FEDERAL COURT OF AUSTRALIA

Mutton v Living Australia Pty Ltd, in the matter of Living Australia Pty Ltd [2020] FCA 739

ORDERS

THE COURT ORDERS THAT:

1.    Orders 1, 2, 3 and 7 made by the Registrar on 12 June 2019 are set aside.

2.    The time fixed by Order 3 of the Registrar made on 20 March 2019 within which Living Australia was to file a notice of opposition and affidavits in support is extended to 22 March 2019 and 24 September 2019 respectively.

3.    Living Australia be granted leave to oppose the winding up.

4.    The Registrar’s orders be otherwise affirmed.

5.    Order 1 made on 21 June 2019, by which the operation of Orders 4 and 5 made by the Registrar on 12 June 2019 was stayed, be vacated.

6.    The interlocutory application filed by Mr and Mrs Mutton on 28 May 2019 be dismissed.

7.    The interlocutory application filed by Ms Stylianou and Mr Savvas on 3 June 2019 be dismissed.

8.    Subject to Order 10, the costs of Rans Consulting Group Pty Ltd ACN 613 674 749 on the review, including the costs of the application for the stay, be taxed if not agreed and be reimbursed in accordance with s 466(2) of the Corporations Act 2001 (Cth).

9.    Subject to Order 10, Mr and Mrs Mutton are to bear their own costs of their interlocutory application of 28 May 2019, including the costs of the hearing before the Registrar and the costs on the review and are to pay the costs of Living Australia Pty Ltd in respect of the hearing on 13 November 2019.

10.    If any party seeks an order with respect to costs other than one or other or both of the Orders 8 and 9, or any further order with respect to costs, it or they are by 4 pm on 5 June 2020, to file and serve a written submission identifying the alternative order sought and containing a submission in support, not exceeding three pages, and any other party wishing to be heard in response is by 4 pm on 12 June 2020, to file and serve a submission not exceeding three pages.

11.    Any issue concerning costs will, subject to any further order of the Court, be determined on the papers.

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

REASONS FOR JUDGMENT

WHITE J:

1    On 12 June 2019, a Registrar made an order pursuant to s 459A of the Corporations Act 2001 (Cth) (the Act) that the defendant to these proceedings, Living Australia Pty Ltd (Living Australia), be wound up. In addition, the Registrar made consequential orders of a conventional kind. Immediately before making the order for winding up, the Registrar had ordered, pursuant to s 465B of the Act, that the present plaintiffs (the Muttons) be substituted as applicant in the winding up proceedings.

2    This judgment concerns an application by Living Australia, pursuant to ss 35A(5) and (6) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act), for review of the Registrar’s exercise of power.

Factual setting

3    On 21 June 2019, I made an order staying the Registrar’s winding up order and the Registrar’s appointment of a liquidator to Living Australia: Mutton v Living Australia Pty Ltd [2019] FCA 1051. Some of the circumstances relating to the review are set out in that judgment. Nevertheless, I will repeat them in the present judgment in order that these reasons may be more easily understood.

4    On 25 October 2018, Rans Consulting Group Pty Ltd (Rans Consulting) commenced proceedings against Living Australia in the Magistrates Court of South Australia. Living Australia did not file an appearance or defence to that claim and Rans Consulting obtained a default judgment against it in the sum of $25,955.42. Living Australia then applied, unsuccessfully, to the Magistrates Court to have the default judgment set aside. It succeeded, however, on an appeal to the Supreme Court of South Australia and, by an order made on 24 May 2019, the default judgment was set aside: Living Australia Pty Ltd v Rans Consulting Group Pty Ltd [2019] SASC 86.

5    In the meantime, on 20 December 2018, Rans Consulting had served a statutory demand and that demand went unanswered. On 8 February 2019, Rans Consulting commenced proceedings in this Court pursuant to s 459A of the Act, seeking the winding up of Living Australia on the ground of insolvency. As the statutory demand was not annexed to the Originating Application, Rans Consulting commenced a second proceeding on 11 February 2019. It was common ground that 11 February 2019 was the date on which the proceedings for the winding up of Living Australia had commenced. The sole ground on which Rans Consulting relied was the failure by Living Australia to comply with the statutory demand.

6    On 20 March 2019, a Registrar made programming orders with respect to the filing by Living Australia of a notice of opposition to the winding up and affidavits in support as contemplated by s 465C of the Act, and the filing of submissions. The effect of these orders was to extend to 20 March 2019 the time fixed by r 2.9(1)(b)(i) of the Federal Court (Corporations) Rules 2000 (the Corporations Rules) within which Living Australia could file its notice of opposition and to allow further time for the filing of the supporting affidavits. The application of Rans Consulting was then adjourned for hearing on 20 May 2019.

7    On 20 May 2019, it was known that the Supreme Court would deliver judgment on the appeal by Living Australia on 24 May 2019. In that circumstance, Living Australia and Rans Consulting consented to orders adjourning the hearing of the winding up application until the fate of the appeal was known. The Registrar also made timetabling orders addressing the potential for another creditor to apply to be substituted as the petitioning creditor. The hearing was adjourned to 12 June 2019.

8    On the Supreme Court setting aside the default judgment on 24 May 2019, Living Australia filed a defence and counterclaim in the proceedings in the Magistrate’s Court.

9    By the time of the resumed hearing before a Registrar on 12 June 2019, Living Australia had filed a document entitled “Notice of Appearance” but which was in substance a notice of opposition pursuant to s 465C(a) (two days after the time permitted by the Registrar’s order on 20 March 2019) as well as some short affidavits. It had not however filed and served any submissions in support of its application for leave to rely on the notice of opposition and the affidavits in support, nor any submissions in support of the grounds of opposition, as required by the Registrar’s orders of 20 March 2019.

10    Living Australia sought an adjournment of the hearing on 12 June 2019 so that it could file a further affidavit, to seek leave to amend its notice of opposition and, as I understand it, to seek to remedy its own non-compliance with the Court’s previous orders. The Registrar refused that application and then refused Living Australia’s application for leave to oppose the making of the winding up order. As I understand it, this was essentially because of Living Australia’s non-compliance with the Court’s orders and because of the absence of affidavit material to support the opposition to the winding up.

11    On 28 May 2019, that is, four days after the judgment debt which underpinned the statutory demand of Rans Consulting was set aside, the present plaintiffs, Mr and Mrs Mutton applied, pursuant to s 465B(1) of the Act, to be substituted as petitioning creditors. They did so by filing an interlocutory application seeking leave, in the event that the statutory demand of Rans Consulting was set aside, for them to be substituted as the plaintiff. The affidavit of their solicitor indicated that they sought the substitution on the basis that they were creditors of Living Australia because of an “order” that it pay their costs in proceedings commenced by Living Australia in the District Court of South Australia. The solicitor deposed that Living Australia had commenced those proceedings seeking an extension of the caveat it had lodged on the title to their property. On 6 December 2018, Chief Judge Evans in the District Court made the following order in the proceedings:

On the plaintiff’s counsel indicating that the plaintiff will discontinue the within action: Order that r 107(a) of [the] District Court Rules will apply as to the costs of the action such that the defendants will have their costs of the action save that the plaintiff shall have its costs of the argument on 4 April 2018.

12    The solicitor deposed that on 7 January 2019 he had informed Living Australia’s former solicitors that the Muttons claimed $43,779.40 by way of costs, that he had foreshadowed seeking a Court adjudication of the costs in the absence of agreement from Living Australia, and that he had not received any response. It was common ground on 12 June 2019 that the Muttons had not sought any adjudication of the costs to which they claimed to be entitled.

13    The Registrar allowed the substitution and in due course made the winding up order and other orders. The complete orders made by the Registrar on 12 June 2019 were:

 (1)     Leave for the Defendant to oppose the winding up application is refused.

(2)     To the extent necessary, leave be granted to Gregory Ralph Mutton and Wendy Anne Mutton to be substituted as Plaintiff, and the title of the proceeding be amended accordingly.

(3)    The requirement for the substituted Plaintiff to file and serve an amended originating process be dispensed with.

(4)    Living Australia Pty Ltd ACN 601 559 380 be wound up in insolvency under the provisions of the Corporations Act 2001;

(5)    Stirling Lindley Horne of PKF Melbourne Chartered Accountants be appointed liquidator of the company;

(6)    The costs of Rans Consulting Group Pty Ltd ACN 613 674 749 including reserved costs up to and including 20 May 2019 be taxed if not agreed and reimbursed in accordance with sub-section 466(2) of the Corporations Act 2001.

(7)    The costs of the Plaintiffs, Ralph Mutton and Wendy Anne Mutton be taxed if not agreed and reimbursed in accordance with sub-section 466(2) of the Corporations Act 2001.

(8)    The costs of the supporting creditors Andrea Stylianou and Marios Savvas be taxed if not agreed and be paid by the Defendant.

(9)    The operation of the winding up order be stayed until 18 June 2019.

14    I add that, by an interlocutory application filed on 4 June 2019, two other persons (Ms Stylianou and Mr Savvas) sought to be substituted as creditors in the event that Rans Consulting’s application was withdrawn or dismissed. Ms Stylianou and Mr Savvas were represented at the hearing before the Registrar by the same counsel as Rans Consulting, but no order (other than an order for costs) was made on their application.

15    By its amended interlocutory application of 17 June 2019, Living Australia seeks review under s 35A(5) of these orders. Living Australia also seeks, to the extent that it may be necessary, the grant of leave nunc pro tunc to oppose the winding up application and an order, nunc pro tunc, dispensing with the requirement for it to comply with r 2.9 of the Corporations Rules and/or Orders 1 and 2 made by the Registrar on 20 March 2019 (the orders concerning the filing of the notice of opposition, the affidavits in support and the submissions).

16    The application of Living Australia was opposed by the Muttons and by Rans Consulting. Ms Stylianou and Mr Savvas did not appear on the review and have not otherwise sought to press their interlocutory application.

The de novo nature of the hearing

17    Sections 35A(5) and (6) of the FCA Act provide as follows:

(5)    A party to proceedings in which a Registrar has exercised any of the powers of the Court under subsection (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the Court to review that exercise of power.

(6)    The Court may, on application under subsection (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised.

18    In Jageev Pty Ltd v Deane (1997) 72 FCR 398 at 399 (Jageev v Deane), Davies J stated the following when considering an application to set aside a statutory demand:

Although many matters are sent for hearing in the first instance before a registrar, it is beyond the jurisdiction of this Court to arrange affairs so that the decision of the registrar is equivalent to a decision of a judge. That is a constitutional problem which of course does not face State courts. The result is that … the Court must provide a rehearing on the merits of any matter which comes before a registrar and with which one of the parties to the proceedings before the registrar is dissatisfied.

(Emphasis added)

19    This principle expressed in Jageev v Deane has been endorsed in subsequent decisions, and construed to mean that a review under s 35A(6) requires a hearing de novo: See for example Martin v Commonwealth Bank of Australia [2001] FCA 87, (2001) 217 ALR 634 at [6]; Mazukov v University of Tasmania [2004] FCAFC 159 at [22]-[24]; and Deputy Commissioner of Taxation v Vasiliades [2015] FCA 1190 at [2]. Applicants are entitled, as of right, to a review: Dekkan v Maquarie Leasing Pty Ltd [2008] FCA 1235 at [5]. Section 35A(5) has also been interpreted to extend to the review of questions of both fact and law as a hearing de novo: Guildford International Group Pty Ltd, in the matter of Aviation 3030 Pty Ltd v Aviation 3030 Pty Ltd [2018] FCA 600 at [1]; 3Bears Childcare Centre Pty Ltd v Deputy Commissioner of Taxation, in the matter of 3Bears Childcare Centre Pty Ltd [2018] FCA 1690 at [13]; Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988, (2019) 137 ACSR 411 at [11] and [14].

20    A de novo hearing under these sections is a complete rehearing at which the Court is to decide the facts for itself: West International v Ultradrilling Pty Ltd [2008] FCA 1443; (2008) 68 ACSR 108 at [6] and the authorities therein. On the review, the Court is not confined only to the issue agitated before the Registrar but may consider any issue, including issues which have arisen since the Registrar’s decision: Harris v Caladine (1991) 172 CLR 84 at 96. The parties may adduce fresh evidence as of right: Mazukov v University of Tasmania at [24]; G & J Gears Australia Pty Ltd v Brobo Group Pty Ltd [2006] FCA 330 at [55]. It has been said that subs 35A(5) and (6) bestow a power to review the exercise of the power, that being the order made by the Registrar under that power, as if it were otherwise a party could, without asking the Registrar to cease hearing the application, ask the Court to review every individual finding of fact as and when the Register made them: Deputy Commissioner of Taxation v Commercial and General Law (SA) Pty Ltd [2011] FCA 1269; (2011) 198 FCR 417 at [98]–[99].

21    In Callegher v Australian Securities and Investments Commission [2007] FCA 482; (2007) 218 FCR 81, Lander J succinctly summarised these propositions at [46]:

The hearing before me is a hearing de novo: Mazukov v University of Tasmania [2004] FCAFC 159; Pattison v Hadjimouratis (2006) 155 FCR 226. The right to review arises because the Registrar has exercised the judicial power of the Commonwealth and, as such, is subject to the supervision of the court. The Registrar’s orders are reviewable by hearing de novo: Harris v Caladine (1991) 172 CLR 84 per Dawson J at 124. A hearing de novo contemplates a complete rehearing. The moving party before the Registrar has the responsibility of satisfying the Court that the orders should have been made. The parties may adduce further evidence before the Court and the rehearing is determined on the evidence put before the Court which may include the evidence put before the Registrar. The judge determines the rehearing without being fettered by the decision of the Registrar: Southern Motors Pty Ltd v Australian Guarantee Corp Ltd [1980] VR 187…

22    Accordingly, on a review of the present kind, the Court engages in a de novo consideration of the Registrar’s exercise of power.

Should Mr and Mrs Mutton be substituted as the plaintiff?

23    Although the Registrar’s order granting leave to Mr and Mrs Mutton to be substituted as plaintiff was the second order made on 12 June 2019, it is convenient to consider this exercise of power first.

Statutory provisions and principles

24    The Court’s power to substitute an applicant in an application for winding up under s 459P is found in s 465B of the Act. It provides:

465B Substitution of applicants

(1)    The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up.

(2)    The Court may only make an order if the Court thinks it appropriate to do so:

(a)    because the application is not being proceeded with diligently enough; or

(b)    for some other reason.

(3)    The substituted applicant may be, or the substituted applicants may be or include, the person who was the applicant, or any of the persons who were the applicants, before the substitution.

(4)    After an order is made, the application may proceed as if the substituted applicant or applicants had been the original applicant or applicants.

As subs(1) indicates, it is only a person or persons who might otherwise have applied for the winding up who can be substituted as an applicant.

25    The persons who may apply for the winding up of a company in insolvency are identified in s 459P itself. It provides (relevantly):

459P Who may apply for order under section 459A

(1)    Any one or more of the following may apply to the Court for a company to be wound up in insolvency:

  (a)    the company;

(b)    a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);

...

(2)    An application by any of the following, or by persons including any of the following, may only be made with the leave of the Court:

(a)    a person who is a creditor only because of a contingent or prospective debt;

...

(3)    The Court may give leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise.

 (4)    The Court may give leave subject to conditions.

(5)    Except as permitted by this section, a person cannot apply for a company to be wound up in insolvency.

26    As is apparent, s 459P(1) allows creditors who are only contingent or prospective creditors to apply for a company’s winding up. However, a winding up application by a person who is a creditor only because of a contingent or prospective debt may be made only with the leave of the Court (s 459P(2)). By s 459P(3) the Court may grant the leave if satisfied that there is a prima facie case that the company is insolvent, but not otherwise. By s 459P(4) the Court may give leave subject to conditions.

27    The inter-relationship between s 459P(2) and s 465B(1) has been considered in a number of the authorities. It is established that persons who are creditors only because of a contingent or prospective debt must first obtain the leave of the Court under s 459P(2) before they can seek to be substituted as the applicant for the winding up under s 465B(1): Chief Commissioner of State Revenue v Reliance Financial Services Pty Ltd [2006] NSWSC 1017 at [36]. The leave can be granted nunc pro tunc: Masri Apartments Pty. Limited (in liq) v Perpetual Nominees Limited [2004] NSWCA 471, (2004) 23 ACLC 165 at [52]; Deputy Commissioner of Taxation v Rural & General Insurance Broking Pty Ltd [2011] FCA 683, (2011) 84 ACSR 55 at [12].

28    The meaning of the term “contingent or prospective creditor” has been discussed in a number of authorities. In Community Development Pty Ltd v Engwirda Construction Co (1966) 120 CLR 455, the debt relied upon by the petitioner was the balance of the price payable under a building contract together with an amount for extras, the quantum of which had not yet been determined in an arbitration for which the contract provided in the event of dispute. Kitto J, with whom Barwick CJ and Windeyer J agreed, said at 459-60:

[E]ven if the work required by the contract has not yet been properly completed, the fact remains that the appellant is presently bound by the obligation of the contract to make the final payment if and when, according to a certificate of the architect or an award of an arbitrator, the time for the payment has arrived. The respondent is therefore, in my opinion, a contingent creditor of the appellant for the amount of that payment, whatever the amount may turn out to be.

29    Earlier, Kitto J had referred to In re William Hockley Ltd [1962] 1 WLR 555 at 558 in which Pennycuick J had suggested that a “contingent creditor” denoted “a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date”. Kitto J then said:

The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen.

(Emphasis added)

30    In Australian Beverage Distributors v Evans & Tate Premium Wines Pty Ltd [2006] NSWSC 560; (2006) 2000 FLR 332, White J described a prospective creditor as being one “whose debt is not presently due but which will become due in the future” and a contingent creditor as being one “to whom an existing obligation is owed out of which a liability may arise on the occurrence of a possible future event”, at [36]-[37].

31    In McLellan v Australian Stock Exchange Ltd [2005] FCA 585; (2005) 144 FCR 327 at [16], Finkelstein J confirmed the necessity for there to be an underlying legal liability of the contingent liability.

32    When a debt is genuinely disputed and the dispute not yet determined on its merits, the person claiming the debt is not a contingent or prospective creditor. In that circumstance, there is no existing obligation, whether contingent or prospective: Mandarin International Developments Pty Ltd v Growthcorp (Australia) Pty Ltd (1998) 143 FLR 408 at 422; Alati v Wei Sheung [2000] NSWSC 601, (2000) 34 ACSR 489 at [17].

33    In National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) [2001] NSWSC 253; (2001) 161 FLR 1 at [133]-[134], Young J accepted that a beneficiary of a costs order may be a contingent creditor even though the costs had not been taxed or assessed. See also In the matter of Aquaqueen International Pty Ltd [2014] NSWSC 527 at [24]-[25]. But it is the order for costs which is the source of the legal liability and, until the order is made, there is no contingent liability: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [35]-[36].

34    An entity seeking to be substituted as the plaintiff in a winding up application must be a creditor of the debtor company at the time the application was filed. This is an incident of the requirement that an applicant for substitution had a right to apply for a winding up order at the time the application was made: Re Elgar Heights Pty Ltd (No 2) (1985) 3 ACLC 480 at 482; Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527, (2004) 185 FLR 130 at [65]; In the matter of Erfanian Developments Pty Ltd [2018] VSC 342 at [7].

35    Section 465B requires that, even when the applicant for substitution is a person who might otherwise have applied for the company to be wound up, the Court must be satisfied that it is appropriate to make the order, and even then, the Court has a residual discretion as to whether to make the order: Aquaqueen International at [22].

36    Accordingly, the application by the Muttons to be substituted as creditors raises the following issues:

(i)    is the debt raised by the Muttons contingent or prospective for the purposes of s 459P(2)?

(ii)    if so, should the Muttons be granted leave to apply for a winding up in insolvency?

(iii)    if so, should an order for substitution be made under s 465B?

The standing of the Muttons

37    Mr and Mrs Mutton contended that they could make the application to be substituted as the applicant because, at 11 February 2019, they were contingent or prospective creditors of Living Australia. They accepted that they required leave under s 459P(2) in order to be substituted. For their status as contingent or prospective creditors, the Muttons relied on the “order” of Chief Judge Evans of 6 December 2018, set out earlier in these reasons.

38    Initially, it was common ground that the Muttons had a contingent or prospective debt in the requisite sense. However, when it was pointed out at the hearing on 25 September 2019 that Living Australia had not filed any notice of discontinuance of the District Court proceedings, Living Australia disputed that the Muttons had that status at 11 February 2019. It contended, correctly in my opinion, that in that circumstance, r 107(4) of the District Court Civil Rules 2006 (DCC Rules) as in force at the time, did not have any operation. That Rule provides in relation to discontinuance of proceedings in the District Court:

(4)    Unless the parties agree or the Court orders to the contrary, the party against whom the action, or a claim or defence in the action, is discontinued is entitled to costs arising from the action, or the claim or defence (as the case may require) up to the time of receiving notice of the discontinuance.

39    As is apparent, the entitlement to costs for which r 107(4) provides arises only on the discontinuance of the action. Rule 107(1) provides the means which is relevant for present purposes by which a plaintiff may discontinue proceedings, namely, by the filing of a notice of discontinuance. As no notice of discontinuance had been filed, r 107(4) could have no application.

40    The District Court had not ordered that Living Australia file a notice of discontinuance. It was not its place to do so as Courts do not order that proceedings be discontinued. Discontinuance is instead a voluntary action by a plaintiff. Accordingly, Living Australia had not been obliged by the order of 6 December 2018 to file a notice of discontinuance.

41    The solicitor for the Muttons sought to overcome these difficulties by providing an affidavit in which he deposed that Living Australia’s counsel had given the District Court an “undertaking” to discontinue the proceedings and that Living Australia had breached that undertaking by failing to do so. Counsel then submitted, as I understood it, that the undertaking should be treated as the equivalent of a court order so that, taken together with s 107(4) and the order of Chief Judge Evans on 6 December 2018, the Muttons were contingent or prospective creditors of Living Australia.

42    Counsel for Living Australia objected to the Court receiving the solicitor’s affidavit because of issues of form and because of an underlying dispute about what had been conveyed to the District Court on 6 December 2018. Faced with the objection, counsel for the Muttons did not press the receipt of the affidavit.

43    During an adjournment period, the Muttons took steps to enhance their position. On 11 October 2019, they filed an interlocutory application in the proceedings in the District Court seeking the setting aside of that Court’s order of 6 December 2018 and the making of an order in lieu thereof, with retrospective effect to 6 December 2018, that they have their costs of the action. Chief Judge Evans heard the interlocutory application on 7 November 2019. His Honour was satisfied that neither Living Australia nor its counsel had undertaken to the Court on 6 December 2018 to file a notice of discontinuance and rejected the submission of the Muttons that there had been any misconduct by Living Australia in a relevant sense. The Chief Judge noted in this respect that it had been open to the Muttons to have applied to bring the matter back before the Court if they had been concerned about the absence of the notice of discontinuance. His Honour declined to make the nunc pro tunc order sought by the Muttons. Instead, his Honour noted the undertaking of Living Australia’s present solicitor to cause a notice of discontinuance to be filed and served by midday on 12 November 2019. The interlocutory application of the Muttons was then dismissed.

44    Living Australia did on 11 November 2019 file the notice of discontinuance which had been the subject of the solicitor’s undertaking of 11 November 2019. Rule 107(4) of the DCC Rules was then engaged.

45    Given this sequence of events, the Muttons have difficulty in establishing that, as at 11 February 2019, they had a debt which was either prospective or contingent in the requisite sense. The difficulty lies in their inability to identify an underlying legal liability in Living Australia as at that date to pay any amount to them. As already noted, Living Australia was not then under any obligation to file a notice of discontinuance. The contention that they had given an undertaking to do so was rejected by Chief Judge Evans. It was not suggested that this Court should adopt a different conclusion. In fact, in an affidavit made on 2 October 2019, the solicitor for the Muttons effectively withdrew the claim that the former solicitor had provided the claimed undertaking to the District Court. Moreover, at 11 February, there remained a number of uncertainties as to whether Living Australia would become subject to a legal obligation of the requisite kind: would Living Australia proceed in the manner which it had foreshadowed in the District Court on 6 December 2018 by filing a notice of discontinuance; if so, would the terms of the filed notice of discontinuance attract the application of r 107(4) of the DCC Rules; in the event that a notice of discontinuance was not filed, would the Muttons have sought to bring the matter back before the District Court; had the Muttons done so, would they would have obtained an order for costs in their favour; and, if so, would the costs to which the Muttons were entitled as against Living Australia have exceeded the costs to which Living Australia was entitled against the Muttons in respect of the argument in the District Court on 4 April 2018?

46    Counsel for the Muttons sought to support the existence of the legal obligation by reference to events subsequent to 11 February 2019. He referred to the fact that Living Australia did, in November 2019, file a notice of discontinuance in a form which attracted the application of r 107(4) and also to the steps taken by the Muttons to bring the matter back before Chief Judge Evans. However, those matters cannot serve to bring into existence, or to evidence the existence of, a legal obligation at an antecedent date. In relation to the issue concerning the balance of the costs owing as between the Muttons and Living Australia, counsel submitted that counsel for Living Australia had conceded before the Registrar that there would be a balance of costs due from it to the Muttons after the costs owed by the Muttons had been set off. On my perusal of the transcript before the Registrar, it is not clear that counsel for Living Australia did make a concession in those terms. Counsel submitted instead that it was not known how the off-setting claims would “come out at the end” and accepted in that context that the costs order in favour of Living Australia was more limited than that to which the Muttons may be entitled. In any event, even if counsel’s statement did comprise an admission of fact, it was not one of which the Muttons had the benefit at 11 February 2019.

47    The fact that events have happened since 11 February 2019 which have brought an underlying legal obligation into existence, does not assist the Muttons in establishing that that state of affairs existed on 11 February 2019.

48    The Muttons have proceeded, incorrectly, on the basis that they had a costs order in their favour. That was not so, as Living Australia was not obliged to proceed in the way it had indicated to the District Court on 6 December 2018. That means that the Muttons could not be regarded as a contingent creditor of Living Australia on 11 February 2019. Nor was there a debt not presently due but which would become due on the happening of some event in the future which could be characterised as a prospective debt.

49    Accordingly, in my opinion, as at 11 February 2019, the Muttons were not persons who could be substituted as the petitioning creditor.

The appropriateness of an order for substitution

50    In case the conclusion as to the standing of the Muttons be wrong, it is appropriate to consider whether it would, in the terms of s 465B(2), be appropriate to make the order for substitution.

51    It is established that a court ought not make an order for substitution when there is a genuine dispute about the existence of the debt claimed by the party seeking substitution. The commencement of winding up proceedings is not to be a means by which the law’s processes for resolving genuine disputes as to the existence or amount of a debt may be bypassed. In particular, the courts have been astute not to allow winding up proceedings to be a means of circumventing protections provided by the law with respect to the enforcement of debts of particular kinds.

52    The claims of solicitors seeking to recover costs in respect of unpaid legal work are an example of the latter. In Jarena Pty Ltd v Sholl Nicholson Pty (1996) 136 ALR 427, in which a solicitor was the petitioning creditor and the debt was said to comprise unpaid legal costs, Heerey J said, at 429, that it would be wrong to allow the protection afforded to clients by a provision in the Supreme Court Act 1986 (VIC) against claims for costs by their solicitors to be bypassed effectively by the use of winding up proceedings. Ryan J applied a similar approach in South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465.

53    Rules 271-278 of the DCC Rules contained a detailed regime for the quantification of claims for legal costs. The appropriateness of that regime being the means by which the quantum of the Muttons’ entitlement should be resolved is emphasised by the fact that Living Australia has an off-setting claim for costs. That would no doubt be taken into account in any quantification of the costs pursuant to the regime set out in rr 271-278 to which the Muttons may be entitled. In these circumstances, I consider that the Court should be particularly cautious before allowing the regime for quantification of costs to be bypassed by allowing the Muttons to be substituted as the petitioning creditor. In the language of s 465B, it would not be appropriate to allow this occur.

54    Accordingly, for this further reason, I consider that the substitution of the Muttons for Rans Consulting as the petitioning creditor in this case is not appropriate and the order of the Registrar to that effect should be set aside. I add, in fairness to the Registrar, that the status of the Muttons as a contingent creditor had not been put in issue in the hearing before him.

55    Before considering the effect of the setting aside of the substitution order, it is appropriate to refer to two other issues.

Should Living Australia be granted extensions of time?

56    As noted earlier, by the programming orders made by a Registrar on 20 March 2019, the time fixed by r 2.9(1)(b)(i) of the Corporations Rules within which Living Australia was to file the notice of opposition and supporting affidavits required by s 465C of the Act was extended to that day. In addition, the Registrar ordered Living Australia to file by 10 April 2019, submissions in support of the grant of leave to rely on the notice of opposition and affidavits in support as well as submissions in support of the grounds of opposition.

57    Living Australia did not comply with any of those orders. It did, however, file a notice of opposition on 22 March 2019. Apart from brief affidavits from its solicitor and from its accountant and the affidavit in support of the adjournment of the hearing on 20 May 2019, it had not otherwise filed any affidavits by the hearing on 12 June 2019. As previously noted, the Registrar refused the application of Living Australia for an adjournment so that it could file a further affidavit and remedy its own non-compliance with the Court’s programming orders.

58    Both the Muttons and Rans Consulting accepted that the Court has a discretion to grant an extension of time for the filing of the notice of opposition and supporting affidavits but submitted that that discretion ought not to be exercised in favour of Living Australia.

59    The explanations provided by Living Australia for not having complied with the Registrar’s orders of 20 March 2019 are not altogether satisfactory. The solicitor with principal conduct of the matter deposed that, before 20 March 2019, he had been engaged in steps to satisfy the debt claimed by Rans Consulting (including by providing a bank cheque in the sum of $30,000 to the solicitors of Rans Consulting in the belief that that amount would be sufficient to satisfy its claim including costs). The solicitor also deposed that, prior to the hearing on 20 March 2019, he had not been aware of the requirements of s 465C of the Act or of r 2.9 of the Corporations Rules. Another solicitor in the firm acting for Living Australia deposed to pressure of other work being the explanation for the notice of opposition not having been filed until 22 March 2019. He also acknowledged, frankly, that he had not considered it necessary to comply with the Registrar’s orders for the filing of further affidavits and the outline of submissions by reason of his then understanding of what would occur once the Supreme Court of South Australia handed down its decision on the appeal against the refusal of the Magistrates Court to set aside the default judgment. The solicitor deposed that he had considered that, if the appeal was unsuccessful it would be necessary for Living Australia to pay the judgment debt including any associated costs and that, if the appeal succeeded, that would have the effect of bringing to an end the winding up proceedings.

60    As is, or will become, apparent, the solicitors for Living Australia were operating under some misapprehensions, both as to the applicable law and as to the need for compliance with the Court’s orders.

61    However, this appears to be a case in which the responsibility for non-compliance with the Registrar’s orders lies with Living Australia’s solicitors rather than with Living Australia itself. It is evident that Living Australia did intend to resist the application to wind up and that it was taking action to set aside the judgment on which Rans Consulting relied.

62    An important matter bearing upon the grant of the extension of the time is the prejudice, if any, that would be caused to Rans Consulting. Counsel for the Muttons contended that they too would be prejudiced by the grant of the extension of time but, given my earlier finding concerning their substitution, they cannot be heard in opposition to the extension of time. In any event, the matters said to comprise the prejudice did not seem to be of any substance.

63    Counsel for Rans Consulting did not identify any prejudice to it if the extension of time is granted. He submitted, however, that the grant of the extension would be futile as the material provided by Living Australia was not sufficient to establish solvency.

64    Counsel also submitted that s 465C of the Act has the effect that, in addition to the grant of the extension of time, Living Australia needs a grant of leave to oppose the winding up. Section 465C provides:

465C Applicant to be given notice of grounds for opposing application

On the hearing of an application under section 459P, 462 or 464, a person may not, without the leave of the Court, oppose the application unless, within the period prescribed by the rules, the person has filed, and served on the applicant:

(a)    notice of the grounds on which the person opposes the application; and

(b)    an affidavit verifying the matters stated in the notice.

65    In my view, the period prescribed by the rules for the purposes of s 465C includes any extension of time permitted under the rules. Accordingly, I doubt that an additional grant of leave is required.

66    The periods of extension sought by Living Australia are short. Given the nature of the review hearing, it is not apparent that there is any material prejudice to Rans Consulting. The explanation for the non-compliance with the Court’s orders, although barely satisfactory, does indicate that it is not Living Australia itself which was responsible for the delay. There is the further fact that this is a de novo hearing, in which the parties have been able to agitate all matters. There is also the fact that, on my findings, an order for winding up has been made on an application by substituted creditors who were not entitled to be substituted. That indicates by itself prejudice to Living Australia.

67    I am persuaded that an extension of time to 22 March 2019 within which the notice of opposition to the winding up is appropriate. I am also satisfied that an extension of time to 24 September 2019 for the filing of the supporting affidavits is appropriate. These extensions of time should be granted retrospectively.

68    To the extent that Living Australia requires a grant of leave to oppose the winding up, that too is granted. There will be an order to this effect.

69    These orders mean that the standing of Living Australia to oppose the winding up is not in issue.

The effect of the setting aside of the default judgment

70    Counsel for the Muttons submitted that the setting aside of the default judgment by the Supreme Court was a matter of no relevance in the proceedings. That submission was adopted by counsel for Rans Consulting.

71    The submission is correct insofar as it concerns the presumption of insolvency. It is also correct insofar as it concerns the standing of Rans Consulting. However, the setting aside of the default judgment is material to the Court’s discretion to make the winding up order.

The presumption of solvency

72    It is convenient to refer first to the effect of the setting aside of the default judgment on the presumption of insolvency. For this purpose it is necessary to note elements of the statutory scheme in Pt 5.4 of the Act.

73    On an application for winding up under s 459A, the Court is to presume that the company is insolvent if the company fails within the period of three months before the application is made, or thereafter, to comply with a statutory demand (s 459C(2)). A company has 21 days in which to comply with a statutory demand (s 459F(2)(b)) unless the company applies in accordance with s 459G for an order setting aside the statutory demand (s 459F(2)(a)). If the company does so apply, it may able to obtain an extension of the time for compliance in the manner contemplated by s 459F(2)(a). However, an application under s 459G may be made only within 21 days after service of the demand. That period cannot be extended: David Grant & Co Pty Limited (Receiver appointed) v Westpac Banking Corporation (1995) 184 CLR 265.

74    If the company does not apply to set aside the statutory demand within the period of 21 days, then the presumption of insolvency is applicable. It operates unless the company proves that it is not insolvent (s 459C(3)). By s 459S, a company may not, without the leave of the Court, oppose an application for its winding up on a ground on which it did rely, or on which it could have relied, on an application for the setting aside of the statutory demand. Section 459S(2) confines the Court’s discretion by stipulating that leave is not to be granted unless the Court is satisfied that the ground is material to proving that the company is solvent.

75    The rigor of these provisions was confirmed in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited [2008] HCA 9; (2008) 232 CLR 314 in which it was held that an order cannot be made under s 459F(2)(a) extending the period for compliance with a statutory demand after the period for compliance has expired. The majority (Gleeson CJ, Hayne, Crennan and Kiefel JJ) said:

[21]    The temporal focus of s 459C is upon a period which commences three months before the date of the application for winding up, but the period does not terminate upon the date on which the winding up application commences. The question for a Court is whether any of the identified events has occurred at any time after the commencement of the relevant period. The Act does not require any further consideration of whether the event persists at the date of the application for winding up.

[22]    If one of the specified events has occurred at any time during the identified period, the Court must presume that the company is insolvent. But the presumption may be rebutted …

[23]    On its face, s 459F(1) is engaged if the time for compliance with a statutory demand expires and the company has not then complied with it. The demand was in force; the time expired; the company did not comply with the demand.

(Emphasis in the original)

76    This position was confirmed in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2011] HCA 18; (2011) 244 CLR 1:

[28]    Under the present statutory scheme, where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption. This may be contrasted with the position which formerly pertained, where the presumption that a company was unable to pay its debts could not arise if the debt the subject of the demand was shown to be the subject of a genuine dispute of substance.

77    In the present case, Living Australia did not make any application under s 459G, let alone an application within 21 days of service of the statutory demand on 20 December 2018. Had it done so, it would have been able to seek an extension of the 21 day period for compliance until after the appeal to the Supreme Court had been determined: s 459F(2). On the setting aside of the default judgment, it is almost inevitable that, without the substitution of another creditor as applicant, the statutory demand would have been set aside: TQM Design & Construct Pty Limited v MI Kitchen Design Pty Ltd [2011] NSWSC 800 at [6]-[7].

78    But Living Australia did not take any of the steps which would have precluded the statutory presumption of insolvency from arising. Accordingly, the setting aside of the default judgment by the Supreme Court had no effect on that presumption.

The standing of Rans Consulting

79    In the hearing before the Registrar, the doubts about the standing of Rans Consulting as a creditor resulting from the setting aside of the default judgment led to the Registrar allowing the substitution of the Muttons as the applicant for the winding up.

80    However, on the review, counsel for Rans Consulting maintained that it was sufficient that his client had had standing at 11 February 2019 to bring the application and that the setting aside of the default judgment had not affected that standing. Counsel submitted in this respect that s 459P was conclusive of the position and that it requires only standing to bring an application, not continued standing to press it at the hearing. The submission draws support from Motor Terms Company Pty Limited v Liberty Insurance Limited (in liq) (1966) 116 CLR 177 in which the question was whether the petitioning creditor’s debt becoming statute barred after the lodgement of the petition but before the hearing precluded the making of an order for winding up. In answering that question in the negative, Menzies J, with whom Barwick CJ agreed, said at 194:

Section 221(1)(b) of the Companies Act authorises the court to make a winding up order “on the petition of … any creditor”. As I construe this provision in the light of other provisions of the Act … a petition presented by a creditor is a petition “of” a creditor upon which a winding up order may be made. After the presentation of such a petition, the court may stay proceedings against a company. When a winding up order is made upon the hearing of a petition, the winding up order is – in the absence of an earlier resolution for voluntary winding up – deemed to have commenced at the time of the presentation of the petition.

81    Later, at 194-5, Menzies J said:

In the course of argument upon this appeal, reference was made to the consequence of a petitioning creditor being paid off between the presentation of the petition and the making of an order. That circumstance would not, in my opinion, put an end to the petition nor would it affect the jurisdiction of the court to hear and determine the petition although, of course, in such circumstances proceedings might not be continued and, if they were, the court could, in the exercise of its discretion, refuse to make a winding up order upon the petition of a person not then a creditor.

82    The Act does not contain any explicit provision requiring that an applicant pressing a winding up application have the status of creditor both at the time the application for winding up is made and at the hearing. Moreover, while the Act in s 459Q(c) requires that an application for winding up in insolvency based on a failure by the company to comply with the statutory demand be accompanied by an affidavit verifying that the debt “is due and payable”, it does not contain any counterpart requirement with respect to proof of that status at the hearing. This was a matter to which Menzies J attached significance in Motor Terms, at 194.

83    The authorities since the enactment of Pt 5.4 of the Act confirm that, when a company on which a statutory demand is served does not satisfy the demand within 21 days and does not make an application under s 459G to have it set aside, it cannot dispute the applicant’s standing as a creditor: Tokich Holdings v Sheraton Constructions at [69] and see the authorities cited therein. Other authorities indicate that the standing of the applicant for winding up, and therefore the jurisdiction of the Court, turns on the applicant being a creditor at the commencement of the proceedings rather than at the hearing: Deputy Commissioner of Taxation v Guy Holdings Pty Ltd (1994) 116 FLR 314 at 320; Deputy Commissioner of Taxation v Visidet Pty Ltd [2005] FCA 830 at [5]; Deputy Commissioner of Taxation v BK Ganter Holdings Pty Ltd [2008] FCA 1730 at [21]-[22]; and Deputy Commissioner of Taxation v Complete Liquid Transport Pty Ltd [2010] FCA 1067 at [29]-[30].

84    Accordingly, the standing of Rans Consulting cannot be put in issue. The setting aside of the default judgment does not alter that circumstance.

The exercise of the discretion

85    In circumstances of the present kind, it is open to the Court to exercise the discretion granted by ss 459A and 467(1)(c) to refuse the winding up: Motor Terms Company at 194-5; D.M.K. Building Materials Pty Ltd v Baker Timbers Pty Ltd (1985) 2 NSWLR 711 at 714; Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966, (2007) 213 FLR 450 at [33]-[34]. In D.M.K. Building Materials, Needham J noted, at 714:

It is of course plain enough that a plaintiff seeking the winding up of a company who is unable to rely upon his own debt at the date of the hearing of the proceedings is unlikely to obtain an order to wind up the defendant.

86    There are numerous authorities to the effect that an application for winding up will be dismissed, as I understand it, in the exercise of the discretion under ss 459A and 467(1)(c) if, by the time of the hearing, the original applicant is no longer a creditor and there is no one else seeking (and entitled) to be substituted as a creditor. Thus, in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 397; (2005) 189 FLR 309, Barrett J said, at [15]:

[I]n a case such as this involving a presumption of insolvency because of non-compliance with a statutory demand, the matter of standing as such is to be judged at the time the winding up application is initiated … Thereafter, the proceeding remains extant for the benefit of any creditor the court sees fit to allow to pursue it. If the only person seeking to pursue it by the time it eventually comes before the court for determination is the original plaintiff but that plaintiff is not then a creditor, the application will be dismissed. If any person who is a creditor at that time (whether the plaintiff or someone else) then has the ability and standing to press for the making of a winding up order, the court will entertain the application and may make the order …

(Citation omitted)

87    In Treadtel International Pty Ltd v Cocco [2016] NSWCA 360, Barrett AJA (with whom Gleeson and Leeming JJA agreed) said at [57]:

… It is a well-established rule of practice that a person who claims to be a creditor but whose debt is disputed on genuine grounds will not be permitted to initiate or pursue a winding up application …

(Emphasis added)

88    This statement was made in relation to an application for winding up commenced under s 461 but can be taken to be a proposition of general application. Barrett AJA referred in this respect to the judgment of Ungoed-Thomas J in Mann v Goldstein [1968] 1 WLR 1091 at 1098-9:

I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor’s petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of process of the court.

89    However, account must be taken of s 459S to which I referred earlier. That section has the effect that, without the leave of the Court, Living Australia cannot rely on a ground on which it could have relied had it applied to set aside the statutory demand. Further, the Court may grant that leave only if satisfied that the ground is material to proving that Living Australia is solvent. Thus, if leave is sought on the basis that a debt is disputed, the existence or amount of the debt must be relevant to a conclusion as to the company’s solvency: ASIC v Lanepoint at [27].

90    There is a line of authority to the effect that the ground to which s 459S refers must be one that was actually available to be asserted according to the facts and circumstances existing at the relevant time: Perpetual Nominees Ltd v Masri Apartments Pty Ltd [2004] NSWSC 551, (2004) 49 ACSR 719; Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Ltd [2008] FCA 1777; Willard King Organisation (1978) Pty Ltd v CT Franchises Pty Ltd [2009] NSWSC 97; and Re Tomic Industries Pty Ltd [2012] NSWSC 1478. Thus, if a statutory demand which was properly served did not come to the attention of the company’s directors through no lack of diligence on their part, it may be said that issues about the statutory demand or the debt on which it was based could not have been relied on in an application to set it aside.

91    In AXF Entertainment Pty Ltd v AXF Group Pty Ltd (No 2) [2019] VSC 753, Efthim AsJ took a different view holding that, in light of the decision in ASIC v Lanepoint referred to earlier, the lack of actual opportunity to seek the setting aside of the statutory demand did not relieve the company of the obligation to prove its solvency. His Honour noted, at [36], that “the focus of the present Australian legislative scheme is on a company’s solvency” and that “if a statutory demand has been served and not complied with, then a debt can only be challenged if a company demonstrates solvency in accordance with s 459S of the Act”.

92    Living Australia did not seek to rely on the Perpetual Nominees line of authority. Nor did it seek a grant of leave under s 459S. Its submission instead was that it could not, on an application to set aside a statutory demand, have challenged Rans Consulting’s status as a creditor as it was, at the relevant times, a judgment creditor. It was only on the setting aside of the default judgment on appeal that the status of Rans Consulting changed. That submission cannot be accepted. Living Australia could have applied to set aside the statutory demand on the basis that it was disputing its indebtedness to Rans Consulting and was seeking to have the default judgment set aside. As noted earlier, it could then have sought an extension of the 21 day period fixed by s 459G until the steps which it was taking to that end had concluded.

93    Living Australia submitted next that the continuance of the petition by Rans Consulting after the setting aside of the default judgment is an abuse of the Court’s process. That submission was not developed in any detail. In particular, the precise nature of the abuse was not identified. I understood it as a submission that the Court should, in the exercise of the more general discretion, set aside the winding up order made by the Registrar.

94    The parties’ submissions did not address, at least in any detail, the matters bearing on the exercise of the discretion. I have already referred to the general principle that a winding up order will not, as a matter of discretion, be made on a debt which is subject to dispute, provided that the dispute is based on some substantial ground. If the presumption of insolvency and s 495S are put to one side, a number of matters could support an exercise of the discretion to set aside the winding up order made by the Registrar:

(1)    the judgment debt on which the statutory demand was based has been set aside;

(2)    moreover, there is an unchallenged curial finding that the debt claimed by Rans Consulting is genuinely disputed. That is to say, that is not a matter of evaluation now. The parties have known that that was so since the judgment in the Supreme Court delivered on 24 May 2019;

(3)    as was observed by Hammerschlag J in TQM Design & Construct at [6], “[i]t would be inimical to the policy lying behind the statutory scheme for the defendant to obtain the benefit of the statutory presumption of insolvency based on a judgment debt where the judgment has been set aside”;

(4)    the sorry saga of this litigation commenced with the institution of proceedings by Rans Consulting against Living Australia in the Magistrates Court. Rans Consulting relied upon the service by post of the Magistrate Court proceedings at the registered office of Living Australia. Mr Cakar, the sole director of Living Australia, has deposed that he did not receive the summons. The service of the proceedings by Rans Consulting at the registered office of Living Australia cannot be criticised. However, it is unfortunate that Rans Consulting did not, at the same time, give notice of its institution of the proceedings to the solicitors who it knew were acting for Living Australia in relation to the same dispute. Had it done so in accordance with the usual professional practice, it is probable that Living Australia would have entered an appearance to the Magistrates Court action in a timely way and the default judgment on which Rans Consulting relied never obtained;

(5)    Rans Consulting, by its conduct in the present litigation, accepted that the setting aside of the default judgment was a critical matter. This is evidenced, for example, by its agreement that the hearing of the winding up petition should be deferred pending the judgment of the Supreme Court on the appeal; and

(6)    Rans Consulting acquiesced in the substitution of the Muttons as the applicant for the winding up, even though they were not, on my findings, a contingent or prospective creditor at 11 February 2019.

95    However, the presumption of insolvency does apply and Living Australia is required to prove the contrary of the presumption: ASIC v Lanepoint at [28]. It is fair to say that the evidence which Living Australia adduced in support of its solvency was not extensive.

96    Section 95A of the Act provides that a person is solvent if, and only if, the person is able to pay all the person’s debts as and when they become due and payable. This cashflow test of insolvency focuses on the liquidity and viability of the company’s business.

97    The solvency of a company is a question of fact to be supported by evidence of the company’s financial position taken as a whole: First Equilibrium Pty Limited v Bluestone Property Services Pty Limited (in liq) [2013] FCAFC 108, (2013) 95 ACSR 654 at [33]; Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213 at [54].

98    Counsel for the plaintiff referred to the statement of the relevant propositions by Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44]:

•    The respondent is presumed to be insolvent and as such bears the onus of proving its solvency …

•    In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent …

•    Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared…

•    There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency …

•    The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account …

•    The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored …

•    It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights …

(Citations omitted)

99    The evidence which Living Australia provided concerning its solvency comprised an affidavit from Mr Gary Olsen (its accountant and business advisor) and two affidavits from Mr Cakar, its sole director. Both Mr Olsen and Mr Cakar opined that Living Australia is presently solvent. However, Living Australia did not provide any source documents such as bank statements, ledgers, cashflow statements or the like. It is also evident that nearly all of the material on which Mr Olsen relied was historical, that is, relating to the financial year ending on 30 June 2018. Mr Olsen did not express any opinion as to the position as at 30 June 2019 or even provide evidence on which an opinion as to Living Australia’s solvency as at that date could be based.

100    Mr Cakar deposed that Living Australia carries on business managing the operations and activities of nine related entities, each of which is controlled by him. All of the management services provided by Living Australia are provided by Mr Cakar and it does not have any employees. Further, Living Australia does not carry on any business activity other than acting as the management company for the related entities. Mr Cakar deposed that for that reason Living Australia is not currently incurring any “trade creditors” from its activities. It is instead the related entities which incur the debts. Living Australia’s sole source of income is from the management fees paid by the related entities, some of which are engaged in property development.

101    Mr Cakar did not disclose the contractual arrangement between Living Australia and himself pursuant to which he provides the management services of Living Australia to the related entities. Nor did he provide any evidence as to his billing of Living Australia or as to the making of payments by Living Australia to himself.

102    The financial statements for Living Australia for the financial years ending on 30 June 2017, 2018 and the draft financial statements for the financial year ending on 30 June 2019, reveal the following:

103    The levels of expenditure in each year raise issues as to the accuracy of Mr Cakar’s statement that Living Australia is not incurring any debts. The two are not mutually inconsistent but it does underline the significance of the absence of detailed evidence concerning Living Australia’s liabilities and of its terms of trade.

104    Counsel for the Muttons submitted (in a submission adopted by Rans Consulting) that Living Australia’s net profit in each of the years is illusory because the related entities do not pay cash. He submitted that this was evidenced by the increase of $257,984 in the unsecured loans by Living Australia to the related entities.

105    Counsel for the Muttons referred to the liquidation of one of the significant related entities (Entertainment Venues Australia Pty Ltd (EVAPL) on 15 July 2019) which had the consequence that that unsecured loan from it of $113,108 should be written off. Other evidence indicates that the liquidation of EVAPL is likely to have much more significant implications, in particular, that $337,000 of Living Australia’s unsecured loans will not be recoverable. Counsel also noted that, if the unsecured loans to the related entities are removed from the total equity in each year, a deficit position is produced (in 2018 a deficit of $98,508, and in 2019 a deficit position of $199,558). Living Australia did not provide any evidence in answer to this material.

106    The evidence indicates that the landlord of the premises used by Living Australia had issued a distraint for unpaid rent on 16 July 2019. Counsel noted that the claim with respect to unpaid rent had not been included as a liability in the draft accounts for the 30 June 2019 year. Mr Cakar acknowledged that the Notice of Distraint had been issued but deposed that he had come to an arrangement with the landlord by way of satisfying the claim for outstanding rent. This arrangement included Living Australia relinquishing the fixtures and fittings (including all furniture) at the rented premises and relinquishing its tenancy. Mr Cakar provided a letter from the landlord confirming that the claim for unpaid rent and legal costs had been fully discharged and I did not understand that to be challenged.

107    It is significant that, although Mr Cakar made an affidavit after the entry into liquidation of EVAPL on 15 July 2019, he did not depose at all to the effect of that liquidation on Living Australia. This is remarkable given that it appears that EVAPL was a significant source of Living Australia’s income, and it was a significant debtor to Living Australia. It suggests an awareness that the evidence on that topic would not have assisted Living Australia to discharge its onus.

108    Mr Cakar did provide an “Aged Payables Summary” for Living Australia. This document listed each creditor of Living Australia at 30 June 2019. The debt total $71,175.79 of which $48,073.82 is shown as having been outstanding for more than three months, and $17,246.86 outstanding for three months. These include amounts due to ASIC and to Living Australia’s accountants and lawyers. The Aged Payables Summary did not include the amount claimed by Rans Consulting.

109    Mr Cakar also deposed to having payment arrangements in place with respect to three of the debts in the Aged Payables Summary, in addition to the unpaid rent. These include the debt to AGL, Living Australia’s electricity provider. Mr Cakar did not provide evidence of those arrangements. He claimed that Living Australia is paying its debts as and when they become due but the Aged Payables Summary suggests that that is not so, as does the fact that Living Australia has “payment arrangements” in place. At the least, Living Australia which has the onus, has not shown that that is the case.

110    Counsel for Rans Consulting submitted that the Court is required, by s 459D(1) of the Act to take into account contingent or prospective liabilities of Living Australia. He referred in this respect to affidavits indicating that Living Australia is indebted to Ms Stylianou and Mr Savvas, Malmax Holdings Pty Ltd, Seaton Glass Pty Ltd and Ms Rachael Zeuner. However, contrary to counsel’s submission, s 459D(1) does not have that effect. It provides only that, for the purposes of determining (relevantly) an application under s 459C, the Court may take into account a contingent or prospective liability of the company. Moreover, there is significant doubt as to whether the debts claimed by the persons and entities referred to above can be characterised as “a contingent or prospective liability” of Living Australia as Mr Cakar’s affidavit indicates that there is a genuine dispute about their existence. Rans Consulting acknowledged that it was not asking the Court to resolve the disputes which arose on the affidavits of the persons and entities referred to above, on the one hand, and from the affidavits of Mr Cakar, on the other.

111    Nevertheless, I am not satisfied that Living Australia has proved its solvency. The evidence it has provided is meagre. Taken as a whole, the evidence suggests that Living Australia’s net asset position is significantly in deficit; it has a significant liability to creditors which have been outstanding for three months or more; it has not provided evidence of its terms of trade but does acknowledge having entered into payment arrangements with four of its creditors; and has not provided the Court with evidence of the impact on its solvency (both balance sheet and cashflow) of the liquidation of EVAPL.

Section 459R of the Act

112    Some of Living Australia’s submission were to the effect that s 459R should operate in this case, because the application for its winding up had not been determined within six months of its commencement on 11 February 2019. That submission cannot be accepted: see Deputy Commissioner of Taxation v Revolve Ltd [2012] FCA 555 at [23]-[24]; Owen-Pearse v Lander Land Company Pty Ltd [2018] FCA 2077 at [125]-[126].

Conclusion

113    As indicated, I am not satisfied that Living Australia has proved its solvency. On the contrary, it appears to be insolvent. It would not be appropriate to allow an insolvent company to continue operations so that, despite matters bearing on the discretion to which I referred earlier, the Registrar’s order for its winding up should be affirmed.

114    For the reasons given above, I consider that the Registrar’s orders should be affirmed, save those concerning the grant of leave to Living Australia to oppose the winding up and the substitution of the Muttons. Those orders should be set aside.

115    This gives rise to a question about the appropriate orders to be made with respect to costs, a matter about which I have not heard from the parties. My preliminary view is that, as the Muttons were not entitled to be substituted, they should bear their own costs of the interlocutory application filed on 28 May 2019 and that they should pay the costs of the hearing on 13 November 2019, because that hearing was necessitated only by their pursuit of their claim to be substituted. I will, however, allow for submissions to be made to some different effect.

116    The orders of the Court are as follows:

(1)    Orders 1, 2, 3 and 7 made by the Registrar on 12 June 2019 are set aside.

(2)    The time fixed by Order 3 of the Registrar made on 20 March 2019 within which Living Australia was to file a notice of opposition and affidavits in support is extended to 22 March 2019 and 24 September 2019 respectively.

(3)    Living Australia be granted leave to oppose the winding up.

(4)    The Registrar’s orders be otherwise affirmed.

(5)    Order 1 made on 21 June 2019, by which the operation of Orders 4 and 5 made by the Registrar on 12 June 2019 was stayed, be vacated.

(6)    The interlocutory application filed by Mr and Mrs Mutton on 28 May 2019 be dismissed.

(7)    The interlocutory application filed by Ms Stylianou and Mr Savvas on 3 June 2019 be dismissed.

(8)    Subject to Order 10, the costs of Rans Consulting Group Pty Ltd ACN 613 674 749 on the review, including the costs of the application for the stay, be taxed if not agreed and be reimbursed in accordance with s 466(2) of the Corporations Act 2001 (Cth).

(9)    Subject to Order 10, Mr and Mrs Mutton are to bear their own costs of their interlocutory application of 28 May 2019, including the costs of the hearing before the Registrar and the costs on the review and are to pay the costs of Living Australia Pty Ltd in respect of the hearing on 13 November 2019.

(10)    If any party seeks an order with respect to costs other than one or other or both of the Orders 8 and 9, or any further order with respect to costs, it or they are by 4 pm on 5 June 2020, to file and serve a written submission identifying the alternative order sought and containing a submission in support, not exceeding three pages, and any other party wishing to be heard in response is by 4 pm on 12 June 2020, to file and serve a submission not exceeding three pages.

(11)    Any issue concerning costs will, subject to any further order of the Court, be determined on the papers.

Associate:

Dated:    29 May 2020