New South Wales Supreme Court CITATION : Gujarat NRE Australia v Williams [2006] NSWSC 518 HEARING DATE(S) : 24 May 2006 JUDGMENT DATE : 24 May 2006 JURISDICTION : Equity JUDGMENT OF : Austin J EX TEMPORE JUDGMENT DATE : 05/24/2006 DECISION : Statutory demands set aside, with indemnity costs CATCHWORDS : CORPORATIONS - winding up in insolvency - creditor's statutory demand - offsetting claim - inappropriate use of statutory demand procedure by creditor aware of genuine offsetting claim LEGISLATION CITED : Corporations Act 2001 (Cth), ss 459G, 459H, 459J Calquid Pty Ltd v A & D R Illes Pty Ltd (2000) 34 ACSR 523 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 CASES CITED : Filaria Pty Limited v Carlisle & Ors [2004] ACTSC 95 Gujarat NRE Australia Pty Limited v Williams [2006] NSWSC 211 Help Desk Institute Pty Ltd v Adams (1999) 17 ACLC 18 Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 Gujarat NRE Australia Pty Limited (P1) Gujarat NRE Coke Limited (P2) Gary Alexander Williams (D1) Mark Ngataiwhio William Gray (D2) PARTIES : Malcolm Anthony Carson (D3) Continental Mining and Minerals Handling Pty Limited (D4) Billiva Pty Limited (D5) Ambigo Pty Limited (D6) Bounty Industries Australia Pty Limited (D7) FILE NUMBER(S) : SC 1743/06 COUNSEL : B J Gillard, Solicitor (P) T D Tzovaras, Solicitor (D1, D4 & D5) SOLICITORS : Gillard Consulting Lawyers (P) Tzovaras Legal (D1, D4 & D5) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J WEDNESDAY 24 MAY 2006 1743/06 GUJARAT NRE AUSTRALIA PTY LTD & ANOR V GARY ALEXANDER WILLIAMS & ORS JUDGMENT (Ex tempore; revised 25 May 2006) 1 HIS HONOUR: The first plaintiff, which I shall call Gujarat Australia, applies by an amended originating process filed in court on 27 March 2006 for orders setting aside statutory demands directed to it and issued by, respectively, the first, fourth and fifth defendants and dated 4 March 2006 in each case. The first defendant, Mr Williams, is a director of the fourth and fifth defendants ("Continental" and "Billiva" respectively). 2 The statutory demands are in identical terms, each directed to Gujarat Australia, except that they respectively allege that the debt was owing to, in each case, a different entity, namely Mr Williams in the first case, Continental in the second case and Billiva in the third case. 3 The particulars of the debt are identical in the three demands, as follows: "Obligation of the company to pay the creditor the sum of $1,400,000 pursuant to cl 3.6(a) of the Venture Agreement dated 15 October 2004 between Gujarat NRE Coke Limited and Continental Mining & Materials Handling Pty Limited, Billiva Pty Ltd and Gary Alexander Williams and other parties as varied by the Variation Deed of 24 January 2005 by Gujarat NRE Coke Limited and Gujarat NRE Australia Pty Limited and Deed of Settlement in relation to the Venture Agreement of 8 December 2005." The amount claimed in each case was $1,400,000. 4 Gujarat NRE Coke Ltd is the parent company of Gujarat Australia. It appears as a plaintiff, and other parties appear together with the first, fourth and fifth defendants as co-defendants. The reason is that, when the originating process was first filed, it attempted to combine in a single proceeding the claim for Corporations Act relief by way of the setting aside of the statutory demands with claims for "non-Corporations Act relief" by way of declarations, damages and interest. 5 On 27 March 2006 Barrett J held that it was inappropriate to combine non-Corporations Act relief of those kinds with an application to set aside statutory demands. He made orders having the effect of removing the non-Corporations Act claims from the present proceeding (Gujarat NRE Australia Pty Limited v Williams [2006] NSWSC 211). The case now before me involves only Gujarat Australia as plaintiff and Mr Williams, Continental and Billiva as defendants, and is confined to the question whether the three statutory demands should be set aside. 6 Gujarat Australia seeks that relief on three grounds. The first is that there is "some other reason why the demand should be set aside" under 459J of the Corporations Act. The reason is said to be that the amount claimed in the three statutory demands would, if it were properly owing, be a single debt owed by Gujarat Australia to the three defendants jointly. The debt is said to arise out of cl 3.6(a) of the Venture Agreement dated 15 October 2004. That clause is in the following terms: "3.6(a) On each of the first and second anniversary of the date on which the Initial Payment (referred to in cl 2.2(a)(i)) is paid to the Litigation Funders, Newco must pay to the Plaintiffs an amount of not more than $1.4 million to the Litigation Funders on behalf of the Plaintiffs, which the Plaintiffs must properly pay to the Litigation Funders to meet their obligations to the Litigation Funders." 7 Although the clause is imperfectly drafted, submissions were made today on the basis, on both sides, that the clause purported to create an obligation for Newco to make the payments in question to the Plaintiffs rather than to the Litigation Funders. The "Plaintiffs" defined in the Venture Agreement are three Defendants in the present proceeding, that is to say Mr Williams, Continental and Billiva. Newco was identified as Gujarat Australia. Therefore cl 3.6(a) is a covenant by Gujarat Australia to make certain payments to Mr Williams, Continental and Billiva. 8 The question raised by Gujarat Australia is whether that provision is an obligation to make a payment to the three Defendants jointly, or gives them joint and several rights to receive payments entitling each of them to issue a separate statutory demand. 9 I was taken to JW Carter and DJ Harland, Contract Law in Australia (4th Ed, 2002) page 363 where the learned authors make the point that the question whether an obligation is owed to several persons jointly depends upon construing the instrument that creates the obligation to ascertain the intention of the parties. 10 In forceful written submissions, the defendants' solicitor contended that the rationale that would require a statutory demand to be signed by all joint creditors is not applicable, because payment to one joint creditor would discharge the debt obligation to the other joint creditors. In any event, he submitted, all three joint creditors are parties to the proceeding and therefore there is no room for any prejudice of the kind that might otherwise have been suffered by Gujarat Australia if the application had concerned only one of the three statutory demands. 11 In my view the submissions made on behalf of Gujarat Australia on this ground are plausible, but it is preferable not to base my decision on this matter. A decision as to whether the payment obligation is owed to the present defendant jointly or jointly and severally might have other ramifications in proceedings not presently determined, namely the Commercial List proceedings to which I shall refer. I have decided that Gujarat Australia must succeed on another ground referred to below and therefore, having set out the competing submissions on this ground, I shall not purport to make any resolution of the matter. 12 It is appropriate to observe that the present defendants have not sought to make any submission arising out of the fact that, although there were three statutory demands served on Gujarat Australia, Gujarat Australia made only one application to set aside all three statutory demands, rather than three separate applications (see Help Desk Institute Pty Ltd v Adams (1999) 17 ACLC 18; Calquid Pty Ltd v A & D R Illes Pty Ltd (2000) 34 ACSR 523; Filaria Pty Limited v Carlisle & Ors [2004] ACTSC 95). Without the benefit of argument, I should say that, were the Help Desk issue raised, I would be inclined to distinguish that line of cases, having regard to the fact that the three statutory demands all purportedly relate to the same debt arising out of the same dispute, are all directed to the same alleged debtor and were all served at the same time. 13 I intend to treat the second contention made on behalf of Gujarat Australia in the same fashion. Its solicitor has drawn attention to the fact that cl 3.6(a) does not create a payment obligation of $1.4 million, the amount the subject of the statutory demands, but rather it speaks of "an amount of not more than $1.4 million". 14 Clause 7.3(a) of the Venture Agreement is relevant to this matter. It states conditions to be satisfied by, inter alios, Mr Williams, Continental and Billiva. Sub-paragraph (a) says: " Litigation Release: The Plaintiffs [Mr Williams, Continental and Billiva] providing to GNCL [Gujarat Australia's Indian parent] (i) supporting documentation in respect of amounts owing to the Litigation Funders in respect of the Litigation; and (ii) signed statements from each of the Litigation Funders and each of the Defendants releasing the Plaintiffs from the Litigation and the subject matters of the Litigation, in a form satisfactory to GNCL." 15 Gujarat Australia submitted that the two provisions, when read together, indicate an intention that it is liable to pay an amount, not exceeding $1.4 million, corresponding to the amount certified under cl 7.3(a). It submitted that since no amount has been certified, there is no amount owing, or at any rate the amount of $1.4 million is not owing. 16 However, on 24 January 2005 there was a deed entered into in relation to the Venture Agreement, by which Gujarat Australia and its Indian parent company purported to acknowledge and agree to waive cl 7.3(a) of the Venture Agreement. I am not sure of the status of that deed, given that the only parties appear to be the two Gujarat companies, but it is at least arguable that the deed had the effect of removing cl 7.3(a) from the Venture Agreement and converting the effect of cl 3.6(a), so that the amount payable in the stated circumstances became simply an amount of $1.4 million. 17 The Defendants have submitted that this deed and other correspondence have the effect that the amount to be paid under cl 3.6(a) in March 2006 was $1.4 million. It seems to me preferable not to attempt to resolve that issue, since again there may be significance in my doing so going beyond the present proceeding, but I record once again the submissions in case this matter should go further. As with the first submission it seems to me that the arguments advanced on behalf of Gujarat Australia have some plausibility. 18 The matter upon which I rest my decision is the third matter that was advanced on behalf of Gujarat Australia. There is a substantial body of evidence before me about the commercial relationship between Gujarat Australia and its Indian parent, on the one hand, and the three defendants and other parties, on the other. I do not intend to describe this evidence any more than is necessary to identify the issue for decision before me today. That issue is whether Gujarat Australia has established that it has an "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act. 19 "Offsetting claim" means a genuine claim that the company has against the respondent by way of counter-claim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates): s 459H(5). In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18], Palmer J explained the concept of a "genuine offsetting claim" as follows: "In my opinion, a genuine offsetting claim for the purposes of CA s 459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith' means arguable on the basis of facts asserted with sufficient particularity to enable the court to determine that the claim is not fanciful." 20 Effectively, the standard to be reached to persuade a court that there is an offsetting claim is the same as the standard to be reached to persuade a court that there is a genuine dispute between the alleged debtor and the party claiming to be creditor. The most effective cited description of the standard for establishing a genuine dispute is a passage in the judgment of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. There, his Honour said 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. 21 It is of fundamental importance for parties to proceedings of this kind to understand that the court does not enter into the merits of any dispute between the parties. The court merely satisfies itself, to the standard described by McLelland CJ in Eq, that the dispute, or the assertion of an offsetting claim, is "genuine". If it is, then the statutory demand procedure is out of place. The whole purpose of the reforms introduced to corporate insolvency law, when the present Part 5.4 was introduced, was to remove litigation about disputed claims from the winding up process. That is why courts have said, time and again, that if a creditor is aware that there is a dispute, asserted on behalf of the alleged debtor with sufficient plausibility to meet that relatively low threshold described by his Honour, issuing a statutory demand is wholly inappropriate. The correct course is to have the dispute resolved by proceedings asserting the debt. 22 Applying those principles to the present case, what strikes me as particularly significant is the development of the relationship between the parties, showing that over time a dispute emerged which has ultimately been crystallised in the Summons and Commercial List Statement in matter No 50056 of 2006 in the Commercial List of this court. 23 I note the following: (1) Mr Williams commenced other proceedings on his behalf and on behalf of Continental and Billiva as Plaintiffs to assert claims against Great Pacific Capital Limited, Bellpac Pty Ltd and others for damages as a result of breaches of contract and misrepresentations and other claims relating to the acquisition by Bellpac of a mine known as Bellambi West Colliery; (2) In September 2005 Bellpac placed various mining assets from the Bellambi mine on the market; (3) Mr Williams was approached by the directors of Greater Pacific Capital enquiring whether he would be interested in purchasing mining assets on terms that would involve settlement of the Bellpac proceeding; (4) A company called Bounty Industries Australia Pty Ltd ("Bounty") expressed an interest to Mr Williams for it and others to purchase mining assets from Bellpac; (5) After discussions an agreement was reached in principle for Bounty to purchase mining assets from Bellpac on condition that Continental, Billiva and Mr Williams would discontinue the Bellpac proceedings and enter into an appropriate deed of release. 24 That is the background for entry into the principal agreements. There was an agreement entered into on 22 September 2004, referred to in the evidence as the Bounty Purchase Agreement, which it is unnecessary for me to deal with more fully now. 25 On 3 October 2004 there was a meeting involving directors and advisers of the Indian parent of Gujarat Australia (which had not at that stage been formed) to explore issues relating to the acquisition of mining assets. There were further meetings and on 6 October 2004 a document entitled "Terms Sheet" was entered into between a group described as the Purchasers (including Mr Williams, Continental and Billiva) on the one hand, and the Indian Gujarat company or its nominee on the other. The document was intended to create a binding legal relationship and it contained some covenants upon which Gujarat Australia now relies in its Commercial List proceeding. In particular there was an acknowledgment by the "Purchasers" that the Indian Gujarat company had not and would not undertake a due diligence investigation of the assets and would place reliance on the Purchasers' findings pursuant to their due diligence investigation. That is, reliance would be placed on due diligence investigations by parties including the three Defendants in the present case. 26 The defendants' solicitor emphasised that the Terms Sheet was entered into before Gujarat Australia was formed, but the Commercial List Statement, paras 36 to 39, makes allegations which are intended to provide a foundation for contending that Gujarat Australia, once it was incorporated on 8 October 2004, obtained the benefit of the representations that had been made and subsequently was induced to act in reliance on them. Obviously I am not able, at the present time, to take any step towards resolving those matters on the merits. The issue for me is whether they point to a genuine offsetting claim. In my view there is the kind of plausible contention that would satisfy the standard. 27 It was pointed out in submissions that the due diligence process that was contemplated by the Terms Sheet extended over a period of time until after Gujarat Australia was formed, and the Venture Agreement, which is the foundational agreement for the ongoing relationship between the parties, was entered into after formation of Gujarat Australia, that is on 15 October, and indeed Gujarat Australia was a party to it. 28 Reliance was placed by the Defendants on provisions of the Venture Agreement having the effect that other obligations merged in the Agreement and the Venture Agreement purported to state the full legal relationship between the parties. The precise effect of those clauses is, I think, open to further argument, especially to the extent that the Commercial List proceedings seek recovery on Trade Practices grounds as well as on contractual grounds. 29 The Venture Agreement itself contains some warranties and the warranting parties include Mr Williams. 30 I shall not recite all of the documentation that will need to be considered in the Commercial List proceedings, but it is relevant to give a summary account of things that happened after the signing of the Venture Agreement indicating, as I have said, that a dispute emerged. 31 On 23 November 2005 there was a meeting attended by various parties, including Mr Williams, at which Mr Williams was handed a document entitled "Statement of Dispute". That document, which is in evidence, begins by referring to the Venture Agreement which, it says, requires and encourages the parties to undertake negotiations and other forms of mediation, prior to formal steps, in pursuing any disputed issues. The Venture Agreement has an alternative dispute resolution clause broadly to that effect. The Statement of Dispute says that Gujarat Australia and its Indian parent wish to raise various matters for discussion and negotiation. The matters are then listed. 32 It is true, as the Defendants' solicitor submitted, that the matters listed are expressed in general terms. There is a reference, for example, to: "Warranties provide [sic] by Williams and others in the Venture Agreement and in particular as to the state of repair and condition of the improvements and equipment at or acquired with the NRE No.1 Colliery". 33 But the document is specific enough to identify subject areas for negotiation, and that was the purpose. I infer from the document that on 23 November there was a dispute about matters concerning warranties and representations and allegations of delay, generally of a nature that might entitle one or both of Gujarat Australia and its Indian parent to take proceedings to recover damages. 34 Although Gujarat Australia was formed after the Terms Sheet was entered into, the course of conduct therefore seems to me consistent with a claim that Gujarat Australia acted in reliance on such warranties or representations and at least there is a plausible contention of a cause of action. 35 The defendants' solicitors wrote to Gujarat Australia and its Indian parent on 28 November 2005, referring to the meeting on 23 November and denying on behalf of Mr Williams any breach of warranty or any false or misleading representation, but expressing nevertheless a willingness on behalf of Mr Williams to engage in further discussions. 36 There was a Deed of Settlement entered into on 8 December 2005 which referred to the Venture Agreement and recorded that the parties had agreed to amend it in various ways. The Deed of Settlement sets out various releases and warranties and specific amendments to the original Venture Agreement. It is appropriate to infer that there were matters for discussion up until that stage, which might broadly be described as dealing with an alleged offsetting claim. 37 On 20 February 2006 the solicitors for Gujarat Australia wrote a letter which I regard as important. The letter was sent to Mr Williams. Letters in equivalent terms were sent to Continental and Billiva. The letter referred to the issues raised in the Statement of Dispute. It asserted that Gujarat Australia and its Indian parent had undertaken negotiations without resolution, and said that in the circumstances Gujarat Australia had formed the opinion that the alternative dispute requirements of the Venture Agreement had been satisfied, there was no good purpose to be served by further pursuit of the dispute resolution process, and instructions had been received to commence legal proceedings without further notice. At that point the three defendants were put on express notice that Gujarat Australia asserted that there was a continuing claim which would be pursued in litigation. Since the evidence to which I have referred provides a basis for the inference that there was a plausible contention requiring investigation and hence a genuine offsetting claim for the purposes of s 459H, it follows that the letter of 20 February 2006 had the effect of putting the three defendants on notice that there was such a genuine offsetting claim at that stage. 38 On 2 March 2006 the defendants' solicitors wrote to Gujarat Australia and its Indian parent reminding them that payment under cl 3.6(a) in the sum of $1.4 million would fall due on 3 March, and giving instructions as to payment. 39 Gujarat Australia's solicitors wrote on the same day to each of the three defendants, indicating that they had instructions to commence proceedings in the Commercial List of the Supreme Court by filing process on the following day, and seeking undertakings that the defendants would not take any steps by way of enforcing their asserted rights until the outcome of the foreshadowed proceedings. In fact, Commercial List proceedings were not filed on the following day, but instead on 6 March 2006 the present proceeding was instituted. As I have said, the originating process purported to raise claims for relief not dissimilar from the claims ultimately raised in the Commercial List proceeding, but they were struck out by Barrett J. The Commercial List proceeding was initiated on 28 April 2006. 40 Copies of the letters written to the three defendants were sent to their solicitor on the same day. There was no reply to the demand for undertakings. Nevertheless, on 6 March 2006 the defendants caused the statutory demands presently in contention to be issued and served and their solicitors sent a copy of the demands to Gujarat Australia's solicitors. 41 On the same day Gujarat Australia's solicitors responded, referring to the correspondence that I have just described and asserting that it was wholly inappropriate for the defendant to have issued statutory demands. 42 I should briefly describe the Commercial List proceedings. It is sufficient to say that claims are made for damages, declarations that Gujarat Australia is relieved of making payments under the Venture Agreement and in the alternative, orders establishing set-offs. The grounds for the asserted relief are breach of warranty, breach of representation, misleading conduct and the Trade Practices Act and, to the extent that Mr Williams was a director of Gujarat Australia, breach of his duty of care as a director. There are also claims for civil accessory liability. 43 In my view, without purporting to deal with the merits of these claims, they reflect matters that have arisen during the course of development of the dispute to which I have referred, and therefore reflect what I have found to be plausible contentions requiring investigation and therefore genuine claims for offsetting amounts. The amounts concerned are, according to paragraph 99 of the Commercial List Statement, claims for well in excess of the $1.4 million that has been claimed in the statutory demands. 44 It is worth emphasising that under the rules of this court and the requirements of the Legal Profession Act, the initiation of proceedings such as the Commercial List proceedings requires that the solicitor acting for the plaintiffs provide a certificate that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim for damages has reasonable prospects of success. A certificate in those terms was given by the solicitor for Gujarat Australia in the present case. The existence of that certificate also supports the conclusion that there is a genuine offsetting claim. 45 My conclusion, therefore, is that the plaintiff has clearly established that there is an offsetting claim for more than the amount claimed in the statutory demands for the purpose of s 459H. The three statutory demands should be set aside. 46 In my view, having considered the correspondence, it was wholly inappropriate for the defendants to issue statutory demands, given all that had happened in the development of the dispute prior to that step being taken. I see no justification, even endeavouring to avoid looking at the matter with the benefit of hindsight, for the issue of statutory demands, given the history I have outlined. 47 Notwithstanding submissions to the contrary, I think the correct course is to make an order for costs on the indemnity basis, in view of matters that I have addressed in these reasons for judgment. This is not the first time that a court has been persuaded to order costs on the indemnity basis, where a statutory demand has been issued wholly inappropriately in circumstances where the party issuing the demand has reason to believe that there is a genuine dispute or genuine offsetting claim. It is important for the courts to convey to the commercial community the message that the statutory demand procedure is not to be used in circumstances of that kind. ********** 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.