R H Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd

Judgment 1By its amended originating process, the plaintiff seeks an order that a statutory demand served on it by the defendant be set aside and, in the alternative, for the following relief: "A declaration that the statutory demand dated 24 December 2010 served by the defendant on the plaintiff does not comply with Form 509H and non-compliance with it is insufficient to support an application to wind up by the plaintiff." "An order that the defendant is restrained from making an application to wind up the plaintiff based on non-compliance with the statutory demand dated 24 December 2010 served on the defendant by the plaintiff." 2The defendant has led evidence from its sole director, Mr Pearse, that the statutory demand was lodged by him in the post on 24 April 2010 in an envelope addressed to the plaintiff at Level 22, 1 York Street, Sydney. It is common ground that this is the registered office of the plaintiff. There is however, a dispute as to the day on which service of the statutory demand occurred. 3The plaintiff's originating process seeking an order setting aside the statutory demand was filed on 27 January 2011, along with a supporting affidavit. The defendant says that this was more than 21 days after the service of the statutory demand. The plaintiff contends otherwise. 4The plaintiff accepts, however, that the originating process was not served within that period of 21 days. In fact, the plaintiff accepts that there has never been valid service of the originating process. This is because service was effected in another State (South Australia) and was not in accordance with the Service and Execution of Process Act 1992 (Cth), so that there was no valid service: see Energy Conservation Systems Pty Ltd v Downer EDI Engineering Pty Ltd [2008] NSWSC 1139; (2008) 221 FLR 393. 5The plaintiff accepts that, in these circumstances, it has not, by its originating process, made a valid application under s 459G. The element made essential by s 459G(3)(b) is lacking and the deficiency can never be remedied. It is therefore unnecessary to decide precisely when the statutory demand was served. 6The plaintiff contends, however, that circumstances are such that the court should preclude reliance by the defendant on the plaintiff's failure to pay in accordance with the demand as a ground for seeking winding up of the plaintiff. 7The plaintiff relies on two particular features of the demand. 8First, it points to the fact that, although the demand was served on the plaintiff at its registered office (which is in New South Wales), the address specified in the demand as the address for service of an application to have it set aside was an address in South Australia. This is contrary to the directive in Form 509H which states that the address so specified must be in the State or Territory in which the demand is served. 9Second, the plaintiff makes the point that the claim to which the demand relates is obviously a claim for damages, not a debt. The demand refers, in terms, to a debt of $412,000.00 and contains the following description of the debt: "Breach of Agreement." 10In David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, the High Court made two things clear: first, that allegations of dispute in relation to a debt should be confined to s 459G applications; and, second, that, to the extent that a company did not, through neglecting to act or inability to prove its case, establish a genuine dispute at the s 459G stage, it should not be allowed to do so in response to a winding up application. The High Court added, however, that it may in some cases transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term. 11It is upon this abuse of process ground that the plaintiff now relies in making the claims set out at paragraph [1] above. The plaintiff says that there will be an abuse of process if the defendant petitions for winding up in reliance on non-compliance with the demand dated 24 December 2010; and that this will be so for either or both of two reasons: (1) The defendant's act of non-compliance regarding specification in the statutory demand of an address for service of originating process in New South Wales prevents the plaintiff from defending any winding up proceedings by arguing that no presumption of insolvency operates against it. (2) The use of a statutory demand to found a presumption of insolvency is impermissible where the demand is based on a debt known to be non-existent. 12For proposition (1), the plaintiff relies on Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287, a case expressly mentioned by the High Court in a footnote to the passage concerning abuse of process to which I have referred. 13Pacific Communication Rentals (above) was, however, quite different to this case. The abuse of process consisted of the conduct of the applicant for a winding up order in proceeding to make that application (on the basis of an unsatisfied statutory demand) when he had, by his own act, prevented the company from defending itself. The applicant, a former employee, had taken the company's books of account home with him and left the company unable to know the state of the account between it and him and therefore incapable of challenging the statutory demand. 14In the present case, the defendant's failure to comply with the directive on Form 509H may, in a sense, have led the plaintiff into the trap arising from the Service and Execution of Process Act , so that it might be said that the defendant, by its non-compliance, contributed to the failure of the plaintiff's attempt to make a s 459G application. But the fact remains that the plaintiff retained reputable and competent solicitors who set about serving the New South Wales process in South Australia, thus, as it were, shouldering the additional burden occasioned by the non-compliance. That burden was by no means a heavy one, entailing, as it did, a very modest quantity of additional paperwork. The solicitors should have realised the need to comply with the Service and Execution of Process Act . 15The plaintiff's failure to make a valid s 459G application was not caused by any conduct of the defendant that deprived the plaintiff of the practical ability to do so. 16The failure to specify an address in New South Wales constitutes a defect in the demand but whether that defect would, in the circumstances I have mentioned, be properly regarded as productive of "substantial injustice" (see s 459J(1)(a)) is, at the least, doubtful: see Daewoo Australia Pty Ltd v Suncorp Metway Ltd [2000] NSWSC 35; (2000) 48 NSWLR 692 at [53]. 17In relation to item (2) above - the fact that the claim expressed in the statutory demand as a debt for "Breach of Agreement" was in truth an unliquidated claim - the plaintiff relies on reasoning found in the decision of Finn J in Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd [2008] FCA 22; (2008) 26 ACLC 122 and, in particular, the following statement of his Honour at [25]: "A use of the statutory demand procedures in respect of a debt known to be spurious would give rise to an abuse of process if the statutory demand in turn was used to found a winding up application, the more so if, as alleged here, there is some evidence suggesting the likelihood that the statutory demand procedure itself is being used for some tactical purpose relating to proceedings in another court." 18I turn therefore to matters of background. The plaintiff is a financier specialising in home loan finance. The plaintiff made a secured loan of some $314,500 to the defendant in 2007. The loan was secured by a mortgage of land in South Australia. Following default by the defendant as mortgagor, the plaintiff took enforcement action under the mortgage. The property was sold. The sale resulted in a shortfall of $57,565. As at late January 2011, the amount owing by the defendant to the plaintiff was $59,324.17. The loan agreement and mortgage are the only documents of a contractual kind ever entered into by the plaintiff and the defendant. The matters I have just stated appear from the uncontradicted evidence of Mr Scotland, a senior manager of the plaintiff. 19Mr Pearse, the sole director of the defendant, explained in a letter to the plaintiff's solicitor the basis of a claim for $412,000 that the defendant considered itself to have against the plaintiff. The letter is undated. It appears from Mr Wirth's affidavit and a file note annexed to it, however, that Mr Pearse said that he had sent it on 24 December 2010, that it was not received and that Mr Pearse emailed it again on 19 January 2011. It may safely be inferred that it outlines the defendant's claim as seen by Mr Pearse on 24 December 2010 and as embodied in the statutory demand of that date. 20The letter is in these terms: "Dear Mr Graham I became the managing director of the above company [ie, Kerry Ann Properties Pty Ltd] on 12/04/2010 and as such advise the following