NA Investment v Perpetual

[2010] NSWSC 248

CITATION:	NA Investment v Perpetual [2010] NSWSC 248
HEARING DATE(S):	16/03/2010
JUDGMENT DATE :	8 April 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Macready AsJ at 1
DECISION:	I dismiss the proceedings with costs.
CATCHWORDS:	Corporations Act. Application to set aside statutory demand under s 459G of the Corporations Act. Whether proceedings were in breach of the terms of a facility agreement between parties. Held not. Offsetting claim not sufficiently quantified. Proceedings dismissed.
PARTIES:	NA Investment Holdings Pty Limited v Perpetual Nominess Limited
FILE NUMBER(S):	SC 2009/00291026
COUNSEL:	Mr S Duggan for plaintiff Mr RD Marshall for defendant
SOLICITORS:	Argyle Lawyers Pty Ltd for plaintiff Middletons for defendant

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

Associate Justice Macready

Thursday 8 April 2010

4994/09 N A Investments Pty Limited v Perpetual Nominees Limited

JUDGMENT

: This is the hearing of an application to set aside a statutory demand under s 459 G, s 459H and s 459J of the Corporations Act 2001. The demand, which was served by the defendant on the plaintiff, was dated 28 September 2009 and it was in respect of an amount of $7,655,603.93. The description of the debt in the demand was as follows:

“Being the total of the debts owing as at 23 September 2009 in respect of a commercial advance facility provided to Future Fuels Australia Pty Limited (in liquidation) ACN 116 448 143 on the terms and conditions set out in a Facility Agreement dated 3 July 2006, as varied on 11 January 2007 and on 28 June 2007 and amended and restated on 15 October 2008, calculated as follows: …“

2 There were then set out calculations of interest in tabular form giving the amount of claim of being both principal and interest.

Background facts

3 These are helpfully set out in the parties’ submissions which I will incorporate with some amendment. It may be necessary to refer in more detail to events referred to in this part of the judgment.

4 In 2005 N A Investments Holdings Pty Ltd (“N A Investments”) was the holding company and 100% shareholder of three entities, namely, Future Fuels Australia Pty Ltd (“FFA”), FFA Properties (“FFA Properties”) Pty Ltd and FFA Equipment Pty Ltd (“FFA Equipment”) (collectively known as “the FFA Group”).

5 In August 2005 the FFA Group purchased property and equipment in Moama being a refinery plant which at that time was not a going concern.

6 In June 2006 Perpetual Nominees Limited (“Perpetual”), through its agent MFS Investment Management Limited, agreed to provide a facility of $23M to FFA to fund the continuing development of the bio-diesel plant in Moama. A Facility Agreement was subsequently executed on 3 July 2006. N A Investments, Messrs Nabil and Adil Magar guaranteed the obligations of FFA under the Facility Agreement.

7 After the full $23 M was drawn on the facility two further amendments were made to the Facility Agreement on 11 January 2007 and 28 June 2008.

8 By early 2007 the bio-diesel plant was up and running but FFA was experiencing cash flow difficulties because of the increase in the price of raw materials and the expense of dealing with glycerol, a highly volatile by product of the bio-diesel refinement process.

9 In about March 2007 Adil Magar had a conversation with Tim Martin, Perpetual’s representative, in which FFA sought $2 M to $3 M in additional funding from Perpetual. Mr Martin’s reply was:

“When we can see that you are producing finished product and resolving the Glycerol issue we can give you the money.”

10 There is debate as to what steps were then taken to comply with Perpetual’s requirements. In May 2007 a further request was made for additional funding. Mr Martin’s reply was:

“OK but we will need more security to raise the funds.”

11 FFA offered additional security and there were a number of emails detailing requirements for security.

12 In August 2007 Perpetual declined to lend any further money.

13 FFA and N A Investments then investigated a sale of the business. On 1 November 2007 N A Investments entered into a contract for sale of the business with Jonvana Enterprises Pty Limited, which contemplated the sale of N A Investments’ shares in the FFA Group. The purchase price was $41.55 M but also involved Jonvana taking over FFA’s debt to Perpetual. This put the price at about $63 M.

14 The sale was delayed a number of times by the purchaser (and in fact has never been fully executed). Notwithstanding this on 18 October 2008 N A Investments, FFA, Perpetual and Jonvana entered into an arrangement the effect of which was to reduce FFA’s debt to Perpetual by $20 M with the new purchaser effectively taking over that obligation. As part of that arrangement a new Restated Facility Agreement was executed between FFA and Perpetual. N A Investments was again a party as one of the guarantors. It is in its capacity as a guarantor that the demand has been issued against N A Investments.

Plaintiff’s claims

15 The plaintiff seeks to set aside the statutory demand on four different basis which are:

The subject of the statutory demand is a debt which is not recoverable by action,
The statutory demand is a “proceeding” prohibited by the agreement between the parties,
The statutory demand is an abuse of process, and
An offsetting claim rising out of the failure to extend further finance and the consequent sale of the business.

16 The first three of these claims arise out of clause 11.18 of the Restated Facility Agreement which is in these terms:

“11.18 Limitation of liability
(a) The Trustee’s liability to pay any amount in accordance with the Finance Documents, may be discharged from, and the recourse of the Trustee is limited to, the FFA Trust Property. The Lender may not seek to recover any shortfall in the amounts owing to it under or in connection with this agreement by bringing proceedings against the Trustee or applying to have the Trustee wound up. This clause applies despite anything in this agreement but subject to clause 11.18 (b) and clause 11.18 (c).
(b) The Mortgagee may:
(1) do anything necessary to enforce its rights in connection with the FFA Trust Property; and
(2) take proceedings to obtain:
(A) an injunction or other order to restrain any breach of this agreement by the Trustee; or
(B) declaratory relief or other similar judgment or order as to the obligations of the Trustee under this agreement.
(c) Clause 11.18 (a) does not apply in respect of the Trustee to the extent of fraud, negligence or wilful breach by the Trustee."

17 In the deed “Trustee” is defined to mean N A Investments. This is because, as is apparent from the deed, that the company, although being the holding company of the three other companies, holds those shares as the trustee of the N A Investments Trust of which it is the trustee.

18 According to N A Investments the commercial rationale to be gleaned from the clause is to limit the liability of the trustee to the assets of the trust, and prevent Perpetual from seeking recourse to the company’s other assets. It effectively quarantines the liability. Although Clause 11.18(c) provides an exception enabling Perpetual to sue for negligence, wilful breach or fraud any such cause of action is for damages and is not a debt recoverable by statutory demand.

19 N A Investments emphasises that the clause expressly prohibits Perpetual specifically in relation to N A Investments’ obligations under the Restated Facility Agreement, from “bringing proceedings against” N A Investments or applying to have it “wound up”.

20 In its submissions N A Investments submitted that the clause is quite clear in its terms, but even in the event of some ambiguity a “doubt as to the status of a provision in a guarantee should ... be resolved in favour of the surety.” It referred to Ankar Pty Limited v National Westminster Finance (Aust) Ltd (1987) 70 ALR 641 on this point.

21 N A Investments’ construction ignores the initial qualification in the second sentence of the clause. The bringing of proceedings or applying to have the trustee wound up is conditioned by the first part of the sentence to a situation where the lender is seeking “to recover any shortfall in the amounts owing to it under or in connection with this agreement…”. Plainly the shortfall is the extent to which the trust property is insufficient to allow recovery of the full amount due.

22 The effect of this condition may be illustrated by a situation where a plaintiff simply refuses to pay any amount that is due under the facility. If the lender then sued it would be open to the borrower to plead as a matter of defence that the whole or some part of the amount sought to be recovered is beyond the amount of the trust property and therefore not recoverable. It could hardly be imagined that a proper construction of the clause would allow the borrower to defend the proceedings simply on the basis that they are “proceedings” for recovery and thus prohibited by the clause.

23 On an ordinary grammatical construction the condition in the first part of the sentence would have to apply to both the alternatives in the second part of the sentence.

24 In the case there is no evidence before me in these proceedings that the amount sought in the demand represents in whole or in part a “shortfall in the amounts owing”.

25 The first basis on which the plaintiff seeks to set aside the demand is that the debt which is the subject of the statutory demand is a debt which is not recoverable by action. It is plain that this is a condition that must be met before a demand can be issued. See Takchi Bros Constructions Pty Ltd v Woods [2010] NSWSC 115 at [5] and Remuneration Data Base Pty Ltd v Pauline Goodyer Real Estate Pty Ltd [2007] NSWSC 59 at paras [40] – [43]. This is a matter which I must decide to see whether the demand should be set aside under s 459J(1)(b). I am not dealing with whether there is a genuine dispute as to the existence or amount of the debt.

26 I do not think that the primary submission of N A Investments as to the construction of the clause is correct. Absent any evidence to enliven the qualification in the second sentence of the clause there is no basis to conclude that there is some other reason to set aside the demand.

27 The second basis is that the statutory demand is a “proceeding” prohibited by the agreement between the parties. N A Investments’ submissions were as follows:

“A statutory demand is itself capable of being a “proceeding” within the terms of the Restated Facility Agreement.
The service of the statutory demand constitutes “bringing proceedings against the Trustee” to “seek to recover any shortfall in the amounts owing to [Permanent] under or in connection with this agreement” and falls foul of clause 11.18.
The service of the demand is analogous to the situation in Arcade Badge Embroidery Co Pty Ltd v DCT (2005) 157 ACTR 22. In that case it was held that where there was an oral agreement between the creditor (in this case the tax office), and the Company, in which the ATO sought to renege on a promise or representation to withdraw the statutory demand. In those circumstances, the ACT Court of Appeal set aside the demand saying that:
“What is contemplated by s 459J(1)(b) is a discretion of broad compass which extends to conduct that may be described as unconscionable, an abuse of process, or which gives rise to substantial injustice ...”
The demand should be set aside under s 459J(1)(b).”

28 As it is again a claim that the demand be set aside under s 459J(1)(b) I have to decide the question of construction and thus in the absence of the relevant evidence I would not set it aside on this basis.

29 The third claim is that the statutory demand is an abuse of process. The submissions were:

“Paragraph 4 of the Statutory Demand contains the usual statement that:

“The Creditor may rely on a failure to comply with this demand within the period for compliance ... as grounds for an application to a court having jurisdiction under the Corporations Act 2001 for the winding up of the Company.”
That paragraph is incorrect and misleading in the present case as the Creditor is not able to rely on the statutory demand to wind up N A Investments because of clause 11.18 of the Restated Facility Agreement. It is, at the very least, a defect in the demand which would cause substantial injustice if the demand were not set aside.
Moreover, whilst it is accepted that there is no prima facie abuse of process where a statutory demand is used for the collateral purpose of obtaining payment of a debt, there is an abuse in circumstances where the creditor is unable to obtain the ultimate relief, that stated in paragraph 4 of the demand, namely an order that the company be wound up. This is an abuse in the sense of Williams v Spautz (1992) 174 CLR 509. In that case Brennan J, cited the proposition from an earlier Court that:
"the term 'abuse of process' connotes that the process is employed for some purpose other than the attainment of the claim in the action.”
In the present case, the ultimate remedy of winding up the Company is unavailable to Permanent, and it must follow that the payment of the debt would not be a collateral benefit or purpose, but the only benefit or purpose available to it. For that reason, it is submitted that the service of the demand is an abuse in the relevant sense.“

30 For the same reasons, namely, the construction that I adopt and the absence of evidence, this ground is not made out. I do not see that the condition in the first part of the second sentence only applies to the first alternative in the second part of that sentence.

31 I turn to whether there is an offsetting claim rising out of the failure to extend further finance and the consequent sale of the business. N A Investments helpfully included in their submissions a pleading of the claim that they say arises on the facts of this case. The claim provides:

“1. N A Investments was the holding company and 100% owner of issued capital in each company in the FFA Group, including FFA.
2. FFA had a Facility Agreement for $23M with Perpetual.

3. FFA needed more money to finance its ongoing operations.


4. FFA approached Perpetual for more money.

5. In March 2007 Perpetual (through its agent MFS) made a representation to FFA and N A Investments as borrower and guarantor respectively under the Finance Agreement that it would provide further finance “when it could see that finished product is being produced and the glycerol issue is resolved” (“First Representation”).

6. On the strength of the First Representation:

a. Steps were taken to have plant fully functional and sort out the glycerol issue.

b. No steps were taken by FFA and N A Investments to seek alternative finance.


7. In May 2007 Perpetual made a representation that it would provide further finance if more security provided. (“Second Representation”)

8. On the strength of the First and Second Representations:

a. Steps were taken to provide the relevant information and security requested by Perpetual.

b. No steps were taken by FFA and N A Investments to seek alternative finance.


9. The first and second representations were false in that in August 2007 Perpetual refused to provide any further funding notwithstanding that adequate security had been proffered, the plant was up and running and the glycerol issue had been sorted out.

10. N A Investments had lost the opportunity to obtain funding from alternative sources.

11. Without additional funding, N A Investments was forced to sell the bio-diesel business.

12. On 1 November 2007 N A Investments entered into an agreement whereby it contracted to sell its entire shareholding in FFA and related companies.

13. Settlement of that sale agreement was delayed a number of times and Perpetual required FFA and N A Investments to amend the Facility Agreement and execute an amended restated Facility Agreement pursuant to which N A Investments provided a guarantee (Restated Facility Agreement).

14. FFA was placed into liquidation in late 2009.
15. On 30 September 2009, Perpetual made a demand of N A Investments under that guarantee.
Breach of Contract

16. The Restated Facility Agreement contains an express term (clause 11.18(a)) that Perpetual agrees not to institute any proceedings or wind up N A Investments in relation to its obligations under the Restated Facility Agreement.

17. In breach of clause 11.18 of the Restated Facility Agreement Perpetual has served a statutory demand.

18. Any proceedings instituted to obtain judgment for the debt the subject of the statutory demand would also be a breach of clause 11.18.

19. By operation of cl 11.18(a) of the Restated Facility Agreement Perpetual is estopped from instituting any proceedings against N A Investments, including winding up proceedings, in relation to N A Investments’ obligations pursuant to the guarantee in the Restated Facility Agreement.
Promissory Estoppel and Equitable Compensation

20. In the premises, Perpetual has resiled from the promises made in the First and Second Representations.

21. In resiling from those representations Perpetual has acted unconscionably in that it knew that N A Investments, as a guarantor to the facility arrangements, suffered loss by relying upon the representations to its detriment in that:

a. It lost the opportunity to arrange alternative funding. Had FFA arranged alternative funding N A Investments would not have been required to sell its shareholding in FFA and act as guarantor on the Restated Facility Agreement.

b. The loss suffered, inter alia, includes any obligations of N A Investments under the Restated Facility Agreement.

22. To the extent N A Investments is liable for the debt the subject of the statutory demand, it is entitled to equitable compensation from Perpetual for any amount it is required to pay under the guarantee.
Misleading and Deceptive Conduct – Trade Practices Act

23. The conduct of Perpetual was in trade or commerce and was misleading and deceptive, or likely to mislead and deceive.

24. In the alternative, the representations were as to a future matter and there were no reasonable ground for making them at the time they were made.

25. Reliance and Loss


a. N A Investments had knowledge of the representations.

b. N A Investments made the corporate decisions of FFA because of its board representation and 100% shareholding.

c. Because of the representations N A Investments thought that Perpetual would provide funding if it met the plant and security requirements, and did not seek funding from other financial institutions.

d. Funding from another financial institution would have taken some time to arrange, and FFA and its holding company N A Investments had lost that opportunity.
e. Because of that inability FFA was forced to enter into a contract for sale of the business and after extensions of time for settlement of that contract Perpetual was required to renegotiate the Facility Agreement. N A Investments was required to be a guarantor and suffered loss by incurring the obligations under that guarantee. The amount of loss is the amount of any claim against it by Perpetual, currently estimated at $7.6M.

32 In determining whether there is an offsetting claim it is useful to bear in mind the process which is involved. In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 Palmer J usefully described a genuine offsetting claim in these terms:

“18 In my opinion, a genuine offsetting claim for the purposes of CA s.459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. “Good faith” means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s.459H(1) and ( 2).”

33 The same sentiments were expressed in Sewmail (Australia) Pty Ltd v Booby Traps Pty Ltd (1997) 23 ACSR 339 at 342 in these terms:

“Section 459H of the Law does not require the court to make a final determination of the admitted total and the offsetting total. Rather the court is required to determine whether or not, where some or all of the debt the subject of the statutory demand is admitted, there exists a genuine claim which must be offset against the admitted debt. Section 459H(1)(a) refers to “a genuine dispute” and “offsetting claim” is defined in subs (5) to mean “a genuine claim …”. Whether the court must deal with a genuine dispute or an offsetting claim or a combination of both, it is necessary for the court to determine whether the dispute or offset is pursued genuinely.”

34 His Honour Burley J went on to deal with quantification in these terms:

“While I am satisfied, on the basis of the affidavit evidence filed by the plaintiff, that a genuine offsetting claim exists, I am not satisfied that the claim amounts to $50,000 or any other amount. To support the genuineness of an offsetting claim amounting to $50,000, the plaintiff relies upon the unsubstantiated assertion of Mr Taylor, a director of the plaintiff, that the offsetting claim amounts to $50,000. That in my view is not sufficient. There needs to be evidence supporting the quantum of the offsetting claim so that the court may determine whether or not there is a genuine offsetting claim of a given amount. It is not necessary that the evidence be such as might be advanced at a trial but it is, in my view, necessary to adduce some evidence in that regard: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451 at 460 and 463 ; 120 ALR 173 ; 12 ACSR 341; Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 21 ACSR 581 ; 14 ACLC 1703 at 1706. In the absence of such evidence it is impossible for the court to determine whether or not the statutory demand must be altered or set aside in accordance with the provisions of s 459H of the Law. For these reasons the ground relied upon by the plaintiff in relation to the offsetting claim must fail.”

35 Perpetual submitted that the offsetting claim made here is not a genuine or bona fide claim for the following brief reasons:

“(a) The evidence does not disclose any misleading or unconscionable conduct;
(b) the defendant qualified its position in writing in June 2007;
(c) NA Investments did not comply with the plaintiff’s stated requirements to even consider a further loan;
(d) the claim is not quantified so as to produce any economic loss. The evidence is deficient and so is the whole notion that any loss could ever be proven when the $68M sale is unlikely to ever complete.”

36 The promises relied upon by N A Investments I have set out earlier in this judgment. They have to be seen, as Perpetual points out, in the light of the fact that the original loan requirements were very detailed. Not unsurprisingly after the May request there were emails, which set out the detailed requirements for the provision of the further funding. These requirements included management financials, business projections completion of lodgement of applications for government grants and further details of the security offered. The evidence does not disclose that there was ever any response to this request. In the light of this it seems that the claim may have difficulties.

37 However the offsetting claim has greater problems when one comes to consider its quantification. In his affidavit Mr Magar estimated the claim in these terms:

“In the sum of at least $32 M, being the difference between the ‘for sale’ price of $68 M of the FFA Group business and the value of the business as a going concern.”

38 The statement by itself is not a sufficient quantification of the amount of the offsetting claim as the authorities to which I referred make clear.

39 The only evidence of the value of the group is a report of Worley Parson of March 2006. Perpetual described the report in their submissions in these terms:

The report states that the Moama plant was producing fuel at the rate of 3 tonnes per hour. That equals 24 million litres per annum. A “comparable” facility is reviewed, being one at Berkeley Vale. It produces 40 million litres per annum from a process similar to that employed at Moama. The owner of that plant commenced trading in December 2005 and has a market capitalisation at “the offer price of $110M”.
The author of the report refers to competitive sites of comparable production capability at 120,000 tonnes per annum. Whilst this was the approximate size that Moama was planning to grow to in capacity, the report discloses that only about a fifth of that capacity had actually been reached and more work was required to upgrade.
The report also refers to a cash flow summary provided by FFA in which the authors say:
“Although we have not examined de detailed financial model for production of this facility, we have seen and noted the cash flow summary attached and it is quite feasible that fuel produced by this plant will be at a lower cost...”
The cash flow summary is divided into two parts:
(a) current capacity, which represents actual production figures; and
(b) expanded capacity.
Based on current capacity figures, the net monthly profit is said to be $257,409.02. Annualised, that leads to a profit of $3,088,908. The author of the report says a multiplier of 4 should be used. Accordingly, based on current capacity, the value of the Moama refinery is $12M. Therefore, even if the Court were to accept for the purposes of this case that the sale of the shares held by NA Investments will occur at $68M, there is no evidence that that figure was less than the worth of the shares.

40 This is valid criticism and the report does not establish that the business was valued at $100 M as claimed by Mr Magar. It is suggested that when expanded capacity is reached this may be the case. The current capacity only gives the value referred to in the submissions. There is no evidence of when the expanded capacity will be achieved and at what costs. In my view there is no quantification of the offsetting claim. In addition, at the moment it seems unlikely that the sale will proceed. As one of the subsidiary companies is in liquidation the vendor may not be able to pass title to the shares in the subsidiary without the consent of the liquidator or the court. In addition, the parties to the sale have differences with the purchaser having purported to terminate the sale agreement and N A Investments advising that it would not accept the purported termination.

41 NA Investments submitted that if it had not been misled it would not have guaranteed the obligations of FFA in the Revised Facility Deed. I agree with Perpetual that the argument is wrong because until that lesser obligation arose, N A Investments was liable to guarantee the whole $23 M facility under the 3 July 2006 Facility Deed. The same reasoning is applicable to the estoppel count.

42 In my view no offsetting claim has been established.

43 I dismiss the proceedings with costs.


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