Cempro P/L v Dennis M Brown P/L

CEMPRO PTY LTD, G.S.C. HOLDINGS PTY LTD, COLORFLOW PAINTS PTY LTD, GLENN
PRODUCTS PTY LTD, GLENN INDUSTRIES PTY LTD, GROSNAR PTY LTD, RAMOX PTY LTD,
MORETONE PTY LTD, GROSSET PTY LTD, SENNAR PTY LTD, GROSSARD PTY LTD AND
SENNESS PTY LTD v. DENNIS M BROWN PTY LTD AND GEORGE J NOWAK PTY LTD both
trading as BROWN NOWAK AND CO.
No. SG3008 of 1994
FED No. 407/94
Number of pages - 9
Corporations Law
(1994) 12 ACLC 501, (1994) 13 ACSR 628
(1994) 128 ALR 277

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
VON DOUSSA J

CATCHWORDS

Corporations Law - notice of statutory demand - notices served on 12 companies demanding payment of the same debt - demands unconditionally withdrawn in respect of 11 companies by letter received before time for compliance - whether orders setting aside those statutory demands necessary - whether genuine dispute as to existence or amount of debt demanded from twelfth company - misdescription of debt as being jointly and severally due by the companies - whether defect in the statutory demand - whether substantial injustice unless demand set aside.

HEARING

ADELAIDE, 11 May 1994
#DATE 11:5:1994

Counsel for the applicants : Mr J Sulan QC

Solicitor for the applicants : Thomsons

Counsel for the respondents : Mr N Strawbridge

Solicitor for the respondents : Wadlow Solicitors

ORDER

THE COURT ORDERS THAT:
1. The statutory demand served on Cempro Pty Ltd on 10 January 1994

by the respondents be set aside.

There be no order on the applications by the second to twelfth

applicants to set aside statutory demands served on each of them on 10 January 1994 by the respondents.

The respondents pay the applicants' costs of the application.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

VON DOUSSA J On 10 January 1994 each of the 12 applicant companies was served with a notice of statutory demand in the prescribed form under s.459E of the Corporations Law by the respondents who together carry on business as chartered accountants. The demand was for unpaid professional fees alleged to be due to the respondents by the applicant companies. The alleged debt demanded in each notice was $49,472.85. Within the 21 day period prescribed by s.459G(2), this application was made by the 12 companies to set aside each of the notices.

Between the date of service of the notices of statutory demand and the commencement of proceedings in this Court there were communications between the parties which dealt with contentious issues that existed or were perceived by one side or the other to exist between the parties. In consequence of that correspondence, the respondents' solicitors wrote to the solicitors acting for the applicants unconditionally withdrawing 11 of the notices. The only notice that remains outstanding, in the sense that it has not been withdrawn, is the one against Cempro Pty Limited. In the case of the 11 withdrawn notices, a point has arisen whether it is necessary for the recipient companies to continue with these proceedings and to obtain an order of the Court setting aside the notices, to prevent the statutory consequences of non-compliance with a notice of demand arising or whether the interests of the recipient companies are sufficiently protested by the letter which withdraws the notices.
In my view if the party serving a notice of statutory demand under s.459E, within the time limited by the notice for compliance therewith, arms the recipient company with a document in writing saying that the statutory demand is unequivocally withdrawn, the notice thereafter has no further force or effect, and it is not necessary to prevent presumed insolvency arising at the expiration of the period for compliance to obtain an order of the Court formally setting aside the notice. I consider that the unconditional withdrawal of the notice of statutory demand means that there is no longer a demand to be complied with, and at the expiration of the time limited for compliance, there can be no failure to comply with the demand. The fact that the withdrawal is evidenced by a document in writing given to the recipient company ensures that the company is in possession of proof of the withdrawal should any question thereafter arise as to the fate of the statutory demand.
There remains the notice served upon Cempro Pty Limited. Counsel who appears for the applicants contends that there is a genuine dispute, in the case of each of the applicants, as to the existence of the debt within the meaning of s.459H(1)(a), and also a genuine dispute as to the amount of the debt. In addition, it is contended that there is a defect in each of the notices, such that they should be set aside under s.459J(1)(a), and that there is "some other reason why the demand should be set aside" under s.459J(1)(b).
The obligation of the Court under s.459H(1)(a) is simply to determine whether there is a genuine dispute. It is not the function of the Court to embark upon a lengthy hearing to determine the merits of the dispute or even to determine whether one side or the other is more probably right. The function of the Court is to ensure that spurious or frivolous defences are not allowed to defeat a statutory demand, and that there is some reasonable ground sufficient to found a genuine dispute. If there is some reasonable ground to found the dispute, and the company receiving the notice bona fide disputes the debt, there is a genuine dispute. It is unfortunate, having regard to the nature of the function of the Court under s.459H that the parties in this case have found it necessary to file very substantial affidavits which agitate the merits of the allegations of the respondents and the counter allegations of the applicants in great detail.
As the outcome of this application will all too vividly demonstrate, a party serving a statutory demand based on a debt the existence of which is disputed by the company may be better advised to withdraw the notice and proceed immediately to litigate the claimed debt in a court of competent jurisdiction than to go to the expense and time of contesting whether the dispute is a "genuine dispute" within the meaning of s.459H.
I deal first with the contentions that there is a genuine dispute as to the existence of the debt claimed in the notices, and as to the amount of the debt. In this instance those two grounds run together in that the applicant companies, if I can loosely deal with them as a group, acknowledge that some accounting work was done for them by the respondents. To the extent that effective work was done, they acknowledge that a debt arose. However, the applicants say that they have paid sufficient moneys to the respondents to discharge that debt, or alternatively to reduce the debt below the statutory minimum of $2,000. Thus the applicants say that there is no longer a debt in existence or at least one above the statutory minimum, but if there is, there is a dispute about the extent of the debt.
I do not propose to canvass the details of the dispute asserted by the applicants other than to briefly record that in late 1992 the applicants instructed the respondents to perform accounting services. The applicants say that they orally sought a quote for the work required to be done. They were given first a rough estimate and then a quotation which, as they understood the conversations, was to cover the accounting work necessary to complete the financial statements of all the companies for the 1991/92 year and also the accounting functions required to prepare financial statements for the 1993 year. The quotation was for an amount of $20,000.
The respondents on the other hand say that whilst a quotation was given, and later set down in writing in a letter dated 24 December 1992, it was to cover only the completion of the 1991/92 financial statements, and that the accounting functions for the 1993 financial statements were to be separately charged, as were subsequent years. In addition advisory work was to be separately charged.
There is a lot of information in the affidavit material about the communications between the parties and the progress of their relationship. There is obviously a dispute between the parties about the terms of the arrangement between them. The respondents, however, contend that the dispute about the quotation asserted by the applicants in their affidavits cannot be viewed as genuine because the applicants said nothing about the dispute until a very late stage in their relationship, and well after the time when it would have been apparent to the applicants that the respondents were raising charges for their services on a different basis. For months after this time they continued to deal with one another. Nothing was raised by the applicants, so the respondents say, which identified the alleged dispute. Moreover the respondents say that letters that were written first in September 1992 and then on 24 December 1992 are plain if they had been properly read and understood. The letters are consistent with the respondents' case and inconsistent with the applicants' assertions. There is force in these points, but it seems to me they go rather to the chances of success by the applicants if the dispute is to be tried on the merits than to the absence of any genuine basis for there being a dispute.
In my view there clearly is a genuine dispute as to the arrangement between the parties. The resolution of that dispute is central to determining whether there remains an outstanding debt, and if so, the amount of that debt.
I do not go further into the question whether the resolution of that particular dispute would lead to a conclusion that no debt exists. I am inclined to think that even if the dispute were resolved in the applicants' favour there would remain a balance still payable to the respondents. A question would then arise as to the calculation of the "substantiated amount" under s.459H(2).
It is unnecessary to explore these questions as the applicants go further than merely to raise issues about the scope of the quotation which they say were given. They say that in any event they have been grossly overcharged as a consequence of over-servicing in that senior chartered accountants performed work at high hourly rates which was of a fairly menial nature that could have been carried out by less qualified people on the respondents' staff. The applicants have sought to identify that over-charging and the extent of it by the preparation of a spreadsheet.
Again, the respondents say that the allegation of over-charging and over-servicing is merely one of obfuscation that was raised very late in the piece. It was raised, so they say, for the first time in January 1994. They contend that the allegation does not give rise to a dispute that is "genuine"; rather it should be viewed as an artificial attempt to further delay and defeat creditors and to avoid the obligation to pay a legitimate debt.
The spreadsheet on the face of it does appear to show that highly qualified chartered accountants were doing mundane work in many instances, and moreover were charging out their time at a rate above that which was mentioned in the correspondence said to constitute the quotation. I consider there exists a genuine dispute as to the amount of the debt arising by reason of possible over-charging. The fact that the grounds of that dispute were not properly articulated until very late in the piece is obviously a matter that goes to the weight to be given to the spreadsheet. It is a matter that would bear some importance, no doubt, at a trial, but it is not sufficient to lead the Court to conclude that the dispute is not genuine. Once the conclusion is reached that there is a genuine dispute as to the amount based on the allegations of over-servicing and over-charging it is impossible, without resolving that dispute, to determine if any amount remains due to the respondents in respect of the work done by them for the applicant companies as a group.
Without further discussing the issues that arise under s.459H, I turn to the arguments that are advanced by the applicants under s.459J(1)(a), namely that there is a defect in the notices. Each of the notices served on the 12 applicants was in an identical form save for the name of the company served. As against each company, the notice asserted that the company was indebted to the respondents in the amount claimed. The particulars of the debt were that:

"The amount of the debt is due and owing for services rendered by the creditor to the company in connection with the preparation of financial accounts for the Glen Group of Companies, namely...(each of the 12 applicant companies were named) from or about October 1992 until June 1993 as evidenced by invoices rendered by the creditor to the Glenn Group of Companies of which the company is one dated, variously...(and the dates of the invoices are given)."

As the amount claimed was not based upon a judgment debt, the obligation of the party serving the notice was to verify the debt by affidavit. That was done by an affidavit of George John Nowak, an officer of one of the respondent companies. The affidavit, by paragraph 4, deposes that the company is justly and truly indebted to the creditor in the sum of $49,472.85 on account of charges for accounting services rendered to the Glenn Group of Companies in connection with the preparation and completion of the accounting records of the Glenn Group of Companies between October 1992 and June 1993.
Paragraph 5 deposes that the Glenn Group of Companies comprises the 12 applicant companies. Paragraph 6 reads:

"The creditor was instructed by the Glenn Group of Companies which companies are jointly and severally liable to the creditor for payment to the creditor for work done by the creditor on behalf of the Glenn Group of Companies and each and every one of the companies."

A "defect" is defined by s.9 of the Corporations Law. In relation to a statutory demand it includes a misstatement of an amount and a misdescription of a debt or other matter. To determine whether there is a misstatement or misdescription in a statutory notice served under s.459E(1) the Court is permitted to go beyond the terms of the notice and supporting affidavit, and beyond the terms of a specified invoice incorporated by reference into the notice. The Court is permitted to look at surrounding circumstances as they are proved by the material before the Court.

The assertion that each of the companies in the Glenn Group of Companies is jointly and severally liable to the creditor was made in a summons that was issued in the Magistrates Court in Adelaide on 23 August 1993 for certain of the work performed by the respondents in respect of the 1991/92 financial statements. In the particulars of claim it was pleaded that the 12 companies comprising the Glenn Group of Companies carried on business in partnership. The defence in the proceedings denied that allegation and said that each of the defendant companies traded as a separate and distinct legal entity and at no time had the defendant companies traded in partnership as the Glenn Group of Companies.
That denial is verified by Mr Grosset, one of the directors of the applicant companies, in his affidavit filed in these proceedings on 28 January 1994. Moreover, the absence of any partnership arrangement between the companies is evident from a perusal of the financial statements for each of those companies that were prepared by the respondents for the period ended 31 December 1992, and incorporated as an exhibit to that affidavit. Each of the companies is shown to have its own trading income and that income is not part of the proceeds of a partnership.
The financial statements include among them a Glenn Group consolidation, but the existence of a consolidated account for companies said to comprise a group does not establish that they are carrying on business in partnership. It suggests that there is a cross-shareholding between the companies such that consolidation is permitted of subsidiaries with the holding company. That does not render each of the subsidiary companies liable for the debts of other subsidiary companies or of the holding company.
There is an irregular affidavit in these proceedings by a solicitor who acts for the respondents which asserts as follows:

"I say that at all material times the defendants conducted themselves in business jointly for the purpose of making profit and operating in partnership. Each of the defendant companies are incorporated pursuant to the provisions of the Corporations Law 1991 and hold themselves out to be the 'Glenn Group of Companies'. The group's corporate brochure refers to all the defendants as, 'Glenn Group of Companies'."

A brochure is not exhibited to the affidavit, nor is any other information given about it. As I have already pointed out the fact that the companies hold themselves out as the Glenn Group of Companies does not establish partnership. The affidavit is irregular in that the deponent does not seek to provide the Court with the basis of the information upon which the conclusion of partnership is based. I can place no weight on that conclusion by the solicitor and do not do so.

Of more significance is the fact that the affidavit filed by Mr Brown, an officer of one of the respondent companies, says that one of the first tasks that the respondents were instructed to carry out was to advise and attend meetings in relation to the business group's, "family tree" and other matters. It is apparent from the affidavit and the nature of the work that was done by Mr Brown that if there were a partnership he would be well aware of it. Yet his affidavit fails to address at all the denial of partnership by the applicants.
In my view the evidence before the Court disproves the assertion that there was a partnership. There is no evidence capable of establishing any basis for the statement in the affidavit verifying the statutory notice for the assertion that each of the companies was jointly and severally liable for the fees of the respondents. The denial of joint and several liability by the applicants has not been contested by Mr Brown whose personal knowledge of the affairs of the applicants would have qualified him to answer the denial. I am satisfied that the assertion that Cempro Pty Limited is jointly and severally liable to the creditor for the debt claimed constitutes a misdescription, and is a defect in the statutory demand served on that company.
Section 459J provides that if the Court is satisfied that because of a defect in the demand substantial injustice will be caused unless the demand is set aside, the notice should be set aside. In my view a substantial injustice would occur to Cempro Pty Limited if the notice served on it were allowed to stand, notwithstanding the defect. The effect would be to presume Cempro Pty Limited to be insolvent for non- compliance with a demand that claimed an amount which, even if it were a fair estimate of the work done by the respondents for the Glenn Group, was not the debt just of Cempro Pty Limited but the amount in aggregate due for work done for 12 separate companies. I therefore consider that the notice should be set aside under s.459J(1)(a).
Commercial expediency no doubt led the parties to enter into a broad agreement whereby the respondent accountants undertook to prepare the financial statements of 12 companies and to render an account for the total work done to the group, without going to the further trouble and expense of apportioning the work precisely to one company or another. Under that broad commercial arrangement the obligation of apportioning the total charges appropriately to each of the companies for accounting and tax purposes was a matter to be decided by the applicants themselves.

No doubt that is the sort of arrangement common in many corporate groups, and one can understand the common sense of it. A problem may arise later, however, if and when the party providing services under such an arrangement seeks to recover from one of the members of the group. That has happened here. As I said in argument, I feel some sympathy for the respondents about that difficulty, but there is a short practical answer to it. The respondents have already recognised and applied that answer in the proceedings issued in the Magistrates Court. They simply sued the 12 companies, and at the end of the day the claim was resolved sensibly between the parties. They were paid under a settlement without the need to nominate what work was done for which company. The problem which has arisen by virtue of the issue of these 12 notices would have been solved by the respondents issuing proceedings in a court of competent jurisdiction for the total debt against the 12 companies. The matter would have proceeded to trial, and in a practical way, if the point were taken, it could have been sorted out in the course of the trial.
It is also asserted by the applicant companies that the notices should be set aside because there exists some other reason why that should happen. The argument advanced by the applicants in support of that contention was first that there had been an abuse of process by the respondents in issuing proceedings in the Magistrates Court claiming $20,000 being for part of the work for which they were claiming, then subsequently serving notices under s.459E in respect of other parts of the money that they alleged was owing. It was argued that an abuse of the court process had occurred by not suing in the one action for all the debts that were outstanding at the time, and in respect of which the respondents knew, or should have realised, that there was a dispute. Secondly, it was argued that it was a misuse of s.459E to sue for those parts of the total amount claimed which appeared to be clearly established, and then to serve notices of statutory demand for the balance which the companies were likely to dispute, when the evident purpose of doing so was to hold the notices over the heads of all the companies in negotiations. As the outstanding notice must be set aside on other grounds, I do not propose to consider these submissions which raise difficult issues that have not been fully explored in argument.
There is, however, another ground upon which I think reason exists under s.459J(1)(b) for setting aside the notice of demand served on Cempro Pty Limited.
I have mentioned that the Magistrates Court proceedings were compromised. The compromise was reduced to writing and recorded in a deed. Each of the 12 companies was a party to the deed. Pursuant to the deed, the companies agreed to pay a settlement sum of $14,000 and upon payment, the claim and counter-claim were to be dismissed. Reference has been made to this deed in argument. My reading of it indicates that the 12 companies, for the purposes of settlement, assumed a joint liability. That is the only evidence before the Court on which the respondents could found an argument that the 12 companies in the Glenn Group had a common obligation to pay the respondents. It is an illogicality to assert that because a joint liability was accepted in that deed, that a joint liability exists in respect of accounting charges that are not the subject of the deed. But assuming for the moment that there is weight in the argument that the deed evidences a common obligation by the companies, there is the evidence that 11 of the 12 demands were withdrawn without any explanation. They were unequivocally withdrawn.
It seems to me that there must arise from that fact ground for believing that the respondents themselves acknowledged on those 11 notices of statutory demand that there were genuine disputes as to the existence or amount of the debts claimed. If there were grounds for genuine dispute in the case of 11 companies, no reasons were put forward why there would not be similar grounds for genuinely disputing the existence or amount of the debt by the twelfth company. In the absence of explanation as to why 11 of the demands were withdrawn but the twelfth was not, I consider the Court ought to exercise the broad power under s.459J(1)(b) to set aside that twelfth demand.
There is one further point arising from the deed that was not the subject of detailed argument by the parties, although it was mentioned by the Court. I consider there exists an argument that by the terms of paragraph 6 of the deed there has been a settlement in relation not only to the accounting charges in respect of the 1991/92 year but also in respect of the 1992/93 year. Upon presentation of full argument by counsel, that might prove to be an incorrect interpretation of the deed, but at the moment that seems to me to be another ground upon which there could be a genuine dispute as to the existence of the debt. Perhaps that argument is only another way of saying that there exists a genuine dispute between the parties as to the scope and extent of the original quotation.
In my view, the statutory demand served on 10 January 1994 on Cempro Pty Limited should be set aside.
I come back to a point mentioned at the outset. It is most regrettable that this matter proceeded in the way it did in this Court. Had the respondents sued at the one time in the Magistrates Court or District Court for all the amounts of money they alleged were due to them, I would venture the view that those proceedings would now be finally resolved between the parties, and there would have been little or no more legal work involved on both sides of that case than has been put into these proceedings.
On the application to set aside the 11 notices that were unequivocally withdrawn by notice in writing given to the applicants before the proceedings were commenced, I decline to make the orders sought. For the reasons given I think that is unnecessary to do so. The notices ceased to operate before the period for compliance expired, and the applicants have been armed with a document signed on behalf of the party giving the notice upon which they could rely if it were ever suggested that demands for payment had not been complied with.
There will be an order under s.459N that the respondents pay the applicants' costs of the application under s.459G. In the result there has only been an order in favour of one of the applicant companies, but the proceedings insofar as they related to the other 11 applicants have added nothing to the nature or length of the issues fought out between the one successful applicant and the respondents.

[1994] FCA 407

11 MAY 1994