Whitby Land Company Pty Ltd v Li, in the matter of Whitby Land Company Pty Ltd
[2014] FCA 806
FEDERAL COURT OF AUSTRALIA
Whitby Land Company Pty Ltd v Li, in the matter of Whitby Land Company Pty Ltd [2014] FCA 806
Citation: Whitby Land Company Pty Ltd v Li, in the matter of Whitby Land Company Pty Ltd [2014] FCA 806 Parties: WHITBY LAND COMPANY PTY LTD (ACN 115 233 193) v LIANG LI File number(s): WAD 322 of 2013 Judge(s): SIOPIS J Date of judgment: 28 March 2014 Catchwords: CORPORATIONS – application to set aside a statutory demand – failure by a company to redeem redeemable preference shares by the due date – whether the failure gives rise to an enforceable debt at the instance of the aggrieved shareholder. Legislation: Corporations Act 2001 (Cth) s 254K Cases cited: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785
Re Marra Developments Ltd and the Companies Act (No 2) (1978) 3 ACLR 798
TNT Australia Pty Ltd v Normandy Resources NL (1989) 1 ACSR 1
Kandelka Management Pty Ltd v Pisces Group Ltd (2009) 76 ACSR 113Date of hearing: 28 March 2014 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 17 Counsel for the Plaintiff: Mr PG Clifford and Mr A Rumsley Solicitor for the Plaintiff: Mr A Rumsley Counsel for the Defendant: Mr DK Zusman Solicitor for the Defendant: HopgoodGanim
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 322 of 2013
IN THE MATTER OF WHITBY LAND COMPANY PTY LTD (ACN 115 233 193)
WHITBY LAND COMPANY PTY LTD (ACN 115 233 193)
PlaintiffLIANG LI
Defendant
JUDGE:
SIOPIS J
DATE OF ORDER:
28 MARCH 2014
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The statutory demand of the defendant in the amount of $1,463,565.70, dated 16 July 2013, be set aside.
2.Costs to be taxed if not agreed.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 322 of 2013
IN THE MATTER OF WHITBY LAND COMPANY PTY LTD (ACN 115 233 193)
WHITBY LAND COMPANY PTY LTD (ACN 115 233 193)
PlaintiffLIANG LI
Defendant
JUDGE:
SIOPIS J
DATE:
28 MARCH 2014
PLACE:
PERTH
REASONS FOR JUDGMENT
On 5 August 2013, a statutory demand dated 16 July 2013 in the amount of $1,463,565.70, was served by the defendant, Mr Liang Li, on the plaintiff, Whitby Land Company Pty Ltd. This is an application by the plaintiff to set aside the statutory demand.
The plaintiff is a company engaged in land development. On 25 January 2011, the plaintiff and the defendant, an investor, entered into an agreement entitled “Investment Agreement”. The agreement contained the following relevant terms:
1.1Mr Li hereby subscribes for the following shares in the Company on the terms and conditions of this agreement for the purpose of facilitating the development of the Property:
1.1.1.One (1) ordinary shares in the Company, which shall amount to thirty three (33.33%) of the ordinary share capital, for the sum of One Dollar (AU$1.00) (“the Ordinary Shares”); and
1.1.2.One million (1,000,000) redeemable preference shares in the Company for the sum of One Million Dollars (AU$1,000,000) (“the Redeemable Preference Shares”) (“the Investment”).
1.2Both parties agree that Mr Li will be offered a position on the Board of Directors of the Company upon payment of the Investment. As a Director of the Company, Mr Li shall participate in the daily management of the development of the Property. No remuneration shall be payable to Mr Li for his directorship.
1.3The terms of the Redeemable Preference Shares shall be that:
1.3.1.the face value of each Redeemable Preference Share shall be one dollar (AU$1.00);
1.3.2the Redeemable Preference Shares shall be redeemed for an amount equal to their face value of AU$1.00 (being AU$1,000,000 in total for the Investment) plus an amount equal to an annual return of 20% on their face value pro rata to the date of redemption of the Redeemable Preference Shares;
1.3.2[sic] the Redeemable Preference Shares must be redeemed by the Company within 13 months of receipt of the Investment, the date being at the sole discretion of the Company, provided that should the development of the Property be delayed for any reason beyond the Company’s direct control the Company may at its election extend the period for redemption for a further period of up to 6 months;
1.3.3redemption of the Redeemable Preference Shares and payment of the amount due upon this (being the sum of the Investment plus an amount equal to an annual return of 20% on this sum) shall be paid in priority of any capital return to the other shares of the Company.
1.3.4the Redeemable Preference Shares shall have no voting rights whatsoever concerning the Company.
The reference to “the Property” in cl 1.2 of the agreement is a reference to land located on Nicholson Road, Piara Waters, which the plaintiff was engaged in developing.
The defendant paid the monies referred to in the agreement and was issued with one ordinary share and the redeemable preference shares referred to in cl 1.1 of the agreement. The final date for the redemption of the redeemable preference shares was 22 October 2012. The plaintiff failed to redeem the preference shares by 22 October 2012.
The defendant served on the plaintiff an affidavit of Ms Winnie Lai Hadad dated 16 July 2013 in support of the statutory demand for $1,463,565.70. The affidavit explained that the plaintiff had failed to redeem the defendant’s redeemable preference shares by 22 October 2012. The affidavit showed that the sum of $1,463,565.70 claimed in the statutory demand was comprised of two elements. The elements were the sum of $1,000,000 allegedly payable in respect of the redemption of the redeemable preference shares and an additional amount referred to as “interest” on the alleged outstanding sum of $1,000,000 calculated at 20% per annum from 22 March 2011 to the date of the statutory demand.
The plaintiff relied upon two affidavits of Mr Allen Caratti, a director of the plaintiff, filed 23 August 2013 and 24 December 2013 respectively, in support of its application to set aside the statutory demand on the grounds that there was a genuine dispute as to the existence of the debt claimed in the statutory demand.
The parties were ad idem that the appropriate test to apply to determine whether there is a genuine dispute is whether there was “plausible contention requiring investigation” as to the existence of the debt claimed in the statutory demand (Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785).
Mr Clifford, on behalf of the plaintiff, relied upon four grounds to demonstrate a plausible contention requiring investigation in relation to the debt demanded in the statutory demand. In light of the decision to which I have come, it is only necessary to refer to the main argument relied on by the plaintiff.
Mr Clifford contended that the application of s 254K of the Corporations Act 2001 (Cth) precluded the defendant from claiming the sum set out in the statutory demand - or at least gave rise to a plausible contention to that effect.
Section 254K of the Corporations Act provides as follows:
A company may only redeem redeemable preference shares:
(a)if the shares are fully paid-up; and
(b)out of profits or the proceeds of a new issue of shares made for the purpose of the redemption.
Note 1: For a director’s duty to prevent insolvent trading on redeeming redeemable preference shares, see section 588G.
Note 2: For the criminal liability of a person dishonestly involved in a contravention of this section, see subsection 254L(3). Section 79 defines involved.
It is not disputed that the plaintiff had, as at 22 October 2012, not made profits from which the defendant’s redeemable preference shares could be redeemed. Nor were there any proceeds from a new share issue available from which the redeemable preference shares could be redeemed, because there had been no new share issue made by the plaintiff for the purposes of the redemption.
Mr Clifford contended that s 254K of the Corporations Act made it unlawful for the plaintiff, in the prevailing circumstances, to redeem the redeemable preference shares. He also contended that penal sanctions would apply to persons who engaged in conduct which would cause the plaintiff to breach that section. Accordingly, contended Mr Clifford, the failure to redeem the redeemable preference shares could not give rise to a liability in the plaintiff to pay the defendant the debt demanded in the statutory demand.
Mr Zusman, on behalf of the defendant, referred to observations made in the cases of Re Marra Developments Ltd and the Companies Act (No 2) (1978) 3 ACLR 798 and also TNT Australia Pty Ltd v Normandy Resources NL (1989) 1 ACSR 1 (TNT) in support of his argument that where, as in this case, there was a specific date set out in the agreement for the redemption of the redeemable preference shares, the plaintiff was under an obligation to put itself in the position to discharge that obligation. Mr Zusman relied particularly upon the following observations of O’Loughlin J at [21] in TNT:
Upon reflection I think that there are two answers to that question: The first is this: if a company is minded to issue redeemable preference shares on terms that include a term enabling the holders to demand redemption, then it is for the company to organise its affairs so as to ensure that it will have appropriate profits out of which to meet its obligations to redeem: or it is incumbent on the company to so organise its capital structure that it will, as and when required, be able to make a fresh issue of shares for the purposes of the redemption.
However, in my view, Mr Zusman’s contentions do not demonstrate an incontrovertible proposition that, in those circumstances, the failure of a company to redeem the redeemable preference shares gives rise to an enforceable debt at the instance of the aggrieved shareholder for the amount due to be paid by way of the redemption.
In Kandelka Management Pty Ltd v Pisces Group Ltd (2009) 76 ACSR 113, Lindgren J at [73] observed in relation to this question:
Difficult questions would arise if the construction arrived at was that there was an unqualified obligation to redeem. Clearly, the remedy of specific performance of such an obligation would not be available if its effect was to require a contravention of s 254K. Nor would a judgment in debt or for damages in those circumstances. A winding up on the “just and equitable ground” may be the only appropriate remedy available to the holder of the redeemable preference shares. I need not discuss all of the issues that would or might arise, in view of the conclusion that I reach below that, as a matter of construction, Pisces did not assume an absolute obligation to redeem. (Emphasis added.)
Accordingly, on the basis of the authorities, in my view, the plaintiff has demonstrated that there is a plausible contention that because of the operation of s 254K of the Corporations Act, the defendant does not have a debt enforceable against the plaintiff. There is, therefore, a genuine dispute as to the existence of the debt claimed in the statutory demand.
In those circumstances, I will order that the orders in the originating process be made.
I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate:
Dated: 31 July 2014
0
3
0