Federal Court Sets Aside Statutory Demand Due to Genuine Dispute

OUTCOME: Allowed

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - notice of demand - application to set aside - genuine dispute - off-setting claim Corporations Law ss 459G,459H,459L, Federal Court Act s18AB

[COMPANY] v Commonwealth Bank of Australia (1993) 11 ASCR 362

[COMPANY] v [COMPANY] (1994) 13 ACSR 37

[COMPANY] v [COMPANY], (Federal Court of Australia, unreported, [NAME] J, 11 August 1997)

[COMPANY] v [COMPANY] (1997) 147 ALR 444

[COMPANY] v [COMPANY] (Federal Court of Australia, unreported, [NAME], 19 December 1997)

[COMPANY] v [COMPANY] (1982) Q.B.84

[NAME] v [NAME] (1986) 4 ACLC 105

[NAME] (1996) 2 [NAME] 12

[APPELLANT] v [NAME] [APPELLANT] TG 3015 of 1997 Judicial Registrar [APPELLANT] 4 February 1998

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY TG 3015 of 1997

BETWEEN: [APPELLANT]

Applicant

AND: [APPELLANT]

Respondent

JUDicial registrar: RYAN

DATE OF ORDER: 4 FEBRUARY 1998

[APPELLANT]

THE COURT ORDERS THAT: (1) the application be granted and the statutory demand set aside (2) the respondent pay the applicant's costs of the application Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA diSTRICT REGISTRY TG 3015 of 1997

BETWEEN: [APPELLANT]

Applicant

AND: [APPELLANT]

Respondent

JUDICIAL REGISTRAR: RYAN

DATE: 4 FEBRUARY 1998

PLACE: [APPELLANT] FOR

JUDGMENT (Delivered ex tempore and revised from the transcript) This is an application to set aside a statutory demand. If the demand is not set aside, the respondent, [APPELLANT], will be entitled to move to have the applicant, [APPELLANT[COMPANY], wound up in insolvency and rely on the demand to establish that insolvency. Before the hearing began this morning I raised with counsel a concern I held that the power of a Judicial Registrar to hear the application was less than clear on the basis of subclause (a) of section 18AB(1)(A) of the Federal Court Act. After submissions from counsel I proceeded on the basis that I have jurisdiction in that the application falls under section 18AB(1)A but not under the exceptions in subparagraph (a) of the section. The respondent claims a debt of $147,282 - I will retract from that....although the statutory demand was not put to the court, I understand that the respondent claims a debt of $147,282.82, an amount recorded by the applicant as a loan from the respondent. The applicant contends the respondent is estopped from claiming the sum demanded, the debt, or alternatively that the applicant is entitled to offset an amount recorded as a debt to the [COMPANY] originally known as [NAME] and trading as [NAME], (the [NAME]). The applicant is the [NAME]'s main service company and is trustee of the [APPELLANT[COMPANY]. All partners are directors of the applicant and all units in the [APPELLANT[COMPANY] are held by [NAME] controlled by individual partners. Mr [RESPONDENT] is a director of the respondent and was a partner in the [NAME] until his retirement and/or resignation. The applicant seeks to set aside a statutory demand for the sum claimed as a debt by the respondent, that is the amount of presumably, $147,282.82, recorded by the applicant as a loan from the respondent on the grounds that there is a genuine dispute as to the existence of the debt demanded and because the applicant has an offsetting claim. I note again that a director of the respondent company is [RESPONDENT] who was a partner in the [NAME] till retirement for reasons outlined in the principal affidavit. [RESPONDENT], the respondent, is controlled by [RESPONDENT] and is the trustee of Mr [NAME] family trust. Mr [NAME] joined the [NAME] on 1 July 1982 and resigned from the [NAME] on 22 March 1995, with effect from 31 March 1995. In accordance with the usual practice, on admission as a partner Mr [APPELLANT] became a director of [APPELLANT], and [NAME] was issued a [NAME] in the [APPELLANT[COMPANY]. Since his resignation from the [NAME], again in accordance with the usual practice, Mr [APPELLANT] has resigned as a director of [APPELLANT] and [NAME]'s [NAME] holding in the [APPELLANT[COMPANY] has been cancelled. The applicant · provides services to the [NAME] · employs all non-professional staff used by the [NAME] · accepts responsibility for general office expenses · receives monthly fees from the [NAME]. None of this evidence is contested and none of the evidence in the principal supporting affidavit is contested. Profits made by the applicant are distributed to the [NAME] in the [APPELLANT[COMPANY], those [NAME] being trusts controlled by the various partners in the [NAME]. Distributions of profits to the [NAME] are taxed in the hands of the beneficiaries of the [NAME] trusts and it has been the practice for some 15 years for distributions of profit to be in part lent back to the applicant by the [NAME] and recorded as loans in the applicant's books. In my view I need not concern myself with the reason or reasons for the practice. I am satisfied on the basis of the evidence in the affidavit of [NAME] sworn 6 October 1997, that this is so. Following cross-examination of Mr [NAME] today I am fortified in that conclusion. Nor need I concern myself with the reasons of the [NAME] or of Mr [NAME], that is the reasons behind Mr [NAME] retirement from the [NAME], other than to note certain uncontested material in the principal affidavit. The [NAME]'s practice has been to calculate entitlements or liabilities of partners leaving or joining the [NAME] by reference to the net position of the partner, the partner's family trust, the [NAME], and its service companies, including [APPELLANT]. After his resignation on 31 March 1995, the [NAME] determined Mr [NAME] entitlements on that basis, and it is still making payments to him in accordance with that determination. In deciding whether there is a genuine dispute the court is not required to determine the merits of that dispute, [COMPANY] v Commonwealth Bank of Australia (1993) 11 ASCR 362 at 367. What must be shown is that the dispute is not vexatious or frivolous, that is that it has some substance, [COMPANY] v [COMPANY] (1994) 13 ACSR 37 at 39. In [COMPANY] v [COMPANY], (unreported, 11 August 1997), [NAME] said that to demonstrate that a dispute is genuine will, in the ordinary case, require evidence to show that the dispute is based on reasonable or substantial grounds. [COMPANY] v [COMPANY] (1997) 147 ALR 444, the [ADDRESS] said that a genuine dispute will exist if the dispute is bona fide and the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. To paraphrase [NAME] J in [COMPANY] v [APPELLANT] (unreported, 19 December 1997), has the applicant shown there is a genuine dispute in accordance with any of these formulations? In my view the assertion by the applicant that such a dispute exists has substance. It is based on reasonable and substantial grounds. I find on the basis of the affidavit of [NAME], sworn 6 October 1997, and on the basis of his evidence-in-chief and cross-examination today and in the absence of any evidence from the respondent by affidavit or otherwise that (1) [APPELLANT[COMPANY], [APPELLANT], the [NAME] [NAME] and [NAME] have conducted their affairs upon the assumption that upon the entry or exit or partners of [NAME] the obligations of [APPELLANT] to the [NAME] holder controlled by the partner would be set off against the partner's obligations to the [NAME] and that the assumption manifested itself in (a) the practice which has been adopted upon admission and exit of partners for at least 15 years (b) the calculation adopted upon Mr [NAME] own admission as a partner (c) the preparation of group accounts for the purposes of calculating partners entitlements (d) Mr [NAME] acceptance of the netting-off approach over the course of his [NAME] and in relation to his own resignation in March 1995 (2) Each of [NAME] and [APPELLANT] has arranged their affairs in reliance upon the assumption and in particular [APPELLANT] has (a) issued a [NAME] in the [APPELLANT[COMPANY] to [NAME] for no consideration (b) borrowed money from [NAME] and in turn lent substantial sums unsecured to the [NAME] (c) made distributions to [NAME] (d) issued units and cancelled units upon terms which were premised upon the netting-off assumption (3) The nature of the association between [NAME] and [APPELLANT] indicates the commercial efficacy of the assumption and of the conduct taken in reliance upon it. I have no doubt that on the material before the Court there is a genuine dispute and I note (1) where parties conduct relations upon an agreed or assumed state of affairs, whether of fact or law, and departure from that agreement or assumption would in the circumstances be unjust, then a party is estopped at common law from resiling from the agreement or assumption: [COMPANY] v [COMPANY] (1982) Q.B.84 (2) the estoppel may preclude departure from an assumption as to the parties to a contract ([COMPANY]) and will in an appropriate case, preclude departure from an assumption that two separate entities in particular, an individual and the company he controls, are to be treated as one: [NAME] v [NAME] (1986) 4 ACLC 105 (3) the relevant assumption need not be expressed and may be inferred from conduct or even from silence: [NAME] (1996) 2 [NAME] 12 at 20. Having concluded the existence of a genuine dispute it follows that the application will be granted with costs. [ADDRESS] orders: (1) the application be granted and the statutory demand set aside (2) the respondent pay the applicant's costs of the application settlement and entry of orders are to be dealt with in order 36 of the Federal Court Rules I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of Judicial Registrar Ryan

Associate: Dated: 11 February 1998

Counsel for the Applicant: [redacted]

[NAME]: [APPELLANT]

Counsel for the Respondent: [redacted]

[NAME]: [RESPONDENT] of Hearing: [APPELLANT], 4 February 1998

Date of Judgment: [APPELLANT], 4 February 1998