Re Huizhong Investment Group Pty Ltd

[2018] NSWSC 390

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Huizhong Investment Group Pty Ltd [2018] NSWSC 390

Hearing dates:

1 March 2018

Decision date:

28 March 2018

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

In proceedings 2017/180296, declaration made that the Defendant did not duly serve a statutory demand dated 21 December 2016 on the Plaintiff, and that that statutory demand, its accompanying affidavit and any reliance by the Defendant on the statutory demand and accompanying affidavit in any proceedings brought by the Defendant to wind up the Plaintiff are an abuse of process. The Court notes undertaking given by the Defendant that it will not rely upon the statutory demand in any application to wind up the Plaintiff or issue any creditor’s statutory demand relating to any debt allegedly owed by the Plaintiff to the Defendant in connection with the loan agreement without prior leave of the Court. In proceedings 2017/151387, the winding up application is dismissed.

Catchwords:

CORPORATIONS – winding up – abuse of process – where creditor’s statutory demand issued in respect of contingent claim – where person who swears affidavit verifying creditor’s statutory demand did not have direct knowledge of the relevant facts – where a more suitable alternative remedy was available to the issuing of creditor’s statutory demand – whether Court will declare creditor’s statutory demand an abuse of process.

Legislation Cited:

- Corporations Act 2001 (Cth) s 459J
- Evidence Act 1995 (NSW) s 136

Cases Cited:

- Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd [2007] NSWSC 966; (2007) 213 FLR 450
- Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374
- Brown v Bluestone Property Services Pty Ltd [2010] NSWSC 869
- Emhill Pty Ltd v Bonsoc Pty Ltd (2004) 50 ACSR 305
- Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] VR 83
- Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd [2010] NSWSC 1453
- James v Ash Electrical Services Pty Ltd (2008) 73 NSWLR 95
- Re Elgar Heights Pty Ltd (No 1) [1985] VR 657
- Re North Sunbury Development Pty Ltd (1983) 1 ACLC 644
- RH Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd [2011] NSWSC 298
- Roberts v Wayne Roberts Concrete Constructions Pty Ltd (2004) 50 ACSR 204
- Williams v Spautz (1992) 174 CLR 509

Category:

Principal judgment

Parties:

Proceedings 2017/180296
Huizhong Investment Group Pty Ltd (Plaintiff)
Geitonia Pty Ltd (Defendant)

  Proceedings 2017/151387
Geitonia Pty Ltd (Plaintiff)
Huizhong Investment Group Pty Ltd (Defendant)

Representation:

Counsel:
Proceedings 2017/180296
P Reynolds (Plaintiff)
J Sleight (Defendant)

 

Proceedings 2017/151387
J Sleight (Plaintiff)
P Reynolds (Defendant)

 

Solicitors:
Proceedings 2017/180296
Elson Pow & Associates (Plaintiff)
GPA Lawyers (Defendant)

  Proceedings 2017/151387
GPA Lawyers (Plaintiff)
Elson Pow & Associates (Defendant)

File Number(s):

2017/180296; 2017/151387

Judgment

The nature of the proceedings and events prior to the hearing

1. By Originating Process filed on 16 June 2017, the Plaintiff, Huizhong Investment Group Pty Ltd (“Huizhong”) applies for declaratory and injunctive relief in relation to a creditor’s statutory demand dated 21 December 2016 (“Demand”) that the Defendant, Geitonia Pty Ltd (“Geitonia”), alleged that it served on Huizhong. Huizhong contends that Demand was not served on it and also contends that the Demand constituted an abuse of process. Huizhong initially sought a declaration that Geitonia did not serve the Demand on it on 21 February 2017 or at all; a declaration that the Demand and supporting affidavit and any reliance by Geitonia on the Demand or that affidavit to wind up Huizhong would be an abuse of process; and injunctive relief restraining any application to wind up Huizhong including the existing winding up application in proceedings 2017/151387 and the issue of any further creditor’s statutory demand by Geitonia relating to any debt allegedly owed by Huizhong to Geitonia in connection with a loan agreement dated 6 September 2011 (“Loan Agreement”) between Huizhong as lender and Geitonia as borrower, either without prior leave of the Court, or at all.

2. By way of background, Geitonia was a property developer. Westpac Banking Corporation (“Westpac”) provided a business loan facility to Geitonia in respect of a construction project in August 2011; Huizhong lent a further amount of $4 million to Geitonia in September 2011, on terms that Geitonia was obliged to repay the principal amount and “consideration” of $1.4 million, totalling $5.4 million, on maturity on 6 November 2012 and that interest would accumulate from that date at the rate of 2.5% per month compounded monthly. Huizhong took a second registered mortgage over a property owned by Geitonia to secure that loan.

3. Difficulties subsequently arose in respect of the relevant development and Geitonia failed to repay the amount due to Huizhong in November 2012 or thereafter. Huizhong then took a transfer of Westpac’s rights under its first mortgage of the secured property, upon paying out Westpac’s loan facility. Geitonia brought proceedings to challenge that transaction in 2015 which were subsequently determined in Huizhong’s favour. Huizhong then brought further proceedings against Geitonia and other parties in September 2015 and a third party commenced declaratory proceedings against Huizhong in early 2016 which it subsequently discontinued. The proceedings brought by Huizhong in September 2015 are yet to be determined. Geitonia commenced further proceedings against Huizhong in March 2016 and, in late March 2016, Huizhong served a creditor’s statutory demand on Geitonia which I refused to set aside by my judgment delivered on 7 September 2016 ([2016] NSWSC 1243).

4. Geitonia then issued the further Demand, which set out a convoluted description of the debt now claimed by it, as follows:

“Description of the debt

On or about 6 September 2011, [Huizhong] entered into an agreement with [Geitonia] (“the Agreement”) to lend [Geitonia] the Principal Sum of $4 million and charge [Geitonia] a Default Rate of Interest of two and a half percent (2.5%) per month compounded monthly.

Under the Agreement:

●   Pursuant to the Reference Schedule, there was no interest other than Default Interest payable.

●   Under clause 3.1, Geitonia was not obliged to pay Interest, other than the Default Interest for which it became liable.”

I interpolate that, although this statement was strictly correct, it failed to have regard to the “consideration” payable by Geitonia under the Loan Agreement, to which I have referred above. The description of the debt continued as follows:

“On 6 September 2011 [Huizhong] made payments of amounts totalling $3,600,000 as directed by Geitonia and claims to have advanced a further $400,000 (which is not admitted), making a total of $4 million.

At that time and for the duration of period of the Agreement, Geitonia had facilities with Westpac Banking Corporation (“the Bank”) and, under those facilities, the rate of interest charged by the Bank, to its customers, including Geitonia was as set out below, under the heading “Interest Calculation”.”

5. The Demand then set out that that interest calculation and the description of the debt then continued:

“The rate of interest charged by [Huizhong], as Default Interest was not a genuine pre-estimate of damage.

As a result, the amount charged by [Huizhong] contains a penalty.

[Huizhong] is not entitled to be paid a penalty.”

6. A description of the process of sale of the property by Huizhong then followed and the Demand then stated:

“[Huizhong] is not entitled to payment of Default Interest, in an amount which contains a penalty.

[Huizhong] is entitled to payment of Default Interest, at a reasonable rate, calculated by reference to the rate charged by the Bank at the time, which totals $1,115,968.36 for the period.

The difference between the amount of interest paid to [Huizhong] at the Default Rate and the amount which would be payable at the reasonable rate, for the period from 6 September 2011 to 1 July 2016, is $1,554,031.64.

[Huizhong] is not entitled to the difference and the amount of the difference, of $1,654,031.64 must be repaid to Geitonia.

[Huizhong] owes Geitonia the amount of $1,654,031.64.

Amount of the Debt

$1,654,031.64.”

I pause to note that that part of the Demand appears to assume that the same interest rate would be charged by a bank lending on a first mortgage and another lender which lends for a short term on a second mortgage.

7. The affidavit verifying the Demand sworn by Geitonia’s current director Ms Amor and dated 21 December 2016 (which was not read by Geitonia but contained in the Court file tendered by Huizhong) in turn stated that:

“1.   I am the sole director of [Geitonia], in respect of a debt totalling $1,654,031.64 owed by [Huizhong] to [Geitonia] relating to the difference between the amount of interest paid to [Huizhong] at the Default Rate and the amount which would be payable at the reasonable rate, for the period from 6 September 2011 to 1 July 2016, is [sic] $1,654,031.64.

2.   I am authorised by [Geitonia] to make this affidavit on its behalf.

3.   I have inspected the business records of [Geitonia] in relation to [Huizhong’s] debt with [Geitonia].

4.   The debt mentioned in paragraph 1 of this affidavit, is due and payable by [Huizhong].

5.   I believe that there is no genuine dispute about the existence or amount of the debt.”

8. As Mr Reynolds, who appears for Huizhong, pointed out, there are several difficulties with the Demand and the initial affidavit of Ms Amor filed in support of it. First, the amount claimed in the Demand was at least arguably not a “debt”, but a quantification of a claim for repayment of an alleged penalty, in an amount which may or may not have been awarded to Geitonia in further proceedings against Huizhong. Second, the amount claimed was plainly not due and payable by Huizhong to Geitonia, where Geitonia had not obtained any judgment in its favour in such a claim. Third, Ms Amor was not a director of Geitonia at the time of relevant events and would likely not have had personal knowledge of the matters to which she deposed, and she does not otherwise explain how she acquired any knowledge of these matters. Fourth, given the history of the proceedings between the parties and the convoluted nature of the claim set out in the Demand, Ms Armor could have had no reasonable basis for a belief that there was or would be no “genuine dispute” about the existence or amount of the debt claimed. The reliance of that claim on complex principles in respect of the recovery of penalties at general law and in equity indicated that there was plainly room for dispute in respect of the amount claimed on that basis. Huizhong did not apply to set aside the Demand on any or all of these bases because, it contends, the Demand and supporting affidavit were not served on it.

9. Geitonia has at various points claimed to have served the Demand on Huizhong at its registered office at the offices of its accountants, or on a director of Huizhong, Mr Hong Gai, at his home, on 21 February 2017. One of the several affidavits, in different terms, of Mr Volonakis (who appears to be associated with the accountants for Geitonia) dated 21 February 2017, which was contained in the Court file for the winding up proceedings and was tendered by Huizhong (with a limiting order under s 136 of the Evidence Act 1995 (NSW) that it was not proof of the asserted facts), stated that:

“I, Ms [sic] James Volonakis of [address], make oath and say:

1.   On 21 February 2017, I attended the premises of Chew & Chiu, Level 7, 60 – 62 York Street, Sydney, NSW, 2000 and served [Huizhong] by placing the documents noted below in those premises.

2.   The documents which I served where [sic] a Statutory Demand an Accompanying Affidavit, true copies of which are annexed hereto and marked “A” and “B” respectively.

3.   At the time of the premises, I took photos and those photos are annexed hereto and marked “C”.”

The error in Mr Volonakis’ description in that affidavit discloses the lack of care taken in swearing that affidavit. Mr Volonakis did not there identify, with any specificity, how the Demand or accompanying affidavit had been left at the premises of Huizhong’s accountants. Annexure “C” said to have been annexed to that affidavit was not annexed to the version filed with the Court. Geitonia did not lead Mr Volonakis’ evidence to seek to prove service of that Demand on Huizhong in this application, and Huizhong led evidence, to which I refer below, to establish that service had not in fact occurred.

10. Geitonia subsequently commenced winding up proceedings against Huizhong in reliance on the Demand. A further affidavit of Ms Amor in respect of the winding up application dated 19 May 2017 (also not read by Geitonia but contained in the Court file for the winding up tendered by Huizhong) in turn identified facts which she claimed to be within her own personal knowledge, including that:

“[Huizhong] was on 21 December 2016 indebted to [Geitonia] in the sum of $1,654,031.64 relating to the difference between the amount of interest paid to [Huizhong] at the Default Rate and the amount which would be payable at the reasonable rate, for the period from 6 September 2011 to 1 July 2016, in the amount of $1,654,031.64, which sum was then due and payable.

… The sum demanded remains due and payable by [Huizhong] to [Geitonia].”

It is again difficult to see how Ms Amor could reasonably have believed that a debt then existed or that that amount was then due and payable by Huizhong to Geitonia, where Geitonia had not obtained a judgment for the amount claimed against Huizhong.

11. The winding up proceedings were served in a manner that, it appears, would not have brought them to the attention of Huizhong or its solicitors. Huizhong’s Counsel only discovered that those proceedings had been commenced by chance, when reviewing the Court list to identify the date of listing of the next directions hearing in other proceedings between the parties, and Huizhong then brought this application.

12. On 26 February 2018, shortly before this application was listed for hearing, the then Counsel for Geitonia, Mr McDonald, advised the Court with Mr Reynolds’ consent, that:

“I wish to inform his Honour that this will matter will not proceed to Hearing as the Defendants have consented to orders 1, 2 and 3 in the Originating Process being made and an order dismissing the winding up application in related proceedings No 2017/00151387. However, as at today, there remains an issue between the parties in relation to costs.”

13. On 28 February 2018, Counsel newly retained for Geitonia, Mr Sleight, provided an outline of the submissions that Geitonia intended to make in respect of the costs application, which advanced the proposition that the proceedings had been settled by Geitonia “consenting (without admission)” to orders in terms of paragraphs 1, 2 and 3 of the Originating Process and an order that the related winding up proceedings be dismissed. That outline of submissions provoked a response from Mr Reynolds that:

“1.   There is no agreement between the parties that [Geitonia] may consent to the relief sought on a without admissions basis. [Huizhong] has not agreed to this. The basis of the resolution is set out in Mr McDonald’s email to the Court dated 26 February 2018, which does not state that the consent to the orders was on a without admissions basis;

2.   Declaratory relief cannot be made on a without admissions basis. The Court would need to be satisfied that there is no proper basis for, and make findings that support, the declaratory relief sought;

3.   The Plaintiff will proceed with its application tomorrow to satisfy the Court that there is a proper basis for the orders sought.”

14. Two observations may be made about this correspondence. The first is that it highlights the desirability of the practice by which legal representatives do not communicate with the Court other than by consent or in respect of administrative matters. The second is that a debate as to whether Geitonia’s position was or was not “without admissions” may have had little utility where, as Mr Reynolds pointed out, the Court could not have granted declaratory or injunctive relief, even by consent, without satisfying itself as to the factual basis of that relief.

The evidence led in this application

15. After the dispute as to the terms on which orders were to be made had arisen, this application was heard and Huizhong read a substantial volume of evidence at the hearing on 1 March 2018. The bulk of that evidence is directed to establishing that the Demand was not served on Huizhong as Geitonia had originally contended. Huizhong relied on the affidavit dated 15 June 2017 of Mr Michael Kerr, its solicitor, which set out previous dealings between Geitonia and Huizhong and other litigation between the parties at some length, to which I have referred above. Mr Kerr’s affidavit also identifies matters on which Huizhong would have relied to set aside the Demand, had it been served with it, and notes that the current director of Geitonia, who had verified the Demand, only became a director of Geitonia after the events that are the subject of the Demand.

16. Huizhong also relies on several affidavits that are directed to establishing that the Demand and supporting affidavit were not served at the offices of Huizhong’s accountants as alleged by Mr Volonakis, including the affidavits of Chen Chi Yu Jane Yeh dated 6 July 2017, Kwan Wai Lau dated 7 July 2017, Yi Zhang dated 7 July 2017, Kathryn Choi dated 7 July 2017, Chin Yee Choo dated 7 July 2017, Glendy Cheung dated 7 July 2017, Jian An Chen dated 7 July 2017, Ka Yu Chung dated 7 July 2017 and Peter Choy dated 26 June 2017. Those affidavits would have been sufficient to establish that matter, had it been contested. In the event, Geitonia did not lead evidence to establish service of the Demand or supporting affidavit at Huizhong’s registered office.

17. Huizhong also led evidence to establish that the Demand and supporting affidavit were not served on its director, although Geitonia also did not seek to establish that matter. For that purpose, Huizhong relies on the affidavit of Mr Hong Gai dated 14 July 2017, prepared with the assistance of an interpreter. Mr Gai is a director of Huizhong and resides at a residential property in Mosman with his wife, Ms Yuping Chen and his son Mr Xiaotong Gai. Mr Hong Gai gives evidence as to a video surveillance system installed at the front of the house and refers to his movements on 21 February 2017, the date on which Geitonia originally claimed to have served the Demand and affidavit at that property, which are corroborated to some extent by photographs from a video surveillance system. Mr Hong Gai also addresses a conversation set out in an affidavit of Mr Volonakis dated 21 February 2017, which was ultimately not read in the application, and also refers to dealings between Huizhong and its accountant, which are ordinarily undertaken by his wife, Ms Chen, since Mr Gai does not have English language skills.

18. Huizhong also relies on the affidavit dated 14 July 2017 of Ms Yuping Chen, Mr Hong Gai’s wife, who gave evidence also responding to Mr Volonakis’ affidavit dated 21 February 2017, which was not read, and addressing her movements on 21 February 2017 and her skills in conversational English. She also referred to dealings with Huizhong’s accountant and to the fact that she had relatives staying at the Mosman house on 21 February 2017 and that she had not seen her relatives respond to the bell at the front gate of the house and her expectation that they would have informed her, and she would have gone to the front door, if that bell had rung while they were staying with her. Ultimately, little turns on that evidence where Mr Volonakis’ affidavit was not read by Geitonia. Huizhong also relies on the affidavit dated 14 July 2017 of Mr Xiaotong Gai, who is Mr Hong Gai’s son and an alternate director of Huizhong for his father and resides at the Mosman address with his parents. Mr Gai also refers to the video surveillance system at the house and to his movements on 21 February 2017 and also addresses Mr Volonakis’ affidavit dated 21 February 2017 which, as I noted above, was not read. Mr Gai also referred to his parents’ English language ability and to dealings with Huizhong’s accountant.

15. Huizhong also relies on the affidavit of Ms Dorothy Le dated 17 November 2017, which dealt with the process by which motion activated photographs from the surveillance footage on 21 February 2017 had been joined in a single continuous sequence. That footage was tendered, but ultimately not played, where no evidence was led by Geitonia which required a response. The Plaintiffs also relied on the affidavit of Ms Michelle Novotny and her attached report (Ex A4), which addressed forensic issues in respect of several of Mr Volonakis’ affidavits. It is not necessary to address those issues, where only one of those affidavits is in evidence, on a limited basis, and the proceedings can be determined on other grounds.

16. Huizhong also tendered the Court’s file in respect of proceedings 2017/151387, the winding up proceedings, as it stood at an earlier date (Ex A6). The Originating Process recorded service of the winding up application at an address which it appears was at some point recorded as the registered office of Huizhong, in circumstances that appear to have been the subject of a separate controversy, but was not the address of its accountants or directors. The application for the winding up was sought on the basis of a failure to comply with the Demand, and the Demand and Ms Amor’s verifying affidavit dated 21 December 2016 was said to have been served by Mr Volonakis at the registered office of Huizhong at its accountants’ address in York Street, Sydney. As I noted above, Geitonia led no evidence in this application to establish service at that address, and the evidence led by Huizhong establishes that the affidavit was not served at that address, at least not on the date initially claimed by Geitonia and likely not at all. Huizhong also tendered notices to produce that it had issued to Geitonia, subpoenas for production (Ex A5) and documents produced by Mr Volonakis in response to a subpoena to produce (Ex A7). It is ultimately not necessary to address those documents or the apparently incomplete response to them where the matter can be determined on other grounds.

17. During the course of Mr Reynolds’ closing submissions, Mr Sleight sought to reopen Geitonia’s case so as to read several affidavits of service (MFI 1) sworn by Mr Volonakis, not to prove the fact of service of the Demand, but to prove a belief on the part of Geitonia, presumably to the effect that the Demand had been served. I did not grant leave to reopen Geitonia’s case to read that evidence, for reasons set out in an ex tempore judgment, which included the fact that Mr Volonakis was not available for cross-examination, although it was common ground that notice had been given that he was required for cross-examination; and that Mr Volonakis’ affidavits, without more, could not establish anything as to any belief of Geitonia or its directors. No evidence was led by any director or representative of Geitonia as to what, if any, view they had formed based upon Mr Volonakis’ evidence, and what knowledge they had, if any, as to its truth or falsity.

Declaration as to service of the Demand

22. Mr Reynolds made detailed written and oral submissions in support of the relief sought by Huizhong. It is not necessary to address the full history of the dispute between the parties or the full range of issues that Mr Reynolds addressed, in order to determine the application.

23. Mr Reynolds rightly points out that a failure to serve a creditor’s statutory demand may, inter alia, be raised in an application for a declaration that the purported service of that demand is ineffective, as an alternative to relying upon that point in opposition to any winding up application based upon that demand, or dealing with the question of a failure to serve the statutory demand as a separate question in the winding up proceedings: Emhill Pty Ltd v Bonsoc Pty Ltd (2004) 50 ACSR 305 at [12]; James v Ash Electrical Services Pty Ltd (2008) 73 NSWLR 95 at [4]–[5]; Brown v Bluestone Property Services Pty Ltd [2010] NSWSC 869. Mr Reynolds also points out that, even in an application of that character, the party that asserts service of the creditor’s statutory demand bears the onus of proving service: Brownv Bluestone Property Services Pty Ltd above at [12]–[18] above. Geitonia cannot discharge that onus, not having led evidence of Mr Volonakis, where he had been required for cross-examination and was not made available.

24. Mr Reynolds referred to the affidavit evidence led by Huizhong to establish that the Demand and supporting affidavit had not in fact been served at the registered office of Huizhong at the premises of its accountants. That evidence includes affidavits of the proprietor of the accounting firm which acts for Huizhong, its office manager, the practice supervisor and numerous employees, to which I have referred above. I am satisfied that those affidavits are sufficient to establish affirmatively that the Demand and supporting affidavit were not served on 21 February 2017, if it were necessary to do so in the absence of any affidavit evidence read by Geitonia that could establish that matter. Mr Reynolds also made submissions as to the allegation of service of the Demand and affidavit at Mr Hong Gai’s home, but it is also not necessary to address those submissions, or Mr Reynolds’ submissions based on the forensic examination of Mr Volonakis’ three affidavits, where Geitonia did not lead evidence to seek to establish service of the Demand on Mr Hong Gai.

25. Mr Reynolds made lengthy submissions as to the circumstances in which the Court may draw inferences from the absence of evidence filed by Geitonia. It is ultimately not necessary to draw inferences from any absence of evidence, where there is substantial and uncontradicted evidence that the Demand was not served. Mr Reynolds also advanced lengthy submissions as to the inferences which could be drawn from witness conduct. It is also not necessary to draw such inferences where the application can be resolved, in a straightforward way, on other grounds. Mr Reynolds made detailed submissions as to three affidavits of Mr Volonakis, only the first of which was in evidence, with the limiting order to which I have referred above. It is not necessary to address Mr Volonakis’ second or third affidavits, where they are not in evidence.

26. I am satisfied that a declaration should be made that Geitonia did not serve the Demand dated 21 December 2016 on Huizhong on 21 February 2017 or at all, where that declaration will allow Huizhong certainty as to that matter, and is supported by the absence of evidence of service of the Demand and the evidence that establishes that the Demand was not served at the offices of Huizhong’s accountants on that date.

Abuse of process

27. Huizhong also seeks a declaration that each of the Demand, the accompanying affidavit and any reliance by Geitonia on the Demand and the affidavit accompanying it in proceedings to wind up Huizhong would constitute an abuse of process. Mr Reynolds draws attention to the principles which relate to an abuse of process, both generally and in respect of a winding up application. He points out that the concept of abuse of process has a wider scope, in respect of a winding up application, than the concept of bringing proceedings for an improper purpose adopted in Williams v Spautz (1992) 174 CLR 509: Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd [2007] NSWSC 966; (2007) 213 FLR 450 at [36] (White J). (An appeal from the decision of White J in Australian Beverage Distributors above was allowed in part, and dismissed in part, in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374).

28. Mr Reynolds also refers to the observations of Barrett J in Roberts v Wayne Roberts Concrete Constructions Pty Ltd (2004) 50 ACSR 204 at [55]–[56], as follows:

“In Williams v Spautz (1992) 174 CLR 509, Mason CJ, Dawson, Toohey and McHugh JJ emphasised that, unless the interests of the justice demand otherwise, it is the duty of courts to exercise jurisdiction rather that refusing to do so. But, at the same time, a court must preserve its process from being employed for ulterior purposes — that is, purposes beyond those that the process itself offers. The focus is upon the purposes of the party initiating the proceeding. One relevant description is to be found in the judgment of Isaacs J in Varawa v Howard Smith Co Ltd (1911) 13 CLR 35:

“If the proceedings are merely a stalking-horse to coerce the defendant in some way entirely outside the ambit of the legal claim upon which the court is asked to adjudicate they are regarded as an abuse of process for this purpose.”

The existence of an unworthy motive is not enough. It is the purpose sought to be effected by the initiating party that is to be considered. The purpose will be improper if it is a purpose of achieving ends other than to which the process is directed.”

29. I also reviewed the relevant principles in Re Gladstone Mortgagee (No 1) Pty Ltd [2015] NSWSC 1551 at [56]ff and I need not repeat that review.

30. Mr Reynolds identifies several bases on which such a declaration could be made, in the circumstances, and any one of them would be sufficient to support that declaration. First, Mr Reynolds points out that a creditor’s statutory demand may only be served in relation to a debt or debts that is due and payable, and that does not include a contingent or prospective liability such as unliquidated damages: Re North Sunbury Development Pty Ltd (1983) 1 ACLC 644; Re Elgar Heights Pty Ltd (No 1) [1985] VR 657. Mr Reynolds submits, and I am satisfied, that the “debt” claimed in the Demand was not a debt, but a contingent claim, and was plainly not due and payable, where there was no judgment in Geitonia’s favour for the amount claimed. Second, it may constitute an abuse of process to serve a creditor’s statutory demand in respect of a debt that is plainly known to be disputed. It seems to me clear beyond doubt that, if (contrary to the finding that I reach above) the amount claimed was a debt, it would have been apparent to Geitonia that it would be disputed by Huizhong, if the Demand was served upon it, and that dispute would have a genuine character.

31. Third, Mr Reynolds points out that a creditor’s statutory demand may be set aside, including under s 459J of the Corporations Act 2001 (Cth), where the person who swears an affidavit verifying that Demand does not have direct knowledge of the relevant facts, and that Ms Amor was not appointed as a director of Geitonia until 30 June 2016, well after the loan made by Huizhong to Geitonia on 6 September 2011 and the default was made in repayment by Geitonia of 6 November 2012. Fourth, the winding up application would at least be an abuse of process within the “second branch” identified in Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] VR 83 and approved by the Court of Appeal in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd above and in RH Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd [2011] NSWSC 298, where a more suitable alternative remedy was available. That more suitable alternative remedy would be the commencement of proceedings by Geitonia to seek to establish its claim in respect of any interest that it attacks as a penalty.

32. Each of the matters I have addressed above is sufficient to support the declaration sought. I do not find it necessary to address several other matters on which Mr Reynolds relied to establish an abuse of process, although I should note those matters for completeness. Mr Reynolds also submits that there was “some other reason” to set aside the Demand for the purposes of s 459J(1)(b) of the Corporations Act, and refers to the history of dealings between the relevant parties, including the oddity that Geitonia, which had unsuccessfully sought to set aside a creditor’s statutory demand served by Huizhong upon it, and not advanced any claim for an offsetting claim in doing so, now asserts an undisputed debt in the amount set out in the Demand against Huizhong. Mr Reynolds also submits that the Demand appears to have been prepared as a collateral attack on Huizhong, in order to bring improper pressure on Huizhong to pay a disputed claim, or possibly to bring the other proceedings between Huizhong and Geitonia to an end, if a liquidator appointed to Huizhong did not continue them. It is ultimately not necessary to reach findings as to those matters, or to determine the application on that basis, where it can readily be determined on more straightforward grounds.

33. I am comfortably satisfied that there should be a declaration that the issue of the Demand, the affidavit accompanying it and reliance upon it in the winding up proceedings amounted to an abuse of process.

Injunctive relief sought by Huizhong and undertaking offered by Geitonia

34. Huizhong also seeks an injunction against Geitonia relying upon the Demand in any application to wind it up, including the existing winding up proceedings, and issuing any creditor’s statutory demand in relation to any debt allegedly owed by Huizhong to Geitonia in connection with the Loan Agreement. Pursuant to leave granted by the Court, Mr Reynolds identified several authorities for the proposition that the Court may, on identifying an abuse of process, injunct reliance on a creditor’s statutory demand or injunct winding up proceedings. He referred to Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd above at [126], where Beazley JA (with whom Hodgson and Santow JJA agreed) observed that, where there is an abuse of process, the Court may dismiss proceedings, and grant injunctions, although the terms of the injunctions must fit the circumstances. The Court did not grant an injunction in that case, where it had found that the winding up application should be dismissed on the narrower basis of a breach of the publication rule.

35. In RH Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd above, Barrett J ordered an injunction to restrain a winding up application, where his Honour had found that any winding up application based on the defendant’s failure to pay a creditor’s statutory demand would be an abuse of process. His Honour observed (at [25]) that:

“The situation is thus one in which the defendant resorted to the statutory demand procedure for a purpose for which the law does not allow. The legislation works on the basis that a creditor to whom a debt is owing due and payable may seek, by serving a statutory demand, to achieve the benefit of a presumption of insolvency for the purposes of pursuing winding up proceedings. The legislation does not countenance the obtaining of the benefit of such a presumption by a person to whom a debt is not owing, due and payable by the company, who has no more than some imperfectly articulated claim for damages and who knows that the person’s position is as just described. For such a person deliberately to resort to the statutory demand procedure in respect of such a claim, having made it clear to the company concerned that the claim is, to the person’s knowledge, of that nature, is a perversion of the statutory process.”

The situation described by his Honour has close similarity to the position in this application. In Golden Plantation Pty Ltd v TQM Design and Construct Pty Ltd [2010] NSWSC 1453 at [33]–[34], Barrett J also restrained a defendant from relying on a failure by a plaintiff to comply with a statutory demand.

36. Huizhong seeks relief extending beyond Geitonia’s reliance on the Demand, so as to prevent Geitonia from issuing any creditor’s statutory demand relating to any debt allegedly owed by Huizhong to it in connection with the Loan Agreement, either absolutely or qualified by reference to prior leave of the Court. I recognise that it is difficult to see how a debt could be owed by Huizhong to Geitonia, about seven years after entry into the Loan Agreement, where no such debt was alleged to constitute an offsetting claim in the earlier application to set aside the creditor’s statutory demand served by Huizhong on Geitonia, and the convoluted claim identified by Geitonia in the Demand was not a debt. In the somewhat exceptional circumstances of this case, it also seems to me that there is a real and not theoretical risk that Geitonia might issue, and fail to serve, a further creditor’s statutory demand without a proper basis and nonetheless commence winding up proceedings. I recognise that there is a significant risk to Huizhong if a further winding up application could be brought against it, where neither the creditor’s statutory demand nor, possibly, a winding up application were served upon it. However, on balance, although with some hesitation, I have concluded that the wider relief in the form sought by Huizhong is not appropriate. I am concerned that a final injunction should not be given to restrain, in absolute terms, the making of any creditor’s statutory demand, where the Court cannot be satisfied that there is no prospect that Geitonia may have a proper basis, not presently be known to it, to claim that a debt is owed by Huizhong to it which could be the subject of such a demand.

37. Geitonia, by its Counsel, Mr Sleight, offered an undertaking in the course of the hearing in accordance with the narrower version of the injunctive relief sought by Huizhong, to the effect that Geitonia would not rely upon the Demand in any application to wind up Huizhong, including proceedings 2017/151387, and would not issue any statutory demand relating to any debt allegedly owed by Huizhong to Geitonia in connection with the Loan Agreement without prior leave of the Court. It seems to me that the undertaking offered by Geitonia, if provided to Huizhong and the Court, would sufficiently protect Huizhong’s interests. I do not accept Mr Reynolds’ submission that that undertaking is of no moment, where, as Mr Sleight points out, a breach of it would constitute a contempt of Court by Geitonia, and likely also give rise to accessorial liability on the part of persons who procured or were knowingly concerned in that breach. It does not seem to me that the wider injunction sought by Huizhong could be granted, where its interests are properly protected by an undertaking, subject to a requirement for prior leave of the Court before a further creditor’s statutory demand was served by Geitonia.

38. This finding has potential implications for the costs of the hearing before me on 1 March 2018, which continued for a substantial time after that undertaking was offered by Geitonia and not accepted by Huizhong. The costs of that hearing may also be duplicated if the same issues need to be again agitated, in a further hearing, in respect of the claim for costs which Huizhong has foreshadowed against third parties.

Orders and costs

39. Accordingly, in proceedings 2017/180296, I will make declarations in the form of the first and second declarations sought by Huizhong, and note the undertaking offered by Geitonia, as follows:

1.   Declare that the Defendant did not duly serve a statutory demand dated 21 December 2016 (“Demand”) on the Plaintiff on 21 February 2017 or at all.

2.   Declare that the Demand, the affidavit accompanying the Demand, and any reliance by the Defendant on the Demand and accompanying affidavit in any proceedings brought by the Defendant to wind up the Plaintiff are an abuse of process.

3.   Note the undertaking given by the Defendant, by its Counsel, that it will not:

(a)   rely upon the Demand in any application to wind up the Plaintiff, including proceedings 2017/151387; or

(b)   issue any creditor’s statutory demand relating to any debt allegedly owed by the Plaintiff to the Defendant in connection with the loan agreement between the Plaintiff as lender and the Defendant as borrower dated 6 September 2011, without prior leave of the Court.

40. I also dismiss the winding up application in proceedings 2017/151387, since there is now no basis for that application.

41. I will hear the parties as to costs, including the Plaintiff’s foreshadowed costs application against third parties.

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Decision last updated: 28 March 2018