FEDERAL COURT OF AUSTRALIA

Gillion Pty Limited (Trustee) v Wet Fix Holdings Pty Limited [2016] FCA 1424

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted pursuant to 459S(1)(b) of the Corporations Act 2001 (Cth) to the defendant to oppose the plaintiff’s winding up application on the ground that the defendant disputes the debt in the statutory demand attached to the originating process.

2.    Costs of the application for leave be costs in the cause.

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

REASONS FOR JUDGMENT

GLEESON J:

1    The defendant (“WFH”) seeks leave pursuant to s 459S(1)(b) of the Corporations Act 2001 (Cth) (“Act”) to oppose a winding up application on the ground that it disputes the debt asserted by the plaintiff (“Gillion”) in a statutory demand dated 16 April 2016 (“statutory demand debt”). WFH did not apply to the Court to set aside the statutory demand pursuant to s 459G of the Act because, WFH claimed, its sole director, Mr Starling, did not become aware of the statutory demand until after the time fixed by the Act for making such an application had passed. It was not disputed that the statutory demand was served at the registered office of WFH.

2    Section 459S of the Act provides:

(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.

3    The threshold issue for determination is whether the dispute about the statutory demand debt is material to proving that WFH is solvent, within the meaning of s 459S(2).

4    If that issue is resolved in favour of WFH, it is necessary to consider whether leave should be granted under s 459S(1) by reference to the following considerations:

(1)    WFH’s basis for disputing the statutory demand debt; and

(2)    the reason why the issue of indebtedness was not raised in an application to set aside the statutory demand, and the reasonableness of the party’s conduct in connection with the failure to apply to set aside the statutory demand: cf. In the matter of Vangory Holdings Pty Ltd [2015] NSWSC 546 (“Vangory”) at [9]–[10], recently applied in Hadley v BetHQ Pty Limited [2016] FCA 1263 (“Hadley”).

5    In Vangory at [10], Black J expressed the matters relevant to an application for leave under s 459S(1) as:

… whether there is a serious question to be tried on the ground sought to be raised; the sufficiency of any explanation as to why that ground was not raised in an application to set aside the creditor’s statutory demand, involving an evaluation of the reasonableness of the debtor’s conduct at the time when the application might have been made; and whether the Court is satisfied that the relevant ground is material to proving whether the debtor is solvent: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 149 FLR 179 at [49]; DAG International Pty Ltd v DAG International Group [2005] NSWSC 1036; Perpetual Nominees Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282 at [33]; Re Pegasus Capital Management Pty Ltd [2011] NSWSC 570 at [6]. The discretion conferred by s 459S of the Corporations Act is to be exercised cautiously and sparingly and with regard to the purpose of Part 5.4 of the Corporations Act to provide for determination of any objections to a creditor’s statutory demand by an application under s 459G of the Corporations Act, rather than at the time of the winding up application: Switz Pty Ltd v Glowbind Pty Ltd [[2000] NSWCA 37; (2000) 48 NSWLR 661]; Perpetual Nominees Ltd v NA Investment Holdings Pty Ltd [[2011] NSWSC 282] at [34].

6    In this case, the reason why WFH did not make an application to set aside the statutory demand and the sufficiency of that reason were hotly contested. Put simply, Gillion contended that Mr Starling received the statutory demand in time to make the necessary application and there was no reason why he could not have done so. If he did not receive it, then that was his own fault.

The statutory demand debt

7    The debt identified in the statutory demand is $1,785,263.30 and is described as “the amount payable under Loan Agreement dated 11 June 2015 between the creditor as Lender and the company as Borrower and including interest to 31 March 2016”.

8    The statutory demand debt is not a judgment debt. There was no evidence of an acknowledgement of debt by WFH, or of any conduct on behalf of WFH demonstrating that it did not dispute the existence or the amount of the debt.

9    On the application for leave pursuant to s 459S(1)(b), WFH did not contend that the winding up proceeding commenced by Gillion is an abuse of process in the absence of a reasonable belief that the debt was not disputed. That approach properly reflects the general scheme of Part 5.4 of the Act, which “envisages a more or less mechanical process whereby if a statutory demand is not challenged in the appropriate way within 21 days, then the Court should not be particularly free with exercising its inherent power or discretion to prevent the process”: Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 44 ACSR 124 at [14] (Stein JA, Mason P and Ipp JA agreeing).

10    In State Bank v Tela (No 2) [2002] NSWSC 20; (2002) 188 ALR 702 at [11], Barrett J said:

The scheme of the legislation makes it clear that a creditor who has duly served a statutory demand which remains unsatisfied for the relevant period has a right to seek winding up. In former times, it was regarded as an abuse of process for such an application to be pursued in circumstances where the debt was disputed or an off-setting claim existed. The rationale was that winding up proceedings were not the appropriate occasion for those matters to be addressed and that the threat of such proceedings, with their serious commercial consequences, involved resort to the particular remedy for a purpose regarded by the law as improper. All that has been changed by Pt 5.4. It is now abundantly clear that, unless the Division 3 process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist.

Background to winding up application

11    WFH was incorporated on 23 May 2015 for the purpose of acquiring a business of manufacturing plastic bottles and supplying bottled water (“Wet Fix business”), relevantly from factory premises in Stapylton, Queensland (“factory”).

12    There are 400 issued shares in WFH. Star HQ Pty Ltd (“Star HQ”), a company of which Mr Starling is the sole director, owns 320 shares. Mrs Gill, a director of Gillion who gave evidence on behalf of Gillion, owns 40 shares. The remaining 40 shares are owned by Chris Chapman Nominees Pty Ltd. Chris Chapman is the former accountant of both Mr Starling and Mrs Gill.

13    According to Mrs Gill, the sale of the Wet Fix business was negotiated in the period between February and early June 2015. According to her, the business was successful. In the period between 2004 and 2015, the revenue of Wet Fix increased from approximately $1.8 million per year to $12 million per year.

Business sale agreement

14    There is a business sale agreement dated 11 June 2015. The parties to the business sale agreement are Gillion as trustee for the Summerfield Trust and WFH. The business sold by the agreement is described in the items schedule to the agreement as “Bottle Manufacturer, Bottled Water and Distribution”. The purchase price is stated in the items schedule as $6 million. The date of completion of the sale is stated in the items schedule as 1 October 2015.

Share sale agreement

15    In addition to the sale of the Wet Fix business, there was a sale of shares in a company called Wet Fix Pty Ltd (“Wet Fix”) which was previously owned by Gillion. The parties to the share sale agreement are Gillion, WFH and Wet Fix. The share sale agreement provided for the sale by Gillion of 20 ordinary shares in Wet Fix for a purchase price calculated in accordance with annexure “A” to the agreement.

16    Among other issues, there is a dispute between the parties as to whether the purchase price payable under the share sale agreement has been finally determined although it seems to be agreed that the purchase price was or is to be calculated by reference to the balance sheet of Wet Fix as at 30 September 2015, rather than as at 30 June 2015 (being the date specified in the share sale agreement). Annexure “A” to the share sale agreement contains provisions which are evidently intended to facilitate the calculation of the purchase price but which do not address explicitly how a dispute as to the quantification of the purchase price is to be resolved.

Shareholders agreement

17    There is a shareholders agreement for WFH dated 11 June 2015. The parties to that agreement are Elem Investments Pty Ltd as trustee for the Lisa Miller Family Trust, Mrs Gill and Chris Chapman Pty Ltd as trustee for the Chris Chapman Pty Limited Superannuation Fund. The recitals to the shareholders agreement record that, as at the date of its execution, Elem held 320 shares in WFH, Mrs Gill held 40 shares and Chris Chapman Pty Ltd held 40 shares.

18    As noted above, the current shareholders are Star HQ, Mrs Gill and Chris Chapman Nominees Pty Ltd.

Loan agreement

19    The loan agreement referred to in the statutory demand provided for part vendor finance of the purchase price. The parties to the loan agreement are Gillion as trustee of the Summerfield Trust (“the Lender”), WFH (“the Borrower”) and Wet Fix and Mr Starling as guarantors.

20    The loan agreement contains the following provisions:

1.    Provision of Loan

The Lender agrees, on the terms and subject to the conditions set out in this Agreement, to lend to the Borrower the sum of One Million Seven Hundred and Fifty Thousand Dollars ($1,750,000.00) (“Principal Sum”).

2.    Repayment

2.1    The Borrower will repay the Principal Sum to the Lender thirty six (36) months from the date hereof or as agreed between the parties.

3.    Interest

3.1    Interest shall be payable on the Principal Sum or the balance of the Principal Sum then outstanding at the target “cash rate” which is the market interest rate on overnight funds set by the Reserve Bank of Australia plus four percent (4%).

3.2    The Borrower must pay the Lender interest calculated from the date of this Agreement with the first interest payment due on the date which is one (1) calendar month after the date of this Agreement and thereafter on the same day of each succeeding month.

3.3    For the avoidance of doubt, the interest payable will compound monthly and each amount of unpaid interest will be treated as an accretion to the Principal Sum or balance of the Principal Sum then outstanding for the purposes of the calculation of further interest payable.

3.4    The Borrower may repay the Principal Sum in whole or in part without penalty on any date when interest is payable under clause 3.2 provided the repayment is at least One Hundred Thousand Dollars ($100,000.00).

…

6.    Termination

6.1    This Agreement may be terminated by either party by notice in writing to the other party if:

6.1.1    the party to whom notice is given is in breach of this Agreement and such breach continues after written notice of such breach is given to that party and fourteen (14) days following the receipt of the written notification for rectification of the breach has expired; or

6.1.2    either party enters into any scheme of arrangement or other composition with its creditors.

7.    Termination Consequences

7.1    On the expiry or other termination of this Agreement:

7.1.1    The loan, together with all interest accrued on the loan and not then paid and all other amounts payable under this Agreement and unpaid shall, at the option of the Lender, notwithstanding any delay or previous waiver of the right to exercise that option, shall [sic] immediately become due and payable without necessity of any demand or notice to the Borrower or the Guarantors.

Materiality of statutory demand debt material to proving solvency

Case law on materiality

21    In David Grant & Co Pty Ltd (Receiver appointed) v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, Gummow J said (at 270):

The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts, unless they are raised promptly.

22    In Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 (“Switz”), at [51] to [56], Spigelman CJ (Handley and Giles JJA agreeing) said relevantly:

[51]    The 1992 reforms were intended to minimise the opportunity for delay by ensuring that disputes as to debts are determined at an early stage and do not delay or prolong the hearing of the issue of solvency. The strict requirements of s459G are subject only to s459S, which Hayne J has called the “only safety net”. (Texel Pty Ltd v Commonwealth Bank of Australia [1994] VicRp 62; [1994] 2 VR 298 at 300-301). However, the scheme did not confer on the Court a general discretion. A mandatory precondition was introduced in s459S(2). The purpose of the legislative scheme is best served by giving that subsection a strict construction.

…

[53]    By the time an application under s459S is made, the company will be presumed to be insolvent and will have the burden of proving that it is not. In my opinion s459S(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 s459S(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 s459S(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 s459S(1).

23    In Switz, the defendant’s expert evidence was that the defendant’s nett current asset position was $2.56 million, which substantially exceeded the debt of $1.3 million that was the subject of the statutory demand.

24    In Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Limited [2008] FCA 1777 (“Grant Thornton”), Perram J concluded (at [19]) that the better reading of [56] of Switz is that:

…an applicant, under s 459S, must show that the debt in respect of which it is seeking leave is pivotal to the question of solvency. That is, the defendant must demonstrate that if the debt exists then the company will be insolvent and if the debt does not exist, then the company will be solvent.

25    In Soundwave Festival Pty Limited v Altered State (W.A.) Pty Limited [2014] FCA 466 at [36], Wigney J noted that there is an apparent dispute in the authorities as to the appropriate test to be applied in determining whether a dispute concerning a debt is material to proving that the company is solvent. Wigney J referred to the decision in Grant Thornton as an instance of the “narrow” approach requiring proof that the dispute is:

… “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.

26    Wigney J referred to an alternative “broad” approach, according to which 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. Examples of this approach are Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962; (2007) 25 ACLC 1216; Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours (No. 2) [2011] NSWSC 113 and Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 161.

27    Concerning the degree of proof required to demonstrate materiality, Wigney J stated (at [40]-[41]):

[I]n 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.

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.

Mr Starling’s evidence about WFH’s solvency

28    Mr Starling gave evidence, which I accept, that WFH does not trade in the sense that it has no customers or suppliers and no third party trade receivables.

29    WFH’s evidence included financial statements for the year ended 30 June 2016, verified by Mr Starling. The financial statements were prepared by BDO (Qld) Pty Ltd (“BDO”), an accounting firm, on the basis of information provided by Mr Starling.

30    The profit and loss statement shows income of $423,325 comprising rental income and total expenses of $423,328.

31    The balance sheet showed net assets and total equity of $3,999,997. The assets include current assets of $4,568, and non-current assets of $8,126,378. The statutory demand debt is included in the non-current liabilities in the balance sheet.

32    The non-current assets are:

(1)    shares in subsidiary companies (being Wet Fix and Wet Fix Equipment Pty Ltd)     $3,241,907;

(2)    an inter-company loan to WFE     $307,848;

(3)    an inter-company loan to Wet Fix    $2,246,698;

(4)    property, plant and equipment less accumulated depreciation    $2,099,925.

33    Gillion contended that WFH has “failed to establish that, in the event that the [statutory demand debt] is due, that it will be insolvent”. I did not understand Gillion to be suggesting that WFH would be solvent in that event. Rather, its case was that, on the eventual winding up application, WFH should be required to prove that it is able to pay the statutory demand debt of $1,785,263.30. Gillion referred to Mr Starling’s evidence that WFH is solvent even if the statutory demand debt is owing. Gillion noted that Mr Starling gave the following evidence in an affidavit sworn 24 June 2016:

34.    Star HQ has also agreed with [WFH] that, in the event that the debt claimed in the [statutory demand] becomes due and payable by [WFH], Star HQ will pay the amount to [WFH] within 5 business days of the debt becoming due and payable. At the final hearing of this matter, I shall instruct [WFH’s] solicitors to give a personal undertaking on my behalf to the Court in the following form – I, Darren Starling of 31 Euryalus Street Mosman NSW, undertake to the Court that I shall cause Star HQ Pty Ltd to pay to the Defendant the amount of $1,800,000.00 within 5 business days of the debt owing to the Plaintiff becoming due and payable under the terms of the Loan Agreement dated 11 June 2015 entered into between the Plaintiff and the Defendant, a copy of which is annexed to my affidavit sworn in these proceedings, provided that event occurs before the end of 1 year from today.

35.    Star HQ has an approved finance facility available to it for the provision of those funds referred to in paragraph 34. A copy of the finance approval from Semper Capital Mtgmt Pty Ltd is at Tab 13 of my Exhibit.

36.    [WFH] can pay all its debts as and when they fall due, and is solvent.

34    Gillion did not suggest that the document referred to in para 35 of Mr Starling’s affidavit was in fact an “approved finance facility ... for the provision of funds” to WFH. It is a letter dated 22 June 2016 from Semper Capital Mgmt Pty Ltd to Lisa Miller (Starling), Mr Starling’s wife (“Ms Miller”), entitled “Indicative letter of offer for mortgage finance”. The letter purports to set out “the general terms and conditions upon which the Credit Provider is prepared to further process your loan application”. The borrower is identified as Star HQ. The purpose of the loan is identified as “Cash flow for Wetfix Pty Ltd”. The estimated funds available at drawdown are stated to be $2,030,035.31.

35    Gillion also referred to the following oral evidence given by Mr Starling:

(1)    that the undertaking mentioned in his affidavit remained available, subject to some changes in the number of days “as to whether it can be done in five days or not”;

(2)    he had spoken to Semper Capital in the past week and a loan from Semper Capital to meet the statutory demand debt would most likely be able to be processed within five days;

(3)    another loan on 22 September 2016 would also more than cover the amount of the undertaking; and

(4)    Star HQ had access to two amounts, $2.5 million and $2.6 million, which would be provided to WFH to cover its liabilities.

36    Gillion also relied on the following evidence:

And so when we look at what you’re saying in paragraph 34, you are saying, aren’t you, that Wet Fix Holdings is solvent whether or not it owes $1.75 million or what – of money, that amount, around that amount?---Correct.

Or not?---Yes.

So it makes no difference, does it, to the solvency of Wet Fix Holdings Pty Limited whether it owes Gillion $1.76 million or it doesn’t, because it’s solvent under both scenarios?---Yes.

37    As will appear below, WFH’s expert accountant, Helen Newman, did not corroborate the evidence of Mr Starling’s opinion on this point. I do not accept that Mr Starling’s evidence requires a conclusion that the existence of the statutory demand debt is not material to proving WFH’s solvency. Such a conclusion would entail an acceptance of Mr Starling’s predictions, albeit confident, that WFH will be able to obtain funds from Star HQ. There were two sources from which Mr Starling said that Star HQ will be able to borrow the amount of the statutory demand debt – Semper Capital and Mrs Starling. However, the documentary evidence provided by Mr Starling in support of his affidavit plainly does not support his assertions as to the availability of funds to Star HQ to lend to WFH for the purpose of paying the statutory demand debt. There is no other evidence, either from Semper Capital or Ms Miller, that those funds are or will be available to Star HQ. Further, WFH’s expert evidence reveals that WFH does not intend to mount a case on solvency that is solely predicated on the availability of funds from Star HQ.

Expert evidence about WFH’s solvency

38    Expert evidence was given on behalf of WFH by Helen Newman, a registered liquidator and chartered accountant. Ms Newman is a business recovery and insolvency partner with BDO.

39    A forensic accountant, Brett Goodyer, gave evidence on Gillion’s behalf.

40    Ms Newman gave evidence, over objection, that WFH is solvent, on the assumption that the statutory demand debt (or at least $1,750,000 being the bulk of the statutory demand debt) is a non-current liability of WFH. Mr Goodyer was not satisfied that WFH is solvent, even if the statutory demand debt is not due and payable. In summary, Mr Goodyer was not satisfied that the verified financial statements accurately reflect the financial position of WFH.

41    An issue arose during the hearing concerning WFH’s liability to pay stamp duty on the business sale agreement and the share sale agreement. This liability is not recorded in the verified financial statements. The accountants agreed on the following two points:

It is likely that stamp duty on the business sale agreement is assessable and payable in the near future and once complete, stamp duty on the sale of shares in [Wet Fix] to [WFH] is payable now, or in the next 12 months as a result of the share transfer.

Given that the stamp duty is more likely than not payable, it is a current liability of WFH.

42    The accounting experts agreed that, if the amount in the statutory demand is found to be due and payable, WFH would not be able to repay that debt from existing resources. Mr Goodyer went further, saying that, as a result, WFH would not be solvent based on the cash flow test of solvency. Although it was not entirely clear, Mr Goodyer’s opinion may have been based on a view that the cash flow test for insolvency is to be applied solely by reference to the company’s own cash resources. If so, that view is inconsistent with Gillion’s contention that Mr Starling’s evidence about cash resources available from Star HQ is relevant to WFH’s solvency.

43    Ms Newman’s view was that, assuming the statutory demand debt is due and payable, it could not be concluded that WFH is not solvent just because it does not have cash resources to meet that debt on its balance sheet. Ms Newman’s view was that the company is entitled to look to other resources. Ms Newman identified “three current prospects for sources of funds to satisfy a current liability”, which she summarised as:

1)    Shareholders as mentioned above, Star HQ undertaking of funds. There is an established pattern of Mr Darren Starling and his family members and related entities providing funds to the Company and companies within the group as indicated in the ledgers for the loan accounts.

2)    Call on the intercompany loan receivable owing from Wet Fix Pty Ltd. As at 30 June 2016 balance sheet, Wet Fix Pty Ltd owes the Company $2,476,698. No provision for bad debt has been raised against this receivable.

My knowledge of Wet Fix is that its balance sheet consists of current assets being cash, debtors and stock. It has fixed assets of plant and equipment which I know to be encumbered. I do not have current cash flow forecast data of Wet Fix, notwithstanding I cannot conclude that the wet fix debt is not recoverable as there is no evidence of that.

3)    The Company has plant and equipment in its balance sheet that is not subject to specific charges. The plant and equipment is carried at a written down value as at 30 June 2016 of $2,099,925. The company may be in a position to raise finance against this equipment. On an objective assessment of a possible lending scenario, at a low lending ratio of 50% this would provide sufficient cash flow funding to meet any stamp duty current liability.

44    Mr Goodyer expressed the following opinions:

•    Based upon the agreed position stated above, on the assumption that the Stamp Duty in question and/or the Loan from Gillion to [WFH] are considered payable in the short term, the company is insolvent on the basis of Ms. Newman’s reconstructed balance sheet with this additional information.

•    Insufficient information has been provided or otherwise examined to provide assurance that funding is available to [WFH] from any third party, or that related parties have sufficient cash flow or other capacity to fund the shortfall in current assets over current liabilities on the adjusted balance sheet position of [WFH].

•    In the absence of external funding, [WFH] appears to be insolvent on the basis of Ms. Newman’s reconstructed balance sheet (page 8 of her expert report), with the addition of stamp duty and loan from Gillion Pty Ltd.

•    It is unknown whether [WFH] has any other tax or other current liabilities that have not yet been disclosed or quantified. Any such current liabilities will affect the solvency of the company.

Other evidence

45    Gillion noted that, on the third day of the hearing, after a failure to address stamp duty liabilities in the special purpose financial statements had been admitted, WFH:

(1)    proffered undertakings to pay its stamp duty liability, together with interest and penalties; and

(2)    tendered a loan agreement between Ms Miller and Star HQ for the purpose of Star HQ making a loan to WFH to meet its stamp duty liability.

46    Gillion argued that this evidence demonstrated that there is “a variety of sources for funds for [WFH]”.

Consideration

47    WFH intends to prove that it is solvent if it does not owe the disputed debt. If the figures in the verified 2016 financial statements are accepted, then it is likely that WFH will demonstrate its solvency, having regard to the other evidence about provisions made for the payment of any stamp duty liability. Further, WFH proposes to adduce expert evidence of its solvency from Ms Newman. Although Ms Newman’s evidence is contested, I accept that it is capable of satisfying the Court that WFH is solvent.

48    Although Mr Goodyer did not accept that there was sufficient evidence to be satisfied by WFH’s solvency, in its written submissions, Gillion accepted that WFH may be able to establish solvency if the statutory demand debt is not due.

49    Conversely, there is evidence that WFH is insolvent if the statutory demand debt is owed: although its assets exceed its liabilities, it does not appear currently to have resources from which to pay the statutory demand debt. This conclusion is supported by the expert accounting evidence set out above.

50    I accept the evidence of Mr Goodyer that the material currently available is insufficient to conclude that funding is available to WFH from any third party, or that related parties have sufficient cash flow or other capacity to fund the shortfall in current assets over current liabilities that would arise if the statutory demand debt is due and payable.

51    Accordingly, on the available evidence, the solvency of WFH turns on the question whether the statutory demand debt is due and payable. I recognise that, on a contested winding up application, WFH is likely to seek to prove its solvency by reference to its capacity to secure funds from external resources but the available evidence does not support a conclusion that it will be successful in that endeavour. In those circumstances, I am satisfied that the existence of the statutory demand debt is material to proving the solvency of WFH.

Basis for disputing statutory demand debt

52    It may be assumed in Gillion’s favour that there is no dispute that WFH borrowed $1.75 million from Gillion under a loan agreement dated 11 June 2015, although the evidence discloses an ongoing dispute about the final purchase price for Wet Fix shares.

53    Gillion acknowledged that the loan agreement provides for repayment after three years. It argued that the agreement confers a right to accelerate the date for repayment of the loan upon termination of the loan agreement. Gillion contended that the agreement was terminated pursuant to clause 6.1 of the loan agreement after the requisite notice was given by letter dated 23 February 2016, from Gillion’s lawyer, Paul Hopkins of RMB Lawyers to WFH. The letter stated relevantly:

Our client instructs us that you have failed to pay interest as required under your loan agreement and we forward a Notice requiring rectification of your breach of the Loan Agreement.

54    The attached notice was in the following terms:

Gillion … as trustee for the Summerfield Trust, the Lender under Loan Agreement dated 11 June 2015, gives you notice that you have failed to pay interest due under the Agreement. Please rectify this breach of the Loan Agreement.

55    WFH did not submit that the right to terminate under clause 6.1 could not be exercised in the event of a breach of the requirement to pay interest. However, WFH contended that Gillion has not provided notice in writing required by clause 6.1 to effect a termination.

56    In my view, WFH’s contention is plainly arguable. The notice attached to the 23 February 2016 letter does not purport to be a notice of termination of the loan agreement. Rather, it appears to be a notice of the kind required by clause 6.1.1. The entitlement to terminate by notice in writing under clause 6.1 appears to arise in the event that the requirements of clause 6.1.1 have been met, namely, the provision of a notice required by clause 6.1.1, the continuation of the breach despite the notice and the passage of 14 days following the receipt of the notice. There was no notice issued after the requirements of clause 6.1.1 had been fulfilled.

57    Gillion sought to argue that, if a separate notice of termination was required, the statutory demand itself operated as a written notice of termination of the loan agreement. In support of that proposition, Gillion relied upon Al Jadeed TV v United Broadcasting International Pty Ltd [2011] FCA 983; (2011) 283 ALR 205 (“Jadeed”). In that case, Flick J said at [21]:

Whatever be the source of the power sought to be invoked by a party seeking to terminate a contract, any notice of termination must be expressed in sufficiently clear terms such that a reasonable person would understand the notice to be one terminating the contract: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749.

58    Jadeed is not authority for the proposition that a statutory demand can operate as a notice of termination. The statutory demand does not contain any statement that it is a notice of termination of the loan agreement. It makes no reference to clause 6.1. It is at least arguable, contrary to the submission made by Gillion, that the statutory demand did not operate as “both a notice of termination and a demand for the consequences of that termination”.

59    Gillion argued that, if the statutory demand did not constitute notice of termination of the loan agreement, then it was a repudiation of that agreement because the demand evinced a clear intention by Gillion no longer to be bound by the terms of the loan agreement. This argument must fail: an unaccepted repudiation does not of itself bring the loan agreement to an end: cf Duncan v Big Country Developments Pty Ltd [2016] NSWCA 163 at [44].

60    In the absence of a persuasive response to WFH’s contentions, there is a strong case that the statutory demand debt is the subject of a genuine dispute: cf Hadley at [30].

Reason for company not applying to set aside the statutory demand

61    The reason given by Mr Starling on behalf of WFH was that the statutory demand did not come to his attention until he received the originating process on 30 May 2016.

Case law about assessing company’s conduct

62    In Vangory, Black J observed that leave is less likely to be granted pursuant to s 459S where there is some default on the part of the defendant company or its advisers which had contributed to the company’s failure to apply to set aside the statutory demand, citing Re Consolidated Constructions Pty Ltd; In the matter of The Satellite Group Ltd [2000] NSWSC 984; (2000) 35 ACSR 565; Perpetual Nominees v Masri Apartments Pty Ltd; Perpetual Nominees v AUS Constructions [2004] NSWSC 551; (2004) 22 ACLC 975; (2004) 49 ACSR 719; In the matter of NA Investment Holdings Pty Ltd - Perpetual Nominee Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282 at [42], [44]; In the matter of Kay Investment Holdings Pty Ltd v North East Developments Pty Ltd (in liq) [2011] NSWSC 1121; (2011) 85 ACSR 610 at [73]. At [21], Black J found that “inattention and inactivity” did not provide a satisfactory explanation for a failure to comply with or set aside a statutory demand.

63    In Nick Scali Ltd v JSK Logistics Pty Ltd [2008] NSWSC 597, Rein J doubted that non-receipt of a statutory demand could be a basis for permitting leave under s 459S except in limited circumstances. In particular his Honour said:

Failure to act reasonably in respect of superintendence of the collection of mail from the company’s registered office and/or failure to take steps to ensure that changes in the registered office were advised to ASIC would, in my view, preclude the grant of leave.

64    In Hadley, Farrell J was not satisfied that the defendant company or its sole director had acted reasonably in the superintendence of the collection of mail from the defendant company’s office. In that case, the evidence was that the registered office was a “virtual office” and that there had been previous “situations” arising from haphazard forwarding or delays in forwarding documents to the director from the “virtual office”.

Evidence

65    The statutory demand was served on the registered office of WFH by registered post on 18 April 2016.

66    At that time, the registered office of WFH was an address of Chris Chapman. Mr Chapman was then the company secretary of WFH.

67    Having received the statutory demand, on 18 April 2016 at 4:47pm, Chris Chapman sent an email to an address abbreviated as “darren”, copied to an email address used by Mrs Gill (“statutory demand email”). The subject matter of the email is “Statutory demand”. A copy of the statutory demand was attached to the email as a pdf document. The message in the email is:

Hi Darren,

This was received in today’s mail. I shall post the original to the factory.

Regards

Chris Chapman CA

68    The following day, Mr Chapman duly posted the original statutory demand to the factory at the North Sydney post office.

69    Mr Starling’s evidence was that he did not see a copy of the statutory demand until 30 May 2016, which was after the time for applying to set aside the demand had expired. Mr Starling’s evidence was that he did not receive the statutory demand by post and nor did he receive the email sent by Mr Chapman.

70    For her part, Mrs Gill gave evidence that she received the statutory demand email.

71    Gillion also tendered an email from darren@wetfix.com to Mrs Gill dated 18 April 2016 forwarding a committee meeting agenda also sent on 18 April 2016 to “undisclosed recipients” from Complete Body Corporate Services (“committee meeting agenda email”).

72    Mr Starling said that, had he received the statutory demand on or about 18 April 2016, he would have immediately instructed his solicitors to apply to set the statutory demand aside as the statutory demand debt was not due and payable.

73    Gillion submitted that “it is difficult to avoid the conclusion that the demand either did come to his attention or else that the processes that he had set up to ensure he received the April Statutory Demand were so lacking that his excuse for not having received it cannot be regarded as adequate”.

74    I do not find that the statutory demand came to Mr Starling’s attention before 30 May 2016. Although Mr Starling was not an entirely satisfactory witness, I do not find that he was untruthful. It was not suggested to Mr Starling that he was seeking to avoid receipt of important documents, or otherwise hiding from creditors. There is no apparent reason why Mr Starling might have chosen to ignore the statutory demand.

75    This is not a case in which the debtor company did not have arrangements in place that would enable a statutory demand to come to the attention of its director. In this case, the registered office was the home of the company secretary, who understood that he should inform Mr Starling of the statutory demand. The address of the registered office was not inappropriate. Mr Chapman attempted to inform Mr Starling by sending him the statutory demand in the post and via email. I do not accept that it was necessary for Mr Starling to give particular directions to Mr Chapman to take additional steps to inform him in the event of receiving a statutory demand.

Non-receipt of original statutory demand by post

76    Mr Starling gave evidence that the mail directed to the factory was collected and opened by the office manager, Janet Bray, and another staff member, Paige. He agreed that, if the statutory demand was received at the factory, then he would have received it.

77    Ms Bray gave evidence. She was a straightforward witness. It was not suggested to Ms Bray that there was any deficiency in the system for receiving mail at the factory.

78    On behalf of Gillion, it was submitted that, if Mr Starling had not received the original statutory demand, then it was likely that this was because there was an inadequate system to ensure that important mail came to his attention. However, beyond the non-receipt of the demand there was no evidence that the system of receiving mail at the factory was inadequate. There was no evidence that other mail addressed to WFH had not been duly received.

79    In my view, the most likely explanation for Mr Starling’s non-receipt of the original statutory demand is that it was somehow lost in the postal system between North Sydney and the factory. I do not find that there was any failure of WFH’s systems which caused Mr Starling not to receive the original statutory demand sent to him by Mr Chapman.

Non-receipt of statutory demand by email

80    Mr Starling has an email address darren@wetfix.com.

81    An email dated 25 February 2016 from Mr Starling to Mr Chapman, printed from Mr Chapman’s computer, shows that Mr Starling used the email address darren@wetfix.com to communicate with Mr Chapman. From that email, it appears that this address was abbreviated on Mr Chapman’s system to “darren”.

82    An email dated 28 February 2016 5:49pm from Mr Starling to Mr Chapman shows that Mr Starling again used the email address “darren@wetfix.com”. From that email, again it appears that this address was abbreviated on Mr Chapman’s system to “darren”.

83    Two emails dated 24 March 2016 from Mr Chapman show that, as at that date, Mr Chapman addressed emails to addresses that were abbreviated to “Darren Starling” and “darren”, as well as copying them to Mr Starling’s wife to an address that was abbreviated to “Lisa Miller”. On 1 April 2016, Mr Chapman sent Mr Starling an email to an address abbreviated to “Darren Starling”, copied to an address abbreviated to “darren”. On 4 April 2016, Mr Chapman copied Mr Starling into an email to the National Australia Bank, using an address abbreviated to “Darren Starling”. On 11 April 2016, Mr Chapman sent an email headed “rental arrears” to Ms Bray, copied to an address abbreviated to “darren”.

84    The copy of the statutory demand email, printed from Mr Chapman’s computer, was addressed to “darren”. This address was probably darren@wetfix.com.

85    WFH relied upon a screenshot, taken by Ms Bray of the inbox for darren@wetfix.com, to prove that the statutory demand email was not received. The screenshot shows that emails were received from Mr Chapman on 18 April 2016 and 21 April 2016. The screenshot does not record the statutory demand email.

86    Ms Bray’s evidence was that the screenshot was a complete record of emails received at darren@wetfix.com and that this fact was demonstrated by the sequential numbering of the emails for 18 April 2016, from 3225 to 3253. Annexed to Ms Bray’s affidavit was a copy of an email that was received from Mr Chapman on 18 April 2016 at 10:35 am. That document confirms that the email was copied to darren@wetfix.com.

87    Despite Ms Bray’s evidence, I am not satisfied that the screenshot was a complete record of emails received at darren@wetfix.com on 18 April 2016 in the absence of any explanation for why the committee agenda email, apparently forwarded from that address on that date, does not appear on the screenshot. In my view, having regard to the previous communications between Mr Starling and Mr Chapman to and from that address, the statutory demand email was probably received at darren@wetfix.com but was deleted, either carelessly or inadvertently, by Mr Starling and without Mr Starling becoming conscious of the fact that the email contained the statutory demand. Thus, I reject Mr Starling’s evidence that nothing was deleted from the mail server during the relevant period.

Consideration

88    WFH could have had a more reliable system for ensuring that Mr Starling received the statutory demand. However, I do not conclude that Mr Starling acted unreasonably in the conduct by which the statutory demand did not come to his attention. WFH had a suitable registered office address, which was occupied by Mr Chapman, the company secretary and a person who could be relied upon to send important correspondence to Mr Starling. The factory was a suitable address for Mr Chapman to send the statutory demand to Mr Starling, because it was the location where he was regularly working. I am not satisfied that Mr Starling deliberately did or omitted to do anything which was the reason why he did not receive the original statutory demand in the mail. The circumstances in which Mr Starling came to delete the statutory demand email are not clear, but I do not find that Mr Starling deliberately deleted the email.

89    I am therefore satisfied that WFH did not apply to set aside the statutory demand because it did not come to Mr Starling’s attention in time, despite the existence of an adequate system for bringing the statutory demand to Mr Starling’s attention. Although I accept that the reasons why the demand did not come to Mr Starling’s attention are not entirely clear, I also accept that neither Mr Starling, nor any person who acted on behalf of WFH, acted in a manner which was calculated to prevent the demand from coming to Mr Starling’s attention.

Conclusion

90    There is a serious question to be tried as to whether there is a genuine dispute about the statutory demand debt. That question is material to WFH’s solvency.

91    I am satisfied that Mr Starling has provided a sufficient explanation for the failure of WFH to make an application to set aside the statutory demand on the ground that there is a genuine dispute about the debt.

92    In those circumstances, I will grant leave pursuant to s 459S to WFH to oppose Gillion’s winding up application on the ground that it disputes the statutory demand debt.

Associate:    

Dated:    29 November 2016