In the matter of Rio Dorado Limited ACN 148 175 991; Rio Dorado Limited (ACN 148 175 991) v Featherstone Enterprises Pty Limited (ACN 137 298 018)

[2023] NSWSC 621

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Rio Dorado Limited ACN 148 175 991; Rio Dorado Limited (ACN 148 175 991) v Featherstone Enterprises Pty Limited (ACN 137 298 018) [2023] NSWSC 621

Hearing dates:

24 May 2023

Date of orders:

9 June 2023

Decision date:

09 June 2023

Jurisdiction:

Equity - Corporations List

Before:

Williams J

Decision:

Statutory demand set aside; see orders at [42].

Catchwords:

CORPORATIONS — Winding up — Statutory demand— Where corporate holder of convertible note changed name — Where noteholder did not apply to update company’s register of debenture holders prior to issuing notice of redemption — Where conditions of notes include that company will recognise only the noteholder whose name appears in the register, and may act accordingly — Where company did not redeem notes in response to notice of redemption — Whether genuine dispute about the existence of debt presently due and payable

Legislation Cited:

Corporations Act 2001 (Cth) ss 110, 110A, 110A(2), 126, 127, 127(1)(c), 153, 157, 168, 171, 176, 459H(1)(a)

Cases Cited:

Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 (2022) 97 ALJR 1; (2022) 406 ALR 632; [2022] HCA 38

C & P Syndicate Pty Ltd v Reddy [2013] NSW ConvR 56-317; [2013] V ConvR 54-842; [2013] ANZ ConvR 13-017; [2013] Q ConvR 54-806; (2013) 16 BPR 31,771; [2013] NSWSC 643

Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; (2017) 35 ACLC 17-056; [2017] NSWCA 300 Electricity Generation Corporation v Woodside Energy Ltd and Others (2014) 251 CLR 640; (2014) 88 ALJR 447; (2014) 306 ALR 25; (2014) 7 ARLR 361; [2014] HCA 7

Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; (2019) 136 ACSR 563; [2019] NSWCA 60

Savage v Lunn [1998] NSWCA 203

Ziegler as trustee for the DorisGayst Testamentary Trust v Cenric Group Pty Ltd [2020] NSWCA 85

Texts Cited:

N/A

Category:

Principal judgment

Parties:

Rio Dorado Limited (ACN 148 175 991) (Plaintiff)
Featherstone Enterprises Pty Limited (ACN 137 298 018) (Defendant)

Representation:

Counsel:
Ms R L Gall (Plaintiff)
Mr N Parsons, solicitor (Defendant)

Solicitors:
HWL Ebsworth Lawyers (Plaintiff)
W Advisers Pty Ltd (Defendant)

File Number(s):

2023/78760

Publication restriction:

N/A

Judgment

1. By originating process filed on 9 March 2023, the plaintiff, Rio Dorado Limited (ACN 148 175 991) (Rio), applies to set aside a statutory demand issued and served by the defendant, Featherstone Enterprises Pty Ltd (ACN 137 298 018) (Featherstone Enterprises), on 16 February 2023.

2. At all material times prior to 5 April 2022, the name of Featherstone Enterprises was Sushi Learning Pty Ltd (Sushi Learning).

3. The statutory demand relates to an alleged debt of $757,850.36 comprising:

1. $30,000.00 in respect of three convertible notes issued by Rio to Mr Scott Jardine on 25 November 2019, and transferred to Featherstone Enterprises (then named Sushi Learning) on 5 February 2021, which Featherstone Enterprises required Rio to redeem by written notice dated 26 August 2022;

2. $14,037.17, being interest that accrued on those 2019 notes;

3. $100,000.00 in respect of ten convertible notes issued by Rio to Featherstone Enterprises (then named Sushi Learning) on 16 March 2022, which matured on 15 April 2022 and which Featherstone Enterprises required Rio to redeem by written notice dated 26 August 2022; and

4. $613,813.19, being interest that accrued on those 2022 notes.

4. On 26 August 2022, Ms Rutherford sent an email to Mr Gary Mares, the managing director of Rio, which stated:

“Notice of Redemption

I hereby give notice of redemption for all of my Convertible Notes with Rio Dorado Limited. These are held in both my personal name (Heather Rutherford) and my trust (Sushi Learning ATF the Rutherford Trust – recently changed in name to Featherstone Enterprises) as follows:

Date of note:            11/12/2019

Holder:               Heather Rutherford

Number of notes:         3 x $10,000 notes = $30,000 plus 12%                monthly capitalised interest.

Date of notice of redemption:       26/8/2022

Date of note:            5/2/2021

Holder:   Sushi Learning ATF The Rutherford Harris Family Trust

Number of notes:         3 x $10,000 notes = $30,000 plus 12%                monthly capitalised interest.

Date of notice of redemption:       26/8/2022

And as a reminder of this overdue redemption payable to me immediately:

Date of 30 DAY note:         16/3/2022

Holder:               Sushi Learning ATF The Rutherford                   Harris Family Trust

Number of notes:         10 x $10,000 notes = $100,000 plus                   20% monthly capitalised interest.

PAST Date of notice of redemption:   verbally 20 April 2022. Via email 19 May 2022.

Please confirm receipt of this notice.

Sincerely

Heather Rutherford”

5. The statutory demand that is the subject of this proceeding relates only to the convertible notes held by Sushi Learning (now named Featherstone Enterprises).

6. Rio does not dispute any of the details set out in Ms Rutherford’s 26 August 2022 email concerning those notes. Rio acknowledges that, as at 26 August 2022, the maturity date of both sets of notes held in the name of Sushi Learning had passed, and that the noteholder was entitled to issue a redemption notice. Rio does not dispute the calculation of the interest set out in the statutory demand in respect of each set of notes.

7. The three convertible notes held in the name of Sushi Learning and referred to in Ms Rutherford’s email were issued to Mr Scott Jardine on the terms of a convertible note subscription agreement dated 25 November 2019 between Rio (“the Company”) and Mr Jardine (“the Subscriber”), and transferred from Mr Jardine to Sushi Learning on 5 February 2021.

8. The ten convertible notes referred to in Ms Rutherford’s email were issued on the terms of a convertible note subscription agreement between Rio (“the Company”) and Sushi Learning as trustee for the Rutherford-Harris Family Trust (“the Subscriber”) on 16 March 2022.

9. The terms of the two convertible note subscription agreements referred to above, and the conditions of the notes set out in schedule 3 of each of those agreements, are the same in all relevant respects.

10. Clause 7.1 of the conditions provides:

“Any Holder may, on giving at least 2 days’ notice in writing to the Company (which may be given at any time), require the Company on or at any time after the Maturity Date to redeem any of the Holder’s Notes which have not been converted in accordance with these Conditions; …”

11. The term “Holder” is defined in clause 1.1 of the agreements as meaning:

“the holder of a Note issued pursuant to this Agreement”

12. Clause 12 of the conditions provides:

“Title of Notes, Non-Recognition of Equities

Subject to these Conditions, the Company will recognise only the Holder whose name appears in the Register as the absolute owner of the Notes in respect of which it is entered in the Register, and the Company may act accordingly.”

13. The term “Register” is defined in clause 1.1 of the agreements as meaning:

“the register of Holders kept under this Agreement and includes any branch register.”

14. The agreements do not include any provisions requiring Rio to keep a register of Holders. However, ss 168 and 171 of the Corporations Act 2001 (Cth) require Rio to maintain a register of debenture holders containing each holder’s name and address, and information about the amount of debentures held. Section 176 of the Corporations Act provides that, in the absence of evidence to the contrary, the register is proof of the matters shown in the register.

15. The agreements do not prescribe any particular form of notice of redemption. Clause 9.1 of the agreement dated 25 November 2019, and clause 8.1 of the agreement dated 16 March 2022, provide that a notice that is required or permitted to be given by one party to another must be in writing and delivered personally, sent by pre-paid post, sent by facsimile, or:

“sent by email to the email address of a party as notified in this Agreement or such other email address notified as being the email address to use for the purposes of this clause.”

16. The agreements do not specify any email address to be used when serving notices on Rio. There is no evidence about whether Rio notified any email address to be used for the purpose of notices issued under the agreements.

17. Ms Rutherford’s 26 August 2022 email mentioned that Sushi Learning had recently changed its name to Featherstone Enterprises. Evidence adduced in these proceedings establishes that this change of name was registered by the Australian Securities and Investments Commission on 6 April 2022. On 7 April 2022, Ms Rutherford sent an email to Mr Mares attaching a copy of the Certificate of Registration on Change of Name and stating:

“Fyi I change [sic] my company name. I am certifying and sending with name correction form to Boardroom to update the register.”

18. The reference to “Boardroom” is a reference to Boardroom Pty Ltd, which provided registry management services for Rio. Evidence adduced in these proceedings establishes that Ms Rutherford sent a certified copy of the Certificate of Registration on Change of Name to Boardroom, and completed Boardroom’s “Name Correction Request” form to change the name of Sushi Learning Pty Ltd to Featherstone Enterprises Pty Ltd, on 21 March 2023. That request was duly processed, and the name was changed in Rio’s register of debenture holders on 27 March 2023. That evidence also discloses that Rio’s register recorded the holder of the notes by its company name, without reference to its ACN. That satisfied the requirements of s 171 of the Corporations Act.

19. Rio did not redeem the three notes or the ten notes in response to Ms Rutherford’s 26 August 2022 email.

20. Ms Rutherford sent a follow up email on 17 November 2022. Mr Mares replied on 27 November 2022, stating that:

“Based on advice, at this point in time the Company has not received properly signed/executed redemption notices properly served on the Company.”

21. Rio seeks an order setting aside the statutory demand under s 459H(1)(a) of the Corporations Act on the basis that there is a genuine dispute about whether the debt exists or is presently due and payable because there is a genuine dispute about whether Featherstone has issued a valid redemption notice in respect of the notes described in Ms Rutherford’s 26 August 2022 email as being held by Sushi Learning. Rio contends that the 26 August 2022 email was not a valid redemption notice in respect of those notes because:

1. the notices were given by Ms Rutherford, and not by the noteholder, as they were not executed by the noteholder in accordance with s 127 of the Corporations Act; and

2. formal confirmation of the noteholder’s change of name had not been given to Rio.

22. During the hearing, counsel for Rio also submitted that Mr Mares’ email address to which Ms Rutherford sent her 26 August 2022 email wasn’t available for the purpose of serving notices under the convertible note subscription agreements because it was not specified for that purpose in those agreements.

23. In his affidavit sworn on 8 March 2023, which was filed in support of the application to set aside the statutory demand, Mr Mares referred to and exhibited the convertible note subscription agreement between Rio and Sushi Learning, the provisions of which I have summarised at [8]-[16] above. Mr Mares then deposed that:

“[Rio] has not received any formal confirmation of a change of name from Featherstone (regarding any change from Sushi Learning Pty Limited to Featherstone Enterprises Pty Ltd) to validate that it is the same corporate entity and thus the correct noteholder …”

24. Mr Mares also deposed that he had received Ms Rutherford’s email on 26 August 2022 “which was purportedly a ‘redemption notice’ in respect of second series notes”. Mr Mares then referred to Ms Rutherford’s further email dated 17 November 2022 following up on her 26 August 2022 email, and continued:

“… I replied on the same day seeking ‘properly signed/executed redemption notices”. … A copy of this email chain is exhibited at page 29 of exhibit GDM-2.

I have conducted a search of the books and records of the Company and, to the best of my knowledge, no signed/executed redemption notice has been received by the Company from Featherstone.

For the reasons deposed in this affidavit, I consider there to be a genuine dispute about the existence of the debts stated in the Statutory Demand.”

25. I accept the submission made on behalf of Featherstone Enterprises that Mr Mares’ affidavit did not identify a ground of challenge to the statutory demand on the basis that the redemption notices had not been validly served, by reason of having been sent to an email address that was not an address that could be used for the service of notices under the relevant clause of each agreement. [1] The ground of challenge identified in Mr Mares’ affidavit, and in the submissions served on behalf of Rio prior to the hearing, was limited to the contention that the redemption notices were not valid for one or both of the reasons referred to at [21] above.

    1. Ziegler as trustee for the Doris Gayst Testamentary Trust v Cenric Group Pty Ltd [2020] NSWCA 85 at [31]-[37] (Gleeson JA, Meagher and McCallum JJA agreeing) (Ziegler).

26. In my opinion, Rio’s contention that the notices were issued by Ms Rutherford and not by the corporate noteholder because they were not executed in accordance with s 127 of the Corporations Act, lacks plausibility.

27. A requirement that notice be given in writing may be satisfied by an email communication. [2]

    2. C & P Syndicate Pty Ltd v Reddy [2013] NSW ConvR 56-317; [2013] V ConvR 54-842; [2013] ANZ ConvR 13-017; [2013] Q ConvR 54-806; (2013) 16 BPR 31,771; [2013] NSWSC 643 at [110]-[112].

28. At all material times, Ms Rutherford has been the sole director and secretary of the company previously named Sushi Learning and now named Featherstone Enterprises.

29. Section 126 of the Corporations Act provides that a company’s power to execute a document may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company.

30. In addition, s 127(1)(c) of the Corporations Act relevantly provides that a company that has a sole director who is also the sole company secretary may execute a document without using a common seal if the document is signed by that director.

31. Sections 110 and 110A of the Corporations Act provide that a document may be signed by a person under s 126 or under s 127 by signing an electronic form of the document using electronic means, providing that the method of signing satisfies the requirements in s 110A(2) that:

(a)    the method identifies the person and indicates the person’s intention in respect of the information recorded in the document; and

(b)    the method was either:

(i)    as reliable as appropriate for the purpose for which the information was recorded, in light of all the circumstances, including any relevant agreement; and

(ii)    proven in fact to have fulfilled the functions described in paragraph (a), by itself or together with further evidence.

32. I accept the submission made on behalf of Featherstone Enterprises that Ms Rutherford’s typing of her name at the conclusion of the 26 August 2022 email was an electronic method of signing the email which identified her by name and which, when read in the context of the email as a whole, and particularly the first paragraph under the heading “Notice of Redemption”, indicated her intention to identify herself as the person expressly or impliedly authorised by Featherstone Enterprises, by virtue of her office as its sole director and secretary, to sign and issue on its behalf the redemption notices set out in the email. None of the evidence adduced in these proceedings raises any plausible contention that Ms Rutherford lacked that authority, despite being the sole director and secretary, and also the sole shareholder, of Featherstone Enterprises.

33. However, Rio has raised a plausible contention, in my opinion, that the redemption notices in Ms Rutherford’s 26 August 2022 email were not issued by a “Holder” that Rio was required to recognise, and that it was thus not required to act on the redemption notices by reason of clause 12 of the conditions of the notes. I reject the submission made on behalf of Featherstone Enterprises that Mr Mares’ affidavit sworn on 8 March 2023 did not raise this contention as a ground of challenge to the statutory demand. As referred to at [23] above, Mr Mares’ affidavit expressly referred to the fact that Rio had not received “any formal confirmation” of Sushi Learning’s change of name to “validate” that Featherstone Enterprises was the same corporate entity as Sushi Learning “and thus the correct noteholder”. It was plain from the convertible note subscription agreement exhibited to Mr Mares’ affidavit that clause 12 of the conditions of the notes was relevant to the question whether the lack of “formal notification” of change of name affected the validity or effect of the redemption notices on which Featherstone Enterprises relies as giving rise to a debt that is presently due and payable. The proper construction of clause 12 has a bearing on that question and was a matter to be raised in submissions, the terms of the agreement and other material facts having been set out in the affidavit and exhibit. [3]

    3. Ziegler, above n 1, at [31]-[37] (Gleeson JA, Meagher and McCallum JJA agreeing).

34. Ms Rutherford’s 26 August 2022 email identifies “Sushi Learning ATF The Rutherford Harris Family Trust” as the name of the “Holder”. That accords with the name recorded in Rio’s register of debenture holders as at 26 August 2022. Ms Rutherford’s email acknowledges that this is no longer the name of the company. While a company may change its name from time to time in accordance with s 157 of the Corporations Act without making any other change to the corporate entity, it is required by s 153 of that Act to set out its current name on all of its public documents and negotiable instruments. As referred to at [14] above, the register of debenture holders maintained by Rio pursuant to ss 168 and 171 of the Corporations Act was required to contain each debenture holder’s name. The names of noteholders recorded in Rio’s register did not include Featherstone Enterprises, being the name in which the redemption notices were issued for the reasons explained above. I accept Rio’s submission that it is arguable that clause 12 of the convertible notes conditions does not require Rio to act on a notice of redemption issued by or on behalf of a person or entity whose name was not recorded in the register at the time the notice was issued. That construction is arguable because of the language used in the clause and because Rio’s statutory obligation to keep a register of debenture holders recording the name of each holder is part of the context to which regard must be had when construing clause 12 in accordance with the established objective approach to construing commercial contracts. [4]

    4. Electricity Generation Corporation v Woodside Energy Ltd and Others (2014) 251 CLR 640; (2014) 88 ALJR 447; (2014) 306 ALR 25; (2014) 7 ARLR 361; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan, and Kiefel JJ).

35. The existence of that plausible argument concerning the construction of clause 12, and its application to the redemption notices contained in Ms Rutherford’s 26 August 2022 email, is sufficient to constitute a genuine dispute about the existence of the debt that is the subject of the statutory demand. The argument is not spurious or fanciful.

36. I acknowledge the contrary arguments put on behalf of Featherstone Enterprises that:

1. the construction for which Rio contends would lead to the perverse outcome that Rio could deny a noteholder its entitlement to redeem notes simply by refusing to update its register; and

1. the heading to clause 12 and the words “absolute owner” appearing in the clause suggest that its sole object is to absolve Rio of any obligation to deal with any a person claiming an equitable interest in notes that are not registered in that person’s name.

37. The first of those contrary arguments overlooks that a noteholder aggrieved by any such conduct could bring proceedings for rectification of the register. [5] The second argument does not grapple with the statutory context referred to above, or with clause 1.2(h) of both convertible note subscription agreements, which provides that headings do not affect the interpretation of the agreements.

    5. Savage v Lunn [1998] NSWCA 203 at BC9800548 pp. 52-53.

38. However, it is neither necessary nor appropriate in the present context to determine the proper construction of clause 12 of the conditions of the notes, or to assess the relative merits of competing constructions. As I have already said, Rio’s construction is plausible and gives rise to a genuine dispute about whether the claimed debt was made due and payable by the redemption notices issued on 26 August 2022. [6]

    6. Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; (2019) 136 ACSR 563; [2019] NSWCA 60 at [62]-[66] (Bell P, White and Sackville JJA agreeing), and the authorities there cited; Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; (2017) 35 ACLC 17-056; [2017] NSWCA 300 at [17] and [26]-[29] (Barrett AJA, Gleeson and White JJA agreeing).

39. I record for completeness the submission made on behalf of Featherstone Enterprises that Rio had waived any entitlement to rely on clause 12 of the conditions of the notes. That submission was without substance for two reasons. First, the conduct alleged to constitute waiver occurred prior to Ms Rutherford’s 26 August 2022 email and was responsive to an earlier notice of redemption dated 19 May 2022 that was referred to in Ms Rutherford’s affidavit affirmed on 28 April 2023, but was not tendered and was not produced in response to a call made by Rio during the hearing. The debt claimed in the statutory demand issued by Featherstone Enterprises does not rely on any notice of redemption issued on 19 May 2022. Featherstone Enterprises did also rely on a letter from Rio to Ms Rutherford dated 31 August 2022 that listed three sets of convertible notes, stated an amount of principal and accrued interest in respect of each of them, and asked Ms Rutherford to “confirm the balance set out hereunder as owing by Rio Dorado Limited to you as at 30 June 2022” [7] for the purpose of Rio’s audit for the year ended 30 June 2022. That letter speaks to the position as at 30 June 2022, prior to the issue on 26 August 2022 of the notices of redemption on which Featherstone Enterprises relies as giving rise to the debt claimed in the statutory demand to be presently due and payable. Moreover, the letter erroneously describes all three sets of notes as being held by Ms Rutherford personally, and therefore provides no support for the contention that Rio had recognised Featherstone Enterprises as the holder of any notes. Second, even putting to one side the lack of any evidence supporting the waiver allegation, the submission did not identify any reason why Rio was not at liberty to revoke the alleged waiver at any time. [8]

    7. Emphasis added.

    8. Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 (2022) 97 ALJR 1; (2022) 406 ALR 632; [2022] HCA 38 at [28]-[33] (Kiefel CJ, Edelman, Steward, and Gleeson JJ).

40. For all of the reasons above, the statutory demand must be set aside under s 459H of the Corporations Act.

41. There is no reason why costs should not follow the event. Those costs should be paid on the ordinary basis. The originating process sought an order that Featherstone Enterprises pay Rio’s costs on an indemnity basis. However, counsel for Rio made no submissions in support of an indemnity costs order, and Featherstone Enterprises has not conducted its defence of the proceedings in a manner that might warrant an indemnity costs order being made against it.

42. For those reasons, the orders of the Court are as follows:

1. Order pursuant to s 459H of the Corporations Act 2001 (Cth) that the creditor’s statutory demand dated 16 February 2023 issued by the defendant to the plaintiff be set aside.

2. Order that the plaintiff’s costs of the proceedings be paid by the defendant on the ordinary basis, in such amount as may be agreed or assessed.

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Endnotes

Decision last updated: 09 June 2023