Norncott Pty Ltd v Glenten Pty Ltd - [2000] WASC 21

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION: NORNCOTT PTY LTD -v- GLENTEN PTY LTD [2000] WASC 21

CORAM: MASTER BREDMEYER

HEARD: 1 FEBRUARY 2000

DELIVERED : 2 FEBRUARY 2000

FILE NO/S: COR 326 of 1999

BETWEEN: NORNCOTT PTY LTD (ACN 008 841 352)
Applicant
AND
GLENTEN PTY LTD (ACN 009 131 613)
Respondent

FILE NO/S :COR 327 of 1999

BETWEEN :SCHRAMM AUSTRALIA PTY LTD (ACN 009 310 212)
Applicant
AND
GLENTEN PTY LTD (ACN 009 131 613)
Respondent

Catchwords:

Corporations Law - Statutory demand - Application to set aside

Legislation:

Corporations Law s 459G

Result:

Applications dismissed

Representation:

COR 326 of 1999

Counsel:

Applicant: Mr M F Holler
Respondent: Mr M H Zilko

Solicitors:

Applicant: Summers Partners
Respondent: Peter Bogue

COR 327 of 1999

Counsel:

Applicant: Mr M F Holler
Respondent: Mr M H Zilko

Solicitors:

Applicant: Summers Partners
Respondent: Peter Bogue

Case(s) referred to in judgment(s):

Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Case(s) also cited:

Capital Bay investments Pty Ltd & Ors v Richard Szklarz Architects Pty Ltd & Ors [1998] WASC 275
Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456
Gray Winter Properties Pty Ltd v Gas & Fuel Superannuation Fund (1996) 14 ACLC 1703
JC Houghton & Co v Nothard, Lowe & Wills [1928] AC 1
John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716
Mibor Investments Pty Ltd v Commonwealth Bank [1994] 2 VR 290
Verte Pty Ltd v Grisbrook (1997) 15 ACLC 1

MASTER BREDMEYER: I have before me two applications to set aside two statutory demands under s 459G of the Corporations Law. The two applications can conveniently be heard together. The demands are for large sums: in the case of Norncott Pty Ltd (Norncott) $321,841, and in the case of Schramm Australia Pty Ltd (Schramm) $496,142.
There is no doubt that each debt is owed to Mr Rear's company, Glenten Pty Ltd (Glenten or the respondent). They are shown as debts in the companies' accounts. There is no dispute over the amount of the debts. The applicant says that the debts are not presently due and owing and that a genuine dispute exists about that.
A statutory demand can be set aside on a number of bases – the relevant one here being that the debt is disputed on genuine grounds. As counsel have said, the case law on this topic is not much disputed. I quote from Ford's "Principles of Corporations Law", sixth edition, par 27.065:
"When a company claims that there is a dispute the court does not have to weigh up the merits of the dispute; the court needs only to find that there is a dispute and that it is a genuine dispute: Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290.
What is clear is that in considering applications to set aside a statutory demand, a court will not determine contested issues of fact or law which have a significant or substantial basis …
A genuine dispute requires that:
• the dispute be bona fide and truly exists in fact;
• the grounds for alleging the insistence of a dispute are real and not spurious, hypothetical, illusory or misconceived. Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452."
The equal shareholders in Norncott are Mr King and Mr Rear. The equal shareholders in Schramm are Mr King's company, Glencow Pty Ltd, and Mr Rear's company, Glenten, the respondent. Both Mr King and Mr Rear are directors of the companies. Mr King is the managing director. Mr Rear is not involved in the day‑to‑day running of the business.
Mr King's company and Mr Rear's company each lent money to the two companies. They never agreed on the terms of the loan arrangements. Each year they drew against their loan accounts from time to time. These drawings are really partial repayments of their loans. Those drawings have been with the consent of both directors. Each year, the dividends or profits (always equal) are credited to their respective loan accounts. They are not paid out. That is a saving to the companies in order to keep their bank borrowings down. The loans appear to be interest‑free.
Under common law, where a loan has been given and the parties have not agreed on a term for repayment, it is up to a court to imply a term. The Court will do so under the following conditions taken from Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337:
1.the term must be reasonable and equitable;
2.it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
3.it must be so obvious 'it goes without saying'; and
4.it must not contradict any express term of the contract.
I consider any Judge would imply a term for the repayment of these loans. I do not consider it is a matter which needs evidence of the parties' intentions in 1968, when they first started out in business together, or of their intentions in later years. There is sufficient evidence before the Court to imply a term. I consider any Judge would imply a term which meets the stated criteria; namely, that the loan is repayable on demand. I consider that is reasonable and equitable. It is necessary to give business efficacy to the contract because, without such a term, a party would never be paid if the other party refused. I consider such a term is obvious and goes without saying and is frequently implied into loan contracts which do not include a term for repayment. Such a term certainly does not contradict any express term of the contract. As I have said, I consider any Judge would imply a term that this loan is repayable on demand. Some Judges, however, may add that it is repayable within a reasonable period of the demand having been made. I consider if I were the trial Judge I would imply a term of about one month, given the purpose of these loans and given that they were for the benefit of a business in which each man was a shareholder and director. It would not be reasonable, equitable and necessary to give business efficacy to this loan to imply a condition that a loan could be repaid only if the other director consents or if the company has enough money available to pay it.
The two companies have advanced another reason why the shareholders' loans are not now due and owing; namely, that to repay them is contrary to the terms of a subordinate agreement signed with the National Australia Bank on 14 July 1995. Each company signed such an agreement. They are in identical terms. They were signed by Norncott and Schramm under seal, plus signatures from the directors, Mr King and Mr Rear. Each letter commences:
"In consideration of the Bank making loans and advances or providing bank accommodation to us, we hereby undertake and pledge … "
The word "us" is ambiguous. It is loose lay language. It is plural. I must adopt an interpretation which is not capricious, unreasonable or unjust, and in so doing I consider that the word "us" in the Norncott letter refers to Norncott, and in the Schramm letter it refers to Schramm.
Paragraph (iii) of the subordination letter reads:
"The company may not repay moneys owing to the shareholders in priority to moneys owing or contingently owing to the Bank without the prior written consent of the Bank, such consent being not unreasonably withheld."
I consider a proper interpretation of that is to read "shareholders" as shareholders and/or their family trusts. The shareholders of Norncott, as I have said, are the two individuals, Mr King and Mr Rear. The shareholders of Schramm are Mr King's and Mr Rear's companies. I note that in Norncott's accounts, the profits are distributed to Mr King's and Mr Rear's family trusts and not to them as individuals.
The subordinate letters are each dated 14 July 1995, as I have said. The Norncott one, I consider, is referred to in item 13 of the $1.3 million bill facility given by the National Australia Bank to Norncott in April 1998. It is the last item "letter of subordination given by Norncott … " The Schramm letter is not mentioned there.
I consider the 1995 Schramm subordination letter is ineffective. It begins:
"In consideration of the Bank making loans and advances or providing bank accommodation to us, we hereby undertake … "
I quoted those words before. "Us" there means the company Schramm. No advances were made by the National Australia Bank to Schramm in 1995 or later, so the three undertakings in that letter are not operative. The undertakings were conditional on the bank advancing money to Schramm and it did not. The Schramm subordination letter is not, therefore, a bar to that company repaying Glenten's loans.
I consider that neither the Norncott letter nor the Schramm letter means that the loan moneys of Glenten are not due and owing. Norncott can honour its undertaking to the bank by paying out its loan to the bank first and then paying out Glenten's loan. Norncott at present owes the bank $650,000, plus an overdraft of $158,079. The payment of the two loans are not inimical to one another. The existence of the NAB subordinate letter does not mean that the Glenten loans should not be paid. It means merely that the NAB loans need to be paid first. I accept Mr Zilko's argument on that.
It is not a valid argument against that to say that the company does not have the money to pay off both NAB loans and the Glenten loans and that it will go into liquidation if it attempts to do so. It may go into liquidation if it fails to pay the demands.
The company's argument that it cannot afford to pay both and will go into liquidation if it does, is a consequence of its own financial structures. Firstly, it chose to rely on large sums of loan capital from its two shareholders instead of getting shareholder capital. If Mr Rear's loans were shares, he would not be able to demand repayment of them. Secondly, it chose not to agree with its lender on deferred repayment terms; e.g. a term that the loan would be repaid six months after demand was made.
I am very clear on the correctness of the implied term for repayment and on my interpretation of the NAB subordination letters. I therefore consider that the applicant has not raised any genuine dispute and I propose to dismiss the applications.