Cato Brand Partners Pty Ltd v Air India Limited [2016] VSC 28 (5 February 2016) : statutory demand, Corporations Act Part 5.7

February 9, 2016 |

The Supreme Court, per Efthim As J, considered an application to set aside a statutory demand in Cato Brand Partners Pty Ltd v Air India Limited [2016] VSC 28.  The issue was bringing an application against a foreign corporate body and the application of foreign law in determining the applicable statute of limitations.

FACTS

In December 2009 the plaintiff’s chairman, Kenneth Willis Cato, travelled to India in December 2009 and February, April and June 2010 for meetings with representatives of the defendant.  An agreement was entered into on 2 June 2010 [3].

The plaintiff claims it was owed a debt totalling $1,048,287.50 by the defendant for professional services performed by the plaintiff pursuant to the agreement [3].

A demand for payment of the debt dated 12 May 2015 was served on the defendant on that date. The defendant failed to pay or to take any step to dispute the debt within three weeks after service of the demand [4].

The defendant is incorporated in India and is a foreign registered corporation in Australia. It is a Part 5.7 body, not a company under Part 5.4 of the Corporations Act [8].

The defendant opposed the  application on the bases that:

(a) the contract on which the plaintiff relies is subject to the laws of India and therefore the claimed debt has been extinguished by s 27 of the Limitations Act 1963 (India); and

(b) it is not insolvent [7].

The contract was terminated on 3 August 2010. According to Indian law, any action to recover the contractual debt must have commenced within a three year period.  If the contract is governed by Australian law then there is a six year limitation period and the plaintiff can bring this application. There is no dispute before the Court as to whether the debt was due [26].

DECISION

The provisions of Part 5.4 of the Corporations Law, which deal with statutory demands, do not apply to the winding up of a foreign company, a Part 5.7 body [8].  If a company does not comply with a statutory demand under Part 5.4 of the Act, it is presumed to be insolvent. A Part 5.7 body that does not comply with a demand pursuant to s 585 of the Act is ‘taken to be unable to pay its debts’ [9].

The Defendant’s failure to respond to the statutory demand

The plaintiff submitted that s 585 requires the defendant to identify the basis upon which it challenged the debt  and absent a reasonable explanation for that failure, it cannot rely on a limitation defence raised for the first time after the application to wind up the defendant was filed [10].

The defendant submitted that its failure to challenge the demand is excused because:

  • it can be inferred that the defendant did not comply with the demand because it was not required to pay the debt ‘because it was old’
  • there is no case which stands for the proposition that the failure to challenge the demand stops the defendant from challenging the debt at the hearing; and
  • there is no statutory reason why this must be done.

The Court did not accept the defendant’s first submission, that an inference can be drawn from the fact that the debt was old or that it is not due [13] stating that:

The appropriate time to challenge the demand was within the 21 day period and to not wait for the hearing of the wind up application. It is not a valid reason for a failure to comply with a demand to assert that a debt is old.

Regarding the 2nd and 3rd submissions the Court found that the requirement for the failure to challenge the demand does not need to be explained. If a demand is not complied with then the company is taken to be insolvent, but it has the right to oppose an application to wind up the company [18].

The plaintiff submitted that the phrase ‘taken to be unable to pay its debts’ is not a rebuttable presumption, and therefore only the discretion of the Court is open to the defendant to rely upon as it cannot argue solvency or that the debt is not owed [19].  After considering the authorities His Honour rejected this submission, finding that a company under Part 5.7 of the Act can challenge an order to wind up the company even though it has not challenged the demand. Solvency and the basis on which the debt is owed are able to be relied upon by a defendant company [25].

Whether the debt is statute barred

The defendant submitted that the debt upon which the demand was based is not payable.  The contract is governed by the laws of India.  It is statute barred.  As such the plaintiff is not a creditor and has no standing to bring the application.

The Court adopted, at [33], the Defendant’s submissions as to the factors relevant to determine the law of contract applicable as being:

– the place of contracting;

– the place of performance;

– the language and form of the contract;

– the place of residence of the parties; and

– in the case of a contract concerning land, the place of the land.

The court found that the contract was governed by Indian Law stating:

..While work may have been performed in Australia, the contract contemplates the performance of the work in India. Performance under this contract was to undertake a research and review process, followed by the delivery of a working brief and finally through making the brand strategy visible. It was in India that the plaintiff had to deliver its plans and designs to the defendant. The contract involved the upgrade of the international and domestic lounges at Delhi Airport Terminal 3, as well as the production of designs in India for the upgrade of those lounges. This also involved interviewing personnel in India. The only connection with Australia on the face of the contract is the fact that the plaintiff is based in Australia.

The court found there was no extension of the 3 year limitation period after considering the evidence of both parties [45] – [59].

Solvency

The court quoted, at [61], Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd in setting out the propositions regarding insolvency s459G of the Corporations Act stating, absent authorities:

The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s459C(2) and (3);

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: 

The Court found that the defendant was solvent, at [72],  because:

…solely because it is being supported by the Government of India. It has poured substantial sums of money into the defendant since 2011

The court found, at [75] that:

defendant has demonstrated to the Court that the debt upon which the demand is based is not due. That in itself is sufficient to dismiss the application. However, in my opinion the defendant is solvent. A wind up order will therefore not be made.

ISSUE

This was an unusual application which dealt with a foreign corporation applying foreign law to determine the limitations issue.  It is also an interesting case in showing that solvency is not determinant on the books of account of the defendant.  In this case the defendant’s debts were met by the Government of India.  As such, notwithstanding that is ran at a loss it was solvent as it paid its debts as and when they fell due.  The case is also instructive in showing the difficulty of providing evidence as to the operation of, in this case Indian, foreign law and regarding financial records where the system is very different to that applying in Australia.

One Response to “Cato Brand Partners Pty Ltd v Air India Limited [2016] VSC 28 (5 February 2016) : statutory demand, Corporations Act Part 5.7”

  1. Cato Brand Partners Pty Ltd v Air India Limited [2016] VSC 28 (5 February 2016) : statutory demand, Corporations Act Part 5.7 | Australian Law Blogs

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