In the matter of JF Essential Power Pty Limited

[2018] NSWSC 435

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of JF Essential Power Pty Limited [2018] NSWSC 435
Hearing dates:	16 March 2018
Decision date:	10 April 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The creditor’s statutory demands issued by each of Link Marketing Services Pty Ltd and KFT Nominees Pty to JF Essential Power Pty Ltd are set aside.
Catchwords:	CORPORATIONS – winding up – application to set aside creditor’s statutory demand – where there is a serious question to be tried as to whether any debt owed was due and payable on demand – whether there is a serious question as to whether alleged loan made by third party to debtor was validly assigned to issuer of statutory demand – whether creditor’s statutory demand should be set aside under s 459H or s 459J of the Corporations Act 2001 (Cth)
Legislation Cited:	- Conveyancing Act 1919 (NSW) s 12 - Corporations Act 2001 (Cth) ss 459E, 459G, 459H, 459J - Evidence Act 1995 (NSW) s 136
Cases Cited:	- Anning v Anning [1907] HCA 13; (1907) 4 CLR 1049 - Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd [2008] NSWSC 3 - Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 - Condor Asset Management Ltd v Excelsior Eastern Ltd (2005) 56 ACSR 223 - Corin v Patton [1990] HCA 12; (1990) 169 CLR 540 - Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 - First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 - Ku v Song [2007] FCA 1189; (2007) 63 ACSR 661 - MNWA Pty Ltd v Deputy Commissioner of Taxation [2016] FCAFC 154; (2016) 117 ACSR 446 - NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 16 ACLC 957 - Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 - Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746 - Re Bastow Civil Constructions Pty Ltd [2017] NSWSC 934 - Re Beechworth Land Estates Pty Ltd (Admin Apptd) and Griffith Estates Pty Ltd (Admin Apptd) (No 3) [2015] NSWSC 733; (2015) 298 FLR 233; (2015) 106 ACSR 495 - Re Erma Properties Pty Limited [2017] NSWSC 1748 - Re Longjing Pty Ltd [2017] NSWSC 1534 - Re MK Group Phoenix Pty Ltd [2014] NSWSC 1467 - Re Tuffrock Pty Ltd [2015] NSWSC 738 - Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 - Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 - Rohan Trading Co Pty Ltd v Glengor Pastoral Co Ltd [2003] NSWSC 1265 - Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 - TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67
Category:	Principal judgment
Parties:	Proceedings 2017/276032 JF Essential Power Pty Limited (Plaintiff) KFT Nominees Pty Limited (Defendant)   Proceedings 2017/276039 JF Essential Power Pty Limited (Plaintiff) Link Marketing Services Pty Limited (Defendant)
Representation:	Counsel: D C Eardley (Plaintiff – both proceedings) G Stapleton (Defendant – both proceedings)   Solicitors: Hammond Nguyen Turnbull (Plaintiff – both proceedings) Osbornes (Defendant – both proceedings)
File Number(s):	2017/2760322017/276039

Judgment

1. By Originating Process filed on 11 September 2017, JF Essential Power Pty Ltd (“JFEP”) applies to set aside a creditor’s statutory demand dated 18 August 2017 (“LMS Demand”) served by Link Marketing Services Pty Ltd (“LMS”) in the amount of $80,698.28, on the basis that there is a genuine dispute under s 459H(1)(a) of the Corporations Act 2001 (Cth) or under s 459J of the Corporations Act. Also by Originating Process filed on 11 September 2017, JFEP applies to set aside a creditor’s statutory demand (“KFT Demand”) dated 18 August 2017 served by KFT Nominees Pty Ltd (“KFT”) in the amount of $52,338, on the basis that there is a genuine dispute as to the amount of the debt for the purposes of s 459H(1)(a) of the Corporations Act or alternatively under s 459J of the Corporations Act.

2. The two applications were heard together, with the evidence in one to be the evidence in the other. I will first address the factual background to the application, then the evidence on which the parties relied in respect of both applications and then the parties’ submissions and a determination in respect of the proceedings involving LMS and KFT in turn.

Factual background

3. By way of background, JFEP is a company associated with Mr Bradley Klevansky, who was in a de facto relationship with Ms Justine Klevansky from 2003. LMS and KFT are companies associated with Mr Basil Klevansky, who is Ms Justine Klevansky’s father and Mr Bradley Klevansky’s father-in-law. I will, without any discourtesy, refer to Mr Bradley Klevansky as “Bradley”, to Mr Basil Klevansky as “Basil” and to Ms Justine Klevansky as “Justine” in order to avoid confusion. KFT holds 40% of the shares in JFEP. The relationship between Bradley and Justine has broken down and she moved out of their home in January 2017, and it is common ground that she and Bradley were subsequently or are party to family law proceedings.

4. It is common ground that Basil is a successful businessman and assisted Bradley in establishing JFEP and that Bradley’s skills are as an electrician and that he had, and possibly has, limited skills in company administration. It appears to be common ground that, within the context of the family relationship arising from Bradley’s relationship with Justine, companies associated with Basil provided moneys to JFEP or to third parties in respect of JFEP’s business, and staff employed by Basil’s companies managed banking and accounting functions for JFEP. Although reference was made, in the course of the hearing, to a number of descriptions of transactions contained in JFEP’s accounting records, the weight to be attributed to those descriptions is reduced by the fact that they reflect the understanding of Basil or his staff as to the relevant transactions and there is little evidence that Bradley’s agreement to those descriptions had been sought, at least in respect of any specific transaction as distinct from a broader arrangement.

5. On 8 June 2017, solicitors for LMS and KFT demanded that JFEP repay advances made to LMS in the amount of $80,698.28 and to KFT in the amount of $62,338. The creditor’s statutory demands in issue in these proceedings were subsequently issued on 18 August 2017. The amount claimed by KFT in the KFT Demand was reduced to $52,338 from the amount originally claimed in that letter.

Application to set aside the LMS Demand

6. The LMS Demand claimed payment of the amount of $80,698.28, as described in the schedule to that demand, and was verified by Basil’s affidavit dated 18 August 2017. The amount of $80,698.26 was described in the schedule as:

“Cash or electronic funds transfer payments by [LMS] to [JFEP] or third parties by way of loans by [LMS] to [JFEP] which were made on or about the dates and in the sums set out below.”

A table in turn referred to a payment of $823.28 to SDRO on 1 January 2015; a loan for operating expenses in the amount of $20,000 on 5 February 2015; a payment to a third party of $800 on 10 February 2015; loans of $12,500, $200, $15,000 and $20,000 on 7 April, 11 April, 1 June and 7 June 2016; a payment to another third party on 6 December 2016 of $1,375; and a loan of $10,000 on 9 December 2016.

7. Basil’s affidavit verifying the LMS Demand in turn described the debts in the same manner as did the LMS Demand and stated that he, on behalf of LMS, had the dealings with JFEP that gave rise to the debt and had inspected LMS’s business records in relation to JFEP’s account with LMS. He confirmed that the total of the amounts of the debts were due and payable by JFEP and that he believed there was no genuine dispute about the existence or amount of any of the debts.

8. Bradley addresses the particular transactions that are subject of the LMS Demand in paragraph 28 of his affidavit dated 11 September 2017 filed in support of the application to set it aside. His evidence, in respect of the payment to SDRO, which appears to be related to a traffic fine, is that he does not know what the amount relates to and denies that amount is owed and that he did not direct Basil or anyone else to make the payment. He claims that the amount of $20,000 as at 5 February 2015 was a deposit for Basil’s office fitout; that the amount of $800 relates to a data cabinet that LMS purchased and is not a loan; and that several other transactions appear in the bank statements, but he was not aware of them until he recently reviewed the bank statements. Paragraph 29 of Bradley’s affidavit refers to a debit transaction on 10 August 2013 labelled “loan repayment to LM” in the amount of $6,000 and he also claims that he did not authorise that payment to be made. The relevant bank statement refers to a “loan repayment” and does not identify LM as the party to which it was paid.

9. Bradley also led evidence in his affidavit dated 11 September 2017 in the LMS proceedings of a conversation with Basil in which Bradley claims to have asked about the money going in and out of JFEP and to have been told not to worry about the money or the descriptions which were just for “tax purposes”. Basil denied that conversation in cross-examination. It is not necessary or appropriate to reach findings of credit in a summary application of this kind, although I recognise that some contemporaneous correspondence is consistent with a characterisation of the transactions as loans. Bradley also expressed a belief, admitted as evidence of his understanding only, that the payments were injections of capital as Basil’s contribution to the business and were noted as “loans” for Basil’s tax purposes (Bradley 11.9.17 [21]). Bradley’s evidence was that he had never seen, signed or discussed a loan agreement with Basil, KFT or LMS, and it is common ground that no written loan agreement exists. Bradley also referred to an email requesting Basil and his staff to stop accessing JFEP’s accounting software and bank accounts, sent in January 2017, although that document was not tendered, and to his realisation that transactions were still occurring in mid-2017. Little turns on that issue when the alleged debts in issue arose in a prior period.

10. LMS and KFT both relied on Basil’s affidavit dated 2 November 2017 which set out the background to KFT’s investment in JFEP as trustee for a family trust. Basil referred to aspects of the arrangements between the companies, in evidence which was partly admitted subject to limiting orders under s 136 of the Evidence Act 1995 (NSW) as his understanding only, but also referred to a conversation with Bradley, in around 2013, to the effect that:

Basil:   “I will set up the company and own 50% of the shares so that I can assist you and keep an eye on the business as you have no experience running a company.

I will loan funds to the company interest free and when the loans are repaid I will hand the shares over to Justine.”

Bradley:   “OK.”

11. Basil denied that there were tax benefits to be obtained from his companies’ lending JFEP money and referred to the circumstances in which he transferred 10% of the shares originally issued to JFEP to Justine. He also referred to later requests for funding by Bradley and to Basil’s having responded that he would organise for money to go in “as loans to JFEP”. He referred to several payments of money to JFEP which he characterised as loans. In cross-examination, permitted by leave, Basil had little recollection of the circumstances of the relevant transactions, although that is perhaps not surprising in circumstances that he runs a substantial business, the amounts involved were not substantial, at least in relative terms, and the chief financial officer of LMS, Ms Lau, and accounting staff appear to have dealt with the detail of a number of transactions. Basil also refers to a number of conversations with Bradley in respect of repayment of the “loans” and to an arrangement between JFEP and a third party which funded some payments to JFEP, and to documentation explaining a number of the transactions referred to in the LMS Demand.

12. Basil accepted in cross-examination that he and his staff were responsible for managing the books and records of JFEP and that JFEP’s bank account was operated by his employees who would deposit and take money out of JFEP, under instructions from him, unless the transactions were signed or authorised by someone else (T25). He also accepted that any loan arrangement was not recorded in a written document and that interest was not to be charged (T26). He conceded in cross-examination that he did not have a “loan agreement” in respect of a number of the challenged transactions (T32), although I understood that answer to be directed to the non-existence of a written loan agreement, rather than to his accepting the non-existence of the informal arrangement of which he had given evidence. He squarely rejected the proposition that money provided to JFEP was for the purpose of injecting capital into the business or was a gift to assist Justine and Bradley with the operation of the business (T36).

13. LMS and KFT also relied on Ms Lau’s affidavit dated 2 November 2017. Ms Lau’s evidence in cross-examination was that she was involved in transferring monies into JFEP in respect of LMS. Her evidence was that she would have been informed by her team when JFEP required money to meet liabilities, for example for supply payments or tax liabilities; Bradley would usually ask for payment to be made to suppliers; and Basil would have instructed her to “loan money” from LMS into JFEP’s bank account (T53). Ms Lau had not ever seen a loan agreement between JFEP and LMS and she had no knowledge of resolutions passed or minutes recording a loan by LMS to JFEP (T53). Ms Lau acknowledged in cross-examination that, as between LMS and JFEP, the date for repayment of any loan “wasn’t defined” and her understanding was that JFEP would repay that amount when it “can afford to repay the money, when JF[EP]’s cash position goes into positive” (T55). I will return to the significance of that matter below.

14. Ms Lau’s evidence in cross-examination was also that she authorised some, but not all, of the transactions which were the subject of the LMS Demand (T56); some of those transactions were not discussed with Bradley, although he is the director of JFEP, because LMS was handling JFEP’s accounts and “Bradley gave us the authority to manage his books and when money is needed” (T57); and Ms Lau and her team had complete control of JFEP’s books and records and bank accounts and operated under Basil’s instructions most of the time (T57). Ms Lau understood the transfer of monies from LMS to JFEP would have been creating liabilities, but largely did that without discussing it with Bradley, and would have expected Basil to have discussed that with Bradley, although she did not know whether he had done so (T58).

15. In submissions, Mr Stapleton, who appears for LMS and KFT, took me to the bank statements recording the relevant payments (Ex D1, pp 238, 239, 248, 279, 382), which indicate a pattern of payments being made at a time that there were minimal balances in the relevant bank account and immediately before wages or other third party payments were made from that account. In a hearing on the merits, a Court might readily infer that the relevant payments, including the payment that Bradley attributes to Basil’s office fitout, were made by LMS to JFEP to put in it funds to make those payments. It does not follow, however, from the fact that the payments were made for that purpose that any such loan was payable on demand.

16. There is some contemporaneous correspondence that supports the character of the transactions as “loans”, including an email dated 1 December 2016 from Bradley to accounting staff indicating that he was “going to ask Basil if he can lend me the money” to pay a particular invoice and an email dated 5 December 2016 from Bradley to Basil attaching the invoice and indicating that:

“I don’t like asking for loans but I have no choice your help would be most appreciated.”

That was followed by an instruction by Basil to his staff to pay the invoice urgently, and that appears to have been done. By email dated 24 March 2017 from Ms Lau to Bradley, Ms Lau in turn noted that JFEP had made little revenue in the last three months and indicated that:

“I need to remind you that JF has an overall liability of $116K owing to Basil/Link and we expect JF to earn revenue at a reasonable pace so it can pay down those liabilities.”

By a further email dated 30 March 2017, Ms Lau advised that a payment from a third party had been transferred to Link to “partially repay loan owed”, noted that she had not received a response to the earlier email and requested an update “in regards to generating revenue and repaying Link”.

17. By a further affidavit dated 4 December 2017, Bradley responded to Basil’s affidavit dated 2 November 2017, and took issue with Basil’s evidence, inter alia, that Basil had offered to “loan money to the company” although he accepted that Basil would, from time to time, say that he would “get the money” when JFEP needed money to pay suppliers. It is not necessary or appropriate to reach a credit finding as to that dispute in a summary application of this kind.

18. The grounds identified in the Originating Process, on which JFEP seeks to set aside the LMS Demand under s 459H of the Corporations Act are relevantly that JFEP does not owe a debt to LMS; the monies advanced by LMS to JFEP were advanced for the purpose of providing capital to JFEP and represent an investment in JFEP by LMS; the monies advanced to JFEP by LMS were advanced as a gift to it by LMS; or the debt claimed by LMS is not a debt on which LMS may sue to recover. I understand the last ground to raise questions whether the relevant arrangements involved an intention to enter legal relations, or otherwise had contractual effect and whether any debt was presently due and payable. It is common ground between the parties that the application to set aside the LMS Demand was served within the twenty-one day period within which it was required to be served under s 459G of the Corporations Act.

19. The applicable legal principles are well-established. The Court has power to set aside a statutory demand under s 459H(1)(a) of the Corporations Act where there is a genuine dispute between a company and the issuer of the demand about the existence or amount of a debt to which the demand relates. Mr Eardley, who appears for JFEP, refers to well known authorities as to the scope of that jurisdiction, including Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court of Australia 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. Mr Eardley also refers to Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], where Barrett J (as his Honour then was) observed that:

“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 when any case apparently available to be advanced against the Company seems stronger.”

20. In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], Dodds-Streeton JA observed that a company which seeks to establish a genuine dispute or offsetting claim:

“… is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. … [I]t is not necessary for the company to advance, at this stage, a fully evidenced claim. Something ‘between mere assertion and the proof that would be necessary in a court of law’ may suffice.”

21. In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601, the Court of Appeal, in summarising the case law applicable to the threshold to demonstrate an offsetting claim, conducted a comprehensive review of the cases referable to establishing whether a genuine dispute was established. Their Honours there emphasised (at [36]) that the court must be satisfied that there is a serious question to be tried or an issue deserving of a hearing or a plausible contention requiring investigation but also emphasised that the evidence necessary for that purpose "need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable". Their Honours 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 also 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, not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim."

22. I also summarised the applicable principles in Re Wollongong Coal Ltd [2015] NSWSC 1680; (2015) 110 ACSR 134 at [9]–[22] and in Re Erma Properties Pty Limited [2017] NSWSC 1748 on which I have partly drawn for the summary that appears above. I proceed on the basis that the test for a genuine dispute is not a particularly demanding one and the Court would not embark upon any extended inquiry as to the claims in determining whether a genuine dispute exists.

23. The Court may also set aside a creditor’s statutory demand under s 459J(1)(b) of the Corporations Act if it is satisfied that there is some other reason that the demand should be set aside. Mr Eardley referred to my decision in Re Tuffrock Pty Ltd [2015] NSWSC 738 in respect of the position where a creditor’s statutory demand was issued in respect of a debt that was not then due for payment. I there held that, where there was a genuine dispute as to whether the amount claimed in the relevant demand was due and payable, by reason of an arrangement in that case that a loan would only be repayable when the company considered it appropriate to make repayment having regard to its financial and operating position, the creditor’s statutory demand should be set aside under s 459J(1)(b) of the Corporations Act. I there summarised (at [13]) the authorities as to the position where a creditor’s statutory demand was issued in respect of a debt that was not due and payable as follows:

“In NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 16 ACLC 957 Finkelstein J considered that an application to set aside a statutory demand on the ground that a debt was not due and payable was a matter falling within the scope of s 459J(1)(b) of the Corporations Act, and Austin J took the same view in Midland Imports Pty Ltd v Asia Pacific International Pty Ltd above at [27]. In Streetwise v Higgins above at [15]–[19] Master Macready in turn referred to the decision in NT Resorts above and adopted the same approach. I summarised the relevant principles in Re MK Group Phoenix Pty Ltd [2014] NSWSC 1467 at [40] as follows:

“The authorities make clear that a statutory demand that relies on, or includes, a debt that is not yet due for payment may be set aside, although the case law differs as to whether such an order may be made under s 459H or s 459J of the Corporations Act. In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1986) 132 FLR 300; 20 ACSR 746, Bryson J held that the inclusion of debts not yet due for payment at the date of the demand was a defect within the demand under s 459J(1)(a) of the Corporations Act, which would authorise the Court to set aside the demand if it was satisfied that subject substantial injustice would be caused unless the demand was set aside. In NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1988) 153 ALR 359 at 366–367, Finkelstein J considered that the Court could set aside the demand if it was satisfied that a genuine dispute existed as to whether the debt to which the demand related was due and payable, under s 459J(1)(b) of the Corporations Act. Statutory demands have also been set aside when issued in respect of debts that were not due or payable, or where there was a genuine dispute as to whether they were due and payable, in Re Carbon Polymers Ltd [2013] NSWSC 376 and Re Forza Plumbing Systems Pty Ltd [2013] NSWSC 1234.”

24. The summary of those principles in Re MK Group Phoenix Pty Ltd above was cited, with apparent approval, by Gleeson JA (sitting at first instance) in Re Longjing Pty Ltd [2017] NSWSC 1534 at [44]. It is only necessary for JFEP to establish that there is a plausible contention requiring investigation that the debt is not presently due and payable, and it need not establish that matter on the balance of probabilities: MNWA Pty Ltd v Deputy Commissioner of Taxation [2016] FCAFC 154; (2016) 117 ACSR 446 at [131]; Re Longjing Pty Ltd above at [46].

25. Mr Eardley submitted that there is a genuine dispute as to the existence of any loan by LMS to JFEP, as distinct from an investment of capital or a gift. He also submits that any loan was not intended to be legally enforceable, and refers to the possibility that an inter-family transaction would not give rise to a legally binding agreement, because of a lack of consideration or, I should add, a lack of intention to create legal relations. He also submits, relying particularly on Ms Lau’s evidence, that there is a genuine dispute as to when any loan made by LMS to JFEP was repayable, and whether it was repayable before JFEP could afford to repay it. Mr Eardley also submitted, in closing submissions, that the payment of money to JFEP did not establish a debt, where the elements of an agreement between the parties, including an intention to create legal relations and a known subject matter, were not established; that there is a genuine dispute as to the amount of the debt, if there is a debt; that any agreement lacked certainty, including as to repayment date; and emphasised the familial basis of the transaction (T70).

26. Mr Stapleton submitted that there is no genuine dispute in respect of the debt claimed by LMS. He submitted that the evidence establishes that the advances were made; there exists a pattern of repayment of loans consistent with JFEP’s knowledge that the advances were loans to be repaid; and the amounts are due to be repaid. He submits that there is no evidentiary basis for a contention that the monies advanced were capital invested in JFEP, where LMS does not own any shares in JFEP; and he relies on Basil’s evidence that the money advanced was in the nature of loans, not a gift, and the evidence of Ms Lau to similar effect. He submits that LMS can sue to recover the debt, implicitly because it is the subject of a binding legal arrangement and is presently due and payable.

27. Mr Stapleton also points out that Basil denies that the advances were injections of capital into JFEP or gifts to it and that Bradley leads no evidence indicating how any money was to be applied to the issue of shares in JFEP so as to give rise to an investment of capital in JFEP. Mr Stapleton also points, with substantial force, to the pattern of payments to JFEP, on a recurrent basis and shortly before expenditures were required by JFEP, and submits that that pattern and the evidence of at least some repayments by JFEP is inconsistent with those payments being characterised as a capital investment in JFEP. Mr Stapleton also submits that Bradley’s evidence is not sufficient to establish, on the balance of probabilities, that the payments made to JFEP were in the nature of a gift, and that the Court should prefer Basil’s evidence, and also relies on a reference to a liability in JFEP’s financial statements in an earlier year, characterising the transactions as loans. However, the question in this application is not whether JFEP has established that no debt exists, on the balance of probabilities, but whether it has established a genuine question to be investigated, sufficient to warrant setting aside the LMS Demand; and, in determining that matter in a summary application, the Court will not ordinarily reach assessments as to which of two competing accounts of events should be preferred, beyond the extent necessary to determine whether JFEP’s account is plausible or gives rise to a serious question warranting further investigation.

28. I recognise that the evidence suggests that LMS’s claim might well be resolved in its favour at a hearing on the merits. However, the evidence at least establishes a serious question to be tried as to whether any debt owed by JFEP to LMS was due and payable on demand, or (as Ms Lau indicated in cross-examination) was only due and payable when JFEP had the capacity to pay it, and Mr Stapleton fairly accepted in closing submissions that condition would not presently be satisfied. That contention raises matters that are not suitable for determination in a summary application of this kind: compare NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 16 ACLC 957 at 962; Re Longjing Pty Ltd above at [50]. The consequence of setting aside a creditor's statutory demand in that situation is that the parties will ultimately be left to the appropriate course, namely to bring substantive proceedings where both parties can lead evidence, that evidence can be contested, and that Court can ultimately determine those matters that are the subject of the genuine dispute: Re Bastow Civil Constructions Pty Ltd [2017] NSWSC 934 at [3]. For these reasons, the LMS Demand must be set aside.

Application to set aside the KFT Demand

29. The KFT Demand described the amount of the debt as:

“Cash or electronic funds transfer payments by [KFT] to [JFEP] or third parties by way of loans by [KFT] to [JFEP], made on or about the dates below and in the sums set out below.”

A table in turn referred to a loan account as at 6 August 2013 of $5,950; a loan of $25,388 by payment of purchase of a motor vehicle on 19 December 2013; loans of $5,000 on 2 and 13 January 2014; a loan of $11,000 on 30 January 2014 in payment for the purchase of a motor vehicle; loans of $15,000 on 28 February 2014 and 16 June 2014, less repayments to date of $30,000, for a total of $52,338. That Demand was verified by Basil’s affidavit dated 18 August 2017 in similar terms to his affidavit verifying the LMS Demand.

30. Bradley led evidence as to these matters in his affidavit dated 11 September 2017 filed in the KFT proceedings. He indicated that he did not know what the amount of $5,950 recorded as the loan account at 6 August 2013 related to and denied that amount was owed; he refers to a loan to buy a vehicle, but claims to have repaid it by bank cheque which was not led in evidence; and he refers to several other amounts claimed as “loans” and indicates that, on occasion, they appear in JFEP’s bank statements but he does not recall asking Basil for money and did not believe that he needed to obtain funds from Basil at the time. Both Basil and Ms Lau were cross-examined as to the first transaction in relation to the purchase of a motor vehicle, and there was inconsistent evidence as to whether the payment was made by Basil personally, or by KFT, or possibly by a third entity, Link No 2 Pty Ltd (“Link No 2”) to which I will refer below. Bradley also referred, in paragraph 28 of that affidavit, to a repayment of $68,000 made on 6 August 2013, but it is apparent that that repayment related to an earlier advance which is not the subject of the KFT Demand; and to three repayments of $10,000 each made on 6 March 2014, 17 February 2017 and 20 May 2017, which KFT accepts were made.

31. An issue also arises as to whether Link No 2, not KFT, had advanced all or a substantial part of the monies relied in the KFT Demand to JFEP. Basil’s evidence was that, prior to 2016, he controlled another company, Link No 2, which was the trustee of a family trust and which has since been deregistered, and that funds from Link No 2’s bank account were paid to JFEP as loans and the loans under Link No 2 were “transferred” to KFT on 30 June 2015. It appears that matters relating to Link No 2 were managed by Basil’s wife or an external accountant, who did not give evidence in the application. In cross-examination, Basil accepted that there was no formal document for any assignment between Link No 2 and KFT and he did not send a written document to either KFT or JFEP in respect of any assignment of a loan from Link No 2 to JFEP. His evidence in cross-examination as to whether there was any consideration for the transfer of the alleged loans from Link No 2 to KFT was unclear (T42), and there is no other evidence of the payment of any consideration by KFT for the assignment. Basil also accepted in cross-examination that there was no notice of a transfer of debt or assignment of a debt from Link No 2 to KFT to JFEP and the accountants “would have transferred the amount” or taken some other step when instructed to close down Link No 2’s account (T45).

32. Ms Lau’s evidence was also that the loans from Link No 2 were transferred to KFT by journal entries (Lau 2.11.17 [15]) and the accounting records of Link No 2 indicate that at least the claims made in the KFT Demand of $823.28 referable to traffic fines and the claims of $11,000 and $25,388 relating to purchase of motor vehicles originally related to transactions between Link No 2 and JFEP, and record a “[t]ransfer JF[EP] accounts to KFT per B[asil] K[levansky]” in the amount of $36,388 (Lau 2.11.17, Annexure F). Ms Lau’s evidence in cross-examination was also that she was not involved in transferring monies into JFEP in respect of Link No 2 or KFT and she had not ever seen a loan agreement between JFEP and KFT (T53). She did not manage KFT or Link No 2 and she did not know whether there were any such minutes or resolutions passed by KFT in respect of any loan to JFEP (T53). Ms Lau’s evidence in cross-examination was also that the majority of the transactions involving KFT (or more precisely Link No 2) occurred before Ms Lau took up employment with Basil and she could provide no further information about them (T59–60). She had no knowledge as to whether there had been any formal assignment of a debt from Link No 2 to KFT (T61). She accepted in cross-examination, by reference to the financial records of Link No 2, that relevant debts were extinguished in Link No 2, because that company was to be deregistered, and were “journaled across” to KFT, and she believed that that occurred only by journal entry, and did not expect that KFT had paid any consideration for the transfer of the amount of $51,388 from Link No 2 to it (T63). Her understanding was also that the transaction was implemented by a book entry in the books of KFT (T63–64).

33. The grounds identified in the Originating Process, on which the JFEP seeks to set aside the KFT Demand under s 459H of the Corporations Act, are relevantly that JFEP does not owe a debt to KFT; the monies advanced by LMS to KFT were advanced for the purpose of providing capital to JFEP and represent an investment in JFEP by KFT; the monies advanced to JFEP by KFT were advanced as a gift to it by KFT; or the debt claimed by KFT is not a debt on which KFT may sue to recover. I understand the last ground, like the similar ground in respect of LMS, to raise questions whether the relevant arrangements involved an intention to enter legal relations or otherwise had contractual effect and whether any debt was presently due and payable. It is common ground between the parties that the application to set aside the KFT Demand was served within the twenty-one day period within which it was required to be served under s 459G of the Corporations Act.

34. Mr Eardley pointed, in opening, to the absence of evidence of an assignment of the relevant liabilities in favour of KFT and submitted that a journal transaction was not a sufficient basis for the transfer of assets and liabilities from one company to another (T16). Mr Eardley also submitted that the amounts transferred from Link No 2 to KFT were receivables of $36,388 and $15,000 broadly corresponding to the amount of the KFT Demand of $52,338. Mr Eardley submitted that if (which JFEP denies) Link No 2 had made a loan to it, KFT had neither made that loan nor taken an assignment of the relevant debt, and could not maintain a claim for debt based on no more than a journal entry (T17). In closing oral submissions, Mr Eardley submitted that there was clearly no written loan agreement between KFT and JFEP; there was no valid assignment of a debt owed by JFEP to Link No 2 to KFT in law or in equity; and there was no loan agreement between JFEP and Link No 2, and therefore nothing that was capable of being assigned (T68).

35. In opening, Mr Stapleton submitted that Link No 2 had made some initial advances, then became deregistered, and the receivables were “transferred” to KFT, without identifying how that transfer had been effected (T18–19). He also submitted that the evidence establishes that the advances were made and there exists a pattern of repayment of loans consistent with JFEP’s knowledge that the advances were loans to be repaid and that the amounts are due to be repaid. He submits that there is no evidentiary basis for a contention that the monies advanced were capital invested in JFEP, where KFT had previously been issued shares in JFEP and he again relies on Basil’s evidence that the money advanced was in the nature of loans, not a gift, and the evidence of Ms Lau, to similar effect. He submits that KFT can sue to recover the debt, implicitly because it is the subject of a binding legal arrangement, and is presently due and payable.

36. There is no evidence of an assignment in writing signed by Link No 2, to bring about an assignment of the debts in law to KFT under s 12 of the Conveyancing Act 1919 (NSW). KFT relied on a letter dated 8 June 2017 from the solicitors for LMS and KFT to JFEP as a notice of assignment of the debt owed to Link No 2 to KFT, although that would not assist it where there is no evidence of such an assignment. That letter indicated that the solicitors were instructed that:

“KFT and LMS have made advances by way of loans to [JFEP] which:

(a)   as to the loans from KFT have been repaid in part, leaving a balance of $62,338.00; and

(b)   in respect of loans from LMS, have not been repaid, and the outstanding balance is $80,698.28.”

That letter also noted that interest had not been charged on the outstanding amount of the loans and demanded immediate repayment of the total amount of $143,036.28. That letter did not refer to Link No 2 or to any loan made by it, or to any assignment, and it does not seem to me to constitute notice of such an assignment. Rather, that letter, and the KFT Demand that followed, proceeded on the basis that KFT had made advances that had in fact been made by Link No 2.

37. There is authority that, if it were established that KFT were the assignee in equity of the debts owed to Link No 2, then it would be a creditor in equity and entitled to issue the creditor’s statutory demand, although real issues may then have arisen as to the adequacy of the description of the debt in the KFT Demand: compare Condor Asset Management Ltd v Excelsior Eastern Ltd (2005) 56 ACSR 223 at [35]–[38]. In Rohan Trading Co Pty Ltd v Glengor Pastoral Co Pty Ltd [2003] NSWSC 1265, Palmer J referred to authority that, for the purposes of a winding up application, the concept of “creditor” includes both a creditor at law and a creditor in equity, and held that the term “creditor” must have the same meaning in s 459E for the purposes of a creditor’s statutory demand, at least where the equitable creditor is the assignee in equity of the whole, rather than a part, of the company’s debt. His Honour observed that, where there is an equitable assignment of a debt, either the creditor at law or the creditor in equity may make a statutory demand on the debtor and may apply to have the debtor wound up in default of compliance.

37. In Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd [2008] NSWSC 3 at [42], Austin J took the same view, observing that, where an assignment is for valuable consideration, the assignee becomes an equitable assignee of the debt and that:

“An equitable assignee of a debt is a creditor within the meaning of s 459P(1)(b), entitled to apply for a winding up order (Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966 at [18] per White J, citing Re Steel Wing Co Ltd [1921] 1 Ch 349; Re Allebart Investments Pty Ltd (1969) 92 WN (NSW) 726; and Rohan Trading Co Pty Ltd v Glengor Pastoral Co Pty Ltd [2003] NSWSC 1265 at [14]).”

That approach was also recently followed by Robb J in Re Beechworth Land Estates Pty Ltd (Admin Apptd) and Griffith Estates Pty Ltd (Admin Apptd) (No 3) [2015] NSWSC 733; (2015) 298 FLR 233; (2015) 106 ACSR 495.

39. There is, however, no evidence that KFT gave any consideration for the assignment of the debt by Link No 2 to it to allow that assignment to take effect in equity on that basis. There is also a serious question to be tried as to whether Link No 2 had done all, or any part of, what was necessary to be done on its part to bring about an effective assignment of the debt, being a legal chose in action, as set out in the authorities (to which Counsel did not refer) that deal with the equitable assignment of a legal interest: for example, Anning v Anning [1907] HCA 13; (1907) 4 CLR 1049, Corin v Patton [1990] HCA 12; (1990) 169 CLR 540; Ku v Song [2007] FCA 1189; (2007) 63 ACSR 661 at [117]–[118]. A genuine dispute is therefore established as to whether that assignment has become effective in equity, to allow KFT standing to issue the KFT Demand in respect of all or a substantial part of the claimed debt. It would be no answer to that difficulty for KFT to contend (although I do not understand it to have done so) that only the substantial part, and not all, of that debt was affected by that issue, since the overstatement of any debt owed to KFT (as distinct from Link No 2) in the KFT Demand would itself support an order setting aside that demand under s 459J of the Corporations Act: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd [1996] NSWSC 199; (1996) 20 ACSR 746 at 750; First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256.

40. For these reasons, and because a genuine issue as to whether any debt owed to KFT was due and payable would arise for the same reasons as in respect of the LMS Demand, the KFT Demand must also be set aside under s 459J of the Corporations Act.

Conclusion and orders

41. Accordingly, each of the LMS Demand and the KFT Demand should be set aside, and costs should follow the event. Accordingly, I make the following orders:

1.   The creditor’s statutory demands issued by each of KFT Nominees Pty Ltd and Link Marketing Services Pty Ltd to JF Essential Power Pty Ltd be set aside.

2.   The Defendants pay the Plaintiff’s costs of the respective proceedings, as agreed or as assessed.

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Decision last updated: 17 April 2018