Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd

[2001] NSWSC 867

Reported Decision: (2002) 20 ACLC 304

New South Wales

Supreme Court

CITATION:	Redglove Holdings Pty Ltd v. GNE & Associates Pty Ltd [2001] NSWSC 867
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4663/01
HEARING DATE(S):	2 October 2001
JUDGMENT DATE:	3 October 2001
PARTIES :	Redglove Holdings Pty Limited [Plaintiff] GNE & Associates Pty Limited [Defendant]
JUDGMENT OF:	Palmer J

COUNSEL :	Justin Young [Plaintiff] Matthew Tyson [Defendant]
SOLICITORS:	Grogan & Webb [Plaintiff] Greg Wilkinson [Defendant]
CATCHWORDS:	CORPORATIONS - STATUTORY DEMAND - GENUINE DISPUTE - ABUSE OF PROCESS - Defendant serves statutory demand knowing that Plaintiff disputes debt - Plaintiff fails to apply within time to set aside statutory demand under s.459G - Plaintiff seeks injunction to restrain commencement of winding up proceedings as abuse of process - genuine dispute found - whether seeking to wind up company for non-payment of genuinely disputed debt is abuse of process - conflict in authorities - principles discussed - Held - no evidence that Defendant's purpose in issuing statutory demand and seeking to invoke legislative scheme of Part 5.4 is other than to test genuineness of dispute and to collect payment of debt - no abuse of process.
LEGISLATION CITED:	Corporations Act
CASES CITED:	- Gramwick Investments Pty Ltd v Advanced Underpinning Pty Ltd [2000] NSWSC 1131 - David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 - House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527 - Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523 - Liverpool Cement Renderers (Aust) Pty Limited v Landmarks Constructions (NSW) Pty Limited (1996) 19 ACSR 411 - Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287
DECISION:	Plaintiff's Summons dismissed with costs.

Introduction
1    By Summons filed on 20 September 2001 the plaintiff seeks a final order restraining the Defendant from commencing proceedings for the winding-up of the Plaintiff founded upon the Plaintiff’s non-compliance with a statutory demand served by the Defendant under s.495E of the Corporations Act (“CA”).

2    The statutory demand was served on the Plaintiff on 31 July 2001. The Plaintiff says that all relevant times there has been a genuine dispute between it and the Defendant as to the existence of the Defendant’s alleged debt. It says also that it is, and always has been, solvent. Nevertheless, the Plaintiff failed to file an application under CA s.459G to set aside the statutory demand within the twenty-one day time limit imposed by s.459G(2). It has not explained in the evidence its failure to do so. These proceedings were commenced almost a month after the time limited for an application under s.459G had expired.

3    The Plaintiff concedes that it has no basis in the Corporations Act for the relief which it now seeks. Mr J. Young of Counsel, who appears for the Plaintiff, accepts that, as far as any jurisdiction to set aside a statutory demand under the Corporations Act is concerned, the Court is bound by the decision of the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. The Plaintiff, however, invokes the inherent jurisdiction of the Court to prevent a threatened abuse of process. That jurisdiction, as David Grant (supra) itself shows, has not been abrogated by the legislative scheme embodied in CA Pt 5.4.

4    The Plaintiff says that it would be an abuse of process for the Defendant to file an application under CA s.459Q to wind it up for non-compliance with a statutory notice of demand when it knows that there is a genuine dispute as to the existence of the debt. In support of its case, the Plaintiff has filed evidence as to whether the Defendant’s alleged debt is genuinely disputed by the Plaintiff and as to the Plaintiff’s own solvency.

5    Mr Tyson of Counsel, who appears for the Defendant, agrees that in a case such as the present the Court retains its jurisdiction to prevent an abuse of process. He says, however, that there is no abuse of process involved in a putative creditor serving a statutory notice of demand and invoking thereby the legislative scheme of CA Pt 5.4 in aid of the collection of an alleged debt even when the creditor knows that the debt is disputed and when the creditor has no basis for alleging that the company is insolvent.

6    One would have thought that the stark issue raised by this case would have been settled by the law in the six years which have elapsed since the decision in David Grant . Unfortunately, there are conflicting decisions at first instance on the point, so that I must resolve the issue in this case for myself as a matter of principle.

The facts
7    The facts giving rise to the issue may be stated briefly. The Defendant claims that in June 2000 it was agreed between the Plaintiff and the Defendant that the Plaintiff would pay to the Defendant a fee of $2,000 for every home unit sold in a 29 unit resort development at Salamander Bay, called “the Horizon Project”. It says that seventeen of the units have been sold so that it is now entitled to fees totalling $34,000, which is the amount specified in its statutory demand served on the Plaintiff on 31 July 2001.

8    The Plaintiff denies that such an agreement was made. It says that after the discussions between the parties as to the Horizon Project further discussions took place concerning the Defendant’s possible involvement in another project called “the Garden View Project”. The Plaintiff says that it was proposed that if the Plaintiff received no more than $50,000 for introducing the Defendant to the Garden View Project then no fee would be payable by the Plaintiff to the Defendant in respect of sales of units in the Horizon Project. On the other hand, if the Defendant were to receive a fee of $2,000 for each sale in the Horizon Project then the Plaintiff would require the Defendant to pay to it an introduction fee of $150,000 in respect of the Garden View Project. The Plaintiff says that this proposal was put in a letter to the Defendant dated 20 July 2000 and that, there having been no response to that letter, the Plaintiff proceeded on the assumption that the proposal had been accepted.

9    The Defendant denies having received the Plaintiff’s letter of 20 July 2000. There is in evidence, however, a brief diary note of the Defendant’s Managing Director referring to a discussion with the Plaintiff’s Managing Director on 13 July 2000, which suggests that the Plaintiff’s proposal was discussed and agreed between them.

10    It is not necessary to go further into the evidence as to whether the Defendant’s debt is genuinely disputed. Mr Tyson frankly and properly concedes that had the Plaintiff made a timeous application under CA s.459G on the basis of the evidence now adduced, it would have succeeded in demonstrating a genuine dispute for the purpose of CA s.459H. Mr Tyson’s point is, simply, that it is now too late for the Plaintiff to agitate the question at all.

11    In support of its contention that the Defendant is seeking to abuse the process of the Court the Plaintiff endeavours to prove its solvency. Its evidence in this respect is highly unsatisfactory. There are no accounts of the Plaintiff in evidence. The Plaintiff’s Managing Director has deposed to the value of some assets of the company and as to some of its liabilities but only in the most general way. Bearing in mind that the Plaintiff was served with the Defendant’s statutory demand more than two months ago, I would have expected a great deal more detailed evidence from the Plaintiff as to its solvency if it seriously proposed to contest that issue. Had it been a critical issue in the case to determine whether the Plaintiff had proved its solvency, I would have held that it had failed to do so on the evidence so far adduced by it.

The submissions
12    Mr Young’s principal submission is that it is an abuse of the Court’s process for a creditor to invoke the legislative scheme of CA Pt 5.4 for the purpose of debt collecting, especially when the creditor knows that the debt is genuinely in dispute. The whole purpose of Pt 5.4 is, he says, to put an end to the existence of insolvent companies, not to provide a means whereby creditors can coerce solvent companies into paying disputed debts.

13    Mr Young relies on a frequently cited passage from the judgment of Gummow J in David Grant (supra). His Honour, with whom the other members of the Court agreed, said at p.279:
“No doubt, in some circumstances, the new Pt 5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz . However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction.”

14    In Mr Young’s submission, a number of authorities show that it is an abuse of process within the meaning of this passage for a creditor to seek to wind up a company for the purpose of collecting a debt known to be disputed. He refers first to Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287.

15    In that case the defendant, who was an officer of the plaintiff company, removed the plaintiff’s books of account from the plaintiff’s possession and then served a statutory demand upon it claiming payment of certain amounts which could only be verified by the plaintiff by reference to its books of account. The defendant refused to return the books of account, asserting an indefensible claim to a lien over them. Brownie J held that the Court’s inherent jurisdiction to prevent an abuse of its process had survived the statutory code enacted in Pt 5.4. His Honour found (at p.289) that the plain purpose of the defendant’s conduct in serving a statutory notice of demand and at the same asserting a claim over the plaintiff’s books of account “was to coerce the plaintiff into meeting his claim, under threat of winding up proceedings, without giving it the opportunity, within the time fixed by the statutory demand, to ascertain its position” .

16    His Honour, therefore, granted an injunction restraining the defendant from commencing winding up proceedings founded upon the statutory demand which the defendant had already served, although his Honour expressly did not prevent the defendant from serving a new notice of demand and proceeding upon it.

17    The facts in Pacific Communication are very different from those in the present case. There, the abuse of process found by his Honour was not commencing or threatening winding up proceedings for an improper purpose but, rather, commencing proceedings when the Defendant had, by his own act, prevented the Plaintiff from properly defending them. That is certainly one form of abuse of process but is not the sort of abuse to which Gummow J was referring in David Grant . Accordingly, I do not find the decision in Pacific Communication of any assistance in resolving the issues in the present case.

18    Mr Young then referred to Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523. So far as the report of the case reveals, that appears to have been an application to set aside a statutory demand under s.459G, not under the inherent power of the Court to prevent an abuse of process. Heerey J found that there was clearly a genuine dispute between the parties as to the existence of the debt. His Honour said, at pp.526-527:
“If the respondent considered that it had such a strong case there is no reason why it could not have proceeded in the County Court of Victoria and sought summary judgment. The answer put on behalf of the respondent to my inquiry as to why this was not done was simply that the winding up proceeding provided a “faster track”.
This is precisely what the law does not permit. Winding up proceedings are to be used for the winding up of companies, that is, paying off creditors and distributing whatever surplus remains amongst the shareholders. There is not the slightest indication in my mind that that was the true purpose for which this statutory demand was issued. Rather, I infer that it was issued for the improper purpose of exerting pressure on the applicant for the payment of what clearly was, and was known to be, a disputed debt. So the application is allowed. The statutory demand will be set aside.”

19    Mr Young relies on this passage as strongly supporting his proposition that the issuing of a statutory demand when it is known that the debtor company genuinely disputes the debt amounts to exerting improper pressure for payment. Accordingly, he says, to rely upon such a statutory demand to found a winding up application is to abuse the process of the Court because the winding up proceedings are, like the statutory demand, infected with the improper purpose of exerting pressure.

20    Finally, Mr Young relies on the decision of Hamilton J in Gramwick Investments Pty Ltd v Advanced Underpinning Pty Ltd [2000] NSWSC 1131. In that case, an application to set aside a statutory demand was made by the plaintiff under s.459G but, due to the fact that it was served by mail, it was not served within the time limit imposed by s.459G(2). On the authority of David Grant , his Honour held that the application under s.459G could not succeed. In those circumstances, the plaintiff sought an injunction restraining the defendant from filing a winding up application founded upon the statutory demand on the ground that to do so would be an abuse of the process of the Court.

21    After referring to the passage from the judgment of Gummow J in David Grant which I have quoted above, his Honour said:
“In the present case I find it has been established that there is a genuine dispute as to the whole of the debt claimed by the defendant as the foundation for the notice of demand and that the plaintiff is both solvent and has adequate funds to meet the defendant’s claim if it is proved in appropriate litigation. I hold that it would be an abuse of the process of this Court for a winding up summons to be filed to wind up the company. In those circumstances I am prepared to grant the relief as now sought.”

22    His Honour does not disclose further in his judgment the principles upon which he founds his decision, doubtless for the reason that the application before him was uncontested so that there was no contradictor to the plaintiff’s submissions. His Honour was obviously not referred to the decisions upon the point to which I shall shortly come. However, Mr Young relies upon the judgment in Gramwick and it is certainly directly in point.

23    I turn now to the authorities upon which Mr Tyson relies. He refers principally to the decision of Tamberlin J in Liverpool Cement Renderers (Aust) Pty Limited v Landmarks Constructions (NSW) Pty Limited (1996) 19 ACSR 411. There, the defendant served a statutory demand upon the plaintiff but the plaintiff failed to make an application within time to set aside the demand under s.459G. The plaintiff then sought an injunction to restrain the defendant from proceeding further with a winding up application founded upon the statutory demand and further sought an order that the application be dismissed as an abuse of process. His Honour accepted that the defendant’s debt was genuinely in dispute.

24    After quoting the passage from the judgment of Gummow J in David Grant which I have set out above, his Honour proceeded at p.416:
“Counsel for Landmarks seeks to rely on this statement in the present case in relation to the residual power of the court to grant injunctive relief. In order to do so, facts must be proved which amount to a threat to wind up the company for a collateral and improper purpose, so as to be an abuse of process: see Williams v Spautz , supra, at 522. In my view, no such improper purpose has been shown in the present case. Indeed, the purpose which emerges from the evidence, is that Liverpool seeks to recover the moneys allegedly owed to it, which, it seems to me, is not only proper but is the purpose for which the statutory demand was issued. There is no suggestion of threats of undue pressure, extortion, or commercial duress. Nor is there any suggestion that the demand was a charade in that it was not intended to be pursued to its conclusion.”

25    Liverpool Cement was cited with approval upon this point by Brownie J in House of Tan Pty Ltd v Beachiris Pty Ltd (1996) 21 ACSR 527, at 529-30.

Whether an abuse of process
26    In order to resolve the question at issue in this case one must go back to what was meant by Gummow J when his Honour referred, in David Grant , to making or threatening a winding up application “for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz ” . His Honour clearly chose those words carefully, intending to convey that “abuse of process” is a concept precisely defined in law and is not to be loosely used, as it often is in strenuously contested proceedings when one party considers that the other is motivated by animosity or else has a patently insupportable case.

27    In Williams v Spautz the majority said (at 526) that an abuse of process occurs when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or for some collateral advantage beyond what the law offers. At 529, the majority said that a party alleging abuse of process bears a heavy onus of proof that the predominant purpose of the other party in commencing the legal process had been one other than that for which it had been designed.

28    In the present case, there is no evidence that the Defendant, in issuing its statutory notice of demand, seeks to invoke the legislative scheme of Pt 5.4 for any purpose other than to have its debt paid or else to have the Plaintiff wound up and its debt admitted to proof in the liquidation. True it is that, prior to issuing the statutory demand, the Defendant knew that the Plaintiff disputed the debt. But at the heart of the scheme imposed by Pt 5.4 is the legislative intent that debtors wishing to dispute debts should not be permitted merely to protest in general terms and for an indefinite period; they must particularise the grounds of the dispute upon affidavit and they must do so quickly. By this means, many spurious attempts to delay payment of just debts will be defeated, either because the debtor company cannot support the existence of a genuine dispute when called upon to do so on affidavit or because the grounds of the dispute, once sufficiently exposed, simply do not stand up to the Court’s scrutiny.

29    Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by serving a notice of demand under s.459E in order to invoke the procedures of Pt 5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s.459G. That is the risk that the creditor takes in serving the notice of demand. But if the debtor company fails to substantiate the dispute in the manner which is required by Pt 5.4 and, in particular, by s.459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s.459C, s.459Q and s.459S. This is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts. Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor’s purpose in seeking the winding up is not to collect payment of its debt or, in default to have `the company wound up, but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality.

30    It follows from the above discussion that I consider the reasoning of Tamberlin J in Liverpool Cement is correct. I am unable to accept the reasoning of Heerey J in Intergraph . I disagree with the view that the issuing of a statutory demand when the creditor knows that the debt is disputed gives rise to an inference that the demand is issued for the purpose of exerting improper pressure on the company for payment. In my opinion, the only inference which should be drawn, absent compelling evidence to the contrary, is that the demand is issued in order to invoke the statutory procedure for testing whether or not the dispute is genuine.

31    It will be apparent, also, that I feel myself unable to follow the decision of Hamilton J in Gramwick . I have no doubt that his Honour was not referred to the authorities which I have discussed above and that his Honour’s decision was per incuriam.

Orders
32    In the result, the Plaintiff’s claim for an injunction fails. There is no evidence to suggest that the Defendant’s purpose in issuing its statutory demand was other than to secure payment of its debt or to test the genuineness of the alleged dispute by invoking the legislative scheme of Pt 5.4. The commencement of winding up proceedings founded upon the Plaintiff’s failure to comply with the statutory demand or to have it set aside under s.459G will not be an abuse of process.

33    The solvency or otherwise of the Plaintiff cannot be an issue at this stage of the proceedings. If an application to wind up the Plaintiff is actually made, the Plaintiff will be at liberty to seek leave under s.459S to adduce evidence directed to solvency. Nothing I have said in this judgment is intended to bear upon the question whether such leave, if sought, should be granted.

34    The orders of the Court are:
(1) The Plaintiff’s Summons is dismissed.
(2) The Plaintiff is to pay the Defendant’s costs.
– oOo –

Last Modified: 10/08/2001