EVIDENCE - Inferences - Rule in Jones v Dunkel

D.S. Weinberger (Plaintiff) H.W. Somerville (Defendant)

Bowles Lawyers (Plaintiff) Nelson McKinnon Lawyers (Defendant) File Number(s): 2018/365141 Publication restriction: Nil

Judgment

1. HER HONOUR: This is an application under sections 459G and 459H of the Corporations Act 2001 (Cth) to set aside a statutory demand on the basis that there is a genuine dispute as to the existence of the debt. Hartford Investments Pty Ltd (Hartford), the creditor, claimed in a statutory demand to be entitled to be subrogated to the rights of H&H Mezz Pty Ltd, which had lent monies to the plaintiff, Harmon International Holdings Pty Ltd (Harmon), a debt said to have been repaid by Hartford. Harmon says that Hartford is not entitled to be subrogated, either to the security accompanying the loan, the terms of the loan agreement between H&H Mezz in respect of interest, or at all.

Admissibility of Examination Transcripts

1. Before turning to the facts, it is necessary to give reasons for an evidentiary ruling made during the hearing, as I indicated that I would. Hartford is itself now in liquidation. The liquidator of Hartford tendered the transcript of a liquidator's examination of Ali Talanehzar, the sole shareholder, director and secretary of Harmon. Mr Talanehzar is also known as Alan Zar. Objection was taken to the admissibility of the transcript under section 597(14) of the Corporations Act 2001 (Cth) which provides: (emphasis added) … any written record of an examination … may be used in evidence in any legal proceedings against the person. It was submitted that these were not legal proceedings "against the person", that is, Mr Talanehzar, but against the company Harmon. The submission was correct, but not dispositive. Rather, the examination transcript may be used in evidence in any legal proceedings against Mr Talanehzar and may also be used against another person or entity as long as it is admissible under the Evidence Act 1995 (NSW).
2. A situation relevantly identical to the one at hand was considered by Gordon J in Rathner (in his capacity as official liquidator of Kalimand Pty Ltd (in liq) v Hawthorn (2014) 320 ALR 776; [2014] FCA 1067. A liquidator examined Mr Hawthorn, who was the sole director of Kalimand and also sole director and shareholder of High Country Meats (Vic) Pty Ltd. The liquidator brought a claim against High Country Meats to recover a voidable transaction and assets alleged to be held on trust by High Country Meats for Kalimand. The liquidator sought to tender parts of the transcript of the examination of Mr Hawthorn as evidence against High Country Meats. Whilst her Honour considered that the transcript was not admissible under section 597(14) of the Corporations Act, it was admissible under section 63(2) of the Evidence Act 1995 (Cth), which governs the admissibility of documents containing a previous representation of a person who is not available to give evidence.
3. A similar approach was taken in earlier cases. In Wily v Lo Presti (1997) 16 ACLC 82, a liquidator brought proceedings to recover a voidable preference from Mr Lo Presti. The liquidator could not locate a witness, Mr Lettieri-Barbato. The liquidator tendered a transcript of the examination of Mr Lettieri-Barbato. Young J considered that section 597(14) said nothing about the admissibility of transcript of evidence of other persons than that of Mr Lo Presti. His Honour proceeded to deal with the admissibility of the transcript under section 63(2) of the Evidence Act. In Southern Equities Corp Limited (in liq) v Bond (2001) 78 SASR 554; [2001] SASC 70 at [133], Wily is cited as authority for the proposition that transcript may be admitted against others.
4. In Fodare Pty Ltd v Shearn (2010) 240 FLR 187; [2010] NSWSC 737, Barrett J noted that section 597(14) has the result that the transcript of examination is admissible against the examinee but, where there are several defendants, it is not admissible by force of section 597(14) against the other defendants: at [39]; citing In the matter of Westgate Wool Co Pty Ltd (2006) 206 FLR 190; [2006] SASC 372 at [22] per Debelle J. However, at [41]: Given the limiting effect of s 597(14) of the Corporations Act, it is necessary to go back to the Evidence Act and to see whether it creates any greater degree of admissibility in relation to the signed records of the examinations. I frame the question in that way because I am satisfied that s 597(14) does not, as it were, make an exhaustive statement on the question of admissibility or, putting this another way, contain at the end the invisible words, "but may not otherwise be used in evidence". His Honour was not otherwise prepared to admit the examination transcripts into evidence against the other defendants under the Evidence Act.
5. In this case, the examination transcript was relied upon to counter Harmon's evidence in the form of an affidavit sworn by Mr Talanehzar setting out the facts upon which it is said that the Court should conclude that there is a genuine dispute as to the debt. The examination transcript was, as I understood it, relied upon as a prior admission against interest by Mr Talanehzar and Harmon, being a version of events given when examined on the subject in August 2018. Section 81 of the Evidence Act 1995 (NSW) has the result that the transcript is admissible as evidence of a previous representation, and I admit it.

FACTS

1. This case is hampered by a lack of documents and witnesses. The liquidator of Hartford has few records. The person behind Hartford, Peter Larcombe, is dead. Mr Talanehzar provided no records and apparently has none. The person who is said by Harmon to have actually discharged the H&H Mezz loan, George Eleter, did not give evidence.

Harmon

1. In 2014, Harmon was incorporated. Michael Eleter was sole shareholder, director and secretary of the company. Harmon was engaged in property investment and development. Harmon exchanged contracts to buy two adjoining boarding houses at 306 and 308 Cleveland Street, Surry Hills for $2,480,000. Solicitors' trust account statements in respect of the purchase record the client as George Eleter. Presumably, therefore, George Eleter had something to do with the decision by Harmon to acquire the properties.
2. In 2015, Tony Eleter became sole shareholder, director and secretary of Harmon. A month later, Mr Talanehzar became the sole shareholder, director and secretary of Harmon. It is apparent from emails in evidence that Mr Talanehzar had a business relationship with Mr Larcombe of Aventis Capital.
3. Harmon was also buying other properties. In May 2015, Mr Larcombe authorised his solicitors to release $350,000 held in the solicitors' trust account to complete Harmon's purchase of a property in Stanmore for $1,652,000. It would appear that Mr Larcombe was a contributor of funds to acquire Harmon's investment properties, apparently as equity as no mortgages were recorded on the title of the Stanmore property in respect of Mr Larcombe's contribution. Harman also obtained a loan from H&H Mezz, a company owned by Gabreal Halvagi, to buy the Stanmore property. A second mortgage to H&H Mezz was registered on the title of the Stanmore property.

Loan from H&H Mezz

1. Harmon obtained a loan from Sydney Wyde Mortgage Fund to buy the Surry Hills properties. On 9 June 2015, Harmon also entered into a Deed of Loan with H&H Mezz, which agreed to lend Harman $408,400 secured by a second mortgage over the Surry Hills properties. The term of the loan was 6 months. Interest was payable at 24% per annum, with four months' interest payable in advance. On 10 June 2015, purchase of the Surry Hills properties was completed and title was transferred to Harmon. H&H Mezz's loan to Harmon was secured by a registered second mortgage over the Surry Hills properties.
2. On 10 July 2015, Hartford was incorporated. Christian Budd-Madison was the sole shareholder, director and secretary of Hartford but all decisions in the company were made by Mr Larcombe.
3. In September 2015, Harmon purchased a property in Paddington for $1 million. On 20 October 2015, Mr Larcombe requested a solicitor provide settlement sheets for the purchases of Surry Hills, Stanmore and Paddington properties, together with details of the amounts sent to the solicitors' trust account for settlement of each of the properties. The information was provided, together with the first pages of the contracts for sale for each property. The trust account statements in respect of the Surry Hills properties recorded: 1. the client was George Eleter; and 2. Mr Larcombe had provided some $505,000 towards the purchase of the Surry Hills properties. It would appear that Mr Larcombe had an interest in the properties acquired by Harmon. It would also appear from the corporate history of Harmon and the trust account statement that members of the Eleter family including George Eleter had also had some involvement in the acquisition of the Surry Hills properties.

Repayment of loan

1. The loan from H&H Mezz in respect of the Surry Hills properties was due to be repaid on 9 December 2015. On 5 November 2015, Mr Halvagi of H&H Mezz sent Mr Talanehzar a letter to be signed and returned. The draft letter stated that the Stanmore property was currently being sold. From the proceeds, which will be ample, once the first and second mortgage loans are cleared on the Stanmore property, we request the second mortgage for $408,400 to H&H Mezz on the Surry Hills properties be cleared in full also. There is also unpaid fees of $9,000 which includes GST owing which we wish to pay from the sale. A caveat in the amount of $418,300 to be placed on the Stanmore property is acceptable to us. Mr Halvagi clearly wanted the loans in respect of both the Stanmore and Surry Hills properties paid out on the sale of the Stanmore property, which was apparently then under consideration.
2. On 15 November 2015, Mr Talanehzar forwarded the proposed letter to Mr Larcombe, together with statements of account from the first mortgagee in respect of the loans to purchase the properties, noting "Mate also Vaucluse mortgage is due on 20th with Paddo". On 10 December 2015, the loan from H&H Mezz was not repaid.
3. On 22 January 2016, Mr Talanehzar sent Mr Larcombe and George Eleter the first page of the contracts of sale for the Surry Hills and Stanmore properties. H&H Mezz conducted a title search for the Surry Hills properties. On 29 January 2016, George Eleter emailed Mr Talanehzar and Daniel Hausman of Aventis Group in respect of one of the Surry Hills properties, and Mr Hausman replied (copied to Mr Larcombe) that he had read both contracts and noted there were no section 149 certificates and the title searches were out of date. Two days later, on 31 January 2016, Mr Hausman sent an email to Mr Larcombe: … Pete - please advise ASAP re tomorrow morning caveats as I'm ready to go - notwithstanding Alan's plea to me Friday to hold off on Friday re 306- 308 Cleveland Street Surry Hills given a potential NAB refinancing that Gaby is doing which I personally do not recommend so I need to know by 10am tomorrow to advise my lawyer. He has what he needs to lodge tomorrow. I have no faith in Gaby/ Alan's a nice guy but the likelihood of them refinancing $2.1 million worth of funding off the back valuation of $2.5 (84%) and Alan's balance sheet or whatever I find difficult to swallow - in the meantime on those properties, you have about $400K equity now if sold for current valuation. If Gaby continues to rape you on the second mortgage - the $400K will wither down in no time. Would be a good outcome if they took Surry Hills and he told me that's what they want to do and they're running their DA for 10 units which is apparently DA'd which I don't believe - you take Paddo - value $1.45/ Stanmore - value $2.2 million/ Adam take Rozelle - value $2.3 million (virtually zero equity) and Tris/ Synd take MacDonald - that all works for the lebs - we whiteboards do it - but how is Alan/ George going to fund $2.1 million debt on $2.5 val? The rest I agree Friday which is a good outcome and gives you back circa $1.8million (allowing $200,000 for Adam if he buys Rozelle). I email you work-out I did with Ali. It would appear that Mr Larcombe was considering selling the Surry Hills properties in order to extract his equity in the investment, and Mr Talanehzar and George Eleter were endeavouring to obtain finance to refinance the existing loans on the properties and buy out Mr Larcombe's interest. Mr Larcombe, or his company Aventis Capital, was preparing to lodge caveats and Mr Larcombe was being advised to pay out the H&H Mezz loan in order to prevent the erosion of his equity in the Surry Hills properties by high interest rates charged under that loan.
4. On 2 February 2016, Mr Halvagi of H&H Mezz emailed Mr Talanehzar a further document to be signed and returned, and also emailed Mr Larcombe asking him to get Mr Talanehzar to sign and return it. A week later, Mr Larcombe replied "Yes. Speak Tuesday morning mate." A week later on 16 February 2016, Mr Halvagi emailed Mr Larcombe again "call me" and a few days later, Mr Larcombe replied "working on refi the second mate. Should have answer am." It would appear from these emails that Mr Halvagi saw Mr Larcombe, rather than Mr Talanehzar, as the person to deal with in respect of repayment of the H&H Mezz loan, and Mr Larcombe was endeavouring to refinance the second mortgage.

George Eleter

1. Mr Talanehzar says that he started to look for someone to refinance the H&H Mezz loan. He spoke to George Eleter, a former business associate. On 18 February 2016, Mr Talanehzar says he had a conversation with George Eleter, which he deposed was to the following effect: Mr Eleter: I have spoken to Peter [Larcombe]. He is willing to give me a loan. Once received I will give Harmon a loan so it can pay out H&H. Mr Talanehzar: Is Peter serious about lending you the money? I can't stuff Gabreal [Halvagi] around as he won't wait any longer Mr Eleter: Yes I have spoken at length with Peter and he will definitely lend me the money. It will take about a week. Mr Talanehzar: Can it be done any quicker? Mr Eleter: Get the final figures and account details from H&H and to save time I will tell Peter to pay H&H directly. Mr Talanehzar: Ok that would be great.
2. Mr Talanehzar says that he called Mr Halvagi and advised that he had obtained finance to pay out the mortgage and needed about a week. Mr Halvagi said that he would calculate a payout figure for the next week but it needed to be paid out by that date or he would push ahead legally. Mr Talanehzar told Mr Halvagi that he understood and was hoping that payment would be made directly by Mr Larcombe by direct deposit into H&H Mezz's account. Mr Talanehzar said he was happy for Mr Halvagi to liaise with Mr Larcombe to make sure everyone had the correct figures and account information.
3. On 19 February 2016, Mr Halvagi of H&H Mezz sent a default notice to Mr Larcombe and Mr Talanehzar noting that the loan had been due for repayment on 10 December 2015 and was now in default. Mr Halvagi noted "promised return 25 February 2016" and calculated the amount due and payable on that date to be $439,714. H&H Mezz's bank account details were provided. Mr Halvagi advised that if the amount was not paid in full by 25 February 2016, legal action would be commenced.

Payment by Hartford

1. On 24 February 2016, $440,000 was paid from the bank account of Hartford to H&H Mezz. Mr Budd-Maddison deposed that he made the payment at the direction of Mr Larcombe. The amount paid was roughly the same as the payout figure advised by H&H Mezz on 19 February 2016. According to Mr Budd-Maddison, Mr Larcombe told him: Mate, we need to make this payment to extinguish H&H. They've cost me so much money so far. I've been covering them because Ali hasn't been making mortgage payments.
2. Mr Budd-Maddison deposed that Hartford did not have any contractual dealings or agreements with Harmon, George Eleter or H&H Mezz which created any obligation on the part of Hartford to make the payment. Further, the liquidator of Hartford has not found any satisfactory explanation or justification in Hartford's books and records for the payment.
3. The following day, on 25 February 2016, Mr Talanehzar deposed that he had a conversation with George Eleter, as follows: Mr Eleter: Peter [Larcombe] has confirmed that the payment of $440,000 went into the account of H&H Mezz. I now owe Peter $440,000. Mr Talanehzar: Thanks for everything George it takes a lot of pressure off. Harmon will pay you back the $440,000 as soon as it can. Mr Eleter: That's all good I'm glad I could help. I understand Harmon's position at the moment let's sort out how and when Harmon will repay me when things settle down.
4. Objection was taken by Hartford to the admissibility of Mr Talanehzar's evidence of conversations with George Eleter in which George Eleter conveyed what Mr Larcombe had told him about approving and providing a loan. This is second-hand hearsay evidence. However, the evidence is admissible to prove the fact of the conversation, and what Mr Eleter asserted to Mr Talanehzar, irrespective of the truth of what Mr Eleter asserted to Mr Talanehzar. Such evidence is admissible to establish the existence of a genuine dispute as to the debt, being in this case whether Hartford repaid the H&H Mezz loan on its own account or as agent for Hartford's borrower, George Eleter: In the matter of Creata (Aust) Pty Ltd [2017] NSWSC 1055 at [14]-[16] per Black J; Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; [2017] NSWCA 300 at [38] and footnote [9]. Whilst admissible for this purpose, the Court may ultimately find that the mere fact that a third party asserts a fact is not a sufficient basis to establish a genuine dispute as to a debt: Black J at [15].
5. On 23 March 2016, Mr Talanehzar emailed Mr Larcombe, George Eleter and Patrick Willmott of Aventis Capital. Mr Talanehzar provided Mr Willmott with details of upcoming mortgage repayments, noting: Hey mate Pete has asked me to send you the below, can you note these to be paid a few days prior to the date. We are paying a shitload in penalties etc … Mr Talanehzar provided details of the payments due to the first mortgagees on the Surry Hills and Stanmore properties and mortgage repayments to La Trobe Finance in respect of the Paddington and Vaucluse properties. Apparently, La Trobe loans were paid by "direct debit from Harmon". It would appear that, although Mr Talanehzar was the sole office-holder and shareholder of Harmon, it was Mr Larcombe who stood behind and made the mortgage repayments in respect of each of the properties.
6. On 17 May 2016, Mr Talanehzar sent George Eleter and Mr Larcombe a title search for each of the properties. Repayment of the H&H Mezz loan had not been followed by a discharge of the second mortgage on the Surry Hills properties.

Liquidators appointed to Hartford

1. On 20 September 2016, liquidators were appointed to Hartford. On 31 October 2016, a discharge of mortgage was registered in respect of the H&H Mezz second mortgage on the Surry Hills properties. The discharge of mortgage was dated 30 June 2016. Whether the discharge of mortgage was executed on 30 June 2016 or at the time it was registered on 31 October 2016, whether this occurred before or after Mr Larcombe died, and the surrounding circumstances, are not in evidence. As the authorities to which I will shortly refer attest, such evidence may indicate whether the discharge of mortgage rebuts a presumption that Hartford intended to keep the mortgage alive for its own benefit, or is neutral as being consistent only with an intention by those surviving Mr Larcombe to remove the secured nature of the debt.
2. Hartford's liquidators issued summons for examination and production of documents. In July 2018, Mr Talanehzar was served with a summons for examination by the liquidators of Hartford, and says that this was the first time he had heard of Hartford.
3. On 21 August 2018, Mr Talanehzar was examined before Judicial Register Ng of the Federal Court of Australia. His evidence in the examination was broadly consistent with his affidavits in these proceedings. Mr Talanehzar agreed that Harmon had not made the payment which gave rise to the discharge of H&H Mezz's mortgage. He agreed that, having regard to the documents that he was shown, which appear to have been the same documents in evidence in these proceedings, that Hartford had discharged the mortgage: … It seems to show that, but I had not borrowed any funds from Hartford or - nor had any knowledge of that. … I had an idea that the payment was made, but not from Hartford. Where did you think it came from? - From my business associate, George Eleter. Did you have any correspondence with George Eleter in relation to this payment? - … Yes. And what was the form of that correspondence? - … That I had a short time to make this payment. I was under default, and I needed these funds, and he agreed to arrange the funds to be lent to me by himself, and I still, today, owe that money to Mr George Eleter.
4. Mr Talanehzar said that the arrangement with Mr Eleter was oral. Mr Talanehzar repeated: … I believe Mr Eleter, in talking with Mr Larcombe, arranged funds between him and Mr Larcombe to be paid to sort out my debt. But I borrowed the funds - or my company borrowed the funds from Mr Eleter. So do I understand that when you are saying that the chain was that when you spoke to Mr Eleter, Mr Eleter spoke to Mr Larcombe, and Mr Larcombe caused the payment to be made? - …That's what I believe. And you understood, at the time that this was taking place, that Mr Eleter was arranging for Mr Larcombe to have the payments made; correct? - …Yes.
5. Mr Talanehzar said that he had no idea that Mr Larcombe was associated with Harmon. … Mr George Eleter is a business associate of mine and I consulted him regarding this matter and he arranged the funds. At your instigation? You said, George, can you sort this out? - I wasn't aware where he was going to get it from but it seems that he got it from Mr Larcombe.
6. Mr Talanehzar repeated: … What I am saying is I borrowed the funds from Mr Eleter, Mr Eleter then borrowed the funds from Mr Larcombe to pay out this mortgage. And did Mr Eleter tell you that he borrowed the funds from Mr Larcombe, did he? - at that time, yes, he told me to correspond with Mr Larcombe to arrange to get it paid out. And I sent him whatever he needs.
7. Mr Talanehzar also said that he later sold his shares in Harmon to Mr Eleter and, since leaving the company, had not kept any of the documents relating to Harmon or the loan.

Statutory demand

1. On 6 November 2018, Hartford issued a statutory demand to Harmon supported by an affidavit of the liquidator. The schedule to the statutory demand described the discharge of H&H Mezz's mortgage as a result of Hartford's payment to H&H Mezz of $440,000 and continued: 5. The Creditor is entitled to be subrogated to the rights of H&H as mortgagee. 6. The Creditor is entitled to be repaid the sum it advanced to discharge the Mortgage, and interest charges that have accrued since that date. 7. As at 6 November 2018, the total amount the Creditor is entitled to be repaid is $841,804.46, being the sum of the Payment and the interest charges to date.
2. The statutory demand contains two elements. The first element is assertion of an entitlement to an equitable mortgage arising through the doctrine of subrogation. Such an entitlement may not give rise to a debt "due and payable" under section 459E of the Corporations Act but rather an alternate means of obtaining repayment if the debt is not repaid on demand. The second element is an entitlement to monies under the Deed of Loan. As the loan was due and payable some time ago, this is more likely to qualify as a debt "due and payable", assuming that Hartford was subrogated not only to the security but to H&H Mezz's contractual entitlements. The authorities to which I was taken were largely relevant to the first element but not the second.
3. On 27 November 2018, Harmon filed an originating process to set aside the statutory demand, supported by an affidavit of Mr Talanehzar, who described his conversations with George Eleter on 18 and 25 February 2016, already set out in this judgment. In response, Hartford served an affidavit by the liquidator and also Mr Budd-Maddison. The liquidator noted that the books and records of Hartford appeared to be incomplete but said that he had been unable to ascertain any satisfactory explanation or justification in Hartford's books and records for the payment of $440,000 to H&H Mezz.

Jones v Dunkel

1. Hartford submitted that the Court should draw a Jones v Dunkel (1959) 101 CLR 298 inference in respect of Harmon's failure to call George Eleter citing BI (Contracting) Pty Ltd v Strikwerda (2005) 3 DDCR 149; [2005] NSWCA 288 at [37] per Mason P. Hartford submitted that a Jones v Dunkel inference should also be drawn in respect of Harmon's failure to call Mr Halvagi. I am not sure that the latter follows as it is difficult to see why Mr Halvagi could be considered to be "in the camp" of Harmon as opposed to, say, Hartford.
2. There is nothing in principle to stop the Court drawing a Jones v Dunkel inference in an application under section 459H to set aside a statutory demand by reason of a genuine dispute as to the debt, although the nature of such applications and the evidence which may be relied upon in such applications may suggest that it would be unusual to do so. Such an inference was drawn by Senior Master Mahoney in Radly Corporation Pty Ltd v Suncorp-Metway Ltd (2001) 19 ACLC 1597; [2001] VSC 272 at [29(c)] and [33]. The Court was invited to do so in similar applications but did not draw the inference in Tony Innaimo Transport Pty Ltd v Skyroad Logistics Pty Ltd [2018] FCA 1134 at [35], [51]-[52] per Griffiths J (application for leave under 459S); Complete Equipment Solutions Pty Ltd v Tesab Engineering Ltd (2016) 309 FLR 236; [2016] VSC 253 per Randall AsJ (whether service effected); XSRE Pty Ltd v Lightning Electrical Group Pty Ltd [2011] NSWSC 1147 at [7] per Ward J (offsetting claim).
3. Harmon submitted that it was not appropriate to draw a Jones v Dunkel inference having regard to the use to which hearsay evidence may be put in such applications. As explained by Barrett AJA (with whom Gleeson and White JJA agreed) in Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; [2017] NSWCA 300 at [39]: Mr Henderson's evidence of what he had been told by Mr Saunders … was tendered not to prove the truth of what Mr Saunders reportedly said to Mr Henderson but to prove the existence of a person who, if called as a witness in a future debt recovery action brought by Mr Faull against Creata, might confidently be expected to give evidence of things said to him by Mr Faull which, if true, would justify or contribute to a finding in that action that Mr Faull had breached [a contract] and was not entitled to recover the debt.
4. Here, Harmon called evidence directed to establishing whether there is a genuine dispute as to the debt, rather than establishing on a final basis that Hartford is not entitled to be subrogated to H&H Mezz's position. It was sufficient for Harmon to do so by the use of "hearsay" evidence (in the sense described by Barrett AJA). It was not necessary to call George Eleter, and I do not draw a Jones v Dunkel inference for failure to do so.

What is the debt?

1. Hartford claims to be entitled to be subrogated to H&H Mezz's entitlements under the Deed of Loan and the second mortgage in respect of the Surry Hills properties. Subrogation is an equitable doctrine by which rights are transferred from one person to another by operation of law with the consequence that persons owing obligations are ordered to tender performance to a person other than the one originally entitled: Parkinson, ed., The Principles of Equity (2nd ed., Lawbook Co., 2003) at [1501], [1502]. One of the recognised situations founding subrogation is where a lender makes an unsecured loan which pays out a secured creditor. In this case, the lender may be subrogated to the secured rights. Equity makes the rebuttable presumption that the security is to be kept alive for the lender's benefit. In Australia, the formulation of the principle most often cited is that of Lord Jenkins in delivering the advice of the Privy Council in Ghana Commercial Bank v Chandiram [1960] AC 732 at 745: It is not open to doubt that where a third party pays off the mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit. This statement has been widely following including in Rogers v Resi-Statewide Corp Ltd (No 2) (1991) 32 FCR 344 at 352 per von Doussa J; Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 per Kearney J; Re H & S Credits Ltd (in liquidation), Tucker v Roberts [1969] Qd R 280 at 285, 288 (per WB Campbell J, with whom Lucas and Douglas JJ agreed); see also Heydon et al., Meagher Gummow & Lehane's Equity: Doctrines & Remedies (5th ed., LexisNexis, 2014) at [9-075]-[9-090].
2. There has been a divergence in recent times between Australian and English law on this subject: see Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 cf. Challenger Managed Investments Limited v Direct Money Corp Pty Ltd (2003) 59 NSWLR 452; [2003] NSWSC 1072 at [48]-[50] per Bryson J, approved by Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 at [98], per curiam. This is not the occasion of a detailed examination of this topic, suffice it to say that Ghana Commercial Bank remains good law in Australia: see also MJ Cleaver, Equitable Subrogation in Australia and England (2018) 29 JBFLP 34 for a discussion of the position after recent developments in the Supreme Court of the United Kingdom. As the learned authors of Parkinson, op. cit., succinctly explain at [1514]: Sometimes it is said that this form of subrogation is only attracted if the whole circumstances of the lending transaction make it clear that the parties intended the lender to have security for the loan (Evandale Estates Pty Ltd v Keck [1967] VR 647, Hudson J at 652; Cid v Cortes (1987) 4 BPR 9391, Young JA, at 9393-4; Paul v Speirway Ltd (in liquidation) [1976] 1 Ch 220). However, the better view may be that a lender will be subrogated to security rights of a paid-out creditor unless the circumstances of the transaction indicate a contrary intention. In effect, the defendants bears the burden of rebutting the doctrines application (discussed in State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11,947, Cohen JA at 11,950-4.
3. An illustration of the application of these principles is Re H & S Credits Ltd (in liquidation), Tucker v Roberts [1969] Qd R 280 where a receiver mistakenly believed that a debenture deed had a particular effect such that he could safely cause the mortgages over a property to be extinguished. He did not intend to keep the mortgages alive for the benefit of the debenture holders but to rely upon an existing security which he considered valuable and effective. The receiver evinced a plain intention at all times to have the mortgages extinguished and for them not to be kept alive for the benefit of the debenture holders. The actual discharge of the mortgages was inconsistent with an intention to keep them alive. By reason of the receiver's actual intentions, the presumption had no application.

a 'Genuine dispute'

1. The threshold to establish a genuine dispute about the existence of a debt is a relatively low one. The principles were concisely collated by Black J in In the matter of Gorji Property Investment Pty Ltd [2018] NSWSC 1671 at [14]-[15], in particular: In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the ground for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], Barrett J (as his Honour then was) formulated that proposition as follows, in a proposition applied in subsequent cases: "Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger." In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACLR 67 at [71], Dodds-Streeton JA in turn observed that a genuine dispute required only that a claim have a "sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile."
2. As McLelland CJ in Eq explained in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; (1994) 12 ACLC 669 at ACSR 787 (citations omitted): 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", or "a patently feeble legal argument or an assertion of facts unsupported by evidence". This statement was approved in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [46].
3. In Britten-Norman, the Court of Appeal clarified the standard of evidence required in such an application, at [36]: Accordingly, there must be evidence that satisfies the court that there is "a serious question to be tried", or "an issue deserving of a hearing", or a "plausible contention requiring investigation" of the existence of either a dispute as to the debt or an offsetting claim. It is apparent, therefore, that evidence sufficient to satisfy this test, given the time period in which the affidavit must be filed, cannot and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable.
4. The Court, at [48], also approved the following statement of Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601: There is little doubt that Div 3 … prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a 'genuine dispute' and whether there is a 'genuine claim'. It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).

the dispute IN THIS CASE

1. Harmon submits that Hartford has no right of subrogation in the circumstances of this case. Harmon relied upon the analysis of Eve J in Wylie v Carlyon [1922] 1 Ch 51 at 53: An individual who advances money to another for the purpose of enabling that other to pay specific debts does not in the absence of a special bargain thereby acquire the rights of the person's whose debts are discharged out of his monies against the property of the debtor. I do not, with respect, consider that this reflects the current law in Australia.
2. Beyond this, Harmon submitted correctly that "in order to determine whether the presumption applies in any given case the circumstances of the case have to be looked at": Cochrane v Cochrane (1985) 3 NSWLR 403 at 405; see also Re H&S Credits Limited (in liq), discussed above. In particular, Harmon relied upon Paul v Speirway Ltd (in liquidation) [1976] Ch 220 where Oliver J concluded at 233: Where a Court, upon a review of the facts, comes to the conclusion that what was intended between the parties was really an unsecured borrowing, there is no room for the doctrine of subrogation … because to apply the doctrine of subrogation in such a case would in fact be putting the lender in a better position than he is bargaining to be put in when he advances money.
3. Harmon submits that in order to determine intention it is necessary to look at the circumstances of the case. That is not possible on the application to set aside the statutory demand and it is not possible because there is no evidence adduced by the relevant officers of Hartford. The last submission is not correct, as Mr Budd-Madison gave evidence including as to the intention of Mr Larcombe.
4. Further, Harmon disputes that Hartford is entitled to stand in the shoes of H&H Mezz under the Deed of Loan. The fact that the loan was discharged by the payment of $440,000 had the result that the Deed of Loan is at an end. According to Mr Budd-Maddison, Hartford did not have any agreement with Harmon and as such there is no basis to assert that Hartford is entitled to interest at 24% per annum, giving rise to the asserted debt of $841,804.46 and there is a genuine dispute that the debt claimed in the statutory demand is due and payable.
5. Hartford submits that the fact of Hartford's $440,000 payment and the subsequent discharge of the mortgage give rise to the presumption that Hartford intended to keep the H&H Mezz mortgage alive for its own benefit, and Harmon has failed to rebut that presumption as Harmon's evidence does not rise above a bare assertion of facts unsupported by evidence. Putting differently, if the Court is disinclined to accept the evidence of the Harmon, the presumption is not displaced and Hartford is entitled to subrogation. It is submitted that Hartford is thus entitled to rely on the presumption and is subrogated to the rights of H&H Mezz as mortgagee and is entitled to recover, as a debt, $440,000 plus interest calculated under the Deed of Loan.
6. Hartford submits that the mere assertion of a contrary position by a plaintiff does not form the foundation of a conclusion that a genuine dispute has arisen. Indeed, it would be a perverse outcome if a plaintiff were to be permitted to simply file an application supported by an affidavit which merely recounts a countervailing version of events to that contended by the defendant in support of the original statutory demand. A degree of scrutiny necessarily informs the Court's consideration of the evidence of each party to the dispute (which may not be a genuine one). As Lockhart J stated in Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at [35]: …the court must be careful, because if all an applicant has to do is to assert both a claim and some basis for it, without more, it would mean in almost every case that the court would set aside statutory demands where application is made to that effect. Plainly that is not what the legislature intended by introducing this new regime.
7. Hartford submitted that Harmon's evidence amounted to unsupported bare assertions. Whilst hearsay evidence is admissible on statutory demand cases, the Court would give little weight to the representations of Mr Talanehzar where such representations could have been supported or corroborated by documentary evidence or evidence from Mr Eleter. Further, Harmon's contentions were said to be implausible as: (a) Mr Eleter advanced funds to a company in distress without, apparently any documentation; (b) Mr Eleter caused no safeguard to be implemented to secure the loan, by caveat, mortgage or otherwise; (c) Harmon has not produced a single document which evidences a liability to Mr Eleter; and (d) there is no evidence of Harmon having repaid anyone (let alone Mr Eleter), nor is there evidence that Mr Eleter has requested payment in the ensuing three years.

conclusion

1. Harmon's contention, essentially, is that Hartford is not entitled to subrogation as Hartford did not discharge the secured H&H Mezz loan but George Eleter did. On Harmon's case, Mr Larcombe lent the money to George Eleter for the purpose of on-lending to Harmon to repay a secured loan. That fact that Hartford paid the funds directly to H&H Mezz was because Mr Larcombe was directed by George Eleter to pay the loan funds directly to H&H Mezz. In doing so, Hartford was not repaying the H&H Mezz loan on its own account but on behalf of George Eleter. Further, Harmon contends that the nature of the loan from Mr Larcombe to George Eleter was unsecured. That is, this is not a case of subrogation at all or, alternatively, the presumption described in Ghana Commercial Bank can be rebutted in this case.
2. Hartford submitted that there were no accounting entries or financial statements which corroborated the existence of a loan from George Eleter to Harmon in circumstances where Mr Talanehzar, according to his affidavit, had had access to the books and records of the company when preparing his evidence. But evidence does not have to be supported by contemporaneous documentation. "Whilst a witness's evidence may be more cogent if it is supported by such documentation, the absence of documentation does not, of itself, render a witness's evidence lacking in credibility, reliability or cogency: Britten-Norman at [61]. In that case, the Court noted that the available emails posed difficulties for Britten-Norman but, at [60]: The existence of evidence that cast doubt, even significant doubt, on applicant's contention that there is a disputed debt … is not the basis for a rejection of an application under s 459H. … The email correspondence did not so undermine the appellant's evidence as to make it implausible or to justify a conclusion that the claim was not genuine.
3. The available emails in this case indicate that Mr Larcombe had an investment in Harmon and the properties it owned, was in a business relationship with Mr Talanehzar and / or George Eleter and may have been effectively the person behind Harmon. The emails indicate that Mr Larcombe wanted to repay the H&H Mezz loan in order to remove an expensive source of finance that was eroding his equity in the Surry Hills properties. But the evidence is scant and not sufficiently definitive to exclude another version of events.
4. Mr Talanehzar's version of events is unsupported by any contemporaneous documents and may be supported by George Eleter. The paucity of emails and other documentation also points to the parties conducting business orally and having informal arrangements based upon business relationships of some long standing. Is the loan described by Mr Talanehzar spurious, mere bluster or assertion? Does it have a sufficient objective existence and prima facie plausibility and sufficient factual particularity to exclude the merely fanciful or futile? It is not inconsistent with undisputed contemporary documents as there are so few which exist, and the available records are themselves obscure. If Hartford and Mr Larcombe had kept accounting and financial records which one might commonly expect to see in a property investment business, then one might think that Mr Talanehzar's assertion could be readily rejected out of hand. But in the absence of such records, I am unable to do so. It seems to me that Mr Talanehzar's affidavit is sufficient to establish a genuine dispute as to the debt such that Harmon's application to set aside the statutory demand on the basis of a genuine dispute as to the existence of the debt should be granted. This does not mean that the liquidator will not be able to prove that Harmon is obliged to repay the monies to Hartford but simply that issuing a statutory demand is not the way to go about it.

orders

1. For these reasons, I make the following orders: 1. Pursuant to section 459H of the Corporations Act 2001 (Cth), order that the statutory demand dated 6 November 2018 served by the defendant upon the plaintiff be set aside. 2. Order the defendant to pay the plaintiff's costs of the application.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 April 2019