Citation Resources Ltd v IBT Holdings Pty Ltd

1. The statutory demand dated 6 May 2016 served by the defendant on the plaintiff on 13 May 2016 be set aside.
2. The defendant pay the plaintiff's costs of the application, to be assessed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MCKERRACHER J: 1 Citation Resources Ltd (ACN 118 710 508) applies to set aside a statutory demand notice on the grounds that there is a genuine dispute. For the reasons which follow, in these most unusual circumstances, I consider that while the case for a genuine dispute is presently not strong, there is a 'genuine dispute' and the notice should be set aside.

BACKGROUND 2 On or about 15 May 2014, Citation and IBT Holdings Pty Ltd (ACN 157 759 138) entered into a Loan Facility Agreement to which IBT was to advance $350,000 to Citation on or before 19 May 2014 in consideration for debt notes with a face value of $420,000. On or about 12 March 2015, the parties entered into a Convertible Loan Deed, pursuant to which IBT was to advance $100,000 to Citation on the same day. On or about 24 September 2015, the parties and various other parties entered into a Deed of Debt Conversion, Repayment and Release. By this Conversion Deed pursuant to cl 2.1, and subject to certain preconditions, the debt outstanding to IBT under the Loan Facility Agreement and the Convertible Loan Deed was to be converted into an adjusted settlement amount of $400,000: repaid partly in cash ($171,000), and partly in shares (4.58 million, to be issued at $0.05 per share). The debt conversion and payment so effected was to occur 'on, or soon as reasonably practicable after, the Completion Date, and subject to receipt of any necessary regulatory and shareholder approvals of [Citation]'. 3 Citation relies upon evidence capable of demonstrating that perhaps as late as early December 2015, the terms of the Conversion Deed were 'fundamentally varied' in terms of a settlement arrangement set out in a 10 December 2015 email from a then director of Citation, Mr Anthony Eastman, to a then director of Citation, Mr Peter Landau, and Mr Victor Turco, another director of Citation. In that email Mr Eastman suggested that it had been agreed that 'historical debt and convertible note arrangements' owing to IBT (which Citation argues is a reference to the Conversion Deed) would be paid, that there would be an issue of 4 million options to IBT and that any entitlement to shares would be foregone. The only evidence of this alleged variation available to Citation is this email because there has been a change in control of the company. Those who currently direct Citation do not necessarily have, I infer, access to evidence and information from the former directors. There is therefore no evidence of the variation being recorded in writing or duly executed by the parties to the Conversion Deed. Nevertheless, for that and other reasons, Citation contends there is an arguable defence to its liability. 4 There is some corroboration for the variation, because on 9 December 2015, Citation issued 4 million options exercisable at $0.05 to IBT. There was at that time no other documented reason for those options to be issued from Citation to IBT. But IBT, through its director, Mr Ivan Brown, says that it was contacted by Mr Landau of Citation in November 2015 and that Mr Landau offered to issue the options to IBT. Mr Brown says that Mr Landau said in effect that because Citation had delayed in repaying the loan to IBT he would arrange for the 4 million options to be issued to IBT. Mr Brown said that at no time did Mr Landau or anyone else on behalf of Citation tell him that the issuance of those options to IBT was in part payment of IBT's loans to Citation. Mr Brown also deposed to his belief that at no time did Mr Landau or anyone on behalf of Citation tell him that the issuance of those options would have any effect on the shares to be issued under the Conversion Deed. Mr Turco deposed to a conversation with Mr Brown during which Mr Brown said that he took the offer, which he accepted, as being in lieu of interest which would be due to IBT at that stage. I note, however, that as at November 2015, by virtue of the terms and effect of the Conversion Deed, it is quite unclear that any obligation to meet a payment had been incurred by Citation. 5 The 4 million options were issued on 9 December 2015. On 8 January 2016, Mr Turco, who had been a director of Citation since 1 December 2015, was provided by Mr Landau with a reconciliation statement of a Westpac bank account which had been opened in the name of Citation. That statement records a payment in the amount of $400,000 to IBT by Citation. Mr Landau resigned as a director from Citation on about 19 January 2016. 6 There were difficulties, however, and on or about 19 February 2016, Citation requested and was granted a trading halt with respect to its securities. Since 23 February 2016, those securities have been suspended from trading on the official quotation of the Australian Securities Exchange (ASX). On or about 26 February 2016, on the evidence as it is at the moment, Mr Turco was told by Mr Brown that IBT had not, in fact, received payment of funds owing to it from Citation. Prior to that, Mr Turco says that he understood that there were no outstanding payments due and owing to IBT from Citation. Two days later, on 28 February 2016, Citation was informed by Mr Landau that he had entered into a separate deal with IBT. Citation is unable at this stage to give particulars of the 'separate deal' and does not know whether the obligations under it have been discharged wholly or otherwise. According to a chain of emails between Mr Landau and Mr Turco on 28 February 2016, that supposed 'separate deal' appears to have been entered into between Mr Landau and Mr Brown after Mr Landau's resignation as a director of Citation. It is not apparent, on its face, how a transaction entered into at that time could bind Citation, if Mr Landau was no longer a director or employee. 7 That, in any event, was not apparently the view of IBT and on 7 March 2016, IBT advised by email that it terminated the Conversion Deed. 8 The Termination Notice was in the following form by email from Mr Brown on 7 March 2016 to (and forwarded to approximately 30 minutes later): Hi Victor and co This is written notice that I terminate the attached deed or agreement as it is more than 90 days from the end date and [Citation] has breached its obligations. [Conversion Deed attached] 9 A week later, on 14 March 2016, IBT notified Citation's employees and officers by email that '[Mr Landau] has indicated he will be transferring 850k aud to me imminently as part payment with a further 200k later'. The evidence is that no such payment was made and three days later, on 17 March 2016, IBT issued its initial statutory demand on Citation. 10 On 13 May 2016, IBT served a second statutory demand dated 6 May 2016 seeking the sum of $657,690.71, being the amount said to be owing to it from Citation under the Loan Facility Agreement and the Convertible Loan Deed. 11 In the account just given, the key documentary evidence is undisputed and is sufficient for the purposes of resolving the dispute at this stage. There is, additionally, hearsay evidence as to two possible tranches of negotiations. On the question of the admissibility of hearsay evidence, there is some debate on the authorities as to whether a decision dismissing an application to set aside a statutory demand is final or interlocutory, but on one view it is a final hearing: Keylink Physical Care Pty Ltd v Ergoline (Australia) Pty Ltd [1999] SASC 483. As such hearsay evidence is inadmissible and IBT objected to it under r 30.30 of the Federal Court Rules 2011 (Cth). This affects a number of matters, including the truth of the contents of the email from Mr Eastman dated 10 December 2015, the truth of the contents of the email from Mr Landau to Mr Turco and Mr Eastman of 28 February 2016, the truth of the statements made by letter dated 13 January 2016 of Mr Landau that debts had been paid, and the truth of oral statements made by Mr Landau on 14 January 2016. I give no weight to the pure hearsay evidence relating to a possible agreement reached early this year. But I do treat emails generated before the demands were made as being a contemporaneous business record.