FEDERAL COURT OF AUSTRALIA

Soundwave Festival Pty Limited v Altered State (W.A.) Pty Limited (No 1) [2014] FCA 466

THE COURT ORDERS THAT:

1.    The question whether the defendant should be given leave pursuant to s 459S of the Corporations Act 2001 to rely on the existence of a genuine dispute between the defendant and the plaintiff about the existence of the debt referred to in the statutory demand dated 14 June 2013 in opposition to the plaintiff’s application to wind up the defendant, be determined separately and prior to the hearing of the application to wind up the defendant.

2.    Leave pursuant to s 459S of the Corporations Act 2001 for the defendant to rely on the existence of a genuine dispute between the defendant and the plaintiff about the existence of the debt referred to in the statutory demand dated 14 June 2013 in opposition to the plaintiff’s application to wind up the defendant is refused.

3.    The defendant to pay the plaintiff’s costs of the application for leave.

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

REASONS FOR JUDGMENT

1    Soundwave Festival Pty Limited (Soundwave) applies to the Court pursuant to s 459P of the Corporations Act 2001 (the Act) for an order that Altered State (W.A.) Pty Limited (Altered State) be wound up in insolvency under s 459A of the Act. Soundwave relies on a failure by Altered State to comply with the statutory demand dated 14 June 2013 and served on Altered State on 26 June 2013. The statutory demand is for the sum of $340,690.46 said to be due and payable to Soundwave by Altered State.

2    There is no dispute that the statutory demand was served and not complied with. Altered State did not apply to have the statutory demand set aside under s 459G of the Act.

3    Altered State opposes the application to wind it up. It seeks leave pursuant to s 459S of the Act to rely on a ground on which it could have relied if it had applied to set aside the statutory demand. That ground is said to be that there is a genuine dispute between it and Soundwave about the existence of the debt to which the demand relates. Altered State also contends that it is solvent and can pay its debts as and when they fall due.

4    Ordinarily, the question of leave under s 459S should be dealt with prior to the hearing of the application to wind up the company under s 459P: Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661 at [62] - [65] (Switz); Timms v Dellaplus Pty Ltd [2007] SASC 236 at [36]; Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No. 2) [2011] NSWSC 113 at [3] (Ewen Stewart); TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011] NSWSC 438. Regrettably that did not occur in this case. When the matter first came before the Court for hearing, I raised with the parties whether the application for leave under s 459S should be dealt with as a preliminary issue. It appeared likely that if the leave application was dealt with at the same time as the winding up application, that would inevitably result in an inefficient use of Court resources and would lengthen the hearing. It would be necessary to hear and determine objections to Altered State’s affidavits and entertain cross examination in relation to evidence relating to the disputed debt even though leave to raise that issue may not ultimately be granted. Such a course would be contrary to Part VB of the Federal Court of Australia Act 1976, in particular s 37M. It would also be contrary to the intention of the statutory scheme concerning statutory demands.

5    Ultimately there was no opposition to the leave application being dealt with as a preliminary issue. Accordingly, affidavits were read and evidence was received in the first instance limited to the preliminary issue as to whether leave under s 459S should be granted. As a result, there were no objections to the affidavits and only limited cross examination.

6    For the reasons that follow, leave under s 459S of the Act to rely on the alleged dispute concerning the existence of the debt is refused.

7    459S provides as follows:     

(1)    In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:

(a)    that the company relied on for the purposes of an application by it for the demand to be set aside; or

(b)    that the company could have so relied on, but did not so rely on (whether it made such an application or not).

(2)    The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent.

8    In Chief Commissioner of Stamp Duties v Paliflex Pty Limited (1999) 47 NSWLR 382; [1999] NSWSC 15 (Paliflex), Austin J indicated that the exercise of the discretion to grant leave under s 459S to oppose a winding up application on a ground involving a dispute about the debt in a statutory demand involves three considerations. Those three considerations are:

(i)    a preliminary consideration of the defendant’s basis for disputing the debt which was the subject of the demand;

(ii)    an examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party’s conduct at that time; and

(iii)    an investigation of whether the dispute about the debt is material to proving that the company is solvent.

9    I propose to approach Altered State’s application for leave under s 459S in that way.

What is the nature and basis of the dispute concerning the debt?

10    A “preliminary” consideration of the nature and basis of the dispute concerning the existence of the debt that the defendant wishes to raise in opposition to the winding up application does not involve a final determination of whether there is in fact a genuine dispute, or a final determination of whether the debt actually exists. To approach s 459S in that way would defeat the very purpose of the statutory scheme of which s 459S is a part (as to which see Switz at [46] - [51]). Rather, the preliminary consideration is directed to a consideration of whether the defendant (the applicant for leave under s 459S) has a seriously arguable case that the debt is the subject of a bona fide dispute: D.A.G. International Pty Ltd v D.A.G. International Group Pty Ltd [2005] NSWSC 1036 at [5].

11    The debt the subject of Soundwave’s statutory demand is for the amount of $340,690.46. It is said to be the balance of an amount owing to Soundwave by Altered State under a “Beverage Services Binding Terms Sheet”. In the affidavit that accompanied the statutory demand (affidavit of Andrew Tatrai sworn 14 June 2013) the debt is explained in the following terms (at paragraph 2):

The debt relates to unpaid shares of profit and revenues for beverages sold at the Soundwave Festival held at Claremont Showground, 1 Graylands Road Claremont, Western Australia on or about 4 March 2013 agreed to be paid by way of agreement between the creditor and the debtor company entered into on or about 25 February 2013. I drafted the Beverage Services Binding Terms Sheet, conducted a bar stock analysis and supervised the overall operation of the festival, allowing me to have knowledge of the debt so far as it is known to the creditor.

12    In the letter from Soundwave’s solicitors that enclosed the statutory demand and supporting affidavit, the debt is described as follows:

Our client instructs that pursuant to a contract entered into by you on or about 25 February 2013 for beverage services to be supplied at Soundwave Festival, Claremont WA on 4 March 2013 you were obliged to account to our client for a 70% share of net profit of beverage sales. We are further instructed that you have provided a spreadsheet detailing sales and expenses which prima facie indicates a liability to our client for the amount of $690,690.46. Our client instructs that following repeated demands, it has received payment of an amount of $350,000.00 on or about 1 May 2013. An amount of $340,690.46 remains due and payable.

13    Altered State does not appear to dispute that Soundwave and Altered State entered into the contract described as the Beverage Services Binding Terms Sheet (Contract). Indeed, a copy of the Contract is annexed to the affidavit of Altered State’s “manager”, Mr Christopher Knight, sworn on 29 October 2013 (the First Knight Affidavit). The Contract provides that Soundwave is entitled to 70% of the net profit in respect of the “beverage services” that Altered State was appointed to provide for the 2013 Soundwave Festival in Western Australia, a large touring music festival promoted by Soundwave. The First Knight Affidavit also annexes a spreadsheet which appears to provide the basis for the gross figure of $690,690.46 referred to in the affidavit and letter that accompanied the statutory demand (the Spreadsheet). That Spreadsheet, which was prepared by Altered State, specifies a net profit from the bar operations of $986,700.66 (70% of which is $690,690.46).

14    On the evidence relied on by Altered State on this application, there appears to be two aspects to the alleged dispute concerning Altered State’s indebtedness as described in the statutory demand and accompanying documents. First, Altered State appears to contend that whatever amount may be owing to Soundwave under the Contract, Soundwave owes Altered State a larger sum arising from other agreements or arrangements between the two concerning the 2013 Soundwave Festival in Western Australia, as well as earlier Soundwave Festivals in Western Australia. Second, there appears to be a suggestion that the Spreadsheet was not a final reconciliation of the revenue and expenses in relation to the beverage services provided under the Contract. Accordingly, there is said to be a dispute concerning the calculation of the amount owing under the Contract.

15    The evidence in relation to the first of these contentions is, to say the least, far from satisfactory. It essentially comprises a series of what can only be described as general assertions and conclusions by Mr Knight about the nature and content of various agreements and arrangements between Soundwave and Altered State in relation to the 2013 Soundwave Festival, as well as earlier festivals, and his reconciliation of amounts said to be owing by Soundwave to Altered State for one reason or another. These assertions and conclusions are contained in the First Knight Affidavit, as well as a second affidavit sworn by Mr Knight on 5 December 2013 (the Second Knight Affidavit).

16    The assertions and conclusions in the First Knight Affidavit and Second Knight Affidavit concerning the nature of the arrangements between Soundwave and Altered State are essentially uncorroborated by any contemporaneous business records or correspondence, aside from a few invoices of questionable provenance. Given the size of the events and the amount of revenue generated, it is somewhat surprising that the arrangements between the parties appear, at least on Altered State’s version of events, to have been dictated by nothing more than discussions, custom and practice. Counsel for Altered State sought to explain this by the submission “that’s rock ‘n’ roll”.

17    In relation to the reconciliations referred to in Mr Knight’s affidavits, with perhaps one exception, most of the reconciliations carried out by Mr Knight appear to be reconciliations of recent origin produced for the purposes of these proceedings. Given the amounts of money supposedly involved it is, to say the least, surprising that there are no contemporaneous reconciliations and, perhaps even more surprising, that there is apparently no contemporaneous correspondence concerning amounts supposedly owing in relation to earlier festivals.

18    It would appear that in October 2013, that is after these winding up proceedings were commenced in September 2013, Altered State commenced proceedings in the District Court of Western Australia seeking to recover the amounts it contended were owed to it by Soundwave upon a reconciliation of “the account” between Soundwave and Altered State. This account, which counsel for Altered State called a “running account”, allegedly included amounts said to be owing to Altered State as a result of “shortfalls” arising from the management of the festivals, as well as outstanding management fees. The pleadings are in very broad and general terms.

19    No objection was taken to Mr Knight’s evidence in relation to these alleged arrangements and the amounts said to be owing pursuant to them. Nor was he cross-examined. That may have been because at the s 459S leave stage all that is involved is a “preliminary examination” of the alleged dispute.

20    As for the second contention concerning the Spreadsheet and the amount owing under the terms of the Contract, I am unable to identify any evidence that is capable of supporting Altered State’s contention that the Spreadsheet was not a final reconciliation of the revenue and expenses in relation to the beverage services provided under the Contract. In the First Knight affidavit, Mr Knight describes the Spreadsheet as being a “reconciliation of the bar expenses only” (First Knight Affidavit at [71]). It did not include “other expenses from the event” (First Knight Affidavit at [66]). Yet those other expenses appear to have nothing to do with the bar operations and therefore nothing to do with the amount owing under the Contract.

21    This is confirmed by such contemporaneous documentary evidence as there is about the supposed dispute. The statutory demand was served on 26 June 2013. The first indication of any dispute concerning the demand is in an email sent by Mr Knight to Soundwave’s solicitors on 11 July 2013. In that email Mr Knight says:

You will notice from attached reconciliations that our company has made significant payments on behalf of your client to cover non bar related festival expenses. These expenses include in excess of $180,000 from the 2012 event and $145,000 from the 2013 event.

Our company has also not been paid to manage the 2012 and 2013 events the invoices for which I also attach.

22    The copy of this email which is in evidence does not attach either the reconciliations or the invoices that are referred to in the email.

23    Soundwave’s solicitors did not respond to this email until 31 July 2013, after the expiry of the statutory demand. The email response pointed out that the demand had not been complied with and that if the amount referred to in the notice was not paid within 7 days, Soundwave would proceed to have Altered State wound up. The email did not otherwise take issue with anything said in Mr Knight’s 11 July 2013 email.

24    In an email response sent by Mr Knight on 11 August 2013, eleven days after the threat of winding up proceedings for failure to comply with the demand, Mr Knight again referred to “attached invoices and reconciliation of outstanding monies” and stated that he found “it incongruous that you are considering legal action given that it in (sic) fact your client that owes Altered State WA ply (sic) ltd $471,622.06 inc gst”. Again, the copy of this email that is in evidence does not attach any invoice or reconciliation. It would appear, however, that the reconciliation referred to in the email is a document annexed to the First Knight Affidavit (“KN 6”). The content of that reconciliation suggests that Soundwave owed Altered State $471,622.06. On its face, however, the reconciliation accepts that Altered State owes $354,840.41 to Soundwave in respect of “Bar Monies”. It then deducts from that amount a series of expenses, none of which appear to relate to the beverage services under the Contract, as well as money alleged to be owed in respect of expenses paid in relation to the 2012 Soundwave Festival and management fees in relation to the 2012 and 2013 Soundwave Festivals.

25    In my opinion, the evidence relied on by Altered State does not demonstrate that there is an arguable case of a genuine dispute concerning the amount of money owed by Altered State to Soundwave under the terms of the Contract. At its very highest, the evidence demonstrates that Altered State contends that the amount owed to Soundwave under the Contract is offset by other amounts Soundwave owes it arising from the alleged broader arrangements concerning the management and organisation of the 2012 and 2013 Soundwave Festivals. The offsetting amounts alleged to be owed by Soundwave to Altered State may constitute an “offsetting claim” for the purposes of s 459H.

26    That said, as already indicated, the evidence of the alleged offsetting claim or claims is most unsatisfactory. Were it not for two matters, I would not be satisfied that there was a seriously arguable case in relation to these offsetting claims. The first matter is that there is no evidence that Soundwave disputes the existence of the offsetting claim or claims. Soundwave did not, through its solicitor or otherwise, respond to the allegations in Mr Knight’s emails of 11 July and 11 August 2013 concerning the offsetting claims - or at least there is no evidence that it did. Nor did Soundwave adduce any evidence in response to Mr Knight’s affidavits. The second matter is that Mr Knight was not cross-examined. Accordingly, as unsatisfactory as it is, his evidence about the existence of the offsetting claims is essentially unchallenged.

27    Not without some doubt, I am prepared to accept for the purposes of the application under s 459S, that Altered State has a seriously arguable case that it has an offsetting claim or claims against Soundwave which, if made out, would eclipse the debt in the statutory demand. On that basis, and that basis alone, it may be accepted that there is a seriously arguable case that there is a genuine dispute concerning the debt in the statutory demand.

Is there a satisfactory explanation for why there was no application to set aside the statutory demand? Was Altered State’s conduct reasonable?

28    There is some evidence of an explanation for why, in the face of an apparently genuine dispute concerning the debt in the statutory demand, there was no application to set the demand aside. That evidence is in the First Knight affidavit. Mr Knight’s evidence is that his brother Kenneth Knight, who is the sole director and shareholder of Altered State, was seriously ill at the time the demand was served on 26 June 2013. Kenneth Knight did not return to work at Altered State until late August 2013. Mr Knight himself was overseas at the time the demand was served. He returned to Australia on 1 July 2013 and returned to work on 11 July 2013. Upon this return to work, an employee of Altered State brought the correspondence from Soundwave’s solicitors that enclosed the statutory demand to his attention. His evidence is essentially that he did not appreciate the significance of the correspondence. In his affidavit, he states:

I did not read the correspondence properly and upon a quick look mistook the statutory notice as a mere “letter of demand” received from the plaintiff’s solicitors and did not comprehend the full import of a notice under section 459P of the Corporations Act.

29    Mr Knight’s evidence was not challenged. Nevertheless, in my opinion, it scarcely provides an adequate or satisfactory explanation for why no application was made to set aside the demand.

30    First, even a cursory reading of the covering letter from Soundwave’s solicitors and the statutory demand would have revealed that this was not a matter that could simply be put to one side. The covering letter states in clear terms that failure to comply with the enclosed demand within the time period specified in the notice carried serious consequences. The demand itself also emphasises, in a part of the demand that is highlighted, the serious consequences that might follow from a failure to respond to the demand, including that the company might be placed in liquidation. It is difficult to see how the letter and its enclosures could possibly be mistaken for a mere letter of demand if Mr Knight had acted with any degree of care or diligence.

31    Whilst Mr Knight may have been overseas at the time the letter was received by Altered State, and he may have been distracted by his brother’s illness, there was nevertheless a fulltime employee at Altered State’s offices. There was no evidence from this employee or any explanation for his absence. There is accordingly no explanation for why the employee did not act on the notice beyond bringing it to the attention of Mr Knight upon Mr Knight’s return. Moreover, even when Soundwave’s solicitors clearly pointed out to Mr Knight that Altered State had failed to comply with the statutory demand and that in seven days proceedings would be commenced to wind up Altered State on the basis of that non-compliance, Mr Knight did nothing for another eleven days. Even then, he did nothing beyond sending a cursory email response.

32    The only matter that assists Altered State in terms of demonstrating the reasonableness of its conduct is that Soundwave’s response to Mr Knight’s emails was also less than helpful or reasonable. Whilst Mr Knight’s email of 11 July 2013 was brief and did not directly engage the question of Altered State’s indebtedness under the Contract (this being the debt specified in the demand), it did nonetheless raise the alleged existence of the offsetting claims. Soundwave did not, through its lawyers, respond to that allegation prior to the expiry of the demand. Even then, the email from Soundwave’s solicitors of 31 July 2013 did not directly respond to the allegation. It simply contained a threat that proceedings would be commenced because the demand had not been complied with. As White J observed in not dissimilar circumstances in Ewen Stewart at [21], “[l]itigation is not a game in which parties or their legal advisers should keep their cards close to their chest to achieve a tactical advantage.”

33    Notwithstanding this, I am not satisfied that Mr Knight’s evidence provides an adequate or satisfactory explanation for why no step was taken to set aside the demand. If the kind of inattention, want of care, inactivity and lack of urgency displayed by Mr Knight could provide a satisfactory explanation for a failure to comply with or set aside a statutory demand, the statutory scheme in relation to statutory demands would be significantly undermined.

34    As it turns out, however, it is unnecessary for me to decide whether this matter alone would be sufficient to warrant the refusal of leave under s 459S.

Is the dispute concerning the debt material to Altered State’s solvency?

35    In Switz, Spigelman CJ (with whom Handley and Giles JJA agreed) said of the requirement in s 459S(2) that the relevant ground (usually a dispute concerning the debt) be material to proving that the company is solvent (at [53] - [56]):

53    By the time an application under s 459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s 459s(2) directs attention, in part, to what it is that the company intends to prove and how it intends to prove it. If the company is not prepared to contemplate the possibility that its assertion of solvency is subject to qualification, then the Court cannot be “satisfied” of the mandatory precondition in s 459s(2). An objective element is introduced by the word “material” but that can only be determined after identifying the company’s contentions.

54    If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to a ground based on dispute about the debt, the test of materiality to it “proving” its solvency, cannot be satisfied.

55    The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.

56    It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be “satisfied” in the sense required by s 459s(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is “material”, let alone whether leave should be granted under s 459s(1). On the submissions made to this Court, these issues do not arise. The appeal should be dismissed.

36    There appears to be a dispute in the authorities concerning s 459S(2) about the appropriate test to be applied in determining whether the relevant ground (the dispute concerning the debt) is relevant to the solvency of the company seeking to oppose the winding up application. On the one hand, there are various authorities which are said to adopt a strict or narrow approach: HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169 at [53]; Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Limited [2008] FCA 1777 at [19] (Grant Thornton); Deputy Commissioner of Taxation v Neo Rock Pty Limited [2009] FCA 129 at [9]; Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282. This approach is said to require an applicant for leave under s 459S to prove that for a dispute concerning the debt to be material, it must be “the difference between solvency and insolvency”, or “pivotal”, “crucial” or “determinative” of solvency. That would require proof that if the disputed debt exists then the company will be insolvent, and that if the debt does not exist then the company will be solvent.

37    On the other hand, there are authorities that are said to favour a broad or less strict approach: Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962; (2007) 25 ACLC 1216 at [64]; Ewen Stewart at [31]-[48]. This approach is said to be that the disputed debt need not be determinative of the company’s solvency. Rather, materiality will be established if there is evidence that the company would undoubtedly be insolvent if the debt was owed, as well as evidence that it “might be” solvent if the debt is not owed. In Ewen Stewart, White J put the test in the following terms (at [48]);

In short, the existence or non-existence of the plaintiff’s debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company’s solvency are to be advanced to the stage at which leave is sought under s 459S, so that a company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2).

38    It is neither necessary, nor desirable, that I reach a concluded view as to which of these differing approaches is correct. It is not necessary because, as will be seen, Altered State fails to meet the materiality test whichever test may be correct. It is not desirable because this issue was not fully argued before me. Counsel for Altered State did not draw my attention to any of these authorities. Counsel for Soundwave drew my attention to the apparently conflicting decisions in Grant Thornton and Ewen Stewart, but made no submission as to which of these cases provided the correct test.

39    Nevertheless, subject to one observation, I would incline to the view that to make out the materiality test, it is not necessary to prove at the s 459S(2) stage that the existence or otherwise of the disputed debt is pivotal, crucial or determinative of solvency. In my opinion to satisfy the s 459S(2) materiality test it is only necessary to prove that the existence or otherwise of the debt is relevant to, or has the capacity to have some influence or effect on the conclusion as to the company’s solvency. A similar view was expressed by Barrett J in Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161. The proposition that “material” in s 459S(2) is essentially synonymous with “relevant” also finds some support in observations made by the High Court in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1 at [27].

40    The additional observation that I would make is that, in my view, at the s 459S stage, the company that is seeking leave must adduce sufficient evidence concerning solvency to satisfy the Court that the existence or otherwise of the debt will be material to the conclusion as to the company’s solvency – that is, that the existence or otherwise of the debt is relevant to, or has the capacity to influence, or have an effect on, that conclusion. If, at the s 459S stage, the company contends and intends to prove that it is solvent if it does not owe the disputed debt, it must lead evidence of its financial position which, if accepted, is capable of satisfying the Court of that fact. It is doubtful that the Court could be so satisfied on the basis of mere assertion. Nor should the Court be required to speculate about what evidence of solvency might be led at the final hearing of the winding up application.

41    Whilst it may be that at the s 459S stage the company is not required to lead the “fullest and best evidence” of its solvency (cf. Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (Ace Contractors); Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 (Begonia); Ewen Stewart at [25]-[26]), in my opinion it is unlikely that the materiality requirement in s 459S(2) can be satisfied by mere assertions of solvency, or by conjecture about what further evidence concerning solvency might be led at the hearing of the winding up application. The Court must be satisfied that the ground is material to the company’s solvency or otherwise, not that it might be if further or better evidence is adduced at the hearing of the winding up application. To the extent that White J expresses the contrary view in Ewen Stewart at [31], I respectfully disagree, though his Honour’s observations and findings to that effect might have been directed to the particular facts and circumstances of that case.

42    In any event, as I have said, Altered State does not satisfy the materiality requirement in s 459S(2) whether the strict or the broad approach to the requirement is adopted. That is because the evidence upon which Altered State relies to demonstrate solvency is plainly directed at proving that it is solvent irrespective of whether the debt claimed by Soundwave is in fact due and payable. This too is the contention that appears in the grounds of opposition to the winding up application in Altered State’s notice of appearance. Nothing in Altered State’s written submissions contends otherwise.

43    In his oral submissions, counsel for Altered State accepted and conceded that if the evidence of solvency relied on by Altered State was accepted, the company was solvent whether or not the debt to Soundwave is owed. Counsel did not submit or concede, let alone seek to prove, that Altered State would be insolvent if the debt to Soundwave is owed.

44    The evidence of solvency relied on by Altered State is largely contained in the First Knight Affidavit and a third affidavit sworn by Mr Knight on 1 May 2014 (the Third Knight Affidavit). In the First Knight Affidavit, Mr Knight says (at paragraphs 6 and 7):

The defendant is a private company with a long established and strong on-going business and is fully supported by myself and Kenneth. Both of us own substantial assets and are in the event of any financial exigency would be able to ensure that the company is always is in a position to meet its financial obligations. To date no situation has ever arisen in the defendant’s finances.

The defendant has never had an overdraft at the bank nor any significant outstanding liabilities.

(Errors in original)

45    In the third Knight Affidavit, Mr Knight says (at paragraphs 4 to 7):

Of my own knowledge and belief the defendant neither owes any other debts has any other liabilities that that said to be owing in the allegation of the plaintiff.

At the present time, the company’s assets are as follows:

(a)    I am informed and believe it true that as at today’s date, the defendant owns cash in the sum of $121,944.69 in a Bank West account 306 076 067 2434 in the name of Altered State Pty Ltd, with Kenneth being the sole signatory of this account.

(b)    The company beneficially owns 1.5 million, $1 units, in the Stargrove Unit Trust, the trustee of which is Stargrove Pty Ltd which represents a one third share in the unit holding.

(c)    The corpus of Stargrove Unit Trust comprises of:

(i)    30% of the beneficial ownership of the business of Astor Theatre in Mount Lawley Western Australia;

(ii)    30% of the beneficial ownership of Show Ticketing Pty Ltd an operating event ticketing business;

(iii)    50% of the shareholding in Silversky Asset Pty Ltd, a business comprising the Liquor Barons Bayswater Liquor Store in Western Australia;

(d)    A semi-rural property of 5 acres of Real estate situate at 518 Great Eastern Highway Middle Swan, Western Australia;

(e)    A rural property of 140 acres at Greens Road Pemberton Western Australia;

(f)    A suburban property comprising shops and a house located at 395 to 399 Guildford Road Bayswater Western Australia;

(g)    Office furniture and sundry office equipment to a value I estimate of $8,000.

(h)    Outstanding invoices owing by the plaintiff to the defendant of $472,488.72 according to my affidavit sworn herein 5 December 2013.

The said units in the Stargrove Unit Trust are special units holding an entitlement upon vesting limited to the paid up nominal capital value of the units and an ongoing a discretionary entitlement to income.

Whatever the position of the solvency of the company, following the resolution of the plaintiff’s claim which is disputed, I and by brother who will support the company and pay any sum required to discharge any obligation found to be justly owing.

(Errors in original)

46    Two points should be made about this evidence. First, it is far from adequate or satisfactory evidence of Altered State’s financial position or solvency. When seeking to rebut the presumption of insolvency that arises upon noncompliance with the statutory demand, a company is ordinarily required to put forward “the fullest and best” evidence of its financial position: Begonia at 1081; ACE Contractors at [44]. Bald assertions and unverified claims concerning the company’s assets and liabilities or ability to pay its debts as and when they fall due are unlikely to be considered to be acceptable, particularly if (as here) they are unsupported by any contemporaneous business or accounting records. Even if it is accepted that a company is not required to lead the fullest and best evidence of its financial position at the s 459S stage (as White J found in Ewen Stewart at [25] and [26]) counsel for Altered State conceded that the evidence to be relied on by Altered State at the final hearing of the winding up application is unlikely to differ in any, or any significant, respects from the evidence relied on at the s 459S stage.

47    Second, it is readily apparent that Mr Knight’s assertion that Altered State is able to pay its debts as and when they fall due is largely based on the fact that the company is “fully supported” by himself and his brother Kenneth Knight, who is the sole director and shareholder of Altered State. He asserts, for example, in the Third Knight Affidavit that he and his brother “will support the company and pay any sum required to discharge any obligation found to be justly owing”. Such an assertion might be relevant in assessing the prospective solvency of a company. In certain circumstances a company can be considered to be solvent if “as a matter of commercial reality the company has a resource available to pay all its debts as they become payable” even if that resource is an unsecured borrowing or a voluntary extension of credit by another party: Lewis v Doran (2004) 208 ALR 385 at [116]; affirmed on appeal; (2005) 219 ALR 555.

48    There is some, albeit very limited, evidence concerning the company’s assets and liabilities. As for liabilities, in the First Knight Affidavit Mr Knight asserts that the company has never had any “significant” outstanding liabilities. In the Third Knight Affidavit, he asserts that Altered State has no debts or liabilities other than the debt alleged to be owing to Soundwave. Neither assertion is corroborated or verified by any business or accounting records. In relation to assets, in the Third Knight Affidavit Mr Knight asserts that the company has $121,944.69 in a bank account (though no bank statement is tendered) and owns 1.5 million $1 units in a discretionary trust. He then asserts that the trust owns a number of assets. There is, however, no evidence of the nature or value of the trust’s interest in those assets. The suggestion appears to be, however, that the units in the trust held by Altered State are potentially valuable. Once again, however, not a single document capable of corroborating or verifying the company’s asset position is tendered.

49    The deficiencies of the evidence relied on by Altered State on this application are such that I cannot be satisfied that the dispute concerning the debt owed to Soundwave is material to proving that Altered State is solvent. At this stage, I am not satisfied on the existing evidence that Altered State is solvent even if it does not owe the debt to Soundwave. Mere assertions that Mr Knight and his brother would support the company, even if accepted, are insufficient to prove solvency in the almost complete absence of any evidence, beyond assertion, concerning the assets, liabilities and financial position of the company. No evidence is tendered to explain the complete absence of any business or accounting records capable of verifying Altered State’s assets, liabilities and financial position. That is so despite the fact that Altered State purports to be a trading company, the annual revenue of which has averaged in excess of $2 million over the last five years: cf. Commonwealth Broadcasting Corporation Pty Ltd v Pacific Mobile Phones (2008) 219 FLR 422 at [29]; Bank of Western Australia Ltd v Scotia Downs Pty Ltd [2011] FCA 1302 at [22].

50    More significantly, it is clear from Switz (at [54]) that where a company intends to prove that it is solvent whether or not the disputed debt is payable, the materiality test in s 459S(2) cannot be satisfied. That is clearly the case here. Altered State clearly contends, and intends to prove, that it is solvent whether or not the alleged debt to Soundwave is payable. So much so was conceded by counsel for Altered State.

51    Counsel for Altered State submits that the materiality test in s 459S(2) might still be satisfied if the evidence led by Altered State is not accepted in whole or in part. That submission must be rejected. It is difficult to see how Altered State can, on the one hand, adduce evidence which it apparently submits should be accepted at the s 459S stage, and no doubt will submit should be accepted at the hearing of the winding up application, yet on the other hand submit that if it is not accepted the materiality test might be satisfied. Counsel for Soundwave correctly submits that this is akin to having “a bet each way”. In my opinion such an approach is not permissible at the s 459S stage. As is clear from Switz (at [56]), if a company is not prepared to mount a case which contemplates, as a possibility, that the disputed debt is material to it being able to establish its solvency, it is not open to the Court to be satisfied, in the sense required by s 459(2), on the basis that “the company should be protected from itself”. That is so even if it may well turn out to be the case that the existence of the debt may prove to be material, or even crucial, to the company being able to establish its solvency.

52    Counsel for Altered State also submits that the existence of the debt to Soundwave is material to proving that Altered State is solvent because if the debt is not owed to Soundwave, Altered State has no creditors and therefore the company must be solvent. That submission is rejected. First, it is no answer to the point that Altered State intends to prove that it is solvent whether or not the debt is owed. Second, I am not in any event satisfied on the existing evidence that Altered State has no other creditors. In the Third Knight Affidavit Mr Knight asserts that to his knowledge or belief the company does not owe any other debts or have any other liabilities. I am not prepared to accept, even at the s 459S stage, the unverified assertion of the knowledge or belief of Mr Knight in the complete absence of any corroborating accounting or business records. That is particularly because this assertion appears to be at odds with the assertion (again unverified) in the First Knight Affidavit that the company has never had any “significant” outstanding liabilities.

53    Counsel for Altered State advanced a number of additional submissions for why leave under s 459S should nonetheless be granted. He submits that it would be harsh and unjust to refuse leave given that the uncontested evidence demonstrates that Altered State has a good case that it has offsetting claims. He also submits that Soundwave, or its lawyers, acted unreasonably in relying on the statutory demand in the face of a communication from Mr Knight, prior to the expiry of the demand, to the effect that there was a genuine dispute. It would, counsel contends, be tantamount to an abuse of process to allow reliance on the statutory demand and refuse leave to rely on the dispute concerning the debt in these circumstances.

54    These submissions are rejected. The precondition in s 459S(2) is a mandatory precondition which must be construed strictly. There is no general discretion: Switz at [51]. Once it is found that the existence of the debt is not material to proving that Altered State is solvent, there is no discretion to grant leave. Any unreasonable conduct on the part of Soundwave or its lawyers is accordingly immaterial. Likewise, it is immaterial that it might be seen to be harsh or unjust to not permit Altered State to rely on the dispute concerning the debt in circumstances where it has been found that there is a serious argument that the dispute is genuine. As is clear from Switz and many other judgments (for example David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 279), the legislative scheme in Part 5.4 Division 4 of the Act in relation to statutory demands can operate harshly. But that is a consequence of the fact that the scheme was designed and adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand.

Disposition

55    The power to grant leave under s 459S is to be used “cautiously and even sparingly given the overall policy of Pt 5.4”: Paliflex at [40]. I am not satisfied that Altered State has met the mandatory precondition for leave in s 459S(2). Leave therefore cannot be granted. In any event, given the unsatisfactory evidence relating to the alleged dispute concerning the debt, the unsatisfactory evidence concerning the financial position and solvency of Altered State and the unsatisfactory explanation for why no application was made to set aside the statutory demand, I would not, in any event, be minded to exercise the discretion to grant leave.

56    Altered State’s application for leave under s 459S to rely on the alleged dispute concerning the debt the subject of the statutory demand is accordingly refused with costs.

Associate:

Dated:    12 May 2014