Rivercorp Pty Ltd v Casement

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3987/04 RIVERCORP PTY LTD v FRANK CASEMENT JUDGMENT 1 HIS HONOUR: The defendant has given the plaintiff a notice of demand dated 25 June 2004 under s 459E of the Corporations Act 2001 (Cth) ("the CA") for $80,000. Two amounts totalling some $91,000 were recorded in the books of the plaintiff as loans by the defendant to the plaintiff. They were reduced by some $11,000 out of a payment of $45,000 made by the plaintiff under an agreement to which the defendant was not a party ("the agreement"). An earlier notice of demand relating to the same debt was ordered to be set aside with costs for non compliance with the requirements of the CA. 2 The questions arising in these proceedings are as follows: (1) Is there a bona fide dispute as to whether the claimed debt existed and was immediately due and payable at the time the notice of demand was given? (2) Is there a bona fide dispute that the whole of the $45,000 paid by the company under the agreement should have been credited to the loans claimed by the defendant in the notice of demand? (3) Is there an offsetting claim of some $47,000 arising from the costs of the proceedings relating to the earlier notice of demand?

If question (1) is determined in the plaintiff's favour, the notice of demand must be set aside and questions (2) and (3) will not arise to be determined. 3 The legal principles as to the setting aside of notices of demand are well established and are not in dispute. The principles relating to the existence of a genuine dispute for the purposes of s 459H, and of an offsetting claim, are reasonably well established. They are set out as follows in the judgment in this Court of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 - 788 as follows: "It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s450H [sic]. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth' (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or 'a patently feeble legal argument or an assertion of facts unsupported by evidence': cf South Australia v Wall (1980) 24 SASR 189 at 194.

But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at 366 - 367) Hayne J said, after referring to the state of the law prior to the enactment of Division 3 of Pt 5.4 of the Corporations Law, and to the terms of Division 3: 'These matters, taken in combination, suggest that at least in most cases, it is not expected that the Court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.' In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605 Thomas J said: 'There is little doubt that Div 3 ... prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the Court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim".

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it). '

There was a discussion of the concept at appellate level in the decision of the Full Court of the Federal Court in Spencer Constructions Pty Ltd v G & A Aldridge Pty Ltd (1997) 76 FCR 452 at 462 - 465, commencing with an express approval of part of what had been said by McLelland CJ in Eq in Eyota , and concluding at 464 as follows: "In our view a 'genuine' dispute requires that:

the dispute be bona fide and truly exist in fact; the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

We consider that the various formulations referred to above can be helpful in determining whether there is a genuine dispute in a particular case, so long as the formulation used does not become a substitute for the words of the statute."

The situation as to what was necessary to make a finding of the existence of a genuine dispute of the debt on the one hand or, on the other, of an offsetting claim which could be inserted in the equation contained in s 459H to determine the substantiated amount, was stated as follows in this Court by Santow J in Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR 301 at [31], where his Honour said: "31 For the demand to be set aside on the basis of the demand debt being genuinely disputed, it must be established by the Plaintiff that the dispute concerning its existence is bona fide and not spurious, hypothetical, illusory or misconceived: Spencer's case, (supra). In other words, there must be a plausible contention requiring further investigation which genuinely puts in dispute the debt which grounds the statutory demand. But the merits are not now to be determined beyond the preliminary testing as to whether there is a serious question to be tried. The alternative basis for the demand to be set aside or reduced by reason of an offsetting claim involves, as I have said, a different test. The question is not whether there is a genuine dispute in the above sense against the offsetting claim. The question is rather whether the 'offsetting claim' can be shown to be 'not frivolous or vexatious': Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37. That places a heavier onus on the party seeking to maintain its statutory demand, than if it merely had to establish the reciprocal of a genuine dispute against the offsetting claim."

The principles were stated by me in the terms set out in this paragraph in Remuneration Planning Corporation Pty Ltd v Paidion Foundation Pty Ltd [2001] NSWSC 598. 4 Since then Barrett J has summarised the legal situation as follows in CGI Information Service Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] 47 ACSR 100 at [16]. "It is unnecessary to canvass in detail here the scope of 'genuine dispute' ground under s 459H as laid down in well known cases such as Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 362; Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 and Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; 147 ALR 444; 24 ACSR 353. It is sufficient that I repeat what I have said in other cases, namely, that the task faced by the company challenging a statutory demand on the genuine dispute grounds is by no means at all a difficult or demanding one. The company will fail in that task only if it is found, upon the hearing of its s 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger." 5 The facts as they appear from the evidence are as follows. Prior to 1 July 2002 Stephen McCann was the sole shareholder and director of the plaintiff company. Monica Casement was his wife. She was employed as the plaintiff's bookkeeper. The defendant, who lives in the USA, is her brother. 6 A sum of $46,997.08 (apparently the proceeds of a transmission from the US of $US25,000) was recorded in the plaintiff's books as lent by the defendant on 29 March 2002. The evidence concerning the advance and transmission of those funds and the terms of their repayment is exiguous. It was Monica Casement who asked her brother for financial assistance for the company. Sean Brosnan and Tony Rowe were not at that time involved in the company. 7 On 1 July 2002 each of those gentlemen acquired one third of the shares of the company. By resolution of that day each was appointed a director of the company. None of those transactions was recorded in the companies registry until 2003 - in fact, it never was recorded that Tony Rowe had become a director of the company, and Sean Brosnan is now recorded as its sole director. However, it would appear from the evidence that after 1 July 2002 they both commenced to act as directors. In late September or October 2002 there was some suggestion that the defendant would acquire shares in the company (whether from an existing shareholder or by issue of fresh shares is unclear). The defendant transmitted a further $US25,000 to Australia. The proposal that he acquire shares did not proceed. Again, the evidence of the nature of the transaction which led to the payment and of the terms of the payment is exiguous. On 1 November 2002, Monica Casement, at the direction of Stephen McCann, recorded a further loan of $44,658.78 by the defendant (it would seem the proceeds of the second $US25,000 transmission) in the company's books. 8 Shortly afterwards, there was a falling out between Stephen McCann, on the one hand, and Sean Brosnan and Tony Rowe, on the other. Monica Casement was dismissed from the company's employ. There were allegations of misconduct by Stephen McCann. On 23 April 2003 the dispute between Stephen McCann, Brosnan, Rowe and the company was resolved by the agreement. A curious feature of the agreement, in so far as it dealt with the defendant's loan account, was that the defendant was not a party to the agreement. The parties were McCann, Brosnan, Rowe and the company. The relevant provisions of the agreement are essentially as set out in the defendant's written submissions: "1 Definitions

'Casement Loan Account' means all loans or other monies owed by the Company to Frank Casement. 'First Instalment Amount' means Five Thousand Dollars ($5,000) 'First Instalment Date' means 17 April 2003 or the WIP Entry Finalisation date whichever is the later 'Monthly Instalment Amount' means Forty Thousand Dollars ($40,000.00) 'Monthly Instalment Dates' means 30 April 2003, 31 May 2003 and 30 June 2003. "SMC Loan Account" means all loans and other moneys owed by the Company to SMC. 'Total Loan Payment Amount' means $125,000.

22 SMC agrees that the $50,000 withdrawn by him on or about 10 April 2003 from the Company's lank account was in reduction of the SMC Loan Account balance prior to that date.

23 The Company agrees to repay the balance of the SMC Loan Account and the Casement Loan Account in the following manner;- 23.3 the Company will pay the First Instalment Amount on the First Instalment Date; and

23.4 the Company will pay three instalments on the Monthly Instalment Amount prior to the Completion Date.

In the event of default in any payment the whole of the balance will be immediately due and payable and interest shall accrue on any outstanding sum at the rate of 15% per annum until all sums have been paid and any payment after default shall be first in payment of interest and then in payment of the outstanding Monthly Instalment Amount.

24 SMC agrees that upon the payment of the amounts referred to in paragraph 22 no further amount will be owing by the Company to SMC or Frank Casement for the SMC Loan Account and the Casement Loan Account.

25 SMC agrees and acknowledges that he has authority to receive the payment in respect of the Casement Loan Account on behalf of Frank Casement." 9 It is to be observed that there was no adversion in the agreement to the amounts of the loan accounts, either the Casement loan account or the McCann loan account. There is no evidence at all as to the quantum at any time of the McCann loan account. It is unclear whether there was an element of compromise and, if so, what it was, in the payment that was to be made under the agreement. Under the agreement the company was to pay $125,000. Only some $45,000 was paid. Of that, the defendant received some $11,000 and that is the sum which reduced his claim from $91,000 odd to the $80,000 claimed in the notice of demand. 10 Between late October 2002 and April 2003 Brosnan deposes that there were various conversations between him and Rowe, on the one hand, and McCann, on the other, which contained suggestions that the loans were made by the defendant not to the company but to Stephen McCann or to Monica Casement. These conversations are denied by McCann, but whether or not they occurred is a matter that cannot be resolved in these proceedings. If the conversations as deposed to by Brosnan are accepted, they are strongly suggestive that the loans were not made to the company at all. 11 The defendant's case is that the entries relating to the Casement loan account in the company's books plus the acknowledgment of the Casement loan account in the agreement make it quite plain that the debt as claimed by the defendant in the notice of demand was due and owing: there is no bona fide dispute. 12 The agreement cannot operate as an agreement binding the company vis a vis the defendant (or vice versa), as the defendant was not a party to the agreement. But it does provide some evidence that the company acknowledges that there was a Casement loan account. It does not, however, contain any acknowledgment as to the amount of that loan account or as to the terms of the advances. Furthermore, as I have already made plain, the agreement cannot operate in any binding way between the plaintiff and the defendant. At best it is only one piece of evidence as to the existence of the debt recorded in the loan account. Bearing in mind that the agreement arose in the context of settlement negotiations between the two sides in dispute, it may be that it should be regarded as a fairly equivocal piece of evidence. 13 The plaintiff bears the onus of establishing that there is a bona fide dispute: see Re Mega Engineering Australia Pty Ltd (1997) 24 ACSR 683 at 684 (Shepherdson J); Europecars Pty Ltd v Century International Ltd 1999 30 ACSR 774 at [6] and [7] (Lehane J); Sterling Estates (SA) Pty Ltd v Bradley (2000) 34 ACSR 177 at [16] (Hamilton J). It seems to me on the material available that it has established at the very least that further investigation of the situation is warranted. In my view, there is a bona fide dispute in the requisite sense as to whether the debt claimed was owed by the company to the defendant and as to whether or not it was due and payable at the time of the notice of demand. That conclusion, as I have already indicated, is determinative of the present proceedings. I need not decide the second and third questions and do not do so. I shall say only the following. It seems to me difficult to see, bearing in mind the nature of the agreement, even including the warranty by McCann that he had been appointed agent by the defendant to receive the Casement loan account, how it could be concluded as between the plaintiff and the defendant that the portion of the $45,000 not on paid by McCann to the defendant should be regarded as credited in effect to the defendant's loan account. On the other hand, as to the third question, there was really no conflict. The parties were agreed that the law as to offsetting claims under this legislation was correctly set out in my decision in Glazier Holdings Pty Ltd v Meehan [2004] NSWSC 185. Whilst a bill of the costs of the earlier proceedings has been drawn up by independent costs consultants, it has not been assessed. But, as it is not the Court's function to value the claim, it would seem clear that there is an offsetting claim of some $47,000 that would have to be brought into account if I had not decided question (1) in the plaintiff's favour. On that basis, even if the plaintiff did not succeed on the second question, the notice of demand would have to be varied by reducing the claim to $32,570.11. 14 However, as I have said, the view that I have taken of the first question leads to the conclusion that the notice of demand should be set aside. It seems to me inevitable that the defendant must pay the plaintiff's costs of the proceedings. 15 The orders of the Court, therefore, are: (1) Order that the notice of demand under s 459E of the CA dated 25 June 2004 given by the defendant to the plaintiff be set aside. (2) Order that the defendant pay the plaintiff's costs of the proceedings.

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