Wang v ABC Homes (NSW) Pty Ltd

1. [1]

   In these proceedings the plaintiff, Hai Ling Wang, applies to have the defendant, ABC Homes (NSW) Pty Ltd (“ABC”) wound up in insolvency. The application is based on failure to comply with a statutory demand under Part 5.2 of the Corporations Act 2001 (Cth).

2. [2]

   ABC has filed grounds of objection, asserting that the debt the subject of the statutory demand is the subject of genuine dispute. In order to raise these grounds, the defendant needs leave under s 459S of the Act. This judgment concerns ABC’s application for the necessary leave.

3. [3]

   ABC carries on business as a builder. The statutory demand which is the subject of this application arises out of a building job undertaken by ABC for Ms Wang on a residential property she owns in Chatswood. Ms Wang now lives at the property with her de facto partner, Nyuk Win (known as “Laurence”) Hiew.

4. [4]

   The sole director and secretary of ABC is Marco Fathabadi. He is a licensed builder. In January 2017 Ms Wang, as owner, entered into a contract with ABC, as builder, for construction and renovation works on the property. Ms Wang paid a ten per cent deposit in mid-January and a further ten per cent progress payment in mid-February. Work began at about the time of the second payment. Ms Wang obtained finance for the remainder of the building cost from the National Australia Bank (“NAB”).

5. [5]

   In mid-March, ABC submitted the next progress claim, which was for $229,625. This claim remained outstanding for more than three months. By late June, Mr Fathabadi needed funds to continue the work. On 26 June, at Mr Fathabadi’s request, Ms Wang advanced ABC $140,000. On 21 July she made a further advance of $50,000. At the end of July, the NAB approved $194,465 of the claim and paid it to ABC.

6. [6]

   At this point, ABC had received a net advance of $154,840 ($190,000 paid in June and July less the shortfall between the progress claim and the amount paid by NAB of $35,160). The work continued and, in October, ABC issued a further payment claim for $137,775 which was approved by the NAB.

7. [7]

   Further trouble then arose. On 11 December ABC issued a fifth payment claim in the sum of $183,700. On 19 December, NAB declined payment of this claim, on the basis that the works were incomplete.

8. [8]

   By late February 2018, the works were still incomplete and the parties fell into dispute concerning the subcontractors and their payment. A notice was served on behalf of ABC purporting to suspend the works because Ms Wang was allegedly dealing directly with subcontractors without ABC’s consent. On 9 April solicitors for Ms Wang wrote to ABC purporting to terminate the building contract.

9. [9]

   Meanwhile, on 5 April Ms Wang’s solicitors served the statutory demand upon which these proceedings are based. The demand was for $154,840 (apparently a transposition error for $154,480, the net amount advanced following the payment by NAB in late July 2017: see above). The description of the debt was:

10. [10]

    Ms Wang’s affidavit in support stated:

11. [11]

    The statutory demand was sent by Ms Wang’s solicitors both by email and registered post. It was apparently received by email by Mr Fathabadi on 5 April. Thus the twenty-one day period specified in the statutory demand expired on 26 April.

12. [12]

    On 26 April, the last day of the twenty-one day period, Mr Fathabadi filed an application in this Court to have the statutory demand set aside. The application itself was completed in handwriting by Mr Fathabadi on a Court form. Under “Details of Application” Mr Fathabadi wrote (quoted verbatim):

13. [13]

    Mr Fathabadi attached a typewritten affidavit which stated (again, quoted verbatim):

14. [14]

    It is clear from the form of these documents that they were prepared by Mr Fathabadi without legal assistance. Although the application was filed in time, Mr Fathabadi did not take steps to serve it until later. As a result, the application did not comply with the requirements of s 459G(2) and it was subsequently dismissed for this reason.

15. [15]

    On 3 May the Originating Process was filed in these proceedings, based on the failure to comply with the statutory demand. On the same day, proceedings were commenced on Ms Wang’s behalf against ABC in the District Court pursuant to the building contract. The Statement of Claim alleged numerous breaches of the contract, involving both incomplete and defective works. Although the claim would seem to be one for unliquidated damages, the specific sum of $434,020 was claimed.

16. [16]

    The sum claimed was particularised in the Statement of Claim by reference to a building defects report obtained by Ms Wang’s solicitors in late April 2018. According to the report, the cost to repair the defects and complete the works was $646,580, against which was credited the sum of $212,560, representing the difference between the contract price of $918,500 and the amount that the author of the report was instructed had been paid to the builder of $705,940. That figure included the $154,840 advance to which I have referred. Thus, in effect, that sum was being allowed as a credit against ABC’s alleged liabilities in the District Court proceedings.

17. [17]

    ABC has filed a defence to the District Court claim, which is proceeding towards hearing.

18. [18]

    Mr Fathabadi has filed two affidavits in these proceedings. For the purposes of the leave application, he gave some short supplementary evidence and was cross-examined. For the plaintiff, a number of affidavits of Ms Wang and Mr Hiew were read on the leave application, together with a formal affidavit from Ms Wang’s solicitor. These affidavits were read so as to show the nature of the evidentiary contest between the parties, and on the understanding that the Court would not resolve the underlying dispute on this hearing. On this basis, there was no cross-examination on any of the plaintiff’s affidavits.

19. [19]

    Mr Fathabadi’s cross-examination covered two main areas. The first was the circumstances in which the abortive application to set aside the statutory demand was made. The second was ABC’s financial position.

20. [20]

    In Mr Fathabadi’s affidavit, which was sworn in early July, he referred to the set-aside proceedings and said:

21. [21]

    In his oral evidence, Mr Fathabadi added various details to this account. He said that in the period leading up to 26 April his wife had been sick. He acknowledged that he was aware of the requirement that the application had to be served as well as filed within the twenty-one day period. He said that he thought that the Court would do this. He also said that after filing the application on 26 April he checked the internet and only later became aware of the requirement for service within twenty-one days.

22. [22]

    Counsel for Ms Wang criticised Mr Fathabadi’s evidence on this point. Counsel put to Mr Fathabadi in cross-examination that his oral evidence was inconsistent with his affidavit and he was making his evidence up.

23. [23]

    There is force in these criticisms. Counsel for ABC suggested that Mr Fathabadi’s oral evidence had merely “rounded out” his affidavit evidence, but if it was a “rounding out”, it was a very convoluted one. Mr Fathabadi did not really address the differences between his affidavit and his oral evidence satisfactorily, although counsel for Ms Wang in cross-examination gave him a fair opportunity to do so.

24. [24]

    Overall, I do not find Mr Fathabadi’s evidence on this question very persuasive. But it is clear that, on behalf of ABC, he was trying, however ineptly, to challenge the statutory demand. The filing fee paid when the application was lodged was over $3,000. Mr Fathabadi cannot have intended that such a payment would be futile. I think that if he had truly appreciated that service was required by 26 April he would have attempted to effect service. Mr Fathabadi presented as lacking sophistication and, perhaps, as also lacking a high level of proficiency in English; and the application and supporting affidavit he filed in the abortive set-aside application confirm that impression. I suspect that Mr Fathabadi made the application in a rush, and that despite an apparent concession in cross-examination, was unaware of, or did not turn his mind to, the service requirements until it was too late. I am satisfied that, on ABC’s behalf, he wished to challenge the statutory demand on the ground that the amount claimed was to be credited against the amount due to ABC under the building contract, and that there was no separate debt agreement with respect to that amount. I am also satisfied that it was through inadvertence or lack of understanding that the application was not served in time.

25. [25]

    Mr Fathabadi’s affidavit of early July also referred to ABC’s financial position. Annexed to the affidavit was a financial report described as a “detailed balance sheet” for ABC as at 31 May 2018. The balance sheet was in the usual form one sees produced from accounting software, but in the affidavit Mr Fathabadi said that he had prepared it himself. It showed current assets of $264,000 (all figures are rounded to the nearest thousand dollars) made up of cash on hand and at bank of $104,000 and trade debtors of $160,000. Against that were current liabilities totalling $93,000 consisting of debts to suppliers and contractors of $70,000, a credit card liability of $15,000 and current tax liabilities of $8,000. Non-current assets were made up of plant and equipment, office equipment and motor vehicles. The initial cost of the equipment was shown as $20,000 but this had been fully depreciated. The initial cost of the motor vehicles was shown as $46,000 with accumulated depreciation of $21,000, resulting in non-current assets of $25,000. Non-current liabilities were a bank loan of $19,000 and a loan from Mr Fathabadi of $50,000. The result was net assets of $127,000.

26. [26]

    Counsel for Ms Wang objected to this evidence. In my view, as a matter of substance the evidence was no different in principle from Mr Fathabadi saying, from his personal knowledge of ABC’s affairs, how much money the company had in the bank, how much its trade creditors were and so forth. In my view, evidence of that character coming from the sole director of a small company such as ABC is admissible, although it is not the best evidence and the Court may ultimately decline to act on it at a subsequent hearing as to ABC’s solvency. I therefore overruled the objection. Below I consider further the nature of the factual inquiry undertaken by the court in an application for leave under s 459S. The conclusions I reach there further support the admissibility, at this point, of the evidence in question.

27. [27]

    As it happened, in cross-examination Mr Fathabadi stated that the balance sheet had in fact been prepared by ABC’s accountant at his request. He also gave some further evidence about changes in ABC’s financial position since 31 May. He said that as a result of the commencement of the winding up proceedings, he had lost his home warranty insurance and could no longer deal with contractors. He said that the amount due to contractors shown as at 31 May ($42,000) had been paid out and he was now doing the work himself. He said that net assets of the company had reduced to approximately $100,000 from the figure of $120,000 as at 31 May.

Requirement of materiality

1. [28]

   Section 459S provides:

2. [29]

   Because of s 459S(2), ABC cannot obtain leave to raise the objection that there is a genuine dispute about the debt claimed in the statutory demand unless that ground is “material to proving” it is solvent. Counsel for Ms Wang argued that the evidence was insufficient to permit the Court to determine what ABC’s current financial position was. In those circumstances, counsel argued the Court could not be satisfied that any dispute about the debt claimed in the statutory demand was material.

3. [30]

   I was referred to a number of authorities concerning the test of materiality under s 459S. Counsel for both parties proceeded on the basis that the authorities had identified two views, referred to as the “narrow view” and the “broad view”, of the materiality requirement.

4. [31]

   The narrow view derives from the decision of Perram J in Grant Thornton Services (NSW) Pty Ltd v St George Wholesale Distributors Pty Ltd (2008) 26 ACLC 1,462; [2008] FCA 1777, referred to below. In turn, Perram J relied on the decision of the Court of Appeal in Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661; [2000] NSWCA 37. In that case, the defendant company applied under s 459S to contend that the debt the subject of the statutory demand was genuinely in dispute. The application was refused by Austin J. Subsequently, Hodgson CJ in Eq made orders extending the time within which the application was to be determined, but on certain conditions. The plaintiff sought leave to appeal to challenge Hodgson CJ in Eq’s decision. The defendant made a cross-application to appeal from the decision of Austin J.

5. [32]

   In evidence before Austin J, the defendant company relied on an expert report which stated that, on the balance of net current assets against net current liabilities, the company had a surplus of $2.6 million. This exceeded the $1.3 million the subject of the statutory demand. Austin J concluded that the company would be solvent whether or not the debt was taken into account and refused the application under s 459S on this basis. In the Court of Appeal, the defendant pointed to subsequent affidavits put forward on behalf of the plaintiff which disputed the defendant’s expert’s calculations and resulted in a net current asset figure that was considerably lower. On the plaintiff’s expert’s analysis, the $1.3 million debt in the statutory demand would have made the difference between solvency and insolvency.

6. [33]

   After referring to the purpose of the 1992 reforms which introduced the current version of the statutory demand procedure, Spigelman CJ, who gave the leading judgment in the Court of Appeal said (at [52]-[56]):

7. [34]

   In Grant Thornton Perram J said (at [19]) that the authorities, and in particular Switz, showed that:

8. [35]

   In Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) (2011) 29 ACLC 11-006; [2011] NSWSC 113, White J (as his Honour then was) considered the question in some detail. His Honour said (at [35]):

9. [36]

   His Honour emphasised that in Switz the defendant’s case was that it was solvent whether the debt the subject of the statutory demand was payable or not. His Honour said that the decision had to be understood in that context. His Honour acknowledged that the background to the 1992 reforms showed that s 459S(2) should be construed strictly so as to minimise the opportunity for delay by ensuring that disputes about debts do not prolong the hearing of the issue of solvency. His Honour said (at [42]):

10. [37]

    His Honour (at [43]) repeated, and adhered to, what he had said in his earlier decision in Radiancy (Sales) Pty Limited v Bimat Pty Limited [2007] NSWSC 962 at [64]:

11. [38]

    In Soundwave Festival Pty Ltd v Altered State (WA) Pty Ltd (No 1) [2014] FCA 466, Wigney J referred to the difference between the narrow view and the broad view. His Honour said he did not need to decide the question in that case, although he “would incline to” the broader view. He said (at [40]-[41]):

12. [39]

    The difference between the broad and narrow view was also referred to by Black J in Re Vangory Holdings Pty Ltd [2015] NSWSC 546 and Re Yuan Tong Investments Pty Ltd [2017] NSWSC 910 but his Honour did not find it necessary to decide which view is preferable. I refer further to those decisions below. On the other hand, Griffiths J in the Federal Court recently stated that he should follow the narrow view expressed by Perram J in Grant Thornton on the basis that it was not clearly wrong: Tony Innaimo Transport Pty Ltd v Skyroad Logistics Pty Ltd [2018] FCA 1134 at [7].

13. [40]

    So far as authority in this Court is concerned, the decision of White J in Ewen Stewart was a considered one which analysed the narrow view and rejected it. His Honour expressly addressed the decision in Switz but concluded that it was consistent with the view which he expressed. I would, as a matter of comity, prefer White J’s interpretation of Switz to that of Perram J unless there is a compelling reason to depart from his Honour’s views.

14. [41]

    I see no compelling reason to depart from White J’s view in Ewen Stewart. On the contrary, I think, with respect, that there is much to be said for it. An application under s 459S is an interlocutory application in the main winding up proceeding. It may be, and often is, heard separately and in advance of the hearing on the winding up application itself. Although there is a six month limit (which can be extended) on the hearing of the winding up application, and winding up applications are usually dealt with well within that period, an application under s 459S could be heard weeks, or even months, before the winding up application itself. At the winding up application extensive evidence may be given as to solvency and there may even be expert evidence (as in Switz). The s 459S application may thus be heard at a time when the evidence is not complete and the nature of the forensic contest concerning insolvency is not fully defined.

15. [42]

    In my view, the phrase “material to proving” must be construed in that context. The “proving” of which s 459S speaks is a forensic process which will not culminate until the winding up application is itself heard. In my view, this strongly supports the test of materiality stated by White J.

16. [43]

    In Soundwave Wigney J observed that the term “material” was a synonym for “relevant”. In the Evidence Act 1995 (NSW), relevance is defined (s 55) in terms of what “could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue”, not material which, if accepted, would rationally affect that assessment. That too supports White J’s test of materiality.

17. [44]

    In Geoffrey W Hill & Associates v King (1992) 27 NSWLR 228, McLelland J was dealing with a contest about the admissibility of evidence in an application for an interlocutory injunction. He said (at 229-230):

18. [45]

    Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; [2004] NSWSC 527 involved, among other things, an application to set aside a statutory demand on the grounds that there was a genuine dispute about the debt claimed. White J referred to part of the passage from Geoffrey W Hill & Associates quoted above. He continued (at [22]):

19. [46]

    This statement was approved by the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [38].

20. [47]

    In my view, similar considerations apply in the present case. In an application under s 459S, the Court’s focus is different from the focus on the hearing of the winding up application itself. On an application under s 459S, the Court is not determining any facts concerning solvency. What the Court is doing is determining whether a contention is “material to proving” solvency and that brings into play the type of distinction which McLelland J and White J were drawing.

21. [48]

    The subsequent decisions by Black J to which I have referred above are not inconsistent with this analysis. In Vangory, the critical issue for insolvency was going to be whether the defendant company could rely upon support from its shareholders as a means of demonstrating its solvency. The shareholders had sufficient assets to meet the claim which was the subject of the statutory demand as well as the company’s other liabilities. In those circumstances, a dispute about the debt could not be relevant. In Yuan Tong Investments, the evidence on insolvency at the s 459S stage was so uninformative that it was impossible to make any judgment about the materiality of the dispute concerning the debt the subject of the statutory demand.

22. [49]

    In the present case, in written submissions prior to the hearing counsel for Ms Wang argued that on ABC’s case, it was solvent even allowing for payment of the debt the subject of the statutory demand. While the 31 May balance sheet did show an excess of current assets over current liabilities of $167,000, which is slightly more than the $155,000 claimed in the statutory demand, it would leave a buffer of less than 5 per cent of current assets. In any event, Mr Fathabadi’s evidence suggests that the net asset figure has now narrowed by $20,000 which would mean that, taking the debt in the statutory demand into account, ABC would be insolvent on a balance of assets against liabilities.

23. [50]

    The evidence of Mr Fathabadi and the May balance sheet are far from the best evidence which could have been presented concerning ABC’s financial position. If nothing is done to shore that evidence up at the hearing, the Court may not be prepared to receive it. But I think it is sufficient to show that the financial affairs of ABC are such that unless the debt the subject of the statutory demand can be excluded from consideration at the solvency hearing, it is at least doubtful whether ABC would be able to establish its solvency. For these reasons, I consider that the materiality requirement in s 459S(2) is satisfied.

Discretion

1. [51]

   It has been stated many times that the discretion under s 459S should be sparingly exercised and that the defendant/applicant seeking the exercise of the court’s discretion in its favour must show that there is a prima facie case that the debt is disputed and an adequate explanation for failing to apply to have the debt set aside. Counsel for both parties were content to argue the question of discretion on this basis.

2. [52]

   The evidence shows that the debt the subject of the statutory demand has been allowed as a credit against a contested claim in the District Court. On the evidence, no application has been made to the District Court to strike out ABC’s defence. In fact, the amount is not even pleaded in the District Court Statement of Claim as a separate debt, which is the way it is asserted in the statutory demand. I do not have to consider at this stage whether there is in fact a genuine dispute about the debt; all I need to decide is whether there is a sufficient prima facie case that such a dispute exists. I have no doubt on the evidence that such a prima facie case exists.

3. [53]

   The authorities suggest that merely to ignore or overlook a statutory demand could rarely, if ever, amount to a sufficient explanation of failure to challenge it. In this case, the evidence shows that Mr Fathabadi, on behalf of ABC, did in fact make an application. The problem was that the application was fatally flawed by the failure to serve it in time. As I have said, I am satisfied that this was a mistake and resulted from Mr Fathabadi’s lack of understanding of the requirements for making a set-aside application and, perhaps, a more general lack of familiarity with legal procedures as they apply to companies. None of this was the fault of Ms Wang and her legal advisers, but it must have been obvious to them within a matter of days of the expiry of the twenty-one day period that Mr Fathabadi, on behalf of ABC, wished to dispute the debt the subject of the statutory demand. Ms Wang suffered no prejudice in the meantime. In my view there is a sufficient reason to exercise the discretion in ABC’s favour so as to allow it to raise a dispute about the debt in answer to the winding up application.

Conclusions and orders

1. [54]

   For these reasons, ABC’s application under s 459S succeeds. I will hear the parties on consequential directions for the further conduct of the winding up proceedings and on costs, if that is necessary.

2. [55]

   The orders of the Court are: