In the matter of Creata (Aust) Pty Ltd (No 2)

[2017] NSWSC 1090

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Creata (Aust) Pty Ltd (No 2) [2017] NSWSC 1090
Hearing dates:	20 July 2017
Decision date:	18 August 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Plaintiff’s Originating Process be dismissed with costs.
Catchwords:	CORPORATIONS — Winding up — Statutory demand — Application to set aside – whether evidentiary basis of conduct said to give rise to genuine dispute established – whether Plaintiff’s construction of deed seriously arguable – whether serious question to be tried that debt is not due and payable – whether offsetting claim or some other reason to set aside demand established
Legislation Cited:	- Corporations Act 2001 (Cth), Pt 5.4, ss 459G–459H, 459J - Evidence Act 1995 (NSW), s 136
Cases Cited:	- Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 - Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 - CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 - Drill Search Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 - Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 - Infratel Networks Pty Ltd v Gundry’s Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 - Lee v R (1998) 194 CLR 594 - Ligon 158 Pty Ltd v Huber [2016] NSWCA 330 - Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 - Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229 - Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 362 - Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746 - Re Datlas-Rahme Construction Pty Ltd [2016] NSWSC 1833 - Re Diveva Pty Ltd [2015] NSWSC 509 - Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236 - Re Pages Sales Pty Ltd [2016] NSWSC 616 - Re Rockwall Homes Pty Ltd [2017] NSWSC 223 - Re Tetbury Pty Ltd [2017] NSWSC 37 - Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 - Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; 120 ACR 173; 12 ACSR 341 - Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452; 147 ALR 444; 24 ACSR 353 - Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466
Category:	Principal judgment
Parties:	Creata (Aust) Pty Ltd (Plaintiff) Gary Adrian Faull (Defendant)
Representation:	Counsel: S Foda (Plaintiff) D Sulan (Defendant)   Solicitors: Connor & Co (Plaintiff) Arnold Bloch Leibler (Defendant)
File Number(s):	2017/51706

Judgment

The affidavit evidence and the background to the application

1. By Originating Process filed on 17 February 2017, the Plaintiff, Creata (Aust) Pty Ltd (“Creata”) applies to set aside a creditor’s statutory demand dated 30 January 2017 (“Demand”) served by Mr Gary Faull on Creata under s 459H, or alternatively s 459J, of the Corporations Act 2001 (Cth).

2. Creata relied on the affidavit dated 17 February 2017 of Mr Kenneth Henderson, who is a director of Creata and in house general counsel for Creata and its associated and related entities, in support of the application to set aside the Demand. That affidavit set out some of the factual background to which I will refer below.

3. Mr Faull relies on his affidavit dated 30 January 2017 in support of the Demand, which attached a copy of a deed dated 25 July 2014 (“Deed”) relating to the termination of his employment, to which I will refer below; contended that the time for payment of an instalment of US$400,000 under cl 2(c)(ii) of the Deed was within ten business days of 1 January 2017, being 16 January 2017; and confirmed that the debt claimed, the amount of that instalment, was due and payable by Creata and that he believed there was no genuine dispute about the existence or amount of the debt. Mr Faull also relies on the affidavit of his Macau lawyer, Mr Fong, dated 28 March 2017 which indicates that his firm has not received any notification, including any notification of breach, from Creata under the notice provisions of the Deed or under a Deed of Settlement and Release dated 30 November 2014 between Creata Macau Commercial Offshore Ltd (“Creata Macau”) and Mr Faull. Mr Faull also relies on his affidavit dated 10 May 2017 which refers to his background, his employment by Creata and then by Creata Macau, the entry into the Deed with Creata and a Settlement Deed with Creata Macau to which I will refer below, and payments previously made under the Deed.

4. By a second affidavit dated 29 May 2017, Mr Henderson responded to Mr Faull’s affidavit dated 10 May 2017. By a third affidavit dated 11 July 2017, Mr Henderson responded to further documents on which Mr Faull had relied, in correspondence between the parties’ solicitors, to address an issue as to an alleged breach of a non-compete provision in cl 5 of the Deed to which I refer below.

5. By way of background, Creata owns and operated a global marketing, branding and licensing business with offices in several jurisdictions and Ms Norma Rosenhain is the founder and a director of Creata. Ms Rosenhain also held or holds a substantial unitholding in another entity, SAF Capital Pty Ltd as trustee for SAF Food Investment Fund (“SAF Foods”) through a third entity, NRG Nominees Pty Ltd (“NRG”). The Defendant, Mr Faull, was employed by Creata as Group Financial Controller under an employment agreement dated 13 June 2002 and was also employed by Creata Macau as Chief Financial Officer under employment agreements dated 2 January 2007 and 1 April 2013 (Henderson 17.2.17 [12]). Notice of termination of the employment agreement with Creata Macau was given to Mr Faull in May 2014, allowing a six month notice period.

6. Mr Faull and Creata then executed the Deed to which I have referred above on or about 25 July 2014. Clause 2(c) of the Deed required Creata to pay Mr Faull US$3 million including amounts payable by five instalments each of US$400,000, one of which was payable within ten business days of 1 January 2017 (Faull 10.5.17, Annexure “A”). Clauses 4, 5 and 6 of the Deed imposed several obligations on Mr Faull, and Creata relies on alleged breaches of those clauses to establish a genuine dispute as to the debt claimed in the Demand, an offsetting claim and some other reason to set aside the Demand. Creata made an initial payment under the Deed on 31 July 2014 and two instalment payments in January 2015 and January 2016, such that an amount of US$1.8 million has to date been paid by Creata to Mr Faull (Henderson 17.2.17 [15]; Faull 10.5.17 [8]).

7. In June 2015, NRG, which (as I noted above) had a substantial unitholding in SAF Foods, issued a creditor’s statutory demand to SAF Foods for declared but unpaid dividends in excess of $1.5 million. Mr Henderson refers (Henderson 17.2.17 [19]) to several conversations with a third party connected with SAF Foods including a telephone call on 26 June 2015, in which that third party said words to the following effect:

“Then let me put it to you this way. We understand from Gary (Faull) that the McDonald’s contract is coming up for renewal. It’s an important part of your business.

He’s (Gary Faull) shared certain information with me about Creata’s and Norma’s tax and business and affairs.

If you don’t withdraw your statutory demand then I will send affidavits that I’ve already prepared about those matters to the ATO, the IRS, the Police, the FBI and McDonalds.”

Creata relies on that conversation to establish that it has a seriously arguable claim for breach of the Deed against Mr Faull so as to deprive him of a right to payment of the January 2017 instalment under the Deed and establish an offsetting claim against him.

8. Mr Henderson’s evidence was also that Mr Faull had an intimate understanding of the tax and business affairs of Creata’s corporate group and Ms Rosenhain where he had worked as Group Financial Controller and Chief Financial Officer of that group (Henderson 17.2.17 [21]). Mr Henderson also referred, in his second affidavit, to an earlier working relationship between the third party associated with SAF Foods and Mr Faull, in his then capacity as Chief Financial Officer of Creata. Mr Henderson’s evidence was that he instructed Creata’s lawyer to withdraw the statutory demand issued by NRG to SAF Foods after the conversation with the third party to which he had referred in his first affidavit. Mr Henderson’s second affidavit also indicated something of the third party’s background, and that he had no reason to doubt the veracity of the third party’s statements, and that he had no experience of the third party lying to him in the past.

9. Mr Faull’s evidence is that he has no recollection of any contact with the third party associated with SAF Foods in 2014 and 2015, and he denies having discussed with, or disclosed to, that third party or anyone else employed with SAF Foods information concerning the contractual arrangements between McDonalds and Creata in 2015 or at any other time, or information concerning the tax and business affairs of Creata in 2015 or at any other time.

10. After the alleged conversation to which I have referred above, Creata paid the second instalment due under the Deed to Mr Faull on 11 January 2016 (Faull 10.5.17 [8(c)]).

11. On 12 January 2017, Mr Faull and Mr Henderson had a telephone conversation (Faull 10.5017 [11]; Henderson 29.5.17 [7]) in which Mr Henderson referred to matters affecting Creata’s financial position and suggested a meeting with Mr Faull and Mr Faull reminded Mr Henderson that a payment under the Deed was due on 16 January 2017. Mr Faull’s evidence is that Mr Henderson did not raise any concerns with him as to whether he had performed his obligations under the Deed in that conversation. Mr Henderson responds in his second affidavit that he had not raised any concern with Mr Faull about his performance of his obligations under the Deed in that conversation because it was his intention to discuss that matter face-to-face in a meeting which was proposed for late January 2017 but did not proceed. That evidence provided no explanation of that matter not having been raised with Mr Faull in the period from June 2015, when the alleged conversation with the third party to which I referred in paragraph 7 above took place, until February 2017, although that matter is not material to the findings that I reach below.

12. Creata did not make the third instalment payment which, subject to the alleged breaches of the Deed by Mr Faull that I address below, was due in January 2017. Mr Faull’s Macau lawyers sent a letter of demand to Creata on 18 January 2017 and the Demand was issued on 30 January 2017. By letter dated 15 February 2017 from Creata’s lawyers, after the Demand had been issued, Creata first asserted the breaches of cll 4, 5 and 6 of the Deed on which it now relies to establish a genuine dispute as to the amount claimed in the Demand.

Whether a genuine dispute is established as to the debt claimed by Mr Faull

13. Creata seeks, first, to set aside the Demand on the basis that a genuine dispute is established in respect of the debt claimed in the Demand for the purposes of s 459H(1)(a) of the Corporations Act. In opening submissions, Ms Foda, who appeared for Creata, relied on several earlier authorities as to the circumstances in which a “genuine dispute” may be established, including Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452; 147 ALR 444; 24 ACSR 353, Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 362 and Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785. Ms Foda submitted that the Court need only be satisfied that a dispute was plausible without having to embark upon the evaluation of the merits of the case or the evidence relied upon by the parties.

14. Mr Sulan, who appears for Mr Faull, submits that, in order to set aside the Demand, Creata must establish that the allegation that the Deed has been breached gives rise to a plausible contention requiring further investigation, and he refers the observation of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd above at 787 that the Court need not:

“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’”.

Mr Sulan also refers to the Court of Appeal’s observation in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 (“Britten-Norman”) (at [53]) that:

“all that is necessary is there be a plausible basis for the claim that there is a disputed debt or an off-setting claim … To the extent that there are sometimes found in these cases statements that there must be a “plausible and coherent basis” for such contention, we do not consider that any more is intended to be said than the test stated by McLelland CJ in Eq in Eyota, which we consider and understand to be the correct statement of the law.”

15. Section 459H(1)(a) of the Corporations Act provides, of course, that a creditor’s statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which that demand relates. The test for a “genuine dispute” has been variously formulated as requiring that the dispute is not “plainly vexatious or frivolous” or “may have some substance” or involves “a plausible contention requiring investigation” and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Ltd above at 787. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd above at 76 FCR 464, to which Ms Foda referred, the Full Court of the Federal Court held that a “genuine dispute” must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 at [16], Barrett J summarised the principle as follows:

“[T]he task faced by the company challenging a statutory demand on the genuine dispute grounds is by no means at all a difficult or demanding one. The company will fail in that task only if it is found, upon the hearing of its s 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.”

16. In Infratel Networks Pty Ltd v Gundry’s Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44], Young AJA (with whom Hoeben JA and Ward J agreed) similarly noted that the question for a primary judge, in determining an application to set aside a statutory demand under s 459H(1)(a), is:

“to determine whether there was a genuine dispute, that is one in which a plausible contention has been raised by the company on which the statutory demand was served.”

17. In Britten-Norman at [30]–[31] and [39]–[55], the Court of Appeal in turn referred to the relatively low minimum requirements for demonstrating a genuine dispute or an offsetting claim, although the Court was there addressing the latter. The Court of Appeal there noted at [30] that:

“It is settled law that s 459H requires the court to be satisfied that there is a ‘serious question to be tried’: see Scanhill v Century 21 Australasia at 467, or ‘an issue deserving of a hearing’ as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted ‘with sufficient particularity to enable the court to determine that the claim is not fanciful’.”

18. The Court of Appeal also observed (at [36]) that, although there must be evidence that satisfies the court that there is a serious question to be tried or an issue deserving of a hearing or a plausible contention requiring investigation as to the existence of an offsetting claim:

“evidence sufficient to satisfy this test, given the time period in which the affidavit must be filed, cannot and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable.”

The Court of Appeal also observed (at [46]) that:

“In determining whether there is evidence of a genuine dispute as to the debt, or that there is an offsetting claim, except in extreme cases, the court is not concerned to engage in an enquiry as to the credit of the deponent of the affidavit filed in support of the application.”

The Court of Appeal summarised the position (at [47]) as being that the court’s role is:

“to determine whether there was plausible evidence to establish the existence of a genuine dispute [or offsetting claim], not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim.”

19. In Re Diveva Pty Ltd [2015] NSWSC 509, I observed (at [26]) that:

“I do not understand the Court of Appeal’s approach in Britten-Norman above to require the Court to eschew any evaluative exercise as to whether there is a plausible basis for an offsetting claim, where such an evaluation is contemplated by the earlier cases to which they refer, and seems to me to be necessarily required by any determination of whether there is a serious question to be tried, an issue deserving of a hearing, or a plausible contention requiring investigation.”

20. In Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 at [47]–[50] (“Malec Holdings”), the Court of Appeal of the Supreme Court of Victoria described the applicable principles as follows (omitting citations):

“The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one.

In determining such an application, 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. This is because 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. It is therefore 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. Further, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised.

The court is required to determine whether the dispute or offsetting claim is ‘genuine’. It has been said that the criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile. A rigorous curial approach is essential to the effective operation of the statutory scheme.

The court is not required to accept uncritically 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, as it may not have sufficient prima facie plausibility to merit further investigation as to its truth. The court is also not required to accept uncritically a patently feeble legal argument or an assertion of facts unsupported by evidence, although this should not be read as suggesting that the applicant must formally or comprehensively evidence the basis of its dispute or off-setting claim. Except in such extreme cases, the court should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on by the applicant to set aside a statutory demand.”

21. In Ligon 158 Pty Ltd v Huber [2016] NSWCA 330; (2016) 117 ACSR 495 (“Ligon 158”) at [8], Barrett AJA (with whom McColl and Meagher JJA agreed) in turn referred to Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 at [9]–[22] and summarised the relevant principles as follows:

“(1)   A dispute is “genuine” if it is not “plainly vexatious or frivolous” or “may have some substance” or “involves a plausible contention requiring investigation”. A genuine dispute requires that it be bona fide and, to that effect, be premised on sufficiently particularised grounds that are “real and not spurious, hypothetical, illusory or misconceived” and which demonstrate the dispute’s “objective existence” and “prima facie plausibility”.

(2)   The test is governed by principles analogous to those which underpin an application for an interlocutory injunction or summary judgment. The court must, however, guard against setting the threshold too low for that is liable to defeat the legislative purpose of the section.

(3)   The task faced by a company challenging a statutory demand on the genuine dispute ground is by no means at all a difficult or demanding one. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow and the demand will be set aside. A finding to the contrary could only be arrived at if the contentions advanced are so devoid of substance that no further investigation is warranted.

(4)   The function of the court is merely to determine the existence of a genuine dispute. While this neither requires nor invites it to weigh or assess the merits of the dispute, the court will not exceed its legitimate function by having regard to evidence which bears upon whether the asserted dispute is genuine.” [citations omitted]

22. These principles are of course well-established, although not always easy to apply to the facts of particular cases, and I have drawn on my summaries of those principles in Re Tetbury Pty Ltd [2017] NSWSC 37 and Re Rockwall Homes Pty Ltd [2017] NSWSC 223 for the summary that appears above.

Whether a serious question to be tried is established that the debt is not due and payable by reason of a breach of cl 4 of the Deed

23. Creata seeks to set aside the Demand on the basis, first, of an alleged breach of cl 4 of the Deed arising from the conversation set out in Mr Henderson’s affidavit to which I referred in paragraph 7 above. Mr Henderson submits, in his affidavit, and Creata contended that, that conversation or the matters referred to in it gave rise to serious questions whether Mr Faull had breached cll 4 and 6 of the Deed which are said to support a genuine dispute as to the amount claimed in the Demand.

24. Clause 4 of the Deed provided for confidentiality and, relevantly, that Mr Faull will not (unless required by law or to enforce the Deed):

“(i)   use any trade secrets or Confidential Information for any purposes or

(ii)   disclose any trade secrets or Confidential Information to any person including, without limitation any client of Creata or client of any Group Entity (“Client”), any supplier of goods and services to Creata or any Group Entity (“Supplier”) and any employee of Creata, any employee of any Group Entity, any employee of any Client or any employee of any Supplier.”

That clause prohibits disclosure of trade secrets or Confidential Information (as defined) “to any person” and then identifies several categories of person. The term “Confidential Information” was then defined, at least to some extent, by a sprawling clause as follows:

“[Mr Faull] acknowledges that during the term of his employment, he had access to and became acquainted with proprietary trade secret information belonging to Creata, Group Entity, Client and Supplier including, without limitation, information concerning their organization, business and affairs of Creata, Group Entity and any Client and Supplier, Client/Customer lists, Member lists, Supplier lists, pricing information, profit margins, referral source lists, vendor services lists, Client presentations [actual and proposed], sales and financing projections, budget Information and procedures, accounting and financial records, policy and procedure manuals, industry contacts, computer software, computer programs, techniques of operation, employee compensation and financial structure, strategies of any kind or nature, and marketing, promotion, development or acquisition plans [whether past, current, future or potential] (“Confidential Information”).”

25. By cl 4(f) of the Deed, Mr Faull acknowledged that if he is in breach of the clause, then:

“Creata’s obligations regarding the making of the Payment pursuant to this Deed and the payment by Creata Macao Commercial Offshore Limited pursuant to the Settlement Deed shall cease upon Creata becoming aware of such breach and further the Employee shall be obliged to repay to Creata any and all monies paid by Creata to [Mr Faull] pursuant to this Deed.”

No submission was made and I need not address any question of whether that clause may amount to a penalty at law or in equity.

26. Mr Sulan submits that the conversation with the third party to which Mr Henderson deposed, and to which I referred in paragraph 7 above, was in the nature of second hand hearsay (although it was admitted into evidence over objection given the nature of this application) in that A (Mr Faull) is alleged to have said something (which, I interpolate, is largely unidentified) to B (the third party) which the third party is alleged to have conveyed (I interpolate, in the most general terms) to C, Mr Henderson. There may be a question whether that conversation is strictly of that character, where the evidence is not led to establish the truth of what Mr Faull is alleged to have disclosed to the third party (which is not identified) but only that he disclosed it. Even if the evidence is not strictly of that character, it has the difficulty identified by the unanimous High Court in Lee v R [1998] HCA 60; (1998) 195 CLR 594 at [34]–[35] (to which Mr Sulan referred), where the Court referred to the Law Reform Commission’s observation that “secondhand hearsay is generally so unreliable that it should be inadmissible except where some guarantees of reliability can be shown together with a need for its admissibility” and observed that (as the Law Reform Commission had pointed out and the Court approved):

“where A gives evidence of what B said that C had said, the honesty and accuracy of recollection of B is a necessary link in the chain upon which the probative value of C’s statement depends. Estimating the weight to be attached to what C said depends on assessing B’s evidence about it.”

27. Mr Sulan submits that if Mr Henderson’s evidence as to this matter was admitted (as it has been), it should be found that the evidence does not have sufficient weight to give rise to a genuine dispute. Mr Sulan also points out that the third party was not called to give evidence and there was no corroborating documentary or other evidence of the conversation or alleged breaches of confidence. I do not neglect, in that respect, the fact that the Court of Appeal gave little weight to the absence of corroborative evidence in Britten-Norman above. Mr Sulan also submits that the matters said to have been divulged by Mr Faull to the third party are so imprecise and ambiguous that they could not be said to give rise to a genuine dispute as to a breach of cl 4 of the Deed; that there is no evidence that the fact of the contract between Creata and McDonald’s or its date for renewal was confidential; that there is no evidence as to the content of the “certain information” that Mr Faull is alleged to have disclosed to the third party; and that some information about a company’s tax affairs would not be confidential in character.

28. It seems to me that the matters conveyed by the third party to Mr Henderson are not such as to give rise to a serious question warranting further investigation as to whether there was a breach of cl 4 of the Deed or a genuine dispute as to the debt claimed in the Demand. So far as it is alleged that the third party informed Mr Henderson that the McDonald’s contract was coming up for renewal, or was an important part of Creata’s business, there is no evidence that those matters were confidential in character that could support a serious question to be tried as to breach of confidentiality in that respect. Mr Henderson’s conclusory statement that the “Information” (as vaguely defined in his affidavit) was not public knowledge was admitted with a limiting order under s 136 of the Evidence Act as a submission only, and that submission has no evidentiary support. It seems to me that there is no basis to infer, absent admissible evidence of that matter, that there is a serious question to be tried that the information that a contract between Creata and McDonald’s was coming up for renewal or was an important part of Creata’s business was confidential.

29. The specific content of any information that Mr Faull is alleged to have shared with the third party, about the topics of Creata’s and Ms Rosenhain’s “tax and business and affairs”, was not identified in the conversation between the third party and Mr Henderson to which I referred in paragraph 7. Mr Henderson’s assertion that the “Information” (as defined in his affidavit) or Ms Rosenhain’s tax affairs were not public knowledge was admitted with a limiting order under s 136 of the Evidence Act as a submission only, and does not provide an evidentiary basis for a claim as to confidentiality of the unidentified information that is alleged to have been disclosed or for breach of cl 4 of the Deed in that respect. I recognise that the third party’s threat to disclose that unidentified information to taxation and law enforcement authorities and McDonald’s in that conversation may have implied that they did not or might not already know that information, but that threat could equally have been made if no such information had not been shared with the third party in the first place, or any such information was already publicly known and the third party was simply lying or mistaken. The question whether the unidentified information allegedly shared by Mr Faull about Creata’s or Ms Rosenhain’s tax and business and affairs was confidential must otherwise depend upon the character of that information which is not identified. It seems to me that an inference of breach of confidentiality cannot be drawn, even to the relatively low level necessary to establish a serious question to be tried, from these matters.

30. Ms Foda sought to answer the difficulty that Mr Henderson’s assertion of the confidentiality of the relevant information was not admitted as evidence of the fact, but merely a submission, by pointing to the breadth of the definition of “Confidential Information” in cl 4(c) of the Deed. Ms Foda submitted, in answer to a question which I asked in the course of submissions, that it was arguable that that clause extended beyond “proprietary trade secret information” to information that was not confidential or not proprietary or not a secret (T24). I do not accept that that construction of the clause is seriously arguable. The clause defines “Confidential Information” as “proprietary trade secret information” and then gives examples of matters that are included within that category. It does not seem to me that the inclusions within the category of “proprietary trade secret information” could, on any arguable reading of the clause, extend to information that was not proprietary or a trade secret or at least confidential. In particular, it does not seem to me that there is any arguable basis for reading the definition of “Confidential Information” as extending, as Ms Foda suggested, to any matter relating to Ms Rosenhain’s tax and business and affairs, or Creata’s tax and business and affairs (T24), whether confidential or not.

31. I also recognise that, as the High Court pointed out in Lee v R above, the cogency of the evidence of what the third party said to Mr Henderson, as to the unidentified information that Mr Faull is alleged to have shared with him, depends upon the question whether the third party was or was not telling the truth. It seems to me that Mr Henderson’s evidence provides no evidentiary basis for any inference, or any serious question to be investigated as to, the truth of the third party’s statement. Mr Henderson’s evidence of the conversation goes no further than to indicate that a third party said something, which may have been true or may have been false, and Mr Henderson chose to proceed on the basis that it may have been true by withdrawing the creditor’s statutory demand issued to SAF Foods. Unless it were assumed, without any adequate evidentiary basis, that the third party’s statement was true and also that either the information as to the McDonald’s contract was not in the public domain or that the “certain information”, the content of which is not disclosed, as to Creata’s and Ms Rosenhain’s tax and business and affairs was also confidential, then no serious question for investigation and no genuine dispute is established on this basis. For these reasons, I am not satisfied that a genuine dispute has been established in respect of any breach of cl 4 of the Deed.

32. I have regard, in reaching this view, to the observations in the appellate authorities, including Malec Holdings and Ligon 158, that emphasise the importance of determining whether the dispute or offsetting claim has a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion; the need for sufficient factual particularity to exclude the merely fanciful or futile; the importance of a rigorous curial approach to the effective operation of the statutory scheme and the need to guard against setting the threshold for setting aside a statutory demand too low where that is liable to defeat the legislative purpose of the section. It seems to me that, as Mr Sulan pointed out, the utility of the creditor’s statutory demand procedure would be substantially undermined if a creditor’s statutory demands could be set aside on evidence of the kind led by Creata in this case. If a creditor’s statutory demand could be set aside by no more than a claim that a third party had asserted the fact of conduct that might or might not undermine the debt claimed, depending on whether that third party’s assertion was true and on what had in fact occurred, then the possibilities for an application to set aside a creditor’s statutory demand would be limited only by, I hesitate to say, a third party’s and an applicant’s creativity.

33. Mr Sulan also advanced two other submissions as to matters that strictly need not be determined given the conclusion that I have reached above. First, Mr Sulan submitted that, as a matter of construction, Creata cannot rely on a past breach of cl 4 of the Deed to trigger the right in cl 4(f) of the Deed, which applies only where Mr Faull, is “in breach” of the Deed. I do not consider that that contention is so clear as to displace a genuine dispute arising from cl 4 of the Deed, if it had otherwise been established. Second, Mr Sulan advanced submissions to seek to undermine the cogency of Mr Henderson’s evidence which it would not be appropriate to determine in an application of this kind, and as to election, which it is also not necessary to determine in this application. Mr Sulan points out that the alleged conversation between Mr Henderson and the third party on 26 June 2015, to which I referred in paragraph 7 above, occurred before the second instalment payment under the Deed made by Creata on 11 January 2016 and some 20 months before Creata first alleged a breach of the Deed by Mr Faull, after Creata’s receipt of the Demand. Mr Sulan also points out that Mr Henderson did not take up the allegation with Mr Faull until long after the suggested conversation with the third party, and also after Creata had made the second instalment payment to Mr Faull in January 2016. Mr Sulan also submits that the payment of a further instalment payment in January 2016, after Mr Henderson learned of the alleged breach of cl 4 of the Deed, would amount to an election, such that Creata could no longer terminate the Deed and would be limited to a right in damages. While these submissions might ultimately be successful at a hearing on the merits, it does not seem to me that they would have been sufficient to exclude a genuine dispute, had they otherwise been established.

Whether a serious question to be tried is established that the debt is not due and payable by reason of a breach of cl 5 of the Deed

34. Creata also contends that there is a serious question to be tried as to an alleged breach of cl 5 of the Deed in order to establish a genuine dispute as to the amount claimed in the Demand. That clause is headed “non-compete” and provides that Mr Faull:

“… agrees that he will not, at any time, within a period of 5 years from the date of this Deed, for any reason, be interested in or engage in any way, directly or indirectly and whether as a principal, employee, agent or shareholder or otherwise howsoever in any enterprise carrying on business similar to or in competition:

(a)   with any Business carried on by Creata or Creata associated and related entities; or

(b)   with any Business carried on by a Client or Supplier.

For the purposes of this Clause 5, “Business” shall mean and include the core business of Creata (being a promotional and Product supply business) and shall also include the business of all Clients, Suppliers and administrators including competitors of Creata (by way of example [omitted]) and any business relating to the growing, processing, sale and distribution of macadamia nuts, oils and products including cosmetics.”

35. Creata contends that a serious question arises as to an alleged breach of this clause by Mr Faull, on the basis that Ms Rosenhain has supported medical research and commercialisation work undertaken by a Professor Thomas Borody, who is a gastroenterologist and medical researcher; that Professor Borody’s initial research projects extended to the treatment of several diseases, commercialised through a group company of Creata known as CIPAC Ltd (“CIPAC”); and that the scope of the agreement with Professor Borody was varied since 2010 to extend to research into therapies for cancers. It is common ground that Mr Faull has, though a company associated with him, been engaged as a consultant to Biosceptre (UK) Ltd (“Biosceptre”) which undertakes research and development into treatment of cancer. Mr Henderson contends, in evidence that was also admitted subject to a limiting order under s 136 of the Evidence Act as a submission only, that Biosceptre is in competition with CIPAC and that Mr Faull is therefore in breach of cl 5 of the Deed.

35. Mr Faull responds, by evidence also admitted with a limiting order under s 136 of the Evidence Act, as submission only, claiming that his contract with Biosceptre was approved by its board of directors, on which he contends Mr Michael Lovett, who he says is a friend of Ms Rosenhain, sat as Creata’s representative. In his second affidavit, Mr Henderson in turn led further evidence responding to Mr Faull’s contention that Creata had, through the participation of Mr Lovett on the board of Biosceptre, consented to Mr Faull’s involvement with Biosceptre, and to establish that Biosceptre and CIPAC were competing entities. By a third affidavit dated 11 July 2017, Mr Henderson responded to further documents on which Mr Faull had relied, in correspondence between the parties’ solicitors, to suggest that Creata had approved, or known of and acquiesced in, Mr Faull’s arrangements with Biosceptre. It is not necessary to address this evidence given the findings that I reach below.

36. Ms Foda contended (T26) that, once cl 5 of the Deed is breached, then the obligation to pay no longer arises under cl 2(c) of the Deed. I recognise that the Court, in dealing with an application to set aside a creditor’s statutory demand under s 459G of the Corporations Act, is not compelled to and will ordinarily not determine questions of construction of documents: Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 at [45]–[46]; Infratel Networks Pty Ltd v Gundry’s Telco and Rigging Pty Ltd above; Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 at [22]. However, it does not follow from that proposition that the Court should treat a proposition as arguable in such an application where it has no apparent basis under the relevant contract.

37. I understand that this argument may draw on the introductory words of cl 2(c) of the Deed which provide that Creata agrees to pay the relevant amounts:

“[i]n consideration of [Mr Faull] agreeing to enter into the Settlement Deed and entering into this Deed generally but specifically giving the release as contained in Clause 3 hereof and assuming the obligations referred to in Clauses 4, 5 and 6 of the this Deed.”

It does not seem to me that there is any serious basis for a contention that provision is anything other than an identification of the consideration that Mr Faull gave for the obligations assumed by Creata, namely the assumption of the obligations referred to in the relevant clauses which occurred when Mr Faull entered the Deed, rather than conditioning Creata’s payment obligations under the Deed upon Mr Faull’s compliance with those obligations.

39. It seems to me that the proposition that, once cl 5 of the Deed is breached, then the obligation to pay no longer arises under cl 2(c) of the Deed is not seriously arguable. Clause 2(c) of the Deed imposes an obligation to pay which is not expressly conditioned on compliance with the obligations in cl 5 of the Deed, and cl 5 of the Deed does not contain a similar acknowledgement of the consequence of breach to that contained in cl 4(f) of the Deed. In my view, the contention that the alleged breach of that clause gives rise to a genuine dispute as to Creata’s obligations to make payments under the Deed is so weak that it does not give rise to a basis to set aside the Demand. It is therefore not necessary to determine whether Mr Faull’s involvement with Biosceptre could give rise to a contravention of cl 5 of the Deed, where it is not seriously arguable that Creata’s obligation to make payments under cl 2(c) of the Deed is conditional upon Mr Faull’s compliance with cl 5 of the Deed. No genuine dispute as to the debt claimed in the Demand arises on this basis.

Whether a serious question to be tried is established that the debt is not due and payable by reason of a breach of cl 5 of the Deed

40. Creata relies, third, on a contention that there is a serious question to be tried as to an alleged breach of cl 6 of the Deed in order to establish a genuine dispute as to the amount claimed in the Demand. That clause is substantially briefer than cll 4 and 5 and provides simply that:

“Neither Party will make disparaging remarks about the other Party.”

41. Ms Foda made clear, in reply, that the disparaging remarks relied on to support an alleged breach of cl 6 of the Deed are said to arise from what was said by Mr Faull to the third party, to the extent it emerges from the conversation to which I referred in paragraph 7 above. The information in that paragraph that the McDonald’s contract was coming up for renewal or was an important part of Creata’s business is not disparaging of Creata. The third party did not identify the content of the “certain information” that he claimed Mr Faull had shared as to Creata’s and Ms Rosenhain’s tax and business and affairs and there is no evidentiary basis for a suggestion that that information (as distinct from the threat made by the third party) was adverse to Creata or Ms Rosenhain. It does not seem to me that that inference can be drawn from the fact that the third party threatened to share information with the various regulatory bodies, because that threat could equally have been made, albeit in a misleading way, even if information had not in fact been shared by Mr Faull or, if shared, had not been adverse to either Creata or Ms Rosenhain. In any event, there is nothing in the Deed that makes Creata’s payment obligations contingent on compliance by Mr Faull with cl 6 of the Deed, as distinct from leaving Creata to its right to damages for any breach of that clause.

42. In my view, it is not seriously arguable that anything conveyed by Mr Faull to the third party, to the extent it can be inferred from the conversation referred to in paragraph 7, amounts to disparagement of Creata or impugns Mr Faull’s right to payment under the Deed and no serious question to be tried is established on this basis.

Whether an offsetting claim is established

43. Creata also seeks to set aside the Demand under s 459H(1)(b) of the Corporations Act on the basis that Creata had an offsetting claim to repayment of the amount of US$1.8 million that it had already paid under the Deed. An offsetting claim, for the purposes of s 459H(1)(b) of the Corporations Act, is the amount of a claim that a company has against a person who served a creditor's statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as to which the demand relates. If the Court is satisfied that a company has an offsetting claim, then the Court is required to calculate the substantiated amount of the demand by deducting any offsetting claim from the admitted amount of the debt. An offsetting claim is established if there exists a "serious question to be tried", or an "issue deserving of a hearing", as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; 120 ALR 173; 12 ACSR 341. I otherwise summarised the relevant principles relating to an offsetting claim in Re Pages Sales Pty Ltd [2016] NSWSC 616 and again in Re Datlas-Rahme Construction Pty Ltd [2016] NSWSC 1833 and need not repeat that summary here.

44. Creata’s offsetting claim depends on the proposition that, by reason of a seriously arguable breach of cll 4, 5 or 6 of the Deed, Mr Faull is obliged to repay amounts paid to date under the Deed. That argument could not succeed unless a seriously arguable claim for a breach of cll 4, 5 or 6 of the Deed were established, and therefore does not add anything to Creata’s application to set aside the Demand on the basis of a genuine dispute. Where a serious claim warranting further investigation as to these matters has not been established for the reasons noted above, then an offsetting claim arising from the alleged breaches of these clauses has also not been established.

Whether the Demand should be set aside for some other reason

45. In opening written submissions, Ms Foda noted that Creata relied, in the alternative, on s 459J(1)(b) of the Corporations Act, without disclosing the matters of fact or law which were said to support reliance on that section. It became apparent in the course of the hearing that Creata relies on “some other reason being the breaches of the Deed” by Mr Faull to set aside the Demand on that basis. That section permits the Court to set aside a demand where there is some other reason for it to do so. The Court's power to set aside a demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746; Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229; Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466 at [16]; Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236 at [24].

46. Creata’s claim under s 459J of the Corporations Act appears to amount, in substance, to a claim that a party who is, or is alleged to be, in breach of contract or in breach of a duty of confidentiality may not serve a creditor’s statutory demand, and a creditor’s statutory demand served by such a party should be set aside for some other reason. Creata did not draw attention to any authority establishing such a proposition, and the case law to which I have referred above does not establish such a proposition. That claim is also not established.

Orders and costs

47. Accordingly, the Originating Process filed by Creata on 17 February 2017 should be dismissed with costs.

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Decision last updated: 22 August 2017