Re Lifestyle Residences Hobsons Bay Pty Ltd (recs & mgrs apptd) [2023] VSC 179 (6 April 2023): statutory demand, service under section 109X(1)(a), service outside the statutory period, whether director can make application on behalf of company when receivers appointed

April 23, 2023 |

The Victorian Supreme Court in Re Lifestyle Residences Hobsons Bay Pty Ltd (recs & mgrs apptd) [2023] VSC 179 considered a range of issues; whether a director can bring an application when receivers appointed, the operation of section 109X(1)(a) of the Act and the calculation of service. it makes it clear that there is an immutability of filing an application out of time making the application is a nullity.

FACTS

The facts relating to service were:

  • on 22 November 2022, Ms Celia Luki, the solicitor with carriage of the matter for the defendant, ascertained the registered office address of the Company from an Australian Securities and Investments Commission (‘ASIC’) company search [35].
  • Luki requested the Office Services Clerk in her firm in Redfern, New South Wales, to organise for the documents to be couriered to Melbourne for delivery to the registered office address.
  • a Client Services Assistant at McCullough Robertson received Luki’s instructions on the service of the statutory demand in the sum of $213,166.89 in an email forwarded to her by the Office Services Clerk, who also provided the statutory demand and accompanying affidavit.
  • the assistant logged into the Toll Priority (Aus) system and inputted those details, recording Luki’s email address as the contact person to receive email updates on the progress of the delivery of the demand. She printed a label from the Toll system, which included all of the recipient’s details which she affixed the label onto a Toll Express Services priority satchel and obtained a tracking number and manifest document.
  • in the afternoon of 22 November 2022, a courier from Toll attended the McCullough Robertson office and collected the sealed envelope and two copies of the manifest document [35]
  • on 16 December 2022 the tracking log records the documents were delivered to the company at the registered office address on 23 November 2022 at 9:46am. The proof of delivery document clearly records the registered office at which delivery occurred and the signature of Paula accepting delivery of the envelope [36]. Paula was a receptionist an accounting firm engaged by the company, whose business address is the registered office address of the company.
  • Paula was unsure who to forward the demand to and sought confirmation from her principal, Mr Sam Cimino. However, because Cimino was extremely busy that day, she was only able to email him and unable to speak to him in person [37].
  • on 24 November 2022, Paula had a discussion with Cimino, who instructed her to immediately send the statutory demand to Mr Burgess, Mr Dale Harrison and Mr Peter Van De Steeg, who are nominated contact people at the company. 
  • Paula emailed the nominated people at the company, attaching an electronic copy of the statutory demand but erroneously stated the demand had arrived by courier at the registered office address on 24 November 2022 when, in fact, it was delivered by courier the day prior [38]. 

On 15 December 2022 the plaintiff applied under s 459G of the Corporations Act 2001 (Cth) to set aside a statutory demand dated 22 November 2021 [1].

The application was made in the name of the company by its sole director and shareholder, Mr David Burgess, in circumstances where receivers and managers were appointed to the company on or around 14 September 2022 [1]

On 22 March 2023, Welner Lawyers, for the Plaintiff, wrote to the lawyers acting for the receivers in relation to the proceeding stating that:

(a) Mr Burgess has agreed to be liable for all of the company’s legal costs charged by Welner Lawyers;

(b) Welner Lawyers will not seek to recover any costs from the company;

(c) the defendant accepts that $39,732 is adequate security for the defendant’s costs of the proceeding, having regard to the 16 March orders; and

(d) Mr Burgess will pay the sum of $39,732 into Court as security for the defendant’s costs should the defendant obtain a costs order in its favour.

At the hearing, Burgess, gave the following undertakings to the Court:

(a) an undertaking to pay the defendant’s costs in the event of an adverse costs order;

(b) an undertaking to indemnify the company for the costs of the company in the proceeding; and

(c) an undertaking to be solely responsible for Welner Lawyers’ costs in the proceeding [7].

The parties and Burgess agreed to a form of order whereby Burgess would pay into Court the amount of $39,732 as security by 19 April 2023, for the defendant’s costs in the event of an adverse costs order being made in its favour [8].

DECISION

Pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Rules’), His Honour set out the preliminary questions as:

(a) whether the proceeding has been properly commenced with the authority of the company;

(b) depending on the answer to (a), whether the proceeding can continue; and

(c) whether the application was made within the statutory period specified in s 459G(2) of the Act [2].

The Court granted leave for the Company to raise two additional arguments at the hearing:

  1. that the statutory demand should be set aside under s 459J(1)(b) of the Act for want of ‘fair notice’.
  2. argument that a statutory demand that fails to provide an address for service within the state the demand is served does not comply with s 459E(2) of the Act and Form 509H to the Corporations Regulations 2001 (Cth) (‘Corporations Regulations’) and is therefore a nullity [9].

Whether proceeding commenced with authority & can it continue

It was not in issue that Burgess had authority to commence this proceeding [14].
The Court stated:

  • as a matter of law, the appointment of receivers to a company does not entirely displace a director’s power and authority to commence a proceeding [15].
  • a receivership does not change the company’s internal structure. A proceeding may be instituted by a director in his or her ‘residual capacity’ [15].
  • the practical question that arises is ‘whether the exercise by a director of any power in the name of the company would interfere with the legitimate exercise by the receivers of their powers’.  Can the director can exercise a power ‘without prejudicing the legitimate interests of the receiver and the secured creditor in the realisation of the [relevant] assets’.
  • In Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (‘ASIC v Lanepoint’), Justice French held that:
    • a director was entitled, as a matter of law, to oppose a winding up application in the name of the company and therefore it was unnecessary to seek leave under ss 236 and 237 of the legislation 
    • because the receivers did not oppose the regulator’s winding up applications, there was no actual or apparent conflict between their non-opposition and the director’s proposed exercise of the companies’ rights to oppose the winding up proceedings
    • the existence of the receivers’ power under s 420 of the Act to defend the winding up applications did not give rise to any conflict
    • that absent the director’s participation, there was no natural contradictor to the winding up application [16].
  • in Capital Globe Investments Pty Ltd v Parker Investments Australia Pty Ltd Applegarth J determined that where a statutory demand is served upon a company in receivership, the director may initiate or maintain a proceeding in the name of the company to set aside the statutory demand provided there is no interference with, or prejudice to, the receivership or secured creditors because the director had made an offer to indemnify the company and the receivers against any adverse costs consequences of the proceeding. The Court held the director’s offer to be personally responsible for any costs was appropriate and that the director should also provide security in respect of any costs order made against the company arising from the continued prosecution of the application [17].

The Court was satisfied that the appointment of the receivers did not entirely displace the powers and authority of Burgess as a director. Burgess had the residual power to commence the application without the leave of the Court [18].

Regarding the separate question as to whether the continuation of the proceeding may prejudice the legitimate interests of the receivers and the secured creditor in relation to the realisation of the secured property the Court stated:

  • Such prejudice will arise if the company’s assets are imperilled by the costs of the litigation. This leads to the next preliminary question, namely whether the proceeding can continue and, if so, on what conditions [20].
  • quoting his previous decision in Tred Nominees Pty Ltd (recs & mgrs apptd) v Albarran that
    • where a director initiates and maintains a proceeding in the name of a company in receivership without the consent of the receivers, he/she is usually required to satisfactorily indemnify the company against any liability for costs
    • the governing principle is that those giving instructions on behalf of a company must demonstrate that ‘nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders’.
    • where the secured property of a company in receivership is placed at risk by the prosecution of a proceeding brought in the company’s name by its director the right to continue the proceeding is conditional upon the company being indemnified against any liability for costs [21].

The Court considered that as the interests of the relevant secured creditor are threatened by the continuance of this proceeding because the company’s assets are at risk of being diminished by the legal costs incurred and its exposure to an adverse costs order it was appropriate that Burgess provide a satisfactory indemnity to the company which should be underpinned by an appropriate amount of security [22]. The requirement for the indemnity to cover the company’s costs and the need for that indemnity to be supported by security are related requirements [23].

The Court found it  “just and reasonable in all the circumstances” that Burgess paid security in the form of the agreed security sum into Court [25].

Relevant statutory provisions and principles

As is usual with these decisions his Honour set out section 459G as relevantly providing that:

(1) A company may apply to the Court for an order setting aside a statutory demand served on the company.

(2) An application may only be made within the statutory period after the demand is so served.

(3) An application is made in accordance with this section only if, within that period:

(a) an affidavit supporting the application is filed with the Court; and

(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.

In calculating when time runs and whether an application is within time the Court stated:

  • where an application under s 459G has not been filed and served within the statutory period, the Court has no jurisdiction to consider the application and it will be dismissed as incompetent [27]
  •  the statutory period is ‘strict and immutable.’
  • there are no means by which the 21 day statutory period can be extended or service validated after its expiration [28]
  • to ascertain whether the company has commenced its s 459G application within the statutory period, it is necessary to determine when precisely it was served with the statutory demand [29]

The court cited section 109X(1) which deals with service on a company and relevantly provides that a statutory demand is served by:

(a) leaving it at, or posting it to, the company’s registered office; or

(c) if a liquidator of the company has been appointed–leaving it at, or posting it to, the address of the liquidator’s office in the most recent notice of that address lodged with ASIC; or

(d) if an administrator of the company has been appointed–leaving it at, or posting it to, the address of the administrator in the most recent notice of that address lodged with ASIC; or

The plaintiff contended, at [41], that service was within time because:

  • the company was  in external administration since 14 September 2022,
  • the address for service to the external administrator was ‘Said Jahani and Andrew Hewitt: Grant Thornton Australia Limited, Level 17, 383 Kent Street Sydney NSW 2000’;
  • no formal service had been effected by the defendant as service was not made to the correct address of service of the external administrators;
  • the company accepts there was effective informal service of the demand at the time the document actually came to the attention of a responsible officer of the company who was expressly or implicitly authorised by the company to deal with the document;
  • there was only effective informal service of the demand on 24 November 2022 when it was emailed to the company’s officers, including Mr Burgess.

The court rejected those arguments because:

  • while s 109X specifically provides for service of a document on a company by service upon its liquidator or administrator, it does not make any provision for service of the document at the offices of a company’s receivers and managers [42].
  • the prescribed mode of service found in s 109X(1)(a) was not displaced by the appointment of receivers to the company on 14 September 2022 [43].
  • the fact the company was subject to a receivership did not invalidate service of the statutory demand when it was left at the company’s registered office address on 23 November 2022 [43]
  • service by the defendant under s 109X(1)(a) was permissible and valid even if another mode of service was available [44].
  • as formal service was validly effected under that provision, the effective informal service rule has no application [45].

The court found that the statutory demand and accompanying affidavit were duly served by hand delivery to the company’s registered office address on 23 November 2022 at or around 9:53am [46]. The 21 day statutory period under s 459G expired on 14 December 2022.  The company’s s 459G application was commenced the following day, on 15 December 2022, which was outside the statutory period. The company’s application was incompetent and stands to be dismissed.

The Plaintiff relies upon the doctrine of fair notice [49]

The doctrine of fair notice was explained by Palmer J in Woodgate as follows:

[W]here a creditor serves a statutory demand in a prescribed mode and:
— knows, at the time of service or before the s 459G(3) period expires, that the demand has not actually come to the attention of the company;

— knows that the company would dispute the demand if made aware of it;

— refrains from bringing the demand to the actual notice of a responsible officer of the company within the s 459G(3) period; and

— relies on good service of the demand and the presumption of insolvency arising under s 459C(2)(a),
the court may, in its discretion and in the interests of justice, set aside the statutory demand under s 459J(1)(b), not for want of good service but for want of fair notice ... [48]

The argument is put in the alternative if the Court is against the plaintiff on the question of service of the statutory demand there should be an order that the demand be set aside for ‘some other reason’ under s 459J(1)(b) of the Act

The Court rejected the applicability of fair notice and s 459J(1)(b) because:

  • it had already found that the plaintiff’s s 459G proceeding was initiated after the expiration of the 21-day statutory period contemplated by s 9 of the Act. It is therefore out of time for the purpose of s 459G(3)(b) of the Act. As such it did not have jurisdiction to determine the proceeding to the extent it is made under s 459G.
  • none of the authorities relied upon by Palmer J in Mangraviti and Woodgate in support of the doctrine of fair notice stand as authority for the proposition that s 459J(1)(b) can be used to set aside a statutory demand where it is shown the demand has not come to the attention of the debtor company and a subsequent application is made to set aside the demand after the expiry of the 21-day statutory period [54].
  • the necessary preconditions identified by Palmer J in Woodgate have not been met in this case. The company did not put forward sufficient evidence that the defendant knew at the time of service or before the expiry of the 21-day period that the demand had not actually come to the attention of the company[55]. The evidence shows the demand was in fact brought to the attention of a responsible officer of the company the day after delivery to the registered office address.

The plaintiff  then submitted that the failure of the defendant to nominate in the demand an address for service within the jurisdiction in which it was served (in this case, Victoria), in compliance with s 459E(2) of the Act and Form 509H to the Corporations Regulations, was fatal and rendered the demand a nullity [59]. The Court cited Slap Corp Pty Ltd v Civil, Infrastructure & Logistics Pty Ltd (‘Slap’) which involved analagous facts. The court there noted that relevant demand was not compliant with the prescribed form and is therefore defective, but did not consider the demand to be null and void because:

(a) the existence of conflicting authority, including a decision of the Full Court of the Supreme Court of South Australia in Elan Copra Trading Pty Ltd v J K International Pty Ltd (‘Elan Copra’);[61]

(b) the risk of direct or indirect subversion of the legislative purpose of the statutory regime found in Div 3 of Pt 5.5 of the Act; and

(c) the availability of other avenues to ventilate the same arguments, including s 459S of the Act in the context of a winding up application.

The court found there were no exceptional circumstances to warrant a declaration that the statutory demand is a nullity as there is no evidence before the Court to suggest the defendant’s specification of an interstate address for service actually impacted upon the timing of the company’s application under s 459G as there is no evidence about how and when the company actually came to serve its s 459G application [65].

ISSUE

There is a common erroneous belief that once a receiver is appointed a director cannot bring an action on behalf of the company.  This decision set out the law in detail.  The court did not break new ground in finding that commencing proceedings outside of the 21 days of service made the proceedings incompetent.  What never ceases to surprise me is how applicants leave filing of applications to the last minute.  The consequences of late filing are so severe there is no good reason for doing so if it can be avoided.

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