The Federal Court, per Markovic, set aside a statutory demand in Print Mail Logistics Limited v Warratah Investments Pty Ltd [2018] FCA 1618.  It was a very hard fought fight which involved a complex factual situation and difficult legal issues.  Unusually it involved a cross examination of a deponent.  The demand was set aside because of a technical error by the respondent.

FACTS

The parties  were:

• Nigel Benjamin Elias (“Elias”),  director of Print Mail and the sole director of Print Mail Logistics (International) Pty Ltd (PMLI).
• Jennifer Joan Hutson (“Hutson”),  director and secretary of Warratah and sole director of Wellington Capital Pty Ltd (now called Southland Stokers Pty Ltd) (Wellington);
• Mark John Halle (“Halle”), director of Warratah and the chief financial officer of Wellington; and
• Wellcap Holdings Pty Ltd the ultimate holding company of Warratah and  sole shareholder of Wellington [4].

On 5 February 2013 PMLI and MMB entered into a commercial facilities agreement with  MMB makiung a facility of $312,000 available to PMLI to assist with the purchase of a property in 11 McRorie Court, Cambridge, Tasmania (Property) [5].  On 28 October 2013  PMLI and MMB entered into a commercial facilities agreement pursuant to which MMB made a facility of $132,000 available to PMLI and Print Mail and MMB entered into a deed of guarantee and indemnity whereby  Print Mail guaranteed payment to MMB of monies owed to MMB by PMLI.  On 28 May 2014 MMB offered a commercial facility to PMLI in the sum of $438,000 available to consolidate existing MMB commercial loans (MMB Facility Agreement).

Clauses 15(a) and (p) of the agreement provide:

You are in default if:

(a) you do not pay on time any amount payable under an arrangement with us in the manner required by it; or

…

(p) you do not, or a guarantor does not, meet all your or their monetary obligations (whether present or future) on time or within any applicable grace period or any of these obligations become, or can be rendered, payable early otherwise that at your or the guarantor’s election; or

(4) on 25 June 2014 MMB and Print Mail entered into a second deed of guarantee and indemnity in identical terms to the first deed of guarantee and indemnity save that the maximum recoverable amount under the guarantee was increased to $438,000 plus applicable interest, charges and costs (MMB Guarantee).

The loan facilities were secured by a first registered mortgage over the Property in favour of MMB (MMB Mortgage) [5].

On 29 July 2015 PMLI and Wellington entered into a secured loan agreement with Wellington agreeing to loan $420,000 to PMLI (Wellington Loan) [6].  It was secured by a fixed and floating charge over PMLI and a second ranking mortgage over the Property (Wellington Mortgage) [7].  On 4 August 2015 PMLI, MMB and Wellington entered into a priority deed (Priority Deed) which gave priority to MMB over the Property up to its priority amount plus interest and costs [8].

On or about 4 July 2017 Wellington served a Notice of Sale under s 77 of the Land Titles Act 1980 (Tas) (Land Titles Act) on PMLI claiming that PMLI was in default of its obligations under the Wellington Loan and the Wellington Mortgage because it failed to pay the amount of $420,000 on or before 1 July 2017 [9]. On or about 21 July 2017 it commenced proceedings iseeking an order for possession of the Property [10]. On 22 August 2017 the Supreme Court of Tasmania made an order giving possession of the Property to Wellington [11].

On 18 September 2017 Warratah and MMB entered into a deed of assignment pursuant to the terms of which MMB assigned and transferred to Warratah all of its rights and benefits under or in respect of, among other things, the MMB Mortgage, the MMB Facility Agreement, the MMB Guarantee and the Priority Deed [12]. On 21 September 2017 Warratah served a notice of assignment  on PMLI [13].

By letters dated 22 September 2017 Warratah notified PMLI and Print Mail of a default by PMLI under the MMB Facility Agreement and demanded payment of $415,648.41, the monies owing by PMLI under that facility. [14]

On 5 October 2017  Elias, director of PMLI, received an unconditional offer to acquire the Property for $450,000 which was conveyed to Wellington’s solicitors, AJ & Co Lawyers Pty Ltd (AJ & Co), by letter dated 5 October 2017 from Whittens & McKeough (Whittens), solicitors for Print Mail [15]. On 9 October 2017 AJ & Co stated that Wellington had only been in possession of the Property for five business days and its preliminary view was that the true value of the Property was significantly higher than $450,000 [16].

on o9 October 2017 Print Mail was served the Demand which sought payment of $412,606.37 under the MMB Guarantee and an affidavit sworn by Halle on 9 October 2017 (Halle Affidavit).  On 25 October 2017 Print Mail invited Warratah to withdraw the Demand. Warratah refused to do so [18].

On 30 October 2017 Print Mail commenced the Set Aside Application and on 17 January 2017 it filed an Injunction Application.

Elias deposed:

• Warratah’s actions were unconscionable and in breach of the Land Titles Act to exercise its power of sale “in good faith and having regard to the interests of the mortgagor, encumbrancer and other persons” [19];
• the actions by companies controlled by Ms Hutson, including the issuing of the Demand, were an attempt to force Print Mail to discharge PMLI’s liability under the loan without the benefit of any proceeds from the sale of the Property so that once the MMB Mortgage has been discharged Wellington could exercise its power of sale without having to apply any of the proceeds to Warratah [19];
• the Demand was a means of “benefitting the interests of [Wellington], to the prejudice of [Print Mail] and, in [Print Mail’s] contention, made possible by a continuing breach by [Wellington] of its obligations” under s 78 of the Land Titles Act and s 420A(1) of the Act;
• the Demand was issued for a collateral purpose or constitutes an abuse of process and as such should be set aside;
• there was also a genuine dispute as to whether PMLI was in default under the MMB Facility Agreement in circumstances where it was up to date with all payments due to be made by it under that facility;
• the validity of the notice of assignment was disputed because the purpose of the purported assignment was unconscionable and prejudicial to Print Mail’s interest for the reasons already identified; and
• the Demand was not a complying demand because the affidavit verifying it does not meet the mandatory requirements of s 459E(3) of the Act.

As is commonly the way there was considerable correspondence between the parties being:

• on 12 December 2017 Whittens informing Gadens that PMLI had reached an agreement with EM Commercial Finance Pty Ltd (EM Commercial) to refinance its facility with Warratah and that finance was conditional on the assignment to EM Commercial of all security interests that ran with the MMB Facility Agreement and sought the current payment amount for the loan and confirmation that Warratah would execute all necessary documents to give effect to the:·assignment of all Security Interests would keep alive the mortgage and other securities under the loan[21]
• on 12 December 2017 Gadens advised Whittens that Warratah would agree to PMLI entering into a refinance agreement with EM Commercial on the basis that the incoming financier would pay Warratah the total amount owing under the MMB Facility Agreement and that, upon receiving payment of that amount, Warratah would release all of its securities. Warratah would not agree to assign its securities to the incoming financier [22]
• on 18 December 2017 Whittens sought:
  • a total payout figure for the loan to PMLI inclusive of all interest and enforcement costs.
  • agreement that, upon payment to it of the full amount either by an incoming financier or by the guarantor, the paying entity would be subrogated to Waratah’s ]interests under the securities upon payment in full.
  • Waratah provide an undertaking that, in the event that it is paid the total payout figure, it will not discharge or release any of its securities in respect of the debt arising under the Secured Loan Agreement and registered mortgage [23]
• On 21 December 2017 Gadens responded stating:
  •  they did not accept the assertion that an assignment of securities to an incoming financier was “conventional and orthodox”
  • they denied that their client had “blocked [PMLI] from being able to refinance”, was “actively trying to ‘frustrate a refinancing of the funds borrowed by PMLI’” or that it was “threatening to frustrate the refinance”. Gadens noted that their client was agreeable to a refinance of the loan “after which Warratah would release its securities”; and
  • stated the amount then owing to Warratah and confirmed that upon receipt of that amount “Warratah will release the relevant securities”.
• on 22 December 2017 Whittens wrote to Whittens stating it was “a necessary condition of the refinance that the incoming financier be granted a first ranking mortgage over the property” [25]
• on 22 December 2017 Gadens informed Whittens, among other things, that provided the full amount owing under the Warratah Agreement is paid there would be a release of securities, including the mortgage [26]
• On 7 February 2018 Whittens wrote to AJ & Co stating that PMLI had made arrangements for the refinance of the MMB Facility Agreement by EM Commercial and that Warratah confirmed that provided the full amount owing under the Facility Agreement is paid in full it would release its securities including its mortgage over the land [27].  On 8 February 2018 Whittens provided a copy of EM Commercial’s offer of finance dated 28 November 2017 to Gadens.
• on 9 February 2018 Gadens informed Whittens that, having regard to the EM Proposal, Warratah was prepared to withdraw the Demand provided that PMLI and PML entered into an agreement wity PML and PMLI each agreeing to pay the entire amount owing under the Warratah Loan Agreement by 25 August 2018,  PMLI continuing to make monthly payments of principal and interest to Warratah.
• on 12 February 2018 Whittens declined Warratah’s offer “as the EM Proposal was made in the context of a broader financing relationship” [30].
• on 14 February 2018, Gadens complained that  that they and Warratah were led to believe that the EM Proposal constituted the entirety of EM Commercial’s refinance offer and that the broader financing relationship is not in fact legitimate impediment to accepting the offer [31]
• on 16 February 2018 AJ & Co refused the request to give priority over the Property to an incoming financier [32].
• on 21 February 2018 Whittens asked whether if an incoming financier (or alternatively Print Mail Logistics Ltd, as guarantor) were to pay the debt to Warratah that it would be entitled to be subrogated to the interests of Warratah under its securities and in particular its first ranking registered mortgage over the Property [33] and also made an open offer that:
  • the Demand be withdrawn and the proceeding be dismissed with no order as to costs;
  • PMLI will refinance the entire amount owing to Warratah “this year” and Print Mail will guarantee its obligations to the incoming financier provided that Warratah keeps the securities alive for the incoming financier; and
  • in the alternative, Print Mail, as guarantor, will pay out the entire amount owing provided Warratah keeps the securities alive for Print Mail [34].
• on 22 February 2018 Gadens responded to the Whittens offer stating that it knew the  would  not be accepted & didn’t contain a proposed repayment date or evidence suggesting that PMLI would be capable of refinancing the Warratah debt [35].

Unusually in applications of this nature there was cross examination, here of Halle [36].  The court noted that :

• Halle acknowledged that as at August 2017 he was aware that Wellington held a second ranking mortgage & that if Wellington exercised its power of sale it would hold the sale proceeds on trust for the first ranking mortgagee and if Wellington sold the Property all of the money from the purchase would be applied first to discharge the first ranking mortgage [37].
• Halle was  aware that the Property is not worth the combined amount owing to Wellington and the amount claimed in the Demand owing to Warratah [37].
•  Halle knew as at August 2017 that Wellington, as second ranking mortgagee, would not get anything out of a sale of the Property unless it did something else [38] and accordingly he and Hutson agreed to get Warratah to acquire the loan, mortgage and securities from MMB for approximately $415,000 for the purpose of getting both the MMB facility and the Wellington Loan repaid [38].
•  the effect of recovering the full amount owing on the MMB Mortgage by issuing the Demand was that Wellington would be free to execute against the equity in the Property without having to account to any higher ranking mortgagee, provided there was no incoming first ranking mortgagee [39].
•  the effect of what Warratah was doing deprived Print Mail of the ability to have the benefit of the securities it holds after Print Mail repaid the amount the subject of the Demand [40].
•  Halle was aware that Warratah owed a duty to hold the MMB Mortgage for Print Mail such that, when it pays the amount owing as guarantor, it can have access to that security [41].
• Halle’s intention was to get both facilities paid and that the effect, though not the intention, of taking those steps was to deprive Print Mail of the ability to have the benefit of the securities [41].
•  Halle accepted that what Warratah was doing was possibly unfair but said that Warratah was doing it to achieve the best possible result for Warratah and Wellington, namely to get the facilities repaid [42].

During the hearing Warratah  provided the Court with a copy of a proposed undertaking in the following terms, at [46]:

Definitions

“Loan Facility” means the loan facility between Maitland Mutual Building Society Limited ACN 087 651 983 (Maitland) and Print Mail Logistics (International) Pty Ltd ACN 142 144 830 (PMLI) dated on or about 28 May 2014, which was assigned to the Defendant on or about 18 September 2017 and which is guaranteed by the Plaintiff for the borrower, PMLI.

“Securities” means the Guarantee and Indemnity dated 25 June 2014 between Maitland and the Plaintiff, First Registered Mortgage number D133476 dated 30 July 2014 over the land comprised in Certificate of Title Volume 167361, Folio 1, and the General Security Agreement dated 12 February 2013 between Maitland and PMLI, which were assigned to the Defendant on or about 18 September 2017.

Undertaking

The Defendant by its directors undertakes to the Court that, in the event that the Plaintiff (as guarantor) or a third party on behalf of the Plaintiff as guarantor makes payment in full to the Defendant pursuant to the Statutory Demand dated 9 October 2017 or otherwise pays out in full the Loan Facility, the Defendant will by its directors, officers, servants and employees, upon receipt of that payment:

a.  provide executed release documents in respect of the Securities to the Plaintiff or the third party payer as the case may be;

b.  not lodge any such releases with the Tasmanian Land Titles Registry, on the Personal Properties Securities Register or otherwise; and

c. otherwise keep alive the Securities.

DECISION

Print Mail relied on s 459H(1)(a) or (b)  (genuine dispute and offsetting claim) and, in the alternative, s 459J(1) of the Act (defect in the demand or some other reason) [48].

The Court identified two issues for determination, at [54]:

• the alleged deficiency in the Halle Affidavit which accompanied the Demand, was described by Print Mail as the technical issue and only arises on the Set Aside Application.
• whether Warratah intentionally acted to impair securities that ought to be available for a guarantor or an incoming financier upon payment of the principal debt

Print Mail alleged that the affidavit which accompanied the Demand did not comply with s 459E,  setting out the requirements for a statutory demand and the affidavit which must accompany it unless the demand relies on a judgment debt [51].

The technical issue

Print Mail submitted that:

•  Halle did not state the source of his knowledge of  the debt and was incorrect [58].
• Halle admitted candidly in an affidavit that Print Mail did not have an account with Warratah.
• it was not possible to make good an affidavit which did not comply with the Act in the first instance by relying on evidence given after service of the Demand [58].
• the Halle Affidavit could not  “verify” the matters stated in the Demand, relying as it did on a false statement about a non-existent account [59]

Warratah submitted that:

•  Print Mail’s complaint was “a minor one” with Halle Affidavit referring to Print Mail’s account with Warratah rather than to PMLI’s account with it, given the debt was called up from Print Mail as guarantor which was addressed in the November Affidavit and
• Print Mail understood what was meant in the Halle Affidavit by use of the words “debtor company’s account” [60].
• in order for Print Mail to succeed on this argument it would need to satisfy the Court that the Demand should be set aside “for some other reason” pursuant to s 459J(1)(b) of the Act,
• the fact that the Halle Affidavit was not drawn “sufficiently” did not mean that it was deficient in any significant respect and was not of sufficient seriousness to warrant the Court exercising its discretion to set aside the Demand [61].
• Print Mail understood the nature of the debt which was the subject of the Demand [7]

The court in analysing the submissions stated:

• … The requirements that the deponent state the source of his knowledge and his belief that the matters stated in the affidavit concerning the debts were true and his belief that there was no genuine dispute are in at least the same order of importance as the requirement that the verification be made by a member or officer.
• s 459J(2) must be read as a “defect” in the demand itself
• the failure of the affidavit to comply with the rules of court is not a defect in the demand itself and is not protected by s 459J(2) [64].
• the “dominant consideration” was the need to ensure “the purity of the manner in which creditors follow statutory procedures which are preliminary to litigation and for which verification is required by law”.
• the exercise must be carried out in a responsible way, and regard must be paid to the need to review the available information and observe whether what is being verified conforms to the information in the creditor’s own hands [65].
• s 459E(3) stipulates that except in the case of a judgment debt, a demand must be accompanied by an affidavit that verifies that the debt is due and payable by the company. I
•  s 459J(1)(b) applies whenever there is a need to counter some attempted subversion of the intended operation of Part 5.4 [71]

The Court stated that:

• Halle  averred that he had inspected Warratah’s records &  the amount claimed is due and payable by Print Mail but conceded that  Print Mail did not have an account with Warratah [74]
• as a consequence of this error:
  • Halle has verified a matter which is untrue [76].
  • Halle Affidavit did not comply with the Corporations Rules which requires that the affidavit accompanying a statutory demand be in accordance with Form 7 being  a requirement that the deponent state the source of his or her knowledge of the matters stated in the affidavit in relation to the debt [77].

• Halle’s reference to a source that simply does not exist means that there was, in effect, a complete failure to state the source of his knowledge about the debt [81]
• there was nothing in the Halle Affidavit to suggest that he signed any, let alone “all”, relevant documentation in relation to the assignment of the loan from MMB to Warratah or was otherwise aware of Print Mail’s role as guarantor of the relevant loan and which could explain his knowledge of the debt the subject of the Demand [81].
• the failure to comply with r 5.2 of the Corporations Rules by referring to an incorrect source and thus failing to include the source of Halle’s knowledge in the Halle Affidavit as required by Form 7 is not of minor or no significance and not a matter that can be remedied by reference to a later affidavit [82].
• the failure was sufficiently serious for the court to exercise its discretion pursuant to s 459J(1)(b) of the Act and make an order setting aside the Demand [83].
•  Halle did not carry out the task of completing the affidavit required to accompany the Demand in a responsible way as it failed to include the source of  Halle’s knowledge about the debt, a matter which should have been apparent on a proper review of the available information [84].

The substantive issue

Print Mail submitted that

• Warratah should not be permitted to rely upon the Demand when:

87. • it is frustrating the refinancing of the MMB Facility Agreement by refusing to assign its securities to PMLI’s incoming financier; and
    • in unconscientious disregard of its equitable duties it stated that upon payment of the amount demanded, it would release its securities thus stripping Print Mail’s right of subrogation of any value [87].

• Warratah’s conduct constituted unconscionable conduct under s 21 of the Australian Consumer Law (ACL) set out in Sch 2 of the Competition and Consumer Act 2010 (Cth) [88].
• a creditor taking action to release securities which would otherwise be subrogated to it as guarantor gives rise to a discharge of the guarantee itself. Warratah would be liable to repay the amount paid by Print Mail, as monies had and received, together with equitable compensation for the loss of the equity in the property in question.
• Warratah’s title to sue for the sum the subject of the Demand was impeached and there was a genuine dispute as to Warratah’s entitlement to the amount demanded [90]
• the Demand was issued and relied on in furtherance of a collateral purpose being:
  • Print Mail is prepared to pay out the total amount owing to Warratah;
  • Warratah has repeatedly stated an unequivocal intention to release its securities such that Print Mail’s right of subrogation would be of no value and Wellington has refused to acknowledge that Print Mail or, alternatively, an incoming financier would be entitled to subrogate to the first ranking mortgage; and

and therefore the Court should infer that Warratah’s conduct is directed towards a collateral and unconscionable purpose, namely, at Print Mail’s expense, assisting Wellington to achieve a better level of security than that to which it is entitled [91]

• Warratah’s used the Demand as a means of forcing Print Mail to discharge the loan without it having recourse to the equity in the Property so as to assist the second ranking mortgagee, Wellington [92].
•  Warratah issued the Demand in circumstances that are entirely unjust and that the Demand should be set aside under s 459J(1)(b) of the Act [92].
• Warratah’s proposed undertaking, was not sufficient to cure the problems with the Demand because:
  • a demand issued in circumstances which amount to an abuse of process cannot be “cured” retrospectively by providing an undertaking.
  • the undertaking is “entirely useless” from a practical perspective of Print Mail’s offer of finance from EM Commercial; and
  • if the demand was not set aside :
    • Print Mail would have to pay the whole amount demanded prior to the determination of that proceeding and therefore without the benefit of finance; or,
    • if Print Mail will be deemed insolvent and face being wound-up unless it incurs the cost of proving solvency in winding up proceedings that might well be determined before the Supreme Court proceeding is resolved.
•  the fact that Warratah had an alternate means of getting paid immediately, provided it agrees to assign its interest in the relevant securities, constitutes a powerful discretionary reason why the Demand should be set aside for “some other reason”.

Warratah submitted that:

• there was no genuine dispute about the debt the subject of the Demand.
• as Print Mail had effectively acknowledged in its submissions, the primary argument made by it as to why there is a genuine dispute is based on events which occurred after the 21 day period following service of the Demand.
• while acknowledging that there is a relatively low threshold to establish a genuine dispute,  Print Mail failed to demonstrate that there was any dispute that the debt the subject of the Demand was not due and owing or that it is subject to an offsetting claim.
• neither the circumstances nor the law supported Print Mail’s alternative argument that the Demand should be set aside “for some other reason” pursuant to s 459J(1)(b) of the Act because it was issued for some collateral purpose and/or amounted to an abuse of process.
• the evidence did not support Print Mail’s assertion that:
  • it had frustrated PMLI from refinancing the MMB Facility Agreement, and
  • that it had provided a payout figure and there was nothing preventing PMLI or Print Mail from arranging to pay out the MMB Facility Agreement.
• contrary to the position taken by it in its correspondence, it would not discharge the securities upon payment of the debt by Print Mail but would hand over relevant release documents.
• the right of subrogation arises in equity and that there is no requirement for securities to be assigned for a guarantor’s rights to be subrogated.
• if Print Mail or a third party financier tendered payment then, at settlement, Warratah would provide that party with releases for the securities it held, who would not lodge those releases until such time as the debt owing to it was paid, thereby preserving the priority position of the securities.
• if  there was conduct on its part that impaired the securities, Print Mail would be protected in equity by the principle of subrogation and that as this was a future contingency itwas immaterial to the question of whether there was any genuine dispute about the debt.

The court found :

• the guarantor’s right of subrogation operates in favour of a guarantor as against mortgages that rank lower in priority than the relevant creditor’s mortgage [104].
• it was clear that Warratah accepted that if Print Mail paid out the amount owing to Warratah pursuant to the MMB Facility Agreement, Print Mail (or a financier paying on its behalf) is entitled to be subrogated to the securities held by Warratah to secure the amount owing under the MMB Facility Agreement [107]
• Print Mail has not established that there is a genuine dispute about the existence or the amount of the debt [108].
• Print Mail’s contention that the basis upon which it alleges that the Demand should be set aside pursuant to s 459J(1)(b) only emerged after the 21 day period specified in s 459G and accordingly the First Elias Affidavit, which was filed and served within the 21 day period did not raise the issue of a collateral purpose or is an abuse of process within the the 21 day period following service of the Demand [116].
• The first Elias Affidavit did not promote or advance in any way Print Mail’s case insofar as it alleges that the Demand should be set aside for “some other reason” pursuant to s 459J(1)(b) being an abuse of process and it relied on other facts unconnected to those now relied on to make out the ground [117]

ISSUE

This complicated and involved application was ultimately resolved on the uncommon basis of the deponent failing to comply with the fundamental obligation in his affidavit, that he stated the source of his or her knowledge of the matters in relation to the debt.  In this application the deponent made egregious errors, referring to incorrect accounts and not addressing the question of the knowledge and the basis for it.  That was fortunate for the applicant as the Court was not convinced by the genuine dispute and some other reason argument.

It is critically important in preparing an accompanying affidavit to comply with the obligations under the Corporations Act and aver to relevant documents and details in the affidavit accompanying the demand.  In this case the facts were very complicated and involved.  That may have contributed to the error.  It was a very significant error.  It was very thorough and effective work by the applicant in highlighting this technical error.