Clarke and Walker Pty Ltd v Thew

IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) VG 217 of 1997 ) GENERAL DIVISION )

(FORMERLY EQUUS FINANCIAL SERVICES LIMITED) (ACN 006 012 344)

JUDGES: FRENCH, KIEFEL AND SUNDBERG JJ PLACE: MELBOURNE DATED: 5 DECEMBER 1997

INTRODUCTION This appeal concerns an application to set aside a notice of demand under s 459C of the Corporations Law. The notice was delivered to the financier of investors in a film-making enterprise by the trustee for the investors. At first instance questions were raised concerning the existence of a genuine dispute about the claimed debt and related to that, the existence of alleged off-setting claims. The trial judge, Heerey J, declined to set the notice aside but did vary it by substantially reducing the amount of the demand. The alleged debtor company, Equuscorp Pty Ltd ("Equus"), appeals against that decision and Perpetual Trustees WA Limited ("Perpetual") cross-appeals.

FACTUAL HISTORY Equus is the provider of financial services by way of consumer and investment loans. It was incorporated in 1988 as Equus Financial Services Limited, but converted to a proprietary company and changed its name on 29 May 1996. In 1990 it agreed to lend money to persons wishing to invest in the production of a film to be called "Night of the Leopard". The film was retitled "Double Impact" when released. The provision of finance for the investors was part of an overall financing and production arrangement involving a number of entities. The foundation document for the arrangements was a document called The Second Multiple Prospectus Deed which was made on 9 May 1988. That Deed which came into existence prior to Equus' involvement, was made between Kamisha Corporation Limited ("Kamisha") and Perpetual as an umbrella document to which investors, designated Production Contractors in relation to various films, would become parties. Under the Deed, Kamisha would issue prospectuses for the production of films and would manage the production on behalf of the investors who had subscribed for units offered in the prospectus. Perpetual was to act as a trustee of each fund set up pursuant to each prospectus and as agent for the investors. The Deed contemplated that Kamisha could provide in each such prospectus for investors to apply for a Loan Facility under which they could borrow the whole or any part of the money payable for their units (cl 2.03). The owner of the rights to make the film was a company called Balmedie Pty Ltd ("Balmedie"). It entered into a Production Services Agreement with Perpetual as agent for the investors. Separate Supervision Agreements were made between Kamisha and each of the investors. By those agreements each of the investors appointed Kamisha as its agent to carry out and administer on its behalf the investors' obligations to the owner under the Production Services Agreement. The Prospectus for the film issued on 11 June 1990. It offered each investor up to 4812 units of $100 each in the Trust Fund established by the Trust Deed and up to 4812 parcels of production contribution moneys of $5,000 each. For every $100 unit taken up the investor was also to pay a $5,000 parcel of production contribution money. The combined total payment for each unit and parcel was therefore $5,100. There was a minimum guaranteed return for each investor of 125% of the original investment. This was a Base Production Services Fee payable by the owner to the investors pro rata according to the number of units held by each. The minimum total was $30,072,516 payable as follows: 1. On the fourth anniversary of the operative date of the Production Services Agreement (29 June 1994) $1,100,000. 2. On the fifth anniversary of the operative date of the Production Services Agreement (29 June 1995) $1,300,000. 3. On the sixth anniversary of the operative date of the Production Services Agreement (29 June 1996) $27,672,516.

Additional payments to the investors were Production Services Fees up to 20% of the cost of production and 15% of net proceeds. These latter fees based upon the success of the distribution of the film were referred to in argument as "super profits" although that term does not itself appear in the documents. Under the Production Services Agreement, Balmedie was to provide security for the payment of fees due to the investors. The security for the Base Production Service Fee was to be by way of letter of credit or bank guarantee or otherwise as was acceptable to and approved by Perpetual. Discussions took place in late 1989 and early 1990 between the Managing Director of Equus and John Davis then of VDA Consultants Pty Ltd and later of Kamisha. The discussions related to the provision of loan finance by Equus to prospective investors. The film then contemplated was to be called "Glengarry Glenross". Balmedie held the relevant rights. In June 1990 it was decided that that film would not proceed but that "Night of the Leopard" would go ahead with investors being financed by Equus. On 28 June 1990, Equus wrote to Balmedie and offered a credit facility. This was described as a "letter of credit facility for AUD$10,468,750 representing an amount being 125 per centum (125%) of the total principal sums that Equus has agreed to advance to Production Contractors... to subscribe for units in the Trust...". The facility was to be used for the purpose of issuing a letter of credit to Perpetual as trustee under the Second Multiple Prospectus Deed. The facility was to terminate on 29 June 1996. The offer was accepted by Balmedie on 29 June 1990. Equus provided a letter of credit in favour of Perpetual dated 29 June 1990. The letter was for a maximum sum of $10,468,750 to be drawn down in three tranches: 29 June 1994 $ 382,740 29 June 1995 $ 452,250 29 June 1996 $9,633,760

A Tripartite Agreement, also dated 29 June 1990, was made between Balmedie, Equus and a company called Jolane Pty Ltd ("Jolane") associated with Equus. Balmedie agreed to deposit $5,025,000 with Jolane which would deposit the same sum with Equus. The deposit from Balmedie to Jolane was to be treated as an interest free deposit repayable by Jolane to Balmedie "on the date specified in the Credit Facility for repayment of all moneys owing by the owner to Equus thereafter". His Honour found that it was Equus' expectation that it would generate sufficient earnings from the use of Balmedie's payment to meet its obligations under the letter of credit facility when they fell due in 1994, 1995 and 1996. Perpetual also obtained letters of credit from the National Mutual Royal Bank for $779,800 and $625,010 respectively.

Between 11 June 1990 and 28 August 1990 investors applied for a total of 1,903 units in the fund. 1,675 of those units were issued to investors who borrowed from Equus to advance their production contribution moneys to Perpetual. They each borrowed from Equus under a standard form of Loan Contract. As security for the repayment of the moneys borrowed each investor gave to Equus a charge over its right, title and interest in its units and all property thereafter held or acquired by the investor in substitution or replacement for the units. Equus was given an irrevocable power of attorney for each of the investors to, among other things, do any act or sign, deliver and execute any document in relation to the units. Equus lent money amounting to $8,375,000 to investors on or about 29 June 1990. That sum was advanced to Perpetual by way of 1675 parcels of production contribution moneys in accordance with the terms of the Prospectus. Units were also allotted to 228 cash investors who used funds other than those provided by Equus. The first payment by Equus to Perpetual under the letter of credit proceeded on 29 June 1994. It was facilitated by an exchange of cheques effected by agreement. Equus paid a cheque for $382,740 to Perpetual and received a trustee's cheque for $351,892.22. The latter payment was in satisfaction of Equus' charge over the fees due to the investors. The amounts of the cheques were not equal because some of the Equus investors had paid out the loans and were entitled to receive their fees from Perpetual free of any charge to Equus. The exchange arrangement was evidenced by a letter from Equus to Perpetual dated 24 June 1994 in the following terms: "Further to our telephone conversation of yesterday's date I wish to advise Equus must have a "Bank Cheque" at Settlement so we have cleared funds to enable us to issue cheques to our clients on that day." A similar arrangement was adopted on 29 June 1995. Equus paid Perpetual $452,250 and received $409,050. The exchange arrangement was evidenced by a fax from Equus to Perpetual ".... and confirm that the agreement between our firms is for cheques to be exchanged on the Drawdown date." The final tranche of $9,633,760 was due by Equus to Perpetual on 29 June 1996. A meeting took place between representatives of Perpetual and representatives of Equus on 23 April at which Equus' concerns about its ability to meet the payment were discussed. Following the meeting, the Managing Director of Equus sent a letter to Perpetual. He said that Equus had been unable to arrange required funding to make the payment due on 29 June 1996. He proposed that Equus make a payment of $4,625,000 on 29 June 1996 on condition that Perpetual would in turn pay to Equus on or before 30 April 1996 the sum of $4,183,208.96. This sum represented an entitlement of $2,761.19 per unit for each of the current Equus investors. He wrote: "The settlement procedure to be followed would be similar to that followed by both of us in the past two years ie by way of an exchange of cheques." A list of current Equus investors was enclosed. The letter concluded: "We would like to stress that the funding for $4,625,000 is only available if it is taken up by 30 April 1996. We can give no assurance that we will be in a position to arrange this funding past that date. Please let us have your response as soon as possible." On 17 May by arrangement with Equus, the South Australian Asset Management Corporation paid a bank cheque for $4,625,000 directly to Perpetual on the basis that it receive from Perpetual simultaneously a bank cheque for the amount of $4,183,208.96 in satisfaction of the investors' respective entitlements due in reduction of their indebtedness to Equus. The transaction proceeded accordingly. Perpetual wrote to Equus on 17 May 1996 confirming receipt of the moneys from the South Australian Asset Management Corporation and adding: "The balance under the Letter of Credit is now $5,008,760 and remains payable in accordance with its terms." By a letter dated 28 May 1996, Equus advised Perpetual that after reviewing all of the documentation it had concluded that Perpetual must pool all proceeds for the various Letters of Credit pertaining to the Trust and distribute those proceeds pro rata amongst all the unit holders in the Trust. The letter said: "As you are aware we have been given security over each of the our borrower's interest in the Trust and this security includes the entitlement to any proceeds from payments to be made on or about 29 June 1996, pursuant to National Mutual Royal Bank's Irrevocable Standby Letters of Credit No. 26000995 and No. 26001044 dated 28 and 29 August 1990 respectively. We ask you to confirm that pursuant to the Irrevocable Direction of Notice and Assignment to you by each of the unit holders set out in the attached list, that you will distribute all of the entitlements of these unit holders to funds under the two National Mutual Royal Bank Letters of Credit, to us as they become available on the 29 June 1996." Equus calculated the relevant amount to be $1,028,533.50 representing an entitlement of $670.90 on the 1515 units in the Trust charged to Equus. In the alternative, Equus invoked its power of attorney under the Loan Contracts and demanded the entitlement of each of the investors to proceeds from the National Mutual Royal Bank Letters of Credit. Perpetual rejected the Equus contention. A further exchange of correspondence followed but Perpetual maintained its position. On 24 June 1996, Perpetual wrote to Equus confirming its intention to present the Letter of Credit to Equus for payment on Friday, 28 June 1996. It said: "We note that the letter of credit expires on 29th June 1996 which is a Saturday, and, in the circumstances, but without prejudice we are prepared to accept payment prior to 12 noon on Monday 1st July 1996."

Equus responded briefly on 25 June saying its office was open between 8.30am to 5pm Monday to Friday inclusive and confirming that it had been unable to arrange funding for the remainder of the Letter of Credit payment due on 29 June 1996. Perpetual wrote again to Equus on 26 June enclosing a Statutory Declaration to claim the balance of funds due under the Letter of Credit. It said: "We will expect payment of the amount due VIZ $5,008,760 prior to 12 noon on Monday 1st July 1996 as set out in our letter of 24th June 1996. You may care to ring the writer direct to facilitate the payment and any subsequent payment to Equus Financial Services Limited pursuant to Charge and Assignment and Notice to trustee letters held by our company." There was some telephone discussion between officers of Perpetual and Equus thereafter. In particular, it was pointed out to Equus that the maximum payable on a cheque exchange would only be $200,000. Equus, however, worked out that on the assumption that funds from National Mutual Royal Bank Letters of Credit were pooled as previously demanded, the balance due by Equus would be $29,753.96. This amount was able to be made available to Equus by the South Australian Asset Management Corporation. Equus again wrote to Perpetual on 28 June reasserting its contention about pooling and including a calculation to demonstrate that this would result in a total pool of $6,299,910, being $3,310.51 per unit. Equus would be entitled to proceeds from 1504 units, making a total of $4,979,007.04. Equus requested that Perpetual have a bank cheque in its favour for $4,979,007.04 available on 1 July 1996 to exchange for its bank cheque of $5,008,760 payable to Perpetual. The letter concluded: "We propose to have our funds available for this purpose. Should you fail to pool the proceeds of all Letters of Credit and have a cheque available in the sum of $4,979,007.04 we put you on notice that we thereafter propose to exercise our rights for recovery of that sum without further notice to you." Subsequently, as the trial judge found, on the morning of 28 June Mr Clifford Clayton, an officer of Perpetual, went to the office of Equus at 388-399 Collins Street and handed to an employee of Equus, Ms Fugaro, a copy of the letter of 26 June together with a copy of the Letter of Credit and the Statutory Declaration. He also said that it had not been suggested to him that the letter of 26 June, delivered on that day, did not constitute a draft for the purpose of the Letter of Credit. In the event he held it to be clear that the letter of 26 June had been sent earlier and received by Equus and that under the terms of the Letter of Credit it was sufficient if drafts drawn under the letter were presented "on or before the time and date of expiry specified". On 18 July 1996 a statutory demand was served on Equus. Paragraph 1 of the demand was in the following terms: "1. The Company owes Perpetual Trustees WA Limited (ACN 000 431 827) as Trustee for the Second Multiple Prospectus Trust of 89 St Georges Terrace, Perth, Western Australian,(sic) 6000 ("the Creditor") the amount of $5,008,760 being the balance of the amount due pursuant [to] an irrevocable standby letter of credit dated 29 June, 1990 issued by the Company in favour of the Creditor, particulars of which are more fully set out in the Schedule hereto." The notice particularised the debt claimed as follows: "Schedule Particulars of Debt Amount "The balance due by the Company to $5,008,760.00 the Creditor pursuant to an irrevocable standby letter of credit issued on 29 June, 1990 by the Company to the Creditor as trustee for the Second Multiple Prospectus Trust, which irrevocable standby letter of credit expired on 29 June 1996 and pursuant to the terms of which the Creditor on 28 June, 1996, being a date prior to the expiry date of the said irrevocable standby letter of credit, presented a request for the said balance accompanied by a Statutory Declaration requiring payment in full of the said balance by 29 June, 1996." In July 1996, Perpetual sought declarations in the Equity Division of the Supreme Court of New South Wales as to the construction of the agreements relating to pooling. Judgment was delivered by Windeyer J on 19 February 1997. It was held that the proceeds of the National Mutual Royal Bank Letters of Credit were to be pooled. Equus investors had to bring to account amounts received from the part payment of the third instalment of the Equus letter of credit. On 6 August 1996, Equus filed an application in this Court to set aside the statutory demand pursuant to s 459H and/or s 459J of the Corporations Law. On 12 May 1997 the learned trial judge made an order varying the statutory demand by deleting from par 1 the figure $5,008,760 and substituting the figure $943,765 and adding to the particulars of debt a reference to an off-setting claim of $4,064,994.74, leaving the balance due of $943,765. The period for compliance with the demand was extended to 2 June 1997. The question of costs was reserved. Subsequently, his Honour delivered a separate ruling on costs whereby Perpetual was to pay 80% of the costs of Equus. He made a further order granting an extension of time for compliance with the statutory demand until the determination of this appeal. He granted leave to Perpetual to appeal against his order for costs. An appeal was commenced in this Court on 22 May 1997, with a cross-appeal lodged by Perpetual. THE DECISION AT FIRST INSTANCE The proceedings before his Honour the learned trial judge took place nine months after the service of the statutory demand and occupied three and a half days of hearing. Some forty six affidavits were filed. As his Honour pointed out, the statutory objective of a quick summary hearing was not achieved in this case. His Honour identified a number of arguments advanced by Equus before him which were said to raise a genuine dispute or offsetting claim. He rejected at the threshold a contention for Equus that the letter of 9 June 1990 was not a Letter of Credit at all. Notwithstanding that it was a Letter of Credit he was of the view that Equus would be entitled, for the purpose of the Corporations Law, to rely on any cross-demand that it could otherwise make out. In this respect his Honour referred to the definition of "off-setting claim" in s 459H(5) of the Corporations Law. The arguments finally advanced by Equus were characterised by his Honour thus:

1. No draft had been presented in accordance with the terms of the Letter of Credit. 2. There was an off-setting claim for amounts in respect of which Equus was entitled to a charge for money advanced to the investors.
2. There was an off-setting claim for super profits.
3. There was an off-setting claim for damages for breach of trust. On his consideration of the evidence, his Honour was not satisfied that there was any genuine dispute that a draft was not presented to Equus in accordance with the terms of the Letter of Credit. As will appear later in these reasons, this was a reference to the question whether Perpetual's letter of demand for payment under the Letter of Credit had been delivered to Equus. His Honour took the view also that there was no substantial dispute that Equus' entitlement under the Charge did raise an off-setting claim within the meaning of s 459H(5). The real question, as he saw it, related to quantum. As to the quantum of the cross-demand, his Honour had regard to the decision of Windeyer J that the proceeds of the National Mutual Royal Bank Letters of Credit were to be pooled. Against Equus, on the other hand, he held that the Investors' Charges in its favour would only extend to moneys to which it was beneficially entitled by way of loan repayment and interest. Any further amounts due by an investor to Perpetual were held on trust by Equus for the investor. The reference to an off-setting claim in the Corporations Law is to a genuine claim that the company has beneficially in its own right. The effect of clauses 23 and 17 of the Loan Contract was that moneys in excess of capital and interest payments due to Equus were to be held on trust for the investor. Moreover the investors had to be treated separately. Equus could not exercise a charge over funds payable by Perpetual to an investor who did not owe money to Equus. The off-setting claim has to be considered as at the time of the Court's determination under s 459(G). It did not matter that under the Trust Deed, Perpetual had thirty days from the due date to make payments to investors. On this basis the off-setting claim of Equus allowing it a charge in respect of principal and interest and only in respect of borrowers in debit was $4,064,995. The subtraction of that sum from the amount due under the Letter of Credit left a substantiated amount of $943,765 within the meaning of s 459H(2). His Honour rejected the contention that there could be an off-setting claim based on super profits to which investors might become entitled. The alleged breach of trust by Perpetual depended, his Honour found, "on the speculative assertion that the Trustee has received funds and not accounted." His Honour declined to make a finding as to the insolvency of Equus. Reliance was placed, by his Honour, on s 459H(4) of the Corporations Law to vary the demand as specified in the order. There was a discretion to be exercised on the facts of the particular case. His Honour saw no injustice in ordering that the demand stand for the amount which, in his opinion, was "beyond reasonable argument now due to Equus". If Equus were solvent it could and should pay, if it were not, its failure to pay could only be as a result of insolvency. On the matter of costs, his Honour held that while not wholly successful, Equus had achieved against the opposition of Perpetual a reduction in the amount of the statutory demand from $5,800,760 to $943,765 which, he said, was a substantial benefit only achieved as a result of bringing the application. The primary case of Perpetual was that there should be no variation at all. However Perpetual had wrongly asserted that the National Mutual Royal Bank Letters of Credit should not be pooled. On the other hand, the hearing was significantly lengthened by reason of issues raised by Equus which were without foundation, such as alleged non-tender of the Letter of Credit. On that basis his Honour took the view that a fair order would be one that gave Equus its costs but with a reduction to recognise added costs arising from issues on which it failed. THE APPEAL AND CROSS-APPEAL The first two subparagraphs of the first ground of appeal attacked the learned trial judge's finding that the letter of 29 June 1990 was a Letter of Credit and not a performance guarantee. These sub-grounds, however, were abandoned on the hearing of the appeal. The third part of Ground 1 and the whole of Ground 2 challenged his Honour's conclusion that the letter of 26 June 1996 was a "draft" within the meaning of that term in the Letter of Credit and that there had been a presentation of the draft. The Court ruled, at the hearing of the appeal, that the characterisation of the letter of 26 June raised in those grounds had not fairly been put before the Judge at first instance. Nor was the Court persuaded that there was now any cogent reason for allowing that point to be argued on appeal. The basis for that conclusion is set out later in these reasons. The remaining grounds of appeal challenged his Honour's construction of clauses 17 and 23 of the Loan Agreement as having the effect that moneys paid to Equus in excess of the capital and interest payments due by the investors were to be held on trust for the several investors (Ground 3). The Judge was said to have erred in construing "off-setting claim" in s 459H(5) as meaning a genuine claim that a recipient of a statutory demand has beneficially in its own right (Ground 4). His Honour was also said to have erred in law in holding that for the purposes of the application in dealing with Equus' rights under the Charge, investors had to be treated separately and the off-setting claim could only be calculated in respect of those investors who were in debt with Equus (Ground 5). The calculation of the off-setting claim arising under the Charges was said to have been in error. This brought in the previous two grounds. There was said to have been a failure to reconcile the off-setting claim of $4,064,995 with the calculation of Windeyer J in the Supreme Court of New South Wales of $4,515,369. Moreover his Honour had failed to take account of alleged breaches of trust by Perpetual and interest accrued to Borrowers' loan accounts between 31 March 1997 and the date of judgment (Ground 6). The allegation that there was an off-set for damages for breach of trust by Perpetual was raised in Ground 7. The power of the Court to make an order varying the demand in circumstances where there is a substantial difference between the original demand and the demand as varied was challenged in Ground 8 although in substance this became an argument about the exercise of his Honour's discretion. There was no submission on the remaining ground which related to the alleged failure of the learned trial judge to give adequate weight to the primary obligation of Balmedie to pay the Base Production Services Fee to the investors. In the cross-appeal, it was contended that the learned trial judge was wrong in finding that Equus had any off-setting claim (Ground 1). This was connected to the assertion that his Honour ought to have found that, until Equus paid the money claimed in the statutory demand, there was no money other than a portion of those paid under the National Mutual Royal Bank Letters of Credit that could be charged or assigned by Equus investors in favour of Equus. There was no subject matter for the operation of the cl 17 set-off (Ground 2). Alternatively, it was said his Honour erred in not calculating the admitted amount and the off-setting claim as at the date of the statutory demand rather than as at the date of trial (Ground 3). Further and in the alternative, his Honour ought to have found the Equus off-set to be assessed in the sum of $3,622,168 with no interest to be accrued thereon on and after 18 July 1996. The substantiated amount which he ought to have found was $1,386,592 with the admitted amount and off-setting claim to be assessed as at the date of the statutory demand rather than a later date (Ground 4). His Honour's discretion on the matter of costs was challenged. (Grounds 5 and 6) It was said also that he erred in law in purporting to extend the time for compliance with the statutory demand until the determination of the appeal by the Full Court in that he had no power to make such an order in that "no period" within the meaning of s 459F(2) was fixed by such an order (Ground 7). STATUTORY FRAMEWORK Provisions of the Corporations Law relating to statutory demands are to be found in Chapter 5. If a Court is satisfied that a company is insolvent, the Court may order it be wound up (s 459B). It must be presumed that the company is insolvent if during or after three months ending on the day when the application is made, it has failed to comply with a statutory demand (s 459C(2)). Failure to comply, means failure to comply by the end of the period for compliance (s 459F(1)). The period for compliance with a statutory demand is defined in s 459F(2). It is ordinarily twenty one days after the demand is served but where a company has applied to have the demand set aside, the Court may make an order extending the period for compliance and, absent such an order, the period ends seven days after the application is finally determined or otherwise disposed of. Section 459F(2) provides: "459F(2) The period for compliance with a statutory demand is: (a) if the company applies in accordance with section 459G for an order setting aside the demand: (i) if, on hearing the application under section 459G, or on an application by the company under this paragraph, the Court makes an order that extends the period for compliance with the demand - the period specified in the order, or in the last such order, as the case requires, as the period for such compliance; or (ii) otherwise - the period beginning on the day when the demand is served and ending 7 days after the application under section 459G is finally determined or otherwise disposed of; or (b) otherwise - 21 days after the demand is served." An application to set aside a statutory demand is provided for in s 459G and must be made within twenty one days after the demand is served. The determination of such an application, where there is a dispute or off-setting claim, is dealt with in s 459H: "459H(1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates; (b) that the company has an offsetting claim. 459H(2) The Court must calculate the substantiated amount of the demand in accordance with the formula: Admitted total - Offsetting total where: "Admitted total" means: (a) the admitted amount of the debt; or (b) the total of the respective admitted amounts of the debts; as the case requires, to which the demand relates; "Offsetting total" means (a) if the Court is satisfied that the company has only one offsetting claim - the amount of that claim; or (b) if the Court is satisfied that the company has 2 or more offsetting claims - the total of the amounts of those claims; or (c) otherwise - a nil amount. 459H(3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand. 459H(4) If the substantiated amount is at least as great as the statutory minimum, the Court may make an order: (a) varying the demand as specified in the order, and (b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company. 459H(5) In this section: "admitted amount" in relation to a debt, means: (a) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or (b) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or (c) otherwise - the amount of the debt; "offsetting claim" means 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); "respondent" means the person who served the demand on the company. 459H(6) This section has effect subject to section 459J." The terms of s 459J are as follows: "459J(1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. 459J(2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect." The terms of s 459J should be read in conjunction with the definition of "defect" in s 9 of the Corporations Law: " "defect", in relation to a statutory demand, includes: (a) an irregularity; and (b) a misstatement of an amount or total; and (c) a misdescription of a debt or other matter; and (d) a misdescription of a person or entity;" Where the notice is not set aside then the Court must dismiss the application (s 459L). An order setting aside a demand may be made subject to conditions (s 459M). PROVISIONS OF THE RELEVANT DOCUMENTS The Second Multiple Prospectus Deed (sometimes referred to as a Trust Deed) between Kamisha and Perpetual included provisions under which Perpetual as Trustee was to receive fees payable to the investors under the Production Services Agreement (cl 19) and to pay them into a single pooled fees account (cl 19.03 and cl 19.04). Subject to the provisions of any loan agreement the Perpetual was to make payments out of the fees account first to itself for its fees and commission, second to Kamisha for its fees, third for the payment of out-of-pocket expenses and costs and fourth, to the investors in the proportion that the number of units held by each of them bore to the total number of units issued in relation to the Prospectus. The payment to the investors was to take into account repayments made on behalf of any investor of money borrowed including charges and interest pursuant to the Loan Facility (cl 19.06). Clause 19.07 provided for Perpetual, before distributing fees to any investor, to first repay any moneys borrowed by the investor under any loan agreement entered into pursuant to the Loan Facility together with any fees, expenses, charges, withholding tax and interest thereon as might be payable under the Loan Facility. Clause 19.08 dealt with the time and manner of distribution to investors and read: "All distributions of fees to Production Contractors shall be paid within THIRTY (30) days of the receipt of fees from the relevant Owner." Perpetual was not obliged to make a distribution of fees when the aggregate amount to be distributed was less than $10,000 (cl 19.09). The Production Services Agreement was scheduled to the Second Multiple Prospectus Deed. It was established as an agreement between Perpetual as Owner and Trustee respectively. It provided for the Owner to pay to the Trustee as agent for each of the investors the Base Production Services Fee and Further Production Services Fees, the latter calculated as a percentage of net profits derived from the film. (cl 23). The exclusive method of payment of the Base Production Services Fee was to be by way of calling the securities referred to in Schedule 9 of the Production Services Agreement. The securities were identified in that Schedule as follows: "Owner shall provide the Production Contractor as security for the payments of the Base Production Services Fee set forth in paragraphs 8.1, 2 and 3 above, such securities (whether by way of irrevocable letter of credit, bank guarantee or otherwise) as are acceptable to and approved by the Trustee." The Prospectus explained the security arrangements in para 7: "7. Security for Payment of Fees to Production Contractors Under the Production Services Agreement, the Owner is obliged to provide the following security for payment of fees to Production Contractors. In respect of the Base Production Services Fee, as at the Operative Date of the Production Services Agreement, such securities (whether by way of letter of credit, bank guarantee or otherwise) as are acceptable to and approved by the Trustee. The securities to be provided in respect of the Prospectus will be by way of irrevocable letter of credit or bank guarantee of correspondent security standing drawn on an Australian bank of the stature of Westpac Banking Corporation (including a State Bank) or a subsidiary of an Australian bank of the stature of Westpac Banking Corporation or other company acceptable to the Trustee, in favour of the Trustee, for the Production Contractors. (the Owner is in a position to provide such securities effectively because of the Distribution Arrangements entered into.)" The letter of credit provided by Equus to Perpetual was in the following terms: LOCAL BENEFICIARY EQUUS FINANCIAL SERVICES LIMITED ADVICE OF STANDBY LETTER OF CREDIT : ORIGINAL Perpetual Trustee W A Limited as Trustee for the Second Multiple Prospectus Trust 89 St Georges Terrace PERTH 6000 Dear Sirs We have pleasure in detailing hereunder the particulars of the Standby Irrevocable Letter of Credit issued in your favour dated 29 June 1990. EQUUS FINANCIAL SERVICES LIMITED IRREVOCABLE STANDBY LETTER OF CREDIT DATED 29 JUNE 1990 ON ACCOUNT OF: BENEFICIARY: Perpetual Trustees WA Limited as Trustee for the Second Multiple Prospectus Trust 89 St Georges Terrace PERTH 6000 AMOUNT: Maximum Limit of Liability to be AUD$10,483,750 which may only be drawn strictly in accordance with the following Schedule: Date of Drawing Amount Available 29 June 1994 $ 382,740 29 June 1995 $ 452,250 29 1996 $9,633,760 EXPIRY DATE: 29 June 1996. AVAILABLE AT: Equus Financial Services Limited 1st Floor 2 Clarke Street SOUTH MELBOURNE 3205 BY BANK Equus Financial Services Limited CHEQUE 1st Floor DRAWN BY: 2 Clarke Street SOUTH MELBOURNE 3205 PAYABLE AT: Sight. ENFACED: Drawn under Equus Financial Services Limited Irrevocable Standby Letter of Credit dated 29 June 1990. Drafts drawn under this Letter of Credit must be presented to: Equus Financial Services Limited 1st Floor 2 Clarke Street SOUTH MELBOURNE 3205 on or before the time and date of expiry specified above and be accompanied by a Statutory Declaration purporting to be made by two officers of the Beneficiary on behalf of the Beneficiary stating that: a) The Declarants have authority to make the Statutory Declaration on behalf of the Beneficiary. b) The Statutory Declaration is made pursuant to the terms of Equus Financial Services Limited Irrevocable Standby Letter of Credit dated 29 June 1990. c) The amount claimed is not more than the maximum aggregate amount available at the date of the said Statutory Declaration under Equus Financial Services Limited Irrevocable Standby Letter of Credit dated 29 June 1990. The amount of this Letter of Credit will automatically reduce by the amount of all drawing made in accordance with this Letter of Credit. Except where they may conflict with the abovementioned terms and conditions, the Uniform Customs and Practice for Documentary Credit (1983 Revision) International Chambers of Commerce Publication No 400 shall apply to this Irrevocable Standby Letter of Credit. Equus Financial Services Limited engages with Perpetual Trustees WA Limited as Trustee for the Second Multiple Prospectus Trust of 89 St Georges Terrace, Perth, Western Australia and/or bona fide holders that drafts drawn under and in compliance with the terms of this Letter of Credit shall be duly honoured on presentation. Yours faithfully,

The Uniform Customs and Practice for Documentary Credits (1983 Revision) was also before the trial judge. Its Articles apply to all documentary credits including, to the extent to which that would be applicable, standby letters of credit. The nature of credits as separate transactions from the sales or other contracts on which they may be based is asserted in Article 3 and their exclusive documentary nature in Article 4. The obligation attached to an irrevocable credit is characterised in Article 10 as "a definite undertaking of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with". The form of Loan Agreement between Equus and each of the investors was standardised. The Agreement defined Secured Property as "THE UNITS OWNED BY THE BORROWER IN THE TRUST BETWEEN KAMISHA CORPORATION LIMITED (MANAGER) AND PERPETUAL TRUSTEES W.A. LTD. (the TRUSTEE)". It provided for repayments by instalment, the first to be made on 29 June 1990 and thereafter on the 29th day every six months. The principal sum was to be repaid to the lender on the principal repayment date. In addition to the principal sum advanced there was an establishment fee, stamp duty and provision for higher and lower interest rates. There was a direction in the Loan Agreement for disbursement of the proceeds of the loan to Perpetual. Conditions governing repayment and interest were set out in paragraph 5. Interest only was to be repayable by the borrower during the term of the Deed, but the principal sum was to be repaid on or before the Principal Repayment Date specified in the Schedule (cl 5.1). Clause 7 provided for a charge in the following terms: "7.1 As security for the due and punctual payment of the Secured Moneys and the due and punctual performance and observance of the terms of this Deed, the Borrower as beneficial owner hereby charges in favour of the Lender all of its right, title and interest in and to the Secured Property and all property hereafter to be held or acquired by the borrower in substitution or replacement of or addition to the Secured Property. The Borrower hereby agrees, that the provisions of this Deed relating to the powers of the Lender upon the default of the Borrower shall apply to the charge granted under this Clause provided that these powers shall only apply upon the occurrence of an event of default specified in Clause 11." Clause 17, under the heading "SET OFF" was in the following terms: "17.1 Subject to the proviso hereafter contained the Lender shall be entitled to set off any moneys that it holds on deposit or otherwise on account of the Borrower (including without limitation any moneys deposited with the Lender pursuant to the provisions of Clause 23) and all interest accrued thereon against any moneys owing to the Lender under this Deed notwithstanding that: (a) the maturity date of the deposit has not arrived and/or (b) those moneys may not be payable to all of the parties to this Deed; PROVIDED ALWAYS that the Lender shall not exercise its right of set off pursuant to this Clause, nor shall it exercise any of its rights of recovery of the Principal Sum pursuant to this Deed if at the time of the proposed set off the Lender is in default in payment of any moneys that it is obliged to pay under the terms of any Letter of Credit which it has provided and/or may agree to provide ("the Equus Letter of Credit Agreement") and is referred to in the Charge and Assignment and Notice to Trustee bearing even or prior date, and given by the borrower to the Trustee, Perpetual Trustees W.A. Limited of 89 Georges (sic) Terrace, Perth, Western Australia, but the Lender may exercise the right of set off and rights of recovery of the principal sum, at any time after remedying any such default, under the Equus Letter of Credit Agreement." By cl 23.1 the Borrower irrevocably appointed the Lender and its officers its attorney or attorneys during the currency of the agreement for the purpose of authorising the Trustee to pay to the Lender proceeds from the secured property and in the name of the Borrower to do all such acts and sign all such documents as might be necessary for that purpose. Clauses 23.2 and 23.3 then provided: "23.2 The Borrower hereby authorises the Lender to place the Proceeds on deposit with the Lender in an account to be opened in the name of the Borrower and the parties acknowledge and agree that interest will accrue on a (daily/monthly) basis on the balance of the Proceeds in such account from time to time at a rate 2% below the average of the money market rates quoted by Westpac Bank, National Australia Bank, Australia and New Zealand Bank and Commonwealth Bank appearing in the Australian Financial Review on the first business day of each calendar month. 23.3 The Borrower agrees that the Proceeds deposited with the Lender pursuant to Clause 23.2: (a) shall be subject to the Lender's right of set-off from time to time pursuant to Clause 17; (b) may be called upon by the Borrower giving fourteen (14) days prior written notice to the Lender." In addition to the Loan Agreement there was a deed described as a "Charge and Assignment and Notice to Trustee". This was to be signed by each of the investors borrowing from Equus. It was in the following terms: CHARGE AND ASSIGNMENT AND NOTICE TO TRUSTEE To: The Manager Perpetual Trustees Western Australia Ltd 89 St George's Terrace PERTH WA 6000 ("the Trustee") Dear Sir, In connection with my investment in the trust between Kamisha Corporation Limited and Perpetual Trustees W.A. Limited and the film "The Night of the Leopard" ("the Film"), I hereby charge and assign to EQUUS FINANCIAL SERVICES LIMITED of 2 Clarke Street, South Melbourne ("Equus") all of my right, title and interest in the Film (including the Base Production Services Fees arising under the Production Services Agreement for the Film, and secured by my proportionate interest in the letter of credit held therefore by the Trustees and all my units and parcels of Production Contribution Moneys and moneys payable in respect thereof) as security for the payment of all moneys due by me to Equus. I hereby irrevocably direct the Trustee to make payment to Equus of all and any moneys due to me at any time (including the secured Base Production Services Fee and any moneys payable to me under the letter of credit) in respect of my investment in the trust. This notice shall have effect until such time as Equus shall have given the Trustees written notice that all my obligations to Equus have been satisfied. I confirm that Equus may exercise all of the powers of a mortgagee whether conferred by statute of law without notice to you or to me on default by me of my arrangements with Equus and I will pay all stamp duties, registration fees and other costs, charges and expenses incurred in respect of this Charge and Assignment. Yours faithfully" THE NEW ISSUES RAISED ON APPEAL His Honour identified as one of the arguments advanced before him by Equus that no draft had been presented in accordance with the terms of the Letter of Credit. And he held: "For the reasons already mentioned in discussion of the evidence, I am not satisfied there is any genuine dispute that a draft was not presented to Equus in accordance with the terms of the letter of credit." The "reasons already mentioned" related to the suggestion raised by counsel for Equus that no draft under the Letter of Credit had been presented in accordance with its terms. But this agreement was based upon what his Honour described as "the somewhat lukewarm suggestion" that Mr Clayton from Perpetual did not in fact go to the offices of Equus on the 28th. That was a suggestion which was clearly rejected by his Honour who was left "in no doubt at all" that the relevant visit took place. He held that a copy of the Perpetual letter of 26 June was then delivered and said: "It was not suggested that that letter did not constitute a draft for the purpose of the letter of credit." His Honour's view of the case presented to him was therefore that no question of the characterisation of Perpetual's letter of 26 June had been raised. The appellant submitted that contrary to his Honour's observation it had been argued before him that the letter of 26 June was not a draft for the purposes of the Letter of Credit. However, notwithstanding various passages in the transcript to which senior counsel for the appellants referred, it was apparent that the question of characterisation had never squarely been raised before the trial judge. At one point it was submitted to the Court that "...it was never suggested that what had been handed over was a draft". That is to say the respondent had not raised a positive case that the letter was a draft. Absent the point being taken by the appellant, the parties and the trial judge proceeded upon the common basis that the question was whether the Perpetual letter had in truth been tendered, not whether it was a draft. The point is therefore taken for the first time on appeal and in the opinion of the Court it is a point which cannot fairly be raised at this late stage. As counsel for the respondent submitted, the question whether the letter of demand constituted a draft was not an issue before the trial judge and the respondent was denied the opportunity of presenting evidence and argument on the matter. Evidence might have gone to questions of estoppel or conclusive proof of custom or the proposition that the Letter of Credit did not require a Bill of Exchange to be drawn and presented. For these reasons the Court did not permit the appellant to pursue Grounds 1 and 2 of the Notice of Appeal. THE QUESTIONS FOR DECISION In approaching the balance of the grounds of appeal and cross-appeal it is convenient to set out the principal questions to which they give rise. The first of these is whether under the terms of the deeds and contracts making up the financing arrangements there was any basis for asserting an off-setting claim (Cross-appeal Grounds 1 and 2). This is connected to the question of the time at which the offset, able to be considered by the Court, must have arisen (Cross-appeal Ground 3). And regardless of the precise terms of the documentation, was there, at least arguably, a variation of arrangements so that Perpetual's drawdown on the Letter of Credit was to be effected as part of an exchange of cheques arrangement (Cross-appeal Ground 2(b)). Assuming an off-set was available to Equus, the issue of its quantum is in dispute. The question is whether the off-set extended to all of the investors' interests in the units including any surplus over and above what they owed to Equus (Ground of Appeal 6(1) and (2)). Put another way, was Equus' charge limited to money to which it was beneficially entitled by way of loan repayment or interest (Ground of Appeal 6(1)). Going to quantum also was a question of the date at which the calculation of any off-set was to be made, namely whether it was the date of the statutory demand or the date of the trial (Cross-appeal Grounds 3 and 4). The possible entitlement of Equus to further off-sets based upon alleged breaches of trust by Perpetual was also raised (Ground of Appeal 7). The next major area of inquiry is the exercise of the trial judge's discretion to vary rather than set aside the demand (Ground of Appeal 8). The remaining issues relate to the costs order made by his Honour (Cross-appeal Grounds 5 and 6) and the way in which the period for compliance with the demand was extended (Cross-appeal Ground 7). GENERAL OBSERVATIONS ON THE SETTING ASIDE AND VARIATION OF STATUTORY DEMANDS Neglect to pay, within a statutory period, a debt for which written demand was made, has long been a trigger and sufficient condition for the winding up of a company. Provisions to that effect were to be found in the Joint Stock Companies Act 1856 (U.K.) (s 68) and the Companies Act 1862 (U.K.) (s 80). Australian colonial lawsand Ordinancescontained like provisions as did the laws of the States after federation which were largely modelled on the 1862 Act. The Uniform Companies Acts of 1961 of the various States provided in s 222 that a company was "deemed to be unable to pay its debts" if, for three weeks after service of a notice of demand, it neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor. A similar provision was found in the 1981 Companies Codes adopted by the various States (s 364). The Corporations Act 1989 (Cth) in s 460 for the first time made separate provision for winding up on the ground of insolvency. The demand provisions in their various statutory manifestations from the Joint Stock Companies Act to the present day created "a convenient method of proof, if a debtor company for three weeks after service of a demand neglects to pay the sum due or to secure or compound for it to the reasonable satisfaction of the creditor, that a company is unable to pay its debts which, by virtue of the earlier subsection is a ground for winding up" - Clarke and Walker Pty Ltd v Thew (1967) 116 CLR 465 at 467; See also Re Willes Trading Pty Ltd [1978] 1 NSWLR 463 at 464 (Needham J). However, "neglect" to pay was never equated with mere omission to pay. It required an omission to pay without reasonable excuse. It did not extend to a refusal to pay any or any but the uncontested part of a debt the existence or quantum of which was bona fide disputed by the Company - Re London and Paris Banking Corporation (1874) LR 19 Eq 444 at 446 (Jessel MR); Re Concrete Pipes and Cement Products Limited [1926] VLR 34. On the other side of the coin a demand in excess of the amount of money owing did not thereby forfeit the assistance of the statute - Cardiff Preserved Coal and Coke Co. v Norton (1867) 2 LR Ch App. 405 at 410. The latter proposition was the subject of conflicting views among, and sometimes within, the Supreme Courts of the Australian States and Territories. The broad approach adopted by the Court of Chancery so early in the life of the amended provision was favoured by the Victorian Full Court in Re Fabo Pty Ltd [1989] VR 432. That approach was adopted in South Australia, Re Gem Exports Pty Ltd (1984) 36 SASR 571, Tasmania, Re Pardoo Nominees [1987] Tas SR 1, the Northern Territory, Arafura Finance Corp Pty Ltd v Kooba Pty Ltd (1987) 88 FLR 79 and in Western Australia by some but not all judges, Mine Exc. Pty Ltd v Henderson Drilling Services Pty Ltd (in liq.) (1989) 1 ACSR 118 at 124 (Ipp J), Hassgill Investments Pty Ltd v Newman Air Charter Pty Ltd (1991) 9 ACLC 883 at 897-898 (Malcolm CJ ) contra at 901 (Rowland J). In New South Wales on the other hand a strict construction was favoured by Waddell J in Processed Sand Pty Ltd. v Thiess Contractors Pty Ltd (1983) 1 ACLC 1069 an approach on which the Court of Appeal expressed no concluded view in Wichita Pty Ltd v Elders IXL Ltd (1990) 8 ACLC 704. In Queensland an excess claim was held to invalidate the demand - General Welding and Construction Co (Qld) Pty Ltd v International Rigging (Aust) [1983] 2 Qd R 568. Heerey J noted facetiously that the divergence followed the same lines as that dividing Australia between different football codes - Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 29 FCR 564 at 569. As late as October 1992 Ryan J in the Supreme Court of Queensland noted the conflict of authority in Australia. But whatever the effect of a failure to pay in response to an excessive demand he was in no doubt that no statutory presumption would arise where the amount demanded exceeded "by a very large amount" the amount due - Re Witan Nominees Pty Ltd (1993) 11 ACLC 56 at 57. In the Ataxtin case the excess of the demand was $4.53 in $552,484.22. Heerey J could not see "how the statutory mechanism can operate so that the company is deemed to be unable to pay its debts if the demand is only a little bit over, but that at some indeterminate point the excess becomes so much that the statute ceases to operate." The conflict was not fully resolved before the law was amended to its present form. The current law as set out in Part 5 of the Corporations Law "lays to rest the judicial differences of opinion that surfaced in the 1980's and remained unsettled to the present time" - Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919 at 922 (Thomas J). Before the enactment of the present law there was no statutory facility for setting aside a notice of demand. The first line remedy for a contested notice was an interlocutory injunction to restrain the presentation of a winding up petition. In a case in which the notice was challenged on the basis that the debt was the subject of a bona fide dispute on substantial grounds the grant of an injunction was categorised as an exercise of the inherent jurisdiction of the Court to prevent abuse of its process - Mann v Goldstein [1968] 1 WLR 1091 at 1094 (Ungoed-Thomas J), Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation (Cth) [1978] VR 83 at 87 (McGarvie J); Australian Mid-Eastern Club Ltd v Elbakht (1988) 13 NSWLR 697 at 705 (Kirby P), Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376 at 391-395 (Malcolm C J, Wallace and Rowland JJ agreeing). It was suggested that the abuse of process arose from the want of standing of a party not yet established as a creditor to present a petition - Mann v Goldstein (supra) at 1098-1099. There is however much to be said for the view that want of standing itself would not give rise to an abuse of process - Forsayth NL v Silver (1990) 2 ACSR 595 at 596-597 (Ipp J) approved in Forsayth NL v Juno Securities Ltd (supra) at 388-389. The law did not require that an applicant for interlocutory relief against the presentation of a petition establish a probability of success in its action but rather demonstrate that there was a bona fide dispute as to the indebtedness whether in relation to the debt itself or arising from the existence of cross-claims - Transport and Property Holdings Pty Ltd v Buntine (1982) 16 NTR 1 at 4-5 (Toohey J). Put another way it must "be shown that there is a serious question to be tried whether liability for the alleged debt is genuinely disputed on a substantial ground or grounds" - Forsayth NL v Juno Securities Ltd (supra) at 389. The amendments to the Corporations Law in 1992 established a new and different statutory regime for resolving "the often sterile disputes which used to take place about the validity of demands" - Felkro Nominees Pty Ltd v Austissue Pty Ltd (1993) 11 ACSR 607 at 608. They established a code "for the resolution of disputes involving statutory demands and [did] so on the basis of the commercial justice of the matter rather than on the basis of technical deficiencies" - Explanatory Memorandum para 688; Texel Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACLC 1059 at 1061-2 (Hayne J); Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605-606; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 38-39 (Lockhart J). In particular the Court has a statutory discretion under s 459H(4) to vary the demand. It would be an undertaking of doubtful utility to attempt to define exhaustively a set of principles governing the exercise of that discretion which must have regard to the particular circumstances of each case. The operation of the discretion to set aside a demand and the conditions governing its exercise under s 459J were considered by the Full Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (Full Court, 29 July 1997, unreported). The Court held that s 459J constitutes a statutory code for dealing with defects in a demand. A defect in a demand will only give rise to an entitlement to set aside the notice if a substantial injustice is established. There is no fallback position under which a defect in a demand may give rise to the entitlement for some other reason under s 459J(1)(b). The date of revision applies to cases in which there is some defect other than a defect "in the demand" itself. There may, for example, be some defect in relation to the demand that is not in the demand itself. There, however, the court must find some other reason why the notice should be set aside. We add the observation that the other reason may itself involve substantial injustice if the notice is not set aside. However it need not do so. But a defect in the demand which does not give rise to substantial injustice will not enliven the discretion. The definition of "defect" in s 9 includes "a misstatement of an amount or total". A discrepancy between the amount claimed and the substantiated amount would seem to fall within that description. On the basis of the decision in Spencer therefore, such a discrepancy will ground an order setting aside the notice if and only if a substantial injustice would be caused. This is subject to the provisions of s 459H(3) where the substantiated amount is less than the statutory minimum. Then the court must set aside the demand. Where the substantiated amount is at least as great as the statutory minimum, then the court may make an order under s 459H(4) varying the demand as specified in the order. In First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939, Santow J gave what appears to have been the first reported judicial consideration to the operation of s 459H(4) in the circumstances of a large discrepancy between the amount claimed in the statutory demand and the substantiated amount of that demand. His Honour observed that where the substantiated amount exceeded the statutory minimum the circumstances would generally be such as to call for the exercise of the discretion to vary the demand. In that case there was no contention that the over-statement would have given rise to a substantial injustice unless the demand was set aside under s 459J(1)(a). It may be that there will be few cases in which the fact of a discrepancy alone will give rise to such an injustice. It was suggested however in that case that there may be circumstances in which the over-statement will give rise to "some other reason why the demand should be set aside". Santow J said at 951: "Where a statutory demand has been so grossly inflated as almost exclusively to comprise matters which it should have been obvious from the outset were in genuine dispute between the parties at the time the demand was served, then an order under s 459J(1)(b) setting aside the demand may well be required to prevent such an abuse of the regime under Part 5.4. This is even if the substantiated amount remained above the statutory minimum. The lack of bona fides on the part of the creditor in serving a demand where substantially the whole claim was obviously in dispute might be relevant to this."

Spencer's case would not contemplate that the discrepancy itself, absent substantial injustice, could give rise to some other reason for setting aside the demand under s 459J(1)(b). Rather, it would be the absence of good faith or some abuse of process on the part of the creditor that would ground the discretion. Such an approach would be consistent with the limits set by the Full Court in Spencer. Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 14 ACLC 1095 was referred to by his Honour as a case in which the discretion to vary was declined. As appears from the judgment of Bryson J that case concerned a defect in the affidavit purportedly verifying the demand as distinct from a defect in the demand itself. Bryson J said (at 1105): "I see a clear distinction between a defect in a demand as a ground for setting aside the demand, and a defect in an affidavit purportedly verifying the demand as a ground for setting aside the demand. An affidavit which is incorrect has a different and higher order of importance to a demand which is incorrect. There are some deficiencies in procedure which the Court should not allow to be successful, whether or not they have any high practical significance in terms of justice between the parties in the instant case."

The requirement of verification and its attendant responsibilities are not to be regarded as "no more than another form to fill in, errors in which the debtor can have put right on application to the Court". (at 1105) If these observations mean no more than that a defect in the verifying affidavit is to be regarded as a factor weighing strongly against the exercise of the discretion to vary and in favour of the discretion to set aside, then they are consistent with the requirement that the discretion to set aside or to vary be exercised having regard to all the circumstances of the case. There is therefore no ironclad rule that a defective affidavit will mandate the setting aside of the demand. A Full Court of this Court did discuss the exercise of the discretion under s 459H in John Shearer Ltd v Gehl Co. (1995) 60 FCR 136 where it was said at 139: "A statutory demand may be set aside by the company upon which it has been served where the Court is satisfied that there is a genuine dispute as to the existence or the amount of the debt to which the demand relates (s 459H(1)(a)), or that the company has an offsetting claim. In each case the statutory demand, however, would only be set aside if the dispute as to the debt or its amount, or as to the offsetting claim, has the result that the debt is wholly disputed or alternatively that the offsetting claim is at least equal to the amount of the debt to which the statutory demand relates. Otherwise the Court may make an order under s 459H(4) varying the amount of the demand and declaring it to have effect as varied." The observation was confined to the operation of s 459H and was strictly obiter as the Court there dismissed an appeal from a decision of a court at first instance that a counterclaim, set-off or cross-demand for an unliquidated claim could not be set-off against a debt due on a dishonoured bill of exchange. The question of the exercise of the discretion with respect to variation or setting aside the notice of demand did not arise for determination. What the Full Court said in that case should not be seen as excluding the kind of abuse of process considerations adverted to by Santow and Bryson JJ respectively in the cases cited above, nor as excluding the requirement that in each case the discretion is to be exercised according to all the circumstances. The Full Court in Spencer (supra) reviewed authorities dealing with the concept of a "genuine dispute" for the purposes of s 459H. It concluded that a genuine dispute requires that: ". the dispute be bona fide and truly exist in fact; . the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived."

The various formulations referred to in the cases may be helpful in determining whether there is a genuine dispute in the particular case so long as they do not become substitutes for the words of the statute. In considering the nature of the dispute as to the debt or claimed off-set which will support an order setting aside or varying a notice of demand, authorities from earlier and different legislative contexts must be treated with caution in their application to the new regime. Nevertheless in deciding whether or not to set aside a statutory demand or to vary the demand "the basic question remains - whether the court is satisfied that there is a genuine dispute between the company and the respondent about the existence or amount of the debt to which the notice relates - and that question obviously raises considerations that at the least are similar to those arising under the old rule that a winding up order would not, as a matter of discretion, be made on a debt which was bona fide disputed" - Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 at 294 (Hayne J). In Mibor Investments (supra) at 294 Hayne J drew attention to the following aspects of the statutory code: 1. The application to set aside must be made quickly - within twenty one days. 2. The only outcome will be an order affecting the statutory demand not a judgment on the debt. 3. The only significance of the demand is deemed insolvency if there be failure to comply with it. 4. An application to wind up in insolvency must be determined within six months subject to special circumstances. 5. The debtor company may not oppose a winding up application on grounds that it might have taken in the application to set aside the demand unless relevant to solvency. As his Honour observed: "These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute." (at 295) These are remarks with which the learned trial judge agreed in pointing out the divergence between the statutory objectives and the conduct of the proceedings at first instance in this case. He also observed that perhaps in future where such applications show signs of burgeoning in the manner of the present case there may be need for the imposition of rigorous directions which might, for example, impose limits on the length of affidavits and hearing times. This is a view which should be supported and it may be supported by an alteration to the Rules or an appropriate practice direction. WHETHER THE LOAN CONTRACT AND CHARGE GIVE RISE TO AN OFFSET Perpetual submitted that Equus' off-setting claim arose only by reason of the charges in clauses 7, 17 and 23 of the Loan Agreement, the Notices of Charge and assignment. The off-setting claim could not come into existence until the Trustee first received moneys on behalf of the investors. On the face of it the Letter of Credit created an unconditional obligation on the part of Equus to pay $9,633,760 on 29 June 1996. This amount had been varied by agreement to $5,008,760 on the basis that $4,635,000 had previously been paid by arrangement with the South Australian Asset Management Corporation. The provisions of cl 19.08 of the Second Multiple Prospectus Deed allowed a period of thirty days within which fees could be distributed to investors after their receipt from the Owner. The right of set-off created by cl 17 of the Loan Agreement could only be activated in respect of moneys deposited with Equus on account of the Borrower. This can be read with cl 23 which creates a power of attorney in favour of Equus. It authorises it to place the proceeds on deposit in an account in the name of the relevant Equus investor. Such proceeds are acknowledged by the investor to be subject to Equus' right of set-off from time to time under cl 17. Subject to variation of the arrangements, as at the time of the statutory demand it appears that no off-setting entitlement had arisen under cl 17 of the Loan Agreements. But as his Honour said in his judgment: "The amount of the offsetting claim, including accrued interest, has to be considered as at the time the Court is determining the application under s 459(G). This follows from the ordinary language of the statute and the use of the present tense. Section 459H(1) speaks of the Court being satisfied that there is a genuine dispute between the company and the creditor. Similarly the definition of "offsetting claim" refers to a genuine claim that the company has against the creditor. Moreover s 459H(4) assumes that the Court may vary the amount in the demand, which necessarily contemplates that the Court may take into account variations in the debt which have occurred since the service of the demand, for example by payment on account." (pp 19-20) His Honour's view is in accord with the ordinary English construction of the relevant provisions of s 459H. The proposition that the trustee has thirty days in which to distribute fees after their receipt from the relevant owner has no effect upon the outcome in this case. In any event his Honour found that all drawdowns prior to that in issue in this case were effected by exchange of cheques, albeit that the amount of the cheques exchanged varied slightly. Further, it is to be remembered that it was Perpetual which, towards the end of June 1996, pointed out to Equus that the maximum amount payable on a cheque exchange, in relation to the payment due on 29 June, would be $200,000. It is arguable, and therefore a genuine dispute, that there was an entitlement on the part of Equus to pay the sum demanded by Perpetual subject to an exchange of cheques, the cheque from Perpetual incorporating the pooling of the proceeds of the National Mutual Royal Bank Letters of Credit or by Balmedie to the Equus investors. The contention that no off-setting claim can be made out in the present case cannot be sustained. THE AMOUNT OF THE OFF-SET In deciding the amount of the off-setting claim, his Honour rested upon the following propositions: i) that the proceeds of the National Mutual Royal Bank Letters of Credit should be pooled for the benefit of all unitholders with the proceeds of the Equus Letter of Credit; ii) that the Investors' Charges in favour of Equus extended only to moneys to which it was beneficially entitled by way of loan repayment and interest; iii) that the possibility of production services fees or "super profits" being paid to investors did not give rise to any additional off-set, there being no evidence that such fees had been earned and they being unquantified; iv) that allegations raised by Equus of a possible breach of trust by Perpetual were based on the speculative assertion that Perpetual had received funds and not accounted for them. Moreover any damages or further profit in excess of 125 per cent of the amount of Equus loans and interest would belong to investors and not to Equus. In its submission on the pooling question, Equus said that his Honour had treated it, as if it were a final and certain determination by Windeyer J, the finding that one amount owing by Perpetual included base production service fees of $4,515,369. In his judgment on 19 February 1997, Windeyer J concluded that Equus investors were entitled to share in the moneys paid to Perpetual pursuant to the Letters of Credit given by National Mutual Royal Bank. The proceeds of various Letters of Credit had been appropriated to specific investors. On the interpretation given by Windeyer J to the scheme documents the distributions ought to have been appropriated so that each investor would have received from the proceeds of all Letters of Credit the same sum in respect of each unit held by each investor. The Notice of Charge, assignment and authority were effective. It followed that in ordinary circumstances the amount payable to any Equus investor should be paid to Equus. However, as Equus was obliged under its Letter of Credit to pay a balance of over $5 million to Perpetual, there might be an argument available for the benefit of cash investors that they should get a proportional share of any moneys which would otherwise be paid to Equus. Other questions of set-off might arise. The relevant formal orders by way of answer to questions posed to the Court under s 63 of the Trustees Act 1925 (NSW) were: "(1) The plaintiff [Perpetual] is justified in acting upon the basis that upon the true construction of the Trust Deed and the Production Services Agreement, and in the events which have happened, the proceeds of the Letters of Credit now held by the plaintiff and any future proceeds so far as those proceeds are distributable to investors be distributed to the investors so that after the distribution of the funds now held each investor will have received the same amount per unit held by that investor pursuant to the prospectus for the film and thereafter each investor will receive the same amount per unit held. (2) In respect of any Equus investor whose loan from Equus has not been repaid the plaintiff is justified until further order in withholding any payment until the respective rights of the plaintiff, the defendant and the said Equus investors have been determined in proceedings to be commenced by the plaintiff for that purpose." On the basis of Windeyer J's ruling, Heerey J calculated that the amount payable to Equus under its charge would be $4,515,359. If that sum were subtracted from the balance due under the Equus Letter of Credit it left at least $493,391 payable by Equus. As his Honour noted and as appeared from the transcript of the hearing before his Honour counsel for Equus did not formally concede the point but did not dispute that the off-setting claim from the Equus charge would "at least" leave that amount payable. Counsel said: "But, in fact, because some of the units were refunded, your Honour, there is in fact 1510 which have not been paid out and that means, your Honour, that the figure that was said to be not in dispute - using a mutual word - comes down to $493,391.90." (sic) It is not now open for Equus to challenge this aspect of his Honour's approach to the calculation of its off-setting claim. The second proposition upon which his Honour relied was that Equus' entitlement under the Investors' Charges did not exceed the amount to which it was beneficially entitled by way of loan repayment and interest. Clause 7.1 of the Loan Agreement between Equus and each of the investors charged each investor's "right, title and interest in and to the Secured Property" in favour of Equus "as security for the due and punctual payment of the Secured Moneys and the due and punctual performance and observance of the terms of [the loan agreement]". This did not confer upon Equus any entitlement to apply the charge to the recovery of any sum greater than the loan repayments and interest on them. Clause 17.1 creating a right of set-off of secured moneys is ancillary to the principal charging provision and to its purpose of securing repayment of what was due and owing under the loan agreement. His Honour's conclusions as to the entirely speculative nature of the claimed set-off based upon alleged "super profits" payable to the investors was properly based on the evidence. The correspondence from Kamisha in February and June of 1993 and September 1994 about possible super profits to which his Honour referred indicated movement of the asymptotic variety approaching but never quite reaching the point at which super profits would be payable. His Honour concluded: "No attempt has been made to quantify the amount of any such super profits. There is no evidence that any such fees have been earned. The assertion is "in the most general of terms"." (p 21) No reason is shown for disturbing his Honour's conclusion on this point. On the alleged under payments by Perpetual, Equus was unable to quantify the amount in issue. There is no basis shown for an off-setting claim on this ground. The off-set calculated by his Honour was contained in figures provided by counsel for Perpetual and based arithmetically upon schedules of surplus funds owed to investors as at 31 March 1997 which had been provided by Equus. The calculation was as follows: (a) Letter of Credit proceeds $5,008,760 (b) Equus off-setting claim representing the total of amounts due to Equus after Letter of Credit honoured as per Windeyer J's calculation of $2,990.31 per unit $4,064,995 Substantiated amount $ 943,765 An alternative way of getting to the same figure was using a balance of $493,391.90 payable by Equus to Perpetual as the "least amount" payable with an additional sum of $450,373 as at 31 March 1997 due to the investors being surplus over loan repayments and interest. This figure was taken from column (d) of Equus' Schedule and which was in evidence before his Honour. The sum of the two amounts calculated was again $943,765. The reasons in the preceding section of the judgment dispose of the contention on the cross-appeal relating to the date upon which the admitted amount and the off-setting claim were to be calculated. VARIATION AS DISTINCT FROM SETTING ASIDE THE STATUTORY DEMAND His Honour characterised the power to vary, as distinct from set aside, a statutory demand as a discretion to be exercised upon the facts of the particular case. He said: "In the present case, I see no injustice in ordering that the demand stand for the amount which is in my opinion is beyond reasonable argument now due by Equus. If Equus is solvent, it can and should pay. If it does not, its failure to pay can only be as a result of insolvency." (p 23)

It was submitted for Equus that even on his Honour's findings as to the quantum of the off-setting claim there was a substantial defect in the statutory demand productive of substantial injustice. The discretionary character of the powers to set aside or vary a notice of demand are not to be confined by rigid principle. Factors relevant to the discretion have already been mentioned in the general observations relating to ss 459H and 459J in these reasons. The discretion to set aside a notice of demand is not to be exercised as a punitive response to a discrepancy between the amount claimed in the notice and the amount found to be owing on an application to set aside the notice. There must be substantial injustice in such a case to ground the exercise of the discretion under s 459J(1)(a). If a notice of demand has been drawn with a view to damaging the alleged debtor by wilfully claiming an amount substantially higher than that known to be due or recklessly demanding such a sum then that would be tantamount to a fraudulent or abusive use of the process and would ordinarily require the notice be set aside in the public interest to maintain confidence in the law and the administration of justice. There may be other cases in which a demand is made so far in excess of any admitted sum and for such collateral purposes or with such carelessness as to be frivolous or vexatious or an abuse of process. These could all constitute "some other reason" for setting aside the notice under s 459J(1)(b). But the fact that there is a substantial discrepancy does not require a conclusion to be drawn that there is a lack of bona fides on the part of the creditor or that there has been an abuse of process. Each case must be considered on its own merits. Where the discrepancy turns, as here, upon the proper construction of contractual documents and transactions of some complexity and upon questions of statutory construction, there is no real basis for the exercise of the discretion under s 459J(1)(b). The discrepancy itself does not give rise to such a discretion and in this case will not operate as the progenitor of "some other reason" for setting aside the notice. His Honour properly addressed the relevant factors in this case and his discretion did not miscarry. THE COSTS ORDER The costs order made by his Honour required that Perpetual pay 30 per cent of the costs of Equus. The order was made on the basis that Equus, while not wholly successful, had achieved against the opposition of Perpetual a substantial benefit by way of the reduction of the amount of the statutory demand. The discount of 20 per cent was based upon his Honour's view that the hearing had been lengthened significantly by reason of issues raised by Equus without foundation such as the alleged non-tender of the Letter of Credit. Perpetual, by way of cross-appeal, submitted that his Honour had acted upon a mistake of fact in concluding that Equus had achieved a reduction against Perpetual's opposition. It was no part of Equus' case that the demand be varied at all. Perpetual referred to submissions made on behalf of Equus and on behalf of itself at the trial. Perpetual pointed out that while Equus maintained that no variation should be made of the statutory demand, Perpetual in its submission of 4 April 1997, sought variation of the notice as an alternative. There was nevertheless a substantial contest on the existence and quantum of any off-setting claim and it is the outcome of that contest which in the end underpinned his Honour's decision to vary, rather than to set aside or allow to stand, the Notice of Demand. The power to award costs is to be found in s 43 of the Federal Court of Australia Act 1976. It is a discretionary power to be exercised by the Judge. It is a wide discretion and provided that the order made is within the range of a proper exercise of that discretion an Appeal Court will not interfere with it - Hannpost Pty Ltd v Mita Copiers Australia Pty Ltd (1996) 137 ALR 701 at 716. In this case his Honour had regard to appropriate factors in making his costs order and the Court will not interfere with it. THE EXTENSION ORDER On 12 May 1997, his Honour made the principal orders varying the Notice of Demand. He also ordered that the period for compliance with the demand be extended to 2 June 1997. On 29 May 1997, upon the appellant's motion, his Honour made an order in the following terms: "The applicant be granted an extension of time for compliance with the statutory demand served upon it on 18 July 1996 until the determination of the appeal by the Full Court of the Federal Court or as otherwise ordered by the Full Court, upon an undertaking by the applicant to prosecute the appeal with expedition with a view to having the appeal heard on 10 June 1997."

The order is said to have been made by consent. It was not by consent and the reference to a consent was subsequently vacated. The order is attacked by way of cross-appeal on the ground that his Honour failed to specify a period when extending the time for compliance. In this respect reliance was placed on s 459F(2) of the Corporations Law. The effect of the order, it was said, was to extend the demand indefinitely rather than for a specified period. In Vista Commercial Construction Pty Ltd v Deputy Commissioner of Taxation (Full Court, 5 November 1997, unreported) the Full Court held that there is power in an appropriate case to extend the time for compliance with a statutory demand after the court has determined to dismiss an application to set it aside. However the power is not to be exercised simply so that a corporation unable to pay debts as they fall due can obtain an extended time to comply with the demand. In this case there is no challenge to the grounds of his Honour's exercise of the discretion to extend time for compliance. The challenge is to the content of his order and whether it was an order contemplated by the section in terms of the way in which it defined the period of extension by reference to the determination of the appeal. The period of the extension is defined with precision by the order. It runs from the date on which the order speaks, namely 29 May 1997 until the date upon which this Court gives judgment on the appeal. It is noted that in Graywinter Management Pty Ltd v Deputy Commissioner of Taxation (1996) ACSR 636, Finn J extended a period for compliance with certain statutory demands until twenty one days after the hearing and determination of an appeal. Provided an application for an extension is brought before the expiry of the period fixed for compliance, that period can be further extended even if the s 459G application has been determined - Graywinter Management Pty Ltd v Deputy Commissioner of Taxation (supra); Graywinter Properties Pty Ltd v Dyer (1996) 12 ACLC 302, Livestock Traders International Pty Ltd v Thi Lam Bui (1996) 22 ACSR 51. See also David Grant & Co. Pty Ltd v Westpac Banking Corporation Ltd (1995) 184 CLR 265. CONCLUSION For the above reasons the order of the Court should be that the appeal and cross-appeal are dismissed. The appellant should pay the respondent's costs of the appeal. The respondent should pay the appellant's costs of the cross-appeal. Having regard to the passage of time since the application before Heerey J was dismissed, it is appropriate to permit a short extension of the time within which the appellant is to comply with the varied notice of demand. In the circumstances an extension of twenty one days is appropriate.

I certify that this and the preceding forty-two (2) pages are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellant: M R.F. Beaumont QC with Mr A. Nolan

Counsel for the Respondent: Mr R. Robson QC with Mr J. Peters