Federal Court of Australia

Hoy v RHM Industries Pty Ltd [2023] FCA 115

ORDERS

THE COURT ORDERS THAT:

1.    The defendant, RHM Industries Pty Ltd, be wound up.

2.    Michael Edward Slaven of Slaven Torline be appointed as liquidator of the defendant.

3.    The defendant pay the plaintiff’s costs:

(a)    assessed on a party/party basis up to 6 January 2023; and

(b)    assessed on the indemnity basis on and from 6 January 2023.

4.    Those costs be reimbursed out of the property of the defendant company pursuant to s 466(2) of the Corporations Act 2001 (Cth).

5.    To the extent that the plaintiff’s costs under order 3 are not able to be reimbursed out of the property of the defendant company, the plaintiff’s costs be payable by Mr Ralph George Noel Nancy Hurst-Meyers personally.

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

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

JACKMAN J:

1    This is an application for winding up under s 459P for an order under s 459A of the Corporations Act 2001 (Cth) (the Act) that the defendant, RHM Industries Pty Ltd (which I will refer to as the Company) be wound up in insolvency. The application was made on 23 August 2022. The effect of s 459R of the Act is that the application must be determined within six months after it is made, that is by 23 February 2023. Accordingly, the matter was fixed for hearing today in order to ensure that it would be determined as required by s 459R. I note that there has been no application for an extension of that time.

2    The plaintiff, Mr Hoy, served a statutory demand under s 459E on 12 May 2022. The statutory demand was served on the Company’s registered office by Ms Naomi Woodward who affirmed an affidavit to that effect. The statutory demand refers to the Company owing Mr Hoy a figure of $220,142.19, being the amount of the judgment by Elkaim J of the Supreme Court of the Australian Capital Territory. Justice Elkaim gave reasons which are to be found at Hoy v Hurst-Meyers (No 2) [2022] ACTSC 58. The defendant failed to comply with the statutory demand within 21 days of service, that is by 2 June 2022. No application was made to set aside the statutory demand. The statutory demand complies with the requirements of s 459E of the Act. On 20 January 2023, the Company sought and obtained a stay of that judgment in the Supreme Court of the Australian Capital Territory. The reasons of Loukas-Karlsson J are to be found at Hoy v Hurst-Meyers (No 3) [2023] ACTSC 6.

3    A factor favouring the stay which was granted was the prejudice to the Company of rendering its appeal nugatory, or at least taking the control of the appeal out of the director’s hands. Her Honour made reference to the New South Wales Court of Appeal’s decision in Kalifair Pty Ltd v Digi-Tech (Australia) Limited (2002) 55 NSWLR 737, in which it was held that a stay may properly be granted where an order for the winding up of a corporate appellant is likely to render its appeal nugatory (see [16]). It is apparent from [21] of the reasons of the New South Wales Court of Appeal that, in that case, no statutory demands had actually been served by the time of the stay application, the Court observing that if a stay was refused then the judgment creditor would be free to serve statutory demands and proceed to winding up. It was then noted by the Court at [21], that the prosecution of the appeals would then be stayed automatically, and that status would continue unless and until the liquidator elected to prosecute the appeals. Further, the Court noted that the directors would lose control of the litigation, and the creditors including the judgment creditor would have a say in any decision to proceed.

4    In the present case, the stay that was ordered by the Supreme Court of the Australian Capital Territory was to stay the orders of Elkaim J made on 30 March 2022 until the delivery of orders in the appeal from that judgment. By further judgment of 3 February 2023, Loukas-Karlsson J gave reasons for imposing certain conditions on that stay including that the defendants (which include the Company) must not sell or otherwise deal with or dispose of all or any of their assets, except for the purpose of paying expenses incurred in the ordinary course of business including legal expenses incurred in prosecuting the appeal. That decision can be found at Hoy v Hurst-Meyers (No 4) [2023] ACTSC 17.

5    Pursuant to s 459C of the Act, the Court must presume that the Company is insolvent if, during or after the three months ending on the day when the application was made, the Company failed, as defined by s 459F, to comply with a statutory demand: see s 459C(2)(a). Given that the Company had failed to comply with a statutory demand within that three-month period, the Court is obliged to presume the Company is insolvent. However, the presumption operates except so far as the contrary is proved for the purposes of the application: see s 459C(3). Accordingly, the issue which arises at today’s hearing is whether the Company has proved the contrary of that presumption, that is that the Company is, in fact, solvent.

6    The statutory test for solvency is that laid down by s 95A(1) of the Act, namely 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. Subsection (2) then provides that a person who is not solvent is insolvent. There is a paucity of evidence concerning the question of the Company’s solvency. The only evidence tendered by the Company which has been admitted into evidence comprises some eight exhibits. There is no expert report as to solvency. At a case management hearing held three days ago, I was informed by the then solicitor for the Company that the Company would not be producing a solvency report, and that the report by Mr George McMillan, which had previously been served, would not be used.

7    There was an attempt today by Mr Ralph Hurst-Meyers, who was granted leave under r 4.1 of the Federal Court Rules 2011 (Cth) (Rules) to represent the Company at this hearing, to revive two reports by Mr McMillan. I declined to allow that course to be taken given the express statement three days ago to which I have referred, together with the evident and obvious unfairness to counsel for the plaintiff in requiring counsel to cross-examine Mr McMillan without notice in circumstances where counsel had prepared the case on the footing that Mr McMillan would not be giving evidence, and nor would any other expert dealing with the question of solvency.

8    Dealing, in turn, with the eight exhibits which are in evidence, the first of them comprises two letters from Beyond Bank Australia, dated 25 January 2023, saying that a loan to the Company was not then in arrears, and a loan to Mr Ralph Hurst-Meyers was not in arrears either. Both letters refer to the next repayment being due on 1 February 2023, and there is no evidence as to whether that payment occurred or not. The evidence of the Company not being in arrears several weeks ago in relation to one particular creditor does not take the question of solvency very far at all.

9    I will deal next with exhibit 8, which comprises a screenshot of a statement which Mr Hurst-Meyers said was sourced from Beyond Bank Australia, showing that the Company’s loan from Beyond Bank Australia has a balance, as at yesterday, of $357,213.21. There is no evidence as to the provenance of that document, but even on the assumption that the source of the document is Beyond Bank Australia, the document does not indicate to which mortgage or to which property the loan is referable, and it certainly does not prove that the debt of about $350,000 is the only debt which the Company currently has, whether to lenders or to other creditors.

10    The next document (exhibit 2) is a copy of a contract for sale and purchase of land at 5 Leck Street, Crestwood, dated 18 January 2023, for a purchase price of $900,000. As a matter of principle, I accept Mr Hurst-Meyers’ submission that the Court should have regard to assets which may potentially be realised in cash, and the Court should not merely have regard to the assets which have already been realised in cash. There are several difficulties with relying on the contract for sale as evidence of the Company’s solvency. First, pursuant the orders of the ACT Supreme Court of 3 February 2023, to which I have referred at [4] above, the Company is not presently entitled to sell any of its assets, including the land at 5 Leck Street, Crestwood without the leave of the Court. While the ACT Supreme Court may well be favourably disposed towards granting that leave, it cannot be said at this stage to be an asset which is akin to cash and available to pay debts of the Company at the present time.

11    Second, the purchaser is an associate of Mr Hurst-Meyers, and appears to be a fellow board member of a charity with Mr Hurst-Meyers. It was submitted by Ms Costin for the plaintiff that the contract does not appear to be an arm’s-length transaction, both because of the association between the purchaser and Mr Hurst-Meyers, but also because the contract reveals that no deposit has been paid for the purchase. The written submissions, which were filed for the Company on 14 February 2023, express doubt as to whether the purchaser will be able to settle on the completion date, which is scheduled to be 1 March 2023. In those circumstances, it would appear to be a matter of speculation as to whether the contract will be completed, and the purchase money paid on or about 1 March 2023.

12    Mr Hurst-Meyers submitted that a sale at $900,000 of that property would yield net proceeds of $540,000, but there is no evidence to that effect. A similar submission was made to Loukas-Karlsson J at the hearing of the stay application, but her Honour referred in [2023] ACTSC 17 at [18] to the fact that this was no more than a submission and there was no evidence advanced supporting the figure of $540,000. What is said at [18] of the judgment, accordingly, could not be characterised as a finding of fact, but even if it were a finding of fact, it would not be admissible pursuant to s 91 of the Evidence Act 1995 (Cth).

13    The next document (exhibit 3) is a pair of documents entitled “Invoices” from the Supreme Court of the ACT, showing a total of $35,000 having been deposited as security for costs of the appeal in that court. It is common ground that that money is tied up until the outcome of the appeal is known and will only be released if the appeal succeeds. The hearing of the appeal is apparently anticipated to be held in May 2023, and it is, obviously, not known when judgment will be delivered. The $35,000 which has been deposited is not currently a resource available to the Company to pay its debts as and when they fall due, and the possibility of the Company succeeding on appeal and the timing of that success are both too remote and speculative to enhance the solvency of the Company here and now.

14    Exhibit 4 is a land title search proving that the Company owns the property at 5 Leck Street, Crestwood, together with a mortgage of that property. The ownership of the property is not in issue, and it is not known how much money is secured by the mortgage granted to Community CPS Australia Limited.

15    Exhibit 5 is a certificate of registration from ASIC’s database of the Company as a company. Again, that is not a matter in issue.

16    The next document is a letter from Queanbeyan-Palerang Regional Council to the Company, dated 16 February 2023, referring to the Company owing a balance for council rates of $33,009.66, and setting out an instalment agreement for monthly payments of $200 to reduce that account balance. That document certainly evidences a debt which is owed by the Company, together with the agreed forbearance of the council in relation to that debt, provided that the instalments are paid, but it does not take the evidence of solvency very far at all. The fact of the agreement is likely to reflect financial difficulties being experienced by the Company, but it does not, itself, establish that the Company is able to pay its debts as and when they fall due.

17    Exhibit 7 is an unsigned letter from Beyond Bank Australia to Mr Hurst-Meyers of 16 February 2023, showing that he personally owes Beyond Bank Australia the amount of $357,213.21. That is the same amount as the Company owes to Beyond Bank Australia. The indebtedness of Mr Hurst-Meyers to Beyond Bank Australia does not advance the proof of solvency of the Company itself.

18    That completes the evidence which the defendant has tendered. It will be noted that there is no evidence of the indebtedness of the Company, other than the amount of about $357,000 which it owes to Beyond Bank Australia and the amount of $33,000-odd which it owes to the Queanbeyan-Palerang Regional Council. There is no basis on which the Court could conclude that they are the only debts which the Company has, and there is, certainly, no evidence to that effect.

19    There is no evidence as to the assets presently available to the Company to pay its debts, including the two debts to which I have just referred, other than the possible completion of the contract to sell the property at 5 Leck Street, Crestwood. In terms of assets readily available to be realised in order to pay debts, the Court is bereft of evidence to satisfy itself that the Company is able to pay all its debts as and when they become due and payable. In saying that, I have proceeded on the basis that the stay ordered by the Supreme Court of the ACT means that the debt of some $220,000 owed under Elkaim J’s judgment is not due and payable at present and is not due and payable until judgment is given in the appeal in the Supreme Court of the ACT. Notwithstanding that I have put to one side that debt of about $220,000, there is no basis on which the Court could conclude that the Company is able to pay all its debts as and when they fall due. Accordingly, it is appropriate to order that the Company be wound up, and I will appoint Michael Slaven of Slaven Torline as liquidator of the Company.

20    Mr Hurst-Meyers seeks a stay of the winding up order until the outcome of the appeal is known. That was the application made orally today by Mr Hurst-Meyers. A similar application was foreshadowed in the written submissions filed by Mr Hurst-Meyers’ then solicitors, on 14 February 2023, although the application foreshadowed by the solicitors was only for a stay until 1 March 2023, which is the anticipated date for completion of the contract of sale of the property at 5 Leck Street, Crestwood. Given the absence of any probative evidence of solvency even if that sale is completed, or even if the appeal is successful so that the debt of $220,000 or so is no longer payable, I do not see any basis to stay the winding up order.

21    It is in the public interest that a company which is insolvent be wound up and there is no factor of any weight or significance which would operate against that public interest in the present case.

22    I should also mention that in the written submissions filed by the solicitors for the Company on 14 February 2023, an application was foreshadowed to have these proceedings cross-vested to the Supreme Court of the ACT pursuant to s 5(4) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth). That provision confers power on this Court to cross-vest a matter to the Supreme Court of a territory if it appears to this Court that it is more appropriate that the relevant proceedings be determined by that Supreme Court, having regard to certain factors.

23    The application was not pressed in oral argument today, but in any event, I can see no basis on which it would have been more appropriate that the proceedings today be cross-vested so as to be determined by the ACT Supreme Court. Apart from the lack of any basis for such a conclusion, I am mindful that s 459R of the Act requires that these proceedings be determined by 23 February 2023, that is by Thursday of next week, and it would seem to me an inappropriate imposition on the Supreme Court of the Australian Capital Territory to force it to conduct an urgent hearing for that purpose when this court has set aside time and resources for the hearing to take place today.

24    That brings me to the question of costs. The plaintiff seeks orders for the Company to pay the plaintiff’s costs on a party/party basis up to 6 January 2023, and on the indemnity basis on and from 6 January 2023, and to be reimbursed out of the property of the Company in accordance with s 466(2) of the Act. Further, the plaintiff seeks an order that, to the extent that his costs under those orders are not able to be reimbursed out of the property of the Company, the plaintiff’s costs are payable by Mr Ralph Hurst-Meyers personally. Mr Hurst-Meyers resists those orders.

25    Dealing first with the question of orders against Mr Hurst-Meyers personally. The relevant authorities were usefully collected by Thawley J in Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 (Vanguard). At [36] to [52], Thawley J referred to s 43 of the Federal Court of Australia Act 1976 (Cth), which has been accepted provides power to make orders for costs against a non-party: Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154 at [73] (Keane CJ, Lander and Foster JJ). Further, in Consolidated Byrnes Holdings Limited v Hardel Investments Pty Limited (2009) 176 FCR 348 at [314], Lander J held that s 1335(2) of the Act did not have the effect of preventing the Federal Court from making an order for costs against non-parties to such proceedings.

26    In Knight v FP Special Assets Ltd (1992) 174 CLR 178 at [192] – [193], Mason CJ and Deane J (with whom Gaudron J agreed) considered it appropriate to recognise a general category of case in which an order for costs should be made against a non-party, namely in circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. The categories of case which attract the exercise of the discretion are not closed: Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103] (Beaumont, Sundberg & Hely JJ). However, as Basten JA stated in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210] (Beazley & Giles JJA agreeing):

… the cases in which orders have been made against non-parties … tend to satisfy at least some, if not a majority of the following criteria:

(a)     the unsuccessful party to the proceedings was the moving party and not the defendant;

(b)     the source of funds for the litigation was the non-party or its principal;

(c)     the conduct of the litigation was unreasonable or improper;

(d)     the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and

(e)     the unsuccessful party was insolvent or could otherwise be described as a person of straw.

27    In the present case, in my opinion, the last three of those criteria are satisfied. In terms of the unreasonable conduct of the proceedings, on 6 January 2023, Mr Hurst-Meyers served a report by Mr McMillan purporting to prove the solvency of the Company and indicated that that report would be relied upon. That caused the plaintiff to undertake the trouble and expense of preparing a lengthy affidavit by the solicitor for the plaintiff, Mr Evelyn, filed on 17 January 2023, together with extensive written submissions, also filed on that date, critiquing the report of Mr McMillan. Given the plaintiff’s change of position at the case management hearing last Monday, in which the Court was expressly told that Mr McMillan’s report would not be relied upon, the time and expense undertaken in the plaintiff’s camp was entirely wasted.

28    The stance taken last Monday by the Company through its solicitors, implicitly acknowledged that Mr McMillan’s report was not of sufficient forensic value to be used at today’s hearing, and it has plainly caused a substantial waste of valuable resources on the part of the plaintiff. I regard that aspect of the conduct of the case as unreasonable. Further, the evidence relied upon today by the Company is grossly inadequate to rebut the presumption of insolvency. There is simply no arguable basis disclosed in that evidence for resisting an order for winding up, and the eight exhibits which have been tendered today fall a long way short of establishing solvency. Added to that, it is clear that Mr Hurst-Meyers, as the sole shareholder and director of the Company, has an interest to an equal extent as the Company in the proceedings heard today.

29    Finally, on the conclusions which I have reached, the unsuccessful party, being the Company, is insolvent by force of the statutory presumption of insolvency and the paucity of evidence adduced in order to seek to rebut that presumption. Furthermore, the non-party, namely Mr Hurst-Meyers, has played an active part in the conduct of the litigation, and represented the Company at today’s hearing pursuant to the leave which I granted under r 4.1 of the Rules. Accordingly, in my opinion, in the circumstances of this case, it is appropriate to make the order against Mr Ralph Hurst-Meyers that he pay the plaintiff’s costs to the extent that those costs cannot be paid out of the assets of the Company.

30    In terms of indemnity costs on and from 6 January 2023, again, Thawley J’s judgment in Vanguard sets out the relevant principles by reference to the judgment of Sheppard J in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at 233. In that case, his Honour said that there are a number of categories of case which have been recognised as ones in which it may be appropriate to order indemnity costs as a departure from the ordinary rule, and they include, relevantly the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions. In my opinion, the conduct of the Company in serving the expert report of Mr McMillan with the indication that that report would be relied upon, has caused an undue waste of resources through prolongation of the case and by increasing the evidentiary burden on the plaintiff in meeting that case. The fact that the Company decided, last Monday, that it would no longer rely upon that report of Mr McMillan, apparently for the first time, means that the plaintiff has wasted substantial resources on what was an unnecessary prolongation of the case and the evidence within the case.

31    In my opinion, that conduct, alone, is sufficient to justify the making of an indemnity costs order against the Company, on and from 6 January 2023, when Mr McMillan’s report was served. Accordingly, I make the following orders:

(1)    that the defendant, RHM Industries Proprietary Limited, be wound up;

(2)    that Michael Edward Slaven of Slaven Torline be appointed as liquidator of the defendant;

(3)    that the defendant pay the plaintiff’s costs:

(a)    assessed on a party/party basis up to 6 January 2023; and

(b)    assessed on the indemnity basis, on and from 6 January 2023;

(4)    that those costs be reimbursed out of the property of the Company in accordance with s 466(2) of the Act; and

(5)    that to the extent that the plaintiff’s costs under order 3 are not able to be reimbursed out of the property of the Company, the plaintiff’s costs are payable by Mr Ralph George Noel Nancy Hurst-Meyers, personally.

Associate:

Dated:    16 February 2023