Citycourt Pty Ltd v Forestry Finance Ltd - [2013] WASC 435

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CITYCOURT PTY LTD -v- FORESTRY FINANCE LTD [2013] WASC 435

CORAM: MASTER SANDERSON

HEARD: 16 OCTOBER 2013

DELIVERED : 5 DECEMBER 2013

FILE NO/S: COR 170 of 2013

BETWEEN: CITYCOURT PTY LTD (ACN 075 142 228)
Plaintiff
AND
FORESTRY FINANCE LTD (ACN 108 513 239)
Defendant

FILE NO/S :COR 171 of 2013

BETWEEN :SLONDIA NOMINEES PTY LTD (ACN 008 892 224)
Plaintiff
AND
FORESTRY FINANCE LTD (ACN 108 513 239)
Defendant

Catchwords:

Corporation law - Application to set aside two statutory demands - Genuine dispute said to exist - Turns on own facts

Legislation:

Nil

Result:

Demands set aside

Category: B

Representation:

COR 170 of 2013

Counsel:

Plaintiff: Mr C G Hicks
Defendant: Mr M F Holler

Solicitors:

Plaintiff: Herbert Smith Freehills
Defendant: AustAsia Legal Pty Ltd

COR 171 of 2013

Counsel:

Plaintiff: Mr C G Hicks
Defendant: Mr M F Holler

Solicitors:

Plaintiff: Herbert Smith Freehills
Defendant: AustAsia Legal Pty Ltd

Case(s) referred to in judgment(s):

Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785
Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896
Spencer Constructions Pty Ltd v G & M Aldridge (1997) 76 FCR 452

MASTER SANDERSON:

Introduction

Both of these actions concern the setting aside of a statutory demand. In each matter the defendant says it lent certain funds to the plaintiff. While the facts in each case are similar they are not identical. However, the two actions were so closely related it was prudent that they should be heard at the same special appointment. In both matters the plaintiff is seeking to set aside a statutory demand.

Legal principles - genuine dispute

In both cases it is the plaintiff's position there is a genuine dispute as to the debt underlying the demand. There was no disagreement between counsel as to the legal principles. It is enough if I refer to the often quoted cases of Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 and Spencer Constructions Pty Ltd v G & M Aldridge (1997) 76 FCR 452 as examples of the applicable principles. In Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896, Barrett J put the position as follows:
Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger [18].

Citycourt Pty Ltd v Forestry Finance Ltd - COR 170 of 2013

In both of these matters the application to set aside the statutory demand was supported by an affidavit of Aaron McDonald sworn 26 August 2013. Mr McDonald is a solicitor acting for the plaintiffs. Appearing as attachment AM1 to Mr McDonald's affidavit are copies of the statutory demand. The amount of the debt is $96,083. Under 'description of the debt' in the schedule to the statutory demand there appears the following:
The unpaid balance outstanding as at 30 June 2012 of the loan of $115,070.00 plus interest at the rate of 12% per annum made by the creditor to the debtor by loan agreement made 30 June 2007 by which the debtor agreed to make 96 monthly payments to the creditor of $1,901.14 per month on the 1^st day of each month commencing 1 July 2007.
The debtor has defaulted on the monthly instalments.
The creditor is entitled to and has called for the payment of the total sum of the loan outstanding plus interest at accruing daily [sic] at the rate of 12% per annum.
In his affidavit Mr McDonald explains the plaintiff is the trustee of the Footwear Wholesale Trust (FWT). The FWT owns the wholesale arm of a multiservice shoe repair business. The sole shareholder of the plaintiff is Michael Angelo Mercanti. At present he is the managing director of the plaintiff. Between about 2004 and 30 July 2013 Michael's son Tyrone Mercanti was the managing director of the plaintiff and undertook the day to day management of the plaintiff's business and affairs. During that time Mr Michael Mercanti was a director of the plaintiff but was not involved in the day to day management.
On his appointment as managing director Mr Michael Mercanti engaged Mr Damon Harris, a director of William Buck (WA) Pty Ltd, to investigate the plaintiff's accounts. As part of his enquiries Mr Harris reviewed information about a liability listed in the plaintiff's financial accounts recording a purported non‑current liability described as 'loan - Forestry Finance Ltd'.
Mr McDonald in his affidavit notes that the amount of the loan changed over time. In the draft financial accounts for the financial year ended 30 June 2012 the quantum of the loan was $96,083. That accords with the amount in the statutory demand. It is clear from Mr McDonald's affidavit the records of the company did not disclose the terms of this loan or indeed the reasons it was taken out. But it is the fact it is noted in the accounts for the financial years ending 30 June 2007 through to 30 June 2012. Mr Michael Mercanti as a director of the plaintiff signed off on those accounts.
Between early February and mid‑June 2013 the plaintiff's solicitors wrote to Tyrone seeking copies of the documentation relating to the loan. These enquiries received no response. Sydney James Chesson was for a time an alternate director of the plaintiff. He resigned on 4 August 2013. Mr Chesson is also a director of the defendant. On 4 August 2013 Mr Chesson sent an email to Mr Michael Mercanti stating he (Michael) would soon receive correspondence regarding the solvency of the plaintiff. It was soon after that the statutory demand was received. Mr Chesson swore the affidavit which accompanied the statutory demand.
Subsequent to receiving the statutory demand the plaintiff's solicitors wrote to the defendant seeking copies of the loan documentation. Relevantly the defendant responded by providing a spread sheet said to be a loan schedule for a loan made by the defendant to the plaintiff. A copy of that spread sheet appears as annexure AM27 to Mr McDonald's affidavit. The defendant also provided what was said to be a 'loan application', and a copy of that document appears as annexure AM29 to Mr McDonald's affidavit.
At par 36 of his affidavit Mr McDonald sets out certain matters which he says are relevant to considering whether or not the loan is repayable. The paragraph reads as follows:
I note the following matters in relation to the Loan Application:
(a)In the space for the 'Applicant' to be named on page 6 of the Loan Application, Slondia Nominees Pty Ltd has been written, struck out, and replaced with 'City Cort [sic] Pty Ltd';
(b)the 'Corporate Borrower' named on page 8 of the Loan Application is Slondia Nominees Pty Ltd, rather than the plaintiff;
(c)the 'Loan Schedule' does not have a page number;
(d)the 'Borrower' in the 'Loan Schedule' has been left blank;
(e)the 'Loan Schedule' has not been executed;
(f)the page numbering of the Loan Application starts at page 6 of 12 and ends at page 10 of 12;
(g)the 'Loan Agreement' referred to in page 10 of 12 is missing; and
(h)the 'Principal & Interest Repayments' listed in the 'Loan Schedule' provides for 8 annual payments of 22,813.68, which is inconsistent with:
(1)the Spread Sheet, which provides for 96 monthly payments of $1,901.14; and
(2)the Statutory Demand, which claims that the Loan was to be repaid by way of 96 monthly payments of $1,901.14.
No further information has been forthcoming which details the loan and the background circumstances. On that basis the plaintiff says there are five reasons for concluding there is a genuine dispute as to the claimed debt. They are:
1.there is a genuine dispute about whether the plaintiff is bound by the loan application, in circumstances where it was named inconsistently and did not execute the document;
2.there is a genuine dispute about whether the loan is repayable in full by the plaintiff in circumstances where the defendant had previously agreed not to enforce the loan;
3.there is a genuine dispute about whether the loan is repayable in circumstances where there is no express contractual right to require repayment of the loan;
4.there is an inconsistency between the loan repayment regime contained in the loan application and the loan repayment regime contained in the spread sheet and claimed in the statutory demand; and
5.the defendant has not provided the loan documentation in full.
In opposition to the application the defendant has filed two affidavits of Tyrone Kane Mercanti, the first sworn 9 September 2013 and the second sworn 18 September 2013. It also relies on an affidavit of Sydney James Chesson sworn 9 September 2013. In his first affidavit Mr Tyrone Mercanti confirms the plaintiff borrowed an amount of $115,020 from the defendant. He points out the plaintiff claimed a full tax deduction for the interest paid on the loan from 1 July 2007 onwards. He is unable to provide any loan documentation. He also says at all times his father Michael Mercanti was aware of the loan. There is clearly a difference between the parties on this point which I am not in a position to resolve.
Mr Tyrone Mercanti says the plaintiff defaulted on its scheduled repayments to the defendant in 2008. He says he discussed the position with Mr Chesson. Mr Chesson responded he would discuss the matter with the directors of the defendant. Subsequently Mr Chesson said the defendant would allow the plaintiff further time to make repayments provided the defendant was kept fully informed of the trading performance of the plaintiff's business. Mr Tyrone Mercanti confirms the amount claimed in the statutory demand is owed by the plaintiff to the defendant.
Mr Tyrone Mercanti's second affidavit does not take the matter any further. It is directed at the issue of his authority to enter into agreements such as the one between the plaintiff and the defendant. He makes the point he was the managing director of the plaintiff and frequently entered into financial agreements. He says the plaintiff had significant turnover and was operating a large business. The thrust of his evidence is there was nothing unusual or untoward in his entering into an agreement with the defendant on behalf of the plaintiff and he had the actual authority to do so.
Mr Chesson's affidavit is a rather strange document. He confirms a loan was made by the defendant to the plaintiff in an amount of $115,020. He also says the plaintiff agreed to make annual payments to the defendant in the sum of $22,813.68 on 30 June of each respective year commencing 2008. In support of these two propositions he refers to annexure SJC7 which he says is a copy of the loan agreement between the plaintiff and the defendant. In fact that attachment is precisely the same as annexure AM29 to Mr McDonald's affidavit to which I have referred earlier. At best the documentation is incomplete as alleged by the plaintiff.
The remainder of Mr Chesson's affidavit deals with the apparent agreement between Mr Tyrone Mercanti and the defendant to delay repayments under the loan. Mr Chesson also details his relationship with Mr Tyrone Mercanti and certain discussions he allegedly held with Mr Michael Mercanti. In all Mr Chesson's affidavit is of limited utility.
On behalf of the defendant it was submitted what was not in dispute in this case was a loan was made by the defendant to the plaintiff and had not been repaid. This was supported by the company's accounts. Under s 286 of the Corporations Act 2001 (Cth) a company has an obligation to keep written financial records that correctly record and explain its transactions and financial position. Pursuant to s 1305(1) of the Corporations Act these accounts are prima facie evidence of any matter stated or recorded. Given no evidence has been led which would rebut the inference to be drawn from the accounts it must be concluded the plaintiff is indebted to the defendant in the amount recorded in the books.
That proposition should in my view be accepted. On behalf of the plaintiff it was put it was not clear whether s 1305(1) applied to the plaintiff. Although a number of ingenious arguments were deployed in support of this proposition it seems to me there is no reason to doubt the books are prima facie evidence of the existence of the debt. The fact is year after year they were signed off by the directors including Mr Michael Mercanti. There is nothing in the evidence which would suggest the loan was not actually made. But there is some question as to the terms upon which the loan was made and how much is to be repaid.
On behalf of the defendant it is submitted once that point is reached there is no answer to the defendant's demand for repayment of the debt. It was submitted the terms of the loan agreement and the fact the documentation cannot be produced does not alter the fact of the loan being in existence. Given the demand is consistent with the accounts there can be no genuine dispute as to repayment.
In my view the circumstances surrounding this loan can best be described as murky. It is not possible to say with any certainty what the terms and conditions of the loan were or what the repayment regime actually was. There appears to be a difference between the loan application documents and the spread sheet provided by the defendant. Moreover there was clearly some agreement between Mr Tyrone Mercanti and Mr Chesson which affected the plaintiff's obligations to make repayment of the loan. It may be that agreement was of no force and effect - it is difficult to see how it was supported by consideration. But if an agreement was reached and if the agreement was enforceable its terms do not emerge fully from the evidence. Perhaps the agreement for forbear fell away when Mr Chesson decided it was no longer applicable. But a clear position does not emerge from the evidence.
It is a matter of weighing in the balance the evidence of each party. So far as the defendant is concerned there are the statements in the accounts and the prima facie evidence that provides the debt is owing. There is the evidence of Mr Tyrone Mercanti he was authorised to and did enter into the loan agreement. On the other hand the plaintiff is not now in a position to know precisely on what terms and conditions the loan was made. It does not know the nature of the agreement reached between Mr Tyrone Mercanti and Mr Chesson about deferring repayment of the loan. When all these matters are weighed in the balance I am satisfied there is a serious question to be tried and there is a genuine dispute between the parties.
The proper order is the statutory demand be set aside.

Slondia Nominees Pty Ltd v Forestry Finance Ltd - COR 171 of 2013

In this matter the amount of the debt is said to be $82,030. The description of the debt found in the schedule to the statutory demand reads as follows:
The unpaid balance outstanding as at 30 June 2012 of the loan of $111,654.00 plus interest at the rate of 12% per annum made by the creditor to the debtor by loan agreement made 30 June 2006 by which the debtor agreed to make 96 monthly payments to the creditor of $1,845.51 per month on the 1^st day of each month commencing 1 July 2006.
The debtor has defaulted on the monthly instalments.
The creditor is entitled to and has called for the payment of the total sum of the loan outstanding plus interest at accruing daily [sic] at the rate of 12% per annum.
The background facts to this application vary to the extent the loan application has attached a document 'Loan Agreement' which appears to embody the terms and conditions of the advance. Mr McDonald notes five matters in relation to the loan application (par 38 of his affidavit). These are:
1.the 'Applicant' named on page 6 of the loan application is Tyrone, rather than the plaintiff;
2the 'Loan Schedule' has been executed for the borrower by a person Mr McDonald believes to be Tyrone. It does not appear to have been executed by the company;
3.the page numbering of the loan application starts at page 6 of 12 and ends at page 11 of 12;
4.the 'Loan Agreement' contained on page 11 of the loan application is missing cl 6(a) and cl 6(b); and
5.the 'Loan Schedule' does not have a page number and does not display the binder marks on the left hand side of the page that the other pages in the loan application display.
Mr McDonald then goes on to set out four reasons why the plaintiff says there is a genuine dispute in relation to this debt. They are:
1.there is a genuine dispute about whether the plaintiff is bound by the loan application that was entered into by Mr Tyrone Mercanti;
2.there is a genuine dispute about whether the loan is repayable in full by the plaintiff in circumstances where the defendant had previously agreed not to enforce the loan;
3.there is a genuine dispute about whether the loan is repayable in circumstances where, before the issue of the statutory demand, the defendant had not made an election to recover the loan; and
4.the defendant has not provided the loan documentation to the plaintiff in full.
The third of these grounds requires some further explanation. Clause 7, cl 8 and cl 9 of the loan agreement deal with the lender's rights when the borrower is in default. None of the clauses is particularly happily worded and there is a clear omission in cl 8. It has subclauses (b), (c) and (d). But it does not have a subclause (a). This would appear to be a typographical error but it confirms the impression of sloppy drafting. Be that as it may the clauses are I think tolerably clear and would not seem to prevent the statutory demand procedure being used in relation to the loan. I am not satisfied there is any obligation to make an election under one or other of the clauses prior to issuing a statutory demand.
It is not necessary in this case to go through again the evidence of Mr Tyrone Mercanti and Mr Chesson. Effectively they say the same about this loan as they do about the loan in the Citycourt matter. That is to say they allege the loan was made, it has not been repaid, there was a moratorium on repayments for a period but now the loan is due and payable. Once again they point to the accounts of the plaintiff and say that amounts to prima facie evidence the money is owing and that evidence has not been rebutted.
However as with the earlier matter I am not satisfied the matter is so clear I can conclude there is no genuine dispute. Really the same arguments apply in this case as applied in the earlier case. There is one additional matter - that is the uncertainty as to the identity of the borrower. A document entitled 'Loan Application Forms' forms the first page of annexure AM30 to Mr McDonald's affidavit. That shows the 'Applicant Full Name' as 'Tyrone Kane Mercanti'. On the loan application the plaintiff appears under 'Corporate Borrowers'. It would appear the document is signed by Mr Tyrone Mercanti in his own name. The section which allows for execution by two directors or a director and secretary of the company is blank. While I accept there is prima facie evidence to support the borrowings being by the company based upon the books of the plaintiff it seems to me arguable that primary liability for the loan rests with Mr Tyrone Mercanti personally. At the very least the circumstances of the execution of the loan documents require further investigation.

That being the case I am satisfied there is a genuine dispute in relation to the debt and the statutory demand ought be set aside.