FEDERAL COURT OF AUSTRALIA

Inter Mining Pty Ltd v Lake Johnston Pty Ltd, in the matter of Lake Johnston Pty Ltd [2013] FCA 915

IN THE MATTER OF LAKE JOHNSTON PTY LTD ACN 062 967 042

THE COURT ORDERS THAT:

1.    The defendant’s interlocutory application dated 23 July 2013 is dismissed.

2.    The defendant is to pay the plaintiff’s costs of and incidental to the application in any event, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF LAKE JOHNSTON PTY LTD ACN 062 967 042

REASONS FOR JUDGMENT

INTRODUCTION

1        Lake Johnston applies for orders that the present winding up application pursued against it be dismissed pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) and r 26.01(1)(a), or alternatively r 26.01(1)(d), of the Federal Court Rules 2011 (Cth) (the Rules).

2        The basis of Lake Johnston’s application is that the statutory demand on which Inter Mining relies to ground proceedings to wind up Lake Johnston is invalid due to the statutory demand’s non-compliance with s 459E(2)(e) of the Corporations Act 2001 (Cth) (CA) and the prescribed form, being Form 509H.

3        In particular, the statutory demand failed to incorporate the requisite warning in a prominent box containing text in bold type as follows (Warning):

A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.

4        For reasons which follow, Lake Johnston’s application will be dismissed.

STATUTORY FRAMEWORK

5        Section 459E(3) CA sets out the requirements of the form of demand that may be served on a company relating to a debt. Subsection (2)(e) of that provision provides that the demand ‘must be in the prescribed form’. Amendments to the Corporations Regulations 2001 (Cth) by the Corporations Amendment Regulations 2007 (No 13) (Cth) provided that the prescribed form pursuant to s 459E(2)(e) CA, being Form 509H, required the inclusion of the Warning.

6        Sections 459J and 467A CA respectively provide as follows:

459J    Setting aside demand on other grounds

(1)    On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

(a)    because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

(b)    there is some other reason why the demand should be set aside.

(2)    Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

467A    Effect of defect or irregularity on application under Part 5.4 or 5.4A

An application under Part 5.4 or 5.4A must not be dismissed merely because of one or more of the following:

(a)    in any case—a defect or irregularity in connection with the application;

(b)    in the case of an application for a company to be wound up in insolvency—a defect in a statutory demand;

unless the Court is satisfied that substantial injustice has been caused that cannot otherwise be remedied (for example, by an adjournment or an order for costs).

7        Section 9 CA contains an inclusive definition of the word ‘defect’. It includes in relation to a statutory demand:

(a)    an irregularity; and

(b)    a misstatement of an amount or total; and

(c)    a misdescription of a debt or other matter; and

(d)    a misdescription of a person or entity.

8        ‘Statutory demand’ is defined in s 9 CA as meaning a document that is ‘or purports to be’ a demand served under s 459E CA.

FOUNDATION OF LAKE JOHNSTON’S ARGUMENT

9        The significance of a demand that fails to include the Warning has been considered in a number of decisions. In Randall Pty Ltd v Chepan Pty Ltd (2009) 73 ACSR 267 (Randall No 1), White J dismissed an application by the debtor company, Randall Pty Ltd, to set aside the demand by reason of the omission of the Warning. Justice White held (at [13]) that ‘there was no question but that the omission of the required warning was a defect in the demand’. His Honour went on to observe that the demand could not be set aside as the failure to do so would not in the circumstances cause substantial injustice as required by s 459J CA. Justice Barrett in Randall Pty Ltd v Chepan Pty Ltd [2009] NSWSC 848 (Randall No 2) was required to consider the prospects of success in a proposed appeal. His Honour held (at [12]) that an appeal against the decision of White J would ‘enjoy no prospects of success’.

10        In McElligott v Boyce [2011] QCA 117, the Queensland Court of Appeal (Muir JA with whom Chesterman and White JJA agreed) held (at [12]), citing the decision of White J in Randall No 1, that ‘the absence of the warning statement has been held not to require the setting aside of a statutory demand’. Muir JA also noted that there was no basis for concluding that the company had suffered any injustice, substantial or otherwise, as a result of the omission.

11        In Sugarmill S.L. v Nomis Sports Innovations Pty Ltd [2011] FCA 1285, Jacobson J followed McElligott and concluded (at [5]) that as no substantial injustice arose from the failure to include the Warning, the omission did not impugn the demand. Similarly, Brereton J in In the matter of Pro Carwash Pty Ltd [2012] NSWSC 1289 concluded (at [14]) that, as there was no evidence of any substantial injustice, the omission did not provide any basis to set aside the demand.

12        Most recently, the matter arose for consideration in Townview Holdings Pty Ltd v Sunstate Design & Construct Pty Ltd [2012] FCA 1296, an authority on which Lake Johnston relies heavily. In Townview, the Court said (at [10]-[11]):

10.    The question that arises then is whether the omission of the warning notice to the debtor renders the statutory demand invalid.

11.    [Counsel] advises the Court that his research has failed to reveal any authorities dealing with this question and submits that this application may well be the first case to confront the question. Accordingly, I proceed today to construe the provisions expressly on that footing. (emphasis added)

13        Lake Johnston argues that despite the authorities discussed above, the assurance given to his Honour was strictly correct. That is because the authorities discussed above that considered the absence of the Warning, beginning with the decision of White J in Randall No 1, proceeded on the basis that the omission of the Warning was a ‘defect’ and the omission of the Warning therefore fell to be determined by reference to the question of substantial injustice under s 459J CA. The characterisation of the omission of the Warning as a ‘defect’ appears to have been a matter not open to question (see White J at [13]).

14        The matter considered in Townview, Lake Johnston argues, was different, that is, whether the omission of the Warning was something more substantial than a ‘defect’ or ‘irregularity’ and rendered the demand a nullity. Lake Johnston says that the question considered was not whether the demand was liable to be set aside but the anterior question of whether it was a demand at all.

15        Lake Johnston argues that while the observations of Barrett J in Randall No 2 appear to conflict with the decision in Townview, it should be noted that Barrett J's comments were made in the context of an application to set aside the notice of demand and Barrett J did not squarely address the issue as a matter of statutory construction as to whether the omission of a Warning is a ‘defect’ or whether on a proper construction of the CA it is something more fundamental.

16        In considering the correctness of Townview, Lake Johnston says it is appropriate to note two general matters:

(a)    whether the omission of the Warning invalidates the notice of demand is a matter of statutory construction, i.e., whether the CA properly construed reflects a legislative intent that the omission of the Warning invalidates the notice as an effective notice of demand under Pt 5.4 Div 3 CA;

(b)    judicial comity is an important factor to be considered especially when dealing with the application of what is in effect national legislation: Australian Securities and Investments Commission v Ingleby (2013) 93 ACSR 274 (at [27]).

17        Lake Johnston suggests that the question of whether a notice of demand may fall short of being a demand at all for the purposes of the CA on its proper construction and thus invalid is not novel. The issue has been raised both in the context of notices of demand under s 459G CA and in respect of ‘analogous bankruptcy legislation’.

18        In Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226 Lockhart J observed (at 238):

The new Pt 5.4 of the Corporations Law does not recognise two regimes: one dealing with documents that suffer from major defects such that they cannot be described as statutory demands for the purposes of Pt 5.4 of the Corporations Law; and another dealing with documents that suffer only from minor defects and are capable of being saved from invalidity by the operation of s 459J(2). This is a distinction which the Parliament has sought to avoid and which for many years bedevilled the law and practice relating to bankruptcy notices.

There may however be cases where deficiencies in the form of demands are so fundamental that the demands are incapable of assuming the description of statutory demands within the meaning of the Corporation Law.

19        His Honour continued (at 239):

Assume, for example, a statutory demand that fails to follow critical parts of the prescribed form by not informing the company that the consequence of failing to comply with the demand is that the creditor may rely upon that failure as a ground for an application to wind up the company; or a demand may fail to inform the company that it may apply under s 459G to set the demand aside. The company may wish to lead evidence before the Court, that it assumed the document was simply a demand for payment, but it had no idea of the consequences under the Corporations Law of failure to comply with it. It would be odd indeed if the Court could not take this evidence into account in deciding whether to exercise its discretion to order the winding up of the company. That may be a case (I do not say that it is or is not) of a demand that is so deficient as to be incapable of answering the description of a statutory demand within the meaning of the Corporations Law.

20        The cases, including Topfelt and Re Beralt Pty Ltd (2001) 1 Qd R 232 were reviewed by Hasluck J in Peak Hill Manganese Pty Ltd v Hydraplant Equipment Pty Ltd (2003) 179 FLR 382. His Honour concluded (at [72]):

The decided cases, and especially Re Beralt, suggest that in certain circumstances an applicant might be able to obtain injunctive relief, notwithstanding a failure to comply with the statutory procedure to set aside. This might be so where the nature of the flaws complained of have misled the debtor as to the time limits, or as to the need to make an application to set aside or, alternatively, if the flaws are such that the statutory demand in question does not purport to be a statutory demand or are so fundamental that the demand cannot reasonably be characterised as a statutory demand. (emphasis added)

21        As Lake Johnston notes, bankruptcy legislation in the United Kingdom and Australia has for a long time contained a provision of a kind which is now found in s 306 of the Bankruptcy Act 1966 (Cth) (BA). That section is entitled ‘Formal defect not to invalidate proceedings’ and relevantly provides:

(1)    Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.

…    (emphasis added)

22        In Adams v Lambert (2006) 228 CLR 409 the High Court (Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ) considered the meaning of the words ‘formal defect or an irregularity’ in that statutory provision. The High Court identified as the relevant question of construction: was the error or omission in the notice a requirement made ‘essential’ by the BA? Lake Johnston argues that is the question to which the construction exercise is to be directed.

23        Lake Johnston suggests that was, in substance, the question to which the analysis in Townview was directed. In arriving at the decision that a statutory demand without the Warning was invalid in Townview, his Honour properly took into account the essentiality of the Warning, construed against the legislative purpose behind the amendments to the Corporations Regulations 2001 (Cth) to incorporate the Warning into Form 509H. The Explanatory Statement to the Corporations Amendment Regulations 2007 (No 13) (Cth), which introduced the Warning into Form 509H, states the legislative purpose relevantly as follows:

Item [49] - Schedule 2, Form 509H

Under section 459E(1) of the Corporations Act, a person may serve a statutory demand on a company relating to a single debt that the company owes to the person, which is due and payable and whose amount is at least the statutory minimum; or two or more debts that the company owes to the person, that are due and payable whose amounts total at least the statutory minimum. Form 509H, `Creditor's statutory demand for payment of debt', is the prescribed form for a statutory demand for the purposes of paragraph 459E(2)(e).

Failure to comply with a statutory demand can have serious consequences for a company, including potentially being wound up in insolvency. Each year applications to a court for termination of windings up are made in circumstances where the company is solvent, but the statutory demand was either not brought to the attention of the relevant officers or its significance was not recognised.

Form 509H will be amended so that there is a clear warning on its face stating that a failure to respond to a statutory demand can have very serious consequences for a company.

Item 49 replaces the current Form 509H with a new form that contains a boxed, bold warning noting the seriousness of the consequences for a company of a failure to respond to the demand, including liquidation and the passing of control to a liquidator. Subregulation 4(2) permits the current form of statutory demand to be used concurrently with the new, form for 12 months after the commencement of the regulations.

(emphasis added)

24        Lake Johnston argues that in assessing the relevant question, i.e., the essentiality of the requirement to include the Warning, it is very difficult to imagine how Parliament could have manifested a clearer intent to make something ‘essential’, other than to mandate a ‘boxed, bold warning noting the seriousness of the consequences’. Parliament was concerned with the mischief caused by a statutory demand that did not adequately convey the seriousness of the demand and the consequences of non-compliance. The interpretation in Townview recognised the mischief that Parliament intended to address and the means by which such mischief was to be remedied in Form 509H. The wording of the statute, the regulation and the form read as a whole, manifest the clearest possible intention that the Warning is an essential requirement of the notice. The contrary construction necessarily treats the Warning as mere surplusage that can be omitted in certain circumstances (where no substantial injustice can be demonstrated). That construction is contrary to the plain purpose evident in the wording of the statutory instruments.

25        In Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446, Hill J considered (at 452) that two questions fell for determination: whether the demand was a ‘statutory demand’ within the meaning of the definition in s 9 CA and whether the omission constituted a ‘defect’ within the meaning of that term in s 9. If both those questions are answered in the affirmative, then the demand may only be set aside where substantial injustice has been caused under s 459J(1)(a) or for ‘some other reason’ under s 459J(1)(b). It follows, however, that the outcome is otherwise if the notice is not a ‘statutory demand’ or the omission is not a ‘defect’ within the statutory demand.

26        Lake Johnston argues that the omission of the text box is to be distinguished from other cases such as Kalamanda. In that case, the omission was plainly a mere ‘defect’. The omission was of notes referring to requirements of the demand that were in fact complied with. In the present case, Lake Johnston says that the Warning was plainly intended by Parliament as an essential and, indeed, critical component of the notice. The omission rendered the notice something other than a ‘statutory demand’ and the omission was more fundamental than a ‘defect’.

CONSIDERATION

27        I am unable to accept Lake Johnston’s argument.

28        In my view, the omission of the text box is a defect in the statutory demand. The demand is not a nullity; applying the definition in s 9, it is a statutory demand because it is a document that purports to be served under s 459E CA. That is apparent from the text of the document. Accordingly, s 467A has the effect that the application must not be dismissed unless substantial injustice has been caused that cannot otherwise be remedied. Lake Johnston makes no allegation of substantial injustice.

29        In my view, the arguments advanced for Lake Johnston would defeat the legislative purpose. As submitted by Inter Mining, the Corporate Law Reform Act 1992 (Cth) introduced Pt 5.4 ‘Winding up in insolvency’ into the then Corporations Law with effect from 23 June 1993. The statutory changes followed the Australian Law Reform Commission's General Insolvency Inquiry (Report No 45, 1988). The 1993 changes effected considerable change to the law and practice concerning statutory demands and winding up applications.

30        The underlying policy and purpose of the new Pt 5.4 was said to be ‘to clarify the law and increase the efficiency of the winding up process’: Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) (EM-1992) (at [23]).

31        The EM-1992 explained (at [24]) that reforms to the winding up process included that:

procedures for statutory demands ... will be simplified, time limits will be imposed on the life of a demand and the court will be given the discretion to disregard technical irregularities in statutory demands. This will greatly facilitate the winding up process, resulting in time savings to the courts and reduced costs for the parties, by preventing the use of the winding up hearing for the dispute of minor matters. (emphasis added)

32        It would appear that the Court in Townview was not referred to a number of prior authorities, including one decision of an intermediate appellate court, in which courts had held that the omission to provide a boxed warning was a defect only. Thus the statutory demand was not invalidated unless there was substantial injustice. The Court in Townview expressly relied on the assurance from counsel that there were no relevant authorities. If the assurance to the Court was confined to the issue of whether the demand was a nullity, not merely defective, then it may have been correct. It may be accepted entirely that there is a slight difference between the ‘defect’ approach and the ‘nullity’ approach and that reasonable minds may differ on which approach is to be preferred. Nonetheless, the earlier authorities (including those that conclude that the magnitude of the defect is no longer the issue), appear not to have been cited to the Court (and are not mentioned in the reasons which were given on the day of the hearing). That may be because counsel submitted that ‘this application may well be the first to confront the question’ on which his researches had revealed no precedent – which was possibly correct on a narrow view. In my respectful assessment it is likely that had the Court been taken to those authorities, it would have referred to and considered them. It is difficult to conclude that they were not at least in the broader sense ‘dealing with this question’ of whether the omission of the warning rendered the demand invalid. On proper analysis of the authorities, in my view, McElligott is binding on me. It is not apparent that the Court was referred to McElligott in Townview. I consider I must follow McElligott.

33        I also consider that it is relevant that ‘statutory demand’ is defined in s 9 CA to mean:

(a)    a document that is, or purports to be, a demand served under section 459E; or

(b)    such a document as varied by an order under subsection 459H(4).

(emphasis added)

34        The word ‘purport’ bears its usual meaning of ‘profess’ or ‘claim’: Kalamunda (at 452).

35        I accept the submission for Inter Mining that the provisions as to the setting aside of statutory demands are intended to be ‘a complete code for the resolution of disputes involving statutory demands’ and such disputes to be resolved ‘on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies’: EM-1992 (at [688]). See also EM-1992 [689], [699]-[700] and [738]-[739]). That point was reiterated in the second reading speech that introduced the legislation and was discussed by Hill J in Kalamunda (at 450).

36        Although s 459E(2)(e) provides that a statutory demand ‘must’ be in the prescribed form, strict compliance is not required; substantial compliance is sufficient: Quitstar Pty Ltd Cooline Pacific Pty Ltd (2003) 204 ALR 649 (at [31]), relying on s 25C of the Acts Interpretation Act 1901 (Cth) which provides that where a statute prescribes a form, substantial compliance rather than strict compliance is sufficient and s 459J CA set out above (at [6]).

37        In Topfelt Lockhart J also noted (at 237):

…

The definition of “defect” is an inclusive definition, so one must construe the term initially according to its ordinary meaning and then introduce into it, if it is otherwise not included, the deemed statutory connotations. According to its ordinary usage a “defect” means a lack or absence of something necessary or essential for completeness, a shortcoming or deficiency; an imperfection. A defect according to ordinary understanding is not necessarily something which is of a minor nature, it may be either major or minor.

… (emphasis added)

38        His Honour observed (at 238) that on the plain language of the CA, the concept of ‘defect’ was not confined to minor defects or irregularities. Accordingly, it must include major defects. His Honour also contrasted the broad notion of ‘defect’ enacted as part of the then new statutory demand regime with the more limited ‘formal defect or irregularity’ saving provision in s 306 BA (at 238).

39        For this reason Lake Johnston’s reliance on the bankruptcy provisions and, in particular, the decision in Adams is misplaced. The consequence of non-compliance with s 459E(2)(e) must be determined by construing the relevant provisions of the CA.

40        Having regard to Lockhart J’s observation as to the nature of a defect, I am also unable to accept that ‘essentiality’ referred to by Lake Johnston assists its arguments. Where a statutory demand lacks something essential for completeness that circumstance, even if major, is a mere defect. As noted in Topfelt, a demand will be a ‘statutory demand’ as long as it meets the s 9 definition even if it contains one or more defects. A defect in a statutory demand only amounts to a ground to set it aside where it causes substantial injustice: s 459J(1)(a).

41        In Kalamunda, Hill J also concluded (at 452) that the demand was a statutory demand as, on its face, the document professed to be a statutory demand made under the then Corporations Law. The omission of notes which constituted part of the prescribed form did not alter that conclusion.

42        All of this is not to say that a demand could never be a nullity. Although the issue is not presently relevant, it is to be noted that courts have alluded to the possibility that a demand may be so fundamentally defective that it would not be treated as a statutory demand and, therefore, it will be a nullity: see, for example, Topfelt (at 238); Kalamunda (at 452); 2020 Construction Systems Pty Ltd v Dryka & Associates Pty Ltd [2010] WASC 22 (at [39], [40]-[43]). However, that can only occur in the ‘very rare’ case where the demand falls outside anything that could be a purported demand for the purpose of the s 9 definition of statutory demand: Dromore Fresh Produce Pty Ltd v W Paton (Fertilizers) Pty Ltd (1997) 137 FLR 307 (at 311) per Young J. The deficiencies would have to be of a ‘gross and exceptional character’: Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 (at [110]) per Dodds-Streeton J. Since Kalamunda it has been accepted that if a demand professes or claims to be a demand served under s 459E, then it is a statutory demand notwithstanding any defects.

43        In the present case, no one receiving the document could have been in any doubt that it was, or purported to be, a demand under s 459E CA. That is very clear from the text of the document.

44        In short, Inter Mining's demand was not a nullity. Rather, it was a statutory demand as it is a document that purports to be served under s 459E CA. The omission of the boxed warning was a mere defect. As a defect it provides no basis for the summary dismissal of the winding up application in the absence of substantial injustice: s 467A.

45        It follows that the following orders will be made:

1.    The defendant’s interlocutory application dated 23 July 2013 is dismissed.

2.    The defendant is to pay the plaintiff’s costs of and incidental to the application in any event, to be taxed if not agreed.

Associate:

Dated:    10 September 2013