking Corporations (supra)).  It was submitted that the offsetting claim can only be relied upon if leave is granted and if the claim is relevant to the issue of solvency (s 459S).  It was said that the claim is not relevant to the issue of solvency because the existence of the claim does not alter the fact that the company is presently without the means to pay its debts.  It was further submitted that the claim is, at best, a highly contingent asset.  It cannot fall within that class of asset referred to by Barwick CJ in Sandell v Porter (supra).  As the existence of the claim is immaterial to the question of solvency it follows that leave should be refused and it should be disregarded. 

56                 In the case of Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 15 ACLC page 1025 Lander J considered an application pursuant to s 459S of the Corporations Law for the defendant to rely upon grounds of opposition that it could have relied upon to set aside a statutory demand.  In that case Lander J stated that at page 1033.

“The scheme therefore contemplates that the hearing of the winding up application will be confined to matters relevant to the solvency of the company.  This scheme when understood that way means that it is only when it is a matter that it is important for the resolution of the question of the defendant company’s solvency that the court is called upon, on an application for winding up, to determine whether the debt is due to the creditor.  There is a public interest…that solvent companies do not get wound up so that the company, its contributories and its creditors are not put to the expense of an administration in insolvency….  I believe the existence or otherwise of the debt is a ground material to proving the defendant company’s solvency.  That is so because the amount disputed is greater than the difference between the company’s current assets and current liabilities.  If this debt was recognised as a liability then that would be a material matter in a consideration of this defendant company’s solvency.  A further matter which needs to be considered is some assessment of the strength of the ground sought to be put in opposition.  I would have thought that the defendant company would need to establish that the ground was arguable before it could benefit by the order.  It must be remembered that the company is seeking a statutory indulgence.  If it had a good ground to set aside the statutory demand it should have advanced it at the appropriate time and before the creditor was put to the cost of the application for winding up.  I would therefore be entitled to make an order in favour of the defendant company pursuant to section 459S.  However, whether or not the order ought to be made must involve some consideration of why the ground or grounds were not advanced in opposition to the statutory demand.”

57                  In the present case, it is true that Rosemist’s counter claim particularises a claim in excess of Mr Khourys claim in these proceedings.  Mr Khoury himself has made a significant claim against Rosemist in the proceedings.  Those proceedings are not going to be heard for, at an optimistic estimate, at least five months.  The offsetting claim is highly contingent.  It is not possible for me to make an assessment of the likelihood of success of either Mr Khoury, or Mr Jabbour and Rosemist in the District Court proceedings. 

58                  I am further mindful of the fact that although Rosemist has paid its debts, they have been paid by way of unsecured loans forwarded by Mr Jabbour, the Jabbour Family Trust and Mr Jabbour’s family.  I have been referred to the case of In the matter of Liverpool Cement Renderers Pty Ltd v Landmarks Constructions Pty Ltd (NG 3064 of 1996 Federal Court) where Tamberlin J stated at paragraph 46 as follows;

“The evidence does not disclose whether the overdraft facility referred to, was secured or unsecured.  This is an important consideration on the question of solvency.  See the remarks of McGarvie J in Taylor v Australian and New Zealand Banking Group Ltd (1988) 6 ACLC 808 at 814, to the effect that monies available by way of unsecured borrowing is not to be treated as the debtor’s own money when determining insolvency.”

59                  This is an important factor to be considered in this case.  The evidence of Mr Jabbour is that Rosemist paid its debts only through unsecured borrowings from the Jabbour Family Trust, Mr Jabbour and his family.  When that is taken into account, the amount of the off-setting claim balanced against Mr Jabbour’s judgment debt and further claim against Rosemist means that this Court cannot be satisfied that the ground is material to proving solvency.  Further, I am not satisfied that Rosemist had a good reason for not applying to have the demand set aside.  Rosemist was aware of the existence of at least a substantial portion of the offsetting claim at the time the statutory demand was served.  It chose to do nothing about it and to pursue another avenue instead.  There was nothing to stop Rosemist applying to have the statutory demand set aside within the required time period as well as seeking leave to appeal out of time in respect of the Industrial Relations Commission decision. 

60                  In all of the circumstances, I do not consider that the requirements for granting leave under section 459S(1) are met. 

Discretion

61                  Finally, it is argued on behalf of Rosemist that the court has a discretion under s 459A of the Corporations Law in deciding whether to wind up the company.  It points to the fact that Rosemist has by letter offered to make payment into court of the admitted amount to abide the District Court proceedings.  It is submitted that that clearly suggests that the company is able to make payment and is solvent.  It is further submitted that the amount of the claim by Mr Khoury is small, the company’s District Court counter claim is for a significantly greater sum, and that Mr Khoury is the only creditor of the company.

62                  It was further submitted on behalf of Rosemist that the application by Mr Khoury for winding up is an application to assist in execution in respect of a judgment debt.  It was submitted that this was not proper and that it was a waste of time and money. 

63                  I note in respect of this last submission that in the Landmarks Constructions case (supra) Tamberlin J referred to submissions by counsel for Landmarks in relation to allegations which were said to amount to a threat to wind up the company for a collateral and improper purpose, so as to be an abuse of process.  Tamberlin J stated at paragraph 33

“In my view, no such improper purpose has been shown in the present case.  Indeed, the purpose which emerges from the evidence, is that Liverpool seeks to recover the monies allegedly owed to it, which, it seems to me, is not only proper but is the purpose for which the statutory demand was issued.  There is no suggestion of threats of undue pressure, extortion, or commercial duress.  Nor is there any suggestion that the demand was a charade in that it was not intended to be pursued to its conclusion.” 

64                  This indicates that the use of the statutory demand process and the subsequent application for winding up for the purpose of recovering a debt is a proper purpose and in the absence of any evidence of an abuse of the court’s process cannot be challenged in this way.

65                  On behalf of Mr Khoury it is submitted that as the company is insolvent there would have to be compelling reasons for any residual discretion in the court to be exercised against winding up.  I agree with the submissions made on behalf Mr Khoury that Rosemist’s submissions do not demonstrate any such reasons.  It is quite clear from the evidence that any offer to pay into court was made by Mr Jabbour or the Jabbour Family Trust, as Rosemist itself has no money to pay into court. 

66                  In all of the circumstances of the case, I am satisfied that it is appropriate to make the orders sought and the court orders:

(1)        Rosemist Holdings Pty Ltd be wound up.

(2)        Ronald Derek Gamble of BDO Nelson Park Hill, 267 St George’s Terrace Perth, an official liquidator, be appointed the liquidator of the company.

(3)        The applicant’s costs be taxed and reimbursed out of the property of the company.

Associate:

Dated:              15 April 1999