FEDERAL COURT OF AUSTRALIA

Offstage Support Association Inc v Time of My Life Pty Ltd [2011] FCA 378

THE COURT ORDERS THAT:

1.    The application be dismissed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    On 12 April 2011 I dismissed an application by the plaintiff for an order to wind up the defendant (‘the company’) on one or more of the grounds provided for by s 461 of the Corporations Act 2001 (Cth) (‘the Act’), namely:

‘(e)    directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; or

(f)    affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole; or

…

(k)    the Court is of opinion that it is just and equitable that the company be wound up.’

2    Counsel for the plaintiff conceded, correctly in my view, that there was no evidence to support a winding up order on any of these grounds and that, subject to what follows, I had no alternative but to dismiss the application.

3    That evidentiary matter aside, it is clear, in my view, that unless a person has standing on one or more of the bases set out in s 462(2) of the Act, that person is not entitled to apply to the Court for an order to wind up a company on a ground provided for by s 461: ss 462(1) and (5). The plaintiff did not assert any standing other than as a creditor of the company: para (b) of s 462(2).

4    The debt in respect of which the plaintiff claimed to be a creditor of the company is disputed by the company; in my opinion, for good reason. Apart from an instrument of assignment dated 20 March 2011 between Encore International Inc, as assignor, and the plaintiff, as assignee, to which was attached an invoice dated 18 April 2006 addressed to the company and signed by a Mr Bruce Glatman, as President of Encore International Inc, as well as a notice of assignment dated 20 March 2011 addressed to the company and signed by Mr Glatman in the same capacity, there was no evidence that the company was indebted to Encore International Inc, and its permitted successors and assigns, either in the sum referred to in the invoice or at all. Moreover, the alleged debt was strongly disputed by the company. In all the circumstances, on the evidence before me, I am not satisfied that the plaintiff is a creditor of the company. As the plaintiff does not rely on any other relevant standing to bring its application, that too would be sufficient for me to dismiss its application.

5    Counsel for the plaintiff nevertheless submitted that notwithstanding my lack of satisfaction as to the plaintiff’s standing as a creditor of the company and notwithstanding the lack of any evidentiary basis for making a winding up order on the s 461 grounds relied on, if the Court was satisfied, on the application before it, that the company was insolvent, it was open to the Court under s 459B of the Act to order that the company be wound up in insolvency. So much may be conceded. But I am far from satisfied that the company is insolvent. The only evidence the plaintiff relied on was the financial statements of the company for the years ended 30 June 2006 and 2007. They include balance sheet statements of the assets and liabilities of the company as at the respective dates and even though they show a deficiency of assets as against liabilities of $7,398 and $469,403 respectively, without more, they contribute nothing to any conclusion about the insolvency of the company as at these dates, let alone at the present time.

6    As was said by Ollson J (Duggan and Williams JJ agreeing) in the Supreme Court of South Australia in Fryer v Powell (2001) 159 FLR 433 at [75]:

‘The conclusion of insolvency must be derived from a proper consideration of the company’s financial position, in its entirety, based on commercial reality. Generally speaking, it ought not to be drawn simply from evidence of a temporary lack of liquidity; Sandell Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651. Regard should be had not only to the company’s cash resources immediately available, but also to moneys which it can procure by realisation by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of, it. It is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due which indicates insolvency: cf Sandell at 670; Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119; Flavel v Day (1984) 9 ACLR 502.’

So much is confirmed by the learned authors of Ford’s Principles of Corporations Law (14th Edition, Butterworths, 2010) at [25.050]:

‘The test of solvency posed by s 95A is the so-called “commercial” or “cash flow” test of solvency as distinct from “balance sheet” solvency constituted by an excess of assets over external liabilities. The answer is not sought by analysing a hypothetical instantaneous liquidation: Re New World Alliance Pty Ltd (rec and mgr apptd) (1994) 51 FCR 425 at 435-436 per Gummow J. The s 95A test relates to liquidity because the legislation is concerned with the failure of a unit in a trading environment. The basic question is whether the company’s business is viable. A balance sheet does not answer that question. Although it shows a company’s assets and liabilities at a particular time it does not show the viability of the company’s business by reference to ability to trade.’ (Emphasis added.)

7    In short, I am not satisfied that the company is insolvent such as to enliven my discretion under s 459B of the Act.

8    Which brings me finally to the company’s submission that the plaintiff’s application should be dismissed as an abuse of process. In its written outline, this submission was put on three grounds, but senior counsel for the company only pressed one of those grounds, namely, that it can be an abuse of process to bring a proceeding to wind up a company where it is plain that there is a dispute about the debt said to be due and the alleged creditor has not proceeded by means apt and appropriate for the determination of the issue of indebtedness, e.g., suing on the debt or serving a statutory demand. Reference was made to what was said by a Full Court of this Court in Lanepoint Enterprises Pty Ltd v Australian Securities & Investments Commission (2010) 78 ACSR 487 at [43] – [60] and the cases referred to therein.

9    In Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation (Cth) [1978] VR 83, McGarvie J stated that the court had jurisdiction to restrain the presentation of a winding-up petition in order to prevent an abuse of process. There were, said McGarvie J, two branches to this principle. At 93 – 94, his Honour observed:

‘The first branch applies to cases where the petitioner is incapable of success as a matter of law or through absence of supporting evidence. Where the petitioner is not entitled to present a petition or where the ground alleged is not a ground which can found a winding up order, the petition is incapable of success as a matter of law. If there is no sufficient evidence to establish an otherwise sufficient ground, the petition is incapable of success for that reason. Thus the first branch applies where the proposed petition cannot succeed.

The second branch applies to cases where there is a more suitable alternative means of resolving the dispute involved in a disputed claim against the company. They are not necessarily cases in which, as a matter of law or through absence of evidence, there is an inherent incapacity of success. They may be cases where the petitioner is entitled to present the petition, the ground is sufficient in law and there is evidence to support the ground. They are cases, though, where, due to the availability of the more suitable alternative remedy, the Court hearing the petition would in the circumstances, in the exercise of its discretion, decline to make a winding up order, at least while the circumstances remain as they are at the time of the application for an injunction. Thus the second branch applies where, because of the availability of a suitable alternative procedure, the petition is unlikely to succeed in the circumstances existing at the time.’

10    In L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183, McLelland J said:

‘Proceedings by a person as creditor for the winding up of a company on the ground that it is unable to pay its debts will ordinarily be held to be an abuse of process:

(1)    if the winding up proceedings are bound to fail eg if it is clear that the applicant will not be able to prove that he is a creditor within the meaning of s 363(1)(b) of the Code, or will not be able to prove that the company is unable to pay its debts within the meaning of s 364(1)(e);

(2)    if the application is made for some improper purpose eg if the applicant is seeking to use the winding up proceedings to coerce a company into paying an alleged debt without affording the company a reasonable opportunity to ascertain or have it established that the debt is properly payable; or

(3)    if issues will arise in the winding up proceedings of a kind inappropriate for determination in such proceedings eg a substantial contest as to the existence or enforceability of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose.’

11    In Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374, the New South Wales Court of Appeal considered whether the longstanding principles in respect of the abuse of the winding-up process continued to apply to winding-up proceedings under the Act, notwithstanding the legislative changes enacted to companies legislation pursuant to the 1992 Corporate Law Reform Act. Beazley JA (with whom Hodgson and Santow JJA agreed) drew a distinction between the concept of an abuse of process referred to in Williams v Spautz (1992) 174 CLR 509, where a party commences a proceeding for an improper purpose; and the concept of abuse of the winding-up process. Beazley JA accepted that the concept of abuse of the winding-up process was well-established in the law. Her Honour cited with approval Fortuna Holdings and observed at [56] – [57]:

‘The statutory demand procedure under the earlier versions of the companies legislation was very different from that which applies under the Corporations Act (Cth), and many of the cases of abuse of process in the winding-up context arose in circumstances where there had been a failure to pay pursuant to a statutory demand. Nonetheless, the Evans & Tate companies submit that there will be circumstances where the Court considers it appropriate to grant an injunction or to grant a temporary stay of proceedings until the entire question of indebtedness of the companies has been determined and that in such circumstances, the principles stated in the earlier authorities still apply.

I agree that those principles still apply. The court retains a discretion to make an order in the circumstances discussed by McGarvie J in Fortuna Holdings under the “second branch” or upon the basis referred to by McLelland J in Re Jeff Reid Pty Ltd and the Companies Act in a case where an application for winding-up has been brought in circumstances where the statutory demand procedure was not relied upon. The reference by Brownie J in Pacific Communication Rentals to Williams v Spautz was not intended to indicate that the principles stated by the High Court were those that applied. Rather, he was saying that Williams v Spautz is authority that the Court has an inherent jurisdiction to prevent an abuse of process. The circumstances in which he found abuse of process clearly indicate that he was applying the long standing principles that govern the Court’s exercise of discretion when dealing with a winding-up application.’

12    When I asked counsel for the plaintiff why it was in the interests of his client that the company be wound up, he replied: ‘Because it wants to get paid its debt’. By way of response, I asked :’[T]hat’s the only basis of it?’ He answered: ‘Yes, your Honour.’ There was no statutory demand made for this debt. Moreover, the plaintiff, and those associated with it, were well aware that the existence of the debt, not just its amount, was in dispute. It is true, as counsel for the plaintiff submitted, that this application was not made for the winding up of the company in insolvency pursuant to s 459P of the Act, cf., Lanepoint Enterprises, so that, arguably, the ‘second branch’ of the abuse of process principle referred to by McGarvie J in Fortuna Holdings does not apply where the plaintiff merely seeks to enliven the discretion of the Court under s 459B. On the other hand, the plaintiff’s conduct in seeking to do so, coupled with the fact that there was absolutely no evidence to support an order for winding up the company on the s 461 grounds upon which the plaintiff’s application was predicated, is sufficient, in my view, to bring it within the ‘first branch’ of the principle referred to by McGarvie J in Fortuna Holdings, if not the ‘second branch’.

13    It follows, in my view, that the application should be dismissed as an abuse of process.

14    I was asked to refrain from making any order in relation to costs at this stage. I grant the company leave to approach my chambers to have the matter re-listed so that I can hear any application that may be sought in relation to costs.

Associate:

Dated:    15 April 2011