Supreme Court New South Wales Medium Neutral Citation: In the matter of Connec Pty Limited ACN 093 143 027 [2014] NSWSC 157 Hearing dates: Thursday, 27 February 2014 Decision date: 27 February 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Originating process dismissed with costs Catchwords: CORPORATIONS - winding up - statutory demand - whether a genuine dispute as to indebtedness - held, none - whether evidence sufficient to establish offsetting claim - held, none Legislation Cited: (Cth) Corporations Act 2001, s 459G Cases Cited: Britten-Norman Pty Ltd v Analysis and Technology Aust Pty Ltd [2013] NSWCA 344 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Greenwood Manor Pty Ltd v Woodlock (1994) 48 FCR 229 Category: Principal judgment Parties: Connec Pty Limited ACN 093 143 027 (plaintiff) Stephen Lambourne, Scott Lucas, Paul Franks, Jason Ginns, Chad Nean, Chad Stead, Michael Kinniard, Pearlrain Pty Limited ATF Lambourne Trading Trust, Gantrox Pty Limited ATF Scott Lucas Family Trust, JSM Franks Pty Limtied ATF Franks Accounting Trust, Jagen Investments Pty Limited ATF Ginns Family Trust, CR Nean Investments Pty Limited ATF Nean Family Trust, Chad Stead ATF CA Stead Family Trust, M&N Kinniard Pty Limited ATF Kinniard Discretionary Trust, trading as Lambourne Partners (defendants) Representation: Counsel: R Notley (plaintiff) G Carolan (defendants) Solicitors: Norton Rose Fulbright Australia (plaintiff) Bilbie Dan Solicitors (defendants) File Number(s): 2013/28488 Judgment (ex tempore) 1HIS HONOUR: On 9 September 2013 the defendants, who are the partners in a firm of accountants to which and to whom, for the sake of convenience I shall refer by their trading name Lambourne Partners, served on the plaintiff Connec Pty Ltd a creditor's statutory demand claiming a debt of $78,188 described in the schedule to the demand as follows: Description of debt Amount of debt Debt due and payable re invoice numbers 22434, 22955, 23415, 23804, 24233 and 24735 provided to the debtor Company and relating to an agreement between the Company and the Creditor for the Creditor to provide accounting and taxation services to it - refer schedule attached $78,188.00 Total amount still outstanding and due and payable $78,188.00 2Annexed to the demand was a further schedule which listed each of the six invoices by date and amount and showed the same total sum. The demand was accompanied by an affidavit which annexed each of the relevant invoices. 3By originating process filled on 20 September 2013, the plaintiff applies pursuant to (Cth) Corporations Act 2001, s 459G, for an order setting aside the demand. It asserts that there is a genuine dispute as to the whole of the indebtedness claimed and that it has offsetting claims greater in amount than the amount of the demand. 4Lambourne Partners is, as I have said, a firm of chartered accountants which provides accounting and taxation services but tend to specialise in business services and assisting clients with transactions, although they also perform compliance work such as completing tax returns. 5Connec is engaged in the development of a technology project. On 20 October 2011 three documents relevant to its constitution and operation were executed. The first is a shareholder agreement between Connec, then known as Head Electrical International Pty Ltd and called "the company", Oyster Holdings Corporation Pty Ltd, now known as "3EI-1", and called "the investor", and a number of shareholders listed in a schedule. By the shareholders agreement, Oyster Holdings, whose principal is Mr Kim Manley, agreed to subscribe for shares in Connec pursuant to the subscription agreement, and the shareholders agreed that their relationship as shareholders in the company would be governed by the terms and conditions set out in the shareholders agreement. 6The parties to the subscription agreement were Connec and Oyster Holdings. By it, Oyster agreed to "the right" to invest up to $6,575,000 in cash in the company in return for 1,937 shares in the company, representing 50% of the total issued share capital of the company, upon the terms and conditions set out in that agreement and ancillary agreements. The subscription agreement provided for Oyster to subscribe for shares called the "first investment tranche" and the "second investment tranche" upon completion, and then by cl 4.1 as follows: 4.1 Further Investment Tranche The Investor agrees to subscribe for the number of Shares at the sum specified in Schedule 3 and shall pay for such Shares by direct transfer to the Company Bank Account of immediately available funds and the Company shall allot and issue the relevant number of Shares to the Investor, which shall be fully paid and rank pari passu with all other Shares, together with the share certificates in respect of such Shares. The Investor agrees to make the further Investment Tranche payments (after the First and Second Investment Tranches) quarterly in advance subject to the Company achieving the next consecutive Milestone and it being verified as set in Schedule 4 by the relevant Long Stop Date. 7It will be noted that Oyster's obligation to make the further investment tranche payments after the first and second investment tranches was subject to the company achieving "the next consecutive Milestone" and that being verified as set out in schedule 4 "by the relevant Long Stop Date". Clause 4.3 provided that if the Milestone had not been achieved by the relevant Long Stop Date then the investor may, but is not obliged to, subscribe for the Shares comprised in the subsequent Investment Tranches relevant to that Milestone. Clause 6.1 provided The Company shall use commercially reasonable efforts to achieve each Milestone by its corresponding Expected Achievement Date. 8Milestones were defined to mean any of the milestones 1, 2, 3 or 4 as the case may be. "Milestone 1" was defined to mean "a committed customer order (which is unqualified) for a commercially viable quantum at a commercially acceptable purchase price, as determined by the parties, for 3.3KV capacity production units of the Company Technology". 9"Expected achievement dates" were defined to mean the "dates upon which the milestones are expected to be achieved as set out in Pt A of Sch 4", and "Long Stop Date" meaning the "latest date by which a milestone is to be achieved and verified as set out against each relevant milestone in Pt A of Sch 4". Part A of Schedule 4 provided, in respect of milestone 1, that the expected achievement date was 10 months from the date of the agreement, which would have been 20 August 2012, and the Long Stop Date was 12 months from the date of the agreement, which would have been 20 October 2012. 10Also on 20 October 2011, Connec and Oyster entered into a debt management agreement which recited that the company had unsecured debts of $1,681,899 and the investor had agreed to invest additional funds and subscribe for further shares in the company on the terms set out in the agreement. By clause 2, Oyster agreed to subscribe for additional shares to enable the company to pay its debts in accordance with the repayment plan, and that the creditors were to be paid in repayment of debts if the relevant milestones for each debt as set out in the repayment plan had been verified. The schedule listed approximately 20 creditors of the company, in respect of most of which the due date was said to be milestone 4 and the others were said to be "refer to initial budget". The repayment plan in schedule 2A is difficult to relate to individual debts, as it attributes various amounts of the total indebtedness to the various investor tranches. 11The shareholders agreement provided by clause 3.8 that the board should consist of up to three directors, and that when the investor held 15% or more of the shares in the company but less than 30% Oyster was entitled to appoint one director, and upon obtaining pursuant to the subscription agreement 30% or more of the issued shares, the board would be extended to four members or possibly five, including two appointed by the existing shareholders and two appointed by Oyster. However, until early 2014, the board comprised only two directors, Mr Mark Wells and Mr Kim Manley. 12The arrangements for day to day management of the company's affairs were, as described by Mr Manley in para 22 of his affidavit, that Mr Wells was responsible for the day- to-day management of the running of the plaintiff's operations, his primary responsibility being to develop and produce a particular technology project being undertaken by the plaintiff. 13The first milestone to which I have referred was not achieved by the expected achievement date or the Long Stop Date and, so far as the evidence goes, has still not been achieved. Its non-achievement, apparently, led to a deterioration in the relationship between Mr Wells and Mr Manley, and the board became dysfunctional. This state of affairs continued until about 27 February 2013 when, according to Mr Manley - he says as a consequence of Mr Franks' failure to provide the board with information it had requested and growing concerns about the mismanagement of the plaintiff's affairs generally - he caused Oyster to invest a further $500,000 in Connec as a result of which its shareholding exceeded the 30% that enlivened its power to appoint a further director, with the result that on 27 February 2013 David Hancock was appointed a director on the nomination of Oyster and the impasse was overcome. 14I turn first to whether there is a genuine dispute as to the debt claimed. 15The approach of the Court to such questions has recently been restated by the Court of Appeal in Britten-Norman Pty Ltd v Analysis and Technology Aust Pty Ltd [2013] NSWCA 344. As the Court said: [30] It is settled law that s 459H requires the court to be satisfied that there is a "serious question to be tried": see Scanhill v Century 21 Australasia at 467, or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted "with sufficient particularity to enable the court to determine that the claim is not fanciful". [31] In similar vein, although dealing with the question whether there was a genuine dispute within the meaning of s 459H(1)(a), McLelland CJ in Eq, in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 considered that the expression "genuine dispute" involved a plausible contention requiring investigation and raised much the same sort of considerations as the "serious question to be tried" criterion that applied in the case of an interlocutory injunction. 16It is worth noting that (at [36]) the Court restated that while there must be evidence that satisfies the Court that there is a serious question to be tried, an issue deserving of a hearing or a plausible contention requiring investigation, the existence of either a dispute as to the debt or an offsetting claim, the evidence sufficient to satisfy that test, given the time period in which the affidavit must be filed, cannot and need not conclusively prove the claim, or otherwise be incontrovertible or substantially incontestable. At the same time, their Honours recognised the distinction between determining whether there is sufficient evidence to establish a disputed debt and determining whether the applicant's claim will succeed, as described by Northrop J in Greenwood Manor Pty Ltd v Woodlock (1994) 48 FCR 229 at 234, where his Honour said: Although it is true that the Court, on an application under s459G and s459H is not entitled to decide a question as to whether a claim will succeed or not, it must be satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt. If it can be shown that the argument in support of the existence of a genuine dispute can have no possible basis whatsoever, in my view, it cannot be said that there is a genuine dispute. This does not involve, in itself, a determination of whether the claim will succeed or not, but it does go to the reality of the dispute, to show that it is real or true and not merely spurious. 17There Honours also refer, with evident approval, to the oft quoted statement of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 (at 787) as a qualification to the proposition that the Court was not concerned to engage in an enquiry as to the credit of the deponent of the affidavit filed in support of the application. His Honour had said: This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be" not having "sufficient prima facie plausibility to merit further investigation as to [its] truth" (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or "a patently feeble legal argument or an assertion of facts unsupported by evidence": cf South Australia v Wall (1980) 24 SASR 189 at 194. 18Bearing that guidance in mind, I turn to the facts in this case. There is no dispute that the work the subject of the invoices which comprises the debt claimed was done. There is in evidence the time sheets that demonstrate that it was done, and nothing in the plaintiff's evidence or submissions called into question that the work had been done. On the part of the defendant, it was accepted that much of the work, though not all of it, had been done, on the instructions of Mr Wells, as distinct from the instructions of Mr Manley. The plaintiff's contention was that the work was not authorised by the company and, therefore, that it had not been done with the instructions, authority or approval of the company which was, therefore, not obliged to pay for it. 19The company retained Lambourne Partners to provide accounting and taxation services by a retainer in writing dated 3 March 2011, pursuant to which Lambourne Partners agreed to provide various services to the company. Thereafter, Lambourne Partners did so principally through the person of one of its partners, Mr Paul Franks. Until December 2012, Lambourne Partners rendered invoices on a monthly basis at the end of each month and, at least up until the invoice rendered at the end of November 2012, its invoices were paid. 20A meeting of the directors of the company was convened on 10 December 2012. It will be recalled that by this time the relationship between the two directors had deteriorated. The best evidence of what took place at that meeting is what is described as the "plenary notes" of the meeting, which in effect are a full set of minutes. As well as the two directors, Mr Franks was present, as appears to have been commonplace, as was Mr Ireland. The notes record, towards the end of the meeting, the following under the heading of "Action Items". Given the level of concern for the progress of the company and tis financial position KM advised that he does not want the company to incur debts that is unable to pay from available cash reserves. It was agreed that the following action should be undertaken without delay: 1. All contractors and service providers engagements are to cease and they are to be notified of same and appropriate terms so as not to lead to adverse sentiment toward the company. 2. Hold off on paying Wood Mackenzie, to conserve resources. 3. Return $100,00 good faith payment to 3ei-1. 4. Seek out / source alternate investors within 7 days who are willing to invest in the company. 5. In the event that there is expressed interest from investors, have an IM prepared for the investor(s) to commit without delay. 6. In the event that there are no investors with a sated interest in investing in the company within 7 days or they do not commit within 14 days, then without delay appropriate notification si to be given to staff and service providers to end financial commitments of the company. 7. Arrangements are to be made for an AGM at the end of January 2013 and appropriate notification issued. 8. All outstanding invoices to Argyle's are to be paid out today. 21For present purposes, item 1 is germane. The plaintiff's contention, by Mr Manley, is that this amounted to a direction to Lambourne Partners (by Mr Franks) that its engagement had ceased. Subsequently, on 12 December, Mr Manley sent an email to Mr Wells, Mr Franks and Mr Ireland entitled "Board Agreements" (Manley affidavit page 184). It was addressed to "Mark, Paul, Andrew" and then referred to the board meeting and "the actions agreed to be undertaken for you and Paul Franks on Tuesday 11 December." It then specified a number of action items, including "6. No third-party contractors or providers will be engaged or engaged to do further work by the company." The email then complained that Mr Manley had received no communication or confirmation of those actions and sought such confirmation. After making some further requests for information, it continued: Being aware that Paul Franks is away from 22 December, the two week window of opportunity to seek funding for the company being less than $100,000 of cash available (following Franks' summary) and need the board to approve the terms and conditions of any investment in the company. I have rescheduled my overseas commitments in order to address these matters and arrange the meeting at the earliest possible date. 22The letter then specified a meeting with an insolvency practitioner on Thursday 20 December 2012. The inescapable inference from the circumstances that a reference was made to Mr Franks' being away from 22 December and to the author having re-arranged his affairs to address the matters at the earliest possible date and the appointment of the meeting for 20 December - that is to say before Mr Franks would be away - is that Mr Franks' ongoing involvement was implicit. Indeed, it seems to me to have contemplated Mr Frank's attendance at the specified meeting, but in any event it contemplated that he was going to continue to be involved: otherwise, his absence from 22 December would have been quite immaterial. 23Some time after the deterioration in the relationship between Mr Wells and Mr Manley, Lambourne Partners became concerned that they received conflicting instructions from the two directors. In a letter to Mr Manley of 26 July 2013, Mr Lambourne wrote: At this point in time, Paul Franks, a partner in this practice, sought legal advice from the Institute of Chartered Accountants who advised that no requests from directors be actioned unless both directors were in agreeance. 24In his affidavit - which was not contradicted nor the subject of challenge - Mr Franks attributed this to March 2013, and says that he spoke with the Institute of Chartered Accountants and was advised that, in situations where he received conflicting instructions from more than one director he should not act, but he could carry out the non-contentious work for the company on matters where there was no dispute. 25Of course, what the Institute of Chartered Accountants might have advised Lambourne Partners does not in any way bind the company; nor does it establish what the true legal position is. Moreover, it seems to me that, in effect, what the firm was advised was that where there were conflicting instructions it would be prudent not to act without confirming the instructions with both directors. That is not quite the same thing as advice that they were not legally entitled to act except on the direction of both directors. 26That interpretation is supported by Mr Franks' email to Mr Manley, which was copied to Mr Wells, on 11 March 2013 (Manley affidavit page 183), in which Mr Franks advised: Given the ongoing disputes between you and Mark, it would, perhaps, be more appropriate for any further requests from you to be approved by all the directors of the company. Accordingly, can you please both provide confirmation of this for all questions...my engagement is with the company and not the company directors personally. 27In his s 459G affidavit, Mr Manley invokes the advice from the Institute and his email of 12 December 2012 and characterises them as "a clear direction that Paul Franks can only be engaged by the plaintiff by joint direction when working for the plaintiff." 28It will be evident enough from the material set out above that the advice does not satisfy the description attributed to it by Mr Manley. In its terms it said nothing about requiring joint direction. The only place that idea arose was in an advice from the Institute which conveyed it, perhaps indirectly, to Mr Manley in March 2013. 29So far as what transpired on 10 December and 12 December 2012 is concerned, there was no such direction. Nor was there any direction terminating the retainer, or "disengaging", Lambourne Partners. In my view, the context makes very clear that neither Mr Manley nor Mr Wells nor Mr Franks the resolution of that date to affect Lambourne Partners. In speaking of third-party consultants, it was not intending to embrace the company's accountants. In my view, this is made clear by a number of matters. 30First, I have already referred to Mr Manley's email of 12 December contemplating the ongoing involvement of Mr Franks. 31Secondly, on 19 February 2013, Mr Franks sent to Mr Wells and Mr Manley the January finance report, saying, "I hope you can make it for the meeting on Friday." Mr Wells responded on the same day, thanking him for the report and saying that it raised a number of questions and that he would revert with questions and comments before or during the board meeting, and then asking to confirm his availability for a meeting on 27 February in Sydney, as Mr Franks subsequently did. 32Thirdly, Mr Franks continued to prepare financial statements on a monthly basis for the company and provided them to the board of directors and attended directors meetings. No objection was raised by Mr Manley on any occasion to this, and there was no suggestion that Mr Franks was asked or told, "Why are you here", "Don't expect the company to pay for your time", "I have not agreed to this" or anything to that effect. 33Fourthly, on 22 February 2013, Mr Manley sent an email to Vivienne Lightfoot at Price Waterhouse Coopers. In the course of that email (Manley affidavit page 211) he said: Please note Mr Paul Franks is the accountant for the company, he is not a director and has no right to vary the terms of your engagement without the company's authority which includes me with a director. 34That is inconsistent with the proposition that he had been "disengaged" on 10 December 2012. 35Fifthly, on 28 February 2013 Mr Manley sent an email to Mr Franks copied to Mr Wells and others (Manly affidavit page 198) which inter alia said: As you are well aware, as external accountant to the Company, I would expect that you would respond to my reasonable requests promptly. Please arrange to provide the corporate key to the company secretary by 5.00pm today. If you are out of the office please direct someone in your office to forward the key by 5.00pm 36That is quite inconsistent with Lambourne Partners being included in the scope of the resolution on 10 December 2012 37Sixthly, on 5 March 2013 Mr Manley sent an email to Mr Franks (Manly affidavit page 197) referring to two emails received from Mr Franks on 1 March and continuing: Please advise when you will respond to my questions: Please confirm the name of the legal advisors you have engaged. Please detail the discussions you have had with Mark Wells over the last 2 days. I note that the company pays your time and services, not Mr Wells. Please confirm and forward details of the dates and substance of any conversation or discussion you have had with Mr Nino Odorisio, or the firm, Hapgood Ganim in the last 3 months. 38Again, that is entirely inconsistent with any concept that the resolution of 10 December 2012 was to include Lambourne Partners. 39Seventhly, on 19 March 2013 Mr Manley sent an email to Mr Franks (Franks affidavit page 53), asking that he ensure that: We have: ● updated company finance for tomorrow's meeting (a summary form will suffice if full report not available). ● copy of D&O insurance." 40He was also asked to have available for discussion proposed terms for re-engagement of key management personnel. On no view could it be said that proposed terms for re-engagement of key management personnel related to work done in the past and simply for updating information. 41Eighthly, Mr Franks deposed to a conversation, which was corroborated by another witness in the defendant's case, following a meeting on 30 May 2013 at which the defendant's retainer was terminated. In that conversation, Mr Franks asked, "Can the Lambourne Partners invoices get paid, is there any problem about them?", to which Mr Manley replied, "There is no problem with the bills and they will be paid shortly. There is no preference being shown as to which creditors are getting paid." For reasons given yesterday, I rejected for unexplained late service an affidavit in reply by Mr Manley in which he sought to explain, without fully denying, that conversation. Suffice it to say that had I admitted that affidavit - in which Mr Manley says that his response was, "No, I don't personally have an issue with the Lambourne Partners invoices", then his own version of the conversation would be quite inconsistent with a genuine belief that the work done by Lambourne Partners since December 2012 had been unauthorised by the company so that the company was not liable to pay for it. 42Ninthly, as I have said, the Lambourne Partners retainer was terminated in May 2013. It is instructive that Mr Manley deposes (in paragraph 56 of his s 459G affidavit) that on 31 May 2013 a meeting of the board took place, "where the engagement of the defendant was terminated by the plaintiff". If the resolution of 10 December 2012 had the effect for which it is now contended, then there would have been no necessity to do that on 31 May 2013. 43Finally, Mr Manley wrote a letter of complaint to Lambourne Partners which, after passing through a number of drafts, was sent on 13 March 2013. In it, under the heading "6. Your fees", reference is made to the level of accounting fees that Lambourne Partners had charged and continued to charge. There is no complaint in that letter that the work had not been authorised by the company. 44In my view, that material shows that the argument that the work performed by Lambourne Partners from December 2012 onwards was unauthorised is spurious. It was authorised under the terms of the original retainer, until that retainer was terminated as it was at the end of May 2013. The absence of any prior objection on the basis of lack of authority, the ongoing requests and acceptance of Mr Franks' presence at meetings and provision of financial statements, all demonstrates that the work he was performing was regarded as sufficiently authorised when done on the instructions of either of the directors, but in any event when done on the instructions of Mr Wells who, as Mr Manley said, had responsibility for management of the affairs of the company. Accordingly, there is no genuine dispute as to the indebtedness. 45I turn to the contentions that there are offsetting claims. Again, reference was made to what must shown in this context by the Court of Appeal in Britten-Norman, as follows: [48] The same approach has been taken to the evidence required in the case of an alleged offsetting claim: see s 459H(1)(b). In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 Thomas J stated, at 605: There is little doubt that Div 3 ... prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a 'genuine dispute' and whether there is a 'genuine claim'. It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it). (emphases added) [49] It should be noted that the observations of Hayne J in Mibor and Thomas J in Morris Catering were cited with approval by McLelland CJ in Eq in Eyota at 787-788. [50] Eyota was expressly applied by this court in Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365 ; 297 ALR 372 at [44], where Young AJA (Hoeben JA and Ward J (as her Honour then was) agreeing) stated the test in the following terms: ... all the primary judge needed to do was to determine whether there was a genuine dispute, that is one in which a plausible contention has been raised by the company on which the statutory demand was served (Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785). [51] More recently, in Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSCA 176, Osborn JA, with whom Ashley JA agreed, endorsed the approach taken in Eyota. In this regard, Osborn JA approved the review of the authorities in Rhagodia Pty Ltd v National Australia Bank [2008] VSC 295; (2008) 67 ACSR 367 by Robson J, where his Honour made extensive reference to Eyota. Robson J in Rhagodia also referred to the remarks of Dodds-Streeton JA (with whom Neave and Kellam JJA concurred) in TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; 66 ACSR 67 where her Honour stated, at [57], in an approach which mirrors what was said in Eyota, that when determining whether to set aside a statutory demand, an in-depth examination or determination of the merits of the alleged dispute was neither necessary nor appropriate. Her Honour likened the determination to that taken in respect of an interlocutory injunction. [52] Dodds-Streeton JA explained further, at [71], that: As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice. 46As appears from the passage in the judgment of Dodds-Streeton JA just quoted, though a fully evidenced claim amounted to the proof that would be necessary to prove a claim in a court of law is not required, the offsetting claim must rise above mere assertion. 47In Mr Manley's s 459G affidavit, a scatter-gun approach was initially adopted, with paragraph 9 of that affidavit being in the following terms: The offsetting claim arises as a consequence of conduct of Paul Franks, as a partner of the defendant. Namely, without limitation, Paul Franks: (a)Acted as a shadow director of the plaintiff and in this capacity, breached the duties he owed pursuant to s 180 - 184 of the Corporations Act 2001 (Act) to the plaintiff; (b)Dealt in an unauthorised manner with shares of the plaintiff; (c)Via entities controlled by, or alternatively, related to, Paul Franks, was in a position of conflict in relation to the provision of services to the plaintiff (d)Breached his duty to the plaintiff by promoting his own interests to the detriment of the plaintiff; (e)Knowingly caused and assisted the plaintiff to breach its obligations to its shareholders; (f)Failed to appropriately report to the board of the plaintiff (board) in relation to transactions that constituted a breach by the plaintiff of its obligations to shareholders; and (g)In his capacity as an the accountant of the plaintiff with joint and several liability with the defendant given the conduct above, the plaintiff also has claims for: (i)Breach of conduct; (ii)Negligence; and (iii)Misleading and deceptive conduct. 48However, in respect of most of the assertions contained in that paragraph, the affidavit entirely failed to show how the matters or breaches alleged caused any loss to the company, even if it could establish to the requisite standard that there were any such breaches. 49Ultimately, the case was put on three bases, all of which essentially depend on or derive from subpara (g) of para 9 of the affidavit. In short, they can be described as, first, general mismanagement; secondly, unauthorised loans; and, thirdly, the debt management agreement. The arguments were advanced on that basis, and only in respect of those matters, in the plaintiff's written and oral submissions. In the course of argument, counsel for the plaintiff accepted that they were the only bases on which offsetting claims were advanced. 50As to "general mismanagement", the claim can, I think, best be formulated for present purposes as follows. First, Mr Franks, as a partner in Lambourne Partners, who were jointly and severally responsible with him, served as a close business adviser to Mr Wells in the management of the company. Secondly, Mr Wells relied on Mr Franks' advice. Thirdly, Mr Wells was responsible for achieving the first milestone. Fourthly, at least $3.1 million was received by the plaintiff from investors during the period up to 31 May 2013. Fifthly, those funds were dissipated without achieving the first milestone. Sixthly, the reason the first milestone was not achieved was mismanagement by Mr Wells to which Mr Franks' advice materially contributed. 51I am content to assume for present purposes that Mr Franks provided advice to the company through Mr Wells, and that that advice extended to business and commercial as well as pure accounting matters, and that Mr Wells relied on that advice. However, the proposed claim fails as presently articulated is doomed to fail, at numerous levels. First, the fact that a milestone was not achieved simply does not demonstrate mismanagement; indeed, the provision of the subscription agreement to which I have referred does not even impose an obligation to achieve the milestone, but only to use commercially reasonable efforts to do so. 52The consequence of not achieving a milestone is, so far as I can tell, simply that the investor is relieved of the obligation to make the next investment tranche payment, although the investor is still entitled at its discretion to do so. Secondly, there was simply no identification of the alleged mismanagement beyond the fact that the milestone was not achieved. Thirdly, there was no identification of any negligent act or advice of Mr Wells. It is not enough to say that time does not permit all that to be worked out or an audit is still under way. An applicant must address sufficient evidence to demonstrate at least a plausible contention requiring investigation. At this stage there is merely speculation that there might have been negligence, not any identified act of negligent advice or conduct. Finally, there is no reason to suppose that the money expended has been wasted or dissipated without purpose, as distinct from advancing the progress of the project towards achieving the first milestone, even though that milestone may not yet have been achieved. Accordingly, it simply cannot be said that any damage has been suffered as a result. In my view the claim of general mismanagement does not rise above speculation. 53The next alleged cross-claim is founded on the contention that the shareholders agreement, by clause 5.1(u), reserves as requiring the prior approval of the board the power to: Make terminate or materially amend any contract or arrangement or commitment or series of related contracts, arrangements or commitments involving, or which could involve, an amount to be paid or received by the company greater than $10,000, including, without limitation, financing arrangements or borrowings... 54It is said that by procuring loans of $400,000 received by the company on or about 24 January 2013, Mr Franks acted in breach of his duties to the company, those loans being characterised for that purpose as "unauthorised". Of the loans in question, one was from an entity associated with Mr Franks. The others were from entities which were clients of Lambourne Partners. For present purposes, I am content to accept that Mr Franks played some role in introducing the opportunity to the lenders - that is, in sourcing the loan. The shareholders agreement, of course, is an agreement, as it says, between the shareholders to regulate their affairs. 55The resolution of the meeting of 10 December 2012, to which I have referred, included the return of a $100,000 payment to Oyster and "seek out/source alternate investors within seven days who are willing to invest in the company" and "in the event that there is expressed interest from investors, have an IM prepared for the investors to commit to without delay." In the context of those resolutions of the directors, including Mr Manley, I cannot see how, by seeking to source investors for the company, if that is what Mr Franks did, he committed any breach of his duty of care to the company. To the contrary, it seems to me that he was doing exactly what the board resolved on 10 December should be done. If one or other of the directors did not attend to the formalities of obtaining formal board approval for the loans in question, that is a complaint that might be levelled against the relevant director or shareholder for breach of the shareholders agreement, but it does not seem to me arguably to involve any breach of duty by Mr Franks in sourcing the potential lenders. 56The heart of the complaint is that Mr Franks, as Mr Manley puts it in his affidavit, "did not expressly disclose" the "unauthorised loans". The company financial statements included reference to the loans in question. They were prepared by Mr Franks. Essentially what this boils down to is an allegation that Mr Franks was under an obligation to inform Mr Manley, as well as Mr Wells who was his ordinary point of contact with the company, that loans which both directors had joined in requesting be investigated were available. I know of no authority to the effect that a professional adviser to a company must communicate his or her advice to every director separately, as distinct from to the person who gives the instructions on behalf of the company. No such authority was referred to. Accordingly, I do not think there is any such duty. Moreover, in the context that what Mr Franks did was in accordance with the directors' resolutions of 10 December, even if such a duty existed I do not think it arguable that there was a breach of it on this occasion. That is because the loans were disclosed in subsequent financial statements of the company, and both directors knew what would be done from the resolutions in which they joined on 10 December. 57But even more fatal to this claim is the question of damage. Mr Manley says (in paragraph 69 of his affidavit) that if he was aware of the existence of, inter alia, the unauthorised loans he would immediately have taken the steps that he ultimately did take - presumably to invest a further $500,000 and appoint an additional director, "in order to ensure a greater level of transparency in relation to the plaintiff's affairs and mitigate any damage to the plaintiff during this period". 58The difficulties with that proposition in the context of the "unauthorised loans", which it will be recalled were sourced in late December 2012 and realised on 24 January 2013, are, first, the resolution of 10 December 2012 referred to above. It is impossible to reconcile a resolution to repay money to the investor and to seek out further loans from other sources with the proposition that, had Mr Manley been aware of the "unauthorised" loans, he would immediately have invested a further $500,000 himself. Secondly, the fact that, assuming that he had become aware of them some time in the latter part of December or the earlier part of January 2013 - that is to say, even before they were received - it is difficult to see that he could have acted much earlier than he did, in February 2013; although it is possible that the events might have been accelerated by one month, the evidence simply does not show that that would or might have had any significant impact on the financial position. But, thirdly, if what he contends were correct, then one would have expected his investment of $500,000 to be applied to repayment of the unauthorised loans rather than, as what happened, the retention of the loans and, at least in one case, subsequent ratification by Mr Manley's own signature. In those circumstances it does not seem to me that it is genuinely or seriously arguable that Mr Franks' role, such as it was, in the procuring of the "unauthorised" loans amounted to a breach of duty that caused loss to the company. 59The final aspect of the supposed offsetting claim was the debt management agreement. I have already referred to clause 2 of the debt management agreement, which provides that the creditors are to be repaid on the repayment dates if the relevant milestone for each debt as set out in the repayment plan has been verified. It is apparently alleged that Mr Wells paid one of the creditors $40,000, before the "repayment date". Again, this claim fails at numerous levels. First, it is not apparent that paying a creditor before the repayment date would be a breach of the debt management agreement in any event, though that might not be enough to conclude that the claim was unarguable. However, the only evidence of the underlying facts that would be required to sustain this claim is that in Mr Manley's s 459G affidavit he says, para 49, that on or about 4 April 2013: I caused a letter to be sent to Mark Wells regarding a misappropriation of funds in the sum of $40,000 that were applied in reduction of debt contrary to the plaintiff's obligations under the debt management agreement. 60Then the letter of 4 April is itself annexed and it contains the bare assertion - "I note that you misappropriated $40,000 of company cash reserves in the month of February 2013 and applied it to paying down the debt identified in the debt management agreement prior to the particular debt payment dates by many months...". 61There is, other than this bare assertion, no evidence that $40,000 was paid down in the way alleged or at all. Even less is there any evidence that it came to the notice of Mr Franks. It is suggested that because Mr Franks "controlled" the accounts of the company that he would or should have known of this. But as I understand the evidence, he did not operate the accounts or sign the cheques. He prepared the financial statements on a monthly basis. It is by no means apparent that an accountant preparing financial statements on a monthly basis and seeing an expenditure of $40,000 authorised by a director would recognise that that was a breach of the debt management agreement. Mr Franks was an accountant, not an auditor. The material simply does not show that he ought, as a matter of legal duty or as a matter of fact, have recognised the alleged and unproven payment to be a contravention of the debt management agreement, especially considering that it is by no means clear that such a payment would be a breach of the debt management agreement. 62But finally again, this claim completely fails at the level of causation. On this claim also Mr Manley's argument, as he says in para 69 of his affidavit, is, "If I was aware of the existence of the payments contrary to the debt management agreement I would have immediately taken the steps that I ultimately did take as set out at paragraph 53 above". The best evidence, defective as it is, of the alleged breach of the debt management agreement is the letter of 4 April 2013 to which I have referred. It asserts that the relevant payment took place in the month of February 2013. It does not say on what date in February. It was in any event in February 2013 that Mr Manley acted in the way that he says he would have acted had he known of the payment in question. Accordingly, the affidavit totally fails to establish that there was any difference made by the absence of knowledge of that matter. 63In my view there is nothing genuine or real about any of the proposed offsetting claims on the material that has been put before the court on this application. 64I order that the originating process be dismissed with costs assessed in the sum of $17,500. ********** 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: 27 November 2014