Farnow v Jazute Pty Ltd

[2001] NSWSC 1158

CITATION:	Farnow v Jazute Pty Ltd [2001] NSWSC 1158
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 3066/01
HEARING DATE(S):	11/12/01
JUDGMENT DATE:	13 December 2001
PARTIES :	Farnow Technologies Pty Ltd v Jazute Pty Ltd
JUDGMENT OF:	Master Macready at 1

COUNSEL :	Mr P.B. Walsh for plaintiff Mr. M.J. Cohen for defendant
SOLICITORS:	M.D. Nikolaidis & Co for plaintiff Gadens Lawyers for defendant
CATCHWORDS:	Corporations Law. - Application to set aside statutory demand. - Demand set aside. - No matter of principle.
DECISION:	Paragraph 27

- 1 -

1 MASTER: This is an application under s 459G to set aside a statutory demand served by the defendant on the plaintiff. That demand is dated 25 May 2001 and claims a debt, being an amount advanced by the defendant to the plaintiff in the sum of $312,500.

2 The defendant claims that the amount was a loan to the plaintiff. The plaintiff contends that the funds were contributed on an equity basis to the intent that shares ultimately were to be issued. This is said to give rise to a genuine dispute. The defendant also seeks to attack the proceedings on the basis that there is no jurisdiction.

3 It is said that the affidavit sworn in support of the application was not a sufficient affidavit. The law in this regard is conveniently set out in the judgment of Sunburg J in Graywinter Properties Pty Limited v Gas and Fuel Corporation Superannuation Fund, 21 ACSR, 581. At 587.8 his Honour had the following to say:

"Is a complying affidavit a condition of jurisdiction?

It seems to me that as 459G(3) makes plain that the Court can entertain an application to set aside only if within the prescribed period an affidavit supporting the application is filed and copies of the application and affidavit ares served. The High Court in Grant said that compliance with the subsection is a limitation or a condition upon the authority of the Court to set aside a demand; it is a condition of the jurisdiction that subs (3) be observed; if the condition is not observed there is no application before the Court. I am thus unable to agree with the Senior Master that the failure of an affidavit to satisfy the minimum requirements for an affidavit to be a "supporting affidavit" is not a jurisdictional impediment.

The minimum requirements in a genuine dispute case.

In order to be a "supporting affidavit", an affidavit must say something that promotes the company's case. An affidavit which merely says "I am a director of the company but am too busy at present to make a full affidavit, and I will do so later" would not support the application. It would in no way advance, further or assist the company's cause, which is to have the notice set aside. At the other extreme, the affidavit need not detail, in admissible form, all the evidence that supports the contention of a genuine dispute: John Holland. That evidence must be available at the hearing of the application to set aside, because that application is for final and not interlocutory relief: 71 Paisley Street.

In a s 459H1(a) case, the affidavit must in my view disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute not enough. Nor is there a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of an affidavit, that it may read like a pleading.

An affidavit which exhibits an exchange of correspondence between the parties or between their solicitors from which it appears that a claim is made and rejected for reasons given can qualify as a supporting affidavit. And an affidavit verifying the pleadings in an action may qualify.

I am thus unable to accept the respondent's submission that the affidavit must contain sufficient material to make out a case under s 459H. In reply, that submission was somewhat retreated from. It was said that the affidavit must, as a minimum, contain a statement of the material facts on which the applicant intends to rely to show a genuine dispute - it might read more like a pleading than a story. That accords with what I consider to be the minimum requirement.

.....

A multitude of affidavits?

In several cases, it has been held that an applicant is not restricted on the hearing to the affidavit that is served with the application. See Scanhill at 467 and Mibor Investments Pty Limited v Commonwealth Bank of Australia (19983) 11 ACSR 362 at 368. An applicant whose initial affidavit has satisfied the threshold test must be able to supplement the material, because while the "supporting" affidavit does not have to deploy the evidence, on the hearing only admissible evidence can be relied on. In Louisbridge, Ryan J said that "provided that an affidavit is filed and served within the 21 day period which supports the application by providing grounds for concluding that there is a genuine dispute ... or that the company has an offsetting claim", supporting affidavits may be filed under the period has expired. Apart from Hire Works, the cases do not support the proposition for which the applicant contended, namely that an affidavit that does not satisfy the threshold test can be supplemented later on. That issue did not arise in Scanhill or Mibor. It did arise in Hire works, but for the reasons I have given, I am respectfully unable to agree that the Court can entertain as an application under 459G a case in which an affidavit containing the minimum requirements has not been served within time."

4 Given the fact that the affidavit does not need to be in strictly admissible form, I think it is appropriate to consider the whole of the affidavit and not just the parts admitted into evidence on the hearing before me. This is important because the relevant parts of the affidavit of 13 June 2001, being paragraphs 7, 8 and 9, were all rejected as inadmissible. Those paragraphs are in the following form:

"7. To fund ongoing research and development of the Projects, the Plaintiff sought investors to contribute funds to enable it to continue such research and development. Investors have contributed such funds on an equity basis, in return for which they have obtained shares in the plaintiff, commensurate with the funds invested. The Plaintiff has been so funded by investors since the commencement of the projects and to date, investors have contributed a total of $5,306,991.00.

8. The Defendant herein is one of the said investors ("Jazute").

9. The moneys particularised in the Creditor's Statutory Demand issued by Jazute, were provided to the Plaintiff as investment funds."

5 The submissions were to the effect that all the affidavit was was a mere assertion that there was a genuine dispute. As I have said, I think, given the fact that the affidavit does not have to be in admissible form, and may in fact be like a pleading, that one has to have regard to the whole of the affidavit. Paragraph 7 clearly makes a claim that the investors contributed on an equity basis in return for which they received shares. I think in a general sense this raises the plaintiff's contentions which have also been advanced in supplementary affidavits that have been admitted and read.

6 Accordingly, I am satisfied that the affidavit is sufficient to ensure that there is jurisdiction to proceed with the matter.

7 I turn to the question of whether there was a genuine dispute. Mr Scurr, a director of the defendant, swore an affidavit that the moneys were deposited with the plaintiff. The plaintiff's then accountant, pursuant to the following conversation, which he had with Mr Holtom of the plaintiff:

"In or about early September 2000 I had a conversation with Mr Holtom to the following effect:

SH: 'Farnow requires further funds to pay wages and outstanding creditors'.

DS: 'I am prepared to lend money to Farnow if the company is properly managed and a business plan put in place.'

SH: 'This is being done. Garry Neave is now responsible for the Farnow's affairs and we will be putting in place a board of management.'

DS: 'Good. I will arrange for the funds to be deposited into William Buck's trust account [meaning the trust account operated by William Buck (NSW) Pty Limited, who were acting as Farnow's accountants at the time] and these funds can be provided to the company as and when required.'"

8 Mr Holtom has in fact denied on oath that he had that conversation with Mr Scurr. He also deposes to the fact that at the relevant time he was overseas. It is clear that the accountant, William Buck, has a substantial part to do with the matter. A letter written on 15 May 2001 to the Secretary of the defendant, confirmed the lodgment of the funds. The first paragraph of that letter was in these terms:

"Further to your request we confirm that the amount of $312,500 was received from Jazute Pty Limited and banked into our trust account on 22 September 2000 for the purpose of investing in Farnow Technologies Pty Limited. The following table is an extract of the trust account ledger for Jazute Pty Limited and Farnow Technologies Pty Limited. This table sets out the details of the authorised transfers of those funds from the trust account to the bank account of Farnow Technologies Pty Limited."

9 Importantly, that letter refers to the advance being for the purpose of investing. That is a very general term and probably could comprise both a loan or a subscription for equity capital.

10 The evidence in this matter is somewhat disparate. There is in fact minutes said to exist in respect of the meeting of the plaintiff company on 3 November 2000. The only copy that is in evidence is unsigned and it was admitted as what was alleged to be a copy of a minute. That records an allotment of shares to Jazute Pty Limited for 312,500 shares. No return of allotment was ever lodged and, in fact, the company's records in Corporate Affairs show that the companies which Mr Holtom controls still owns control of the plaintiff company.

11 Importantly, Mr Spring, who was a director of William Buck, the accountant, wrote a note on 10 July 2001 in which he said the following:

"The attached paper work for the appointment and resignation of directors and secretary of the company and allotment of share capital to Jazute and Tom Muir was tabled at various meetings of directors of Farnow during October and November 2000, and taken away by the various board members for review and signing. To date none of the paper work has been returned to us for lodgement."

12 In this matter there has been no tender of the share register. It is important to note that in fact Mr Holtom has since sworn that he held the shares in his name or in the companies he controls. The other thing to note is that William Buck, the chartered accountants for the plaintiff, apparently had their retainer terminated in March 2001, and fresh accountants were engaged.

13 Thereupon, Mr Holtom set about, with the help of his new accountants, to devise a whole new scheme for the allotment of shares in respect of the moneys advanced by many investors. This involved the creation of a new company in Bermuda, which was clearly aimed at avoiding a substantial capital gains tax liability for Mr Holtom. That proposal for the new way of allotting shares in some other company apparently is now ready to proceed. The question is, of course, whether in fact there was ever a meeting on 3 November 2000.

14 Given what Mr Spring has said, there is a real doubt in my mind as to whether there was ever such a meeting. The very question of allotment seems to be subject to further thought and I am not satisfied that the copy of the minutes which is in evidence records a meeting of the company. I will in fact proceed on the basis that there is no allotment and all that can be alleged is some agreement to allot shares on some other arrangement for investment.

15 It is important to note the following points in this regard. The first is that Mr Holtom was the owner of the shares, and he does not allege or give evidence of any agreement that he made as to the terms upon which the moneys were received by the company. In fact, he was overseas when they were received by his accountants. No-one from the accountants has been called. The obvious person who would have perhaps arranged this investment was Mr Spring. No doubt he was not called because there was a falling out between the plaintiff and their former accountants.

16 Any agreement for the allotment of shares or further investment in some way most likely would have arisen in September 2000 or at some stage before that. If it is a loan, the usual presumption would arise that the debt, being repayable upon demand, is now due and payable. See Collins v Benning (1701) 12 Mod Rep 444.

17 The question that I have to address is whether there is a genuine dispute. I have had the benefit of having a number of submissions in respect of the principles to be applied and I think probably the most useful summation is that given by McClellan CJ in Equity in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACLC 669. At page 671 his Honour made the following comments in respect of the expression "Genuine dispute":

"It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s.459H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to (its) truth' (cf Eng Mee Young v Letchumanan (1980) AC 331 at 341), or 'a patently feeble legal argument, or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194).

But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at ACLC 1066; ACSR 366-7) Hayne J said, after referring to the state of the law prior to the enactment of Division 3 of Part 5.4 of the Corporations Law, and to the terms of Division 3:

'These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute'.

In Re Morris Catering (Australia) Pty Limited (1993) 11 ACLC 919 at 922; (1993) 11 ACSR 601 at 605 Thomas J said:

'There is little doubt that Division 3 ... prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the Court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim".

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.

The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).'

I respectfully agree with those statements."

18 The question is whether there is any plausible contention to suggest that there was some agreement to allot shares or some other form of investment. There are a number of matters which have been advanced. The first is some material contained in exhibit 4, which was subpoenaed from William Buck. That is a schedule of investor worksheets, and of individual worksheets, which clearly shows many investments by way of loan. Unfortunately, they do not help because they do not have anything to show concerning the loan to this company.

19 The next one is exhibit 3, which is an email from some other investor which talks of recalling the loan and converting part of the loan to equity. That also is irrelevant because it does not concern this particular defendant.

20 The more important document is the document which was produced by the former accountants, and which was headed "Capital structure - February 01, 2001". Under the initial headings, it says the following:

"In June 2000, with the need to provide the necessary working capital without diluting the other investors equity, The Holtom Family Trust decided to release 6% of its equity in Farnow Technologies. All the proceeds of the sale were then to be invested in Farnow Technologies as an 'interest free loan', to be repaid when the venture became profitable and started providing returns to unitholders. These units were priced at $312.50 per unit or $312,500 (US$162,500) per 1. As at 28 February $875,000 was raised and loaned to Farnow Technologies with another 3.2% due to raise $1,000,000 being still available for release."

21 Thereafter, the page lists the founding investors, then deals with the basement investors and then goes on to deal with the second tier investors. Among those appears Earl Cameron's $312,500. Given that he is a director of the defendant, it seems fairly plain that that is a reference to the subject claim.

22 Of importance in this document is that it records that the proceeds of the sale, which was the sale by the Holtom Family Trust, were to be invested in Farnow Technologies as an "interest free loan" to be repaid when the venture became profitable, and started providing returns to unit holders. There is no evidence to say that the venture has become profitable and, given the state of it, it is not surprising.

23 The tables talk about investments in US dollars and Australian dollars, and quote a percentage of equity in units.

24 The next important document is the authorisation which was given and signed by Mr Scurr in respect of the first draw down of the funds that he had lodged with the accountants. In that draw down, the first paragraph is as follows:

"I, David Scurr, a director of Jazute Pty Limited of 2a/302 Parramatta Road, Auburn, hereby authorise William Buck (NSW) Pty Limited, Chartered Accountants, Level 16, 456 Kent Street, Sydney, to bank into their Trust Account the sum of $312,000 representing funds deposited on account of a capital raising for Farnow Technologies Pty Limited."

25 Of importance, is the reference to funds being deposited on account of capital raising. The existence of this authorisation clearly is quite contrary to what Mr Scurr has said in the conversation which I have referred to earlier in this judgment. The evidence in the capital structure document suggests that there were loans to be repaid when the venture became profitable. Ultimately, it seems to me, that this dispute will probably have to be determined as a result of evidence probably given by the former accountants, as to the terms upon which the funds were received.

26 In my view, particularly bearing in mind the other document signed by Mr Scurr, there is a plausible contention requiring investigation. In the circumstances, I am satisfied that there is a genuine dispute.

27 Accordingly, I order that the statutory demand dated 25 May 2001, served by the defendant on the plaintiff be set aside. I order the defendant to pay the plaintiff's costs.

28 The exhibits may be returned.

oOo

Last Modified: 01/31/2002