Injuncting A Wind Up Application – Abuse Of Process?

By Jack Golding, Lawyer and Alicia Hill, Principal, MST Lawyers

Non-compliance with a statutory demand is the most common way to prove insolvency.

If a company which is the recipient of a statutory demand and wishes to resist that demand, there are grounds upon which the company may apply to the court to do so. However, any application must be made within 21 days of service of the demand on the company. This is a definite time limit, and it cannot be extended.

The recent decision of the Supreme Court of Victoria in A G Coombs Pty Ltd v M & V Consultants Pty Ltd (in liq) [2018] VSC 468 illustrates the issues faced by the recipient of a statutory demand who disputed the debt on which the demand was based. While it was argued that they were unquestionably solvent, the recipient failed to make an application to have the statutory demand set aside within the 21-day time limit. 

The Statutory Demands

On 3 May 2018, the liquidator for M & V Consultants served two statutory demands on A G Coombs for unpaid works previously undertaken by M & V Consultants.

Upon being served with the demands, A G Coombs had 21 days to file and serve applications to have the statutory demands set aside under section 459G of the Corporations Act 2001 (Cth) (Act).

A G Coombs filed applications to set aside the statutory demands on 30 May 2018 but due to an oversight by their lawyer, failed to serve those demands on the liquidator until 5 June 2018. This meant that the applications were not made within the 21 days prescribed by section 459G of the Act.

As a result, A G Coombs was taken to have failed to comply with the statutory demands and was presumed insolvent by virtue of section 459C of the Act. Section 459P of the Act then enabled the liquidator to use that presumed insolvency as the basis for making an application to wind up  A G Coombs.

On 12 June 2018, the lawyer for A G Coombs wrote to the liquidator’s lawyer seeking confirmation of the liquidator’s intentions concerning the statutory demands.

The liquidator’s lawyer responded the next day stating that they anticipated receiving instructions to commence winding up proceedings against A G Coombs immediately.

Application For Injunction To Prevent Winding Up

On 15 June 2018, A G Coombs filed an application seeking an injunction to restrain the liquidator from making applications to wind up the company under section 459P of the Act.

A G Coombs alleged that it was an abuse of process for the liquidator to initiate the threatened winding up proceedings in circumstances where the company was unquestionably solvent, and the winding up proceedings would plainly fail.

A G Coombs also claimed that the filing and advertising of the threatened winding up applications would cause irreparable damage to the company.

Abuse Of Process

Justice Sloss of the Supreme Court found that A G Coombs had failed to make out the prima facie case of abuse of process needed to sustain an injunction. This was because the evidence adduced by A G Coombs failed to demonstrate that the liquidator had an improper or ulterior purpose in making the applications to wind up the company.

In reaching that conclusion, Justice Sloss noted that the foreshadowed winding up applications would be made against the background of the statutory demands having been served and in circumstances where A G Coombs had failed to comply with the demands and was presumed insolvent.

Justice Sloss considered that the issue of whether A G Coombs was, in fact, insolvent should be determined in the course of the winding up applications. It was contrary to public policy to deviate from the statutory process to enable satellite litigation simply for the reason that A G Coombs might well be solvent.

As such, the Court refused to grant the injunctions.

A G Coombs would have to run a defence of solvency in any application brought to wind up the company or reach an agreement with the liquidators on the debts alleged to be owed to avoid adverse publicity and possible wind up.

Consequences

The decision highlights the need for the recipient of a statutory demand who wishes to challenge that demand to file and serve an application to set aside the demand within 21 days of being served.

To establish an abuse of process to sustain an injunction against issuers of statutory demands a Court needs to be convinced that there is an improper or ulterior purpose which will be dependent upon the facts of each case.

In respect of statutory demands parties issuing or defending such claims need to work within the codified approach contained in the Act and should ensure that they are familiar with all the time frames and requirements when doing so or seek assistance from those who are if required.

If you have any questions about this article or the issues raised in it, please feel free to contact Jack Golding or Alicia Hill of MST’s Dispute Resolution and Litigation team by email or phone +61 8540 0200.