Supreme Court New South Wales Medium Neutral Citation: FAL Healthy Beverages Pty Limited v Manly Warringah Sea Eagles Limited [2016] NSWSC 1058 Hearing dates: 27 July 2016 Date of orders: 03 August 2016 Decision date: 03 August 2016 Jurisdiction: Equity Before: Barrett AJA Decision: 1. Order that the statutory demand dated 30 March 2016 served on the plaintiff by the defendant be set aside. 2. Order that the defendant pay the plaintiff's costs of the proceedings. Catchwords: CORPORATIONS – winding up – statutory demand – application for order setting aside – whether genuine dispute about existence of debt – CORPORATIONS – statutory indoor management rule – entitlement to make certain assumptions in relation to dealings with company – disentitlement in case of suspicion that assumptions not correct. Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth) Corporations Act 2001 (Cth) Cases Cited: Correa v Whittingham [2013] NSWCA 263; 278 FLR 310 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89; 19 ACLC 1270 Category: Principal judgment Parties: FAL Healthy Beverages Pty Limited (P) Manly Warringah Sea Eagles Limited (D) Representation: Counsel: Mr MLD Einfeld QC & Mr T Buterin (P) Mr DAC Robertson (D) Solicitors: Colin W Love & Company Lawyers (P) Unsworth Legal Pty Limited (D) File Number(s): 2016/121400 Publication restriction: Nil Judgment 1. BARRETT AJA: The plaintiff applies under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand dated 30 March 2016 served on it by the defendant. 2. The plaintiff manufactures and sells coconut beverages. The defendant organises and administers participation of the Manly Warringah Sea Eagles rugby league team in the national competition. It will be convenient to refer to the plaintiff as "FAL" and to the defendant as "Manly". 3. The alleged debt to which the statutory demand relates is said to have arisen from a written agreement entitled "Major Partnership Agreement" between the two companies dated 7 October 2015. Reduced to its essentials, the agreement provides for Manly to provide advertising benefits to FAL in connection with the staging of football matches, including by placement of FAL's logo on players' jerseys, and for FAL to make payments to Manly. 4. The debt is said to be in the sum of $302,500 and to have become due and payable on 20 February 2016 pursuant to the Major Partnership Agreement and an invoice issued to FAL on 15 January 2016. 5. FAL's s 459G application is based on s 459H(1)(a) and the proposition that there is a genuine dispute concerning the existence of the debt so described. The Major Partnership Agreement was signed for FAL by one Nick Xenos who, FAL alleges, had neither actual nor ostensible authority to bind it to that contract. 6. As to actual authority, FAL says that, in the event of debt recovery proceedings brought against it by Manly, it would be incumbent upon Manly to prove Xenos' authority. As to ostensible authority, FAL makes the point that Xenos could not represent his own authority. 7. FAL further says that, in any such proceedings, it would not assist Manly to look to assumptions made available by ss 128 and 129 of the Corporations Act. Having regard to the way in which FAL's case was ultimately framed, the task on the present application is to assess the outcome that would emerge in such a hypothetical debt recovery action, having regard solely to the limited facts now before the court and the availability or unavailability of a particular statutory assumption of due execution of a document by a company. 8. As a prelude to outlining the facts, I should set out some relevant provisions of the Corporations Act: 9. Section 127(1) provides, so far as is relevant to this matter: "A company may execute a document without using a common seal if the document is signed by: (a) . . . ; or (b) . . . ; or (c) for a proprietary company that has a sole director who is also the sole company secretary—that director." 1. Relevant subsections of s 128 are: "(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. . . . (4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect." 1. Section 129(2) provides: "A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company." 1. The part of s 129(5) relevant to this case is: "A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1)." 1. Approaching the facts against that statutory background, I consider first the extent of what I shall call "publicly available ASIC information" concerning FAL, by which I mean "information provided by the company that is available to the public from ASIC" as referred to in s 129(2). 2. The application was argued on the basis that, as at 7 October 2015 (the date of execution of the Major Partnership Agreement), publicly available ASIC information concerning FAL showed that FAL had a single director and a single secretary, being Xenos. It is not disputed that, between 9 August 2011 and 15 September 2015, Xenos was an undischarged bankrupt and therefore automatically disqualified by s 206B(3) of the Corporations Act from managing corporations. 3. The possibility that Xenos had contravened s 206A(1) by acting while disqualified may be taken to have come to the notice of ASIC in some way since, by letter dated 13 November 2014 addressed to Manly's chief executive officer, Mr Kelly (by name), Manly was informed by ASIC of "a suspected contravention of section 206A of the Corporations Act (Cth) 2001 [sic] during the period 9 August 2011 to 13 November 2014" by Xenos. The letter was accompanied by a notice to Manly under s 30 of the Australian Securities and Investments Commission Act 2001 (Cth) also dated 13 November 2014 requiring Manly to produce certain documents relevant to a "suspected contravention" by Xenos described in terms corresponding with those in the covering letter. Section 206A makes it an offence to be involved in the management of a corporation while disqualified and, as noted above, s 206B(3) identifies bankruptcy as one cause of automatic disqualification 4. On 28 July 2015, some eight months after receipt of the ASIC letter and notice, two officers of Manly (the chief executive officer, Mr Kelly, and the chief financial officer, Mr Bare) initiated a telephone conversation with two ASIC officers. A file note of the conversation made by one of the ASIC officers (Ms Parbery) is as follows: "On Tuesday 28 July 2015 at around 10:10am, Jeremy Lang and I had a telephone conference with Neil Bare and Joe Kelly of Manly Warringah Sea Eagles. Neil advised that he requested the conference in the interests of 'transparency' as Manly are considering increasing their sponsorship agreement with FAL to include the following: * FAL would like to move their sleeve partnership to half of the front of the Manly jersey. This would occur at an increased price of around $300k per season and provide greater exposure for the FAL brand. * Extend the FAL/Manly sponsorship agreement for a period of 3 years. Neil further advised that in light of the current ASIC investigation, Manly had decided to 'de-risk' by only offering half of the jersey front to FAL for the sponsorship expansion. Neil highlighted that FAL are 'increasing their exposure in the marketplace' with extensive social media exposure and extended involvement with Melbourne City FC through the Manchester City sponsorship deal. Jeremy advised Neil that ASIC is unable to provide information on the status of the investigation other than it is ongoing. Neil asked for clarification regarding the focus of the investigation, whether it is the company or the individual identified in the Notices. Jeremy directed Neil to the relevant section identified on the Notices which is s 206A of the Corporations Act 2001, which is concerned with a person. Neil advised that Manly has the intention to proceed with the apparel sponsorship." 1. Execution of the Major Partnership Agreement occurred on 7 October 2015. On the view FAL takes, that agreement was a working out of an arrangement that had earlier been recorded in heads of agreement entered in August 2015. The heads of agreement commence: "This Heads of Agreement (HOA) is a legally binding document. It sets out the principal terms and conditions upon which the two parties agree to enter into for a new contract term of 2016-2018 inclusive with an option for 2019." 1. Detailed terms are then set out. The concluding paragraph is: "Subject to signing this HOA, Manly Warringah Sea Eagles and FAL Healthy Beverages Pty Ltd will execute a formal sponsorship agreement." 1. Comparison of the terms of the heads of agreement with those of the Major Partnership Agreement strongly suggests that the latter was entered into pursuant to and in fulfilment of the former. 2. Against this factual background, FAL contends that any entitlement that s 128(1) of the Corporations Act may otherwise have conferred on Manly to rely on a statutory assumption of due execution of the Major Partnership Agreement was denied by s 128(4) because, at the relevant time, Manly "suspected" that Xenos was disqualified by s 206A from the offices of director and secretary of FAL. 3. Manly contends that, by operation of s 128(1), it was, as at 7 October 2015, entitled to make an assumption that the Major Partnership Agreement was duly executed by FAL by means of the signature of Xenos alone. FAL's position is that the entitlement that might otherwise have arisen from s 128(1) is denied by s 128(4). It is the aspect of s 128(4) based on the word "suspected" (rather than "knew") that is said by FAL to operate against Manly. 4. A feature of s 128(4) and the disentitlement it effects is the temporal element. A person who, under s 128(1) is otherwise entitled to make a s 129 assumption "in relation to dealings with a company" is not entitled to make the assumption "if at the time of the dealings" they knew or suspected that the assumption was incorrect. Operation of the exclusion thus proceeds from the state of knowledge or suspicion prevailing "at the time of the dealings". 5. The alternative disqualifying factors under s 128(4) are that, at the relevant time, the person concerned "knew" that the assumption "was incorrect" and that the person "suspected" that the assumption "was incorrect". If in truth the assumption was correct (in the sense that the state of affairs actually pertaining corresponded with the assumption), it is not possible for someone to have known that the assumption was incorrect. Knowing connotes actual awareness; and it is not possible to have actual awareness of a non-existent state of affairs. In the case of suspicion, however, the position is different. One can easily suspect that a state of affairs exists that differs from the state of affairs in fact existing. 6. In the present case, the relevant "dealings" were, at the least, those involved in the preparation and execution of the Major Partnership Agreement. The parties put forward different views as to the time at which the "dealings" should be regarded as having begun. FAL argues for a long period extending back to, at least, execution of the preliminary heads of agreement entered into in August 2015. Manly argues for a short period encompassing, of course, the actual signing of the Major Partnership Agreement and perhaps events immediately preceding that signing but excluding still earlier events concerning the heads of agreement. 7. The desire of FAL to see the longer period identified as the relevant period (and the desire of Manly that the period be as short as possible) come from the fact that the events concerning ASIC in November 2014 and July 2015 are relevant to the possibility that Manly "suspected", in the s 128(4) sense, that that Xenos was disqualified from acting as an officer of FAL. On the view FAL takes, the closer those events were in time to the "dealings", the less promising are Manly's prospects of resisting a s 128(4) finding adverse to it. This is because of the words "at the time of the dealings" in s 128(4). 8. I am not persuaded that that is a correct approach to the legislation in this particular case. Section 128(1) creates entitlement to make specified assumptions "in relation to dealings with a company". The assumption relevant to this case is, in reality, a combination of the s 129(5) assumption that a document has been duly executed by the company if the document appears to have been signed in accordance with s 127(1) and the s 129(2)(a) assumption that anyone who appears from publicly available ASIC information to be a director or secretary of the company has been duly appointed. If entitlement to make the second assumption in relation to a particular person arises from the state of the publicly available ASIC information and a document is signed for the company by that person, entitlement to make the first assumption also arises. If both assumptions are thus available (and, in addition, the person is shown as sole director and sole secretary and the company is a proprietary company), the assumptions lead, via s 127(1)(c), to the conclusion that execution of the document by the person is due execution by the company. 9. For this particular combination of assumptions to be available to a person "in relation to dealings with" a proprietary company and a conclusion of due execution of a document by the company to be justified by the assumptions, the relevant "dealings" must necessarily have occurred at a time when, according to publicly available ASIC information, the person who signed was the sole director and sole secretary. In seeking to rely on this aspect of the statutory indoor management rule which, in effect, causes publicly available ASIC information to acquire a degree of conclusivity as to the status of a person in relation to the company, an outsider cannot obtain statutory assistance in relation to "dealings" involving that person that occurred at a time when publicly available ASIC information did not ascribe that status to the person. 10. In the hypothetical debt action with which we are here concerned, therefore, Manly, as plaintiff, will derive assistance from s 128(1) by way of entitlement to rely on the combination of assumptions concerning Xenos only in relation to "dealings with" Manly that occurred on or after 17 September 2015 when publicly available ASIC information first identified Xenos as sole director and sole secretary of FAL (which dealings, of course, include the execution of the Major Partnership Agreement on 7 October 2015). Likewise, FAL, as defendant, will succeed in deploying s 128(4) by way of defence only if it is shown that Manly "suspected", at the time of the dealings to which the s 128(1) entitlement would otherwise extend – that is, dealings after 17 September 2015 – that the assumption regarding Xenos based on publicly available ASIC information "was incorrect". 11. Since the relevant combination of assumptions can thus apply only to "dealings" within the period that began on 17 September 2015, the inquiry as to what, if anything, Manly "suspected" is confined to that period. 12. In relation to the meaning of "dealings" in s 128, it was noted on both sides that the Corporations Act itself contains no relevant definition and that all references to "dealings" in the section are in the plural rather than the singular form. FAL sees that as supporting its continuum approach. But Manly took the position that use of the plural form does not in any way preclude operation of the section in a discrete manner upon the single dealing consisting of the making of the Major Partnership Agreement. 13. Both counsel referred to the decision of the Court of Appeal in Correa v Whittingham [2013] NSWCA 263; 278 FLR 310 and to the following passage (at [127]) in the judgment of Gleeson JA with whom Tobias AJA and I agreed: "As to the question of principle, the language of s 128(4) has a temporal element. To be disqualified from making the assumptions in s 129 the person must know or suspect "at the time of the dealings" that the assumption was incorrect. Thus, the material time for the purpose of applying s 128(4) is "at the time of the dealings". Whilst the notion of "dealings" has been given a broad meaning, relevantly in the present case the reference to a dealing between Mr Whittingham and the club is to be taken as the source transaction. That is, the instrument purportedly appointing the administrator, not a step taken under it. Knowledge or suspicion acquired later does not deprive the party dealing with the company of the protection afforded by s 128: see Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662 at 667 per Wood J, a decision on the former provision in s 68D of the Companies (NSW) Code; Eden Energy at [83](e), an interlocutory decision concerning s 128(4) of the Corporations Act." 1. Applied to the present case, the reference here to "the source transaction" extends to the making of the Major Partnership Agreement on 7 October 2015 but cannot include a reference to the making of the heads of agreement in August 2015. 2. It is then necessary to consider the meaning of "suspected" in s 128(4). Reference was made in that connection to the observation in Correa v Whittingham above (at [159]) that the word refers to "actual suspicion". The judgment of Gleeson JA continues (at [160]–[162]): "[160] The word "suspect" has been taken to mean more than a mere idle wondering whether something exists or not. It is a positive feeling of actual apprehension or mistrust; of having an apprehension or mistrust amounting to a slight opinion but without sufficient evidence. Thus, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence: see Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 303 per Kitto J, in relation to the meaning of "suspect" in the phrase "reason to suspect" in s 95(4) of the Bankruptcy Act 1924 (Cth). [161] The statement of Kitto J in Queensland Bacon may be taken to provide the most useful guidance to the meaning of the word "suspicion" in s 129(4) [sic] of the Corporations Act: see Oris Funds Management at [118]; Silver v Dome Resources NL [2007] NSWSC 455; (2007) 62 ACSR 539 at 557 [77]; Eden Energy at [83](d). [162] The primary judge (at [44]) correctly observed that a company seeking to avoid the application of the statutory assumptions bears the burden of persuasion that a person claiming to make an assumption knew or suspected that the assumption was incorrect, referring to Ford's Principles of Corporations Law at [13.300]." 1. The evidence shows that, as at 28 July 2015 (a little more than two months before execution of the Major Partnership Agreement), the chief executive officer and chief financial officer of Manly were informed by ASIC officers that an investigation into suspected statutory contravention by Xenos (referred to in the file note as "the individual identified in the Notices") was ongoing. The precise meaning of "the Notices" (plural) is not entirely clear. The evidence now before the Court identifies only one s 30 notice dated 13 November 2014 as having been served on Manly. A matter for investigation in the hypothetical debt recovery action, based on the plural form "Notices" in the file note, could be whether in fact several notices had been received by Manly from ASIC. 2. Manly emphasises that the s 30 notice in evidence and its covering letter referred specifically to suspected contravention within the period 9 August 2011 to 13 November 2014. That, it was said, indicated that ASIC's apparent suspicion of contravention by Xenos did not extend to the possibility of contravention after 13 November 2014, a date some eleven months before the Major Partnership Agreement was signed. But, of course, the date identified by ASIC in the s 30 notice and covering letter as the end of the period to which the investigation related was the date those documents bore. ASIC obviously could not have been investigating on that date possible contravention in the future. That reality, coupled with the statement in the 28 July 2015 telephone conversation that the investigation was "ongoing", is sufficient to displace the possibility that, as at 7 October 2015, Manly was under the impression that there was no possibility of contravention by Xenos after 13 November 2014. 3. In the course of submissions, there was speculation (it could be no more) about the purpose of the two senior officers of Manly in initiating contact with ASIC officers on 28 July 2015. The ASIC file note makes it clear that Manly's relationship with FAL and proposed or possible changes to that relationship were the immediate reason for the contact. But what was Manly seeking – and why? It may be, as counsel for FAL suggested, that Manly had developed concerns about dealing with Xenos and, in particular, about his authority to deal on behalf of FAL. That, I suppose, is something that someone connected with Manly who had legal knowledge might have had in mind. Another possibility is that Manly was concerned that an ASIC investigation involving FAL in any way at all might have the potential to produce adverse publicity about a brand advertised on Manly's jerseys and thereby to damage Manly's standing in the eyes of its supporters and the community more widely. Hence, perhaps, the apparent concern to find out whether ASIC's investigation concerned the company or the individual. 4. With the evidence in its present state, there can be no more than speculation on Manly's purpose in making inquiries of ASIC. What can be said, however, is that senior officers of Manly had, as at 28 July 2015, information that an ASIC investigation concerning Xenos and the possibility of contravention by him of s 206A (that being the subject matter of "the Notices" referred to in the file note) was "ongoing". There is nothing in the evidence to suggest that, a little over two months later, as at 7 October 2015, Manly had learned anything more on the subject. It may therefore be plausibly contended that, at the time of the signing of the Major Partnership Agreement, the state of Manly's knowledge was unchanged and, in terms of Kitto J's formulation in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 303 referred to in Correa v Whittingham (above), such as to have engendered a positive feeling of actual apprehension or mistrust amounting to a slight opinion (but without sufficient evidence) that Xenos was a person disqualified from participating in the management of corporations who accordingly could not act so as to bind FAL. 5. In the course of the hypothetical debt recovery action, an issue not so far mentioned but noted briefly in submissions might arise, namely, whether, in terms of s 129(1), Xenos ever appeared "from information provided by the company that is available to the public from ASIC" to be a director or secretary of FAL (emphasis added). His appointment to both offices on 17 September 2015 was notified to ASIC by means of Form 484 signed by Xenos himself – a circumstance which, in the context of issues about his authority, raises a question whether the information in the Form 484 was "provided by the company". Affidavit evidence tendered by FAL was to the effect that the corporate books and records of FAL contain no record of any appointment of Xenos as a director. 6. More evidence on all the matters canvassed in these reasons would no doubt emerge in the hypothetical debt recovery action, particularly after discovery and if Mr Kelly and Mr Bare gave evidence and were cross-examined. For the present, however, the Court is concerned only with the evidence currently before it and the question whether, on that evidence, there is, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, "a plausible contention requiring investigation" – a question which, as McLelland CJ in Eq said, "raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat". 7. Counsel for FAL referred to the following observation of Brooking and Charles JJA in Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89; 19 ACLC 1270 (at [4]): "We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes." 1. This is not a case in which it can be said that indebtedness or absence of it is as plain as a pikestaff. A rational basis has been shown for a plausible contention requiring investigation that the state of mind of Manly at the relevant time was such that s 128(4) will deny the entitlement (if any) arising from s 128(1) to rely on the combination of the s 129(5) and s 129(2)(a) assumptions that would to lead to a conclusion of due execution under s 127(1)(c). Genuine dispute within s 459H(1)(a) has therefore been established. 2. This assessment causes the orders to be as follows: Order that the statutory demand dated 30 March 2016 served on the plaintiff by the defendant be set aside. Order that the defendant pay the plaintiff's costs of the proceedings. ********** 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: 03 August 2016