Wellnora Pty Ltd v Fiorentino

[2008] NSWSC 483

CITATION:	Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483
HEARING DATE(S):	14/04/08
JUDGMENT DATE :	20 May 2008
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Statutory demand set aside. Defendant to pay plaintiff's costs.
CATCHWORDS:	CORPORATIONS - winding up - statutory demand - application for order setting aside - whether genuine dispute as to existence of debt for remuneration of administrator of deed of company arrangement - where remuneration quantified by court order - no statutory provision requiring company subject to deed to pay deed administrator's remuneration - deed itself states that deed administrator entitled to remuneration "out of" specified funds and assets - whether "debt" thereby created - deed also states that, if deed terminated, remuneration to be paid by company - question as to statutory effect of such provision after deed terminated - whether source of debt - whether court should on present application choose between competing contentions
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss 443D, 443E(1), 443F(1), 444B, 444D, 444E, 444G(a), 444G(c), 444H, 445(c), 445H, 449E, 459G, 459H(1)(a), 459H(1)(b), 459H(5), 473(3), 495(1), 499(3), 556 Corporations Amendment (Insolvency) Act 2007 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Arcfab Pty Ltd v Boral Ltd [2002] NSWSC 1188; (2002) 43 ACSR 573 BBX Holdings Pty Ltd v American Home Assurance Co [2007] NSWSC 549 Bidald Consulting v Miles Special Builders [2006] NSWSC 434 Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226 Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd [2000] NSWCA 195; (2000) 49 NSWLR 513 Cresvale Far East Ltd v Cresvale Securities Ltd [2001] NSWSC 791; (2001) 39 ACSR 622 Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 Deputy Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308 Kyle House Pty Ltd v ACN 000 016 213 Pty Ltd [2007] NSWSC 224 Lifestyle Retirement Projects No 2 Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 705 Lombe v Wagga Leagues Club Ltd [2006] NSWSC 3; (2006) 56 ACSR 387 MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636 RJK Enterprises Pty Ltd v Webb [2006] QSC 101; [2006] 2 QdR 593 Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89; (2001) 19 ACLC 1270 Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 46 ACSR 458 Tatlers.com.au Pty Ltd v Davis [2007] NSWSC 835; (2007) 213 FLR 109 W & P Reedy Pty Ltd v Macadams Baking Systems (Pty) Ltd [2007] NSWCA 146 Worrall v Harford (1802) 8 Ves 4; (1802) 32 ER 250
PARTIES:	Wellnora Pty Limited - Plaintiff Pino Fiorentino and William James Hamilton - Defendants
FILE NUMBER(S):	SC 6103/07
COUNSEL:	Mr S J Burchett - Plaintiff Mr S M Golledge - Defendants
SOLICITORS:	Diamond Conway - Plaintiff RBHM Commercial Lawyers - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUESDAY, 20 MAY, 2008

6103/07 WELLNORA PTY LIMITED v PINO FIORENTINO and WILLIAM JAMES HAMILTON

JUDGMENT

1 The plaintiff makes application under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand dated 10 December 2007 served on it by the defendants.

2 The debt or alleged debt the subject of the demand is described as follows in its schedule:

Description of the debt	Amount of the debt
Balance of remuneration ordered to be paid by the debtor company to the creditor, for their work as Deed Administrators of the debtor company by the Federal Court of Australia order entered on 26 November 2007	$ 21,000

3 The defendants were administrators under a deed of company arrangement executed by the plaintiff in February 2006. It is common ground that, on 26 November 2007, the Federal Court of Australia made an order as follows:

“Pursuant to s449E of the Corporations Act, the remuneration of William James Hamilton and Pino Fiorentino as the previous joint administrators of the Deed of Company arrangement of Wellnora Pty Limited for the period 17 February 2006 to 21 June 2006 be fixed in the amount of $31,000, of which creditors have approved an amount of $10,000, leaving a balance of $21,000 (excluding GST and disbursements).”

4 That order was made under s 449E of the Corporations Act as it stood before the commencement of the Corporations Amendment (Insolvency) Act 2007 (Cth) on 31 December 2007:

“ Remuneration of administrator
(1) The administrator of a company under administration, or of a deed of company arrangement, is entitled to:
(a) such remuneration as is fixed by a resolution of the company’s creditors passed at a meeting convened under section 439A, or under section 439A or 445F, as the case may be; or
(b) if no remuneration is so fixed—such remuneration as the Court fixes on the application of the administrator.

(2) Where remuneration is fixed under paragraph (1)(a), the Court may, on the application of the administrator or of an officer, member or creditor of the company:
(a) review the remuneration; and
(b) confirm, increase or reduce it.

(3) Subsection (2) has effect despite section 437C.”

5 It is the contention of the plaintiff that there is “a genuine dispute . . . about the existence . . . of a debt to which the demand relates”. It thus relies on the ground made available by s 459H(1)(a). The plaintiff also alleges that it has an “offsetting claim” as defined by s 459H(5) and thereby relies on the ground made available by s 459H(1)(b). I concentrate for the moment on the genuine dispute ground.

6 In support of its contention that there is a genuine dispute as to the existence of the debt to which the statutory demand relates, the plaintiff relies on the deed of company arrangement itself.

7 The deed of company arrangement provided for the creation of a “Creditors Fund” defined or described as follows:

“’ Creditors Fund ’ means the fund to be available to be distributed in accordance with the Deed, created from the sum of $65,000.00 to be paid by the Funder to the Administrator in accordance with the terms of the Deed of Funding.”

8 Provision with respect to the Creditors Fund was made by clause 4.1:

“ Property of the Company
(a) Any Property of the Company which existed at the Fixed Date will remain the property of the Company and will not form the Creditors Fund.
(b) The Proposer must pay $65,000.00 to the Administrator by an unendorsed bank cheque, by 5.00pm on the day 7 days after the Commencement Date pursuant to the Deed of Funding, which shall form the Creditors Fund.
(c) Subject to clause 14.4, the payment received by the Administrator pursuant to clause 4.1, must be held by them in trust and paid into a separate bank account which shall include in its name the term ‘Creditor Fund’ and which is to be utilised solely in accordance with the covenants in the Deed.”

9 “Property of the Company” meant property of the plaintiff at the “Fixed Date”, being 18 January 2006. The “Funder” and the “Proposer” was Ms Soong, a director of the plaintiff. The “Administrator” was the present defendants.

10 Clause 4.2 of the deed of company arrangement was as follows:

“ Distribution of the Creditors Fund
Subject to the lien in clause 11 which may be enforced against the Creditors Fund, the administrator must only distribute the Creditors Fund in the following manner and order of priority:
(a) first, to pay that part of the Administrator’s Remuneration and Costs relating to the Administration;
(b) secondly, to pay that part of the Administrator’s Remuneration and Costs incurred since the Commencement Date relating to his administration pursuant to this Deed;
(c) thirdly, to pay any Superannuation;
(d) fourthly, to pay any amount due to Employees as at the fixed Date applying the same priority as in Section 556 of the Act as if the Company were paying dividends in a liquidation;
(e) fifthly, to pay the costs of the solicitors for the applicant in the winding up proceedings in the Supreme Court of New South Wales;
(f) finally, to pay the remaining Participating Creditors a dividend on a pari passu basis, in accordance with the priority and method provided for in the Act, as if the Company were paying dividends in a liquidation in clause 5 of this Deed.

11 It is also necessary to quote clauses 10 and 11:

“ Administrator’s Remuneration and Costs
10.1 The Administrator is entitled to be paid or reimbursed for the Administrator’s Remuneration and Costs out of the Creditors Fund, however the remuneration component must first be fixed in accordance with the Act, applying the scale in Schedule 1.
10.2 Subject to clause 10.1, the Administrator will be entitled to draw their Administrator’s Remuneration and Costs or any part of it, out of the Creditor’s Fund, at any time, to the extent that there are funds available in it.
Administrator’s Indemnity
11.1 The Administrator is entitled to be indemnified out of the Property of the Company and the Creditors Fund for:
(a) the Administrator’s Remuneration and Costs;
(b) debts they incur or causes the Company to incur, related to the conduct of the Administration, or the administration of this Deed; and
(c) claims (as defined in subparagraph (a) of the definition of ‘Claims’) made against the Administrator, his partners or staff related to the conduct of the Administration, or the administration of this Deed.
11.2 The Administrators shall have a lien on the Property of the Company and the Creditors Fund to secure the indemnities given in clause 11. The lien shall have a priority over Creditors rights to a distribution from the Creditors Fund.
11.3 Any liens available to the Administrator under Australian laws, are expressly preserved.
11.4 The rights of indemnity under clause 11 are excluded for any claim relating to:
(a) a proven act of gross negligence, fraud, breach of fiduciary duty, or breach of an officer’s duty under the Act by the Administrator, his partners or staff; or
(b) any act done or debt incurred in excess of the Administrator’s powers.
11.5 To the maximum extent permitted by the Law (but not otherwise) the indemnity and lien given in clause 11, shall survive and not be prejudiced or limited in any way by:
(a) the termination of this Deed;

(b) the removal of the Administrator;

(c) any invalidity in the Administrator’s appointment, either the Administration or under this Deed.”

12 The definition of “Administrator’s Remuneration and Costs” was:

“ ’Administrator’s Remuneration and Costs’ means the costs, expenses and remuneration of the Administrator, his staff and partners, incurred or earned in respect of:
(a) the Administration (including in respect of the drafting and finalisation of this Deed and carrying on the business of the Company during its Administration); and
(b) administering this Deed as the deed administrator.”

13 The only other provision that it is necessary to set out is clause 14.2:

“If this Deed is terminated at any time then, except to the extent that the Act provides otherwise, such termination will not affect:
(a) the priorities given by this Deed to the Administrator’s Remuneration and Costs up to the date of such termination, which must be paid in full by the Administrator, or by the Company, or by any liquidator or other administrator of the Company as soon as possible after the termination;
(b) any prior acts undertaken by the Administrator under this Deed, or the previous operation of the Deed.”

14 By a separate deed dated 17 February 2006, Ms Soong (the “Funder” and the “Proposer” named in the deed of company arrangement and a director of the plaintiff) undertook to make available to the administrators the sum of $65,000.

15 The circumstances in which the Creditors Fund was eventually constituted were examined by Lindgren J in Deputy Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232. His Honour concluded that, although there had been some irregularities, the sum of $65,000 was provided by Ms Soong and the Creditors Fund was created. Lindgren J also concluded, however, that distribution of the Creditors Fund was completed on 21 June 2006. As a result, his Honour held (at [173]), the deed of company arrangement terminated on that date by operation of s 445(c) of the Corporations Act.

16 In seeking to have the statutory demand set aside on the genuine dispute ground, the plaintiff contends that the rights of the defendants, as deed administrators, to receive remuneration were limited in such a way that they were entitled to satisfaction only to the extent allowed by the provisions of the deed of company arrangement – so that, once those provisions had operated and been exhausted, the defendants could recover nothing more. The contention is, in essence, that remuneration was recoverable from specific sources identified in the deed of company arrangement and that there was no payment obligation of the plaintiff in respect of any balance once those sources had been fully exhausted.

17 The contention concerning genuine dispute turns wholly on the construction and effect of provisions of the deed of company arrangement considered in the statutory context in which deeds of company arrangement have effect. The terms of the deed were binding on the plaintiff by operation of s 444G(a) and on the defendants by operation of s 444G(c).

18 By virtue of s 449E(1)(b), as it stood at the relevant time, the defendants were, on and from 26 November 2007, “entitled to” remuneration of the amount specified in the Federal Court order of that date. But the order itself in no sense created a judgment debt. Its effect was to give quantified content, in the particular case, to the entitlement arising from s 449E itself.

19 The concept of entitlement to remuneration is reflected in other parts of the Corporations Act. Section 473(3), dealing with court-appointed liquidators, says that a liquidator “is entitled to receive” such remuneration as is determined in a particular way. Sections 495(1) and 499(3), which are concerned with liquidators in a members voluntary winding up and a creditors voluntary winding up respectively, prescribe ways of fixing “the remuneration to be paid to” the liquidator. A concomitant entitlement of the liquidator is implied.

20 In the case of a liquidator, satisfaction of the entitlement to remuneration is a matter dealt with exclusively by s 556. For the purposes of that section, the liquidator’s remuneration is part of “deferred expenses” and takes its position accordingly on the scale of priorities the section creates. A liquidator has no right to payment apart from that which flows from s 556. In every case, of course, winding up will be in progress at all times during the liquidator’s tenure.

21 The remuneration entitlement of the administrator under a voluntary administration has the same statutory source as that of the administrator of a deed of company arrangement. Section 449E, in both its present form and the form quoted above, refers alike to both species of administrator.

22 In the case of the administrator under a voluntary administration (as distinct from a deed administrator), s 443D creates a right to be indemnified out of the company’s property for remuneration fixed under s 449E. By s 443E(1), the right of indemnity has priority over all the company’s unsecured debts – subject, however, to s 556 which will begin to operate in the event of subsequent winding up. Section 443F(1) provides that, to secure the right of indemnity under s 443D, the administrator has a lien on the company’s property. The property to which the lien extends is the property of the company as it existed at the time the right to remuneration accrued: Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd [2000] NSWCA 195; (2000) 49 NSWLR 513 at [67].

23 None of ss 443D, 443E and 443F applies to or in relation to remuneration to which the administrator of a deed of company arrangement is “entitled” under s 449E. In fact, the Corporations Act is silent on the matter of satisfaction of that entitlement except in the case of a subsequent winding up. Upon such a winding up, remuneration of the administrator of a deed of company arrangement is within the s 556 definition of “deferred expenses” and is cognisable in the application of assets under s 556 accordingly. Otherwise, as I have said, the Act does not specify the means of satisfying the s 449E entitlement of the administrator of a deed of company arrangement. In particular, there is nothing in the Corporations Act that says or implies that the company subject to the deed of company arrangement is obliged to pay the remuneration of the deed administrator.

24 The absence of any such statutory specification does not mean, however, that the administrator of a deed of company arrangement cannot resort to the company’s property for satisfaction of his or her remuneration duly fixed. I refer, in that connection, to the decision of Austin J in Cresvale Far East Ltd v Cresvale Securities Ltd [2001] NSWSC 791; (2001) 39 ACSR 622. After noting the distinction between the administrator under a voluntary administration and the administrator of a deed of company arrangement, the fact that voluntary administration comes to an end when a deed of company arrangement becomes operative (so that there can be no overlap in tenure between the two kinds of administrator) and the absence, in relation to the administrator of a deed of company arrangement, of equivalents of ss 443D, 443E and 443F, Austin J said (at [70]):

“In my opinion, however, Mr Gould had an equitable right to an indemnity and lien. As a deed administrator he was the agent of the company. That relationship was created by cl 1 of Sch 8A to the Corporations Regulations: see also cl 7.1 of the deed. Nothing in the deed (including cl 7.2) had the effect of detracting from the fundamental principal/agent relationship. That being so, Mr Gould was a fiduciary, in a position analogous, relevantly, to the position of a court-appointed receiver, who (analogously to a trustee) is recognised to have a well-established right of indemnity to recover fees and expenses out of property realised in the course of the receivership, supported by an equitable lien. In Shirlaw v Taylor (1991) 31 FCR 222; 102 ALR 551; 5 ACSR 767, the Full Federal Court extended the principle underlying the receiver's indemnity and lien to the case of a provisional liquidator, and in Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64; 14 ACSR 343 Young J applied these principles to the case of a voluntary administrator, even though an administrator is not a court-appointed officer: see also Weston v Carling Constructions Pty Ltd . I see no relevant distinction, in the application of these principles, between the position of a voluntary administrator of a company under administration, who administers the business and affairs of the company as agent for the benefit of others, and the administrator of a company under a deed of company arrangement.”

25 A longer passage in which this paragraph appears was approved by Campbell J in Bidald Consulting v Miles Special Builders [2006] NSWSC 434 at [48] where it was noted that the reversal of Austin J’s decision on appeal did not affect the soundness of the legal principles set out in the passage he had quoted.

26 Austin J implicitly recognised that the relevant deed of company arrangement might exclude, limit or modify the equitable right to indemnity and lien. This is, of course, a reflection of the binding force given to a deed of company arrangement by statute as against both the company and the deed administrator.

27 I return, therefore, to the particular deed of company arrangement with which I am here concerned.

28 Clause 10 said that the defendants were entitled to be “paid or reimbursed” for “the Administrator’s Remuneration and Costs” out of “the Creditors Fund”, subject to remuneration having been fixed in in accordance with the Act. Clause 11.1 created a right for the deed administrator to be “indemnified” for “the Administrator’s Remuneration and Costs” out of both “the Property of the Company” (that is, the property of the plaintiff as at 18 January 2006) and “the Creditors Fund”. While there is some incongruity between these provisions, it is, I think, sufficiently clear that, once an entitlement to remuneration as deed administrator was quantified under s 449E, the deed administrator had a right, by virtue of clause 10, to payment or reimbursement of that remuneration “out of” the Creditors Fund plus a right, by virtue of clause 11.1, to be “indemnified” for the remuneration “out of” both the Creditors Fund and the Property of the Company. There was thus an entitlement on the part of the deed administrator to resort to both “the Property of the Company” and “the Creditors Fund” for satisfaction of the quantified remuneration.

29 The concept of an entitlement to be reimbursed or indemnified out of identified property is of long standing in the law of trusts. Lord Eldon said of a trustee in Worrall v Harford (1802) 8 Ves 4; (1802) 32 ER 250 that it “flows from the nature of the office, whether expressed in the instrument or not, that the trust property shall reimburse him all the charges and expenses incurred in the execution of the trust”. A trustee, of course, holds trust property. The entitlement to be reimbursed or indemnified out of it is given effect to by means of an equitable interest in the whole of the trust property: Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226. There is, for obvious reasons, no concept of the trustee being indebted to himself for charges and expenses properly incurred in the execution of the trust.

30 In the trustee context, there is a clear distinction between, on the one hand, the existence of the entitlement to reimbursement or indemnity out of trust property and the concomitant equitable interest and, on the other, the sufficiency of the trust property to satisfy the entitlement in full: RJK Enterprises Pty Ltd v Webb [2006] QSC 101; [2006] 2 QdR 593 and cases there cited. At the same time, however, the fact that the trust property is exhausted means that the right of reimbursement or indemnity is, as it were, devoid of further utility in the sense that, while it continues theoretically to exist, the sole means of satisfying it is lacking.

31 The same conceptual approach must be taken to the operation of clauses 10 and 11.1. Once an entitlement to remuneration of the deed administrator arose under s 444E, the deed administrator had an equitable interest in “the Property of the Company” and “the Creditors Fund” commensurate with the s 444E quantification. And by virtue of clause 11.2, the deed administrator also enjoyed a lien on “the Property of the Company” and “the Deed Fund” for payment of the quantified remuneration. These rights should, I think, be taken to be an explicitly stated version of the equitable rights to which Austin J referred in the Cresvale case.

32 But subject to a possibility arising from clause 14.2 to be considered presently, the equitable interest and lien were, it seems to me, all that the deed administrator enjoyed by way of assurance of recovery of the quantified remuneration. If “the Company’s Property” (as existing at 18 January 2006) and “the Deed Fund” (a finite sum of $65,000) were insufficient to cover the remuneration in full, the right of indemnity no longer supported (or was supported by) the equitable interest and the lien since they, of their nature, could only subsist in property. The important point for present purposes is that the clauses 10 and 11 entitlements entailed no right beyond the defined rights in respect of the identified assets. As counsel for the plaintiff submitted, the sole right was to have the particular property applied towards meeting remuneration. The proposition that that right was a proprietary right which did not entail a debt as such is so strongly arguable that there is obviously a genuine dispute as to the existence of any such debt.

33 I turn now to clause 14.2 of the deed of company arrangement and the question whether that clause might be a separate and distinct source of a debt for remuneration owing, due and payable by the plaintiff to the defendants in the sum quantified by the Federal Court order of 26 November 2007.

34 Clause 14.2 operated only if the deed of company arrangement “is terminated at any time”. The judgment of Lindgren J to which I have referred established that the deed terminated on 21 June 2006. It was at that point, therefore, that the clause 14.2 provisions became operative, if they became operative at all.

35 Clause 14.2 is, in the first instance, a saving clause. It says that, “except to the extent that the Act provides otherwise”, termination of the deed “will not affect … the priorities given by this Deed to the Administrator’s Remuneration and Costs”. The “priorities” thus referred to can only be the reimbursement right, the indemnity right, the equitable interest and the lien sourced in clauses 10 and 11 and affecting “the Property of the Company” and “the Deed Fund” (or, in the case of clause 10, the latter only).

36 Clause 14.2 purports to go further. It says – again “except to the extent that the Act provides otherwise” - that “the Administrator’s Remuneration and Costs up to the date of such termination … must be paid in full by the Administrator, or by the Company, or by any liquidator or other administrator of the Company as soon as possible after the termination”.

37 A preliminary comment about this provision is that, despite the words ”must be paid . . . by the Administrator”, it cannot, for obvious reasons, be the source of any debt owing, due and payable by “the Administrator” to “the Administrator”. Nor can it be the source of any debt owing, due and payable by “any liquidator or other administrator of the Company”, since these persons – of necessity future appointees, as at the time of termination of the deed – are not included in any of the classes of persons upon whom the Corporations Act makes a deed of company arrangement binding. The only possibility that seems to arise is that which is relevant to the present s 459G application, that is, that clause 14.2 was (and continued to be) the source of a debt owing, due and payable by “the Company” (the plaintiff) to “the Administrator” (the defendants).

38 Stated more fully, the question is whether, as to remuneration of the deed administrator for work done in the period before termination, clause 14.2 caused to arise upon termination of the deed and to subsist thereafter an independent payment obligation on the part of the plaintiff (being “the Company”), such that the remuneration quantified by the court order of 26 November 2007 was recoverable by the defendants from the plaintiff by reference to that payment obligation and regardless of the existence or non-existence of “the Property of the Company”, “the Creditor’s Fund” and the defendants’ proprietary rights therein.

39 This raises issues about the effect and consequences of termination of a deed of company arrangement.

40 A deed of company arrangement has the statutory force created by ss 444B, 444D, 444G and 444H: see generally MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636. Termination of a deed of company arrangement is also a purely statutory matter, in the sense that there can be no termination except as is produced by the Corporations Act and the consequences of termination are those produced by the Act. The only provision which deals in any way with the the effect and consequences of termination is 445H:

“The termination or avoidance, in whole or in part, of a deed of company arrangement does not affect the previous operation of the deed.”

41 Decided cases do not provide any comprehensive analysis of the effect of s 445H. It is reasonably clear that, by operation of this section, the position after termination is that the effects produced by the deed before termination continue to prevail (so that, for example, persons who have received distributions in accordance with the deed are entitled to retain them: Cresvale Far East Ltd v Cresvale Securities Ltd (above)), but the deed provisions no longer have an operative force capable of grounding any further changes to rights and obligations (so that, for example, the deed administrator is discharged from office and has no further role to perform: Arcfab Pty Ltd v Boral Ltd [2002] NSWSC 1188; (2002) 43 ACSR 573 at [37]). It has been said that the several persons bound cease to be bound as to their future, conduct, rights and liabilities: Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673; (2003) 46 ACSR 458 at [14]. This may be subject to such rights and liabilities as had accrued before termination, although it has been observed that, after termination, a person who was previously statutorily bound by the deed provisions can no longer look to another person so bound for the performance of some duty imposed through the deed: Lombe v Wagga Leagues Club Ltd [2006] NSWSC 3; (2006) 56 ACSR 387 at [83]. Once termination occurs, there is no longer extant any collection of presently operative provisions that can properly be regarded as a deed of company arrangement: Kyle House Pty Ltd v ACN 000 016 213 Pty Ltd [2007] NSWSC 224 at [15]. The statutory force imparted by ss 444B, 444D, 444G and 444H no longer applies to the previously operative provisions.

42 In the present case, it may be that, even though clause 14.2 was expressed to operate only in the event of termination of the deed, an independent payment obligation sourced in that clause had come into existence before termination on 21 June 2006 and continued thereafter. Alternatively, it may be that, after 21 June 2006, the deed of company arrangement was no longer available as the source of any such payment obligation, with the result that the provision expressed to apply in case of termination and to require payment after termination did not then in reality require payment at all.

43 Although not articulated in precisely that way, this is, in essence, the substance of the genuine dispute, with respect to the clause 14.2 aspect, that the plaintiff asserts as the basis for setting aside the statutory demand. The dispute concerns the operation and effect of both clause 14.2 of the deed of company arrangement and s 445H of the Corporations Act.

44 It was submitted on behalf of the defendants that the court should, in this proceeding, come to a conclusion on the way in which the provisions in question operate, as distinct from simply accepting that there are alternatives each of which is fairly arguable.

45 I was referred to several cases on the question whether matters of construction should properly be determined upon a s 459G application. The first is the decision of Austin J in Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308. But, as was pointed out by counsel for the plaintiff, that was an offsetting claim case, not a genuine dispute case. I accept that the references there to the need for a contractual provision to be construed related to the question of the existence of a claim, not the question of the existence of a dispute. I do not consider the case to be of assistance in the present context.

46 In Tatlers.com.au Pty Ltd v Davis [2007] NSWSC 835; (2007) 213 FLR 109 at [47], White J said that a purely legal question could be decided on a s 459G application even though the question of law was fairly arguable. The question was as to the availability of a right of set-off. It went, therefore, to the existence of an offsetting claim for s 459H purposes.

47 White J referred with apparent approval to a passage in the judgment of Cohen J in Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384:

“Section 459H(1) refers to the court finding that there is a genuine dispute. The parties have argued this case on the issue of whether the proper construction of the agreement and the facts results in the plaintiff owing money to the defendant. The facts were not in dispute and there was thus no question of whose evidence would be accepted on a final hearing. Under the previous legislation, when there was a claim that there was a bona fide dispute on substantial grounds as to the debt claimed, the court could decide that dispute if it arose from a question of law or was of short compass. See, for example, Offshore Oil NL v Acron Pacific Ltd (1984) 2 ACLC 8.

I consider that under the provisions of the Corporations Law, the same approach can be taken. Although questions of disputed fact will not be decided on an application to set aside a statutory demand, the issue of whether there is a genuine dispute can be resolved on that application where the question arises on a short point of law or the construction of documents or agreed facts.”

48 These observations apply, in terms, to a case in which genuine dispute, as distinct from offsetting claim, is alleged. They have been approved and followed in later cases: see, for example, Lifestyle Retirement Projects No 2 Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 705 at [16] – [17]; BBX Holdings Pty Ltd v American Home Assurance Co [2007] NSWSC 549 also at [16] – [17]. But while a “short point of law” or a question of construction might be resolved on a s 459G application, I do not understand Cohen J to have said that every point of law or question of construction must be determined.

49 In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, McLelland CJ in Eq said (at 787) that the court must not accept uncritically as giving rise to a genuine dispute “a patently feeble legal argument”. His Honour was here indicating that if the basis for the alleged dispute is a “legal argument”, the court should decide whether the argument is “patently feeble” – and, if it is, recognise that it is not in truth productive of genuine dispute. In such a case, the dispute said to arise from the “patently feeble legal argument” would be seen not to be a genuine dispute.

50 Where the basis for the alleged dispute is a legal argument or question of construction which is not “patently feeble” and does not involve a “short point of law” and there are clearly arguable alternatives as to the correct outcome, the court should not, upon the s 459G application, attempt to reach a definitive resolution. The reasons are stated in the joint judgment of Brooking JA and Charles JA in Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89; (2001) 19 ACLC 1270 at [4]:

“We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.”

51 The reference here to “the ultimate question” is a reference to the question whether the debt exists.

52 The real and only question upon a s 459G application based on s 459H(1)(a) – which, as noted by the Court of Appeal in W & P Reedy Pty Ltd v Macadams Baking Systems (Pty) Ltd [2007] NSWCA 146 at [12], is intended to be a “summary process” - is whether there is in truth a genuine dispute as to the existence of the alleged debt. A dispute about the legal effect of a statute or a question of construction is not, of its nature, incapable of being genuine. That is the position here. Potentially quite difficult and significant questions of statutory interpretation arise under the provisions about the force and effect of a deed of company arrangement and the effect and consequences of its termination. The arguments on each side are far from “patently feeble”; nor do they involve merely a “short point of law”. It was submitted on behalf of the plaintiff that the allied questions of construction relating to clause 14.2 might be affected by evidence about surrounding circumstances. That may be so. There is also the point that neither counsel actually made submissions on the true construction of s 445H. In fact, the question of the force and operation of the deed provisions generally (and clause 14.2 in particular) after termination was not addressed in argument.

53 The question whether clause 14.2 of the deed of company arrangement created and continued to be the source of a debt as claimed in the statutory demand can only be determined satisfactorily in properly constituted proceedings in which the alleged payment right and defences are articulated in detail by reference to the deed provisions and the operation of the Corporations Act. That being so, I am bound to conclude that there is, as contemplated by s 459H(1)(a), a genuine dispute as to the existence of the debt.

54 This conclusion, coupled with the conclusion stated at paragraph [32] above, is sufficient to justify the grant of the relief the plaintiff seeks. I proceed nevertheless to consider briefly the alternative claim based on s 459H(1)(b) and the allegation of offsetting claim.

55 An offsetting claim is said to arise because of what the plaintiff regards as breach by the defendants of a deed of indemnity dated 13 June 2006 made between the defendants and Ms Soong. By that deed, Ms Soong undertook to indemnify the defendants, as deed administrators, for their costs and expenses of defending the Federal Court proceedings to which reference has already been made. It is alleged by the plaintiff that funds made available to the defendants under that deed were applied by them otherwise than as allowed by the deed. That, it is said, amounted to a breach of contract giving rise to a right to damages.

56 Even if these allegations are correct (and it is not conceded by the defendants that they are), there is no offsetting claim relevant to the operation of s 459H(1)(b). The definition of “offsetting claim” in s 459H(5) refers to a claim that “the company has against the respondent”. In the present context, that means a claim that the plaintiff has against the defendants. Any breach by the defendants of the contract between Ms Soong and the defendants cannot be the source of a claim by the plaintiff against the defendants. Furthermore, the plaintiff has not provided any basis for a finding – even by way of estimate - about the “amount” of the alleged offsetting claim, that being an indispensible component of the case that must be made under s 459H(1)(b): see the observations of the Court of Appeal in W & P Reedy Pty Ltd v Macadams Baking Systems (Pty) Ltd (above) at [6]. I accept the submissions of counsel for the defendant on these matters.

57 In the result, therefore the claim under s 459H(1)(b) fails but the claim under s 459H(1)(a) succeeds. It will therefore be ordered that the statutory demand dated 10 December 2007 served on the plaintiff by the defendants be set aside and that the defendants pay the plaintiff’s costs of the proceedings.

**********