Computronics Holdings Limited v Pilarinos
[2011] VSC 218
•23 May 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
List E
S CI 2011 00012
IN THE MATTER OF COMPUTRONICS HOLDINGS LIMITED (ACN 082 573 108)
| COMPUTRONICS HOLDINGS LIMITED (ACN 082 573 108) | Plaintiff |
| v | |
| JERRY PILARINOS | Defendant |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6, 14 April 2011 | |
DATE OF JUDGMENT: | 23 May 2011 | |
CASE MAY BE CITED AS: | Computronics Holdings Limited v Pilarinos | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 218 | |
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CORPORATIONS – Statutory demand - Appeal from Order of Associate Judge dismissing application – Whether genuine dispute established – Whether new basis for demand may be relied upon - Contract for convertible notes – Appeal allowed – ss 459E(3)(b), 459G(1), 459H Corporations Act 2001.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Galvin | TressCox Lawyers |
| For the Defendant | Mr R S Randall | John Dimitropoulos |
TABLE OF CONTENTS
Parties and Introduction................................................................................................................... 2
The relevant legal principles - Genuine dispute.......................................................................... 2
On what basis did Mr Pilarinos pay the $500,000 and why did he say he was entitled to return of the money?................................................................................................................................................. 3
The hearing before the Associate Judge........................................................................................ 6
Issue of convertible notes - is there a genuine dispute?............................................................. 8
Is there otherwise a genuine dispute about the debt?................................................................ 9
Conclusion......................................................................................................................................... 10
HER HONOUR:
Parties and Introduction
In May 2010, the plaintiff, Computronics Holdings Limited, sought to raise funds by way of a convertible note issue. It entered into a convertible note agreement with an equity fund broker, Melbourne Finance Broking Pty Ltd. In early July 2010, the defendant, Mr Pilarinos, paid Melbourne Finance Broking $500,000 for the issue of convertible notes. That money was in turn paid to Computronics. Mr Pilarinos claims that he is entitled to return of the money he paid. On 17 December 2010, Mr Pilarinos served a statutory demand for $500,000 on Computronics. Computronics applied to set the demand aside under s 459G of the Corporations Act 2001 (Cth). The basis of the application was that no amount was due and payable by Computronics to Mr Pilarinos as at the date of the demand. An Associate Judge dismissed the application to set aside the demand. Computronics appeals from that decision. The time for complying with the demand has been extended until determination of the appeal.
The appeal is by way of re‑hearing.[1]
[1]Supreme Court (Corporations) Rules 2003 (Vic), Rule 16.5(1), Supreme Court (General Civil Procedure) Rules 2005 (Vic), Rule 77.06(7).
The relevant legal principles - Genuine dispute
Section 459G(1) of the Corporations Act provides that a company may apply to the Court for an order setting aside a statutory demand served on the company. One of the grounds on which a demand may be set aside is where there is a genuine dispute as to the existence or amount of the debt.[2]
[2]Section 459H Corporations Act.
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd,[3] Dodds‑Streeton JA said:[4]
The court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim.
No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised. (Citations omitted).
[3](2008) 66 ACSR 67.
[4]Ibid at [56] – [57].
Her Honour also said:[5]
As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice.
[5]Ibid at [71].
It was submitted on behalf of Computronics that there is a genuine dispute as to the existence of the debt. The argument is that the terms of the agreement between Mr Pilarinos and Computronics as to the payment of the money, and the issue of the convertible notes, includes the terms in the convertible note agreement between Computronics and Melbourne Finance Broking Pty Ltd dated 21 May 2010 and that it is at least arguable that at the time the demand was served, the terms had not been breached by Computronics, nor had any notice of redemption been served in accordance with the relevant terms.
On what basis did Mr Pilarinos pay the $500,000 and why did he say he was entitled to return of the money?
Mr Pilarinos relies on a receipt dated 10 July 2010 he received from Computronics which he says contains the terms of the contract between him and Computronics. The text of the receipt reads:
Confirmation of receipt of funds for Convertible Notes 10 July 2010
This is to confirm that Jerry Pilarinos of 22 Winter st [sic] Malvern has paid $500,000.00 to Computronics Holdings Limited (CPS) for the issue of Convertible Notes (CN) on the following terms.
CN conversion price 1.5 cents per share.
CN convert into ordinary shares of CPS upon CPS Shareholder approval and ASX relisting of CPS
Failure to achieve conversion and re listing deems the CN redeemable.
CN held in trust by Melbourne Finance Broking Pty Ltd on behalf of CN holder.
Copy of CN agreement attached.
The document attached to the receipt is on Computronics letterhead and reads as follows:
Computronics Holdings Limited Convertible Note Subscription Agreement
Computronics Holdings Limited has entered into a convertible note facility with Melbourne Finance Broking Pty Ltd for the issue of $1,000,000.00 in convertible notes. The notes are convertible into fully paid ordinary of Computronics at the conversion price of 1.5 cents per share.
Subscribers to the convertible note facility will have their notes held in trust by Melbourne Finance Broking Pty Ltd until the notes are converted into fully paid ordinary shares of Computronics Holdings Limited which is expected to be after shareholders of Computronics approve the convertible note issue.
When notes are converted in ordinary shares they will be in the name of the subscriber.
At the bottom of the document, provision was made for the inclusion of the applicant’s name and contact details, the amount to be subscribed and election of payment method by either cheque or electronic funds transfer to Melbourne Finance Broking. It is common ground that Mr Pilarinos paid $500,000 for convertible notes to Melbourne Finance Broking which then deposited that amount into Computronic’s bank account on 5 July 2010.
On 14 December 2010, Computronics received a letter from Mr Pilarinos dated 9 December 2010 in the following terms:
Re:Money paid to Computronics Holdings Limited (CPS) for Convertible Notes (CN)
I refer to the payment by me to CPS in the sum of $500,000 and in respect of Convertible Notes on agreed terms (the Terms) as detailed upon the Receipt.
I enclose copy of the receipt (the Receipt) dated 10 July 2010 evidencing the payment of $500,000 (the Payment) and listing the said Terms.
The Terms included a requirement that CPS be re-listed by the ASX within 6 months of Payment.
As re-listing has not been achieved I require to redeem the Payment.
Please therefore treat this letter as notice (the Repayment Request) and confirmation that I seek to redeem the Payment in the sum of $500,000.
It is my understanding that the Repayment Request is upon demand.
I therefore require that a bank cheque in the sum of $500,000 be made available for my collection in accordance with the Terms and the Repayment Request and hereby nominate Monday 13 December 2010 as the date upon which the said bank cheque be made available for my collection.
In the event that Repayment Request is not satisfied by close of business Monday 13 December 2010 by way of bank cheque made payable to me, I hereby give notice of my intention to seek the appropriate redress and to use this letter on the question of legal costs on an indemnity basis.
This Repayment Request is made without prejudice to any other rights and obligations that the CPS has to me and including but not limited to the payment of interest upon the sum of $500,000 and the issue of shares, unrelated to the Payment, and in accordance with the option agreement (the Option Agreement) executed between myself and the CPS dated 20 May 2010.
On 17 December 2010, Mr Pilarinos served the statutory demand. Paragraph 1 of the demand stated that Computronics owed Mr Pilarinos the amount of $500,000 as a debt. The schedule to the demand included a description of the debt as follows:
The sum of $500,000 paid to the company and redeemed by notice (the Notice) dated 9 December 2010.
The demand was accompanied by an affidavit sworn by Mr Pilarinos. He referred to the letter dated 9 December 2010 as the notice demanding payment of the sum of $500,000 and deposed that the debt was due and payable by Computronics. Finally, Mr Pilarinos deposed that he believed that there was no genuine dispute about the existence or amount of the debt.
By letter dated 4 January 2011, Computronic’s solicitors wrote to the solicitors for Mr Pilarinos requesting that the demand be withdrawn on the basis that the sum of $500,000 was not due and payable. Reference was made to the 9 December 2010 letter from Mr Pilarinos. Computronic’s solicitors noted that the reason given in that letter for repayment of the $500,000 was that Computronics had not ‘re-listed’ within six months of payment but that less than six months had passed since the payment was made by Mr Pilarinos. The solicitors contended that on that basis alone, the amount was not due and payable. The letter went on to refer to other reasons which (in the solicitors’ view) established that no amount was due and payable. Those additional reasons were based on the proposition that the rights of Mr Pilarinos were affected by the convertible note agreement between Computronics and Melbourne Finance Broking. That agreement provides that Melbourne Finance Broking would make available to Computronics a facility of $1 million comprising convertible notes. The terms of the convertible notes are contained in Schedule 1 to the agreement. Those terms include the following:
(a)the notes are redeemable for cash on the first anniversary of the date of their issue;
(b)Computronics will seek shareholder approval and ASX re-listing for the conversion of the notes within six months of issue and upon shareholder approval and ASX re-listing the notes will be converted into shares within 7 days. If shareholder approval and ASX re-listing is not obtained the notes become redeemable; and
(c)if an “Event of Default” occurs and Melbourne Finance Broking serves a notice on Computronics declaring the notes to be immediately redeemable, Computronics must immediately redeem the notes.
The demand was not withdrawn by Mr Pilarinos and the application to set aside the demand was made by Computronics.
The hearing before the Associate Judge
As noted above, the Associate Judge dismissed the application to set aside the demand. The “other matters” section of his Honour’s orders sets out the terms recorded in the receipt (to which I have referred in paragraph [7]). The following then appears in the “other matters” section of the orders:
No convertible notes have been issued nor has the Plaintiff been re-listed. There is no time limit to be issued. There are no convertible notes held by Melbourne Finance Broking Pty Ltd.
The agreement between the parties has been frustrated.
There is no arguable defence available to the Plaintiff.
When the appeal came on before me, counsel for Mr Pilarinos informed me that at the hearing before the Associate Judge, counsel for Computronics conceded that no convertible notes had been issued. Different counsel appeared for Computronics before me. His instructions were that such a concession had not been made and no concession was made at the hearing before me. Counsel noted that in any event the appeal was by way of re-hearing.
A recording of the hearing before the Associate Judge was retrieved and re-played in open Court. Due to the quality of the recording, it was difficult in patches to hear what was said, but a transcription of the recording discloses that the following exchange took place between his Honour and counsel for Computronics:
COUNSEL: Under the terms of the agreement Melbourne Finance was to hold the convertible notes on trust for the subscribers - - -
HIS HONOUR: Well are these convertible notes in issue?
COUNSEL: No. They haven't been issued.
HIS HONOUR: Why not?
COUNSEL: And we say because Melbourne - - -
HIS HONOUR: Is there any evidence as to why not?
COUNSEL: Well, I don't - there's nothing in the material as to why not. I don't have any instruction - - -
HIS HONOUR: All right, so it should be against Melbourne Finance…
I granted special leave to Mr Pilarinos to file an affidavit by Mr Constantine Scrinis, who was a director of Computronics between 23 April and 1 December 2010. His affidavit was to the effect that to his knowledge convertible notes were not issued by Computronics whilst he was a director. Subsequently, Computronics sought leave to file a responding affidavit. That application was opposed and, if granted, Mr Pilarinos asked for leave to file a further affidavit. As I have come to the view that the appeal should be allowed and the demand should be set aside even if the convertible notes were not issued, I do not propose to grant leave to file any further affidavit material. Nor will I make any finding as to whether the convertible notes have issued.
Issue of convertible notes - is there a genuine dispute?
It was submitted on behalf of Mr Pilarinos at the hearing before me that the issuing of the convertible notes was a condition (either precedent or subsequent) of the contract and that that term was breached. Alternatively, it was submitted that there had been a total failure of consideration or the whole import of the contract between the parties was frustrated. In each case, it was submitted that Mr Pilarinos was entitled to the return of his $500,000 and that there was no genuine dispute about the debt.
It became clear at the hearing before me, that the first time that Mr Pilarinos and his advisers became aware that the convertible notes may not have been issued was when the matter was before the Associate Judge.
It is also clear to me, from the statutory demand itself, the affidavit accompanying it and the letter of 9 December 2010, that the basis on which it was put that a debt was due was that there was an alleged default by Computronics in failing to re-list within 6 months. The letter of 9 December 2010 was sent as a redemption notice by Mr Pilarinos. The letter of 4 January 2011 from the solicitors for Computronics shows that this is what it understood was put as the basis for the debt claimed in the statutory demand. There was no suggestion that the claimed debt was based on the contention that the money was owed because the convertible notes had not been issued. Nor could there be because it was not until later when the application to set aside the demand was before the Associate Judge that the suggestion that the notes had not been issued came to light.
It is important for the recipient of a statutory demand to know the basis upon which the creditor seeks payment of the debt. It only has 21 days to decide whether the debt should be paid or compounded or whether application should be made to set aside the demand. In determining what to do, it is relevant for the company to consider the basis upon which the creditor claims the debt. Unless the debt claimed in a statutory demand is a judgment debt, the demand must be accompanied by an affidavit that complies with the court rules.[6] There is a requirement under the rules that the affidavit must state the nature of the debt, ensuring that what is stated corresponds with the description of the debt in the statutory demand.[7] This requirement ensures that the company has information relevant for making its decision as to what to do in response to the demand. If the creditor later wants to rely on a basis for claiming the amount demanded other than the basis set out in the demand and accompanying affidavit, then a fresh demand and affidavit should be served.
[6]Section 459E(3)(b) Corporations Act.
[7]Rule 5.2(a) and paragraph 1, Form 7, Supreme Court (Corporations) Rules 2003.
It follows from what I have said that Mr Pilarinos is not permitted to rely on the argument that there is no genuine dispute about the debt if the convertible notes have not been issued.
Is there otherwise a genuine dispute about the debt?
I will now consider whether there is a genuine dispute as to whether or not Mr Pilarinos is entitled to demand the $500,000 as a debt on the basis that there has been no re-listing within six months.
I am satisfied that there is a genuine dispute. It is arguable that the agreement between Mr Pilarinos and Computronics contained terms in addition to those set out in the receipt and the document attached to it and that those additional terms are to the same or similar effect as the terms in the convertible note agreement between Melbourne Finance Broking and Computronics to which I have referred in paragraph [13]. I have formed the view that this is arguable because Mr Pilarinos in his letter of 9 December 2010 refers to a requirement for re-listing “within 6 months” of payment. That time period is not included in the receipt nor in the document attached to the receipt but it is referred to in the convertible note agreement. If the terms of the convertible note agreement (or some of them) are also terms of the agreement with Mr Pilarinos, then there is a genuine dispute as to whether there has been any breach by Computronics and, if there is a breach, whether the correct procedures have been followed by Mr Pilarinos in his efforts to redeem.
Conclusion
The appeal should be allowed and the statutory demand should be set aside.
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