Universal Greening Pty Ltd v Sabine

BACKGROUND FACTS 5 Universal Greening is a company concerned with the development, for commercial purposes, of means of converting organic waste into soil organics. The company commenced operation in 1993. It was intended to hold intellectual property, particularly the intellectual property related to what has been styled the Murphy compost maker. Dr Sabine was amongst the company's first directors and Sabine Holdings is a shareholder. 6 Universal Greening has, at all times, suffered from a shortage of working capital. Counsel for Universal Greening submitted that the sums of $5,000, advanced by Dr Sabine (assuming, for present purposes) in November 1994, and $20,000, advanced by Sabine Holdings in April 1995, were raised "on passing around the hat", in order to ensure the company had sufficient funds to continue trading. Those sums, were, so counsel said, advanced on the footing that they would be repaid when Universal Greening came into sufficient funds. 7 The circumstances attending the making of the loans can be gleaned in part from the manner in which they were treated at board level as well as by the company's accountants. The company's accountants, Hughes Fincher, specifically stated, in a letter dated 10 November 1994 and addressed to Dr Sabine, that they were treating the $5,000 contributed by him as a loan to the company. That sum and the subsequent sum of $20,000, which was contributed by Sabine Holdings, were the subject of a resolution by the directors of Universal Greening at a meeting on 1 May 1995. The minutes for that meeting record: J R SABINE LOAN: The contributions of J R Sabine to the company were gratefully acknowledged. This comprises $5,000 loaned on 10 November 1994 and a further $20,000 loaned on 3 April 1995. It was resolved that these loans be recorded in the company's financial accounts as unsecured loans and that these loans bear interest at 20% per annum simple. It was also resolved to send Dr Sabine a copy of this minute as evidence of the company's acceptance of these terms. 8 Universal Greening further submitted that the payment of $13,775, made by Dr Sabine to Headerworld Pty Ltd on 1 September 1995, either had not been authorised or had been made on the basis that it was not repayable until the company came into funds so that it could afford to make repayment. 9 Again, the circumstances relating to the provision of the loan are discussed in the company's records. The minutes of a meeting of directors on 19 August 1995 refer to what was to become the payment of $13,775 made by Dr Sabine to Headerworld Pty Ltd on the company's behalf on 1 September. According to those minutes, the sum was intended to pay for modifications to the composter. The minutes of 19 August 1995 record the directors' acceptance of a loan of $14,500 which was to be paid back "as soon as possible". It is not, I think, disputed that the company subsequently issued a further 725 of its shares at par ($1 per share) to Sabine Holdings in reduction of the debt of $14,500 to $13,775. 10 Universal Greening went on to claim that a payment of $32,000 made on 20 December 1995 by Sabine Holdings to Abattoir Engineering (a division of Pinches Industries Pty Ltd) ("Abattoir") for the purchase of a pre-breaker (a kind of shredder) to be installed at a wholesale fruit and vegetable market in Melbourne was not authorised, alternatively was not repayable until Universal Greening came into funds. That loan too was apparently the subject of discussion by the board of directors. One item on the agenda for a meeting of directors on 21 December 1995 is described in the following terms: Temporary Loan Facility Recommendation That an offer to provide temporary financial accommodation by Dr John Sabine to the extent of $40,000 for a period of two months with the prepayment of interest of $2,000 be approved. Background The need to acquire a shredder has been well established and with the proximity of the Christmas break and prospect of a minor delay in clearing the first payment from the new major shareholder, John Sabine has once again offered to step into the breach on a short term basis. It is recommended that John Sabine's offer be accepted given the importance of demonstrating our capacity to HPC. The minutes of the subsequent directors' meeting held in December recorded: Temporary Loan Facility - Noted that JS has already transferred $32,000 to Abattoir Engineering for the purchase of the shredder. (The terms of the documents to which I have just referred fail to support the claim made by Universal Greening that Dr Sabine did not disclose, at the December meeting, that he had purchased the equipment and installed it at the market and that the purchase was unauthorised.) 11 Universal Greening conceded that the sum of $18,500 which was paid by Dr Sabine on 15 April 1996, was advanced to ensure that the company's patent applications went ahead. Its counsel submitted, however, that the advance was made on the basis that the sum would not be repaid until the company came into funds. 12 The circumstances attending the making of the loan can be discerned from the board minutes. The agenda for a meeting of directors on 22 April 1996 included an item which read as follows: Item 17. Patents Recommendation That the company proceed with the completion of registration of all provisional patents. That Dr J Sabine be reimbursed for patent costs incurred for those countries requiring action by 20 April, 1996. The board minutes for the meeting of 22 April 1996 record: 17 Patents - due to timely action on the part of J Sabine and the loan by him to UG of $18,500, UG now holds the patent rights in USA, Canada, China, Japan and Australia. - UG has 1 month to decide to spend another $17,500 to obtain the rights in NZ and Europe, this decision put off until a future board meeting. - The board ratifies that J Sabine has loaned UG the money for the patents and that he be reimbursed the costs. That position was confirmed at board meetings on 29 April and on 27 May 1996. The minutes for the meeting of 29 April 1996 record that: It was agreed that Dr J Sabine be reimbursed for patent costs incurred for those countries requiring action by 20 April 1996. At the meeting on 27 May 1996, it was agreed, according to the minutes, that: J Sabine, in consideration for payment of the patent costs, be granted a charge over the patent for the composter. J Sabine requested that it be on record that he did not request this. 13 The submissions made by Universal Greening find little or no support in subsequent exchanges between it and its legal representatives and the respondents and their legal representatives. Dr Sabine ceased acting as director on 20 October 1997. In a letter to Dr Sabine dated 21 October 1997, Peter Ellyard then Chairman of the board of directors, relevantly said: I am mindful of the outstanding loans which you have made to the company. I shall ensure that repayment of Director's/Shareholder's loans remain a top priority, and that you will be repaid in full in the shortest possible time. 14 In a letter dated 1 April 1998 Graeme McCrae, then the company's managing director, advised the respondent's solicitors, Messrs Nicholas Brand and Co, that Dr Sabine's "company's entitlements would be paid to him as soon as it could be arranged and after the quantum of those entitlements was agreed". By letter dated 14 May 1998 to Messrs Nicholas Brand and Co, Messrs Rogers and Gaylard, solicitors for Universal Greening, wrote: We confirm our telephone advice to you of 14 May, 1998 that the statutory demand, made by your clients and dated 5 May, 1998, have been handed to us by our client company. We further confirm that this statutory demand shall be paid promptly. Whilst the letter refers to "the statutory demand" partly in the singular and partly in the plural, it seems clear enough that it was intended to refer to both demands and, in effect, incorporates the two demands into one. 15 Consistently with those letters, there is uncontested evidence, in the affidavits of Dr Sabine sworn 8 August 1998 and Mr Brand sworn 12 August 1998, that the solicitor for Universal Greening, Mr Mullins, spoke by telephone to Mr Brand, the respondents' solicitor, on 4 May, stating, amongst other things, that (i) Universal Greening was making arrangements to repay the loans which were then owing to the respondents; (ii) he did not encourage Universal Greening to pursue litigation if it could be prevented and, for that reason, was encouraging it to make the necessary arrangements to repay the loans; and (iii) a firm proposal for repayment would be made within a couple of days. There is also uncontested evidence that Mr Mullins telephoned Mr Brand on 14 May 1998, stating, amongst other things, that Universal Greening would meet both statutory demands promptly. 16 Prior to this, the applicant had given only one possible indication to the respondents that it might challenge the existence and the amount of the loans. That was the assertion by Graeme McCrae in his letter of 1 April 1998 that "the basis and quantum" of the demands for the payment made on 30 March would be "strenuously resisted" if the "matter" was not "deal[t] with … in a constructive way".

assessing the applicant's submissions (a) Genuine dispute about the debts 17 I reject the submission made by counsel for Universal Greening that there is no debtor/creditor relationship between Universal Greening on the one hand and Dr Sabine and his company on the other. In support of that submission, applicant's counsel relied on a decision of Fullagar J in Ogilvie v Adams [1981] VR 1041. That case does not assist. In this case, the contracts establishing the relevant debts are either admitted or are plain on the face of the evidence before the Court (even if the precise terms of the stipulation as to the time for repayment is unclear). 18 I reject the submission made on behalf of Universal Greening that there is a genuine dispute, within the meaning of s 459H(1)(a), about the existence or amount of the debts to which the demands relate. The relevant principles are not in dispute. They are conveniently summarised in Spencer Constructions Pty Ltd v G & M Alridge Pty Ltd (1997) 76 FCR 452 at 464, in the joint judgment of Northrop, Merkel and Goldberg JJ, as follows: In our view a "genuine" dispute requires that: - the dispute be bona fideand truly exist in fact; - the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. 19 Having regard to the evidence, I am not satisfied that the applicant has satisfied even that comparatively low standard. The claim that the loans made by the respondents were made without the authority of Universal Greening (or were not ratified by it) is, in my view, groundless. Nor do I think the applicant has made an effective answer to the demands by its claim that the loans were "conditional loans" in the sense that, as the applicant's counsel said, they were "predicated on the understanding as between directors that moneys would only be repayable when the company either through cash flow or through the provision of further capital could afford to do so". It is, in my view, immaterial that the directors, or some of them, remained hopeful that the provision of funds, from York Private Capital Pty Ltd or some other lender, was, as the applicant's counsel put it, "literally just around the corner". 20 Let it be assumed that the respondents made the loans (or part of them) upon terms that they were repayable by Universal Greening only when Universal Greening could afford to make repayment. If such were the case, then, in my view, the term as to repayment was void for uncertainty. That conclusion is supported by the decision of Sholl J in Bailes v Modern Amusements Pty Ltd [1964] VR 436 and by the decision of Drummond J in Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1993) 11 ACSR 1. 21 In Argyll Park, the directors of the applicant company deposed that loans, made to it by the respondent company, were repayable only when the borrower's directors believed that the borrower was in a position to repay them. That claim was not, so Drummond J held, an effective answer to a demand for repayment of the loan. His Honour said, at 3-4: In Head v Kelk [1963] 63 SR (NSW) 340, in a claim for money lent, the plaintiff demurred to a plea in the defence that the money was lent upon the terms and conditions as to repayment that the defendant would be bound to repay the same when he was financially able to do so, and not before, on the ground that the agreement alleged in the plea did not constitute a contract as it was so vague and uncertain as to be unenforceable. The plaintiff's demurrer was overruled. This decision was distinguished in Bailes v Modern Amusements [1964] VR 436. That case involved an agreement between a company and a shareholder that a loan by the shareholder would be repaid by the company when the company considered it was in a position to repay it. Sholl J held that that agreement was void for uncertainty. At 441, his Honour said: Notwithstanding Head v Kelk and the other authorities referred to, I have come to the conclusion, after careful consideration of the wording of this alleged term, that I ought not to hold it to be valid. Either it is illusory or it is not sufficiently certain to be enforceable. If it confers on "the company" an arbitrary discretion to determine whether and to what extent (if at all) the moneys are to be repaid, it is an attempt to cut down to an illusory obligation what would otherwise, as I have held, be an obligation to repay on demand. If, however, it is to be understood as imposing an obligation to repay whenever, acting bona fide, the company … is bound properly to consider itself in a position to repay, nevertheless in my opinion it is still too uncertain to be valid. It appears to me to admit a number of alternative meanings. It may be that the true distinction between Head v Kelk and Bailes is that if the question whether the agreed time for repayment has arisen can be determined objectively, then the term will be valid; but, if the agreed time for repayment operates in a subjective way by leaving it to the borrower to decide for himself when, if ever, he will repay, the term will be void as illusory: see Bailes at 440 and cf Godecke v Kirwin (1973)129 CLR 629 at 645-6. 22 If there was an agreement such as Universal Greening claims, between it and the respondents, that was intended to have contractual effect and under which the moneys demanded were lent, then that agreement was void for uncertainty. A term to the effect that none of the loans were repayable until Universal Greening could afford to make repayment leaves it to the borrower to decide when, if at all, the occasion for repayment might arise. As Sholl J observed in Bailes at 438, a term of this kind would "prompt in the mind of the reader a whole series of questions as to what the parties intended". First, who was to determine when the company could afford to repay? Secondly, what is meant by "afford to make repayment". To adapt the observations of Sholl J in Bailes at 440: Does it meant out of capital, or out of income only? Or out of gross profits? Or out of net profits? Would it be inconsistent with the intention of the parties if the board determined that the company was not in a position to pay because to do so would inhibit plans to expand its operations? Finally, how long was the stipulation to operate? Was it was to extend beyond liquidation, with the result that the loans become irrecoverable? 23 The loan, of course, remains and so does the promise to repay, although not on the terms for which Universal Greening has contended. When then must the borrower repay? In Argyll Park, Drummond J dealt with the matter, observing at 4: In Bailes at 442, Sholl J stated: In those circumstances I consider that the term limiting the right to repayment is void for uncertainty, but that in its absence there remains an agreement for a loan The law is that where there is an agreement for a loan and the time for repayment is not fixed by the agreement, any money advanced will be repayable on demand: Bailes at 441 or perhaps, more accurately, without any previous demand. See Chitty on Contracts, 26th ed, at para 3582. That too is the position in this case. The moneys advanced by way of loan were, in my view, repayable on demand in the event that an arrangement of the kind for which Universal Greening contends was made. The respondents would reach the same result more directly: they contend the loans were always understood to be repayable on demand. In view of my conclusion as to the efficacy of the applicant's answer, I do not need to examine that aspect of the matter further. 24 The decision of Williams J in Woods Bagot Pty Ltd v Poppy Lodge Pty Ltd (1995) 65 SASR 583 does not dictate a different result. In that case Williams J held that a loan to a company upon terms that the loan "would be for as short a time as possible, repaid as soon as we can see our way clear in a cash management situation" was repayable on demand. His Honour added, at 587, that "in some circumstances the 'cash management' clause now under review (when examined in the light of the director's assessment of the relevant financial situation) might assist in making a decision as to what would be reasonable as regards time for compliance with the creditor's demand". 25 Accordingly, I accept the respondent's submission that the loans were repayable on demand, either because that is what the parties expressly agreed, or because that is what the law provides is the effect of a term of the kind for which Universal Greening contends. Where a debt is payable on demand, the debtor is entitled to a reasonable time to comply with the demand: see Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491 at 502-503. In the circumstances, Universal Greening has had more than sufficient time to comply with the demands made by the respondents. The loans made by the respondents are due and payable and were so at the time of the statutory demands. (b) Offsetting claim 26 Universal Greening, by its counsel, also submitted that it has an offsetting claim within the meaning of s 459H(1)(b) of the Corporations Law. An offsetting claim is defined by s 459H(5) as meaning "a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as the debt to which the demand relates)". 27 For present purposes, the questions, whether there is a genuine claim or whether there is a genuine dispute, are to be determined according to the same principles. Those principles have already been discussed. 28 According to the affidavit of Graeme McCrae sworn 10 July 1998, Universal Greening has received advice from its lawyers to the effect that it has "a prima facie case against Dr Sabine and the Second Respondent in negligence and … a prima facie case against Dr Sabine personally for breach of the fiduciary duties he owed to the company" arising out of what Mr McCrae terms "the forced acquisition" of the shredding machine from Abattoir. The evidence before the Court would not support that claim and, in oral argument, it was scarcely pursued by the applicant's counsel. It suffices to say that, having regard to the evidence presently before the Court, I am not satisfied that Universal Greening has a genuine claim of the kind which it alleges. (c) Abuse of process 29 The final submission made on behalf of Universal Greening is that the statutory demands should be set aside as an abuse of process. The substance of that claim is set out in the Registrar's decision of 6 November 1998. In his reasons, the Registrar wrote: The kernel of the claim of abuse of process is that the first respondent on his own behalf and on behalf of the second respondent did not cause the issue of the demands for legitimate purposes within the terms of Part 5.4 of the Corporations Law but for the illegitimate purpose of forcing a wind-up of the applicant company and subsequent negotiations with the view to purchasing a particular compost machine and generally obtaining the intellectual property of the applicant company. It is said that the fact that the first respondent offered Mr Murphy the possibility of a job with him, if the applicant was wound up, was evidence of improper intention on the part of both respondents. I agree with the Registrar that the evidence is insufficient to support the abuse of process claim. First, in the event that Universal Greening went into liquidation, it would, as the respondents' counsel contended, be open to Dr Sabine to negotiate with the liquidator to purchase the company's assets. The success of those negotiations would depend upon the company's liquidator and a number of factors, including, presumably, the degree of interest shown by other possible purchasers. Secondly, I do not consider that any inference should be drawn against Dr Sabine by reason of his alleged conversation with Mr Murphy. Thirdly, I do not draw any inference against Dr Sabine arising out of his refusal to sign a confidentiality agreement, the terms of which are not before the Court. Finally, I draw no adverse inference from the fact that Dr Sabine has chosen to issue statutory demands instead of commencing debt recovery proceedings in a court of competent jurisdiction. 30 In support of his submissions, counsel for Universal Greening relied upon Dewina Trading Sdn Bhd v Ion Australia Pty Ltd (1996) 14 ACLC 1603, Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 14 ACLC 1234 and Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACLC 5. Each of those cases is distinguishable and, in any event, does not assist the applicant. 31 In Walker, Brownie J set aside a statutory demand issued by a company accountant as an abuse of process. The accountant, who had resigned without notice and taken the company's books of account, claimed some $6,700 by way of salary and other expenses. He issued a statutory demand and, because he declined to give up the company's books, the company was unable to evaluate his claim. His Honour held that in those circumstances the plain purpose of the accountant's conduct was to coerce the company into meeting his claim, under threat of winding up proceedings, without giving the company an adequate opportunity to ascertain its financial position by reference to its books of account. The facts of that case were plainly very different from those in question in this case. 32 In Intergraph, the respondent conceded, in answer to Heerey J's enquiry, that it had chosen to proceed by way of demand, rather than by way of recovery proceedings in a court of competent jurisdiction because "the winding up proceeding provided a 'faster track'": 14 ACLC at 1237. There was no evidence in that case that the company was insolvent. In those circumstances, Heerey J held that the purpose of the demand was "the improper purpose of exerting pressure on the applicant for the payment of what clearly was, and was known to be, a disputed debt": 14 ACLC at 1237. 33 The facts in Dewina are quite different from those in the present case. In any event, Moore J found in that case that there had been no abuse of process and an application to stay the winding up proceeding was refused. 34 After inquiring into the company's affairs at the company's request, John P Kellaway, chartered accountant, informed Universal Greening's directors, in a letter dated 19 May 1998, that: The information provided to me indicates that unless funding becomes available to the group immediately, and that sufficient funding continues to be made available, the group will be, or become, insolvent and will be required to cease trading. Indeed it appears to me that without the support of certain creditors and shareholders the group is already technically insolvent. 35 Like the Registrar, I am not satisfied of any improper purpose in issuing the statutory demands in this case. 36 For the above reasons, I would dismiss the motion, notice of which is dated 11 November 1998, seeking review of the decision of the Judicial Registrar made on 6 November 1998. The applicant should pay the respondents' costs of the motion. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.