Australia: Insolvency Update

In Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321 [2007] NSWSC 103, White J of the Equity Division of the Supreme Court of New South Wales found that a creditor's statutory demand may be issued for a claim for liquidated damages.

Section 459E of the Corporations Act 2001 (Cth) provides that a creditor may issue a creditor’s statutory demand for a "debt" which is due and payable¹, meaning that damages claims are not the subject of such demands².

Hansmar Investments Pty Ltd ("Hansmar") applied under section 459G of the Corporations Act 2001 (Cth) to set aside a creditor's statutory demand served by Perpetual Trustee Co Ltd ("Perpetual").

The statutory demand was based upon a claim arising pursuant to a contract of sale between Hansmar, as purchaser, and Permanent Trustee Australia Ltd ("Permanent") as mortgagee exercising its power of sale over land at Milsons Point, Sydney. The contract of sale was entered into by Permanent in its capacity as custodian for Challenger Managed Investments Ltd as responsible entity for the Howard Mortgage Trust as mortgagee exercising its power of sale.

After Hansmar failed to settle, Permanent gave notice of termination of the contract to Hansmar and forfeited its deposit. The contract provided that if the purchaser defaulted, the vendor may terminate and sue to recover the deficiency on a resale as damages for breach of contract (including reasonable costs and expenses, after forfeiting the deposit).

Between the time of the breach of contract and the issuing of the creditor's statutory demand, Permanent was removed as the custodian for Challenger Managed Investments Ltd and replaced by Perpetual³.

Hansmar challenged the statutory demand on two grounds. Firstly, it claimed that the sum payable was not a "debt". Secondly, it claimed that the proper party to the demand was Permanent, and not Perpetual. Hansmar also claimed that there was a genuine dispute as to the amount of the debt claimed, or that it had an arguable offsetting claim. It asserted that the property was resold at an undervalue and that there was a failure to mitigate loss by taking reasonable steps to secure a proper price on the resale of the property.

Was a "debt" recoverable?

White J drew a distinction between unliquidated damages for breach of contract assessed by the court, and liquidated damages for breach of contract assessed in accordance with strict contractual terms. The former was not a claim in "debt" although the latter may give rise to a "debt" as the assessment was readily calculable in accordance with the terms of the contract. It was significant that Perpetual made no claim for the costs and expenses of its lawyers in the resale process, which would have involved an element of opinion, assessment or determination outside of the terms of the contract. It simply claimed the difference between the contract price and the resale price, less the deposit. The creditor’s statutory demand was upheld on that basis.

The identity of the creditor

Perpetual was ultimately unsuccessful because it was not the correct party to issue the creditor’s statutory demand in the first place. Although Perpetual became the new custodian, the custody agreement did not assign the benefit of the contract between Permanent and Hansmar to Perpetual. It had no standing to issue the creditor’s statutory demand.

The decision of the New South Wales Court of Appeal in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 61 ACSR 441; [2007] NSWCA 57 is part of a long saga of litigation and legal manoeuvring between two wine and beverage suppliers.

The facts were anything but straightforward.

Australian Beverage Distributors Pty Ltd ("ABD") was a distributor which purchased substantial quantities of wine from Evans & Tate Premium Wines Pty Ltd ("ETPW"), but failed to pay. ETPW served a creditor's statutory demand on ABD, which in turn applied to set aside the demand based on an alleged set‑off. The application was refused and ETPW subsequently filed winding up proceedings against ABD. ABD proved its solvency upon the hearing of the winding up application to stave off a winding up order, and obtained the benefit of costs orders against ETPW. The costs in favour of ABD were approximately $80,000.

In "tit for tat fashion", ABD later filed winding up proceedings against ETPW and Evans & Tate Limited ("ETL") after these companies fell into financial difficulties. The Evans and Tate group only survived as a result of support from its bankers. An independent report to note holders of the Evans & Tate group revealed that it was insolvent. Hence, ABD did not seek to rely on a presumption of insolvency which would be invoked had the Evans & Tate companies failed to comply with a creditor’s statutory demand, instead relying upon actual insolvency as the grounds for its winding up application.

ABD published a press release in "The West Australian" in which it informed the public at large of the commencement of the winding up proceedings. The press release was published even before the winding up application was served on the Evans & Tate group.

The Evans & Tate group sought injunctions against ABD from further prosecuting the winding up application. In separate proceedings, the court had also ordered that ABD be restrained from registering the costs certificate as a judgment before the filing of the winding up proceedings.

The judge at first instance considered that the debt was not one which was "due and payable" to ABD, on the basis of the stay of registration of the costs certificate, and so it could not form the basis of winding up proceedings. There were also findings made that the winding up proceedings were an abuse of process, leading to their dismissal.

The New South Wales Court of Appeal, relying upon earlier authorities that an order restraining the enforcement of a judgment does not alter the status of a party as a creditor, overturned the trial judge’s decision¹. A stay of execution did no more than preclude resort by the judgment creditor to remedies entailing execution of the judgment, and did not prohibit the commencement of winding up proceedings.

Nevertheless, the trial judge’s decision to dismiss the winding up application was ultimately upheld on other grounds.

The trial judge held that the filing of the winding up application where there was a known dispute about the enforceability of the debt constituted an abuse of process by ABD. Potentially, it was likely that ABD was in fact a debtor of the Evans & Tate group when the ongoing disputes were ultimately determined. However, the New South Wales Court of Appeal did not consider this to constitute an abuse of process.

The trial judge had also found that ABD’s subjective intention in publishing the press release was an abuse of process. However, the New South Wales Court of Appeal considered that subjectively, ABD had not issued the press release for an improper purpose. The press release was simply an example of a party in legal proceedings seeking to place itself in a more advantageous position.

Despite the Court of Appeal's finding of there being no abuse of process, the Corporations Rules provide that a party must advertise a winding up application at least three days after the winding up application is served. This constituted an implied restraint on advertising a winding up application prior to that time. The reasoning is that a debtor company may wish to satisfy the amount outstanding, or otherwise seek an injunction to restrain an applicant from publishing notice of a winding up application as there may be a dispute between the parties.

ABD argued that the pre-emptive advertising was cured by section 467A of the Corporations Act 2001 (Cth), which provides that a winding up application should not be dismissed merely due to a "defect or irregularity", unless there is substantial injustice which cannot otherwise be remedied. The New South Wales Court of Appeal upheld the trial judge’s decision that the publication, even if it was a defect or irregularity (which it doubted), had caused substantial injustice which could not otherwise be remedied.

The reasoning in this decision concerning a stay of enforcement is to be limited to its facts. Of course, a party would normally refrain from issuing a creditor’s statutory demand based upon a judgment which had been stayed, as the very fact of a stay being granted may constitute an acknowledgment that there is a "genuine dispute" which would allow a defendant company to apply to set aside a creditor’s statutory demand.

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