Commercial Capital v Durman [2007] NSWSC 869

Reported Decision : (2007) 25 ACLC 1,242

New South Wales Supreme Court

CITATION : Commercial Capital v Durman [2007] NSWSC 869

HEARING DATE(S) : 07/05/07, 05/06/07

JUDGMENT DATE : 15 August 2007

JURISDICTION : Equity Division

JUDGMENT OF : Associate Justice Macready at 1

DECISION : Paragraph 74

CATCHWORDS : Corporations Law. Application under s459G of Corporations Act to set aside statutory demand. Discussion of Graywinter principle. Demand varied.

PARTIES : Commercial Capital Pty Limited v Christopher Charles Durman and Jennifer Anne Durman

FILE NUMBER(S) : SC 2164 of 2006

COUNSEL : Mr J Drummond for plaintiff Mr A Gruzman for defendants

SOLICITORS : Barringer Leather Lawyers for plaintiff Stacks//Gray Lawyers for defendants

- 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Associate Justice Macready

Wednesday 15 August 2007

2164 of 2006 Commercial Capital Pty Limited v Christopher Charles Durman & Jennifer Anne Durman JUDGMENT 1 His Honour: This is an application by the plaintiff seeking to set aside a statutory demand issued by the defendants. The statutory demand was dated 9 March 2006 and was served on the plaintiff on 14 March 2006. The present proceedings were commenced within time. 2 The demand claimed $256,251.81 due from the plaintiff to the defendants pursuant to a loan agreement dated 9 January 2003 together with costs of $1837.70, altogether totalling $258,089.51. Background history 3 In late 2002, Mr Durman and Mr Fitzgerald decided to form the plaintiff company. The company was incorporated on 23 August 2002 and Mr Durman and Mr Fitzgerald became directors and shareholders of the company. 4 In order to fund the operations of the company Mr and Mrs Durman and Mr and Mrs Fitzgerald provided various funds. The first loan was on 16 December 2002. Mr and Mrs Durman agreed to advance to the plaintiff $100,000 on certain terms and conditions. Mr B J Fitzgerald and his wife, Melissa Fitzgerald, also advanced $100,000 on the same terms and conditions. Mr and Mrs Durman and Mr and Mrs Fitzgerald both borrowed $100,000 from third party lenders using the security of their respective homes. 5 In due course the plaintiff required additional funds and on 27 March 2003 Mr Durman together with Mr and Mrs Fitzgerald jointly acquired a further loan from ANZ Banking Group Ltd ("ANZ") in the sum of $200,000 which was then advanced to the plaintiff on certain terms and conditions. Mrs Durman was not a party to that loan although she executed a mortgage debenture to secure the loan. 6 On 7 February 2005, Mr Durman resigned his employment with the plaintiff and on 23 February 2005 he resigned as a director of that company. 7 On 15 January 2005 Mr and Mrs Fitzgerald and Mr and Mrs Durman executed separate Loan Agreements with the plaintiff. However both Loan Agreements were dated 9 January 2003. Mr B J Fitzgerald witnessed the signatures of Mr and Mrs Durman in relation to the Loan Agreement between them and the plaintiff. 8 At the time of execution the schedules to the loan agreements, which specified as the repayment date, default interest and other matters, was left blank. Subsequently, Mr Durman inserted some details in this part of the loan agreement. I will return to the detail of this in due course. 9 As a result of the circumstances in which the loan agreements were signed it is said by the plaintiff that there is a genuine dispute as to whether or not the amounts claimed by the defendants in the statutory demand are presently due for repayment. The plaintiff relies upon the fact that the claim made in the statutory demand is for repayment of monies said to be due under the loan agreement. 10 The defendant Mr Durman says an available construction of the loan arrangements is that the money is repayable upon demand and the demand has been made. The defendant also suggests that there is interest payable upon the loan and by reason of default in payment of that interest the principal sum is presently due. The defendant had contended that there was a term that the monies would be repaid upon certain events, including the sale the plaintiff's interest in a company In Motion Technologies Pty Ltd. That evidence was in an inadmissible form and was not admitted. The loan agreement 11 The evidence is clear that at the date when the loan agreement was signed and exchanged between Mr Fitzgerald and Mr Durman on 15 January 2003, the only item in the schedule to the Loan Agreement that was completed was item 1 which set out the principal sum as $200,000. 12 It is plain that after the execution of the loan agreement insertions were made by Mr Durman in his handwriting in the schedule. Relevantly he made the following insertions in the schedule: "Item 2 Completion Date: Interest only monthly; quarterly review Item 3 Interest rate 10% Item 6 Drawdown date 27 March 2003" 13 According to Mr Fitzgerald, these were not made with his consent and accordingly the parties are at issue on this matter. The circumstances in which they occurred after the meeting will require careful analysis to determine which witness should be accepted on this point. That is not a matter to be determined in this hearing. 14 It is necessary to consider the terms of the Loan Agreement which are conveniently set out in submissions which I will incorporate with some modifications in this judgment. 15 Clause 3 of the Loan Agreement is headed "Repayment" and provides as follows: "3.1 The Borrower must repay the Loan in full on or before the Completion Date to the Lenders Bank Account or as the Lender may from time to time otherwise direct in writing. 3.2 Subject to clause 3.3 the Loan is not due and payable by the Borrower prior to the Completion Date. 3.3 If any of the events specified in clause 7 of this Agreement occur the Loan will be become due and payable by the Lender in full, without the need for notice to the Borrower." 16 Clause 7 of the Loan Agreement provides as follows: "At the option of the Lender the Loan will become immediately due and payable under the Agreement if: (a) The Borrower breaches any of the covenants and agreements contained and incorporated by reference or implied in this Agreement or the Security." 17 An examination of the Loan Agreement discloses that it contains no express term requiring interest be paid on the Loan. The term "Loan" is defined in clause 1.1 to mean: "The Principal Sum together with interest calculated at the Rate which accrues on the Principal sum from time to time." 18 The term "Rate" is defined in clause 1.1 to mean: "The interest rate payable per annum specified in Item 3 of the Schedule." 19 Clause 5 of the Loan Agreement is headed "Interest on Default". It provided that interest in accordance with the "Rate" may be accrued daily "if any payment to be made by the Borrower is not paid when due." 20 The term "Completion Date" is defined in clause 1.1 to mean: "the date specified in Item 2 of the Schedule." 21 There was also a debenture executed about the same time. Clause 2.1 provided that the mortgagor would pay to the mortgagee, forthwith upon demand, all monies secured and would pay interest at the interest rate on the monies secured or the balance thereof, from time to time, which interest was payable upon demand. That covenant however only applied "unless otherwise agreed in writing". In this respect the Loan Agreement governs whether interest is payable as it specifies the circumstances in which interest is payable. 22 The plain construction of the loan agreement is that in the absence of default, there is no obligation to pay interest prior to the Completion Date, that being the first date upon which there could arise a default sufficient to activate clause 5. As no interest was payable prior to the Completion Date, there could be no default pursuant to clause 7.1 sufficient for the "Loan" to become due and payable by 9 March 2006 when the demand was issued, if the completion date had not arrived. 23 It seems plain that at the time of the original discussions for the advancement of funds to the company that no discussion occurred as to when the funds were to be repaid. In the middle of 2003, lawyers were engaged to draft Loan Agreements that were to be between the company and each of the directors and govern the terms on which each would be repaid their $200,000. The solicitors at some stage sought further information concerning, inter alia, the final date for repayment of the loans. Nothing further seems to have been done about the completion of these documents until the matter was reactivated in either late 2004 or early 2005, when draft documents were signed. 24 I have earlier referred to the fact that when the first loan was obtained the parties borrowed the necessary funds from the ANZ Bank based upon the security of their own homes. The second loan from the ANZ Bank was also secured by these securities. In respect of the first loan the relevant parties repaid their lenders from the sale of homes on 20 September 2005. This did not affect the fact that the parties were still owed amounts by the company. In respect of the second loan the ANZ bank was repaid on 24 March 2005. Mr Fitzgerald paid his amount of $100,000 and Mr and Mrs Durman refinanced their part of the loan against another security. These repayments naturally did not affect the liability of the company to the two parties for the amount lent to the company. 25 During the period of the borrowings to finance the company's business there were arrangements in place concerning the payment of interest on those borrowings from the bank. In respect of the first loan Mr Fitzgerald gave the following evidence on this aspect: "Fitzgerald: ComCap being a start up company needs money to commence operations. I suggest we each advance it $100,000. That way it will have about $200,000 by way of capital. Durman: Yes ComCap needs at least $200,000 to get underway. As I don't have $100,000 cash I will have to obtain a loan using my house as security. Fitzgerald: I will do the same. How shall we deal with the interest which we will be liable to pay to the banks? Durman: As the company won't have any cash flow for a while what I suggest is that we be responsible for and pay the interest ourselves. That amount can be credited to our individual capital accounts and the company can reimburse us when and if it has sufficient moneys to pay us. Fitzgerald: What rate of interest should the company pay? Durman: What I propose is that we treat the loan as a pass through loan, that is the company will only be charged interest at the rate charged by the lender. As these funds are to be treated as seed capital ComCap will not be liable to pay interest if and when the bank is paid out. Fitzgerald: Okay."