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

Supreme Court of NSW|2017-03-29|Before: Gleeson JA

Solicitors: McGirr Lawyers Pty Limited (Plaintiff) Piper Alderman (Defendant) File Number(s): 2016/335159

Background

The affidavit accompanying the statutory demand is sworn by Mr Patrick Coope, a director of AIG, who stated his belief there is no genuine dispute about the existence or amount of the debt.
Mr Coope deposed in his affidavit (par 4) that on or about 30 April 2014, the company requested AIG to advance to it such loan funds as it required to establish a broking business in Australia for various litigation insurance products. Mr Coope said that he and Mr Patrick Moloney, agreed through respective corporate entities that they each controlled, to fund the company on an equal basis to establish the business, which Mr Coope described as the "Funding Agreement".
Each of Elizabeth Hawksworth, Australian Insolvency Group Pty Ltd (AIG) (Mr Coope's company) and ATE Holdings Pty Ltd (ATE) (Mr Moloney's company) beneficially holds one-third of the shares in the company. On 10 July 2014, the company and its shareholders entered into a Shareholders Agreement which provided for the management of the company and for "Shareholder Loans" to be made available to the company by AIG and ATE upon certain terms. Between 2014 and 2015 those shareholders provided loans totalling $452,378 for working capital. These funds were equally contributed by AIG and ATE. It seems that some of the loans were provided (at least by AIG) before the date of the Shareholders Agreement.
Mr Coope deposed (in par 5) that AIG agreed with the company that the loan funds were to be repayable in the event that there was an Event of a Default Notice served pursuant to the provisions of the Shareholders Agreement. This may be taken to be a reference to the provisions of schedule 7 to the Shareholders Agreement (which is referred to below).
It is not in dispute that AIG gave notice to the company of an event of default on 7 August 2016; that the company did not remedy the specified events within 10 business days of receipt of the notice; and that on 22 August 2016 AIG forwarded to Mr Moloney and Ms Hawksworth an email giving notice pursuant to par 5(a) of Schedule 7 to the Shareholders' Agreement that shareholder loans made by AIG to the company shall be due and payable after 10 business days. The company did not comply with that demand for repayment.

The asserted dispute

The dispute identified in Mr Moloney's affidavit sworn 9 November 2016 involves a question of construction of the Shareholders Agreement. That is, whether on the occurrence of an event of default, AIG is entitled unilaterally to demand immediate repayment of its portion of the Shareholder Loans on giving 10 business days' notice in writing to the company. Reference was made to par 5 of Schedule 7 to the Shareholders' Agreement which provides: [5] On an event of default: (a) the Shareholder Loans at the option of PC and PM shall become immediately repayable on the giving of 10 Business Days' notice in writing. [Emphasis added]
The reference to "Shareholder Loans" in par 5 of Schedule 7 is a reference to the loans made pursuant to cl 12 and Schedule 7 of the Shareholders' Agreement by the entities described as PC and PM. The reference to PC is a reference to AIG and the reference to PM is a reference to ATE Holdings.
In his affidavit, Mr Moloney deposed: [19] …."Shareholder Loans" is a reference to loans made by both AIG and ATE Holdings and the option contained in paragraph 5 of Schedule 7 is an option of both AIG and ATE Holdings which may only be exercised by these parties jointly. [20] AIG did not consult with ATE Holdings before sending the 22 August Email and ATE Holdings did not at any time (and does not) agree to exercise the option in paragraph 5 of Schedule 7. As such, the Shareholder Loans are not currently repayable and there is no debt owed to AIG by the [company]. [Underlining in original]
The company contends that the Shareholders Agreement provides for joint "Shareholders Loans" and that the option conferred on the two shareholders to accelerate repayment of Shareholder Loans upon an event of default, is a compendious requirement following upon the fact that the loans are joint loans. Since the debt to AIG is, on the company's preferred construction, a joint debt, the demand by only one of the joint creditors is said to be invalid. Reference was made to In the Matter of Access Elevators Australia Pty Limited [2016] NSWSC 739 (Robb J); Kevin McNamara & Son Pty Ltd (2014) 287 FLR 96; [2014] VSC 337 (Robson J); 115 Constitution Road Pty Ltd v Alan Downey as Trustee for NBD Systems & Anor (2008) 220 FLR 216; [2008] NSWSC 997 (Rein J); Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42 (Doyle CJ, Perry and Debelle JJ).
The company contends that the requirements of par 5 of schedule 7 were not followed so as to call up the loans because ATE did not participate in any notice to accelerate the obligation for repayment. As a consequence, the company submitted, the statutory demand was invalidly given. On the company's case, repayment of the Shareholder Loans is not due until 31 May 2007: par 6(c), Sch 7, Shareholders Agreement.
AIG contends that the Shareholders Loans are several obligations of the company and accordingly the option conferred on the two shareholders by par 5 of schedule 7 to accelerate repayment of Shareholder Loans, may be exercised severally by the two shareholders upon an event of default. In support of this construction, AIG points to a general interpretation provision in cl 2(h) of the Shareholders Agreement and, what it submits, are a number of contextual indicators in the Shareholders Agreement that the Shareholders Loans are several not joint.

Relevant provisions of the Shareholders Agreement

It is not necessary to set out in detail the provisions of the Shareholder's Agreement to which the parties referred in submissions. It is sufficient to refer to the following provisions.
The general interpretation provision in cl 2(h) of the Shareholders Agreement provided: 2. In this agreement, unless the context otherwise requires: …… (h) reference to two or more persons means each of them individually but not jointly; [Emphasis added]
The company submits that cl 2(h) is not directed to, nor intended to, substantively affect legal rights or obligations but rather to correctly identify persons named in groups in the contract. In support of this submission the company emphasises that cl 2(h) uses the word 'individually' rather than 'severally', the latter being the logical counterpart to a use of the word 'jointly' if the intention of the clause was to define the nature of the legal relationship.
Clause 12.1 provided that AIG and ATE would lend money to the company to cover its estimated expenses to be detailed in the Annual Budgets for the period 31 March 2016 on the terms set out in schedule 7 to the agreement. The company contends that this obligation is a joint obligation because of use of the words "PC and PM and agree to lend".
Clause 12.2 contemplates that a shareholder may lend more, proportionately, than other shareholders, in which case that shareholder is entitled to be paid in priority to other amounts lent. AIG points to this provision as an indicator of there being individual obligations and individual loans, such that there can be priority as between them.
Schedule 7 headed "Shareholder Loans" sets out the terms on which the company could request payment of monies to be loaned under cl 12.1 of the Shareholders' Agreement. Paragraph 1 provides that upon the issue of a valid drawdown notice, "PC and PM must provide any amount requested" within a specified time. Paragraph 3 provides that the relevant drawdown notices are to be given "to both PC and PM and are to be for the same amount". The notices were to be signed by Ms Hawksworth and to contain certain information.
The Shareholders Agreement set out various events of default in cl 22. These included Insolvency Events as defined, a breach of the company's employment agreement with Ms Hawksworth, and breach of the agreement itself which was not remedied after notice.
Paragraph 5 is the critical clause; par 5(a) has been set out above. The company says that it is clear that a notice under par 5(a) could only be given jointly by AIG and ATE. AIG says that reading in the relevant definitions of "PC and PM", and applying the interpretation provision in cl 2(h), par 5(a) provides that the loans made in accordance with clause 12 and schedule 7 at the option of AIG and ATE individually and not jointly shall become immediately repayable on the giving of the notice.
Paragraph 5(c) provided that upon the giving of a valid notice under par 5(a), the company was required to give security "jointly" to AIG and ATE. AIG says that this is an example where the context "otherwise requires" so as to exclude the interpretation provision in clause 2(h).
Under par 6, Shareholder Loans were otherwise repayable at the election of the company, or 20 business days after certain trigger events have been achieved. This was a reference to reaching certain sales and profitability targets set out in schedule 5 of the Shareholders Agreement. In addition, the loans are in any event to be repayable on 31 May 2017.
Paragraph 8 provides what is to occur if either AIG or ATE fail to make "their respective Shareholder Loan". If the defaulting party fails to meet its obligations within 10 business days of being given notice by the other party to do so, the "non-defaulting party is required to meet the obligations of the defaulter" (par [8(b)]). The non-defaulting party is also entitled to acquire all of the defaulting party's shares in the company at a specified value and all of the Shareholder Loans to the Company of the defaulting party at face value (par [8(c)].
Paragraph 9 "sets out the circumstances in which PC and/or PM can refuse to provide Shareholder Loans to the Company". AIG submits that the use of the disjunctive "and/or" is an indicator that there are separate loans, because if there was a single joint obligation, one party could not avoid making good that obligation if the other refused to contribute as is contemplated by par 9.

Decision

It is necessary to first say something about the approach to the existence of a genuine dispute where a question of construction of documents is involved.
In Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 at [45], Barrett J explained the proper approach to the existence of a genuine dispute where the issue in contention is one of construction: [45] … A dispute as to the existence of a debt that is the product of a dispute about construction is not removed from s 459H(1)(a) just because the issue in contention is one of construction. While it has been said that "a short point of law or the construction of documents or agreed facts" may, unlike a disputed question of fact, be determined upon a s 459G application (see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384), it does not follow that the court is compelled to make such a determination. In the case of a legal argument, determination might be appropriate if it were, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, a "patently feeble legal argument". [46] I consider it appropriate to adopt in this case the approach I outlined in Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483; (2008) 66 ACSR 229 at [50]: "Where the basis for the alleged dispute is a legal argument or question of construction which is not 'patently feeble' and does not involve a 'short point of law' and there are clearly arguable alternatives as to the correct outcome, the court should not, upon the s 459G application, attempt to reach a definitive resolution. The reasons are stated in the joint judgment of Brooking JA and Charles JA in Spacorp Australia Pty Ltd v Myer Stores Ltd (2001) 19 ACLC 1270; [2001] VSCA 89 at [4]: '[4] We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), Judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.'"
His Honour returned to this issue in Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 at [22], summarising the approach reflected in the subsequent authorities as follows: [22] In cases of this kind the court will not decide between competing contentions on a matter of construction of an instrument unless the point is a short and straightforward point. The notion that the court may, as it were, descend into the arena to that limited extent probably first emerged in Delnorth Pty Limited v State Bank of New South Wales (1995) 17 ACSR 379 but, as the Court of Appeal emphasised in Infratel Networks Pty Limited v Gundry's Telco and Rigging Pty Limited [2012] NSWCA 365; 297 ALR 372, that is not the course that should ordinarily be taken. In fact, the Court of Appeal there endorsed the observation of Sackville J in Trecomax Pty Limited v Prentice [2004] FCA 1057; 50 ACSR 314, that s 459G proceedings are not ordinarily the occasion for the court to construe the contract where there are competing views about its meaning.
Recently the Court of Appeal in Ligon 158 Pty Ltd v Huber [2016] NSWCA 330, (Barrett AJA, McColl and Meagher JJA agreeing) emphasised the restraint that a court should exercise in considering the ultimate question of the indebtedness of a company served with a statue demand, referring with approval to the remarks of Brooking and Charles JJA in Spacorp Australia Pty Ltd v Myer Stores Ltd (2001) 19 ACLC 1270; [2001] VSCA 89 at [3] - [4]. The passage of their Honours' reasons at [4] had been earlier referred to by Barrett J in Drillsearch at [46] (see [27] above).
The important points to be derived from the authorities are as follows. First, the court dealing with a s 459G application is not compelled to determine questions of construction of documents. Second, s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. Third, the cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number. Fourth, the court's state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared.

Construction of par 5(a)

In the present case, the prima facie meaning given by cl 2(h) to a reference to two or more persons in the Shareholders Agreement is expressly displaced if the context requires otherwise. An understanding of the context of a provision requires reference to the terms of the agreement as a whole. Here the terms include that the funding requirements of the company were to be met by two shareholders equally; if one shareholder failed to make its respective contribution to the company the other shareholder was required to meet such obligation; and that the funding obligations of both shareholders would cease upon an event of default, in which event, the company was to provide security jointly to the shareholders in respect of the Shareholder Loans.
The context may also include an understanding of the genesis of the transaction, the background and the market: International Air Transport Association v Ansett Australia Holdings Limited (Subject to Deed of Company Arrangement) & Ors (2008) 234 CLR 151; [2008] HCA 3 at [8] (Gleeson CJ). The Chief Justice explained at [8] that there may be cases: … in which the Court's general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes it meaning. (Citations omitted)
That the construction of a contract requires consideration of the significance of the language used by the parties, the surrounding circumstances known to the parties and the commercial purposes and objects to be secured by the contract, was emphasised by the High Court when restating the general principles of construction in Electricity General Corporation t/as Verve Energy Limited v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation t/as Verve Energy Limited (2014) 251 CLR 640; [2014] HCA 7 at [35]. Similarly, the United Kingdom Supreme Court has recently said that "[t]extualism and contextualism are not competing paradigms in a battle for exclusive occupation of the field of contractual interpretation": Wood v Capita Insurance Services Ltd [2017] UKSC 24 at [13].
Counsel for AIG fairly acknowledged that the genesis of the transaction and its background might be relevant to the proper construction of par 5(a). That concession was properly made consistently with the principles stated by the High Court in Electricity General Corporation t/as Verve Energy Limited v Woodside Energy Ltd at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[50].
Counsel for AIG also acknowledged that there is some imprecision in the language of Schedule 7. For example, unlike par 8 where express reference is made to the "respective" Shareholder Loan of AIG or ATE, par 5(a) does not use the word "respective" to signify, as AIG submitted, the individual nature of the option given to the shareholders to demand early repayment of the Shareholder Loans.
On the face of the Shareholders Agreement each of the possible constructions is at least fairly arguable. For the reasons given in the authorities mentioned above, it is inappropriate to express a view as to whether one construction is to be preferred over the other. It is sufficient to say, adopting the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, that I do not consider the company's preferred construction to be a "patently feeble argument".
That there is a dispute about the correct construction of the Shareholders Agreement means that there is also a dispute about the existence of the debt that would exist if AIG's preferred construction were correct, but would not exist if the company's preferred construction was correct: Drillsearch at [45]. This is a case where the differing views as to the correct construction of the contract could only be resolved by proceedings in which one party sought to enforce the Shareholders Agreement against the other: Broadspectrum at [23]. Accordingly, there is a genuine dispute concerning the existence of the debt the subject of the statutory demand.

Orders

I make the following orders: 1. Order that the statutory demand dated 12 October 2016 served on the plaintiff by the defendant be set aside. 2. Order that the defendant pay the plaintiff's costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 April 2017

Corporations Act 2001(Cth)s 459G, 459H(1)(a), 459J(1)(b)

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