Cycliq Group Ltd v Cycliq Research & Development (HK) Limited (CR NO. 2582187)
[2024] WASC 150
•29 APRIL 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: CYCLIQ GROUP LTD -v- CYCLIQ RESEARCH & DEVELOPMENT (HK) LIMITED (CR NO. 2582187) [2024] WASC 150
CORAM: HOWARD J
HEARD: 17 APRIL 2024
DELIVERED : 29 APRIL 2024
FILE NO/S: COR 193 of 2023
BETWEEN: CYCLIQ GROUP LTD
Plaintiff
AND
CYCLIQ RESEARCH & DEVELOPMENT (HK) LIMITED (CR NO. 2582187)
Defendant
Catchwords:
Corporations - Application to set aside a statutory demand - Alleged debt consists of an amount owing to the defendant by reason of an alleged breach by the plaintiff of a Settlement Deed - Whether genuine dispute or there were offsetting claims - Where the plaintiff alleges no payment obligation arose and the statutory demand was defective - Defendant's statutory demand set aside
Legislation:
Corporations Act 2001 (Cth)
Corporations Regulations 1990 (Cth)
Result:
Statutory demand set aside
Category: B
Representation:
Counsel:
| Plaintiff | : | A McDonald |
| Defendant | : | S Penglis SC |
Solicitors:
| Plaintiff | : | Pragma Lawyers |
| Defendant | : | Trinix Lawyers |
Case(s) referred to in decision(s):
AVZ Minerals v Fat Tail [2023] WASC 403
CA & Associates Pty Ltd v Fini Group Pty Ltd [2020] WASCA 31
Daewoo Australia Pty Ltd v Suncorp‑Metway Ltd (2000) 48 NSWLR 692
SMEC International Pty Ltd v CEMS Engineering Inc [2001] NSWSC 459; (2001) 162 FLR 383
Vehicle Wash Systems Pty Ltd v Mark VII Equipment Inc (1997) 80 FCR 571
HOWARD J:
On 9 November 2023, the defendant (Cycliq R&D) issued a statutory demand pursuant to s 459E of the Corporations Act 2001 (Cth) against the plaintiff (Cycliq Group) (all statutory references from here are to this Act unless otherwise identified).
The statutory demand was accompanied by an affidavit of Chen Yicheng made 9 November 2023.
The statutory demand described the debt as:
the amount outstanding to [Cycliq R&D] by reason of the [plaintiff] failing to comply with clause 6(b) of the Settlement Deed dated 18 November 2020 between the [plaintiff], [Cycliq R&D] and Glory Horse Investment Holdings Ltd for the months of November 2020 ‑ September 2023 [in the sum of USD $1,326,753.33].
By application made pursuant to s 459G, on 6 December 2023, Cycliq Group applied to set aside the statutory demand.
Factual background
The following facts were common ground at the hearing.
Cycliq Group is an Australian publicly listed company.
Cycliq Group has and had a wholly owned subsidiary, Cycliq Products Pty Ltd, (Cycliq Products) which placed and places orders for bicycle accessories and safety equipment.
Cycliq Group formed a joint venture with Glory Horse Investment Holdings Ltd (a Hong Kong company) (Glory Horse) in about November 2017.
The joint venture was to design and manufacture certain bicycle accessories and safety equipment.
For the purposes of the joint venture, Cycliq Group and Glory Horse incorporated Cycliq R&D in Hong Kong and each of them owns and owned 50% of Cycliq R&D.
On about 10 November 2017, Cycliq Group and Glory Horse (with Cycliq R&D) entered into a Shareholders' Agreement.
A dispute arose in late 2020 between, at least, Cycliq Group and Glory Horse.
To settle that dispute Cycliq Group, Glory Horse and Cycliq R&D entered into a Settlement Deed dated 18 November 2020.
In March 2021, Cycliq Group, Glory Horse and Cycliq R&D entered into a Side Letter by which the terms of the Shareholders' Agreement were amended.
Clause 6(b) of the Settlement Deed provided:
Cycliq [Group] shall procure that Cycliq Products shall pay Cycliq [R&D's] revenue share to Cycliq [R&D] on a monthly basis, calculated based on the Revenue Share Model, commencing from the month in which this Deed is signed.
The Settlement Deed defined the Revenue Share Model by cl 21(j) to mean:
[T]he terms for sharing of the revenue generated from the sale of the Fly 6 Generation 3 Products supplied by Cycliq [R&D] to Cycliq Products, as set out in Schedule 2.
There was no Schedule 2 to the Settlement Deed, but there was a Schedule 1 headed 'Revenue Share Model'.
I have proceeded on the basis that there was a typographical error in the definition in cl 21(j) and the reference to Schedule 2 should be construed and read as a reference to Schedule 1.
This application
Cycliq Group submits the statutory demand should be set aside.
Cycliq Group relied on the affidavits of:
(1)Xavier Jean Robert Kris made 6 December 2023 and filed 7 December 2023;
(2)Kylie Simone Michael made 7 December 2023 and filed the same day; and
(3)Timothy Ryan Slate made 29 February 2024 and filed the same day (in reply).
Cycliq R&D relied on the affidavit of Chen Yicheng made 15 February 2024 and filed the same day.
As refined in the course of the hearing, Cycliq Group says the statutory demand should be set aside because of one or more of the following:
1no products were supplied by Cycliq R&D and so no payment obligation under cl 6(b) of the Settlement Deed arose;
2cl 6(b) of the Settlement Deed imposed no payment obligation on Cycliq Group, simply an obligation to 'procure' payment;
3Cycliq R&D could not issue the statutory demand based on the Settlement Deed without complying with the Shareholders' Agreement;
4the amount claimed in the statutory demand was not in accordance with the formula in the Settlement Deed;
5the statutory demand was defective as it claimed a sum in a foreign currency; and
6Cycliq Group had offsetting claims against Cycliq R&D.
The first, second and fourth matters were said to raise a genuine dispute under s 459H(1)(a).
The third was said to be another reason to set aside under s 459J(1)(b).
The fifth was said to be a defect within s 459J(1)(a).
And, the sixth was said to be within s 459H(1)(b).
Applicable principles
Understandably, there was no dispute between the parties as to the applicable principles. I have taken (and applied) the following from [35], [38] ‑ [41] of the Court of Appeal's judgment in CA & Associates Pty Ltd v Fini Group Pty Ltd:[1]
[1] CA & Associates Pty Ltd v Fini Group Pty Ltd [2020] WASCA 31 [35], [38] ‑ [41] (Buss P, Mitchell & Vaughan JJA).
35There was no discernible difference between the parties as to what was required to constitute a 'genuine dispute' as to the existence of a debt for the purposes of the statutory demand regime and s 459H(1)(a). It is well-established that:
1.The court's function is to determine whether there is a genuine dispute; the court is not expected to undertake an extended inquiry or attempt to weigh the merits of the dispute. It is not part of the court's function to resolve the dispute.
2.It suffices if there is a 'plausible contention' requiring 'further investigation' - something that may be equated to the criterion of whether there is a 'serious question to be tried'.
3.However, the applicant must establish that: (a) the dispute is bona fide and truly exists in fact; and (b) the grounds alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived.
…
38Cases in which the court will determine a disputed question of contractual construction on an application to set aside a statutory demand will be the exception rather than the norm. Two things are established by the authorities. First, in dealing with an application to set aside a statutory demand the court is not compelled to determine questions of construction of instruments. Second, such proceedings are not ordinarily the occasion for the court to construe a contract, especially where there are competing views about its meaning. The corporations list ought not to be used as a convenient means of determining a dispute about whether a putative debt is due and payable, even if the only disputed issue is one of contractual construction.
39Where the question of contractual construction has any element of rational controversy the court should exercise restraint.
40Competing but plausible submissions on a question of contractual construction should lead to a finding that there is a dispute on the question and therefore a dispute as to the existence of the debt the subject of the statutory demand. Consistent with the existing authorities - excluding as a 'genuine dispute' only that grounded on feeble legal argument or which is spurious, illusory or misconceived - there is a genuine dispute where a question of contractual construction is subject to rational argument.
41Thus it is necessary to consider whether the question of contractual construction being relied on for the genuine dispute is so obviously incorrect that it is properly characterised as being incapable of rational argument, ie it is no more than a patently feeble legal argument - one that is spurious, illusory or misconceived - which lacks plausibility. (citations and footnotes omitted)
Most of the issues raised by Cycliq Group go to the construction of the Settlement Deed and Shareholders' Agreement. I have used the phrase 'rationally arguable' below to assess the points of construction raised by the plaintiff. By that phrase, I intend to pick up the meaning in the above paragraphs from CA & Associates.
The desirability of a court exercising restraint in considering questions of construction reflects the context in which the questions arise. This is not a final, nor even a preliminary, judgment as to the merits of the disputed contractual interpretation.
No products were supplied by Cycliq R&D
As quoted above, cl 21(j) of the Settlement Deed referred to revenue generated from the sale of products supplied by Cycliq R&D to Cycliq Products.
The affidavit of Mr Slate deposed to:
(1)Cycliq R&D having not, relevantly, supplied products to Cycliq Products; and
(2)such products (in cl 21(j)) being supplied to Cycliq Products by a third party, being Asia Optical Co Inc, Asia Optical International Ltd and/or Dong‑Guan Sintai Optical Co Ltd.[2]
[2] Mr Slate's affidavit [6]; see also Mr Kris' affidavit [13].
Cycliq R&D submitted that I could, in effect, overlook or not accept that evidence on the basis that documents generated by Mr Slate himself to either Cycliq R&D or Glory Horse were 'admissions' against Cycliq Group to the effect that Cycliq Group had an obligation to pay Cycliq R&D.
It may well be in the fullness of time that Cycliq R&D is found to be correct in this submission.
However, even if I were to take Cycliq R&D's submissions at their highest, then presently there are conflicting statements from Mr Slate when one compares his affidavit with the documents that Cycliq R&D relied on.
In those circumstances, it seems to me, that a dispute has been identified within the principles identified above.
The consequence of that dispute is that there is a genuine dispute as to whether an obligation had arisen for Cycliq Group to pay on the Revenue Share Model because the relevant products were not supplied to Cycliq Products by Cycliq R&D.
No obligation to pay: only to 'procure'
Cycliq Group asserted that the statutory demand wrongly proceeded on the basis that Cycliq Group had an obligation to pay Cycliq R&D. It was said that was not in accordance with the provisions of cl 6(b) of the Settlement Deed, which imposed only an obligation on Cycliq Group to 'procure' payment.
Given the conclusions I have reached on other matters, it is enough for present purposes for me to say that I do not consider that is a rationally arguable proposition.
That a failure to procure or cause Cycliq Products to pay would not result in a claim against Cycliq Group for readily ascertainable damages appears to me not to be rationally arguable. I would not have held there was a genuine dispute based on this asserted dispute.
The Shareholders' Agreement
The steps in Cycliq Group's assertion that the statutory demand was issued in breach of the Shareholders' Agreement (as amended by the Side Letter) were, as I understood it, as follows:
1.the Shareholders' Agreement governed, amongst other things, Cycliq R&D's relationship with Cycliq Group: Recital B;
2.the issuing of this statutory demand was an issue with respect to Cycliq R&D which had a material impact on Cycliq Group as a shareholder and had to be approved unanimously by the shareholders to proceed: Clause 5.3; and
3.as was common ground, there had been no unanimous resolution of Cycliq Group and Glory Horse as shareholders in favour of Cycliq R&D issuing the statutory demand.
In reply, broadly, Cycliq R&D contended that:
1.the Settlement Deed was a stand alone document which could be enforced directly without the Shareholders' Agreement having to be separately complied with: clauses 4(c) and (d) of the Settlement Deed;
2.the Settlement Deed was an entire agreement: clause 13 of the Settlement Deed;
3.the Shareholders' Agreement was concerned principally with the relationship between Glory Horse and Cycliq Group qua shareholders of Cycliq R&D (ie. internal management issues) and not with the sort of dispute that had led to the issuing of the statutory demand;
4.given the Settlement Deed had settled disputes under the Shareholders' Agreement, it was not commercially likely the settling act would send the parties back to the Shareholders' Agreement;
5.the statutory demand was not, in any event, within cl 5.3 of the Shareholders' Agreement and the deadlock provisions which became applicable if there was not a unanimous resolution of shareholders demonstrated the commercial inaptness of that dispute resolution process under the Shareholders' Agreement being invoked in relation to the statutory demand.
It may well be that after a final determination, the contentions of Cycliq R&D are correct.
The strongest proposition, in my view, put by Cycliq R&D (against those advanced by Cycliq Group) is that as a settling act, it was most unlikely that a dispute under the Settlement Deed would send the parties back to the Shareholders' Agreement.
In considering whether Cycliq R&D was obliged to satisfy the provisions of the Shareholders' Agreement before it could issue the statutory demand, it is significant, in my view, that:
(1)cl 4 of the Settlement Deed identified what may be 'past' disputes and called them 'Released Claims' on the conditions set out in cl 5 of the Settlement Deed; and
(2)cl 6 may, arguably, establish a new regime for payments to be made by Cycliq Group to Cycliq R&D going forward - ie. from the time of the Settlement Deed.
In my view, that would allow a rational argument to be made that the statutory demand arising out of the 'new regime' might (nonetheless) require the parties to go back through the Shareholders' Agreement in the event of a dispute (which otherwise was rationally arguable as being within cl 5.3 of the Shareholders' Agreement).
Whether or not I consider it is a strong, or the stronger, argument at this time, nonetheless, it appears to me rationally arguable that the dispute provisions on which Cycliq Group relied in the Shareholders' Agreement (as modified by the Side Letter) may apply so that Cycliq R&D was contractually required to comply with those provisions.
The amount claimed was not in accordance with the formula in the Settlement Deed
Cycliq Group contended that the monthly amounts claimed in the statutory demand were calculated:
1.according to some only of the variables in the Revenue Share Model which appeared at Schedule 1 of the Settlement Agreement; and
2.other variables in that Schedule 1 were also relevant; and
3.the variables not taken into account meant that the amounts claimed by Cycliq R&D were not in accordance with the formula.
In seeking to make good that assertion, Cycliq Group pointed to the calculation done by Mr Slate and which appeared at page 11 of Mr Chen's affidavit as taking into account all of the variables. That was then compared with the more simple calculation, again by Mr Slate, which appeared at page 14 of Mr Chen's affidavit, and which used a smaller number of variables (the latter being the set of calculations which Cycliq R&D had relied on).
Cycliq Group went so far as to submit that Schedule 1 to the Settlement Deed was 'incapable of producing a workable formula for any amount to be paid'[3] and that the amount in the statutory demand was 'not the result of applying any formula set out in Schedule 1, and is rather, an illusory interpretation of the Schedule'.[4] With respect, I do not consider those propositions to be rationally arguable here.
[3] Cycliq Group's written submissions [23].
[4] Cycliq Group's written submissions [24].
I would not hold that this question raised by Cycliq Group raised a genuine dispute and I would not have set the statutory demand aside on that basis. Given the view I have taken on other questions raised by Cycliq Group it is not necessary for me to set out my reasoning here.
The statutory demand claimed as sum in USD
The hearing proceeded on the basis that the currency in which any obligation under cl 6(b) (and the Revenue Share Model) of the Settlement Deed was to be paid was in US dollars.
Cycliq Group disputed that a statutory demand could be issued in a foreign currency as had been done here.
Cycliq Group relied on Vehicle Wash Systems Pty Ltd v Mark VII Equipment Inc[5] where Finkelstein J considered the question in the context of an application to set aside a statutory demand after noting that '[m]ore often than not little that is of interest is raised by this type of application'.[6]
[5] Vehicle Wash Systems Pty Ltd v Mark VII Equipment Inc (1997) 80 FCR 571.
[6] Vehicle Wash Systems (573B).
Finkelstein J in that case proceeded on the basis that the debt was owed in US dollars[7] and said (after noting the cases which had held that an obligation to pay a sum in foreign currency was not an obligation to pay a debt):
There is much to be said in favour of the view that where a foreign currency functions as money an action for its recovery should be regarded as an action in debt. [8]
[7] Vehicle Wash Systems (577A‑B).
[8] Vehicle Wash Systems (577B).
Finkelstein J then considered whether the demand expressed in US dollars was defective. His Honour noted s 459E(2)(e), reg 1.03(1) of the Corporations Regulations 1990 (Cth) and form 509H[9] and said:
There is no doubt that the statutory form assumes that the debt will be specified in Australian currency.[10]
[9] The present provisions are reg 1.0.03(1) and item 51H to Sched. 1 of the Corporations Regulations 1990; form 509H appears in Sched. 2 to the Regulations.
[10] Vehicle Wash Systems (578A).
Finkelstein J held that as the prescribed form required the debt to be expressed in Australian currency (and it was expressed in US Dollars), there was a deficiency in the statutory demand.[11]
[11] Vehicle Wash Systems (578E).
However, his Honour did not consider that a substantial injustice would be caused unless the statutory demand would be set aside. His Honour held:
The facts that are before the court show that if Vehicle Wash does owe Mark VII the amount in question that amount is to be paid in US dollars. No question of conversion arises and no injustice will result from stating the debt in US dollars.[12]
[12] Vehicle Wash Systems (578G ‑ 579A).
The matter was further considered by Austin J in two cases: Daewoo Australia Pty Ltd v Suncorp‑Metway Ltd[13] and SMEC International Pty Ltd v CEMS Engineering Inc.[14]
[13] Daewoo Australia Pty Ltd v Suncorp‑Metway Ltd (2000) 48 NSWLR 692.
[14] SMEC International Pty Ltd v CEMS Engineering Inc [2001] NSWSC 459; (2001) 162 FLR 383.
In the first, Austin J concluded that the statutory demand before him (in US Dollars) substantially complied with the prescribed form for the statutory demand and was not defective. But, even if it were held to be defective, Austin J would have followed Finkelstein J in Vehicle Wash, and held that no substantial injustice would be caused if it were not set aside.[15]
[15] Daewoo Australia [42].
Austin J reconsidered the matter in SMEC International and applied the same approach he had applied in Daewoo notwithstanding the matter was further argued.[16]
[16] SMEC International [29] ‑ [33].
In AVZ Minerals vFat Tail,[17] I considered whether I should follow the statutory construction adopted of federal legislation by other first instance courts (not this Court) sitting in federal jurisdiction. I held that I should and have not repeated my reasoning here from that case.
[17] AVZ Minerals v Fat Tail [2023] WASC 403 [20] ‑ [32].
I consider, with respect, that the reasoning of Finkelstein J, is at the least, not plainly wrong and I should follow it. That is especially in circumstances where Austin J also followed that reasoning.[18] I would not set the statutory demand aside on that basis. I note that Cycliq Group did not identify any substantial injustice.
Offsetting claims against Cycliq R&D
[18] I accept that Austin J held in those two cases that the statutory demand was not defective which was contrary to the conclusion that Finkelstein J had reached.
Cycliq Group claimed that it is owed approximately AUD $650,000 by Cycliq R&D and that there were further offsetting claims arising out of Cycliq R&D's supply of defective products and their delayed supply. Cycliq Group asserted this claim to be at least AUD 1 million.
The evidence supporting the debts said to be owed by Cycliq R&D to Cycliq Group were contained in an extract from, it is said, the latter's financial records which were annexed as XJRK‑19 to the affidavit of Mr Kris and which was said to show that Cycliq R&D owed and owes HKD $3,331,235.81 to Cycliq Group.
With respect, the evidence contained in Mr Kris' affidavit[19] is scant and conclusionary at best.
[19] [52] ‑ [53] and XJRK‑19 attached thereto.
On that evidence alone, I would not have found an offsetting claim within s 459H(1)(b) and would not have set aside the statutory demand on that basis.
The evidence which was said to support the asserted claims by Cycliq Group for defective products and delayed supply is even more cursory and conclusionary (than that going to the debts said to be owed to Cycliq Group). It is contained in one, or maybe two, paragraphs of Mr Kris' affidavit.[20]
[20] [46] and [54].
Given the thinness, being generous, of the evidence on the 'offsetting claims', I would not find that an offsetting claim had been sufficiently raised within s 459H(1)(b) and I would not have set aside the statutory demand on that basis.
Disposition
I would set aside the defendant's statutory demand.
I will hear the parties as to costs, if they are not agreed.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
JC
Associate to the Honourable Justice Howard
29 APRIL 2024
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