General Steel Industries Inc v Commissioner for Railways

On the 29th June, 1990 Equus issued a letter of credit in your favour. Under the terms of that letter, Equus is to make a payment to you on 29 June 1996 of $9,633,760. At this point in time, Equus has been unable to arrange the required funding to make the payment due on the 29 June 1996. We are, however, able to make a payment of $4,625,000 on condition that if Equus makes this payment, you will in turn pay to Equus on or before 30 April 1996, the sum of $4,183,208.96. This sum represents an entitlement of $2,761.19 per unit for all unit holders in the "Night of the Leopard" Trust who are current Equus borrowers (unit holders) and whose interests in the film production have been assigned to us pursuant to an Irrevocable Direction of Notice and Assignment signed by each Borrower (unit holder) to you as Trustee. The settlement procedure to be followed would be similar to that followed by both of us in the past two years ie. by way of an exchange of cheques. A list of all current Equus borrowers setting out each of their entitlements is enclosed. We would like to stress that the funding for the $4,625,000 is only available if it is taken up by 30 April, 1996. We can give no assurance that we will be in a position to arrange this funding past that date. Please let us have your response as soon as possible. On 17 May Equus delivered to Perpetual a bank cheque for $4,625,000 and received in exchange a bank cheque for $4,183,208.96. On 28 May Equus wrote to Perpetual concerning the final payment due on 29 June. This letter raised a claim that Perpetual was required to pool for the benefit of all unit holders the proceeds of the two National Mutual Royal Bank letters of credit and the Equus letter. On 3 June Perpetual wrote to Equus rejecting that assertion. Equus wrote on 7 June requesting Perpetual to particularise the basis of its claim that it was not required to pool all proceeds. Perpetual replied on 14 June again rejecting the pooling proposal and stating that it held "strong legal advice" to that effect, but providing no further detail. On 20 June Equus wrote again repeating its request for particulars.

On 24 June Perpetual wrote to Equus concerning the proposed settlement. The letter stated amongst other things that since 29 June was a Saturday, Perpetual was prepared to accept payment prior to 12 noon on Monday 1 July. On 25 June Equus wrote to Perpetual acknowledging receipt of the letter, and advising that "our office is open 8.30 am to 5.00 pm Monday to Friday inclusive" and confirming as previously advised that funding could not be arranged. The letterhead gave the address of Equus as 8th Floor, 388-390 Little Collins Street, Melbourne. On 26 June Perpetual wrote to Equus enclosing a statutory declaration which stated that the amount claimed was not more than the maximum aggregate amount available under the Letter of Credit, which was $5,008,760. The letter further stated that Perpetual would expect payment of that amount "prior to 12 noon on Monday 1st July 1996 as set out in our letter of 24 June 1996". On 27 June a Mr Estaban of Perpetual telephoned Mr Russo and said that he could not understand why Equus were not meeting their obligations because from calculations that he and another Perpetual officer had done, the maximum payable was only approximately $200,000. He asked whether Mr Russo had calculated the net difference due to Perpetual following a swap of cheques. Mr Russo said he had not done so and would calculate the amount. Mr Russo then did some calculations on the basis that the funds from the National Mutual Royal Bank letters of credit would be taken into account. He worked out the balance due by Equus as $29,753.96. He made enquiries of a manager at South Australian Asset Management Corporation and was told this amount could be made available to Equus. Equus wrote on 28 June referring to Perpetual's letter of the 26th. The letter enclosed a list of investors who had charged their units to Equus. The letter reasserted the claim to pooling with the proceeds of the National Mutual Royal Bank letters of credit. The letter then calculated that pooling of the proceeds of all the letters of credit would result in a total pool of $6,299,910, ie $3,310.51 per unit. It was said Equus was entitled to the proceeds of 1504 units, making a total of $4,979,007.04. The letter concluded: Please confirm that you will have a bank cheque in our favour of $4,979,007.04 available at 12 noon on 1 July 1996 to exchange with our bank cheque of $5,008,760 made payable to Perpetual Trustees Australia. We propose to have our funds available for this purpose. Should you fail to pool the proceeds of all letters of credit and have a cheque available in the sum of $4,979,007.04 we put you on notice that we thereafter propose to exercise our rights for recovery of that sum without further notice to you. There was no response to that letter. Tender On the morning of 28 June Mr Clifford Clayton, an officer of Perpetual, telephoned the office of Equus and spoke to Mr Russo's personal assistant, Ms Mary Fugaro. Mr Clayton asked tospeak to Mr Russo. Ms Fugaro said that he was unavailable. Mr Clayton said that he wished to attend at the Equus office to present the Letter of Credit. She said that he should attend at the office and if Mr Russo was available he would see him. Later that day Mr Clayton went to the office of Equus at 388-399 Collins Street, accompanied by two other Perpetual Officers, Mr Gregory Semmens and Ms Gayle Cox. They met Ms Fugaro. She said that Mr Russo was not available. Mr Clayton handed to Miss Fugaro a copy of the letter of 26 June from Perpetual already referred to, a copy of the letter of credit and the statutory declaration. Mr Clayton showed the original Letter of Credit to Ms Fugaro and said that it was available at Perpetual's office for further inspection that day if Mr Russo required. Ms Fugaro said that she would hand the documents to Mr Russo. On the same day Mr Clayton wrote to Mr Russo to confirm delivery today to your office of the following documents: 1. Letter to Equus requesting payment of the amount due on 29 June under Letter of Credit. 2. Statutory Declaration. 3. Copy of Letter of Credit. At a late stage in the hearing before me, counsel for Equus sought to raise as a matter giving rise to a genuine dispute the contention that no draft under the Letter of Credit was presented in accordance with its terms. As part of this argument there was a somewhat lukewarm suggestion that Mr Clayton and his two colleagues did not in fact go to the offices of Equus on the 28th. I so characterise this argument because Mr Russo swore an affidavit in very equivocal terms saying, for example, I believe I was out of the office on the morning of 28 June 1996. It is also the belief of Mary [Fugaro] that I was unavailable that morning although she cannot recall the reason why.

and further deposing that the only other officers in the company capable of binding the company are a Mr Christian Gusner and a Mr Mark Leaker and that neither they or myself have any recollection of officers from Perpetual ... attending our office on or about 28 June 1996. and that I have no recollection of Mary speaking to me about the matters referred to in Mr Clayton's affidavit and further to the best of my recollection I received no notice from Perpetual or anyone else informing me that an officer of Perpetual had rung my office saying Officers of Perpetual wished to attend the office of Equus on the morning of 28 June 1996. At an even later stage, and after comment had been made by opposing counsel on the absence of any affidavit from Ms Fugaro, Equus did file an affidavit from her in which she deposed I recall receiving a telephone call from someone from Perpetual Trustee. He said he wanted to see Nick Russo and I said he was unavailable. It would have been in June 1996. I am unsure if it was the same day but later three people saying they were from the office of "Perpetual Trustee" attended at the office Equus. I told them Nick Russo was unavailable. My recollection was they were dropping off something. I recall them dropping off something saying the original could be inspected. I recall receiving a business card and sighting something and receiving what was alleged to be a copy of that [sic] documents. I am left in no doubt at all that the visit in fact deposed to by Mr Clayton (confirmed by affidavits sworn by Mr Semmens and Ms Cox) in fact took place. Moreover I am satisfied that a copy of the Perpetual letter of 26 June was delivered on that day. It was not suggested that that letter did not constitute a draft for the purpose of the letter of credit. In any event it was clear that the letter of the 26th had been sent earlier and received by Equus because their letter of 28 June acknowledges its receipt. Under the terms of the letter of credit it is sufficient if drafts drawn under the letter must be presented "on or before the time and date of expiry specified". Statutory Demand On 4 July Perpetual wrote to Equus asserting that Equus had failed to pay the sum of $5,008,760. On 5 July Equus responded stating that it was ready, willing and able to meet its commitments at 12 noon on 1 July and continued to be able to do so. The letter also reiterated Equus' position regarding settlement procedure by way of exchanging bank cheques in accordance with past practice, Equus' appointment as lawful attorney of the borrowers and Perpetual's obligation pursuant to the loan agreement that it pay all proceeds of the investors' involvement to Equus. The letter concluded with Equus stating that it had no obligation to provide Perpetual with full particulars of amounts owed by the borrowers. Equus instructed Perpetual to seek such information from the borrowers themselves On 18 July a statutory demand was served on Equus. The debt claimed was $5,008,760. The demand gave particulars of the debt in the following terms: The balance due by the Company to the Creditor pursuant to an irrevocable standby letter of credit issued on 29 June, 1990 by the Company to the Creditor as trustee for the Second Multiple Prospectus Trust, which irrevocable standby letter of credit expired on 29 June 1996 and pursuant to the terms of which the Creditor on 28 June, 1996, being a date prior to the expiry date of the said irrevocable standby letter of credit, presented a request for the said balance accompanied by a Statutory Declaration requiring payment in full of the said balance by 29 June, 1996. NSW Proceeding On 23 July 1996 Perpetual commenced proceeding No. 2827 of 1996 in the Equity Division of the Supreme Court of New South Wales seeking declarations as to the construction of the various documentation concerning the pooling question. On 19 February 1997 Windeyer J delivered judgment. His Honour ruled that, as contended by Equus, the proceeds of the National Mutual Royal Bank were to be pooled. However his Honour noted that Equus investors had to bring into account amounts received from the part payment of the third instalment of the Equus letter of credit. On the basis of Windeyer J's ruling, the amount payable to Equus under its charge would be $4,515,369. Subtraction of that amount from the balance due under the Equus letter of credit leaves a balance of $493,391.90 payable by Equus. Counsel for Equus, while not formally conceding the point, did not dispute that the offsetting claim arising from the Equus charge would at least leave the last mentioned amount payable. However, as will be seen, other issues have to be considered in relation to this calculation. Arguments said to Raise Genuine Dispute I shall now summarise the arguments said to raise a genuine dispute. Before doing so, one point should be mentioned. Counsel for Equus contended that the letter of credit was not really a letter of credit at all. It was, he said, a "performance guarantee". In support of this it was said that letters of credit are issued by banks, Equus was not a bank, ergo the document in question was not a letter of credit. The argument was not a compelling one. On its face the document in question is called a letter of credit and in its terms seems to bear all the hallmarks of that particular form of commercial document. Banks engage in all sorts of transactions and the fact that a person enters into a transaction of a kind which banks also carry out does not alter the nature of the transaction. Nor is there anything unlawful in so doing, provided of course that such a person does not carry on the business of banking without a licence. But on further examination it appeared this argument was only raised to avoid the consequence of the rule that letters of credit must be paid without set-off. However the definition of "offsetting claim" in s 459H(5) of the Corporations Law is a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross demand (even if it does not arise out of the same transaction or circumstances as a debt to which demand relates). This expansive definition makes it clear that a company can rely on a cross demand which might not have qualified as a set-off in the strict sense: see John Shearer Ltd v Gehl (1996) 18 ACSR 780 at 786. Whether or not the document of 29 June 1996 was a letter of credit (and I have no doubt that it was), Equus would be entitled for the purpose of Part 5.4 Division 3 to rely on any cross-demand that it can otherwise make out. The arguments finally advanced were: (i) No draft had been presented in accordance with the terms of the letter of credit. (ii) There was an offsetting claim for amounts in respect of which Equus was entitled to a charge for monies advanced to the investors. Although not formally conceded by counsel for Perpetual, there was no substantial dispute as to this and I am satisfied that such a claim does raise an offsetting claim within the meaning of s 459H(5). The real question is as to the quantum. (iii) There was an offsetting claim for super profits. (iv) There was an offsetting claim for damages for breach of trust. Depending on my finding as to whether any and if so what amount claimed by Perpetual is not the subject of a genuine dispute, questions then arise as to whether there should be an order under s 459H(4) varying the amount of the statutory demand and what period for compliance should be fixed under s 459F(2). (i) Draft For the reasons already mentioned in discussion of the evidence, I am not satisfied there is any genuine dispute that a draft was not presented to Equus in accordance with the terms of the letter of credit. (ii) Quantum of Cross-Demand In addition to the consequences of Windeyer J's decision discussed above, the cross-demand of Equus is subject to further reduction. I accept the argument of counsel for Perpetual that the charge of Equus only extends to monies to which it is beneficially entitled by way of loan repayment and interest. To the extent that any further amount is due to an investor by Perpetual, and in particular to the extent that the amount includes the repayment of capital in excess of 100 per cent, Equus would hold that money on trust for the investor. I also agree with counsel for Perpetual that "offsetting claim" means a genuine claim that the company has beneficially in its own right. Since Part 5.4 Division 3 is concerned with proof of solvency, only those assets which would be available to meet a company's debts, that is to say property held beneficially, should be taken into account. The following are terms of the loan contract between Equus investors and Equus ("Borrower" means the investor, "Lender" means Equus): 23. FUNDS ON DEPOSIT 3.1 The Borrower hereby irrevocably appoints the Lender and its officers jointly and each of them severally its attorney or attorneys during the currency of this Agreement for the purpose of authorising the trustee in respect of the investment specified in the Schedule under the heading "Secured Property" to (forward/pay) to the Lender all proceeds, distributions, dividends or returns ("the Proceeds") from the Secured Property and in the name of the Borrower to do all such acts and sign all such documents as may be necessary for that purpose. The Borrower shall ratify anything done by the attorney or attorneys in accordance with this Clause. 3.2 The Borrower hereby authorises the Lender to place the Proceeds on deposit with the Lender in an account to be opened in the name of the Borrower and the parties acknowledge and agree that interest will accrue on a (daily/monthly) basis on the balance of the Proceeds in such account from time to time at a rate 2% below the average of the money market rates quoted by Westpac Bank, National Australia Bank, Australia and New Zealand Bank and Commonwealth Bank appearing in the Australian Financial Review on the first business day of each calendar month. 23.3 The Borrower agrees that the Proceeds deposit with the Lender pursuant to Clause 23.2: (a) shall be subject to the Lender's right of set-off from time to time pursuant to Clause 17; (b) may be called upon by the Borrower giving fourteen (14) days prior written notice to the Lender. Clause 17 gives Equus a right to set-off any moneys that it holds on deposit or otherwise on account of the Borrower ... and all interest accrued thereon against any moneys owing to the Lender under this Deed I agree with counsel for Perpetual that the effect of these clauses are that monies in excess of capital and interest payments due to Equus are to be held on trust for the investor. I also agree that investors have to be treated separately. If Equus is owed money by investor A but not investor B, Equus cannot exercise a charge over funds payable to B by Perpetual in order to satisfy A's debt. The amount of the offsetting claim, including accrued interest, has to be considered as at the time the Court is determining the application under s 459(G). This follows from the ordinary language of the statute and the use of the present tense. Section 459H(1) speaks of the Court being satisfied that there is a genuine dispute between the company and the creditor. Similarly the definition of "offsetting claim" refers to a genuine claim that the company has against the creditor. Moreover, s 459H(4) assumes that the Court may vary the amount in the demand, which necessarily contemplates that the Court may take into account variations in the debt which have occurred since the service of the demand, for example by payment on account. The Full Court in Shearer, 18 ACSR at 786, spoke of a cross-demand which existed "at the time the application to set aside the statutory demand is made". The Full Court did not have need to discuss the point, but I take it their reference to "the time the application ... is made" means the time the application is heard by the Court, not some earlier time when the application was filed. It therefore does not matter that under the trust deed Perpetual had 30 days from the due date to make payments to investors. The figures showed that the off-setting claim of Equus calculated in accordance with the foregoing findings, (i.e. only allowing Equus a charge in respect of principle and interest and only in respect of borrowers in debit) is $4,064,995. Subtracting that sum from the amount due under the letter of credit leaves a substantiated amount of $943,765 within the meaning of s 459H(2). Following the hearing counsel submitted a set of calculations, agreed as a matter of arithmetic, which contained figures as at 30 June 1996 and 31 March 1997. For the reasons already mentioned, I consider that the latter is the appropriate date. (iii) Super Profits This attempt to set up an offsetting claim rests entirely on predictive statements in letters from Kamisha following the release of the film which were said to indicate a likelihood of moving into the area where super profits were to be payable. Thus in a letter to an investor dated 9 February 1993 Kamisha said that this stage should "cut in after approximately another $1.5 million of worldwide net revenue from distribution of the picture and all markets and media". The letter also stated that the best estimates are that this position will be shown as having been reached during the period reflected in the participation statement to 31 December 1992. On 7 June 1993 a further letter stated that it only requires an additional $2 million of worldwide net revenues over the figure originally reported (or 5.5 per cent of net revenue collected so far) before production contractors participation (further production services fees) cuts in. A letter of 15 September 1994 stated that revenue had moved approximately $1 million closer to the total recoupment position. If and when that point is reached Australian investors will share in profits over and above the 125 per cent guaranteed fees. We hope that the balance of costs will be recouped over the next six to nine months. Hopefully then additional profits may emerge from revenues collected from domestic syndication foreign markets. A further letter on 17 June 1995 from Kamisha reported on discussions with a distributor as to disputes over accounts. No attempt has been made to quantify the amount of any such super profits. There is no evidence that any such fees have been earned. The assertion is "in the most general of terms": Shearer, 18 ACSR at 791. (iv) Breach of Trust Again this alleged offsetting claim depends on the speculative assertion that the trustee has received funds and not accounted. In any case, to the extent that any recovery by way of damages or further profits exceed 125 per cent of the amount of the Equus loans and interest, moneys would belong to the investors and not to Equus. General Evidence of Insolvency Perpetual filed affidavits which were relied on as general evidence of the insolvency of Equus. For example, an affidavit was filed by an accountant experienced in insolvency matters analysing accounts Equus provided at the meeting of 23 April 1996. Equus sought to counter this material by further affidavits and argument. But I do not think it appropriate in proceedings under Part 5.4 Division 3 to entertain such debate. The purpose of Divisions 2 and 3 of Part 5.4 is to provide a limited summary means of proving insolvency by non-payment of a specific debt. It would be quite contrary to this purpose to open up the whole issue of insolvency. Variation of Demand Section 459H(4) provides if the substantiated amount is at least as great as the statutory minimum, the Court may make an order (a) varying the demand as specified in the order; and (b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company. This provision needs to be read in conjunction with s 459F(2) which provides that the period for compliance with the statutory demand is either 21 days after the demand is served or, if a company applies under s 459G, then such extended period as the Court orders, or otherwise seven days after the application is "finally determined or otherwise disposed of". I was referred by counsel for Equus to the case of Portrait Express (Sales) Pty Ltd v Kodak (Australasian) Pty Ltd (1996) 14 ACLC 1095 where the Court declined to exercise the discretion to vary. However this is a discretion to be exercised on the facts of the particular case. In the present case, I see no injustice in ordering that the demand stand for the amount which is in my opinion is beyond reasonable argument now due by Equus. If Equus is solvent, it can and should pay. If it does not, its failure to pay can only be as a result of insolvency. By the same token, I think it reasonable to give to Equus the same amount of time as it would have had if the demand had been made for the substantiated amount, that is to say 21 days. The amount is a large one and there is no suggestion that there will be hardship on Perpetual having to wait for this further period, relatively modest in the overall time span. Costs I will reserve liberty for the parties to file within seven days written submissions as to costs. Orders There will be orders as follows: 1. Vary the demand by the respondent served on 18 July 1996 by (a) Deleting from para 1 therein the figure $5,008,760 and substituting the figure $943,765. (b) Adding to the Particulars of Debt: Less offsetting claim $4,064,994.74 Balance due $943,765.00 2. Order that the period for compliance with the said demand be extended to 2 June 1997. 3. Reserve liberty to apply on the question of costs by filing written submissions within seven days.

I certify that this and the preceding twenty-four (24) pages are a true copy of the reasons for judgment of the Honourable Justice Heerey. Dated: 12 May 1997 Associate Appearances Counsel for the applicant: F G A Beaumont QC and Ms Pamela Tate Solicitor for the applicant: Mark Leaker Counsel for the respondent: R McK Robson QC and J W Peters Solicitor for the respondent: Madgwicks Date of hearing: 7, 8, 9 and 10 April 1997