Australian Aloe Limited v Export Growth Finance Pty Limited and Australian Aloe Marketing Limited

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5445/02 AUSTRALIAN ALOE LIMITED -v- EXPORT GROWTH FINANCE PTY LIMITED

5446/02 AUSTRALIAN ALOE LIMITED -v- AUSTRALIAN ALOE MARKETING LIMITED DRAFT JUDGMENT 1 MASTER: These two matters were heard together and, by consent, the evidence in the one, so far as was relevant, was treated as evidence in the other. 2 By originating process 5445 of 2002 Australian Aloe Limited claims an order that the statutory demand of the Defendant, Export Growth Finance Pty Limited, dated 16 October 2002 and served on the Plaintiff on 18 October 2002, be set aside. 3 By that demand the Defendant claims payment by the Plaintiff of the sum of $108,500, being the amount of the debt described in the schedule thereto. The schedule describes that debt as follows, Unpaid balance of monies loaned by the creditor to the company $108,500 4 (The Plaintiff during the hearing was referred to as "AAL", whilst the Defendant was referred to as "EGF".) 5 By originating process 5446 of 2002 filed on 8 November 2002 the Plaintiff Australian Aloe Limited claims an order that the statutory demand of the Defendant, Australian Aloe Marketing Limited, dated 16 October 2002 and served on the Plaintiff on 18 October 2002, be set aside. 6 By that demand the Defendant claims payment to it by the Plaintiff of the sum of $325,958.98, being the amount of the debt described in the schedule thereto. The debt is described in the schedule as follows, Unpaid balance of monies loaned by the creditor to the company $325,958.98. 7 (The Defendant was referred to during the hearing as "AAM".) 8 Each proceedings is brought pursuant to the provisions of Division 3 of Part 5.4 of the Corporations Act, and, in particular, pursuant to section 459H of the Corporations Act. The Plaintiff asserts in each case that there is a genuine dispute as to the existence of the debt to which the demand relates. 9 In proceedings 5446 of 2002 (in which the Defendant is Australian Aloe Marketing Limited) - but not in proceedings 5445 of 2002 - the Plaintiff seeks to assert an offsetting claim, such offsetting claim being in an amount of $633,535.25. 10 The alleged offsetting claim relates to moneys claimed by the Plaintiff for Aloe Vera product from the Project against the Defendant in those proceedings as agent for the Licensees. (The Licensees were people holding prescribed interests in the Project and with whom AAL and AAM have entered into a management agreement and a licence agreement. I shall later in this judgment describe in greater detail the nature of the Project and the relationship between the various parties and entities involved in and associated with the Project.) 11 There was no dispute between the parties that the moneys referred to in each of the two statutory demands had been paid by the respective Defendants to the Plaintiff. The characterisation of those payments was, however, in issue between the parties. The Plaintiff asserted that those payments were in the nature either of advances or of licence fees or of payments for the product. The Defendants, on the other hand, each asserted that those payments were in the nature of loans made to the Plaintiff by the respective Defendants. 12 The legal principles in respect to the setting aside of a statutory demand upon the ground of a genuine dispute as to the existence or amount of the debt are well recognised. It is unnecessary to do more than refer to such decisions as Eyota v Havane (1994) 12 ACSR 785 at 789 (where McLelland CJ in Eq spoke of "a plausible contention requiring investigation") and Mibor Investments Pty Limited v Commonwealth Bank of Australia (1993) 11 ACSR 362 at 366-367. 13 Once the Court has recognised the existence of such a genuine dispute, it is no part of the Court's function to attempt to weigh the strengths or weaknesses of the cases of the respective parties, let alone to attempt to resolve that dispute. The Court, if satisfied that such a genuine dispute exists, must set aside the statutory demand. 14 I have had the benefit of receiving a form of flow chart prepared on behalf of the Plaintiff concerning the relationships between the various companies and the other participants in the business activities of the Plaintiff and each Defendant (including the Licensees and the Customers in respect to the Australian Aloe Vera Project ("the Project")); together with a list of dramatis personae, as well as a chronology and written outlines of submissions and supplementary submissions furnished by the Defendants. Those various documents will be retained in the Court file. 15 It is appropriate here to record that the Project was constituted as a prescribed interests scheme by an investment deed dated 27 May 1998, executed by AAL, AAM, Inteq Custodians Limited and licensees. The nature of that scheme was described by Barrett J in his judgment of 20 December 2002 in proceedings 4641 of 2002 Australian Aloe Marketing Limited v Australian Aloe Limited, as follows, The scheme is organised according to the traditional structure, in which scheme assets are held by a trustee and administered by a management company. The trustee - originally Inteq Custodians, now named Cardinal - is in insolvent winding up in circumstances where the liquidator is without funds, so that the trustee is, for all practical purposes, unable to act. The management company, or manager, under the scheme as originally constituted was AAM.

At present, the managers functions are being performed by AAL. 16 The submissions in respect to each of the statutory demands were identical, apart from the submissions relating to the asserted offsetting claim in proceedings 5446 of 2002. 17 In each case the Plaintiff submitted that the payment was not documented as a loan. Neither was it evidenced by a minute of a meeting of the directors of the Plaintiff company. 18 In support of that submission the Plaintiff referred to the failure of the propounder of the loan to produce documentary source material on which the alleged loan was based. 19 It was submitted on behalf of the Defendants that the Court would not be satisfied that the Plaintiff has discharged the onus of satisfying the Court that there is a genuine dispute in relation to either of the alleged debts, having regard to the following matters:

(a) The most recent accounts of the Plaintiff before the commencement of the proceedings (being for the half year ended 31 December 2000, executed by auditors on 14 March 2001), and signed by both Mr Young and Mr Grogan as directors on 12 March 2001) acknowledge the indebtedness of the Plaintiff to AAM ($824,112) and EGF ($108,500).

(b) On 30 May 2001 the Plaintiff repaid $500,000 to AAM in reduction of the asserted indebtedness of the Plaintiff to that Defendant.

(c) On 18 January 2002 Mr Grogan requested documentary evidence to verify the remaining amounts of loans asserted to have been made by AAM and EFG to the Plaintiff. Information was provided on 5 February 2002, and requests for further documentation, including bank statements, were made by Mr Grogan on 11 February 2002. Those requests were complied with, Mr Grogan expressly stating on 22 February 2002 that he had no further queries regarding the 2001 year and the financial statements of the Plaintiff.

(d) On 27 May 2002 the internal accountant of the Plaintiff, Mr Jim Robins, prepared financial accounts for the Plaintiff as at 31 December 2001, recording an amount of $325,958 as being payable to AAM and an amount of $108,500 as being payable to EGF. It should in this regard be observed that Mr Robins was not called to give evidence in the proceedings, and that his absence has not been explained. The Defendants in consequence rely upon the principle in Jones v Dunkel (1959) 101 CLR 298.

(e) It was only in mid-2002, when the relationship between the Plaintiff and the two Defendants began to sour, that in proceedings 4641 of 2002 in the Equity Division, to which proceedings I have already made reference (concerning a dispute in relation to a meeting of licensed interest holders which had been convened to take place on 20 September 2002 and at which one of the resolutions proposed to be considered was for the removal of AAM as manager of the investment scheme), Mr Grogan and others cross-claimed against AAM and Mr Thomas.

(f) When on 2 September 2002 the Defendants made demands for payment the indebtedness of the Plaintiff to the Defendants was not denied, but the request for payment was met merely by a request on 3 September 2002 for "reports showing every transaction".

(g) The Defendants responded to that request by a letter of 3 September 2002 attaching all previous correspondence in relation to admissions of indebtedness made by the Plaintiff.

(h) As early as 9 September 2002 the position adopted by AAM was that the Plaintiff's request for information was not "sent in good faith or to any purpose other than delay".

(i) In October 2000 the auditors of the Plaintiff conducted further investigations in relation to amounts shown in AAL's accounts as owing to AAM and EGF, and, as a result of those investigations, concluded that those amounts were due and payable.

(j) By letter dated 30 October 2002, the auditors of AAL confirmed that, having checked all cash transactions, bank statements and other transactions, "in our view, the balance in the accounts of AAL are properly stated as owing to AAM and EGF".

(k) In November 2002 Mr Thomas again inspected the books of the Plaintiff and the two Defendants at the request of the Plaintiff.

(l) By letter dated 12 November 2002 the auditors of the Plaintiff again confirmed that the balance due to each Defendant as disclosed in the accounts were due and payable by the Plaintiff. 20 It has been submitted on behalf of the Plaintiff that Mr Thomas, the auditor of the Plaintiff, has an association with Mr Young, who is a director of each Defendant and was, between May 1998 and August 2002, a director of the Plaintiff, which raises doubt as to Mr Thomas's impartiality. 21 I do not consider that the asserted lack of impartiality (an allegation not otherwise in any way substantiated by the evidence) constitutes a basis for the Court being satisfied of a genuine dispute as to the existence of the debt. Further, the resolution of the directors of 3 December 2002 disputing the indebtedness of the Plaintiff to each Defendant, is a self-serving resolution which was passed some three weeks after the institution of the present proceedings on 8 November 2002. 22 The fact that neither of the payments was at the time when received by the Plaintiff documented as a loan and the fact that there was no minute of a directors' meeting recording or evidencing that the payment was a loan does not satisfy me of the existence of a genuine dispute as to the indebtedness of the Plaintiff to the Defendants in the amounts claimed. It could equally well be observed that there was no documentation and no minute of a directors' resolution recording that the payment was of some character other than as a loan. 23 It should also be observed that the circumstances in which the Plaintiff is now asserting that there is a genuine dispute as to its indebtedness in the amounts of the advances (or, in the case of AAM, the balance outstanding, after repayment of a substantial part of the advance made by that company) are not circumstances where there has been a material change in the identity of the directors of the Plaintiff company. All the present directors were directors of the Plaintiff at the time when the payments were made to the Plaintiff (although Mr Young, who was a director at that time, is no longer a director). It may also be observed that no evidence has been offered on behalf of the Plaintiff from any director of the Plaintiff company other than Mr Grogan. 24 I am not satisfied that the Plaintiff has established that there is a genuine dispute as to the indebtedness of the Plaintiff to the Defendants in the amount claimed in each of the two statutory demands. 25 It follows, therefore, that in proceedings 5445 of 2002 (Australian Aloe Limited v Export Growth Finance Limited), the originating process must be dismissed. 26 In proceedings 5446 of 2002 (Australian Aloe Limited v Australian Aloe Marketing Limited), it is necessary for the Court now to proceed to a consideration of the asserted offsetting claim advanced by the Plaintiff, such offsetting claim being in an amount of $633,535.25. 27 The alleged offsetting claim relates to money claimed by the Plaintiff for Aloe Vera product from the Project against AAM as agent for the licensees, (they being people holding prescribed interests in the Project and with whom the Plaintiff and AAM have entered into a management agreement). 28 The amount of $633,535.25 is said to be made up as follows:

Outstanding payment prior to October 2002 - $419,774.82 29 An offsetting claim is defined by section 459H(5) of the Corporations Act to mean, a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates). 30 It has been said that the Court is not required to value the claim or assess its chances of success, but that if it finds there is a genuine claim, provided that there is some evidence of the amount of the claim, it should offset the total amount of that claim: Classic Ceramic Importers Pty Limited v Ceramica Antiga SA (1994) 13 ACSR 623. 31 In the instant case, I am not persuaded that the asserted offsetting claim is not a genuine claim. Further, there is some evidence to support the amount of that claim. 32 Nevertheless, it was submitted on behalf of the Defendant, AAM, that the offsetting claim must be in the same right as the demand; that is, that where a demand is made against a company as trustee, the company cannot offset a claim for an amount owed to it in its personal capacity. In this regard, the Defendant relied upon the unreported decision of Master Sanderson in the Supreme Court of Western Australia in PCH Group Limited v Hallbridge Pty Limited [2002] WASC 88 (19 April 2002, unreported). In the instant case it was submitted on behalf of the Defendant that there was no mutuality between, on the one hand, what was described as the personal indebtedness of AAL to AAM in the sum of $325,958.98 and, on the other hand, the alleged indebtedness of AAM, as disclosed agent on behalf of the licensees, to AAL in the sum of $633,535.25. 33 Master Sanderson in PCH Group Limited v Hallbridge Pty Limited referred to a decision of the Full Court of the Federal Court of Australia in Stec v Orfanos [1999] FCA 457, concerning a bankruptcy notice, and applied the same principle of mutuality, saying, There appears to be no good reason why this requirement of mutuality should not apply in relation to applications brought under section 459G [of the Corporations Act ] as it undoubtedly applies in applications made under the Bankruptcy Act … However, there appears to be no direct authority on the point. 34 It is arguable that such mutuality may be required for an offsetting claim of the nature recognised by the Corporations Act. Nevertheless, in the absence of direct authority to that effect (especially authority of an appellate court), I do not consider that such a qualification should be imported into the clear and unambiguous words of the statute, to have the consequence that what on its face appears to be a genuine offsetting claim by the Plaintiff should be disregarded. 35 But, in any event, it is disputed by the Plaintiff that there exists such a lack of mutuality, the Plaintiff disputing that the character in which the offsetting claim is asserted is otherwise than against the Defendant in its personal capacity, and in particular disputing that the offsetting claim is asserted against the Defendant in its capacity as disclosed agent on behalf of the licensees. In this latter regard the Plaintiff points to the express terms of the Management Agreement (Exhibit A, Plaintiff's Tender Bundle, Tab 6), clause 9.2 whereof, concerning the character of the Manager (AAM), provides, The Manager is an independent contractor to the Licensee and nothing herein contained shall establish or create a relationship of partnership, master and servant or principal and agent between the Licensee and the Manager, other than that contemplated by this clause. 36 In these circumstances I am not persuaded, firstly, that there is such an absence of mutuality as the Defendant submits; further, that, even if there be such an absence of mutuality in the character of the Plaintiff as debtor and in its character as claimant, that absence of mutuality necessarily deprives the Plaintiff of the right recognised by section 459H to have the statutory demand set aside, where, as here, the offsetting claim is not other than a genuine claim and there is some evidence to support the amount thereof. In consequence, the statutory demand should be set aside. 37 I make the following orders:

5445 of 2002 Australian Aloe Limited v Export Growth Finance Pty Limited

(1). I order that the originating process be dismissed.

(2). I order that the Plaintiff pay the costs of the Defendant.

5446 of 2002 Australian Aloe Limited v Australian Aloe Marketing Limited

(1). I make an order in the terms of prayer 1 in the originating process.

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