By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
In an application to wind up a company for failure to comply with a statutory demand, section 459S of the Corporations Act 2001 (Cth) (“the Act”) operates to exclude grounds that a defendant either did rely on, or could have relied on, in an earlier application to set aside a statutory demand.
In the Explanatory Memorandum to the Corporate Law Reform Bill 1992, the stated policy goal of section 459S is to:
“…penalise debtor companies who do not give early notice of all the issues they have with the statutory demand, since needless delay and expense will occur if those issues are raised only at the winding up hearing.”
Thus, Brereton J states at [10] in Re Vangory Holdings (No 2) [2015] NSWSC 1809:
“It follows that in proceedings to which s 459S applies, upon proof of service of a creditor’s statutory demand claiming to be a creditor and the absence of an application to set such a demand aside, the defendant company is precluded from contending that the plaintiff is not a creditor or that the debt does not exist. In essence, s 459S operates, where it is applicable, to create a statutory issue estoppel on those matters.”
However, section 459S leaves open the possibility for a debtor company to seek leave from the Court allowing it to rely on a ground which would otherwise be precluded by operation of the section. Section 459S has been called the “only safety net” to the strict requirements of s 459G applications to set aside statutory demands – Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 at 300-301. However, it too has been held to be properly the subject of “strict construction” – Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723 at [51]
Pursuant to section 459S(2) the Court must not grant leave unless it is satisfied that the ground is material to proving that the debtor company is solvent.
Exercising the Court’s discretion
In Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15 (“Paliflex”) Austin J at [49] said the Court’s decision to exercise its discretion turns on a consideration of the following stages:
- A preliminary consideration of the defendant’s basis for disputing the debt which was the subject of the demand;
- An examination of the reason why the issue of indebtedness was not raised in an application to set aside the demand, and the reasonableness of the party’s conduct at that time; and
- An investigation of whether the dispute about the debt material is to proving that the company is insolvent.
In Vangory Holdings Pty Ltd [2015] NSWSC 546 (“Vangory”), Black J cited the above formulation by Austin J with approval, but characterised the first stage of the inquiry as “…whether there is a serious question to be tried on the ground sought to be raised…”
Such an inquiry necessarily requires the Court to consider whether the defendant has open to it a seriously arguable case that the debt in question is subject to a bona fide dispute or off-setting claim.
Whether the ground is material to proving solvency
Pursuant to section 459S(2), the ground sought to be relied on must be material to proving solvency.
In this regard, there is a divergence in approaches utilised by the courts which adopt either a stricter or more lenient approach to the question of materiality.
An example of the strict approach is Switz Pty Ltd v Glowbind Pty Ltd (2000) 33 ACSR 723 (“Glowbind”), where the NSW Court of Appeal said at [54]:
If, as here, the company intends to prove that it is solvent whether or not a debt is payable, then with respect to the ground based on dispute about the debt, the test of materiality to it “proving” its solvency, cannot be satisfied.
The court reasoned, therefore, that where a debtor company’s argument for solvency does not depend on whether the principal is owing or not, then there is no role for the court’s discretion in s 459S.
Thus, as Sifris J stated in Re Kornucopia Pty Ltd (No 4) [2020] VSC 7 at [226] (emphasis added):
…the company must show that the debt demanded by the creditor if found not to be due and payable, or the offsetting claim alleged by the company if established, is the difference between the company being solvent and insolvent.
Put another way, if the debt were to be ignored and the company might be found to be solvent as a result, then only in these circumstances would the existence of a bona fide dispute be relevant to the consideration of materiality under section 459S(2).
However Austin J in Paliflex considered that previous decisions had “set the materiality threshold too high” and adopted what has been termed a more lenient approach to the question of materiality to proving solvency (at [44]):
The Court considers the materiality question before deciding whether to grant leave to the company to dispute the debt. It has not, at that stage, reached a conclusion about the company’s overall solvency, and may not have heard all the relevant evidence. It is not in a position to decide, at that stage, whether the debt in question is the difference between solvency and insolvency.
In Re Pioneer Cryogenics Pty Ltd [2015] NSWSC 1202, Black J referred (at [16]) to his earlier review of the authorities in Vangory of the “strict and the less strict approach” to materiality. His Honour held that Glowbind does not establish a statutory test in place of the section itself. Black J expressed a preference for the less strict approach, but noted the question may be a ‘false dichotomy’ where “what is involved is a question of whether the Court is satisfied, or not, of materiality of the debt to the proof of solvency in the particular circumstances”(at [18]).
The distinction between the two approaches to the question of materiality is irrelevant in a situation where the debtor company leads a case that contends that it is solvent in any event or irrespective of the debt. Thus, as explained by White J in Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113 at [35]:
What is material to proving solvency is not the same as what is determinative of solvency… In short, the existence or non-existence of the plaintiff’s debt is not material to proving that the company is solvent where the company claims it is solvent, even if it owes the debt. It does not follow that all questions of a company’s solvency are to be advanced to the stage at which leave is sought under s 459S, so that the company must then establish by the fullest and best evidence that it is solvent if it does not owe the disputed debt. A finding of the existence or non-existence of the debt will be pivotal to a decision on solvency at the s 459S stage, if the company might be found to be solvent if the debt does not exist. That would establish materiality for the purposes of s 459S(2).
Thus a company seeking leave under section 459S of the Act must adduce at least some evidence as to the Company’s financial position.
Debtor companies need to deal with statutory demands urgently, or risk having a difficult application to defend a winding up application on grounds that could have been advanced earlier. When seeking leave under section 459S to defend a winding up application, debtor companies should ensure that they have a clear understanding of the operation of section 459S and provide the Court with sufficient financial evidence for the Court to determine the effect of the debt in question on solvency. Failure to provide sufficient evidence will result in the court being unable to assess whether the ground sought to be relied on is material to solvency and an unsuccessful application, with the consequence being a more likely liquidation of the company.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
