By Originating Process filed on 25 August 2015, the Plaintiff, Hit & Bounce Pty Limited ("Hit & Bounce") applies under s 459G(1) of the Corporations Act 2001 (Cth) to set aside a creditor's statutory demand ("Demand") issued by Slat Pty Limited as trustee for the O'Brien Superannuation Fund ("Slat") which claimed an amount of $150,000 was due and payable by Hit & Bounce.
That Originating Process identified the basis on which the Demand was disputed as that Hit & Bounce had received $150,000 from Slat pursuant to an agreement, arising from conduct and correspondence in March and April 2014, that Slat was to pay $300,000 for 20% of the shares in Hit & Bounce. Hit & Bounce initially sought orders under s 459H(1)(a) of the Corporations Act setting aside the Demand on the basis that there was a genuine dispute.
Hit & Bounce also sought, but did not press, an order setting aside the Demand under s 459J(1)(b) of the Corporations Act on the basis that there was some other reason to set aside the Demand. It seems to me that second claim was sensibly not pressed, because it raised a range of serious allegations, which may well not, even if established, have given rise to some other basis to set aside the Demand for the purposes of s 459J(1)(b) of the Corporations Act. I say that because, if, as Slat contends, it had lent the amount of $150,000 to Hit & Bounce, which was due and payable and not repaid, then the service of a Demand may well have been a proper step under the relevant provisions, and not a step that was in any way inconsistent with the statutory demand procedure under Pt 5.4 of the Corporations Act, notwithstanding the existence of other disputes between the parties.
Before turning to the evidence led by the parties, and the issues in dispute, I should make one wider observation. The principals of Slat, who served the Demand, are in a position which is plainly unfortunate, where a significant amount of money has been advanced to Hit & Bounce, in circumstances that there was at least an expectation that shares would be issued to them, as is common ground between the parties, and those shares have never been issued. There is no doubt that Slat, and its principals, are entitled to feel aggrieved by that matter. It is important, however, to recognise that the Court's jurisdiction to deal with creditor's statutory demands has a particular character. It does not involve a determination whether, for example, Slat has a meritorious claim against Hit & Bounce, but instead, a question whether that claim is such that it may properly be pursued by the issue of a creditor's statutory demand, rather than by proceedings for breach of contract or a claim for restitution brought in a court in the usual way. It is not uncommon that there are circumstances in which a party which may have a meritorious claim, as to which it might well succeed in proceedings in a court, is nonetheless unable to rely on a creditor's statutory demand, because there exists a genuine dispute as to the relevant debt, or as to whether the claim constitutes a debt, that is sufficient to require that the demand be set aside on the low standard that is applicable to setting aside such demands, to which I will refer below.
I note these matters by way of introduction because it is understandable that a party which has issued a creditor's statutory demand may be disappointed where it ultimately does not prove to provide the quick resolution, in giving rise to a presumption of insolvency where a demand is not met, that the party may have sought. Whether that is the case will often turn, not upon the underlying merit of the dispute, but upon whether there exists a genuine dispute such that the creditor's statutory demand procedure cannot properly be used and court proceedings must instead be brought.
With that background, the Demand dated 3 August 2015 identified a claim by Slat for the amount of $150,000 which was described as:
"Amount due and payable by the Company to the Creditor for moneys that were loaned to the Company by the Creditor in March and April 2014 and which said moneys have never been repaid."
The Demand was supported by an affidavit dated 3 August 2015 of Ms Lisa O'Brien, a director of Slat, who indicated that the claimed debt owed by Hit & Bounce related to:
"The amount due and payable by the Company to the Creditor and which were moneys loaned to the debtor Company."
Ms O'Brien's affidavit referred to evidence of withdrawals from Slat's account, which recorded payments which, it is common ground, were made to Hit & Bounce.
Ms O'Brien also referred to financial statements for Hit & Bounce dated 30 June 2014 which disclosed a non-current liability of Hit & Bounce to Slat. I pause there to note that that record, on which Mr Robertson and Mr Horobin, who appeared for Slat, placed considerable weight, provided substantial support for the claim that an amount was due by Hit & Bounce to Slat. Plainly, the Court, in a trial on the merits, might well determine that the fact that that amount was recorded as a liability of Hit & Bounce was consistent with a characterisation of the amount as a loan due by Hit & Bounce to Slat, although the treatment of that loan as "non-current" might give rise to some complexities. Again, however, I must emphasise that my role is not to determine, as though I were determining a trial on the merits, which is the most likely outcome that a court would reach in such a trial, but instead, whether a serious question to be tried has been raised in respect of the proper characterisation of the claimed debt.
The Plaintiff in turn, relies on the affidavit of Mr Merriam, one of its directors, dated 24 August 2015, which refers to discussions concerning a potential subscription for, and on Mr Merriam's evidence, an agreement to subscribe for, shares in Hit & Bounce. Mr Merriam in turn refers to a range of correspondence containing references to the potential subscription for shares in Hit & Bounce by Slat, to which I will refer below. Mr Merriam claims that he had every intention of having a shareholders' agreement drawn up, but that did not occur by reason that the principals of Slat had not finalised a further amount referable to a share investment in Hit & Bounce. There was a question between the parties as to whether that was a proper basis for not having drawn up the shareholders' agreement, or, as Mr Robertson pointed out, undertaking the step of issuing the shares, but that question ultimately is not one that needs to be determined in deciding this application, for reasons that I will refer below.
Mr Merriam's evidence is that Mr O'Brien, one of the principals of Slat, first raised the suggested treatment of the amount paid by Slat to Hit & Bounce as a loan when he returned from an overseas trip in July 2015, and to steps which had subsequently been taken by Mr O'Brien to seek, unsuccessfully, to formalise such a loan. I should emphasise that those steps were hardly unreasonable, in circumstances that a significant amount of money had been paid by Slat to the Company and shares had not been issued at that time. I should also point out that the suggestion that Mr O'Brien first referred to a loan in July 2015, even if correct, needs to be qualified by the fact that, as I have noted above, Hit & Bounce's financials for the year ended 2014 reflected a non-current liability owed by Hit & Bounce to Slat.
Hit & Bounce in turn relies on voluminous correspondence in respect of the subscription for shares, to which I have been taken in the course of submissions. The correspondence at the time the arrangement was proposed plainly contemplated the issue of shares by Hit & Bounce to Slat. In particular, correspondence in March 2014 referred variously to funds to purchase a 20 per cent share of Hit & Bounce for the sum of $300,000, and to the position prior to funds to purchase those shares becoming available, and a letter dated 24 March 2014 from Hit & Bounce's solicitor to Mr and Mrs O'Brien noted that, pending the full amount of subscription being made available, the sum of $50,000 was to be applied immediately "as working capital towards the day to day running and expenses of the company". The same letter referred to the balance of the "share acquisition payment" and to a need to confirm the terms of the "share purchase agreement". Subsequent correspondence from Hit & Bounce's solicitor to Mr and Mrs O'Brien confirmed the solicitor's instructions that Slat has agreed to purchase 20 per cent of Hit & Bounce for the sum of $300,000, and to steps that were being taken to amend the business records "to confirm your 10 per cent share in the company". The procedure subsequently seems to have been delayed, or not implemented, by reason of complexities arising, and delays arising, in a suggested wider restructuring of Hit & Bounce.
As I have noted, on 30 June 2014, Hit & Bounce recorded a liability owing to the O'Briens, which must refer to the liability owing to Slat, as a non-current liability. Subsequent correspondence followed, in early 2015, between the accountants for Slat and the accountants for Hit & Bounce, in which the accountants for Slat requested advice as to whether the investment by Slat had been treated as a loan or a share in the business. Mr Botsman, who appears for Hit & Bounce, points out that the fact that question was asked suggests that there was at least at that point some uncertainty as to that question. The accountant for Hit & Bounce subsequently sent the 2014 financial statements of Hit & Bounce to the accountant for Slat, which recorded the non-current liability to which I have referred, and the accountant for Slat then advised Mr and Mrs O'Brien that that recorded the investment "was a loan, not a share in the company", but also advised Mr and Mrs O'Brien that the loan needed to be put on a commercial footing and made suggestions as to its possible terms. Mr Botsman also submits, and that email suggests, that the question of the terms of any such loan, if the liability is properly characterised as a loan, were at least then uncertain as between the principals, although I will refer below to a submission made by Mr Robertson as to the legal position. As I noted above, Mr O'Brien later took steps to seek to record the arrangement in a loan agreement that was not executed by Hit & Bounce.
Slat in turn relies on a further affidavit of Mrs O'Brien sworn 15 October 2014, which refers to further correspondence between the parties, which included discussions about Mr O'Brien leaving Hit & Bounce and wishing to have his money back. Again, any wish by Mr O'Brien to have his money repaid at that time would hardly have been surprising in the circumstances. A further affidavit in reply of Mr Merriam dated 11 September 2015 claimed that there had never been any demand by Slat, or at least its principals, for an amount payable by interest on the alleged loan. Mr Robertson in turn responds, on behalf of Slat, that interest would not have been payable in the absence of an agreement for it being paid.
With that evidentiary background, I should turn to the applicable test for establishing whether a creditor's statutory demand should be set aside on the basis that a debt is genuinely disputed. Section 459H(1)(a) of the Corporations Act provides for a creditor's statutory demand to be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of the debt to which that demand relates. A genuine dispute may arise, in particular, as to the characterisation of the liability which is the subject of the demand, since a creditor's statutory demand may only be issued in respect of a debt, and not, for example, in respect of an amount that is properly recoverable as an unliquidated amount, such as a claim for contractual damages.
The test for a genuine dispute has variously been formulated as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involve a "plausible contention requiring investigation" and is similar to that which would apply in an application for summary judgment: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. In CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 (at [16]), Barrett J noted that the task faced by a company challenging a statutory demand on the genuine dispute grounds "is by no means at all a difficult or demanding one" and that the company would fail in that task only if it was found that the contentions were so devoid of substance that no further investigation is warranted. His Honour went on to observe that:
"Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions ... if it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even were any case apparently available to be advanced against the company seems stronger."
I recognise that, as Dodds-Streeton J observed in Powerhouse Australasia Pty Ltd v Viarc Pty Ltd [2006] VSC 508 at [48], mere bluster or advancing grounds which are illusory or spurious will not support an application to set aside a creditor's statutory demand, but at the same time her Honour recognised that the Court must not enter into the merits of the dispute, as distinct from determining whether a claim is genuine in character. I have also had regard to the Court of Appeal's observations in Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44] and in the context of dealing with an offsetting claim, in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 at [30]-[31] and [39]-[55]. I also summarised the relevant principles in Re Wollongong Coal Ltd [2015] NSWSC 1680 at [9]ff, and need not repeat that summary here.
Mr Botsman does not contest, nor could he contest, the fact that the amount of $150,000 had been paid by Slat to Hit & Bounce. He also does not contest that shares had not been issued by Hit & Bounce to Slat, although he does seek to contend, by reference to the affidavit evidence of Mr Merriam to which I have referred, that that reflected the absence of a further contribution which had been expected from Slat, a matter which was in turn contested by Mr Robertson as I have noted.
Mr Botsman's first basis for the contention that there is a genuine dispute as to the existence of the relevant debt is that there is no loan agreement and the terms on which the loan is to be repaid is uncertain. Mr Robertson in turn submits, with considerable force, that if an amount was advanced by way of loan, and there were no other terms agreed in respect of that loan, it would be repayable on demand. Mr Robertson in turn submits that the issue of the creditor's statutory demand was itself the demand, although he also refers to previous communications which may constitute a demand. I note, however, that that proposition depends on a premise, which Mr Robertson seeks to establish, that the transaction can properly be characterised as a loan.
That premise is in turn contested by Mr Botsman, who relies on the evidence to which I have referred to submit that the substance of the relevant arrangement is a subscription for shares and not a loan. There is, in the early part of the period, a significant amount of correspondence that is consistent with that submission, and even in the later part of the period, there is correspondence where, at the same time as seeking repayment of the relevant amount, Mr O'Brien refers to his 10 per cent interest in the company, a matter which is only consistent with the suggested issue or purchase of shares in Hit & Bounce to which I have referred above. The significance of that proposition is that, if the arrangement is one of share purchase, then Mr Botsman contends that it is at least genuinely arguable that the transaction would, if not performed, give rise to relief by way of specific performance or a claim in damages. Mr Robertson in turn raises a third possibility, namely that the transaction, if not performed, would give rise to a claim in restitution, at least if it could be said that the consideration had wholly failed. Mr Robertson points out that an amount repayable by restitution might arguably be characterised as a debt for the purposes of the creditor's statutory demand procedure, and that it would have the result, in a successful claim for restitution, in recovery of the amounts claimed.
Mr Botsman submits that the debt claimed is subject to a genuine dispute, by reason of the lack of contractual terms, the lack of documentation and the correspondence to which I have referred in respect of the share subscription agreement. Mr Robertson responds, in his outline of submissions, by recognising that Hit & Bounce disputes the characterisation of the obligation owed, but submitting that that dispute is not available, where, as I have noted, there is a reference to a non-current liability in the balance sheet for the Company for the year ended 30 June 2014. He also emphasises that, as appears to be the case, that characterisation of the amount as a liability was one that was first offered in those financial statements and provided to the accountant for Slat by the accountant for Hit & Bounce. The difficulty with that proposition is, however, that it tends to assume that the financial statements, which are unsigned and are unaudited, are conclusive as to the question of the treatment of the relevant amount. They may, no doubt, be strong evidence which would assist Slat in a trial on the merits. However, it does not seem to me that they are conclusive, or capable of excluding a serious contention to the contrary, so far as it would be open to Hit & Bounce to contend, as Mr Merriam does contend, that the treatment was one adopted for convenience, pending the issue of shares as contemplated by the agreement. Mr Robertson also submits that Hit & Bounce had taken no steps to issue the shares, and that the evidence suggests that it will now take no steps to issue the shares. Those propositions are both at least strongly arguable, but again do not seem to me to establish the absence of a genuine dispute, as to whether the transaction is properly characterised as a loan, as distinct from the fact that, whatever the arrangement was, it is now unlikely to be performed. In oral submissions, Mr Robertson in turn developed, at some length, the question of a possible alternative characterisation of the arrangement as one giving rise to a claim in restitution, to which I have referred above.
In this case, the parties have led substantial evidence, and the parties' submissions have had a significant degree of sophistication, addressing issues which, at least in part, would arise in a hearing on the merits. It seems to me, however, that the result of the case is ultimately determined, relatively simply, by the application of well-established principles to the facts that I have summarised above. The test to set aside a creditor's statutory demand is not a demanding one, and it requires only that a genuine issue be established, such that, for example, a defence to a claim for debt brought by Slat could not be struck out on the basis that it was not seriously arguable. In the present case, it seems to me that there is an arguable claim for debt, and that arguable claim for debt finds a significant amount of support from the financial reports to which I have referred. However, the fact that that claim is arguable does not have the consequence that a serious defence to that claim does not exist, or that the claim in the Demand is not genuinely disputed. A contrary argument plainly exists, in my view, that the relevant transaction was one of subscription for shares, breach of which would give rise to a claim for contractual damages or for specific performance. It is also possible that the claim could be characterised, as Mr Robertson points out, as one for restitution, although that would raise significant complexities, not fully explored before me, as to whether there was a total failure of consideration where the O'Briens had some involvement in the business, and as to whether it would be open, in this case, to rely on that alternative claim, notwithstanding that it had not been identified in the demand: cf Re Attard (trading under the partnership name of Colin Biggers & Paisley) [2013] NSWSC 1579; (2013) 96 ACSR 581. I express no view as to those latter questions, when it is not necessary to do so to determine this application.
Once it is accepted, as it seems to me it must be, that there is an arguable alternative characterisation of the arrangement as an agreement for the issue of shares, which was very likely breached, giving rise to a claim in specific performance or for damages, and not a loan giving rise to a claim for debt, then it must also be accepted that there is a genuine dispute as to the debt. That arises because a claim for the debt could be, by way of defence, properly denied, on the basis that no debt existed and any claim was one for damages, specific performance, or indeed restitution. That does not have the consequence, of course, that the claim cannot be pursued. It does have the consequence that it cannot properly be pursued by the use of the summary procedure which is made available by the creditor's statutory demand regime, where no inference of insolvency could fairly be drawn from non-payment of a "debt" that could be disputed on the basis that it is not properly a debt.
The result that I have reached is consistent with that which was reached by Heerey J in somewhat similar circumstances in Madagascar Australia Trading Pty Ltd v Ramsey (1998) 28 ASR 423 and by White J, albeit in the context of whether leave should be granted to oppose a creditor's winding up under s 459S of the Corporations Act, in Ewen Stewart & Associates Pty Ltd v Blue Mountains Virtual Air Helitours Pty Ltd (No 2) [2011] NSWSC 113. I should recognise, first, that Mr Robertson distinguished those cases from the present case, and there are some factual differences between the two, in the sense that each case turns upon the relevant facts. The result that I have reached does not depend on those decisions, since it arises from the application of the wider principles identified in the case law to which I have referred above in the particular facts of this case. Those decisions emphasise, notwithstanding any differences in the underlying facts, that a share subscription arrangement that has arguably been breached will ordinarily give rise to a claim for breach of contract, leading to remedies in damages or specific performance, rather than a claim for debt. At that general level, those decisions are consistent with the result that I have reached.
This decision will no doubt be a disappointing outcome for Slat and its principals, who have paid a significant amount to Hit & Bounce, and not received either the issue of shares or repayment of that amount, and are now exposed to the setting aside of the creditor's statutory demand. That is the unfortunate consequence of the fact that the creditor's statutory demand procedure ought only to be used where there is no genuine dispute as to the existence or amount of a debt. That result does not, of course, prevent Slat from pursuing its claims, in a Court that has jurisdiction to deal with them, and may deal with them on the merits rather than in a summary procedure of this kind.
Accordingly, I order that the creditor's statutory demand dated 3 August 2015 be set aside. The Defendant must pay the costs of this application, as agreed or as assessed.
After I delivered my judgment, indicating an order as to costs, Mr Robertson fairly sought to be heard as to that issue. Mr Robertson submitted that a significant amount of costs that have been incurred by Hit & Bounce would relate to its claim under s 459J of the Corporations Act which, as I have noted above, it had not pursued. Mr Robertson submitted that it would be unfair that Slat be required to pay the costs of that claim, as a substantive matter, where it had not been pursued. There seems to me to be substantial force in that proposition. The parties are presently discussing the possibility that agreement may be reached between them, for an order as to costs to be made in a form that will provide for payment of an agreed portion of the Plaintiff's costs. I will stand the matter over, and if agreement is reached between the parties, then they may submit consent orders that can be made in chambers, and avoid the costs of a further appearance. If agreement is not reached, then I will allow the parties an opportunity to be heard, both as to the form of any order as to costs, and as to whether the Court ought to make an order in a form that, for example, provides for a percentage of costs to be paid, so as to avoid the need for the costs of a further assessment in respect of particular attendances.
I stand the matter over before me at 3.30 pm on 10 March 2016. I vacate the order that I have previously made in respect of any order that the Defendant pay the Plaintiff's costs of the proceedings, pending further argument as to that question.
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Decision last updated: 16 June 2016