Supreme Court of WA|2001-09-07

Energy Equity Corporation Ltd v Selvendra [2001] WASC 246 (7 September 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : ENERGY EQUITY CORPORATION LTD -v- SELVENDRA [2001] WASC 246

Corporations - Application to set aside statutory demand - Genuine dispute and offsetting claims

Asian Century Holdings Inc v Fleuris Pty Ltd [2000] WASCA 59

Energy Equity Corporation Ltd v Sinedie Pty Ltd [2001] WASC 213

Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 21 ACSR 561

Royal Premier Pty Ltd v Taleski [2001] WASCA 48

1 MASTER BREDMEYER: This is an application by the plaintiff ("EEC") under s 459G of the Corporations Law to set aside a statutory demand. The demand is dated 15 May 2001 and is for the following debt:

"Consultancy fees due and payable by the company to the creditor pursuant to a Consultancy Agreement (entered into between the company and the creditor on or about 21 July 1998 and renewed from time to time thereafter) in respect of services provided by the creditor to the company in the period 1 January 2001 to 31 March 2001

2 A statutory demand can be set aside under s 459H of the Corporations Law if the applicant can show a genuine dispute as to the debt, or the amount of the debt, and/or an off-setting claim. A genuine dispute raises much the same sort of considerations as a serious question to be tried in an interlocutory injunction application or in a caveat case. The applicant must satisfy the court: (a) that the dispute is bona fide and truly exists in fact; and (b) the grounds alleging the existence of the dispute are real, not spurious, hypothetical, illusory or misconceived. An offsetting claim is defined in s 459H(5) to mean a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-claim even if it does not arise out of the same transaction or circumstances as to the debt to which the demand relates.

3 The plaintiff relies on three affidavits of one of its directors, Ian William Jordan, sworn 5 June 2001, 12 July 2001 and 28 August 2001. The defendant relies on his affidavit of 10 August 2001 and on the supporting affidavit of Mr S Mahalangan sworn 13 August 2001.

4 By s 459G(3), an application to set aside a statutory demand:

" ... is made in accordance with this section only if, within those 21 days:

(a) an affidavit supporting the application is filed with the court; and

(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company."

The supporting affidavit must say something which supports the application. It is a jurisdictional requirement. It is not enough to assert merely that the debt is disputed. The affidavit in this case which was filed with the application is the affidavit of Mr Jordan, sworn 5 June 2001. The relevant part is as follows:

"10. I verily believe that the Plaintiff has a number of off-setting claims against the Defendant in respect of the standard of the work performed by the Defendant whilst in the Plaintiff's employ and claims for misappropriation by the Defendant of the Plaintiff's money. The Plaintiff is in the process of investigating those claims and considering the relevant documentation. I verily believe that it is a likely outcome of the finalisation of those investigations that proceedings will be commenced against the Defendant for a sum in excess of that claim in the statutory demand."

5 The claim for misappropriation by the defendant of the plaintiff's money has been abandoned in the second affidavit. Paragraph 10 is very meagre. It does not contain any material facts as to the poor standard of work performed by the defendant whilst in the plaintiff's employ. Counsel for the plaintiff, Mr Dillon, said that the paragraph is like a holding pleading - good enough to escape a default judgment but one which needs to be amplified by particulars. I consider the affidavit barely complies with the section but I propose to let it stand.

6 Objection was made by the defendant's counsel to various paragraphs in the first and second affidavits of Mr Jordan as containing hearsay without disclosing the sources of information and belief. Also, in a number of cases the hearsay is simply not the best evidence. Mr Jordan was appointed a director on 29 September 2000 and, I gather, was not involved in the company prior to that date. In a number of places, for relevant evidence as to Mr Selvendra's work, Mr Jordan gives hearsay evidence of what was said to him by Mr F M (Maurice) Brand, who was the then Managing Director. There is no particular reason why Mr Brand has not given direct evidence of those events. Mr Brand is still an executive with the company. Despite those objections, I propose to let the objected paragraphs stand. I consider some hearsay is admissible in this type of application. In this, I follow what was said by Master Sanderson in Gabstone Pty Ltd v Gumina Investments Pty Ltd [2000] WASC 149. However, the defendant's criticisms will reduce the weight which I give to the statements.

7 It is not disputed that Mr Selvendra was employed by the plaintiff as a consultant under a consultancy contract for two years from 1 January 1998 to 31 December 2000. His fees were initially $87,600 per annum but were increased to $120,000 per annum with effect from 1 January 1999 by a letter from Mr F M Brand, the then Managing Director, dated 4 February 1999. It is also not disputed that, when Mr Selvendra's contract expired, he was asked to stay on on a monthly basis on the same terms and conditions at a fee of $10,000 per month. He was the plaintiff company's manager in India. There is no dispute that Mr Selvendra worked for the company in India for those three months and there is no particular complaint about the quality of his work during that period. He was not paid.

8 Two off-setting claims are raised against the defendant's claim for consultancy fees. The first relates to the Vypeen project. In May 1998 the plaintiff, through its wholly owned subsidiary, Australian Energy Equity Pty Ltd, entered into a sale and purchase agreement with a Malaysian company, Prenergy Investments Pty Ltd ("Prenergy") in connection with the Vypeen project. The agreement is not annexed, but under it certain milestone payment terms were agreed, one of which was: "All applicable State and Central Government of India approvals for alternative fuel for Vypeen Project ... US$2 million." This sum was later amended by agreement to US$1 million.

9 In or about January 1998 Mr Jordan said that the plaintiff requested the defendant, as its manager for India, to investigate whether all necessary government approvals relating to condensate fuel had been received from the relevant government departments in order to make that payment. In the period 8 February 1999 to 6 May 1999 an amount of US$1 million was paid by the plaintiff on behalf of one of its subsidiaries, Australian Energy Equity Pty Ltd, to Prenergy. Mr Jordan says, in effect, that the defendant was negligent in recommending that this payment be made. I quote from his second affidavit:

"14. My review of the Plaintiff's documents shows the above sum was paid as a result of representations made by Prenergy to the Defendant and repeated by the Defendant and another one of the Plaintiff's consultants (Mr Paul Bridgwood) to the Plaintiff to the effect that all necessary approvals relating to condensate fuel had been received from relevant government departments. However, this statement was not accurate as the use of condensate fuel was also subject to approval of the Ministry of Petroleum and Natural Gas, which approval was not obtained at the time and has not been obtained to date.

15. The Plaintiff paid the above sum in reliance on the truth of the statements made by the Defendant and Mr Bridgwood as described in paragraph 14 above."

Mr Jordan goes on in the affidavit, and I summarise, to state that the defendant was negligent in recommending this payment and has directly caused the loss to the company of US$1 million and that the plaintiff has a genuine off-setting claim against the defendant for this sum. Mr Jordan says that from the plaintiff's records he has not found any evidence of the steps taken by the plaintiff to ensure that statements made by Prenergy, as set out in par 14 of his affidavit, were true.

10 Mr Selvendra, in his affidavit, disputes those statements. He said he was asked by Paul Bridgwood of EEC to obtain all available publications and documents relating to the Indian Government's fuel policy. He was not asked by anyone on behalf of EEC to "certify that all approvals had been obtained" and he did not so certify. He said in response to the request of Mr Bridgwood he provided relevant documents to the Perth office as they became available to him and has exhibited to his affidavit five documents, together with an opinion from an Indian lawyer about certain topics. He was told by Mr Bridgwood that Prenergy would have to satisfy the management at a meeting to be held in Perth before the milestone payment would be paid. He says that neither EEC nor Prenergy involved him in any way in the payment relating to the Government approval milestone, other than is set out above. He also states that Mr Shaminathan Mahalangan processed, on behalf of Prenergy, this milestone payment. He said that Mr Mahalangan negotiated this directly with Mr Maurice Brand of EEC at EEC's office in Perth.

11 Mr Mahalangan, in his affidavit, states that he is a resident in Australia but regularly travels to Malaysia on business. He was for a time the Managing Director of Siasin Energy Ltd, and, in that capacity, he processed on behalf of Prenergy the milestone payment for the achievement of approval for condensate as a fuel directly with Mr Maurice Brand and Mr Paul Bridgwood of the Perth office of EEC. He said he did not involve Mr Selvendra in any discussions concerning the milestone payment. I quote:

"6. All justifications for this milestone payment were made directly to EEC Perth by me with supporting documents to demonstrate approval of condensate as an alternate fuel by the Government of India.

7. EEC Perth, under the stewardship of Mr Maurice Brand, being satisfied with the evidence, approved this milestone payment.

8. On my recommendation, Prenergy agreed to a reduction in the amount of this milestone payment from US$2 million to US$1 million because of the financial difficulties of EEC, as a gesture of good faith. The difference of US$1 million was to be made up by EEC upon achievement by the Vypeen project of subsequent agreed milestones."

12 Mr Selvendra, at "RS3" to his affidavit has exhibited a statement by the Ministry of Power, dated New Delhi 15 October 1998, giving its policy on liquid fuel-based power plants. This statement said that the Government had reviewed its policy on the use of liquid fuels for power generation and had taken the following decision: "All non-traditional fuels, such as condensate and orimulsion would be permitted for power stations." This resolution of the Government of India was published in the Gazette of India and a copy of that is annexed. The defendant, at "RS5" has also exhibited a letter from the Chairman of the Kerala State Electricity Board dated 17 October 1998 which refers to the Vypeen Combined Cycle Power Plant - permission requested for use of condensate as an interim fuel. The letter refers to written requests to be allowed to use condensate as an interim fuel at the Vypeen power project. The writer recites the new liquid policy of the Government of India and states that:

"Condensate has been approved as an alternate fuel for power generation and is permitted to be imported on actual user basis under OGL.

The technical parameters are almost the same as that of naptha and the price is generally lower. No problem is envisaged in the availability from the market. Therefore, KSEB has no objection in using condensate as fuel for the Siasin power project until an alternate cheaper fuel is available."

The reference to "OGL" is a reference to Open General Licence and the reference to "KSEB" is to the Kerala State Electricity Board.

13 "RS6" is a letter from the Government of Kerala from the Joint Secretary to Government to the General Manager of Siasin Energy Ltd dated 17 December 1998. It refers to the new Liquid Fuel Policy of the Government of India announced on 6 July 1998 and says that condensate has been approved as an alternate fuel for power generation and is permitted to be imported on actual user basis under OGL. Hence:

"I am to convey the approval of the State Government for the use of condensate as interim fuel for the Vypeen Combined Cycle Power Project until LNG is available."

14 I consider from these documents that there was no negligence on the part of Mr Selvendra. The documents state that State and central government approval was given for the alternate fuel of condensate which the parties propose to use for the Vypeen Project. The contract has not been placed before me so I do not have the benefit of any contractual elaboration of what is meant by the words in the schedule of milestones: "All applicable State and Central Government of India approvals for alternate fuel for Vypeen Project". The plaintiff's Mr Jordan says that an important approval was not given, in that condensate fuel was not approved by the Minister of Petroleum and Natural Gas. The document relied on for this argument is that from the Government of India from the Ministry of Petroleum and Natural Gas, New Delhi, dated 24 June 1999, which is "RS9" to Mr Selvendra's affidavit. It is addressed to a gentleman in the Foreign Trade Development Office, New Delhi, with a copy to the Minister of Power, also in New Delhi. Mr Selvendra, at par 16 of his affidavit, summarises the document:

"16. In or about July 1999 I received advice that the Indian Ministry of Petroleum and Natural Gas determined that it would treat condensate at par with crude oil and that the same regulations as applied to the import into India of crude oil would apply to the import of condensate. Annexure 'RS9' hereto is a copy of the advice I received."

15 The "advice" referred to deals with custom tariff classification. It says, and I summarise, that condensate, being capable of being refined, is treated at par with crude oil which is classified under a certain code number: "Therefore it is suggested that condensate may also be classified under this code (No. 27.09) for customs tariff purposes." The letter goes on to refer to orimulsion and says that orimulsion is, presumably, classifiable under the heading of bitumen or asphalt natural which are already free from import and that this item is classifiable under sub-heading No 2714.90 of the customs tariff. It went on to say that at a meeting of the International Customs Council, the Ministry of Finance of the Government of India had accorded recognition of orimulsion as a natural bitumen and, thus, was free for import:

"4. As for condensate. Since this item is being treated at par with crude oil, it may be mentioned that as per this Ministry's notification No. 224 dated 24th November 1997 pertaining to phase dismantling of APM, import of crude oil continuous to be canalised through IOC except for private and joint venture refineries. Thus condensate will be governed under the existing policy applicable for import of crude oil and cannot be put under OGL."

16 I consider it an unnatural and improper interpretation of the milestone: "All applicable State and Central Government of India approvals for alternate fuel for Vypeen Project", to interpret it as meaning customs free importation for that alternate fuel. Giving the words their natural and ordinary meaning, I consider they mean that the State and Central Government of India shall approve the use of condensate - which was the fuel EEC wanted to use - for the Vypeen Project. I consider these approvals were attained and the defendant has not been negligent in his work. It is of interest that the payment of US$1 million for this milestone was made between February and May 1999 and yet the plaintiff has not been able to refer to any letter of complaint against Mr Selvendra. One would think that if his negligence had lost the company US$1 million, there would be some repercussions. On the contrary, his contract continued for another 18 months and at the end of that term he was invited to stay on for a further three months. I consider this claim is ill-conceived, spurious and not genuine.

17 The second off-setting claim concerns a power project in a different State, Tamil Nadu and in this case the power station is up and running. It is known as the Base Bridge Power Project. The plaintiff, through one of its many subsidiaries, is, I think, a 25 per cent shareholder in a company, GMR Vasavi Power Corporation Private Ltd ("GMR Vasavi"). GMR Vasavi owns and operates the power plant and sells the power generated under an agreement to Tamil Nadu Electricity Board ("the Board"). Mr Jordan has been told by Mr Brand that, because Mr Selvendra was the plaintiff's manager for India, he was its nominated director on the GMR Vasavi's board of directors. He was under Mr Bridgwood and, subject to his direction, had the sole responsibility for representing the interests of the plaintiff in the project in India. I quote from par 22 of Mr Jordan's affidavit:

"22. I am informed by Mr Brand and verily believe that the Plaintiff initially invested in the project on the basis (as represented by the Defendant and Mr Bridgwood) that it would receive regular dividend payments from GMR Vasavi (the dividends). The dividends (totalling AUS$8.1 million per annum were to be paid by GMR Vasavi to the Plaintiff on a quarterly basis throughout the term of the Power Purchase Agreement (being 15 years with three possible extensions of 5 years each). Whilst [the Board] has made the payments it is contractually obliged to make under the Power Purchase Agreement to GMR Vasavi, the dividends (with the exception of one made in 2000 totalling approximately US$2.1 million) have not been paid to the plaintiff.

23. My review of the Plaintiff's records shows GMR Vasavi failed to finalise the necessary financial arrangements made between the various parties involved in the project to the satisfaction of the project's lenders, leading the lenders to 'freeze' payments made by [the Board] to GMR Vasavi's reserve account (which are intended to comprise the dividends).

24. As the Plaintiff's representative on the Board of GMR Vasavi, the Defendant was obliged to ensure that letters of credit were signed by various parties and an ESCROW account was opened and operationalised by [the Board] as required under the Power Purchase Agreement.

25. I am informed by Mr Brand and verily believe that the requirement for letters of credit and an operational ESCROW account was to satisfy the lenders that security requirements were being met."

18 Mr Jordan then exhibits various financial documents relating to these matters.

"23. I am one of 12 Directors on the Board of GMR Vasavi. I am a non Executive Director.

24. At all times, I passed on all documents and information received by me from GMR Vasavi and any representations made by the management of GMR Vasavi about the payment of dividends.

25. I deny representing that EEC would receive regular dividend payments as alleged at paragraph 22 of Mr Jordan's second affidavit.

26. I was not involved in the decision to invest in the Basin Bridge Power Project. A high level executive 'due diligence' committee was established to examine this project in depth. I was not on that committee nor involved in its deliberations.

27. At all material times, I was advised by the management of GMR Vasavi that it was not able to make the dividend payments because the poor financial state of the Tamil Nardoo Electricity Board (TNEB) prevented the TNEB from operating the required ESCROW account. Accordingly, the financiers to GMR Vasavi have advised that dividends cannot be paid until there are sufficient funds in the ESCROW account, or, alternatively until the stake holders in the Basin Bridge Power Project have put up letters of credit fully backing the project.

28. I deny that it was my obligation to 'ensure' that the letters of credit and ESCROW account were properly in place. I deny that it is as a result of anything that I have done or omitted to do that the letters of credit and ESCROW account were not able to be put into place.

29. Put simply. As only one of 12 directors on the GMR Vasavi Board and as a representative of a minority stake holder in the Basin Bridge Power Project I was never in a position to alter the consequences of the fact that the TNEB was in a poor financial state or to simply direct that dividends be paid.

30. I regularly requested advice from GMR Vasavi about the payment of dividends. Annexure 'RS10' hereto is a sample of some correspondence between myself and GMR Vasavi concerning this issue. I relayed all advice received from GMR Vasavi to the Perth office of EEC.

31. I deny making the representations alleged at paragraphs 29 and 30 of Mr Jordan's second affidavit."

20 The correspondence annexed to Mr Selvendra's affidavit shows that he tried to raise these various matters with GMR Vasavi but with little effect. The correspondence also shows, as does the legal documents annexed to Mr Jordan's affidavit, that Mr Selvendra has no real power to effect the commercial relations between the major players, namely GMR Vasavi, the Board, and the financiers of GMR Vasavi. One of the problems is that the Board has only dispatching power at 85 per cent of capacity instead of 90 per cent, as required by the Power Purchase Agreement. Correspondence has ensued between Mr Selvendra and the Managing Director of GMR Vasavi about the interpretation of the relevant clauses and as to what can be done to push the Board to purchase more power. GMR Vasavi had obtained a legal opinion from White & Case regarding the partial load operation of the plant and were going to take up this matter once they had obtained a capital cost approval from the Board. Mr Selvendra also took up with the company the question of dividends, as to when the next dividend may be expected. On 30 March 2001 the company replied to Mr Selvendra's two letters on dividend payments, as follows:

"1. As you are aware that the financial position of TNEB is not encouraging and they have suffered continuous losses during the past two years. Their cash flow position is also not improving due to non revision of tariff by the government and the absence of budgetary support.

2. The security mechanism, despite pressure from the lenders and from our side, is still not put in force and effect. TNEB is at present unable to operate the ESCROW account due to paucity of funds which they expect to overcome within a few months.

3. As you are well aware, TNEB is dispatching below 85 per cent PLF which in turn affects our profitability. We have brought to the notice of TNEB many times and requested them to follow the provisions of PPA [Power Purchase Agreement] in this regard. However, TNEB continues to dispatch the plant below the contracted levels. This has affected our cash flows.

4. For payment of dividend, permission from IDVI, the lead lender, is required. Without the security mechanism in place, it would be very difficult to obtain same.

Though we appreciate your stand on the dividend, we may have to consider the above views before taking up any decision regarding declaration of dividend. We appreciate your active participation on the above issues.

However, the matter will be taken up during the next Board meeting for discussion and decision."

21 I consider that the plaintiff has raised no genuine dispute in relation to these matters. It is outside Mr Selvendra's hands to get the Board to use more power and so pay more revenue from its customers into the ESCROW account. It is outside his hands to get the financier to agree to the company distributing dividends when insufficient money is held, apparently, to satisfy the lenders. It is also outside his hands to get the Board to put up a irrevocable revolving letter of credit in favour of the company to enable the lenders to unfreeze the ESCROW account, when it gets sufficient funds, to enable the dividend to be paid. I guess the company could sue the Board for breach of contract. That would be an option. The Board's obligations are guaranteed by the State Government. The company could also call upon that guarantee. These are difficult decisions which GMR Vasavi alone can take.

22 The plaintiff's allegation that it entered into this project on the basis of Mr Selvendra's representations that it would receive regular dividend payments from GMR Vasavi is, I think, fanciful. I accept Mr Selvendra's evidence as much more likely to be truthful that, prior to investing what I think was $25 million in this project, proper enquiries were made by appropriately authorised people in the company - higher up than Mr Selvendra - that due diligence enquiries were made and that they were not relying on Mr Selvendra's representation for the company's investment. A copy of the plaintiff's Annual Report for the year 2000 has been produced to me. The write up on the Basin Bridge Power Project in India was made after the company had received its first dividend. The write up was not all doom and gloom, and I quote:

"The Basin Bridge Project began commercial operations with 50 MW units being commissioned in January 1999 and the second two 50 MW in March 1999. Whilst the contribution to earnings for 2000 was lower than originally predicted due to the Tamil Nadu Electricity Board (TNEB) continuing to pay each month in order to obtain a settlement discount, the project returns are acceptable and augers well for the future.

... EEC has insured its equity investment and its interest in the revenue stream from TNEB to the project company - GMR Vasavi Power Corporation (GMR). EEC received its first dividend during the year."

23 I consider the two off-setting claims raised are spurious and not genuine and I propose to dismiss the application.

24 There are other matters that reinforce my view that the off-setting claims are not genuine. Firstly, there is no prior correspondence from the company raising these allegations against Mr Selvendra. It is not essential for a claim to be considered genuine that there be prior correspondence, but I would expect some such correspondence in this case. If Mr Selvendra's negligence cost the company $1 million wrongly paid out on the Vypeen project, in early 1998, I would have expected the company to tackle him about that in correspondence. Secondly, why keep him on when his contract expired on 31 December 2000? If he was a negligent consultant who had cost the company $1 million, why renew his contract on a month by month basis for a further three months? That suggests the opposite of what is now asserted. It suggests that he was a satisfactory consultant.

25 Thirdly, the company's non payment of his fees can be explained by the fact that the company appears to have been in financial difficulties at the time. I wondered whether the non payment of his $30,000 might be a cunning ploy to recover some of the money EEC says Mr Selvendra had lost the company. But not only was he not paid, but the normal office expenses of the company's India office were not paid either. The office rent was not paid. The phone and fax were not paid and were cut off. A junior staff member, a Mr Hyden, was not paid for three months. He was paid, but the cheque bounced. EEC normally paid a monthly allowance to a Mr Vasudev who was the company's nominee on the board of GMR Vasavi. His allowance was not paid for the first three months of 2001. Under Mr Selvendra's contract his house rent was to be paid by the company. This was not paid. He was required to travel within India to attend meetings. His travel expenses were not paid.

Energy Equity Corporation Ltd v Selvendra [2001] WASC 246

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Energy Equity Corporation Ltd v Selvendra [2001] WASC 246 (7 September 2001)

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