Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2015] NSWSC 738 | Case summary

Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2015] NSWSC 738 | Case summary | Zoe

Judgment

By Originating Process filed on 9 January 2015, the Plaintiff, Tuffrock Pty Ltd ("Company") applies to set aside a creditor's statutory demand ("Demand") dated 22 December 2014 served by the Defendant, Roger Smith & Associates Pty Ltd ("RSA"). RSA is a shareholder in the Company and a director of RSA, Mr Roger Smith, who verified the Demand, is also a director of the Company. The Company was established in July 2002, and its shareholders then executed a letter of understanding to which I will refer below. It appears that funds contributed by the shareholders to the Company have been recorded as loans.
The Demand claimed the amount of $201,867.50, which was described in the schedule to the Demand as comprising an amount of $40,000 referable to a loan agreement dated 22 April 2004; unpaid interest on the loan of $37.50; and an amount of $161,830 referable to invoices dated 15 March 2011 to 20 June 2014. The Demand stated that the amount of the loan was due and payable to the Company pursuant to "the verbal loan agreement between [the Company] and [RSA] made on or about 22 April 2004, the terms of which were recorded and ratified by the board of [the Company] on 22 April 2004". An affidavit of Mr Roger Smith, who is a director of RSA, dated 22 December 2014 in turn verified that the amount of the debt was due and payable and also referred to "a verbal loan agreement agreed between the parties and recorded and ratified by the Board of [the Company] on 22 April 2004".
RSA did not seek to support the Demand so far as it relied on the amount claimed in the invoices and only the validity of the Demand so far as it related to the amount claimed in the loan agreement and associated interest was in issue before me. A further dispute was identified in submissions as to whether an amount of $2,500 paid by the Company to RSA should be deducted from the amount owing under the loan, or applied against other amounts claimed by RSA. That question would not arise if the Demand is otherwise to be set aside, as the Company contends, on the basis that the loan is not presently due and payable. Mr Klooster, who appeared for RSA, sensibly did not seek to rely on that dispute as a separate basis for setting aside the Demand.
The Company relies on three affidavits of its managing director, Mr Stephen Hurley, dated 8 January 2015, 27 February 2015 and 30 March 2015 and an affidavit of its accountant, Mr Peter Sweeney, dated 2 March 2015 in support of the application to set aside the Demand. Mr Hurley's first affidavit referred to a document titled "Letter of Understanding" regarding the Company's formation, signed on 4 July 2002 by the three founding shareholders in the Company including RSA. That letter of understanding relevantly provided that one of the shareholders, E-Street Pty Ltd as trustee for the 41 Shots Trust, would provide initial development capital required by the Company by a loan in specified instalments, subject to interest, and recorded that: "It is the intention of the Directors that the loan plus interest is to be repaid progressively after the first year and within five years, provided the repayments have no negative impact on the Company's financing and operations. It is fully understood that this loan is unsecured." That letter of understanding also contemplated the possibility that further capital might be raised by selling equity in the Company and that further loans provided to or liabilities incurred by the Company would require a unanimous vote of directors.
Mr Hurley's evidence is that, since incorporation, the Company's founding shareholders have made further loans to it "on the same basis as the Initial Loan", and he identifies the loan of $40,000 by RSA as one of those loans. He refers to financial statements for the Company for the years ended 30 June 2012 to 30 June 2014, which refer to those loans, although they are characterised as current liabilities in those financial statements. He notes that the Company's financial statements also indicate that it has accumulated significant losses in the years 2012-2014 and his evidence is that: "On the advice of the [Company's] accountant, the Board had previously resolved that it would not be appropriate to repay the outstanding loans because such payment would have a negative impact on the Company's financing and operations and contended that the loans were not repayable "at call" under the terms of the letter of understanding for that reason."
Mr Hurley's first affidavit also refers to the minutes of a board meeting of the Company held on 15 August 2014 that resolved to make modest payments, including one of $2,500 to RSA, off unsecured loans and also resolved that: "Each of the directors to consider an appropriate unsecured loan repayment plan to be shared with each other … and the Company hereby commits to making regular payments off unsecured loans on a monthly basis commencing October 2014." The reference to "unsecured loans" in that minute may not strictly extend to the loan to RSA that is in issue, since it appears that it is secured by a lien. A subsequent resolution of the directors sought to correct that earlier board minute to replace the reference to "unsecured loan" with a reference to "balance sheet loan" which would extend to the loan claimed by RSA. There is a dispute as to the effectiveness of that retrospective amendment to those minutes. It is not necessary to determine that dispute in order to determine this application.
Mr Hurley also refers to an email dated 12 September 2014 from the Company's accountant to the Company which expressed the view that the Company's financial statements at 30 June 2013 properly recorded three unsecured loans to the Company, including one to RSA of $40,000. The Company relies on the fact that that email did not state that amount was due and payable, but it does not seem to me that the email's silence as to that matter takes the matter further. That email also expressed the view that the lien claimed by RSA did not apply to those loans, but it is also not necessary to address that question for the purposes of this application.
Mr Hurley's further affidavit dated 27 February 2015, which I admitted over an objection relying on the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452; 21 ACSR 581 at 587, for reasons set out in a separate judgment, refers to a conversation that took place at a board meeting in 2004, presumably the board meeting to which reference was made in the Demand. Mr Hurley's evidence was that one of the directors offered to put in further money, if the two other directors each contributed funds, including the $40,000 ultimately contributed by RSA, "on the same terms as my previous loans and any repayment would be made on a pro-rata basis to my loan". Mr Hurley also refers to a conversation in respect of "security over the company", with agreement being reached between the directors on that basis. The reference to the terms of "my previous loans" is plainly to the terms provided under the letter of understanding, to which I referred above. Mr Hurley also gives evidence of a resolution passed at a further board meeting, on 13 February 2015, after the Demand had been served, that purportedly amended the minutes of the 15 August 2014 meeting to replace the reference to "unsecured loans" with a reference to "balance sheet loans". I have referred to that matter above.
By his further affidavit dated 30 March 2015, in reply to Mr Smith's affidavit dated 6 March 2015, Mr Hurley gives evidence of another director having referred at the 2004 meeting to the fact that: "These further loans are to be treated on the same basis as my outstanding loans, as per the Letter of Understanding."
The evidence of the Company's accountant, Mr Sweeney, is that he understood the Company's directors had agreed that loans to the Company by the shareholders would be paid only by agreement between them and only when the Company had liquid funds to permit it and he also noted that, although the Company's financial statements treated such loans as a current liability of the Company, if his understanding is correct, it would have been more accurate to record them as non-current liabilities (Sweeney 2.3.2015 [3]). That evidence was admitted, with a limiting order under s 136 of the Evidence Act 1995 (NSW), as evidence of his understanding only, and it seems to me that it should be given limited weight in determining the terms of the relevant loan.
By his affidavit dated 6 March 2015, Mr Smith, who is an executive director of the Company and a director of RSA, referred to the 2004 board meeting and relied on a board minute recording the agreement formed at that meeting. That minute in turn referred to loan funds to be provided, inter alia, in the amount of $40,000 by RSA; to interest payable in arrears on those loans; and to the fact that the loans were to be secured by a lien over the Company's assets. That minute referred to the accountant being instructed to prepare loan agreements, but such agreements were not tendered, if they exist. A further board minute dated 13 April 2006 referred to the lien having been granted over the Company's assets as security against the relevant loans, and contemplated that written permission from the relevant companies, including RSA, would be obtained before certain equipment sales were made. RSA also tendered an agreement signed by each of the shareholders in respect of the sale of the relevant equipment and the reinvestment of the proceeds in the Company on terms that the shareholders would retain a lien over equipment purchased by the Company (Ex D1).
Mr Walker, who appears for the Company, submits that there is a genuine dispute about whether the sum loaned by RSA is due and payable. There is no dispute that, an amount is owed to RSA, and it is either $40,000, or $37,500 if the relevant repayment is deducted from that amount. The issue is instead whether there is a genuine dispute that that amount is presently due and payable to RSA. Mr Walker draws attention to authorities as to the circumstances in which a genuine dispute exists, although those authorities largely relate to applications under s 459H(1)(a) of the Corporations Act 2001 (Cth) rather than to an application of this character. Because there is no dispute that the loan (whether in the amount of $40,000 or, if the relevant payment is deducted from it, $37,500) is owed to RSA, Mr Walker relies on s 459J(1)(b) of the Corporations Act to set aside the Demand. That section provides that the Court may set aside a creditor's statutory demand if it is satisfied that there is some other reason that the Demand should be set aside. Mr Walker submitted, and I accept, that that section authorises the Court to set aside a creditor's statutory demand if it is satisfied that there is a genuine dispute about whether the debt to which the statutory demand relates is due and payable at the time the demand is served: Midland Imports Pty Ltd v Asia Pacific International Pty Ltd [1999] NSWSC 12 at [27]; Streetwise v Higgins [2005] NSWSC 535 at [15]-[19]. Mr Walker submits, and I also accept, that a debt is due and payable when the time for payment has arrived and an unqualified obligation requiring immediate performance has arisen: Main Camp Teatree Oil Ltd v Australian Rural Group Ltd [2002] NSWSC 219 at [17].
In NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 16 ACLC 957 Finkelstein J considered that an application to set aside a statutory demand on the ground that a debt was not due and payable was a matter falling within the scope of s 459J(1)(b) of the Corporations Act, and Austin J took the same view in Midland Imports Pty Ltd v Asia Pacific International Pty Ltd above at [27]. In Streetwise v Higgins above at [15]-[19] Master Macready in turn referred to the decision in NT Resorts above and adopted the same approach. I summarised the relevant principles in Re MK Group Phoenix Pty Ltd [2014] NSWSC 1467 at [40] as follows: "The authorities make clear that a statutory demand that relies on, or includes, a debt that is not yet due for payment may be set aside, although the case law differs as to whether such an order may be made under s 459H or s 459J of the Corporations Act. In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1986) 132 FLR 300; 20 ACSR 746, Bryson J held that the inclusion of debts not yet due for payment at the date of the demand was a defect within the demand under s 459J(1)(a) of the Corporations Act, which would authorise the Court to set aside the demand if it was satisfied that subject substantial injustice would be caused unless the demand was set aside. In NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1988) 153 ALR 359 at 366-367, Finkelstein J considered that the Court could set aside the demand if it was satisfied that a genuine dispute existed as to whether the debt to which the demand related was due and payable, under s 459J(1)(b) of the Corporations Act. Statutory demands have also been set aside when issued in respect of debts that were not due or payable, or where there was a genuine dispute as to whether they were due and payable, in Re Carbon Polymers Ltd [2013] NSWSC 376 and Re Forza Plumbing Systems Pty Ltd [2013] NSWSC 1234."
Mr Walker submits that there is a genuine dispute as to whether the amount claimed by the Demand in respect of the loan by RSA is due and payable because the arrangement between the Company's shareholders has always been for the Company to treat loans by them as repayable only when the Company considers repayment is appropriate having regard to its financial and operating position, and the Company's board has not resolved to cause it to repay the balance of the loan to RSA. Mr Walker submits that the conflict in the evidence as to that arrangement cannot be resolved summarily through the statutory demand process. He also submits that the evidence does not support a finding that the Company's obligation to repay money loaned by RSA is an unqualified and unfettered obligation requiring immediate performance, so that that loan could be treated as presently due and payable. He submits that Mr Hurley's evidence establishes that the Company's obligations in respect of the loan have been treated by its shareholders as subject to the board's approval in respect of any repayment, and that the evidence of the Company's accountant also supports that position. He submits that that approach is not fanciful, particularly in circumstances where the Company's success would depend upon individual shareholders applying their financial resources and, in this case, their skills, towards the Company's venture. He submits that a full factual inquiry, in properly constituted proceedings, is necessary to determine whether the sum loaned by RSA to the Company is due and payable, and that the Demand should accordingly be set aside.
Mr Klooster, who appears for RSA, responds that the Company has attempted to "manufacture" a dispute when no genuine dispute exists in respect of the outstanding loan made by RSA to the Company. He submits that Mr Hurley's first affidavit made no reference to the verbal loan agreement relied on in the Demand and accordingly did not dispute the existence of that agreement or its terms. I do not accept that submission, where it seems to me that the explanation of the basis of the loan advanced in Mr Hurley's first affidavit, and expanded in his subsequent affidavit, plainly amounted to an alternative characterisation of the terms of the loan to that asserted in the Demand. Mr Klooster also submits that the Company's claim that the loans made to it were on the same basis as the initial loan made by E-Street Pty Ltd as trustee for the 41 Shots Trust, as evidenced in the letter of understanding, cannot be accepted for several reasons, including that the letter of understanding was signed two years prior to the oral agreement on which RSA relies; that clause 11 of the letter of understanding applies only to the initial loan made by E-Street Pty Ltd as trustee for the 41 Shot Trust; that the initial loan was unsecured, whereas the loan made by RSA was secured, at least by the relevant lien; and that the loan was referred to as a current liability in the Company's balance sheet. I accept that all of those submissions have force, but it is important to recognise that it is not open to the Court, in the summary procedure involved in an application to set aside a creditor's statutory demand, and where witnesses have not been cross-examined, to reach a finding on the merits as to these matters. The authorities to which I referred above indicate that a genuine dispute as to whether the debt is due and payable can provide a sufficient basis to set aside a creditor's statutory demand under s 459J(1)(b) of the Corporations Act, and a genuine dispute may be established even if RSA is more likely to succeed at a final hearing of that genuine dispute.
Mr Klooster also points to other matters that RSA contends have the result that the dispute as to the terms of the loan is not genuine, including the fact that Mr Hurley had initially indicated that the minutes of the 2004 meeting were lost, and that those minutes, when produced by RSA, did not refer to a loan agreement in the terms for which the Company contends. It may be that these matters weaken the Company's case, but it does not seem to me that they establish that the Company's case is not sufficiently plausible, or capable of raising a genuine question, as to whether the debt is due and payable, to give rise to a genuine dispute as to whether the amount claimed by RSA was due and payable prior to service of the Demand. It is by no means implausible that the minutes of a closely-held proprietary company, where directors and shareholders are in the same interest, would not comprehensively set out the terms of a loan agreement known to those parties, particularly if there was agreement between the parties, as the Company contends, that the loan would be made on a similar basis to an earlier loan. RSA's contention in this respect is also weakened by the fact that it did not seek leave to cross-examine Mr Hurley, so as to put the proposition that those matters deprived that dispute of a genuine character, or that that dispute was "manufactured" as Mr Klooster contended in submissions. The Court of Appeal emphasised the relevance of cross-examination as to matters of that kind in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601.
The Demand faces the further difficulty, to which Mr Walker pointed in submissions. Even if the Company's position that the loan was only repayable when it was in a position to do so was not correct, there is no evidence that the $40,000 loan made by RSA had a fixed term and had fallen due for payment by the time the Demand was served. Mr Klooster accepts that the minutes of the board meeting on 22 April 2004 do not state when the loan amount of $40,000 is repayable and submits that, in the absence of an express term, a term would be implied that the loan is repayable upon reasonable notice being given and that the Demand itself gave such notice. However, as Mr Walker points out, that submission itself gives rise to an alternative basis on which the Demand should be set aside under s 459J(1)(b) of the Corporations Act. Where no notice requiring repayment of the relevant debt was given prior to the service of the Demand, it follows that it did not become due for payment until, at the earliest, on service of the Demand, and more likely a reasonable time after service of the Demand to the extent that it constituted a claim for repayment. The Demand cannot be founded on a debt that did not become due and payable until after that Demand was served, because the statement required in the verifying affidavit that the debt is due and payable at the time the Demand was served would not then be correct, and that amounts to some other reason to set aside the Demand: Super Benefit Pty Ltd v McNamara [2009] SASC 167 at [7]; PMCD Investments Pty Ltd v Galatis [2014] VSC 55 at [39].
In these circumstances, I am satisfied that a genuine dispute has been established as to whether the debt claimed in the Demand is due and payable and, for that reason, the Demand should be set aside under s 459J(1)(b) of the Corporations Act. The Defendant must pay the Plaintiff's costs of the application as agreed or as assessed.

Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd

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