GoConnect Ltd v Sino Strategic International Ltd (in liq)
[2016] VSCA 315
•14 December 2016
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2016 0042
| GOCONNECT LTD (ACN 089 240 353) | Applicant |
| V | |
| SINO STRATEGIC INTERNATIONAL LTD (IN LIQUIDATION) | Respondent |
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| JUDGES: | SANTAMARIA and KYROU JJA and ELLIOTT AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 12 October 2016 |
| DATE OF JUDGMENT: | 14 December 2016 |
| MEDIUM NEUTRAL CITATION: | [2016] VSCA 315 |
| JUDGMENT APPEALED FROM: | GoConnect Ltd v Sino Strategic International (in liquidation) (Unreported, Supreme Court of Victoria, Randall AsJ, 17 March 2016) |
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CORPORATIONS – application to set aside statutory demand pursuant to s 459G of the Corporations Act 2001 (Cth) by reason of alleged genuine dispute – Respondent lent applicant substantial amount of money – Respondent put in liquidation – By statutory demand liquidator demanded repayment of loan and interest – Applicant sought to set aside statutory demand on the basis that there was a genuine dispute as the loan was payable only when applicant chose to pay it – Applicant sought to introduce further supplementary affidavits after expiration of 21-day period – Whether primary judge erred in finding that there was no genuine dispute – Whether primary judge erred in refusing to admit supplementary affidavits – Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 – Head v Kelk [1963] 63 SR (NSW) 340 – Universal Greening Pty Ltd v Sabine (1999) 17 ACLC 880 – Application for leave to appeal refused.
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| APPEARANCES: | Counsel | Solicitors |
| For the applicant | Mr S Minahan | James D Mapleston |
| For the respondent | Mr P Agardy | Madsen O’Dea |
SANTAMARIA JA
KYROU JA
ELLIOTT AJA:
Summary
By statutory demand dated 21 October 2015 (‘the statutory demand’), the respondent (‘Sino’) demanded that the applicant (‘GoConnect’) pay the sum of $1,589,316.24 as a debt owed to Sino. The debt comprised a loan of $962,668.77 plus interest of $626,647.47.
GoConnect failed to pay the debt. It brought an application to set aside the statutory demand which Sino opposed. Its application to set the statutory demand aside was accompanied by the conventional ‘21 day’ affidavit.[1] In that affidavit, it was said that the loan facility agreement pursuant to which the moneys were advanced contained a provision that reserved a discretion for GoConnect to choose when to pay and that the loan the subject of the agreement was, therefore, not payable on demand.
[1]See [38] below.
Before the hearing of the application to set aside the statutory demand, but outside the 21 day period, GoConnect filed two supplementary affidavits. In substance, those affidavits describe the history of the relationship between Sino and Goconnect. They also (a) contain the assertion that the loan agreement contained oral terms; (b) contend that the loan agreement was ambiguous justifying the introduction of parol evidence; and (c) advance the contention that the conduct of the parties since the inception of the loan gave rise to an estoppel preventing Sino from demanding its repayment.
The primary judge refused to admit the supplementary affidavits into evidence. He held that there was no genuine dispute in respect of the debt and dismissed the application.
Goconnect has sought leave to appeal the dismissal of its original application. In doing so, it has also challenged the refusal of the primary judge to admit the supplementary affidavits into evidence. For the reasons that follow, the application for leave to appeal will be refused.
Loan facility agreement
By a loan facility agreement dated 20 October 2003 (‘loan facility agreement’), Sino agreed to provide GoConnect with a facility whereby GoConnect could draw $1,000,000 ‘including the sum of $662,000 already provided to’ GoConnect.[2] The agreement provided that interest was ‘payable monthly in arrears on the principle [sic] outstanding at ANZ Bank’s 30 day [Bank Bill Swap Rate][3] plus 2%’.[4]
[2]Clause 2 of the loan facility agreement.
[3](‘BBSW’).
[4]Clause 4 of the loan facility agreement.
Clause 6 of the loan facility agreement was in the following terms:
The Board of Directors of [GoConnect] will review monthly the need of [GoConnect] for this financial assistance, and will repay the loan or part thereof deemed appropriate.
Sino advanced funds to GoConnect in accordance with the loan facility agreement. By 28 August 2015, GoConnect owed Sino $962,668.17, by way of principal, and $626,647.47, by way of accrued interest.
By letter dated 28 August 2015, Michael Basedow, (‘Basedow’), the liquidator of Sino, demanded repayment of principal and accrued interest.
Statutory demand
By the statutory demand, Basedow demanded payment of $1,589,316.24. The statutory demand was accompanied by an affidavit sworn by Basedow on 21 October 2015 (‘the Basedow affidavit’). Because of a contention that arises over the admissibility of two supplementary affidavits, it is necessary to canvass the contents of the Basedow affidavit and its exhibits.
The Basedow affidavit contained the following exhibits:
(a) the loan facility agreement;
(b) letter from Sino to GoConnect dated 14 January 2013, which contained a statement of the amount of the loan and interest owing at that time;
(c) letter from Richard Li on GoConnect letterhead to Con Unerkov of Sino dated 15 January 2013. That letter referred to cl 6 of the loan facility agreement and said:
To date, repayments of the loan have only been made at the discretion of [GoConnect] board of directors, rather than on demand by [Sino]. The agreement has been operated by both companies in this manner since inception.
At the time when the agreement was entered into on 20 October 2003, it was the understanding of the board of [Sino] and that of [GoConnect], for [Sino] to provide financial assistance to [GoConnect] in respect of any outstanding amount owed by [GoConnect] to [Sino]. Hence, the loan to [GoConnect] includes principal and accrued interest which is repayable only at the discretion of the [GoConnect] board of directors.
(d) letter from Richard Li to Basedow dated 21 July 2015 (which responds to a letter from Basedow dated 17 July 2015), which was to the same effect as the letter dated 15 January 2013;
(e) letter from Basedow to Richard Li dated 28 August 2015, which referred to the letter dated 21 July 2015. In his letter, Basedow demanded immediate repayment of the loan and all outstanding interest;
(f) letter from David Colovic of HWL Ebsworth, the solicitors for Basedow, to GoConnect dated 10 September 2015, which demanded immediate repayment of the loan together with all outstanding interest and threatened the service of a statutory demand;
(g) email from Richard Li (GoConnect) to David Colovic, HWL Ebsworth, dated 22 September 2015, which responded to the letter dated 10 September 2015. In that letter, Li said that the directors of Goconnect had not ‘made any decision to repay, following review, as required for repayment under clause 6 of the agreement’; and
(h) a schedule of the unpaid interest payable by GoConnect to Sino, ‘calculated monthly in arrears on the loan amount outstanding on the basis of ANZ Bank’s 30 day BBSW rate plus 2%, including and calculated from the amount acknowledged by [GoConnect] on 15 January 2013 to 31 July 2015’.
The Basedow affidavit and its exhibits refer to cl 6 of the loan facility agreement. However, they make no reference to (a) the existence of oral terms; or (b) any basis for an estoppel that would prevent Sino from enforcing the loan facility agreement.
Application to set aside statutory demand
On 12 November 2015, GoConnect issued an originating process in which it sought orders that the statutory demand be set aside. The originating process was supported by an affidavit of Kevin Wong sworn 12 November 2015 (‘the Wong affidavit’). The Wong affidavit:
(i) exhibited the Basedow affidavit together with the exhibits to it;
(j) contained the following statements:
…
(4) [Sino] relies on a loan facility agreement between [GoConnect] and [Sino] dated 20 October 2003 as the basis for its statutory demand. [Sino] says that the loan agreement is void for uncertainty as the loan agreement reserves a discretion to [GoConnect] as to when to pay and that the loan the subject of the agreement is therefore payable on demand. Page 8 of KW-1 is a copy of the loan agreement.
(5)[GoConnect] disputes [Sino’s] characterization of the loan agreement and says that it is enforceable in its terms. As the loan agreement is enforceable, it is [GoConnect’s] contention that the time for repayment of the monies advanced pursuant to the loan agreement has not yet arrived and as such it has no obligation to repay the loan.[5]
…
[5]Emphasis added.
The Wong affidavit similarly makes no reference to (a) the existence of any oral terms; or (b) any conduct that might give rise to an estoppel that could prevent Sino from enforcing the loan facility agreement. On the contrary, the Wong affidavit asserts that the actual terms of the loan facility agreement are the basis upon which Goconnect resists the demand for payment.
Supplementary affidavits
Before the originating process came on for hearing, GoConnect filed two further affidavits upon which it sought to rely:
(k) affidavit of Richard Li sworn 24 February 2016 (‘the Li affidavit’); and
(l) affidavit of Man Ban Lee sworn 26 February 2016 (‘the Lee affidavit’).
These affidavits sought to introduce arguments based on oral variations to the loan facility agreement and estoppel by conduct.
In the Li affidavit, Mr Li deposed that he was a director of GoConnect.
Mr Li said that he had also been a director of Sino since it was incorporated in 1987 until his retirement in 2012. He said that, when Sino was established in 1987, its primary business was investment services which were conducted on its behalf by a subsidiary company, Sino Investment Services Pty Ltd (‘SIS’). Subsequently, its business included the development of the business of GoConnect, which involved the distribution of video content for various clients. Mr Li explained the listing of Goconnect on the ASX. He said that Sino remained its major shareholder until September 2011. Mr Li explained that the loan facility agreement had been established to provide working capital. There was, he said, an understanding that GoConnect might not reach profit for some time and, effectively, the funding was regarded as quasi-capital, notwithstanding that it was formally structured as a loan to facilitate recoupment by Sino. That understanding, he said, was reflected in the terms of cl 6 of the loan facility agreement. Mr Li said that the understanding was that the capital would be repaid as and when GoConnect became profitable, and that, until then, the loan was to be provided on the basis that it would be subordinated to all other external liabilities of GoConnect. He said that, in his experience, such arrangements were not uncommon. Mr Li said that Goconnect did not have the ability to raise funds other than by relying on Sino. It was critical to the on-going life of the venture that it could subordinate the debt involved and that, if it had not been offered on that basis, the loan would not have been accepted. GoConnect had made a series of payments to Sino in conformity with the agreement and the understanding. Between 2003 and 2013, there was a common director on the boards of Sino and Goconnect. GoConnect made many decisions and allocated funds, with Sino’s knowledge and acquiescence. Mr Li said that, had the arrangement not been in place ‘the entire course of dealing would have been completely different and the series of repayment and redraws by [GoConnect] would not likely have taken place’.
Mr Li went on to describe the entry of interests associated with Mr Teddy Cheng onto the register of Sino. He said that the funding arrangement with GoConnect was maintained. However, disputes arose in the governance of Sino and, in 2012, Mr Li and Mr Man Ban Lee resigned from the board of Sino.
Mr Li deposed to some arrangements that had taken place between Go Connect Australia Pty Ltd (‘GCN Australia’) (which was a subsidiary of GoConnect) and Priority One Network Group Ltd (‘Priority One’). First, GCN Australia and Priority One entered into an agreement for the provision of internet protocol television services to Priority One by GoConnect. Second, in order to assist in its listing on the ASX, Priority One agreed to issue some of its shares to shareholders of GoConnect. Those shares were not distributed to GoConnect itself. Mr Li deposed that Sino itself received no shares in Priority One as it had ceased to be a shareholder of GoConnect. However, it seems that SIS received some of those shares. The shares in Priority One were valuable. In 2012, SIS and another shareholder sold their shares in Priority One and used the proceeds of those sales to cover the price of exercising options to take up more shares in GoConnect. Mr Li also said that the shares in Priority One are currently off market and that, when they are listed, they should have a significantly greater value.
Mr Li deposed that, had GoConnect been aware that Sino was able to or intended to call up the facility on demand, it could have and would have negotiated a different arrangement with Priority One which would have seen some or all of the shares in Priority One distributed to GoConnect and sold to meet the liability. A sale of even a portion of these shares at the values realized by Sino in 2012 would have enabled GoConnect to repay the funding the subject of the statutory demand. Instead, the shares were distributed to GoConnect’s shareholders, including SIS. Mr Li said that, had it been asserted at the time that the loan was repayable on demand, then, in his view as a director, GoConnect would not have agreed with Priority One for the distribution of Priority One shares in the manner that happened.
Mr Li contended that either (a) the loan facility agreement is enforceable in accordance with its terms so that no debt is due at present; or (b) the liquidator is estopped from making the demand for repayment.
In the Lee affidavit, Mr Lee said that he had been a director of Sino since it was listed on the ASX in 1987 until he retired in 2012. He confirmed the contents of the Li affidavit to the extent that it referred to discussions in which he had been involved. He also said that, at the time of the money being advanced by Sino to GoConnect, Sino had absolute shareholding control over GoConnect and that the objective of the agreement and the provision of the funding was to support GoConnect with sufficient capital until that company could stand on its own feet financially. He said that the boards of the two companies discussed and understood that GoConnect might not reach profit for some time and that the loan was only repayable when GoConnect’s board considered it to be ‘appropriate’; that is when the directors of GoConnect considered its balance sheet and cash flow were sufficiently strong to support the repayment. Mr Lee said that it was the understanding of both companies that, while interest was payable monthly in arrears, it was a subordinated debt to be repaid on a similar basis, namely, when GoConnect could afford it. The agreement was made so as to bolster GoConnect’s solvency and assist with its needs for working capital. The loan facility agreement was entered when GoConnect ‘did not have the ability to raise funds other than by relying on Sino’. At the time, GoConnect was Sino’s main asset. Mr Lee said that, while he was the chairman if Sino, the loan facility agreement was never regarded as repayable on demand and that GoConnect could defer repayment as provided for in the agreement. Mr Lee explained that when Mr Teddy Cheng became a member of the board of Sino, conflicts arose at board level leading to Mr Lee’s resignation in the second half of 2012.
Ruling on evidence by primary judge
It appears that GoConnect had contended that the supplementary affidavits were relevant to a submission that, in the present case, the context of the agreement and parol evidence concerning its formation over 12 years ago will be of relevance to its construction.[6] The primary judge ruled that the two supplementary affidavits were not admissible. In doing so, he relied on Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund.[7] The primary judge considered that the supplementary affidavits did no more than (a) indicate that interest was to be capitalised; and (b) demonstrate the conduct or history of the parties in not demanding payment until 2013. GoConnect’s case, he said, had not been set out sufficiently or at all in the original ’21 day’ affidavit sworn in support of the application to set aside the statutory demand. The primary judge also ruled against the admissibility of the affidavits in so far as they sought to adduce evidence of the subjective understandings of the parties as to the meaning of their written agreement. Finally, he rejected the affidavits to the extent that they sought to raise an argument as to an estoppel arising from conduct in November 2011.
[6]GoConnect Ltd v Sino Strategic International (in liquidation) (Unreported, Supreme Court of Victoria, Randall AsJ, 17 March 2016) 4 (‘Reasons’).
[7](1996) 70 FCR 452 (‘Graywinter’).
The reasons of the primary judge
In dismissing the application, the primary judge rejected a submission that the agreement was ambiguous such as to permit the admission of parol evidence to assist in its interpretation. In doing so, he discussed Bailes v Modern Amusements Pty Ltd,[8] which was followed by Kenny J in Universal Greening Pty Ltd v Sabine.[9]The primary judge said:
[8][1964] VR 436 (Sholl J).
[9](1999) 17 ACLC 880 (‘Universal Greening’).
The reservation of the arbitrary discretion in the board of the plaintiff as to repayment of the loan or part thereof deemed appropriate leads to a determination that the clause:
(a)does not provide any objective determinant as to when or if at all any amount should be repaid;
(b)leaves it to the board of the plaintiff to decide when, if at all, the loan and what part is to be repaid;
(c)does not specify any circumstances when the loan would be repayable, for example upon the liquidation of the plaintiff, other than upon determination of the board of the plaintiff;
(d)even a construction of the clause to construe repayment from profits does not overrule the discretion remaining reposed in the board of the plaintiff.
Accordingly, I am bound to follow the Victorian decision of Bailes and consequently Kenny J’s decision.[10]
[10]Reasons 13–14.
In the event, the primary judge dismissed the application to set aside the statutory demand.
Proposed grounds of appeal
GoConnect proposes the following grounds of appeal:
(1)[The primary judge] erred in holding that no genuine dispute existed regarding the debt the subject of the statutory demand because the term of the said loan agreement which provided that:
‘the Board of Directors of [GoConnect] would review its need for the financial assistance and repay the loan or part thereof deemed appropriate’,
was necessarily illusory, alternatively uncertain, and that as a consequence the loans made pursuant to the agreement were payable on demand and are presently due and payable … .
(2)In concluding there was no genuine dispute as to the said debt, [the primary judge] erred in:
(a)refusing to take into account the evidence of Mr Richard Li and Mr. Man Ban Lee as to the circumstances of the making of the said agreement and oral terms of it relating to the said written term;
(b)disregarding the role of parole [sic] evidence in establishing the terms, alternatively construction of the said loan agreement and its terms concerning determination of the time for repayment.
(3)[the primary judge] erred in finding that the conduct of the parties to the loan agreement at the time of its construction [sic] in 2003 and thereafter could not alternatively did not:
(a)effect a variation of the said loan agreement whereby it was agreed that the loan was only repayable upon a consideration of the board of the appellant of its financial position and its ability to repay out of profit;
(b)give rise to an estoppel whereby the respondents or either of them were and are not permitted to:
(i)deny that the said written term was effective and operative
(ii)assert that a debt due under the said agreement is payable on demand, alternatively is presently due and payable.
(4) [The primary judge] erred in failing to give due weight to the evidence of a disputed questions [sic] of fact affecting the construction of the said loan agreement, alternatively the existence of an estoppel precluding assertion of a due debt, and in proceeding to determine that no genuine dispute existed without permitting a trial of those facts.
GoConnect’s written contentions
In its written submissions, GoConnect contended that there was a ‘genuine dispute’ as to the debt. It said that a genuine dispute exists where there is a plausible contention requiring investigation raising similar considerations to the requirement of a serious question to be tried. It said that a genuine dispute will be established if it is bona fide and exists in fact and that the grounds for alleging the dispute are not spurious, hypothetical or misconceived. The function of the court was not to try a claim but merely to establish whether a genuine claim exists and to consider the evidence to that extent.
GoConnect contended that the loan facility agreement provided that GoConnect could determine the timing and amount of repayment having regard to its financial position. The loan facility agreement was not confined to the written terms alone. It also comprised discussions and further conditions agreed between members of the boards of the parties at the time of the agreement. Those further conditions were to the effect that GoConnect was only to repay out of profits and that interest was to be capitalised.[11] Taken together with the oral terms reached in 2003, the true construction of the agreement is that the terms for repayment permitted an objective determination of the timing for repayment or a variation to that effect of the original agreement.
[11]GoConnect referred to (1) the Li affidavit; (2) the Lee affidavit; and (3) GoConnect's letter of 15 January 2013.
There was evidence that the parties had agreed at the inception of the agreement that the timing of payment would be determined by reference to the financial need of GoConnect and profit. There was also evidence that the parties had agreed that interest would be capitalised, not fall due.
GoConnect also said that the primary judge erred in regarding reference to the evidence of oral aspects of the agreement as being solely relevant to construing the written term by way of parol evidence.[12]
[12]See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165.
Alternatively, GoConnect said that Sino had acquiesced in GoConnect’s treating the loan as being repayable as contended for and had given GoConnect reason to assume that it was entitled to so regard the loan facility agreement. Moreover, Sino regarded the agreement in the same way. Over the course of 10 years of dealing, GoConnect had continually made repayment and redrawn funds under the loan facility agreement and changed its position to its detriment in a number of ways. On that basis, GoConnect submitted it would now be unconscionable for Sino — or its liquidator — to change position and maintain that the debt was and is repayable on demand.
GoConnect said that, in holding that there was no genuine dispute, the primary judge said that cl 6 of the loan facility agreement was uncertain and illusory and, in doing so, followed one line of authorities. However, there were several authorities that had upheld agreements which gave a party a wide latitude of choice as to performance.[13] Further, the primary judge should not have preferred one line of authorities as the process of construction involved an investigation of fact which he was not in a position to determine in such an application or on the evidence before him.
[13]GoConnect referred to Ledingham v Bermejo Estancia CoLtd [1947] 1 All ER 749; Head v Kelk (1963) 63 SR (NSW) 340; Ware v Armaral Pastoral Pty Ltd [2012] NSWSC 1550; Meehan v Jones (1982) 149 CLR 571, 587; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130, 136 (Kirby P), 154–55 (McHugh JA).
GoConnect also contended that, even if the terms as to payment were invalid for uncertainty or illusory, it did not follow that the loan facility agreement became repayable on demand. It referred to Re Vince,[14] where the Court of Appeal held that the whole written agreement regarding the loan was thereby rendered void. Accordingly, Sino would not have a liquidated debt which would support a statutory demand.
[14][1892] 2 QB 478.
GoConnect also submitted that the primary judge should have accepted the Li and Lee affidavits into evidence and had regard to the matters raised there and that, had he done so, it was not reasonably open to him to find there was no genuine basis for dispute or to conclude that such dispute had no merit. In wrongly excluding those affidavits, the primary judge had misapplied Graywinter. GoConnect said that a plaintiff must fairly alert the claimant to the nature of the case the company will seek to make in having the demand set aside, even if by inference. It is sufficient for GoConnect to exhibit correspondence. Accordingly, GoConnect submitted, the position is the same — or no worse — where the party issuing the statutory demand exhibits such correspondence in its supporting affidavit. Here, there was no basis for inferring that GoConnect has changed its position.
GoConnect contended that the application under s 459G of the Corporations Act 2001 (Cth) (‘the Corporations Act’) was supported by the Wong affidavit. GoConnect said that this affidavit must be read in the context of the Basedow affidavit. That affidavit exhibited the responses of GoConnect to the demands in 2013 and 2015. Those responses raised GoConnect’s points of dispute based on (a) the terms of the agreement including oral discussions and an understanding from its inception; and (b) subsequent conduct which is the basis for the estoppel argument. GoConnect said that therefore, by his own materials, the liquidator of Sino exhibited a clear awareness of the basis of dispute between the parties. It was too strict to proscribe GoConnect from offering further substantiation of those issues by its affidavits of Li and Lee.
GoConnect contended that the fundamental relevance of the evidence disregarded by the primary judge is that it established oral terms of the agreement from its inception. The construction of the loan facility agreement and repayment terms therefore necessarily depended upon that being investigated in evidence and as such was not properly determined on the application before the primary judge.
Further, it was contended that the Li affidavit identified a plausible basis for an estoppel arising from a representation or a series of representations by Sino that the loan moneys were not payable on demand and that Sino would not seek to treat them that way. It was also said that this showed reliance and detriment in the operation of the loan account and the windfall of shares in Priority One for SIS and other shareholders, which GoConnect might otherwise have taken to itself and used to satisfy debt.
Relevant statutory provisions
Sections 459G and 459H of the Corporations Act provide as follows:
459G Company may apply
(1) A company may apply to the Court for an order setting aside a statutory demand served on the company.
(2) An application may only be made within 21 days after the demand is so served.
(3) An application is made in accordance with this section only if, within those 21 days:
(a) an affidavit supporting the application is filed with the Court; and
(b)a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.
459H Determination of application where there is a dispute or offsetting claim
(1)This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b) that the company has an offsetting claim.
(2) The Court must calculate the substantiated amount of the demand in accordance with the formula:
Admitted total — Offsetting total
where:
admitted total means:
(a) the admitted amount of the debt; or
(b) the total of the respective admitted amounts of the debts;
as the case requires, to which the demand relates.
offsetting total means:
(a) if the Court is satisfied that the company has only one offsetting claim—the amount of that claim; or
(b) if the Court is satisfied that the company has 2 or more offsetting claims—the total of the amounts of those claims; or
(c) otherwise—a nil amount.
(3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.
(4) If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:
(a) varying the demand as specified in the order; and
(b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company.
(5) In this section:
admitted amount, in relation to a debt, means:
(a)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt—a nil amount; or
(b)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt—so much of that amount as the Court is satisfied is not the subject of such a dispute; or
(c) otherwise—the amount of the debt.
offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).
respondent means the person who served the demand on the company.
(6) This section has effect subject to section 459J.[15]
[15]Section 459J provides additional grounds for setting aside a statutory demand which are not presently relevant.
Did the primary judge err in refusing to admit the supplementary affidavits?
Although the proposed grounds of appeal do not contain a direct attack upon the primary judge’s refusal to admit the Li and the Lee affidavits, proposed grounds 2 to 4 are predicated on the admissibility of the evidence contained in those affidavits. Both of the affidavits were filed outside the 21 day period.
In Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq),[16] this Court set out the principles relating to reliance on supplementary affidavits filed outside the 21‑day period. In particular, the Court referred to the analysis of Sundberg J in Graywinter as to the minimum requirements that had to be satisfied by the supporting affidavit: (a) the affidavit must state material facts which show that there is a genuine dispute; (b) the affidavit may read like a pleading and need not detail, in admissible form, all the evidence that supports the contention of a genuine dispute; and (c) neither a mere assertion that there is a genuine dispute nor a bare claim that the debt is disputed is sufficient.[17] Where the affidavit did not meet the minimum requirements, the Court lacked jurisdiction and the absence of jurisdiction could not be overcome by the filing of a supplementary affidavit after the expiration of the 21-day period.[18] However, where the minimum requirements had been met, the material relied upon in that affidavit could be supplemented by affidavits filed after that period.[19] Affidavits filed outside the 21-day period which raise a new ground to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit) cannot be relied upon to set aside a statutory demand.[20] The supporting affidavit must ‘fairly alert’ the respondent to the nature of the case made in support of the application to set aside the statutory demand.[21] It ‘must fairly notify the respondent of the evidentiary basis for a submission that the statutory demand should be set aside on the particular ground upon which the applicant seeks to rely’.[22] It will be sufficient if the material facts on which the applicant intends to rely to support the genuine dispute are ‘discernible from the supporting affidavit and/or the annexures and exhibits to it’.[23]
[16][2015] VSCA 330 (Kyrou, Ferguson and Kaye JJA) (‘Malec’).
[17]Ibid [53], quoting Graywinter (1996) 70 FCR 452, 459.
[18]Ibid [54], quoting Graywinter (1996) 70 FCR 452, 460.
[19]Ibid.
[20]Ibid [57], quoting Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179, 183 [18].
[21]Ibid [59], quoting Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560 (Barrett J).
[22]Ibid [62], quoting Tuta Healthcare v Nipro Asia [2005] NSWSC 664 (Campbell J).
[23]Ibid [65], quoting Re Australia Zhongfu Oil Gas Resources Pty Ltd, [2012] NSWSC 1208 (Brereton J).
GoConnect’s contention that the loan money was not repayable as it had a discretion when to repay was fairly notified in the Wong affidavit. However, no other contention was notified.
It is true that Wong exhibited the Basedow affidavit to his affidavit. GoConnect says that the additional contentions that it now wishes to advance can be seen in the correspondence exhibited to that affidavit. We disagree. That correspondence is innocent of any material that would have put Sino on notice of these additional contentions. In his letter to Basedow dated 21 July 2015, Li said:
Also, we refer you to Clause 6 of the Loan Facility Agreement dated 20 October 2003, ‘The Board of Directors of GoConnect Ltd (‘GCN’) will review monthly the need of GCN for this financial assistance, and will repay the loan of part thereof deemed appropriate’.
To date, repayments of the loan have only been made at the discretion of GCN board of directors, rather than on demand by SSI. The agreement has been operated by both companies in this manner since inception.
At the time when the agreement was entered into on 20 October 2003, it was agreed between the board of SSI and GCN that the loan to GCN includes principal and accrued interest which is repayable only at the discretion of the GCN board of directors.
Mr Richard Li and Mr MB Lee will be able to confirm the above as members of the SSI board when the agreement was signed on 20 October 2003.
In our opinion, this letter does no more than state the effect of clause 6 and the way it has been implemented. It does not fairly give notice that GoConnect contends that the loan facility agreement contained oral terms or that the conduct of the parties with respect to the agreement gives rise to an estoppel binding upon Sino that would prevent it from enforcing it.
Even if we are wrong about this, the correspondence must be read in the context of the contents of the Wong affidavit. As set out at [13] to [14] above, that affidavit explicitly confines the basis of the genuine dispute to the terms of the loan facility agreement.
Accordingly, leave to appeal on proposed grounds 2 to 4 will be refused.
What must an applicant establish pursuant to s 459H of the Corporations Act?
In Malec, the Court set out what an applicant must establish pursuant to s 459H of the Corporations Act. The Court said that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. It is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. An application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt or an offsetting claim. The criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact. The grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory or misconceived. They must have sufficient factual particularity to exclude the merely fanciful or futile. A court is not required to accept uncritically statements that are improbable or inconsistent with contemporary documents. Generally speaking, the court should not embark on an inquiry as to the credit of witnesses. Finally, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised.[24]
[24]Ibid [47]–[51].
Did the construction of clause 6 of the agreement give rise to a genuine dispute?
It is trite law that a contract made for a consideration that is illusory is unenforceable.[25] A consideration is illusory if its payment or fulfilment depends upon the unfettered discretion of the promisor.
[25]Placer Development Ltd v The Commonwealth (1969) 121 CLR 353, 356 (Kitto J); Meehan v Jones (1982) 149 CLR 571, 581 (Gibbs CJ).
In Head v Kelk,[26] the plaintiff claimed the repayment of moneys lent. The defence contained a plea that the money was lent upon the terms and conditions as to repayment that the defendant would be bound to repay when he was financially able to do so and not before. The plaintiff demurred to the plea in the defence on the ground that the agreement alleged in the plea did not constitute a contract as it was so vague and uncertain as to be unenforceable. The demurrer was overruled. Herron J (with whom McClemens and Brereton JJ agreed) said:
If the court comes to the conclusion that parties intended to make a contract, it will, if possible, give effect to their intention no matter what difficulties of construction arise. Thus contracts which contained terms that the price was to be ‘reasonable’, to ‘pay handsomely’ for services, or to pay a commission on ‘the sum available for distribution’ or a percentage of ‘the profits’ of a business, in each case for services rendered, have been held to be enforceable according to the maxim id certum est quod certum reddi potest. … Thus an agreement based on consideration to waive interest on a loan ‘until such time as the company is in the position to pay the interest’ was held to be valid. In Ledingham v Bermejo Estancia Co Ltd, Atkinson J construed such an agreement as meaning that payment of interest should be postponed until the company was in a position to pay the interest out of income so long as it carried on. By reference to a further term, as soon as it ceased business the agreement terminated and the whole of the interest became due but by force of the agreement as so construed the interest did not become due and payable until the condition of ability to pay was fulfiled [sic]. It was also held that the agreement was a binding contract since the offer contemplated legal relations.[27]
[26][1963] 63 SR (NSW) 340.
[27]Ibid 344 (citations omitted).
Head v Kelk was distinguished in Bailes v Modern Amusements Pty Ltd.[28] In that case, the defendant company resisted an application for final judgment for the repayment of moneys lent to it by its shareholders. In order to avoid tax on undistributed profits, the company declared dividends and then credited those dividends to its shareholders’ loan accounts on the basis that ‘the amounts of dividends so credited to [those accounts] … should only be actually paid over … to the shareholders entitled to them when the company to which they were lent considered that it was in a position to pay them’.[29] The defendant company had contended that the shareholder was not entitled to payment because the company ‘does not consider that it is presently in a position to repay those amounts’. In rejecting the defence, Sholl J considered those cases, such as Head v Kelk, in which it had been held that ‘objective but very generally worded conditions qualifying the obligation to pay a debt were valid and effective’.[30] He also held that the case did not fall ‘within the line of authority which has held a contract wholly void because the only promise of one party is illusory, and performance rests only upon his arbitrary discretion’.[31] Rather, he said, the agreement was an agreement:
[28][1964] VR 436.
[29]Ibid 437.
[30]Ibid 441.
[31]Ibid 441.
to receive the dividend moneys back from the shareholders (albeit only by book entry) as a loan, which without more would import an obligation to repay, at least on demand. Superadded to that, however, is a condition purporting to limit the right to repayment.[32]
However, Sholl J concluded:
Notwithstanding Head v Kelk and the other authorities referred to, I have come to the conclusion, after careful consideration of the wording of this alleged term, that I ought not to hold it to be valid. Either it is illusory or it is not sufficiently certain to be enforceable. If it confers on ‘the company’ … an arbitrary discretion to determine whether and to what extent (if at all) the moneys are to be repaid, it is an attempt to cut down to an illusory obligation what would otherwise, as I have held, be an obligation to repay on demand. If, however, it is to be understood as imposing an obligation to repay whenever, acting bona fide, the company ... is bound properly to consider itself in a position to repay, nevertheless in my opinion it is still too uncertain to be valid. It appears to me to admit of a number of alternative meanings.[33]
[32]Ibid.
[33]Ibid 441.
In the event, Sholl J held the term limiting the right to repayment to be void for uncertainty and that, in its absence, there remained an agreement of loan.[34]
[34]Ibid 442.
In Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (rec and mgr apptd),[35] a receiver of the respondent company demanded repayment of a loan that he said was owing to it. The directors of the debtor company deposed that loans, made to it by the respondent company, were repayable only when the borrower’s directors believed that the borrower was in a position to repay. The Court held that that was not an answer to a demand for the repayment of the loan. Having discussed and compared Head v Kelk and Bailes v Modern Amusements, Drummond J said:
It may be that the true distinction between Head v Kelk and Bailes is that if the question whether the agreed time for repayment has arisen can be determined objectively, then the term will be valid; but, if the agreed time for repayment operates in a subjective way by leaving it to the borrower to decide for himself when, if ever, he will repay, the term will be void as illusory.[36]
In the event, the Court held that, where there is an agreement for a loan and the time for repayment is not fixed by the agreement, any money advanced will be repayable without any previous demand.[37]
[35](1993) 11 ACSR 1 (Drummond J) (‘Argyll Park’).
[36]Ibid 4 (citations omitted).
[37]Ibid.
In Universal Greening, the respondent demanded repayment of three separate loans. The borrower admitted that the moneys had been advanced to it, but submitted that the moneys were advanced on the understanding that they would be repaid by it only when it could afford to do so. Kenny J followed Argyll Park and held that the moneys were repayable on demand. She said:
A term to the effect that none of the loans were repayable until Universal Greening could afford to make repayment leaves it to the borrower to decide when, if at all, the occasion for repayment might arise. As Sholl J observed in Bailes … a term of this kind would ‘prompt in the mind of the reader a whole series of questions as to what the parties intended’. First, who was to determine when the company could afford to repay? Secondly, what is meant by ‘afford to make repayment’. To adapt the observations of Sholl J in Bailes ... :
Does it meant out of capital, or out of income only? Or out of gross profits? Or out of net profits? Would it be inconsistent with the intention of the parties if the board determined that the company was not in a position to pay because to do so would inhibit plans to expand its operations?[38]
[38]Universal Greening (1999) 17 ACLC 880, 886 (citations omitted).
Kenny J held that the loan remained and so did the promise to repay.[39]
[39]Ibid. See also Bailes v Modern Amusements Pty Ltd [1964] VR 436, 441–42.
In Central City Pty Ltd v Montevento Holdings Pty Ltd,[40] Murphy JA (with whom Buss JA agreed) said:
At common law, a loan made where no time for repayment is specified, or where the loan is stated to be payable ‘on demand’, creates an immediate debt by which the money is repayable immediately without the creditor first making a demand for payment.[41]
[40][2011] WASCA 5.
[41]Ibid [36] (citations omitted).
In The Bell Group Ltd (in liq) v Westpac Banking Corp [No 9], Owen J referred to inter-company debts within the Bell Group that were unsecured and repayable on demand.[42] In respect of some such debts, it had been said that undertakings had been given not to call for repayment of the loan account until the debtor company was able to pay.[43] Owen J held that any such undertaking would not have been enforceable in the event of a liquidation.[44] He said:
I accept that undertakings of that type would be illusory and void for uncertainty because the agreed time for repayment operates in a subjective way by leaving it to the debtor to decide for itself when, if ever, it will repay.[45]
[42](2008) 39 WAR 1, 290 [1887].
[43]Ibid.
[44]Ibid 290 [1888].
[45]Ibid(citations omitted).
In the present case, cl 6 of the loan facility agreement provided that ‘[t]he Board of Directors of [GoConnect] will review monthly the need of [GoConnect] for this financial assistance, and will repay the loan or part thereof deemed appropriate’. The obligation to repay was wholly within the discretion of the debtor company. As outlined by the authorities summarised at [47] to [54] above, this type of obligation is illusory and void for uncertainty. As a consequence, the loan is repayable on demand. Accordingly, there was no basis for setting aside the statutory demand as GoConnect had failed to establish that there was a genuine dispute or offsetting claim within s 459H of the Corporations Act. For that reason, leave to appeal on proposed ground 1 should be refused.
Conclusion
It may be accepted that the loan facility agreement was adopted for the reasons and in the form indicated in the Li affidavit, the Lee affidavit and the Wong affidavit. This was the form in which they chose to capitalise Sino’s subsidiary. However, other forms were available. They could have chosen to subscribe for share capital. The price of subscribing for shares is that payments to Sino could only have been made by way of dividend, share buyback or reduction in capital. Such a form of capitalisation would have had the consequence that Sino’s rights to be repaid would have been postponed to the rights of creditors to be repaid the moneys owing to them. By choosing to structure Sino’s funding of GoConnect as loan capital giving GoConnect the power to treat Sino as no different from a shareholder, the former directors of Sino have brought on the consequence that, if the existing board of Sino altered its position or if Sino came under new management, Sino could require repayment on demand.
The application for leave to appeal is refused.
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