BETWEEN : MEADOWFIELD PTY LTD (ACN 071 772 202)

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

Corporations Law - Statutory demand - Application to set demand aside pursuant to s 459G - Whether genuine dispute as to alleged debt - Whether first affidavit satisfied "threshold test" - Whether documentary evidence supporting claim to money required

Asset Management v Sportsworld Group [1999] NSWSC 1207

Boardman & Ors v Phipps [1964] 2 All ER 187

Capital Bay Investments v Richard Szklarz Architects, unreported; SCt of WA; Library No 980503; 8 September 1998

Craven-Ellis v Canons Ltd [1936] 2 KB 403

D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 1794

David Securities Pty Ltd v Commonwealth Bank [1992] HCA 48; (1992) 175 CLR 353

Do Carmo v Ford Excavations Pty Ltd (1980) 1 NSWLR 409

Eden Bay Pty Ltd v Bennett & Co (1997) 15 ACLC 1634

Guinness PLC v Saunders [1989] UKHL 2; [1990] 2 AC 663

In Re a Debtor (Nos 49 & 50 of 1992) [1995] Ch 66

John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716

Molit Pty Ltd v Lam Soon Australia Pty Ltd (1996) 21 ACSR 157

Multinational Gas Co v Multinational Gas Services [1983] 1 Ch 258

Northside Developments Pty Ltd v Registrar-General & Ors (1987) 5 ACLC 642

Pascoe Ltd (In Liq) v Lucas (1998) 27 ACSR 737

Re Bailey Hay & Co Ltd [1971] 1 WLR 1357

Re Duomatic Ltd [1969] 2 Ch 365

Re Gasbourne Pty Ltd [1984] VicRp 70; (1984) 2 ACLC 103

Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 47 FCR 451

Silk Holdings Pty Ltd v Palamore Pty Ltd, unreported; SCt of WA; Library No 980692; 26 November 1998

Turner Corp (WA) Pty Ltd v Blackburne & Dixon Pty Ltd [1999] WASCA 294

1 WALLWORK J: On 27 March 2001 a Master of this Court ordered that the appellant's application to set aside a statutory demand by the respondent be dismissed but that the amount of the demand be varied to an amount of $415,033.81. The appellant now appeals against the learned Master's decision on four grounds as follows:

"1. The learned Master erred in fact and in law in holding that the appellant owed the respondent a debt.

2. The learned Master erred in fact and in law in holding that the respondent had any claim against the appellant for moneys had and received.

3. The learned Master erred in finding that the statutory demand was issued in respect of an undisputed debt. The learned Master misapplied the test for assessing whether there was a genuine dispute of substance between the parties.

4. The learned Master erred by determining factual disputes on contentious affidavits."

2 The appellant had brought the application to set aside the statutory demand pursuant to s 459G of the Corporations Law. It claimed that there was a genuine dispute concerning the existence of the debt to which the demand related. At that time the demand was for the sum of $709,033.81. During the course of the argument before the learned Master the respondent conceded that there was a genuine dispute as to a sum of $294,000 but claimed that there was no genuine dispute concerning the balance of $415,033.81.

3 The respondent was in liquidation and the demand had been made by the liquidator. All the events relevant to the application had taken place prior to the respondent being placed in liquidation.

4 In his reasons for judgment the learned Master said that at some time prior to June 1997 the respondent was the owner of 24 units in the Dunsborough Resort Motel ("the Resort"). In or about June 1997 a Mr Papotto had offered to purchase the units from the respondent for a sum of $2.76 million. That sale did not proceed. However, the Master said that those controlling the respondent had determined that Mr Papotto should take control of the respondent by way of a share issue. Prior to that issue the respondent had eight issued shares. Two were held by Mr Magee and his associates, two were held by Mr Lim and his associates and four shares were held by the Fong Family Trust. Mr Magee and Mr Lim were directors of the respondent.

5 Pursuant to the arrangement reached between Mr Papotto and the respondent, Mr Papotto was issued 1000 shares in the respondent. At the date of the issue of those shares the respondent owed various investors approximately $1.4 million. At the time of the share issue the respondent, through Mr 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. An amount of $415,033.81 was paid to the appellant. It was that amount which was the subject of the amended statutory demand.

6 The appellant contended that there was a genuine dispute concerning whether it was entitled to retain that sum. The respondent said there was no dispute and that it was clear that it was owed the money by the appellant.

7 In support of its application the appellant filed an affidavit from Mr Magee sworn 12 December 2000. In his reasons for judgment the learned Master said that there were only two paragraphs of that affidavit in which Mr Magee attempted to explain how and why the $415,000 had been paid by the respondent to the appellant.

8 In my opinion that statement by the Master is not quite correct as the two paragraphs to which the learned Master referred were par 14 and par 15 of the affidavit. However, par 11, par 12 and par 13 in my view were relevant to the application.

11. I acknowledge that Meadowfield received the sum of $415,033.81. However, those moneys were not paid to Meadowfield beneficially. They were moneys payable to myself and Richard Lim as management fees for the two and a half years that we operated the Dunsborough Resort Motel. They were paid to Meadowfield at our direction.

12. In June 1997 Salvatore (Sam) Papotto ('Papotto') offered to purchase 24 units in the Dunsborough Resort Motel owned by Gold Coast Holdings Pty Ltd ('Gold Coast') for $2.76 million. The sale price would have been used to pay out existing debts of approximately $1.4 million; to pay management fees due to Richard Lim and me, with the balance to be distributed to the shareholders.

13. We had neither met nor heard of Papotto prior to his offer. He did not proceed with the purchase.

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 moneys in trust for Richard Lim and myself and they have been paid out by Meadowfield to us. The $415,000 were the only moneys paid to Meadowfield."

10 The learned Master said that it was difficult to work out from par 14 and par 15 of the affidavit "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 that 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 director's 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 respondent to Lim and Magee. In short there is no documentary evidence at all to support the plaintiff's contention."

11 At the hearing of the application and after hearing argument from the parties the learned Master agreed to admit a further affidavit into evidence which I will describe as the second affidavit and which was sworn 15 March 2001 by Mr Magee. Counsel for the respondent was offered the opportunity of an adjournment if he was of the view that the second affidavit raised matters which he needed to answer, but that adjournment was declined.

12 The second affidavit sets out further information concerning the background to the payment of $415,033.81. Those paragraphs were set out in full in the learned Master's reasons and are 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."

13 In his reasons for judgment the learned Master noted that the appellant had failed to produce any document which supported the submission that Messrs Lim and Magee, and through them the appellant, were entitled to be paid the $415,000. The Master said there was no detail as to what work was undertaken, when it was undertaken, how much time it occupied and the like. There had not been an attempt to explain how the $415,000 was calculated.

14 The learned Master said that the respondent had argued that there was nothing in the documents of the company which would justify a payment to the appellant of $415,000 and there was no evidence of a debt being owed to Messrs Lim and Magee in that sum and no evidence of an employment contract or service agreement which would give rise to a liability on the part of the respondent to Messrs Lim and Magee or the appellant.

15 It was argued for the respondent that the basis upon which the claim had been made was nebulous and entirely lacking in particulars. The respondent also submitted that there had been an independent management company engaged to manage the resort units on behalf of the respondent. It was submitted for the respondent that the alleged entitlement to the $415,000 amounted to a mere assertion which was entirely unsubstantiated and which did not give rise to a genuine dispute.

16 In coming to his conclusion that the application to set aside the statutory demand should be dismissed the learned Master said:

"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 to be dismissed."

17 The learned Master was of the view that what had been put forward by the appellant concerning its entitlement to the $415,000 was nothing more than conjecture; that there was a complete lack of particularity about how the alleged debt arose and the basis upon which the respondent was liable to Messrs Lim and Magee. The learned Master was of the view that any liability of the respondent had to arise in contract and that neither Mr Lim or Mr Magee had given any details whatever of that contract or the basis upon which the liability arose. Further, Messrs Lim and Magee had failed to provide any details of the work they had undertaken to justify the payment of the $415,000; that they had made no effort at all to give any real breakdown of the contribution to the respondent's interests such as would give rise to the entitlement they had claimed. The learned Master was also of the view that Messrs Lim and Magee as directors of the respondent owed certain fiduciary duties to it which required some record to be made of a substantial indebtedness from the respondent to its two directors. He said that no such records existed and their absence had not been explained in the affidavit material. He said that there was surely a need for Messrs 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 $415,000 was made. He said they had singularly failed to do that and he was not satisfied that there was a genuine dispute in relation to the $415,033.81.

18 In Eyota Pty Ltd v Hanabe Pty Ltd (1994) 12 ACLC 669 at 671, McLelland CJ in Equity said:

"It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s 459H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. 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' (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or 'a patently feeble argument, or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194).

But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an enquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at ACLC 1066; ACSR 366-7) Hayne J said ...

'These matters taken in combination, suggest that at least in most cases, it is not expected that the Court will embark upon any extended enquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.' "

19 At 672 McLelland J quoted the remarks of Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919 at 922 where his Honour amongst other things said:

"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."

20 It is relevant in this case to ascertain what the appellant had to establish to have the statutory demand set aside.

21 In Graywinter Properties v Gas & Fuel Superannuation [1996] FCA 822; (1996) 14 ACLC 1703 at 1709, Sundberg J said:

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

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

23 It is apparent that the first affidavit of the appellants was required to reveal a genuine dispute, although if it did, a further affidavit could supplement the initial affidavit. What is revealed by par 11 to par 15 of the first affidavit is, in essence, that the $415,033.81 was said to be moneys payable to Messrs Magee and Lim as management fees for the two and a half years "that we operated the Dunsborough Resort Motel". The affidavit reveals that Mr Papotto had offered to purchase 24 units in the motel owned by the respondent for $2.76 million. That sum would have been used to pay out existing debts and to pay management fees due to Messrs Magee and Lim, with the balance to be distributed to the shareholders. It was deposed by Mr Magee that Mr Papotto was a stranger to Mr Magee and Mr Lim prior to his offer. However, that purchase did not proceed. Mr Magee deposed that the respondent had subsequently agreed that Mr Papotto would become a director of the respondent and acquire a controlling shareholding; that Mr Papotto had agreed to obtain the finance to pay out the existing loans and other liabilities and that Mr Magee and Mr Lim would retire as directors and would be paid their management fees of approximately $415,000. They had directed that those management fees be paid to the appellant. It was common ground that the sum of $415,033.81 had been paid to the appellant.

24 In my view, it is a fair inference from the first affidavit that Mr Papotto who had acquired "a controlling shareholding" had agreed to pay the moneys to the appellant. It is significant that the other four shares in the respondent were said by the learned Master to be held by the Fong Family Trust. There is no evidence that the Fong Family Trust disagreed with the relevant payment, although the respondent submitted very considerable evidence to rebut the claims of the appellant. I think it can be inferred in all the circumstances that the representatives of the Fong Family Trust could not have helped the respondent with its case.

25 The evidence produced on the respondent's behalf was to the effect, as the learned Master stated in his reasons, that there was no documentary evidence or other hard evidence available to the liquidator to substantiate the bona fides of the payment to the appellant on behalf of Messrs Magee and Lim. However, after the respondent had filed various documents to in effect establish that there was no written material to support the claim of the appellant, the learned Master allowed the appellant to supplement its first affidavit with the second affidavit of Mr Magee sworn on 15 March 2001. I will not discuss that affidavit at this stage because the "genuine dispute" must appear from the first affidavit of Mr Magee.

26 In my opinion, the first affidavit was not shown to be incorrect. It asserts that there were "management fees" payable to Messrs Magee and Lim "for the two and a half years that we operated" the motel. It is deposed that Mr Papotto was a stranger to the respondent company and that the company subsequently agreed that he would acquire a controlling shareholding; also that he had agreed to obtain finance to pay out the existing loans and other liabilities. Mr Magee deposed that he and Mr Lim "would retire as directors and be paid our management fees of approximately $415,000."

27 Although Messrs Magee and Lim did not produce documentary evidence to justify such an agreement, on my understanding of the law they were not required to do so, particularly as neither Mr Papotto or the Fong interests denied such an arrangement. Prima facie, from the first affidavit filed on the appellant's behalf and with the material put before the Master by the respondent, a "genuine dispute" existed. It was then permissible to look at the second affidavit which revealed that Mr Magee and Mr Lim had originally given security over other property and also personal guarantees for the purchase of the respondent in 1995. Mr Magee deposed that he and Mr Lim had arranged the purchase of the respondent with a view to them working as directors to increase the capital value of the property in the business. They had personally arranged the finance for the purchase of the business by the respondent. They had then conducted the management and administration of the respondent without wages, salary or directors' fees. When Mr Papotto had been unable to complete the proposed purchase for $2.76 million in 1997, Mr Magee deposed Mr Papotto had approached he and Mr Lim with an alternative proposal that he would take over the company "by us resigning as directors and he becoming the sole shareholder". Mr Papotto was to arrange finance to pay out the existing debt with a surplus to be available for distribution. That surplus was ultimately paid to Mr Magee and Mr Lim via Meadowfield and "was payment for the various services we have 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."

28 Mr Magee's evidence was the only evidence deposed to as to the shareholder agreement and was not contradicted by the respondent. It was consistent with an agreement being made between the outgoing shareholders and the incoming majority shareholder for the takeover of the company. It is hardly open to doubt that Mr Papotto knew that the relevant sum was paid to Magee and Lim. It can be assumed that Mr Papotto and the Fong interests knew that that was to be done. Messrs Magee and Lim were asserting that they were entitled to retain the money because of an agreement with the other shareholders. Whether the alleged agreement was bona fide would depend on all the evidence heard at a trial.

29 Mr Magee had deposed that the appellant did not owe the debt because of the facts which he stated. He did not have to prove that those facts were correct. Although the evidence produced by the respondent may have thrown doubt on the bona fides of the arrangement, that question cannot be decided in a case like this on affidavit evidence on an application to set aside the statutory demand. The learned Master in par 13 of his reasons recognised that the appellant was saying that the moneys had been paid "with the acquiescence" of the respondent's shareholders and directors. It was conceded that there was no evidence as to what the Fong position was.

30 The respondent declined the opportunity before the learned Master to file further affidavits. In my view, it can be assumed that neither Mr Papotto nor the Fong interests would have advanced the case of the respondent.

31 In my opinion, the grounds of appeal which assert that the learned Master erred in holding that the appellant owed the respondent a debt and did not apply the correct test in assessing whether there was a genuine dispute between the parties have been established. It is not necessary in the circumstances to deal with the other grounds of appeal.

32 I would allow the appeal and order that the statutory demand dated 1 December 2000 be set aside.

33 It follows from the above reasons, which hold that the first affidavit of Mr Magee satisfied the "threshold test" discussed by Sundberg J, that the decision of the learned Master to allow the appellant to rely on the second affidavit sworn by Mr Magee on 15 March 2001 was correct. The cross-appeal should therefore be dismissed.

34 STEYTLER J: I agree that the appeal should be allowed and the cross-appeal dismissed. It seems to me, generally for the reasons advanced by Wallwork J, that there was enough in the first affidavit sworn by Mr Magee to show a genuine dispute albeit, in my opinion, that affidavit barely limped over the line in that respect. Once that conclusion is arrived at, it follows, for the reasons given by Wallwork J, that the learned Master was entitled to have regard to the supplementary material placed before the court by way of Mr Magee's second affidavit.

35 PIDGEON AUJ: I, too, agree with the reasons of Wallwork J and the orders proposed.