Rinfort Pty Limited & Anor v Arianna Holdings Pty Limited

Supreme Court of NSW|2016-02-23|Before: Black J

uele v Australian Securities and Investments Commission [1997] HCA 20; (1997) 188 CLR 114 - Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 - Federal Commission of Taxation of the Commonwealth of Australia v Sara Lee Household and Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520 - Financial Solutions Australasia Pty Ltd v Predella Pty Ltd [2002] WASCA 51; (2002) 26 WAR 306 - First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 - Fitzpatrick v Cheal [2010] NSWSC 717 - Gerblich v Adplan Pty Ltd [2012] SASCFC 79; (2012) 281 LSJS 175 - Gordon v Tolcher [2006] HCA 62; (2006) 231 CLR 334 - Grant Samuel Corporate Finance Pty Ltd v Fletcher [2015] HCA 8; (2015) 254 CLR 477 - Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 - Gusdote Pty Ltd v Ashley [2011] FCA 250; (2011) 82 ACSR 469 - Haller v Ayre [2005] QCA 224; [2005] 2 Qd R 410 - Home Corporation Projects (No 100) v Australian Home Mortgage Corp [2001] NSWSC 701 - Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1 - Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41 - Indigo Financial Money Pty Ltd v Moustrides [2010] SASC 355; (2010) 81 ACSR 249 - Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 - J Huang v D Wang [2015] NSWSC 510 - Jennings v Credit Corp Australia Pty Ltd [2000] NSWSC 210; (2000) 48 NSWLR 709 - Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 - Manildra Laboratories Pty Ltd v Campbell [2009] NSWSC 987 - Matthews v SPI Electricity Pty Ltd [2011] VSC 167; (2011) 34 VR 560 - McEvoy v The Body Corporate for No 9 Port Douglas Road [2013] QCA 168 - Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229 - MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367 - MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2) [2015] FCA 1128; (2015) 109 ACSR 265 - NA Investments Holdings Pty Ltd v Perpetual Nominees Ltd [2010] NSWCA 210; (2010) 79 ACSR 544 - Nece Pty Ltd v Ritek Incorporation [1997] FCA 504; (1997) 24 ACSR 38 - Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69 - Ogilvie v Adams [1981] VR 1041 - Ox Operations Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (in liq) [2007] FCA 1221 - Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 - Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746 - Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 - Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132; (2014) 46 WAR 483 - Raja v Darul-Iman (WA) Inc (No 2) [2011] WASCA 251 - Re Akierman Holdings Pty Limited [2015] NSWSC 1395 - Re Brighter Directions Pty Ltd [2010] VSC 287 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 - Re Diveva Pty Ltd [2015] NSWSC 509 - Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 - Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 - Re Jackaroo Agencies Pty Ltd [2005] QSC 333; (2006) 1 Qd R 332 - Re RUS Holdings (Australia) Pty Ltd [2012] NSWSC 1075 - Re Tesrol Holdings Pty Ltd [2013] NSWSC 1534; (2013) 97 ACSR 9 - Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 - Re Wollongong Coal Ltd [2015] NSWSC 1680 - Repforce International Pty Ltd v Master Lease Properties Pty Ltd [2003] NSWSC 970 - RTP Holdings Pty Ltd v Roberts [2000] SASC 386; (2000) 36 ACSR 170 - Savage Property Enterprises Pty Ltd v Bianchino & Associates [2011] NSWSC 140 - SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079 - Silovi v Barbaro (1988) 13 NSWLR 466 - South Johnstone Mill Ltd v Dennis and Scales [2007] FCA 1448; (2007) 163 FCR 343 - Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 - Sundarjee Bros (Aust) Pty Ltd v Sundarjee Bros (HK) Pty Ltd (in liq) [2004] NSWSC 1158; (2004) 52 ACSR 532 - Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 - Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 12 ACSR 381 - TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 - TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1074; (2007) 25 ACLC 1371 - Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293 - Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 - Young v Queensland Trustees Ltd [1956] HCA 51; (1956) 99 CLR 560 Texts Cited: - Sir Frederick Jordan, Chapters in Equity in New South Wales (6th ed, 1947) Category: Principal judgment Parties: Rinfort Pty Limited (First Plaintiff) Dana Mekler (Second Plaintiff) Arianna Holdings Pty Limited (Defendant) Representation: Counsel: F Assaf (Plaintiffs) J T Svehla (Defendant)

Solicitors: Mills Oakley (Plaintiffs) & Legal (Defendant) File Number(s): 2015/208445

The parties and the background facts

This proceeding involves an application to set aside a creditor's statutory demand dated 25 June 2015 ("Demand") issued by the Defendant, Arianna Holdings Pty Limited ("Arianna Holdings") to the First Plaintiff, Rinfort Pty Limited ("Rinfort"). That application is sought to be brought by the Second Plaintiff, Mr Dana Mekler, as a statutory derivative action under ss 236-237 of the Corporations Act 2001 (Cth). It is desirable to set out the nature of the parties and the relevant facts before turning to the procedural and substantive complexities which have arisen and, ultimately, to the merits of the application.
Rinfort was incorporated on 7 April 1987 and was under the control of the late Alexander Mekler until, or substantially until, his death on 28 March 2015. I should note, for completeness, that there was a contest between the parties as to whether Mr Alexander Mekler should be treated as having acted as Rinfort's managing director for the purposes of its constitution. It is not necessary to address that issue, given the findings that I have reached on other grounds. The Second Plaintiff, Mr Dana Mekler, is the late Mr Alexander Mekler's son and is currently a director and shareholder of Rinfort (Ex P1, 1). Mrs Fernanda Mekler, who is the late Mr Alexander Mekler's wife and Mr Dana Mekler's mother, is the other director and shareholder of Rinfort, although she is elderly and, it appears, not now taking an active role in Rinfort's affairs. She has appointed her grandson, Mr Brent Maksimovich, as an alternate director and appears to have largely left decision-making in respect of this matter to Mr Maksimovich. Rinfort owns two blocks of residential units located in the eastern suburbs of Sydney which comprise 21 residential units. Mr Mekler led evidence, without objection, that those units have an estimated value of $20 million (Mekler 16.7.15 [23]). Rinfort derives income from rental paid on the units.
Arianna Holdings was incorporated on or about 16 November 1967, also by the late Mr Alexander Mekler, and its current directors are Mrs Mekler and Mr Maksimovich (Ex P1, 17). Mr Dana Mekler was previously a director of Arianna Holdings but was removed as a director of that company on 17 November 2014 in circumstances that are the subject of a dispute which it is not necessary to resolve for the purposes of these proceedings.
Rinfort relies on affidavits of Mr Mekler dated 16 July 2015 and 28 October 2015. Parts of those affidavits were not admitted or were admitted as submission only. In his affidavit dated 16 July 2015, Mr Mekler identified the asserted dispute in respect of the Demand, in a paragraph admitted with a limiting order as identifying the asserted claim, as extending to "the existence of the alleged loans, the terms upon which it is said that the loans were advanced (which is denied) and the alleged terms upon which it is said that they are repayable" (Mekler 16.7.15 [7]). That affidavit also claimed, in a paragraph again admitted with a limiting order as identifying the asserted claim, that the Demand: "is not clear as to how the amounts of the asserted debts and interest claimed have been calculated, or why, or which multiple alleged loans have been combined and now purportedly called upon. The Demand does not particularise the multiple loans upon which it is based." (Mekler 16.7.15 [9]) Mr Mekler's evidence is that he lacks knowledge of the amount of the debt claimed to be owed by Rinfort to Arianna Holdings and that, other than for the information contained in financial reports of the companies for the years 2010-2014, the balance of funds provided by Arianna Holdings to Rinfort are unknown to him (Mekler 16.7.15 [28]) and also that he has not been provided with "particulars" of the asserted loans (Mekler 16.7.15 [31]).
In his second affidavit dated 28 October 2015, Mr Mekler also contends (in evidence admitted subject to a limiting order under s 136 of the Evidence Act 2005 (NSW)) that Arianna Holdings wrongly charged Rinfort both a property management fee and for property management tasks by a real estate agent and that the interest charged by Arianna Holdings to Rinfort in the years 2010 to 2013 was above the Australian Taxation Office's benchmark rates (Mekler 28.10.15 [9]-[10]). Mr Mekler's evidence is that he first became aware of the suggested debt owed by Rinfort to Arianna Holdings when he received a draft 2013-2014 financial report on 31 October 2014, and that he then assumed the opening balances would be correct but questioned the interest rate charges in that report (Mekler 28.10.15 [25]). Mr Mekler's evidence is also that he does not have available the material necessary to determine if the calculations of the balance of liability between Arianna Holdings and Rinfort as set out in Mr Hauer's evidence (to which I will refer below) are correct or whether the amounts claimed in the Demand are due and payable or whether there is a genuine dispute in respect of them (Mekler 28.10.15 [47]). As I will note below, the absence of information necessary to verify the correctness of a debt or a debtor's uncertainty as to whether a genuine dispute as to that debt exists is not the same as the existence of a genuine dispute as to that debt.
Arianna Holdings relies on affidavits of Mr Hauer and Mr Maksimovich dated 18 September 2015 and 2 October 2015. There was a substantial overlap between the content of those two affidavits, parts of which were not admitted or admitted as submission only. Mr Hauer has been the accountant for Rinfort and Arianna Holdings for many years and his affidavit dated 18 September 2015 sets out the history of the acquisition of the blocks of units by Rinfort and the manner in which that acquisition was funded. Mr Hauer's evidence, which is not accepted by, but was also not specifically controverted by, Mr Mekler, is that Arianna Holdings advanced funds to Rinfort for it to develop the first block of units at Curlewis Street, Bondi in 1993 or 1994 at a total acquisition and construction cost of $1,978,205 (Hauer 18.9.15 [18]-[19]) and there was no written loan agreement in respect of that advance. Mr Hauer's evidence is that Arianna Holdings also advanced amounts to Rinfort to develop a second block of units in Old South Head Road, Vaucluse; the total amount advanced by Arianna Holdings in respect of that property was in the order of $1,414,993 (Hauer 18.9.15 [23], [26]); and there is also no written loan agreement in respect of that advance. Mr Hauer also refers to Arianna Holdings advancing fitout costs of $133,394 in respect of the Bondi and Vaucluse unit blocks. Mr Hauer's evidence is that, from at least 1987 to late 2013, Rinfort did not have a bank account, and Arianna Holdings paid the operating costs of Rinfort, including land tax, statutory payments, costs of repairs and maintenance, insurance and income tax out of Arianna Holdings' bank account (Hauer 18.9.15 [29]).
Mr Hauer's evidence is that Rinfort owed Arianna Holdings $2,165,870, or $2,165,874, at 30 June 2014 (Hauer 18.9.15 [154]). The differences between those amounts do not seem to me to be material for present purposes, so far as they may reflect rounding in Arianna Holdings and Rinfort's financial accounts. Mr Maksimovich's evidence is that Rinfort owed Arianna Holdings $2,165,872.12 as at 1 July 2014 and $2,220,763.48 as at 25 June 2015 (Maksimovich 2.10.15 [127]).
Prior to 10 June 2015, Mr Maksimovich (who was then both a director of Arianna Holdings and an alternate director of Rinfort) and Mrs Mekler (who was then both a director of Arianna Holdings and of Rinfort, although inactive in the latter capacity) authorised Arianna Holdings to issue a letter of demand to Rinfort for the amount of $2,165,872, identified as being the amount owing by Rinfort to Arianna Holdings at 30 June 2014 (Ex D1, 341). On or about 25 June 2015, Mr Maksimovich caused Arianna Holdings to issue the Demand to Rinfort. He did so after proposals by Mrs Mekler and him for the winding up of Rinfort and the division of its assets had not been accepted by Mr Mekler but prior to Mrs Mekler commencing further proceedings seeking, inter alia, an order that Rinfort be wound up on the basis of oppression.
The Demand was signed by Arianna Holdings' solicitor and paragraph 1 of the Demand stated that Rinfort owed Arianna Holdings the amount of $2,220,763.48 being the total of the amount of the debts (in plural) described in the Schedule. The Demand referred to Mr Maksimovich's affidavit dated 25 June 2015 verifying that that amount was due and payable by Rinfort. The description of the debt in the schedule to the Demand was as follows: Description of the Debt Amount of the Debt Loans and interest owing by [Rinfort] to [Arianna Holdings] as at 30 June 2014 $2,165,872.00 Plus Interest to 25 August 2014 $13,291.93 Less Payment 25 August 2014 ($30,000.00) Plus [I]nterest to 25 June 2015 [$]71,599.55 TOTAL OWING $2,220,763.48

Mr Maksimovich's affidavit dated 25 June 2015 accompanying the Demand referred to a debt totalling $2,220,763.48 relating to "loans" (in the plural) and interest by Arianna Holdings to Rinfort. The third paragraph of that affidavit stated that Mr Maksimovich had inspected Arianna Holdings' business records in relation to Rinfort's "loan" (in the singular) and the affidavit confirmed that Mr Maksimovich believed there was no genuine dispute about the existence or amount of the debt. Since the service of the Demand, neither Mrs Mekler nor Mr Maksimovich have taken any step to cause or authorise Rinfort to respond to the Demand.
By Originating Process filed on 16 July 2015, Rinfort purportedly brought an application for, first, leave under s 237 of the Corporations Act 2001 (Cth) for Mr Mekler to bring proceedings on its behalf and, second, an order setting aside the Demand. Mr Mekler was not joined as a plaintiff in the Originating Process, although it made clear that leave was sought for him to bring the proceedings on behalf of Rinfort. Mr Mekler also did not have authority to commence the proceedings on Rinfort's behalf. By Interlocutory Process filed at the commencement of the hearing, on 11 February 2016, Rinfort and Mr Mekler sought an order under r 6.24 of the Uniform Civil Procedure Rules 2005 (NSW) that Mr Mekler be joined as the Second Plaintiff in the proceedings and that he be granted leave to amend the Originating Process. That application could only properly be brought by Mr Mekler, rather than by Rinfort, by reason of his lack of authority to act for Rinfort. By consent, an order was made joining Mr Mekler as Second Plaintiff in the proceedings.
The parties reached agreement, on the basis of an undertaking offered by Arianna Holdings to and accepted by the Court, that one aspect of the Amended Originating Process would not be pressed at this stage, namely an order restraining Arianna Holdings from bringing any winding up proceedings against Rinfort if it fails to comply with the Demand. Accordingly, I do not address that issue. The balance of the Amended Originating Process seeks, relevantly, leave under s 237 of the Corporations Act for Mr Mekler to bring or, alternatively, intervene in, the proceedings on Rinfort's behalf and an order setting aside the Demand. Rinfort's and Mr Mekler's claims are set out in more detail as follows: "1. [A]n order under section 459H of the Corporations Act 2001 setting aside the [Demand] served on [Rinfort] by [Arianna Holdings] on the basis that there is a genuine dispute between [Rinfort] and [Arianna Holdings] about the existence or amount of the debt to which the [Demand] relates; 2. [F]urther or alternatively, an order setting aside the [Demand] under section 459J of the Corporations Act on the basis that because of a defect in the [Demand], substantial injustice will be caused to [Rinfort] unless the [Demand] is set aside; 3. [F]urther or alternatively an order under section 459J(1)(b) setting aside the [Demand] on the basis that the [Demand] is an abuse of the statutory demand process … 5. Pursuant to s 237 of the Corporations Act that leave be given to Mr Dana Mekler to bring, or alternatively intervene in, the current proceedings for and on behalf of Rinfort Pty Limited."

Whether the Court has jurisdiction to grant leave under ss 236-237 of the Corporations Act

An initial question is whether Mr Mekler can and should be granted leave to bring the proceedings under s 237 of the Corporations Act. Arianna Holdings, which is under the control of Mrs Mekler and Mr Maksimovich (who are respectively a director and alternate director of Rinfort, a matter to which I will return below), contends that the Court does not have jurisdiction to grant leave to Mr Mekler to bring the proceedings to set aside the Demand in Rinfort's name.
In order to address this contention, it is necessary to commence by identifying the nature of the Originating Process filed by Rinfort, albeit irregularly, that commenced the proceedings. An application to set aside the Demand was filed in Rinfort's name within the 21 day period specified in s 459G of the Corporations Act, and each of the steps required by s 459G(3) of the Corporations Act were also taken. That occurred on Mr Mekler's instructions which he did not have authority to give on Rinfort's behalf. There is little prospect that Rinfort will ratify the commencement of the proceedings, where Mrs Mekler (the other director of Rinfort) and Mr Maksimovich (her alternate director) are the directors of Arianna Holdings which served the Demand. As I noted above, the Originating Process indicated that leave was sought under ss 236-237 for Mr Mekler to conduct the relevant proceedings, although Mr Mekler was initially not joined as a plaintiff in the Originating Process.
Mr Svehla, who appears for Arianna Holdings, submits that, for several reasons, the Court does not have jurisdiction under ss 236-237 of the Corporations Act to confer authority on Mr Mekler to conduct the proceedings in Rinfort's name, where Mr Mekler did not have that authority at the time the proceedings were commenced. Mr Svehla points out, correctly, that this submission raises the question that I noted, but did not need to resolve, in Re RUS Holdings (Australia) Pty Ltd [2012] NSWSC 1075 at [3], namely whether the principle that the absence of leave prior to the commencement of proceedings does not go to jurisdiction, but is an irregularity capable of correction by the Court, applies in an application to set aside a creditor's statutory demand brought under s 459G of the Corporations Act, given the strictness of the time limit in that section. The arguments put by Counsel concerning this issue were complex and subtle and involved several overlapping, and to some extent shifting, issues.

The separate proceedings and no application arguments

First, Mr Svehla submits that an application for leave under ss 236 and 237 of the Corporations Act could not be brought by Interlocutory Process in these proceedings and that Mr Mekler must commence a separate proceeding to seek such leave. Mr Svehla refers to the decision in RTP Holdings Pty Ltd v Roberts [2000] SASC 386; (2000) 36 ACSR 170 at [13], where Lander J expressed the view that leave should be obtained prior to the commencement of proceedings sought to be brought under ss 236-237 of the Corporations Law, and adjourned those proceedings to allow such leave to be sought, implicitly in separate proceedings.
I am unable to accept that there is any statutory requirement or any reason of policy which requires that course. Sections 236-237 of the Corporations Act provide a statutory basis for the grant of leave and do not contain any statutory requirement that the relevant application be brought in separate proceedings to those that are the subject of the leave application. Even if an application under ss 236-237 should be characterised as final relief, the Supreme Court (Corporations) Rules 1999 (NSW) permit an application for final relief to be brought by Interlocutory Process in existing proceedings. There are many cases in this Court where leave under ss 236-237 of the Corporations Act has been sought by Interlocutory Process in the proposed proceedings, and there is at least one case where the application for leave and the proposed proceedings were heard at the same time: J Huang v D Wang [2015] NSWSC 510. It seems to me that there would be no procedural invalidity with such an application, provided the applicant for leave was joined as plaintiff, together with the company which would bring proceedings, if such leave were granted; that did not occur in this case, but only by reason of the failure to join Mr Mekler as an additional plaintiff, at the time the proceedings were commenced, which was subsequently remedied by his joinder to the proceedings.
Second, Mr Svehla submits that the Court does not have jurisdiction to make orders under ss 236-237 of the Corporations Act because Mr Mekler was not a plaintiff in the Originating Process and did not activate any right he might have under the relevant sections. However, the Originating Process expressly sought an order for leave for Mr Mekler to bring derivative proceedings under ss 236-237 of the Corporations Act on Rinfort's behalf. It seems to me that, at the time the Originating Process was filed, Mr Mekler was a necessary and proper party to that application, so far as that leave was sought for him to bring the proceedings on Rinfort's behalf, and the omission to join him was an irregularity in the proceedings. That irregularity has subsequently been addressed by the Amended Originating Process, which joined him as Second Plaintiff as a necessary and proper party to the proceedings under r 6.24 of the Uniform Civil Procedure Rules.
Mr Svehla rightly refers to r 6.28 of the Uniform Civil Procedure Rules which provides that the date of commencement of the proceedings, in relation to a person joined, is taken to be the date on which the order is made or such later date as the court may specify in the order. It follows that Mr Mekler is only party to the proceedings from the date of the amendment; however, that proposition does not assist Arianna Holdings, unless it can be said that the Court does not now have jurisdiction to determine the proceedings brought in Rinfort's name, if leave is now granted to Mr Mekler under ss 236-237 of the Corporations Act to continue those proceedings in Rinfort's name.
Mr Svehla also initially submitted that, at least prior to the amendment that has in fact been made to join Mr Mekler as party to the proceedings, there was no proceeding for leave before the Court. Mr Svehla subsequently clarified that submission in oral submissions, indicating that he did not submit that the commencement of the proceedings were a nullity, and that Arianna Holdings accepts that the commencement of the proceedings was at least sufficient to allow the Court to determine whether it had jurisdiction in respect of the proceedings, which he submits it did not have (T97). To put that proposition another way, Arianna Holdings does not seek to contend that proceedings were not commenced within the 21 day period specified in s 459G of the Act, but instead contends that s 459G of the Act requires that any proceeding commenced in the name of the Company within the 21 day period have been authorised by the Company, unless the Company subsequently ratifies the commencement of the proceeding so that it becomes its own act (T99).
It seems to me that Arianna Holdings was correct not to press any submission that the proceedings were a nullity. The High Court of Australia emphasised in Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; (2006) 225 CLR 364 at [11]ff that there is little utility in reference to concepts of "nullity" and "invalidity" where proceedings are brought in a superior court of record of general jurisdiction. To the extent that it is relevant to address the matter by reference to whether the proceedings are a nullity, the authorities indicate that a proceeding that is irregularly commenced is not a nullity. For example, in Jennings v Credit Corp Australia Pty Ltd [2000] NSWSC 210; (2000) 48 NSWLR 709, Santow J noted (at [50]) that proceedings commenced in the name of a principal by an agent without the principal's authority are not a nullity, where the absence of that authority may be remedied by proper authority subsequently being given, and ratification after the expiry of a limitation period is valid, as it takes effect from the commencement of the proceedings rather than from the date of ratification. I will refer to several other cases to the same effect below.
It seems to me that there were proceedings before the Court, albeit they were commenced in Rinfort's name without corporate authority, and there is an issue as to the Court's jurisdiction to grant leave to bring a derivative claim under ss 236-237 of the Corporations Act that I will address below.

The expiry of the 21 day period argument

Mr Svehla submits that the Court does not now have jurisdiction to grant leave under ss 236-237 of the Corporations Act, and alternatively that it would not be a proper course for it to do so, where leave to commence the proceedings had not been sought or obtained prior to the expiry of the 21 day period specified for an application to set aside the Demand under s 459G of the Corporations Act.
Mr Svehla emphasises that an application to set aside a creditor's statutory demand had to be commenced within the 21 day period specified in s 459G of the Corporations Act. Mr Svehla refers to the principle, identified by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265 at 277 ("David Grant"), that the time limit in s 459G of the Act defines the jurisdiction of the Court, and is not capable of extension. The purpose of Pt 5.4 of the Act was there described by Gummow J (at 270) as follows: "The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the inter-position of disputes about debts, unless they are raised promptly."
In Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 61 FCR 385 at 406, to which Toohey J referred with apparent approval in Emanuele v Australian Securities and Investments Commission [1997] HCA 20; (1997) 188 CLR 114at [2], Lindgren J also noted that the time limit in s 459G of the Corporations Act was one within which the Court must be approached if an application for an order of a particular kind is to be made at all. I accept that proposition, but that time limit was satisfied in this case, unless Arianna Holdings can establish that the commencement of proceedings in Rinfort's name within that time limit, but without authority, did not satisfy that requirement. An application to set aside a creditor's statutory demand was here commenced within time, in the sense that the steps required by the Supreme Court (Corporations) Rules 1999 for the commencement of the application had been taken, and the rules define what is required to commence such an application: Austar Finance v Campbell [2007] NSWSC 1493; (2007) 215 FLR 464. I do not accept, however, the further submission of Mr Assaf, who appears for Mr Mekler, that that matter is determinative, at least in any sense that it would exclude a finding by the Court that the proceeding should be stayed for lack of authority in an appropriate case, or that it were a nullity as a matter of substance. I address that issue below.
Mr Svehla also relies on the decision of Lehane J in Nece Pty Ltd v Ritek Incorporation [1997] FCA 504; (1997) 24 ACSR 38 ("Nece"), where Lehane J held, in a case somewhat similar to this case, that an application brought by a shareholder to set aside a creditor's statutory demand under s 459G of the Corporations Law, which could not be authorised by the company by reason of a deadlock at board level, was not properly commenced by Nece and had to be dismissed. Lehane J did not accept that he should make an order, under the general law as it stood prior to the enactment of ss 236-237 of the Corporations Act, permitting the shareholder to maintain the proceedings in a representative capacity, after the 21 period specified in s 459G of the Corporations Law had expired. His Honour also observed that: "Here, proceedings were purportedly commenced by Nece within the period; on the evidence before me, however, it appears those proceedings were commenced without authority. Unless they are ratified, they cannot be maintained. An order which permitted [the shareholder] to maintain the proceedings would not, however, amount to a ratification; its effect would be to sanction the commencement of an application, not presently on foot, outside the time permitted by the section. For that reason, in my view, I must accept the submission of Counsel for Ritek that it cannot be done." As Mr Assaf submits, there may be a lack of clarity in this observation, since his Honour initially refers to proceedings having been "commenced" without authority, and notes that those proceedings cannot be maintained unless ratified, in an observation which appears to assume that the proceedings had been commenced, albeit irregularly; and subsequently refers to the effect of grant of leave to bring derivative proceedings as being to "sanction the commencement of an application, not presently on foot" with the implication that no proceedings had been commenced. It is not entirely clear whether his Honour was proceeding on the basis that the proceedings had in fact been commenced, albeit without authority, or should be treated as a nullity.
The approach adopted by Lehane J in Nece was followed, but only briefly considered, by Foster J in Gusdote Pty Ltd v Ashley [2011] FCA 250; (2011) 82 ACSR 469 at [142], in circumstances that that aspect of his Honour's reasoning was not necessary to a decision which he had reached on other grounds, and without consideration of the impact of any orders which may be made by a Court under ss 236-237 of the Corporations Act. Mr Svehla also points to an approving reference to Nece in a different context and in respect of a different section of the Corporations Act in Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396.
I would, of course, give the greatest respect to views expressed by Lehane J in respect of aspects of the Court's commercial and corporate jurisdictions. However, it seems to me that the decision in Nece is distinguishable and, if it is not distinguishable, that I should not follow it. It seems to me to be distinguishable because his Honour proceeded on the basis that an application for leave to bring a representative action had been brought outside the 21 day period required by s 459G of the Corporations Law and, in this case, such an application was brought in Rinfort's name within that period, albeit that its commencement had not been properly authorised at the time it was commenced and Mr Mekler had been joined as party to the proceedings in respect of the application which was expressly made for leave for him to bring the proceedings in Rinfort's name. It also seems to me that, with the greatest of respect to Lehane J, his Honour's reasoning may (subject to the uncertainty noted above) have assumed that the proceedings in that case were a nullity, if commenced without authority or irregularly, and the case law is to the contrary, at least in respect of proceedings in a court of superior jurisdiction.
The parties also addressed the application of s 79 of the Judiciary Act 1903 (Cth) in this context. Section 79(1) of the Judiciary Act provides that: "The laws of each State or Territory, including the laws relating to procedure, evidence, and the competency of witnesses, shall, except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State or Territory in all cases to which they are applicable."
In Re Jackaroo Agencies Pty Ltd [2005] QSC 333; (2006) 1 Qd R 332, White J considered the operation of s 79 of the Judiciary Act and held that, where an application to set aside a creditor's statutory demand had been made in the name of the sole director of a company, the company could be substituted as plaintiff, outside the 21 day period provided in s 459G of the Act. If that decision is correct, it supports the view that the Court could also authorise the continuance of the proceedings in the Company's name, outside that period, where it had statutory jurisdiction to do so under ss 236-237 of the Act. In Gordon v Tolcher [2006] HCA 62; (2006) 231 CLR 334 at [40], the High Court considered the application of s 79 of the Judiciary Act in claims under s 588FF of the Corporations Act and observed that: "An application [under s 588FF of the Corporations Act] may be made only to a court invested with federal jurisdiction by one or other of the provisions of Pt 9.6A. Thereafter, and subject to any other relevant provision of the Corporations Act, the conduct of the litigation is left for the operation of the procedures of that court. These procedures will vary from one State or Territory to another and within the court structures of those States and Territories. The scheme of the Corporations Act is not to impose a direct federal and universal procedural regime. Rather, s 79 of the Judiciary Act is left to operate according to its terms in the particular State or Territory concerned."
In Indigo Financial Money Pty Ltd v Moustrides [2010] SASC 355; (2010) 81 ACSR 249 at [40]ff, White J referred to Gordon v Tolcher above and held that, subject to compliance with the procedural requirements contained in s 459G and any other applicable provisions of the Corporations Act, the Court's procedural rules apply to the commencement of an action under that section. Mr Svehla also relied, by way of analogy, on authority that the time for the making of an application in s 588FF(3) of the Corporations Act is not merely procedural: Grant Samuel Corporate Finance Pty Ltd v Fletcher [2015] HCA 8; (2015) 254 CLR 477 at [17]. I accept, of course, that the requirement in s 459G of the Corporations Act for bringing an application within the specified 21 day period is also not merely procedural, which is a matter that has been plain at least since David Grant; however, that does not seem to me to advance the question as to the status of the application that was filed in Rinfort's name within that 21 day period, albeit without its board's authority, subject to an application for leave to bring it under ss 236-237 of the Corporations Act.
Mr Assaf also drew attention to other authorities, such as Gerblich v Adplan Pty Ltd [2012] SASCFC 79; (2012) 281 LSJS 175, dealing with the commencement of an application to set aside a creditor's statutory demand, without payment of the filing fee. I find less assistance from those authorities, where the question of lack of authority to commence proceedings in the Company's name seems to me to be of more fundamental character than a failure to pay a filing fee.
Mr Assaf also refers to several decisions, in different contexts, in which an application has been treated as effective although brought without leave that was required for it. In Emanuele v Australian Securities Commission above, the Australian Securities Commission had applied for an order that several companies be wound up in insolvency under s 459A of the Corporations Law, without first obtaining the leave of the Court as required under s 459P(2) of the Corporations Law. The majority in the High Court held that failure was a mere defect or irregularity which could be cured by granting such leave nunc pro tunc and the commencement of the proceedings without such leave was not a nullity (per Dawson J at 125, per Toohey J at 128-129). Mr Svehla pointed out, and I accept, that the decision in Emanuele v Australian Securities Commission above addresses a somewhat different question, so far as it turned on the status of an order previously made by the Court, in circumstances that leave had not previously been obtained under s 459P(2) of the Corporations Law, whereas the present issue as to the Court's jurisdiction arises prior to the making of any such order. Mr Svehla also submits, plainly correctly, that the decision in Emanuele v Australian Securities Commission above did not overrule or qualify the High Court's decision in David Grant. However, that proposition does not assist Arianna Holdings if the filing of the application to set aside the Demand in Rinfort's name was sufficient to comply with s 459G of the Act.
In Home Corp Projects (No 100) v Australian Home Mortgage Corporation [2001] NSWSC 701, an application to set aside a creditor's statutory demand was brought by a director who had been granted leave to bring proceedings in the name of the plaintiff under s 236 of the Corporations Law, within the 21 day period. However, the director had not obtained leave to bring the proceedings under s 500(2) of the Corporations Law, where the defendant was in voluntary winding up. Palmer J (at [8]) rejected a submission that the fact that the proceedings had been commenced, without leave under s 500(2) being granted within the 21 period, meant that they were a nullity, and followed Emanuele v Australian Securities Commission above.
In Ox Operations Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (in liq) [2007] FCA 1221, to which Mr Assaf also refers, a former director of the plaintiff gave instructions to bring an application to set aside a creditor's statutory demand, and the company subsequently ratified his actions in giving those instructions. Finkelstein J did not dismiss the application to set aside the creditor's statutory demand in those circumstances, observing (at [2]) that an action brought without authority is not a nullity in the sense that it is void ab initio without the possibility of subsequent ratification. His Honour took that view notwithstanding that there was, in that case, a 21 day period in which the application to set aside the demand could be brought under s 459G of the Corporations Act. In Raja v Darul-Iman (WA) Inc (No 2) [2011] WASCA 251 at [33] the Court of Appeal of the Supreme Court of Western Australia held that an action brought without authority is not a nullity in the sense of being void ab initio without the possibility of subsequent ratification, which, once effective related back to the date of institution of the action, referring to Ox Operations Pty Ltd above. The approach in Ox Operations was also approved and followed by Forrest J in Matthews v SPI Electricity Pty Ltd [2011] VSC 167; (2011) 34 VR 560 at [68].
Mr Svehla seeks to distinguish the decision in Ox Operations above on the basis that it deals with ratification, and he accepts that shareholders can ratify retrospectively acts of a company brought without authority by directors or in breach of power by the directors. Mr Svehla points out, and I accept, that an order made by the Court under ss 236 and 237 of the Corporations Act is not the same as an exercise of ratification, where a company adopts the relationship of agency which has been assumed by a person acting on its behalf, and that ratification relates back to the date of the unauthorised act: Davison v Vickery's Motors Ltd (in liq) [1925] HCA 47; (1925) 37 CLR 1 at 19-21; Federal Commission of Taxation of the Commonwealth of Australia v Sara Lee Household and Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520 at 533; McEvoy v The Body Corporate for No 9 Port Douglas Road [2013] QCA 168 at [38]-[39]. However, it seems to me that the Court's statutory power to authorise proceedings to be brought in a company's name is analogous to, or at least operates in substitution for, a company's ratification of the unauthorised commencement of proceedings in its name. I will expand upon that observation below.
Mr Svehla also submits that obtaining prior leave under ss 236-237 of the Act is a necessary condition to the Court's jurisdiction, at least in this context, and the observation of Middleton J in South Johnstone Mill Ltd v Dennis and Scales [2007] FCA 1448; (2007) 163 FCR 343 at [55]-[57] ("South Johnstone Mill") to the contrary is incorrect or at least distinguishable. There are, of course, many cases in which the Courts have proceeded on the basis that retrospective leave may be granted under ss 236-237 of the Act. I recognise, however, as Mr Svehla points out, that the decision in South Johnstone Mill above did not have to consider the issues which arise in an application under s 459G of the Act and that his Honour's observations in that regard are obiter. While I accept that proposition and also accept that I am not bound to follow the view expressed by Middleton J in South Johnstone Mill above, it seems to me that it is correct for the reasons indicated in this section of the judgment.
The case law to which I have referred establishes that the application filed in this case was not a nullity, although the Court could stay or strike out the proceedings in a proper case. Once it is accepted that the proceedings, when commenced, were not a nullity and were merely irregular, their commencement was capable of satisfying the time limit in s 459G of the Act, although they could later be stayed or struck out if that irregularity was not rectified. It seems to me that the exercise of a retrospective power to make an order under ss 236-237 of the Corporations Act can bring about the result that the company is bound by the proceedings taken on its behalf as if the person authorised under that section had had the authority to bring them at the earlier time, and neither the terms nor the policy underlying s 459G of the Corporations Act exclude that result. As a matter of the construction of s 459G of the Corporations Act, an application to set aside the Demand was here filed within the 21 day period specified in the Act, albeit it was irregularly filed. It does not seem to me that the policy of s 459G of the Corporations Act, to which I have referred above, would be promoted by the position for which Arianna Holdings contends. A policy that any issue in respect of a creditor's statutory demand should be identified and determined promptly is satisfied where an application to set it aside is filed within the 21 day period, so as to place the creditor on notice of the dispute, even if there is an issue as to whether that application was properly authorised, which is subsequently resolved by ratification, or by the grant of leave under ss 236-237 of the Corporations Act, or by the dismissal of the proceedings if neither ratification nor the grant of such leave occurs.
I can also see no reason in the terms of ss 236-237 of the Corporations Act or in its policy to take a narrower approach where the Court grants retrospective leave to a shareholder to bring proceedings in the name of a company, because a board and shareholders are deadlocked and the company cannot ratify the commencement of the proceedings, than where an action is subsequently ratified by a company in general meeting, as in Ox Operations, or, to put it another way, why a company should be less able to bring a meritorious application to set aside a creditor's statutory demand where its directors are deadlocked than where they are not.
Mr Svehla points out that Mr Mekler could have commenced these proceedings within the 21 day period specified in s 459G of the Corporations Act by seeking interim or interlocutory relief under ss 236-237 of the Corporations Act within that 21 day period: Re Brighter Directions Pty Ltd [2010] VSC 287 at [2]; Re RUS Holdings (Australia) Pty Ltd above at [4], [8]. While that proposition is correct, the fact that that course was available does not have the consequence that any other course was not available. Mr Svehla also points to the fact that Mr Mekler and his legal advisers were apparently aware of his ability to bring an application for leave to bring proceedings, before the Duty Judge, prior to the commencement of the application to set aside the Demand, having referred to their intent to do so in a letter dated 30 June 2015 to Arianna Holdings' solicitor (Ex D1, 372). That matter does not assist Arianna Holdings, any more than the availability of that course assists Arianna Holdings, unless that course was the only course available to Mr Mekler.
I am satisfied, in these circumstances, that the Court has jurisdiction to grant leave, nunc pro tunc, to Mr Mekler to bring the proceedings to set aside the Demand, which were commenced in Rinfort's name in the 21 day period specified in the Corporations Act, although that period has now expired.

Whether leave should be granted under s 237 of the Corporations Act

As Mr Assaf points out, there are several requirements for the grant of leave under s 237 of the Corporations Act. Adopting the formulation of the elements of that section which has been set out in the case law, and which I recently summarised in Re Akierman Holdings Pty Limited [2015] NSWSC 1395, the Court must be satisfied of five matters in order to grant such leave, and must grant that leave if satisfied of those matters. Those matters are that it is probable that Rinfort will not itself bring the proceedings; Mr Mekler is acting in good faith; it is in the best interests of Rinfort that Mr Mekler be granted leave; there is a serious question to be tried; and at least 14 days before making the application, Mr Mekler gave written notice to the Company of his intention to apply for leave and of the reasons for applying, or that the Court should dispense with that requirement. Mr Mekler bears the onus of establishing that each of the matters specified in s 237(2) of the Corporations Act are satisfied on the balance of probabilities: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [26]. If all the requirements of s 237(2) are satisfied, the Court must grant leave to bring the proposed proceedings. If any or all of the criteria specified in that section are not satisfied, then the Court should not grant that leave: Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12]-[13]; Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 76 NSWLR 69 at [55]-[65].
The first requirement is that it is probable that Rinfort will not itself bring the proceedings or properly take responsibility for them or for the steps in them. Mr Svehla properly accepts that Rinfort will not itself bring the proceedings. It seems to me that that concession was both properly made and inevitable, where Mrs Mekler is one of the two directors of Rinfort, Mr Maksimovich is her alternate director, and Mr Maksimovich has taken steps to create the position where the debt is arguably now due to Arianna Holdings and has also taken no steps to assist Rinfort in placing itself in a position to make payment of that debt or to authorise it to respond to the claim for the debt.
The second requirement under s 237 of the Corporations Act is that Mr Mekler is acting in good faith. The factors relevant to that requirement include whether Mr Mekler has an honest belief that a good cause of action exists and has reasonable prospects of success, although that belief will be tested against whether a reasonable person in the circumstances would hold that belief, and whether he is seeking to bring the action for a collateral purpose. In Swansson above at [36], Palmer J observed that: "[T]here are at least two interrelated factors to which the Courts will always have regard in determining whether the good faith requirement of s 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process." The Court does not consider the merits of the claim in deciding whether the applicant has satisfied s 237(2)(b) of the Corporations Act, since the merits are considered in respect of the question whether there is a serious question to be tried, which arises under s 237(2)(d) of the Act: Fitzpatrick v Cheal [2010] NSWSC 717 at [41].
Mr Assaf submits that Mr Mekler is acting in good faith and that the evidence makes it plain that the dispute regarding the loan between Arianna Holdings and Rinfort existed prior to the issue of the Demand. Mr Svehla submitted that the Court could not be satisfied that Mr Mekler was acting in good faith, by reference to the position advanced by Arianna Holdings as to the merits of the dispute. I will address that position below. It seems to me that the issues raised in this application, and particularly issues as to the age of the alleged debt and whether the Demand could be set aside for some other reason, are such that Mr Mekler could reasonably believe that the application has a reasonable prospect of success. Nothing in the objective facts raises any question that Mr Mekler could not properly form the view that it is not in Rinfort's interests to be wound up in the relevant circumstances, or is bringing the application for any purpose other than to seek to avoid that result.
The third requirement under s 237 of the Corporations Act is that it is in the best interests of Rinfort that Mr Mekler be granted leave. In Swansson above, Palmer J noted that that paragraph required that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the company's best interests. In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432, Ball J identified relevant matters including the prospects of success of the action; the likely costs of the action; the benefit to be gained by the action; and the likely consequences to the company if the action is unsuccessful.
Mr Assaf submits that it is in Rinfort's best interests that Mr Mekler be granted leave to bring or intervene in the proceedings in circumstances that, he submits, the Demand is defective in form, relates to a genuinely disputed debt and is an abuse of process in the circumstances; Mr Maksimovich is acting in breach of fiduciary and statutory duties, in his capacity as alternate director, in respect of the Demand; and Mr Mekler will be joined as a plaintiff and exposed to any adverse costs orders if the application is not successful. Mr Svehla submitted that the Court could not be satisfied that the grant of leave was in the best interests of Rinfort, given the position which Arianna Holdings puts as to the merits, which I will address below. I am satisfied that it is in Rinfort's best interests that it be granted leave, where the alternative would be that it would be wound up without a proper opportunity to defend the winding up application, and where Mr Mekler has undertaken, as I note below, to indemnify it against the costs of the application.
Arianna Holdings contended that it should be a condition of grant of leave to Mr Mekler that he be liable for the Company's costs of the application. An undertaking of that kind is often, although perhaps not invariably, required as a condition of the grant of leave to bring derivative proceedings, since it will be more difficult to establish that the commencement of proceedings is in the company's best interests if the applicant is not prepared to indemnify the company against any adverse costs order made against it if the proceedings are unsuccessful: Power v Ekstein [2010] NSWSC 137; (2010) 77 ACSR 302 at [108]; Re Fishinthenet Investments Pty Ltd and Coastal Waters Seafood Pty Ltd [2014] NSWSC 260 at [31]ff. Mr Mekler has confirmed that such an undertaking is offered, with retrospective effect to the point of commencement of the proceedings.
The next question is that there is a serious question to be tried. Whether there is a serious question to be tried requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction: Swansson above at [25]; Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293 at [147], upheld on appeal in MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367; Re Akierman Holdings Pty Limited above at [23]ff. In Re Gladstone Pacific Nickel Ltd above, Ball J summarised the test as to whether there is a serious question to be tried as follows (at [56]): "The test of whether there is a serious question to be tried is the same as the test that is applied by the court in determining whether to grant an interlocutory injunction: Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [25] per Palmer J; Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 72 ACSR 506 at [164] per Campbell JA, with whom Spigelman CJ and Allsop P agreed. Consequently, the same relatively low threshold is applicable. It is not appropriate for the court to attempt to resolve disputed questions of fact. … Whether the court should attempt to resolve a disputed question of law will depend on the particular circumstances of the case, including whether the question is novel or difficult and whether it is susceptible of resolution on the present state of the evidence: Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 per McLelland J (as he then was). In answering the question whether there is a serious question to be tried, the court must obviously have regard to the material before it; and the material that is available may affect the result."
Mr Svehla submitted that the Court could not be satisfied that there was a serious question to be tried having regard to the position put by Arianna Holdings on the merits that I will address below. I am satisfied that there is at least a serious question to be tried as to whether the debt claimed in the Demand is barred by the Limitation Act 1969 (NSW) and whether the issue of the Demand constituted an abuse of the statutory demand procedure, for the reasons that I will explain below, and there is therefore a serious question to be tried in the proceedings.
The last requirement relates to the giving of notice before making the application, or the Court's satisfaction that it is appropriate to grant leave although such notice was not given. I am satisfied that it is appropriate to grant such leave, even if such notice was not given.

Whether there is a genuine dispute as to the existence or the amount of the debt

Section 459H(1)(a) of the Corporations Act provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which that demand relates. That test has been variously formulated as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6].
In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], Dodds-Streeton JA observed that a company which seeks to establish a genuine dispute or offsetting claim: "… is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. … [I]t is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice."
In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44], Young AJA (with whom Hoeben JA and Ward J agreed) referred to Eyota Pty Ltd v Hanave Pty Ltd above and noted that the question for a primary judge, in determining an application to set aside a statutory demand under s 459H(1)(a), is: "[T]o determine whether there was a genuine dispute, that is one in which a plausible contention has been raised by the company on which the statutory demand was served."
In order to establish a genuine dispute, for the purposes of s 459H(1)(a) of the Corporations Act, Mr Mekler (on Rinfort's behalf) therefore need only establish that it has a plausible contention as to the matters on which it relies so as to give rise to a genuine dispute as to the debt claimed by Arianna Holdings. Mr Mekler contends that there is a genuine dispute as to the existence and amount of the loan, for the purposes of s 459H(1)(a) of the Corporations Act. That dispute seems to have several elements, namely that the fact of a loan is not established, or its amount is not established, or at least the correctness of the calculation of interest is not established, or the amount is not presently due and payable by reason of a limitation defence or an estoppel. I will deal with these matters in turn.
Mr Assaf points out that Arianna Holdings acknowledges that there was no written loan agreement in relation to the alleged loans from Arianna Holdings to Rinfort. On the other hand, Mr Svehla submits that there is no room for a dispute as to the existence of the loan, or as to its amount, where there was never any dispute that Arianna Holdings had provided the money to Rinfort as explained in Mr Hauer's evidence, or what that money had been used for, or that Rinfort did not have a bank account and its available funds, after tax, were paid to Arianna Holdings in reduction of the loan account, that being the manner in which the late Mr Alexander Mekler ran the Mekler group of companies, including in the period when Mr Dana Mekler was a director of Rinfort. Mr Svehla also submits that several matters are inconsistent with any challenge to the existence of a loan, including the recording of the amount as a loan in the financial statements of Arianna Holdings and Rinfort, the payment of tax by Arianna Holdings and Rinfort based upon the relevant financial statements; the charging and payment of interest in each year; and the discussions and correspondence to which I will refer below which recognise the existence of such a loan.
None of the documentary evidence to which the parties referred raised any doubt as to the existence or amount of the inter-company liability on which Arianna Holdings relied in the Demand. As Mr Assaf recognised in submissions, the financial statements of Rinfort for a considerable period reflect the existence of a non-current liability owed by Rinfort to Arianna Holdings, although the corresponding asset is recorded as current in Arianna Holdings' financial statements, a matter which Mr Hauer seeks to correct in his affidavit. Although those financial statements are unsigned, the information in them is in turn incorporated in tax returns lodged by both Rinfort and Arianna Holdings, which were signed by Mr Alexander Mekler, and later by Mr Hauer (who may or may not have been properly authorised to do so) and by Mrs Mekler. Mr Hauer's evidence, which was not challenged on cross-examination and appears to be consistent with the history of the companies, is that the balance of the advances made by Arianna Holdings to Rinfort reflects the "current balance of all of the transactions which have occurred since the inception" of the relevant inter-company (or, as he puts it, loan) account (Hauer 18.9.15 [35]). That description of the relevant transactions is supported by the evidence that Rinfort did not have its own bank account until 11 December 2013, which appears to have had the consequence that amounts that would otherwise be received by or paid by Rinfort would have to be deposited into another bank account, relevantly that of Arianna Holdings, resulting in an inter-company balance owing as between those companies. It is also plain that numerous costs, including those associated with the acquisition and construction of the unit blocks, and also ongoing costs such as land tax, rates, repairs and maintenance were paid in that manner, and the balance recorded in the Company's accounts originates from those payments, whether or not there is room for dispute as to its accuracy. Mr Svehla, in submissions, undertook a comprehensive analysis of the financial statements and tax returns of Rinfort and Arianna Holdings, which were consistent with the amount of the inter-company liability as recorded in the relevant years, and ultimately the amount of that inter-company liability as claimed in the Demand.
As I noted above, Mr Mekler's evidence is that the first time he became aware of a debt said to be owed by Rinfort to Arianna Holdings was on 31 October 2014, when he saw the Rinfort's draft financial statements for the 2013-2014 financial year (Mekler 28.10.15 [25]). Notwithstanding that evidence, and the fact that Counsel sensibly conducted the application without cross-examination, it should be recognised that Mr Mekler was a director of both Arianna Holdings and Rinfort; the accounts of both entities had recorded a substantial inter-company liability over several years; Mr Mekler was and is an experienced businessperson and he would, in the ordinary course, be expected to read a company's accounts, where he was a director of that company, and recognise a substantial liability recorded in them. Mr Svehla also points to substantial correspondence in which Mr Mekler or his accountant appear to have acknowledged the character of the inter-company balance as between Rinfort and Arianna Holdings as being a "loan" or a "liability" (for example, Ex D1, 177, 194, 239). In an exchange of emails between Mr Maksimovich and Mr Mekler prior to a directors' meeting on 18 June 2015, in which Mr Maksimovich had referred to the loan by Arianna Holdings to Rinfort, Mr Mekler had responded, not by denying the existence of such a loan, but by saying that: "It appears this loan has been in place for many years, my lawyer has requested information about it. Perhaps this afternoon you can explain the sudden urgent need for funds to me, is there a financial problem?" (Ex D1, 356-357)
The minutes of a directors' meeting of Rinfort held on 18 June 2015 also record, somewhat obscurely, that Mr Mekler required information to substantiate the loan; that the loan was "accepted by" Mr Mekler and that Mr Mekler "will not accept [the] loan as it has been in existence for a long time" (Ex D1, 358). Mr Mekler later challenged, with substantial force, the accuracy of the reference to his accepting the loan in those minutes, which seems to be inconsistent with contemporaneous correspondence and the statement in the minutes which immediately followed it, but does not seem to have challenged the fact that the conversation related to a "loan" by Arianna Holdings to Rinfort. A cashflow prepared by Mr Mekler for Rinfort (Ex D1, 399-400), after the Demand had been issued, referred to a line item for "Loan Principal Repayment" although it did not contemplate that any amount would be paid off the principal, and for "Loan Finance Expense (Interest Only)" of $90,000 per annum. While the amounts involved were in dispute between the relevant shareholders, the fact that they related to a loan does not appear to have been in dispute. On a then principal amount of $2.25 million, the figure of $90,000 for interest would equate to an interest rate of 4 per cent, which was the interest rate adopted in the Demand. These matters are relevant here, not to displace any dispute as to the alleged loan which had otherwise arisen, but rather to point to the absence of such a dispute.
Neither Mr Mekler nor Rinfort identify any particular aspect of the transactions leading to the liability recorded in the financial statements of Rinfort and Arianna Holdings, other than possibly the quantum of interest charged, that are disputed, and they seem instead to contend that they have not been provided sufficient information to satisfy them that the balance recorded in the financial statements is correct. However, that is not sufficient to establish a genuine dispute, for the purposes of s 459H of the Corporations Act, in the absence of any articulation of a challenge to the existence of the debt or its amount: Re Tesrol Holdings Pty Ltd [2013] NSWSC 1534; (2013) 97 ACSR 9. To the extent that a challenge is raised as to the amount of interest charged, it appears to rise no higher than the proposition that, notwithstanding that the late Mr Alexander Mekler seems to have sanctioned the relevant interest charges in earlier years, when he had control of both companies, including in periods where Mr Dana Mekler was a director of one or both of them, Mr Mekler now considers those interest charges should have been lower. Again, that matter does not seem to me to be sufficient to establish a genuine dispute in respect of the level of interest charges.
It therefore does not seem to me that Mr Mekler, or Rinfort through him, has established a serious question to be tried as to the existence of a loan, in the sense of a case warranting further investigation that a loan did not exist, or that the amount of any loan is anything other than is recorded in Rinfort's and Arianna Holdings' financial statements.
The next matter on which Mr Mekler, and Rinfort through him relies, is a limitation defence. Mr Svehla initially takes the point that this was not a matter that was raised in the affidavit accompanying the s 459G application, relying on the "Graywinter principle", which arises from the decision of Sundberg J in Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452 and reflects the requirement, in s 459G(3) of the Corporations Act, that an affidavit supporting the application to set aside a creditor's statutory demand be filed within 21 days of its service. Mr Assaf rightly draws attention to NA Investments Holdings Pty Ltd v Perpetual Nominees Ltd [2010] NSWCA 210; (2010) 79 ACSR 544, where Lindgren AJA held that an affidavit may "support" an application to set aside a creditor's statutory demand, where it puts a document in evidence and the construction of that document gives rise to the relevant dispute, even if it is not sufficient to alert the other party to the particular construction to be advanced. The weight of authority favours the view that this principle requires a fact-specific enquiry directed to whether the affidavit in fact supports the application, and the question is whether, expressly or by reasonably available inference, the grounds of challenge of the statutory demand were sufficiently identified in the affidavit: Financial Solutions Australasia Pty Ltd v Predella Pty Ltd [2002] WASCA 51; (2002) 26 WAR 306; Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1 at [36]; Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd above at [27]ff; Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132; (2014) 46 WAR 483 at [43], [56]-[57]; Re Diveva Pty Ltd [2015] NSWSC 509 at [11].
Paragraphs 6 and 7 of Mr Mekler's affidavit in support of the application to set aside the Demand identified a dispute as to the existence of the alleged loans and not merely as to their amount. It also seems to me that the limitation issue was sufficiently raised by the minutes of the directors' meeting held on 18 June 2015, which were annexed to Mr Mekler's first affidavit of 18 July 2015 and stated that Mr Mekler "will not accept loan as it has been in existence for a long time" (Ex P1, 23). That affidavit also referred to the fact that the alleged debt arose from monies allegedly invested by the late Mr Alexander Mekler in Rinfort through Arianna Holdings "during the period 1993 to 1994", which plainly raised the age of the relevant transactions (Mekler 16.7.15 [27], admitted as submission and as identifying the asserted claims). It seems to me that these references in the affidavit to the age of the loan arrangements sufficiently raised the limitation issue for the purposes of the Graywinter principle.
Mr Assaf points out that the loans were "allegedly" advanced between about 1987 and 1996, well before 25 June 2009, being six years before the date of the Demand. Mr Assaf refers to s 14(1)(a) of the Limitation Act 1969 (NSW) which provides that a cause of action founded on contract (including quasi contract), which is not founded on a deed, is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff. Mr Assaf also relies on the proposition, recognised in case law to which he refers, that the limitation period in respect of a loan that is payable on demand commences from the date the loan was advanced and not from the date of the demand: Young v Queensland Trustees Ltd [1956] HCA 51; (1956) 99 CLR 560 at 566-567. The reasoning in Young v Queensland Trustees Ltd above was approved, after lengthy analysis of the earlier case law, by Fullagar J in Ogilvie v Adams [1981] VR 1041 and the same approach was adopted in Haller v Ayre [2005] QCA 224; [2005] 2 Qd R 410 and in Chidiac v Maatouk [2010] NSWSC 386 at [234]-[237]. Mr Assaf also refers to Sundarjee Bros (Aust) Pty Ltd v Sundarjee Bros (HK) Pty Ltd (in liq) [2004] NSWSC 1158; (2004) 52 ACSR 532, where Barrett J held that a creditor's statutory demand should be set aside where a debt between related companies was repayable on demand and it was arguable that the cause of action would have arisen more than six years ago and would be statute-barred under the Limitation Act. His Honour there referred to Young v Queensland Trustees Ltd above; noted that there was no evidence of the terms of any loan or the time at which the money was to be repaid and, even if the money was repayable on demand (which his Honour noted may be a common characteristic of indebtedness between related entities), time starts to run, for limitation purposes, from the date the loan was made; and also held that financial statements of another entity did not amount to an acknowledgement of debt for the purposes of s 54 of the Limitation Act.
Mr Svehla responds to the substance of the limitation point by relying on the financial accounts of Rinfort and Arianna Holdings for the period from 1 July 2009 to 30 June 2014 to advance the proposition that Rinfort has, in that period, paid more than the amount owed by Rinfort to Arianna Holdings as at 30 June 2009, such that the amount owed as at that date has been repaid, and the amount now due has arisen from outgoings since that date. That proposition depends on allocating the entirety of Rinfort's income to the payment of previous loans, as distinct from a treatment, which may be supported by Rinfort's accounts, that leaves the existing loan in place, albeit increasing or decreasing in each year by the excess or deficiency in amounts paid by Rinfort to Arianna Holdings over amounts paid out by Arianna Holdings on Rinfort's behalf. Mr Assaf points out that the net reduction of the liability of Rinfort to Arianna Holdings in the period between 2010 and 2014, as recorded in the trial balance of Arianna Holdings as at 30 June 2015 (Ex D1, 602) is substantially less than the gross amount which Mr Svehla submits was "paid" by Rinfort to Arianna Holdings in that period, being in the order of $1,206,000. Mr Assaf also submits, and I accept, that the competing analyses as to how payments should be attributed to the inter-company liability as between Rinfort and Arianna Holdings over that period at least indicates a genuine dispute as to that issue.
Mr Svehla also submits that the amount of the loans was not immediately due and payable from the date of each advance, because it would otherwise have been recorded as a current liability of Rinfort, and the loan did not become due and payable unless and until a demand was made for it, within the relevant limitation period. There is some force in that proposition, although it faces the difficulty that Arianna Holdings recorded the relevant loan as a current asset, in a treatment which Mr Hauer now seeks to correct as noted above, notwithstanding that Rinfort recorded it as a non-current liability. That proposition may be accepted at a final hearing on the merits, but it does not seem to me to deprive the limitation point of a genuinely arguable character.
Mr Svehla also relies on s 54 of the Limitation Act which relevantly provides that: "(1) Where, after a limitation period fixed by or under this Act for a cause of action commences to run but before the expiration of the limitation period, a person against whom (either solely or with other persons) the cause of action lies confirms the cause of action, the time during which the limitation period runs before the date of the confirmation does not count in the reckoning of the limitation period for an action on the cause of action by a person having the benefit of the confirmation against a person bound by the confirmation. (2) For the purposes of this section: (a) a person confirms a cause of action if, but only if, the person: (i) acknowledges, to a person having (either solely or with other persons) the cause of action, the right or title of the person to whom the acknowledgment is made, or (ii) makes, to a person having (either solely or with other persons) the cause of action, a payment in respect of the right or title of the person to whom the payment is made …"
Mr Assaf responds that an acknowledgement, for the purposes of s 54(2)(a)(i) of the Limitation Act would be established only if Rinfort had acknowledged the cause of action before the expiration of the limitation period and that, in the present case, the limitation period would arguably have expired within six years of the original advance, in 1993-1994, and any confirmation of the limitation period would arguably need to have occurred in that period. Mr Assaf submits that there is no evidence that any confirmation by Rinfort of those amounts took place before the expiry of the limitation period. It seems to me that these factors are sufficient to leave open a genuine dispute as to the application of a limitation defence, notwithstanding Arianna Holdings' reliance on an acknowledgement under s 54(2)(a)(i) of the Limitation Act.
Mr Svehla also relies in the second form of confirmation under s 54(2)(a)(ii) of the Limitation Act, being a payment in respect of the right or title of the person to whom the payment is made. However, it seems to me that Rinfort has a seriously arguable case that that form of confirmation is not established by accounting entries made as between Rinfort (which had no bank account and no funds under its control) and Arianna Holdings. Although the parties made somewhat limited submissions as to the scope of this form of confirmation, it seems to me to be arguable that such accounting entries, at least where a party did not have the capacity to make a payment in money or money's worth and in the absence of any formal corporate approval of them, would not constitute a "payment" for the purposes of s 54(2)(a)(ii) of the Limitation Act.
Rinfort, through Mr Mekler, also argues that Arianna Holdings is estopped from requiring repayment of the amount claimed in the Demand. Mr Assaf draws attention to the elements of an estoppel, as summarised in Silovi v Barbaro (1988) 13 NSWLR 466 and Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 at 610 and applied, in the context of an application to set aside a creditor's statutory demand, in Savage Property Enterprises Pty Ltd v Bianchino & Associates [2011] NSWSC 140. Mr Assaf draws attention to the passage of the period of time since the relevant amounts were advanced; a claim that Mr Alexander Mekler never intended Arianna Holdings to demand repayment of the alleged loans; and a claim that the financial statements of Rinfort recorded the alleged loans as non-current liabilities at all relevant times. Mr Assaf submits that Rinfort has relied on those matters to its detriment and that it would be unconscionable for Arianna Holdings to insist upon repayment of the loans.
Mr Svehla submits that no genuine question of estoppel is established, because there is no clear and unequivocal representation by Arianna Holdings that the debt would not be called, and no evidence of reliance by Rinfort to its detriment on such a representation. Mr Svehla points out, with substantial force, that the controlling mind of both companies at the relevant time was that of Mr Alexander Mekler, and it seems unlikely that Mr Mekler would have constrained the freedom of action of two associated companies under his control, by a representation by one to the other that it would not call the relevant debt, if it was in its or both companies' interests to do so. Mr Svehla also made the further submission that the payment of interest, and the reduction of principal was inconsistent with a representation that the loan would not be called. It seems to me that at least the payment of interest, and possibly regular reductions of principal, would not necessarily be inconsistent with a representation that the loan would not be made payable on demand, had such a representation been made (T106).
Mr Hauer's evidence is that he was instructed by Mr Alexander Mekler that he had no "present intention" of requiring payment by Rinfort of the claimed loan by Arianna Holdings within the next 12 months, and therefore recorded the amounts owing by Rinfort to Arianna Holdings as a non-current liability in Rinfort's accounts, although it was incorrectly recorded as a current asset in Arianna Holdings' accounts. In his second affidavit dated 28 October 2015, Mr Dana Mekler referred to Mr Alexander Mekler's practice to establish lending facilities under formal loan agreements, for at least some loans, and examples of such agreements are in evidence, and his evidence is that he inferred from several matters that "any amounts that may have been recorded as liabilities in Rinfort's financial accounts to Arianna [Holdings] were not intended to be repaid". Mr Mekler also led evidence, in a form that was not admissible and was rejected for form with leave, that Mr Alexander Mekler had intended that Arianna Holdings was not to call on Rinfort to repay any alleged loans. Although leave was granted to lead evidence that might have addressed that matter in an admissible way, no such evidence was led.
Mr Svehla points out that Rinfort's estoppel case is weakened by a letter from Mr Mekler to Mr Hauer dated 16 November 2014 (Ex D1, 177) where Mr Mekler accepted that the directors of Arianna Holdings "may choose to either continue to fund the loan's principal value or alternatively the directors of Rinfort must refinance the loan" and argued that, if the loan was to be continued by Arianna Holdings, it should be on terms no less favourable than were available for other inter-company or personal loans. I accept that that letter is apparently inconsistent with the position now put by Mr Mekler, on Rinfort's behalf, that the directors of Arianna Holdings were bound, by reason of estoppel, to continue that loan. However, I would not have treated that letter as sufficient to displace a genuine dispute arising from an estoppel claim, had it otherwise been shown. The decision of the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 emphasises that the existence of contemporaneous documents which are apparently inconsistent with an asserted dispute will not, or will not necessarily, prevent a genuine dispute arising for the purposes of an application of this kind. On balance, it seems to me that the evidence as to any representation by Arianna Holdings and any reliance by Rinfort led by Mr Mekler on Rinfort's behalf falls short of establishing a genuine dispute on the ground of estoppel, although it is not necessary to express a concluded view as to that matter given the conclusion that I reach on other grounds.
Mr Svehla also submits that if, which Arianna Holdings does not accept, there is a genuine dispute, then there is at least an uncontested liability of Rinfort to Arianna Holdings as at 30 June 2014 of $1,611,692 as recorded in correspondence from Mr Mekler's accountant to Mr Hauer (Ex D1, 239) and submits that the Court must vary the Demand accordingly. I do not accept that submission since the limitation defence, which I addressed above, raises a genuine dispute as to the whole of the debt and not only part of it.

Whether the amount of the debt claimed in the Demand is substantially overstated

By supplementary written submissions, Mr Assaf submits that, if a dispute as to the level of interest payable is established, then, the debt claimed in the Demand in the amount of $2,220,763.48 has been substantially overstated, and that that constitutes some other reason why the Demand should be set aside within the meaning of s 459J(1)(b) of the Corporations Act or alternatively supports a finding that the issue of the Demand is an abuse of process. I accept that a substantial overstatement of an amount claimed in a creditor's statutory demand, where a significant part of the debt claimed is genuinely in dispute, may give rise to some other reason to set aside the creditor's statutory demand: First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939; Re Wollongong Coal Ltd [2015] NSWSC 1680 at [82]. However, it does not seem to me that the factual premise of this submission is established for the reasons noted below.
Mr Assaf relies, on that submission, on Mr Mekler's evidence to which I have already referred indicating his lack of understanding as to how the amounts of the asserted debts and interest are to be calculated and on his requests for further information to substantiate the alleged loan. Mr Assaf also relies on Mr Mekler's claim, by letter dated 16 November 2014 that the interest rate charged on the "alleged" Rinfort loan was excessive. For the reasons noted above, I do not accept that a genuine dispute as to the amount claimed, or part of it, has been established by reason that Mr Mekler, as a director of and shareholder in Rinfort, expresses uncertainty or lack of satisfaction as to how the amount has been calculated, where it is supported by the financial records of both lender and borrower over a considerable period, and where he does not identify any specific challenge to any component of that amount, other than the claim as to interest and the limitation claim that I have addressed above.

Whether there is a defect in the Demand causing substantial injustice for the purposes of s 459J(1)(a) of the Corporations Act

Mr Assaf points out, and I accept, that a failure to adequately describe multiple debts may lead to a demand being set aside under s 459J(1)(a) of the Corporations Act, which provides that the Court may set aside a creditor's statutory demand where it is satisfied that, because of a defect (as defined in s 9 of the Corporations Act) in the demand, substantial injustice will be caused unless the demand is set aside.
In Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 12 ACSR 381 at 396, Lockhart J observed that a creditor which wished to have the benefit of the presumption of insolvency, arising from a failure to meet a creditor's statutory demand, should at least: "tell the debtor companies in clear terms what amounts are due, whether they include interest or not, and, if so, the amount."
In Delta Beta Pty Ltd v Vissers (1996) 20 ACSR 583 at 586, Nicholson J observed that substantial injustice will not necessarily arise where the individual amounts of each debt making up a stated total are not expressed and that: "There will not be a substantial injustice where a demand makes clear sufficient information so that the debtor, if its own recordkeeping has been adequate, is able to determine whether it is liable for the amounts claimed. …"
In Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139; (2005) 56 ACSR 223, Barrett J agreed with the observations of Lindgren J in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1955) 55 FCR 562 at 579, where his Honour had observed that: "Clearly, a statutory demand relating to two or more debts must give a 'description' of the individual debts and state their amounts as well as state the total of those amounts." His Honour noted (at [21]) that the clear intention is that a separate description and separate amount be stated for each debt, together with an aggregate amount for all together. His Honour also observed (at [25]) that the question whether substantial injustice will be caused by reason of a defect: "must, of course, be addressed in context; and it is clear that a defect will not be productive of 'substantial injustice' if the demand, viewed in the light of what the company already knows or ought reasonably be expected to know, contains sufficient information to assess its liability for the amounts demanded. …"
Mr Assaf submits that the Demand does not particularise the loans and interest amounts alleged to be owing by Rinfort to Arianna Holdings, and does not explain the terms of the loans, when they were advanced and the appropriate interest rate or rates, and that there is no specification of the interest said to have arisen or accrued as at 30 June 2014, up to 25 August 2014 or up to 25 June 2015. Mr Assaf points to Mr Mekler's evidence that he is unaware of the amounts being claimed and the interest calculated.
It does not seem to me that the principal debt is here properly characterised as amounting to multiple debts within the principle in Condor Asset Management Ltd above. It is, instead, the balance owing by Rinfort to Arianna Holdings as at 30 June 2014 as recorded in the financial statements of both entities (Ex P1, 131, 532). Mr Svehla points out that the amount of the indebtedness at 30 June 2014 specified in the Demand corresponds to that recorded in Rinfort's financial statements as at that date (Ex P2, 194) (albeit with a rounding error of $2, which could possibly be treated as immaterial, or otherwise adjusted if the Demand were not otherwise set aside). Mr Svehla refers in his submissions, and I need not set out at length, the evidence that Mr Mekler had access to those financial statements, and the opportunity for him and his accountant to review them, over an extended period. By letter dated 10 June 2015, Arianna Holdings issued a letter of demand to Rinfort for the amount of $2,165,872, identified as being the amount owing at 30 June 2014 (Ex D1, 341). Notwithstanding Mr Mekler's evidence, he must have been aware that that is the source of the figure in the Demand, albeit that he may not be aware of all of the transactions over many years which have given rise to it.
It seems to me that the specification of the interest in the Demand was defective, so far as the interest rate is not specified, but that deficiency caused no injustice, and certainly no substantial injustice, to Mr Mekler, where it was plain from contemporaneous correspondence that Arianna Holdings was claiming interest at 4 per cent per annum, and a simple calculation would have demonstrated to Mr Mekler that the amounts claimed by way of interest were consistent with the interest rate which he knew that Arianna Holdings claimed to be entitled to charge. Accordingly, to the extent that there is any defect in the Demand in respect of these matters, I am satisfied that there is no substantial injustice and the Demand should not be set aside on that basis.

Whether there is some other reason to set aside the Demand

Mr Assaf submits that the Demand involved an abuse of the statutory demand procedure. Section 459J(1)(b) of the Corporations Act allows a statutory demand to be set aside on the basis that there is some other reason why it should be set aside. The Court's power to set aside a statutory demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746; Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229; CP York Holdings Pty Ltd v Food Improvers Pty Ltd [2009] NSWSC 409. A statutory demand may be set aside under that section where it involves conduct which is unconscionable or an abuse of process: Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; (2005) 157 ACTR 22 at [27]. I proceed on the basis that the alleged abuse of the statutory demand procedure and the consequential reason to set aside the demand must be established on the balance of probabilities and that a seriously arguable case is not sufficient: MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2) [2015] FCA 1128; (2015) 109 ACSR 265 at [160].
In Repforce International Pty Ltd v Master Lease Properties Pty Ltd [2003] NSWSC 970, Campbell J set aside a creditor's statutory demand, on the basis that it involved an abuse of the statutory demand process, where the demand had been issued to seek to require payment of a disputed amount, notwithstanding that a smaller amount was conceded to be owing. In TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1074; (2007) 25 ACLC 1371 at [17], Barrett J in turn noted that: "Abuse of process is concerned predominantly with propriety of purpose. That issue must be judged according to the legitimate objectives of the particular process. A challenge under s 459J(1)(b) on the grounds of abuse of process would pay attention to the objectives properly pursued by service of a statutory demand …"
Mr Assaf submits the Demand was issued for the purpose of assisting Mrs Mekler to have Rinfort wound up, the relief which was subsequently sought in the oppression proceeding. The correspondence between the parties and discussions at directors' meetings indicates that Mrs Mekler wished to wind up Rinfort and distribute its properties between its shareholders and Mr Mekler did not. I infer that Mrs Mekler considered that an order for a winding up of Rinfort would be consistent with her commercial objectives and that Arianna Holdings is acting consistently with those objectives in bringing this application. Subject to the issue of conflicts of duty and duty that I will address below, it is by no means clear that Arianna Holdings' reliance on the creditor's statutory demand procedure would constitute an abuse of that procedure, if the debt claimed by Arianna Holdings was due and payable by Rinfort, merely because Mrs Mekler considered the relief sought would be consistent with her commercial interests. It is also not apparent that a different result should follow because Mrs Meckler subsequently brought the oppression proceeding so as to seek relief consistent with those commercial interests. It is not necessary to express a concluded view as to these matters given the findings that I have reached on other grounds.
In oral submissions, Mr Assaf submitted that the issue of the Demand involved an abuse of the creditor's statutory demand procedure so far as it was infected by a conflict affecting Mrs Mekler and Mr Maksimovich. Mr Assaf submitted that, in particular, the issue of the Demand involved a conflict between Mr Maksimovich's duties as an alternate director of Rinfort and his duties as a director of Arianna Holdings, and the interests of those entities were in conflict so far as Arianna Holdings sought to use the creditor's statutory demand procedure to terminate Rinfort's existence. Mr Assaf submitted that Mr Maksimovich preferred the interests of Arianna Holdings to the interests of Rinfort or, to put it another way, preferred his duty as a director of Arianna Holdings to the duty which he owed to Rinfort in circumstances that involved a conflict of duty and duty (T57). In the course of oral submissions on the second day of the hearing, I had initially raised the possibility that that submission may add little to Mr Assaf's submission as to improper purpose, if each would arise on the same facts and would have the same result, and Mr Assaf, perhaps too readily, accepted that proposition (T58).
On reflection, it seemed to me that Mr Assaf's submission as to conflict of duty and duty potentially raised a separate issue from his submission as to the purpose of the issue of the Demand. In particular, a question seemed to me to have arisen whether the process by which Mr Maksimovich had caused Arianna Holdings to call in Rinfort's inter-company liability to Arianna Holdings and serve the Demand had involved a real and sensible possibility of conflict of duty and duty even if, absent that conflict, the service of the Demand would have been a proper use of the creditor's statutory demand procedure under Pt 5.4 of the Corporations Act. I therefore requested further submissions by Counsel as to that issue and it was addressed with other remaining issues on the third day of the hearing.
The applicable legal principles are well-established. Relevantly, the no conflict rule prohibits conduct where a fiduciary, including a company director, owes a duty to a third party which gives rise to a real and sensible possibility of a conflict with his or her duty owed to his or her beneficiary, including the company. In Boardman v Phipps [1967] 2 AC 46 at 124, Lord Upjohn (dissenting) formulated the test for whether a conflict exists as whether a: "reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict …." In Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 at 199, McHugh, Gummow, Hayne and Callinan JJ formulated the no conflict rule as follows: "… the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is 'a conflict or a real or substantial possibility of a conflict' between personal interests of the fiduciary and those to whom the duty is owed." In Manildra Laboratories Pty Ltd v Campbell [2009] NSWSC 987 at [57] ("Manildra"), McDougall J observed that the fiduciary duties of a director involved, inter alia, a fiduciary obligation to avoid conflict, or a real or substantial possibility of conflict, between the interests of the company and interests of or duties owed by the director to others; that observation was in turn approved by Wigney J in SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079 at [21] ("SBA").
There is some authority that suggests that rule may be narrower and directed to a prohibition on a fiduciary taking advantage of such a conflict if it arises: Sir Frederick Jordan, Chapters in Equity in New South Wales (6th ed 1947) at 115; Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198; Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41 at 103; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [353]ff. On the other hand, in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 98 ACSR 615 at [266], Edelman J observed that the conflict rule extends to situations involving a "potential" for breach of duty to one principal in the case of conflict in duties owed to different principals. I need not address any difference between these approaches where the parties did not do so in submissions and no submission was made by any party that it would have any impact on the outcome of this application. Section 181(1) of the Corporations Act in turn requires a director or other officer of a corporation to exercise his or her powers and discharge his or her duties in good faith in the best interests of the corporation, and for a proper purpose. Section 182(1) of the Corporations Act prohibits a director, secretary, officer or employee of a corporation from improperly using his or her position to gain an advantage for himself or herself or someone else or cause detriment to the corporation, and that section reflects the fiduciary obligation of a director under the general law: Manildra above at [131]; SBA above at [28].
The relevant facts are also clear enough. As late as 24 November 2014, prior to the demand for repayment of the inter-company liability made by Arianna Holdings, Mr Hauer advised Mr Mekler that: "it is apparent that [Rinfort] is solvent. The Company has over $518,000 in accumulated profits - an insolvent company would not be in this position." (Ex D1, 185) That statement emphasises that, but for Arianna Holdings' causing the inter-company loan to be made due, Rinfort was solvent. As I have noted above, prior to 10 June 2015, Mr Maksimovich (who was then both a director of Arianna Holdings and an alternate director of Rinfort) and Mrs Mekler (who was then both a director of Arianna Holdings and of Rinfort, although inactive in the latter capacity) authorised Arianna Holdings to issue a letter of demand to Rinfort for the amount of $2,165,872, identified as being the amount owing by Rinfort to Arianna Holdings at 30 June 2014 (Ex D1, 341). In a subsequent exchange of emails between Mr Maksimovich and Mr Mekler (Ex D1 356-357), prior to a directors' meeting to be held on 18 June 2015, Mr Maksimovich referred to his concern that Rinfort could not repay the Arianna Holdings loan. It follows that Mr Maksimovich had, some eight days previously, taken steps to make that loan repayable in his capacity as a director of Arianna Holdings, notwithstanding the concern he shortly thereafter expressed that Rinfort could not repay it and notwithstanding that he was then an alternate director of Rinfort, acting in place of Mrs Mekler who was inactive as a director of Rinfort.
Mr Maksimovich's evidence is that Mrs Mekler and Mr Maksimovich, as the two directors of Arianna Holdings, then made the decision that Arianna Holdings should issue the Demand to Rinfort (Maksimovich 2.10.15 [128]), and that he calculated the amount that Rinfort owed Arianna Holdings as at 25 June 2015. Mr Mekler's evidence, not contradicted by any evidence led by Arianna Holdings, is that Mr Maksimovich also did not attend any directors' meeting of Rinfort after service of the Demand (Mekler 16.7.15 [16]-[19]). I am conscious that that evidence does not make clear whether such a meeting was convened, but that does not assist Arianna Holdings where Mr Maksimovich took no step to convene such a meeting notwithstanding the issue of the Demand to Rinfort.
Mr Svehla submits that Mr Maksimovich was not a shareholder of Rinfort or Arianna Holdings and would not benefit, at least in any direct financial sense, from the winding up of Rinfort. That proposition may be an answer to the existence of a conflict of duty and personal financial interest on the part of Mr Maksimovich, but is not an answer to a conflict of duty and duty, so far as Mr Maksimovich owed conflicting duties to Arianna Holdings and Rinfort, as an alternate director acting in place of Mrs Mekler in respect of Rinfort, at a time that the interests of Arianna Holdings in achieving the winding up of Rinfort and the interests of Rinfort were in conflict. There was, in the relevant circumstances, arguably no conflict prior to the point at which a question arose whether Arianna Holdings should take steps to make the liability owed by Rinfort to Arianna Holdings immediately due and payable; however, it seems to me that a real and sensible possibility of conflict of duty and duty arose, when that question arose, and Mr Maksimovich could have advanced the interests of Arianna Holdings by making that decision, at the same time as bringing about significant detriment for Rinfort if it was unable to fund a repayment that was made immediately due and payable, particularly if Mrs Mekler and Mr Maksimovich (as director and alternate director of Rinfort) then took no step to authorise it to raise such funding.
Mr Svehla also put, in oral submissions, that: "It can't be the case that, as a director of two companies, that you can't issue a demand of the creditor company or exercise your powers in that regard unless, as the director of the debtor company, you've satisfied yourself as to its means or ability to repay, or to have to put a step in place before the demand is issued." (T127) It does not seem to me that that submission addresses the relevant question. A director of Arianna Holdings was not entitled to take a step which involved a real and sensible possibility of conflict with his duty owed as an alternate director of Rinfort at a time he was acting in place of an inactive director of Rinfort. A director of both companies may potentially have avoided that conflict by, possibly, resigning from one of them, or by taking steps that promoted the interests of both companies, and not merely one of them, for example by ensuring that Rinfort had the capacity to repay the loan before Arianna Holdings called upon it. The latter step was not required as an affirmative duty by Mr Maksimovich but as a means by which he might have avoided the real and sensible possibility of conflict of duty and duty that arose in the relevant circumstances.
In these circumstances, it seems to me that Mr Maksimovich was subject to a real and sensible possibility of conflict of duty and duty, so far as he was both the decision-maker, and owed duties to Arianna Holdings, in respect of the issue of the Demand, and owed duties to Rinfort in respect of its response to the Demand, and there was a real and sensible possibility that he could not comply with both duties, where Arianna Holdings' (or at least Mrs Meckler's) perceived interest was to wind up Rinfort and Rinfort's interest was potentially to the contrary. I need not, in those circumstances, go on to find whether Mr Maksimovich's conduct amounted to an actual breach of the rule against conflict of duty and duty, or an actual preference of the interests of Arianna Holdings over the interests of Rinfort, or a contravention of s 181 of the Corporations Act, and it is preferable that I do not do so given the existence of oppression proceedings between the parties.
It seems to me that that real and sensible possibility of conflict of duty and duty affecting at least Mr Maksimovich's conduct in that respect was inherent in and central to, not merely incidental to, the issue of the Demand. I can readily conclude from the facts set out above that the inter-company liability as between Rinfort and Arianna Holdings would not have been made payable and the Demand would not have been issued, but for the steps that were taken by Mr Maksimovich while in a position of real and sensible conflict between his duties owed to Rinfort and his duties owed to Arianna Holdings. It seems to me that the issue of a creditor's statutory demand in such circumstances is an abuse of the statutory demand procedure under Pt 5.4 of the Corporations Act, which exists in the legal context of the general law and statutory duties affecting directors. The Demand should also be set aside on that basis.

Orders and costs

For these reasons, the creditor's statutory demand dated 25 June 2015 served by Arianna Holdings on Rinfort should be set aside with costs. I will afford the parties an opportunity to make submissions as to costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 March 2016

Evidence Act 2005(NSW)

Corporations Act 2001(Cth)ss 9, 181, 182, 236, 237, 459G, 459H, 459J, 588FF, Pt

Limitation Act 1969(NSW)ss 14, 54

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (95)

Cited By (9)