PMCD Investments Pty Ltd v Nicholas Galatis and Gerald Galatis
[2014] VSC 55
•27 February 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
S CI 2013 01312
IN THE MATTER of PMCD Investments Pty Ltd (ACN 128 630 928)
BETWEEN:
| PMCD INVESTMENTS PTY LTD (ACN 128 630 928) | Plaintiff |
| v | |
| NICHOLAS GALATIS AND GERALD GALATIS | Defendants |
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JUDGE: | Randall AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 August 2013 | |
DATE OF JUDGMENT: | 27 February 2014 | |
CASE MAY BE CITED AS: | PMCD Investments Pty Ltd v Nicholas Galatis and Gerald Galatis | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 55 | |
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CORPORATIONS — Corporations Act 2001 (Cth) — Setting aside statutory demand — Alternative remedies available to creditors — Election to require repayment — Service of statutory demand constituted first demand for repayment — Whether the amount claimed was due and payable at the time of swearing affidavit accompanying the statutory demand.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | S. L. Freire | F.A. Romeo Solicitors |
| For the Defendants | T.P. Mitchell | GPZ Pty |
TABLE OF CONTENTS
Reasons................................................................................................................................................ 2
Proposed order.................................................................................................................................. 13
HIS HONOUR:
Application was made under s 459G of the Corporations Act 2001 (Cth) seeking that an order be made under s 459H (alternatively, s 459S) of the Act that the statutory demand dated 25 February 2013 served by the defendants upon the plaintiff be set aside.
The creditor’s statutory demand for payment of debt dated 25 February 2013 claims the sum of $450,000 being the total amount of the debts described in the schedule. The schedule describes the debt as follows:
Description of debt
Amount of debt
Proceeds of cheque 112 dated 22 July 2009 drawn on NAB account 083-171 53555-9329 paid to the company in respect of which consideration has wholly failed
$200,000
Proceeds of cheque 116 dated 6 August 2009 drawn on NAB account 083-171 58322-6414 paid to the company in respect of which consideration has wholly failed
$250,000
The affidavit accompanying the statutory demand at paragraph 1 sets out:
I am one of the creditors in respect of debts totalling $450,000 owed by [the plaintiff] to [the defendants] (the Creditors) relating to the total amounts of debts of $450,000 arising from the payment of $450,000 by the Creditors to the Debtor Company in contemplation of an agreement for the joint development of a property at Dudley Street, Caulfield East that was never concluded, and which amounts the Debtor company has retained.
The plaintiff relied upon two affidavits sworn by its director in support of its application to set aside the statutory demand. The defendants relied upon an affidavit of Gerald Galatis.
Reasons
The plaintiff carries on the business of property investment and development. In or about 2007, it purchased a property situated at 11 Dudley Street, Caulfield East with a view to developing on it apartments for student accommodation. In or about February 2009 Wanissa Properties Pty Ltd purchased the property situated at 7, 9 and 13 Dudley Street, Caulfield East. These properties, when consolidated with the plaintiff’s property, formed a large continuous site available for the construction of 71 apartments and 113 accommodation rooms, together with a convenience store, a manager’s office and two level basement car park (‘the Project’).
On 6 May 2009 the plaintiff and Wanissa entered into a joint venture agreement for the management, development and sale of the Project properties. Wanissa agreed to issue to the plaintiff a 27% shareholding in the issued capital of Wanissa as consideration for the amalgamation of 11 Dudley Street into the Project. Shortly thereafter, Mr Dimitriou, a director of the plaintiff, offered the defendants an opportunity to invest in the Project. Mr Dimitriou sought to raise from the defendant an amount of $800,000 to be applied towards retiring the plaintiff’s Westpac debt.
The plaintiff agrees that the amount of $450,000 was advanced by the defendants, but disputes the terms pursuant to which the monies were advanced.
In the affidavit sworn by Mr Dimitriou on 18 March 2013, Mr Dimitriou set out that:
(a) he met with the defendants in May and July 2009 and sought a capital contribution of $450,000 towards the Project;
(b) he was prepared to offer a 1:1 return on the defendants’ investment;
(c) in July 2009 Dimitriou had told the defendants that the proceeds of sale of the apartments would be applied:
(i) first, to retire secured debts over the Project properties;
(ii) secondly, to repay outstanding debts relating to the Project;
(iii) thirdly, to the capital/equity of each of the joint venturers, and returned at the same time on a pro rata basis of 73%:27%; and
(iv) finally, profit distributions would be made on the same pro rata basis.
(d) the defendants agreed:
(i) to invest $450,000 in the Project, which was to retire the plaintiff’s existing debt to Westpac; and
(ii) they were entitled to the return of their capital contribution and to any distribution of dividends in accordance with the priority order described by Mr Dimitriou in July 2009, but without discussing whether their return of capital fell within any particular sub-paragraph of sub-paragraph (c) hereof.
(e) the defendants’ returns on investment would be 1:1;
(f) the defendants’ contribution was not described as a loan; and
(g) the defendants have demanded their money back.
In his affidavit on behalf of the defendants in opposition to the application to set aside the statutory demand, Gerald Galatis produced an affidavit by Christopher Dimitriou sworn 6 December 2012, which had been filed in support of an application to set aside a statutory demand served by the defendants upon Island Properties Pty Ltd.
At paragraph 17 in dealing with another property referred to as the Rosella Property, Mr Dimitriou set out:
I prepared a document that outlined the proposed defendants’ interest in the different development projects between the defendants and my different companies. Now shown to me and marked “CD-2” is a true copy [of] the document of the defendants’ interests in the different projects dated 14 May 2009.
Exhibit CD-2 is a document addressed to the defendants from Mr Dimitriou and dated 14 May 2009 (‘First Summary’). It refers to three projects which are said to have been governed by interest in trust. It then sets out:
The properties listed below are not subject to a Deed of Trust and upon settlement shares will be issued in the holding Company or in the case of 17 Rosella Street, your names will appear on title.
After reference to 17 Rosella Street, there is then set out:
7–13 Dudley Street, Caulfield East — Wanissa Properties P/L (73%) & PMCD Investments P/L (27%).
When settled:
Nick Galatis 5.4%
Gerald Galatis 5.4%
PMCD Investments P/L 16.2%
I trust that this information confirms our agreements and should further clarification be required please do not hesitate to contact me.
The First Summary exhibited to Mr Dimitriou’s affidavit sworn 6 December 2002 is similar, but in a slightly different form to, a letter dated 14 May 2009 and produced by Mr Dimitriou to Gerald Galatis (‘Second Summary’).[1] With respect to 7–13 Dudley Street, the Second Summary sets out:
When settled:
Nick Galatis 5.4%
Gerald Galatis 5.4%
Denco Consultants P/L 5.4%
PMCD Investments P/L 10.8%
[1]“GG-16” to Gerald Galatis’ affidavit sworn 10 July 2013.
Only after facing the affidavit in opposition to set aside the statutory demand and, in particular, the prior affidavit sworn by Mr Dimitriou and the First and Second Summaries, did Mr Dimitriou refer to the contribution of $800,000 towards the Project in his affidavit in reply. He deposed that the Second Summary was prepared at the request of the defendants, and that it was based upon an $800,000 investment in the Project. He sought to explain that the words ‘when settled’ in the Second Summary meant ‘upon the [defendants] satisfying their obligation to pay the $800,000 contribution’.
Mr Dimitriou then set out various conversations he had with the defendants with respect to the contribution of $800,000, which had been part of a proposal to issue to the defendants 40% of the shares issued in the capital of the plaintiff in return for the $800,000 contribution.
The defendants said to Mr Dimitriou that the sum of $450,000 already paid was all that they could contribute. In response, Mr Dimitriou said:
I said to them that in return for their $450,000 investment, I would give them a return equal to the amount of their contribution (that is, a 1:1 fixed return on their investment of $450,000). I said to them that I anticipated that the Project would generate some substantial profits. Their contribution, and their return on their contribution, would be paid at the completion of the Project, when all the accounting for the Project had been completed. The [defendants] did not say anything in response to my proposal that they receive a 1:1 fixed return on their investment. I took their silence as acquiescence.
Mr Dimitriou further set out at paragraph 24:
I dispute that, in consideration for the payment by the [defendants] of $450,000, [the plaintiff] had an obligation to issue 40% of the shares, or indeed any shares, issued in the capital of [the plaintiff]. Rather, the [defendants] had an entitlement to receive a return on their investment when the accounting for the Project had been completed (assuming that there was sufficient funds available to fund profit distributions to the investors in the Project).
Although the secured debt over the Project has been retired, the Project has not yet been completed. It is anticipated that it will be completed sometime this month and that the accounting for the Project will then take a couple of months. Mr Dimitriou swore, ‘I anticipate that any distribution to investors, including the return of any capital contributions they have made, will be made in around April 2014’.
I am left with two conflicting versions of the arrangements between the parties. It is tempting to conclude that the parties never reached final agreement.
Counsel for the defendants submitted that I should not take Mr Dimitriou’s evidence at its highest. It was put that it satisfies almost all of the categories of evidence that Eyota Pty Ltd v Hanave Pty Ltd[2] says the Court ought not uncritically accept. It was submitted that Mr Dimitriou’s evidence was vague and equivocal as to the terms of the agreement. It is contradicted by prior sworn statements by Mr Dimitriou and contemporaneous documents signed by Mr Dimitriou. It was submitted that it was inherently improbable that the defendants would hand over $450,000 before any agreement had been reached about the terms of the investment.
[2](1994) 12 ACSR 785.
Earlier, counsel for the defendants had submitted that if the Court were to ignore Mr Dimitriou’s prior inconsistent statements and conflicting evidence, and take at face value the version of events in his 24 July affidavit, there would be no serious question that a binding agreement was reached, and therefore no genuine dispute.
However, sums totalling $450,000 were advanced in July and August of 2009. There was an ongoing relationship between the plaintiff and the defendants. Gerald Galatis has sworn that he did not meet with Mr Dimitriou before Christmas 2012 and that their relationship ceased in January 2013, after the defendants terminated the building contract with respect to another property. The sum of $450,000 had remained invested in the Project before there was any demand for its repayment.
On Mr Galatis’ evidence, the requirement to repay seems to have crystallised by virtue of the termination of the relationship, rather than any matter relating directly or indirectly to the conduct of the Project. In those circumstances the efflux of time supports a view that some agreement might have been reached. The failure to require repayment until services of the statutory demand supports the conclusion that there is ‘a serious question to be tried’, ‘an issue deserving of a hearing’ or a ‘plausible contention requiring investigation’ with respect to the existence of a concluded agreement and the identification of the terms of that agreement.
However, putting that to one side, during the course of the hearing I asked the parties to address me on two issues which arose during the course of argument, mainly:
(a) whether the communication of an election to determine an agreement may be made in a statutory demand; and
(b) whether the efflux of time defeats a right of election.
If I were to reject Mr Dimitriou’s versions of events as inherently improbable, then I would be left with an agreement as formulated on behalf of the defendants — that the defendants paid $450,000 to buy shares in the plaintiff and they received none. Up until the time of election, the defendants could have issued suit for specific performance, pursued damages for breach, or taken the position followed by serving the statutory demand.
The statutory demand dated 25 February 2013, together with the accompanying affidavit sworn on 25 February 2013, were both served under cover of a letter of 25 February 2013 written by the defendants’ solicitor. That letter relevantly sets out:
As described in the Demand and Affidavit, you are indebted to [the defendants] for $450,000, and have been since 2009. In 2009 the two cheques described in the schedule to the Statutory Demand were paid to [the plaintiff] in contemplation of an agreement for the joint development of land at Dudley Street, Caulfield East. No agreement was ever concluded.
Although a significant number of settlements of sales of the units at Dudley Street have occurred, [the plaintiff] has never accounted [the defendants] in respect of the project. Clearly, [the plaintiff] took the money and excluded [the defendants] from the Dudley Street project. It is obliged to repay the money paid over by [the defendants].
Although the letter refers to failure to conclude an agreement, the inference that arises from the second paragraph is that that it is the plaintiff’s failure to account, which has crystallised the making of the demand.
Counsel for the defendants, in his supplementary notes, sets out that the questions do not arise:
2. On reflection, neither of these grounds was raised (even by available inference) on [the plaintiff’s] material filed within 21 days after service of the statutory demand. It is too late to raise these grounds in argument at the hearing.
3. The issue of election only arises if there was a valid subsisting contract. No election is required for money paid over where no contract was formed (as [the defendants] submits was the case). For this further reason the first question does not arise.[3]
[3]Footnotes omitted.
In Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd,[4] White J considered the Graywinter principle. At [16] White J set out with approval a statement by Barrett J in Process Machinery as follows:
[4][2007] NSWSC 103 (‘Hansmar’).
[21] It is thus reasonably clear that the relevant concept of “raising” or “identifying” a particular ground involves some verbal delineation of that ground in the s 459G(3)(a) affidavit. If a debt of $10,000 were claimed as one year's interest under a contract providing for interest at the rate of 9% per annum on a principal sum of $100,000, it would not, in my opinion, be sufficient for the affidavit to annex the loan agreement and say no more. It would have to refer at least to the connection between the contract and the debt claimed and put in issue the calculation of interest - even if it merely said, “The debt does not accord with the annexed contract”.
[22] The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by s 459H and s 459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period.[5]
[5]Process Machinery Pty Ltd (t/a DCL Engineering) v ACN 057 262 590 Pty Ltd [2002] NSWSC 45, [21]–[22].
In Hansmar, the statutory demand claimed money due pursuant to a clause of a contract of sale between Permanent and Hansmar. In an affidavit filed and served within the period of 21 days the deponent for Hansmar swore that:
Hansmar exchanged on the purchase of Milsons Point on 31 March 2005 for $1,125,000. A copy of the front page of the contract for purchase is annexed marked W.[6]
[6]At [19].
At [20] to [22] White J said the following:
[20] The supporting affidavit filed and served within the 21-day period disclosed that Hansmar Investments had failed to comply with a notice to complete, following which it received a notice of default and notice that the vendor (Permanent) would sell the property. Mr Reeves deposed that the property was sold in March 2006 for $850,000.
[21] It was a reasonable inference from the affidavit that the amount claimed as a debt in the statutory demand was the difference between the purchase price under the contract of which the plaintiff was purchaser, the deposit forfeited under that contract, and the price obtained by a successor to the vendor on the resale of the land following the purchaser’s default. All of those facts appeared from the body of the supporting affidavit or the documents annexed to it.
[22] There was no express statement in the affidavit filed and served pursuant to s 459G(3)(a) that the statutory demand was challenged on the ground that the amount claimed was not a debt, but a liability in damages. However, I concluded that it followed by necessary inference that there was a question whether the amount claimed by Perpetual in the statutory demand was an amount of damages arising from Hansmar Investments’ breach of contract, those damages being the difference between the sale price (less the deposit) under the contract with Hansmar Investments and the sale price under the contract to the second purchaser, or, on the other hand, whether the amount claimed was properly characterised as a debt.
White J permitted the plaintiff to supplement the first affidavit by tendering the whole of the contract including cl 9.3 because the question in issue had been clearly delineated by necessary inference.
In his first affidavit, Mr Dimitriou deals with the demand in paragraphs 37 to 39 under the heading ‘Defect in the Demand’. Whilst there is not express statement setting out the grounds referred to in questions 1 and 2, which I posed to counsel, there is the following reference in paragraph 37, after reference to the particulars of debt in the schedule to the demand:
From this description, the nature of the alleged debt is not at all apparent to me. Nor is it apparent to me that the basis upon which it is asserted that [the plaintiff] has a present obligation to return to the [defendants] and that the [defendants] have a corresponding present entitlement to receive, the proceeds of the two cheques referred to in the Schedule.
I have concluded that the reference to the absence of a present entitlement in that paragraph is sufficient to ventilate the issue of whether the amount claimed by the defendants was due and payable, albeit in the context of discussion about the nature of the claim and whether any amount was due and payable in the context of the agreement then propounded by Mr Dimitriou. However, the defendants, by inference, identified the issue as one that needed to be addressed.
In paragraph 9 of Gerald Galatis’ affidavit he set out:
Neither [d]efendant has ever been issued shares in the [p]laintiff, and the [p]laintiff now denies that it is obliged to issue shares to the [d]efendants. By serving the statutory demand on the [p]laintiff, the [d]efendants elected to recover their money paid instead of seeking any alternative remedy under the agreement for the purchase of shares.
That paragraph, in conjunction with the contentions put on behalf of the plaintiff, confirms that there is a plausible contention to be investigated as to whether the amount claimed is disputed on the basis of identifying remedies available to the defendants. More importantly, however, it operates as recognition of the amounts set out in the statutory demand, which were not claimed until the statutory demand was served.
Irrespective of whether an election only arises if there was a valid subsisting contract, the amount was not claimed until the defendants determined that the shares would not be issued or until the plaintiff failed to account for sale proceeds. In this regard, I note the contents of the covering letter which enclosed the statutory demand. The statutory demand was served by post and not received until 27 February 2013. This was two days after Gerald Galatis had sworn the affidavit which accompanied the statutory demand, which followed the usual format including at paragraph 4, which stated:
The total of the amounts of the debts, mentioned in paragraph 1 of this affidavit, is due and payable by the debtor company.
In Super Benefit Pty Ltd v McNamara,[7] the creditor had claimed in the statutory demand an amount due pursuant to a guarantee. The amount was payable on demand. There was no evidence that the defendant had made any demand prior to the service of the statutory demand. The debtor had argued that the monies payable under the guarantee had not become due for payment and could not be the subject of the statutory demand. The defendants argued that service of the statutory demand itself was a sufficient demand for the purpose of the guarantee.
[7][2009] SASC 167.
Lunn J determined:
As a copy of the affidavit had to accompany the Demand when it was served, of necessity the affidavit must have been sworn before the Demand was served. This means that the service of the statutory demand could not have operated as a demand under cl 1(a) of the Guarantee to make the debt due and payable by Super Benefit to the defendant at the time at which the affidavit was sworn. Hence there was a proper ground of dispute about the existence of the debt at the time the affidavit was sworn. The defendant had no proper basis to believe that there was no genuine dispute at that time. He was not entitled to swear the affidavit in anticipation that the statutory demand would be served and that this would make the debt become due and payable. The affidavit must speak of the circumstances at the time at which the demand is served and be correct when it is sworn…Such mis-statements within the supporting affidavit are sufficient “other reason” to justify setting aside the statutory demand.[8]
[8]At [7].
Irrespective of the issue relating to the nature of the agreement between the parties and the remedies that may have been available, the statutory demand includes an amount that does not become ‘due and payable’ until service is effected. Such warrants setting it aside.[9]
[9]See, eg, Streetwise v Higgins [2005] NSWSC 535 and Map Plumbing Services v BB Enterprises Pty Ltd (2000) 35 ACSR 135.
In making that determination I have considered the defendants’ submission that they are entitled to rely upon what is set out in paragraph 36 in Mr Dimitriou’s first affidavit to the effect that over the past 18 months, the defendants had asked for their money back. The submission was that that was sufficient to make the amount due and payable prior to service of the statutory demand.
However, given the term of the covering letter and given what was sworn on behalf of the defendants at paragraph 9, I determine that the issue warrants further investigation.
Accordingly, I am satisfied that the plaintiff has raised an arguable dispute.
I do not need to decide the second question. While I accept that the delay of three and a half years alone cannot constitute an election to affirm any arrangement between the parties, the conduct of the defendants in sitting back while the Project progressed to near completion may be relevant.
In Sargent v ASL Development Ltd,[10] Mason J at 656 said:
A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other (Tropical Traders Ltd. v. Goonan). So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.[11]
[10](1974) 131 CLR 634.
[11]Footnotes omitted.
Certainly, the question of prejudice has not been raised within the 21 day period or at all. Further, although the first affidavit sets out factual material relating to the timeline, it was not until submissions that the plaintiff raised the argument about delay. The plaintiff’s counsel set out in submission at [20]:
…they sat on their hands for over 3 ½ years before they purported to exercise their election to accept the alleged breach and treat the agreement as discharged. In the interim, the construction of the Project progressed, and the [defendants] and Mr Dimitriou met frequently to discuss the Project (as well as the various property development projects in which the [defendants] had invested). No explanation has been proffered by the [defendants] for the inordinate delay in purporting to exercise the right of election. [The plaintiff] submits that the right of election has been lost.[12]
[12]Footnotes omitted.
Although the conduct of waiting until some of the apartments in the Project were sold might constitute affirmation of the agreement proposed by the defendants, I do not need to make any determination as there had not been ‘some verbal delineation of that ground …’ in the 21-day affidavit, as referred to by Barrett J in Process Machinery. Accordingly the argument is not available to the plaintiff.
Proposed order
I will set aside the statutory demand dated 25 February 2013. The defendants will pay the plaintiff’s costs on a standard basis.
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