- CGI Information Systems v APRA Consulting Pty Limited

Supreme Court of NSW|2020-06-05|Before: Black J

Solicitors: Two Birds (Plaintiff) Cohen and Krass (Defendant) File Number(s): 2020/51769

Nature of the application

By Originating Process filed on 17 February 2020 the Plaintiff, Warrego Energy EP469 Pty Ltd (formerly known as Warrego Energy Pty Ltd) ("WEPL") seeks to set aside a creditor's statutory demand ("Demand") for payment of debt served by the Defendant, RAD Drill Services Pty Ltd ("RAD") dated 17 January 2020. It seeks that order under s 459H(1)(a) of the Corporations Act 2001 (Cth) on the basis that there is a genuine dispute as to the Demand, or, alternatively, under s 459J of the Act on the basis there is some other reason that the demand be set aside.
The Demand recites that WEPL owes RAD the amount of $316,250, being the amount of the debt described in the schedule, and refers to an affidavit of Mr Michael Fuller dated 17 January 2020 verifying that the amount is due and payable by the Company. The description of the debt in the schedule refers to a royalty of 5% payable by WEPL to RAD pursuant to an agreement between WAPL and RAD made 14 December 2017, in relation to WEPL's receipt of $250,000 paid by Strike Energy Ltd ("SEL") in or around January 2019, as to which the amount claimed is $13,750. It also refers to a royalty of 5% payable on WEPL's receipt of 50% of the benefit of a payment of $11 million from SEL in the second financial quarter of 2019, as to which the amount claimed is $302,500, each of those figures being inclusive of GST. The total debt claimed is therefore $316,250 being the amount specified in the Demand.

The parties and chronology

It is necessary to say something further as to the identity of the relevant parties, and the chronology of the events, before turning briefly to the affidavit evidence and then to the applicable principles. WEPL is a company incorporated in Australia, and its officers include Mr Dennis Donald, to whom I will refer further below. Its shares are owned by Warrego Energy Limited, incorporated in Scotland, which changed its name to Warrego Energy UK, which, in turn, is wholly owned by another Australian company now known as Warrego Energy Ltd. I will refer to the Scottish company as "WEL". The Defendant, RAD, is a company incorporated in Australia, and its registered office and principal place of business are in South Australia, and it appears that its director and former director are also resident in South Australia. That matter is of some significance, so far as reliance is placed by WEPL on the application of the Land Agents Act 1994 (SA), to which I will refer further below.
I should now say something further as to the chronology of events. WEL originally held an interest in a petroleum exploration permit EP469, issued under the Petroleum and Geothermal Energy Resources Act 1967 (WA) which it subsequently transferred to WEPL, prior to the events in issue in this application.
On 14 December 2017, an informal agreement, documented by email, appears to have been formed between Mr Donald, who was a director of both WEL and WEPL, and Mr Dorsch, who was associated with RAD. It is desirable to set out that email in full, since it underpins the claims in the Demand, and emphasises the degree of informality and the degree of uncertainty in the terms of that agreement. It reads as follows: "Carl Going back to our conversation this morning, please see the terms that I believe we have agreed such that you can move ahead and engage your investor network. The intent will be to formalise the terms below prior to any completion. The terms ● You will be paid 5% of capital raised in the same schedule at Warrego Energy and on completion of the deal - if payment is received in stages the commission will only ever be paid on cash received. ● If any deal involves a royalty, you will be paid 5% of the Warrego Energy royalty in the same manner as Warrego Energy. ● You will be informed and included as appropriate in the negotiation following introduction of the potential investor. ● Warrego Energy will not unfairly engage with the investor to your detriment. ● The deal above only relates to investors that are uniquely introduced by yourself. If you introduce an investor that we have or are engaged with we will provide evidence of that fact. Please review the above, let's agree get it on and email, such that you have the appropriate degree of confidence to proceed."
That email was signed by Mr Donald, there described as Managing Director of WEL with an Aberdeen address and Scottish telephone number, and the signature block also referred to Warrego Energy Pty, omitting the word Limited with a reference to a Western Australian address. It is common ground between the parties that the reference to "you" in the phrase "you will be paid" in that email refers to RAD. The email also refers to "capital raised" and Mr Walker, who appears for WEPL, submits that term is used to refer to equity capital in a company, although also recognising a possible reference to "working capital". Mr Lambert, who appears for RAD, seeks to read that term in a more expanded sense as referring to "money". The email also refers to a "royalty", and I will refer below to an issue as to whether a particular arrangement with SEL gave rise to a royalty paid to WEPL. There is also a significant issue in dispute between the parties as to whether the arrangement was, as WEPL contends, an arrangement for payment by WEL on a subscription for capital into WEL, or a royalty received by WEL, or instead, as RAD contends, an arrangement reached with WEPL in that respect. That question is by no means simple to resolve, because the use of the language "Warrego Energy" in the text of the email could refer either to WEL or WEPL. Subsequently, Mr Dorsch sought confirmation from Mr Donald that he accepted that RAD could be the sole agent in respect of introductions under that arrangement and Mr Donald responded that, "We are ok re RAD". The parties accept that this had the result that the relevant agreement was with RAD rather than Mr Dorsch personally, although that does not assist in resolving the question whether it was with WEL or WEPL.
The Demand in turn relies on a payment which is said to constitute capital, or alternatively a royalty, under a Farmin Agreement between Strike West Pty Ltd ("SWPL") (although the Demand refers to Strike Energy Limited) and WEPL executed on or about 28 March 2018. That agreement recites that WEPL is the owner of the "Sale Assets" defined as a 50% interest in certain assets, including exploration permit EP469. The recitals also record that WEPL has agreed to sell the Sale Assets to SWPL and SWPL has agreed to buy the Sale Assets on the terms of the agreement. On the face of it, the agreement appears to be an asset sale and purchase agreement rather than agreement for the subscription of capital by SWPL. The consideration is then set out in clause 2, which provides for payment of initial consideration, payment of deferred consideration, and payment or reimbursement of costs, expenses and liabilities in performance of certain obligations set out in Schedule 4. It appears that the first payment was made, and WEPL paid commission to RAD in respect of that payment, which Mr Lambert characterises as paid "without demur". RAD then claimed commission on the second and third amounts of the payments under the Farmin Agreement, including the reimbursement of costs, expenses and liabilities in performance of the relevant obligations, and that appears to have prompted a protest by WEL, or WEPL, or both, as to whether it was liable to pay that commission. Those amounts are in turn claimed in the Demand to which I have referred above.
Mr Donald refers, in his affidavit dated 27 February 2020, to the receipt of an email dated 25 July 2018 from Mr Dorsch. That email describes the first invoice as "the first invoice for the sole agency agreement between Warrego and RAD Drill as discussed", and that description did not distinguish between WEL and WEPL. The invoice relates to a claim to 5% of the initial payment of $350,000 made by SEL plus GST, being $19,250. Mr Donald points out that that invoice was initially addressed to Warrego in Scotland. He subsequently replied to Mr Dorsch requesting a removal of the "sole agency" reference, for reasons that are unexplained, and resubmission of the invoice to "Warrego Energy Pty", which was presumably a reference to WEPL. The description of the work in the invoice referred to "payment #1 as per agreed terms between RAD and Warrego and as agreed with [Mr Donald]", and again did not distinguish between WEL and WEPL, although, following Mr Donald's request, the invoice was readdressed to 'Warrego Energy PTY [sic]', presumably a reference to WEPL, at its Perth address.
In January 2019, Mr Dorsch sent a further email to Mr Donald noting that he understood that Warrego (which again did not distinguish between WEL and WEPL, but presumably referred to WEPL in its context) had now received the balance of payment on the Farmin Agreement and attached a further invoice. By email dated 28 January 2019, Mr Donald responded: "We have the bandwidth and I have the okay to deal with your invoice via issuing you with warrants to the value of your invoice."
Mr Lambert relies on that email as indicating a suggested acceptance of an obligation to make payment, although that would still leave open the question of payment by whom. In any event, Mr Dorsch responded to Mr Donald's email rejecting the suggestion for payment by warrants, and pressing for payment in money, and leaving open the possibility that he might accept payment by warrants for "future payments". That, not surprisingly, prompted a query by Mr Donald as to the identity of the future payments to which it referred, and may well have prompted a closer focus by WEL or WEPL, or both upon the nature of its obligations under the relevant agreement.
By an email dated 4 March 2019, Mr MacNiven of WEL emailed Mr Dorsch noting that: "In the context of a couple of your recent emails, we have had to look at your invoice in a new light. There appears to be a difference of opinion as to what has been agreed between you and Warrego Energy Limited, and we are unable to approve your invoice until this is squared away. As [Mr Donald] has mentioned previously, settlement of your current tabled invoice can be made immediately on confirmation that this is in full and final settlement of all sums due by the company to you."
This email treated the arrangement as between Mr Dorsch or RAD on the one hand and WEL rather than WEPL on the other. As Mr Lambert pointed out, it appeared to suggest that there had been a rethinking of WEL's position, but that is perhaps not surprising given Mr Dorsch's suggestion that further amounts would be claimed by RAD. It also made an offer, which was not accepted, for payment if RAD, or Mr Dorsch, accepted that payment in full discharge of amounts due by WEL to RAD. Plainly, Mr Dorsch and RAD did not accept that offer, as the Demand makes clear.
A further email dated 25 April 2019 from Mr MacNiven to Mr Fuller, provided on account of the history of the matter, and contended that Mr Dorsch was engaged to locate sources of investment for WEL in support of its E&P activities in Western Australia, and not to seek Farmin partners; refers to a suggested introduction to SEL in respect of a transaction which did not proceed; referred to the subsequent re-engagement with SEL, said to have been initiated by WEL in Scotland; and contended that the initial invoice was paid because: "Notwithstanding the circumstances, because we've known [Mr Dorsch] a long time and hoped we might be able to work together on other projects, we agreed to pay commission to the introduction based on the first back cost payment from [SEL]. On reflection, this was probably a mistake, as [Mr Dorsch's] introduction did not result in anything other than bad feeling and confusion between ourselves and [SEL]. We have also - again possibly in error - agreed to settle a second instalment based on the second payment by [SEL] but became surprised and alarmed when [Mr Dorsch] indicated there was additional sums expected. We have offered to pay the second instalment in final settlement but this was rejected. We offered to settle the final instalment in warrants..." That email also points to the possibility, also raised by other evidence that WEL, or WEPL, had by then re-assessed its or their position in respect of the further claim for additional commission made by RAD.
Subsequently communications between the parties' solicitors, from September 2019, have some relevance so far as they identify the nature of the dispute that arose between the parties. By a letter dated 16 December 2019, the solicitors acting for RAD asserted that it was entitled to royalties calculated at 5 percent of all capital advanced by SEL to commercialise EP469, those royalties becoming payable upon each "capital advance". That letter made the ambitious assumption that payments made by SWPL by way of purchase consideration under the Farmin Agreement, being reimbursement of expenses in respect of the tenement, could be characterised as a "capital advance" to WEPL.
By letter dated 24 December 2019, the solicitors for WEPL responded that it disputed that it was liable to pay the amount claimed. It also raised a claim, pressed in this application, that RAD was not a registered agent pursuant to the Land Agents Act, to which I have referred above, and that the claim by RAD was prohibited by s 6 of that Act. Second, that letter contended that: "Even leaving aside the statutory prohibition of your client's claim, there would be no entitlement to payment. The Work Commitment Expenditure, undertaken by Strike did not result in the receipt by Warrego of any capital as contemplated by the agreement confirmed on 14 December 2017, and so no commission would have been payable to your client in relation to that amount." That letter does not expressly refer to the further question whether any amount is due by WEL or WEPL.
On 6 January 2020, RAD served a first creditor's statutory demand which appears to have later been withdrawn for reasons that are not addressed by the evidence. By further email dated 14 January 2020, the solicitors for WEPL reiterated the claim that there was a genuine dispute in respect of the debt claimed by RAD. That was in turn rejected by the solicitors for RAD, and the Demand, to which I have referred above, was subsequently served. I pause to note that that makes all the stranger the observation in Mr Fuller's verifying affidavit that he believed there was no genuine dispute about the existence or amount of the debt claimed by RAD.

The affidavit evidence

The parties also read voluminous affidavit evidence, much of which was inadmissible in form and was rejected. The Plaintiffs read an affidavit of their solicitor, Mr Mulcahy, dated 17 February 2020, within the 21-day period required by s 459G of the Act which set out, on information and belief from Mr Donald, the basis on which the Demand would be disputed. A second affidavit of Mr Mulcahy dated 16 April 2020 and a third affidavit of Mr Donald dated 27 February 2020 were read. That third affidavit was substantially identical to Mr Mulcahy's initial affidavit, which is perhaps less problematic in this case than it would be in many cases, where Mr Mulcahy's first affidavit was stated to be on information and belief from Mr Donald, and Mr Donald's affidavit appears to be giving the same evidence directly.
The Defendants relied on affidavits of Mr Fuller dated 17 March 2020 and Mr Dorsch dated 4 May 2020. Significant parts of those affidavits were not admitted, for reasons of form, and other parts appeared to be intended to demonstrate that RAD had made a significant contribution to WEPL's activities or the development of its business. That is of limited relevance to the question which I have to decide, which is whether there is a genuine dispute exists as to the debts claimed in the Demand.

The applicable legal principles

I now turn to the applicable legal principles. 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 a debt to which the demand relates. That test has been formulated as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance", or involves a "plausible connection requiring an investigation", and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Limited (1994) 12 ACSR 785 at 787. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Federal Court held that "a genuine dispute" must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory, or misconceived.
In CGI Information Systems v APRA Consulting Pty Limited [2003] NSWSC 728; (2003) 47 ACSR 100 at [16] Barrett J in term noted that the task faced by a company challenging a creditor's statutory demand on the genuine dispute grounds "is by no means at all a difficult or demanding one", and it will fail in that task "only if it is found, upon the hearing of its 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a significant 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 where any case apparently available to be advanced against the company serves stronger".
The Court of Appeal also addressed the relevant principles in Ligon 158 Pty Ltd v Huber [2016], NSWCA 330 at [8] where Barrett AJA (with whom McColl and Meagher JJA agreed) referred to my summary of those principles in Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 at [9]-[22]. In Re AMP Life Ltd [2018] NSWSC 855 at [35]-[37], Gleeson JA in turn referred to that case law and noted that: "The bar for establishing a genuine dispute is not set high; a 'plausible contention requiring investigation' will suffice. … The Court's state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared."
Several cases at first instance and on appeal have emphasised that the Court would ordinarily not determine construction questions in an application to set aside a creditor's statutory demand, at least when any question of construction is genuinely arguable: Re Linton Developments (QLD) Pty Ltd [2017] NSWSC 336 at [44]-[46]; Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [90]; Re Universal Property Group Pty Ltd [2019] NSWSC 796 at [17] per Rees J.

Submissions and Determination

I have dealt with these authorities at length, because it seems to me that their application in this case means that the result is plain and inevitable. Mr Walker, who as I noted above, appears for WEPL, identifies three bases on which WEPL contends that there is a genuine dispute as to the Demand, for the purposes of a s 459H(1)(a) of the Act. The first is that there is a question which is genuinely arguable as to whether WEL or WEPL is party to the relevant arrangements. I have referred above to the factors which indicate that that matter is plainly arguable, so far as the email dated 14 December 2017 refers to "Warrego Energy", rather than to a particular entity, and is signed by a person who is a director of both entities, with a reference to both entities on the last page. Subsequent invoices, and correspondence from RAD, also refer to "Warrego Energy" without identifying the entity to which they are directed. It may be that, as Mr Lambert contends, it would make more commercial sense for the arrangement to be with WEPL, since it was the holder of the relevant permit, or it may be that it would make more commercial sense for the arrangement to be with WEL, if any capital would have been issued at holding company rather than subsidiary level. There is here a real issue as to who are the parties to the contract, and that is a question to be determined as a matter of construction, and by reference to the objective intention inferred from all the circumstances: Cheshire & Fifoot's Law of Contract, 9th Australia ed [7.2].
The Court's role in an application of this kind is plainly not to determine the question of construction involved in determining which Company is party to the arrangement, where that is properly a matter for a trial on the merits, which should not be determined on an application to set aside the Demand for the reasons identified by White JA in Grandview Ausbuilder above, including the risk that such a determination would give rise to difficulty for a trial judge at a final hearing. It seems to me that there is plainly a genuine dispute on that basis.
I should add that Mr Lambert also submits that WEPL is estopped from contending that it is not party to the relevant arrangements, because of the suggestion that it readily made payment of the first invoice, and contemplated payment of the second, and an arrangement in respect of the third, involving the issue of warrants as noted above. I leave open the question whether the relevant requirements for an estoppel would be established in the relevant circumstances. It seems to me that, in these circumstances, estoppel would be a response on the merits, to a claim by WEPL that it was not liable under the relevant agreement, and not a matter that could deprive that claim of the character of being genuinely arguable. That defence would properly be determined at a trial, and not in a summary application of this kind.
Second, Mr Walker contends that a genuine dispute arises from the reference to "capital" and "royalties" in the email dated 14 December 2017, and that the arrangements which were documented by the Farmin Agreement did not constitute a subscription for capital or royalty arrangements. Again, it seems to me that that proposition is plainly genuinely arguable. If the submission advanced by Mr Lambert that "capital" means money, rather than equity capital or working capital is arguable, it is still not so obviously right that it could be suggested that any contrary argument, giving the usual meaning to those terms, could not be accepted. For that reason, it seems to me that that issue is also genuinely arguable.
Mr Walker developed a third claim, based on the Land Agents Act 1994 (SA). Section 6 of that Act relevantly provides that a person must not carry on business, or hold himself or herself out, as an agent unless registered as an agent under that Act. Notwithstanding the title of the Act, that prohibition extends not only to a person that carries on a business that consists of dealing with land, but also to a person who conducts business dealing with businesses on behalf of others, or conducting negotiations for that purpose. If a person is an agent within the scope of that Act, and does not hold the requisite registration, then that person is expressly not entitled to commission or other consideration for services as an agent.
Mr Lambert submits, and it seems to me likely the case, that RAD was not an agent, on the basis that it was dealing with land, because mining tenements are not land for either generally, or for the purposes of the Act. Mr Walker did not contend to the contrary. Mr Walker instead contended that it was genuinely arguable that RAD was an agent, so far as it was dealing with businesses on behalf of others, namely the business conducted by WEPL or WEL in respect of the relevant petroleum exploration permits. If I were free to determine that question on its merits, then I would be inclined to think that the sale of an interest in an exploration permit could not fairly be characterised as the sale of a business for the purpose of the Land Agents Act. I am conscious, however, of the appellate authority which cautions against determining such questions in respect of an application to set aside a creditor's statutory demands and I will not do so. It is in any event not necessary to determine whether the proposition that the Act applies is genuinely arguable, where I have found that genuinely arguable questions exist in respect of the debt on other grounds.
The parties did not address the further questions whether the conduct of capital raising constituted a financial services business; whether, if so, RAD held the necessary Australian financial services licence under s 911A of the Corporations Act; and whether any obligation of WEPL to pay commission would be enforceable if it was required to hold that licence and did not: cf Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28; Validus Advisory Group Pty Ltd v Consolidated Tin Mines Ltd [2018] NSWSC 417.
For all of these reasons, I am comfortably satisfied that a genuine dispute exists in respect of the debt claimed. On that basis, the Demand must be set aside.

Section 459J application

WEPL alternatively contended that the Demand should be set aside for some other reason under s 459J of the Act, on the basis that the Demand was issued in respect of a debt that was known to be genuinely disputed. Mr Walker fairly accepted that that contention ultimately added nothing to WEPL's claim to set aside the Demand under s 459H of the Act since, once a genuine dispute was established, the Demand would be set aside in any event. For that reason, I need not determine that further contention.

Costs

Mr Walker contended that this is a case in which an order for indemnity costs should be made in favour of WEPL. It is well-established that, because the threshold for establishing a genuine dispute is low, creditors are often ill-advised to proceed with a statutory demand once plausible grounds for a dispute are asserted, and they risk an order for indemnity costs if they do so: Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1998) 16 ACLC 529 at 536; CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd above; and see my summary of the case law in Re Pierotti & Fanani Pty Ltd as trustee for the Caesars Properties Unit Trust; Re Etruscan Properties Ltd as trustees for the Etruscan Properties Unit Trust [2018] NSWSC 457 at 20[ff].
Mr Lambert responded that, instead, costs should be costs in the cause in any substantive proceedings which are subsequently brought by RAD. There seems to me to be at least two difficulties with that contention. The first is that there is, of course, no guarantee that any substantive proceedings will ever be brought by RAD. The second is that it is inconsistent with the usual position, in respect of an application to set aside a creditor's statutory demand, that costs follow the event. If a creditor seeks to pursue a debt by statutory demand, where a genuine dispute exists, and resists an application to set aside that demand, then the compensatory purpose of an order for costs require that an order for costs be made in favour of the plaintiff.
I am satisfied that RAD should be ordered to pay WEPL's costs on an indemnity basis in this case. The solicitor's correspondence to which I have referred above disclosed, in clear terms, the basis on which it would be contended that the Demand was not properly based, because there existed a genuine dispute as to the relevant debt. I have referred above to the fact Mr Fuller's statement that he did not believe the debt was disputed, in his affidavit verifying the Demand, is difficult to reconcile with the clear identification of the grounds of dispute in that correspondence. Where a creditor chooses to pursue a creditor's statutory demand, in the face of clear notice of a dispute about it, then it seems to me that its conduct is sufficiently unreasonable to warrant an order for indemnity costs.

Orders

Accordingly, I make the following orders: 1. The creditor's statutory demand for payment of debt served by the Defendant on the Plaintiff and dated 17 January 2020 be set aside. 2. Defendant pay the Plaintiff's costs of an incidental to these proceedings on an indemnity basis.

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: 31 July 2020

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