Citizens Investments Pty Ltd v Murphy [1994] QSC 241

IN THE SUPREME COURT OF QUEENSLAND BETWEEN: AND: CITIZENS INVESTMENTS PTY LTD Plaintiff ROBERT EUGENE MURPHY Defendant IN THE SUPREME COURT OF QUEENSLAND No. 1304 of 1994 Apn 567 of 1994 IN THE MATTER of the Corporations Law IN THE MATTER of INVESTMENTS PTY LTD JUDGMENT - WILLIAMS J Judgment delivered 12/09/1994 CITIZENS CATCHWORDS: COMPANIES - applications to set aside statutory demand - extension of time - Corporations Law and inherent jurisdiction - offsetting based on purported assignment after knowledge of insolvency - held no genuine claim to offset. Counsel: N Thompson for applicant S Eleftheriou for respondent Solicitors: Clinton Smith & Associates for applicant Bickfords for respondent Hearing Date: 6 September 1994 -- 1 of 9 -- IN THE SUPREME COURT OF QUEENSLAND No. 1304 of 1994 BETWEEN: CITIZENS INVESTMENTS PTY LTD Plaintiff IN THE SUPREME COURT OF QUEENSLAND AND: ROBERT EUGENE MURPHY Defendant Apn 567 of 1994 IN THE MATTER of the Corporations Law IN THE MATTER of INVESTMENTS PTY LTD JUDGMENT - WILLIAMS J CITIZENS Judgment delivered 12/09/1994 At all material times Citizens Investments Pty Ltd (hereinafter referred to as "the company") and Roger Meadmore's Pancakes In Paradise Pty Ltd (hereinafter referred to as "Pancakes") were associated companies, and each was under the effective control of R D Meadmore. At the instigation of Meadmore, Pancakes was placed in provisional liquidation on 30 April 1992, and ordered to be wound up by this Court on 31 May 1993. RE Murphy was initially appointed provisional liquidator, and on the winding up order being made was appointed liquidator. -- 2 of 9 -- 2 In his capacity as liquidator of Pancakes, Murphy caused Statutory Demands pursuant to s. 459E of The Corporations Law to be served on the company. The first was dated 1 July 1994 and related to an amount of $6,014.67 said to be owing by the company to Pancakes pursuant to an agreement for repayment of meals provided, stock taken and invoiced, rent and Telecorn account. The various items comprised in that total were referred to in a supporting affidavit by Murphy. The second Statutory Demand is dated 15 July 1994 and relates to an amount of $73,492.75 said to be moneys due and owing pursuant to a loan agreement between the company and Pancakes. In the supporting affidavit, Murphy refers to the i tern in the Balance Sheet of Pancakes evidencing such indebtedness. It is not absolutely clear when each of those Statutory Demands was served, but Meadrnore acknowledges that each was in h~s possession by 19 July 1994 at the latest. On 24 August 1994 the company caused an application to be filed seeking an order that each of the Statutory Demands be set aside. Clearly that application was based on s. 459G and the following sections of The Corporations Law. Then on 25 August 1994 the company commenced an action against Murphy in which an injunction was sought seeking to restrain the presentation of an application for winding up based on either of the Statutory Demands. A notice of motion was taken out seeking relief in that form. In the action the company was relying on the inherent jurisdiction of this Court. Both the notice of motion and the application came before me and were heard together. -- 3 of 9 -- 3 It is immediately obvious that the application was not brought within the twenty-one day period referred to in s. 459G(2). In consequence the company sought an extension of the time (I regard the use of the word 11 abridged 11 in the application as an error and accept that the word "extended" was intended to be used). The Court of Appeal, by a majority, in Cavetina Pty Ltd v. Synthetic Dyeworks Industries Pty Ltd (unreported, CA No. 250 and 251 of 1993, judgment delivered 22 August 1994) held that the time within which an application may be made pursuant to s. 459G to set aside a Statutory Demand can be extended. That decision is binding on me, and notwithstanding the submissions made in the course of the hearing I must hold that I have jurisdiction to extend the time. If I was otherwise prepared to set aside the Statutory Demands then on the material I would exercise my discretion in favour of the company and extend the time to the necessary extent. Without derogating from the validity of the claim for $6,014.67, the liquidator decided to rely at the hearing only on the Statutory Demand for $73,492.75. In consequence it is only necessary for me to deal with the arguments relating to that amount. In the Balance Sheet of Pancakes from at least the year 1989, under the heading "Current Assets", there was an i tern "Citizens Investments Pty Ltd" in an amount varying around $80,000.00. In the Balance Sheet for the period ended 31 March 1992, the precise amount shown was $73,492.75, and that is the Balance Sheet on which the liquidator relied to support the -- 4 of 9 -- 4 Statutory Demand. Exhibit 1, the Balance Sheet of the company for the year ended 30 June 1993, indicates that the Balance Sheet for the 1992 year showed that the company was indebted to Pancakes in the sum of $74,367.03. In the course of evidence whilst in the witness box, Meadmore conceded that he could not dispute that prior to an assignment transaction to which I will refer later, the company was indebted to Pancakes in the sum of $73,492.75 or thereabouts. The main thrust of the evidence given by Meadmore, and of the submissions made on the company's behalf, were that one could not have any confidence in the accuracy of the accounts on which the demand was based. Though there was a loan which at one time resulted in the company being indebted to Pancakes in the sum of about $74,000.00, it was said that there were other amounts which ought to have been offset against that over the years. Meadmore asserted that the failure to make those necessary offsets in the accounts was due to mistakes on the part of accountants who had attended to the affairs of each company over the years. Until about 1991 Touche Ross had been the accountants, and since then Snelleman Tom had filled that role. After considering all the evidence, I am satisfied that the real cause of any accounting deficiency was the failure on the part of Meadmore, as the governing director of each company, to ensure that proper records were kept. Meadmore asserts that upon a full review of the accounting records of each company, it would found that Pancakes was indebted to the company because certain QIDC funds (strictly advanced to the company) were applied, either directly or -- 5 of 9 -- 5 indirectly, in discharge of liabilities of Pancakes. It is difficult to come to any definite conclusion in that regard, particularly when it is noted that the accounts of the company appear to deal fully with the QIDC loan, and there is no reference in the accounts of Pancakes to any moneys received from that source. Further, Meadmore alleges that there was an advertising agreement between the two companies whereby Pancakes became indebted to the company for advertising of Pancakes through activities of the company. He was not able to point to any writing evidencing such an agreement, and there was nothing in the accounts of either company to suggest that any payment had ever been either claimed or made for such advertising. In the circumstances, the submission on behalf of the company was not that there was a "genuine dispute" as to the debt to which the demand relates within s. 459H, but rather that, within that section, the company had "an offsetting claim". Subsection (5) makes it clear that an offsetting claim must be "a genuine claim that the company has against", in this case, Pancakes. In the light of all of the material I am not satisfied that the company has such an offsetting claim based on an alleged advertising agreement between the companies or the QIDC advance. The more significant "offsetting claim" was based on an alleged assignment on or about 14 April 1993 by Meadmore to the company of the amount of $125, 283.85 owing by Pancakes to Meadmore personally. Undoubtedly in consequence of that purported assignment the Balance Sheet of the company for the year ended 30 June 1993 no longer showed as a liability the loan -- 6 of 9 -- 6 from Pancakes in the sum of $74,367.03, but instead showed as a current asset a loan to Pancakes in the sum of $53,769.61. The liquidator of Pancakes had no knowledge of that assignment notwithstanding that he had been appointed some 12 months prior to its perfection. He only found out about it after demand had been made for payment of the company's liability to Pancakes as disclosed in the latter's books of account. Gregory Tom, a chartered accountant and member of the firm Snelleman Tom, in an affidavit deposed to the fact that in early 1991 Meadmore expressed some concern as to the loan accounts involving himself and each of the companies. Tom says that there was discussion as to ways the accounts could be "regularised" to set off the various loan accounts, but he also said that nothing was finally decided because at the time there was a want of understanding of "what transactions made up the respective balances". He placed a note referring to discussions he had with Meadmore on file, and said that such note "reflects a discussion of the existing state of the accounts rather than an acknowledgment of their accuracy". That note is undated. It commences with a notation that both the company and Pancakes were "technically insolvent". It records matters such as the consequences of the appointment of a receiver. There is also the notation: "Tidy up loan accounts in each company". It would seem that nothing was done to achieve that until the assignment in April 1993. The note in question to which I have just referred must have been made prior to 30 April 1992 when the provisional liquidator was appointed. As already noted it recorded the fact that both -- 7 of 9 -- 7 companies were "technically insolvent". I am satisfied on the whole of the evidence that since at least about the time Pancakes went into provisional liquidation, the company has also been insolvent. The accounts of the company as at 30 June 1993 show that it had accumulated losses of in excess of $2,000,000.00. In the year ended 30 June 1993 it traded at a loss of $6,535.00. Further, those accounts show an excess of liabilities over assets of $19,383.00. Since then substantial assets recorded in those accounts have been sold at a loss. Meadmore gave evidence that a house property had been sold at a substantial loss, and that aircraft and balloons referred to in the Balance Sheet as at 30 June 1993 had also been sold. His oral evidence was that at the present time the total assets of the company were valued at approximately $240,000.00. He listed those assets as artworks valued at $100,000.00, a van valued at $12,000.00, money owing on the sale of the Gatton property $35,000.00, goodwill $50,000.00, and cash receivable $43,000.00. Against that he asserted that there were liabilities amounting to some $89,000.00. He asserted, but was unable to produce any hard evidence to substantiate this, that the company had grossed $200,000.00 in trading to the year ended 30 June 1994, and would make a net profit of the order of $35,000.00. In the course of giving evidence, Murphy, an accountant with considerable liquidation experience, expressed the opinion based on the Balance Sheet as at 30 June 1993 that the company was insolvent. In all of the circumstances I accept that at all material times since at least early 1992 the company has been insolvent. -- 8 of 9 -- 8 I am also satisfied that Meadmore, as the principal director of the company, had full knowledge of that fact. That means that when the purported assignment was made both the assignor and the assignee were aware that the assignee was insolvent. Bearing in mind the provisions of s. 553C of The Corporations Law, and the reasoning in Law v. James ( 1972) N.S.W.L.R. 573, I am of the view that neither the company nor Meadmore can rely on the assignment in order to defeat the claim of the liquidator of Pancakes. Counsel for the company sought to rely on the reasoning in Re Moseley Green Coal Co. Ltd; ex parte Barrett (1865) 12 L.T. 193, but in my opinion that is distinguishable. That was a case where the assignment made after the bankruptcy was pursuant to an arrangement for that purpose made before the bankruptcy giving rise to rights in equity. That is not the case here; on my findings there was no agreement prior to the date on which the Deed of Assignment was executed. It therefore follows that the company has not established an "offsetting claim" consequent upon the purported assignment in April 1993. It follows that the company has no basis for setting aside the Statutory Demand in question either under the provisions of The Corporations Law or as a result of the exercise of the inherent power of this Court. It follows that both the notice of motion and the application must be dismissed with costs. -- 9 of 9 --