19
Jun 2017

Resisting a winding up application by a substituted creditor

In the recent decision of 640 The Esplanade Pty Ltd v Splash Bay Pty Ltd (No 2) [2017] FCA 89 the Federal Court of Australia discussed the limits to the bases upon which a debtor company could oppose a winding up application by a substituted creditor.   

Facts

Splash Bay Pty Ltd (No 2) (the Company) was served with a creditor’s statutory demand by a creditor, Mr Rosch (the Rosch Demand). Before the time to comply with the Rosch Demand expired, the Company was served with another creditor’s statutory demand by 640 The Esplanade Pty Ltd (the 640 Demand).

The Company failed to pay or compound either debt, or seek to set aside the respective demands, within the required 21 day period following service. The Rosch Demand expired, following which Mr Rosch applied to the Federal Court to wind up the Company relying on the presumption of insolvency for failure to comply with a statutory demand.

The Company and Mr Rosch agreed to a settlement however, before the proceedings were dismissed, 640 The Esplanade Pty Ltd (640) was granted leave to be substituted as the petitioning creditor.

The Company then sought to rely on section 459S of the Corporations Act 2001 (Cth) (the Act)  in opposing the application citing the following grounds:

  1. 640 was not owed a debt, or there was a genuine dispute as to the existence of the debt.
  1. The winding up proceedings were an abuse of process as 640 was attempting to use the winding up process to avoid a trial of the merits of the disputed debt.
  1. The debt claimed by 640 was trust property and 640 was not the trustee at the relevant times (having ceased as trustee following the expiration of both demands).
  1. The court should exercise its discretion to dismiss the application.

Section 459S Corporations Act

Section 459S provides that a company may not, without leave, oppose a winding up application on grounds it could have relied to set aside a statutory demand, unless the Court is satisfied the ground is material to proving the company was solvent.

Decision

Firstly, the Court outlined that it was not open to a company to question the standing of a substituted creditor which had itself issued a creditors statutory demand, in circumstances where the company failed to satisfy or set aside that demand with the 21 day timeframe allowed. As a consequence of its substitution, 640 was therefore placed into the position of  Mr Rosch, who had issued the original demand.

Secondly, the Company’s opposition to the application to wind it up remained subject to section 459S. As a substituted creditor stands in the shoes of the original creditor, the reference to the demand in 459S is to be read as a reference to the original statutory demand, the Company’s non-compliance with which forms the basis of the proceedings, and not the additional demand (or demands) issued by the substituted creditor.   As no application to set aside the original demand was ever made, the only grounds that could be raised in the circumstances were grounds that went to the solvency of the Company.

Ultimately, the Court found that in the absence of evidence of the solvency of the Company, no grounds were available to warrant the exercise of its discretion to dismiss the winding up application. As such it ordered that the Company be wound up in insolvency and liquidators appointed.

Take home point

A company will be prevented from opposing a winding up application on grounds that were or could have been raised prior to the expiration of a creditors statutory demand. The Court will only grant leave to rely on those grounds if they go towards proving the company was solvent.

The case is a timely reminder as to the consequences of ignoring statutory demands. The policy of the statutory demand regime is to deal with the existence and quantum of debts quickly and at an early stage.

For more information, contact ERA Legal.