Corporations Law - Appeal - Application to set aside statutory demand - Dismissed - Offsetting claim first raised in affidavit outside 21 day time limit - Whether necessary to indicate details of alleged dispute within 21 days - Whether demand an abuse of process

AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564

Amos v Brisbane TV Limited [2000] FCA 825; (2000) 174 ALR 769

AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170

Dalgetty Australia Ltd v Rubin, unreported; SCt of WA (Burt CJ); Library No 5485; 24 August 1984

Dunlop Pneumatic Tyre Company Ltd v New Garage & Motor Company Ltd [1914] UKHL 1; [1915] AC 79

Energy Equity Corp Ltd v Selvendra [2001] WASC 246

Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87

Gillon v Kyle, unreported; SCt of WA; Library No 9123; 16 October 1991

Gramwick Investments Pty Ltd v Advanced Underpinning Pty Ltd [2000] NSWSC 1131; (2001) 19 ACLC 593

Jacobs v Booth's Distillery Co (1901) 85 LT 262

O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359

Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598

White v Johnston (1886) 8 ALT 53

Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509

1 WALLWORK J: The appellant appeals against the dismissal by a Master of this Court of its application to set aside a statutory demand of the respondent dated 8 March 2001. The statutory demand concerned two sums of money. Firstly a sum of $101,097 for alleged outstanding consultancy fees under a contract between the parties dated 9 February 1998 and secondly, a termination fee of $262,167 under cl 8.6 of the same contract.

2 The first ground of appeal asserts that the learned Master erred in law in failing to have regard to evidence adduced by the appellant demonstrating an offsetting claim within the meaning of s 459H(5) of the Corporations Law ("the Law") when the Master held that the appellant could not raise an offsetting claim concerning a contract in India ("the Vypeen Contract").

3 The Master held that under s 459G of the Law a statutory demand must be accompanied by an affidavit in support within a 21 day time limit. Further that the basis of the genuine dispute or offsetting claim must be set out in that affidavit. If that occurred, further evidence could be admitted in later affidavits. However the Master held in this case that the appellant could not rely on a ground for setting aside the demand which ground was first raised in a third affidavit filed outside the 21 day limit. The Master relied on the reasoning of Templeman J in Aspermont Ltd v Robash Pty Ltd (1998) 16 ACLC 485 at 488.

4 The appellant claimed that the first affidavit of Mr Jordan was sufficient to raise the offsetting claim. The appellant contended that it could make an assertion in an affidavit within the 21 day period that there was a genuine dispute between the parties and expressly or implicitly state in that affidavit that more evidence would be given concerning that matter at a later time. It was submitted that where a company is in a difficult situation due to a change of management, with consequent difficulties in locating evidence to support its claims, then the Court should allow a high degree of flexibility to the company to enable it to investigate the position. It was submitted that the relevant sections of the Law were enacted principally because of concerns in respect of technical difficulties with statutory demands and that s 459G(3) only required an affidavit supporting the application. That a bald assertion such as "we deny that you are entitled to the money" could support the filing of an application to set aside a demand and would enliven the jurisdiction.

5 Counsel for the appellant submitted that following the filing of such an affidavit there could be programming orders made for the filing of further affidavits. The Court could protect the creditor by ensuring that there was adequate content in the affidavits and that they were filed in time. It was not necessary to have a composite affidavit within the 21 day period.

6 The appellant relied on the decision in David Grant & Company Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265; also the explanatory memorandum published at the time of the introduction of the Bill for the 1992 Act into Parliament. That memorandum was referred to in David Grant. It was submitted that in that memorandum there was no intention expressed to curtail the opportunity for a company to bring its case to the Court; that what was required was for an applicant to state within a short time whether it was intending to oppose the statutory demand and then for a regime to be put in place which ensured that disputes concerning statutory demands were dealt with earlier rather than later. The appellant relied on par 688 of the explanatory memoranda which reads:

"The provisions in relation to setting aside a statutory demand are intended to be a complete code for the resolution of disputes involving a statutory demand and to do so on the basis of the commercial justice of the matter rather than on the basis of technical deficiencies."

It was submitted that it was unfair to expect companies to deal with complex matters within 21 days.

7 The appellant also relied on par 689 of the memorandum which referred to a means of dealing with disputes concerning statutory demands in such a way that an alleged defect in the demand did not have the effect of prolonging proceedings. It was submitted that the statutory process did not mean that a company in the position of the appellant would lose the benefits of "standard due process" and the opportunity to prepare its case and put it forward. It should be sufficient in the affidavit to say "I challenge the debt", or "We wish to dispute this debt".

8 In this regard it was submitted that there had not been a considered superior Full Court decision indicating that the decision of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452; (1996) 21 ACSR 581; (1996) 14 ACLC 1703 should be followed. It was noted that in Meadowfield Pty Ltd v Gold Coast Holdings Pty Ltd (in liq) [2001] WASCA 360 Sundberg J's dicta was applied by the Full Court in Western Australia. However it was submitted that in that case the Court did not consider whether or not Sundberg J's dicta should be followed in all cases. Reference was also made to the decision of Senior Master Mahoney in Hire Works Pty Ltd v Elexpo Pty Ltd (1995) 19 ACSR 114.

9 It was submitted that there was nothing in the Law or in the David Grant decision which would not allow latitude in particular cases; that a supporting affidavit could be one that said "We wish to be heard. We wish to take issue with this."; that it should be sufficient to enliven the jurisdiction if somebody deposed on oath that he or she believed there was a genuine dispute.

10 It was conceded that the affidavit in support of the relevant application to set aside the demand did not expressly refer to the Vypeen Contract although it referred to a number of specific offsetting claims. It was said that a director of the company had identified "a string of offsetting claims". That he was saying that the appellant had several offsetting claims against the respondent. He had then recited what he had been able to discover at that stage.

11 The first affidavit filed with the application to set aside the demand referred to claims concerning the use of office premises and facilities during the currency of the consultancy agreement; also to claims with respect to the obtaining of a loan. It was submitted that when the deponent had referred in the affidavit to several offsetting claims, he was not confining himself to those referred to in the following paragraphs of the affidavit. Further that there was evidence before the Court of the difficulties facing the appellant in putting forward its offsetting claims. Those difficulties had arisen from a change in management of the appellant and appeared from Mr Bridgewood's affidavit of the 29 May and Mr Jordan's affidavits, including his first affidavit. In Mr Jordan's fourth affidavit he had deposed to the fact that he was still reviewing voluminous materials in respect of the respondent's conduct at the appellant's works.

12 It was conceded that the dispute concerning office rental which was referred to in the first affidavit was not pursued before the Master or this Court. Also that the appellant was not pursuing the question of whether the respondent had been negligent in giving advice in relation to the obtaining of a loan. The appellant was however pursuing a negligence claim relating to the contract for the purchase of a gas plant which was referred to in the papers as the Vypeen offsetting claim. The Vypeen claim was not specifically referred to in the first affidavit.

13 It was submitted that it was apparent from Mr Jordan's fourth affidavit made on 1 August 2001 that Mr Jordan was still coming to terms with the extent of the offsetting claims generally and the actual losses suffered; that there had been obvious difficulties with the company having to deal with these matters given its change of management. Further that there had been at least some evidence that the appellant company had had difficulty in putting its case together. It should therefore be granted latitude and allowed to raise the Vypeen Contract which was referred to in Mr Jordan's third affidavit.

14 It was submitted for the appellant that Mr Bridgewood of the respondent had been negligent in connection with his prime responsibility for ensuring that "milestone" payments were made only on satisfaction of the appropriate milestones. The relevant alleged payment of $1M had been made via the appellant at the request and direction of Mr Bridgewood on behalf of a subsidiary company of the appellant. It was not alleged that the appellant had paid money on behalf of its subsidiary company but rather that the payment had been made by the subsidiary company via the appellant.

15 It was put to the appellant's counsel that if the appellant had made a payment of $1M on behalf of its subsidiary, the claim would be that of the subsidiary and not of the appellant. In answer to that proposition it was submitted that the appellant did not have to reach a very high threshold. If there had been negligence by Mr Bridgewood in advising the appellant to make the payment the appellant had a cause of action for negligent advice.

16 It was deposed in an affidavit that the subsidiary company had made a payment for a milestone which had not been achieved. There was nothing in the affidavits which suggested that the appellant had suffered or would suffer any loss. The appellant was not a party to the relevant contract.

17 In Meadowfield Pty Ltd (supra), three Judges of this Court applied the reasoning of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 822; (1996) 14 ACLC 1703 at 1709. In that case Sundberg J said:

"In several cases it has been held that an applicant is not restricted on the hearing to the affidavit that is served with the application... An applicant whose initial affidavit has satisfied the threshold test must be able to supplement the material, because while the 'supporting' affidavit does not have to deploy the evidence on the hearing only admissible evidence can be relied on... Apart from Hire Works (1996) 14 ACLC 111, the cases do not support the proposition for which the applicant contended, namely that an affidavit that does not satisfy the threshold test can be supplemented later on... But for the reasons I have given, I am respectfully unable to agree that the Court can entertain as an application under s 459G, a case in which an affidavit containing the minimum requirement has not been served within time."

"It was said that the affidavit must, as a minimum, contain a statement of the material facts on which the applicant intends to rely to show a genuine dispute - it might read more like a pleading than a story. That accords with what I consider to be the minimum requirement."

19 Counsel for the appellant urged this Court not to follow the reasoning of Sundberg J to the extent that any claim first raised after the 21 day period should be rejected. Counsel relied for this proposition primarily on the reasoning in David Grant (supra).

20 At 276 of the report of David Grant Gummow J said:

"... however, by a later and more specific provision inserted in the Law by the 1992 Act, provision is made with respect to a particular class of application and there is attached a specific limitation as to the time within which an application may be made. The imposition of such a restriction is consistent with the scheme of the 1992 Act."

"In providing that an application to the Court for an order setting aside a statutory demand 'may only' be made within the 21 day period there specified and that an application is made in accordance with s 459G only if, within those 21 days, a supporting affidavit is filed and a copy thereof and of the applications be served, sub-section (2) and (3) of s 459G attach a limitation or condition upon the authority of the Court to set aside the demand. ... Here, the phrase 'an application may only be made within 21 days' should be read as a whole. The force of the term 'may only' is to define the jurisdiction of the Court by imposing a requirement as to time as an essential condition of the new right conferred by s 459G. An integer or element of the right created by s 459G is its exercise by application made within the time specified. To adapt what was said by Isaacs J in The Crown v McNeil [1922] HCA 33; (1922) 31 CLR 76 at 100, it is a condition of the gift in sub-section (I) of s 459G that sub-section (2) be observed and, unless this is so, the gift can never take effect. The same is true of sub-section (3)."

"This consideration gives added force to the proposition which has been accepted in some of the authorities that it is impossible to identify the function or utility of the word 'only' in s 459G(2) if it does not mean what it says, which is that the application is to be made within 21 days of service of the demand, and not at some time thereafter and that to treat s 1322 as authorising the Court to extend the period of 21 days specified in s 459G would deprive the word 'only' of effect."

"For these reasons, the requirement in s 459G that the application to the Court for which it provides be made only within 21 days after service of the demand should not be treated as supplemented or qualified by the operation of s 1322(4)."

"No doubt, in some circumstances, the new Pt 4.5 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 518 - 522, 532 - 537. However, in an appropriate case, injunctive relief may then be available to the company in a Court of general equity jurisdiction."

25 In D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1794 at 1798 Perry J referred to the decision in David Grant and said:

"It seems to be implicit in that observation and from the terms of s 459G(3) that if an affidavit is to be used in support of the application, it must be filed within the defined period of 21 days. It seems to me then that the affidavit of Mr Savvas having been filed and served well after the expiration of the period of 21 days, insofar as it raises any ground offered in support of the application not identified in the affidavit of Mr Gerovasilis filed within time, could not be taken into account in determining the application. Furthermore, David Grant is authority for the proposition that there is no ability to extend the time limit."

26 In Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In liq) [2000] VSC 397 Mandie J in the Supreme Court of Victoria said:

"I think that there is another reason for refusing special leave because it seems to me that the interpretation of the Corporations Law contained in D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1794 at 1798 is applicable and should be followed by this Court. If a ground in support of an application to set aside a statutory demand is not identified within the period provided by the Corporations Law then it seems to me that it cannot be relied upon out of time upon appeal."

27 In this case the appellant relied upon the decision of Senior Master Mahoney in the Hire Works decision where the learned Master had taken a different approach to that expressed above. However in Graywinter Properties (supra) at p 460 Sundberg J said:

"Apart from Hire Works, the cases do not support the proposition for which the applicant contended, namely than an affidavit that does not satisfy the threshold test can be supplemented later on... I am respectfully unable to agree that the Court can entertain as an application under s 459G, a case in which an affidavit containing the minimum requirements has not been served within time."

28 In the Fourth Edition of McPherson, The Law of Company Liquidation, it is noted at p 73 that in Z-Tek Computers Pty Ltd v Aus. Linx International Pty Ltd (1997) 15 ACLC 1233 at 1234-1235 Senior Master Mahoney declined to follow the approach which he had adopted in Hire Works (supra). It is said that the Master accepted that he may have erred in that case and that he followed the view expounded in Graywinter Properties.

29 In my view it now seems to be accepted that an affidavit filed outside the 21 day period which raises a new ground or grounds to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit which has satisfied the threshold test) cannot be used in an application of this nature. The Corporations Law operates throughout Australia and uniformity of approach is desirable.

30 Therefore Ground 1 of the appeal, which relies on alleged losses to the appellant arising from the Vypeen Contract should not be upheld, as that claim was not raised within the 21 day period.

31 It is not necessary to deal with other matters raised by the respondent concerning this ground. They were to the effect that in any event, there was not sufficient evidence in the affidavits to provide any offsetting claim arising from the Vypeen Contract. The respondent claimed that the relevant decisions were taken by the then Managing Director of the appellant and not by the respondent and that there was nothing in the affidavits which asserted that the Managing Director was misinformed; or he omitted to take into account any consideration which could be laid at the feet of the respondent.

32 It was submitted for the respondent that it appeared from Mr Jordan's affidavit that Mr Bridgewood of the respondent had taken certain steps in connection with the relevant Contract. However there was nothing in the affidavits to establish that those steps were inadequate to the extent that there was any negligence or breach of contract relating to the loss claimed by the appellant arising from the Vypeen Contract.

33 Ground 2 of the appeal is that the learned Master erred in finding that the termination fee demanded by the respondent was not a penalty and thus unenforceable against the appellant. This ground arose from cl 8.6 of the Contract between the parties which provided:

"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."

"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."

35 The appellant claimed that cl 8.6 was a penalty clause and not a genuine pre-estimate of damage for breach.

36 The learned Master said that the termination payment was payable to the consultant after an unremedied breach of contract by either the company or the consultant under cl 8.3 and that it was a two way clause. The Master said:

"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 clause 8.6(b)."

"If the contract was terminated in March 2001 the defendant's loss is four months pay. He has been terminated four months early. So thirteen months pay is extravagant damages. But if he completed the full contract, he would get fourteen months pay. He would then have done fourteen 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 fourteen months termination pay anyway. Now, because of the earlier termination, it is liable for thirteen months extra pay. I consider this clause does not impose an unconscionable or unreasonable burden on EEC. It imposes a thirteen month pay burden on a company which in a few months time would be liable to pay fourteen months pay to the defendant, irrespective of breach."

38 It was contended for the respondent that the relevant payment was a contractual payment due at the end of the contract, in part, to encourage loyalty. Further, that if the agreement was terminated for the breach by the company, then the sum payable by the company to the consultant could never exceed the sum which would have been payable under the agreement had the Contract not terminated.

39 In Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; (1989) 166 CLR 131 at 139 Wilson and Toohey JJ said:

"In considering whether a term of a contract is penal in character rather than a genuine pre-estimate of damage, Mason and Wilson JJ observed in AMEV-UDC (1986) 162 CLR at p 193 that the test:

'is one of degree and will depend on a number of circumstances, including:

(I) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and

(II) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term.'"

40 Their Honours also quoted Mason and Wilson JJ as saying:

"In both these decisions, in conformity with the doctrine's historic antecedents, the concept is that an agreed sum is a penalty if it is 'extravagant, exorbitant or unconscionable' ... This concept has been eroded by more recent decisions which, in the interests of greater certainty, have struck down provisions for the payment of an agreed sum merely because it may be greater than the amount of damages which could possibly be awarded for the breach of contract in respect of which the agreed sum is to be paid... These decisions are more consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides. However, there is much to be said for the view that the Courts should return to the Clyde bank and Dunlop concept, thereby allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterised as a penalty if it is out of all proportion to damage likely to be suffered as a result of the breach: ..."

"... it does mean that in determining whether the 'recoverable amount' is a genuine pre-estimate of loss or a penalty, 'relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach...'. The respondents' submission to the contrary must be rejected."

42 Applying the principles referred to above, it is my view that the learned Master's approach to this matter was correct. There is no error demonstrated. It is not established that the amount payable was an exorbitant amount in comparison to the greatest loss that could conceivably be proved as asserted in Ground 2 of the appellant's grounds of appeal, which asserts that the relevant sum should be regarded as a penalty and unenforceable as against the appellant.

44 Ground 3 of the appeal is to the effect that because the appellant was a public company with assets of over $100,000,000 and was trading profitably, the learned Master erred in finding that the relevant demand was not an abuse of process which should be struck out. This ground in essence relies on the proposition that the respondent knew that the appellant was not insolvent at the time the demand was issued and when the application was heard, and that in issuing the demand the respondent abused the process.

45 The Court allowed into evidence reports which established that the appellant made a loss of some $35,000,000 in the financial year to 30 June 2001. One expert had concluded that the company had a severe liquidity problem. It had no cash reserves and its cash flows from operations had been adversely affected by operational problems in Australia and a lack of access to underlying cash flows from investments in Indonesia and India, coupled with an increasing cash cost of borrowings. It was relying for working capital on the continued support of the Commonwealth Bank of Australia.

46 In my view the evidence established that the appellant was in a precarious financial position at the relevant times. On all the evidence, it should not be held that the respondent abused the process by issuing the demand. It has not been established that at the time the demand was made or, at the time of the hearing, the respondent knew the appellant was able to pay its debts. The appellant had cash flow problems and its continued viability could have been in question. It may have had difficulty in finding sufficient cash to pay the respondent a sum in excess of $350,000.

48 The result is that the appeal should be dismissed.

49 STEYTLER J: I have had the advantage of reading, in draft, the reasons for decision to be delivered by Wallwork J. I agree, generally, for the reasons expressed by his Honour, that the appeal should be dismissed.

50 OLSSON AUJ: I have had the advantage of reading the reasons for judgment of Wallwork J in draft.

51 I agree with the conclusions to which he has come and that the appeal must be dismissed.