New South Wales Supreme Court CITATION : ACN 000 016 213 v KYLE [2006] NSWSC 544 HEARING DATE(S) : 01/06/2006 JUDGMENT DATE : 11 July 2006 JURISDICTION : Equity Division JUDGMENT OF : Associate Justice Macready at 1 CATCHWORDS : Corporations Law. Application to set aside statutory demand under s 459G of the Corporations Act. Whether the circumstances giving rise to an estoppel make the alleged dispute not a genuine dispute. PARTIES : ACN 000 016 213 Pty Limited (Subject to a Deed of Company Arrangement) ACN 000 016 213 v Kyle House Pty Limited ACN 093 087 373 FILE NUMBER(S) : SC 5679/2005 COUNSEL : Mr JT Johnson for plaintiff Mr R Parsons for defendant SOLICITORS : Watson Mangioni for plaintiff Norbert Lipton & Co for defendant - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Associate Justice Macready Tuesday 11 July 2006 5679 of 2005 ACN 000 016 213 PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 000 016 213 v KYLE HOUSE PTY LIMITED ACN 093 087 373 JUDGMENT 1 His Honour: This is an application by the plaintiff, ACN 000 016 213 Limited, to set aside a statutory demand pursuant to section 459G of the Corporations Act 2001. The demand was dated 11 October 2005 and claimed a sum of $54,406.12 being arrears of rent said to be payable by the plaintiff to the defendant for the months of July, August, September and October 2005. Background history 2 On or about 29 October 2001, the plaintiff and the defendant entered into a lease at shop 1, Ground Floor, Kyle House, 27-31 Macquarie Place, Sydney. The lease was for a term of 5 years commencing on 1 December 2001 and terminating on 30 November 2006. The rent was payable by monthly instalments of $10,750.00 plus GST plus outgoings under the lease. The Plaintiff entered into possession of the premises pursuant to the lease and conducted from the premises a stationery and office supplies shop. 3 On 8 March 2004 David Lombe and John Lethbridge Greig, of Deloitte Touche Tohmatsu Chartered Accountants, were appointed administrators of the company, pursuant to section 436A of the Act, as and from 8 March 2004. 4 The administrators continued to pay the rent payable under the lease. 5 In June 2004 there was a Deed of Company Arrangement which had effect from 25 June 2004. At that stage the company was still carrying on business and rent continued to be paid under the lease. 6 On 28 February 2005 the plaintiff company vacated the property the subject of the lease and in March 2005 handed the keys over to the Managing Agent so that they could look for a replacement tenant. Rent continued to be paid for the four months from the date the property was vacated up to and including June 2005. Rental payments then ceased and as can be seen the demand seeks recovery of the next four months' rent which was not paid. The plaintiff's claims 7 The plaintiff raises the following matters in order to set aside the statutory demand. 1. Two other reasons pursuant to section 459J(1)(a) of the Act. 2. A genuine dispute which arises because of the provisions of the Deed of Company Arrangement in respect of outstanding rent. 3. An offsetting claim in respect of four months' rent which it was said was paid by mistake of fact for the months of March to June 2005. 4. A failure of the defendant to mitigate its losses. Two other reasons pursuant to section 459J(1)(a) of the Act. 8 The first matter relates to the address of the creditor which is required to be stated in the demand. The address was given in the demand as care of John Townsend, Lawyer, 109 Pitt Street, Sydney, NSW 2000. The demand was served at an address in the Australian Capital Territory and therefore it did not comply with the requirements of Form 509H. However, if there is a defect in a demand the demand can only be set aside under this section if there will be substantial injustice caused unless the demand is set aside. In the present case no such substantial injustice was either advanced or apparent and, accordingly, this challenge fails. 9 The second reason for seeking to set aside the demand for some other reason under s 459J(1(b) was said to arise from the circumstances in which the deponent of the affidavit verifying the demand stated as required by the prescribed form of affidavit: "I believe there is no genuine dispute about the existence of the debt." 10 Previously there was a demand issued in August 2005 for some of the same monies and there was correspondence between the solicitors for the parties in which the plaintiff's solicitors clearly adumbrated what they said were the reasons for the genuine dispute about whether rent was payable as a result of the Deed of Company Arrangement. In that correspondence the then solicitors for the defendant advised that they were taking senior counsel's advice in the relation to the matter. It was suggested that it was not appropriate for Tom Mitsoulas to swear the October affidavit as he was aware of this correspondence. The precise reason why this was said to give rise to some other reason for setting aside the demand in not clear but perhaps it might arguably be in certain circumstances that there might be an abuse of process. 11 Indeed there is evidence from Mr Miitsoulas to which I will refer later that as a result of payments throughout the period of the administration and operation of the Deed of Company Arrangement and a result of the conversations which he had with the plaintiff's officers that he believed that the plaintiff was bound by the lease. 12 This is not a case where there has been a failure to include that paragraph within the affidavit in support because the deponent well knew that he could not swear to it. In such cases demands have been set aside. Here the deponent is prepared to swear to the state of his then belief. There is no evidence before me that would suggest that Mr Mitsoulas did not hold that belief. He has not been cross-examined about it and there is no other material to suggest that, notwithstanding there was this correspondence, he did not believe there was no genuine dispute. The deponent was no doubt acting on advice from those solicitors and others then advising the defendant. Absent any cross-examination or other evidence I would not draw an inference that he did not have the relevant belief and accordingly there can be no question of any abuse of process. A genuine dispute which arises because of the provisions of the Deed of Company Arrangement in respect of outstanding rent 13 The lease giving rise to the defendant's claims was executed in October 2001. The Deed of Company Arrangement bound "creditors" of the plaintiff in respect of all claims the circumstances giving rise to which occurred on or before the date of appointment of the Administrators, excluding claims of certain employees. According to the submissions the amounts claimed by the defendant constituted future rent and future outgoings expressly provided for under the terms of the lease and that those claims for future rent and future outgoing were attached by the Deed of Company Arrangement. 14 The Deed of Company Arrangement contained the provisions which for present purposes are accurately summarised and set out in submissions in the following terms: (a) That subject to Clause 2.3 (Conditions Precedent), the Deed would take effect on the date it was executed by all parties to it. All of the conditions precedent specified in the Deed were complied with; (b) In accordance with section 444D of the Act, all person having a "Claim" against the company (inter alia) were bound by the Deed. "Claim" was defined in Clause 1.1 of the Deed in terms similar to section 553 of the Act (which applies to debts or claims that are provable in winding up), as being: "…A debt payable by, or claim against, the Company (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages) being a debt or claim the circumstances giving rise to which occurred on or before the Appointment Date [8 March 2004] but [excluding] the Claims of Continuing Employees in respect of their Employee Entitlements. The reference to 'Claims of Continuing Employees" in respect of their Employee Entitlements' is not relevant for the purposes of these proceedings. (c) That during the Deed period (defined as the period commencing on the commencement date of the Deed and ending on the termination date of the Deed), a person having a claim against the Plaintiff must not: (i) Make an application for an order to wind up the Plaintiff or take or concur in taking any step to wind up the company; (ii) Begin or continue any legal proceeding or arbitration against the Plaintiff or in relation to any of its property unless with leave of the Court and in accordance with such terms (if any) as the Court imposes; (iii) Begin or proceed with any "Enforcement Process" (defined as having the same meaning as section 9 of the Act – "in relation to property…execution against that property…or…any other enforcement process in relation to that property that involves a Court or a Sheriff") in relation to property of the Plaintiff unless with the leave of a Court and in accordance with such terms (if any) as the Court imposes; or (iv) Take or continue any action whatsoever to seek to recover any part of its claim other than pursuant to the Deed, (d) Unsecured Creditors (defined as a "Creditor of the Plaintiff except a Secured Creditor") would have their Claims released and extinguished in exchange for a right to receive payment from the Deed Fund; (e) The Deed did not affect a right that an Owner or Lessor of Property (all terms defined in Clause 1.1) had in relation to that property; unless: (i) The Court grants any equitable relief; (ii) The Deed provides in relation to an owner or lessor who voted in favour of section 439 resolution; or (iii) The Court orders under section 444F of the Act or otherwise, (f) Management and control of the company reverted to the directors of the company on execution of the Deed, (g) The Administrators would hold the Available Property in the Deed Fund on trust for the Admitted Creditors, subject to the terms of the Deed and would pay the available property into the Deed Fund, which would be available for the benefit of Admitted Creditors' (h) The Deed Fund would be distributed by the Administrators in a particular order, under which the Admitted Claims of Unsecured Creditors would be distributed on a pro-rata basis if there were insufficient funds to pay them in full, (i) All Claims against the Plaintiff would be released, discharged and extinguished upon distribution of the Deed fund in accordance with the provision of the Deed, (j) Subject to section 444D of the Act, the Deed could be pleaded by the Plaintiff or the Administrators against any person having a Claim against the Plaintiff bound by the Deed as an absolute bar and defence to any legal proceedings brought or made at any time in respect of that Claim, (k) Creditors of the Plaintiff bound by the Deed were able to prove their claims for participation in the Deed, and (l) The Deed contained the entire agreement of the parties with respect to its subject matter and set out the only conduct relied on by the parties and superseded all earlier conduct by the parties with respect to its subject matter. 15 The plaintiffs referred to four decisions dealing with the effect of section 444D(1) of the Corporations Act which provides: "A Deed of Company Arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the Deed…" 16 In particular reference was made to Lam Soon Australia Pty Limited (Administrators Appointed) v Molit (No. 55) Pty Limited 70 FCR 34, 22 ACSR 169. 17 In that case the Full Court referred to the objects of Part 5.3A as set out in section 435A and observed that a construction of the provisions of the part which would promote those objects was to be preferred to one which would not (section 109H). Turning to section 444D(2) and section 444D(3), they cited Hodgson J's (as he then was) treatment of the provisions in J & B Records Limited v Brashs Pty Limited (1995) 36 NSWLR 172. The Full Court also adopted the decision in Shepherd v Commissioner of Taxation ( Cth) (1965) 113 CLR 385to confirm that if a company were wound up, instalments made over a future period were to be regarded, at the date specified for the purposes of the winding up order in the Deed, as present rather than future property. In the central part of the judgment, they wrote: "Clearly enough a claim under an existing lease for rent payable in the future is an existing right, not a mere expectancy: if authority is needed, Shepherd provides it. There is thus in our view no misuse or straining of language in saying of a claim to rent payable after the specified day under a lease in existence on the specified day that is a claim which has arisen on or before that day. Once that is accepted, it is in our view no less such a claim if the amount payable in respect of it becomes ascertained or crystallised, either in accordance with the terms of the lease itself or as damages at law, in circumstances where after the appointment of the administrator (whether before or after a deed of company arrangement is entered into) the lease is terminated by the lease is terminated by the lessor in exercise of the contractual right to do so, or upon acceptance by the lessor of a repudiation by the lessee. Of course, these considerations do not arise here, where it has been found that the repudiation of the lease, by the administrator on behalf of Lam Soon Australia, has not been accepted by Molit." 18 Later in the judgment the Full Court continued: "To suggest that because a contract might be, but has not yet been repudiated, means that an existing contractual obligation to pay money in the future should be treated as giving rise not even to a contingent claim but to a claim 'which might never arise' seems to us, with respect, simply wrong. It would apply equally, in principal, to a mortgaged debt or a terms sale. In truth, there is in each case an existing right: in each case it does not follow because the right will bear fruit in the future, when money is required to be paid and may be defeasible in certain events, that is not a claim which has arisen. A question may arise as to the valuation of the claim: in the case of a winding up, that question will be answered by referred to section 554A; in the case of a Deed of Company Arrangement, it may be answered by the terms of the Deed." 19 Given the terms of the Deed of Company Arrangement as a result of this decision prima facie the defendant is bound by the Deed and the claims can only sound in an ability to prove under the Deed of Company Arrangement and to receive the benefits under the Deed. 20 Before dealing with the defendant's response to this argument I should also note the off-setting claim because the defendants answer is the same in relation to that matter. An off-setting claim in respect of four months' rent which it was said was paid by mistake of fact for the months of March to June 2005. 21 The off-setting claim relates to four months' rent which was paid allegedly under a mistaken belief that the rent was required to be paid outside the terms of the Deed. The liability for those payments it is said is not a liability that existed because of the terms of the Deed of Company Arrangement which prohibited recovery and in due course discharged liability. 22 The defendant's answer to both the genuine dispute and off-setting claim was to suggest there was an estoppel arising from the circumstances of the payment of rent and the communications between the parties which made it unconscionable that the plaintiff should rely on these matters of genuine dispute. In terms of the submissions it was said that in the face of uncontradicted and clear evidence of the estoppel the court should not hold that the dispute raised by the plaintiff based upon the Deed of Company Arrangement is genuine. 23 The current formulation of the Australian position is said in the 4th edition of Meagher, Gummow & Lehane's Equity: Doctrines and Remedies, to be encapsulated in the judgment of Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. At 428 His Honour said:- "In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs." 24 The authors point out that the statement should be understood as holding, particularly in cases involving an assumption about a state of affairs, that reasonable notice of an intended departure from the assumption may avoid any sufficient detriment: see The Commonwealth v Verwayen (1990) 170 CLR 394 per Deane J at 442. 25 The defendant submitted that in the present case there is uncontradicted evidence that the plaintiff by words and conduct affirmed the proposition that the plaintiff was bound by the terms of the lease notwithstanding the terms of the Deed of Company Arrangement. Plainly, as I have indicated, the rent was paid up until June 2005. 26 Shortly after the appointment of the administrators there were discussions between Mr Laurence Rodny, the principal of the defendant and Mr Lombe one of the administrators about paying rent either on a daily or a weekly basis. The lessor's position was that it should be paid monthly in accordance with the lease. In a letter on 2 June 2004 to the Pharos Group the agents of the lessor, the administrators referred to the fact that if the creditors voted in favour of the Deed that the business would continue at the majority of its stores and in that case the voluntary administration would end and the company "would be liable for ongoing rent". Thereafter there were similar letters when the administrators paid their remaining rent. 27 The letter of 2 June 2004 prompted a further discussion between Mr Rodny and Mr Lombe in which Mr Lombe said: "That's right the Deed has been approved by the creditors and will be signed soon. As soon as that happens we are no longer responsible for the rent the company is." 28 Mr Stephen Brennan, a director of the plaintiff company swore that the payment made during the period of the Deed of Company Arrangement was paid in the mistaken belief that those amounts were not the subject of the Deed of Company Arrangement. 29 Mr Rodny gave evidence that if the lessor had been made aware that they were considered to be bound by the deed that the defendant would have taken immediate steps to obtain possession. It did not do so and it is said that this was an abstaining from action in reliance on the expectation created. That is a factual question and given that occupation continued with rent being paid for another year it may be that it was the continued payment of rent rather than the expectation that led to his inactivity. 30 Given that the lease contained a positive covenant to carry on business from the premises which was an essential term of the lease the lessor at the end of February 2005 would have been able to have terminated the lease when the company vacated the premises. 31 As the lessor was paid his rent up until June 2005 any detriment would seem to have occurred thereafter. It was not paid thereafter and it appears from later correspondence in October 2005 that the lessor was intent on holding the company to the lease and a continuing liability for rent. Once the rent was no longer being paid it had another immediate right to terminate and there must have been a real question as to whether the company had departed from the assumptions which it may have generated in the previous year. In conversations in March 2005 after it vacated the premises the plaintiff was suggesting to the lessor that it was only going to pay another month's rent and should be let out of the lease. There would thus be a real question of whether there was any reliance after June 2005 and whether reasonable notice of departure had been given. 32 It was suggested after the hearing that two further related categories of detriment were evident. They were said to be: "1. The detriment of having to face a claim (however hopeless) by the plaintiff that it is entitled to be repaid the rent paid by it for any of the period after the execution of the DOCA – no such claim could would have been possible but for the parties treating the lease as binding notwithstanding the provision of the DOCA. This is the very claim which the plaintiff propounds in these proceedings as an offsetting claim (albeit, the defendant say, a misconceived claim). 2. The loss of opportunity to require the plaintiff to bind itself to a new lease on substantially the same terms as the existing lease. It should be inferred that the plaintiff would have been willing to so bind itself given: (i) its expressed and demonstrated desire to continue to trade from the premises and to have a lease capable of assignment to an incoming purchaser of its business in so far as it comprised the operations of Kyle House; and (ii) its demonstrated willingness to pay full rent and otherwise to conduct itself on the basis that it was bound by the provisions of the lease up until at least February 2005." 33 On the first matter it should be noted that there is no proceeding on foot for recovery and given the amount there may not be a claim. If it is brought and is hopeless the lessor has the protection of costs' orders. 34 The inference sought to be made in the second matter is far from being straightforward. There may be many commercial reasons why it might not wish to bind itself to a new lease but rather would be content to continue paying rent as the price for still having access to the premises while it tried to negotiate a sale. 35 It is to be remembered that the defendant says that it is in the circumstance that there is a clear and uncontradicted estoppel that the Court should find that the dispute is not genuine. I do not see the estoppel in such absolute terms as I think that there may be little or no detriment, merely disputed questions of reliance and a dispute about whether reasonable notice of departure from the assumptions had been given. A failure of the defendant to mitigate its losses 36 This claim was only made in one of the affidavits of the deponents rather than in submissions. The deponent suggests that because the defendant has not obtained a replacement tenant since 23 February 2005 it has failed to mitigate its loss. Such a claim may be appropriate where there has been a termination of the lease but in the present circumstances it seems very unlikely that there has been a termination. The plaintiff voluntarily left the premises at the end of February 2005 and handed over the keys to the agent to see if they could obtain some other tenant. Thereafter the company continued to pay the rent admittedly on its claim under a mistake and the landlord has continued to insist on the performance of the lease, namely, by demanding the rent due there under. 37 If there had been a termination of the lease whether by acceptance of the abandonment and the surrender or otherwise then, of course, a landlord would only have a claim for damages and questions of mitigation of loss would then arise. In any event the onus is on the person alleging failure to mitigate see TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158. There is no suggestion of some opportunity to mitigate which has been advanced by the defendant with any quantification of any off-setting claim. Accordingly, this is not an appropriate off-setting claim. Conclusion 38 In these circumstances I am satisfied that there is a genuine dispute as to the amount claimed. I make order 1 in the Originating Process and order the defendant to pay the plaintiff's costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.