Reported Decision : (2007) 25 ACLC 1,374 New South Wales Supreme Court CITATION : Roadships Logistics Ltd v Tree [2007] NSWSC 1084 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 28/09/07 JUDGMENT DATE : 28 September 2007 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 28 September 2007 DECISION : Order that statutory demand be set aside. Order that defendant pay plaintiff's costs. CATCHWORDS : CORPORATIONS - winding up - statutory demand - application to set aside - whether genuine dispute as to existence of debt - CORPORATIONS - fundraising - debt said to arise from and reflect rights of defendant under s.724 of Corporations Act - disclosure document issued by plaintiff in relation to offer of shares for subscription - chief executive of plaintiff later dismissed - shares later issued - whether s.724 gave defendant right of action to recover subscription moneys LEGISLATION CITED : Acts Interpretation Act 1901 (Cth), s.13 Corporations Act 2001 (Cth), ss.5C, 9, 459E(1)(a), 459G, 459H(1)(a), 724, 728, 729, 737 Cackett v Keswick [1902] 2 Ch 456 Commissioner of State Taxation v Pollock (1993) 12 ACSR 217 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 CASES CITED : ICAL Ltd v County Natwest Securities Australia Ltd (1988) 39 NSWLR 214 Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 601 Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; 147 ALR 444; (1997) 24 ACSR 353 West Gold Resources NL v Metals Australia Ltd (2002) 41 ACSR 67 PARTIES : Roadships Logistics Limited - Plaintiff Brian Tree as Trustee for the Tree Superannuation Fund - Defendant FILE NUMBER(S) : SC 4547/07 COUNSEL : Mr C.R.C. Newlinds SC/Ms J. Shepard - Plaintiff Mr M. Donnelly, Solicitor - Defendant SOLICITORS : Piper Alderman - Plaintiff Donnelly & Associates - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 28 SEPTEMBER 2007 4547/07 ROADSHIPS LOGISTICS LIMITED v BRIAN TREE AS TRUSTEE FOR THE TREE SUPERANNUATION FUND JUDGMENT 1 The plaintiff applies under s.459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand dated 28 August 2007 served on it by the defendant. The alleged debt to which the statutory demand relates is in the sum of $200,000 and is described in the schedule to the statutory demand as follows: " Description of Debt Amount of Debt 1. The Creditor applied for shares in the Company and paid the sum of $200,000.00 to the Company pursuant to an Offer Information Statement dated on or about 6 December 2005 ('the OIS'). 2. After the monies referred to in paragraph 1 herein were paid, the Chairman and Chief Executive Officer ('CEO') of the Company at the time the OIS was published, namely, Michael Nugent ('Mr Nugent') was removed from those positions within the Company. 3. In breach of section 719 of the Corporations Act 2001 (Cth) ('The Act'), no supplementary or replacement OIS has been delivered to the Creditor advising as to the removal of Mr Nugent. 4. The Creditor, as an investor, regards the removal of Mr Nugent as being a matter that is materially adverse to the prospects of the Company. 5. The Creditor, as an investor, would not have applied for shares in the Company had he known that Mr Nugent would not be Chairman and/or CEO of the Company. 6. In view of the matters referred to in paragraphs 1 to 5 herein, the Company has breached section 719 of the Act. 7. The Creditor seeks to invoke his rights under section 724 of the Act and demands the payment in full of the sum of $200,000.00 which was paid to the Company pursuant to the OIS. $200,000.00 TOTAL OUTSTANDING $200,000.00 " 2 The affidavit accompanying the statutory demand in accordance with s.459E(3) describes the alleged debt in the same terms. The affidavit states that "the amount is due and payable by the Company", that is, by the plaintiff. 3 The plaintiff's contention is that there exists a genuine dispute as to the existence of any such debt. The application under s.459G is therefore advanced on the grounds specified in s.459H(1)(a). 4 I begin with what I understand to be uncontroversial facts. In December 2005, the plaintiff issued an offer information statement in connection with a proposal to solicit subscriptions for shares in the capital of the plaintiff. A statement of this kind is within the definition of "disclosure document" in s.9 of the Corporations Act. At the time the offer information statement was issued and during the period of solicitation under it (which extended up to late March 2006), Mr Nugent was the chairman and chief executive officer of the plaintiff. The fact that Mr Nugent held these positions was, not surprisingly, referred to in the offer information statement. The defendant applied for shares in the plaintiff under the offer information statement. The plaintiff issued shares to the defendant in response to and in satisfaction of his application. The shares were issued on or after 27 March 2006 pursuant to a resolution of the directors of the plaintiff passed at a meeting of directors held on that day. 5 It is necessary to say more about the events on that particular day. At the meeting of directors on 27 March 2006, the directors resolved that Mr Nugent be removed from his positions as chairman and chief executive officer with immediate effect. At a later stage in the same meeting, the resolution for the issue of shares applied for under the offer information section was passed – including the shares applied for by the defendant. 6 It is the contention of the defendant that, upon Mr Nugent's removal as chairman and chief executive becoming effective, either the offer information statement came to contain a "misleading or deceptive statement" or there arose "a new circumstance" that would have been required by applicable statutory provisions to be included in the offer information statement if the circumstance had arisen before the statement was lodged. Events of this description are central to the operation of s.724(1) of the Corporations Act: see s.724(1)(c) and s.724(1)(d). The provisions of s.724 relevant to the present case are as follows: " Choices open to person making the offer if disclosure document condition not met or disclosure document defective (1) If a person offers securities under a disclosure document and: (a) the disclosure document states that the securities will not be issued or transferred unless: (i) applications for a minimum number of the securities are received; or (ii) a minimum amount raised; and that condition is not satisfied within 4 months after the date of the disclosure document; or (b) the disclosure document states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and: (i) an application for the admission to quotation is not made within 7 days after the date of the disclosure document; or (ii) the securities are not admitted to quotation within 3 months after the date of the disclosure document; or (c) the person becomes aware that: (i) the disclosure document contains a misleading or deceptive statement; or (ii) there is an omission from the disclosure document of information required by section 710, 711, 712, 713, 714 or 715; that is materially adverse from the point of view of an investor; or (d) the person becomes aware of a new circumstance that: (i) has arisen since the disclosure document was lodged; and (ii) would have been required by section 710, 711, 712, 713, 714 or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged; and (iii) is materially adverse from the point of view of an investor; the person must deal under subsection (2) with any applications for the securities made under the disclosure document that have not resulted in an issue or transfer of the securities. For the purpose of working out whether a condition referred to in paragraph (a) has been satisfied, a person who has agreed to take securities as underwriter is taken to have applied for those securities. (1A) An offence based on subsection (1) is an offence of strict liability. Note: For strict liability , see section 6.1 of the Criminal Code . (2) The person must either: (a) repay the money received by the person from the applicants; or (b) give the applicants: (i) the documents required by subsection (3); and (ii) 1 month to withdraw their application and be repaid; or (c) issue or transfer the securities to the applicants and give them: (i) the documents required by subsection (3); and (ii) 1 month to withdraw their application and be repaid. Note: Section 719 deals with lodging supplementary and replacement documents. Section 728 makes it an offence for a person to offer securities if the disclosure document is deficient in a way that is material from the point of view of an investor. …" 7 Having regard to the description of the alleged debt in the statutory demand, the operation of s.724 is central to the contention of the defendant that a debt owing, due and payable now exists – or, more precisely, existed so as to justify the issue of the statutory demand dated 28 August 2007. 8 The defendant says that the newly arising misleading or deceptive statement or the new circumstance represented by the removal of Mr Nugent on 27 March 2006 "was materially adverse from the point of view of an investor", that being a form of words appearing in both s.724(1)(c) and s.724(1)(d). The defendant also says that the plaintiff knew of the materially adverse change or event. These contentions depend upon objective assessment in two areas, and I emphasise that in my view the "investor" referred to in the expression "is materially adverse from the point of view of an investor" is, if you like, a hypothetical reasonable investor, not a particular idiosyncratic investor. In other words, the test is an objective test: see, in a comparable context, the reference by Bryson J in ICAL Ltd v County Natwest Securities Australia Ltd (1988) 39 NSWLR 214 to "[t]he shareholder whom I should hypothesise for the purpose of materiality". 9 The first issue of objective assessment raised by the words in question concerns the significance, from the point of view of disclosure under prospectus content requirements, of a statement about who holds in the company the positions Mr Nugent held in this particular case. The second area concerns the capacity of the newly emerged information about the occupancy of such a position to affect the decision of the ordinary would-be investor whether or not to make the investment, this being the test of materiality which has long been applied in this area of the law: see for example, Cackett v Keswick [1902] 2 Ch 456. For s.724(1) to be activated, it would have to be found that any such capacity was adverse, in the sense of turning the would-be investor away rather than making him or her more willing to invest. 10 It is obvious that an assessment of this kind could not be made in a factual vacuum. To put the matter simply, there would be a difference between the case of dismissal and departure of a wise, enlightened and skilful officer and the case of dismissal and departure of a bumbling, inept and unskilful officer. In short, a factual inquiry would be necessary to decide whether the event of Mr Nugent's dismissal and departure was an event triggering s.724(1). 11 The defendant says that the event was of that quality and that I should so find. That is not the correct approach. The cases make it very plain that anything beyond fairly cursory factual investigation of the underlying merits is foreign to applications of this kind. The only question before me is whether there exists a genuine dispute as to the existence of the debt referred to in the statutory demand. To the extent that answer to the question of the existence of the debt goes to factual matters of any complexity, an application of this kind is not the occasion for those depths to be plumbed. 12 Let it be assumed, however, that the s.724(1) threshold was crossed at the point when Mr Nugent was removed from relevant positions on 27 March 2006. Let it be assumed, as part and parcel of what I have just said, that, at the point of Mr Nugent's removal, the defendant's application for shares under the offer information statement was still pending in the sense that no shares had been issued in response to his application. On the basis of those assumptions, let me consider the impact and effect of s.724(1). 13 What s.724(1) does in the assumed circumstances just stated is to require something to be done by the issuer of the relevant disclosure document, in this case, the plaintiff as the issuer of the offer information statement. That person, "must deal under subsection (2) with any applications for the securities made under the disclosure document that have not resulted in an issue or transfer of the securities". 14 It is necessary then to turn to s.724(2) which gives content to the s.724(1) obligation. Section 724(2), although somewhat curiously employing the word "either", refers to three courses of action and says that the person subjected to the obligation referred to in s.724(1) must adopt one of those three courses of action. What it does not say is how the choice among the three alternatives is to be made. 15 I note that submissions entertained by the Supreme Court of Western Australia in West Gold Resources NL v Metals Australia Ltd (2002) 41 ACSR 67 proceeded on the basis that the person fixed with the obligation to act (that is, the offeror of securities under the disclosure document) is the person who makes the choice among the three courses of action. That is also indicated by the heading to s.724, "Choices open to person making the offer if the disclosure document condition cannot be met or disclosure document defective" – although I do note that the applicable interpretation provision (s.13 of the Acts Interpretation Act 1901 (Cth) as in force on 1 November 2000 and as applied by s.5C of the Corporations Act itself) tells us that the heading to a section, as distinct from a part or division or subdivision, is not part of the Act. On the other hand, there is a suggestion, without discussion, at paragraph 17.192 of the work by Emeritus Professor Ford, Justice Austin and Professor Ramsay ("Ford's Principles of Corporations Law" current looseleaf edition) that, in a s.724(1) case, "investors to whom securities have not yet been issued must be given the options specified in s.724(2)". This implies that it is the persons with applications still pending who choose among the s.724(2) alternatives. 16 Looking at the legislation itself, it is my view that the correct interpretation is virtually certainly that which puts the choice into the hands of the person carrying the obligation, that is the person making the offer under the disclosure document. 17 Let me continue for the moment in the realm of assumption – assumption, I emphasise, favourable to the defendant. Assume that the s.724(1) obligation became binding on the plaintiff. I think it is common ground that the plaintiff did not adopt one of courses specified in s.724(2). It issued the shares to the defendant, thereby satisfying s.724(2)(c) in part; but it did not do the other things mentioned in s.724(2)(c). What follows? According to the defendant, the consequence of the plaintiff's failure to follow through to completion any of the three courses described in s.724(2) is that the plaintiff became indebted to the defendant in a sum equal to the amount received by the plaintiff from the defendant upon application for the shares. That contention is reflected in the terms of the statutory demand. The defendant asserts that such a debt owing, due and payable by the plaintiff to the defendant has arisen because of or in the form of the defendant's "rights under s.724 of the Act". 18 The plaintiff says that even if all things necessary to activate s.724(1) occurred so that it became bound by statute to "deal under subsection (2)" with applications for shares which included the defendant's application, there has not thereby arisen, in terms of s.459E(1)(a), a "debt" that the plaintiff owes to the defendant. 19 There can be no real doubt, in my view, that if a statute commands one person to pay money to another, the first person is indebted to the second person, provided that the relevant statute makes it clear, either expressly or by implication, that the second person may sue to recover the money. The judgments in the Supreme Court of Western Australia in Commissioner of State Taxation v Pollock (1993) 12 ACSR 217 are instructive in that respect. 20 In the present context it is by no means at all clear that s.724(2) contains an indication that a person in the position assumed to be occupied here by the defendant may sue to recover money. If the correct approach to the section is, as it seems to me most likely to be, that it is for the person in the position of the plaintiff to elect among the three alternatives specified in s.724(2), I can see no basis on which a right to sue could be said to be created in the applicant for shares. But even if it is the person in the position of the defendant who is to make the choice among the three alternatives, there must still be very significant doubt indeed whether a statutory right to sue to recover a debt is created. There are two reasons for this. First and it is made clear by s.724(1A), failure to comply with s.724(1) entails criminal consequences. The legislature has thus specified one result of failure to comply. Second, another such consequence is stated in s.737 where, as here, the securities have been issued: " Remedies for investors Right to withdraw and have money returned (1) If securities are issued to a person in contravention of section 724 (situation calling for a supplementary or replacement document), the person has the right to return the securities and to have their application money repaid. This is so even if the company that issued the securities is being wound up. (2) A right referred to in subsection (1) is exercisable by written notice given to the company within 1 month after the date of the issue. (3) If the body or the seller does not repay the money as required by subsection (1), the directors of the body or seller are personally liable to repay the money." 21 In making the s.737 remedy available (albeit subject to a time limit), the legislature is making it clear that contravention of s.724 may attract in favour of the allottee of securities what is really a statutory right to rescind and to recover the money paid for the securities, subject to surrender of the securities. That is quite at odds with any notion that the s.724 contravention itself gives rise to a right to a sum equal to the application moneys arises, which right may be enforced by debt recovery action. 22 A disclosure document which comes to be defective because of events after its issue might also attract the operation of s.729 which confers a right to recover "the amount of the loss or damage" suffered by a person because of the defect. The existence of this possibility is also inconsistent with the case the defendant seeks to make. A right to recover "loss or damage" is obviously not a debt. 23 In the present proceedings, I am called upon to decide no more than whether there exists a genuine dispute as to the existence of the alleged debt described in the statutory demand. As I have said, that alleged debt is described in terms which make it abundantly clear that the only source of the right to payment relied on by the defendant is s.724 of the Corporations Act. The crucial issue is therefore whether the plaintiff has shown that there is a plausible basis for a contention that s.724 is not the source of any such right, and that the right alleged debt therefore does not exist. 24 In defining the test in that way, I am mindful of well known cases such as Eyota Pty Ltd v Hanave (1994) 12 ACSR 785, Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290, (1003) 11 ACSR 601, Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 and Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 451, 147 ALR 444, (1997) 24 ACSR 353. As I have said before, these cases make it clear 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 the 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 on rational grounds that indicates an arguable case on the part of the company it must find that a genuine dispute exists even where any case, even apparently available to be advanced against the company seems stronger. 25 In the present case, the arguments advanced by the plaintiff in support of the contention that s.724 is not the source of any debt owing, due and payable by the plaintiff to the defendant are very strong – indeed, virtually certain to succeed. There is without any shadow of a doubt a genuine dispute of the kind upon which the plaintiff relies in pursuing its s.459G application. The order of the court will therefore be that the statutory demand dated 28 August 2007 served on the plaintiff by the defendant be set aside. [Submissions on costs] 26 The plaintiff considers itself entitled to an order for costs and I do not understand the defendant to seek to resist that. The plaintiff further says that costs should be awarded on the indemnity basis and, in that respect, it relies on certain pre-trial correspondence in which the defendant was invited to withdraw the statutory demand and reference was made to its perceived shortcomings. 27 I do not consider this to be an appropriate case for indemnity costs. I say this for two reasons. First, the pretrial correspondence proceeded on a different factual basis. Second, the provisions of the Corporations Act are not perhaps wholly clear in their operation and have not been the subject of any judicial decision, so far as I can discover, relevant to the issues between the parties. I refer in my reasons to a statement in the leading textbook on corporations law which might, at face value, be taken to suggest that there was some possible merit, at least in part, in the line the defendant took. 28 The orders are therefore as follows: 1. Order that the statutory demand dated 28 August 2007 served by the defendant on the plaintiff be set aside. 2. Order that the defendant pay the plaintiff's costs of the proceedings. ********** 04/10/2007 - Incorrect spelling of counsel - Paragraph(s) Under heading "Counsel" on cover sheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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