39 I am satisfied that there is a genuine dispute as to whether Tokich Holdings is indebted to Sheraton Constructions either for money lent or for money had and received by it to Sheraton Construction's use. It is therefore not necessary to decide whether, if I had been satisfied that Tokich Holdings was indebted to Sheraton Constructions beyond genuine dispute for money lent, the statutory demand "related to" that debt, even though the debt was not so described in the demand. I incline to the view that the demand "relates to" an alleged debt arising from the payment by Sheraton Constructions to Tokich Holdings. It is not necessary for the statutory demand to set out all the facts which would give rise to a cause of action for recovery of the debt, such as the existence of an express or implied promise to repay. However it is unnecessary to decide whether the demand "relates to" a debt for money lent. I should note that no submission was made that if Tokich Holdings was indebted to Sheraton Constructions for money lent, the statutory demand was invalid as it did not specify that debt as required by s 459E(2).
40 Another possible way of characterising the transaction based on Mr Tokich's evidence and the supporting documents from Australian Mortgage Administration Ltd is that Mr Joso and Mrs Maria Tokich lent the money which they had borrowed from Perpetual Trustees Victoria Ltd to Sheraton Constructions at the request of Mr Robert Tokich, or that Sheraton Constructions was liable to Mr & Mrs Tokich for $300,000 as money had and received by it for their use, and that that debt was discharged by the payment of $300,000 to Tokich Holdings. The material in Mr Robert Tokich's first affidavit together with the documents in exhibit C establish a reasonable possibility that Sheraton Constructions was indebted to Mr & Mrs Tokich for the $300,000 which Mr Robert Tokich says was advanced to the company from moneys obtained from "Australian Mortgage". Such a debt could be repaid by a payment to Tokich Holdings if made on the direction of Mr & Mrs Tokich, or on the direction of Mr Robert Tokich if he were acting on their behalf.
41 In paragraph 12 of Mr Robert Tokich's affidavit of 2 June 2004 he swore that when he filled out the cheque butt he intended to record that the payment to Tokich Holdings was repayment of $300,000 that it had given as part of the purchase price. This raises another possibility that the moneys borrowed by Mr & Mrs Tokich were lent by them to Tokich Holdings, which in turn lent the moneys to Sheraton Constructions, and that loan was repaid by Sheraton Constructions on 27 June 2000.
42 The evidence is in many respects unsatisfactory. There is a reasonable possibility that Sheraton Constructions borrowed $300,000 from either Mr & Mrs Tokich or Tokich Holdings. If it was indebted to Mr & Mrs Tokich in respect of $300,000 received from them, it must be at least as probable that the payment of $300,000 was made to discharge that debt as it was to create a cross-debt of $300,000 owed by Tokich Holdings to Sheraton Constructions.
43 The matter is further complicated by Sheraton Constructions having acted as a trading trustee and by the accounts created as at 30 June 2000. The financial statements and trial balances as at 30 June 2000 show that in the twelve months to 30 June 2000 the company made a trading profit of $663,186 arising from the sales of the land. After taking into account a trading loss to 30 June 1999 of $76,675 there were accumulated profits as at 30 June 2000 of $586,511. The trial balance purportedly records that that amount of profits had been drawn by three beneficiaries being Tokich Holdings Pty Limited, a trust nominated by I Posa and Mr Robert Tokich. The amount of drawings for Tokich Holdings Pty Limited was $287,390.
44 Mr Nicols the liquidator of Sheraton Constructions swore that he had not been provided with any minute with respect to a resolution concerning distribution of trust moneys, nor a trust deed, nor books and financial records which would show that a distribution was made out of the profits of the trust. He swore that he was unable to verify the statements in the accounts that a share of profits of $287,390 was paid to Tokich Holdings from any source financial records. There is no primary record of any allocation of units to Tokich Holdings. Although the evidence contained in the supporting affidavit of Mr Tokich sworn on 16 April 2004 together with its annexures raises the possibility that the payment of 27 June 2000 to Tokich Holdings was a distribution of profit at least as to $287,390, the evidence of such a distribution is scant. There is every reason to doubt the reliability of the financial statements of Sheraton Constructions as at 30 June 2000.
45 I should add for completeness that the liquidator of Sheraton Constructions contended that the trial balance of the defendant showed a deficit of trust funds at $586,511. It was submitted that this was inconsistent with any distribution being made from profits, because there were none. However when all of the entries in the trial balance are considered it seems to me that the reference to a "deficit in trust funds" is really a reference to a purported distribution of profits. Prior to the alleged distribution the company had sufficient assets to make such a distribution without going into deficit. However in the absence of any source financial records it is not clear how the profits of the venture were dealt with.
46 Notwithstanding the entry made on the cheque butt by Mr Tokich, I am satisfied that Tokich Holdings has a plausible contention requiring investigation that it is not indebted to Sheraton Constructions in respect of the payment of $300,000 made on 27 June 2000. It is not appropriate that I attempt to identify the likely result of Sheraton Constructions' claim or the likely result of any defence. It is not appropriate to decide whether Mr Tokich's sworn evidence about his intentions in filling out the cheque butt should be given credit. To hold that there is no genuine dispute that the payment was by way of loan to Tokich Holdings would be to reject Mr Tokich's explanation as to his intention in completing the cheque butt. It is generally not appropriate on an application under s 459G to embark upon an enquiry as to the credit of a witness.
47 Counsel for Sheraton Constructions submitted that as Mr Tokich was at all relevant times a director of both companies, he was required by s 286 of the Corporations Act 2001 to ensure that the companies kept written financial records that correctly recorded and explained their transactions and financial position and performance and which would enable true and fair financial statements to be prepared and audited. It is true that each of the companies was under the obligation to keep such financial records and that I could infer that Mr Tokich was required in the exercise of his duties as a director to ensure that the companies did so. Sheraton Constructions did not keep proper records. But it does not follow that Tokich Holdings is precluded from disputing the existence of the debt, or that the absence of proper records indicates that the dispute about the debt is not genuine.
48 Counsel for the defendant also submitted that Mr Tokich failed to respond to a specific query raised by the liquidator of Sheraton Constructions as to what was the consideration for the payment of $300,000. The request for that explanation was made on 8 October 2003 as part of a request for a wide range of information relating to the affairs of Sheraton Constructions. The liquidator had received no reply to his letter. I do not infer from Mr Tokich's failure to reply to the letter that the payment was by way of loan or was money received by Tokich Holdings to Sheraton Constructions use.
49 For these reasons I am satisfied that there is a genuine dispute between Tokich Holdings and Sheraton Constructions about the existence of the debt to which the latter's demand relates.
Grounds Identified in the Supporting Affidavit
50 It was not submitted for Sheraton Constructions that the affidavit of Mr Robert Tokich of 16 April 2004 did not satisfy the minimum requirements of an affidavit "supporting the application" referred to in Graywinter Properties Pty Ltd v Gas and Fuel Corporation Superannuation Fund (1996) 70 FCR 452. However counsel for Sheraton Constructions did submit that the only ground identified in the affidavit as giving rise to a genuine dispute was that the payment of $300,000 was the repayment of a loan of $300,000 that Tokich Holdings had made to Sheraton Constructions. He submitted that Tokich Holdings was precluded from raising any other ground as a basis for asserting a genuine dispute as to the debt.
51 It is established that an applicant under s 459G of the Corporations Act may not rely on grounds for disputing the debt to which the statutory demand relates, if these grounds are not raised in the supporting affidavit or affidavits filed within the 21 day limit. (Energy Equity Corporation Limited v Sinedie Pty Limited (2001) 166 FLR 179 at 185). The High Court refused special leave to appeal from this decision. (See casenote "Timely Response to Statutory Demand: Graywinter Revisited", by L. Aitken and S Armstrong, (2003) 77 ALJ 434).
52 The precision with which the ground of dispute must be identified in the supporting affidavit has been addressed in a number of cases.
53 In Process Machinery Australia Pty Limited v ACN 057 262 590 Pty Ltd (2002) NSWSC 45 at [21]-[22] Barrett J, after reviewing the authorities, said:
"[21] It is thus reasonably clear that the relevant concept of "raising" or "identifying" a particular ground involves some verbal delineation of that ground in the s 459G(3)(a) affidavit. If a debt of $10,000 were claimed as one year's interest under a contract providing for interest at the rate of 9% per annum on a principal sum of $100,000, it would not, in my opinion, be sufficient for the affidavit to annex the loan agreement and say no more. It would have to refer at least to the connection between the contract and the debt claimed and put in issue the calculation of interest - even if it merely said, "The debt does not accord with the annexed contract".
[22] The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiably with one or more of the grounds made available by s459H and s459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period."
54 The authorities were again reviewed by Austin J in POS Media Online Limited v B Family Pty Limited (2003) 21 ACLC 533 where his Honour concluded in respect of the passage from Process Machinery Australia Pty Ltd v ACN 057 262 590 Pty Ltd which I have quoted (at 541):
"With respect, these observations are a logical application of the principle enunciated in Energy Equity . However, they might arguably take Sundberg J's observations in Graywinter further than the Financial Solutions case would now take them, and be inconsistent with the decision in Callite . If it was unnecessary for the supporting affidavit in Callite to do anything more than annex the solicitor's invoices, on the face of which there were non-compliances with the Legal Profession Act , why would it be necessary for the supporting affidavit in Barrett J's hypothetical example to do anything more than annex the loan agreement showing a different rate of interest from the one claimed?"
55 His Honour's reference to the "Financial Solutions Case" was to Financial Solutions Australasia Pty Limited v Predella Pty Limited (2002) 26 WAR 306; 167 FLR 106. The reference to Callite was to the decision of Santow J in Callite v Adams [2001] NSWSC 52.
56 Although in Process Machinery Barrett J referred to a need for verbal delineation of the ground of dispute, his Honour went on to say that what was necessary was that "the application and affidavit filed and served within the 21 day period must fairly alert the claimants to the nature of the case the company will seek to make in resisting the statutory demand". It will be sufficient if the area of controversy is clearly delineated by necessary inference so that it is identifiable as one or more of the grounds made available by s 459H and s 459J.
57 In the present case I am of the view that the supporting affidavit did adequately identify the grounds of dispute as being that the payment of $300,000 to Tokich Holdings was either a repayment of existing indebtedness of that company, or a distribution to a beneficiary. The supporting affidavit did not confine the ground of dispute to the payment being a repayment of a loan made by Tokich Holdings. The liquidator of Sheraton Constructions responded in his affidavit to those claims.
58 For these reasons, in proceedings number 2447/04 I will order that the statutory demand be set aside.
Proceedings 6104/03: Application to be substituted as creditor
59 There was no dispute that I had power to set aside the Registrar's order dismissing the winding-up application under Pt 40 r 9. The circumstances in which that order was made in the absence of Sheraton Constructions were sufficiently explained. The parties, correctly in my view, dealt with the application of Sheraton Constructions to be substituted as creditor on its merits.
60 Counsel for Sheraton Constructions submitted that even if I were to find that his client's debt was genuinely disputed, nonetheless his client should be substituted as plaintiff pursuant to s 465B. He relied on the Federal Court decision of Spender J in ACP Syme Magazines Pty Limited v Tri Automotive Components Pty Limited (1997) 74 FCR 372. This submission was not developed. Counsel for Tokich Holdings was content to rely on the judgment of Ryan J in South Eastern Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465; 14 ACLC 1,328.
61 In ACP Syme Magazines, as in the present case, the company had failed to satisfy a statutory demand of a creditor within the period of 21 days and had not applied to set aside the statutory demand. There was therefore a presumption of insolvency. There was nothing in the evidence to rebut the presumption of insolvency. The creditor applied under ss 459A and 459P for an order that the company be wound up in insolvency. After two adjournments that creditor was excused from further attendance. Presumably its debt was paid or compromised. (See at 376). The applicant, ACP Syme Magazines, applied to be substituted as the applicant for winding up. The company opposed the application on the ground that no money was owing by it to ACP Syme Magazines. Spender J held that there was a bona fide dispute as to the existence of the debt claimed by ACP Syme Magazines (at 380). His Honour did not attempt to resolve that dispute. Rather he found that the company was not only presumed to be insolvent but on the evidence before him was actually insolvent and ordered its winding up. Spender J recorded the submission for the respondent company that a substituted applicant has no authority to continue with the application unless it is a creditor and the Court cannot order the winding up of the company unless it is satisfied that the substituted applicant is a creditor. The respondent company relied on s 459P of the Corporations Law. That section provides:
"459P WHO MAY APPLY FOR ORDER UNDER SECTION 459A
(1) [Applications of right] Any one or more of the following may apply to the Court for a company to be wound up in insolvency:
(a) the company;
(b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);
(c) a contributory;
(d) a director;
(e) a liquidator or provisional liquidator of the company;
(f) ASIC;
(g) a prescribed agency.
62 Section 465B provides:
"465B SUBSTITUTION OF APPLICANTS
465B(1) [Substitution of person who could have applied] The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up.
465B(2) [Grounds for substitution] The Court may only make an order if the Court thinks it appropriate to do so:
(a) because the application is not being proceeded with diligently enough; or
(b) for some other reason.
465B(3) [Substituted applicant may be original applicant] The substituted applicant may be, or the substituted applicants may be or include, the person who was the applicant, or any of the persons who were the applicants, before the substitution.
465B(4) [Substituted applicant to proceed as original applicant] After an order is made, the application may proceed as if the substituted applicant or applicants had been the original applicant or applicants.
63 Spender J held (at 376) that:
"This submission, in my opinion, involves a misunderstanding of the nature of a winding-up application, and the submission is inconsistent with what in my view is the better view of the law as reflected by the authorities."