- Austech Institute for Further Education Pty Ltd v Britt

Supreme Court of NSW|2016-08-16|Before: Black J

NSWSC 734 - Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143; (2007) 214 FLR 393 - Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 - Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 - TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 - Zone Product Australia Pty Ltd v Allards Pty Ltd [2003] NSWSC 1161 Category: Principal judgment Parties: Geitonia Pty Limited (Plaintiff) Huizhong Investment Group Pty Ltd (Defendant) Representation: Counsel: G D McDonald (Plaintiff) P Reynolds (Defendant)

Solicitors: Jordan Djundja Lawyers (Plaintiff) Elson Pow & Associates (Defendant) File Number(s): 2016/107376

Introduction and factual background

By Originating Process filed on 8 April 2016, the Plaintiff, Geitonia Pty Ltd ("Geitonia") applies to set aside a creditor's statutory demand dated 24 March 2016 issued by the Defendant, Huizhong Investment Group Pty Ltd ("Huizhong") to Geitonia ("Demand"). The Demand claimed an amount of $2,421,417.43 described in the schedule as follows: "Amount owing as at 15 May 2015 under Registered First Mortgage No [omitted] over the property known as [address omitted] Annandale NSW 2050 comprised in [title reference omitted]."
The application to set aside the Demand was initially supported by an affidavit dated 6 April 2016 sworn by Mr Con Savell, the director of Geitonia, which referred to an affidavit sworn by Mr Savell in other proceedings and annexed a copy of the Demand. Geitonia also relies on Mr Savell's further affidavit dated 16 March 2016 filed in other proceedings and an affidavit of its solicitor, Mr Djundja dated 15 August 2016, in support of the application to set aside the Demand. Huizhong in turn relies on affidavits of its solicitor, Mr Michael Kerr dated 26 April 2016 and 15 August 2016 in opposition to the application to set aside the Demand.
I should briefly refer to the factual background to the Demand, before turning to the basis of Geitonia's application to set aside the Demand. Geitonia was at one point developing a property at Annandale. Westpac Banking Corporation ("Westpac") agreed to provide Geitonia a Bank Bill Business Loan Facility in August 2011, which was secured by a first mortgage over the property and ultimately by a guarantee provided by another entity, Magasi Pty Ltd ("Magasi") in its own right and as trustee for the Schultz Unit Trust. In September 2011, Huizhong made a substantial further loan to Geitonia.
In late November 2012, Geitonia failed to pay an amount exceeding $5.4 million to Huizhong when it fell due. Geitonia subsequently fell into default under the General Conditions Schedule of the Facility Agreement between Westpac and Geitonia (Ex D1, p 232) and failed to meet its contractual obligations to Westpac in respect of interest charges for February, March, April and May 2015 (Ex D1, p 233).
In April 2015, Geitonia contracted to sell the Annandale property to a third party for an amount of $6,600,000 plus GST, with completion due in mid-November 2015. Geitonia unsuccessfully sought to require that the first mortgage over the Annandale property be transferred, initially to Magasi and subsequently to a third party, under s 94 of the Conveyancing Act 1919 (NSW). On 15 May 2015, Huizhong paid Westpac the amount of $2,421,417.43 now claimed in the Demand and Westpac transferred its first mortgage over the Annandale property to Huizhong, which then held both a first and a second mortgage over the property. In mid-September 2015, Huizhong commenced proceedings seeking declaratory relief that it was subrogated to various rights arising under Westpac's loan contract with Geitonia. Those proceedings are now due to be heard in late December 2016, having been delayed by the commencement of other proceedings by Magasi in May 2016 which are now to be heard together with the proceedings commenced by Huizhong.
On 24 March 2016, Huizhong issued the Demand in the amount that had been due by Geitonia to Westpac as at 15 May 2015 and been paid by Huizhong to Westpac as noted above.
In late April 2016, Huizhong took possession of the Annandale property and, at the end of June 2016, it sold that property at public auction for a sale price of approximately $8 million, in a transaction which completed on 1 July 2016. The proceeds were applied by Huizhong to the amount due to it under the loan secured by the second mortgage and not to repayment of the loan secured by the first mortgage. By letter dated 3 July 2016, the solicitors for Huizhong advised the solicitors for Geitonia that settlement in respect of the sale of the property had occurred on 1 July 2016 and that, after payment of land tax and other charges, the "net proceeds were then paid in partial reduction of the amount secured by the second registered mortgage" and that: "Following the application of the proceeds as outlined above, there were no excess proceeds available for application to the amount secured by the first registered mortgage or for distribution." (Kerr 15.8.16, Ex E)
In his first affidavit sworn in support of the application to set aside the Demand, Mr Savell accepts that the amount claimed in the Demand "relates to monies owed under a registered first mortgage" over the Annandale property and that Huizhong was the first mortgagee over the Annandale property. Mr Savell also refers to the contract to sell the property entered into between Geitonia and the proposed purchaser in April 2015 and states that Geitonia was ready, willing and able to complete that contract on that day but that Huizhong: "refuses to allow [Geitonia] to discharge the first mortgage unless [Geitonia] also discharges the second mortgage, which [Geitonia] is not in a position to do so".
Mr Savell also refers, in that affidavit, to other aspects of the dealings between Geitonia and Huizhong and the fact of other proceedings between those parties in the Court. The basis on which those matters were said to give rise to a genuine dispute as to the debt claimed in the Demand, or some other basis to set aside the Demand, was not entirely clear from that affidavit.

Mr McDonald's first submission - whether the affidavit accompanying the Demand was defective

Although Geitonia filed written submissions prepared by its solicitor in support of its application to set aside the Demand, Mr McDonald, who had been briefed shortly before the hearing and appeared for Geitonia at the hearing, put its application to set aside the Demand on a somewhat different basis in oral submissions.
Mr McDonald's first submission was that the Demand should be set aside because the affidavit accompanying the Demand was sworn by the solicitor for Huizhong and, Mr McDonald submitted, there was authority that a solicitor should not swear such an affidavit on the basis that he or she would not have direct knowledge of the relevant debt. Mr McDonald submitted that, on that basis, there was some other reason to set aside the Demand for the purposes of s 459J(1)(b) of the Corporations Act 2001 (Cth).
Before turning to that submission, I should address a preliminary issue raised by Mr Reynolds, who appeared for Huizhong, in that regard. Mr Reynolds pointed out that the initial affidavit of Mr Savell dated 6 April 2016 filed in support of the application to set aside the Demand had neither referred to the form of the affidavit supporting the Demand nor annexed that affidavit and submitted that it did not sufficiently raise any objection as to the form of that affidavit to allow that point now to be taken by Geitonia. Mr Reynolds relies, in that respect, on what is sometimes described as the "Graywinter principle", derived from the decision in Graywinter Properties Pty Ltd v Gas and Fuel Corp Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452 at 459, where Sundberg J noted that the requirement of s 459G(3) of the Corporations Act, that there be an affidavit supporting the application to set aside a statutory demand, required more than a mere assertion of a dispute or a statement that the debt was disputed, and required that an affidavit disclose "material facts" showing there was a genuine dispute between the parties.
Mr Reynolds also referred to the decision of the Court of Appeal in Homeward Bound Export Cherry Project Pty Ltd v Farm Working Hands Pty Ltd [2012] NSWCA 447 at [5], where Allsop P (Macfarlan JA agreeing) referred to my summary of that principle in the decision at first instance as follows: "It is well established that the only grounds of opposition which may be relied on in an application to set aside a statutory demand are those identified in the affidavit supporting that application filed within the 21 day period under s 459G of the Corporations Act or which may necessarily or reasonably be drawn from documents relied on in those affidavits [citations omitted]." The Court of Appeal also there referred to the decision of the Western Australian Court of Appeal in Financial Solutions Australasia Pty Ltd v Predella Pty Ltd [2002] WASCA 51; (2002) 167 FLR 106, which it considered was consistent with that summary of the relevant principle.
The balance of authority establishes that the Graywinter principle raises a fact-specific inquiry as to whether the affidavit in support of an application to set aside a creditor's statutory demand in fact supports that application, and the initial affidavit will sufficiently raise a relevant ground of dispute if that ground is raised by a necessary or reasonably available inference, including from documents exhibited to that affidavit: Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143; (2007) 214 FLR 393; Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1 at [36]; Infratel Networks Pty Ltd v Gundry's Telco and Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [27]ff; Re Scahill & Co Pty Limited [2016] NSWSC 566 at [19]. In Re Australian Institute of Fitness (Vic & Tas) [2016] NSWSC 1143 at [41], Barrett AJA summarised that principle as follows: "The principle associated with Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund [1996] FCA 822; 70 FCR 452 confines a s 459G applicant to grounds revealed by the supporting affidavit. The ground relied on must be evident from the affidavit, even if only from an annexure which reveals it. A mere reference to some other application having been made, albeit in proceedings between the same parties, does not reveal anything about the content of other documents filed in connection with the other proceedings. In the Britten-Norman case, the Court of Appeal accepted that these restrictions apply to a s 459J case as well as a s 459H case. …"
It seems to me that, having regard to the fact-specific inquiry that is required by Graywinter and the cases which have applied it, it cannot be said that Mr Savell's affidavit filed within the 21 day period required by s 459G of the Corporations Act raised directly, or by any necessary or reasonably available inference, any question as to the adequacy of the affidavit supporting the Demand. It does not seem to me that such a question could arise by inference where Mr Savell's affidavit did not annex or refer to that affidavit. I do not accept Mr McDonald's submission, in reply, that it was sufficient to raise that point, by an available inference, that Mr Savell's affidavit had referred to the Demand which in turn had referred to the affidavit supporting it. The fact of a reference to the Demand did not raise any implication of an inadequacy in the affidavit supporting it. For that reason, it does not seem to me that it is open to Geitonia to rely on this matter as a basis to set aside the Demand.
I will nonetheless address this ground of the application on its merits, against the contingency that an appellate court takes a different view as to whether this basis of the application is open to Geitonia. A deficiency in an affidavit supporting a creditor's statutory demand may, in an appropriate case, give rise to reason to set aside that demand under s 459J(1)(b) of the Corporations Act. The Court's power under that section exists to maintain the integrity of the process provided under Part 5.4 of the Corporations Act and will generally be used to counter an attempt to subvert the statutory demand regime: Portrait Express (Sales) Pty Limited v Kodak (Australasia) Pty Limited [1996] NSWSC 199; (1996) 20 ACSR 746; Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 at [16].
The verifying affidavit in respect of the Demand was sworn by Mr Michael Kerr, a solicitor acting for Huizhong, and relevantly provided that: "1. I am solicitor to the Creditor in relation to a debt of $2,421,417.43 owed to it by [Geitonia] as at 15 May 2015 under Registered First Mortgage Number [number omitted] over the property known as [address omitted] comprised in [folio identifier omitted]. 2. I am authorised to make this affidavit of behalf of the Creditor. 3. I am the solicitor with carriage of the creditor's dealings with [Geitonia] and I acted in relation to the assignment of the Mortgage to the Creditor from Westpac Banking Corporation ("Westpac") and I am able to confirm from my personal knowledge that $2,421,417.43 was at that time owing to Westpac by [Geitonia] and was paid by the Creditor to Westpac. I am also aware that [Geitonia] has made no payment under the Mortgage since 15 May 2015. 4. The debt mentioned in paragraph 1 of this affidavit is due and payable by [Geitonia]. 5. I believe there is no genuine dispute about the existence or amount of the debt."
Mr McDonald points out, and I accept, that it is well established that the person who swears an affidavit verifying a creditor's statutory demand should have direct knowledge of the relevant facts: B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 at 435-436. Mr McDonald also refers to the decision in Faji (Australia) Constructions Pty Ltd v AC Professional Accounting Pty Ltd [2009] NSWSC 180, where Barrett J set aside a creditor's statutory demand under s 459J(1)(b) of the Corporations Act, having found that the solicitor did not identify the source of the knowledge that the solicitor considered enabled him to make the relevant statements, and that the solicitor's belief that the amount specified in the relevant creditor's statutory demand was due and payable could only be reporting something that he was told by someone else. His Honour observed (at [30]) that: "If a person claiming to be a creditor of a company is to obtain through service of a statutory demand the benefit of a presumption of insolvency under s 459C(2)(a), it is essential that that person provide the company with all the information that must be provided in connection with the service of the statutory demand. If important elements of that information are of a hearsay nature, without any assurance of their having been inquired into and verified by someone with actual knowledge, that entitlement is denied. This is sufficient to make good the ground under s 459J(1)(b) on which the plaintiff relies."
Mr McDonald also referred to Austech Institute for Further Education Pty Ltd v Britt [2010] NSWSC 56, where Palmer J referred to B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd above and to Faji (Australia) Constructions Pty Ltd v AC Professional Accounting Pty Ltd above and observed (at [17]) that: "… [F]ailure to comply with the requirement to state in the affidavit supporting the Statutory Demand the source of knowledge or the basis of information for the belief that there is no genuine dispute as to the existence of the debt is fatal to the Statutory Demand by virtue of s 459J(1)(b). I do not think that the strict application of that principle should be diluted by creating any exceptions." His Honour also observed (at [18]) that, as a general rule, statutory demands "ought not to be supported by an affidavit from the creditor's solicitor" because it would generally be difficult for such a solicitor to inform himself or herself adequately of the matters relating to the debt required to be verified by Form 7 and r 5.2 of the Supreme Court (Corporations) Rules 1999 (NSW). I understand that proposition to reflect a counsel of prudence rather than a proposition of law.
I do not understand the authorities on which Mr McDonald relies to establish any general proposition that a solicitor who has appropriate knowledge of the relevant facts and has the creditor's authority to verify the creditor's statutory demand may not do so on the creditor's behalf. It seems to me that the present case is plainly distinguishable, as a matter of fact, from the position considered in Faji (Australia) Constructions Pty Ltd v AC Professional Accounting Pty Ltd above and Austech Institute for Further Education Pty Ltd v Britt above. Mr Kerr's affidavit made clear that he was confirming the amount of the debt owed to Westpac and paid by Huizhong to Westpac from his personal knowledge, derived from his carriage of Huizhong's dealings with Geitonia and having acted in relation to the assignment of the mortgage from Westpac to Huizhong. I understand his further statement of his awareness that Geitonia had made no payment under the mortgage since 15 May 2015 to have been made on the same basis.
It is plain that Mr Kerr had a proper basis for such personal knowledge and that this was not a case where he was relying on having been informed of the relevant matters by, for example, an officer of Huizhong. By letter dated 15 May 2015, Westpac had advised Mr Kerr's firm of the payout figure for Geitonia's loan facility as at 15 May 2015, in the amount of $2,421,417.43, the figure that was stated in the Demand (Ex D1, p 232). Mr Kerr also had personal knowledge of the amount paid by Huizhong to Westpac, in taking an assignment of the mortgage, since he signed a letter dated 15 May 2015 from his firm to its bank which in turn instructed that a bank cheque in the relevant amount be drawn in favour of Westpac. By an affidavit dated 16 March 2016, filed on 17 March 2016 in proceedings in which Mr Kerr's firm was acting for Huizhong, Mr Savell also recorded that: "On or about 15 May 2015, Huizhong paid Westpac the sum of $2,421,417.43, being the amount owed by Geitonia to Westpac in respect of a loan facility held by Geitonia with Westpac. On or about the same date, Westpac transferred its first mortgage over the property to Huizhong." (Savell 16.3.16 [5], emphasis added)
For completeness, I should add that Mr Kerr was also party to correspondence with the solicitor for Geitonia, after he had sworn the verifying affidavit and service of the Demand, by which the parties agreed the amount of the money then owed by Geitonia to Huizhong under the first mortgage.
I am satisfied that Mr Kerr had sufficient personal knowledge of the relevant matters so as to depose to the amount of the relevant debt, the absence of payment by Geitonia, the fact that the debt was due and payable by Geitonia and the absence of any genuine dispute as to the existence or amount of the debt. Geitonia's application to set aside the Demand on a basis of a deficiency in the verifying affidavit would therefore fail, even if that application were open to it.

Mr McDonald's second submission and a second Graywinter point

Mr McDonald's second submission was that Huizhong is not now a creditor of Geitonia. Mr McDonald submitted that that matter gave rise to a genuine dispute as to the existence of the debt within the scope of s 459H(1)(a) of the Corporations Act and also submitted that Geitonia had an offsetting claim under s 459H(1)(b) of the Corporations Act arising from its dealings with Huizhong.
Mr Reynolds submitted that this claim was also not available to Geitonia by reason of the Graywinter principle. I was initially somewhat sceptical of that submission. As at the time that Geitonia filed its application to set aside the Demand, there was a dispute as to how sale proceeds of the Annandale property should be applied, if Geitonia was permitted to proceed with its proposed sale of the property to a third party. However, that sale did not proceed and it was not until late April 2016, after the Demand had been served and the application to set it aside had been filed, that Huizhong took possession of the property and not until early July 2016 that the sale of the Annandale property was completed and Huizhong allocated the sale proceeds to the loan secured by the second mortgage, rather than the loan secured by the mortgage initially given to Westpac and subsequently transferred to Huizhong. The ground of dispute on which Geitonia relied therefore only arose after the end of the 21 day period during which any application to set aside the Demand had to be filed under s 459G of the Corporations Act, and could not have been raised when the application to set aside that Demand and the supporting affidavit was filed.
Mr McDonald submitted that, notwithstanding the Graywinter principle, it was open to Geitonia to rely on a ground that had arisen after the 21 day period on which the application to set aside the creditor's statutory demand had to be, and was, brought. Mr McDonald referred to Civil Systems Pty Ltd v ET Constructions Pty Ltd [2000] NSWSC 1119 ("Civil Systems") where Master Macready held that a party was able to rely on a genuine dispute that existed at the time of the hearing of the application to set aside a creditor's statutory demand and that such a dispute could be raised although it had not been included in the affidavit filed in support of the application to set aside the creditor's statutory demand. Master Macready reasoned as follows (at [16]): "The requirement under s459H for the court to determine at the hearing that there is a genuine dispute will no doubt mean in some cases that a perfectly genuine dispute articulated in an affidavit filed within time ceases to exist by reason of some fact occurring after the 21 day period but before hearing. Such fact could emerge through cross examination or defendant's affidavits which are filed after the 21 day period. It is obvious that the court would be required to take such a fact into account. This obverse situation to the present case perhaps assists by drawing attention to when the dispute has to exist. In the present case the affidavit promoted the applicant's case by articulating a ground which would be made out at the hearing the date for which was specified in the revised application. That one of the facts necessary for that ground to exist might only occur after the 21 days and before the hearing does not mean, in my view, that the affidavit failed to promote the applicant's case. To hold otherwise would confuse the two different temporal requirements. One is the establishment at the hearing of the existence of the genuine dispute and the other is the filing of an appropriate affidavit within the 21 days. The legislation in its terms does not also require the establishment of the existence of a genuine dispute at some time within the 21 days."
However, in his subsequent decision in Zone Product Australia Pty Ltd v Allards Pty Ltd [2003] NSWSC 1161, to which Mr McDonald did not refer, Master Macready noted (at [15]) that his decision in Civil Systems above was decided at a time that there was an open question whether additional grounds could be added, beyond those raised in an affidavit filed within the 21 day period under s 459G of the Corporations Act, and that that question was resolved in the negative by the subsequent case law. Master Macready also qualified his earlier decision by observing (at [16]) that, unless a particular dispute is raised in an affidavit filed within time, it cannot be dealt with in later affidavits, subject to the qualification that a genuine dispute arising out of a matter of law, which does not require evidence to support it, would always be available to be argued. The dispute as to whether Huizhong is a creditor is plainly not only a matter of law, since it depends on evidence as to the sale of the Annandale property and the subsequent allocation of the sale proceeds by Huizhong.
In Braams Group Pty Ltd v Miric [2002] NSWCA 417; (2002) 44 ACSR 124, Ipp JA appears to have proceeded on the basis that an event occurring after the 21 day period in which an application could be made to set aside a creditor's statutory demand could not be raised in that application, in holding that such an event could be raised without leave under s 459S of the Corporations Act in opposition to a subsequent winding up application. His Honour observed at ([78]-[79]): "In the context of s 495S, the payment of the judgment debt after the expiry of the statutory 21 day period would be a ground on which the defendant debtor could not have relied in attempting to set aside or stay the statutory demand. Hence, it seems to me, there would be no reason why the defendant could not rely on such payment in opposing the winding up. Assume then, instead of a subsequent payment in full, that - after the statutory period has expired and before the winding up application is made - a judgment is delivered that establishes that the defendant is not indebted to the purported creditor. In these circumstances, I think it readily arguable that it would be "quite unacceptable" for the winding up to proceed. That would be simply on the basis that there could be an abuse of court in an applicant proceeding as a creditor when there is a judgment of the court to the effect that it is not." (emphasis added) I understand his Honour's observation that the debtor could not rely on that matter to set aside the creditor's statutory demand to reflect the fact that it could not be raised, where it had occurred after the 21 day period or, alternatively, a proposition that a subsequent payment would not create a genuine dispute as to the debt. Either proposition is fatal to Geitonia's reliance on a claim that the debt that Huizhong acquired from Westpac should subsequently have been discharged (although it was not) to set aside the Demand, as distinct from as a basis for opposing a subsequent winding up application.
In Biron Capital Ltd v Velowing Pty Ltd [2003] NSWSC 1181 at [10], Barrett J similarly held, in dealing with the matters that could be raised in opposition to a winding up application, that events that occurred outside the 21 day period in which an application to set aside a creditor's statutory demand could be made were not grounds on which a defendant could have relied in making an application to set aside that demand. In Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734 at [11]-[12], Barrett J also gave the example of a payment of the amount claimed in a creditor's statutory demand, after the 21 day period to bring an application to set aside the demand had expired, as a matter which could be relied upon in opposition to a winding up application, on the basis that the payment: "having occurred after the expiration of the period for challenging the statutory demand pursuant to s 459G, will not represent, for s 459S(1) purposes, a ground that could have been relied upon to challenge the statutory demand." I recognise that those cases do not deal directly with the question whether such a ground could later be introduced in an application that was in fact commenced within the requisite 21 day period.
On balance, it seems to me that I cannot follow the approach adopted in Civil Systems above, and this ground of the application to set aside the Demand is also not open to Geitonia where it was not (and could not have been) raised by the application to set aside the Demand or the supporting affidavit filed within the 21 day period specified in s 459G of the Corporations Act, where that ground had not arisen within that period. It seems to me that to set aside a creditor's statutory demand, on a ground which was not raised within the 21 day period specified in s 459G of the Corporations Act, even in circumstances that it could not have been raised, would be outside the statutory jurisdiction conferred on the Court under that section and would involve a significant departure from the appellate authorities that have endorsed the Graywinter principle. Although that result is plainly disadvantageous to Geitonia in some respects, that disadvantage is to some extent mitigated by the fact that Geitonia will be entitled to raise this ground, without leave, in opposition to a winding up application based on a failure to comply with the Demand.
I should note, for completeness, that Mr McDonald also submitted that, if the reference to the 21 day period is to the period in which a debtor may pay the relevant debt, that period is now extended by s 459F of the Corporations Act until after the determination of the application to set aside the Demand. However, that submission is not to the point, since the period in issue is the 21 days within which an application to set aside the Demand and the affidavit in support of it could be filed under s 459G of the Corporations Act, which is not extended on that basis.

Whether a genuine dispute is established on this ground

As I noted above, Mr McDonald submitted that Huizhong is not now a creditor of Geitonia to establish both a genuine dispute as to the existence of the debt, within the scope of s 459H(1)(a) of the Corporations Act and an offsetting claim under s 459H(1)(b) of the Corporations Act. I have held that this submission is not open to Geitonia at this point, although it will be open to it in resisting any winding up application that is later brought in reliance on a failure to comply with the Demand. I will also address this submission on its merits, against the contingency that an appellate court takes a different view as to whether these grounds of the application are open to Geitonia.
Section 459H(1)(a) of the Corporations Act provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of the debt to which the demand relates. That test has often been described as requiring simply that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation", and is similar to that which would apply in determining whether a basis for an interlocutory injunction had been established, or an application for summary dismissal of proceedings could be resisted. Mr Reynolds refers, in identifying the content of a "genuine dispute", to several well-known decisions including Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 and TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], as well as to my discussion of the applicable principles in Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 at [9]-[22]. Mr Reynolds accepts that the test for a genuine dispute is not a particularly demanding one and that the Court would not embark upon any extended inquiry as to Geitonia's claims in determining whether a genuine dispute exists.
It will be sufficient briefly to identify the applicable principles. In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd above at [44], Young AJA (with whom Hoeben JA and Ward J (as her Honour then was) agreed) noted that the question for a primary judge, in determining an application to set aside a creditor's statutory demand on the basis of a genuine dispute, is to determine whether there was a "genuine dispute", that is one in which a plausible contention has been raised by the company on which the creditor's statutory demand was served. In Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601, the Court of Appeal, in summarising the case law applicable to the threshold to demonstrate an offsetting claim, conducted a comprehensive review of the cases referable to establishing whether a genuine dispute was established. Their Honours there emphasised (at [36]) that the Court must be satisfied that there is a serious question to be tried or an issue deserving of a hearing or a plausible contention requiring investigation but also emphasised that the evidence necessarily for that purpose "need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable". Their Honours also observed (at [46]) that: "In determining whether there is evidence of a genuine dispute as to the debt, or that there is an offsetting claim, except in extreme cases, the court is not concerned to engage in an enquiry as to the credit of the deponent of the affidavit filed in support of the application." The Court also summarised the position (at [47]) as being that the Court's role is: "to determine whether there was plausible evidence to establish the existence of a genuine dispute, not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim."
In this case, the debt owed by Geitonia to Huizhong that was the subject of the Westpac mortgage was not repaid, as a matter of fact, on the sale of the Annandale property, because Huizhong did not apply the proceeds of sale to the loan secured by the Westpac mortgage. I will assume, without deciding, that an arguable failure by Huizhong to comply with an obligation to apply the monies to the loan secured by the Westpac mortgage would be capable of giving rise to a genuine dispute as to the debt that is the subject of the mortgage, as distinct from an offsetting claim against Huizhong. Even making that assumption, it does not seem to me that a genuine dispute is established in this case, because Geitonia has not established a genuinely arguable case that Huizhong was obliged to apply the sale proceeds to that part of the debt owed to Huizhong that had originated with the loan made by Westpac rather than with the loan made by Huizhong.
Mr McDonald initially submitted that Huizhong was no longer a creditor of Geitonia on the basis that the debt owed by Geitonia had been satisfied by the operation of s 58(3) of the Real Property Act 1900 (NSW). That section provides that, where a mortgagee exercises a power of sale under ss 57 and 58 of the Real Property Act, then: "The purchase money to arise from the sale of any such land, estate or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be."
Mr McDonald ultimately abandoned reliance on this section in the course of oral submissions and accepted that s 58(3) of the Real Property Act cannot have direct application where Huizhong was both the first and second mortgagee. It seems to me that he was correct to do so, since the first and second steps contemplated by that section had occurred, the second being the payment of the monies then due to the only mortgagee, Huizhong. It seems to me that that section does not then address the position as to the allocation of such payments, by a single mortgagee, between different debts which may be due to it, as distinct from the position as between an initial mortgagee and subsequent mortgagees.
Mr McDonald then developed an alternative submission, in oral submissions, that the debt owed by Geitonia to Huizhong ought to have been satisfied in equity rather than by reason of s 58(3) of the Real Property Act. Mr McDonald relied on the decision of the Court of Appeal in Residential Housing Corporation v Esber [2011] NSWCA 25; (2011) 80 NSWLR 69 where Campbell JA (with whom Macfarlan JA agreed and Sackville AJA also agreed, with additional comments) observed (at [72]) that: "It is necessary for equitable principles to be called into play in deciding priorities between NSW registered mortgagees because s 58(3) does not deal with all the possible situations in which proceeds of sale might come to be distributed amongst a mortgagor and mortgagees. If it is a second registered mortgagee who sells, s 58(3) says nothing about the first registered mortgagee being paid out (because it is not a "subsequent mortgage"). Clearly the first mortgagee would have priority even over the second mortgagee (absent an agreement altering the priority arising from registration) but it is equitable principles, not s 58(3) that requires it to be paid to give effect to that priority."
Mr McDonald contended that there existed an equitable principle that required Huizhong, on settlement of the sale of the Annandale property in July 2016, to apply the proceeds first to discharge the first mortgage given to Westpac (or, more precisely, the debt previously owed to Westpac and then to Huizhong) rather than to the debt secured by the second mortgage and also owed to Huizhong. Mr McDonald was not, however, able to identify the basis of the suggested principle by reference to any established equitable principle or to identify any case law that had previously recognised such a principle.
Mr Reynolds responded to the submission that Geitonia was entitled to require that the proceeds of sale be applied to the debt that was the subject of the Westpac mortgage in priority to the debt arising under the Huizhong loan by submitting that Huizhong was entitled to apply the money it recovered in sale of the Annandale property to debts owed by Geitonia in any order it saw fit, having regard to an express contractual right in Westpac's loan documentation permitting an application of recovered money in any order. Paragraph D6 of the Memorandum of Common Provisions (Ex D1, p 64) relevantly provides that: "The Lender may apply any money it receives or recovers in any way in respect of money you owe, in paying whatever of the money you owe that it chooses (despite any direction to the contrary)." To the extent that that facility was assigned to Huizhong, which was then the relevant lender, that term expressly authorises Huizhong to apply the money that it received, on a sale of the Annandale property, to any part of the money owed by Geitonia to Huizhong, including that part which was secured by the second mortgage in preference to that part which was secured by the first mortgage.
While I am conscious of the relatively low threshold that is necessary to establish a genuinely arguable claim, I am unable to accept that such a claim has been identified, even to that relatively low threshold. First, as I noted above, Mr McDonald was not able to identify any established equitable principle which would give rise to such a claim or any case law that supported it. Second, as Mr Reynolds points out, the terms governing the loan made by Westpac to Geitonia are, on their face, inconsistent with any such right on Geitonia's part.
Third, to the extent that any claim by Geitonia may be put by reference to any wider principle of unconscionability, it is not apparent that Geitonia (as distinct from, for example, Magasi as guarantor in respect of the first mortgage) has any interest in the manner in which the monies are applied by Huizhong, or suffers any detriment because they are applied in the manner in which Huizhong has applied them. The amount owing by Geitonia to Huizhong, after the sale of the Annandale property, is the same whether Huizhong applies the relevant sale proceeds to that part of the loan which it originally made, or that part of the loan which Westpac originally made. The only apparent practical impact of such an allocation is that Geitonia may obtain a strategic benefit, or at least delay a winding up application, if it can set aside the Demand so far as it relies on that part of the debt that was originally owed to Westpac, and leave Huizhong to issue, if it wished, a further creditor's statutory demand directed to the balance of the debt that is still owed to it after the sale of the Annandale property. Mr Reynolds also submitted, and I accept, that to the extent that Magasi may have any claim that it is disadvantaged, in its capacity as guarantor, by the manner in which the monies received on a sale of the Annandale property are applied, that does not create any dispute as to the debt owed by Geitonia to Huizhong.
Mr Reynolds also submitted that the approach adopted by Mr McDonald was inconsistent with the concept of marshalling, so far as that concept is directed to a choice made by a secured creditor as to the security which it chooses to enforce. Mr McDonald responded that the principle of marshalling applies where Huizhong held two debts and one secured property. I do not consider it necessary to address that question, given the findings that I have reached on other grounds.
For these reasons, even if this ground were open to Geitonia, it does not seem to me that a genuine dispute as to the debt is established.

Whether an offsetting claim is established

As I noted above, Geitonia also seeks to establish an "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act. That concept refers to the amount of a claim or claims that a company has against the person who served a creditor's statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates: s 459H(5). If the Court is satisfied that a company has an offsetting claim, then the Court is required to calculate the "substantiated amount" of the demand by deducting any offsetting claim from the admitted amount of the debt: s 459H(2).
Mr Reynolds refers to Palmer J's summary of the relevant principles applicable to an offsetting claim in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18] and to the Court of Appeal's observation in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd above at [30]-[31] and [39]-[55] that that concept requires the party seeking to set aside a demand establish "a serious question to be tried", "an issue deserving of hearing" or a "plausible contention requiring investigation".
In Beauty Health Group Ltd v Sholl [2011] NSWSC 77 at [23], Barrett J observed that s 459H(1)(b), read in conjunction with the definition of "offsetting claim" in s 459H(5): "… requires the court to consider whether the plaintiff has a 'genuine' claim against the defendant in respect of the matter raised. It is also necessary to ascribe an 'amount' to any 'genuine' claim in order to determine, under s 459H(2), the 'offsetting total' which plays a central part in determining whether the 'substantiated amount' is less than the statutory minimum of $2,000. The court's task is not to make any final choice between the competing contentions about the relevant matter. It need only see that the plaintiff has asserted a claim and that the claim rises to the level of a serious question to be tried (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341), is based on a cause of action advanced in good faith for an amount claimed in good faith (Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743) and is not frivolous or vexatious (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37)."
In Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd above, the Court of Appeal observed at [30] that: "It is settled law that s 459H requires the court to be satisfied that there is a 'serious question to be tried': see Scanhill v Century 21 Australasia at 467, or 'an issue deserving of a hearing' as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted 'with sufficient particularity to enable the court to determine that the claim is not fanciful'."
It seems to me that an offsetting claim is also not established, for the same reasons that a genuine dispute is not established, and for the additional reason that, in order to establish an offsetting claim, Geitonia would need to establish that it had an arguable claim to an amount that was recoverable against Huizhong. It does not seem to me that Geitonia can establish an arguable claim to such a loss, where the manner in which the relevant funds are allocated has, as I noted above, no apparent economic impact upon it.
Mr McDonald initially foreshadowed, but did not press, a further claim arising from suggested discrepancies within the amounts claimed by Huizhong.

Orders and costs

For these reasons, Geitonia's application to set aside the creditor's statutory demand dated 24 March 2016 issued by Huizhong should be dismissed with costs.

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: 09 September 2016

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