Vanuatu Indigenous Development Alliance Ltd v Jezabelle Investments Pty Ltd [2009] VUCA 8; Civil Appeal Case 33 of 2008 (30 April 2009)

IN THE COURT OF APPEAL OF
THE REPUBLIC OF VANUATU
(Appellate Jurisdiction)

CIVIL APPEAL CASE No.33 OF 2008

BETWEEN:

VANUATU INDIGENOUS DEVELOPMENT ALLIANCE LIMITED
Appellants

AND:

JEZABELLE INVESTMENTS PTY LIMITED
Respondent

Coram: Justice John von Doussa
Justice Oliver Saksak
Justice Nevin Dawson
Justice Ronald Young

Counsel: Mr Robert Sugden for the Appellant
Ms Jennifer La’au for the Respondent

Date of hearing: 22nd April 2009 & 28th April 2009
Date of Judgment: 30th April 2009

JUDGMENT

On 14th October 2008 the Chief Justice made an Order that Vanuatu Indigenous Development Alliance Limited (VIDA) be wound up by the Supreme Court under the provisions of the Companies Act [CAP.191]. The Order was made on a Petition brought by the Respondent Jezabelle Investments Pty Limited on the ground that VIDA was insolvent and unable to pay its debts.

Before this Court VIDA seeks to challenge the winding up Order in two ways. First, VIDA applies under rules 9 and 27 of the Court of Appeal Rules 1973 to enlarge time to file a Notice of Appeal against the Order made on 14th October 2008. VIDA purported to initiate an appeal against that Order by filing a Notice of Appeal on 11th December 2008. The Notice did not institute a valid appeal as it was filed outside the 30 day time limit imposed by rule 20 of the Court of Appeal Rules.

Secondly, VIDA seeks leave to appeal pursuant to rule 21 of the Court of Appeal Rules against an Interlocutory Order of the Chief Justice made on 25th November 2008 refusing to set aside the Order made on 14th October 2008. The Chief Justice refused leave to appeal against that Order on 17th April 2009. VIDA now urges the Court of Appeal to take a different view of the merits of its proposed appeal, and to grant leave.

When the hearing of the applications commenced, this Court indicated that it would first consider whether, on the merits, either of the proposed appeals had prospects of success, and that we would then return to other issues that must be considered on the exercise of the discretion to grant leave, including the present stage which the winding up of VIDA has reached. The Court therefore invited counsel for VIDA to address the grounds of appeal proposed in its intended Notice of Appeal.

The central contention underlying those grounds is that the Petition was flawed with fundamental irregularity and paucity of particulars as to the debt alleged in the Petition and orally disputed by VIDA’s counsel on the first date of hearing of the Petition. Further, the grounds alleged that the Chief Justice erred in not concluding that the alleged debt was genuinely disputed and in not satisfying himself that the debt was due for payment either when a statutory demand was served on VIDA or when the Winding Up Order was made.

The chronology of the procedural events leading up to and after the making of the Winding Up Order is lengthy. It is set out in the Reasons for Judgment now under challenge. It is sufficient to note the following sequence of events:

16 OCTOBER 2007.

Notice of Demand by the Respondent was served on VIDA’s registered office under s.225 (a) of the Companies Act. VIDA neglected to comply within three weeks of service with the demands of the Notice. By the terms of the Notice the Petitioner: "HEREBY DEMANDS from you immediate payment of the sum of ONE HUNDRED AND TEN THOUSAND TWO HUNDRED FORTY FOUR AUSTRALIAN DOLLARS (AUD$110,244.00) being for monies advanced by Jezabelle to the Company."

21 DECEMBER 2007.

The Petition to wind up VIDA was filed together with an affidavit verifying the Petition. Regrettably there was considerable delay within the Court before the Petition was listed for a conference before a Judge to allocate a date for hearing.

13 AUGUST 2008.

A conference to allocate the hearing date occurred. A hearing date was necessary before the Petition could be served. The hearing date was set for 12 September 2008.

29 AUGUST 2008.

The Petition was advertised in the Government Gazette as required by Rule 22 of the Companies (Winding Up) Rules.

11 SEPTEMBER 2008.

A Certificate of Attendance Before the Registrar was issued under Rule 27 of the Companies (Winding Up) Rules. The Registrar certified that the procedural requirements of the Rules had been complied with.

12 SEPTEMBER 2008.

The Petition came on for hearing. The Petitioner was represented and sought a Winding Up Order. Counsel appeared on its behalf and informed the Court that the alleged debt was disputed. The hearing was adjourned to 14th October 2008 and directions were given that VIDA file and serve its response to the Petition within 21 days (by 3rd October 2008).

14 OCTOBER 2008.

The adjourned hearing took place. VIDA had filed nothing in response to the Petition. No information was provided to the Court as to why there had been no response. The counsel who had previously appeared for VIDA did not appear. Junior counsel appeared on his behalf and sought an adjournment on the basis that his leader was overseas. Junior counsel informed the Court that although no response had been filed there was a draft in existence in the nature of a general denial to the Petition. The Chief Justice refused a further adjournment of the hearing and made the Winding Up Order as he considered no good reasons or rational explanation had been given for non compliance with the Order of 12 September 2008 or for an adjournment.

The proposed grounds of appeal do not directly challenge the decision to refuse a further adjournment of the Petition. However, the final proposed ground contends that the appellant "had a reasonable excuse for having not defended the Petition in that it was denied adequate opportunity to do so". This assertion is totally without merit. VIDA had the opportunity to respond to the Petition and state its grounds of defence when the Petition was first served. It failed to do so. VIDA was given a further opportunity to do so on 12 September 2008, and again failed to do so either in compliance with the directions or at all before the hearing on 14th October 2008. If there is merit in the proposed appeal, it must lie elsewhere, and in particular in the allegation that the Petition was so fundamentally flawed that no valid Winding Up Order could be made on it.

The fundamental flaw is said to stem from the failure of the Petition to allege that the debt claimed was due, and the gravity of that omission is said to be magnified by the failure of the earlier Notice of Demand to assert that the debt was due.

Rule 20 of the Companies Act (Winding Up) Rules requires that every Petition shall be in Forms 3, 4 and 5 in the Schedule to the Rules with such variations as circumstances may require. Rule 24(1) required that every Petition be verified by an affidavit in Form 10 with such variations as the circumstances may require, and Rule 24(3) provides that the verifying affidavit shall be prima facie evidence of the statement in the Petition.

Form 4 is appropriate for a petition by an unpaid creditor on simple contract. Relevantly, the Form requires an allegation that:

"5. The company is indebted to your petitioner in the sum VT......... for ..... (a)".

A marginal note to the Form reads: "(a) State consideration for the debt, with particulars so as to establish that the debt claimed is due."

In this case paragraph 5 of the Petition reads:

"5. The Company is indebted to your Petitioners for monies advanced by JEZABELLE INVESTMENTS PTY LTD to the Company in the sum of ONE HUNDRED AND TEN THOUSAND TWO HUNDRED AND FORTY-FOUR AUSTRALIAN DOLLARS (AUS110, 244.00).

6. Your Petitioner has made application to the Company for payment of the debt, but the Company has failed and neglected to pay the same or any part thereof."

Counsel for VIDA contends that in a case where the Petition is not based on a judgment of a court it is critical that the Petition alleges particulars sufficient to show a proper basis in law for the alleged indebtedness of the Company, and that the debt was actually due. Whilst Rules 20 and 24 permit variations to the Forms as the circumstances require, counsel contended that there must nevertheless be a basis disclosed in the Petition for the Court to be satisfied both of the legal basis of any indebtedness and that the alleged debt is due for payment.

Counsel for the Respondent has drawn the Court’s attention to Rule 210 which provides that no proceedings under the Act or Rules shall be invalidated by any formal defect or any irregularity unless the Court is of opinion that substantial injustice had been caused by the defect or irregularity. In our opinion that Rule will not overcome a fundamental defect such that the Petition fails to allege a basis on which a winding up order could be made. We agree with the appellant’s submission that the Petition and supporting documents must show both a basis in law for the indebtedness of the Company, and that the debt was due at the date of the Petition. It becomes necessary therefore to consider whether the documents before the Court in this case sufficiently disclosed those matters.

Paragraph 5 of the Petition in our opinion sufficiently alleges a legal basis upon which an indebtedness could arise, namely from the advance of monies by the Petitioner to the Company. However paragraph 5 does not allege that a debt is presently due. However, paragraph 5 of the Petition must be read with paragraph 6. The affidavit verifying the Petition makes reference to the Notice of Demand dated 16 October 2007. The terms of the Notice of Demand do not expressly state that the monies advanced by the Petitioner are presently "due". However, the Notice of Demand seeks immediate payment of the debt alleged. Whilst the case is close to border line, we are inclined to the view that an assertion of entitlement to "immediate payment" is in substance an assertion that the debt is due. However, for reasons which now follow we do not think that the outcome of the application for leave turns only on whether the Petition was fundamentally flawed as VIDA now asserts.

By application dated 13th November 2008, VIDA applied to set aside the Winding Up Order. The application was based on the failure to comply with Rule 22(1) of the Companies (Winding Up) Rules in relation to the advertisement of the Petition, and a failure to comply with Rule 24 in relation to verifying the Petition. No allegation was made at that time that the Petition was defective because it did not allege that the Company’s indebtedness was due for payment. Moreover, an earlier application had been made to set aside the Winding Up Order on the basis that it was a default judgment covered by Rule 9.5(1) and (2) of the Civil Procedure Rules No.49 of 2002. That application was later withdrawn when it was appreciated, correctly, that the Civil Procedure Rules do not apply to a petition for winding up a company under the Companies Act. However, significantly, the application also did not allege that the Petition failed to allege that the subject debt was due.

The application dated 13th November 2008 was decided by the Chief Justice on 25th November 2008. The Chief Justice dismissed the allegations that the Petition failed to comply with the Rules in the manners alleged. It is against that Interlocutory Judgment that the second application before this Court seeks leave to appeal.

VIDA does not contend that the Chief Justice erred in his decision on the points that were raised by the Application dated 13th November 2008. Rather, leave is sought to appeal against that decision on the basis that the Chief Justice should have considered the point now raised by VIDA but which VIDA did not raise at that time. Counsel argued that the Chief Justice should have taken this course as there was insufficient evidence before the Court to establish the alleged liability of VIDA.

This argument overlooks s.225(a) of the Companies Act and Rule 24(3) of the Companies (Winding UP) Rules. Under s.225(a) the Company’s failure to respond as required by a notice of demand for three weeks has the effect that a company is deemed to be unable to pay its debts, and under Rule 24(3) the affidavit verifying the Petition is prima facie evidence of the statement in the Petition. Given these presumptions, we do not consider that the Court was under any obligation to embark upon an independent enquiry about the indebtedness of the Company. The proper function of the Court was to decide the points of alleged non-compliance raised by the application. The Court did so, and VIDA does not now contend that on those points the Chief Justice fell into error.

On 24th October 2008, an application had been made on VIDA’s behalf for an urgent stay pending an application to set aside the Winding Up Order. In support of that application affidavits were filed by Isobelle Gidley and Nakat Willie. Strictly speaking, these affidavits had no relevance to the two points of non-compliance with the Rules that were the subject of the application to set aside the Winding Up Order which the Chief Justice decided on 25th November 2008. However, the Chief Justice acknowledged the affidavits in his reasons for decision. Before this Court counsel for VIDA contends that the material in the affidavits should have caused the Chief Justice to find that there was a genuine basis for VIDA to dispute the debt.

The time when VIDA should have filed evidence to raise a genuine dispute about its indebtedness had passed once the winding up was made. The grounds of the application decided by the Chief Justice on 25th November 2008 did not include that there was a genuine basis for disputing the debt. Moreover, we do not consider the affidavits provide a sufficient basis for a finding that the debt was genuinely disputed. Ms Gidley’s affidavit annexed the reasons for decision in a case decided in the Supreme Court of New South Wales on 2nd April 2008. Those reasons refer to affidavit material before that Court which made reference to VIDA, and the Petitioner’s claim against VIDA. However, statements by a judge in another case between different parties about affidavit evidence in that case could be of no probative value in these proceedings. To establish a genuine dispute in relation to the Petition, it was necessary that there be evidence from deponents with direct knowledge of facts which addressed the circumstances of the particular debt the subject of the Petition. Broad general denials of indebtedness are not sufficient.

The reality of the present situation is that VIDA, after a change of legal representation six months after the Winding Up Order, now seeks to raise for the first time a point that was not raised before the Court in any of the earlier proceedings, and in particular not raised in the application decided on 25th November 2008 which was specifically directed to alleged failures to comply with the Rules.

Once a winding up order is made, the progress of liquidation follows. It is necessary that prompt steps be taken by liquidators to replace the management of the company, to secure the assets of the company such as they may be, and to realise them. Reversal of the winding up process at best is extremely difficult and likely to be costly for those with interests in the financial position of the company.

The fact that doubt may arise after a winding up order is made about the nature or extent of the petitioning creditor’s alleged debt is not a reason for setting aside the winding up order. The liquidator is charged with the statutory responsibility of calling for proofs of debts, and being satisfied as to the liabilities of the company before admitting a proof of debt for a claim. Once the liquidation process is underway that is the normal way in which disputes about debts should be resolved.

In the present case, we consider it is far too late for the Court to entertain an application to set aside the Winding Up Order on the basis that there is doubt about the petitioning of the creditor’s alleged debt. For this reason, even if we thought there was strong merit in the ground of alleged irregularity now put forward by VIDA, we would refuse leave to appeal against the order.

VIDA did not seek to put before this Court any evidence about the current position of the winding up of VIDA. That is another critical issue which a Court asked to set aside a winding up order should have, particularly where the winding up has been in progress for sometime. If the investigations of the liquidator indicate that the Company is in fact insolvent, it would be wrong for the Court to exercise its discretion in favour of setting aside the winding up order. For this reason, the Court requested the respondent to obtain a report from the liquidator. That report is now to hand.

The Court sat on 28 April 2008 to hear submissions on the report. Counsel for VIDA also filed further affidavits from three former directors of VIDA which argue that VIDA was established for philanthropic purposes and should be allowed to continue to carry out its objects. The liquidator’s report in our opinion shows that the Company is insolvent. Moreover, neither the new affidavits, nor those previously filed, identify any records relating to extensive loans apparently made by directors to the company, and suggest inadequate management by them of the Company’s affairs.

We consider it is in the interests of the creditors that the liquidation proceed as quickly as possible. If the former directors continue to obstruct this course, this will add to the costs of liquidation and reduce the ultimate distribution to them on account of their loans.

The liquidator’s report provides a further reason why leave should be refused on each of the two applications before this Court.

On the question of costs, three people identifying themselves as former directors of VIDA have filed affidavits in support of the applications before the Court. Whilst the former directors of a company that has been wound up retain standing to challenge the winding up order, if the challenge fails they expose themselves to an order for costs for the unsuccessful proceedings.

For the reasons given, both applications for leave are refused. The costs of the applications to this Court are awarded against the three former directors of VIDA who have supported them namely, Isobelle Gidley, Tony Barber and Alfred Maliu.

DATED at Port-Vila this 30th day of April 2009

BY THE COURT

John von DOUSSA J
Oliver SAKSAK J
Nevin Dawson J
Ronald YOUNG J