John Shearer Ltd v Gehl Company
[1995] FCA 430
•9 JUNE 1995
C A T C H W O R D S
CORPORATIONS - Statutory demand - bill of exchange - whether debtor can have statutory demand set aside because of an off-setting claim.
BILL OF EXCHANGE - See above
Corporate Law Reform Act 1992
Bills of Exchange Act 1909 (Cth)
Topfelt v State Bank of New South Wales (1993) 47 FCR 226 at 231
Mibor Investments v Commonwealth Bank of Australia [1994] 2 VR 290 at 293-294
Nova (Jersey) Knit Ltd v Kammgarn Spinnerei G.m.b.H [1977] 1 WLR 713
Cebora S.N.C. v S.I.P. (Industrial Products) Ltd [1976] 1 Lloyd's Rep 271
Mobil Oil Australia Ltd v Caulfield Tyre Services Pty Ltd (1984) VR 440
Buying Systems (Aust) Pty Ltd v Tien Mah Litho Printing Co (Pte) Ltd (1986) 5 NSWLR 317
Bank of England v Vagiliano Bros [1891] AC 107
JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD
Applicants
- and -
GEHL COMPANY Respondent
O'LOUGHLIN J.
ADELAIDE
9 JUNE 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIAN DISTRICT REGISTRY )
)
GENERAL DIVISION )
No. SG 3117 of 1994
No. SG 3154 of 1994
B E T W E E N:
JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD
Applicants
- and -
GEHL COMPANY
Respondent
MINUTES OF ORDER
JUDGE MAKING ORDER : O'LOUGHLIN J.
WHERE MADE : ADELAIDE
DATE OF ORDER : 9 JUNE 1995
THE COURT ORDERS THAT:
That these proceedings be adjourned sine die with liberty to any party to apply to relist them on 2 days notice.
That the respondent bring in short minutes of order in terms consistent with the reasons this day published with leave reserved to the applicants to speak to the minutes of order.
That all questions of costs be reserved for further argument.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIAN DISTRICT REGISTRY )
)
GENERAL DIVISION )
No. SG 3117 of 1994
No. SG 3154 of 1994
B E T W E E N:
JOHN SHEARER LIMITED and ARROWCREST GROUP PTY LTD
Applicants
- and -
GEHL COMPANY
Respondent
REASONS FOR JUDGMENT
CORAM: O'LOUGHLIN J.
PLACE: ADELAIDE
DATE : 9 JUNE 1995
Applications for review of decisions of a Registrar. The short point in these proceedings in whether the Corporations Law ("the Law") has had any effect upon the rights of a creditor when his debtor dishonours a bill of exchange. Expressed another way (and absent fraud and other specialty defences) does acceptance of a bill of exchange still constitute an irrevocable and unconditional obligation to meet the face value of the bill on its maturity date.
The applicant, John Shearer Limited ("John Shearer") carries on business in South Australia as a dealer in Agricultural machinery; in particular, and until the occurrence of the events that gave rise to this litigation, it had, for many years, been the Australian distributor of farm machinery and spare parts that were manufactured by the respondent, Gehl Company, an American Corporation. The second
applicant, Arrowcrest Group Pty Ltd, is the holding company for John Shearer and it has guaranteed to Gehl the due performance of John Shearer's financial obligations.
In circumstances that need not be described in detail, Gehl decided not to renew John Shearer's distributorship when the current agreement expired on 31 July 1994. This decision took John Shearer by surprise; it has claimed that, having no cause to suspect the termination of their commercial arrangement which had extended over a period of twelve years, it had ordered machinery and spare parts which it would not thereafter be able to sell, it had given purchasers of equipment guarantees of performance which it would no longer be able to meet and it had engaged in promotional expenses for new lines of Gehl equipment which would now be of no value to it. That was the climate in which John Shearer dishonoured various bills of exchange which had been intended for payment for machinery and spare parts that had earlier been shipped by Gehl to John Shearer.
Gehl served statutory demands pursuant to the provisions of s459E of the Law on John Shearer as the principal debtor and on Arrowcrest as the guarantor; those companies, in turn, applied to the court under s459G of the Law for orders setting aside the two demands. Each company maintained that the conduct of Gehl, as briefly summarised above, amounted to misleading or deceptive conduct sounding in damages and that
John Shearer thereby had "an offsetting claim" that exceeded the amount of the dishonoured bills; as to Arrowcrest, it was submitted that it must be entitled, as a guarantor to benefit from any "offsetting claim" that was available to John Shearer.
The Registrar considered the authorities that dealt with the recovery of moneys owing on dishonoured bills of exchange but concluded that they had been overborne by the provisions of the Law; he was of the opinion that the evidence that had been placed before him was sufficient to satify the court that the statutory demand that had been served on John Shearer should be set aside. On the other hand, the Registrar arrived at the opposite result with respect to Arrowcrest; he concluded that the claim by Arrowcrest that it could rely on the claims of John Shearer against Gehl did not constitute "a basis on which the statutory demand issued in respect of Arrowcrest Group Pty Ltd can be set aside".
As a consequence of the Registrar's decisions, Gehl has applied for an order for the review of so much of the decision as favoured John Shearer whilst Arrowcrest has also sought review of that part of the decision that denied it protection from the statutory demand.
At or about the time of the Registrar's decision (in action SG No 3117 of 1994) two further bills of exchange
matured but were dishonoured. This led to Gehl serving further statutory demands on John Shearer and Arrowcrest and to those companies seeking orders setting them aside (action SG No 3154 of 1994). By agreement between the parties, both matters were called on together.
The Registrar, in deciding to set aside the statutory demand that had been served on John Shearer said:
"... I do not consider the issue before the Court as being determined by reference to the law relating to bills of exchange. The issue before the court is instead to be determined by reference to the scheme introduced by the Corporate Law Reform Act 1992 which came into effect on 25 June 1993. The introduction of s459 (sic) of the Corporations Law established a new basis whereby a company who had been served with a statutory demand could apply to the court to set aside that demand either by disputing the genuineness of the debts on which the demands are based or alternatively by accepting the debts as due and payable but relying on an offsetting claim against the originator of the demand."
(I take it that the reference to s459 was intended to be a reference to Part 5.4, comprising s459A to s459T).
In order to test this conclusion it is necessary to consider the state of the Law prior to the amendments that were introduced by the Corporate Law Reform Act 1992. Section 460 of the Law was then in the following terms:
The Court may order the winding up of a company that is unable to pay its debts.
For the purposes of an application that is made in relation to a company on the ground provided for by subsection (1), the company shall be deemed to be unable to pay its debts if:
(a)a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding $1,000 then due has served on the company a demand, signed by or on behalf of the creditor, requiring the company to pay the sum so due and the company has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;
(b)execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c)the Court, after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debts."
Although there were differences, the language of the former s460 of the Law was substantially the same as the comparable provisions in s364 of the former Companies Code. That section provided for the circumstances under which the court may order the winding up of a company: one such circumstance was that:
"... the company is unable to pay its debts" (s364(1)(e)).
It was then provided in s364(2) as follows:
"For the purposes of sub-section (1), if-
(a)a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding $1,000 then due has served on the company a demand signed by or on behalf of the creditor, requiring the company to pay the sum so due and the company has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to the reasonable satisfication of the creditor;
(b)execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned
unsatisfied in whole or in part; or
(c)the Court, after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debts,
the company shall be deemed to be unable to pay its debts."
As a result of the amendments that were introduced in June 1993, Division 2 of Part 5.4 is wholly devoted to the "Statutory Demand" whilst Division 3 is entitled "Application to set aside Statutory Demand". Division 2 is directed to the form and substance of a statutory demand (s459E) and importantly requires (inter alia) the demand to be accompanied by an affidavit verifying that the debt is still due and payable (unless it is a judgment debt). Section 459G is part of division 3; it entitles a company to apply to the court for an order setting aside a statutory demand that has been served on the company. Section 459H then addresses the twin issues of "genuine dispute" and "offsetting claim" and sets out in subs459H(3) the circumstances which will justify the court in making an order setting aside the statutory demand. The contents of s459H are set out in full hereunder:
"459H(1)This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a)that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b)that the company has an offsetting claim.
459H(2)The Court must calculate the substantiated
amount of the demand in accordance with the formula:
Admitted total - Offsetting total
where:
'Admitted total' means:
(a)the admitted amount of the debt; or
(b)the total of the respective admitted amounts of the debts;
as the case requires, to which the demand relates;
'Offsetting total' means:
(a)if the Court is satisfied that the company has only one offsetting claim - the amount of that claim; or
(b)if the Court is satisfied that the company has 2 or more offsetting claims - the total of the amounts of those claims; or
(c)otherwise - a nil amount.
459H(3)If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.
459H(4)If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:
(a)varying the demand as specified in the order; and
(b)declaring the demand to have had effect, as so varied, as from when the demand was served on the company.
459H(5)In this section:
'admitted amount', in relation to a debt, means:
(a)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or
(b)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or
(c)otherwise - the amount of the debt;
'offsetting claim' means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates);
'respondent' means the person who served the demand on the company.
459H(6)This section has effect subject to section 459J."
Section 459J allows the court to set aside the demand if it is satisfied that, because of a defect in the demand, substantial injustice will be caused unless the demand is set aside. The Explanatory Memorandum which accompanied the amending legislation dealt with the subject of setting aside Statutory demands in these terms:
"685. This Division will implement the Harmer Report's recommendations in connection with the setting aside of statutory demands. The Harmer Report considered that the existing largely unregulated, procedure in relation to notices of demand too often produces disputes about the debt at the hearing of a winding up application. The report further noted that companies presently often need to bring injunction proceedings where a debt claimed in a demand is disputed. The report took the view that the legislation should specifically provide for the determination of disputed debt issues and other disputes in respect of a statutory demand.
The Harmer Report proposed that a demand may be set aside if the Court is satisfied that:
.there is a substantial dispute as to whether the debt is owing;
.the company appears to have a counter claim which may exceed the amount of the debt; or
.the demand ought to be set aside on other grounds.
This last general power would enable the Court
to take account of matters such as improper or invalid service and mistakes or misstatements in the notice of demand, in circumstances where this would significantly prejudice any party.
The provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands, and to do so on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies. In particular it is intended to remove the present difficulties which are experienced where difficulties in estimating the extent of the debt may lead to an invalidating of the statutory demand on the basis of a minor overstatement of the amount due. This issue has been highlighted in recent cases: Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 5 ACSR 10; Hassgill Investments Pty Ltd v Newman Air Charter Pty Ltd (1991) 5 ACSR 321.
This proposed Division, together with proposed Division 4, also provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed) at an early stage, rather than after winding uo proceedings have commenced."
See also Topfelt v State Bank of New South Wales (1993) 47 FCR 226 at 231 per Lockhart J where his Honour said that the new provisions "relating to statutory demands were intended to introduce a new regime for proving insolvency of a debtor company..." But as Hayne J pointed out in Mibor Investments v Commonwealth Bank of Australia [1994] 2 VR 290 at 293-294 even though substantial changes were made to the law governing statutory demands, the basic question remains:
"... whether the court is satisfied that there is a genuine dispute between the company and the respondent about the existence or amount of the debt to which the notice relates - and that question obviously raises considerations that at the least are similar to those arising under the old rule that
a winding-up order would not, as a matter of discretion, be made on a debt which was bona fide disputed." (at 294)
The Registrar found that there was no genuine dispute about the existence or amount of the debts and no evidence has been led that would point to any such dispute with respect to the claims represented by the most recent dishonoured bills of exchange. He did however find that John Shearer had an "offsetting claim" as that term is defined in s459H(5) of the Law. It is that finding that requires some consideration of the law relating to bills of exchange. A useful starting point is the definition of a bill of exchange as set out in subs8(1) of the Bills of Exchange Act 1909 (Cth). It provides as follows:
"8.(1)A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer."
The subject of dishonour by non-payment is covered in s52, subs(2) of which lays down that:
"Subject to the provisions of this Act, when a bill is dishonoured by non-payment, an immediate right of recourse against the drawer and indorsers accrues to the holder."
Counsel for Gehl, Mr McNamara, submitted that, save for certain statutory defences, a debtor can not set up a counterclaim, set-off or cross-demand against a claim on a
bill of exchange. Authority for such a proposition can be found in the decision of the House of Lords in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei G.m.b.H [1977] 1 WLR 713. That case was considered at length by Young CJ in Mobil Oil Australia Limited v Caulfield Tyre Service Pty Ltd [1984] VR 440 and the following summary of the relevant facts is taken from his judgment; it concerned an English company and a German company who were in partnership. The partners agreed that all disputes between the partners should be decided by arbitration in Germany. The English company sold machinery to the German company and by way of payment received some 24 bills of exchange. After the first six bills of exchange had been paid, the German company refused further payment on the ground that the English company had mismanaged the affairs of the partnership and that the machinery which is supplied was defective. The English company then began in England an action on the bills. The German company sought to stay the action under the provisions of the Arbitration Act. Bristow J at first instance refused the stay but his decision was reversed by the Court of Appeal. Upon a further appeal being taken to the House of Lords, the House of Lords allowed the appeal upon the ground that the arbitration agreement did not extend to disputes on bills of exchange upon which, in any event, their Lordships pointed out, there was no dispute.
In the course of the leading speech which was made by Lord Wilberforce, his Lordship said, at 720:
"I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange: Warwick v Nairn (1855) 10 Exch.762; James Lamont & Co Ltd v Hyland Ltd. [1950] 1 K.B.585. As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated: Warwick v Nairn (1855) 10 Exch. 762 Agra and Masterman's Bank Ltd v Leighton (1866) L.R. 2 Exch.56, James Lamont & Co Ltd. v Hyland Ltd. [1950] 1 K.B. 585; Brown, Shipley & Co. Ltd. v Alicia Hosiery Co. Ltd. [1966] 1 Lloyd's Rep. 668. The amount claimed here in respect of the machines is certainly neither ascertained nor liquidated, and the claim in repect of the mismanagement is one for a wholly unrelated tort, so that there wuld seem to be no basis for denying the appellants' claim that, as regards the bills, there is no dispute."
Lord Dilhorne agreed with Lord Wilberforce. Lord Salmon dissented but on a different point and did not express any view contrary to what Lord Wilberforce had expressed in relation to bills of exchange. Indeed, his Lordship expressly accepted that view. He said, at 726:
"I agree that there is no defence to the bills, since the only possible defence (which is not relied upon by the respondents) could be that their acceptance had been procured by fraud, duress or for a consideration which had failed and because the damages claimed in the arbitration are unliquidated damages and such damages cannot be set off against a claim on the bills of exchange: James Lamont & Co. Ltd. v Hyland Ltd. [1950] 1 K.B. 585."
In Cebora S.N.C. v S.I.P. (Industrial Products) Ltd [1976] 1 Lloyd's Rep 271 Sachs L.J. expressed the same view but with the added emphasis for the need of certainty in the law merchant. He said at 278-279:
"Any erosion of the certainties of the application by our Courts of the law merchant relating to bills
of exchange is likely to work to the detriment of this country, which depends on international trade to a degree that needs no emphasis. For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the Court will refuse to regard either as a defence or as grounds for a stay of execution any set-off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or, a fortiori, arising in any other way. This rule of practice is thus, in effect, pay up on the bill of exchange first and pursue claims later."
In the same case, Stephenson LJ said:
"Bills of exchange are treated as cash, and unless there are exceptional circumstances where there is a an action between the immediate parties to a bill of exchange judgment will not be held up by virtue of a counterclaim by the defendant, and execution will not be stayed." (at 278)
These decisions have been referred to with approval by Cohen J in Buying Systems (Aust) Pty Ltd v Tien Mah Litho Printing Co (Pte) Ltd (1986) 5 NSWLR 317 at 327-328.
It is not, in my opinion, sufficient to regard the new regime (or the code as it is called in the Explanatory Memorandum) that has been established by the Corporate Law Reform Act 1992 as the repository for all issues that may arise with respect to a statutory demand. Lord Herschell laid down the rule for the construction of codes in Bank of England v Vagiliano Bros [1891] AC 107 at 145. His Lordship was called upon to interpret the English Bills of Exchange Act
1881, which was intended to be a code and said:
"I am of course far from asserting that resort may never be had to the previous state of the law for the purpose of aiding in the construction of the provisions of the code. If, for example, a provision be of doubtful import, such resort would be perfectly legitimate. Or, again, if in a code of the law of negotiable instruments words be found which have previously acquired a technical meaning, or been used in a sense other than their ordinary one, in relation to such instruments, the same interpretation might well be put upon them in the code. I give these as examples merely; they, of course, do not exhaust the category. What, however, I am venturing to insist upon is, that the first step taken should be to interpret the language of the statute, and that an appeal to earlier decisions can only be justified on some special ground."
It seems to me that the preservation of the law merchant in international and intranational transactions can be justified as "some special ground" thereby meeting the first rule laid down by his Lordship. The importance of preserving the certainty and efficacy of the bill of exchange is so paramount that it should not be left to amendment - or worse, annulment - by implication. The words "counterclaim", "set-off" and "cross-demand" are not words of plain and ordinary meaning; they have a special legal meaning that has been created and developed by case law. Without reference to the cases, the words lose their meaning. What is more, they do not carry any defined or special meaning in s459H(1). When one asks of John Shearer whether, in terms of s459H it has an "offsetting claim" that means that one is asking whether in terms of s459H(5) it has a genuine claim by way of "counter-claim, set-off or cross demand" I do not consider that
"offsetting claim" is to be given any special meaning; in my opinion they are merely compendious words to encapsulate "counter-claim, set-off or cross demand". That question cannot be answered without first identifying as a matter of law, what is the correct meaning of those words. And in my opinion, the surrounding facts of this case demand that the question be answered by having regard to the fact that the originating claims are based on dishonoured bills of exchange. The general law having made it clear that unliquidated cross-claims cannot be relied on to extinguish a claim on a bill of exchange, the only available conclusion is a finding that John Shearer does not have an offsetting claim. For these reasons I am of the opinion that the Registrar's decision in favour of John Shearer's application in action SG No 3117 of 1994 should be set aside.
The fate of Arrowcrest depended upon the outcome of John Shearer's case. I agree with the Registrar's final decision although I arrived there by a different route. Its application for an order for review should be dismissed and its application for an order setting aside the most recent statutory demands should also be dismissed.
In view of the many notices that are currently under consideration and in order to give John Shearer and Arrowcrest an opportunity to arrange their affairs, I propose to adjourn these proceedings for a short time. I direct the respondent
Gehl to bring in short minutes of order that will reflect the reasons that are herein set out. There will be liberty to speak to those minutes and liberty to any party to apply on two days notice. I will hear the parties on all questions of costs on the adjourned hearing.
I certify that this and the preceding pages are a true copy of the Reasons for Judgment of Justice O'Loughlin.
Associate
Dated:
Counsel for the Applicants : Mr J M Wilkinson
Solicitors for the Applicants : Cowell Clarke
Counsel for the Respondent : Mr P A McNamara
Solicitors for the Respondent : Johnson Winter and Slattery
Hearing Date : 1 February 1995
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