In the matter of Rio Australia Pty Limited [2013] NSWSC 1291

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Rio Australia Pty Limited [2013] NSWSC 1291 Hearing dates: 28 August 2013 Decision date: 28 August 2013 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Application to set aside creditor's statutory demand dismissed. Order made for plaintiff to pay defendant's costs of the application, as agreed or as assessed. Catchwords: CORPORATIONS - statutory demands - application to set aside a creditor's statutory demand - offsetting claim - whether serious question to be tried - where loan advance in construction loan refused and the schedule of loan advances is not in evidence. Legislation Cited: - Corporations Act 2001 (Cth) s 459G, 459H, 459H(1)(a), 459H(1)(b), 459H(5) - Real Property Act 1900 (NSW) s 57(2)(b) Cases Cited: - Beauty Health Group v Sholl [2011] NSWSC 77 - Macleay Nominees Pty Ltd v Belle Properties East Pty Ltd [2001] NSWSC 743 - Royal Premier Pty Ltd v Taleski [2001] WASCA 48 - Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; (1993) 12 ACSR 341 Category: Interlocutory applications Parties: Rio Australia Pty Limited (Plaintiff) Westpac Banking Corporation (Defendant) Representation: Counsel: M. Sahade (Plaintiff) B. Koch (Defendant) Solicitors: Oliveri Lawyers (Plaintiff) HWL Ebsworth (Defendant) File Number(s): 2013/39926

Judgment - ex tempore 1By originating process filed on 8 February 2013, Rio Australia Pty Limited ("Company") applied under sections 459G and 459H of the Corporations Act 2001 (Cth) seeking an order that a creditor's statutory demand dated 11 January 2013 issued by Westpac Banking Corporation and served on 18 January 2013 be set aside. I should note that Westpac Banking Corporation served that statutory demand in its capacity as a successor to St George Bank ("Bank"), which at one point had a lending relationship with the Company in circumstances to which I will refer below. 2The application was supported by an affidavit of Mr Italiano ("Ollie") Olivieri dated 7 February 2013. Mr Olivieri was the sole director of the Company which was, he indicates, established as trustee of the Sbraccia Trust. The assets of the Company relevantly comprised 25 acres of land situated at Luddenham, New South Wales, on which a road, two dams and a two-storey house were situated and, Mr Olivieri says, its liabilities include a loan to the Bank and loans from beneficiaries of the Trust. 3Mr Olivieri gives evidence of proposals in 2001-2003 for a development of the relevant site, which precede the events in issue in this matter. On 18 July 2003, the Company was granted a development approval to relocate a house situated on the relevant property by 500 metres. Mr Olivieri indicates that plans for a subdivision were prepared in September 2003 but not submitted to council, and contends that he received council approval in 2006-2007 to split the residence on the land into dual occupancy, although a copy of the relevant development approval is not in evidence, because Mr Olivieri says he cannot locate it. In any event, little may ultimately turn on the existence of that development approval. 4In late 2008, the Company took out a residential construction loan agreement from the Bank and gave a mortgage for a loan of $1,015,000 which, Mr Olivieri indicates, was intended to provide for the Company to build a two-storey residential dwelling on the land. At June 2006, the balance of the loan was approximately $608,000. Mr Olivieri contends, in a statement that was admitted as a proof of the Company's contention but not as proof of the underlying fact, that in mid-January 2008 the Bank "stopped" the loan account so that further advances could not be made. Mr Olivieri gives evidence of the Bank requiring a real estate agent's valuation of the property at that time and of further correspondence. He also gives evidence of health issues which have affected him since March 2007. 5I should add that there is evidence of two other matters that are not addressed in Mr Olivieri's evidence. Mr Olivieri refers to a notice given by the bank under section 57(2)(b) of the Real Property Act 1900 (NSW) in October 2009. Subsequent to that notice, the Bank took possession of the property in October 2011 and sold the property as mortgagee in possession in September 2012 for an amount of $660,000. The creditor's statutory demand related to the balance of the debt outstanding, less the amount recovered on the sale of the property. 6Mr Olivieri initially gave evidence seeking to establish a genuine dispute in respect of the demand for the purposes of section 459H(1)(a) of the Corporations Act. The matters to which Mr Olivieri referred were addressed in evidence led by the Bank and the application to set aside the demand on that basis is not pressed. 7Mr Olivieri's evidence also made clear that the Company sought to establish an offsetting claim for the purposes of section 459H(1)(b) of the Corporations Act. An "offsetting claim" for the purposes of that section is the amount of a claim or claims that a Company has against a person who served a statutory demand by way of counter-claim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates: s 459H(5) of the Corporations Act. In order to establish an offsetting claim, the Company must show that there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether it has such a claim against the Bank and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; (1993) 12 ACSR 341; Macleay Nominees Pty Ltd v Belle Properties East Pty Ltd [2001] NSWSC 743 at [18], where Palmer J noted that such a claim must be "arguable on the basis of facts asserted with sufficient particularity to enable the court to determine the claim is not fanciful." 8In Beauty Health Group v Sholl [2011] NSWSC 77 at [23], Barrett J observed that, in determining whether an offsetting claim was established, it is necessary for the court to determine whether the plaintiff's claim "rises to the level of a serious question to be tried...is based on a cause of action for an amount claimed in good faith...and is not frivolous or vexatious"; that it is not necessary, for the Company to establish an offsetting claim, that it lead evidence as to the damages claimed in "meticulous detail"; however, as Ipp J held in Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57] it is necessary that: "there must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof": 9In Royal Premier Pty Ltd v Taleski above, Ipp J held that the absence of evidentiary material to support a damages calculation was fatal to a claim to set aside a statutory demand for an offsetting claim. 10With this background, I should turn to the nature of the offsetting claim, as set out in Mr Olivieri's evidence and expanded by submissions made by Mr Sahade on behalf of the Company. Mr Olivieri's evidence, also admitted to identify the Company's contention and not as proof of the asserted fact, was that, based on his experience, if the bank had not "stopped" the loan, the development on the land would have been completed in June 2008; parts of the house and land would have been rented to two different people; and three further five-acre blocks would be rented for primary production purposes, which Mr Olivieri says could have been done without subdivision approval. Mr Olivieri refers to "expressions of interest" received from a third party between October 2007 and January 2008, and claims the Company has lost $11,300 per week for the period since June 2008, equating to $2.7 million in lost rent, and that the Company intends to bring a claim for damages against the Bank. I note, in passing, that such a claim was first threatened shortly after the relevant events in January 2008 and has not been brought in the several years since, or indeed in the several months since the application to set aside the statutory demand was filed. 11The Bank in turn relies on evidence of Mr Phillip Viney and Mr David Richardson relating to dealings in respect of the loan and documents exhibited to their evidence. It is common ground between the parties that, as at 13 October 2006, the balance of the loan was approximately $662,500; on 16 October 2006, Rio deposited the amount of $600,000 to the credit of the loan; between February 2007 and December 2007, redraw requests were made by Rio to the Bank and the Bank lent the amount of $599,975 in respect of those redraw requests; and that, on 17 January 2008, Rio made a further redraw request in the amount of $50,000 which was not permitted. I will refer below to an alternative characterisation of that request and subsequent correspondence advanced by Mr Sahade. It appears that, from early 2009, Rio ceased to make payments in reduction of its liability to the Bank under the loan. 12The issues in dispute between the parties were further developed by Counsels' helpful submissions. Mr Sahade placed primary reliance on a contention that the Bank had an obligation, arising as a matter of the terms of the Residential Loan Agreement Offer and Residential Loan Agreement General Terms and Conditions, to advance the amount of $1,015,000 specified in the loan amount and had breached that obligation. I do not consider that contention is genuinely arguable or anything other than fanciful, having regard to the terms of the Loan Agreement. The loan type was a construction loan (CB179) which was, as Mr Olivieri's evidence makes clear, to be advanced to fund the construction of a building on the land. Clause 1.3 of the General Terms and Conditions provides that, for a building loan - a term which appears to be used as synonymous with a construction loan - the Bank will lend the loan amount in a series of loan advances as the building is progressed and as indicated in the loan schedule to the offer. The Company's acceptance of the relevant loan, signed by Mr Olivieri under power of attorney for a then director of the Company, acknowledges that before signing the offer the Company had received a schedule of the progress payments and stages, where applicable for a construction loan. Mr Olivieri's affidavit attaches what he describes as the Loan Agreement and mortgage, and does not attach that schedule, but he gives no evidence to suggest that the schedule was not in fact provided to him at the time of entry into the Loan Agreement, as the Company had acknowledged in that agreement. Mr Sahade submits I should draw the inference the schedule does not exist, because it is not in evidence. I do not consider that inference is genuinely arguable, since there is, in terms, an acknowledgment by the Company that it received the schedule and there is no evidence to the contrary by Mr Olivieri. 13Clause 2 of the General Terms and Conditions sets out the requirements for loan advances which included, in respect of a building loan, additional requirements in clause 3. Clause 3.4(c) further referred to the schedule of loan advances and provided that the number and amount of loan advances and the building work which must be completed before each loan advance was set out in the schedule attached to the offer. Plainly, as I have noted above, whether or not a schedule accompanied the offer, or was attached to it, it is not in evidence in the proceedings. Clause 3.4(e) in turn provided that, unless the building works were completed and the scheduled final loan advance was made within six months after the date of the first loan advance, the Bank may refuse to make any further loan advances. 14Pausing here, and subject to a further argument put by Mr Sahade on behalf of the Company that I will address below, the General Terms and Conditions provided for loan advances in accordance with the schedule and subject to specified building work set out in that schedule being completed before each advance. It does not seem to me that the Company has established a genuine question to be tried that it had an entitlement to an advance, noting, as I will indicate further below, that it had in fact sought a redraw rather than an advance at the relevant time. There is no evidence of the relevant schedule and, in particular, no evidence of the building work to be completed before the relevant loan advance was made or of the building work that the Company had in fact completed at the relevant time, by reference to that schedule, although Mr Olivieri gives evidence in somewhat general terms that the building works were well advanced by that time, including identifying some parts of the building works that were complete. In these circumstances, it does not seem to me that a genuinely arguable case has been established that there was an obligation on the Bank to make the relevant advance and, absent a genuine question to be tried as to the existence of such an obligation, no genuinely arguable question of breach arises. 15There was also argument between the parties as to the effect of clause 3.4(e) of the General Terms and Conditions, to which I have referred above. Mr Sahade contends that, where no schedule existed, that clause can have no application to provide a discretion on the bank to decline to make further advances. There is, as I have noted, a difficulty with that submission, namely that there is not sufficient evidentiary basis for its premise that no schedule existed to raise a genuine question to be tried. There is also a difficulty with the logic of that submission. There seem to me to be only two possibilities available. The first is that the scheduled "final loan advance" was made within six months after the date of the first loan advance. In that case, the clause has no application, but needs to have no application because, in the relevant circumstances, the "final" loan advance had already been made. The second possibility is that the scheduled final loan advance was not made within that period, in which case the Bank had a discretion whether to make further loan advances. There are, accordingly, even in the absence of the schedule, only two possibilities, either that the final loan advance had already been made and the Bank had no obligation to make further advances, or that there was a discretion on the part of the Bank as to whether to make further advances. 16Mr Sahade's alternative argument was that, if the schedule did not exist, a term should be implied in fact that the bank would advance the entire loan amount specified, namely $1,015,000, on demand. As I have noted, the evidentiary basis for the premise of that submission was not established. But even if that premise were established, it seems to me there is no genuine question as to that argument, because the basis of the relevant implication could not be established on any view. First, the implication is contrary to the express terms of the Loan Agreement which provided for loan advances in accordance with the schedule, not on demand. Second, the suggested implication is neither necessary to give commercial efficacy to the contract nor so obvious that it goes without saying. Indeed, the suggested result is absurd, since it would have the consequence that, on the penultimate day of a loan with a term of 20 years contemplating scheduled repayments to reduce the principal, the Company could demand the entirety of the loan amount be re-advanced to it, or alternatively, be advanced to it. That implication would defeat the commercial purpose of a loan agreement in this form. 17I should here also note that, as I observed above, the request made by the Company in January 2008 was not, in terms, a request for an advance, but instead a request for a redraw made in the form provided by clause 21 of the General Terms and Conditions for such a redraw. Mr Olivieri's subsequent letter dated 24 February 2008, complaining of the failure to make the relevant payment and threatening legal proceedings, was itself headed "Redraw Amount" although it also referred to use of that amount for progress payments. It was common ground between the parties that clause 21 of the General Terms and Conditions did not impose an obligation upon the Bank to permit a redraw, simply providing a mechanism for the borrower to request one, as the Company did. The Company's case was that the amount of $25 was available for a redraw; the Bank's case was that no amount was available because that $25 had been applied to the last redraw fee; in either event, the Company did not contend that a genuine claim arising from the failure to make a redraw arose, but instead put its primary case on the basis of a failure to make an advance. 18It seems to me that the distinction between the request for a redraw and the request for an advance is a matter of substance and not of form. As Mr Koch, who appeared for the Bank, pointed out, the contractual terms providing for further advances and redraws are substantively different; the former had conditions which needed to be satisfied, including conditions as to the extent to which building works had advanced, whereas the latter did not have such conditions but conferred a discretion on the Bank. The Company had in fact invoked the latter provisions, and there is no evidence that it had sought to satisfy the conditions for the former, including as to the extent of building works which had been completed. Where the Company had sought a redraw, it does not seem to me that any failure by the Bank to provide an advance could be established, even to the level of a genuinely arguable case. 19The Company also relies on an internal Bank document headed "Loan Diary" which, as at 11 November 2011, stated that "Avail to bld $320,000 s/plus $286,317.7." The Company contends that that entry creates an estoppel, whether as a representational or conventional estoppel. Putting aside the somewhat cryptic character of that reference, it does not seem to me that a claim for either a representational or conventional estoppel is genuinely arguable. First, the entry does not say anything as to whether the Bank did or did not have an obligation to advance an amount. Second, there is no evidence of any representation by the Bank to the Company to support a representational estoppel, since Mr Olivieri's evidence is that the Bank made clear that it would not in fact make a further advance without a valuation by the real estate agent. There is also no evidence of common conduct arising from this document which is internal to the Bank alone or of any common assumption between the parties so as to support a claim for conventional estoppel. 20The Company also raised a claim for breach of the bank's discretion under clause 3.4(c) of the General Terms and Conditions to withhold an advance. Again, it does not seem to me that a genuine basis for an offsetting claim is established in this regard since, first, the question of withholding an advance does not arise where no genuinely arguable basis for an obligation to make it has been shown and, second, Mr Olivieri's evidence and the documentary evidence does not establish the slightest evidentiary basis for any allegation that a discretion of the Bank was misused. 21It therefore does not seem to me that the evidence on which the Company relies is capable of establishing the basis of an offsetting claim, even to the undemanding standard required by the authorities, for all the reasons I have indicated above. Even if I had held to the contrary, it also does not seem to me that the Company's evidence rises to the level necessary to establish a quantifiable claim for damages, in the manner that is required as set out in Royal Premier Pty Ltd v Taleski, above. The claim for damages rests, as I noted above, on a suggestion the letters of intent supported a claim for the loss of rental on a weekly basis over an extended period since June 2008. There is a fundamental difficulty with that proposition, namely that two of the six letters of intent on which the Company relies are addressed to another entity, Mio Amico Pty Limited ("Mio Amico"), and refer to a proposal for that entity, not the Company, to lease parts of the property to a third party. The other four letters of intent are addressed to Mr Olivieri but also expressly refer to a proposed lease of the property by Mio Amico to the third parties. There is no basis on which the Court could infer that the Company would derive the suggested income from a lease of the property, not by it but by Mio Amico, and the Company has not sought to lead evidence of any arrangements which might have existed between it and Mio Amico which would allow it to derive any benefit from any lease of the premises by Mio Amico. 22For all of these reasons, the asserted offsetting claim is not established and the application to set aside the creditor's statutory demand should be dismissed. 23In the ordinary course, costs would follow the event. Mr Sahade, who appears for the Company, properly did not submit to the contrary. The Company should pay the Bank's costs of the application, as agreed or as assessed.