Re Occidental Life Insurance Company of Australia Limited v Life Style Planners Pty Limited [1992] FCA 549; (1992) 9 ACSR 171 (1992) 111 ALR 261 (1992) 38 FCR 444 (16 November 1992)

FEDERAL COURT OF AUSTRALIA

Re: OCCIDENTAL LIFE INSURANCE COMPANY OF AUSTRALIA LIMITED
And: LIFE STYLE PLANNERS PTY LIMITED
No. G3220 of 1992
FED No. 832
Number of pages - 15
Corporations Law
[1992] FCA 549; (1992) 9 ACSR 171
(1992) 111 ALR 261
(1992) 38 FCR 444

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Corporations Law - requirements of a statutory notice of demand - whether address for payment need be specified - requirement that notice list all options for compliance.

Corporations Law: s. 460

Federal Court Rules: O.71 r.37(4A), O.71 r.38(1)(c).

HEARING

SYDNEY
16:11:1992

Counsel for the Applicant : S.R. Donaldson

Solicitors for the Applicant : Phillips Fox

ORDER

The Court orders that:
1. Life Style Planners Pty Limited be wound up under the provisions of section 460 of the Corporations Law.

2. Philip Gregory Jefferson of Jefferson and Co., 12th Floor, 127 Creek Street, Brisbane, Queensland, an official liquidator, be appointed liquidator of the affairs of the said company.

3. The applicant shall have its costs of the winding-up.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

LOCKHART J. Three questions have arisen in this matter. They were referred to me by the Registrar.

2. The first question concerns the effect of the failure of the applicant to comply with the requirements of O. 71 r. 37(4A). The application to wind up the company was not accompanied by the nomination of an official liquidator or the written acknowledgment signed by an official liquidator as required by the rule. However, the Registrar has nominated a liquidator and he has consented to act as the liquidator of the company. I dispense with compliance with the rule.

3. The second question concerns the final affidavit of debt required by O. 71 r. 38(1)(c). The deponent states that the company tendered the sum of $5,863 to the applicant's solicitors and that the tender was refused on the ground that any payment by the company to the applicant would more likely than not have been a preferential payment and therefore recoverable by the liquidator.

4. It is well established that if a valid tender be made, a refusal of that tender does not eliminate the debt. The relationship of creditor and debtor still subsists: see Australian Mid-Eastern Club Limited v Yassim (1989) 1 ACSR 399 per Meagher J.A. at 403 and the cases there cited by his Honour.

5. In my opinion the refusal of the tender did not constitute a discharge or elimination of the debt due by the company to the applicant. Also, the applicant had every reason to refuse the tender in view of the probability of the payment being a preference in the winding-up of the company.

6. The third question concerns the form of the statutory demand served by the applicant upon the company to establish the insolvency of the company. The demand requires the company to pay the applicant the sum of $5,863 claimed by the applicant at a particular address, namely, Level 1, 601 Pacific Highway, St. Leonards. The question is whether the specification of an address invalidates the demand.

7. Provision is made for the statutory demand by s. 460(2)(a) of the Corporations Law. Section 460, so far as relevant, provides as follows:

"460(1) The Court may order the winding up
of a company that is unable to pay its debts.
(2) For the purposes of an application that is
made in relation to a company on the ground
provided for by subsection (1), the company
shall be deemed to be unable to pay its debts if:
(a) a creditor by assignment or otherwise to
whom the company is indebted in a sum
exceeding $1,000 then due has served on
the company a demand, signed by or on
behalf of the creditor, requiring the
company to pay the sum so due and the
company has, for 3 weeks after the service
of the demand, failed to pay the sum or to
secure or compound for it to the
reasonable satisfaction of the creditor;
(b) execution or other process issued on a
judgment, decree or order of any court in
favour of a creditor of the company is
returned unsatisfied in whole or in part;
or
(c) the Court, after taking into account any
contingent and prospective liabilities of
the company, is satisfied that the company
is unable to pay its debts."

8. Sections 460 and 461 of the Corporations Law provide a number of statutory grounds for winding up of a company. By far the most important of them for practical purposes is the ground of inability to pay debts (s. 460).

9. Section 460(2) provides three situations in which a company is treated as being unable to pay its debts. The first of them is the failure to comply with the statutory demand. The second situation in which a company is deemed to be unable to pay its debts is if, execution or other process issued on a judgment, decree or order of any court in favour of a creditor, is returned unsatisfied in whole or in part. The third ground for which s. 460(2)(c) provides, requires positive proof to the Court's satisfaction that the company is actually unable to pay its debts.

10. The statutory demand makes available to creditors a simple method by which they can establish that the company is unable to pay its debts. It is the method of proof of inability to pay debts most commonly relied upon. There is no prescribed form of statutory demand.

11. The statutory demand must be signed by or on behalf of the creditor. It is well established that a debt which is bona fide disputed by the company cannot be the subject of a statutory demand and that failure to comply with such a demand gives rise to no presumption that the company is unable to pay its debts: Re K L Tractors Limited (1954) VLR 505 at 509; McPherson on The Law of Company Liquidation, 3rd ed., and the cases cited by the learned author at 52-3. The better view of the basis on which this principle rests is that if the debt is bona fide disputed by the company then it cannot be said to "have failed to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor".

12. Although there are definite similarities between a bankruptcy notice and a statutory demand under the Companies Act, there are obvious differences. Unlike a bankruptcy notice, a statutory demand under the Corporations Law need not be preceded by a final (or any other) judgment. Non-compliance with a bankruptcy notice has what has been referred to in many cases as quasi penal consequences. It constitutes an act of bankruptcy which has a number of repercussions under the law of bankruptcy. It is an essential condition of a court having jurisdiction under the federal law of bankruptcy to make a sequestration order against the estate of a debtor, that he has committed an act of bankruptcy (s. 43). The bankruptcy relates back to and commences at the time of the commission of the earliest act of bankruptcy committed by the bankrupt within the period of six months immediately preceding the day on which the creditor's or debtor's petition is presented (s. 115). The effect of relation back is to treat all dealings with a person's property within six months after he has committed an act of bankruptcy as if his bankruptcy had taken place at the time of commission of such act of bankruptcy. One difference between a bankruptcy notice under the bankruptcy legislation and a statutory demand under the Corporations Law is that a creditor must have obtained a judgment under the law of bankruptcy, though not under the Corporations Law. Also, the period for compliance with the requirements of the notice is determined by the Registrar, and the parties can by search ascertain what bankruptcy notices have been issued in relation to a particular debtor. Provision is made by s. 40(1)(g) of the Bankruptcy Act 1966 for a debtor, who has been served with a bankruptcy notice, to assert a counter-claim, set-off or cross-demand against the creditor equal to or exceeding the amount of the judgment debt and which he could not have set up in the action or proceeding in which the judgment was obtained against him. There is no counterpart in winding-up law.

13. A statutory demand under the Corporations Law is essentially a method by which a creditor to whom the company is indebted in a sum that exceeds the statutory minimum can establish that the company is unable to pay its debts and therefore establish a ground for the winding up of the company.

14. It is an essential function of the statutory demand that it gives the company the opportunity of paying the sum which it is required to pay or to secure or compound for it to the reasonable satisfaction of the creditor. If the company fails to comply with the demand it will be deemed to be unable to pay its debts and thus establish a ground for the winding up of the company. Once the conditions prescribed by s. 460(2)(a) are satisfied, the company is by the Corporations Law deemed to be unable to pay its debts (s. 460(2)), and the Court is empowered to order the winding up of the company (s. 460(1)). It does not necessarily follow, however, that a winding up order will be made because the Court has a discretion as to this.

15. As Professor H.A.J. Ford recognizes in Principles of Company Law, 5th ed., 1990, at para. 2203, note 5, p 759: the failure of a company to comply with a statutory demand has "serious consequences". Once the demand has not been complied with and the three weeks within which compliance is required have elapsed, the creditor may file his application to wind up the company. It has been held that the period of three weeks must have expired before the application is filed: Re Catholic Publishing and Bookselling Co (1864) De G.J. and S. 116; [1864] EngR 296; 46 ER 319; and McPherson at 48, note 75 and the cases there cited. Also, a statutory demand which has not been complied with can be the basis of an application by any other creditor or person who has standing to petition on the ground of insolvency: Re Island of Anglesea Coal Co (1861) 4 LT 684; McPherson at 48, note 75.

16. There may be severe commercial repercussions. On the filing of an application to wind up a company news spreads quickly and the company's reputation may suffer. There may also be repercussions at that stage against a company with its bankers and mortgagees under the terms of security documents.

17. This demonstrates that it is important for companies to know, upon receipt of a statutory demand what its legal consequences are.

18. In Consolidated Press (Finance) Limited v Australian Horticultural Finance Pty Limited (1992) 8 ACSR 341 I held that for a statutory demand under s. 460(2)(a) to be valid it must state all three alternatives referred to in paragraph (a) available to the company, namely, payment of the sum of which the creditor requires payment or securing or compounding for it to the reasonable satisfaction of the creditor. My decision was followed by Acting Master Hawkins of the Supreme Court of Western Australia in the matter of K Peek Production Pty Ltd (Receiver and Manager Appointed), 30 September 1992, unreported.

19. In Richardson v Whitsunday Yachting World Pty Limited (1992) 8 ACSR 441 McLelland J. reached the contrary conclusion. His Honour held that a statutory demand under s. 460(2)(a) must require the company to pay the sum demanded by the creditor, but need not express the alternatives of securing or compounding for the debt to the reasonable satisfaction of the creditor. I respectfully disagree with his Honour. As I observed in Consolidated Press Finance Limited (at 342) the purpose of a notice of demand under the section is to inform the company to which it is directed of the intention of the creditor to institute proceedings to wind up the company if the demand is not complied with: see Re Crust 'n' Crumb Bakers (Wholesale) Pty Limited (1991) 5 ACSR 70 per McPherson SPJ at 73 and In re Manda Pty Limited (1991) 6 ACSR 119 at 120. "The whole object of the demand was to warn the debtor of an impending petition ..." Bateman Television Limited v Coleridge Finance Limited (1969) NZLR 794 per North P at 803.

20. The question is essentially one of construction of s. 460(2), but it is not approached in a vacuum. The form which statutory demands under the section and its predecessors both here and the United Kingdom should take has a long history. In Palmers Company Precedents (see for example the 16th edition (1952) at 34) provision is made for a suggested form (Form 26), which follows through to later editions reading as follows:

"To the Company Ltd
Take notice that I, of do
hereby require you to pay to me the sum of
pounds, owing by you to me (for etc.)
As Witness my hand this day of ."

But modern practice books assume a materially different form. For example, the CCH Australian Company Law Practice (at 50-270) and Butterworths Australian Company Law (at 5.4.0095) suggest a form of notice which requires the company to pay to the creditor or to secure or to compound to its reasonable satisfaction the sum in question; and states in essence that if at the expiration of three weeks after the service of the demand upon the company it fails to comply with the terms of the notice the company shall pursuant to s. 460(2)(a) of the Corporations Law be deemed to be unable to pay its debts and the Court may order it to be wound up. In the United Kingdom the form of statutory demand is specified by the Insolvency Rules (r. 4.5) made under the Insolvency Act 1986 (form 4.1) (see Butterworths Company Law Service, vol. 2, H2573); and that form requires statement of all these matters and others. The modern forms suggested in the practice books are in my experience (and in the experience of the registrars of the Court) generally adhered to in this country and it is only in an exceptional case such as Consolidated Press Finance Limited, Richardson or K Peek Production Pty Ltd that the question arises as to the effect of the omission of the three alternatives from the notice. In other words, the mainstream of modern practice supports a notice in accord with my judgment in Consolidated Press Finance Limited. I referred in my reasons for judgment in Consolidated Press (Finance) Limited to this practice as a "convention" which had been established for many years. I find it difficult to resist the conclusion that the draftsman of the Corporations Law was not mindful of the practice within this country, a practice which existed under the Companies Codes and the previous Uniform Companies Acts. This explains at least in part why s. 460(2)(a) assumes the form which it does, and this is what I had in mind when I said in Consolidated Press (Finance) Limited that there was a "convention" that the statutory demand was drawn in such a form as to indicate all these matters to the recipient. Of course, a convention in this sense does not govern the construction of an Act of Parliament, but it does help to explain why the section takes the form which it does and did under its predecessors.

21. It is not correct in my view to construe para. (a) of s. 460(2) by reading it as if a demand "requiring the company to pay the sum so due" is simply an expression of the legislature's view that the demand need do no more than require payment of a particular sum. As mentioned earlier, the plain intent of the section is to warn the company of the creditor's intention to proceed to wind it up if the demand is not complied with; and essential prerequisites for the creditor to obtain an order for winding up are that the company has failed to pay the amount demanded or to secure or compound for it to the reasonable satisfaction of the creditor within the three week period.

22. This legislative purpose cannot be achieved if statutory demands simply assert that a sum is owing by the company to the creditor and demand payment of it, especially if there need be no necessity for the creditor to have obtained a judgment in his favour in respect of the debt. A notice is bad if it simply requires that the company pay a stated sum said to be due by the creditor to it without the slightest suggestion on the face of the document as to the implications to the company and the detriment it may suffer (and the benefit that may be gained by the creditor) if it fails to comply. The notice must spell out all three alternatives offered to the company by s. 460(2)(a) and state that failure to comply within the three weeks period entitles the creditor to seek an order from the Court that the company be wound up.

23. The injustice of a notice which does no more than simply require payment from the company of the sum said to be due in it, without more, was recognized in Re No 82 Garden Units Pty Limited (1965) NSWR 1452. (This case is cited by McPherson at 48, note 78, as authority for the proposition that the notice should refer to s. 364(2)(a) of the Companies Code (or its predecessor s. 222(2)(a) of the Uniform Companies Act 1961). I doubt if the case is express authority for that proposition, but probably it is a reasonable inference to draw from it). It is at least a recognition of the need for the company to be told something more than the bare fact that a creditor requires payment from it of a particular sum said to be due by the company. That was over 25 years ago and the time was overdue for the next step to be taken which is the step I took in Consolidated Press (Finance) Limited, a step which I understood then and still understand to be consonant with usage and practice for a long time and which recognizes the serious consequences to a company of failure to comply with the requirements of a statutory demand.

24. It is not asking too much of a creditor who wishes to avail himself of an easy form of proof that a company is unable to pay its debts in order that it may be wound up, to tell the company in writing what it must do to comply with the demand and of the consequences of non-compliance with its requirements. The form may be simple. There need be nothing complex about it. Such a form does not have to assume the complexities of a bankruptcy notice.

25. The interpretation of s. 460(2)(a) which I regard as correct may be said by some to be a purposive construction. I would not myself regard this as true because when para. (a) is construed in the light of the plain function which the demand serves, a function dictated by the terms of s. 460(2)(a) itself, the only meaning reasonably open is the one which I have assigned to it. However, if more than one interpretation of a statute is reasonably open, the construction which is to be preferred is the one which avoids an unjust or capricious result. Barwick C.J. said in Tickle Industries Pty Limited v Hann (1974) 2 ALR at 289:

"It is ... a sound rule of statutory
construction that a meaning of the language
employed by the legislature which would produce
an unjust or capricious result is to be avoided.
Unless the statutory language is intractable, an
intention to produce by its legislation an
unjust or capricious result should not be
attributed to the legislature."

26. There are many statements to the same effect, and they are but variations of the famous statements of the rule provided by Lord Wensleydale in Grey v Pearson (1856) 6 HLC 106:

"... the grammatical and ordinary sense of the
word is to be adhered to, unless that would lead
to some absurdity, or some repugnance or
inconsistency with the rest of the instrument,
in which case the grammatical and ordinary sense
of the word may be modified, so as to avoid the
absurdity and inconsistency, no farther."

27. This passage was cited with approval by Higgins J. in The Australian Boot Trade Employees' Federation v Whybrow and Co (1910) 11 CLR at 341 and was referred to by Isaacs J. in The Australasian Temperance and General Mutual Life Assurance Society v Howe [1922] HCA 50; (1922) 31 CLR 290 at 302.

28. What is to be done in the present situation where two single judges, one of this Court and the other of the Supreme Court of New South Wales, have reached different conclusions on a point of every day and fundamental importance to companies, their legal advisers and accountants? They are entitled to be told consistently what the statutory demand must contain in order to comply with s. 460(2)(a). There cannot be divergence between courts throughout Australia, especially courts in the same State, and the State where most winding up litigation occurs; this creates an impossible practical situation.

29. Plainly the situation calls for remedial action by the Parliament (and, the legislatures of the States and Territories under the present co-operative system of corporations law) by amendment to the language of s. 460(2)(a) itself so as to place beyond doubt what the statutory demand must state. This may entail also a prescribed form. A useful guide to an appropriate form is provided from the various Corporations Law Practices and from the form referred to by Heery J. in Ataxtin Pty Limited v Gordon Pacific Developments Pty Limited (1991) 29 FCR 564 at 568-9.

30. The specification of an address for payment of the debt claimed by the creditor or the absence thereof are questions which have been considered by the courts. In Delaine Pty Ltd v Quarto Publishing plc (1990) 8 ACLC 1026 Young J. of the Supreme Court of New South Wales held that a statutory demand is invalid if it does not specify a place within Australia where the company is to pay the debt demanded. In Horans Steel Pty Ltd v Leac Engineering Pty Ltd (1991) 105 ALR 143 I held that a statutory demand which required the company to pay the amount of the alleged debt of the creditor to the applicant's solicitors was a valid demand. In International Factor (Singapore) Pty Ltd v Speedy Tyres Pty Ltd (1991) 9 ACLC 1230 Cox J. of the Supreme Court of Tasmania rejected the contention that the statutory demand in that case was defective because it did not nominate a place for payment in Australia.

31. In my opinion the specification of the address of the creditor at which payment of the debt claimed by the creditor is to be made by the company does not invalidate the statutory demand in this case.

32. The Court orders that:-

1. Life Style Planners Pty Limited be wound up under the provisions
of section 460 of the Corporations Law.
2. Philip Gregory Jefferson of Jefferson and Co., 12th Floor, 127 Creek
Street, Brisbane, Queensland, an official liquidator, be appointed
liquidator of the affairs of the said company.
3. The applicant shall have its costs of the winding-up.