FEDERAL COURT OF AUSTRALIA Trecomax Pty Ltd v Prentice [2004] FCA 1057 CORPORATIONS – winding up – application to set aside statutory demand – applicant trustee of administration trust for legal firm – bankrupt a former partner – trustee in bankruptcy claims amount standing to bankrupt's credit in beneficiary loan account with trust – whether genuine dispute as to claims Corporations Act 2001 (Cth) ss 459E, 459G, 459H Corporations Law Bankruptcy Act 1966 (Cth) ss 58, 116 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 applied Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 referred to Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 referred to Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 referred to Panel Tech Industries v Australian Skyreach (No 2) [2003] NSWSC 896 cited Delnorth v State Bank of New South Wales (1997) 17 ACSR 377 cited Burdon Pty Ltd v Gillford Pty Ltd [1995] FCA 1096 cited McPherson, The Law of Company Liquidation (3rd ed, 1987) McPherson, The Law of Company Liquidation (4th ed, 1999) TRECOMAX PTY LTD v MAXWELL WILLIAM PRENTICE as the Trustee of the Bankrupt Estate of David John Daniels NSD 406 of 2004 SACKVILLE J SYDNEY 17 AUGUST 2004 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 406 of 2004 BETWEEN: TRECOMAX PTY LTD APPLICANT AND: MAXWELL WILLIAM PRENTICE as the Trustee of the Bankrupt Estate of David John Daniels RESPONDENT JUDGE: SACKVILLE J DATE OF ORDER: 17 AUGUST 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The creditor's statutory demand made by the respondent on the applicant, dated 5 March 2004, be 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 NEW SOUTH WALES DISTRICT REGISTRY NSD 406 of 2004 BETWEEN: TRECOMAX PTY LTD APPLICANT AND: MAXWELL WILLIAM PRENTICE as the Trustee of the Bankrupt Estate of David John Daniels RESPONDENT JUDGE: SACKVILLE J DATE: 17 AUGUST 2004 PLACE: SYDNEY REASONS FOR JUDGMENT THE ISSUE 1 The applicant ('Trecomax') is the trustee of the Trecomax Service and Administration Trust (the 'Trust'). Since the Trust was established on 17 September 1992, Trecomax has carried on the business of providing administration services to the legal partnership now known as TressCox Lawyers, but which prior to 1 March 2004 was known as Tress Cocks & Maddox, Lawyers ('Partnership'). 2 The respondent is the trustee of the bankrupt estate of David John Daniels (the 'Bankrupt'). The Bankrupt was, from 1 November 1991 until 1 March 2002, a partner of the Partnership. The Bankrupt lodged a debtor's petition at some time in March 2002 and a sequestration order was made against his estate on 26 March 2002. 3 On 5 March 2004, the respondent served Trecomax with a demand pursuant to s 459E of the Corporations Act 2001 (Cth) ('Corporations Act'). The debt was described as follows: 'Balance of a beneficiary loan account belonging to David John Daniels $161,697.79' 4 Trecomax has applied to the Court under s 459G(1) of the Corporations Act for an order setting aside the statutory demand. The question is whether the Court is satisfied that 'there is a genuine dispute between [Trecomax] and the respondent about the existence … of [the] debt' (s 459H(1)(a)). If so, the demand must be set aside (s 459H(3), (5)). the course of events 5 The evidence adduced by Trecomax was not contested, although an issue arises as to the sufficiency of that evidence to support its claim that there is a genuine dispute between the parties. The course of events is as follows. 6 The Partnership has been in existence since 1897. The Bankrupt joined the Partnership as an equity partner on 1 November 1991. From July 1992, the terms and conditions on which the members of the Partnership ('Partners') carried on practice were contained in a partnership deed executed on 30 July 1992. 7 On 17 September 1992, a deed of settlement was executed establishing the Trust as a discretionary trust (the 'Trust Deed'). Trecomax executed the Trust Deed as trustee of the Trust. The eligible beneficiaries under the Trust included each partner, his or her own family trust and his or her family members. 8 On 18 September 1992 Trecomax entered into an agreement with the Partners, whereby Trecomax undertook to provide administrative services in connection with the practice carried on by the Partnership. 9 On 30 June 1998, the Partnership adopted Articles of Partnership (the 'Articles') which superseded any previous agreement between the Partners except as expressly stated otherwise. The Articles provided for the entitlements of a retiring Partner. The relevant provisions include cll 7, 10, 31 and 40. 10 Clause 7 of the Articles provides as follows: 'Partnership profit is the aggregate of the following: (a) the profit available for distribution to Partners in each year; (b) the amount available for distribution from the partnership administration trust; and (c) the amount of salaries and superannuation contributions paid to Partners or on their behalf as employees of the partnership administration trust.' (Emphasis in this and succeeding extracts in original.) 11 The expression 'partnership administration trust' is not defined. However, cl 40.1 states that '[t]he Partners maintain and control an administration trust for the provision of non-professional services to the partnership and for the benefit of the partnership as a whole, as distinct from individual Partners'. There is no dispute that the administration trust referred to in cl 40.1 is the Trust. Clause 40.2(a) provides that each Partner holds shares in Trecomax on trust for the Partners and for the benefit of the Partnership and has no beneficial interest in the shares. On a partner ceasing to be a partner, he or she must transfer the shares registered in his or her name as the Partners direct. 12 Clause 10 of the Articles relevantly provides as follows: '10.1 What are the Current Accounts Each Partner has current accounts in the Partnership accounts and in the administration trust accounts to record: (a) each Partner's share of profit; (b) each Partner's drawings on account of profit; (c) amounts allocated to each Partner's family trust or other arrangement; and (d) other credits or debits as these Articles or partnership policies authorise. 10.2 Annual Equalisation of Current Accounts Each Partner whose total current accounts are in debit must pay in an amount equal to the debit by the later of: (a) 30 days after the Board of Partners adopts the previous year's accounts; or (b) 31 October.' 13 Clause 31.2 of the Articles is critical to Trecomax's contentions in the present case. It provides as follows: '31.2 Retiring Partner's Entitlements (a) The Partners must pay to a retiring Partner: (i) his or her share of fixed capital calculated as at the retirement date; and (ii) the amount standing to the balance of his or her current account after annual equalisation of current accounts under clause 10.2 for the financial year in which the Partner retired. (b) The Partners may deduct from a retiring Partner's entitlement: (i) his or her share of any loss incurred for the year in which he or she retires; and (ii) the amount standing to the debit of his or her current accounts as at the retirement date.' 14 On or about 28 February 2002, the Partners entered into a 'Consultancy Deed' with the Bankrupt. The Consultancy Deed recorded that the Bankrupt proposed to present a debtor's petition and that the Partners wished to retain his services as a consultant 'on the terms of this Deed and on the basis of the representations made by the Consultant and on the understandings and expectations referred to in this Deed'. 15 Under the Consultancy Deed the Partners agreed that the Bankrupt should retire from the Partnership on 1 March 2002 (cl 2.1). As from that date, the Bankrupt was to resign as director and secretary of Trecomax and to relinquish his shareholding (cl 2.3). The Partners agreed to pay to the Bankrupt or his trustee in bankruptcy his fixed capital in accordance with the Articles (cl 2.4). 16 On 26 March 2002, the sequestration order was made against the Bankrupt's estate and the respondent was appointed trustee of the estate. 17 The financial statements for the Trust for the year ended 30 June 2002, were completed on 7 March 2003. Note 11 to the financial statements records the beneficiary loan account ('BLA') for the Bankrupt as follows: 2002 2001 Opening balance 63,320.92 (341,861.00) Promissory notes 341,861.00 Equalisation Distribution of profit for the year 173,048.87 (179,162.92) Less: drawings (74,672.00) (115,842.00) Closing balance 161,697.79 63,320.92 18 On 22 August 2003, the respondent's solicitors wrote to Trecomax stating that the credit balance in the BLA was an asset of his bankrupt estate. The letter demanded payment of the credit balance of $161,698. The letter did not expressly state that the amount would be claimed from Trecomax (as distinct from the Partnership) but so much could be inferred from the fact that the letter was addressed to Trecomax. 19 The respondent issued a report to creditors dated 13 November 2003. Although that report was not in evidence I infer from subsequent correspondence that the report stated that the respondent proposed to commence legal action against the Partnership (as distinct from Trecomax) to recover the sum of $161,698. 20 On 11 December 2003, the Partnership lodged a proof of debt with the respondent claiming the sum of $14,882 as due from the Bankrupt to the Partnership. This amount was calculated as follows: Amounts owing to DJD from TCM/TMAX [$] Balance of fixed capital owing to DJD 110,489 TMAX Current account underdrawn 161,698 Total due to DJD from TCM/TMAX 272,187 Amounts owing to TCM/TMAX from DJD TCM Current account overdrawn 277,503 Loan 9,566 Total due to TCM/TMAX from DJD 287,069 BALANCE OF FUNDS OWING BY DJD (14,882) The acronyms in the calculations refer, respectively, to the Bankrupt ('DJD'), the Partnership ('TCM') and Trecomax ('TMAX'). 21 On 12 December 2003, the Partnership's solicitors wrote to the respondent stating that any claim by him against the Partnership would be defended and that no amounts were due by the Partnership to the respondent in his capacity as trustee of the Bankrupt's estate. The letter drew attention to cll 7, 31 and 40 of the Articles and pointed out that a partner was entitled on retirement only to the amount standing to his or her credit in the accounts of the Partnership. 22 On 16 December 2003, the respondent rejected the Partnership's proof of debt on the ground that 'you are unable to offset the amount owing to David John Daniels by Trecomax Pty Limited and the amount owed to Tress Cocks & Maddox by David John Daniels pursuant to section 86 of the Bankruptcy Act, because these amounts are not mutual.' 23 On 16 December 2003, the respondent's solicitors stated in a letter to the Partnership's solicitors that the respondent's claim was not against the Partnership (as the Partnership's solicitors had said in the letter of 12 December 2003), but against Trecomax. To the extent that the report to creditors had suggested otherwise, the position was now 'clarified'. 24 By a letter dated 23 December 2003, Trecomax's solicitors set out what was said to be the basis of Trecomax's defence to the claim as follows: 'The fact is that the bankrupt received the benefit of the payments due to him by Trecomax. The payments due by Trecomax to the bankrupt were paid at his direction to Tress Cocks & Maddox pursuant to the terms of the Partnership Agreement to which reference was made in our 12 December letter. That payment clearly operates as a complete discharge of the debt.' the teSt of a 'genuine dispute' 25 The test for determining whether there is a 'genuine dispute' for the purposes of s 459H(1)(a) of the Corporations Act was addressed by a Full Court of this Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452. The Court (Northrop, Merkel and Goldberg JJ) pointed out that the decided cases contain many explanations of the statutory expression. Among the cases cited by the Full Court are three to which I refer below. 26 In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 (SCt Qld), Thomas J said (at 605) that: 'there is little doubt that Div 3 [of Part 5.4 of the Corporations Law] is intended to be a complete code which prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim". It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).' (Emphasis added.) 27 In Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290, Hayne J pointed out (at 293) that there has long been a practice, as a matter of discretion, that a winding-up order will not be made on a debt which is bona fide disputed, provided the dispute is on substantial grounds. His Honour endorsed the reason given by McPherson, The Law of Company Liquidation (3rd ed, 1987), at 63, for the practice, namely 'that a winding-up application is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt which would certainly be discharged as soon as the company's liability was shown clearly to exist.' 28 Hayne J expressed the view that this consideration applied equally to Div 3 of Part 5.4 of the Corporations Law (the predecessor to Div 3 of Part 5.4 of the Corporations Act). His Honour pointed (at 294-295) that other considerations should also be taken into account: 'First, any application to set aside a statutory demand must be made very quickly: it must be made within 21 days. Secondly, the statute contemplates a summary procedure, the only outcome of which will be an order affecting the statutory demand, not any order or judgment declaring a debt to be owing or not to be owing or ordering payment of any money sum. Thirdly, the only significance that the statutory demand has is that if there is failure to comply with it then the company is deemed to be insolvent. Thus the demand is no more than a precursor to an application for winding-up in insolvency. Fourthly, an application to wind up in insolvency must be determined within six months (unless the court is satisfied that special circumstances justify an extension of that time) (s 459R). Fifthly, on the hearing of the application to wind up, the company may not oppose the application on grounds that it might have taken in any application to set aside the demand, unless those grounds are material to proving that the company is solvent. These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.' (Emphasis added.) 29 In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 (SCt NSW), McLelland CJ in Eq cited passage from Re Morris Catering and Mibor Investments with approval. His Honour expressed the view (at 787) that the expression 'genuine dispute': 'connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the "serious question to be tried" criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be" not having "sufficient prima facie plausibility to merit further investigation as to [its] truth" or "a patently feeble legal argument or an assertion of facts unsupported by evidence". But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute.' (Emphasis added; citations omitted.) 30 The Court in Spencer Constructions, after referring to those authorities said (at 464) that: 'a "genuine" dispute 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. We consider that the various formulations referred to above can be helpful in determining whether there is a genuine dispute in a particular case, so long as the formulation used does not become a substitute for the words of the statute.' 31 The latest edition of McPherson, The Law of Company Liquidation (4th ed, 1999) identifies (at 85-88), by reference to the cases discussed above and to others, five slightly different tests for determining whether there is a 'genuine dispute'. However, the learned author expresses the view that the various tests do not seem to differ in substance and points out that the Court must bear in mind that, whatever test is invoked, it is not expected to finally determine the rights and obligations of the parties. 32 The same point has recently been made by Barrett J in Panel Tech Industries v Australian Skyreach (No 2) [2003] NSWSC 896, at [18]: 'These tests [stated in the authorities], applied in the context of a summary procedure where it is not expected that the court will embark on any extended inquiry, mean that the task faced by a company challenging a statutory demand on the "genuine dispute" ground is by no means at all a difficult or demanding one. 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.' 33 In Spencer Constructions, the Full Court thought (at 463) it clear from the authorities that 'in considering applications to set aside a statutory demand, a court will not determine contested issues of fact or law which have a significant or substantial basis'. (Emphasis added.) This suggests that the Court should not investigate contested legal issues, beyond determining whether the argument has a 'significant or substantial basis'. 34 There are authorities which support the proposition that if the facts are not in dispute, the Court can decide the question of law. Thus in Delnorth v State Bank of New South Wales (1997) 17 ACSR 377 (SCt NSW), Cohen J considered (at 384-385) that where no further investigations of the facts was required, the Court, in an application under s 459G of the Corporations Law could decide, as a matter of law, whether there is a genuine dispute. His Honour thought that the occasions where this is possible might be 'few', but he proceeded in that case to resolve the question of law. See, too, Burdon Pty Ltd v Gillford Pty Ltd [1995] FCA 1096, per Hill J, with whom Whitlam J agreed. 35 While this approach is open, in my view the Court should take care to ensure that it does not go beyond the role that is appropriate, having regard to the considerations identified by Hayne J in Mibor Investments and the approach endorsed by the Full Court in Spencer Constructions. The procedure established by Div 3 of Part 5.4 of the Corporations Act is not ordinarily the occasion for final resolution of a dispute, even if the matter in contest rests on a question of law. The question for the Court is whether there is a genuine dispute about the existence or amount of the debt. is there a genuine dispute? 36 The respondent's claim that he is entitled to recover $161,698 from Trecomax is straightforward. The steps in the argument are as follows: * The accounts of the Trust for the year ended 30 June 2002 show that during that year Trecomax exercised its discretion under the Trust Deed to apply income of the Trust in the sum of $173,048 to the Bankrupt. * The BLA for that year shows a credit balance for the Bankrupt of $161,698 (see [17] above). * The ledgers for Trecomax contain no entries reflecting any 'equalisation' of his accounts prior to his bankruptcy on 26 March 2002. * Upon the bankruptcy, all the Bankrupt's right to collect debts due to him by Trecomax, or to enforce any claim he had against Trecomax, vested in the respondent, as his trustee in bankruptcy, pursuant to ss 58(1)(a) and 116 of the Bankruptcy Act 1966 (Cth) ('Bankruptcy Act'). * Even if the exercise of Trecomax's discretion in favour of the Bankrupt occurred after the sequestration order had been made, the Bankrupt's right to claim the credit balance of his account vested in the respondent pursuant to s 58(1)(b) of the Bankruptcy Act (which deals with after-acquired property of a bankrupt). * After the date of his bankruptcy, the Bankrupt lacked any capacity to assign the benefit of any right or entitlement he had against Trecomax. * Trecomax is not a party to the Articles. Any process of 'equalisation' required by the Articles applies only to claims as between the Partners and the Bankrupt. In particular, cl 31.2(b) of the Articles, which provides for an amount to be deducted from a retiring Partner's entitlement, cannot operate to bind Trecomax to pay over any amount standing to the Bankrupt's credit in the BLA. Clause 31.2 merely provides a formula for determining the entitlement of a retiring Partner as against the remaining Partners. 37 Trecomax submitted that it had a plausible defence to any claims by the respondent. Some of the contentions in support of this submission appeared to assume, rather than demonstrate, that the Articles were intended to operate so as to prevent a retiring Partner claiming the credit balance of his or her BLA with Trecomax. Like the letter of 11 December 2002 ([21] above), the contentions appeared to regard it as self-evident that the accounts of a retiring Partner with Trecomax and the Partnership were to be set off against each other. If this was the full extent of Trecomax's submissions I would hold that it had advanced no more than a spurious or misconceived argument. 38 As Trecomax's submission was ultimately developed, however, it rested on the proper construction of the Articles. According to Mr Lee, who appeared for Trecomax, the Articles contemplate that pending the equalisation process required by cl 31.2(a)(ii), a retiring Partner cannot recover from Trecomax any amount standing to that Partner's credit in his or her BLA. 39 Mr Lee pointed out that cl 7 of the Articles defines 'partnership profit' to include the amount available for distribution from the 'partnership administration trust' (that is, the Trust). Under cl 31.2 (which incorporates by reference cl 10.2) the equalisation process requires, in effect, a retiring Partner's accounts with the Partnership to be set off against those with Trecomax in order to calculate that Partner's final entitlement. Moreover, cl 40 provides that the Partners (including the Bankrupt) maintain and control the Trust 'for the benefit of the partnership as a whole as distinct from individual Partners'. 40 As I followed the submission, it was that the Articles incorporate an implied term that the Bankrupt would accept his retirement entitlements (if any) in accordance with the formula set out in cl 31.2 and would not seek independently to enforce any entitlement otherwise arising against Trecomax. If this argument were not correct, so it was said, the Bankrupt (or any retiring Partner) could claim the amount to his or her credit in the BLA from Trecomax, yet also receive the benefit of that amount in the calculation of the amount due pursuant to the formula stated in cl 31.2. In other words, the retiring Partner might receive payment, in effect, twice in respect of a credit balance in the BLA. 41 It seems to me that Trecomax's submission faces formidable difficulties. I can see the force of the contention that the Partners must have contemplated or assumed that a retiring Partner could not demand or enforce payment of amounts standing to the credit of his or her BLA with Trecomax independently of the equalisation process provided for in cl 31.2 of the Articles. What is less obvious is how any such contemplation or assumption, whatever the consequences as between a retiring Partner and the remaining Partners, would prevent the retiring Partner from demanding payment of those amounts from Trecomax. 42 Mr Lee's submissions were not entirely clear on the last point. He contended, as I followed him, that the effect of cl 40 of the Articles is to enable Trecomax, as against a retiring Partner, to take advantage of any equity that the remaining Partners would have against that retiring Partner. 43 In my view, this case is close to the borderline of a 'genuine dispute'. Having regard to the authorities to which I have referred, however, I think that Trecomax has shown that it has grounds for alleging the existence of a dispute that, as required by Spencer Constructions are 'real and not spurious, hypothetical, illusory or misconceived' and warrant further investigation. It is not appropriate for me, on the hearing of an application to set aside the statutory demand, to explore the issues further. conclusion 44 An order should be made setting aside the statutory demand made by the respondent on 5 March 2004. 45 Trecomax sought an order for indemnity costs if it succeeded. In my opinion, the case is not one in which such an order should be made. At no stage prior to the service of the statutory demand did Trecomax advance a clear or cogent argument for resisting the respondent's demand on it. The contention put forward in Trecomax's letter of 23 December 2003 ([25] above) was not pursued or defended. Trecomax has satisfied me that it should obtain the relief that it seeks, but it has done so by a fine margin. The respondent should pay Trecomax's costs on the usual basis. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville. Associate: Dated: 17 August 2004 Counsel for the Applicant: MBJ Lee Solicitor for the Applicant: Freidman Reeve Counsel for the Respondent: A Spencer Solicitor for the Respondent: Bartier Perry Date of Hearing: 29 July 2004 Date of Judgment: 17 August 2004