BETWEEN : ENERGY EQUITY CORPORATION LTD (ACN 009 124 994)

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

D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1,794

Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 822; (1996) 21 ACSR 581

John Shearer v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136

Legione v Hately [1983] HCA 11; (1983) 152 CLR 406

Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In Liq) [2000] VSC 397

Spencer Construction Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452

Turner Corp (WA) Pty Ltd v Blackburne & Dixon Pty Ltd [1999] WASCA 294

Zenaust Imports Pty Ltd v Alember Chemicals Works Co Ltd (1998) 28 ACSR 465

1 MASTER BREDMEYER: This is an application by the plaintiff ("EEC") to set aside a statutory demand. The demand is dated 8 March 2001 and is made up of two sums:

Outstanding consultancy fees under a

contract between the parties dated

9 February 1998 $101,097

Termination fee under cl 8.6 of

that contract $262,167

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 offsetting claim. It can also be set aside under s 459J which I will mention later.

2 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.

3 An offsetting claim is any claim which the plaintiff can raise against the creditor. It can be for damages or debt. It need not arise out of the same subject matter as the demand. The words "offsetting claim" in s 459H is defined as meaning a genuine claim.

4 A number of matters are raised as genuine disputes or offsetting claims.

5 I consider, first, the question of negligence. In my discussion I will be referring to Mr Bridgwood and Sinedie Pty Ltd interchangeably. Mr Bridgwood is the man behind the company. It is said that Mr Bridgwood was a member of the Executive Management Group of EEC and as such he recommended that the company take out a $120 million credit facility from the Commonwealth Bank in 1998. This was said to be a disastrous step. The loan was for two years, yet the projects to be funded by it were for longer terms. The result was that the company was unable to service the loan and had to make other financial arrangements which cost it a lot of money. The company says it has a claim against Mr Bridgwood for negligence in relation to this loan.

6 It was said that Mr Bridgwood was a member of the Executive Management Committee of the company which recommended this loan to the Managing Director, then Mr Brand, and he recommended it to the directors who approved it. In the company's organisational chart, Mr Bridgwood was one of six people at the same management level. He was an Executive Manager - Business Development. He was one of three persons with the same title. He was the Executive Manager - Business Development (Indonesia and Southeast Asia). I note in passing that Mr Bridgwood is an engineer. The second fellow was Executive Manager - Business Development (Western Region). The third was Executive Manager - Business Development (Eastern Region and new Technology). Mr Bridgwood's Consultancy Agreement sets out in some detail his responsibilities in item 1 to the Schedule:

"Item 1 - 'Specified Services' (Clause 2)

To provide the Specified Services of the Executive Manager - Business Development of the Company including, but not limited to such Specified Services as the following:

REPORTS TO: Managing Director

POSITION DESCRIPTION:

Full time position responsible for EEC Business Development in Australia and Asia, Project Development, New Ventures and Acquisitions, Marketing, Feasibility Studies and Evaluations for EEC activities including oil and gas; gas pipeline projects; LNG projects and power projects. Also responsible to monitor appropriate opportunities in South East Asia.

RESPONSIBILITIES: The position will involve Executive responsibility for all Business Developments and achievement of growth objectives, including:

1. Managing the day to day activities of the Business Development Unit including Project Leader for all key 'strategic' projects.

2. Initiating business opportunities, including New Ventures and acquisitions and responding to opportunities presented by internal and external sources within the region.

3. Transfers responsibility for projects to Engineering & Operations following execution of EPC and O&M Contracts.

4. Monitor structural changes within the oil and gas; power and LNG markets to ensure EEC maintains a competitive advantage.

5. Monitor opportunities in South East Asia.

6. Member of the Executive Group and contribute to meeting overall corporate objectives.

7. Prepare and present Business Opportunities to the Board of Directors.

8. Manage selected Government relations."

7 I note that he has no special duties in relation to company finance. He has no duty to advise the company on loans.

8 I said that there were six persons at his management level in the company and that he was one of three with the same title. The fourth of the six persons was the Executive Manager - Finance (Mr Maurice Hayes). The fifth was General Manager - Finance and Administration (Mr Alan Evans). The sixth was General Manager - Engineering and Operations. I note that the company also had a Group Finance Controller (Mr C Adams).

9 The Executive Management Committee consisted of 9 or 10 persons and it was chaired by Mr Maurice Brand the Managing Director. No minutes have been produced whereby Mr Bridgwood led the discussion or advised the meeting on the $120 million facility. No minutes have been produced in which he voted on the $120 million facility. No documents have been produced authored by Mr Bridgwood recommending this loan. He said in his first affidavit that he never advised on this loan and that the decision to obtain the loan was not made by the Executive Management Committee. I think the documents bear that out.

10 The company prepared a document entitled "Corporate Finance, Debt Facility Strategy, Interim Report June 1997". It is not signed and does not give the names of those who prepared it, except in code form at the bottom of the page. This document proposed a loan facility of $120 million. The proposal was put to seven banks and finance houses and the document weighs up the proposals received from those institutions. The proposal compares offers received, for example, from the Commonwealth Bank, AIDC and Rothchilds. The offers from Commonwealth Bank and AIDC were for a loan period of 18 to 24 months. The proposal from Rothchilds was for a loan period of five years. Evidently, CBA was thought to be the best - although that is not stated in the report.

11 The next month, July 1997, a report was prepared for the board of directors on the proposed CBA loan. This report is signed by Alan Evans, the General Manager - Finance Administration, and Maurice Hayes, Executive Manager - Finance, and recommended that the Board of Directors accept the Bank's offer. It was intended that at the end of the two year period the loan would be repaid, renegotiated or refinanced: see 110 of the plaintiff's second affidavit. At the end of the term the loan was renegotiated with the Commonwealth Bank for various periods, including a period of 21 months. All subsequent reports on the progress of the loan were made to the board of directors by Maurice Hayes, the Executive Manager - Finance.

12 I note that a memo in October 2000, at 382 of the plaintiff's second affidavit, refers to new management to the company. Stewart Elliott became Managing Director. He later complained of the short term nature of the loan. I note that Maurice Hayes remained Executive Manager - Finance. I note that the board of directors which approved the loan was chaired by Mr Ron Punch who was still the chairman of the board. His special interest is finance. He is a corporate and finance consultant and is the ex-chairman of the Perth Stock Exchange. The board at that time also included a Mr Ryan, whose expertise was also finance. He was the former Managing Director of Challenge Bank and Chief Executive of the Hospital Benefits Fund of WA.

13 I consider that the company has raised no genuine dispute against Mr Bridgwood for negligence in connection with this loan. He had no special involvement in the loan. He gave no advice in relation to it. I consider this claim is spurious and does not amount to an offsetting claim.

14 The second offsetting claim against Mr Bridgwood for negligence or breach of contract relates to losses to the company of US$1 million arising out of his handling of the Vypeen contract in India.

15 I consider that this claim is inadmissible for technical reasons. Under s 459G a statutory demand must be accompanied by an affidavit in support and both must be done within the 21 day time limit. The basis of the genuine dispute or offsetting claim must be set out in that affidavit. If so, the grounds can be elaborated on in later affidavits. The plaintiff cannot, in a later affidavit, introduce a new ground for setting aside the demand: Aspermont Ltd v Robash Pty Ltd (1998) 16 ACLC 485 at 488 per Templeman J.

16 I consider this evidence of negligence and breach of contract by the defendant in relation to the Vypeen contract is inadmissible, having been first raised in Mr Jordan's third affidavit.

17 I rule in a similar way against the claim that Mr Bridgwood failed to report to the Managing Director, as required by item 1 in the Schedule to his Consultancy Agreement. That was not raised in the plaintiff's original affidavit, but only in Mr Jordan's second affidavit.

18 I turn now to consider the question of a termination payment. Part of the demand is for a termination payment of $262,167 under cl 8.6 of the Consultancy Agreement of 9 February 1998. I quote the whole of cl 8:

8.1 The Company may by notice in writing to the Consultant terminate summarily the engagement of the Consultant under this Agreement if:-

8.1.1 in the opinion of the Company the Consultant or the Consultants ['s] Employee has committed or is preparing to commit a serious or persistent breach of any of the provisions of this Agreement;

8.1.2 the Consultant, goes into liquidation or receivership or suspends payment or compounds with or assigns its estate for the benefit of its creditors; and

8.1.3 the Consultant or the Consultant's employee is convinced of a criminal offence carrying imprisonment as a possible penalty.

8.2 Subject to Clause 8.3 hereof, the Consultant may by notice in writing to the Company terminate summarily this Agreement if the Company suspends payment or compounds with or assigns the Company's estate for the benefit of the Company's creditors.

8.3 Excluding the provisions of Clause 8.1, the Company or the Consultant can terminate this Agreement if the following provisions are complied with:-

8.3.1 the Company or the Consultant is in breach of their respective obligations hereunder for a continuous period of thirty (30) days;

8.3.2 the Company or the Consultant serves a written notice on the other demanding rectification of the breach within thirty (30) days of the date of service of such notice; and

8.3.3 the Company or the Consultant (as the case may be) does not rectify the said breach within thirty (30) days of service of the notice provided for in the previous paragraph 8.3.2.

8.4 Upon termination of this Agreement for whatever reason the Consultant shall deliver and cause the Consultants ['s] Employee to deliver to the Company or its authorised representative all Confidential Information, records, accounts and other documents and property of the Company.

8.5 In the event of the Consultant wishing to terminate its Specified Services hereunder other than stated in 8.3, the Consultant may do so upon first giving to the Company (3) three months written notice of its intention to do so.

8.6 In the event that this Agreement is terminated for any of the following reasons;

(a) Pursuant to Clause 8.3 by either the Company or the Consultant; or

(b) This Agreement is not renewed or extended at the time of expiration for any reason other than as stated in Clause 8.1

the Company shall pay to the Consultant a termination fee equivalent of one months fee (at the rate payable at the time of termination or expiration of this Agreement as stated above) for every twelve months of continuous service by the Consultant under this Agreement or any earlier agreement, after the first twelve months of continuous service to the Company. If the Company terminates this Agreement for any reason stipulated in clause 8.1, the Company will not pay any termination fee."

19 The plaintiff says that cl 8.6 is a penalty clause and not a genuine pre-estimate of damage for breach. It is said to be, in truth, a punishment for non-observance of a contractual stipulation, being the imposition of an additional or different liability on breach.

20 The contract is for four years from 1 July 1997 to 30 June 2001. Clause 8.6 provides for a termination fee of one month's salary for every year of service by the consultant under this, or any earlier agreement. Because there were early agreements, the defendant claims 13 months salary (13 months x $20,166.69 per month).

21 The termination payment is payable to the consultant after an unremedied breach of contract by either the company or the consultant under cl 8.3. It is a two-way clause. If the company breaches its obligations, and does not remedy the breach - the consultant gets the termination payment. On the other hand, if the consultant breaches his contract, short of a serious or persistent breach, he still gets the termination payment. He also gets the termination payment if the contract is not renewed upon expiration: see cl 8.6(b).

22 Clause 8.6 looks like a penalty clause because, if the company terminates the consultant - except for serious or persistent breach - it has to pay the termination payment. But there are two important differences:

(1) If the consultant breaches the contract - short of a serious breach - he gets the termination payment.

That is weird. The consultant is at fault but he still gets the termination payment.

(2) If the contract expires, the consultant gets the termination payment.

I test it this way. If the contract was terminated in March 2001 the defendant's loss is four months' pay. He has been terminated four months early. So 13 months' pay is extravagant damages. But, if he completed the full contract, he would get 14 months' pay. He would then have done 14 years service, as he started on 22 June 1987. What extra damages, I ask, is the plaintiff paying because - on the defendant's evidence - it breached the contract? Nothing. It was going to be liable for 14 months' termination pay anyway. Now, because of the earlier termination, it is liable for 13 months extra pay.

23 I consider this clause does not impose an unconscionable or unreasonable burden on EEC. It imposes a 13 month pay burden on a company which, in a few months time, would be liable to pay 14 months' pay to the defendant, irrespective of breach. I consider the plaintiff has raised no genuine dispute in relation to this clause.

24 Section 459J(1)(b) provides that a demand may be set aside for some other reason. An argument was addressed to me on this. Namely, that EEC is a large public company with net assets of over $100 million as at 30 June 2000, according to its balance sheet. It is trading profitably. The defendant is unlikely to ever prove that EEC is insolvent. This demand has been brought simply to embarrass the company. The Court's companies jurisdiction should not be used as a debt collecting agency. Therefore this claim is an abuse of process and should be rejected under s 459J(1)(b).

25 The plaintiff relies in support of this proposition on Equuscorp v Perpetual Trustees WA (1997) 25 ACSR 675. That is a decision of the Full Court of the Federal Court and goes into the history of statutory demands. I have read that case, especially at the references 694 and 700, given to me. At the latter reference the Court said:

"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 to 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)."

26 I accept those words, but that is not this case. Robson, in his text book, digests the cases decided on s 459J(1)(a) and (b) and he gives there examples of some other reason why the demand should be set aside. I have not seen there, or elsewhere, any reference to a case which says that a statutory demand issued against a solvent company can be an abuse of process so as to constitute some other reason why the demand should be set aside.

27 The plaintiff has also referred me to Soverina Pty Ltd v Jackson & Associates Pty Ltd (1987) 6 ACLC 277. I do not think that case is relevant. It pre-dates the present statutory law on statutory demands introduced in 1992. In that case, the debtor, who had not responded to a statutory demand, sought an injunction to restrain the creditor from bringing a winding up petition. The court there said, and I quote from the headnote:

"Secondly, the use of winding up proceedings, rather than proceedings in debt, must be regarded as an attempt to coerce the plaintiff into paying the debt without affording reasonable opportunity to ascertain or have it established that the debt was properly payable.

Thirdly, it appeared to the Court that there was a bona fide dispute as to the debt on substantial grounds.

Lastly, it appeared that the plaintiff was solvent and able to pay its debts as they fell due."

28 The Court would not say that today. Section 459H and s 459J give the target company an appropriate opportunity to contest the debt - to set up some prima facie defence, and the plaintiff is availing itself of that opportunity in this case. The solvency of the company is a very important matter to be looked at on an application to wind up.

29 For the above reasons, this application will be dismissed.