Sportsco Pty Ltd v Singh Group Pty Ltd (No 2)

Facts

The underlying dispute related to the purchase of a franchise business.  Singh, the purchaser, submitted that the statutory demand on Sportsco for $70,500 was a refundable deposit under the franchise agreement. Sportsco, the vendor, applied to set aside the demand claiming there was a genuine dispute concerning the debt and that it had an offsetting claim.  Singh alleged there was an agreement that the money was refundable if it was unable to obtain finance for the franchise business.  Singh did not obtain finance.  While Singh was provided with an  an offer to lease premises from which the franchise would operate it was never executed by Singh.  Sportsco claimed there was a dispute as to what constituted the agreement and whether the agreement was subject to finance. It also claimed Singh was liable to pay a franchise royalty fee of five years as a consequence of the breach and was liable for damages of approximately $300,000.

Decision

Ferguson J referred to TR administration proprietor Ltd V Frank marketing and Sales Brochure Ltd as support forthe proposition that in considering applications to set aside statutory demands there is no in-depth examination or determination of the merits of the dispute ([6] to [7]). Ferguson J found the evidence filed on behalf of Sportsco did not rise above the low hurdle required to show there was a genuine dispute. Her Honour found that much of the evidence was mere assertion ([9]). Her Honour was critical of the claim by Sportsco that an agreement had been entered into but it was not produced, similarly when the execution of agreement was denied by Singh Sportsco limited its allegations to a claim that it understood the documents had been sent for execution. Sportsco failed to rebut specific allegations made by Singh, in particular the production of an e-mail setting out the basis of the agreement (ie the monies were refundable if finance was unobtainable). Ferguson J stated, at [15], that while in an application to set aside a demand it is not necessary to have all the evidence required at trial it is necessary to respond to material allegations which could have easily been placed in an affidavit in reply. With respect to Sportsco’s contention that a conversation regarding refundability of the deposit was made by an accountant in the employ of Sportsco who did not have ostensible authority Ferguson J critisised the absence of evidence in support of this serious submission.

BKW Investments Pty Ltd v Training Connect Limited [2011] FCA 1314

Facts

BKW is a business which provides the methodology and material for teaching subjects online.  Training Connect provides educational services in English literacy, numeracy and other subjects ([4]). The parties entered into 2 memoranda establishing a business relationship and the parties commenced negotiations for a license agreement. The negotiations were unsuccessful, the relationship broke down and soon thereafter Training Connect issued a statutory demand regarding monies it had previously paid to BKW.

Decision

Cowdrey J relied, at [26], upon Spencer constructions v TNM Aldridge propriety Ltd regarding the criteria for establishing a genuine dispute, which requires that

• the dispute be bona fide and truly exist in fact;
• the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

In that context Cowdrey J considered that the two memoranda showed that the parties were involved in commercial relations and prima facie the conditions within the documents governed their commercial relationship. The subsequent e-mails and events highlighted a genuine dispute regarding the operation of those conditions.  Those documents demonstrated that the dispute between the parties was real and not spurious, hypothetical or misconceived.  The issues raised by BKW were that payments it received were converted to license payments and, conversely, by Training Connect that the agreements were frustrated were such as to require judicial determination.

Cowdrey J accepted BKW’s submission that because there was no address provided in the notice of the statutory demand BKW had to approach the court to obtain leave to serve its application outside Australia. As such it was placed in a position of severe disadvantage which may amount to a substantial injustice ([33]).  His Honour found that the absence of an Australian address for service constituted a defect. His Honour however stated that given there was a genuine dispute it was not necessary  to formally determine whether the defect cause substantial injustice. BKW sought and obtained a costs order on an indemnity basis.  Cowdrey made an indemnity costs order because Training Connect failed to withdraw the demand when it became apparent that a genuine dispute existed.

Issues

Sportsco and BKW is a study in contrasts. In Sportsco the application failed because Sportsco failed to provide the minimum material necessary to satisfy the court that there was a genuine dispute.  It told heavily against Sportsco that it failed to meet allegations made by Singh in any affidavit in reply and that many of its claims were not supported by documentary evidence which should have been available.  In BKW the court set aside the demand because both parties alleged that the documentation supported their respective positions.  Almost invariably documentary evidence lies at the heart of an application to set aside a statutory demand.  While the courts do not require applicants to lay out their entire case in a “ready – for – trial” format the bar is not so low that a court will accept assertion over evidence.

Care should be taken in relying on BKW as support for an award of indemnity costs when successful in setting aside a statutory demand.  That is not the usual orders made in this jurisdiction. Even where the court finds that it was apparent there was a genuine dispute an order for indemnity costs is rare.

LPD Corporation

In determining whether there was a genuine dispute Davies J set out the relevant principles:

1. any dispute must be a genuine dispute [3] and one which is bona fide and the grounds supporting the evidence of the dispute must be real and not spurious;
2. the level of proof required to demonstrate there is a genuine dispute is, using the influential decision of Dodds – Streeton JA in TR Administration Pty Ltd v Marchetti, is something between mere assertion and the standard of proof required by a court of law [4].
3. while the standard of proof is not high the  material should “.be of sufficient probative value that the Court is satisfied there is a real dispute.” [5] The application is akin to one for interlocutory injunction [6];
4. the same principles apply in any claim made by the Plaintiff for an offsetting claim [13];
5. the court will not accept uncritically equivocal statements lacking in precision, assertions which lack prima facie plausibility (relying on Eyota Pty v Hanave Pty Ltd (1994) 12 ASCR 785).

This decision is very instructive in highlighting the material that should (and should not) be included in affidavit material. Davies J analysed the evidence at [11] and [18] – [20].   The applicant’s evidence could be best summarised as generalised commentary of events and intentions intermingled with submissions.

Freestyle Energy Limited

The key question in this application was determining if there was an agreement between the parties as part of the process of determining whether there was a genuine dispute about the existence of a debt.

Genuine dispute

Ferguson J considered the relevant principles at [28] - [32]. In this case Ferguson highlighted Justice Finkelstein’s decision in JSW Parts Pty Ltd v Daraco Pty Ltd where there was no dispute about the fee but rather lack of clarity about the scope of the work..  In that context the fact that payments were made by a party does not constitute evidence of an agreement per se. Ferguson J extracted, at [33], Finkelstein’s reasoning on his point:

… making payments apparently in pursuance of a contractual obligation and without complaint does not always amount to an admission that those payments were lawfully due or, so far as this case is concerned, that the work required to be performed by Daraco had been performed adequately. There may be other explanations. Here we are dealing with relatively small sums of money. A contracting party may be willing to pay a small sum in order to avoid more significant costs that would arise if a dispute arose and litigation followed….

Ferguson J found there was sufficient doubt attendant upon the existence of an agreement to constitute a genuine dispute.  Her reasoning, in particular at [37], is a useful guide when dealing with a matter where there is an issue as to the existence of an agreement where she states, inter alia:

..A party may give reasons for why the debt is disputed. For example, it may be because the party says that goods said to have been supplied have not been received. Here what is said, is that there is a dispute about the debt because there is no binding contract that has been entered into by the parties. Mr Donaghey has sworn that no agreement was reached. There are no contemporaneous documents that clearly evidence that there was an oral agreement, such as to suggest that Freestyle’s argument is spurious. …the Court’s task is to identify the genuine level of a claim not the likely result of it and it is not helpful to perceive that one party is more likely to succeed than the other. Whether there was an oral agreement or not, is a matter that merits further investigation and it is not for me to inquire as to the credit of Mr Donaghey on this appeal.

Renegade Rigging Pty Ltd

The issue for Ferguson J to consider was the date of service of the statutory demand and the date of the application.  It is a very useful decision in that her Honour undertook a thorough analysis of the service provisions and requirements, drawing together the relevant authorities.

Service of Statutory demand

The preliminary question was when the statutory demand was served ([8] - [30]).  Her Honour undertook a very thorough consideration of the service provisions of the Corporations Act, the Evidence Act (as to presumption of delivery of postal articles, see  [15] – [21] – in particular section 160 of the Evidence Act (Cth)) the requisite proof of posting in the affidavit, being, at [22], that the envelope containing the statutory demand:

(a) bore the correct name and address;

(b) contained the relevant document to be served;

(c) bore the correct cost of postage; and

(d) was placed in the post.

Consideration of this issue was complicated slightly by the fact that there was a postal strike  during the relevant period which, it was contended, delayed delivery.  On this issue evidence was taken from a postal manager at the branch in which the letter was processed.

Date of application

Section 459G(2) of the Corporations Act requires an application to set aside a statutory demand.  Ferguson J considered at length the status of applications sent by facsimile ([41] – [50]).  Ultimately her Honour found that service by facsimile was acceptable.  In that context Ferguson J:

• cited Chernov J in Seventh Cameo Nominees Pty Ltd v Holdway Pty Ltd that how a document came to be served at the address for service was irrelevant and that it would be absurd if somebody who admitted to having received a document was not held to have been served with it [42];
• extracted the principles governing service in Woodgate v Garard Pty Ltd, a New South Wales Supreme Court decision of May this year, including that the question of whether email or facsimile is effective is determined by whether that mode of service actually brought the document to the attention of responsible officer [47];
• noted that provided the facsimile number was included within the statutory demand and the facsimile was transmitted within 21 days to the address for service the application was served for the purposes of section 459G [48].

Ferguson J acknowledges there i contrary authority on the question of service by facsimile. In my view her analysis is thorough and convincing.

Facts

Grant Thornton Services (NSW) Pty Ltd (“Grant Thornton”) provides accounting services.  It provided those services to the “Paul’s Warehouse” group of companies.  St George Wholesale Distributors Pty Ltd (St George) is part of that group but unlike other companies in that group it had net asssets.  Grant Thornton issued invoices on St George totalling $91,305.50. When the invoices were not paid Grant Thornton issued a statutory demand.  St George neither paid the sum nor applied to set aside the demand.  When St George found itself the subject of winding up application it roused itself to apply for leave to oppose the application on the basis that there was a genuine dispute. Leave is required because, per section 459 (S), St George could have earlier applied to set aside the statutory demand because there was a genuine dispute.

The issues

Section 459(s) (pars [7]  – [10])

To get leave section 459(s) requires that a court is satisfied that the ground is material to proving that a company is solvent.

Issues  

The focus here was on what constitutes a genuine dispute.  Lingren dealt with that in a two stage process. At [17] he quickly reviewed the authorities and distilled the principle that no “genuine dispute” exists where  the contentions by the applicant is devoid of substance such that “no further investigation is warranted.”  He said:

The concept of a “genuine dispute” has been discussed in the cases. The dispute must be bona fide and must truly exist in fact, and the grounds for alleging the existence of the dispute must be real and not spurious, hypothetical, illusory or misconceived: see, for example, Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464. In Solarite Air Conditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411, Barrett J said (at [23]), after reviewing the authorities, that the task faced by a company challenging a statutory demand on the “genuine dispute” ground is not a difficult or demanding one. His Honour added:

The company will fail in that task only if it is found upon the hearing of its s 459G application that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.

In cases where the dispute revolves around the construction of a contract only and there is no dispute on the facts Lingren says at [18]:

The notion of not warranting further investigation has assumed importance in a particular class of case. Where the dispute relates to a simple question of construction that can be decided following a short hearing and there is no factual issue to be resolved, the Court will decide the question and, if the construction is against the company, the dispute will not be classified as “genuine”: see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384-5 (Delnorth); Lifestyle Retirement Projects No 2 Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 705 at [16]- [17]; BBX Holdings Ltd v American Home Assurance Co [2007] NSWSC 549 at [15]- [17]. In the same vein, in the earlier case of Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, McLelland CJ in Eq said that the expression “genuine dispute” connotes “a plausible contention requiring investigation” (at 787 – my emphasis).

Provided the issue in dispute is a short point on a short point of  law or construction of a document or agreed facts the court can address those issues and make a ruling.  The key issue is whether or not further investigation is required which involves some contention (see paragraph [19].     

Application

The issue then became one of construction of an agreement. Unusually the court needed to consider pre contract material – using the private dictionary cases as authority for ruling on the word “each”.  He summarised that principle at paragraph 31:

Generally speaking, it is not permissible to take pre-contract negotiations into account in the construction of contracts: see, for example, Prenn v Simmonds [1971] 1 WLR 1381. However, there are exceptions to the general rule, one of which is that evidence is admissible to show what both parties intended a particular ambiguous term used in the contract to mean: see, for example, Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 348-350, 352-353 per Mason J; ProForce Recruit Ltd v Rugby Group Ltd [2008] 1 All ER 569 (Comm) at [83], [86], [88]; Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523; and see Corbin on Contracts (rev’d ed, 1998) vol 5 § 24.8. Sometimes cases of this kind are called “private dictionary” cases: the parties have agreed that a word or expression in the express terms of their contract is to have (or not to have) a certain meaning.

Lingren found against the applicant’s construction, the applicant was obliged to pay the creditor 10% of each tranche of payments from a client introduced by the creditor.  Given that was the basis for the statutory demand the application was dismissed.

Lesson

Where the facts are discrete, there was no credit issues at stake and the legal question is a short one, such as a fairly straightforward interpretation of a clause of a contract an applicant should be on guard.  The low bar for assessing a genuine dispute is lower where there is controversy and moving parts requiring findings of fact.  Given the consequences of an application being dismissed is serious – winding up – if there are issues of credit and facts in dispute it is better that they are put before the court than hope a pure legal argument will sway the bench.