DREWNIAK AND ANOR v AIR RUBBER PTY LTD No. SCCIV-01-1665 [2002] SASC 319

Full Court: Duggan, Debelle and Williams JJ (ex tempore)

DUGGAN J I agree that this appeal should be dismissed for the reasons given by Debelle J.

DEBELLE J This is an appeal from a decision of a Master of this Court setting aside a statutory demand made pursuant to s 459E of the Corporations Act 2001.

The appellant Peter Drewniak and his wife have lent the sum of $80,015 to a company called Air Rubber Pty Ltd ("Air Rubber"). The appellants assert that the sum of $80,015 was a loan repayable on demand. By a demand dated 12 November 2001 addressed to Air Rubber, the appellants demanded payment of the loan of $80,015. On 4 December 2001, Air Rubber made an application pursuant to s 459H and s 459J of the Corporations Act to set aside the demand. The application was heard by the Master on 11 March 2002 who gave reasons ex tempore and set aside the demand. The appellants appeal from that decision.

Air Rubber does not deny that it owes the appellants the sum of $80,015 but it asserts that the loan is not repayable until it is earning profits. The background to that assertion is as follows. Air Rubber is a company which makes airbags and associated products for motor vehicles. Mr Peter Drewniak was a director of Air Rubber from 18 April 1995 to 5 August 1999. The other directors of the company are Mr and Mrs Holownia. Mr Drewniak and Mr and Mrs Holownia are all immigrants from Poland. In about October 1994, Mr and Mrs Holownia established a company which is now called Airbags Pty Ltd. Mr Drewniak became interested in the business. In 1995, Mr Drewniak, together with Mr and Mrs Holownia, established Air Rubber. In 1995 and 1996, Mr Drewniak invested the total sum of $80,015 in Air Rubber. It was treated in the books of the company as a director's loan.

Mr and Mrs Holownia assert that it is the practice and custom in Poland that moneys invested in a company for working capital are not repayable until such time as the company is profitable and profits are not needed to develop new products, buy new equipment or upgrade existing equipment. The appellants deny that there is such a custom or practice.

Mr and Mrs Holownia also assert that Mr Drewniak initialled a memorandum dated 16 February 1997 which states that work, capital, interest and a car will be paid out of net profits. They rely also on a document which is said to be notes of a discussion in mid-1998 between themselves and Mr Drewniak in which it was agreed that directors' loans need not be paid until the company earns profits. The relevant part of the note is in these terms:

"The Directors have decided that when the company achieves profits and provided that there is need (sic) for the introduction of new products and no need to purchase new or upgrade the existing equipment, the repayments will be made in the following order:

- directors loans

- interest

- car allowance for Z. D."

According to profit and loss accounts which have been provided, Air Rubber has not earned any profit since it commenced its operations in late 1994. It has continued to accumulate losses.

Notwithstanding its contention that it is not yet liable to repay the sum of $80,015 Air Rubber said on 28 March 2000 that it would commence repayment of the loan by monthly instalments of a minimum of $500. However, it has sent Mr Drewniak only two cheques, each for $500. One was dated 31 March 2000, the other 28 April 2001. According to Mrs Holownia, Mr Drewniak has not presented these cheques for payment. She also asserts that, in May 2001, he said to her words to the effect "Don't worry about repaying the money because the company isn't making enough profit yet".

The business relationship between Mr Drewniak, on the one hand, and Mr and Mrs Holownia, on the other, has broken down. This has obviously led to the demand for repayment of the loan of $80,015.

There is another dispute between the appellants and Airbags Pty Ltd, a company related to Air Rubber, in which Mr and Mrs Holownia are also directors. This dispute also concerns a loan by the appellants. The circumstances of that loan, and the steps which have been taken in relation to that loan, are not relevant to the determination of the issues in this appeal.

In his reasons for judgment, the Master correctly did not rely on the asserted practice and custom of Poland. Plainly he could not do so as there was no proof of that practice or custom. The Master did, however, rely on the notes of the meeting in mid 1998. He noted that the purport of those notes was disputed by the appellant, but concluded it was arguable that the appellants had agreed to waive the payment of the loan until Air Rubber was earning profits. He therefore concluded that there was "a genuine dispute upon substantial grounds".

In my view, there is no ground which justifies this Court in interfering with the decision of the Master. Section 459H enables the court to set aside a statutory demand where it is satisfied that there is a genuine dispute about the existence of the debt. Section 459H reflects the old common law rules that a winding up order will not be made on a debt which is bona fide disputed, provided that the dispute is based on some substantial grounds: Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] VicRp 61; (1994) 2 VR 290 at 293 and the cases there cited.

The question of what must be established to satisfy the court that a genuine dispute exists has been examined in a number of cases. It is sufficient to refer to the well settled test in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, where it was held that the expression "genuine dispute" in s 459H connotes a plausible contention requiring investigation raising much the same sort of considerations as the serious questions to be tried criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. In Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39, Lockhart J said that the notion of a continuing dispute suggests that the court must be satisfied that there is a dispute and it is plainly not vexatious or frivolous.

In Eyota Pty Ltd v Hanave Pty Ltd, McClelland CJ in Eq examined what the court must do for the purposes of determining whether a genuine dispute exists. He said (at 787):

"This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth' (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or 'a patently feeble legal argument or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194).

But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute."

His Honour then referred to the observations of Hayne J in Mibor Investments and of Thomas J in Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605.

The principles expressed in these and other cases were approved by the Full Court of the Federal Court of Australia in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 462 to 464. In that case the court held that a genuine dispute requires:

"● 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 court went on to note that the various formulations referred to in the cases would be helpful in determining whether a genuine dispute existed in any one particular case.

In this case there was sufficient evidence before the Master to determine that a genuine dispute existed on the question whether the loan should be repaid. The note signed by the directors in mid 1998 expressly reserved the time when the directors loans will be repaid. The loan by the appellants might fairly be described as a director's loan. There are sufficient facts to show that there are serious questions to be tried as to the terms of the repayment of the loan. The grounds on which Air Rubber disputes the appellant's demands are not frivolous or vexatious. The contentions of the appellant require certain assumptions of fact. The assumptions cannot be made. The facts must be explored at a trial. Whilst it was proper for the Master not to rely on the asserted custom and practice in Poland, it may be that an investigation of the facts would show that the memorandum of mid-1998 reflected the agreement made at the time or their common intention. In short, there was sufficient evidence for the Master to conclude that there was a genuine dispute. For these reasons, I would dismiss the appeal.

In Polaroid Australia Pty Ltd v Minicomp Pty Ltd (1997) 16 ACLC 529 at 536, Santow J referred to the number of cases in which plaintiffs have successfully applied to set aside a defendant's statutory demand. Noting that insufficient appreciation was evidently being paid to the fundamental and well settled principles that a demand cannot be made on a debt which is genuinely disputed, he noted:

"Sooner or later, courts will have to consider whether indemnity costs should be awarded against the unsuccessful user of a statutory notice to force payment of a genuinely contested debt, simply because those taking out such statutory demands are disregarding that basic principle."

This case raises the question whether the appellant should pay indemnity or solicitor and client costs. The Master held that there was a genuine dispute. The evidence is quite clear that there was. Costs may be awarded on an indemnity or solicitor and client basis where a party, properly advised, should have known that it had no chance of success: Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Ltd [1988] FCA 202; (1988) 81 ALR 397, a decision which has been consistently followed in this Court. The court therefore warns parties that in the future they may be at risk of an order to pay costs on an indemnity basis or on a solicitor and client basis for pressing statutory demands where a genuine dispute exists. I would not, however, in the particular circumstances of this case, make an order for solicitor and client costs or indemnity costs.

18. DUGGAN J The order of the court will be as follows: