In the matter of Shield Hardwood Pty Limited

[2020] NSWSC 697

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Shield Hardwood Pty Limited [2020] NSWSC 697
Hearing dates:	25 May 2020
Date of orders:	25 May 2020
Decision date:	25 May 2020
Jurisdiction:	Equity - Corporations List
Before:	Rees J
Decision:	Dismiss application to set aside statutory demand.
Catchwords:	CORPORATIONS — Statutory demand — Whether genuine dispute — Contracts signed by one director only – Plaintiff says contracts not binding – Plaintiff understood contracts were mere formality – Goods supplied by third party rather than defendant directly – Plaintiff claims contracts was really a trade facility – No genuine dispute — Application dismissed
Legislation Cited:	Coronavirus Economic Response Package Omnibus Act 2020 (Cth) Corporations Act 2001 (Cth), ss 123, 126, 127, 128, 129, 459G, 459H(1)(a)
Cases Cited:	Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785 In the matter of Gorji Property Investment Pty Limited [2018] NSWSC 1671 In the matter of Harmon International Holdings Pty Ltd (2019) 136 ACSR 94; [2019] NSWSC 413 NCR Australia Pty Limited v Credit Connection Pty Limited [2004] NSWSC 1 Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 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 ACLR 67
Category:	Principal judgment
Parties:	Shield Hardwood Pty Ltd (Plaintiff) Sinopec International (Australia) Pty Ltd (Defendant)
Representation:	Counsel: Mr A Norrie (Plaintiff) Mr N Bender (Defendant)   Solicitors: Linc At Law (Plaintiff) Allens (Defendant)
File Number(s):	2020/71975

ex tempore Judgment

1. HER HONOUR: This is an application pursuant to section 459G of the Corporations Act 2001 (Cth) by the plaintiff, Shield Hardwood Pty Ltd, to set aside a statutory demand served by the defendant, Sinopec International (Australia) Pty Ltd, on the ground that there is a genuine dispute as to the existence of the debt for the purposes of section 459H(1)(a) of the Corporations Act.

2. The statutory demand sought payment of $662,029.50 for timber. The demand was served on 14 February 2020. Thus, the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) does not apply. Part 2 of Schedule 12, “Temporary relief for financially distressed individuals and businesses”, amends the Corporations Act and Corporations Regulations 2001 in respect of statutory demands served on or after the commencement of the schedule. Schedule 12 commenced on 25 March 2020.

Principles

3. Drawing on my judgment in In the matter ofHarmon International Holdings Pty Ltd (2019) 136 ACSR 94; [2019] NSWSC 413 at [44]-[47], the threshold to establish a genuine dispute about the existence of a debt is a relatively low one. The principles were precisely conveyed by Black J in In the matter ofGorji Property Investment Pty Limited [2018] NSWSC 1671 at [14]-[15]:

[14] With that background, I now turn to the well-established principles which are applicable in determining whether a genuine dispute is established. The Court has power to set aside a creditor’s 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. 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 held that a “genuine dispute" must be bona fide and truly exist in fact, and the ground for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], Barrett J (as his Honour then was) formulated that proposition as follows, in a proposition applied in subsequent cases:

“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.”

[15]   In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACLR 67 at [71], Dodds-Streeton JA in turn observed that a genuine dispute required only that a claim 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."

4. As McLelland CJ in Eq explained in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785 at 787:

This does not mean that the court must 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”, not having “sufficient prima facie plausibility to merit further investigation as to [its] truth”, or “a patently feeble legal argument or an assertion of facts unsupported by evidence”.

This statement was approved by the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [46].

5. In Britten-Norman, the Court of Appeal clarified the standard of evidence required on such an application at [36]: (emphasis added)

Accordingly, 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" of the existence of either a dispute as to the debt or an offsetting claim. It is apparent, therefore, that 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.

6. The Court of Appeal, at [48], also approved the statement by Thomas J in Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605:

There is little doubt that Div 3 … prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court’s examination are the ascertainment of whether there is a ‘genuine dispute’ and whether there is a ‘genuine claim’.

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or lack of it), the court has no function …

The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely the result of it).

7. Here, the genuine dispute is said to arise by reason of two matters. First, the contracts in question were not properly executed and thus not binding. This is said to be because the contracts were executed by one director of the plaintiff company only and without a common seal. Second, the timber supplied under the contracts did not come from the defendant but was supplied via a third party. The true nature of the arrangement between the parties was said to be a credit facility.

Facts

8. The directors of the plaintiff company were Xuxu Li, also described in the documents as the Chief Executive Officer, and Feng Ye. In support of the application to set aside the statutory demand, the plaintiff relied on an affidavit affirmed by Ms Li. There was no affidavit from Mr Ye.

9. On 14 July 2019, the defendant sent an email to the plaintiff, copied to Ms Li and Mr Ye, setting out the proposed pricing of the arrangements between the parties:

I double checked our last proposal about the calculation of the price. There are two factors that [are] different from yours. One is credit period, which is 60 days in the proposal. This time you amended it is 45 days. The second is total days of one year. Our calculation is generally based on 360 days for one year. And you use 365 days as one year.

Based on the above, our gross profit is $6/mt GST included in the proposal. After subtracting the capital cost, which is around 4.6~4.7 based on the fluctuation of LIBOR, our real profit is only $1.3/mt GST included. As you may understanding [sic], if the amount of the contract is too small, the ratio of the financial cost will be very high as all the bank has bottom fee for every business. If it is too small, it is hard to pass our internal approval.

Anyway, it is a temporary situation as our credit limit is just started. As our cooperation keeps on going ahead and expanding, the average cost will be reduced following the volume increasing. Please follow up our last proposal and let us start first.

It is evident from the email that the defendant was providing some form of finance and the price of the goods factored in the cost of that finance. The author of this email, Jianguo (Arnold) Shi, business manager in charge of the wood trading business of the defendant, explained that the defendant purchases materials from upstream suppliers and sells those materials onto downstream third party purchasers. The defendant allows downstream purchases to pay the defendant within 45 days of receiving the materials. The defendant and upstream suppliers generally agree that the upstream suppliers will deliver the materials directly to downstream purchasers on the defendant’s behalf.

10. There were two contracts. The first contract was entered into on 17 September 2019. The defendant agreed to sell the plaintiff 1,000 metric tonnes of ‘brigalow’ timber and 1,000 metric tonnes of ‘lancewood’ timber. The contract was signed by Ms Li on behalf of the plaintiff, but not by Mr Ye. The plaintiff’s common seal, if it had one, was not used. On the same day, the defendant entered into an agreement with Oz Plantation and Hewer Pty Limited to buy brigalow and lancewood timber.

11. On 24 September 2019, the lancewood timber was delivered to the plaintiff by Oz Plantation. The plaintiff issued a letter of receipt. The defendant issued an invoice to the plaintiff for the sale of the lancewood timber, which the plaintiff paid. On 2 October 2019, the brigalow timber was delivered by Oz Plantation to the plaintiff. The plaintiff issued a letter of receipt, and the defendant issued an invoice to the plaintiff for the sale of the brigalow timber. The invoice was partly paid on 18 December 2019, when the plaintiff paid $49,798 to the defendant. The balance of this invoice forms part of the amount claimed in the statutory demand.

12. On 25 October 2019, the plaintiff sought to enter into another contract with the defendant. An email from the plaintiff, copied to Ms Li, was sent to the defendant requesting that they check the attached agreements and "start your internal procedures". On 31 October 2019, the second contract was entered into. The defendant agreed to sell the plaintiff 1,050 metric tonnes of brigalow timber. The contract was signed by Ms Li on behalf of the plaintiff, but not by Mr Ye. The plaintiff’s common seal, if it had one, was not used. The same day, the defendant purchased 1,050 metric tonnes of brigalow timber from Oz Plantation. On 1 November 2019, the timber was delivered to the plaintiff. The plaintiff issued a letter of receipt. The defendant issued an invoice for $362,029.50 to the plaintiff. This invoice is unpaid and forms part of the amount claimed in the statutory demand.

13. In mid-November 2019, the defendant began chasing the plaintiff for payment. The correspondence was generally copied to Ms Li. On 15 November 2019, Ms Li sent an email to the defendant, copied to Thomas Ye (who I take to be Feng Ye, the other director of the plaintiff), requesting an extension of time to pay "due to the recent suspension on the facility". This was said to have been done without notice and to have upset the plaintiff's financial system and payment schedules. An extension of time was sought and Ms Li advised "the repayment will be made on 30th Dec[ember]". The defendant replied that they did not agree to the request for an extension of payment and, indeed, had been assured by the Chief Financial Officer of the plaintiff that it would pay on time. Payment was sought when due on 17 November 2019.

14. Further emails were sent by the defendant to the plaintiff requesting payment. On 16 December 2019, the defendant sent a letter of demand. On 23 December 2019, Mr Ye replied, advising "we are planning to pay the remaining balance with the monthly payment of $50,000 starting from 20 January 2020." No payment was made on 20 January 2020 and, on 21 January 2020, the defendant issued the statutory demand, which was served on 14 February 2020.

15. Ms Li deposed that, as the two contracts had not also been signed by Mr Ye and the common seal had not been used, she therefore considered that the contracts were not binding. Ms Li said that she had been informed (by whom was not stated) that the general terms forming part of the contracts were required by the defendant for the purposes of mere formality alone. Ms Li suggested that the Sales Contract - General Terms did not form part of the contracts. Further, Ms Li said that, as the timber was not supplied by the defendant but by a third party and the true nature of the contract was a trade facility, the contract had not been performed by the defendant. There was no suggestion that the plaintiff is planning on returning the timber.

Submissions

16. The plaintiff submitted that the contracts had not been properly executed. It was said that a general rule at common law is that a company may enter into a binding contract only under its seal. The plaintiff relied on section 127 of the Corporations Act. As only Ms Li signed the contracts and without the company seal, it was submitted that the defendant was thus unable to rely on any assumptions provided in section 129(5) or (6) of the Corporations Act, relying on NCR Australia Pty Limited v Credit Connection Pty Limited [2004] NSWSC 1 at [90] per Austin J. Sub-sections 129(5) and (6) of the Corporations Act provide:

Document duly executed without seal

(5)    A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

Document duly executed with seal

(6)    A person may assume that a document has been duly executed by the company if:

(a)    the company’s common seal appears to have been fixed to the document in accordance with subsection 127(2); and

(b)    the fixing of the common seal appears to have been witnessed in accordance with that subsection.

For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

17. The plaintiff submitted that the defendant was on notice that Ms Li did not have authority to sign the contract alone as a company search would have revealed that the plaintiff had two directors and that Mr Ye was also the secretary. The plaintiff submitted that the contracts were drafted on the assumption that Mr Ye would sign the contracts but, on closer inspection, the reference to Mr Ye in the contracts was for the purposes of specifying the person to whom notices could be served under the contract. The plaintiff submitted that Ms Li had been informed that the Sales Contract – General Terms, and perhaps also the contracts, were mere formalities and would not be relied upon by the defendant.

18. The defendant submitted that, even if Ms Li was not actually authorised to sign the contracts, she was ostensibly authorised to do so by reason of her office as director. Section 127 does not affect the enforceability of a contract but allows parties to rely on the statutory assumptions within the Corporations Act. The premise of the plaintiff’s submission – that compliance with section 127 is a necessary condition of the enforceability of a contract entered into with a company – is wrong. As to the plaintiff’s suggestion that the contracts were a ‘mere formality’, the documentary evidence did not support this assertion, nor was it consistent with the plaintiff’s conduct in the months following entry into the contracts. It was submitted that it would be entirely unrealistic to conclude that the parties to a commercial contract for the sale of goods did not intend that the defendant should be able to enforce its right to payment while the plaintiff remained entitled to retain the goods.

19. As to the second suggested dispute, the defendant submitted that it did not matter which party delivered the timber. The defendant agreed to sell timber to the plaintiff and the plaintiff agreed to pay the defendant within 45 days of acceptance of delivery. The commercial arrangement permitted the plaintiff to obtain timber 45 days in advance of having to pay for it in circumstances where Oz Plantation’s terms required payment within 3 days. Whether or not the arrangement was a ‘trade facility’, as described by the plaintiff, did not matter as there could be no dispute as to the existence of an enforceable obligation on the plaintiff to pay the amount due to the defendant. Whilst the plaintiff says that the defendant was providing a ‘trade facility’ without a ‘credit licence’, it was not clear what was intended to be meant by those terms but the plaintiff denied that it had failed to comply with any relevant regulatory requirement. Nor did it affect the existence of the debts arising from the contracts. Adopting the phraseology employed in Ligon 158 Pty Limited v Huber [2016] NSWCA 330, the defendant submitted that the plaintiff’s evidence did not demonstrate the objective existence of any dispute in relation to the contracts, was so devoid of substance as to not warrant further investigation and appeared to be disputes constructed in response to the pressure posed by the statutory demand: Ligon at [8], [10].

Consideration

20. It is necessary to set out the section which precedes section 127 of the Corporations Act. Sections 126 and 127 provide:

126   Agent exercising a company’s power to make contracts

(1)   A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal.

(2)   This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract.

127   Execution of documents (including deeds) by the company itself

(1)   A company may execute a document without using a common seal if the document is signed by:

(a)   2 directors of the company; or

(b)   a director and a company secretary of the company; or

(c)   for a proprietary company that has a sole director who is also the sole company secretary—that director.

(2)   A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:

(a)   2 directors of the company; or

(b)   a director and a company secretary of the company; or

(c)   for a proprietary company that has a sole director who is also the sole company secretary—that director.

(3)   A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).

(4)   This section does not limit the ways in which a company may execute a document (including a deed).

21. As section 126 makes plain, a company may enter into a contract by any individual acting with the company's express or implied authority and on behalf of the company. A company may enter into a contract without using a common seal. Indeed, a common seal is optional: section 123 of the Corporations Act. Ms Li was a director of the plaintiff company at the time that the contracts were executed. Whilst I agree that a company search would have revealed that the company had two directors, it does not follow that the defendant was on notice that a director of the plaintiff company was not authorised to sign the contract without the other director also signing. The defendant was entitled to assume that Ms Li had authority to enter into the contracts on behalf of the plaintiff, as she did. The defendant was also entitled to infer from Ms Li’s position, Chief Executive Officer, that she had such authority. There is no evidence that Ms Li was not authorised to execute either contract. One would have expected such evidence to come from Ms Li in her affidavit in support of the originating process or an affidavit by her co-director, Mr Ye.

22. It is apparent from contemporaneous documents that both directors of the plaintiff company were aware of the contracts at the time; neither sought to suggest that the contracts should not have been entered into by Ms Li. Therefore it was not necessary for the defendant to rely on the assumptions in section 129(5) and (6) of the Corporations Act, nor did I understand that the defendant sought to rely on such assumptions. Rather, the defendant relied on the contracts which appeared on their face to be executed by an individual acting with the company’s express or implied authority, as confirmed by contemporaneous documents.

23. As to the suggestion that the contracts were mere formalities, Ms Li does not identify the source of her information. The contemporaneous documents indicate the contracts were no such thing. The defendant insisted upon strict performance of the contracts. The plaintiff did not, in subsequent emails, suggest that the contracts were mere formalities. This suggested ground of dispute is inconsistent with undisputed contemporaneous documents, inherently improbable and amounting to a mere assertion. Therefore, the first suggested genuine dispute is devoid of substance and does not meet the very low threshold required to set aside the demand.

24. Turning to the second suggested genuine dispute, it is not clear to me why it matters whether the timber purchased under these contracts came directly from the defendant or was supplied to the plaintiff via a third party. As long as the defendant performed the contract which it had entered into, it does not matter whether it did so itself or used a third party to assist in doing so. Nor does it matter that, by the means of these contracts, the defendant was supplying not only timber but giving the plaintiff better trading terms than if the plaintiff had purchased the timber from Oz Plantation directly. That was the bargain which appears on the face of the documents to have been struck between these contracting parties. That is what the plaintiff agreed to pay for when entering into these contracts, that is, both the timber and further time to pay for it. It appears on the evidence that the defendant has performed its obligations but the plaintiff has not. Therefore, there does not seem to be any plausible argument as to why the statutory demand should be set aside.

25. For these reasons, I make the following orders and directions:

1. Dismiss the Originating Process filed 5 March 2020.

2. Order the plaintiff to pay the defendant's costs of the proceedings.

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Decision last updated: 05 June 2020