Glazier Holdings Pty Ltd v Meehan

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4069/03 GLAZIER HOLDINGS PTY LIMITED v GRAHAM MEEHAN & ORS JUDGMENT 1 HIS HONOUR: This is another episode in a long course of litigation between these parties. A beneficiary of a trust which conducted clinics to treat sexual dysfunction in men commenced proceedings in this Division (4905/97) seeking an order for the removal and replacement of the trustee and an account of the trustee's dealings. When the proceedings were part heard before Young J (as his Honour then was), orders were made by consent for the removal of the trustee, the appointment of a new trustee and an accounting in general form. The first, second, third and fifth defendants were "ordered to pay to the trustee the amount found to be due on the taking of such account together with interest". The new trustee had himself appointed receiver with power to investigate the affairs of the trust. He reported failures to maintain proper books and records; inadequate controls on transactions; and intermingling of funds. An application was made to vary the consent order for the taking of accounts in general form so as to provide for the taking of accounts on the basis of wilful default. That application was heard by Austin J and granted: Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd [2001] NSWSC 6. An appeal was taken to the Court of Appeal against that variation of the consent order. The appeal was allowed, so that the order for accounting in common form stood: Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146. The respondent, who was not identical with the new trustee, was ordered to pay the appellants' costs of the appeal. 2 Despite the fact that the taking of the account remained outstanding, the appellant (the present plaintiff) did not object to the assessment of the costs of the appeal and they were assessed. This led to a statutory notice of demand being given to the plaintiff in the sum of $115,384.17 based on that assessment. 3 This has led to these proceedings in which the plaintiff seeks to have that statutory notice of demand set aside, essentially on three bases:

(1) that the costs order on which the notice of demand is based was made in proceedings which have not been concluded, so that the enforcement of the order is precluded by Part 52A r 9 of the Supreme Court Rules 1970 ("the SCR");

(2) that the plaintiff company has an offsetting claim within the meaning of s 459H of the Corporations Act 2001 (Cth) ("the CA"), arising from the amounts which it claims it will receive as a result of the taking of the account;

(3) that in any event there is some other reason within the meaning of s 459J(1)(b) of the CA why the notice of demand should be set aside. Whether proceedings concluded 4 If the relevant proceedings were the original proceedings in the Equity Division in which the account was ordered and remains to be taken, there would be a nice question as to whether the proceedings are concluded. It is arguable on the one hand that the conclusion of the proceedings was the making of Young J's original orders and that the pendency of post trial proceedings before the Master does not alter that situation. On the other hand, it is arguable that those orders build in the taking of the accounts and require the payment of the amount certified after the account is finalised, so that the proceedings cannot be taken to be concluded until the relevant order is perfected by that certification. I need not, however, enter into that somewhat arcane area. 5 The defendants, who gave the notice of demand, argue that the proceedings in the Court of Appeal are separate proceedings; that they were concluded by the orders of the Court of Appeal disposing of the appeal; that it was entirely appropriate that the Court of Appeal's costs order proceed to assessment and enforcement; and that the debt created upon assessment of the costs is immediately due and payable. 6 The plaintiff argues that the appeal is in the same proceedings as the original Equity Division proceedings in which Young J made his orders and that those proceedings are not concluded. In support of that contention it points to the provisions of s 75A of the Supreme Court Act 1970 ("the SCA"). By subs (1) the section applies to "an appeal to the Court and to an appeal in proceedings in the Court". The plaintiff relies on the expression "appeal in proceedings in the Court". However, this section is not the section which creates the right of appeal. It makes provisions relating to the nature of the appeal, for instance, it provides that, where the decision appealed from has been given after a hearing, the appeal shall be by way of rehearing: subs (5). The right of appeal from Judges of this Court is given by s 101 of the SCA, which provides in terms that "an appeal shall lie to the Court of Appeal from … any judgment or order of the Court in a Division." The defendants point out that appellate proceedings are separately numbered as proceedings in the Court of Appeal and that the parties are quite different, by description (as appellant and respondent), in order and, possibly by identity, since not all parties below are always parties to an appeal. There is no definition of proceedings in the SCA. 7 I have come easily to the conclusion that the defendants' submission is correct and that the proceedings in the Court of Appeal on an appeal from a judgment in a Division are proceedings separate from the proceedings below. On this basis it is clear that the proceedings in which the costs order was made are proceedings which have been concluded. Whether there is an offsetting claim 8 Section 459H of the CA provides by sub s (1) as follows: " (1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates; (b) that the company has an offsetting claim."

'offsetting claim' means 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 the demand relates)."

If "the substantiated amount" of the demand after taking into account the offsetting claim or claims is greater than the demand, then the notice of demand must be set aside. If the substantiated amount is less than the demand, then the demand may be varied as specified by order of the Court. 9 The courts have held that the words "cross-demand" where they appear in s 459H(5) should be given a wide meaning. Young J (as his Honour then was) in Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263 at 269 approved the view of Hill J in Re Smith; Ex parte Chesson (1992) 106 ALR 359 (affirmed on appeal: Chesson v Smith (1992) 35 FCR 594) that "the concept of 'cross-demand' is a wide expression deliberately used in insolvency law to denote an opposing demand which was wider than the traditional concepts of set-off and which encompassed an unliquidated demand." In Smith Hill J held that it encompassed a claim for the value of goods detained. 10 In the same case Young J held that on its proper construction s 459H(5) required the Court, in assessing the "offsetting total" only to determine if there is an offsetting claim but not to value the claim. Therefore, if the Court finds that there is a genuine claim, the Court is to offset the total amount of the claim. 11 The plaintiff's evidence outlines a number of claims which it says will be determined in its favour in the process of accounting which is continuing in the Equity Division and upon the determination and assessment of the costs of those proceedings. Those claims will be payable under the order of the Court into the trust fund held by the new trustee. The evidence indicates that, if those claims be vindicated, the plaintiff's share of them to come from the trust fund will be greater than the amount demanded in the notice of demand. I do not propose to go into the matter in any great detail, but there seems to me to be no reason, despite some objections raised by the defendants, to treat these claims as other than "genuine". In my view they have an "objective" existence the genuineness of which is capable of being assessed, in the words of Lindgren J in Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 at 353; and see John Shearer Ltd v Gehl Co (1995) 60 FCR 136. That being so, if they are claims within the rubric of offsetting claim as used in s 459H, that would lead to the conclusion that the notice of demand should be set aside. 12 However, the defendants object to them being regarded as falling within the rubric because of what they say is the lack of mutuality between these claims and the claim promulgated in the notice of demand. They say that the claims cannot be offsetting claims in the appropriate sense because the demand promulgated in the notice of demand is payable by the plaintiff to the defendants and the claims propounded as offsetting claims are payable by the defendants to the new trustee to be included in the trust fund. 13 I am not sure that the introduction of a concept of "mutuality" into the debate has utility. As I have said, "offsetting claim" has been given a wide significance by the courts in the present context. But I do not think it is necessary to introduce any concept of "mutuality" in order to uphold the defendants' contention. In the relevant definition, offsetting claim is stipulated to mean a "claim that the company has against the respondent": see the decision of Barrett J in Toorallie Pty Ltd v Black (t/a Chapman & Eastway) [2001] NSWSC 1088 at [20], [23]. The company does not have the relevant claims against the respondent. The respondents will be obliged to pay the sums claimed to the new trustee for the benefit of the trust fund. The company will in due course of the administration of the trust be entitled to receive its share of the trust fund, including its share of amounts paid to the new trustee in satisfaction of these claims. I am of the view that these claims simply do not fall within the rubric of a claim "that the company has against the respondent". They are therefore not available to be brought into account under Part 5.4 of the CA as offsetting claims. Whether there is some other reason why the demand should be set aside 14 Section 459J of the CA provides as follows: "(1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect." 15 There has been a good deal of judicial controversy as to the meaning and ambit of this section. There are at least two Full Court decisions concerning it and a number of single Judge decisions which are relevant. The two Full Court decisions, both decisions of the Federal Court, are Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 and Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; and see also Equuscorp Pty Ltd v Perpetual Trustees WA Pty Ltd (1997) 80 FCR 296. Among the problems which have been discussed is whether paragraphs (a) and (b) of subs (1) are mutually exclusive and whether subs (2) is applicable to subs 1(b) as well as to subs 1(a). 16 In Hoare Bros supra the Full Court (Black CJ, Einfeld and Sackville JJ) found that it was unnecessary to decide whether or not paragraphs (a) and (b) were mutually exclusive. They held that the trial Judge had not been in error in stipulating that it would have been appropriate to exercise the discretion under (b) if the defendant's "conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice" (at 318 - 319). In Spencer Constructions supra the Full Court (Northrop, Merkel and Goldberg JJ) held that the provisions of paragraph (a) and paragraph (b) were mutually exclusive and that the provisions of subs (2) governed the provisions of both paragraphs of subs (1). They held that an "other reason" is clearly a reason other than "a defect in the demand". They said (at 460): "Our conclusion is that in the absence of substantial injustice, a court is precluded by s 459J from setting aside a demand solely on the ground that it contains defects." 17 They thereby confirmed substantial injustice as a criterion for the setting aside of a notice of demand. They also laid down that in determining under s 459J(1)(b) whether there was sufficient other reason to set aside the notice the adjudicating Court should bear in mind the underlying intent of Part 5.4 of the CA: see at 458, 461; see also the decision of Austin J in Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (t/a Release Roofing Services) (1998) 29 ACSR 11 at 18. 18 It has been held that the solvency of the company is not alone a sufficient other reason to set aside the demand: Chippendale Printing Co Pty Ltd v Commissioner of Taxation (1995) 55 FCR 563; Kezarne supra. It has been held that an inappropriate attempt to exercise coercion through or in association with the notice of demand procedure is a sufficient ground: Universal Music Australia Pty Ltd v Brown [2003] FCA 1213. It has also been held that the pendency of an appeal against a judgment precluding the validity of a cross demand is a sufficient ground if the appeal is bona fide and arguable: Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454. There has been controversy as to the circumstances in which defects not being defects in the demand may justify setting aside: see Kezarne supra and authorities gathered there. 19 In this case I have already expressed the conclusion that there are claims against the defendants relating to the subject matter substantially in dispute between the parties, but that those claims are not available as offsetting claims under s 459H of the CA because they are not directly in favour of the plaintiff, but of a trust fund in which the plaintiff has an interest. Nonetheless, if the claims be established, there will come to the plaintiff from the defendants through the intermediacy of the trust fund sums greater in total than that demanded in the notice. Whilst the proceedings in the Court of Appeal may be over, the dispute between the parties is not and the final results are not yet up. In these circumstances, it seems to me to wreak a substantial injustice that the defendants should have the benefit of exacting payment at this stage of the costs of an intermediate stage of the overall proceedings by the mechanism of the notice of demand. I should say that this result also appears to me conformable with the legislative intent of Part 5.4 of the CA, insofar as that intention is that the notice of demand mechanism should not be available where there are outstanding genuine disputes between the parties. Subject to what immediately follows, I am of the view that the plaintiff has established that there is a sufficient other reason for the notice of demand to be set aside. 20 The only consideration that makes me hesitate in setting aside the notice of demand is the fact that the plaintiff could have, but has not, sought relief in the situation by application to the Court of Appeal for a stay of its costs order: see what was said by Emmett J in Eumina Investments supra. This consideration is strengthened rather than detracted from by the plaintiff's conduct in not raising any objection to, and participation in, the process of the immediate assessment of the Court of Appeal costs. These matters would justify my refusing relief. But to do so may well only prolong conflict, since the refusal may merely send the plaintiff back to the Court of Appeal to apply for a stay, and then to engage in further litigation as to what flows from the stay if obtained. In all the circumstances, it seems to me that the course best designed to save the Court's time and the parties' financial resources and to further the ends of justice is for the Court to intervene at this stage and set the demand aside on the ground of the substantial injustice which I perceive. 21 I therefore propose the following orders:

1 Order that the defendants' notice of demand under s 459E of the Corporations Act 2001 (Cth) served on the plaintiff on 9 July 2003 be set aside.

2 Order that the defendants pay the plaintiff's costs of these proceedings.

3 Order that order 2 be stayed until the finalisation of the taking of the account ordered in proceedings 4905/97.

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