ETT Ltd v Carling Capital Partners Ltd

[2010] NSWSC 215

CITATION:	ETT Ltd v Carling Capital Partners Ltd [2010] NSWSC 215
HEARING DATE(S):	11 March 2010
JUDGMENT DATE :	11 March 2010
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Palmer J
EX TEMPORE JUDGMENT DATE:	11 March 2010
DECISION:	Statutory Demand set aside.
CATCHWORDS:	CORPORATIONS – STATUTORY DEMAND – Whether genuine dispute – whether off-setting claim.
LEGISLATION CITED:	Corporations Act 2001 (Cth) – s 459G
CATEGORY:	Principal judgment
CASES CITED:	- First Line Distribution Pty Limited v Whiley (1995) 18 ACSR 185 - Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348
PARTIES:	ETT Limited (Plaintiff) Carling Capital Partners Ltd (Defendant)
FILE NUMBER(S):	SC 2009/00290006
COUNSEL:	D. Charles, P. D’Arcy-King (Plaintiff) A. Fox (Defendant)
SOLICITORS:	John Walsh & Partners (Plaintiff) Bradfield & Scott (Defendant)

2009/290006 ETT Ltd v Carling Capital Partners Ltd

JUDGMENT – Ex tempore

11 March, 2010

1 This is an application under s 459G of the Corporations Act 2001 (Cth) to set aside a Statutory Demand served by the Defendant on the Plaintiff on 14 July 2009. The Plaintiff says that the claimed debt is genuinely disputed and, in addition, that it has an off-setting claim for the whole of the amount claimed.

2 The Plaintiff's Originating Process and the affidavit in support were filed and served within the time prescribed by s 459G(3). The debt claimed in the Statutory Demand is described as for “professional services provided in excess of retainer payments, as invoiced 5 May 2009, $150,200 plus GST on above $15,020, total $165,220”.

3 The affidavit accompanying the Statutory Demand is that of the Chief Financial Officer of the Defendant, Mr Knox. The affidavit is unusual in that it sets out at length the circumstances leading to the issue to the Plaintiff on 5 May 2009 of the invoice for services rendered, which is the debt claimed in the Statutory Demand . The affidavit annexes documents including board minutes of the Plaintiff, memoranda between the parties and correspondence between the parties and their solicitors.

4 Notably, one of the annexures is a letter dated 12 May 2009 from the Plaintiff's solicitors to the Defendant, stating that the Plaintiff rejects the Defendant's claim in its 5 May 2009 invoice and giving detailed reasons for the rejection, to which I will come shortly. Also annexed is a letter in response from the Defendant's solicitors. It is couched in somewhat condescending tones, but it can be taken as a rejection of the propositions put forward in the letter from the Plaintiff's solicitors. In short, Mr Knox's affidavit in support of the Statutory Demand clearly reveals a dispute between the parties as to the existence of the debt claimed. However, Mr Knox states in the final paragraph of his affidavit that he believes that the dispute is not genuine.

5 Certain facts are not disputed. On 20 May 2008 the Plaintiff retained the Defendant to provide certain services upon the terms contained in a letter of agreement. The operational date of the retainer was 1 May 2008. The Defendant performed services under the retainer and invoiced the Plaintiff at the agreed rates of remuneration. The Plaintiff paid those invoices.

6 The Defendant then performed additional work between March and August 2008, which was not expressly provided for in the retainer agreement. Clause 5 of the retainer agreement provided:

“The Company agrees to pay where the board has previously agreed and pre-approved activities, projects and associated expense plans/ schedules and be responsible for of all reasonable experts and/or professional and/or other adviser’s fees on behalf of the Company and pre-approved by the board in the discharge of the CFA services under this appointment.”

7 There is no dispute that the Plaintiff's board did not approve of the additional work carried out by the Defendant before that work was done.

8 On 7 October 2008 the Defendant sent a memorandum to the Plaintiff's board setting out the time that it had spent on the additional work. It claimed a certain rate of remuneration per hour but proposed that, in lieu of a cash payment, the Plaintiff issue to it 30 million options according to a certain valuation formula. The memorandum concluded:

“Alternatively, if the Board is uncomfortable with an options issue, then [the Defendant] requests a cash payment to compensate it for the additional time and effort expended. We are happy to discuss this with you".

9 This memorandum was tabled at the Plaintiff's Board meeting on 17 October 2009. Some directors saw it then for the first time. The Defendant's Chief Executive Officer attended the Board meeting, as did Mr Meehan, the Plaintiff company's secretary. Mr Meehan is said to be also the solicitor for the Defendant or, at least, aligned in interest with the Defendant.

10 After some discussion, the content of which is now disputed to some extent, the Plaintiff's board resolved by a three to one majority to issue 30 million options to the Defendant, as requested in the memorandum of 7 October 2008. By letter dated 20 October 2008 the Plaintiff confirmed the issue of the options to the Defendant for the work undertaken by it between 1 March and 31 August 2008.

11 On 13 November 2008 the Plaintiff's board, after receiving certain legal advice, resolved to revoke the issue of the options to the Defendant and notified the Defendant of that decision by letter dated 10 December 2008. By letter dated 5 May 2009 the Defendant advised that it disputed the Plaintiff's right to revoke the issue of the options but said that it was prepared to forfeit the options upon payment of an attached invoice for services provided. That invoice claimed $165,220 and is the invoice upon which the Statutory Demand is founded. Thereafter correspondence ensued between the parties' solicitors.

12 The affidavit in support of the Plaintiff's Originating Process sets out the grounds upon which the Plaintiff says that there is a genuine dispute as to the existence of the debt and, in addition, a wholly off-setting claim. In summary, the Plaintiff says that the Defendant has no claim for a liquidated sum of any amount for services rendered. It says that, as at the time of the Plaintiff's board meeting on 17 October 2008, the Defendant was not entitled to any debt for services agreed by the Plaintiff at a stipulated rate. There had been no prior approval under clause 5 of the retainer agreement of the work for which the Defendant was claiming. In its memorandum of 7 October 2008 the Defendant was seeking an agreement from the Plaintiff for compensation upon certain terms, which were clearly open for negotiation.

13 The Plaintiff says that the resolution of the board on 17 October approving the issue of options as sought by the Defendant resulted in an agreement, which was the only agreement in existence for the Defendant's remuneration. The Plaintiff says that, if its revocation of the options was a breach of this agreement, then the Defendant's only remedies are either a claim for specific performance of the agreement or a claim for unliquidated damages. It says that a claim for specific performance has been expressly rejected by the Defendant because the Defendant has accepted what it says is a wrongful repudiation of the agreement by the issue of the invoice for $165,220.

14 The Plaintiff says that the only claim that the Defendant now has is for an unliquidated sum which it must prove as damages for breach of the agreement. The Plaintiff says that a claim for unliquidated damages is not a claim which can be made the subject of a Statutory Demand. There is no dispute that this is a correct proposition of law: see, for example, First Line Distribution Pty Limited v Whiley (1995) 18 ACSR 185, at 188, and the authorities helpfully reviewed by Master Macready, as he then was, in Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348.

15 The Defendant submits that, as at 17 October 2008, there was already a debt owing by the Plaintiff to the Defendant in a specific sum being, calculable by reference to the hours worked by the Defendant at the rates of remuneration which can be worked out from the retainer agreement. It says that the Plaintiff acknowledged the existence of this debt on 17 October and that it simply agreed to the Defendant's request to pay that debt by means of an issue of options. The Defendant says that, having reneged on its promise to issue the options, the Plaintiff is still bound to pay the acknowledged debt in existence as at 17 October 2008.

16 In my view, the Plaintiff is correct as to the characterisation of what has occurred between the parties. It seems to me clear that there was no debt in existence as between the parties prior to the 17 October board meeting because the Plaintiff had not approved in advance the work to be performed by the Defendant in addition to that provided in that retainer agreement in accordance with clause 5 of the retainer agreement, nor had the Plaintiff approved any rate of remuneration for any additional work performed.

17 What the Defendant was putting forward in its memorandum of 7 October 2008 to the board was a proposal for remuneration at a certain rate, or for satisfaction of its claim for payment by the issue of options calculated by reference to a certain formula which it acknowledged was open for the Plaintiff to negotiate. The Plaintiff's Board resolution of 17 October 2008 resulted in an agreement to issue options in consideration of work previously provided.

18 The Plaintiff's characterisation of the Defendant's available remedies for breach of that agreement is, in my view, correct.

19 The Defendant has a claim for unliquidated damages representing the present value of the options which it has lost. It does not have a claim for a liquidated sum as set out in the Statutory Demand. For those reasons it is clear that, in my view, the Statutory Demand must be set aside.

20 I will say something very briefly about the alternative basis upon which the Plaintiff relies to set aside the Statutory Demand, i.e., that there is an off-setting claim for the whole of the amount claimed. The Plaintiff says that the agreement which it made on 17 October 2008 to pay the Defendant by the issue of options was procured by breach of fiduciary duty on the part of one of its board members, Mr Wicks, and that the Defendant was a knowing participant in that breach. The breach is said to be that Mr Wicks was a consultant to the Defendant at the time of the board meeting but had not disclosed to the board properly, or at all, his financial interest in the Defendant at the time that the resolution was considered by the Board.

21 It is said that the Defendant was aware of this breach of fiduciary duty in that its own Chief Executive Officer was present at the board meeting which discussed the Defendant's proposal, so that the Defendant must have known that there had not been adequate disclosure by Mr Wicks of his conflict of interest and duty. There is, as I have said, some considerable dispute between the parties as to what was said at the board meeting. That is not a dispute which can be resolved in a hearing such as this.

22 It is also not clear what, if any, interest Mr Wicks had in the Defendant at the time of the meeting and whether that interest gave rise to any duty on his part to make disclosure or to disqualify himself from voting. One of the board members says that, had he been aware at the time of Mr Wicks' relationship with the Defendant, he would not have voted in favour of the proposal to issue options to the Defendant. If that board member had voted against the proposal, then the resolution would not have been carried.

23 There is sufficient evidence to establish a basis for the Plaintiff's assertion that it has a genuine off-setting claim against the Defendant for an account of whatever profits it might receive from the agreement made on 17 October, on the ground that the Defendant was a knowing participant in a breach of fiduciary duty by a director of the Plaintiff.

24 For those reasons, in addition to the first reason which I have given, it seems to me that the Statutory Demand must be set aside. I so order.

25 The Defendant is to pay the Plaintiff's costs of the proceedings

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