RH Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd

[2011] NSWSC 298

Supreme Court

New South Wales

Medium Neutral Citation:

R H Mortgage Corporation Ltd v Kerry Ann Properties Pty Ltd [2011] NSWSC 298

Hearing dates:

11 April 2011

Decision date:

15 April 2011

Jurisdiction:

Equity Division - Corporations List

Before:

Barrett J

Decision:

Order that the defendant be permanently restrained from making an application for the plaintiff to be wound up in insolvency relying on a failure by the plaintiff to comply with a demand dated 24 December 2010 served on the plaintiff by the defendant.

Question of costs reserved

Catchwords:

CORPORATIONS - winding up - winding up in insolvency - where defendant served statutory demand and plaintiff's attempt to apply for an order setting aside miscarried - whether defendant responsible for the miscarriage - held not - but subject matter of statutory demand obviously not a debt - subject matter explained by defendant in contemporary correspondence in terms making it clear that defendant knew there was no debt - resort to statutory demand procedure was a perversion of the statutory process - any winding up application based on defendant's failure to pay will be an abuse of process - injunction granted to restrain such application

Legislation Cited:

Corporations Act 2001 (Cth), s 459G
Service and Execution of Process Act 1992 (Cth)

Cases Cited:

Australian Beverage Distributors Pty Ltd v Evans & Tait Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374
Daewoo Australia Pty Ltd v Suncorp Metway Ltd [2000] NSWSC 35; (2000) 48 NSWLR 692
David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265
Energy Conservation Systems Pty Ltd v Downer EDI Engineering Pty Ltd [2008] NSWSC 1139; (2008) 221 FLR 393
Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83
Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd [2008] FCA 22; (2008) 26 ACLC 122
Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287

Category:

Principal judgment

Parties:

R H Mortgage Corporation Ltd - Plaintiff
Kerry Ann Properties Pty Ltd - Defendant

Representation:

Counsel:
S B Docker - Plaintiff
Mr W Pearse, Director - Defendant
Solicitors:
Kemp Strang - Plaintiff
Mr W Pearse, Director - Defendant

File Number(s):

2011/27174

Judgment

1. By its amended originating process, the plaintiff seeks an order that a statutory demand served on it by the defendant be set aside and, in the alternative, for the following relief:

"A declaration that the statutory demand dated 24 December 2010 served by the defendant on the plaintiff does not comply with Form 509H and non-compliance with it is insufficient to support an application to wind up by the plaintiff."

"An order that the defendant is restrained from making an application to wind up the plaintiff based on non-compliance with the statutory demand dated 24 December 2010 served on the defendant by the plaintiff."

1. The defendant has led evidence from its sole director, Mr Pearse, that the statutory demand was lodged by him in the post on 24 April 2010 in an envelope addressed to the plaintiff at Level 22, 1 York Street, Sydney. It is common ground that this is the registered office of the plaintiff. There is however, a dispute as to the day on which service of the statutory demand occurred.

1. The plaintiff's originating process seeking an order setting aside the statutory demand was filed on 27 January 2011, along with a supporting affidavit. The defendant says that this was more than 21 days after the service of the statutory demand. The plaintiff contends otherwise.

1. The plaintiff accepts, however, that the originating process was not served within that period of 21 days. In fact, the plaintiff accepts that there has never been valid service of the originating process. This is because service was effected in another State (South Australia) and was not in accordance with the Service and Execution of Process Act 1992 (Cth), so that there was no valid service: see Energy Conservation Systems Pty Ltd v Downer EDI Engineering Pty Ltd [2008] NSWSC 1139; (2008) 221 FLR 393.

1. The plaintiff accepts that, in these circumstances, it has not, by its originating process, made a valid application under s 459G. The element made essential by s 459G(3)(b) is lacking and the deficiency can never be remedied. It is therefore unnecessary to decide precisely when the statutory demand was served.

1. The plaintiff contends, however, that circumstances are such that the court should preclude reliance by the defendant on the plaintiff's failure to pay in accordance with the demand as a ground for seeking winding up of the plaintiff.

1. The plaintiff relies on two particular features of the demand.

1. First, it points to the fact that, although the demand was served on the plaintiff at its registered office (which is in New South Wales), the address specified in the demand as the address for service of an application to have it set aside was an address in South Australia. This is contrary to the directive in Form 509H which states that the address so specified must be in the State or Territory in which the demand is served.

1. Second, the plaintiff makes the point that the claim to which the demand relates is obviously a claim for damages, not a debt. The demand refers, in terms, to a debt of $412,000.00 and contains the following description of the debt:

"Breach of Agreement."

1. In David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, the High Court made two things clear: first, that allegations of dispute in relation to a debt should be confined to s 459G applications; and, second, that, to the extent that a company did not, through neglecting to act or inability to prove its case, establish a genuine dispute at the s 459G stage, it should not be allowed to do so in response to a winding up application. The High Court added, however, that it may in some cases 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.

1. It is upon this abuse of process ground that the plaintiff now relies in making the claims set out at paragraph [1] above. The plaintiff says that there will be an abuse of process if the defendant petitions for winding up in reliance on non-compliance with the demand dated 24 December 2010; and that this will be so for either or both of two reasons:

(1) The defendant's act of non-compliance regarding specification in the statutory demand of an address for service of originating process in New South Wales prevents the plaintiff from defending any winding up proceedings by arguing that no presumption of insolvency operates against it.

(2) The use of a statutory demand to found a presumption of insolvency is impermissible where the demand is based on a debt known to be non-existent.

1. For proposition (1), the plaintiff relies on Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287, a case expressly mentioned by the High Court in a footnote to the passage concerning abuse of process to which I have referred.

1. Pacific Communication Rentals (above) was, however, quite different to this case. The abuse of process consisted of the conduct of the applicant for a winding up order in proceeding to make that application (on the basis of an unsatisfied statutory demand) when he had, by his own act, prevented the company from defending itself. The applicant, a former employee, had taken the company's books of account home with him and left the company unable to know the state of the account between it and him and therefore incapable of challenging the statutory demand.

1. In the present case, the defendant's failure to comply with the directive on Form 509H may, in a sense, have led the plaintiff into the trap arising from the Service and Execution of Process Act , so that it might be said that the defendant, by its non-compliance, contributed to the failure of the plaintiff's attempt to make a s 459G application. But the fact remains that the plaintiff retained reputable and competent solicitors who set about serving the New South Wales process in South Australia, thus, as it were, shouldering the additional burden occasioned by the non-compliance. That burden was by no means a heavy one, entailing, as it did, a very modest quantity of additional paperwork. The solicitors should have realised the need to comply with the Service and Execution of Process Act .

1. The plaintiff's failure to make a valid s 459G application was not caused by any conduct of the defendant that deprived the plaintiff of the practical ability to do so.

1. The failure to specify an address in New South Wales constitutes a defect in the demand but whether that defect would, in the circumstances I have mentioned, be properly regarded as productive of "substantial injustice" (see s 459J(1)(a)) is, at the least, doubtful: see Daewoo Australia Pty Ltd v Suncorp Metway Ltd [2000] NSWSC 35; (2000) 48 NSWLR 692 at [53].

1. In relation to item (2) above - the fact that the claim expressed in the statutory demand as a debt for "Breach of Agreement" was in truth an unliquidated claim - the plaintiff relies on reasoning found in the decision of Finn J in Hardel Property Holdings Pty Ltd v Allmark Property Management Pty Ltd [2008] FCA 22; (2008) 26 ACLC 122 and, in particular, the following statement of his Honour at [25]:

"A use of the statutory demand procedures in respect of a debt known to be spurious would give rise to an abuse of process if the statutory demand in turn was used to found a winding up application, the more so if, as alleged here, there is some evidence suggesting the likelihood that the statutory demand procedure itself is being used for some tactical purpose relating to proceedings in another court."

1. I turn therefore to matters of background. The plaintiff is a financier specialising in home loan finance. The plaintiff made a secured loan of some $314,500 to the defendant in 2007. The loan was secured by a mortgage of land in South Australia. Following default by the defendant as mortgagor, the plaintiff took enforcement action under the mortgage. The property was sold. The sale resulted in a shortfall of $57,565. As at late January 2011, the amount owing by the defendant to the plaintiff was $59,324.17. The loan agreement and mortgage are the only documents of a contractual kind ever entered into by the plaintiff and the defendant. The matters I have just stated appear from the uncontradicted evidence of Mr Scotland, a senior manager of the plaintiff.

1. Mr Pearse, the sole director of the defendant, explained in a letter to the plaintiff's solicitor the basis of a claim for $412,000 that the defendant considered itself to have against the plaintiff. The letter is undated. It appears from Mr Wirth's affidavit and a file note annexed to it, however, that Mr Pearse said that he had sent it on 24 December 2010, that it was not received and that Mr Pearse emailed it again on 19 January 2011. It may safely be inferred that it outlines the defendant's claim as seen by Mr Pearse on 24 December 2010 and as embodied in the statutory demand of that date.

1. The letter is in these terms:

"Dear Mr Graham

I became the managing director of the above company [ie, Kerry Ann Properties Pty Ltd] on 12/04/2010 and as such advise the following

1. The primary debt with your client is Kerry Ann Properties Pty Ltd

2. The primary Counter Claim issues remain with Kerry Ann Proprieties Pty Ltd

3. Mary McKenzie is the guarantor to the mortgage

The issues being revised are;

a. Prior to order for possession Property Valuation $412,000.

b. Your client through its legal representation (Lynch Meyer) issued proceedings against the company and erroneously restricted an appointment of your client as the controller/receiver of the company on 18 th August 2009. This act is in direct contravention of section 418 of the Corporations Act (which forbids the appointment of a mortgagee as a controller/receiver for which there could be a Penalty of up to $200,000.

c. Further your clients law firm (Lynch Meyer) also filed a document on your client's behalf with ASIC (that it had obtained a Supreme Court's order appointing your client as the controller of our company. This did not happen at law (as there was no registered or unregistered debtor charge issued in this case) and this allegation is factually wrong and maybe construed as a fraud for which there could be a further penalty of up to $200,000.

d. There is also the possibility that the appointment of a non registered receiver/controller is a further breach of the Corporations Act thus potentially attracting a further fine of up to $200,000.

e. When the company took out and paid for mortgage insurance I would like an explanation of why you aren't claiming on that insurance.

f. Further when your client filled the form 505T the very fact of this lodgement caused a number of financial brokers (which we were negotiating with to refinance) to refuse to even continue with the loan application. Because our company was the subject of an appointment of an insolvency officer (controller/receiver) thus the fact of the appointment has irretrievably damaged the creditworthiness of our company to the point that it may never be able to get a loan.

g. Previous Director (McKenzie) has also been similarly damaged by this action of either deliberate or negligent conduct by your client or its agents (Lynch Meyer).

h. There is also the interesting point, when your client, withdrew the appointment of the Controller on 18 th Sept 2009 and this act is Direct proof that your clients original appointment was illegal and improper - the interesting point is that if your clients Solicitors were the negligent party to this misconduct how could they continue to Act in your clients best interest if they caused the error themselves - it is a classic case of conflict of interest.

i. After many requests by myself to your clients collection Dept neither Kerry McKenzie nor Kerry Ann Properties Pty Ltd has received a copy of the Statement to date and as such now demand a full and complete settlement statement to be emailed back to [ email address ] within 48 hours.

Failure to receive the settlement Statement within the stated period of time and manner will activate our claim against your client for at least $412,000 (Four Hundred and twelve Thousand Dollars)

W. Pearse

Director

Kerry Ann Properties Pty Ltd"

1. Mr Pearse thus referred to the following matters (as he saw them) as the basis of the supposed debt owed by the plaintiff to the defendant:

1. The commencement of legal proceedings by the plaintiff.

2. The plaintiff's having "erroneously restricted an appointment of" a receiver.

3. Contravention by the plaintiff of s 418 of the Corporations Act attracting a potential penalty of up to $200,000.

4. Improper filing of a factually wrong document with ASIC by the plaintiff's solicitors on its instructions, possibly amounting to "fraud for which there could be a further penalty of up to $200,000".

5. A possible breach of the Corporations Act by appointment of a "non registered receiver/controller" attracting a "further fine of up to $200,000".

6. Damage to the defendant by reason of the plaintiff's having appointed a receiver and lodged notice of the appointment with ASIC whereby persons who might have done business with the defendant were deterred from doing so.

7. Proof, by means of withdrawal of the receiver by the plaintiff, that its original appointment of a receiver "was illegal and improper".

8. Failure to provide a settlement statement when asked.

1. Mr Pearse identified $412,000 as the value of the property before "order for possession". He then quantified the defendant's claim in the same amount.

1. On no conceivable basis did any of the matters referred to by Mr Pearse in his explanation of the basis of claim give rise to a debt. To the extent that statutory penalties or fines may be involved, any liability, if and when established, would entail a payment obligation owed to the Commonwealth or a State, not the defendant. To the extent that any wrong may have been done by the plaintiff in appointing a receiver, commencing legal proceedings, withdrawing a receiver, notifying the appointment of a receiver or failing to give a settlement figure, the wrong could only be of a contractual or tortious kind, so that any payment obligation of the plaintiff to the defendant could arise only by establishing a cause of action and proving actual damage. If the plaintiff were in due course found to be liable, it would be liable for damages, not debt.

1. On the material before the court, there was no rational basis on which the defendant could have believed, when it served the statutory demand, that a debt in the sum of $412,000 was owing due and payable by the plaintiff to the defendant. Mr Pearse made it clear in his letter that he did not hold any such belief. He referred to a "claim against your client for at least $412,000 (Four Hundred and twelve Thousand Dollars)". By using the words "claim" and "at least", Mr Pearse showed, first, that there was a claim as distinct from an entitlement to be paid and, second, that the relevant sum was not certain - in other words, that essential and fundamental elements of a debt were lacking.

1. 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.

1. That is the position here. Mr Pearse's letter makes it perfectly plain that the defendant did not consider a debt of $412,000 - or any other amount - to be owing, due and payable to it by the plaintiff and, in that frame of mind, served a purported statutory demand referring to what was (and was known to the defendant to be) a false and spurious debt.

1. The plaintiff would have succeeded in having the statutory demand set aside had it made a valid s 459G application. It did not make such an application. But in the circumstances of egregious misuse of the statutory demand procedure exhibited by the facts of this case (coupled with the circumstance that the defendant's claim obviously represents some form of retaliation for the plaintiff's having taken enforcement action under its security), any application by the defendant for winding up of the plaintiff relying on the plaintiff's failure to comply with the demand dated 24 December 2010 would be an abuse of the process of the court. This is because it would be within the "second branch" referred to by McGarvie J in Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83 and approved by the Court of Appeal as continuing to be applicable today in Australian Beverage Distributors Pty Ltd v Evans & Tait Premium Wines Pty Ltd [2007] NSWCA 57; (2007) 69 NSWLR 374, that is, where:

"due to the availability of the more suitable alternative remedy, the court hearing the petition would in the circumstances, in the exercise of its discretion, decline to make a winding up order, at least while the circumstances remain as they are at the time of the application for an injunction ."

1. In this case, the "more suitable alternative remedy", while the defendant's claim remains in the form stated in Mr Pearse's letter, is that that claim should be determined and, if found proved, be quantified in appropriately constituted proceedings outside the ambit of the winding up provisions of the Corporations Act .

1. The plaintiff has adduced evidence of its financial position. I refer to the annexures to Mr Wirth's affidavit of 11 April 2011. The company is comfortably solvent. The filing and advertising of a winding up application by the defendant and publicity that might well flow from that would very likely be prejudicial to the plaintiff.

1. The jurisdiction to restrain the bringing of winding up proceedings where there has been non-compliance with a statutory demand is one that, since the enactment of the insolvency reforms of 1993, is to be exercised sparingly. Many of the older cases require reconsideration in the light of the present statutory regime. But, as the David Grant case (above) makes clear, cases of abuse of process may properly attract the exercise of that jurisdiction. This, for the reasons I have stated, is a clear and egregious example of such a case.

1. The orders of the court are as follows:

1. Order that the defendant be permanently restrained from making an application for the plaintiff to be wound up in insolvency relying on a failure by the plaintiff to comply with a demand dated 24 December 2010 served on the plaintiff by the defendant.

2. Order that the question of costs be reserved for future argument.

1. In relation to costs, I note that Mr Pearse appeared for the defendant and stated in his affidavit of 7 April 2011 that he was aware that he might be liable for some or all of the costs of the proceedings. I shall hear submissions on costs at 9.30am on 28 April 2011.

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Decision last updated: 15 April 2011