Two companies which contended they were ‘unquestionably solvent’ were unsuccessful in an application to injunct a party from instituting proceedings to wind them up. This decision clarifies the extent to which the case law on abuse of process made prior to the enactment of Part 5.4 of the Corporations Act continues to apply.

Facts

A G Coombs Pty Ltd and A G Coombs (NSW) Pty Ltd (referred to collectively as ‘AG Coombs’) had worked with M&V Consultants Pty Ltd (In Liq) (M&V Consultants) on a number of major construction projects including Box Hill Hospital and the Barangaroo Towers in Sydney. M&V Consultants went into administration in April 2018 and its administrators then issued two statutory demands to AG Coombs.

Solicitors acting for the parties subsequently corresponded about the history of the dispute, including significant set off claims on the part of AG Coombs. Ultimately, the solicitors for AG Coombs filed an application to set aside the statutory demands; but then failed to serve the application on the defendant within 21 days of service of the demands as required by section 459G(3)(b) of the Corporations Act 2001 (Cth). Accordingly, the statutory presumption of insolvency pursuant to section 459C(2)(a) applied and the solicitors for M&V Consultants advised of its intention to apply to wind up AG Coombs.

AG Coombs immediately sought an injunction to prevent M&V Consultants from issuing a winding up application on the basis that maintaining the demands and threatening to apply to wind up AG Coombs was an abuse of the processes of the court: A G Coombs Pty Ltd v M & V Consultants Pty Ltd (in liq) [2018] VSC 468.

The bases on which abuse of process was alleged

AG Coombs argued that the defendant was abusing the processes of the court in the Williams v Spautz[1] sense. That is, that the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed.

Alternatively, they argued that the winding up applications would plainly fail because of the unquestionable solvency of AG Coombs and that the liquidators of M&V Consultants ought to investigate and resolve the claims between the parties in the ordinary way rather than exploiting the unfortunate failure of AG Coombs to serve in time. In this regard, they relied on Wimpole Properties Pty Ltd v Beloti Pty Ltd (No 3),[2] where Judd J stated that:

… there may be an abuse of the winding up process, although the facts may be insufficient to invoke inherent jurisdiction of the court to prevent an abuse of process of the kind under consideration in Williams v Spautz.[3]

AG Coombs also relied on what is referred to as the ‘second branch’ of Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation (Cth) (Fortuna Holdings),[4] to the effect that where a party is aware that the other party contends on credible evidence that they are solvent, it is an abuse of process to file winding up proceedings when it is plain that conventional litigation is the appropriate course.

In response, M&V Consultants submitted that the effect of the legislative policy behind Part 5.4 of the Corporations Act 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.

Decision

Justice Sloss determined that the regime established by Part 5.4 of the Corporations Act does not entirely preclude allegations of an abuse of process where the abuse is alleged to be the institution of proceedings for an improper purpose. However, she agreed with Farid Assaf’s statement 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’.[5]

Her Honour then addressed the subsisting uncertainty as to the extent to which the abuse of process principles decided under the previous winding up regime continue to apply since the enactment of Part 5.4; particularly in the context where a winding up application is brought based on non-compliance with a statutory demand. In her Honour’s view, 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.[6] In reaching this conclusion, Sloss J cited the decision of Barrett J in State Bank of New South Wales v Tela Pty Ltd (No 2),[7] in which His Honour said:

It is now abundantly clear that, unless the Div 3 [of Part 5.4] process is employed by the company concerned to ventilate in advance, by way of opposition to the statutory demand, any claim it has about the existence or amount of the debt or any off-setting claim, it is perfectly legitimate for the creditor to proceed with a winding up application even though such a dispute or off-setting claim may in fact exist.[8]

Practice Points

Absent evidence that the purpose of a proposed winding up application is to use the proceeding as a means of obtaining an advantage for which it is not designed, rather than prosecuting the proceeding to a conclusion, it will now be difficult to obtain an injunction preventing the application being made.

The courts have made it clear that where a solvent corporation fails to comply with a statutory demand, it will have to prove its solvency in the context of the winding up application. This is the case, regardless of the impact the winding up application may have on the corporation.