Re Aurora Funds Management Ltd
[2021] VSC 690
•22 October 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 01160
IN THE MATTER of AURORA FUNDS MANAGEMENT LIMITED
(ACN 092 626 885)
| AURORA FUNDS MANAGEMENT LIMITED (ACN 092 626 885) | Plaintiff |
| v | |
| NG PARNTERSHIP (a firm) (ABN 88 115 548 982) | First defendant |
| PIPER ALDERMAN (a firm) (ABN 42 843 327 183) | Second defendant |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4 August 2021, further written submissions 6 October 2021 |
DATE OF JUDGMENT: | 22 October 2021 |
CASE MAY BE CITED AS: | Re Aurora Funds Management Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 690 |
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CORPORATIONS – Application to set aside a statutory demand on ground that there was a genuine dispute within the meaning of s 459H of the Corporations Act2001 (Cth) – Plaintiff contended that provisions in terms of settlement constituted a penalty – O’Dea v Allstates Leasing Systems (WA) Pty Ltd (1983) 152 CLR 359; Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514; Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2001] 2 Qd R 114; Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd [2013] VSC 734 applied – Plaintiff found to have discharged onus of establishing genuine dispute – Order made setting demand aside.
CORPORATIONS – Plaintiff sought to submit that demand should also be set aside for “some other reason” within the meaning of s 459J of the Corporations Act 2001 (Cth) – Finding that such ground not raised in 21 day affidavit – Sceam Construction Pty Ltd v Clyne (2021) VSCA 270 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S Clement | Gadens Lawyers |
| For the Defendants | Mr D F McAloon | Piper Alderman |
HIS HONOUR:
The plaintiff applies by an originating process filed 16 April 2021 for orders under ss 459G, 459H and 459J of the Corporations Act 2001 (Cth) (‘the Act’) to set aside a creditors’ statutory demand dated 22 March 2021 issued to it by the defendants, NG Partnership (‘NG’) and Piper Alderman, both constituted as firms.
The demand claims that Aurora owes NG and Piper Alderman $259,335.28. The schedule to the demand describes the debt as follows:
Moneys due and payable to the creditor by the company by reason of the company’s default under the Deed of Settlement and Release executed by the company and the creditor on 25 October 2019 (Deed).
By virtue of clause 3 of the Deed, the moneys due and payable to the creditor by the company is particularised as the amount of $259,335.28 comprising the “Debt” (as defined in the Deed) totalling $419,335.28 less the amount of $160,000.00 paid by the company in accordance with the Deed.
The demand was signed by Michael-Antony Hayes who identified his capacity was solicitor for the creditor. Mr Hayes is a principal of the firm Piper Alderman, one of the defendants. The demand was accompanied by an affidavit of Anthony Britten-Jones dated 22 March 2021 and is in compliance with s 459E(2)(e) of the Act. The affidavit of Mr Britten‑Jones verifies the debt in terms of the description in the schedule to the demand.
Aurora’s application is supported by an affidavit of Michael James Harty sworn 16 April 2021. NG and Piper Alderman rely on an affidavit of Mr Britten‑Jones sworn 7 May 2021.
Factual background
The factual background to the proceeding is not controversial. NG and Piper Alderman were each the former solicitors for Aurora and provided legal services in a variety of matters. The parties were in dispute concerning those legal services, the invoices rendered by the respective solicitors to Aurora and the amounts properly owing by Aurora to each of NG and Piper Alderman. Ultimately, the parties entered into a Deed of Settlement and Release dated 25 October 2019 (‘Deed’) and it is the terms of the Deed which are the focus of this application.
The parties to the Deed are Aurora, of the one part, and NG and Piper Alderman of the other. The recitals to the Deed state that NG (referred to in the Deed as Norton Gledhill) and Piper Alderman provided identified legal services to Aurora and rendered invoices in respect of such services. The recitals state that Aurora has paid some, but not all, of the invoices raised by NG and Piper Alderman and culminates in a statement that “the parties have agreed to resolve all or any issues regarding the Debt and the Legal Services on the basis set out in this Deed.”
The definitions and interpretations section of the Deed defines Debt as meaning:
... the debt owed by Aurora to Norton Gledhill in the sum of $142,470.26 (as particularised in Annexure A of this Deed) and the debt owed by Aurora to Piper Alderman in the sum of $276,865.02 (as particularised in Annexure B of this Deed).[1]
The Deed defines Settlement Sum as “$300,000 (inclusive of GST)”.
[1]Those sums total $419,335.28. The settlement sum therefore represents a ‘discount’ of $119,335.28 when compared with the invoiced amounts.
Clause 2 of the Deed provides relevantly:
2.1 The Parties agree to settle the Debt on the terms of this Deed.
2.2Aurora agrees to pay the Settlement Sum to Norton Gledhill and Piper Alderman.
Clause 2.3 provides for payment of the Settlement Sum by several instalments. The instalments were required to be made by electronic funds transfer into the trust account of Piper Alderman.
Clause 3 of the Deed makes provision in the event of default. It states as follows:
In the event Aurora fails to comply with any of its obligations under clause 2 of this Deed, and Aurora fails to rectify any such failure within three (3) Business Days of being notified of any failure by Piper Alderman or Norton Gledhill, Aurora agrees that:
(a) the whole of the Debt will become immediately due and payable; and
(b)it will pay interest on the Debt, from the date of default of the payment of the Settlement Sum until the date payment of the Debt is made, calculated at the rate for the time being fixed under section 2 of the Penalty Interest Rate Act 1983 (Vic).
Clause 5 of the Deed provides for a release by NG and Piper Alderman to Aurora on payment of the Settlement Sum in accordance with the terms of the Deed; Aurora agrees to provide a release to NG and Piper Alderman upon exchange of the Deed. The annexures to the Deed identify the invoices comprising the total amount said to be owed by Aurora and are respectively headed “Debt owed by Aurora” to NG and Piper Alderman. There is no provision in the Deed as to how the instalments payable under the Deed were to be appropriated against the respective debts which comprised the Debt.
On 31 October 2019, Aurora paid the first instalment of $50,000 payable under the Deed. The second instalment payable, $100,000, was paid by Aurora on 30 December 2019. The final instalment payable, $150,000, payable under the Deed on 21 April 2020 was not paid but on the following day Aurora paid $10,000.
On 23 April 2020, Aurora was given notice of default under the Deed. Eleven months later, on 22 March 2021, NG and Piper Alderman issued the statutory demand the subject of this proceeding seeking payment of $259,335.28, which the defendants claimed was the balance owing under the terms of the Deed.
On 12 April 2021, Aurora paid $140,000 to NG and Piper Alderman which represented the balance of the Settlement Sum owing and commenced this proceeding by filing the originating process shortly after, on 16 April 2021. The payment of $140,000 meant that the balance of the Debt remaining unpaid under the Deed by reason of Aurora’s default was $119,335.28.
Both parties accepted in their written submissions that the starting point for the purposes of this application was that the demand should be regarded as being one for a debt of $119,335.28.[2] It necessarily follows that if Aurora is successful in establishing the existence of a genuine dispute in respect of that amount, or “some other reason” under s 459J of the Act, the demand should be set aside. If the defendants are successful in their contention that there is no genuine dispute about the amount claimed, or some other reason why it should be set aside, then the demand should be varied so that it is an effective demand for $119,335.28.
[2]Plaintiff’s outline of submissions filed 30 July 2021, [5]; Defendant’s outline of submissions filed 16 July 2021, [4(a)].
Evidence of the parties
Aurora’s evidence
In his affidavit Mr Harty, who is the solicitor having carriage of this matter on behalf of Aurora, puts into evidence a copy of the statutory demand and accompanying affidavit, together with a copy of the Deed. He deposes that he is instructed that Aurora has made payment of all instalments owed under the Deed. He states that Aurora relies on the grounds of genuine dispute and offsetting claim for setting aside the statutory demand. The only ground to set aside the demand expressly referred to in the affidavit appears in paragraph 6 where Mr Harty asserts specifically that the Debt is unenforceable as a penalty:
... because the sum claimed exceeds what could be regarded as genuine [sic] pre‑estimate of loss likely to be suffered by the defendants as a result of a breach of the Deed. The Deed also acts as a cord [sic] and satisfaction of the defendants [sic] claim for legal fees which is referred to within the Deed.
He concludes by stating that he is instructed that on or about 14 April 2021, Aurora paid Piper Alderman and NG $140,000 and this is not reflected in the statutory demand or affidavit in support.[3]
[3]See remarks at paragraph [14] above regarding the agreement between the parties as to the amount now alleged to be outstanding.
Defendants’ evidence
In his affidavit, Mr Britten‑Jones states that he is a partner in the firm Piper Alderman and that he is authorised to swear his affidavit on behalf of both Piper Alderman and NG. He details the payments made by Aurora to which reference has been made. He deposes that Aurora failed to pay the final instalment within the time required by the Deed and, on 23 April 2020, Piper Alderman and NG caused a letter and default notice to be sent to Aurora requesting that Aurora rectify the default within three business days of the notice. Aurora failed to rectify that default. He then describes the further payment of $140,000 by Aurora almost a year later, on 12 April 2021, after the statutory demand had been served on Aurora.
The factual background of the matter is thus uncontentious and resolution of the application before the Court involves consideration of a number of legal issues surrounding the terms of the settlement deed.
Aurora submits that the demand should be set aside on two grounds:
(a) by reason of the default clause being an impermissible penalty provision, there is a genuine dispute about the existence and amount of the alleged debt so the statutory demand ought to be set aside pursuant to s 459H of the Act; and
(b) the statutory demand is defective because of the manner in which it is issued by multiple creditors claiming a composite amount from Aurora and it ought to be set aside pursuant to s 459J of the Act.
Legal principles
Aurora seeks to set aside the demand on the basis that, first, there is a genuine dispute about the existence and amount of the debt within the meaning of s 459H so that the demand ought to be set aside pursuant to s 459G. The principles applicable are well settled and have been summarised by the Court of Appeal in this State in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq):[4]
[4][2015] VSCA 330 (‘Malec’).
The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one.
In determining such an application, it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. This is because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt or an offsetting claim. It is therefore not helpful to perceive that one party is more likely than the other to succeed or that the eventual state of the account between the parties is more likely to be one result than another. Further, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised.
The court is required to determine whether the dispute or offsetting claim is ‘genuine’. It has been said that the criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile. A rigorous curial approach is essential to the effective operation of the statutory scheme.
The court is not required to accept uncritically every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be, as it may not have sufficient prima facie plausibility to merit further investigation as to its truth. The court is also not required to accept uncritically a patently feeble legal argument or an assertion of facts unsupported by evidence, although this should not be read as suggesting that the applicant must formally or comprehensively evidence the basis of its dispute or off-setting claim. Except in such extreme cases, the court should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on by the applicant to set aside a statutory demand.
Solarite Air Conditioning Pty Ltd v York International Australia Pty Ltd involved a demand for payment of a debt alleged to be due under a contract for the supply of goods. The applicant relied on four matters, each of which had the potential to affect the respondent’s entitlement to be paid the entire amount of the debt. Barrett J held that all four matters were sufficiently plausible to raise a genuine dispute. He relevantly stated:
The [applicant] will fail in [the] task [of establishing a genuine dispute] only if … the contentions upon which it seeks to rely … are so devoid of substance that no further investigation is warranted. Once the [applicant] shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the [applicant], it must find that a genuine dispute exists, even where any case apparently available to be advanced against the [applicant] seems stronger. [5]
[5]Ibid [47]-[51] (citations omitted).
The Court of Appeal of this State in SpaCorp Australia Pty Ltd v Myer Stores Ltd,[6] a case concerned with an application to set aside a statutory demand on the basis of a genuine dispute, observed:
…except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.[7]
[6](2001) 19 ACLC 1270.
[7]Ibid [4].
Here there is no factual controversy and Aurora’s contention that the default provisions of a deed constitute a penalty and are unenforceable involves an analysis and an application of the relevant principles of contract and the construction of the default clause.
The relevant test to be applied as to whether there is a genuine dispute arising from the construction of a contract is identical to where the application involves controversies as to transactions or events. In Creata (Aust) Pty Ltd v Faull,[8] the New South Wales Court of Appeal observed:
[8](2017) 125 ACSR 212, 218-9 [26]-[27], [29].
The grounds of appeal raise squarely the question of the extent to which it is open to the court to decide questions of construction in s 459H(1)(a) cases. In every such case, the issue is, of course, merely whether it has been shown that a “genuine dispute” exists. In determining that issue, the court is neither required nor expected to avoid all issues of construction. Where a contract contains a simple and unambiguous promise to pay, the court embarks on a task of construction (albeit not a difficult or controversial one) in determining that that promise creates a debt and no argument to the contrary is plausible. But where the question of construction has any element of rational controversy to it, the court must exercise particular restraint.
That matter was recently addressed by Gleeson JA in both Re Litigation Insurance Pty Ltd [2017] NSWSC 334 and Re Linton Developments (Qld) Pty Ltd [2017] NSWSC 336. In each of those cases, his Honour quoted the following passage in the judgment in Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 at [45]:
A dispute as to the existence of a debt that is the product of a dispute about construction is not removed from s 459H(1)(a) just because the issue in contention is one of construction. While it has been said that “a short point of law or the construction of documents or agreed facts” may, unlike a disputed question of fact, be determined upon a s 459G application (see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384), it does not follow that the court is compelled to make such a determination. In the case of a legal argument, determination might be appropriate if it were, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, a “patently feeble legal argument”.
…
After referring to a summary of the position in in Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 at [22] and the statement by this Court in Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330 (Ligon) at [11] concerning the restraint that a court should exercise in considering the “ultimate question” of the indebtedness of a company served with a statutory demand (as distinct from the question whether genuine dispute exists), Gleeson JA said:
The important points to be derived from the authorities are as follows. First, the court dealing with a s 459G application is not compelled to determine questions of construction of documents. Second, s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. Third, cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number. Fourth, the court’s state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared.
After considering the facts before it, the Court of Appeal observed:
… Neither side’s argument was so obviously correct or incorrect as to put the issue of construction beyond the realms of reasonable debate. Ultimate resolution could only come from an objective determination, in appropriately constituted proceedings, of what a reasonable business person would have understood the clauses to have meant. Central to any such determination would be the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.
This was not a case in which counsel for Creata presented a “patently feeble argument” as to the true construction of cl 4(b) and cl 4(c). Nor was the answer to the question of construction “as plain as a pikestaff”, to quote again the words used in Spacorp (above). As this Court said in Infratel Networks Pty Ltd v Gundry’s Telco & Rigging Pty Ltd (2012) 297 ALR 372; 92 ACSR 27; [2012] NSWCA 365 (Infratel Networks) at [46], s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. This was such a case; and there was nothing to displace the principle ordinarily applicable. Competing but plausible submissions on the question of construction should have led to a finding that there was dispute on that question and therefore dispute as to the existence of the debt the subject of the statutory demand.[9]
[9]Ibid 221 [36]-[37].
Is the default clause a penalty provision?
Mr Clement, counsel for Aurora, referred to clause 3 of the Deed which is extracted at paragraph 10 above. The Deed provided that the parties agreed to a settlement sum of $300,000 in compromise of a dispute, however clause 3 provided that if Aurora defaulted in paying that sum, it became liable to pay the entirety of the disputed debt claimed by the defendants. Mr Clement submitted that clause 3 imposed upon Aurora a penalty upon the failure of the primary stipulation to pay the settlement sum on time. He contended that the stipulation for an additional $119,335.28 to be immediately owing on any default by Aurora was out of proportion to the interest that the defendants, or either of them, have in the performance of the Deed. He made reference to various authorities, which are detailed below, in support of the proposition that such terms and settlement agreements have been held to constitute penalties.
The emphasis of Mr Clement’s submissions that the default clause was a penalty were based on a contention that the terms of the Deed do not unambiguously acknowledge the existence of the debt, nor could it be said that there is an implicit acknowledgement of the debt arising merely because the sum total of the two invoices, $419,000, is defined as the “Debt”. Further, Mr Clement stated that recital F of the Deed, which he submitted is relevant to the construction of the Deed, refers to and identifies “issues” between the parties. Recital F to the Deed states:
The Parties have agreed to resolve all or any issues regarding the Debt and the Legal Services on the basis set out in this Deed.
There is no elaboration or identification as to what the “issues” were.
Mr Clement contended that recital F, speaking of resolving “all or any issues regarding the Debt”, is indicative that there was a controversy concerning the invoices which was resolved by the agreement in the deed to pay $300,000 rather than the $419,000 claimed. Mr Clement submitted that a genuine dispute arises as to whether clause 3 constitutes a penalty; it is not the Court’s role in these applications to weigh up competing arguments to assess which is the stronger argument, rather the Court’s jurisdiction is to decide whether or not the position which Aurora puts has a sufficient degree of cogency to be arguable.
Mr Clement accepted that the general position as to what constitutes a penalty is as stated by Gibbs CJ in O’Dea v Allstates Leasing System (WA) Pty Ltd, whereby a provision cannot amount to a penalty where a deed simply grants an indulgence for the payment for a debt which is affirmed to be due and payable.[10] This principle was also the subject of consideration in Acron Pacific Ltd v Offshore Oil NL[11] where the High Court of Australia restated the proposition found in O’Dea and observed:
As cl. 22 alone is singled out as a supposed penal provision, the operation of that clause must be determined not in the light of the circumstances existing before the deed was executed but in the light of the legal rights and obligations which the deed itself creates or confirms. The clause does not operate on the antecedent debts but on the debts as acknowledged in the deed.
The debts which were the subject of cl. 10 and the first schedule were acknowledged to be owing on the dates specified in the schedule and “unconditionally repayable by such Creditor on demand”. The debts which were the subject of cl. 10 and the second schedule were acknowledged to be owing on the dates specified in the schedule and to be “now repayable in full”. Whatever the terms of the debts may have been before the moratorium deed took effect, thereafter the debts were owed on the terms therein set out. The parties thus agreed upon the character of the debts to which the creditors’ covenants should apply. The creditors’ covenants in cll.7(l) and 10.2 not to enforce the debtors’ liabilities during the moratorium related to debts that were unconditionally payable on demand. The loss of the benefit of the creditors’ covenants was therefore no more than the loss of the qualified indulgence which the creditors had agreed to give - that is, an indulgence qualified by the terms of cl. 22. The loss of the benefit of the creditors' covenants was not a penalty. [12]
[10]O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 367 (‘O’Dea’).
[11](1985) 157 CLR 514, 518 (‘Acron’).
[12]Ibid 519.
Mr Clement contended that the Deed entered into by the parties here contained no such express acknowledgement that the sum of $419,335.28 was due and owing and was therefore distinguishable from the scenarios considered not to be penalties in O’Dea and Acron. Mr Clement submitted that in the circumstances of this case, there is insufficient evidence to say that Aurora acknowledged that it owed the debts to each of the defendants; the parties were in dispute about those services and the corresponding invoices the subject of the settlement deed, and they resolved their dispute by arriving at the terms of the settlement deed.
Mr Clement submitted that the defendants needed to demonstrate that the $419,335.28 was due and payable and he submitted that the evidence in that regard was “mixed”, by which I understood him to mean equivocal. He contended that the evidence demonstrates that there was a dispute about the invoices rather than an acknowledgment of indebtedness and he stated this to be the most significant factor on the question of whether the default provisions were a penalty.
In support of this proposition, he made reference to several authorities. The first was a decision of the Queensland Court of Appeal in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd.[13] In Zenith, the appellant sued for work done under a contract and contended it had a claim for $72,000. The parties settled on an amount of $55,000 to be paid in instalments. The terms of settlement contained a default clause that, if an instalment was missed, the applicant could enter judgment for the full amount of $72,000. Pincus JA observed:[14]
The quotation from O’Dea’s case set out above, defining a set of circumstances to which the equitable doctrine preventing recovery of penalties cannot apply, speaks of a creditor agreeing to accept ‘‘payment of part of his debt’’. That expression is difficult to treat as apt in the present case; there was a claim made for an alleged debt, but it was disputed. The amount properly due was never established, because the case was settled. It cannot be said, then, that it has been shown that the sum claimed in the action was a debt, part of which the applicant agreed to accept in full discharge.
[13][2001] 2 Qd R 114 (‘Zenith’).
[14]Ibid 118.
After surveying several authorities, Pincus JA stated:
In my opinion the law as it presently stands is correctly stated in Professor Rossiter’s chapter on relief against penalties in The Principles of Equity, (1996), edited by Professor Parkinson:
‘‘Where a stipulated sum is presently due and owing as a debt and the creditor grants the debtor an indulgence to pay the debt by instalments, it is not a penalty for the creditor to provide, as a condition of granting the indulgence, that the indulgence will be withdrawn if the debtor defaults in the payment of an instalment. However, this principle… has no application where, having regard to the substance and notwithstanding the form of the transaction, the stipulated sum is not owing as a present debt.’’ (296)
Here the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed. That is, the case is one in which the obligation sought to be enforced was one to pay a much larger sum than that agreed to be due, upon default in payment of agreed instalments of the latter…[15]
[15]Ibid 116-17.
Mr Clement also referred to the decision of Sloss J of this Court in Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd.[16] In that case, the appellants performed legal work for the respondents and rendered bills of costs. The respondents initiated a costs review proceeding in the Costs Court of this Court which was ultimately settled on the terms set out in a deed of settlement. Under the deed of settlement, the parties agreed that all of the legal fees rendered, of which $132,000 approximately was outstanding, would be settled by the appellant accepting the lesser sum of $80,000, which was defined in the deed of settlement as the “Settlement Amount”, to be paid by a series of monthly instalments. The terms of settlement contained a provision that, upon non-compliance with the deed of settlement, the appellant’s solicitors were entitled to have judgment entered against its former clients for the higher sum, $132,000, less any amounts paid.
[16][2013] VSC 734.
There was a default in the payment of the instalments. Amongst their defences, the defendants contended that the default provisions constituted a penalty and were void and invalid. After canvassing the authorities on this issue (including Zenith), her Honour found:
When read fairly, the Deed of Settlement under consideration here, unlike that in Calcorp, does not contain an implied acknowledgment of present indebtedness on the part of each of the Simms entities for the stipulated sum of $132,394.12 as at the date of entry into the Deed of Settlement. This was not a case like Cameron, where it could be said each of the Simms entities had implicitly acknowledged an existing indebtedness of a larger sum that was quantified, and already due and owing.
Under clause 1 of the Deed of Settlement, when read with clause 7, the Simms entities, jointly and severally, agreed to pay, and the legal practice agreed to accept, the Settlement Amount of $80,000, payable by way of instalments.
In respect of the larger stipulated sum, its quantum or perhaps more correctly the quantum of the respective bills of costs was collectively the subject of challenge by each of the Simms entities. In those circumstances, when regard is had to the defining features of cases in the category referred to by Gibbs CJ in O’Dea, to which the equitable doctrine preventing recovery cannot apply, it will be observed that here there was no ‘original debt’ due and owing. Thus, the legal practice could not demonstrate that it had agreed to accept payment of part of its debt in full discharge if the terms of the Deed of Settlement were complied with, but otherwise it would ‘be entitled to recover the original debt’.
Accordingly, in my view, the circumstances of the present case are more closely analogous with those under consideration by the Queensland Court of Appeal in Zenith. Here, as there, the stipulated sum was neither in form nor substance a present debt. Rather, the stipulated sum was merely an amount claimed for work and labour done, that was disputed, and the amount contended to be due was never established because the case was settled.
In the present case, the learned Magistrate found, in my view correctly, that there was no express or implied acknowledgment of the indebtedness for the stipulated sum claimed. He then turned to consider whether or not the amount claimed under clause 8 was a penalty. He referred to the relevant test outlined by Lord Dunedin in the Dunlop Pneumatic Tyre case.
His Honour noted that the differential between the $80,000 agreed to be paid by instalments and the total sum of $132,394.12 was at least $50,000, and he regarded that as ‘an extreme and excessive amount’. He found ‘it would be an extravagant and unconscionable amount in comparison with the greatest loss that could be conceived,’ the sum sought to be made the subject of the judgment being ‘well outside the boundaries of what could be seen as appropriate’ given Lord Dunedin’s test. Accordingly, his Honour found that the sum sought to be made the subject of the judgment is a penalty and should not be ordered, it being ‘extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved’ as having followed from the breach. His Honour dismissed the plaintiff’s claim with costs.
In circumstances where the relevant breach under clause 9 was the appointment of external administrators to Beloti Pty Ltd, I agree that the increase in liability from $80,000 to effectively the sum of $137,430.68,108 or indeed the sum of $132,394.12,109 constituted a penalty, and the learned Magistrate was correct to dismiss the appellant’s claim.[17]
[17]Ibid [83]-[89] (citations omitted).
Mr Clement concluded with a reference to the decision of Darke J in Di Gregorio v Jersey Developments 27 Pty Ltd[18] where parties to litigation entered into terms of settlement whereby the defendants agreed to pay the plaintiffs $250,000 by instalments. The terms of settlement provided that in the event of default the plaintiffs would be at liberty to enter judgment in the amount which represented the difference between the plaintiffs’ claim in the proceeding, approximately $769,000, and the sums already received by the plaintiffs from the defendants. His Honour observed:
[18][2018] NSWSC 966.
There is clearly no express acknowledgment of an existing debt in the terms of the agreement. I did not understand the plaintiffs to contend to the contrary. I therefore agree that paragraph 5 of the agreement should be held to be a penalty unless in the circumstances there is an implied acknowledgment by the defendants that the amount referred to in paragraph 5 is a debt owed to the plaintiffs. In that event, the agreement could be seen as one that provides for an indulgence in relation to the payment of an existing debt, and thus fall within the principle referred to earlier that was enunciated in O'Dea v All States Leasing System (WA) Pty Ltd (supra).
… I accept that it is open to a defendant, in substance, to acknowledge its liability to a plaintiff, by entering into of terms of settlement (see Australian Management Consultants Pty Ltd v Direct Mortgage Funding Pty Ltd [2003] VSC 202 at [52]).
…
As I have mentioned, the plaintiffs submitted that the present case is akin to Calcorp. That case involved terms of settlement which contained an agreement by the defendants to pay $200,000 in instalments, in default of which the plaintiff was entitled to enter judgment for the full amount of the plaintiff’s claim “in the agreed sum” of $262,648.96, less amounts paid, plus interest and costs.
The leading judgment was delivered by Nettle JA (as his Honour then was) with whom Redlich and Harper JJA agreed. Nettle JA held that the terms of settlement contained an implicit acknowledgment that the sum of $262,648.96 was due to the plaintiff (see at [17]-[23].) At [19] his Honour noted that “there was no dispute about the existence of the lease, or the appellants’ default in payment of rent and outgoings under the lease, or even the amounts which the appellants had failed so to pay.”…
At [21], Nettle JA placed some emphasis on the words "in the agreed sum of $262,648.96". Viewing those words in the context of the historical background of the lease and the proceedings, his Honour found that there was:
“an implication that the appellants were thereby acknowledging that the amount of the liability which was in issue on the pleadings was that amount, and thus that the appellants were liable to pay it at that time."
Those words are not present in paragraph 5 of the terms in this case. Paragraph 5 employs the expression "the plaintiffs' claim of $769,762.61 in these proceedings".
In my opinion, these differences are significant. It seems to me that the present case is more akin to Zenith, a case that was itself distinguished in Calcorp (at [24]).[19]
[19]Ibid [16]-[17], [19]-[20], [22]-[24].
Darke J considered that the terms of settlement in that case did not embody an implicit acknowledgement of the existing debt on the part of the defendants but rather the language of the deed spoke in terms of an amount “claimed by the plaintiffs in the proceedings”. His Honour considered that the default provision was a penalty.
Mr McAloon, counsel for the defendants, contended in his written submissions that rather than clause 3 of the Deed being properly characterised as a penalty provision, it is properly regarded as a “default provision” which does not have the character of a penalty as described in O’Dea.[20] In that regard, he also referred to and relied on the observations of the High Court in Acron as extracted above in paragraph 29 above.[21]
[20]O’Dea (n 10).
[21]Acron (n 11) 518 “… the operation of that clause must be determined not in the light of the circumstances existing before the deed was executed but in the light of the legal rights and obligations which the deed itself creates or confirms. The clause does not operate on the antecedent debts but on the debts as acknowledged in the deed” and there will be no penalty where a deed “simply grant[s] an indulgence for the payment of a debt that is due and payable”.
Mr McAloon drew attention to the provisions of the Deed which he contended were not complex and their effect clear. In particular, he placed emphasis on the definition of “Debt” being defined at clause 1.1 to mean the “debt owed” by Aurora to each of the defendants respectively in the amounts particularised in annexures to the Deed. He submitted that the terminology is important in that “debt owed” distinguishes the amounts from being “amounts claimed”. As such, he contends, the Deed records the amounts as presently owing to the defendants and no other construction is cogent. He also drew attention to clause 2.1 which provides that the parties agree to “settle the Debt” under the terms of the Deed, which terms provided for payment of a lesser amount by way of three instalments.
It was submitted that this was to be distinguished from the position in Zenith,[22] as here there is not an amount claimed, but rather a “debt owed”. It is not an implied acknowledgement, rather it is express.
[22]Zenith (n 13).
Mr McAloon says that in such circumstance, there is no point of law which warrants a trial or requires further investigation and that the rigorous curial approach described in Malec[23] requires that the ground contending that clause 3 is a penalty should be rejected.
[23]Malec (n 4).
Consideration
In my view, there are competing but plausible submissions on the question as to whether clause 3 of the Deed operates as a penalty and therefore is unenforceable. On the one hand, Aurora submits that is has a plausible contention that the terms of the Deed contained no acknowledgement on its part as to the state of indebtedness between it and the defendants and that the Deed operated to implement a compromise on the amount of indebtedness between the parties and pointed to the disparity between the total of the invoices, $419,335.28, and the Settlement Sum, $300,000. Adopting the rationale of Lord Dunedin in Dunlop Pneumatic, the argument would run that the disparity is “extravagant and unconscionable” and therefore unenforceable as a penalty.[24]
[24]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87.
Recital F to the Deed speaks of the parties agreeing to “resolve all or any issues regarding the Debt and the Legal Services”, suggesting the existence of a controversy as to the state of indebtedness between the parties rather than an acknowledgement in that regard on Aurora’s part.
As has been emphasised in the authorities to which reference has been made, the Court’s role in the present context is not to attempt to predict what the outcome of the controversy surrounding the construction of the Deed will be; an application to set aside a statutory demand under s 459G of the Act does not involve a final determination of the matters upon which the company relies to dispute the debt. Rather, the application is decided on the basis of whether those matters are plausibly arguable. Here, the Court’s jurisdiction is confined to a determination of whether or not Aurora has discharged the onus it bears that it has plausible arguments that clause 3 operates to impose a penalty.
I consider that there is a rational controversy as to whether the Deed expressly or implicitly contains an acknowledgement of indebtedness on Aurora’s part. Clearly, it will be necessary for Aurora to successfully confront the construction which Mr McAloon pressed, in particular the definition of Debt as being the “debt owed” by Aurora to NG and Piper Alderman as well as the use of the phrase “settle the debt” in the operative part of the Deed. In my view, I would not characterise the position being put by Mr Clement as being patently feeble, rather I consider that Aurora has plausible arguments that clause 3 operates to impose an impermissible penalty which merit further investigation. For that reason it has established a genuine dispute in relation to the operation of clause 3 of the Deed.
Should the demand be set aside pursuant to s 459J?
Although it is not strictly necessary to do so, I now turn to consider Mr Clement’s submission that the demand should be set aside on application of s 459J of the Act. The basis for this is that the demand impermissibly and incorrectly combines each defendant’s respective entitlement under the default clause of the Deed.[25]
[25]Plaintiff’s written submissions filed 30 July 2021, [13].
Mr Clement submitted that the definition of “Settlement Sum” contained in the Deed created a joint debt owed by Aurora to the defendants which reverted back to two singular debts owed separately to the defendants upon default. Mr Clement contended that the authorities reveal that multiple separate debts cannot be joined in the one statutory demand. In support of this proposition he referred to the decision of Cohen J in First Line Distribution Pty Ltd v Whiley[26] and Aerospace Aviation v Deshmukh.[27] As such, Mr Clement contended the statutory demand in this proceeding is fatally defective in form.
[26](1995) 18 ACSR 185 (‘Fist Line’).
[27][2009] NSWSC 659, [4].
Mr McAloon contended that Aurora did not raise the defect ground within the 21 day statutory period and this point therefore cannot be agitated in this application as it infringes what was formerly known as the Graywinter principle.[28] Further, he submits that the demand is not defective and no substantial injustice will arise if it is not set aside.
[28]This is discussed further at paragraph [61] below.
Mr McAloon referred to my decision of 133 Walsh Street Pty Ltd v BMF Pty Ltd[29] where I canvassed the authorities in support of his submission that the defect ground was not raised by Mr Harty in his affidavit dated 16 April 2021, being the only affidavit filed by Aurora in the 21 day statutory period.
[29][2020] VSC 650, [31].
On 27 September 2021, after I heard the application and reserved my decision, the Court of Appeal in this State delivered judgment in Sceam Construction Pty Ltd v Clyne[30] in which one of the points of appeal concerned the application of the authorities in what was until that time referred to as the Graywinter principle.[31] As this issue was raised by Mr McAloon regarding whether Aurora was able to raise the defect ground, the parties were given the opportunity to provide further written submissions on the effect of the Court of Appeal’s decision. Both parties took up that opportunity and submissions were filed on 6 October 2021.
[30][2021] VSCA 270 (‘Sceam’).
[31]See Graywinter Properties Pty Ltd v Gas & Fuel Corporations Superannuation Fund (1996) 70 FCR 452.
In their submissions, both counsel placed emphasis on the same passage in Sceam in support of their positions:
Standing back from all that has been written in the authorities, it is important to bear firmly in mind that what is critical is the language in the legislation. It requires an affidavit supporting the application to be filed with the Court within the statutory period. In the context of a claim to set aside the statutory demand on the basis that there is a genuine dispute as to the existence or amount of the demand, pursuant to s 459H(1)(a), the affidavit must support the application by providing the basis for establishing that there is a genuine dispute. Establishing the genuineness of the dispute requires material showing, or from which it can be inferred, that there is a real dispute. Most commonly this will be done by the deponent describing the dispute. That description will delineate the scope of the dispute which may be relied upon to set the demand aside. Where the dispute is based purely on the construction of a written agreement between the parties, the support requirement may be satisfied by exhibiting the agreement without more. But, for example and without being prescriptive, if something beyond the written terms is to be relied upon, then it is highly likely that this will need to be raised in the affidavit and more than mere assertion will be necessary. Ultimately, what is required to satisfy the support requirement must be assessed in the context of the particular application that is made.[32]
[32]Sceam (n 30) [38] (emphasis in original).
Mr Clement submits that Sceam is authority for the proposition that the critical question for the Court to consider is whether the affidavit filed within the statutory period, here being 21 days, “supports” the application. Aurora relies on the affidavit of Mr Harty which was filed within the 21 day statutory period which exhibited the Deed. Mr Clement submits that Sceam confirms that it is sufficient to exhibit a written document “without more” to support an argument based on the construction of that document. It is submitted that the defect ground, being Aurora’s submission that two separate claims have been impermissibly combined into a single demand, is “raised” by exhibition of the Deed to the affidavit.
Mr Clement submitted that, although Aurora had only made specific reference to the penalty argument in Mr Harty’s affidavit, this did not mean that the defect ground was not available to it. He contended that the defendants were on notice about the defect ground since 25 June 2021. The significance of that date was not made clear, but it is the date that Aurora’s submissions were filed and served. Of course, it must be demonstrated by Aurora that the defect ground was raised within the 21 day period, it is not to the point that it was later the subject of Aurora’s written submissions.
Mr Clement submitted that by exhibiting the Deed it was sufficient to enable Aurora to “support” an argument based on the construction of the document. He contended that the argument regarding the impermissible “rolling up” of two separate claims into a single, undivided statutory demand is a ground which is reliant solely upon the construction of the Deed.
Mr McAloon submitted that Mr Harty’s affidavit, being the “21 day affidavit” referred to in the authorities, made no reference to any argument that the demand was defective. He referred to Mr Harty’s affidavit asserting that Aurora:
… relies on the grounds of a genuine dispute and an offsetting claim for setting aside the statutory demand.[33]
[33]Affidavit of Michael Harty sworn 16 April 2021, [5].
Because of the significance attached to Mr Harty’s affidavit, it is appropriate to set out its contents in full:
1. I am the solicitor with carriage of this matter. I have daily care and conduct of this file on behalf of the plaintiff. I am authorised to make this affidavit on behalf of the plaintiff. Annexed to this affidavit and marked 'MJH-1' is a record of a search of the records maintained by the Australian Securities Investments Commission in relation to the plaintiff carried out on 16 April 2021.
2 . The statutory demand dated 22 March 2021 seeks payment of $259,335.28 (Debt) pursuant to a Deed of Settlement and Release dated 25 October 2019 (Deed). Annexed to this affidavit and marked 'MJH-2' is a copy of the statutory demand and affidavit in support. Annexed to this affidavit and marked ‘MJH-3' a copy of the Deed.
3. The statutory demand alleges to be posted on 22 March 2021. Pursuant to section 160 of the Evidence Act 2008, a postal article received by post is assumed to be received on the seventh working day after being posted.
4. I am instructed that the plaintiff has made payment of all instalments owed under the Deed. Pursuant to the Deed the settlement amount was $300,000. The plaintiff has paid the defendants $300,000, leaving a balance owing of $0.
5. The plaintiff relies on the grounds of a genuine dispute and an off-setting claim for setting aside the statutory demand.
6. The Debt is unenforceable as a penalty because the sum claimed exceeds what could be regarded as genuine pre-estimate of loss likely to be suffered by the defendants as a result of a breach of the Deed. The Deed also acts as a cord [sic] and satisfaction of the defendants claim for legal fees which is referred to within the Deed.
7 . Further, I am instructed that on or about 14 April 2021, the plaintiff paid the defendants the sum on $140,000 which is not reflected in the statutory demand or affidavit in support.
I note that although the originating process speaks of making application under s 459J, there is no reference in Mr Harty’s affidavit to the statutory demand being defective. I also observe that at no point did Aurora seek to agitate an offsetting claim in this application as deposed to in paragraph [5] of Mr Harty’s affidavit.
Mr McAloon referred to the Court of Appeal’s observations in Sceam that:
In our opinion, while various forms of language are used in the authorities, their effect is the same. Whether the terms ‘fair notice’ or ‘fairly alert’ are used or whether it is said that the ground must be raised ‘expressly, by necessary inference or by a reasonably available inference’, the outcome turns on whether the affidavit supports the application. In their context, we do not understand the Victorian authorities referred to above to have used the terms ‘fair notice’ and ‘fairly alert’ in a procedural fairness sense. Rather, in substance and properly understood, those phrases have been used as a shorthand for the lengthier phrase ‘expressly, by necessary inference or reasonably available inference’. That phrase requires that the grounds for resisting the statutory demand appear in the affidavit. The phrases ‘fair notice’ and ‘fairly alert’ convey the same requirement.[34]
[34]Sceam (n 30) [39] (emphasis added).
Mr McAloon submitted that Mr Harty’s affidavit plainly does not support an application made by Aurora regarding a defect in the demand and the starting point in the analysis of this issue is to consider whether the Mr Harty’s affidavit raised, as a basis for setting aside the demand, an attack on the form of the demand and it did not. Rather, Mr Harty’s affidavit made no reference to the demand being defective as contended in Aurora’s written submission or otherwise. Mr McAloon submitted that no reader of Mr Harty’s affidavit could possibly have discerned that Aurora’s application to set aside the Statutory Demand was based upon the Statutory Demand being defective as to form. Consequently, he submitted, consistent with the Court of Appeal’s statement in Sceam,[35] the Court has no jurisdiction to consider the submission relating to the defect ground filed by Aurora beyond the 21 day period.
[35]Ibid [42].
Mr McAloon submitted that Aurora’s approach in this application is aptly described in the Court of Appeal’s observation that:
…it is not sufficient to identify one genuine dispute in the supporting affidavit, and then to identify a different genuine dispute in later affidavits filed out of time and at the hearing of the application.[36]
[36]Ibid [43].
It was submitted by Mr McAloon that while Mr Harty’s affidavit specifically identified the penalty ground, there was no express reference to the defect ground, nor could it be said to arise from implication. There was no mention of the word “defect” in Mr Harty’s affidavit.
As such, Mr McAloon submitted, the reasoning and conclusions in Sceam serve to confirm that the Court has no jurisdiction to consider the written and oral submissions of Aurora made after the 21 day period to the extent that those submissions advance the entirely new and different ground that the demand was susceptible to being set aside on account of being “defective”.
Consideration
In my opinion, Mr Harty’s affidavit does not, as required, raise the argument that the demand was defective. Mr Harty’s affidavit, when read fairly, in my view, narrowly and very specifically confined the ground of dispute to the contention that clause 3 constituted the exaction of a penalty and was unenforceable. Aurora now seeks to rely on quite a different ground in its submissions to that specifically identified in Mr Harty’s affidavit.[37] The position is very much akin, in my view, to the subject of consideration by the Court of Appeal in Malec, where the applicant was considered to have raised a quite specific dispute or offsetting claim in its 21 day affidavit and later sought to raise a “different” ground based on the same broad issue; the Court of Appeal held that the later ground was not available.[38] Adopting the phraseology of the Court of Appeal in Sceam, the ground for resisting the statutory demand must “appear in the affidavit”. Here, there is no express reference to the defect ground
,nor in my opinion does it arise by implication. The mere exhibition of the Deed, without more, does not in my opinion enliven the jurisdiction to consider a ground that the demand is defective by reason that the form of the demand, when making claims arising out of the default under the terms of the Deed, was impermissible.[37]Ibid [43].
[38]Malec (n 4) [105]-[107].
In my view, a reading of Mr Harty’s affidavit and the exhibits to it does not inform the reader that an attack was being mounted on the demand by reason of it being defective for the reasons which are now the subject of Aurora’s submissions. In my opinion, the ground in respect of the alleged defect in the demand is not available to Aurora.
Conclusion
For the foregoing reasons, Aurora has discharged the onus that it bears that the amount remaining unpaid under the demand, $119,335.28, arguably constitutes a penalty and the statutory demand should be set aside. The submission by Aurora that the demand if defective is not available by reason that it was not raised in Mr Harty’s affidavit.
I will order that the statutory demand dated 22 March 2021 served on Aurora by the defendants be set aside. The normal order is that costs follow the event but if either party wishes to agitate or make a submission in that regard, they should file a short submission not to exceed three pages with my Associate within seven days of today’s date.
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