Re Nature One Dairy (Australia) Pty Ltd
[2021] VSC 879
•25 August 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 00894
IN THE MATTER of NATURE ONE DAIRY (AUSTRALIA) PTY LTD (ACN 633 981 665)
| NATURE ONE DAIRY (AUSTRALIA) PTY LTD (ACN 633 981 665) | Plaintiff |
| v | |
| BICHENO INVESTMENTS PTY LTD (ACN 122 192 134) | Defendant |
- and -
S ECI 2021 00896
IN THE MATTER of NATURE ONE DAIRY PTY LTD (ACN 602 371 684)
| NATURE ONE DAIRY PTY LTD (ACN 602 371 684) | Plaintiff |
| v | |
| BICHENO INVESTMENTS PTY LTD (ACN 122 192 134) | Defendant |
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JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 July 2021 |
DATE OF JUDGMENT: | 25 August 2021 |
CASE MAY BE CITED AS: | Re Nature One Dairy (Australia) Pty Ltd; Re Nature One Dairy Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 879 |
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CORPORATIONS – Application to set aside a statutory demand pursuant to s 459G of the Corporations Act 2001 (Cth) – Genuine dispute – Offsetting claim – Whether claim in separate proceeding constitutes offsetting claim for purpose of s 459H(1)(b) of the Corporations Act 2001 (Cth) – Offsetting claim cannot be quantified – Lack of mutuality – Whether debt due and payable – Abuse of process – s 459J of the Corporations Act 2001 (Cth) – Multiplicity of claims for single debt – Statutory demand issued for improper purpose.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S B Rosewarne Mr N J Guenther | Nicholson Ryan Lawyers |
| For the Defendant | Mr C R Brown | Mills Oakley |
HIS HONOUR:
The plaintiffs in these proceedings, Nature One Dairy (Australia) Pty Ltd and Nature One Dairy Pty Ltd, apply pursuant to s 459G of the Corporations Act 2001 (Cth) (‘the Act’) to set aside statutory demands dated 9 March 2021, which were served on them by the defendant, Bicheno Investments Pty Ltd, in each proceeding.
The demands claim that the plaintiffs are indebted to the defendant in the amount of $5,520,000. The debt is described in the schedules of each demand as:
…relating to the Redemption Amount calculated pursuant to the Converting note deed poll executed by Nature One Dairy (Australia) Pte Ltd Singapore Entity No. 201507161W in favour of the creditor and guaranteed by the debtor pursuant to the Guarantee Deed Poll executed by the debtor in favour of the creditor.
Affidavits
The plaintiffs rely on three affidavits of their CEO, Nick Dimopoulos, each affirmed on 26 March 2021, 14 May 2021 and on 29 June 2021, respectively, and an affidavit of Francesco Licciardello, director of Nature One Dairy Pty Ltd (‘NOD’), affirmed on 21 May 2021. The defendant relies on the affidavit of its former solicitor Benjamin Scott Swain, sworn on 15 June 2021.
Background
NOD operates, primarily through its Australian subsidiaries, as an Australian blend and pack manufacturer of powdered milk products, including infant formula, from its 100% owned processing facility located in Carrum Downs, Victoria. As well as developing its own range of powdered milk products, NOD also has blend and pack agreements with several Australia-based infant formula brands.
In or around late 2019 NOD commenced a capital raising process for the purpose of raising pre-initial public offering funding for the purpose of retiring debt, raising working capital and providing funding for the transaction costs associated with a proposed initial public offering (‘IPO’) on the Australian Securities Exchange (‘ASX’).
Sanston Securities Australia Pty Ltd (‘Sanston’) was then and remains NOD’s corporate advisor in relation to its capital raising initiatives and undertook these activities by its sole director, Mr Licciardello. In or about September 2019 Mr Licciardello was contacted by persons connected with Janet Cameron, who indicated that Ms Cameron was interested in becoming an investor in NOD.
Ms Cameron, the sole director of the defendant, is a well-known businesswoman, being the founder of the business ‘Kathmandu’, and is also a former director and substantial shareholder of Bellamy’s Australia Limited (‘Bellamy’s’). Bellamy’s is a producer of infant formula and food products and was formerly listed on the ASX.
On 19 November 2019, Ms Cameron attended the Carrum Downs facility operated by the plaintiffs with Messrs Dimopoulos and Licciardello, among others. At that meeting Ms Cameron told Mr Dimopoulos that she would be able to provide marketing and other services to assist with undertaking a successful IPO, including achieving a more favourable valuation for the IPO, and that she would require a substantial allocation if she were to invest.
On or about 20 December 2019, NOD executed a deed poll under which NOD made available a facility for converting notes to be issued for the purposes of raising capital (‘the Converting Note Deed’). In addition, the plaintiffs executed the guarantee deed poll (‘the Guarantee Deed Poll’) under which the debt is claimed.
Terms of the Guarantee Deed Poll included, inter alia:
-the plaintiffs agree to jointly and severally guarantee the liability of NOD in relation to the notes, including any amounts that become due pursuant to the terms above;
-the plaintiffs agree to pay any amounts under the guarantee on demand from the defendant; and
-the plaintiffs waive any rights to require the defendant to make demand against NOD, commence proceedings against NOD, make a claim or enforce any other right against NOD, another guarantor or any other person or entity.
Prior to Ms Cameron’s investment in NOD, but following her visit to the factory, Mr Dimopoulos spoke to her on the telephone on one or two occasions. During these conversations Ms Cameron discussed with him her ability to assist NOD to successfully complete an IPO, assist NOD with marketing and sales initiatives and attract greater investment coverage and interest for NOD because of her business network, reputation and image.
On 24 January 2020 Mr Swain sent Mr Licciardello an email regarding Ms Cameron’s investment in NOD. That email stated, inter alia:
(a)I confirm that Jan is prepared to invest $4M via share purchase and $4M via Convertible note on the basis of my comments below.
(i)Jan (or her nominee) will be entitled to a board seat;
(ii)Jan will provide her consulting and advisory advice to the Board and senior management. I understand that Jan has already made suggestions around substantial improvements to the branding. As a result of this Jan is to have 580,000 bonus shares issued to her such that she will have 19.9% of Nature One on a fully diluted basis pre any capital raising at IPO;
(iii)Jan would also like an allocation to her of between $5M - $10M in IPO through Evolutions allocation. The final amount to be determined once the actual amount of funds to be raised in the IPO is determined and also being conscience [sic] that Jan’s share post IPO does not exceed 20%. This allocation may include associates or associated entities of Ricky & Jan.
Mr Dimopoulos deposes that, given that Ms Cameron had sought accommodations that were not sought by any other potential investors, it was necessary for the NOD board to scale back or reject applications that had been received from other corporate investors.
On 12 February 2020 the defendant and NOD entered into the following agreements:
-a consultancy agreement whereby the defendant was to provide certain consultancy services to NOD (‘the Consultancy Agreement’); and
-an agreement for the defendant to subscribe for 80 notes under the Converting Note Deed each with a face value of $50,000 for a total of $4,000,000 (‘the Converting Note Subscription Agreement’).
The terms of the Consultancy Agreement included:
-that its primary purpose was the successful commercialisation of NOD’s products, raising capital and generally in connection with the successful promotion, implementation and completion of the IPO.
The terms of the Converting Note Subscription Agreement included:
-the notes were to convert to shares in NOD at the time of the IPO;
-if the IPO did not occur within 12 months of issue of the notes, the defendant could elect to redeem the notes;
-on receipt of any redemption notice (prior to the conversion of the notes), the notes are to be redeemed;
-the redemption amount of a note was the $50,000 face value of the note multiplied by 1.3, plus any interest accrued; and
-payment of the redemption amount is immediately Australian dollars into a bank account nominated by the defendant.
The transactions to which those agreements referred were completed on 14 February 2021. The defendant paid $4,000,000 for the notes but never received the original note certificate.
Around the same time as the defendant’s investment, the parties entered into the following further independent agreements:
-a share sale agreement (in relation to NOD’s shares) between Masie Ng-Dimopoulos and the Elsie Cameron Foundation Pty Ltd ATF Elsie Cameron Foundation (an entity associated with Ms Cameron) (‘ETF’); and
-a share sale agreement (in relation to NOD’s shares) between Topshield International Pte Ltd and ETF.
Also on 14 February 2020 the Australian Securities and Investments Commission (‘ASIC’) published an online press release that Ms Cameron had been criminally charged by ASIC with contravening ss 671B(1) and 1308(2) of the Act in relation to her shareholding and conduct in respect of Bellamy’s.
On 24 September 2020 Ms Cameron informed the board of NOD that she would resign as a director of NOD. The plaintiffs also allege that at this time Ms Cameron stated that she would not be providing any further services to NOD even though she was required to do so under the Consultancy Agreement as the defendant’s representative.
NOD did not achieve its IPO before the maturity date of the notes, being 15 February 2021.
On 18 February 2021 the defendant served a redemption notice on NOD seeking payment of an amount calculated as the face value of the converting notes under the Converting Note Subscription Agreement multiplied by 1.3 plus accrued but unpaid interest.
On 2 March 2021 the defendant sent letters of demand to each of the plaintiffs as guarantors under the Guarantee Deed Poll for $5,520,000, being the debt claimed in the demands.
On 9 March 2021 NOD filed a generally indorsed writ in this Court seeking relief pursuant to the Australian Consumer Law (‘the ACL’) in relation to the Converting Note Subscription Agreement and the subsequent redemption notice (‘the Main Proceeding’).
Genuine Dispute
The Law
Section 459G of the Act provides:
Company may apply
(1)A company may apply to the Court for an order setting aside a statutory demand served on the company.
(2)An application may only be made within 21 days after the demand is so served.
(3)An application is made in accordance with this section only if, within those 21 days:
(a)an affidavit supporting the application is filed with the Court; and
(b)a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.
When an application alleges a genuine dispute the Court is guided by s 459H of the Act. Section 459H states:
Determination of application where there is a dispute or offsetting claim
(1)This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a)that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b) that the company has an offsetting claim.
The meaning of a genuine dispute in the context of the challenge of a statutory demand was formulated by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd.[1] His Honour said:
It is, however, necessary to consider the meaning of the expression “genuine dispute”… in my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, 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” not having “sufficient prima facie plausibility to merit further investigation as to [its] truth” (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or “a patently feeble legal argument or an assertion of facts unsupported by evidence”: cf South Australia v Wall (1980) 24 SASR 189 at 194.[2]
[1](1994) 12 ACSR 785.
[2]Ibid 787.
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd,[3] Dodds-Streeton JA (as her Honour then was), with whom Neave and Kellam JJA agreed, referred to the principles that are to be taken into account in determining a genuine dispute and offsetting claim. Her Honour said:
As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off‑setting claim. It is required to evidence the assertions relevant to the alleged dispute or off‑setting claim only to the extent necessary for that primary task. The dispute or off‑setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice.[4]
[3](2008) 66 ACSR 67.
[4]Ibid [71].
It is not for the Court to determine the merits of a dispute when an application is made to set aside a statutory demand. In Mibor Investments Pty Ltd v Commonwealth Bank of Australia,[5] Hayne J said:
at least in most cases, it is not expected that the Court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of the dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.[6]
[5](1993) 11 ACSR 362.
[6]Ibid 366-7.
The Issues
The plaintiffs put forth the following three bases on which they assert that the statutory demands be set aside:
-NOD has offsetting claims in respect of the amounts claimed in the demands;
-the statutory demands comprise debts that were not due and payable at the time that the demands were issued; and/or
-the statutory demands amount to an abuse of process.
The Offsetting Claims
The plaintiffs’ submissions are framed in the context of the Main Proceeding, alleging that their offsetting claims arise from defendant’s misleading or deceptive conduct.
They submit that NOD accepted the defendant’s proposal for investment in circumstances where it had other potential investors available to raise the funds that it was seeking. They allege NOD accepted the defendant’s proposal for investment over the other available option given Ms Cameron’s willingness and stated ability to use her business profile, image and experience to provide NOD with services to assist in the completion of its IPO, and the support she would offer the company as a committed shareholder of the company.
The deals between the parties arise from a meeting on 19 November 2019 at which the terms of Ms Cameron’s potential investment were discussed. The plaintiffs assert that the promised provision of services was therefore an important reason why NOD permitted the defendant’s investment in the company, including the investment subscribing for the converting notes.
They submit that there is a plausible contention requiring investigation that the defendant failed to provide these consultancy services and that the defendant’s evidence itself demonstrates the lack of work undertaken by the defendant with NOD.
The plaintiffs submit that, to the extent that any services were provided under the Consultancy Agreement, these services did not satisfy the requirement to provide the consultancy services and there has been no completion or implementation of the proposed IPO. This gives rise to a genuine dispute arising from an offsetting claim – the defendant engaged in misleading or deceptive conduct that induced NOD to enter into the Converting Note Subscription Agreement and the Converting Note Subscription Agreement is therefore liable to be set aside under s 237(1) of the ACL.
Should orders be made under s 237(1) that the Converting Note Subscription Agreement is void ab initio, it would mean that there was no foundation for the debt claimed in the demands pursuant to the Guarantee Deed Poll. In these circumstances they submit that the demands should be set aside entirely.
The plaintiffs also submit that they have an offsetting claim arising from their claim in the Main Proceeding for damages arising from alleged breaches of the Consultancy Agreement. It is also alleged in the Main Proceeding that the defendant repudiated the Consultancy Agreement to the extent that it did not already terminate that agreement pursuant to cl 13.3.
The plaintiffs are unable to precisely quantify the amount of the offsetting claim that arises due to the defendant’s alleged breaches of the Consultancy Agreement other than to submit that:
-NOD has been financially impacted by the defendant’s failure to provide the consultancy services, as this failure substantially contributed to the delay of the IPO;
-the current market sentiment is worse than that prevailing at the time NOD was intending to launch the IPO; and
-NOD has lost the present benefit of $20,000,000 that would have been raised as part of the IPO.
They submit that the statutory demand procedure is an inappropriate vehicle for determining these offsetting claims, which can only be fully resolved by a trial on the merits. Accordingly, the invoking of the statutory demand procedure in the circumstances of this case should lead to disappointment for the defendant.
With respect to the plaintiffs’ assertion of a genuine dispute, the defendant submits that it is not for the Court in this application to determine the merits of a dispute. Rather, the Court must consider whether the ‘dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile.’[7] However, the Court can examine legal questions and questions of contractual interpretation in the context of a s 459G application.
[7]TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACSR 67.
In the defendant’s submission the manner in which the debt has arisen is simple and not subject to any dispute or offsetting claim:
-the defendant made an investment under clear terms as summarised above;
-the parties agreed that if the IPO did not occur by a certain date, the defendant could redeem its investment;
-all rights and obligations are clearly contained within the transaction documents – the parties are highly sophisticated and consideration of events leading up to and surrounding the investment transaction are irrelevant;
-the defendant’s right to redeem its investment has been triggered and NOD and the plaintiffs have failed to meet their obligations – presumably due to an inability to pay the debt; and
-the rights and obligations under the terms of the Guarantee are particularly straightforward and not open to challenge – the liability of the plaintiffs is unconditional.
As to the quantum of the offsetting claims, the plaintiffs submit that no further evidence was required to be filed. They rely on Bakota Holdings Pty Ltd v Bank of Western Australia Ltd (‘Bakota Holdings’).[8]
[8][2011] NSWSC 1277.
In that case, a statutory demand was served by the defendant claiming a debt which arose from a guarantee granted by the company to the creditor. The company sought to set aside the statutory demand on the basis of an existing offsetting claim. The claim in question was a statutory claim for damages for misleading and deceptive conduct. Barrett J held that that debt was arguably not due because the offsetting total was equal to the amount demanded in the statutory demand. The ‘admitted total’ for the purposes of s 459H(2) was equal to the ‘offsetting total’ so that the ‘substantiated amount’ was zero.
His Honour said:
It is true that the affidavit does not articulate any process of reasoning leading to a conclusion that the damages based on the alleged misrepresentations by the defendant would be equal to the amount of the guaranteed debt. But the basis for the conclusion may be inferred from the overall circumstances stated in the affidavit. Had the defendant not made representations giving rise to an expectation that it would roll over the loan facilities (causing FOB not to pursue possibilities of obtaining alternative finance in order to pay out the defendant), FOB would have obtained replacement finance elsewhere and thereby avoided a presently enforceable obligation to pay the defendant on 19 January 2011; the plaintiff, in turn, would not have incurred, as guarantor, an equivalent presently enforceable obligation to pay the defendant; the incurring of that presently enforceable obligation by the plaintiff was therefore caused by the defendant's representations and FOB's reliance on them; and the plaintiff will suffer damage by having to make under the guarantee a payment that it would not have had to make had the defendant not made the representations.
As I have said, I am satisfied that this reasoning can be inferred from the content of the affidavit as a whole, including its description of the parties' relationship, the surrounding circumstances and the point the relationship had reached. I am also satisfied that, although aspects of it might be controversial, it of sufficient prima facie cogency, in conjunction with the statement of amount in paragraph 60 of the affidavit of 5 August 2011, to qualify as sufficient articulation of the quantification of the offsetting claim. That affidavit is accordingly a “supporting affidavit” in the s 459G(3) sense, including as to the matter of quantification of the offsetting claim.[9]
[9]Ibid [43]–[44].
The plaintiffs do not need to go any further in proving quantum. The plaintiffs’ offsetting claim, as in Bakota Holdings, is based on misleading and deceptive conduct. If it is successful, then there will be no debt.
In Bakota Holdings, the plaintiff guaranteed the loan given to it by the defendant. Here, two subsidiaries of NOD are the recipients of a statutory demand pursuant to a guarantee. The defendant is not claiming a debt from NOD.
The defendant submits that there can be no offsetting claim because there is no mutuality. The defendant asserts that the offsetting claims relied on by the plaintiffs are not their claims but claims made by NOD in the Main Proceeding. The defendant also asserts that the plaintiffs have clearly indemnified the defendant from any non-payment by NOD and, as such, they are co-obligors with NOD and also have rights against NOD as the principal.
In support of that submission, the defendant relies on Tatlers.com.au Pty Ltd v Davis (‘Tatlers.com.au’),[10] where the debt the subject of the statutory demand was a joint and several debt pursuant to a judgment, with only one of the co-obligors receiving the statutory demand. The plaintiff claimed an offsetting amount was owed by the debtor to the co-obligor to the judgment debt.
[10][2007] NSWSC 835.
White J held that an offsetting claim was not appropriate in the case before his Honour and said:
However, this submission demonstrates the reason why one joint and several obligor who is sued alone cannot raise a set-off to which his or her co-obligor is entitled (Bowyer v Pawson (1881) 6 QBD 540). The reason is that, in a suit so constituted, rights of contribution between the co-obligors cannot be resolved. To take the present case, if the plaintiff were obliged to indemnify Ms Fletcher against her liability under the judgment in favour of the defendant, it would be unjust to allow the plaintiff to rely upon the set-off available to her against the defendant. If that were permitted, she would have to look to the plaintiff, rather than to the defendant, to recover the $11,000 owed to her by the defendant. There is no equity in allowing the plaintiff to distort the true position by taking advantage of a set-off available to her (Lord v Direct Acceptance Corporation Ltd (in liq) (1993) 32 NSWLR 362 at 369). The position would be different if the co-obligors are both joined in a suit so that a set-off available to one is actually given effect to, and rights of contribution between them can be determined. In the absence of such a suit, the plaintiff is not entitled to avail itself of the set-off available to its co-obligor (Bowyer v Patterson).
…
It follows that in an action to set aside the statutory demand, to which the only parties are the plaintiff and the defendant, and in which the set-off available to Ms Fletcher cannot be given effect to, nor rights of contribution between the plaintiff and Ms Fletcher determined, the plaintiff cannot avail itself of the set-off available to Ms Fletcher.
As this question is purely one of law, it can be decided on the present application even though the question of law is fairly arguable (Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384-385 per Cohen J).[11]
[11]Ibid [44]–[47].
In Saratoga Integration Pty Ltd v Canjs Pty Ltd (‘Saratoga Integration’),[12] Macready AsJ considered Tatlers.com.au and distinguished it on the following basis:
His Honour’s decision was plainly not concerned with a guarantee and it may be for this reason that his Honour was not referred to the extensive case law which discusses the ability of a guarantor to raise an equitable set off which is available to the principal debtor against the creditor.[13]
[12][2010] NSWSC 654.
[13]Ibid [43].
The learned author, Farid Assaf, is also of the view that any offsetting claim must be available to the debtor company served with the demand and not to some other party, even where the debt the subject of the demand is a joint and several debt owed by the company and another. He referred to Tatlers.com.au and stated:
The debtor company argued that it was entitled to set off against the debt it owed to the creditor the amount owed by the creditor to the debtor’s sole director. White J of the New South Wales Supreme Court rejected this submission. There was no authority for any such proposition and indeed it offended the principle that one joint and several obligor who is sued alone cannot raise a set-off to which his or her co-obligor is entitled. This is because in such a suit any rights of contribution between the co-obligors cannot be resolved. It follows that in an action to set aside a statutory demand, to which the only parties are the plaintiff company and the defendant creditor, and in which the set-off available to a company’s co-obligor cannot be given effect to, nor rights of contribution between the company and any co-obligor determined, the debtor company cannot avail itself of the set-off available to the co-obligor.[14]
[14]Farid Assaf, Statutory Demands and Winding Up in Insolvency (LexisNexis Butterworths, 2nd Ed, 2012) 311.
Farid Assaf also stated that Saratoga Integration did not follow Tatlers.com.au and, with respect, Tatlers.com.au is correctly decided. To the extent that there is an inconsistency between the two judgments, the decision of White J should be preferred.[15]
[15]Ibid 311 (fn 186).
I also agree with the learned author. The principle referred to by White J, in my view, applies to this case. There is no mutuality and an offsetting claim cannot be raised by the plaintiffs here.
The defendant also submits that there needs to be some indication and some evidence adduced in support of the alleged quantum of the offsetting claim so that the Court may determine whether there is a genuine offsetting claim of a given amount, and whether that amount exceeds the claim made in the statutory demand. A ‘claim’ for the purposes of s 459H is more than just a cause of action, so that, once a genuine cause of action for unliquidated damages is shown by a company, the court is compelled to accept at face value the damages claimed by the plaintiff as the amount of the offsetting claim for the purpose of the calculation required by s 459H(2) of the Act.
Genuine Dispute – debts not due and payable.
The plaintiffs submit that the Converting Note Subscription Agreement (by reference to the Converting Note Deed) provides specific requirements around when and how notes can be redeemed. One of these requirements for redemption was for the defendant to surrender and deliver up the relevant note certificate or notify NOD that it had lost or destroyed that note certificate.
The plaintiffs have provided evidence that the defendant failed to comply with this requirement. They submit that, as a result of that failure, the purported redemption by the defendant on or about 18 February 2021 is legally ineffective. The consequence of this is that no debt has arisen in respect of those notes and therefore there is presently no debt due and payable that can be claimed as against the plaintiffs pursuant to the Guarantee Deed Poll.
All the note certificates were issued to investors under the converting note deed by way of emailed PDFs. The plaintiffs submit that it was incumbent on the defendant to ensure that it had effectively destroyed all electronic copies and any printed copies of the note certificate that it held in order to effect redemption in accordance with the terms of the Converting Note Subscription Agreement.
This matter was not raised by the plaintiffs when the statutory demand was served. Since the matter was raised, the defendant’s solicitors wrote to the plaintiffs’ solicitors on 5 July 2021 advising that the defendant had not received a note certificate but would destroy the copy.
There is no genuine dispute here about the debt being due. The IPO has not occurred and the defendant can redeem its investment. It did not receive an original note certificate but has agreed to destroy the copy certificate pursuant to cl 6.5 of the Schedule 1 to the Converting Note Deed Poll. Clause 6.5 provides that the defendant must surrender and deliver the relevant note certificate to the plaintiffs in exchange for the plaintiffs paying the relevant redemption amount. The defendant is willing and able to provide a copy of the certificate that it got in exchange for payment. The defendant’s right to redeem its investment has been triggered. The debt is owed pursuant to the guarantee.
Abuse of Process
In the Main Proceeding the defendant has filed a counter-claim pursuant to the orders of Connock J made on 2 July 2021. In the counterclaim, it seeks to join the two plaintiffs to this proceeding as defendants to the counterclaim and claims the same debt that is the subject of the statutory demands.
The plaintiffs submit that it is an abuse of process to have the two proceedings on foot. They rely on Re Zarzar Pty Ltd (‘Re Zarzar’),[16] where Barrett AJA held that it was an abuse of process to rely on the statutory demand while at the same time suing for the relevant debts.
[16][2017] NSWSC 93.
His Honour explained why there was an abuse of process as follows:
While there is no explicit rule precluding parallel resort by a creditor to both the statutory demand procedure and debt recovery proceedings, the reality is that it is an abuse of the statutory demand process to continue to press and rely on a demand while at the same time suing for the relevant debt or debts. This is because the two procedures have different objectives. The aim in serving a statutory demand is not to recover the debt (although eliciting payment may become a welcome by-product) but to obtain the benefit of a presumption of insolvency through non-compliance with the demand. The aim of recovery proceedings, by contrast, is to compel payment and obtain monetary satisfaction. The same reasoning holds good, in my view, when the alleged indebtedness is asserted by the putative creditor by way of set-off defence in proceedings commenced by the alleged debtor. Again, the putative creditor abandons its stance of waiting for the expiration of a statutory period in order to obtain a presumption of insolvency (or, as an alternative, to obtain voluntary payment by the debtor in the meantime) in favour of positive assertion of the right to be paid as a means of obtaining recovery by way of reduction of a liability.[17]
[17]Ibid at [22].
His Honour also made the following observations:
On this basis, it was, in my opinion, unreasonable of Evton to seek to maintain the statutory demand after 16 August 2016. It should, at that point, have notified Zarzar that the demand was no longer pressed and was withdrawn. It should also have consented to an order setting aside the statutory demand. The date 16 August 2016 (being the point at which Evton should have ceased to press the statutory demand) is, to my mind, more significant for present purposes than 30 September 2016 (the point at which the parties apparently agreed that the statutory demand should be set aside).[18]
[18]Ibid at [23].
In Re Vortex Communications Australia Pty Ltd (‘Re Vortex Communications’),[19] I followed Re Zarzar and held that it was an abuse of process where a statutory demand had been served and the defendant commenced a proceeding in the United States District Court in the Northern District of Texas-Dallas Division to recover the debt. The defendant had not served the statutory demand on the plaintiff and informed the Court that the United States proceedings would not proceed until after the application for the statutory demand had been determined. The fact remains that there were two proceedings on foot with different objectives, and in my view, in the context of the statutory demand procedure, this was an abuse of process. The objective of the statutory demand is to obtain an event in insolvency whereas the counterclaim is designed to elicit payment.
[19][2020] VSC 796.
The defendant submits that Re Vortex Communications and Re Zarzar can be distinguished. It says that here the counterclaim is issued after the statutory demand, and is only filed in case the statutory demand is set aside and time would be lost in the other proceeding. It also submits that it was filed as a defensive mechanism.
The counterclaim is issued against two new parties to the Main Proceeding, the plaintiffs in this claim. It is not merely a defensive proceeding. If the main claim is dismissed against NOD, then the counterclaim will remain on foot as against the plaintiffs. The defendant could have elected to continue only with the statutory demand procedure but decided to issue a counterclaim. Two claims on foot are, in my view, impermissible and an abuse of process. If the statutory demand was set aside the defendant could have sought leave to file the counterclaim in the main proceeding. There would be little delay caused because the statutory demand would have been heard and determined before the main proceeding.
The plaintiffs also submit that this is an abuse of process because the defendant’s purpose in issuing the demands was to recover a disputed debt. They submit it is important to note that:
-the statutory demands were issued in circumstances where the defendant knew that NOD and the plaintiffs disputed the amounts sought to be claimed;
-the statutory demands were issued in circumstances where the defendant refused to engage in mediation of the dispute that existed between the parties as to the defendant’s entitlements under the Converting Note Subscription Agreement and Consultancy Agreement;
-there is no evidence before the Court that the NOD Australian subsidiaries are insolvent; and
-the defendant has not used the statutory demand process as means of laying the foundation of a winding up action in respect of the plaintiff and has instead sought to use the procedure as a way of exerting commercial pressure on NOD and the plaintiffs.
The plaintiffs rely on Createc Pty Ltd v Design Signs Pty Ltd,[20] where it was held that the sole purpose of the statutory demand process is to provide a means whereby the insolvency of a company may be established for the purpose of an application to wide up the company.
[20][2009] WASCA 85.
Martin CJ said:
The issue of the statutory demand, and the appeal from the decision of the master setting it aside, reflect a fundamental misconception as to the purpose of the statutory demand process created by Pt 5.4 of the Corporations Act. That purpose is to provide a means whereby the insolvency of a company may be established for the purposes of an application to wind up that company. Its purpose is not to provide a means whereby those claiming a genuinely disputed debt can avoid the obligation of establishing their entitlement to that debt in a court of appropriate jurisdiction by placing commercial pressure on the party resisting payment. There is a clear inference from the evidence that Createc’s purpose in issuing the statutory demand was the improper purpose of using the statutory demand process to enforce payment of a debt which it knew to be genuinely disputed. That is an abuse of process.[21]
[21]Ibid [2].
His Honour further said:
Adopting the criterion from Williams v Spautz (1992) 174 CLR 509; 107 ALR 635; [1992] HCA 34 (Williams), suggested by Gummow J in David Grant, there will be an abuse of process if the purpose of the party issuing the statutory demand is not the purpose of pursuing the statutory demand to wind up the company on the ground of insolvency, but rather to use the process as a means of obtaining an advantage for which the process is not designed or to obtain some collateral advantage beyond what the law offers — such as the application of pressure to compel payment of the disputed debt.[22]
[22]Ibid [50].
The plaintiffs submit that presently there is an abuse of process because there is no evidence that the relevant entities are insolvent, which invites me to draw an inference that these statutory demands have not been issued to wind up these companies.
They rely on a letter dated 10 March 2021 which was sent by the defendant’s solicitor to the plaintiffs’ solicitor. Paragraph 7 of that letter states:
Finally, your clients’ allegation to the effect that the Statutory Demands have been issued for an improper purpose and amount to an abuse of process are vehemently denied. Our client has served the Statutory Demand in order to obtain payment of its debt.
The defendant agrees that it is clear in the correspondence that it was pursuing the recovery of the debt. The defendant submits that it chased a debt in the context of a statutory demand because the defendant had come to the conclusion that there were issues of insolvency.
I note that Mr Swain has deposed that on 17 May 2021 an article was published in The Australian Financial Review titled ‘Nature One Dairy raising to repay Jan Cameron loan’. He further deposes that he and Ms Cameron have formed the view that the capital raising has had to occur because NOD is not otherwise in the position pay the debt. That is the only evidence in relation to insolvency as contained in his affidavit. That article was written well after the statutory demand was issued (9 March 2021).
In TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd,[23] Barrett J (as his Honour then was) considered an abuse of process where a statutory demand is issued to obtain a debt. His Honour said:
Abuse of process is concerned predominantly with propriety of purpose. That issue must be judged according to the legitimate objectives of the particular process. A challenge under s 459J(1)(b) on the grounds of abuse of process would pay attention to the objectives properly pursued by service of a statutory demand, whereas an abuse of process allegation in relation to the pressing of winding up proceedings would pay attention to the objectives for which winding up proceedings are properly pursued.
It seems to me that, even apart from the different timing factors I have mentioned, the two purposes do not coincide. A creditor serving a statutory demand aims, first and foremost, to obtain payment of the creditor's debt. The word "demand" means what it says: the creditor is demanding payment of what is due. The creditor may have a second or subsidiary purpose, which is to obtain the benefit of a presumption of insolvency if the primary purpose of eliciting payment is not achieved and no successful application to have the demand set aside is made. But the principal purpose is to obtain payment.
A winding up application is designed to serve a different purpose, at least where it is pursued in the present circumstances where a presumption of insolvency has arisen, and the defendant company, while conceding insolvency, consciously and deliberately chooses to defend. In those circumstances, proper pursuit of winding up proceedings entails the purpose of securing the imposition of a scheme of insolvent administration aimed at ending the company's activities, seeing assets marshalled and the claims of creditors ascertained and culminating in payment to creditors of whatever is available from the insolvent estate. The logical and expected outcome will be the imposition of that regime (for the benefit of all creditors), not payment of the plaintiff’s debt.
These differences in purpose, it seems to me, emphasise the separateness of application of abuse of process principles in relation to a creditor’s service of a statutory demand and application of the same principles in relation to the creditor’s pursuit of winding up proceedings where insolvency is conceded, at least where, at the later stage, the alleged abuse is not really a collateral allegation of dispute about the existence of the debt grounding the statutory demand: see Radiancy (Sales) Pty Ltd v Bimat Pty Ltd [2007] NSWSC 962 and cases there discussed.[24]
[23][2007] NSWSC 1074.
[24]Ibid [17]–[20].
I note here that the defendant has made a demand to the plaintiffs for debt due prior to issuing the statutory demand. In my view that does not demonstrate that the defendant suspected that the plaintiffs were insolvent. The letter relied upon by the defendant is clear. The sole reason for issuing the demands appears to be to obtain payment of the debt.
I am aware that there are few decisions in which courts have held that it is an abuse of process when a the statutory demand is be used as a debt collection device. Whether an abuse of process exists will depend upon the circumstance of each case. Here, the factors raised by the plaintiff and, in particular, the letter sent by the defendant’s solicitors leads to the conclusion that there has been an abuse of process.
Conclusion
The statutory demands will be set aside as they amount to an abuse of process.
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