Australian Information Technology Pty Ltd v Prior Art Pty Ltd
[1995] FCA 193
•31 MARCH 1995
CATCHWORDS
CORPORATIONS LAW - statutory demand - application to set aside - whether or not genuine dispute between parties as to existence of debt to which statutory demand relates - no issue of principle involved.
Corporations Law, ss 459E, 459G, 459H.
AUSTRALIAN INFORMATION TECHNOLOGY PTY v PRIOR ART PTY LTD
No VG 3062/95
Olney J
Melbourne
31 March 1995
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION No VG 3062 of 1995
BETWEEN:
AUSTRALIAN INFORMATION TECHNOLOGY PTY LTD
Applicant
PRIOR ART PTY LTD
Respondent
Coram: Olney J
Place: Melbourne
Date: 31 March 1995
REASONS FOR JUDGMENT
On 17 January 1995 the respondent (Prior Art) served a statutory demand pursuant to s 459E of the Corporations Law on the applicant (AIT). The demand is founded on a claimed debt of $25,950 said to be due and payable by AIT to Prior Art which is described in the demand as:
"Loan a/c balance owing by the company to the creditor pursuant to company loan a/c reconciliation of 12 January 1995".
The statutory demand was supported by an affidavit of Michael Frederick Prior (Prior) a director of Prior Art to which 2 letters are exhibited namely a letter dated 10 January 1995 written by Prior Art to AIT and a letter dated 12 January 1995 written by AIT to Prior Art. The full text of the letters follows:
10th January 1995
The Secretary
Australian Information Technology Pty Ltd
Level 13
474 Flinders Street
MELBOURNE VIC 3000
ATTENTION: Ms J E Yuille
Dear Jane
RE: MONIES OWED BY AUSTRALIAN INFORMATION
TECHNOLOGY PTY LTD AS TRUSTEE FOR THE AIT
UNIT TRUST TO PRIOR ART PTY LTD
We hereby request that you provide us with a reconciliation of the monies owed to this company in respect of the period commencing on 1st July 1993 and up to the present time, together with a cheque for the balance of the indebtedness of Australian Information Technology Pty Ltd to this company.
Please provide us with this information together with your remittance prior to close of business on \friday, 13th January 1995. If you have any query in relation to this request please do not hesitate to contact me by telephone.
Yours faithfully
PRIOR ART PTY LTD
PER:
MICHAEL PRIOR
DIRECTOR
12th January 1995
Mr M. Prior,
C/- Prior & Co Pty Ltd.,
2nd Floor, 3395 Collins Street
MELBOURNE Vic, 3000
Dear Mike,
I received your letter dated 10 January 1995 and the loan account reconciliation you requested is enclosed.
Regarding your request for payment in cash of the Prior Art Pty Ltd loan account balance, at present this is not possible.
The AIT Unit Trust does not have available cash to make the payment and, accordingly, an interim F'95 cash distribution would be required from MITS. Also, as it has been normal practice to on-distribute interim cash distributions pro-rata to all unit holders, it would be appropriate for the other unit holders to agree that the funds be paid solely to Prior Art Pty Ltd.
In light of the above, your request will need to be discussed by the Board. Accordingly, I will ensure that it is included as an agenda item for the 25 January, 1995 meeting and a copy of your letter and this letter will be distributed with the Board papers.
Yours sincerely,
J.E. Yuile,
Secretary.
The letter of 12 January 1995 was accompanied by the following enclosure:
AIT/PRIOR ART P/L
UNITHOLDER LOAN ACCOUNT
RECONCILIATION
TOTAL PRIOR ART P/L
30 June 93 2,528,212 347,497
F94
Less
. capitalisation -1,310,145 -185,604
Less
. July Cash Distribution -1,275,690 -180,723
. Mar Cash Distribution - 850,000 -120,417
. June Cash Distribution - 495,000 - 70,125
Add
. profit 1,918,424 271,777
. interest 61,525 7,683
. units calls in arrears 78,682 11,147
30-June 94 656,008 81,235
F95
Less
. Sept Cash Distribution - 311,562 -44,138
. units alls in arears - 67,535
offset by loan
_____________________________
30th November 1994 276,911 37,097
Less amount receivable for unpaid units issued F'94 -11,147
NET AMOUNT OWING 25,950
AIT has made application pursuant to s 459G of the Corporations Law setting aside the statutory demand on the ground that there is a genuine dispute between it and Prior Art about the existence of the debt to which the demand relates. Specifically, it says that the sum claimed was not at the time the demand was made and is not now, due and payable by AIT to Prior Art.
To understand what follows it is necessary to know something of the relationship between the parties.
AIT is the trustee of a unit trust known as the AIT Unit Trust under a trust deed dated 11 October 1990. Melbourne Information Technology Services Limited (MITS) is the trustee of a unit trust known as the MITS Unit Trust under a trust deed dated 12 October 1990 between MITS, as trustee, and AIT, as sole unit holder. AIT receives distributions of income from the MITS Unit Trust in its capacity as sole unit holder of the MITS Unit Trust, which income it holds and distributes in its capacity as trustee of the AIT Unit Trust to the unit holders of the AIT unit trust. Prior Art is a unit holder of the AIT Unit Trust and is entitled to receive distributions of income from the AIT Unit Trust.
So far as is present relevant the AIT Unit Trust Deed provides:
DISTRIBUTIONS AND ACCUMULATIONS
17.
17.1The Trustees shall in each Accounting Period until the Vesting Day or the date of the termination of the Trust whichever shall first occur pay apply or set aside the whole of the Net Income of the Trust Fund of that Accounting Period for the benefit of the Unit holders in proportion to the number of Units of which they are respectively registered as at the end of the said Accounting Period.
17.2Notwithstanding anything contained in Clause 17.1 the Trustees shall if so requested in writing by the holders from time to time of not less than 80% of the number of Units before the expiration of any Accounting Period aforesaid accumulate all or any part of the Net Income of the Trust Fund arisen or arising during such period and such accumulation shall be dealt with as an accretion to the Trust Fund. Any part of the Net Income of the Trust Fund arisen or arising during an Accounting Period not accumulated pursuant to this Clause 17.2 and not otherwise applied or set aside for or paid or distributed to any Unit Holder pursuant to clauses 17.1 or 17.3 shall, unless all the Unit holders otherwise direct, be deemed to have been set aside immediately before the expiry of the said Accounting Period for the benefit of the Unit holders in proportion to the number of Units of
which they are respectively registered as at the end of the said Accounting Period.
17.3Notwithstanding the foregoing the Trustees shall with the consent of each of the Unit Holders be entitled to make an interim distribution of the Net Income of the Trust Fund at such time or times as the Trustees shall determine during any Accounting Period such interim distribution to be made in proportion to the number of Units of which the Unit Holders are registered at the time.
17.4Any amounts applied or set aside for or paid or distributed to any Unit holder pursuant to clauses 17.1, 17.2 or 17.3 shall cease to form part of the Net Income of the Trust Fund and shall, if set aside, thenceforth be held by the Trustees on a separate trust for such Unit Holder absolutely and immediately upon ascertainment of the precise amount thereof be paid to or applied in accordance with the instructions of such Unit Holder or if the Unit holder is an infant be paid to a parent or guardian of such infant and the Trustees shall not be bound to see to the application thereof by such parent or guardian. The relevant Unit holder shall be deemed to be presently entitled to any amounts as soon as they are applied or set aside for or paid or distributed to the Unit Holder pursuant to clauses 17.1, 17.2 and 17.3
17.5Prior to any determination by the Trustees of the Net Income of the Trust Fund from time to time for the purposes of clauses 17.1 to 17.4 (both inclusive), the Trustees may distinguish between different types and sources of Income accrued or received and may, for this purpose:
17.5.1establish and maintain a separate account in respect of each type or source of Income;
17.5.2upon receipt of each type or source of Income, credit the amount received to the relevant account;
17.5.3determine the account against which expenditure or losses incurred in deriving any type or source of Income is or are to be set off and debit that account accordingly; and
17.5.4establish and maintain such other records and accounts as they think fit, including such records and accounts as to enable Unit holders to determine the type or source of Income to which any Net Income of the Trust Fund (paid applied or set aside to or for the benefit of them) relates.
For the purposes of this Clause 17.5, "Income" means the amounts referred to in clauses 1.1.8.2 to 1.1.8.6 (both inclusive) before expenses.
DISTRIBUTION POLICY
17.6The Unit Holders and the Trustees will each use their best endeavours to procure that:
(a)the Board of Directors of MITS will make the maximum distribution to holders of units in the
MITS Trust from all assessable income of the MITS Trust and that, in any event, in any year such distribution is not less than 70% of the assessable income of the MITS Trust; and
(b)that the Board of Directors of MITS will ensure that any such distribution is made in cash.
17.7The Unit Holders by virtue of their holding of units agree that they will each use their best endeavours to procure that the Board will ensure that the assessable income of AIT is distributed in the following order of priority:
(a)first towards payments of principal and other amounts (other than interest deductible from income) payable under the Loan Agreement; and
(b)second towards distribution to holders of AIT units.
Once the Loan has been repaid in full, together with all outstanding interest, the Unit holders by virtue of their holding of units agree that they will each use their best endeavours to procure that the Board will ensure that AIT makes maximum distributions from the AIT Unit Trust to the Unit Holders and that such distributions will include all distributions received in respect of the MITS Units held by the Trustees. Nothing in this Clause 17.7 shall derogate from or affect the obligations of AIT under the Loan Agreement.
Prior Art says that in spite of the acknowledgment in writing of its indebtedness in the letter of 12 January 1995, and in spite of the demand for payment, AIT has refused or otherwise failed to pay the sum of $25,950 which sum remains due and payable.
AIT denies that the letter of 12 January 1995 amounts to an acknowledgement that the sum claimed is, or was at the date of service of the statutory demand, due and payable to Prior Art. The case put by AIT (as set out in the affidavit of the company secretary Jane Elizabeth Yuile of 3 February 1995), is that in December 1993, because of the need to retain cash in MITS, the Board of Directors of MITS resolved to distribute not more than 50% of the assessable income of the MITS Trust
to AIT. The minutes of the Board of Directors of AIT record that on 28 February 1994, the AIT Board unanimously approved a resolution that MITS enter into a financing agreement with the Commonwealth Development Bank (CDB) and agree to a maximum cash distribution by MITS to AIT of 50% of the taxable income of the MITS Trust for the duration of the CDB facility or for so long as combined unit holder funds in MITS and the unit holder loan account did not exceed $5.5 million, whichever first occurred. It is said that as a consequence of the resolution passed on 28 February 1994, regardless of whatever amount is applied or set aside pursuant to clause 17.1 of the trust deed, no more than 50% of the assessable income in any one year may be paid in cash or applied for the benefit of any unit holder pursuant to clause 17.4 and in particular, in the case of Prior Art, the amount of $25,950 shown in the unit holder loan account reconciliation is not currently due and payable because it represents an amount in excess of 50% of the assessable income of the trust.
In a subsequent affidavit dated 15 March 1995 Mrs Yuile exhibited what she described as a further Unit Holder Loan Account Reconciliation Statement which is set out below:
AIT/PRIOR ART PTY LTD
UNITHOLDER LOAN ACCOUNT
RECONCILIATION
TOTAL PRIOR ART P/L
Loan account balance @ 30 June 1993 2,528,212 347,497
Less final F93 cash distribution
made in July 1993 (1,275,690) (180,723)
Add interest 61,525 7,683
Less capitalisation of the loan (1,310,145) (185,604)
3,902 (11,147)*
Add F94 profit (clause 17.1) 1,918,424 271,777
Less cash distributions
(50% of the assessable income for F94)
- March (850,000) (120,417)
- June (495,000) ( 70,125)
- September (311,562) ( 44,138)
Net loan account balance @ __________________________
31 December 1994 265,764 25,950
Note
* Represents balance owing by Prior Art Pty Ltd in respect of units issued in F94 pursuant to the decision to capitalise the loan account balance.
The figures in this statement are the same as in the statement annexed to the letter of 12 January 1995. In her affidavit Ms Yuile explains these figures thus:
The amount of $271,777 which appears in the Unit holder Loan Account reconciliation represents the Respondent's pro rata entitlement to the Net Income of the Trust Fund for the 1994 financial year which was set aside in accordance with Clause 17.1 of the Deed. The sums of $120,417, $70,125 and $44,138 total $234,680 and represent cash distributions made to the Respondent in March 1994, June 1994 and September 1994. These amounts represent the Respondent's pro rata entitlement to the amount (ie 50%) of the assessable income of the Trust for the 1994 financial year ...
The amount of $25,950 shown in the Unit Holder Loan Account reconciliation is not currently due and payable because it represents an amount in excess of 50% of the assessable income of the Trust. The amount of $25,950 appears in the reconciliation because, notwithstanding the resolution made on 28 February 1994 described in paragraph 8 of my previous affidavit, the Trustees are required to set aside the whole of the Net Income of the Trust Fund pursuant to Clause 17.1 of the Deed.
The amount of $25,950 will become payable:
(a)upon the expiration of the CDB facility; or
(b)when combined Unit Holder funds in MITS and the Unit Holder Loan Account exceed $5.5M,
whichever occurs first.
I have great difficulty in following this reasoning for these reasons. First, the resolution of 28 February 1994 says nothing about the distribution of income by AIT. It refers
to the income of MIT and limits the amount to be distributed to AIT to 50% of MIT's assessable income. Presumably, for the resolution of 28 February 1994 to be given effect to, the income of AIT received by way of distribution will be reduced to 50% of MITS assessable income, but the whole of the amount received by AIT would be distributable to the AIT unit holders and this appears to be what has occurred. According to Ms Yuile, Prior Art's pro-rata entitlement to the net income of the AIT trust for the 1994 financial year was $271,777 of which sum a total of $234,680 has been distributed in 3 payments made subsequent to the resolution of 28 February 1994. The balance of Prior Art's entitlement for 1994 has been applied in part to a prior liability leaving a credit in the loan account of $25,950. For this sum to represent 50% of the assessable income of the trust it would mean that the assessable income of the trust (or at least Prior Art's pro rata share thereof) was $51,900; or if the debit of $11,147 is taken into account, Prior Art's full share in the assessable income would have been $74,194. On the material put in evidence, none of these figures support the interpretation advanced by Ms Yuile on behalf of AIT. The only logical explanation is that MIT has retained the required portion of its assessable income and will distribute it to AIT if and when one of the conditions referred to in the resolution is satisfied.
To the extent that AIT and Prior Art adopt differing interpretations as to the effect of the resolution of 28 February 1994 it may be fair to say that they are in dispute as to the existence of the debt said to be due by AIT to Prior Art, but I am not convinced that it is a genuine dispute for the reason that the argument advanced by AIT is entirely inconsistent with the evidence upon which it relies to support its case.
I turn now to a further ground upon which AIT relies to establish that there is a genuine dispute as to the existence of the claimed debt.
On 26 October 1994 AIT's directors passed a resolution which is recorded in the minutes of the meeting thus:
A vote was then taken regarding the capitalisation of the unitholder loan account to avoid 'technical insolvency' and by majority vote (G. Cosgriff, J. Hendra, R. Leonard, A. Savage, A. West, R. Zammit in favour, M. Prior against) it was resolved that in accordance with Clause 7.4.2 of the AIT Unit Trust Deed, 183,178 units be issued at an issue price of $1.00 pro-rata to existing unitholders.
It is said by AIT that by reason of this resolution, the balance of the unit holder's loan account was capitalised and that there is no liability remaining in favour of Prior Art.
The reconciliation of the loan account to which reference has been made above, records that on a previous occasion when there was a capitalisation of the loan account balance, the relevant sum was debited to the account, and one would have expected that following the resolution of 26 October 1994 similar action would have been taken. That such a step was not taken is explained in an affidavit of Ms Yuile dated 23 March 1995. She says that following the passing of the resolution of 26 October 1994 AIT's solicitors received a letter from Prior Art's solicitors to which the latter responded. Both letters were dated 26 October 1994. The full text of the letters follows:
Messrs Freehill Hollingdale & Page
Solicitors
DX 240 MELBOURNE
FACSIMILE NO: 288 1567
FROM: Anthony Marasa
DATE: 26 October 1994
RE:Prior Art Pty Ltd and Michael Prior v Australian Information Technology Pty Ltd
Supreme Court Action No 9847 of 1994
Supreme Court Action No 2012 of 1994
Meeting of AIT Board of Directors held this day
As you are aware, we act on behalf of Prior Art Pty Ltd and Michael Prior.
We are instructed that a meeting of the Board of Directors of Australian Information Technology Pty Ltd ("AIT") was held this morning. We are instructed that during the course of the meeting Ms Jane Yuile, AIT's secretary, proposed resolutions for the Board to consider in the following terms:
that, in accordance with clause 7.4 of the MITS Unit Trust Deed, MITS be requested to issue 1,089,300 units at an issue price of $0.25 per unit paid for out of the Unitholder Loan Account due to the AIT Unit Trust.
that, in accordance with clause 7.4.2 of the AIT Unit Trust Deed, 183,178 units be issued at an issue price of $1.00 pro rata to existing Unitholders.
We are instructed that Michael Prior voted against each resolution but they were approved by each of his Co-Directors and were accordingly carried.
We are instructed to inform you that Prior Art Pty Ltd will not presently subscribe for, or accept, the issue of further units in the AIT Unit Trust.
In our view both resolutions contravene the provisions of the Subscription and Shareholders Deed. Further, in the absence of Prior Art Pty Ltd's agreement to accept a pro rata issue of units, any action to implement the second resolution will constitute a breach of the undertaking given by AIT as Trustee of the AIT Unit Trust in settlement of proceeding on 10546 of 1992. The undertaking was confirmed by you in the following terms, namely:
"... AIT the Trustee of the AIT Unit Trust will not seek to issue any further units in the AIT Unit Trust other than on a pro rata basis to all Unitholders unless otherwise agreed in writing by all Unitholders".
Unless we have AIT's undertaking by no later than 2.30pm this day, that it will refrain until the hearing and determination of proceeding No 9847 of 1993 on(sic) No 2012 of 1994 from:
(a)issuing 1,089,300 units at an issue price of $0.25 per units paid for out of the Unitholder Loan Account due to the AIT Unit Trust; and
(b)issuing 183,178 units at an issue price of $1.00 pro rata to existing Unitholders;
(c)to otherwise acting pursuant to the resolutions referred to above and carried at today's board meeting;
Prior Art Pty Ltd and Michael Prior shall immediately make an application to the Supreme Court of Victoria to restrain such conduct without further notice.
Yours faithfully
STRONGMAN & CROUCH
AIT & Ors ats Prior Art and Anor
Our clients have advised that AIT will not act in accordance with the resolutions referred to in your facsimile of 26 October 1994 and carried at today's AIT Board meeting without having first given 12 hours notice in writing to Prior Art Pty Ltd and Michael Prior.
Yours faithfully
FREEHILL HOLLINGDALE & PAGE
(The two Supreme Court actions mentioned in the letter from Prior Art's solicitors are referred to later in these reasons).
Ms Yuile says that as a result of the undertaking given on behalf of AIT on 26 October 1994, no action has been taken to debit the unit holder's loan account to give effect to the resolution relating to capitalisation.
Whether or not the resolution of 26 October 1994 was effective to capitalise the balance of Prior Art's loan account and thus to extinguish any liability to it by AIT is clearly a matter as to which the parties are in dispute. No better evidence of the dispute could be provided than the exchange of
correspondence on 26 October 1994. And I am satisfied that it is a genuine dispute as that term is used in s 459H of the Corporations Law. The dispute is one which has existed since 26 October 1994 and it is one which it would appear will only be resolved by litigation. It may be that the parties contemplate that the present actions in the Supreme Court will resolve it although that is not altogether clear from the correspondence. In any event the dispute is not one of recent origin which AIT has in some way manufactured in response to the serving of the statutory demand with a view to avoiding the consequences of failure to comply with the demand. Nor is it one which on the face of it is spurious or unworthy of serious consideration. In fact, the dispute was generated by Prior Art and not by AIT. The only conclusion open is that it is a genuine dispute.
As has already been alluded to, the parties are presently involved in litigation in the Supreme Court of Victoria. There are two actions current in which Prior Art and Prior are the plaintiffs and AIT is the first defendant. The litigation was commenced in 1993 and has yet to come to trial.
Prior Art says, contrary to AIT's assertion, that the Supreme Court proceedings have no bearing upon the question of whether there is a genuine dispute between the parties as to AIT's liability to pay the sum claimed in the statutory demand. The question of AIT's indebtedness to Prior Art in respect of the claimed debt is not specifically raised in the Supreme Court proceedings. However, whilst it is inappropriate here to canvass in detail the pleadings in those proceedings, it is fair to say that the relief sought in both actions includes claims for injunctive relief to restrain AIT from allowing or breaching the distribution policy contained in clause 17.6 of the AIT Trust Deed and in opposing that relief, AIT has pleaded the resolution of 28 February 1994.
In the circumstances, it is unnecessary to examine the pleadings in the Supreme Court actions to determine whether or not the issues raised by them impact upon the matter presently before this Court. The finding which I have made in relation to the capitalisation issue is sufficient to dispose of the application in favour of AIT.
AIT has established grounds for the setting aside of the statutory demand. There will be an order that the statutory demand be set aside.
I certify that this and the preceding 13 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney
Associate:
Dated:
Heard: 22, 23 March 1995
Place: Melbourne
Judgment: 31 March 1995
Appearances:
Mr D. O'Callaghan (instructed by Freehill Hollingdale and Page) appeared for the applicant.
Mr G. Bigmore QC and Mr M. Galvin (instructed by J.M. Smith & Emmerton) appeared for the respondent.
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