MATTER : Section 459G of the Corporations Law

BETWEEN : MEADOWFIELD PTY LTD (ACN 071 772 202)

GOLD COAST HOLDINGS PTY LTD (IN LIQ) (ACN 050 161 021)

Corporations Law - Application to set aside statutory demand - Turns on own facts

1 MASTER SANDERSON: This is the plaintiff's application to set aside a statutory demand. The application is brought under the provisions of s 459G of the Corporations Law. It falls to be determined under s 459H(1). The plaintiff says that there is a genuine dispute about the existence of the debt to which the demand relates. The amount specified in the demand was $709,033.81. During the course of his submissions counsel for the defendant conceded that there was a genuine dispute as to the sum of $294,000. But as to an amount of $415,033.81 the defendant said there was no genuine dispute.

2 The defendant in these proceedings is in liquidation and the action is being maintained by the liquidator. All of the events relevant to this application took place prior to the defendant being placed in liquidation. For some time prior to June 1997 the defendant was the owner of 24 units in the Dunsborough Resort Motel ("the Resort"). In or about June 1997 one Salvatore Papotto ("Papotto") offered to purchase the units from the defendant for a sum of $2.76 million. For reasons not presently relevant this sale did not proceed. However, those controlling the defendant determined that Papotto should take control of the defendant by way of a share issue. Prior to this share issue the defendant had eight issued shares. Two were held by Terry William Magee ("Magee") and his associates, two shares were held by one Richard Lim ("Lim") and his associates and four shares were held by the Fong Family Trust. Magee and Lim were directors of the defendant. Pursuant to the arrangement reached between Papotto and the defendant, Papotto was issued 1000 shares in the defendant. At the date of the issue of these shares the defendant owed various investors just on $1.4 million. At the time of the share issue the defendant, through the agency of Papotto, raised an amount of just over $1.888 million through the agency of mortgage brokers. The money raised was used to pay out the secured creditors and an amount of $415,033.81 was paid to the plaintiff. It is that amount which is the subject of the demand (in its amended form). The plaintiff says that there is a genuine dispute about whether it is entitled to retain those funds. The defendant says there is no such dispute and it is clear that it is owed the money by the plaintiff.

3 In support of its application the plaintiff filed an affidavit of Magee sworn 12 December 2000. The affidavit is brief indeed. There are only two paragraphs in which Magee attempts to explain how and why the $415,000 was paid by the defendant to the plaintiff. Paragraph 14 and par 15 are in the following terms:

"14. Gold Coast subsequently agreed that Papotto would become a director of Gold Coast and acquire a controlling shareholding. Papotto agreed to obtain finance to pay out the existing loans and other liabilities. Richard Lim and I would retire as directors and be paid our management fees of approximately $415,000.

15. We directed that the management fees be paid to Meadowfield. In effect, Meadowfield received those monies in trust for Richard Lim and myself and they have been paid out by Meadowfield to us. The $415,000 were the only monies paid to Meadowfield."

4 It is difficult to work out from this evidence just what Magee says the legal relationship was between he and Lim on the one hand and the defendant on the other, such as to require the payment by the defendant to its two directors of the sum of $415,000. The terms of the affidavit hint at some form of employment contract. There is no suggestion in the evidence that the payment was by way of director's fees. If there was an employment agreement or in some way Magee and Lim subcontracted to the defendant, no written evidence of such an arrangement has been provided. Not only is there no written contract document, but there are no directors' minutes or minutes of shareholders' meetings at which such an arrangement has been approved. Furthermore, the affidavit evidence of Evan Robert Verge, the liquidator of the defendant, makes it plain that the respondent's accounts show no historical liability of the defendant to Lim and Magee. In short, there is no documentary evidence at all to support the plaintiff's contention.

5 During the course of the hearing counsel for the plaintiff sought leave to rely upon a further affidavit of Magee sworn 15 March 2001. Counsel for the plaintiff strenuously objected to this further affidavit being read into evidence. He made the point, quite reasonably, that orders programming this matter through to a special appointment had been made by consent. The defendant had ample time to marshall its evidence. No explanation was provided as to why the affidavit was filed late - save for inadmissible comments made from the Bar table. Prior to determining whether or not the affidavit ought be received into evidence I read it. The affidavit dealt with the entitlement of the plaintiff to receive the payment of $415,000 from the defendant. There is no doubt that it was directly relevant to the central issue in the action. After hearing argument I formed the view that the affidavit should be admitted into evidence. I then offered counsel for the defendant the opportunity of an adjournment if he was of the view that the affidavit raised matters which he needed to answer. While maintaining his objection to the affidavit counsel declined the opportunity of an adjournment. Accordingly the affidavit of Magee sworn 15 March 2001 was received into evidence.

6 The affidavit runs to five paragraphs, the last three of which are relevant. Rather than attempt to summarise these three relatively short paragraphs I will quote them in full. They read as follows:

"3 Gold Coast had owned the units since early 1995. Richard Lim and I had arranged the purchase with a view to us working as directors to increase the capital value of the property and the business. This included arranging new management for the motel and supervising that management. We personally arranged the finance for the purchase of the units by Gold Coast. That involved providing security by way of a mortgage over other property and by us giving our personal guarantees. Richard Lim and I conducted the management and administration of Gold Coast without wage, salary or directors' fees. The sale of the units on the original offer from Papotto would have produced a surplus of more than $1,200,000 which would have been paid in part to us as directors and distributed to the shareholders.

4 When Papotto was unable to complete the purchase from Gold Coast he approached us with an alternative proposal that he take over the company by us resigning as directors and he becoming the sole shareholder. He would arrange finance to pay out the existing debt with a surplus to be available for distribution. That surplus was in effect the equity in the assets of Gold Coast.

5 The surplus that was ultimately paid to us via Meadowfield was payment for the various services we had provided to Gold Coast for the previous two-and-a-half years. The shareholders agreed that because the amount of the surplus was considerably less than was expected on the original Papotto contract then it would all be paid to us as directors."

7 It is to be noted that despite this further affidavit still the plaintiff has failed to produce any document which supports the submission that Lim and Magee and through them the plaintiff were entitled to be paid the $415,000. Still there is no detail as to what work was undertaken, when it was undertaken, how much time it occupied and the like. There is not even any attempt to explain how the $415,000 was calculated. Rather it seems that this was the amount that was available and this was the amount that was paid to Meadowfield.

8 The defendant's case may be summarised in this way. Lim and Magee were directors of the defendant and over a period of years it was their personal efforts, so they say, that ensured that the Resort was constructed and run. Among other things they arranged finance for the purchase of the units by the defendant and provided personal guarantees to secure the money borrowed. When Papotto was introduced into the defendant there was an amount of $415,000 which was, in all the circumstances, appropriate to compensate them for their efforts. Furthermore, and most importantly they say, none of the shareholders of the defendant raised any objection to the payment. Given that the defendant at no stage objected to the payment of the $415,000, there is no basis upon which it can now be recovered. If the liquidator of the defendant now says that the payment was made improperly or in breach of statutory or fiduciary duties, the plaintiff denies that is so. In any event, the plaintiff says that there is clearly a serious question to be tried.

9 The plaintiff's position on the other hand might be summarised in these terms. The liquidator of the defendant is able to find nothing in the documents of the company which would justify a payment to the plaintiff of $415,000. There is no evidence of a debt owed to Lim and Magee in that sum and there is no evidence of an employment contract or a service agreement which would give rise to a liability on the part of the defendant to Lim and Magee or the plaintiff. Furthermore, the basis upon which the claim is put is nebulous and entirely lacking in particulars. As to the claim by Lim and Magee that they were responsible for managing the affairs of the Resort, the defendant points to the fact that there was an independent management company which was engaged to manage the Resort units on behalf of the defendant. There is no evidence of how the Resort manager interacted with Lim and Magee. In all, it is submitted, the entitlement to the $415,000 amounts to mere assertion, is entirely unsubstantiated and does not give rise to a genuine dispute.

10 There was no difference between the parties as to the test to be applied in determining whether or not there is a genuine dispute. The test for when a genuine dispute arises in the context of s 459 has been considered in numerous cases of which Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] VicRp 61; (1993) 11 ACLC 1062 per Hayne J at 1066 and Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 15 ACLC 1001 at 1010 - 1012 are two cogent authorities. In relation to the question of what evidence a plaintiff must lead to establish there is a genuine dispute, the defendant relied upon the decision of Murray J in Capital Bay Investments Pty Ltd v Richard Szklarz Architects Pty Ltd, unreported; SCt of WA; Library No 980503; 8 September 1998. His Honour referred to what was said by Young J in John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716 at 718 and by Emmett J in Eumina Investments Pty Ltd v Westpac Bank [1998] FCA 824; (1998) 16 ACLC 1440 at 1442 - 3. Drawing upon both decisions his Honour said at 7:

"What is required, in my opinion, is that I discern in the affidavit evidence in support of the application, material of some real substance, more than mere assertion, to show that there is a serious question to be tried as to the existence of a genuine dispute about the debt or a genuine claim which may be put against the respondent, even if not of a kind which could in law or equity be set off against the respondent's claim. If such material is available the application will succeed even though there might in the affidavits filed on behalf of the respondent appear to be a completely contrary view as to the relevant facts. The court will not, indeed may not, and is not required to resolve that kind of factual disputation upon the affidavits. If it genuinely emerges it will be a matter to be resolved at trial or otherwise in the context of litigation or other dispute resolution procedures to resolve the opposing contentions."

11 The Capital Bay Investments decision itself provides a ready example of how this statement of principle operates in practice. The respondent, a firm of architects, had undertaken certain design and supervision work in relation to alterations and renovations carried out on a property owned by the applicant. The services were provided pursuant to an oral contract. In a statutory demand the respondent claimed a percentage of the work undertaken by subcontractors at the respondent's direction. In its affidavit in support of the application to set aside the statutory demand, the applicant gave particulars of the value of the work that was undertaken. His Honour made the point that the degree of particularity was such that it could not be suggested that what was put by the applicant was mere assertion. In that situation his Honour was satisfied that there was a genuine dispute in relation to this aspect of the claim.

12 Such situations are not atypical when dealing with applications to set aside a statutory demand. It is frequently the case that the party issuing the demand has undertaken certain work for or rendered services to a party and has not been paid. Once the demand is issued the recipient of the demand alleges that the work was not done or that it was done improperly or that the services were performed in such a way that gives rise to a counterclaim or a set-off. The recipient of the demand then applies to set the demand aside and the affidavit in support of the application must provide sufficient particulars to enable an assessment to be made of the then plaintiff's claim. As the authorities make plain, it is not necessary for the plaintiff to establish its claim as might be required if the proceedings were finally to determine the rights and liabilities between the parties. But it must be possible on reading the evidence provided by the plaintiff to see some real and substantial basis upon which it might reasonably be argued that there is a genuine dispute about the debt. No hard and fast rules can be laid down which would apply in every case. It would not be correct, in my view, to say that a plaintiff must condescend upon particulars in the same way as a defendant must in a summary judgment application: see Moscow Narodny Bank Ltd v Mosbert Finance (Aust) Pty Ltd [1976] WAR 109 per Brinsden J at 111. Ordinarily what a plaintiff will need to show is the basis or the nature of the dispute, it will need to provide an outline or summary of the evidence which will be led to support its contention that there is a serious question to be tried and it should bring to the court's attention any documents which are central to its claims and which support its position.

13 There is no doubt that this case is somewhat unusual. What the defendant is arguing is that the plaintiff has no basis for saying that the plaintiff is not liable to repay funds paid to it by the defendant with the acquiescence of its shareholders and directors. Nonetheless, even taking into account the unusual nature of the application, I am satisfied that there is no serious question to be tried and that the application to set aside the statutory demand ought be dismissed. I have reached that conclusion for two main reasons.

14 First, in my view what is put by the plaintiff about its entitlement to the $415,000, when properly analysed, is nothing more than conjecture. There is a complete lack of particularity as to how the alleged debt arose and the basis upon which the defendant was liable to Lim and Magee. For a liability to have arisen there must at some stage have been a contractual arrangement entered into between the defendant and its directors which entitled the directors to payment of a fee. The liability has to arise in contract. Neither Lim or Magee have given any details whatever of that contract and the basis upon which the liability arose. Furthermore, they have singularly failed to provide any detail of the work they undertook such as would justify payment of $415,000. They need not have gone so far as to provide timesheets detailing the work that they did and when it was done. But they have made no effort at all to give any real breakdown of their contribution to the defendant's interests such as would give rise to the entitlement they claimed.

15 Secondly, Lim and Magee as directors of the defendant owed certain fiduciary duties to the defendant. That fiduciary relationship surely required some record to be made of a substantial indebtedness from the defendant to its two directors. Yet no records exist. At the very least this absence of records should have been explained in the affidavit material. During the course of his submissions counsel for the plaintiff suggested that as the defendant was a small private company and as such companies are notorious for maintaining inadequate records, there was a ready explanation as to why no records were kept such as would justify the payment of the $415,000 to the plaintiff. With respect, that submission is without foundation. The defendant may be a private company but it held a substantial asset. Even putting that to one side there was surely a need for Lim and Magee to explain why no records were kept, what discussions took place between the shareholders and how and in what circumstances the payment of the $415,000 was made. That they have singularly failed to do.

16 In all the circumstances I am not satisfied that there is a genuine dispute in relation to part of the debt the subject of the statutory demand. The demand will be amended to an amount of $415,033.81. I will hear the parties as to the precise form of orders and as to costs.