115 Constitution Road Pty Ltd v Alan Downey as Trustee for NBD Systems & Anor

PARTIES : 115 Constitution Road Pty Ltd (plaintiff) Alan Downey and Debra Patrick as Trustees for the NBD Systems Super Fund (defendant)

COUNSEL : MA Friedgut (plaintiff) C Mobellan (defendant)

SOLICITORS : Levitt Robinson (plaintiff) Rouse Lawyers (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Hearing: 15 September 2008 Judgment: 23 September 2008

103811/07 115 Constitution Road Pty Ltd v Alan Downey as Trustee for NBD Systems & Anor JUDGMENT 1 Rein J: The plaintiff company entered into a loan agreement with "Alan Downey and Debra Patrick as Trustees of the NBD Systems Super Fund". 2 Pursuant to clauses 1.1 and 2.2 of the agreement, the $25,000 lent was to be repaid by March 2006. It was not repaid and a demand was served on the company on 8 July 2008. 3 The demand, dated 8 July 2008, is signed by Alan Downey ("Downey"). It is not signed by Debra Patrick ("Patrick"). 4 The loan agreement contains no clause empowering Downey to act on behalf of Patrick. 5 The trust deed pursuant to which Downey and Patrick were appointed is before me. The only clause which is relied on to authorise Downey to act on behalf of both trustees is clause 8.11.

6 The company, for whom Mr Friedgut of Counsel appears, seek to set aside the statutory demand pursuant to s 459J(1)(b) of the Corporations Act. S 459J ("the Act") is in the following terms: " Setting aside demand on other grounds (1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside.

(2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect." 7 Mr Friedgut argued that the absence of a signature of Patrick was more than a defect in the statutory demand and was a fundamental flaw which brought the matter within s 459J(1)(b). He also argued that the affidavit accompanying the demand was defective and did not comply with Rule 5.2 of the Corporations Rules in that the affidavit was not an affidavit by "the creditors" or with the authority of the creditors. 8 Mr Mobellan, Counsel for the trustee, argued: (1) that there was no defect in the statutory demand (2) that if there was, it was a technical defect and no substantial injustice would be suffered by the company as there was no evidence of any dispute concerning the debt led by the company (3) that there was compliance with Rule 5.2 and if there was not, non-compliance ought no preclude reliance on their demand, there having been no substantial injustice. 9 The statutory demand, by para 1, states relevantly for present purposes: "The Company owes ALAN DOWNEY DEBRA PATRICK AS TRUSTEE OF THE NBD SYSTEMS SUPER FUND… the amount of $25,000, being the amount of the debt described in the schedule. The amount is due and payable by the Company" and is signed Alan Downey. No reference is made to it being signed on behalf of Patrick. 10 The affidavit in support of the statutory demand (required by s 459E(3) of the Act) defines Downey and Patrick as "creditors". Downey swears on oath that he is "trustee of the creditor in respect of a debt of $25,000.00 owed by the Company". The jurat refers to Downey as "deponent creditor". It must be remembered that a "trust" is not a legal entity - the trustees are the parties to any contracts entered into by them in respect of trust assets: see Jacobs' Law of Trusts in Australia (Lexis Nexis Butterworths, 7th edn, 2006). The wording used in the affidavit is incorrect because Downey is not the trustee of the creditor - he is one of two joint creditors. 11 The affidavit of Mr Alan Richmond Brawn, a director of the Company, in para 9 draws attention to the absence of any reference to authority by Downey in the affidavit filed in support of the statutory demand, asserts a belief to the contrary and disputes Downey's ability to make the demand. No objection was taken to the paragraph and in any event, it puts the defendants on notice of the point as at July 2008. In his affidavit of 26 August 2008, read in resistance to the company's application, Downey did not address the point. 12 The question of whether there was a defect in the statutory demand centred around the question of whether one or two trustees can issue a statutory demand in the name of both trustees, which in turn is linked to the question of whether a joint creditor can issue a demand for a debt.

13 Clauses 8.8, 8.9 and 8.13 of the trust deed provide that there would need to be a delegation of authority to one of them. Clause 8.11 does not appear, in context, to be directed to the present issue and the plaintiff's proposed reading of it is inconsistent with the other clauses to which I have referred. In my view, the trust deed did not empower Downey to issue a demand by himself.

14 In Australian Workers Union v Bowen [No. 2] (1948) 77 CLR 601, Latham CJ, Rich, Dixon and Williams JJ held that a bankruptcy notice cannot be authorised by some only of the judgment creditors, and that the petition, being founded on an invalid bankruptcy notice, was "irregular". See Latham CJ at p583-584 per Dixon J at p589-590 and per Williams J at p594. 15 In Manzo v 555/255 Pitt St Pty Ltd. (1990) 21 NSWLR 1; (1990) 2 ACSR 809, Hodgson J noted, obiter, that the common law rule is that payment to one of a number of joint debtors discharges a joint debt (see p 7F) and on the basis of that principle, it could be argued that it must be open to one joint creditor to demand payment of a joint debt. His Honour drew a distinction between a debt that is both a debt at common law and in equity, and where there is a debt based on equitable principles only, he held the s 364 notice (an earlier form of statutory demand) had to be signed by all creditors. His Honour noted, again obiter, that another reason why a joint creditor could not sign a statutory demand alone is Bowen, saying: "That case turned on the rights of joint judgment creditors in relation to execution of a judgment, so it is not directly applicable to s 364 notices; although it can be said that there is some analogy between bankruptcy notices and s 364 notices".

16 In Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42 BC 200700712. Debelle J, (with whom Doyle J and Perry J agreed), obiter touched on Manzo and the question of whether a statutory demand could be issued by one of two joint creditors, saying: "I respectfully suggest that there is a real question whether that is the correct view. The principle that a payment to one of a number of joint creditors discharged the debt jointly due to all of them does not necessarily lead to the conclusion that one joint creditor can demand payment of the whole of the joint debt without the consent of the other lenders. The other lender or lenders might not consent to the demand. They might, say, have reasons which justify giving the debtor time to pay. That might apply a fortiori in the case of a statutory demand upon a company which is capable of leading to the winding up of that company. The lenders may prefer to give the borrower time to pay rather than liquidate the company. The question whether both lenders must execute the statutory demand is an issue for later determination. In any event, even if both lenders had to sign the statutory demand, it would be necessary to consider whether the failure to do so caused substantial injustice and so required the statutory demand to be set aside: see s 469J of the Corporations Act ." 17 In Catalyst Securities Pty Ltd v Pegg [20004] QSC 469, McMurdo J set aside demands by each of nine creditors who had loaned money to the company, because there was only one loan, and none of the demands were made by all of the creditors (although as he noted in aggregate there were statutory demands by all creditors). His Honour noted that it was conceded "that while a debt is owed to two or more creditors, that a statutory demand for that debt must be one which is given by all creditors that is, they all must join in the same notice. See for example, Re A & K Holdings Pty Ltd [1964] VR 257, and Manzo". 18 I do not think that Manzo is authority for the proposition that all creditors must join in the demand, rather that they must do so where the debt is on based on equitable principles. Re A & K Holdings, p 262.42-263.5, offers support for the proposition in one sense, but not in another, as Sholl J held that as a matter of interpretation of the deed, any one of the creditors under a scheme of arrangement could call for repayment of all of the unsecured debts, but that the demand had not been in that form as the creditor had, purportedly pursuant to the deed of arrangement, issued a demand for payment of only the debt owed to it. 19 In Indaba Pty Ltd v Home Building Society Limited [2000] WASC 38, 18 ACLC 335, Sanderson M had to consider the effect of a second statutory demand issued shortly after an earlier demand which earlier demand had not been signed by the creditor to the setting aside of the first notice and was ordered to pay the debtor's costs. The second demand was signed and otherwise valid. Sanderson M held that the fact that there had been an earlier defective notice did not make it appropriate under s 459J(1)(b) to set aside the second otherwise valid notice. The creditor had agreed to the setting aside of the first notice and was ordered to pay debtor's costs. 20 In Thomson's Corporations Legislation, in the notes to s 459J, under the heading "No insubstantial injustice: examples", is the following note before reference to Indaba: "a failure to sign demand". I accept Mr Friedgut's submission that Indaba is not authority for the proposition that absence of signature will not lead to setting aside of a demand. The unsigned demand was set aside by consent and it was the signed and otherwise valid second demand that the Court was then concerned with. I do not accept however, that the case is authority for the proposition that absence of a signature will lead to the demand being set aside - that was not the subject of the master's decision but rather was the subject of an earlier concession by the creditor.

21 I do not regard Hodgson J as having expressed the view that a statutory demand could, in the case of a simple debt, be signed by one of two creditors, only that the point was arguable, and that Bowen would need to be considered in that context. I think there is a further complication, which is that a distinction might be drawn between a demand signed by only one creditor with no reference made to the other creditor(s) and one signed by one creditor, but expressed to be on the authority of both (or all) creditors. The affidavit verifying could in the latter situation then explain the basis of that authority. In my view, a statutory demand is analogous to a bankruptcy notice, and the principle in Bowen is applicable and leads to the result that notice must be given by all creditors or at least on behalf of all joint creditors, and I would respectfully agree with Debelle J's obiter dictum in Bentham, which incidentally assumes, as I shall do, the correctness of the proposition that the common law treats payment to a joint creditor as payment to all. 22 'Defect' is defined in s 9 of the Corporations Act as: "in relation to a statutory demand, includes: (a) an irregularity; and (b) a misstatement of an amount or total; and (c) a misdescription of a debt or other matter; and (d) a misdescription of a person or entity".

23 Mr Friedgut contended that the problem of authority in the execution of the statutory demand was beyond a 'defect' for the purposes of s 459J(1)(a), and that really the matter fell within s 459J(1)(b). 24 In Catalyst, Murdo J regarded the absence of a demand by all creditors as leading to the setting aside of the demand - he did not refer to the question of substantial injustice, and appears to be treating the matter as falling within s 459J(1)(b) and hence not requiring that issue to be addressed. 25 I recognise, therefore, that Catalyst can be seen as support for the proposition that absence of authority is not a "defect" within s 459J(1)(a), but that view, if it is the view taken by Murdo J (as he then was) is not one apparently shared by Debelle J in Bentham. 26 It follows from the view in Bowen that the absence of execution of the demand by Patrick is an irregularity, and one which in view of s 9 of the Act amounts to a defect pursuant to s 459J(1)(a) of the Act. 27 The company has placed no evidence before the Court to show that the debt claimed has been paid or is not owing. The debt arose from a loan of money to the company. The loan was made by both trustees out of monies of the trust fund. There is no evidence that the company is solvent. 28 Mr Friedgut argued that to read s 459J(1)(b) as limited to matters not relating to the statutory demand (such as the affidavit in support) as opposed to problems in the demand itself that were not mere technical defects, would involve a reading into s 459J(1)(b) limitations, and that such an approach was contrary to that mandated by the High Court in a number of cases including Oshlack v Richmond River Council (1998) 193 CLR 72, at 81 [21] per Gaudron and Gummow JJ and Owners of Shin Kobe Maru v Empire Shipping Co Inc (1994) 181 CLR 404 at 421 (per the Court). 29 There is authority for the proposition that s 459J(1)(b) is intended to deal with matters of abuse of or unconscionable use of the statutory demand procedure: see Hoare Bros Pty Ltd v Deputy Federal Commissioner of Taxation (1995) 16 ACSR 213 per Olney J at 222; or subversion of the procedure: Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143 per Barrett J. In Equus Corp Pty Ltd v Perpetual Trustee (WA) Ltd (1997) 25 ACSR 675, 16 ACLC 12, 28, at p27 the Full Court accepted that failure to abide by the rules could lead to exercise the discretion to set aside the demand. 30 Mr Mobellan argued that the NSW Court of Appeal in Meehan & Ors v Glazier Holdings Pty Ltd [2005] NSWCA 24, has held that s 459J(1)(b) should be read as dealing with defects relating to the demand but not in the demand. 31 I do not think that Meehan is authority for that proposition, but rather it is authority for the proposition that s 459J(1)(b) is not concerned with broad ranging notions of fairness but with grounds consistent with the legislature intent of pt 5.4 of the Act. Young CJ in Eq in a separate judgment did express the following views about s 459J(1)(b): "58 Although the wording of s 459J(1)(b) of the Corporations Act appears wide, its context and history requires reading it down to encompass in general terms only cases where the Court is satisfied that injustice will be caused unless the demand is set aside because of a defect relating to, but not in, the demand, see Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11 at 17. 59 In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746, 757, Bryson J truly said that the discretionary power under s 459J(1)(b) should not be activated "unless the decision to do so is supported by some sound or positive ground or good reason which is relevant to the purposes for which the power exists." 60 It is not possible to set out fully the cases that might fall within s 459J(1)(b) nor if it were possible would it be wise to do so. The sort of case that will be covered will include gross defects in supporting affidavits and documentation and where the alleged creditor has made statements or representations relating to the statutory demand which have reasonably induced a change of the alleged debtor's position." 32 It will be observed that Young CJ in Eq did express support for the view that 'injustice' had to be established for s 459J(1)(b) but his endorsement of what Bryson J said in Portrait Express shows support for an approach that lays emphasis on the importance of compliance with the rules and acceptance that a good reason for setting aside a demand includes one relevant to the purposes for which the rules exist. It is possible to read "gross defects in the supporting affidavit" as a form of injustice but in [60] his Honour also emphasizes that the categories and cases falling within subsection (b) are not closed. 33 The Full Federal Court in both Spencer Constructions Pty Ltd v CRM Aldridge Pty Ltd (1997) 15 ACLC 1, 0001 and Equus Corp (supra) was of the view that defects in a demand which did not give rise to substantial injustice could not be brought under s 459J(1)(b). 34 If s 459J(1)(a) is read as dealing with all defects (as defined) with the demand, and if defects are treated as wide-ranging, then there is a sound reason for construing s 459J(1)(b) as dealing with a different topic. I do not think that such an approach infringes or the broad principle of statutory construction which is found in those High Court cases. For example, in The Shin Kobe Maru the Court considering to the extent of Admiralty jurisdiction conferred held that there was no room to restrict that jurisdiction by reading into the provision limitations which the legislature had not mentioned. Here the question is how subsections forming part of the Statutory Scheme are to be interpreted. In any event here in addition to the problem of the demand there was also a problem with the affidavit which does entail consideration of s 459J(1)(b).

35 Rule 5.2 of the Corporations Rules requires an affidavit to accompany the statutory demand which must "be made by the creditor or by a person with the authority of the creditor or creditors". The affidavit which accompanied the demand (which showed the creditors as both Downey and Patrick) did not state that it was made by Downey with Patrick's authority, and notwithstanding the company having drawn this deficiency to the attention of the creditors, no attempt has been made to provide evidence that in fact Downey did have Patrick's authority. At one point, Mr Mobellan asserted that Downey, as a trustee, had a common law right to issue a demand in his own name. Even if, contrary to my view, that were correct, that is not what he has purported to do here, since he has made a demand in the name of himself and Patrick, but without asserting, then or now, that he had authority to do so. 36 Construction of s 459J has not been without its difficulties. A divergence of opinion between this Court and the Federal Court is described by Austin J in Kezarne Pty Ltd v Sydney Asbestos Removal Service Pty Ltd (t/a Royce Roofing Services) (1998) 29 ACSR 1 - in short, the Full Federal Court view is that s 459J(2), in speaking of 'defect', is referring to any kind of defect, not just one in the demand. His Honour points out that there is, however, no disagreement between the Courts that a defect in the demand itself cannot be dealt with otherwise than under s 459J(1)(a), and for that reason, he is of the view that there may be little significance in the differing interpretation of s 459J. In Kezarne, Austin J referred to the judgment of Bryson J in Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 in which reference was made to the difference between defects in a demand and a defect in the affidavit: "I see a clear distinction between a defect in a demand as a ground for setting aside the demand, and a defect in an affidavit purportedly verifying the demand as a ground for setting aside the demand. An affidavit which is incorrect has a different and higher order of importance to a demand which is incorrect. There are some deficiencies in procedure which the Court should not allow to be successful, whether or not they have any higher practical significance in terms of justice between the parties in the instant case... [It] seems to me that the opportunity ought to exist for the Court to register clearly and appropriately the importance of the requirement of verification of demands. I cannot see the requirement of verification and the responsibilities in relation to it which fall both on the officer swearing the verification and on the creditor as no more than another form to fill in, errors in which the debtor can have put right on application to the Court."

37 I think this passage (as does Catalyst (Supra)) supports the proposition that matters falling within s 459(1) do not have to meet the 'substantial injustice' test, although if they caused a substantial injustice that would no doubt be a good reason to set aside the demand a view that is expressed by the Full Federal Court in Equus at p27. 38 In Peel Valley Mushrooms Ltd v Corporate Investment Australia Funds Management Ltd (2000) NSWSC 958, Santow J distinguished Portrait Express and Kezarne, in which non compliance with rules lead to setting aside of the statutory demand on the basis of s 459J(1)(b), as in Peel the source of the deponent's knowledge was apparent from the affidavit here. 39 If evidence had been lead on behalf of the defendants that established that Downey did in fact have authority from Patrick to issue a demand either in his name or in their joint names, and hence that the absence of a reference to authority in the affidavit was an oversight, the breach of the rules might be excused. I note that Latham CJ in Bowen spoke of "prima facie" invalidity in dealing with the question of authority (at p583) which rather suggests that evidence of authority could be supplied retrospectively. The creditors have, however, offered no evidence of authority in Downey at the time of the demand or as to the failure of the affidavit accompanying the demand to make reference to authority. Given the absence of evidence here from either of the persons who would be able to give such evidence, it is probable or at least a distinct possibility, that Downey did not have Patrick's authority to issue the demand, which links back to the matters touched upon by Debelle J in Bentham. Conclusion 40 If the matter rested solely on the failure of the demand to be signed by both creditors (i.e. both trustees), I think that there would be no substantial injustice in permitting the creditors to proceed on the demand, but the absence of any power given to Downey in the trust deed to act alone, and the absence of any evidence of authorisation, either prospective or retrospective, coupled with allied defects in the affidavit, leading to at least uncertainty about whether the demand was made with Patrick's authority and the importance of affidavits in the scheme of the statutory demand lead me to conclude that it is appropriate to set aside the demand, even though it can be inferred that the debt is owing and remains unpaid. I will hear the parties on the issue of costs.

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