Elite Catering Equipment Pty Ltd v Seroshtan
[2012] VSC 241
•8 June 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2012 00045
| ELITE CATERING EQUIPMENT PTY LTD (ACN 115 315 921) | Plaintiff |
| v | |
| BORIS SEROSHTAN | Defendant |
---
JUDGE: | Ferguson J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 31 May 2012 | |
DATE OF JUDGMENT: | 8 June 2012 | |
CASE MAY BE CITED AS: | Elite Catering Equipment Pty Ltd v Seroshtan | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 241 | |
---
CORPORATIONS – Appeal from Associate Judge dismissing application to set aside statutory demand – Whether genuine dispute – Whether funds contributed as capital or by way of loan – Accounts included funds as loan - No genuine dispute – Corporations Act 2001 (Cth) ss 459G, 459H.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Ravech | Spigler & Schwarcz |
| For the Defendant | Mr M J Kenny (solicitor) | Kalus Kenny |
HER HONOUR:
Introduction and parties
The plaintiff, Elite Catering Equipment Pty Ltd, carries on business as the manufacturer, importer and wholesaler of commercial refrigeration and catering equipment. Mr Seroshtan (who is the defendant) served a statutory demand for $233,355.07 on Elite. The amount is claimed in respect of a loan of $140,000 together with interest of $93,355.07.
Elite applied to set the demand aside under s 459G of the Corporations Act2001 (Cth) based on an alleged genuine dispute as to its indebtedness to Mr Seroshtan.
An Associate Judge varied the amount of the demand to $221,687.32[1] (to take into account an amount that had been recovered from Elite by Mr Seroshtan) and otherwise dismissed the application. His Honour gave detailed written reasons.[2] Elite has appealed the orders made by the Associate Judge. The time for compliance with the demand has been extended until determination of the appeal.[3]
[1]The parties agreed that, if the demand is to stand, this is the correct amount.
[2]Elite Catering Equipment Pty Ltd v Serosthan [2012] VSC 194.
[3]Section 459F(2)(a)(i) Corporations Act 2001 (Cth).
The appeal is by way of a rehearing,[4] although the Court will give such weight to the decision of the Associate Judge as appears proper.[5]
[4]Supreme Court (Corporations) Rules 2003 (Vic), r 16.5(1), Supreme Court (General Civil Procedure) Rules 2005 (Vic), r 77.06(7).
[5]Southern Motors Pty Ltd v Australian Guarantee Corporation Limited [1980] VR 187 at 189-190.
The issue on the appeal (as it was before the Associate Judge) is whether there is a genuine dispute concerning the basis upon which funds were paid by Mr Seroshtan to Elite. Mr Seroshtan contends that the moneys were advanced as a loan, whereas Elite contends that the funds were a capital investment in the business.
Legal principles
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. A demand may be set aside where there is a genuine dispute as to the existence or amount of the debt or where the company has an offsetting claim that exceeds the amount of the debt claimed.[6]
[6]Section 459H Corporations Act.
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd,[7] Dodds‑Streeton JA said:[8]
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).
[7](2008) 66 ACSR 67.
[8]Ibid at [56] – [57].
Her Honour also said:[9]
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.
[9]Ibid at [71].
Factual Background
The facts in relation to the dispute are set out fully in the reasons given by the Associate Judge and I gratefully adopt his Honour’s description of them.[10] In summary, Elite is the trustee of a unit trust which was established on 1 February 2006. The units in the trust are held in equal shares by Messrs Rozenvasser, Zechiri and Seroshtan. The directors and shareholders in Elite are Messrs Rozenvasser and Zechiri. To acquire the business now operated by Elite, the three unit holders provided funds. Mr Rozenvasser provided $123,000, Mr Zechiri provided $112,500 and Mr Seroshtan provided $133,000.
[10]Elite Catering Equipment Pty Ltd v Serosthan [2012] VSC 194 at [7] – [35].
Elite contends that the funds were provided as capital rather than by way of loan. It relied on the evidence of Mr Rozenvasser that shortly after the establishment of the unit trust, the three individuals entered into a written partnership agreement which was to govern the obligations of the parties with respect to the unit trust and the business conducted by Elite. The document that was in evidence is unsigned and there is a dispute about whether that form of document was signed. Mr Rozenvasser and Mr Zechiri say that it was. Mr Seroshtan denies this. Mr Alan Shnider, the solicitor who prepared the document, swore an affidavit on behalf of Elite in which he deposed that he believed that the document had been signed. He also stated that the document recorded an agreement that was reached between the individuals in accordance with the instructions he received from them when he prepared it. A second affidavit was sworn by him on behalf of Mr Seroshtan. In that affidavit, Mr Shnider stated that he wanted to clarify what he had said in his earlier affidavit. He said that he presumed that the document had been signed because after he prepared it, he did not hear further. In his second affidavit, Mr Shnider also says that he did not receive specific instructions as to how the initial payments made by the three unit holders would be treated and whether the funds would be treated as capital or a loan account. He says that he drafted the document to characterise the payments as capital on the basis that the unit holders would discuss that issue and decide if that is the way they wished to proceed.
Paragraphs 6 and 7 of the partnership document are as follows:
Capital
6.The capital of the partnership shall be deemed to be the assets of the partnership provided that if at any time from now on any partner shall advance to the partnership with the consent of the other partners any more than his due proportion of capital the excess shall be considered as a loan to the partnership repayable on demand and until payment shall carry interest but only with the written consent of the other partner at the rate of the current bank bill rate at the time. The business shall commence with a bank overdraft of $250,0000 from the Commonwealth Bank
Further Capital
7.If any further capital shall at any time or times be necessary or expedient for efficiently carrying on the business it shall be contributed by the partners equally or as otherwise agreed in writing. The parties acknowledge and agree that they shall each invest into the business the sum of $133,000 each. The sum of $100,000 each was paid in on the commencement of the business and each partner will pay in the sum of $33,000 over time as and when required by the business.
Elite did obtain an overdraft from the Commonwealth Bank and, as noted above, Mr Seroshtan paid $133,000 to Elite. In March 2007, Mr Seroshtan paid a further $30,000 to Elite pursuant to a written loan agreement. By the end of March 2008, $24,000 of this further amount had been repaid by Elite to Mr Seroshtan. The balance of $6,000 formed part of the amount claimed in the statutory demand.
Mr Seroshtan says that in June 2008, Mr Rozenvasser told him that Elite had no funds and could only survive if he, Mr Zechiri and Mr Seroshtan, all advanced further moneys to the company. Mr Seroshtan said he would not agree to do this because Elite, he said, still owed him the entire first loan (of $133,000) and the balance of the second loan (being $6,000). He was concerned that he would not be repaid and was also upset as he had discovered that Mr Rozenvasser and Mr Zechiri had been repaid in full the amounts that they had contributed.
According to Mr Seroshtan, Mr Rozenvasser asked him to attend a meeting with Peter Schwarcz of the firm Spigler & Schwarcz Solicitors on 16 June 2008. He deposes that Mr Schwarcz told Mr Rozenvasser in Mr Seroshtan’s presence that the company should provide Mr Seroshtan with a letter acknowledging its debt with interest and that Mr Schwarcz told Mr Rozenvasser how the letter should be worded.
Mr Seroshtan states that on 17 June 2008, Mr Rozenvasser gave him the letter which was drafted in accordance with the advice that Mr Schwarcz had given at the meeting and that Mr Rozenvasser signed the letter in front of Mr Seroshtan. The letter reads as follows:
2008 – 06 – 17
This document is confirmation that each party (Bessim Zechiry (sic), Vlad Rozenvasser and Boris Seroshtan) had contributed $140,000 (one hundred forty thousand dollars) each towards the purchase of the business (Elite Catering Equipment Pty Ltd). As Bessim Zechiry (sic) and Vlad Rozenvasser received their $140,000 (one hundred forty thousand dollars) (sic) back by reimbursements, Boris Seroshtan entitled to receive interest on his contribution of $140,000 (interest rate is 19%) but may call for repayment of whole amount at any time on the base (sic) that $140,000 (one hundred forty thousand dollars) (sic) is an unsecured debt to the company.
Vlad Rozenvasser
Director
Mr Seroshtan assumes that the reference to the sum of $140,000 is a rounding up from $139,000, as interest was also owing. Mr Seroshtan states that he did not make a demand for repayment of the amount stated in the 2008 letter until recent times because he believed Elite could not pay it and he hoped that its fortunes would improve.
In his affidavit, Mr Schwarcz recalls that a meeting convened at his office was attended by Mr Rozenvasser and Mr Seroshtan for the purpose of discussing Elite’s affairs, but he denies the suggestion made by Mr Seroshtan that he told Mr Rozenvasser to provide a letter in the terms alleged or at all.
The letter is referred to in the statutory demand. In his first affidavit filed in support of the application to set the demand aside, Mr Rozenvasser denied any knowledge of the letter. Mr Seroshtan exhibited the letter to a later affidavit that he swore. In an affidavit in response, Mr Rozenvasser, deposed that the signature looks like his but he stated that he had no recollection of the letter and was certainly not the author of it. He went on to state that he would not have put his name to such a letter because it contained a number of errors including that Mr Zechiri’s name was misspelt and that none of them had contributed $140,000. Mr Rozenvasser deposed that if the signature on the letter is his, then his only explanation for how it came to be there is that he put it there at the request of Mr Seroshtan without reading the letter. He gave evidence to the effect that he had a close and trusting friendship with Mr Seroshtan and that if Mr Seroshtan asked him to sign the letter, he would have done so unhesitatingly and unquestioningly because he trusted him implicitly.
In May 2009, Mr Seroshtan and Elite entered into a further written loan agreement in respect of an advance of $10,000.
A number of Elite’s balance sheets from 2006 to 2010 were in evidence. There was also a draft balance sheet as at 30 June 2011. Until 2008, the accounts were prepared by Diamond Singer Partners (the accountants who had been suggested by Mr Seroshtan). The accounts for 2010 and the draft balance sheet for June 2011 were prepared by GA Partners, the new accountants appointed by Elite (those accountants having been chosen by Messrs Rozenvasser and Zechiri). All of the balance sheets from 2006 onwards show the amounts paid by Mr Seroshtan as loans. The balance sheets for the years when amounts were owed to Messrs Rozenvasser and Zechiri also include those amounts as loans. In addition, Elite’s internal general ledger as at 30 June 2006 records the amounts paid by Messrs Rozenvasser, Zechiri and Seroshtan as loans. [11]
[11]See the Associate Judge’s reasons which include more detailed analysis of the evidence in relation to the balance sheets and internal general ledgers: Elite Catering Equipment Pty Ltd v Seroshtan [2012] VSC 194 at [23] – [35].
In his first affidavit, Mr Rozenvasser asserted that the financial statements for the year ended 30 June 2010 do not record any loan owed to Mr Seroshtan. However, the amounts paid by him are included under the entry “Loans-Directors”. The draft balance sheet for the year ended 30 June 2011, records under the heading “Other Current Liabilities” the entry “Boris Seroshtan Loan Account” with the amount of $142,943.78 being given for the liability.
Each of Messrs Rozenvasser, Zechiri and Seroshtan were paid wages. In some years, the wives of Messrs Rozenvasser and Zechiri were also paid wages. Messrs Rozenvasser and Zechiri drew amounts over and above their wages out of the business. Mr Diamond, of Diamond Singer Partners, raised this with them. According to Messrs Rozenvasser and Zechiri, they left it to Mr Diamond to characterise the amounts they had received (in addition to their wages) so as to reduce, as far as possible, their liability to pay income tax on those amounts. The internal general ledger records the additional payments made to Messrs Rozenvasser and Zechiri as loan repayments. Messrs Rozenvasser and Zechiri say that the general ledgers were prepared based on advice given by Mr Diamond that the amounts paid to them should be classified as loan repayments.
Mr Rozenvasser asserted that the accounts were incorrectly prepared by Mr Diamond and that GA Partners had been instructed to amend them so that they correctly show that the monies that he and Mr Zechiri received were wages rather than loan repayments. The Associate Judge asked counsel for Elite whether amended income tax returns had been filed for Mr Zechiri and Mr Rozenvasser which reflected the drawings as wages. Counsel indicated that they had not despite the passage of time. When I heard the appeal, I asked if the amendment of income tax returns had been attended to by Messrs Rozenvasser and Zechiri. Counsel informed the Court that it was being undertaken but had not occurred as yet.
Is there a genuine dispute?
Elite submitted that the issue of whether there is a genuine dispute concerning the sum of $133,000 paid by Mr Seroshtan must be determined by the agreement actually reached between Messrs Rozenvasser, Zechiri and Seroshtan at the time the moneys were paid. Elite contended that it is at least arguable that the unit holders agreed that the moneys were a capital investment in the business and that there was no agreement to pay interest on that money from 17 June 2008 or at all.
Counsel for Elite, submitted that each of the witnesses (including Mr Shnider) would need to be cross examined about the agreement that was reached and whether the partnership document was signed. Counsel contended that it is arguable that the partnership document was signed or that it records a previously concluded oral agreement made by Messrs Seroshtan, Rozenvasser and Zechiri. Counsel also submitted that it is arguable that on a proper construction of clauses 6 and 7 of the document that the amount of $133,000 was advanced as a capital investment and not as a loan. He also submitted that discovery of documents would be required, including discovery of Mr Shnider’s file. Counsel contended that there is no claim by Mr Seroshtan that the agreement reached by the parties, as to the character of the payment at the time it was made, was subsequently varied.
In my opinion, whether there was a partnership or unit holders agreement between the three individuals of the nature contended for by Elite (either oral or written) bears very little (if any) relevance to the question that has to be determined as between Elite and Mr Seroshtan. As the solicitor for Mr Seroshtan submitted, even if there was such an agreement, the parties ignored it when it came to the moneys paid by each of them to Elite.
Counsel for Elite pointed to the written loan agreements entered into in respect of the additional $30,000 and $10,000 lent by Mr Seroshtan and noted that there was no written loan agreement entered into in respect of the much larger amount of $133,000 at the time it was paid. However, it is not unusual in a business like that conducted by Elite for the company and those dealing with it to fail to document all the agreements that are entered into, particularly when the business is starting. Further, Mr Rozenvasser gave evidence that he and Mr Seroshtan had met in 2001 and became extremely good friends. In those circumstances, I am not persuaded that because there are later written agreements for smaller loan amounts advanced by Mr Seroshtan it is implausible that the original $133,000 was advanced by way of loan.
Counsel for Elite noted that one of the written loan agreements was entered into before the 17 June 2008 letter and the other after that time. He asked rhetorically why the amount of $133,000 had not been included in either of those written agreements. However, by the time of those agreements, the $133,000 had already been paid and the time for a written loan agreement had passed. In any event, the letter of 17 June 2008 served as a written acknowledgement of the debt. That letter needs to be understood in its correct chronological context. The first written loan agreement was entered into in March 2007. On 16 April 2008, Mr Seroshtan discovered that Messrs Rozenvasser and Zechiri had been repaid the amounts that they had paid to Elite. There was a meeting with Elite’s solicitor on 16 June 2008. There is a dispute about exactly what occurred at that meeting. However, it is not in dispute that there was discussion about the avenues that were available to Elite to raise finance as it was experiencing problems with cash flow. The letter of acknowledgement bears the following day’s date. Understood in that context, the timing of the acknowledgement (after the first written agreement and before the second) is not surprising. The loans advanced by Messrs Rozenvasser and Zechiri had been repaid, yet the loan advanced by Mr Seroshtan remained outstanding in circumstances where the company was having cash flow difficulties. That some form of written acknowledgement of the debt owed to Mr Seroshtan should follow the meeting is understandable.
Counsel for Elite noted that the evidence of Mr Seroshtan as to the genesis of the letter is denied by Messrs Schwarcz and Rozenvasser and contended that it is arguable that it is a fabrication and the letter a fake. Counsel submitted that the document itself is implausible and he contended that it is not a proper document for a number of reasons including that it has no addressee, no-one contributed $140,000 (as stated in the letter), there are a number of typographical errors and the letter refers to an unsecured debt to (rather than owed by) Elite. As the Associate Judge found, ultimately Mr Rozenvasser effectively admitted signing the document of 17 June 2008 in which the debt owed to Mr Seroshtan is acknowledged. Whilst the language used in the letter could have been more precise, its meaning is clear.
Counsel contended that the evidence of Mr Rozenvasser regarding the letter could support defences of non est factum, misleading and deceptive conduct by silence or unconscionability. That submission is not based on material that shows that such defences are arguable. The letter is very short – no more than a few lines. In essence, Mr Rozenvasser’s evidence was that he did not read the document before it was signed and that he trusted Mr Seroshtan. His evidence did not rise above that.
Successful pleas of non est factum are rare. To succeed, the party making the plea needs to persuade the Court that there is a compelling reason why they ought not to be bound by their signature and that they thought they were signing a document that was markedly different from the one that they did sign.[12] Whilst it is not necessary for Elite to have evidence at the level required for proof at trial, Mr Rozenvasser’s evidence is insufficient to show that the defence of non est factum is arguable. For example, his evidence does not touch at all upon what he might have thought the letter was.
[12]Saunders v Anglia Building Society [1971] AC 1004; Petelin v Cullen (1975) 132 CLR 355.
Nor does Mr Rozenvasser’s evidence support the contention that there are arguable defences of unconscionability and misleading or deceptive conduct. In respect of unconscionability, there is no evidence that Mr Rozenvasser was in a position of special disadvantage or that Mr Seroshtan took unconscientious advantage of Mr Rozenvasser.[13] For example, there is no evidence that Mr Rozenvasser was not capable of looking after his own affairs and those of Elite due to a lack of education or the like or that Mr Seroshtan tricked him into signing the letter. In relation to the suggestion that a defence of misleading and deceptive conduct is arguable, there is simply no cogent evidence given by Mr Rozenvasser about what occurred when the letter was signed.
[13]Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.
Most tellingly, the assertions made by Mr Rozenvasser on behalf of Elite, that the funds were capital payments, are not supported by the contemporaneous accounting records. In Elite’s own accounting records (both those prepared internally and those prepared externally by the accounting firm suggested by Mr Seroshtan and the firm subsequently chosen by Messrs Rozenvasser and Zechiri) the moneys were consistently treated as loan funds. The loan is recorded in the first internal general ledger and balance sheet prepared after the funds were advanced[14] and the loan by Mr Seroshtan continues to be recorded in the subsequent balance sheets up to and including the draft balance sheet for 30 June 2011 (which was prepared by the accountants chosen by Messrs Rozenvasser and Zechiri). As noted above, the payments to Messrs Zechiri and Rozenvasser over and above their wages are recorded in the general ledger as loan repayments.
[14]The relevant general ledger and balance sheet are as at 30 June 2006. Mr Seroshtan paid the sum of $110,000 on 21 March 2006 and the further sum of $23,000 on 25 May 2006. The loans advanced by Messrs Rozenvasser and Zechiri are also recorded in the June 2006 general ledger and balance sheet.
Counsel for Elite contended that the treatment of the advances in the accounts “was entirely tax driven” and has no bearing on the agreement reached by Messrs Rozenvasser, Zechiri and Seroshtan. He pointed to the evidence of Messrs Rozenvasser and Zechiri that the internal ledgers and the attribution of the amounts paid to them as loan repayments was on the advice of Mr Diamond. Counsel submitted that the correct approach was to rectify the accounts. However, Messrs Rozenvasser and Zechiri saw the relevant balance sheet after the end of each of the financial years from 2006 to 2008 and signed off on the income tax returns of Elite. They raised no issue about the correctness of the accounts at the time. It was only when the inclusion of Mr Seroshtan’s loan was pointed out to them (Mr Rozenvasser having first denied that the 2010 balance sheet recorded the moneys paid by Mr Seroshtan as a loan) that they contended that the accounts do not accurately reflect the position. They have not explained satisfactorily why Elite’s own internal ledgers include the amounts advanced as loans, nor why the balance sheets prepared by GA Partners (the accountants chosen by them) continued to record a loan by Mr Seroshtan.
Added to this, neither Mr Rozenvasser nor Mr Zechiri have paid income tax on the moneys paid to them which they now wish to characterise as wages rather than as loan repayments. They have still not filed amended tax returns, despite the Associate Judge raising that matter when the application to set aside the demand was heard by him.
As noted above, the threshold for a company seeking to set aside a demand is not high. Nevertheless, it bears the burden of establishing that there is a genuine (not merely an asserted or spurious) dispute about the debt. In this regard, it is not sufficient for Mr Rozenvasser to make bald statements that suggest that there might be a dispute as to the debt, particularly where those statements are in conflict with contemporaneous documentary evidence and when no satisfactory reasons are given which explain that conflict.
In my opinion, Elite has not established that there is a genuine dispute about the amount or existence of the debt and the demand (for the varied amount) should stand. I will dismiss the appeal.
0
5
0