In the matter of Morf Dynamics Pty Limited
[2013] NSWSC 2039
•23 December 2013
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Morf Dynamics Pty Limited [2013] NSWSC 2039 Hearing dates: 23 December 2013 Decision date: 23 December 2013 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Originating process dismissed with costs assessed in the sum of $12,500.
Catchwords: CORPORATIONS - application under (Cth) Corporations Act 2001 s 459H for order setting aside statutory demand - whether genuine dispute - application dismissed. Legislation Cited: (Cth) Corporations Act 2001 s459E, s 459G, s 459H Cases Cited: Lodge Partners Pty Ltd v Pegum [2009] FCA 519; (2009) 255 ALR 516 Category: Principal judgment Parties: Morf Dynamics Pty Limited (plaintiff)
JNAB Pty Limited (defendant)Representation: Counsel:
J Darams (plaintiff)
E Peden (defendant)
Solicitors:
Russells Law (plaintiff)
Source Legal Pty Limited (defendant)
File Number(s): 2013/232779
Judgment - EX TEMPORE
HIS HONOUR: On 11 July 2013 the defendant JNAB Pty Ltd served on the plaintiff company Morf Dynamics Pty Ltd a creditor's statutory demand for payment of debt pursuant to (Cth) Corporations Act 2001, s 459E, demanding payment of the amount of $146,750.68, being the total amount of loan and interest described in the schedule to the demand as follows:
Loan repayment due pursuant to Loan Facility Agreement dated 16 January 2008 between the company and the creditor
$100,000.00
Interest on the Principal sum of $100,000 at 8.64% per annum from February 2008 to 8 July 2013
$46,750.68
Total debt payable by Morf Dynamics Pty Ltd
$146,750.68
By originating process filed on 31 July 2013, Morf seeks an order pursuant to s 459G and s 459H setting aside the demand. In the s 459G affidavit filed in support of the application, Chin Meng Fong deposed, after setting out his claimed authority to make the affidavit and annexing searches of Morf and of JNAB, as follows:
5 On or about 16 January, 2008, the Plaintiff entered into a Loan Facility Agreement (the "Agreement") with the Defendant. Annexed and marked "C" is a copy of the Agreement.
I observe that the second sentence of paragraph 5 was ultimately not read by the plaintiff, but was tendered by the defendant and received as an admission against interest. Mr Fong proceeded to depose as follows:
6 The Agreement provided that the Defendant lend the Plaintiff $100,000 ("the Loan").
7 The loan is not repayable until the completion of the Plaintiff's "series A Funding".
8 At the time of swearing this affidavit, the Plaintiff has been unable to secure funding facilities and complete its "series A Funding". The loan from the Defendant is not presently due and payable by the Plaintiff under the terms of the Agreement.
9 On 26 June, 2013 I received an email from the Defendant's solicitors regarding the repayment of the loan. Annexed and marked "D" is a copy of this email.
10 On 26 June, 2013 I sent an email to the Defendant's solicitors, asking that the Defendant contact me to discuss repayment of the loan. Annexed and marked "E" is a copy of this email.
11 On 28 June, 2013, I received an email from the Defendant's solicitors, Annexed and marked "F" is a copy of this email.
12 On 11 July, 2013, the Plaintiff was served with a creditor's statutory demand for payment of a debt ("Statutory Demand"). Annexed and marked "G" is a copy of the Statutory Demand.
13 On 17 July, 2013, the Plaintiff's solicitors wrote to the Defendant's solicitors indicating that the purported debt subject to the Statutory Demand was disputed, and requesting that the Statutory Demand be withdrawn. Annexed and marked "H" is a copy of that letter.
The letter of 17 July 2013 referred to in paragraph 13 of the affidavit was relevantly in the following terms:
We act for Morf Dynamics Pty Limited (Morf) and we understand that you act for JNAB Pty Limited (JNAB).
On 11 July, 2013, Morf was served with a creditors' statutory demand signed by Billy Nan Choong Chong and dated 16 January, 2008 (the Demand).
We are instructed as follows:
1. The terms of the loan from JNAB to Morf (the Loan) are set out in the loan facility agreement dated 16 January, 2008 (the Agreement).
2. As set out in the Agreement, the repayment of the Loan was entirely conditional upon Morf securing certain funding facilities for the business. Specifically, it was an express term of the Agreement that: "[Morf] must immediately pay back the full amount of the loan plus interest and disbursement costs to [JNAB] upon the completion of its Series A Funding".
3. Despite our client's best endeavours, Morf's Series A Funding process was never completed and is ongoing.
Consequently, and despite Mr Chong's affirmation to the contrary, the Loan is not currently due and payable. As such, the Demand is invalid and the accompanying affidavit of Mr Chong is incorrect.
The affidavit proceeded:
On 19 July, 2013, the Defendant's solicitors wrote to the Plaintiff's solicitors stating that they did not agree with the interpretation of Agreement put forward by the Defendant in the letter referred to in paragraph 13. Annexed and marked "I" is a copy of this letter.
On 22 July, 2013, the Plaintiff's solicitors again wrote to the Defendant's solicitors indicating for various reasons, that the purported debt subject to the Statutory Demand was disputed. Annexed and marked "J" is a copy of this letter.
On 24 July, 2013, the Defendant's solicitors wrote to the Plaintiff's solicitors stating that the Defendant would not withdraw the Statutory Demand. Annexed and marked "K" is a copy of this letter.
In the course of the hearing, I rejected evidence which sought to introduce a dispute not referred to or identifiable from the s 459G affidavit, to the effect that the loan facility agreement of 16 January 2008, a copy of which was annexure C to Mr Fong's affidavit, was not in fact a binding agreement between the parties on various grounds, including that it had not been signed on behalf of the plaintiff. I rejected that evidence upon the Graywinter principle that no such dispute had been raised or was identifiable from the s 459G affidavit. In any event, it might be observed that it would be extraordinary in the extreme that that affidavit could be annexed to an affidavit of the plaintiff as a copy of "the agreement" if it had not previously been known or seen by or on behalf of the plaintiff. Secondly, the document bears some indicia, particularly the subscript at the bottom of each page, which tends to confirm that it was generated by the plaintiff as distinct from by the defendant. Thirdly, the letter of 17 July 2013, to which I have referred, asserts affirmatively that the terms of the loan are set out in that agreement.
Accordingly, the dispute sought to be raised depends upon the construction of the loan facility agreement, which is expressed to have been made on 16 January 2008. Under the heading of "Repayment of Advances", it provides:
The borrower shall pay to the lender to full amount owing, including the loan and the interest incurred only owing under this agreement by the repayment date.
Under the heading "The Entire Agreement", it provides:
This agreement, together with the security, constitutes the entire agreement between the parties with respect to its subject matter and supersedes and replaces any earlier agreement and representations whether written or oral among the parties.
Under the heading "Introduction", it records:
The lender has agreed to provide a secured loan facility to the borrower in accordance with this agreement in the amount shown in the schedule ['the loan facility'] below.
The schedule which is dated 8 February 2008 is as follows:
Advance: AUD $100,000 immediately upon the execution of this agreement.
Approved purpose: bridging finance and working capital.
Term: six months, or earlier in the event the borrower is successful in raising capital or upon the receipt of the borrower's funding facilities, in which case the funding must first be used to repay this loan.
Drawdown date: 8 February 2008.
Expiry date: 7 August 2008.
Repayment date: 7 August 2008 or immediately upon the receipt of the borrower's funding facilities.
Other conditions: that the borrower must immediately pay back the full amount of the loan plus interest and disbursement costs to the lender upon the completion of its series A funding.
The company would further issue ordinary shares of 165,161 of the company to JNAB Pty Ltd or any of its nominees as part of the terms of the loan assistance extended to the company. The company will issue such ordinary shares immediately upon the receipt of the full loan amount.
On 14 January 2008 - that is to say two days before the date of the loan agreement - the then chairman of directors of Morf, in accordance with the resolution of directors, circulated to shareholders a Shareholders' Circular Resolution, which included the following:
1.0 Relief funding
Explanation of Resolution:
The relief funding of an amount AUD$100,000 will be provided by JNAB Pty Ltd as a short term loan to the Company to assist in continuing its operations.
The full amount of the loan plus interest and disbursement costs will be paid back to JNAB Pty Ltd upon the completion of raising the Series A Funds.
The Company will further issue ordinary shares of 165,161 of the Company to JNAB Pty Ltd or any of its nominees as part of the terms of the loan assistance extended to the Company.
To consider if thought fit to pass the following resolution:
Resolution 1
THAT the Company will issue ordinary shares of 165,161 of the Company to JNAB Pty Ltd or any of its nominees upon the receipt of the relief funding as stated above.
That document does not establish that the resolution was adopted by shareholders. However, on 22 February 2008, Morf issued a share certificate for 165,161 shares in favour of JNAB.
The plaintiff's contention is that upon the proper construction of the share facility agreement, and it not being disputed that the principal of $100,000 was advanced, the amounts claimed are nonetheless not due and payable unless and until the plaintiff completes the "series A funding" referred to in the loan facility agreement. In other words, the plaintiff contends that the loan facility agreement is to be construed such that the loan would be repayable on the later of 7 August 2008 or the receipt of the borrower's funding facilities. This involves, as counsel was compelled to admit, the rather unattractive proposition that in the event that the borrower did not succeed in raising the "series A funding", the loan would never be repayable.
Quite apart from that, however, it seems to me that on the proper construction of the agreement, the loan is repayable on the earlier and not the later of those events. The strongest indication of this in the loan facility agreement is what appears under the heading "Term", which makes clear that the term is six months "or earlier" in certain alternative events. In my view, there are two alternative events specified as potential earlier expirations of the term: first, success in raising capital; and secondly, receipt of the borrower's funding facilities. Additional indicia are the identification of the expiry date as 7 August 2008, without qualification. I do not accept that this can be construed as only limiting the date for drawdowns. It is clear from what is said under the heading "Advance" that the drawdown was to occur immediately. When a facility expires, it becomes repayable.
Under "Repayment Date", the reference to "7 August 2008 or immediately upon the receipt of the borrower's funding facilities" makes much more sense if read as "the earlier of" rather than "the later of". This is reinforced by what appears under "Other Conditions" in respect of immediate repayment of the full amount of the loan upon completion of the series A funding, which would be unnecessary if that were to be an alternative later repayment date.
In my view, read as a whole, the agreement admits only of the construction that the term was six months or earlier in the event of earlier receipt of the series A funding. The Shareholders' Circular Resolution notice to which I have referred and the subsequent issue of shares does not affect this conclusion. First, the issue of shares was contemplated in the loan facility agreement itself. Secondly, the draft resolution predated the loan agreement and in any event was a unilateral document of the plaintiff and there is nothing to indicate any notice to, let alone assent by, the defendant in respect of it.
I accept of course that the task faced by a company challenging a statutory demand on the genuine dispute ground is by no means a difficult or demanding one. A genuine dispute connotes a plausible contention requiring investigation and raises the same sort of considerations as the serious question to be tried criteria which arises on an application for an interlocutory injunction. Once it is demonstrated that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. But although the Court will not generally determine questions of construction of a contract, it may do so on such an application in an appropriate case, which includes one in which the issue can be decided following a short hearing, with no relevant factual dispute: see LodgePartners Pty Ltd v Pegum [2009] FCA 519; (2009) 255 ALR 516 at [18]. In this case, the question of construction is straightforward and can be determined on a short hearing without the necessity to resolve disputed questions of fact. Once that question is resolved in the way in which I have resolved it, it can be concluded that in this case there is not a bona fide disputed issue of fact or law but only one based on spurious, hypothetical, illusory or misconceived grounds.
I order that the originating process be dismissed with costs assessed in the sum of $12,500.
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Decision last updated: 03 July 2014
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