Supreme Court New South Wales Medium Neutral Citation: In the matter of TZ Limited (ACN 073 979 272) [2013] NSWSC 375 Hearing dates: Tuesday, 19 March 2013 Decision date: 19 March 2013 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Creditor's statutory demand be varied by substituting as the sum of the demand the amount of $73,820.49, and declaring the demand to have had effect as so varied as from when the demand was served on the plaintiff Catchwords: CORPORATIONS - winding up - creditor's statutory demand - Corporations Act 2001 s 459G - whether genuine dispute exists - whether offsetting claim exists - whether abuse of process Legislation Cited: (Cth) Corporations Act 2001, s 459G, s 459H, s 459J Cases Cited: Re Harbour Radio Pty Ltd [2012] NSWSC 1290 Category: Principal judgment Parties: 2012/ 401431 TZ Limited (plaintiff) Yatabi Australia Pty Ltd (defendant) 2012/ 401436 TZ Limited (plaintiff) Interco Pty Ltd (defendant) Representation: Counsel: Mr JT Johnson (plaintiff) Mr J Horowitz (defendants) Solicitors: Landerer and Company (plaintiff) Benjamin & McInnes (defendants) File Number(s): 2012/ 401431 2012/ 401436 Judgment (Ex Tempore) 1HIS HONOUR: By originating processes filed on 28 December 2012 the plaintiff TZ Limited applies pursuant to (Cth) Corporations Act 2001, s 459G, for orders setting aside creditors statutory demands dated 13 December and served on it on 14 December 2012 by each of the defendants Interco Pty Ltd and Yatabi Australia Pty Ltd. 2The supporting s 459G affidavit of Kenneth Ting sworn 27 December 2012 makes clear that the application is made both on the grounds referred to in s 459H that there is a genuine dispute as to the existence or amount of the debt, and in s 459J that there is some other reason - in particular that the issue of the demand constitutes an abuse of process, and perhaps that there is a defect in the demand under s 459J of the Act. Each creditor's statutory demand claims a debt of $73,914.82, described in the schedule in the following terms: Debt owing pursuant to a shareholders agreement dated 30 July 2013 between the company, the creditor and others as invoiced on 23 March 2012 less royalties payable $73,914.82. 3Neither the schedule nor the verifying affidavit of Alan Mark Dunshore sworn 14 December 2012 descends to further particularity of the claimed debt. However, the demand was served under cover of a letter from the creditors' lawyers of 14 December 2012 which was in the following terms: Re: Interco Pty Ltd & Yatabi Pty Ltd We act for the above named companies and now enclose by way of service: 1. Statutory Demand from Interco Pty Ltd for the sum of $73,914.82 2. Statutory Demand from Yatabi Pty Ltd for the sum of $73,914.82 These amounts have been calculated by reference to clause 19.3(e)(iv)(1)(B) and setting of that amount in each case half the amount of royalties owing to Telezygology Inc under clause 19.3(e)(iii). Although the primary obligation to pay these amounts is that of Telezygology Inc, TZ Limited is liable to pay these amounts pursuant to clause 2.1 of the shareholder agreement. We look forward to receipt of the amounts within 21 days of the date of service. 4As will be apparent, the claimed debt arises out of a shareholders agreement made on 30 July 2010 between the plaintiff TZ Limited, Telezygology Inc (TZI), Kevin Martin Carter, Alan Mark Dunshore, the defendants Interco Pty Ltd and Yatabi Australia Pty Ltd and Intanova Pty Ltd. The shareholders agreement recited inter alia that the plaintiff has agreed to guarantee the obligations of TZI under the agreement (recital C). By clause 2.1, in consideration of Yatabi and Interco Pty Ltd entering into the agreement, the plaintiff unconditionally guaranteed to Yatabi, Interco and Intanova "the due and punctual performance by TZI of its obligations under this agreement" and indemnified Yatabi, Interco and Intanova "against any loss or damage suffered by them as a result of TZI's failure to perform such obligations". 5Of particular relevance in the present circumstances is clause 19.3, entitled "Reversionary rights", which relevantly provides as follows. 19.3 Reversionary rights (a) If, at any time prior to the third anniversary of the Completion Date and provided always that either Yatabi or Interco is a Shareholder at the relevant time: (i) a Relevant Event occurs in relation to TZ Limited or TZI; (ii) TZI or TZ Limited repudiates this Agreement; (iii) the Interco Consultancy Contract or the MD Employment Contract is terminated by the Company without cause under the terms of those agreements; (iv) the Company suffers an Insolvency Event; or (v) TZI fails to exercise its option to subscribe for Shares under clause 4.5. then, provided it is a Shareholder at the relevant time, Interco, or if Interco is not a Shareholder at the relevant time and Yatabi is a Shareholder at the relevant time, Yatabi, may elect to send a written notice, which must be signed by the giver of the notice, witnessed and delivered to the Company, TZ Limited and TZI, that one or more of the matters set out in clauses 19.3(a)(i) to 19.3(a)(iv) inclusive has occurred (the "Reversionary Notice"). The Reversionary Notice must specify the ground or grounds upon which it is given with sufficient particularity that the Company, TZ Limited and TZI are reasonably able to determine whether or not the Reversionary Notice is validly and justifiably given in accordance with this Agreement. For the avoidance of doubt, Interco and Yatabi shall have no right to serve a Reversionary Notice under any circumstances at any time after the third anniversary of the Completion Date. ... (e) If a Reversionary Notice is given and: (i) no Response is given in accordance with clause 19.3(b); (ii) no proceedings are commenced in accordance with 19.3(d); (iii) no Reversionary Notice Injunction is in operation within fourteen (14) days of the termination of the mediation in accordance with clause 19.3(c); or (iv) a Reversionary Notice Injunction having operated ceases to operate; then, and only then: (1) where the relevant Reversionary Notice was given prior to completion of the transactions that under this Agreement are to occur on the Assignment Date, the following shall apply: (A) TZI and any Permitted Transferee of TZI will be deemed to have given an irrevocable Transfer Notice under clause 10.2 in respect of all Shares respectively held by TZI and each such Permitted Transferee, at a total cash price for all Shares the subject of each such Transfer Notice of $1.00; (B) TZI must pay $81,657.80 each to Yatabi and Interco; (C) TZI shall grant the Reversionary Licence to the Company and must, for the avoidance of doubt, make available the TZI Manufacturing Assets for use by the Reversionary Licensee in accordance with the Reversionary Licence; (D) TZI shall appoint the Company as a non-exclusive distributor of the New Products (as that term is defined in Schedule 10) in the territory of Australia, New Zealand and the United Kingdom (the "Reversionary Territory") for the term of the Reversionary Licence, on TZI's standard trading terms applying to TZI's distributors of the highest status, subject to the Company meeting TZI's standard volume targets consistent with those standard trading terms; and (E) the Put Option shall immediately terminate; Or: ... (3) The parties agree that at the instigation of any party: (A) (I) any royalties owing under the Transitional Licence during the period from the Completion Date to the giving of the Reversionary Notice and (II) any moneys owing by TZI to Yatabi and Interco under paragraphs (1)(B) or (2)(F) above may be set off against each other; and (B) (I) any royalties owing under the Reversionary Licence and (II) any moneys owing by TZI to Yatabi and Interco under paragraphs (1)(B) or (2)(F) above may be set off against each other; notwithstanding anything to the contrary in this agreement or the Reversionary Licence. 6Clause 21.1(d) provided that the agreement constituted a valid and legally binding obligation of each party in accordance with its terms. Clause 23.3 provided that if the agreement conflicted with any other document, agreement or arrangement, the agreement prevailed to the extent of inconsistency. Clause 23.13 provided that the agreement superseded all previous agreements with respect to its subject matter, and clause 23.14 provided that the agreement contained the entire agreement and understanding between the parties in connection with the transactions it contemplated and that there were no inducements, representations, warranties, covenants or undertakings relied on to any extent by any party entering into the agreement except as expressly contained in the agreement. 7It is not in dispute that TZI did not exercise its option to subscribe for shares under clause 4.5 of the agreement as described in clause 19.3(a)(v). On 17 February 2012, Interco gave notice to Intanova, the plaintiff and TZI in the following terms: Re: Intanova Pty Limited Shareholders Agreement dated 30 July 2010 ("Shareholders Agreement") - Reversionary Notice Pursuant to clause 19.3(a) of the Shareholders Agreement, Interco Pty Limited hereby gives notice that Telezygology Inc ("TZI") has failed to exercise its option to subscribe for Shares under clause 4.5 of the Shareholders Agreement ("Option"). Under the said clause 4.5, if TZI wishes to exercise the Option, it must do so by written notice within 10 Business Days after 1 February 2011. By agreement on 3 May 2011 the parties extended the date by which TZI could exercise the Option to 30 November 2011. TZI did not exercise the Option by 30 November 2011. 8On 23 March 2012, Interco issued an invoice to TZI for "payment in accordance with clause 19.3(e)(iv)(1)(B) of the shareholders agreement for $81,657.80 less credit for transfer of shares in accordance with clause 19.3(e)(iv)(1)(A) of one dollar being a net sum of $81,656.80." Yatabi issued a similar invoice on the same date. 9The essential issue in this case is whether Interco was entitled to issue the reversionary notice as it purported to do on 17 February 2012. The plaintiff's case is that in its terms clause 19.3(a) did not permit a reversionary notice to be issued in respect of the event referred to in sub-clause (v), its terms being expressly limited to events under clause 19.3(a)(i)-(iv). I do not regard this contention as giving rise to a genuine dispute. On an application of this kind, the Court is entitled to construe transactional documents, at least for the purposes of ascertaining whether there is a seriously arguable dispute as to their construction [Re Harbour Radio Pty Ltd [2012] NSWSC 1290]. In this case, while it is true that the text of clause 19.3(a) requires that a reversionary notice specify that one of the matters set out in clause 9.3(a)(i) - (iv) has occurred, that is a prescription as to the text and content of the notice, not as to the events which authorise the issue of the notice. The events that authorise the issue of such a notice are set out in the enumerated sub-clauses (i) - (v). The fact that the description of the textual requirements of the notice does not pick up one of those five events is manifestly falsa demonstratio and an obvious error of the type which the Court can correct as a process of construction without resort to rectification. In this case it is clear that the intent of the parties is that the content of the notice specify which of the events in clause 19.3(a)(i) - (v) had occurred so as to enable the recipient to determine whether or not the notice was validly and justifiably given. It is, in my view, quite clear on the face of the agreement that it was not the intent of the parties that there be no facility for giving a reversionary notice in the event that event (v) occurred, quite the contrary. 10I have reached these conclusions purely on the face of the document as a matter of construction without resort to the extraneous evidence. However, the same conclusion is reinforced by the extraneous evidence which shows patently that event (v) was introduced in an iteration of the drafts of the agreement at a time when there had until then only been events (i) - (iv) but that when event (v) was introduced the requisite amendment to the description of what was required to be inserted in the notice was overlooked. In those circumstances it seems to me that there is no room for genuine dispute that Interco was entitled to issue the reversionary notice, and, accordingly, that the amounts referred to in clause 19.3(e)(iv)(1)(B) became payable. It therefore seems to me that there is no room for genuine dispute as to a debt of $81,657.80 each. 11However, that is not the amount claimed in the creditors statutory demands which give credit for royalties owing pursuant to clause 19.3(e)(iv)(3) of the agreement. The description of the debt in the creditor's statutory demand does so by referring to "less royalties payable". And the covering letter explains similarly how the sum was calculated "by setting off against that amount in each case half the amount of the royalties owing to TZI under clause 19.3(e)(iii)", apparently the most clear reference which should have been to clause 19.3(e)(iv)(3). 12Although it had appeared originally that the amount of the debt claimed in the demand was less than the amount actually due by about $8,000, a recalculation made by the creditor in anticipation of the hearing has revealed an error in that amount, so that the true amount due after giving credit for all royalties payable, amounting to $15,672.63, half of which is to be set off against each debt, is $73,820.49. That means that the amount claimed in each statutory demand is, on one view at least, overstated by $94.33. It is also arguable that that, in fact, is the amount of an offsetting demand, since the ability to set off is "at the instigation of any party", and no offsetting demand has been raised in the s 459G affidavit. On the other hand, it is arguable that it amounts to an overstatement of the indebtedness, given the manner in which the indebtedness is described in the statutory demand as effectively a net figure. 13No evidence has been adduced that an overstatement by $94.33 would occasion any such prejudice to the plaintiff as is referred to in s 459J(1)(a), especially in circumstances where the amount of the overstatement would remain payable to the plaintiff under the arrangements which give rise to the royalty entitlement. On the other hand, no injustice would be done to either party by varying the statutory demands by reducing them by the amount of that overstatement, and it seems to me that in the interests of resolving as many issues as possible between the parties, that is the preferable course - namely to treat the sum of $73,820.49 as the substantiated amount, in the light of the concession that the defendants have made in that respect. 14The plaintiff also contended that, in the words of the s 459G affidavit, "It is not immediately clear to me the basis upon which the defendant has calculated the amount of the debt". This, again, appears to be a claim of a defect in the demand, in insufficiently particularising the demand. Given the terms of the accompanying letter and the invoices that had preceded it, it was clear enough that in each case the debt claimed was the amount payable upon issue of the reversionary notice less half of the royalties owing to TZI. In any event, there is no evidence that "substantial injustice" would be caused if the demand were not set aside on that account. 15There is nothing in the evidence to support Mr Ting's contention that the issue of the statutory demand is otherwise an abuse of process. 16In each case I make an order varying the creditor's statutory demand by substituting as the sum of the demand the amount of $73,820.49, and declaring the demand to have had effect as so varied as from when the demand was served on the plaintiff, and order that the plaintiff pay the defendants' costs assessed in the sum of $10,000, apportioned $5,000 to each matter. ********** 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. Decision last updated: 13 June 2013