FEDERAL COURT OF AUSTRALIA

Hughes v Lopez [2010] FCA 1180

REASONS FOR JUDGMENT

1                                             Mr Michael Hughes and Mrs Lorelle Hughes, the applicants, are the only directors and shareholders of a company, Asia Pacific Lodging Pty Ltd, which is in liquidation.  On 22 June 2010, District Registrar Jan made orders placing the company into liquidation on the grounds of insolvency and appointing the first respondent, Mr George Lopez, as the liquidator.  The company was placed into liquidation on the basis that it had failed to pay a statutory demand for $162,611.81 which had been issued by the third respondent, the Deputy Commissioner of Taxation, within 21 days of the service of the demand.  The company did not appear at the hearing of the winding-up application before District Registrar Jan.  Mr Hughes has given evidence that the first he knew of the company being placed into liquidation was when he received a letter of 30 June 2010 from Mr Lopez of Melsom Robson, a firm of chartered accountants, advising that he had been appointed as liquidator of the company.

2                                             The major asset of the company is a house in Broome.  Mr and Mrs Hughes reside in the house as their family home.  There are two registered mortgages over that property – the first in favour of Permanent Custodians Pty Ltd (Permanent Custodians) and the second in favour of NCF Financial Services Pty Ltd (NCF).  NCF also has a fixed and floating charge over the assets of the company.  On 27 August 2010, NCF issued the company with notices of default under each of the securities it holds.  These notices were issued by NCF consequent upon it being notified that the company was a creditor of the third respondent in respect of the tax debt and that a liquidator had been appointed to the company on the application of the third respondent.

3                                             This application is for the Court’s approval pursuant to s 471A(1A)(d) of the Corporations Act 2001 (Cth) (the Act) for the applicants to cause the company to commence, principally, two legal proceedings.  The first intended proceeding is an application to set aside the winding-up orders made by District Registrar Jan on 22 June 2010.  The second intended proceeding is against NCF for a declaration that it was not entitled to issue the notices of default and a permanent injunction restraining NCF from taking any steps to enforce its rights under the charge and the mortgage to secure the repayment of the monies which it lent to the company.

4                                             Further, in anticipation of getting leave under s 471A(1A)(d), the applicants also seek interlocutory injunctions restraining the liquidator until further order from taking any further steps pursuant to the liquidation, and restraining NCF from taking any steps pursuant to the notices of default which it issued.  The applicants contended that unless the injunctions were granted they would be evicted from the Broome house and would lose their family home.

5                                             I deal with each of the two proposed applications which the applicants seek leave to cause the company to bring.

application to set aside winding-up orders

6                                             The applicants intend to cause the company to bring an application, pursuant to O 35 r 7(2)(a) of the Federal Court Rules (the Rules), to set aside the winding- up orders on the grounds that the orders were made in the company’s absence.  Order 35 r 7 relevantly provides:

(1)               The Court may vary or set aside a judgment or order before it has been entered.

(2)               The Court, where it is not exercising its appellate or related jurisdiction under Division 2 of Part III of the Act, may if it thinks fit vary or set aside a judgment or order after the order has been entered where:

(a)        the order has been made in the absence of a party, whether or not the absent party is in default of appearance or otherwise in default and whether or not the absent party had notice of the motion for the order.

7                                             Barrett J considered a similar application under s 471A(1A)(d) in the case of Lane Cove Council v Geebung Polo Club Pty Ltd (Green as liq) & Ors (No 2) (2002) 41 ACSR 15.  In that case, also, the winding-up order had been founded on the failure of the company to meet a statutory demand, and had been made in the absence of the company.  It was, also, alleged that the statutory demand and the notice of the winding-up application had not come to the attention of the company.  Barrett J considered that there were two matters which were relevant to the exercise of the discretion under that section, namely, the merits of the proposed application and whether the assets of the company would be protected from costs exposure in relation to the proposed litigation.  At [13], Barrett J observed that:

Mr George submitted that two matters are relevant to the decision whether to grant s 471A(1A)(d) approval:  the existence of a prima facie case and that the costs of the application can be met from the assets of the company.  That latter, it seems to me, misconstrues the position.  The fact that there may be in the hands of the liquidator sufficient funds to meet the costs of the application has nothing to do with the kinds of safeguard to which I have just referred.  It is necessary to see either that the company is in reality solvent or that its assets will be protected from claims for costs unless and until it emerges that the winding up is not to continue.  Neither of those things is shown here, even though Mr George has led evidence of ownership of substantial property by Geebung.  Even if a prima facie case on the merits is shown Mr La Nauze has not satisfied what I regard as an indispensable prerequisite to the grant of approval under s 471A(1A)(d).  His application must therefore be refused.

8                                             Barrett J went on, obiter, to deal with the merits of the case.  Barrett J referred to s 459G(2) of the Act and said that the time for applying to set aside a statutory demand had expired.  Barrett J said that there was no discretion for that time to be extended.  Barrett J, also, determined that the statutory demand and the notice of the winding-up orders had been served on the company.

9                                             I consider, first, the prospect of the company successfully bringing an application under O 35 r 7 of the Rules, to set aside the winding up orders made by District Registrar Jan.

10                                          Under that rule, the Court has a discretion to set aside an order which has been made in the absence of a party.

11                                          In the case of Gyro Pty Ltd v Deputy Commissioner of Taxation [2009] FCA 1477, Nicholas J considered whether to set aside, under O 35 r 7, a winding-up order which had been made about five months earlier.

12                                          Nicholas J referred to the following observations made by Hodgson J in the case of George Ward Steel v Kizkot (1989) 15 ACLR 464 at 465:

In my view, if an order winding up a company is made in the absence of the defendant company, and an application is brought promptly by the company, with notice being given to the liquidator, to the plaintiff and to any creditor who appeared at the hearing; and if the evidence shows an explanation for the non-appearance at the hearing and indicates solvency of the company; and if there is consent to setting aside, or at least non-opposition; and if the liquidator indicates that nothing in his investigations to date shows a reason for the company to be stopped from trading, then the court will normally set aside the order.

13                                          Nicholas J refused to set aside the order on the basis of the length of the delay, the inadequate explanation for the delay and the absence of evidence indicating solvency.

14                                          In this case, the third respondent posted on 9 March 2010, a statutory demand addressed to the company’s registered office, being the house in Broome where the applicants reside.  Later in March 2010, Mr Hughes had a discussion with an officer in the Australian Taxation Office, during which he said he had not received the demand.  A second statutory demand was then posted by the Australian Taxation Office, addressed to the company at both the registered office, and the post office box address that Mr Hughes had given during the conversation.

15                                          The third respondent did not file an affidavit in relation to the circumstances of the service of the statutory demand.  However, I was advised by counsel for the third respondent that, after the winding-up orders were made on 22 June 2010, the first statutory demand and also the notice to the company of the winding-up application, which had also been sent by post to the address of the registered office, had been returned as undelivered by Australia Post to the Australian Taxation Office.

16                                          At paras 17-20 of his affidavit of 13 September 2010, Mr Hughes deposed that on 29 March 2010, he had, following his conversation with an officer of the Australian Taxation Office, received the second statutory demand.  As mentioned, that statutory demand was addressed both to the company’s registered office and also the post office box provided by Mr Hughes, which, he said, he used to receive mail for the company.  The statutory demand required that the company pay, within 21 days after the service of the demand, the sum of $162,611.81.  Mr Hughes deposed that he did not make the payment because he thought that he was going to be given an opportunity to arrange a payment plan.

17                                          It follows that the 21 day period from 29 March 2010, being the date on which the demand came to the attention of Mr Hughes, has expired without the payment having been made.  No application was made by the company within that period to set aside the statutory demand.

18                                          I turn to the issue of whether the company would be able to satisfy the requirement of being able to produce evidence indicating solvency.  The applicants relied upon the existence of two company assets, namely, the house in Broome and the company’s claims against Riverside Pier Hotel Pty Ltd (Riverside).

19                                          As to the house in Broome, Mr Hughes has also sought to rely upon evidence to the value of the house.  However, that evidence was given in the form of unsourced hearsay and I do not accept that this evidence in that form is reliable as to the value of the property.  There are two mortgages registered over the property.  Mr Hughes said that the balance outstanding in respect of the loans secured by the mortgages was approximately $550,000.

20                                          As to the claims against Riverside, the evidence is that the applicants obtained the permission of the liquidator to issue statutory demands, in the company’s name, against Riverside in respect of judgment debts owed to the company, and that those statutory demands were not met.  The company, at the instance of the applicants, is now looking to bring an application to wind up Riverside.

21                                          There is no evidence that Riverside has sufficient assets, or is otherwise able, to meet the judgment debts; nor that the company could expect to receive any dividends in a winding‑up of Riverside which would be sufficient to meet the judgment debts, or in sufficient time for the company to meet its debts as and when they fell due.  The certificate of title handed up to me showing that Riverside has a leasehold interest in land, does not assist the applicants because it shows that such interest as the company may have, is encumbered by a registered mortgage.

22                                          It is noteworthy that, notwithstanding that evidence of solvency is crucial to the question of whether the winding-up orders would be set aside, and whether leave under s 471A(1A)(d) of the Act should be given, the applicants did not produce the company’s books of account.

23                                          Further, and significantly, there was no evidence that, if the winding-up orders were set aside, the company would be able to use any equity in the house in Broome, to pay its debts as and when they fell due.  Mr Hughes has deposed that he has been in ongoing discussions with the Australian Taxation Office with the object of arranging a payment plan in respect of the company’s tax debt for around two years.  This evidence militates against the conclusion that the company has been able, or would be able, to raise sufficient funds to meet that debt.

24                                          The applicants’ counsel submitted that the tax debt should not be taken into account on the question of determining whether the company is solvent or not, because that debt is the subject of a bona fide dispute.  However, there is no evidence as to the particulars of the dispute such as would permit me to make an assessment whether the assertion that the debt is the subject of a bona fide dispute, has substance.  Accordingly, I do not accept the applicants’ contention that the tax debt should be disregarded.

25                                          In the circumstances, therefore, on the basis of the paucity of the evidence led by the applicants indicating the solvency of the company, I am of the view that there are insufficient prospects of success in respect of the proposed application to set aside the winding-up orders made by District Registrar Jan, to warrant the grant of leave to the applicants under s 471A(1A)(d) of the Act, to cause the company to bring such an application.

26                                          Further, there has been a delay of just short of three months in making this application to set aside the orders of District Registrar Jan.  There has been an attempt to explain the delay in bringing this application foreshadowing the challenge to the winding-up orders, on the basis of the applicants’ lack of funds.  In my view, notwithstanding the assertion of lack of funds, the delay of almost three months in bringing the application is undue.  The interests of third party creditors, such as NCF, have become involved.  This is another reason why, in my view, it is likely that an application to set aside the winding-up orders would fail.

27                                          I would also observe, although it is not necessary to deal with this in light of my previous findings, that the failure of the company to meet the statutory demand following the service of the demand on 29 March 2010, would constitute a further obstacle to the company’s success in seeking to set aside the orders of District Registrar Jan.  In my view, it would be open to a court to find that the failure to meet that demand would give rise to a presumed insolvency.  Further, the fact that the time period for the setting aside of that statutory demand expired in April 2010; and the paucity of the evidence of the company’s solvency, also militate strongly against the company’s prospects of success of overcoming any presumption of insolvency, and, therefore, in setting aside the winding-up orders.

28                                          However, there is, also, another, and conclusive, reason why the applicants’ application for relief under s 471A(1A)(d) fails.  This is that I am not satisfied that the evidence of Mr Hughes has demonstrated that the assets of the company will be immunised from the costs, and the risks of costs, associated with the conduct of the proposed litigation.

29                                          The evidence of Mr Hughes in his affidavit sworn on 24 September 2010, is that he has an income of $10,000 per calendar month.  From that income he said that he has, as a guarantor, to meet a mortgage repayment obligation of $4,500 to the first mortgagee, Permanent Custodians.  Mr Hughes says at para 9 of that affidavit, that he would have surplus monies of about $4,000 a month from which to meet legal costs of conducting the proposed proceedings.  Mr Hughes also stated that he would, also, be able to raise further finance to meet further legal costs and contingencies.

30                                          The utility of the applicants’ proposed litigation strategy depends upon the company, at the instance of the applicants, initially obtaining interlocutory injunctions restraining further conduct of the liquidation by Mr Lopez, and restraining NCF from exercising its rights under its securities, and then succeeding on the primary applications the applicants propose to bring.  The implementation of this strategy will require the applicants, on behalf of the company, to give an undertaking for damages in respect of each of the two interlocutory applications.  It is also likely that the applicants would be required to provide security for the costs of the respondent parties in each of these two proposed applications.  In addition, the applicants would be required to fund the company’s own legal costs and would be at risk for the payment of each of the respondent’s costs in the event that the company lost one or both of the applications.

31                                          Mr Hughes referred to an ability to raise further funds in his affidavit.  However, Mr Hughes did not refer to the means by which that could be achieved.  The Broome house is an asset of the company and not an asset of the applicants.  In the absence of evidence as to the means whereby further finance may be raised, I am not satisfied that the applicants would be good for any undertaking for damages, nor be capable of meeting costs orders made against the company in respect of any unsuccessful applications.

32                                          Therefore, I am not satisfied that the applicants are in a position to support the financial burdens of the proposed litigation, and so I am not satisfied that the assets of the company would be immunised from the risk of exposure to costs.

33                                          It follows that because the applicants have failed to satisfy me that the assets of the company will be immunised against potential costs; and because, in my view, there are insufficient prospects of success in respect of the proposed application seeking to set aside the winding-up orders, I do not give approval for the applicants to make that application.

the proposed application against ncf

34                                          The effect of my finding in relation to the applicants’ failure to satisfy me that the assets of the company will not be exposed to the risk of costs, renders consideration of the merits of the second proposed application, namely, against NCF, otiose.  However, I will deal with that question anyway.

35                                          The claims which the company intends to bring against NCF are for a declaration that it has acted unlawfully in issuing notices of default and a permanent injunction restraining NCF from acting on the notices of default.

36                                          NCF contends that it was entitled to issue the notices of default because of two events which constitute defaults under the securities.  First, it is said that the company has a tax debt which has not been satisfied.  Secondly, NCF alleges that an “insolvency event” as defined in the securities, has occurred.  An “insolvency event” includes the making of an application to wind up, as well as the appointment of a liquidator or administrator or third party controller to the company.  The notices of default are founded on those two grounds.

37                                          The applicants said that the company’s application would claim that, in issuing the notices of default, NCF breached an implied duty of good faith owed to the company.  The absence of good faith alleged by the applicants is that NCF issued the notices of default in circumstances where it knew that the applicants intended to bring this application as a prelude to challenging the winding-up orders.

38                                          I might interpose to say that NCF challenges the contention by the applicants that it owed such a duty of good faith.  However, in light of the views that I have come to, it is not necessary for me to deal with that question.

39                                          The applicants rely upon a letter dated 19 August 2010, to support their contention that they gave notice to NCF as to the basis upon which they would seek to bring a proceeding to set aside the order of District Registrar Jan, and that, in defiance of that information, NCF had acted in bad faith by issuing the notices of demand.

40                                          However, the evidence shows that after the receipt of that letter of 19 August 2010, and before it issued the notices of default, NCF sought from the applicants’ solicitors full information about the statutory demand issued by the Australian Taxation Office, the application for winding-up, the advice the applicants had received in respect of their prospects of success in relation to their proposed application to set aside the winding-up orders, and a clear statement indicating whether the company did have an outstanding debt owing to the Australian Taxation Office, and, if so, the amount of that debt.

41                                          The applicants, by their solicitors, did not provide enlightening information to NCF in response to the request for information made by NCF.

42                                          In those circumstances, in my view, the company would have insufficient prospects of success in respect of its allegation that NCF acted in bad faith in issuing the notices of default, to warrant allowing the applicants to bring such a claim in the company’s name.

43                                          In support of the company’s claim for an injunction, the applicants contended they lived in the Broome house as their family home and did not pay rent to the company.  The applicants said that if NCF was not enjoined from acting on the notices of default, there would be a sale of the property, with the consequence that they would lose their family home.  Accordingly, said the applicants, damages would not be an adequate remedy, in respect of any unlawful sale of the Broome house by NCF.

44                                          In my view, that is not the appropriate way to look at the matter.  The house is an asset of the company, and, although it may not have been utilised by the applicants, as directors of the company, as a profit earning asset, it is capable of being used as such.  Accordingly, in my view, even if NCF was to act unlawfully in selling the house, the company would be able to be compensated adequately by an award of damages.

45                                          Accordingly, even if I had come to a different view in relation to the immunisation of the company’s assets, I would not have granted the applicants relief under s 471A(1A)(d) to cause the company to bring the proposed claim against NCF, because of the lack of prospects of success of the company’s claim.

46                                          It follows that the application is dismissed.

47                                          It is not necessary to deal with the claims for interlocutory injunctions, but it is plain from what I have said in relation to the prospects of success and undertakings as to damages, in relation to each of the two proposed applications, that the applicants would have failed on those grounds.

Associate:

Dated:         29 October 2010