FEDERAL COURT OF AUSTRALIA CORPORATIONS - statutory demand - application to set aside - application by incumbent director - alleged indebtedness for consultancy services and director's fees - shareholders previously rejected payment of fees - matter again to be put to shareholders - whether substantial injustice unless demand set aside or some other reason why should be set aside - whether genuine dispute as to existence of debt. Corporations Law ss 243F(1)(a), 243H(1), 243Q, 459C(2), 459E, 459G, 459H, 459J, 459P(1)(d), 459P(2) Federal Court Rules 1976 (Cth), O 71, r 36B Chadwick Industries (South Coast) Pty Limited v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 followed. COLLINS MOTOR CORPORATION LTD (ACN 008 924 570) v VICTOR JAMES MCVEIGH NG 3263 of 1997 R D NICHOLSON J PERTH 24 NOVEMBER 1997 LIMITED DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY NG 3263 of 1997 BETWEEN: COLLINS MOTOR CORPORATION LIMITED (ACN 008 924 570) Applicant AND: victor james MCVEIGH Respondent JUDGE: R D NICHOLSON J DATE OF ORDER: 24 NOVEMBER 1997 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The Statutory Demand made under Section 459E of the Corporations Law dated 5 November 1997 and served upon the Applicant on or about 5 November 1997 be set aside. 2. The Respondent pay the Applicant's costs as taxed by the Court. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. LIMITED DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA DISTRICT REGISTRY Ng 3263 of 1997 BETWEEN: COLLINS MOTOR CORPORATION LIMITED (ACN 008 924 570) Applicant AND: VICTOR JAMES MCVEIGH Respondent JUDGE: R D NICHOLSON J DATE: 24 November 1997 PLACE: PERTH REASONS FOR JUDGMENT (EX TEMPORE) HIS HONOUR: This is an application under section 459G of the Corporations Law for an order setting aside a statutory demand served on the applicant company ('the company'). The statutory demand in question was issued by the respondent who remains a director of the company and was until recently its Chairman. The statutory demand seeks payment by the applicant of $284,000 calculated as follows: Fees claimed by the respondent for the provision of consultancy services to the applicant $140,000 Director's fees claimed by the respondent for the period ended 30 June 1997 $144,000 ____________ Total $284,000 The applicant claims an order under either section 459H or section 459J that the statutory demand be set aside. It is not in dispute between the parties in this application that the provisions of O 71, r 36B of the Federal Court Rules 1976 (Cth) have been complied with. Statutory requirements Section 459H provides in subs (1) that the section applies where the Court is satisfied of either or both of the existence of a genuine dispute about the existence or amount of a debt to which the demand relates or that the company has an offsetting claim. It is the former of these requirements which is relied upon by the applicant. On the applicant's case it is said there is a genuine dispute in relation to both limbs of the debt the subject of the statutory demand, so that the provisions of section 459H(2) to (3) apply with the result that the substantiated amount is less than the statutory minimum the Court must by order set aside the demand. By s 459H(6) that section has effect subject to s 459J. I turn therefore to s 459J which provides the Court may by order set aside the demand if it is satisfied that because of a defect in the demand substantial injustice will be caused unless the demand is set aside or there is some other reason why the demand should be set aside. That is to be read subject to subs (2) which provides that, except as provided in subs (1), the Court must not set aside a statutory demand merely because of a defect. See also s 467A of the Corporations Law. Applicant's Case under s 459J The applicant's case pursuant to s 459J is the demand is defective in claiming an amount which is genuinely disputed both as to quantum in respect of the director's fees and in respect of both the director's fees and consulting fees as to whether it is due and payable or whether it is to be satisfied by the issue of shares and options. In effect that seeks to bring within the rubric of s 459J the matters addressed in s 459H but no exception is taken to that in argument before me. So far as the consultancy fees claim is concerned, it is said the substantial injustice which would result if the statutory demand was not set aside is that the shareholders would be deprived of the opportunity to consider a resolution to be put to them at a General Meeting on 28 November 1997 authorising payment of that financial benefit. It is because of the proximity of that meeting and the consequent urgency of the application that I now give my reasons. So far as the director's fees claim is concerned, the applicant's case is that a substantial injustice would be created because there has been no resolution of the Board nor the shareholders approving payment of director's fees to the respondent in the sum claimed or any other sum so that no amount is presently due and payable. In reliance upon s 459J(1)(b) other reasons are advanced as to why there would be a substantial injustice caused if the demand was not set aside, principal among those is the position in which the company would be placed in the event of the demand proceeding. It is submitted the respondent, being a "related party" as defined by s 243F(1)(a) of the Corporations Law and Chapter 19 of the ASX Listing Rules, and the applicant being a public company as defined by s 243H(1) of the Corporations Law, the Board is put in a position where it could have conflicting obligations. Under the latter mentioned section, as a public company, it could not give a financial benefit to a related party except as permitted, likewise it would be enjoined to comply with the statutory demand thus giving rise to the conflict. Additionally, it is accepted as a common fact that the shareholders have already rejected a proposal put to them under s 234Q of Division of 5 of the Corporations Law to give the respondent the financial benefit demanded. Apart from the position of the company, reliance is also placed on the respondent's position. It is said the respondent as a present director is in an irreconcilable conflict of interest in serving a statutory demand upon the company and that on one view he would not be entitled to apply to the Court for such a demand. That is a matter of statutory construction. There are many facts not in dispute and I do not seek to set them out in these oral reasons, except to say that in the extensive written submissions for the applicant, the facts not in dispute are listed and remain uncontentious. Legal principles The applicant's submissions also set out the relevant legal principles and they have not been put into contention before me. It is important, as those submissions and the cases they refer to emphasise, to remember that in an application under s 459G(1) it is not for the Court to decide whether there is a genuine dispute within s 459H or where the merits of the disputes between finally lie. The question is whether the conditions of s 459J and subject to that section 459H are satisfied. As was said by Lockhart J in Chadwick Industries (South Coast) Pty Limited v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39: "Certainly the Court will not examine the merits of the dispute other than to see whether there is in fact a genuine dispute." The authorities set out in the submissions to which I have referred put the tests in different ways. It is not contested before me that I should approach the issues on the basis that no final determination of the merits of the dispute between the parties should now be made. The question is whether the statutory demand should be set aside and that requires, firstly, attention to whether a substantial injustice would be caused unless it were set aside, or for some other reason it should be set aside within section 459J. Respondent's contentions For the respondent no injustice is done by saying the broad submission made is that, in relation to consultancy fees, there is a quantified debt due and payable and that argument over the method of payment is to be distinguished. I will return to the details of that contention. In relation to director's fees, the argument for the respondent is that a true reading of the Corporations Law shows a director is entitled to bring a statutory demand and, being entitled to do so, cannot be in the position contended for in the applicant's submissions. I turn, therefore, to the detail of each of the submissions. Consultancy fees issue In relation to the consultancy fees issue, the relevant chain of facts seems to me to be as follows. On 14 April 1997 the applicant wrote to the solicitors acting for Transcom, which are a party referred to in the information memoranda to which shares were being issued stating that it was the intention of the applicant to issue to its directors a consideration and the quantum of that would be directly related to the period for which they had not been paid ending at June 1997. In the case of the respondent, it was said the consideration due would be 48 months at $3000 per month, totalling $144,000. It was added that there are several means by which this could be paid contingent upon tax issues and the paying entity. On 23 May 1997, the respondent sent a hand-written memorandum to a director of the applicant in which he said his fee note for past consultancy fees was $140,000. He expected that to be added to the list of the applicant's creditors and then stated: "My fees can be satisfied by the issue of shares at 20 cents each plus four options for every 20 cents extinguished, or paid in cash at some future date when the company has sufficient funds to pay - the manner of payment can be left to shareholders to decide." On 16 July 1997, the directors of the applicant corporation held a meeting at 8 am in which, after declaration of interest, the respondent withdrew and it was resolved the fee note in question be paid on or before 31 December 1997 or when adequate funds were available to the company. It was noted it was the intention of the company to make the payment at the earliest opportunity. The minute notes the respondent was informed of this and, with his consent, it was resolved (resolution 5) to withdraw from an extraordinary general meeting scheduled for that day. The 8 am meeting resolved that resolution 5, to be put to the shareholders, be withdrawn. A 10 am meeting resolved that resolution 5 was now to be put to shareholders at the meeting as originally proposed in the notice of meeting. That resolution, which had been proposed as a special resolution, was to permit the company to give a financial benefit to the respondent in the form of the allotment and issue of 700,000 ordinary fully paid shares of 20 cents each in the capital of the company, each ranking pari passu with the existing issued ordinary shares of the company, together with 700,000 options (2002 class), in payment of consultancy fees of $140,000 for consulting services carried out for the company between 30 June 1993 to date, pursuant to an oral consultancy agreement with the company. Following the directors meeting on 16 July, the respondent was handed by a director of the applicant a hand-written memorandum of what the director considered the company had then resolved. The effect of that note is to record it had been resolved that the fee note for $140,000 for consultancy fees for the period from 1 July 1993 to 30 June 1997 be accepted as due and payable and be considered as an arms length transaction. It was further resolved, according to the note, that the fee would be paid on or before 31 December 1997 or when adequate funds are available, whichever is the earlier and the intention of the company to pay at the earliest opportunity was recorded and there was a note that, at that time, the resolution 5 to be put to the meeting be withdrawn. In the event, when the resolution was put to the meeting, it was lost. At a meeting of the directors of the applicant on 25 September 1997, a director put to the meeting that a form of notation should appear in the annual report in relation to the claim being made by the respondent. It read: "A director ... has invoiced the company for $140,000 ... for the provision of consulting services to the company and its related entities. The company is negotiating with Mr McVeigh in regard to this invoice and is, at the date of this report, finalising a settlement. Such a settlement may result in a special resolution being put to shareholders at the next general meeting of shareholders." In the notice of annual general meeting calling the meeting for 28 November 1997, it was recited the invoice for $140,000 had been submitted; the resolution had been defeated at the extraordinary general meeting on 16 July 1997; there had been a subsequent demand from the respondent for payment; and that the company was negotiating with the respondent in regard to a settlement, but that, at the date of the notice, no resolution had been reached. It was then set out in the notice that the proposed basis of settlement was to offer to the respondent $300,000 worth of fully paid shares in the company at a value of 25 cents a share to be issued and allotted no later than 3 months after the date of the meeting and ranking pari passu in all respects with existing issued securities. In addition, the company had requested another company to transfer options to the respondent at a nominal cost, those being of the same order as that proposed to the extraordinary general meeting on 16 July. It is then recorded the directors recommend that shareholders vote in favour of this resolution. It is clear that the resolution is proposed as a settlement of the dispute. In my view examination of that evidentiary material cannot lead the Court to the prima facie position which the respondent's case seeks the Court to find, that being there is simply a debt due and payable for $140,000 which can be, as it were, severed from the conditions of payment. It is clear from the first moment the respondent stated the indebtedness on 23 May 1997 he has linked the quantum with the method of payment and from his own fee note to that effect, the subsequent history which I have set out, as it presently appears, has flowed. The only way which the Court could find in favour of the respondent on this aspect, is, in my view, to do what it is not permitted to do, and that is to make determinative findings of fact as to the merits of the dispute. I have no doubt the evidence which I have gone through establishes a genuine dispute as to whether on the one hand there is a debt, due and payable, or, on the other, there is a debt with the date and method of payment as yet undetermined, and indeed the subject of negotiations between the parties with a view to settlement. Director's fees issue Turning to the directors fees, I do not consider again without any definitive ruling as to the effect of the statute, I can on this application conclude as the respondent's case would seek, that it is open to the respondent to apply for a statutory demand, as the respondent has done. I accept that the Corporations Law specifically provides in s 459P(1)(d) that a director may apply for a company to be wound up in insolvency, and the effect of subs (2) of the same section is that the leave of the Court is required in the event of such an application. That does not necessarily carry with it, in my view, an entitlement as such to make a statutory demand upon the company. It may be that on final analysis, that is exactly the position. But there is prima facie a distinction to be drawn between the application for a statutory demand and the application to wind up the company and I consider the issue to be arguable. In any event, there are other considerations arising under the Corporations Law which arguably inhibit the bringing of a statutory demand by an incumbent director. Those are matters which cannot be resolved other than in the proper way of resolving disputes, and that is by a court properly informed as to the evidence and properly informed as to the statutory arguments. In my view neither of those circumstances can be satisfied on this application and it would be inappropriate for me to seek to resolve them on such an application. Conclusion The question then is whether a substantial injustice would be caused unless the demand was set aside or there is some other reason why the demand should be set aside. Numbered in this latter category must also be the fact the meeting has been called for a few days time at which the shareholders will themselves express an opinion on a germane resolution. So far as the grounds upon which the applicant relies are properly brought within the concept of substantial injustice, and so far as they provide other reasons why the demand should be set aside, I consider the application succeeds for the reasons which I have given, namely, the grounds require proper resolution and there would be a lack of justice in not allowing those genuine arguments to be determined in that way. So far as section 459J does not apply, I would find there is genuine dispute both as to the consultancy fees and as to the directors fees between the applicant and the respondent about the existence or amount of a debt to which the demand relates and accordingly the operation of section 459H(3) would in the alternate require the Court to set aside the demand. I add that I have taken into account the effect of section 459C(2) in reaching my view in relation to the argument over statutory interpretation. For those reasons I consider that the applicant is entitled to an order in accordance with paragraph 1 of the application. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice R D NICHOLSON Associate: Dated: 4 December 1997 Counsel for the Applicant: J G Harrowell Solicitor for the Applicant: Hunt & Hunt Counsel for the Respondent: K A Dundo Solicitor for the Respondent: Clayton Utz Date of Hearing: 24 November 1997 Date of Judgment: 24 November 1997