LSI Australia Pty Ltd v LSI Holdings Ltd
[2007] NSWSC 1406
•6 December 2007
Reported Decision:
(2007) 25 ACLC 1,602
New South Wales
Supreme Court
CITATION: LSI Australia v LSI Holdings; LSI Australia v LSI Consulting [2007] NSWSC 1406 HEARING DATE(S): 26 November, 4 December 2007
JUDGMENT DATE :
6 December 2007JURISDICTION: Equity JUDGMENT OF: Austin J DECISION: Statutory demands set aside. CATCHWORDS: CORPORATIONS - winding up - application for order setting aside statutory demand - whether applicant may rely on grounds not mentioned in supporting affidavit ("Graywinter principle") - whether vagueness and ambiguity is a "defect" in a demand - whether, because of such a defect, applicant would suffer substantial injustice if demand is not set aside LEGISLATION CITED: Corporations Act 2001 (Cth), ss 459G, 459H, 459J CASES CITED: Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42
Callite Pty Ltd v Adams [2001] NSWSC 52
Condor Asset Management Ltd v Excelsior Eastern Ltd BC 200509536, [2005] NSWSC 1139
Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785
Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452
Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321
Infact Consulting Pty Ltd v Kyle House Pty Ltd [2007] NSWSC 56
Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746
POS Media Online Ltd v B Family Pty Ltd [2003] NSWSC 147
Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143
Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 12 ACSR 381
Zenaust Imports Pty Ltd v Alembic Chemicals Works Co Ltd (1998) 28 ACSR 465PARTIES: 4521/07
LSI Australia Pty Ltd ACN 103 919 740 (P)
LSI Holdings Ltd (D)
4523/07
LSI Australia Pty Ltd ACN 103 919 740 (P)
LSI Consulting Pty Ltd (D)FILE NUMBER(S): SC 4521/07; 4523/07 COUNSEL: Mr J S Mendel (P)
Mr S Galitsky (D)SOLICITORS: Greenstein Shakenovsky (P)
Webster O'Halloran & Associates (D)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST
AUSTIN J
THURSDAY 6 DECEMBER 2007
4521/07 LSI AUSTRALIA PTY LTD V LSI HOLDINGS LTD
4523/07 LSI AUSTRALIA PTY LTD V LSI CONSULTING PTY LTD
JUDGMENT
1 HIS HONOUR: These are two applications to set aside statutory demands. The plaintiff in each case, LSI Australia Pty Ltd ("LSIA"), seeks to set aside a demand by LSI Holdings Ltd ("LSIH") for $99,825.44 and a demand by LSI Consulting Pty Ltd ("LSIC") for $5,887.20.
2 Counsel for the defendant in each matter objected to the admissibility of affidavits by David Hughes and David Greenstein, each made on 22 November 2007, sought to be read on behalf of LSIA, on the ground that the evidence was irrelevant having regard to "the Graywinter principle". Counsel's contention was that it was not open to LSIA to challenge the statutory demands on grounds other than those identified in the affidavits in support of each application, which were sworn on 12 September 2007. I ruled that LSIA's evidence be allowed subject to relevance, so that I could consider the objection concurrently with my final decision.
3 In my view the evidence challenged by the defendants is relevant and therefore admissible. It is relevant because the court needs to have regard to the contested evidence in order to assess whether that evidence opens up a new ground of challenge to the demands, or is merely supplementary to the grounds laid out in, or emerging from, the affidavits supporting the applications.
Facts
4 LSIH and LSIC are companies formed in New Zealand, according to some documents to which I shall refer. It seems probable that LSIC is a subsidiary of LSIH, though I need not make any finding on that matter. Mr Ian Fahy was a director of LSIH at all relevant times.
5 Until October 2006 LSIA conducted an Australian business as part of the LSI group and until that time Mr Fahy was a director. Counsel for the defendants told me that on his instructions, the shareholders of LSIA were Mr and Mrs Fahy, who then sold their shares to Mr Hughes in the circumstances that I shall describe. That statement seems to me to be contrary to the terms of an Agreement for Sale and Purchase dated 6 October 2006, to which LSIH, LSIA and Mr Hughes, but not Mr or Mrs Fahy, were parties. Para B of that document records an agreement by LSIH to transfer all the share capital in LSIA to Mr Hughes, implying (as one would expect) that LSIH was the sole shareholder of LSIA prior to the sale. It seems to me more likely than not that the written document, rather than what I was told from the bar table, is correct.
6 Mr Fahy came into contact with Mr Hughes in about April 2006, when Mr Hughes responded to an internet advertisement in which LSIH advertised for the services of a consulting business development partner. Mr Fahy entered into discussions with Mr Hughes which resulted in an agreement for a trial period of some months, apparently on terms set out in Mr Hughes' letter to Mr Fahy dated 2 May 2006. Though the position is far from clear, it appears from the terms of that letter that the contracting parties were LSIA, LSIH (and perhaps also Mr Fahy personally), and the Bottom Line Partnership, in which Mr Hughes was a partner. I say that LSIH was probably a party on the basis that (as stated above) the shares in LSIA were held by LSIH and the agreement provided for a sharing of profits made by LSIA. The trial period was subsequently reduced by agreement, so that it was a period of five months beginning early in May and expiring on 30 September 2006 ("the trial period").
7 According to the letter of 2 May 2006, the Bottom Line Partnership made the services of Mr Hughes available to LSIA for the trial period for fees calculated on a daily basis, including a 50% profit share to be calculated after deducting several amounts from gross revenue, one of the deducted amounts being a 20% royalty, evidently payable to LSIH.
8 In Mr Fahy's affidavit in the LSIC matter made on 24 October 2007, he alleged that, before the commencement of the trial period and when the relevant companies were under the control of himself and Mrs Fahy, LSIA had insufficient funds to meet a payment of $5,887.20 for wages, and so that amount was lent to it by LSIC by means of book entries made in the accounts of the two companies on 20 February 2006. As noted more fully below, Mr Fahy claimed that Mr Hughes had been provided with copies of LSIA's accounts containing the provision for that liability.
9 There is evidence, in the affidavit of Mr Fahy made on 24 October 2007 (paras 21-24) and in the affidavit of Mr Hughes made on 22 November 2007 (paras 10-13), indicating that disagreements developed between Mr Hughes on the one hand and Mr and Mrs Fahy on the other hand with respect to the conduct of the business of LSIA during the trial period: disputes concerning the preparation of management accounts by Mrs Fahy, the supply of information by Mr Hughes to her for that purpose, and the use of the LSIA bank account by Mr Hughes. It is unnecessary to track through this evidence in detail. Suffice it to say that apparently LSIH claims that it is owed some money in respect of the division of profits earned by LSIA during the trial period, accounts for which have later been prepared by Mr and Mrs Fahy, but not accepted by Mr Hughes.
10 In his affidavit made on 24 October 2007, para 23, Mr Fahy said that as at 30 September 2006 royalties were payable by LSIA to LSIH, in accordance with invoices annexed to his affidavit. There were five invoices annexed to the affidavit, namely invoices issued by LSIH to LSIA in respect of January, June, July and August royalties, and an invoice issued by LSIC to LSIA in respect of the September royalty. Each invoice was dated the last day of the month in respect of which a royalty was claimed. Therefore four of the five royalties related to months during the trial period, although one of them is claimed by LSIC rather than LSIH, while the January royalty was in respect of a month preceding the trial period. The total amount of the five royalties is $99,825.44.
11 Mr Fahy said in his affidavit (para 24) that monthly "accounts" were provided to Mr Hughes in respect of the trial period, though he explained that there was a delay in respect of September 2006 because (he said) Mr Hughes declined for several months to provide information, although ultimately accounts for the period ended 30 September 2006 were completed and provided to Mr Hughes. A copy of those accounts is annexed to Mr Fahy's affidavit. The accounts comprise a balance sheet for LSIA as at 30 September 2006 and a profit and loss account for LSIA for the period from May to September 2006.
12 The profit and loss statement for May-September 2006 includes an expense for "Royalty" of $104,650.40. According to the balance sheet as at 30 September 2006 current liabilities included "Accounts Payable" of $103,268.59. It will be noted that neither of these amounts corresponds with the amount of LSIH's statutory demand.
13 Mr Fahy did not say when these accounts were finalised and presented to Mr Hughes, but Mr Hughes said in his affidavit of 22 November 2007 that the accounts were only provided in July 2007 and that there is considerable dispute about them.
14 On 6 October 2006 LSIA, LSIH and Mr Hughes entered into three agreements, the general purpose of which was for LSIH to dispose of its Australian business to Mr Hughes by selling the shareholding of LSIA to him, while at the same time providing for the continuing cooperation of the two companies and for LSIA, under its new ownership, to use some intellectual property belonging to LSIC under licensing arrangements.
15 One agreement was the Agreement for Sale and Purchase, to which LSIH, LSIA and Mr Hughes were parties. Another agreement, made on the same day, was the Cooperation Agreement to which LSIH and LSIA were parties. The third agreement was the Intellectual Property Licence Agreement, to which LSIH, LSIA and Mr Hughes were parties.
16 By clause 3 of the Intellectual Property Licence Agreement, LSIA as licensee promised to pay LSIH as licensor royalties for the use of the LSIA brand and certain intellectual property of LSIC, at the rate of 20% of LSIA's revenue based on monthly management accounts, in arrears on the 20th of the month following receipt of the revenue.
17 A term of the Sale and Purchase Agreement was as follows:
- "D. LSI Holdings grants indemnity to LSI Australia for any outstanding liabilities that may occur prior to 1st October 2006."
18 Mr Fahy and Mr Hughes have given conflicting evidence about this clause. According to Mr Fahy, the parties agreed orally that the indemnity would be against unknown liabilities such as tax audits. Mr Hughes maintained, in his affidavit of 22 November 2007, that he had orally insisted on an indemnity for all liabilities of LSIA arising prior to the date of takeover of the company, and he said that Mr Fahy agreed.
19 Mr Hughes gave evidence (affidavit of 22 November 2007, para 11) that he told Mr Fahy on several occasions that LSIA would not pay any royalties for the period prior to 1 October 2006 because LSIH had indemnified LSIA against any liabilities for this period. Obviously Mr Fahy asserts that the indemnity clause is no obstacle to LSIH's claims for royalties.
20 Mr Hughes also gave evidence, in the same affidavit, that all royalties due and payable to LSIH in the period from 1 October 2006 to 31 August 2007 have been paid. That does not appear to be contested.
21 Mr Hughes also claimed, in his affidavit of 22 November, that not all elements of the LSIA brand and intellectual property to which the licensing agreement referred had been provided to LSIA as required by the agreement, and he gave some particulars. He identified some tax invoices rendered by LSIC and asserted that LSIA was entitled to input credits in respect of the GST component of those invoices and was prejudiced by not being able to claim those credits.
22 It should be noted that Mr Hughes' evidence about these offsetting claims falls well short of what would be needed, in terms of particularity of valuation, to make out a case for a genuine offsetting claim under s 459H (Crontec Automotive Tooling Pty Ltd v Allsteel Australia Pty Ltd [2006] NSWSC 555 at [34], and cases there cited).
23 Mr Greenstein, LSIA's solicitor, made an affidavit dated 22 November 2007 in which he said that, according to his search of the database records of the Australian Securities and Investments Commission, there are no registered bodies in Australia called "LSI Holdings Ltd" and "LSI Consulting Ltd". That is perhaps not surprising, as the evidence (including the three agreements to which I have referred) indicates that those companies were formed in New Zealand. It was not contended at the hearing that they have come under any obligation to register as foreign companies in Australia.
The statutory demands
24 On about 24 August 2007 LSIA was served with two creditors’ statutory demands, one purporting to have been issued on behalf of LSIH for $99,825.44, and the other by LSIC for $5,887.20. Each demand was signed by Mr Fahy as a director of the relevant company.
25 Each demand was accompanied by an affidavit of Mr Fahy made on 24 August 2007 in which he said he had inspected the business records of the creditor in relation to the debtor's account with it, and that the debt referred to in the statutory demand was due and payable, and that he believed there was no genuine dispute about the existence or amount of the debt.
26 In the Schedule to the demand by LSIH, there was a description of the debt as follows:
- "Amount due owing and payable by the Debtor to the Creditor in accordance with the Accounts of the Debtor: $99,825.44."
27 It will be noted that the amount demanded by LSIH is equivalent to the total amount claimed for royalties for the months of January, June, July, August and September 2006, although the September invoice is in the name of LSIC. It has not been shown that at the time of service of the statutory demand, Mr Hughes was aware of the invoices for those royalties; in his affidavit of 22 November 2007 he apparently denies that these invoices were rendered. It will also be noted that the description of the amount claimed is vague and ambiguous. An amount said to be due "in accordance with the Accounts" of LSIA might well be interpreted as referring to the division of profits earned during the trial period which depended on finalisation of the accounts of LSIA, rather than to any royalty claim; an interpretation the plausibility of which is enhanced by the evidence that there was a well-established dispute about the division of profits by the time of service of the demand.
28 In the Schedule to the demand by LSIC, the debt was described as follows:
- "Amount due owing and payable by the Debtor to the Creditor, being moneys lent to the Debtor by the Creditor: $5,887.20."
29 As the claim is for money is lent, it does not appear to relate to the royalty invoice for September 2006. It will be noted that the description is vague, and specifically the date of the loan is not identified. There is nothing to indicate whether the loan is alleged to have arisen before the trial period, or during the trial period, or after the sale of shares.
The originating processes and the affidavits filed to support the applications
30 The originating processes to set aside each statutory demand were filed on 13 September 2007, supported in each case by an affidavit by Mr Hughes as managing director of LSIA, made on 12 September 2007.
31 In the proceedings against LSIH, Mr Hughes annexed to his affidavit a copy of a letter dated 24 August 2007 from his company's accountant, Mr Cousins, to a Mr Tolley, described by Mr Hughes as "the creditor's accountant". Mr Hughes said that Mr Cousins' letter set out the amount which he believed to be owing by LSIA to LSIH, as well as the basis of calculation of that amount, and he noted that the amount was significantly less than the amount claimed in the statutory demand. He asserted that there was a genuine dispute as to the amount of the debt.
32 Mr Cousins' letter was directed to "settling the matter of the balance of cash owed to [Mr Tolley's] client, Ian Fahy (FAHY) covering the period of trading between 1 May 2006 and 30 September 2006 when David Hughes (HUGHES) entered into an agreement with FAHY to provide consulting services to his company". Thus, the subject of Mr Cousins' letter was the division of profits on a final accounting for the trial period, in terms of the arrangements reflected in the letter of 2 May 2006. Mr Cousins was not addressing royalty claims.
33 Mr Cousins set out to establish what amount should have been retained in LSIA's bank account for the use of the business in the hands of Mr Hughes, when ownership of LSIA passed from Mr Fahy's interests to Mr Hughes on 1 October 2006. That, he said, could be calculated by taking the bank balance as at 30 September 2006, adding the value of receivables outstanding as at 30 September according to LSIA's agreed accounts, deducting the value of payables outstanding as at 30 September according to LSIA's agreed accounts, and also deducting the share of profit earned from May to September 2006 that was due to Mr Hughes under the profit-splitting agreement. Without wishing to resolve any yet-to-be-contested matters concerning the interpretation of the arrangements during the trial period, I observe that this is at least very like the arrangements contemplated in the letter of 2 May 2006.
34 Mr Cousins set out some figures, which showed a "Balance due to FAHY" of $66,646.99. From that amount Mr Cousins deducted a provision for company tax for the trading period of $15,800, leaving a balance of $50,846.99, which Mr Cousins said Mr Hughes was prepared to pay forthwith in full and final settlement of all issues covering the five months trading period.
35 The letter attached some explanatory notes showing how the values of receivables and payables and the profit split had been calculated. The explanatory notes said nothing about any royalties owing to LSIH but the letter itself suggested that the company tax for the trading period could be "applied against the August 2007 royalty payment that will be due to your client". Counsel for LSIH placed some emphasis on that sentence at the hearing. But in that sentence Mr Cousins is talking about a royalty payment that had yet to accrue at the time he was writing. There is nothing to suggest he was aware that LSIH may have a royalty claim in respect of the trial period, and certainly no acknowledgement by him that any such claim could be made notwithstanding the indemnity.
36 Mr Hughes also annexed to his affidavit in the LSIH matter a copy of a letter dated 31 August 2007 from Mr Greenstein, LSIA's solicitor, to LSIH, marked for the attention of Mr Fahy. The letter referred to Mr Cousins' earlier letter, which, according to Mr Greenstein, had identified the amount of LSIA's indebtedness to LSIH, and noted that the amount differed substantially from the amount in the statutory demand, and that Mr Cousins' letter had provided the basis of LSIA's calculations "in extensive detail". Mr Greenstein's letter asserted that it was "evident" that there was a genuine dispute about the existence of, or the amount of, the debt claimed in the statutory demand, and expressed surprise that Mr Fahy had sworn an affidavit saying there was no genuine dispute about the existence or amount of the debt. The letter invited LSIH to withdraw the statutory demand and said that if that did not occur an application would be made to the court to set the demand side.
37 It is clear that in preparing his application and his supporting affidavit in the LSIH matter, Mr Hughes regarded the statutory demand as a demand for LSIH's share of the profits earned by LSIA during the trial period. That is obvious from the fact that he chose to annex the letters of Mr Cousins and Mr Greenstein and did not say anything about royalties payable during the trial period. That interpretation was, as I have said, available to be taken by a reasonable reader because of the vague and ambiguous terms of the demand.
38 Counsel for LSIC submitted that Mr Hughes, or a reasonable person in his position, would have realised that the claim was for royalties rather than a share of profits, because the amount of the demand was the very same figure as the total of the invoices rendered for royalties in the months of January, June, July, August and September 2006. But the evidence does not indicate that the invoices for royalties for those months, which were prior to the sale of the business, were supplied to Mr Hughes. According to Mr Fahy, Mr Hughes was given a balance sheet as at 30 September 2006 and a profit and loss statement for the period from May to September 2006. As I have pointed out, the total figures for accounts payable in the balance sheet and for royalties in the profit and loss statement are not the same as the amount of the statutory demand. Therefore the amount demanded does not of itself provide a link to the alleged outstanding royalties.
39 In the LSIC matter, Mr Hughes deposed in his affidavit of 12 September 2007 that he was not aware of any dealings or transactions between LSIA and LSIC, and he said he had checked the records of LSIA and had not been able to locate any tax invoices rendered by LSIC. He said he therefore had no knowledge of the existence of any debt that might be owing by LSIA to LSIC. He annexed to his affidavit a letter by Mr Greenstein asserting that LSIA had had no dealings with LSIC and asking for copies of documentation that might evidence the alleged debt. There is no evidence of any reply to that letter, other than Mr Fahy's affidavit.
40 It seems to me probable that in making his affidavit of 12 September 2007, Mr Hughes did not identify the provision in the accounts as a source of the claim made by the statutory demand, if he was aware of it at all, and was simply non-plussed by the claim which, as I have said, was vaguely expressed without a specific date. It is true that the amount of the statutory demand was the same as the amount listed in the balance sheet as at 30 September 2006 for "LSIA Consulting Loan A/c", but the description of the debt in the statutory demand was so vague that no link was provided between the demand and the balance sheet. Specifically, the demand gave no date for the alleged loan and made no reference to the balance sheet or any other financial statements. Indeed, the wording of the Schedule to the demand suggested an active loan transaction rather than mere ledger entries. In my opinion a reasonable person in the shoes of Mr Hughes would not have linked the vague wording in the statutory demand to the balance sheet entry, notwithstanding that they were for the same amounts. Clearly Mr Hughes did not in fact do so.
41 When, subsequently, Mr Fahy made an affidavit linking the statutory demand to the provision in the accounts, Mr Hughes responded (in his affidavit in the LSIC matter made on 22 November 2007) by referring to the indemnity in paragraph D of the Sale and Purchase Agreement. Of course, LSIC is not a party to the Sale and Purchase Agreement, but since it was involved in the intellectual property arrangements made on 6 October 2006 (though also not a party to the Intellectual Property Licence Agreement) there may be some scope for argument that LSIC is bound by an implied indemnity in the arrangements.
LSIA's challenges to the statutory demands
42 LSIA seeks to set aside the statutory demands on two grounds, that is to say, under s 459H and s 459J(1)(a) respectively.
43 LSIA's case under s 459H is in two parts. First, it claims that there is a genuine dispute as to the existence of the debts now claimed by LSIH and LSIC respectively, because, it says, it is protected from such claims by the indemnity clause in para D of the Sale and Purchase Agreement. Secondly, it asserts offsetting claims for breach of the Intellectual Property Licence Agreement and in respect of GST input credits. The offsetting claims are not sufficiently particularised to satisfy s 459H, for the reasons I have given.
44 In the other part of its case, LSIA alleges that, because of a defect in each of the two demands, substantial injustice will be caused to it unless the demand is set aside (s 459J(1)(a)). The defect in each demand is said to be that the description of the debt is too vague and ambiguous to identify the debt. According to LSIA, this led Mr Hughes, in his affidavits supporting the applications, to misconstrue LSIH's demand and not to be aware of the nature of the claim made by LSIC, and therefore not to put in evidence, within the 21 day limitation period set by s 459G, the indemnity upon which LSIA now wishes to rely.
The "Graywinter principle"
45 The defendants contend that LSIA is precluded from relying on the affidavits of Mr Hughes and Mr Greenstein made on 22 November 2007, having regard to the "Graywinter principle".
46 The Graywinter principle derives from s 459G(3), according to which an application for an order setting aside a statutory demand is made in accordance with s 459G only if, within 21 days after the demand is served, an affidavit supporting the application is filed with the court, and a copy of the application and a copy of the supporting affidavit are served on the person who served the demand on the company. In David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, the High Court held that the prescriptive requirements of s 459G are mandatory and the time limit cannot be extended. There is now a long series of cases, beginning with Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452, affirmed at the appellate level, which hold that "the corollary of the mandatory requirement that an affidavit supporting the application be filed and served within 21 days is that the grounds to be relied upon to set aside the statutory demand must be raised in that affidavit" (Infact Consulting Pty Ltd v Kyle House Pty Ltd [2007] NSWSC 56 (White J), at [23], and cases there cited).
47 Here the defendants submit that the matters concerning “genuine disputes” raised in the affidavits of Mr Hughes made on 12 September 2007 in each case are irrelevant to (or no answer to) the claims asserted in the statutory demands, given the explanations of those claims contained in the affidavits of Mr Fahy made on 24 October 2007; and, having committed his company to the "genuine dispute" grounds stated in those earlier affidavits, it is impermissible for Mr Hughes, outside the 21 day time limit, to seek to put in evidence and rely upon other "genuine dispute" grounds, specifically matters going to the question of indemnity.
48 In my opinion that submission is correct. As Debelle J (with whom Doyle CJ and Perry J agreed) said in Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42, at [24]:
- "There is a substantial body of judicial opinion to the effect that, while a supplementary affidavit may adduce further evidence in support of grounds raised in the initial affidavit, the supplementary affidavit cannot introduce a new ground on which to set aside the demand for that would be to extend the 21 day period prescribed by s 459G".
49 There is a line of cases beginning with Zenaust Imports Pty Ltd v Alembic Chemicals Works Co Ltd (1998) 28 ACSR 465, at 469 (Santow J) supporting the proposition that if the affidavit in support of the statutory demand barely articulates the debt claimed, then the affidavit in support of the application to set the demand aside cannot be expected to rise to a higher level of particularity (see, for example, the Bentham Management case at [18] per Debelle J). But in my view that proposition cannot be invoked here, because the affidavits in support of the applications do not even begin to articulate the grounds on which LSIA now wishes to rely.
Defective statutory demands
50 However, that is not the end of the case. As I have said, LSIA also submits that there are defects in the statutory demands, namely their vagueness and ambiguity, which will cause substantial injustice to it unless the demands are set aside.
51 The word "defect" is defined in s 9, as follows:
- " defect , in relation to a statutory demand, includes:
(a) an irregularity; and
(b) a misstatement of an amount or total; and
(c) a misdescription of a debt or other matter; and
(d) a misdescription of a person or entity."
52 The definition does not directly address the present circumstances. Counsel for the defendants submitted that vagueness and ambiguity are not "defects" for the purposes of the definition, arguing that the general sense of the word is a failure to comply with a standard. It may be right that a measure of vagueness or ambiguity is not necessarily a defect in the demand. It seems to me that the important issue is the degree or measure of vagueness or ambiguity, as affecting the perception and understanding of a reasonable reader.
53 In Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 12 ACSR 381 at 392, Lockhart J said:
- "The definition of 'defect' is an inclusive definition, so one must construe the term initially according to its ordinary meaning and then introduce into it, if it is otherwise not included, the deemed statutory connotations. According to its ordinary usage a 'defect' means a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection."
54 A statutory demand is required by Form 509H to "describe" the debt that is claimed. If the demand is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim, then there is a lack of something necessary for completeness, and therefore a defect in the demand. In my opinion, for the reasons I have given, that is the case in respect of both of the statutory demands presently before the court.
55 There is an additional difficulty in relation to LSIH's alleged debt. According to Mr Fahy's affidavits, that is not a single debt but a series of debts for unpaid monthly royalties, the months in question being the months of January, June, July, August and September 2006. But the statutory demand does not identify those months. It makes a reference to "Accounts". If the "Accounts" referred to are those comprising Annexure J to Mr Fahy's affidavit, then the Accounts do not identify the separate royalty months for which debts are claimed. Of course, another aspect of vagueness in the description of the debt in the statutory demand is that the "Accounts" to which the demand refers are not specified.
56 Because the demands are defective in these ways, substantial injustice will be caused to LSIA unless the demands are set aside. This is precisely because of the application of the Graywinter principle. LSIA wishes to assert that there is a genuine dispute as to the existence of each of the debts, as now specified in Mr Fahy's affidavits of 24 October 2007, because of the indemnity arrangements entered into at the time of the sale and purchase of the business. Although there appears to be some scope for a contest about the proper construction of para D of the Sale and Purchase Agreement, there is at least a plausible contention requiring investigation, satisfying the test in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, that the indemnity clause may cover LSIH's claim. Although the matter is more contentious, my view is that there is a plausible contention that LSIA may be protected by an indemnity, implied in the overall transaction, from LSIC's claim as well.
57 The vague and ambiguous statutory demands, neither of which identify to a reasonable observer the true nature of the alleged debts, have put LSIA's director, Mr Hughes, in the position of not having realised the true claims asserted against his company and therefore not realising the potential relevance of the indemnity, and consequently have led to his failure to put forward the indemnity ground in the affidavits supporting the applications. Unless the court sets aside the statutory demands, LSIA will in those circumstances suffer the substantial injustice of having the presumption of insolvency raised against it in any subsequent winding up proceedings. Therefore there are reasons of "appropriate seriousness" for setting the statutory demands aside (cf Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746) and the statutory requirement is satisfied.
58 Some observations by Barrett J in Condor Asset Management Ltd v Excelsior Eastern Ltd BC 200509536, [2005] NSWSC 1139 at [28], are, in my opinion, applicable to the present circumstances:
- "Fundamental, in these circumstances, is the proposition that the company on which the demand is served must be able to identify with precision the debt - or each and every one of the several debts - upon which a statutory demand is based. Failure to provide the means of such identification means that the company is denied the ability even to begin to consider whether s 459H(1)(a) [the "genuine dispute" ground] provides a ground for challenge. The company in that position suffers severe prejudice; and that prejudice must, of its nature, mean that there will be, in terms of s 459J(1)(a), 'substantial injustice' unless the demand is set aside."
59 Counsel for the defendants submitted that if LSIA was in any real uncertainty as to the subject matter of the statutory demands, the uncertainty should have been ventilated as part of the supporting affidavits. In the case of the statutory demand by LSIC, that is precisely what the affidavit supporting the application does; and further, the affidavit annexes a letter from LSIA's solicitor asking for evidence that the alleged transaction had occurred. In the case of the statutory demand by LSIH, there is no expression of uncertainty in the affidavit supporting the application because it is plain that Mr Hughes misunderstood the subject matter of the demand. In neither case does the law require the supporting affidavit to articulate, in terms, a case under s 459J(1)(a), so long as the ingredients of the claim are presented in the affidavit and its annexures.
The Graywinter principle and s 459J(1)(a)
60 Does the Graywinter principle permit LSIA to rely on s 459J(1)(a) now, without having articulated that ground in the supporting affidavits? In my view an affirmative answer should be given to that question.
61 It is well established that the affidavit supporting an application to set aside a statutory demand does not need to articulate fully the grounds for challenging the demand, if the grounds emerge from the affidavit and its annexures. Indeed, it may be that certain grounds can be relied upon at the hearing even if they are not articulated at all in the affidavit, provided that they are evident on the face of documents annexed to the affidavit (see the cases discussed in POS Media Online Ltd v B Family Pty Ltd [2003] NSWSC 147, at [31]-[40], especially Callite Pty Ltd v Adams [2001] NSWSC 52; see also Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd (2007) 61 ACSR 321 at [29]-[32]; Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143 at [22]-[25]).
62 The vagueness and ambiguity of the statutory demands are evident on the face of those documents themselves. The statutory demands are put into evidence by the affidavits supporting the applications, which were filed and served within the 21-day period. Those affidavits show, on their face, that in the one case the deponent misunderstood the nature of the debt that was the subject of the demand (thinking it was a claim for a share of profits for the trial period, rather than a claim alleging unpaid royalties), and in the other case the deponent was simply non-plussed as to what the claim was all about. In the circumstances, those reactions were not unreasonable. Those are ingredients for a case under s 459J(1)(a).
63 The later affidavits expand and consolidate the evidence, which shows that Mr Hughes was confused and unclear about the demands until receiving Mr Fahy's affidavits. Hence, the affidavits of 22 November 2007 are supplementary affidavits that are permissible, consistently with the Graywinter principle (as to supplementary affidavits, see Bentham Management at [24], per Debelle J).
64 In summary, it seems to me that the facts of each of these cases fall within s 459J(1)(a). I have heard submissions with respect to s 459(1)(b), which allows the court to set aside a statutory demand if it is satisfied that there is "some other reason why the demand should be set aside". Since, however, the present circumstances are covered by subparagraph (a), it is not necessary for me to address subparagraph (b) and I shall not do so.
Conclusions
65 I have decided that LSIA has made out its case under s 459J(1)(a). The appropriate course is to set aside the two statutory demands under s 459J(1). I shall hear the submissions of the parties with respect to costs.
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