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Hallinan & Co Pty Ltd v A & B Cotton Pty Ltd

 

[2014] QSC 112

SUPREME COURT OF QUEENSLAND

CITATION:

Hallinan & Co Pty Ltd & Anor v A & B Cotton Pty Ltd [2014] QSC 112

PARTIES:

HALLINAN & CO PTY LTD (ACN 064 227 783)
(applicant)
v
A & B COTTON PTY LTD (ACN 010 814 776)
(respondent)

FILE NO:

2 of 2014

PARTIES:

HALLINAN BROTHERS PTY LTD (ACN 129 645 085)
(applicant)
v
A & B COTTON PTY LTD (ACN 010 814 776)
(respondent)

FILE NO:

3 of 2014

DIVISION:

Trial Division

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court at Toowoomba

DELIVERED ON:

26 May 2014

DELIVERED AT:

Brisbane 

HEARING DATE:

29 April 2014, further material provided 30 April 2014.

JUDGE:

Ann Lyons J

ORDER:

The statutory demands dated 21 February 2014 are set aside pursuant to ss 459H and 459J(1)(b).

CATCHWORDS:

CORPORATIONS – WINDING UP – STATUTORY DEMANDS – APPLICATION TO SET ASIDE – whether there is a genuine dispute as to the amount, the interest payable and the parties to a debt, the subject of the statutory demands – whether, in any event, the applicants satisfy s 459J(1)(b) of the Corporations Act 2001 (Cth) to have the statutory demands set aside

Corporations Act 2001 (Cth), s 459G, 459H, s 459J

Andrews v ANZ Banking Group Pty Ltd [2012] 247 CLR 205; considered

Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; considered

Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWSC 338; considered

Ringrow Pty Ltd v BP Aust Pty Ltd [2005] 225 CLR 656; considered

Wellnora Pty Ltd v Fiorentino [2008] NSWC 482; considered

COUNSEL:

A Shah for the applicants

D E F Chesterman for the respondent

SOLICITORS:

Hallewell Law for the applicants

Russells Law for the respondent

The current applications

  1. There are two applications before the Court in relation to two separate proceedings. Each application, however, seeks identical relief in relation to two separate corporations. In Supreme Court proceeding No 2 of 2014 (Toowoomba) the applicant is Hallinan & Co Pty Ltd (HC) and in Supreme Court proceeding No 3 of 2014 (Toowoomba) the applicant is Hallinan Brothers Pty Ltd (HB).
  1. Both applicants seek Orders pursuant to sections 459G, 459H and 459J of the Corporations Act 2001 (Cth) that the statutory demands served on them by the respondent, A & B Cotton Pty Ltd (AB Cotton) be set aside.
  1. At the commencement of the hearing of the applications I made Orders that the applications in Toowoomba Supreme Court proceedings Nos 2 of 2014 and 3 of 2014 be heard together given that the grounds relied upon by each applicant were identical in each application.

Background

  1. On 21 February 2014, AB Cotton by its director, Michael Manley, signed a statutory demand addressed to HC. The amount demanded was $243,574.71. The amount is described as:

“Balance of a contractual liability of $745,000.00 plus interest (for the compromise and guarantee of prior debt from [HC] to [ABC] and the acquisition of shares in [HC] by [HC] and others) pursuant to a Deed dated 30 May 2011.”

That statutory demand was served on HC on 28 February 2014. An identical statutory demand was served on HB the same day.

  1. The affidavit of Michael Manley sworn 15 April 2014 sets out the history of the dispute. It would seem that HC was formed in April 1994 as part of a rescue package for John Hallinan’s transport business which was in liquidation. John and Carol Hallinan are married and Matthew and Cameron are their sons. They all work in the business operated by HC which was registered in 1994. Cameron and Matthew Hallinan are the only two directors of HB.
  1. Michael Manley deposes that five backers contributed $12,000 capital by way of the issue of $60,000 fully paid up $1 shares in HC. Between 8 April 1994 and 1 May 2011 the only two directors of HC were Michael Manley and Colin Stewart.
  1. Michael Manley and Rodney Wolski have been directors of AB Cotton since 14 June 1988 and 29 December 1993 respectively. Colin Stewart was a director of AB Cotton from March 2004 until December 2013.
  1. He states that after it was established it was clear that HC required further external funding and AB Cotton was a major lender. It was on this basis that HC became indebted to AB Cotton to the order of $1,829,358.47 by May 2011. Michael Manley deposes that by early 2011 AB Cotton indicated it wished to terminate its involvement with HC. Accordingly he states that he and Rodney Wolski met with John Hallinan to negotiate a resolution. John Hallinan deposes that he negotiated in relation to the Deeds on behalf of HB, HC and his family as Borrowers and Guarantors, with Michael Manley and Rodney Wolski who were negotiating on behalf of AB Cotton and the “Vendors & Lenders”
  1. Michael Manley states that in March 2011 an agreement was struck in principle for the acquisition of the remaining shares in HC and for a settlement of HC’s debt to AB. He states that AB Cotton through its directors recognised that it was unlikely that the whole of the loan balance would be repaid and that a compromise was necessary. He stated that Rodney Wolski as negotiator for AB wanted $1 milion in settlement and that John Hallinan wanted $700,000. He states that it was known that HC had an overdraft in the order of $55,000 and that the figure of $800,000 was ultimately agreed upon which he argues can be seen in the final figure of $745,000. He argues that the final figure of $745,000 was based on $800,000 less the overdraft of $55,000.
  1. Michael Manley deposes that the agreement reached was then to be documented and, as he was the accountant, he was asked to draft the documents. In this regard I note that one of the documents, which is referred to as Attachment “A” to the Deed, in fact specifically acknowledges that it was prepared “at the direction of all the parties” and that the Guarantee had not been prepared by a legally qualified practitioner and was to be interpreted in the spirit of a “Gentlemen’s Agreement” without the need to resort to stating all specific clauses of a legally prepared Guarantee.

The Deed

  1. On 30 May 2011, HC, John Hallinan, Carol Hallinan, Matthew Hallinan, Cameron Hallinan, HB, and AB Cotton entered into a deed called “Deed of Receipt & Indemnity”.
  1. The statutory demands made against HC and HB are based expressly on the Deed which is in the following terms:
DEED OF RECEIPT & INDEMNITY
THIS DEED is made the 30th day of May, 2011
BETWEEN: A & B COTTON  PTY LTD ACN 010 814 776 a company duly incorporated according to law and having its registered office at 96 Cunningham Street, Dalby in the State of Queensland (hereinafter called ‘A & B Cotton’)
AND: HALLINAN & CO PTY LTD ACN 064 227 783 a company duly incorporated according to law and having its registered office at 96 Cunningham Street, Dalby in the State of Queensland (hereinafter called ‘Hallinan & Co’)
AND:

JOHN JAMES HALLINAN of …..

CAROL MAY HALLINAN of …

MATTHEW CRAIG HALLINAN of …

CAMERON SCOTT HALLINAN of …

HALLINAN BROTHERS PTY LTD ACN 129 645 085

HALLINAN & CO PTY LTD     ACN 064 227 783

(hereinafter called ‘the Borrowers & Guarantors’)

WHEREAS:

a)Hallinan & Co is indebted to A & B Cotton in the sum of $1,829,358.47 including all interest to the date of this deed on account of an unsecured loan (‘the loan’).

b)Hallinan & Co is desirous of repaying the loan to A & B Cotton.

c)A & B Cotton will accept repayment of the loan to the agreed amount of $685,000.00 in full and final satisfactory of the total debt as per attached Deed marked Attachment ‘A’ conditional upon the Borrowers and Guarantors providing a release and indemnity to A & B Cotton and Hallinan & Co’s retiring Directors

Michael Joseph Manley (‘Manley’) and Colin James Stewart (‘Stewart’) in respect of all future liabilities which Hallinan & Co may incur.

NOW THIS WITNESSETH AS FOLLOWS:

a)A & B Cotton acknowledges receipt of the sum of $685,000.00 in full and final settlement and extinguishment of the loan, such amount to be paid as per terms detailed in attached Deed marked Attachment ‘A’.

b)That in consideration of the payment of the loan and execution of this Deed the borrowers and Guarantors hereby release and discharge A & B Cotton and Manley and Stewart from all future liabilities whatsoever which Hallinan & Co may incur and covenants with A & B Cotton and Manley and Stewart that the Borrowers and Guarantors will at all times hereafter indemnify and keep indemnified A & B Cotton and Manley and Stewart against all calls costs charges and expenses whatsoever which A & B Cotton or Manley or Stewart may now or hereafter incur or become liable to pay or sustain in connection with the future operation and running of Hallinan & Co.

  1. As the Deed of Receipt and Indemnity acknowledges, attached to that document, as Attachment “A”, was another document entitled “Deed of Personal and Company Guarantee”. It was between AB Cotton as the lender together with eight other parties who were called the “Vendors & Lenders” on the one part and HB, HC and John, Carol, Matthew and Cameron Hallinan on the other part as the “Borrowers and Guarantors”.
  1. The effect of the Deed can be summarised in the following terms:

a.the ‘Borrowers & Guarantors’ were to acquire 60,000 shares in HC in exchange for the payment of:

i. $685,000 towards an existing debt of $1,829,358.47 owed by HC to AB Cotton; and

ii. $60,000 to the "Vendors" for their shares in HC;

b. the ‘Borrowers & Guarantors’ specified in the Deed included HC and HB;

c. AB Cotton agreed to release HC from its debt to AB Cotton of $1,829,358.47;

d.upon receipt of an initial payment of $500,000.00 by AB Cotton from the ‘Borrowers & Guarantors’, each of the ‘Vendors’ agreed to transfer their individual shareholdings of 12,000 shares in HC to HB;

e.the ‘Borrowers & Guarantors’ jointly and individually agreed to pay the further amount of $245,000.00 to AB Cotton by no later than 30 April 2013;

f. from that $245,000.00 AB Cotton was to pay $12,000.00 to each of the ‘Vendors’;

g.interest was payable on all amounts unpaid as at the date of the Deed, but would not be charged if those amounts were paid in full by 30 April 2013.

 

The issue to be decided

  1. In this application the issue is whether the statutory demands issued by AB Cotton dated 21 February 2014 should be set aside or varied pursuant to ss 459H and 459J of the Corporations Act. The basis upon which they could be set aside or varied is whether there is a genuine dispute about the existence or amount of the debt which is claimed in the statutory demands; or whether there is any defect in those statutory demands such as to cause substantial injustice; or if there is some other reason those statutory demands should be set aside.
  1. Sections 459H and 459J are in the following terms:

459H Determination of application where there is a dispute or offsetting claim

(1)This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

  1. That there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
  2. that the company has an offsetting claim.

(2)The court must calculate the substantiated amount of the demand in accordance with the formula:

Admitted Total – Offsetting Total

Where:

admitted total means:

  1. if the Court is satisfied that the company has only one offsetting claim – the amount of that claim; or
  1. if the Court is satisfied that the company has 2 or more offsetting claims – the total of the amounts of those claims; or
  1. otherwise – a nil amount

(3)If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.

(4)If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:

  1. Varying the demand as specified in the order; and
  2. Declaring the demand to have had effect, as so varied, as from when the demand was served on the company.

(4)In this section:

admitted amount, in relation to a debt, means:

  1. if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt – a nil amount; or
  2. if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt – so much of that amount as the Court is satisfied is not subject of such a dispute; or
  3. otherwise – the amount of the debt

Offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

Respondent means the person who served the demand on the company

(6)This section has effect subject to section 459J

459J Setting aside demand on other grounds

(1)On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

  1. because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
  2. there is some other reason why the demand should be set aside.

(2)Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

  1. It is clear that the applicants must persuade the Court that there is a genuine dispute as to the existence or the amount of the debt and the Court’s task is to determine if there is a genuine dispute or plausible contention. It is not the role of this Court to conduct an in-depth examination or a determination of the merits of the alleged dispute. The relevant principles were set out recently in the 2013 decision of the New South Wales Court of Appeal of Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd:[1]

“30.It is settled law that s 459H requires the Court to be satisfied that there is a "serious question to be tried": see Scanhill v Century 21 Australasia at 467, or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Limited v Oscty Pty Limited [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted "with sufficient particularity to enable the Court to determine that the claim is not fanciful".

  1. In similar vein, although dealing with the question whether there was a genuine dispute within the meaning of s 459H(1)(a) McLelland CJ in Eq, in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 considered that the expression "genuine dispute" involved a plausible contention requiring investigation and raised much the same sort of considerations as the "serious question to be tried" criterion that applied in the case of an interlocutory injunction.”

Is there a genuine dispute?

  1. AB Cotton argues that only $642,754 has been received by AB Cotton being an amount of $442,754 which was received into the AB Cotton bank account on 13 July 2011 and the sum of $200,000 which was received on 23 May 2013.
  1. John Hallinan on behalf of HB and HC, however, deposes that an amount of $699,948.37 has been paid by the applicants. He states that a total of $499,948.37 was paid initially in July 2011 with $385,948.37 paid on 6 July 2011 and $114,000 7 July 2011. A final amount of $200,000 was paid on 23 May 2013. It would seem that the difference between $699,948.37 and $642,754 is about $57,194.37 which is made up of an overdraft of $57,222.24 (which was attached to an account into which the deposits of 6 and 7 July were made) together with a bank fee of $51.63. In any event it would seem clear that an amount less than the $745,000 agreed to be paid under the Deed has not been paid and at the very least is an amount in excess of $45,000.
  1. It is also clear that the vendors who were to have been paid $12,000 each (a total of $60,000) from the $245,000 to be paid by 30 April 2013, have not been paid.
  1. The amount for which payment has been demanded by AB Cotton from HC and HB is, however, $243,574.71. It would seem that that amount is calculated as the principal amount still to be paid under the Deed to AB Cotton, being $745,000 minus $642,754, which they submit is $102,246. Interest in an amount of $141,328.71 is also charged.

Grounds of dispute

  1. The affidavit of John Hallinan sets out a number of bases upon which the applicants rely to establish a genuine dispute. In this hearing three grounds were put forward:

(i) that there is a payment dispute as to the amount paid to AB Cotton;

(ii) in relation to the $60,000, whether that amount is a debt due, owing and payable to AB Cotton; and

(iii) whether the interest claimed is a penalty.

The payment dispute

  1. The applicants argue that the Hallinan companies, namely HC and HB, have paid $499,948.37 ($500,000 minus the bank fee of $51.63), whereas AB Cotton submit that an amount of $442,754 only has been paid and that an amount in excess of $57,000 was directed to the payment of an overdraft.
  1. In his affidavit John Hallinan deposes that he was directed by Michael Manley who was the director of AB Cotton to pay the first instalment of $500,000 by depositing that amount into the “old” HC bank account. It is clear that Michael Manley denies that he gave any such direction.
  1. Counsel for the respondent argues that there is nothing in the Deed which contemplates that the amount payable to AB Cotton was to be offset or reduced on account of a liability of the Hallinan companies on a bank account which was overdrawn. It is argued that the Deed expressly requires the payment of $745,000 to AB Cotton. Counsel for the respondent also argues that the overdrawn account was in the name of the Hallinan companies and was therefore a liability of that company. Counsel for the respondent also argues that the Hallinan companies could not satisfy its liability to pay an amount of money to AB Cotton by paying off a liability of its own.
  1. It would seem clear that the Deed does not itself state how or when the $500,000 was to be paid. It would also seem clear however that whilst Michael Manley became a director of AB Cotton in June 1998 he was also a director of HC from 1994 to 1 May 2011. The evidence also indicates that as at 12 July 2011 he was still a signatory to the “old” HC bank account and that the account was not closed until 13 July 2011 when the funds in the account were transferred to AB Cotton’s bank account. The amount of the overdraft of $57,222.24 however was debited from the account before the balance was transferred. It is uncontroversial that the “old” HC account was linked to an overdraft facility of around $55,000.
  1. John Hallinan deposes that during the course of the negotiations he made it clear that he did not want HC to be left with the overdraft in that account and that the “old” HC bank account would be closed and a new account would be opened by HC. John Hallinan also swears that a direction to the debtor’s bank account was consistent with the way in which he believed the overdraft would be dealt with. He states that Michael Manley and Colin Stewart thought of the “old” HC bank account as their account and that: “When the time came to pay the amount of $500,000 referred to in the Deed of Personal and Company Guarantee I was not surprised when the Respondent directed that the amount was to be paid to the old Hallinan and Co account because that was the account that had always been operated by the business while Michael Manley and Colin Stewart were the only directors of the HC.”
  1. Michael Manley agrees in his affidavit sworn 15 April 2014 that John Hallinan had made it clear during the negotiations that, “he did not want to be left with the overdraft”. The issue would seem to be a dispute as to where the initial payment was to be made and for what purpose it was paid. John Hallinan states he was given a direction as to where it was to be paid which is denied as Michael Manley and Colin Stewart depose that there was no such direction. It would seem to me therefore that there is indeed a factual issue in dispute which needs adjudication. That factual dispute cannot be determined in this application. It would seem to me that there is a genuine dispute as to the amount paid.
  1. I also consider that there is, in fact, an issue as to whether the amount of $60,000 which is owed to the “Vendors & Lenders” is fact a joint debt.

Whether $60,000 is a debt due and owing and payable to AB Cotton

  1. The applicants argue that the $60,000 debt payable under Attachment “A” to the Deed is a debt due, owing and payable to the “Vendors & Lenders” and is not a debt due, owing and payable to AB Cotton. Accordingly it is important to examine the precise terms of the document which is Attachment “A”.

 

“Attachment “A”

THIS DEED OF PERSONAL AND COMPANY GUARANTEE is made the 30th day of May, 2011

 

BETWEEN:

 

A & B COTTON PTY LTDACN 010 814 776

(“the Lender”)

 

PERCIVAL PTY LTD ATF SUNDANCE TRUST

MERVYN DOUGLAS & SUSAN MARGARET SEARLE …

ALLAN WALTER & STEPHANIE JOYCE GRANT

COLIN JAMES & ROBYN LESLEY STEWART

FALKLAND NOMINEES ATF SUNRISE TRUST….

(“the Vendors & Lenders”)

 

AND

JOHN JAMES HALLINAN

CAROL MAY HALLINAN

MATTHEW CRAIG HALLINAN

CAMERON SCOTT HALLINAN

HALLINAN BROTHERS PTY LTD

HALLINAN & CO PTY LTD

(“the Borrowers & Guarantors”)

 

NOW THE PARTIES AGREE as follows:

A.The Borrowers & Guarantors are acquiring the 60,000 shares not currently owned by Tinmar Pty Ltd ATF Hallinan Family Trust in the company Hallinan & Co Pty Ltd ACN 064 227 783 in exchange for the payment of $685,000 towards the existing current debt of $1,829,358.47 owed by Hallinan & Co Pty Ltd to A & B Cotton Pty Ltd, plus $60,000 to the Vendors for their shares.

 

B.Upon receipt of an initial payment of $500,000 by A & B Cotton Pty Ltd from the Borrowers & Guarantors, all Vendors agree to transfer their individual shareholdings of 12,000 shares each to Hallinan Brothers Pty Ltd on the basis that the Borrowers & Guarantors each jointly and individually guarantee payment of the remaining amount of $245,000 to A & B Cotton Pty Ltd by no later than 30 April 2013 from which A & B Cotton Pty Ltd will remit the amounts of $12,000 to the respective 5 shareholder vendors referred to above. Under the terms and successful completion of this Guarantee arrangement, the Vendors & Lenders agree to forego any interest charge on any outstanding portion of the $245,000 between the date of this Guarantee and 30 April 2013 subject to it being fully repaid by 30 April 2013. In the event that the debt is not fully repaid by 30 April 2013, interest shall be applicable at the rate of 15% compounding daily on all amounts unpaid commencing from the date of this Guarantee to the respective dates repayments are made.

 

C.Upon receipt of the acknowledgement of these terms by each of the Borrowers & Guarantors signing this document (in triplicate), A & B Cotton Pty Ltd agrees to waive any amount of debt owing by Hallinan & Co Pty Ltd in excess of the $685,000 amount referred to above, being $1,144,358.47 as A & B Cotton acknowledges the fact that Hallinan & Co Pty Ltd does not have the economic financial capacity to pay any more than $685,000.00 towards such debt.

 

This Guarantee has not been prepared by a legally qualified practitioner at the directive of all parties, but is to be read and interpreted in the spirit of a ‘Gentleman’s Agreement’ without the need to resort to stating all specific clauses of a legally prepared Guarantee which are taken to be understood and accepted as forming part of this Deed and arrangement by all parties prior to signing here below.

 

It is noted that the shares actually owned by the 5 shareholder Vendors and Lenders are held in Nominee status only on behalf of each of them by Dunlop Nominees Pty Ltd.”

  1. Counsel for the respondent argues that this ground of dispute calls into question the construction of the Deed. He argues that clause A. of that document is an introductory clause which is essentially a recital which indicates that the “Borrowers & Guarantors” were to acquire 60,000 shares in HC in exchange for the payment of $685,000 towards an existing debt in excess of $1.8 million owed by HC to AB Cotton and the payment of $60,000 to the Vendors for their shares in HC. Counsel then argues that it is clause B which then specifies the manner in which the agreement was to be performed namely that when the initial payment of $500,000 was made the Vendors agreed to transfer their shareholding of 12,000 shares to HB on the basis that the “Borrowers & Guarantors” would each jointly and individually guarantee payment of the remaining amount of $245,000 to AB Cotton by 30 April. It was from that amount AB Cotton would then remit $12,000 to each of the 5 shareholders.
  1. The applicants argue however that when the Deed is construed as a whole the amount of $60,000 can only be a debt due, owing and payable to the “Vendors & Lenders” and not AB Cotton which is referred to in the document as the “Lender”. When one examines the document, there is no doubt that AB Cotton is referred to at all times in the document as A & B Cotton Pty Ltd (“the Lender”) or as A & B Cotton Pty Ltd and not as “The Vendors & Lenders”. It would seem to me that there is indeed a real issue about the construction of the document and the question as to whether the $60,000 which is clearly owed to the “Vendors & Lenders” is indeed a debt owed to AB Cotton. If not the amount of the statutory demand would need to be reduced by $60,000.
  1. It is also arguable that the $60,000 is in fact a joint debt owing to AB Cotton and the “Vendors & Lenders”. If that is the case, then the statutory demands need to be issued jointly by those parties.
  1. Counsel for the respondent argues that those issues can be resolved by this Court construing the documents. Should the Court, however, proceed to construe the documents on an application to set aside a statutory demand? That question was considered by Barrett J in Wellnora Pty Ltd v Fiorentino[2] who examined the authorities and held that the point of statutory construction in that case was a ‘short and simple one’ and he then proceeded to determine the question. Barrett J relied in particular on previous decisions of White J in Tatlers.com.au Pty Ltd v Davis[3]and Cohen J in Delnorth Pty Ltd v State Bank of New South Wales[4] as follows:[5]

“[46]In Tatlers.com.au v Davisat [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 to the availability of a right of set-off. It went, therefore, to the existence of an off-setting 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:

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, where 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) 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 wether 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 205 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.”

  1. In the present case it is abundantly clear theat the facts are in fact in dispute and there is a question as to whose evidence would be accepted on a final hearing. I am satisfied that the applicants have satisfied the requirements of s 459H and the statutory demand should be set aside.
  1. I also consider that there are also arguments pursuant to s459J(1)(b) of the Act as to why the statutory demand should be set aside.
  1. In Kisimul Holdings Pty Ltd v Clear Position Pty Ltd, Stevenson J stated:[6]

“The Act provides two bases on which statutory demands may be set aside.

First, a company served with a statutory demand can apply under s459G of the Act to set aside the demand on the basis that, for the purposes of s 459H, there is either a “genuine dispute” or an “offsetting claim” in respect of the debt to which the demand related.

Alternatively the recipient of the demand can apply under s 459J of the Act to set aside the demand on the basis that there is a “defect” in the demand which will cause “substantial injustice” if the demand is not set aside (see 459J(1)(a)) or because there is “some other reason” why the demand should be set aside (see 459J(1)(b)).

Section 459H(6) provides that s 459H “has effect subject to section 459J”.

In my opinion s459H(6) does not more than make clear the legislative intention that s 459G and s459H on the one hand and s 459J on the other provide separate bases on which the court can set aside a statutory demand (Carwyn Constructions Pty Ltd v J & W Consulting Services).

I see nothing in the Act to suggest the legislature intended that primacy be given to either basis.

Further, in my opinion, the discretion to set aside a demand under s 459J may be informed by the strength or otherwise, of the case made out under s 459G and s 459H.”

The interest dispute

  1. The applicants dispute their liability to pay interest under the Deed on the following bases:

a.the provision germane to interest is an unenforceable penalty;

b.if interest is payable it is only payable to the “Vendors & Lenders”;

c.if interest is payable it is only payable from 30 April 2013 and no earlier;

d.fault for the late payment lies with AB Cotton.

  1. The applicants argue that the interest charge of 15% compounding daily on amounts outstanding since May 2011 is a penalty. There is no doubt that for it to be a penalty the interest term must oblige the Hallinan Companies to pay an amount significantly greater than the pre-estimate damage. The respondent argues that there is no penalty in a situation where it is agreed to charge a certain rate of interest on the condition that if the payment is made the rate will reduce.
  1. The law of penalties was discussed by the High Court in the 2005 decision of Ringrow Pty Ltd v BP Aust Pty Ltd[7] in the following terms:

“10.The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach.

11.The starting point for the appellant was the following passage in Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd ([1915] AC 79 at 86-87):

‘2.The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ...

3.The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ...

4.To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

(a)It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ...

(b)It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...

(c)There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage'(Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342 per Lord Watson).”

  1. The concept of a penalty was also discussed more recently in Andrews v ANZ Banking Group Pty Ltd:[8]

“10.In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.”             

  1. With respect to interest, the Deed provides:

“Under the terms and successful completion of this Guarantee arrangement, the Vendors & Lenders agree to forego any interest charge [sic] on any outstanding portion the $245,000.00 between the date of this Guarantee and 30 April 2013 subject to it being fully repaid by 30 April 2013. In the event that the debt is not fully repaid by 30 April 2013, interest shall be applicable at the rate of 15% compounding daily on all amounts commencing from the date of this Guarantee to the respective dates repayments were made.”

  1. The amount of $245,000 was not paid by 30 April 2013 but $200,000 was paid on 23 May 2013. I do not consider that the matter is as clear cut as the respondent argues and further information is required before the question could be fully determined. In any event, I consider that there are some further issues which arise in relation to this question of interest which lead me to conclude that there is a genuine dispute in relation to this aspect of the statutory demand as well. It would seem clear that a large part of the statutory demand relates to the question of interest. When one looks at the words of the Deed that relate to the charging of interest I consider that there are questions about the interpretation of the clause that need to be resolved after further argument. In particular, I consider there is an issue in relation to the interpretation of the clause and the date from which interest can be charged. There is no doubt that the clause was drawn by a layman but the consequence is that there are some significant issues about the interpretation of the document which need to be resolved.
  1. It would also seem from the affidavit material that there is a factual dispute about the late payment given allegations that the respondent had not provided information that was required. In any event those matters cannot be determined on an application of this nature. However, taking into account the issues raised overall I consider that there are indeed matters which satisfy s 459J(1)(b) due to the number of issues which arise for consideration in relation to this question of interest.
  1. In all of the circumstances, therefore, I am satisfied that the statutory demands should be set aside pursuant to ss 459H and 459J(1)(b).
  1. I will now hear from the parties as to costs.

Footnotes

[1] [2013] NSWCA 344.

[2] [2008] NSWC 482.

[3] (2007) 213 FLR 109.

[4] (1995) 17 ACSR 379.

[5] [2008] NSWC 482 at [46] – [48].

[6] [2014] NSWSC 338 at [16]-[22].

[7] [2005] 225 CLR 656.

[8] [2012] 247 CLR 205 at 216  at [10].

Close

Editorial Notes

  • Published Case Name:

    Hallinan & Co Pty Ltd & Anor v A & B Cotton Pty Ltd

  • Shortened Case Name:

    Hallinan & Co Pty Ltd v A & B Cotton Pty Ltd

  • MNC:

    [2014] QSC 112

  • Court:

    QSC

  • Judge(s):

    A Lyons J

  • Date:

    26 May 2014

Litigation History

No Litigation History

Appeal Status

No Status