Ground 2 - should the Demand be set aside because the description of the debt is defective or productive of prejudice?
101 Wollongong Coal contends that the Demand should be set aside under either s 459J(1)(a) or (b) because the description of the Debt in the Demand is either deficient or defective, or otherwise gives rise to prejudice. The nub of the argument is that the Demand simply describes the Debt as arising from loans made on three occasions, less repayments. The verifying affidavit of Mr Jagatramka provides no further details or particulars of the loans, their terms or conditions, or how they arose.
102 Gujarat NRE India apparently still maintains that the alleged debt is and can properly be characterised as a loan. Its evidence in opposition to Wollongong Coal's application, however, demonstrates that, if the Debt can be said to be a loan, it is, at the very least, a very unusual one. As has already been made clear, Gujarat NRE India's evidence and submissions contend that the Debt (or at least most of it) arose because $7,962,974.88 was paid by Gujarat NRE India to Wollongong Coal purportedly pursuant to obligations arising under a sub-underwriting agreement. Because Wollongong Coal failed to repay this money or issue shares to Gujarat NRE India, the outstanding payment is said to have somehow become a loan. Another payment of $690,549.18, which is also said to make up the Debt, is said to be an amount paid "in respect of current liabilities." It also appears to be claimed that this amount became a loan because it was not repaid.
103 Wollongong Coal argues that, in light of Gujurat NRE India's evidence and submissions concerning the genesis and characterisation of the Debt, the description of the Debt in the Demand is either deficient, because in the circumstances it is vague and ambiguous, or constitutes a misdescription of the alleged debt and is therefore a defect in the Demand. It submits that the evidence indicates that its officers who swore affidavits did not know, and had no reason to believe, that the Debt described in the Demand had anything to do with any payments made under any sub-underwriting agreement. Nor could any reasonable person have discerned this from the description of the Debt in the Demand. Substantial injustice is said to arise because, amongst other things, Gujarat NRE India now objects to any evidence being led in relation to the alleged genesis of the loan by reason of the Graywinter principle.
104 Gujarat NRE India, on the other hand, maintains that the Demand contained sufficient information to enable Wollongong Coal to determine from its own records whether it owed the Debt as described in the Demand. It relies, in particular, on the fact that Wollongong Coal's letter of 21 February 2014 describes the amount owing to Gujarat NRE India as a loan. It submits, in addition, that there is no substantial prejudice or injustice and that, in any event, Wollongong Coal is precluded by the Graywinter principle from even raising this ground of challenge because it was not referred to in its initial affidavits.
105 There is substantial merit in Wollongong Coal's submissions. There is no merit in Gujurat NRE India's response.
106 Section 459J(1) of the Act provides as follows:
On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:
(a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
(b) there is some other reason why the demand should be set aside.
107 The first issue is whether the description of the Debt in the Demand can be said to be, or give rise to, a "defect in the demand" for the purposes of s 459J(1)(a). A "defect" is defined in s 9 of the Act in the following terms:
defect, in relation to a statutory demand, includes:
(a) an irregularity; and
(b) a misstatement of an amount or total; and
(c) a misdescription of a debt or other matter; and
(d) a misdescription of a person or entity.
108 Because the definition of "defect" is an inclusive definition, it is necessary first to consider the ordinary meaning of the word. A defect, according to ordinary meaning, means "a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection": Topfelt Pty Limited v State Bank of New South Wales Limited (1993) 47 FCR 226 (Topfelt) at 237.
109 The reference to "misdescription of a debt or other matter" in the s 9 definition is not to be susceptible of rigorous or narrow reading down: Topfelt at 237 - 238; Quitstar Pty Ltd v Cooline Pacific Pty Ltd [2002] NSWCA 329 at [15].
110 A statutory demand must be in the prescribed form: s 459E(2)(e) of the Act. The prescribed form for a statutory demand makes it clear that the demand must "describe" the debt: Form 509H, Corporations Regulations 2001 (Cth): LSI Australia v LSI Holdings; LSI Australia v LSI Consulting [2007] NSWSC 1406 (LSI) at [54]. If the demand "is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt, then there is a lack of something necessary for completeness, and therefore a defect in the demand": LSI at [54].
111 On the face of it, there is nothing vague or ambiguous about the description of the Debt in the Demand. Nor, without more, could it be said that there is any misdescription. When served, it is clear that Gujarat NRE India claimed that the Debt arose as a result of a loan made on 16 April 2013 and two loans made on 24 June 2013. The issue concerning the sufficiency of the description, and whether it amounts to a misdescription, only really arises by reason of the evidence of Mr Jagatramka later led by Gujarat NRE India which sought to characterise the Debt (or most of it) as arising as a result of a payment made under a sub-underwriting agreement.
112 It is clear from Wollongong Coal's initial affidavits that the deponents took the description of the Debt in the Demand at face value and sought to address the claim that Gujarat NRE India had loaned Wollongong Coal money. The thrust of the initial evidence was that Messrs Singh, Firek and Sharma knew nothing about any such loan, never approved any such borrowings and were unable to locate any loan agreements or records of such loans. It is only when Wollongong Coal received Mr Jagatramka's second affidavit, containing the explanation that the alleged loans arose as a result of a payment made under a sub-underwriting agreement, that it attempted to address this issue in its evidence. That attempt was met with objections based on Graywinter.
113 The main difficulty for Gujarat NRE India is that, contrary to Mr Jagatramka's assertion, even if it is ultimately accepted that the payment made by Gujarat NRE India to Wollongong Coal was made in the circumstances described by him, it could not reasonably be considered to constitute a loan. If, as appears to be suggested, the payment was consideration for shares subscribed for pursuant to Gujarat NRE India's sub-underwriting commitments, and the shares were not issued, it does not follow that the payment could be described as a loan. That is the case unless, perhaps, the parties subsequently agreed that the outstanding monies should be treated as a loan until repaid. There is no suggestion, let alone evidence, that they did so agree. It is implicit in, or may be inferred from, Wollongong Coal's evidence that there was no such agreement. If the money was subscription money for shares, not ultimately issued, Guijarat NRE India may have a restitutionary claim for return of the money arising from a total failure of consideration. Such a claim, however, cannot accurately be described as a loan or as giving rise to a loan.
114 It follows that the description of the Debt in the Demand is deficient, inadequate or simply wrong.
115 Two decisions of single judges of the New South Wales Supreme Court have considered applications to set aside statutory demands under s 459J of the Act in not entirely dissimilar circumstances to the circumstances of this case.
116 In LSI, Austin J considered two statutory demands which described the alleged debts in fairly generic terms. One demand described the debt as owing "in accordance with the Accounts." The other described the debt as "moneys lent to the debtor". The verifying affidavits that accompanied the demands added nothing to these descriptions. The debtor company applied to set aside the demands supported by an affidavit by its managing director that addressed the position as he understood it in relation to the claimed indebtedness. The creditor company then filed an affidavit which indicated that the claimed indebtedness arose in circumstances quite different to that addressed in the debtor company's affidavit. A further affidavit from the director of the debtor company that sought to address this further evidence was objected to on the basis of the Graywinter principle.
117 Austin J held that both demands were defective on the basis that the descriptions of the debts in them were vague and ambiguous. That was because they failed to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director could assess whether there was or is a genuine dispute as to the existence of the debt. The demands did not identify to a reasonable observer the "true nature" of the alleged debt, as described in the creditor company's later affidavits. At [57] his Honour said:
The vague and ambiguous statutory demands, neither of which identify to a reasonable observer the true nature of the alleged debts, have put LSIA's director, Mr Hughes, in the position of not having realised the true claims asserted against his company and therefore not realising the potential relevance of the indemnity, and consequently have led to his failure to put forward the indemnity ground in the affidavits supporting the applications. Unless the court sets aside the statutory demands, LSIA will in those circumstances suffer the substantial injustice of having the presumption of insolvency raised against it in any subsequent winding up proceedings. Therefore there are reasons of "appropriate seriousness" for setting the statutory demands aside (cf Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746) and the statutory requirement is satisfied.
118 Whilst the descriptions of the debts in the demands in LSI were perhaps slightly more vague than in this case (for example, the date of the alleged loan was not specified), it is clear that the critical consideration for Austin J was the fact that the later affidavits filed by the creditor company put forward explanations of the debts (the "true nature" of the debts) which were not apparent from the descriptions in the demands themselves.
119 Austin J set aside the demands under s 459J(1)(a) of the Act on the basis of the substantial prejudice arising from the application of the Graywinter principle.
120 A similar, though slightly different, scenario was considered by Black J in Re Attard and Others (trading under the partnership name of Colin Biggers & Paisley) (2013) 96 ACSR 581; [2013] NSWSC 1579 (Attard). In that matter, a firm of solicitors served a demand on a company that described the debt as owing on the basis of a guarantee contained in a specified deed. The debtor company commenced proceedings to set aside the demand supported by an affidavit that raised a dispute about the indebtedness based on a construction of the specified deed. The solicitors then realised that there may have been a difficulty with the deed and sought to support the alleged debt on the basis of a guarantee provided in a separate letter.
121 Black J held that there was no defect in the demand because there was no misdescription of the debt in the demand. At the time the demand was served, the solicitors sought to rely upon a debt arising under the deed. In that sense, it accurately described the debt upon which the solicitors relied. It was only later that the solicitors sought to support the debt in a different way.
122 Nonetheless, his Honour held that the demand was liable to be set aside on the basis of "some other reason" in s 459J(1)(b) of the Act. At [42]-[43] his Honour said:
In my view, some other reason to set aside the demand would arise, if it were open to CBP [the solicitors] to serve the demand claiming a debt arising on one basis and to support the debt claimed on another basis, because that process would be inconsistent with allowing the company a proper opportunity to move to set aside the demand. That inconsistency arises…by reason of the operation of the Graywinter principle…
The consequence of the Graywinter principle, and more fundamentally s 459G(3) of the Act which that principle reflects, is that it would not now be open to the company to lead, in further affidavits, evidence as to the circumstances in which the 2010 letter was entered into or other evidence of its commercial context which may be relevant to its construction, because those matters were not raised in the original affidavit filed in support of the application to set aside the demand…
123 Black J referred to LSI and noted that Austin J's reasoning was addressed to s 459J(1)(a) of the Act. His Honour said of this reasoning (at [46]):
However, the injustice noted by Austin J, arising from the situation where a party that receives a statutory demand moves to set it aside understanding that it is directed to a debt claimed on one basis and the debt is then sought to be supported on another basis, which the debtor will not have the opportunity to address by reason of the Graywinter principle, equally supports setting aside the demand under s 459J(1)(b) of the Act where that position arises, not from a defect that initially existed in the demand, but from a subsequent change in the creditor's position.
124 It is unclear whether the circumstances of this matter are closer to the LSI situation or the Attard situation. It seems to be a fair inference that the Debt was described as a "loan" in the Demand simply because it was so described in the letter dated 21 February 2014. It is unclear whether, at the time of the service of the Demand, Gujarat NRE India sought to support the Debt on the basis that the loan arose as a result of the payment made in compliance with its supposed commitments under the sub-underwriting agreement. If so, the situation is perhaps closer to LSI. No reasonable person in the shoes of a director of Wollongong Coal could discern from the description of the Debt in the Demand that it somehow arose from payments or commitments under a sub-underwriting agreement. The description in the Demand would for that reason properly be considered to be vague and ambiguous and therefore defective.
125 It may be, on the other hand, that the explanation for the Debt based on the sub-underwriting commitments was only put forward as a result of Wollongong Coal's first tranche of evidence, which exposed the total absence of any contemporaneous records of a loan or loan agreement having been made or entered into. That led Mr Jagatramka to characterise, or re-characterise, the Debt as arising as a result of Gujarat NRE India's sub-underwriting commitments. In that case, the situation would be closer to that considered in Attard. That is, Gujarat NRE India now seeks to shift or change its position in relation to the genesis of the alleged Debt. In those circumstances, whilst there may have been no initial defect in the Demand because it accurately described Gujarat NRE India's claim at the time it served the Demand, it is not now open to Gujarat NRE India to seek to support the Debt on a different basis.
126 Either way, the Demand should be set aside because of the unfairness of the position faced by Wollongong Coal. It was not entirely unreasonable for Wollongong Coal, based on the fairly generic description of the Debt in the Demand, to support its application to set aside the Demand on the basis of evidence that there was no loan agreement or business records evidencing or even referring to the approval or making of a loan or borrowing. The evidence of Messrs Singh, Firek and Sharma indicates that Wollongong Coal could not possibly have foreseen that Gujarat NRE India did, or would, seek to support the Debt on the basis of dealings concerning a sub-underwriting agreement. It is now effectively shut-out from addressing this asserted basis for the Debt by the invocation of the Graywinter principle. Either there is a defect in the Demand which gives rise to a substantial injustice for the purposes of s 459J(1)(a) of the Act, as was the case in LSI, or the unfairness and prejudice is such as to provide some other reason to set aside the Demand under s 459J(1)(b) of the Act, as was the position in Attard.
127 Gujarat NRE India's submissions based on the letter dated 21 February 2014 are rejected. Whilst it is true that the 21 February letter refers to the existence of a loan, it is equally clear from the earlier correspondence (in particular the letter of 8 January 2014) and the context generally that this characterisation was disputed by Mr Singh and Wollongong Coal. Mr Singh was seeking to deal with a whole series of inter-group payments apparently instigated by Mr Jagatramka in the absence of proper documentation, justification or authorisation. It is clear that Mr Singh had no real idea about the nature of the payments or the basis or terms upon which they were made. That point was made clear in the letter dated 8 January 2014. Mr Jagatramka did not respond to it. It had plainly never before been suggested to Mr Singh by Mr Jagatramka or anyone else that the main payment that was said to give rise to the Debt was made under a sub-underwriting arrangement and that it was said to be a loan because Wollongong Coal had not issued the underwritten shares that the money was intended to pay for.
128 Whilst it may be accepted that the proposal in the letter dated 21 February 2014 allowed a credit to Gujarat NRE India in respect of the supposed loan, it is equally clear that this merely formed part of a larger settlement proposal involving a series of disputed payments. It does not, in all the circumstances, and when considered in context, amount to an admission of indebtedness, let alone an admission that there was or ever had been a loan. At the very least there is a plausible, if not cogent, argument available to Wollongong Coal that it does not constitute such an admission. To the extent that the 21 February 2014 letter (or, for that matter, Exhibit DI) could be said to constitute an admission by way of an "account stated", Wollongong Coal has demonstrated (or at least raised a cogent argument) that any such admission was in error: Brown at 535-536.
129 The submission that Wollongong Coal is precluded from raising this alleged defect by reason of the Graywinter principle is also rejected. A similar argument was raised and rejected in analogous circumstances in LSI at [61]. As pointed out by Austin J in LSI, it may be that certain grounds can be relied on at the hearing even if they are not articulated at all in the initial supporting affidavit, provided that they are evident on the face of the documents annexed to the affidavit. Here, the critical document is the Demand itself, together with the accompanying affidavit, both of which were annexed to Mr Singh's first affidavit. When considered along with the other evidence filed within the 21 day period, and Mr Jagatramka's second affidavit, this ground of challenge was evident. That is because the disjunct between the description of the Debt in the Demand and Mr Jagatramka's explanation in his second affidavit is evident.
130 This issue is also, in many respects, similar to the issue considered by Barrett J in Saferack Pty Ltd v Marketing Heads Australia Pty Ltd (2007) 214 FLR 393; [2007] NSWSC 1143. In that case, a debtor company sought to raise arguments which involved a defect arising from an omission from the creditor's accompanying affidavit. Those arguments were able to be raised, notwithstanding that these arguments were not articulated in the debtor company's affidavit, because they were evident from the face of the accompanying affidavit.
131 It must also, in any event, be highly doubtful that the principle in Graywinter could operate to prevent a plaintiff/applicant from raising an argument concerning a defect in a demand or accompanying affidavit in circumstances where the defect only became apparent upon service of the defendant/respondent's affidavits. Were it otherwise, the plaintiff in Attard would similarly have been precluded from arguing that the demand should be set aside under s 459J(1)(b) of the Act.
132 It should perhaps also be noted that there are two additional potential misdescriptions of the Debt. The first is that the Debt in the Demand appears to be described in Australian dollars. It is clear, however, that the underlying payments were in US dollars. In his affidavit dated 26 May 2014, Mr Jagatramka also states that the payments (or at least one of them) were in US dollars. Neither of the parties addressed this apparent discrepancy in their evidence or submissions. The second possible misdescription relates to the payment of $690,549.18 made on 24 June 2013. The Demand describes this payment as a loan. In his 26 May affidavit, however, Mr Jagatramka describes this as a payment "in respect of current liabilities". He says nothing about the terms upon which the money was paid. He appears to suggest, however, that it became a loan because it was not repaid. There is no explanation for the apparent discrepancy between the initial description of this payment as a loan, and the slightly more detailed account in Mr Jagatramka's evidence. Because Wollongong Coal did not rely on these possible misdescriptions, they provide no basis for an order setting aside the Demand. These discrepancies do, however, tend to indicate just how dubious some of the evidence in this matter is.
133 If follows that Wollongong Coal has established that that there is a defect in the Demand which causes substantial injustice, or some other reason to set aside the Demand under s 459J of the Act.
134 Given that the Demand is liable to be set aside under s 459J of the Act, it is strictly unnecessary to consider Wollongong Coal's other grounds of challenge. However, because Gujarat NRE India may decide to appeal this decision, or may decide to serve a new statutory demand and accompanying affidavit, Wollongong Coal's challenge to the notice under s 459H should also be addressed and determined. Some observations should also be made in relation to the other grounds of challenge, though ultimately it is unnecessary to determine those other grounds.