First Equilibrium Pty Limited v Bluestone Property Services Pty Limited (in liq) [2013] FCAFC 108 (18 September 2013): winding up, judgment creditor applied to wind up appellant company on the grounds of insolvencystanding as a creditor under section 459P(1)(b) Corporations Act 2001, solvency of appellant, mutual credits or mutual dealings for the purposes of section 553C(1)

September 25, 2013 |

In  First Equilibrium Pty Limited v Bluestone Property Services Pty Limited (in liq) [2013] FCAFC 108) the Full Federal Court considered an appeal against a winding up order, made by Jacobson J  in Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd [2013] FCA 876, under sections 459A and 459P of the Corporations Act 2001 (Cth) (“the Act”) . The court considered in detail the principles associated with winding up on the grounds of insolvency, including the concept of “commercial realities”, and the argument that there was a genuine offsetting claim (which was included as an asset in the financial returns of the appellant on the question of solvency).

FACTS

 Equilibrium has a sole director and shareholder, Mr Justin Brown (“Brown”).  Bluestone has a sole director and a shareholder, Mr Lance Hodgkinson (“Hodgkinson”) [4].  Brown & Hodgkinson were property developers involved in  a number of substantial property developments [4] [5].   In late 2005  Brown wanted to sell out of a development [6] and at a meeting convened to discuss this with Hodgkinson he wrote on a single sheet of paper what arrangements would effect this outcome.  Both then signed the document. Brown claimed the document was an enforceable agreement. Some of the payments contemplated by the document (totalling $600,000) were made by Hodgkinson while other aspects of the transactions were not implemented. Brown commenced proceedings in the New South Wales Supreme Court against Hodgkinson (amongst others) to enforce the terms of the agreement. Bluestone served a cross-claim seeking to recover the $600,000. In Brown & Ors v Hodgkinson & Ors, the trial judge, found there was no enforceable agreement and that Equilibrium was liable to repay the $600,000 to Bluestone as money had and received and ordered judgment for $600,000 (the “Judgment Debt”).  An appeal was dismissed in Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd.

Equilibrium paid Bluestone approximately $294,000 in partial satisfaction of the Judgment Debt [27].  It did not seek an order setting aside the balance of the Judgment Debt or obtain a stay. Bluestone served statutory demands on Equilibrium, with the debt in each being the Judgment Debt outstanding. In Equilibrium’s application to set aside the first demand the court found that the offsetting claim asserted by Equilibrium was not genuine claims for the purpose of section 495H. The claim concerned a Unit Sales Agreement between Sharlotte Pty Limited, company entity owned by Brown, and Bluestone whereby Bluestone agreed to purchase Sharlotte’s units in a Unit Trust for $450,000. By a Deed of Assignment  Sharlotte allegedly assigned to Equilibrium its right, title and interest in the debt due by Bluestone for  $1.

On 27 March 2013, Bluestone filed its originating process making an application for a winding up order on the ground of Equilibrium’s insolvency [18]. It relied upon:

  1.  the “commercial realities” of the matter including, in particular, that the Judgment Debt has been outstanding for over four years and that Equilibrium has taken no steps to establish its asserted counter-claim, other than to put the claim forward in proceedings of an interlocutory nature.
  2. inferences to be drawn from the fact that the sole director of Equilibrium has sworn affidavits which did not disclose the existence of any assets available to meet the Judgment Debt other than the asserted counter-claim.
  3. inferences of insolvency to be drawn from a balance sheet introduced into evidence by Equilibrium which  was unsigned but purported to describe the financial position of Equilibrium for the financial year ended 30 June 2011.

Jacobson J ordered the winding up of the appellant on 2 September 2013.

Grounds of appeal

Equilibrium appealed the Winding-up Order on the grounds that:

  1. Bluestone did not have standing to bring the application because it was not a “creditor” of Equilibrium (section 459P(1)(b));
  2. Bluestone had not discharged the onus of establishing that Equilibrium was insolvent on each of the Relevant Dates; and,
  3.  there were mutual credits and dealings between Equilibrium and Bluestone under section 553C(1).

DECISION

 Bluestone’s standing as creditor

Equilibrium submitted primary judge’s finding that Bluestone was a creditor was erroneous because he rejected Equilibrium’s claim to  have a counter-claim equal to or exceeding the Judgment Debt [20].

In considering the validity and strength of the counterclaim the court, at [21],  set out the relevant principles:

  1. mere assertion of a claim or counter-claim is not sufficient. The claim or counter-claim must raise a bona fide or genuine dispute on substantial grounds as to the whole of the judgment debt
  2. that the enquiry to be undertaken is not inconsistent with the statutory question posed by section 459H  which, in the context of statutory demands, defines an “offsetting claim” to mean “a genuine claim against the respondent  by way of counterclaim, set-off or cross-demand even if it does not arise out of the same transaction or circumstances;
  3.  “a genuine dispute” uses ordinary English words and its meaning in any particular set of circumstances must be a question of fact;
  4. there must be some evidence to support the factual allegations that go to make up the claim;
  5. it is insufficient for the facts to be asserted in the supporting affidavit or by annexing a copy of the statement of claim;
  6. the relevant evidence does not need to be admissible at a final hearing on the merits of the case but it needs to be sufficient to satisfy the Court that the claim has a proper factual basis;
  7. there must be a “plausible contention requiring investigation”, being the same  considerations as the “serious question to be tried” criterion applicable to interlocutory injunctions;
  8. the threshold is not high or demanding but the claim must have some merit and be genuine; and
  9. the burden on the party asserting the claim is analogous to that of an alleged debtor resisting an application for summary judgment. If there is any factor that, on rational grounds, indicates an arguable case, the court must find that a genuine dispute exists even where any case apparently available to be advanced to the contrary seems stronger.

The basis of the counterclaim was Bluestone’s alleged obligation to make payment under the Unit Sales Agreement.  The court found, at [23]:

  “..Bluestone’s obligation to pay the $450,000 was not an obligation at large. It was an obligation expressly predicated upon Sharlotte’s agreement “to sell all its interest in the Sale Units in the [282 Oxford Street Unit] Trust to Bluestone and to transfer to Bluestone those 50 units (free of Encumbrances and other third party rights and interests)”. … although on its face, it appeared as though Equilibrium may have had a right to claim $450,000 under the Unit Sales Agreement the question which immediately arose before the primary judge, and on appeal, was whether Sharlotte had the ability to transfer the Sale Units in the Trust?

The court stated, at [25], it was not sufficient for Equilibrium:

“..to simply point to the Unit Sales Agreement and assert an absolute obligation by reference to cl 2 of the Unit Sales Agreement” .

Their Honours found there was no evidence that Equilibrium had ever:

procured compliance with the Trust Deed for the transfer of the Sale Units and completion of the assurance of unencumbered title to Bluestone. And that evidence was necessary. It was necessary because Equilibrium could not recover the amounts allegedly owed under the Unit Sales Agreement without first establishing that its assignor (Sharlotte) had in fact conveyed clear title to the Sale Units. [28]

INSOLVENCY

In establishing that Equilibrium was insolvent the applicable  question is “.. whether a company is solvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole”[33].  The court, at [34], referred to the the applicable principles set out in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation being:

  1. whether or not a company is insolvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole;
  2. in considering the company’s financial position as a whole, the Court must have regard to commercial realities:
  3. in assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency;
  4. the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand;
  5. in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence that there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment. there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment or there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand; and
  6. it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence.

The court found:

  • regarding the  Judgment Debt, Equilibrium failed to pay a Judgment Debt obtained by Bluestone for more than four years and has done nothing to enforce its rights under the counterclaim [38]; and
  • Equilibrium’s evidence regarding  solvency, in the form of a Financial Report for the year ended 30 June 2011, was deficient.  It  was unsigned,  stale (being the Financial Report for the year ended 30 June 2011) and the Balance Sheet incorrectly classified the Judgment Debt as a contingent liability and included as an asset the counter-claim that has been found not to be a genuine or bona fide [39].

The Court found that, taking Equilibrium’s financial position as a whole including the commercial realities and the evidence adduced to the Court, the primary judge was correct to conclude that Equilibrium was insolvent on each of the Relevant Dates [40].

 SECTION 553C(1)

There were no mutual credits or mutual dealings and that the issue of set-off under section 553C(1) did not arise, [42], because this section applies when a person wants to have a debt or claim admitted against an insolvent company that is being wound up. That was not the subject of the appeal [43].   Further the purported offsetting claim was not a genuine claim that could be taken into account in considering dealings between those parties [44].

ISSUE

This case is notable because the court undertook a very detailed analysis of the principles applicable in winding up on the grounds of insolvency as well as consideration of an offsetting claim. It also reviewed the concept of “commercial realities” when considering a winding up application.

Amongst the fatal flaws in the appellant’s claim for a counter claim were the failure of the Appellant to agitate its rights under the Agreement it relied upon and the inadequate financial documents it relied upon in countering an allegation of insolvency; here an unsigned and stale report which characterised the major asset as being a counter claim which the court found not to be a genuine dispute and and, worse, the Judgement Debt described as a contingent liability.

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