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 Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ASCR 362 Chadwick Industries South Coast Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 JSW Parts Pty Ltd v Dacaro Pty Ltd, (Federal Court of Australia, unreported, Finkelstein J, 11 August 1997) Spencer Constructions Pty Ltd v G and M Aldridge Proprietary Limited (1997) 147 ALR 444 Vehicle Wash Systems Pty Ltd v Mark VII Equipment VII Equipment Inc (Federal Court of Australia, unreported, Finkelstein J, 19 December 1997) Amalgamated Investment and Property Company v Texas Commerce International Bank Limited (1982) Q.B.84 Stuart Miller v Custom Credit (1986) 4 ACLC 105 The Indian Grace (1996) 2 Lloyds Reports 12 RAASAY PTY LIMITED v SCAPA FLOW PTY LIMITED TG 3015 of 1997 Judicial Registrar Ryan Hobart 4 February 1998 IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY TG 3015 of 1997 BETWEEN: Raasay Pty Limited Applicant AND: Scapa Flow Pty Limited Respondent JUDicial registrar: RYAN DATE OF ORDER: 4 FEBRUARY 1998 WHERE MADE: HOBART 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: Raasay Pty Limited Applicant AND: Scapa Flow Pty Limited Respondent JUDICIAL REGISTRAR: RYAN DATE: 4 FEBRUARY 1998 PLACE: HOBART REASONS 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, Scapa Flow Pty Limited, will be entitled to move to have the applicant, Raasay Proprietary Limited, 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 law firm of partners originally known as Bushby Taylor and Griffiths and trading as Archer Bushby, (the partnership). The applicant is the partnership's main service company and is trustee of the Raasay Unit Trust. All partners are directors of the applicant and all units in the Raasay Unit Trust are held by family trusts controlled by individual partners. Mr Simon Whishaw is a director of the respondent and was a partner in the partnership 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 Simon Whishaw who was a partner in the partnership till retirement for reasons outlined in the principal affidavit. Scapa Flow Pty Ltd, the respondent, is controlled by Simon Whishaw and is the trustee of Mr Whishaw's family trust. Mr Whishaw joined the partnership on 1 July 1982 and resigned from the partnership on 22 March 1995, with effect from 31 March 1995. In accordance with the usual practice, on admission as a partner Mr Whishaw became a director of Raasay, and Scapa Flow was issued a unit in the Raasay Unit Trust. Since his resignation from the partnership, again in accordance with the usual practice, Mr Whishaw has resigned as a director of Raasay and Scapa Flow's unit holding in the Raasay Unit Trust has been cancelled. The applicant · provides services to the partnership · employs all non-professional staff used by the partnership · accepts responsibility for general office expenses · receives monthly fees from the partnership. 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 unit holders in the Raasay Unit Trust, those unit holders being trusts controlled by the various partners in the partnership. Distributions of profits to the unit holders are taxed in the hands of the beneficiaries of the unit 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 unit holders 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 Stuart Alden Roberts sworn 6 October 1997, that this is so. Following cross-examination of Mr Roberts today I am fortified in that conclusion. Nor need I concern myself with the reasons of the partnership or of Mr Whishaw, that is the reasons behind Mr Whishaw's retirement from the partnership, other than to note certain uncontested material in the principal affidavit. The partnership's practice has been to calculate entitlements or liabilities of partners leaving or joining the firm by reference to the net position of the partner, the partner's family trust, the partnership, and its service companies, including Raasay. After his resignation on 31 March 1995, the partnership determined Mr Whishaw's 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, Mibor Investments Pty Ltd 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, Chadwick Industries South Coast Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39. In JSW Parts Pty Ltd v Dacaro Pty Ltd, (unreported, 11 August 1997), Finkelstein J 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. In Spencer Constructions Pty Ltd v G and M Aldridge Pty Ltd (1997) 147 ALR 444, the Full Court 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 Finkelstein J in Vehicle Wash Systems v Mark VII Equipment Inc (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 Stuart Alden Roberts, 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) Raasay Proprietary Limited, Scapa Flow Proprietary Limited, the firm Archer Bushby and Simon Whishaw have conducted their affairs upon the assumption that upon the entry or exit or partners of Archer Bushby the obligations of Raasay to the unit holder controlled by the partner would be set off against the partner's obligations to the firm 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 Whishaw's own admission as a partner (c) the preparation of group accounts for the purposes of calculating partners entitlements (d) Mr Whishaw's acceptance of the netting-off approach over the course of his partnership and in relation to his own resignation in March 1995 (2) Each of Archer Bushy and Raasay has arranged their affairs in reliance upon the assumption and in particular Raasay has (a) issued a unit in the Raasay Unit Trust to Scapa Flow for no consideration (b) borrowed money from unit holders and in turn lent substantial sums unsecured to the partnership (c) made distributions to Scapa Flow (d) issued units and cancelled units upon terms which were premised upon the netting-off assumption (3) The nature of the association between Archer Bushby and Raasay 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: Amalgamated Investment and Property Company v Texas Commerce International Bank Limited (1982) Q.B.84 (2) the estoppel may preclude departure from an assumption as to the parties to a contract (Amalgamated Investments) 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: Stuart Miller v Custom Credit (1986) 4 ACLC 105 (3) the relevant assumption need not be expressed and may be inferred from conduct or even from silence: The Indian Grace (1996) 2 Lloyds Reports 12 at 20. Having concluded the existence of a genuine dispute it follows that the application will be granted with costs. The Court 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: Mr Simon Whelan QC Solicitor for the Applicant: J K Levis Counsel for the Respondent: Mr Philip Zeeman Solicitor for the Respondent: Gunson, Pickard & Hand Date of Hearing: Hobart, 4 February 1998 Date of Judgment: Hobart, 4 February 1998