The Victorian Supreme Court in A G Coombs Pty Ltd v M & V Consultants Pty Ltd (in liq) [2018] VSC 468 considered and dismissed a plaintiffs’ application for injunctive relief to prevent an application under section 459 of the Corporations Act 2001 being made.

FACTS

On Friday 15 June 2018, the plaintiffs sought urgent interlocutory relief and final relief by way of an injunction to enjoin the defendant from making an application under s 459P of the Corporations Act 2001 (Cth) to wind up each of the plaintiffs in insolvency in connection with statutory demands dated 3 May 2018 [1].

Each of the plaintiffs is a constituent part of the A G Coombs group of companies. The business:

• was founded in 1945
• operates with permanent offices in Queensland, New South Wales, Australian Capital Territory and Victoria.
• employs more than 650 staff nationally
• has an annual turnover in excess of $250 million.
•  has historically been in the design, supply, installation and servicing of mechanical services in the commercial building industry.
• also provides:
  • technical advisory services,
  • design services,
  • fire protection supply and installation and
  • technical facilities management [2].

The first plaintiff, A G Coombs Pty Ltd, was incorporated in 1980. The second plaintiff, A G Coombs (NSW) Pty Ltd was incorporated in 2008 [3].

The defendant, M & V Consultants Pty Ltd (in liquidation), is a supplier and installer of insulation products [4]

A G Coombs  had a working relationship with M & V Consultants Pty Ltd since about December 2012 when A G Coombs engaged it to work on the ‘Box Hill Hospital project’ [5]. They also worked together on other projects including the ‘T1’ and ‘T2’ projects in the Barangaroo precinct in central Sydney.

By a resolution of the director of M & V Consultants Pty Ltd on 4 April 2018, Mr Jason Glenn Stone and Mr Glenn Franklin were appointed jointly and severally as voluntary administrators. On 4 May 2018, Messrs Stone and Franklin were appointed as liquidators [6].

Mr Stone, as administrator of the defendant, served statutory demands  on A G Coombs dated 3 May on 7 May 2018, for the total sum of $865,751.70, comprised of:

(a) a demand for $831,145.70 to A G Coombs Pty Ltd; and

(b) a demand for $34,606 to A G Coombs (NSW) [7].

The statutory demands related only to works undertaken by the defendant that are the subject of the Barangaroo projects and that :

• the amounts sought in the statutory demands comprise only a portion of the total claim that M & V Consultants Pty Ltd has against A G Coombs.
•  additional claims that M & V Consultants Pty Ltd has against A G Coombs are being investigated
• there were monies outstanding including the balance of retention moneys of $48,060.46 due in respect of the completion of the Monash Children’s Hospital and Bendigo Hospital projects, and a further sum of $7,554,440.05 for additional works performed by the company in relation to the towers at the Barangaroo project [8].

After service of the statutory demands, the plaintiffs’ solicitors wrote to the defendant’s solicitors on 22 May 2018:

• setting out details of the history of disputation between the parties,
• denying that any debt was owing and
• requesting that the plaintiffs withdraw their demands, failing which the plaintiffs would commence an application to set them aside [9]

On 30 May 2018 the plaintiffs made applications under s 459G of the Corporations Act 2001 (Cth) to set aside the statutory demands however, through an oversight of their solicitor, the applications were not served until about 5 June 2018, outside the 21 days prescribed under s 459G(3)(b) of the Act.  It was not in issue that the applications were not served within time and that  the period allowed for an application under s 459G cannot be extended [10].

On 12 June 2018, the plaintiffs’ solicitor wrote to the defendant’s solicitor and enquired as to its intentions with respect to the statutory demands. The defendant’s solicitor responded the next day, confirming that it anticipated receiving instructions to immediately commence winding up proceedings. On Friday, 15 June 2018, the plaintiffs commenced this proceeding [13].

Each of the plaintiffs relied on evidence of ‘substantial solvency’  based on:

1. AGCPL [the first plaintiff] has a strong equity position of just short of $15,000,000 with long term retained earnings of more than $12,000,000;
2. AGCPL’s raw liquidity ratio for the 2018 financial year of 1.06;

100. All federal and state government taxes are paid up to date for each entity;

4. All employee contributions including superannuation, LSL, redundancy and so forth are paid up to date for each entity;
5. AGCPL has a strong working relationship with all of its financial facility providers including Westpac, Macquarie, Swiss Re and IAL and as at the date of this affidavit was not in breach of any covenant with any financial institution with the exception of the failure to serve the application to set aside the statutory demands within time;
6. Each entity is regarded as creditworthy with its suppliers and is within its trading terms with its supply chain particularly all major suppliers and subcontractors and that position is unchanged for at least the last 12 years;
7. Each entity has no disputed contractual claims of any substance from suppliers or subcontractors that I am aware of with the exception of this proceeding. AGC’s level of disputation has historically been very low and that position is unchanged for at least the last 12 years;
8. Each entity has very strong management and governance procedures and is actively managed by a highly experienced board of directors and managers within the A. G. Coombs Group;
9. The A. G. Coombs business has been a going concern for more than 70 years; and
10. AGCPL has a strong credit rating as shown in the Dun & Bradstreet Report [37]

The plaintiff was prepared to pay the sum of $865,751.70 into trust pending resolution of any claim the liquidators may bring generally [39].

DECISION

Under Section 459F , at the end of the 21 day period for compliance with a statutory demand, where the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand.  The creditor may then make an application under s 459P to wind up the company in insolvency [11] and within the three month period specified in s 459C(2), the Court ‘must presume that the company is insolvent’ [15].

It was not in issue that the relevant three month period in which the defendant could rely upon the statutory presumption of insolvency in a winding up petition expired on Friday, 24 August 2018, 2 days after this decision [16].

The plaintiffs’ case was:

• there was a genuine dispute about the amounts the subject of the statutory demands, and that there were offsetting claims exceeding the amount of those demands [17].
• the failure to serve their s 459G applications was an oversight by their solicitor and that the filing of any winding up applications by the defendant was likely to result in irreparable damage to each of them, even if the applications were subsequently dismissed on the plaintiffs demonstrating their solvency [17].
• they sought urgent injunctive relief to restrain the defendant from filing applications for  winding up oon the basis that would be an abuse of process [17].
• while this proceeding cannot be used collaterally to challenge the operation of Part 5.4 of the Corporations Act ithe defendant was abusing the processes of the court  [18]
• the threatened winding up applications would plainly fail because the plaintiffs were ‘unquestionably solvent’;
• the liquidators had every opportunity to investigate and resolve the state of accounts between the parties in the conventional way instead of exploiting the failure of the plaintiffs to serve in time;
• reliance upon the additional or alternative bases for injunctive relief recognised by Judd J in Wimpole Properties Pty Ltd v Beloti Pty Ltd (No 3) [19]
  
• the ‘second branch of Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation (Cth).

In response to a specific request to articulate how the abuse of process arose the plaintiffs stated:

1. The plaintiffs submit that to file a winding up application relying on the presumption of insolvency in the face of substantial solvency of both plaintiffs would constitute an abuse of process.
2. Or, at least where the defendant is aware that the plaintiffs contend on credible evidence that they are solvent, and where the [defendant] had previously threatened litigation against the plaintiffs, and withdrawn that threat, in March 2017, it is an abuse of process to file winding up proceedings when it is plain that conventional litigation is the appropriate course.
3. That is because it is to be inferred in such circumstances that the defendant must have an ulterior purpose where the intended winding up proceedings are bound to fail (because of the solvency of the plaintiffs). [21]

and further submitted:

• that in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd, the Court of Appeal of New South Wales confirmed that it remained open to the Court to restrain the presentation of a winding up petition under the ‘second branch’ of Fortuna Holdings in circumstances where there is a more suitable alternative means of resolving a disputed claim against the company sought to be wound up [22].
• as a matter of logic, it must be improper to file a winding up application with the ‘true motive’ of collecting a disputed debt rather than with the intention of winding up the company in relation to which the application is made and referred to Mandie J in Commissioner for State Revenue of Victoria v The Roy Morgan Research Centre Pty Ltd, that:

. . . in some cases it may be so clear that a company is solvent that it would be appropriate to restrain a winding up application and not force a company to go to the ultimate hearing to prove solvency.

The defendant submitted that:

• the Court must have regard to the ‘harsh’ regime established under Part 5.4 of the Corporations Act citing Gummow J in David Grant & Co Pty Ltd (rec apptd) v Westpac Banking Corporation.
• where a company has failed to comply with a statutory demand it is presumed insolvent for the purposes of an application for winding up brought under s 459P, and it bears the onus of proving its solvency.
• the statutory presumption is relevant here as the plaintiffs seek to have the Court draw inferences as to their solvency.
• under s 459S, a company cannot, without leave of the Court, oppose a winding up application based on a failure to comply with a statutory demand on a ground on which it could have relied in an application to set aside the statutory demand
• where a defence of solvency is advanced, in order to discharge its onus, the company is required to adduce the ‘fullest and best’ evidence of its financial position [26].
• on the approach contended for by the plaintiffs, there is no role for s 459S if the company is, ‘demonstrably solvent’, because leave can only be granted under that provision if the Court is satisfied that the ground on which the company seeks to rely is material to proving that the company is solvent [28]
• while the Court has power to restrain threatened winding up proceedings where the  proceedings  constitutes an abuse of process  the onus of proving abuse of process lies on the person alleging it and the onus is a heavy one [30]
•  ‘collateral purpose’ abuse of the kind considered in Williams v Spautz can, if demonstrated, provide a basis for the grant of injunctive relief.
• the court retains a discretion to make an order under the second branch of Fortuna Holdings but the scope for a company to seek injunctive relief is limited and the general principle that a company will not be wound up on a disputed debt does not apply given the statutory presumption of insolvency in s 459C. [31]
• the effect of the legislative policy behind Part 5.4, as described in ASIC v Lanepoint, was that it did not follow that a winding up application would be an abuse of process merely because the indebtedness of the plaintiffs was disputed and the plaintiffs may appear to be solvent [35]
•  because the three month period fixed by s 459C(2) will expire on 24 August 2018, the practical effect of any grant of interlocutory relief will be the same as final relief [36]
• the presentation of the accounting materials and opinions did not ‘prove’ that each company is solvent. It was relied upon to argue there was an abuse of process [40].
• each plaintiff is to be presumed insolvent because it has failed to comply with a statutory demand and the defendant is proceeding to pursue a debt that it considers to be due and owing [40].
• the plaintiffs’ evidence as to solvency has a tendency to focus on the debt the subject of the statutory demands but there was also evidence of a much larger debt owing,  $7.5 million owed by the plaintiffs to the defendant [41] which will nevertheless feature in any solvency analysis [42]
• the Part 5.4 regime contemplates that issues as to solvency will be tested on the hearing of the application for winding up, where the company, in order to discharge its onus, is required to adduce the ‘fullest and best’ evidence of its financial position [43] and that the evidence adduced on behalf of the plaintiffs is not the ‘fullest and best’ [43].

The court, at [37], commenced its analysis with consideration of ‘solvency’ and ‘insolvency’,  relevantly defined in s 95A of the Corporations Act and citing Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd:

[55] The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.[56] It may well prove to be the case that whether or not a particular debt is owing is material, indeed crucial, to a company being able to establish its solvency. However, if the company itself is not prepared to mount a case which contemplates that as a possibility, then it is not open to the Court to be “satisfied” in the sense required by s 459S(2) on the basis that the company should be protected from itself. As I have said, the fact that the company does intend to so contend would not determine the issue of whether the disputed debt is “material”, let alone whether leave should be granted under s459S(1).

The Court cited  Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd for the proposition that Part 5.4 does not preclude an application for an injunction to restrain an abuse of process in the initiation or prosecution of winding up proceedings founded on non-compliance with a statutory demand [45].  It does not preclude allegations of an abuse of process where the institution of proceedings was for an improper purpose but it is unlikely that any scope remains for the continued application of the ‘second branch’ of Fortuna Holdings type of abuse of process, particularly in a case where an application for winding up is pursued on the basis of presumed insolvency [46] and cited  Georgiou Building Pty Ltd v Perrinepod Pty Ltd [47].

Her Honour expressed the view that only in rare circumstances will it be an abuse of process for a creditor which has a presumption of insolvency in its favour to proceed with a winding-up application [49] and that it is unlikely that the bringing of a winding up application could be considered an abuse of process where the debtor company is insolvent [50].

Injunction

The Court has power under Section 37 of the Supreme Court Act 1986 (Vic) may grant an injunction.  Interlocutory injunctions may be made if applicant has made out a prima facie case, that damages would not be an adequate remedy and that the balance of convenience would favour the grant of such relief [52]. In that context the court stated that:

• in Australian Broadcasting Corporation v O’Neill, Gummow and Hayne JJ said of the first enquiry, as to whether plaintiff has made out a prima facie case, that ’it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial however the plaintiff is not required to show that it is more probable than not that at trial the plaintiff will succeed [53]
• in determining where the balance of convenience lies, the Court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been wrong [54]
• there is a relationship between ‘a prima facie case’ or ‘a serious question to be tried’ and ‘the balance of convenience’ which need to be examined together. If the plaintiff’s claim is weak the balance of convenience must be more strongly in favour of the plaintiff before the court grants injunctive relief [55].

The plaintiffs submitted that the statutory demands have been issued and maintained by the defendant for an improper purpose because:

(a) the statutory demands were accompanied by an affidavit of an administrator who had been appointed less than a month earlier based solely from inspection of the books and records of the companies and without a proper investigation expected of an insolvency practitioner;

(b) the plaintiffs put the defendant on notice of the dispute prior to the expiration of the demands, and notwithstanding the lack of independent knowledge of the transactions by the liquidators and the alleged debts were in genuine dispute and had been for several years; and

(c) in circumstances where the plaintiffs are demonstrably solvent, the statement from the defendant that it will seek to apply to wind up the plaintiffs on the statutory presumption of insolvency must have been made in order to exert commercial pressure on the plaintiffs who would suffer irreparable harm by virtue of the filing of winding up applications[55]

(d)based on the ‘second branch’ of Fortuna Holdings, to the effect that where the defendant is aware that the plaintiffs contend on credible evidence that they are solvent, and where the defendant had previously threatened litigation against the plaintiffs, and withdrawn that threat, in March 2017, it is an abuse of process to file winding up proceedings when it is plain that conventional litigation is the appropriate course [56]

The plaintiffs summarised the history of the dispute between the plaintiffs and M & V Consultants Pty Ltd stating:

• that since about September 2015 there had been discussions between them concerning claims made by M & V Consultants Pty Ltd on the T2 Barangaroo project.
• there had been a meeting had been held in mid-October 2015 at which A G Coombs had requested further substantiation in respect of certain invoices issued by M & V Consultants Pty Ltd and a reconciliation of invoices issued against the contract sum.
• M & V Consultants Pty Ltd never provided the substantiation or reconciliation requested.
• until sometime in early 2017 the plaintiffs believed the claims made by M & V Consultants Pty Ltd on the T2 project had been resolved.  Further meetings and discussions took place, and documents were exchanged [57].
• an email to M & V Consultants Pty Ltd on 20 March 2017, summarised the outcomes of their meeting on 17 March 2017, including the outcome of the discussions on the Monash, Bendigo and Barangaroo T2 and T1 projects, which identified:
  • a balance was due to M & V on each of the Bendigo Hospital and Monash Children’s Hospital projects;
  • the claims on the T2 Project had previously been resolved; and
  • A G Coombs considered that M & V had been paid more than its entitlement on the T1 Project but would consider any further response from Sharyn when provided [58].
• while further meetings and discussions have since been held A G Coombs has been ‘unable to reconcile the invoices issued by M & V with orders placed, work undertaken by M & V or on any other basis.’
• while retention monies are payable in respect of the Bendigo Hospital and Monash Children’s Hospital projects there is an overpayment made to M & V Consultants Pty Ltd which exceeds the retention sums [60].
• since  discussions and meetings Mr Stone, as liquidator of M & V Consultants Pty Ltd, has been conducting further investigations & recently notified A G Coombs that he proposes to pursue additional claims against the plaintiffs, referable to the completion of the Bendigo Hospital and Monash Children’s Hospital projects (totalling $48,060.46) and the Barangaroo T1 and T2 projects (totalling an additional $7,554,440.05) which are not part of the statutory demands issued and all amounts due to the Defendant have been paid [61].

The defendant submitted there was no abuse of process because:

• the fact that the liquidator was appointed around one month prior to issuing a statutory demand does not prove a want of “proper investigation expected of an insolvency practitioner” – let alone abuse;
• liquidators have an obligation to act expeditiously in calling in the assets of the company in liquidation;
•  the fact that the defendant did not withdraw the statutory demands despite asserted disputes by the plaintiffs is not evidence of abuse;
•  the allegation that the the defendant’s motive was “to exert commercial pressure on the Plaintiffs” was not feasible because:
  • the alleged proof of solvency came after the steps taken by the defendant to issue statutory demands;
  • the evidence relied upon by the plaintiffs (which is not the “fullest and best”) does not prove that it is solvent in any event:

• the matters relied upon by the plaintiffs would appear to be little more than a backdoor way of getting around s 459S of the Act [70].

The Plaintiffs submitted that the balance of convenience favoured the the grant of an injunction because:

• the injury that would be suffered should wind-up applications be brought would be severe and require the companies to take extensive and expensive steps to maintain their financing arrangements and building contract which may result in:
  1.  the withdrawal and immediate repayment of the entirety of the Plaintiffs’ finance facility; and/or
  2. the Plaintiff being prevented from tendering for new work by reason of its inability to access funding for bank guarantees or bonds;
  100. the immediate termination of many of its contracts with its clients; or
  4. in creditors ceasing the provision of services or withdrawing or no longer providing credit terms [65].

• the ‘knock on effects’ of the withdrawal of the group’s finance facilities and/or the cancellation of any of its major contracts ‘would’ be likely to result in:

  1. immediate forced redundancies of a significant number of A G Coombs almost 700 staff including many long term employees;
  2. significant and irreparable reputational damage to the A G Coombs business and brand which has been built over more than 70 years;
  100. its industry standing as the leading provider of specialist building services in Australia being diminished;
  4. loss of client confidence, support and ongoing opportunities including, in particular, the loss of an ability to tender for state and federal government projects; and
  5. a consequential impact on A G Coombs’ valued suppliers and specialist contractors [66]
• the defendant would only be held out of its (worthless) statutory right to apply to wind up the plaintiffs and would have every opportunity to establish its claims in the conventional way [62].

The plaintiffs submitted that damages would not adequately compensate them, because as soon as the applications to wind up are filed, notified to the Australian Securities and Investments Commission and advertised, the plaintiffs will suffer immediate, irreparable reputational damage [69].

The defendant submitted that when the Court comes to consider the balance of convenience, it should not take too seriously the plaintiffs’ submission to the effect that ‘terrible things will happen to these companies if a winding up application is brought’ [71] because

• there has already been an event of default, in that each of the plaintiffs is ‘Insolvent’ because in each case ‘it is taken (under s 459F(1) of the Corporations Act) to have failed to comply with a statutory demand.’
• the evidence is silent as to whether the plaintiffs’ financiers and other relevant contracting parties in the commercial building industry have been informed of that failure to comply.
• any damage has already been done, and the plaintiffs cannot advance the potential for loss to be suffered on the filing of an application for winding up as a factor to be weighed in their favour when the Court is assessing the balance of convenience [71].
• the entities have not proved that they are solvent;
• the failure to comply with the statutory demands (admitted) was itself a default the existence of which the entities were under a statutory obligation to inform their financiers [72];
• the entities do not explain what impact winding up proceedings have on building contracts
• the plaintiffs  position is no different to any other company that fails to comply with a statutory demand;
•  Part 5.4 may operate harshly but that is what Parliament intended in striking the balance between companies and persons seeking payment from them;
• the practical effect of an injunction will be to forever shut the defendant out from bringing a winding up proceeding against the [A G Coombs] entities [72].
• the platinfif’s demonstrably undermines the statutory purpose of Part 5.4 of the Corporations Act. The defendant observes that [73]

The court accepted the Defendant’s submissions and stated that it seemed unlikely that any scope remains for the continued application of the ‘second branch’ of Fortuna Holdings type of abuse of process, particularly in cases where an application for winding up is pursued on the basis of presumed insolvency [82].

The court noted, at [83], that:

• the defendant  embarked on the Part 5.4 process in a manner consistent with the statutory scheme.
• the liquidator  gave sworn evidence that there was a proper basis for serving the statutory demands (in his earlier role as administrator),
• there was opportunity for the plaintiffs to dispute the debts, and upon their failure to do so, the statutory presumption of insolvency was enlivened.
• the policy of Pt 5.4 is that there be a speedy resolution of applications to wind up in insolvency’.
• it would be contrary to that policy to deviate from the statutory process so as to enable the plaintiffs to dispute the debts in satellite litigation, simply for the reason that they may well be solvent.
• if the solvency of the plaintiffs is as clear-cut as they contend, it will remain open to them to dispute the debts underlying the statutory demands at a later point.
• the plaintiffs have not established that there is a more suitable alternative means of resolving the dispute as to the debts pursued by the defendant by way of the statutory demands.

The court regarded the alleged additional indebtedness of $7.5 million when issues as to the plaintiffs’ solvency fall to be determined on s 459P applications as being a material factor in the assessment of the solvency of one or both of the plaintiff companies and was not  an ‘ambit claim’, as the plaintiffs submitted [84].

The court was not prepared to conclude that the plaintiffs were solvent on the limited and untested evidence as to the plaintiffs’ solvency before me [84]

In any event the court found that the material suggests that:

• there has already been an event of default under the main facility agreement and although a winding up application may precipitate damage to the plaintiffs, at least some of that damage may be viewed as resulting from the plaintiffs’ failure to comply with the statutory demands [86].
• it is unclear to what extent the ‘knock on effects’ are likely to occur [87].

The court noted that if injunctions were granted, the defendant would be prevented from filing winding up applications and thereby availing itself of the statutory process provided by Part 5.4. [87]

The court did not consider that the loss of that right (if injunctions were granted) would pose a greater risk of injustice than the risk of injustice to the plaintiffs (if injunctions were refused in error). As such the court would have found that in all of the circumstances, the balance of convenience weighed more strongly in favour of the grant of the injunctive relief sought [87].

The Court dismissed the plaintiffs’ application for interlocutory relief [88]

ISSUE

This decision highlights the difficulty a plaintiff has in failing to apply to set aside a statutory demand within the 21 days.  Seeking injunctive relief was open but establishing an abuse of process in this jurisdiction is difficult.