Supreme Court New South Wales Medium Neutral Citation: In the matter of 360 TV Network Pty Limited [2015] NSWSC 2142 Hearing dates: 25 August 2015 Date of orders: 25 August 2015 Decision date: 25 August 2015 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Statutory demand varied; originating process otherwise dismissed. Catchwords: CORPORATIONS – creditor's statutory demand – application to set aside statutory demand – genuine dispute as to the amount or existence of debt – whether directors salary not due and payable – whether defendant had abandoned employment – offsetting claim – where claim not particularised or quantified – variation of statutory demand – abuse of process – collateral purpose – no abuse – where statutory demand underpinned by debt about which there is no genuine dispute. Legislation Cited: (CTH) Corporations Act 2001, s 459G Category: Principal judgment Parties: 360 TV Network Pty Ltd (ACN 109 929 704) (plaintiff) Jonathan Papworth (defendant) Representation: Counsel: C O'Neill (plaintiff) B Hemsworth (solicitor) (defendant) Solicitors: Kennedys (plaintiff) Somerville Legal (defendant) File Number(s): 15/156581 Judgment (ex tempore) 1. HIS HONOUR: By originating process filed on 26 May 2015, the plaintiff company 360 TV Network Pty Limited applies pursuant to (CTH) Corporations Act 2001, s 459G, for an order setting aside a creditor's statutory demand dated 1 May 2015 and served on it by the defendant Jonathan Papworth on or about 5 May 2015. Although the precise date of service of the demand is not established by the evidence, no point was taken that the originating process was out of time and accordingly I need not consider that question any further. 2. The statutory demand asserted that the company owed Mr Papworth the amount of $27,405 described in the schedule as "salary owing pursuant to employment agreement between the creditor and the debtor company" and particularised as amounts of $3,915 for monthly salary said to be due and payable on 23 October 2014, 23 November 2014, 23 December 2014, 23 January 2015, 23 February 2015, 23 March 2015 and 23 April 2015. The demand was accompanied by the affidavit of Mr Papworth which deposed that the amount claimed was due and payable by the debtor company and that he believed that there was no genuine dispute about the existence or amount of the debt. 3. On the application presently before the Court, essentially three grounds were raised: first, that there was a genuine dispute as to whether the debt claimed was due; secondly, that there was an offsetting claim said to arise out of the unilateral withdrawal of moneys, principally on account of arrears of salary, by Mr Papworth in December 2014; and thirdly, that the service of the demand was an abuse of process in that it was an attempt to exert pressure on the company and the other directors and shareholders to buy him out from the company in circumstances in which he wished to be extricated from it. Background facts 1. The following abbreviated summary of the factual background is largely taken from the outline of submissions prepared by the plaintiff whose counsel, Mr O'Neill, came into the matter at very short notice and argued the case with great ability. 2. The company sells advertising space having acquired it from third parties. It has three equal shareholders; namely, Mr Papworth, one Greg Johnston and one Peter Lynch. Those three are also the three directors. 3. On or about 29 September 2008, the directors, together with the company and a number of investors, entered into a shareholders' deed of that date. Relevantly, clause 6.2(b) provided: For the next three coming financial years (30 June 2009, 30 June 2010 and 30 June 2011) the parties agree that the total remuneration package for Jonathan Papworth, Peter Lynch and Greg Johnston will be $150,000 per annum, including the aggregate payment to any person or entity related to or associated with such person, until such time the company achieves a profit after tax of $3 million for a financial year, after which time their remuneration package will be adjusted to reflect market level commensurate to their position and skills. 1. In respect of those financial years, the directors were paid a salary of $150,000 per annum gross each. Save as I have set out above, the shareholders' agreement did not make more detailed provision in respect of their remuneration, nor in respect of the years after 2011. 2. According to Mr Papworth, a meeting of directors on 1 July 2009 considered a proposal for a new salary and commission structure and this was followed by an exchange of emails in that respect. Then, on 26 July 2011, Mr Papworth proposed a new remuneration structure involving "a small fixed monthly salary and a performance-based commission structure". This proposal, which was contained in an email to the other directors of 26 July 2011, initially involved a salary of $40,000 per annum paid on the 15th day of each month and a commission of 15% of all media sales after any agency commission. At some stage, the proposal was amended in respect of salary from $40,000 per annum to $50,000 per annum. According to Mr Papworth, in about September 2011, he had a conversation with his fellow directors, the substance of which was that it was agreed that a new base salary, as suggested in Mr Papworth's email, should commence. Thereafter, a monthly amount was paid to Mr Papworth of $3,915; to Mr Lynch of $3,764; and to Mr Johnston of $3,422. Mr Papworth explained, and there was no evidence to the contrary, that these were based on the same gross salary before tax but reflected different amounts after tax due to differing motor vehicle allowances claimed by each of the directors. 3. On 1 March 2012, the then Chief Financial Officer of the company responded to an inquiry from Mr Papworth: "Are we employees and what is the total wages bill for FY2012 forecast?" in the terms: "Yes, you are employees and at present are paid $50,000 per annum, this is your base salary and commission [is] paid on top." 4. Since then, Mr Papworth has received, in respect of salary, $3,915 net per month until August 2014. His bank statements, which are in evidence, record the deposit of that amount into his bank account from the defendant more or less on a monthly basis, though not always so and not always punctually on any particular day of the month. But often – and particularly since January of 2014 – the payment was described in the bank account deposit entry, which was by direct transfer, as wages or salary; in some cases as "monthly salaries". 5. The company's cash flow forecast as at 18 July 2014 shows, as for payment on 23 July 2014, "monthly payroll directors" of $7,186 and an accompanying note demonstrates that that is unpaid salary for Mr Johnston and Mr Lynch for May; then a further monthly payroll schedule for payment on 26 June 2014 of $11,101, apparently being the payments for the three directors in respect of June; and then, scheduled for payment on 24 July 2014 a monthly payroll of $15,378, which the evidence indicates was the July payment for the three directors plus the Chief Financial Officer. Similar monthly payroll entries are scheduled for 22 August, 22 September and 22 October 2014. 6. Mr Papworth did not receive a payment for April 2014 when it was due, but in August 2014 received a double payment representing – on his evidence, which has not been contradicted – the arrears for April and July. Genuine dispute as to the amount or existence of the debt 1. In his s 459G affidavit, Mr Lynch, on behalf of the company, asserts that the company is currently engaged in an ongoing dispute with Mr Papworth regarding the salary claim and denies that it has a liability in the sum of $27,405. He then annexes a number of emails as evidencing the dispute. The substance of those emails is to evidence repeated demands by Mr Papworth to the Chief Financial Officer for payment of his salary after August 2014, occasional representations by the CFO that it would be paid, the absence of any denial whatsoever that he was entitled to the salary, but on the CFO's part an indication that Mr Papworth should speak about it to the other directors. Mr Lynch says that it is the practice of the directors to pay themselves only when other creditors have been paid and that, in accordance with that practice, neither of the other directors – that is, himself and Mr Johnston – have been remunerated since May 2014. He also deposes that in January 2015, he sent Mr Papworth an email explaining that all directors were foregoing monthly payments to ensure that creditors were paid first. 2. Mr Papworth agrees that in the past there were occasions when the directors agreed that they would not draw their salary and it could be accrued, but he deposes to a conversation in mid-2014 with Mr Lynch and the CFO Ms Cassie in which he complained that his salary had not been paid for that month and queried whether the company was trading while insolvent, to which Mr Lynch responded that the company was still able to meet its financial obligations and said "both Greg and I will continue to accrue our salary and commission payments until further notice," to which Mr Papworth replied "Well, I do not agree to that". There is simply no evidence that Mr Papworth agreed at any time in or after 2014 not to draw his salary as and when it fell due. 3. It was submitted on behalf of the plaintiff that it was implicit in the arrangements between the parties that the directors would be paid their salary only after other creditors had been paid, if the company was able to do so. If the directors were receiving distributions from the company by way of dividend or on loan account, such an agreement or term might very well be implicit, but were – from the term of the shareholders' agreement to which I have referred and the reference in it to "remuneration", the references in the bank statements and accompanying transfers to "salary" or "wages", and from the way in which the parties described what was being received in their conversations, it is plain that this remuneration was by way of salary. 4. Suggestions in Mr Lynch's s 459G affidavit that there never was an employment agreement with Mr Papworth may be correct in so far as it means that there was never a written contract of employment, but it is very clear that the directors and the company had agreed that the directors would be remunerated by way of salary or wage. In that is implicit a relationship of employment, and to import into such a relationship, even where the employee is a director, an implied term that salary would not be paid until after all other creditors had been paid, is far from obvious, or necessary to give business efficacy to the arrangement, but contrary to all ordinary notions of an employment agreement. I do not think it is seriously arguable that such a term is to be implied into the arrangements in these circumstances. 5. Support is provided for that conclusion by the circumstance that on any view of the evidence, even after Mr Johnston and Mr Lynch agreed between themselves in April 2014 to accrue their wages and not to draw them, the company continued at least until and including July, to pay Mr Papworth, at least until and including July, who did not. 6. Further support is provided by the circumstance that this notion of "accrual" was not advanced in response to Mr Papworth's initial claims after the failure to pay his August salary, but only trotted out in about December, when it was said that the other directors had agreed to accrue their salaries. And even if there was an agreement to accrue salaries, or an acceptance that they could be accrued, that does not deny that the salaries were due and payable, but simply indicates that those directors who were content for their salaries to accrue were not insisting on payment of their salaries in accordance with the terms of their employment; merely forbearing from insisting on strict performance does not mean that the payment is not due. 7. Amongst Mr Papworth's demands on the company was an email sent on 12 January 2015 to the other directors in which, having pointed out a number of matters – including that he had previously been promised payment of the salaries – he asked "Do you deny I am owed the money?". Mr Lynch's response was, relevantly, "In regards to salary payments to directors, as you know we have foregone payments to ensure that creditors are paid first and so that, all directors can be paid once we have met these obligations. Why do you think you have been singled out?" Conspicuously, there was no denial that he was owed the money, but simply an assertion that the other directors were foregoing payments and that because they were doing so, he too was not to be paid. 8. In my view, although there is evidence that there has been some sort of dispute about whether the debt is due in the correspondence attached to Mr Lynch's affidavit, it is totally devoid of the character of being a genuine dispute. There has been a refusal to pay, and some sort of explanation as to why it has not been possible to pay, but no genuine denial that there is an entitlement. No one has deposed on behalf of the company that Mr Papworth was not entitled to his salary. No one has deposed on behalf of the company that the amount is incorrect. 9. There was a submission that it was arguable, at least to the relatively low standard to show a "genuine dispute", that Mr Papworth's employment had come to an end, he having abandoned his employment. In that respect, reference was made to statements by him in an email to Mr Johnston on 24 October 2012 in the terms, "Your day will come you gutless parasite", and in an email of 12 January 2015, to the effect that he wished to leave the company, pointing out that neither of the other directors had the courage to make him an offer, "so it is my intention to wind the company up". It appears to be common ground that he did not attend the company office after about June or July 2014. However, the evidence amply demonstrates that he continued to do work for the company and 300 pages of the exhibit to his affidavit contain evidence of that work ranging over the period from August 2014 to May 2015. Not only is there not the slightest evidence that the company ever treated the statements to which I have referred as bringing his employment to an end, but the 12 January 2015 email occurred in circumstances in which he discovered that his access to the company bank account had been revoked and wrote to other directors complaining about that. Mr Lynch's response on 12 January was to explain, in essence, that it was not clear how his online banking access had been withdrawn, and that arrangements would be made the following day to reinstate it. All that is quite inconsistent with any suggestion that the other directors were treating him as no longer an employee of the company or as having abandoned his employment. 10. In short, no assertion that he had abandoned his employment was made before the institution of the current proceedings. In my view, it is not seriously arguable that his employment had been abandoned or terminated before May 2015. 11. There is some evidence, slight perhaps, of some dispute concerning his entitlement to motor vehicle expenses. On the one hand, Mr Papworth puts into evidence the company policy, apparently adopted by the directors, which indicates that directors would be entitled to 100 cents in the dollar reimbursement for proper motor vehicle expenses such as fuel, insurance, registration and repairs and maintenance. The evidence of a dispute about this amounts to emails, after the dispute about salary had arisen in late 2014, in which it is asserted on behalf of the company that directors who received a motor vehicle allowance as part of their remuneration package were not entitled to reimbursement of out-of-pocket expenses. The mere assertion that that is the position of the company now does not go very far towards raising a genuine dispute, but assuming that it did it would not affect the amount of the creditor statutory demand, which makes no demand in respect of motor vehicle expenses and claims only the bare salary component. 12. Subject to one matter, with which I shall deal when I come to the offsetting claim, there is therefore no substance in the contention that there is a genuine dispute that the debt claimed in the creditor's statutory demand is due and payable, or as to its amount. Offsetting claim 1. The asserted offsetting claim has two components. Essentially, the first arises out of the unilateral withdrawal by Mr Papworth from the company's bank account on about 26 December 2014 of the sum of $14,105. When the Chief Financial Officer sent an email to all the directors advising of a "suspicious withdrawal" of that amount, Mr Papworth immediately explained that he had taken that amount, being his salary for the three months of August, September and October, along with $1,500 for his ANZ credit card and expenses of $860 outstanding since May. At least in so far as it relates to the salary component, this is not an offsetting demand because to the extent that there was any demand or any claim to recover from Mr Papworth the amounts he had drawn for salary for August, September and October, that would simply increase the amount of his original claim. It does not offset anything. 2. The balance of the asserted offsetting demand, to the very limited extent it is disclosed in the s 459G affidavit, arises by annexing to that affidavit a chain of emails which are said to evidence an ongoing dispute regarding his entitlement to car-related expenses. No claim for reimbursement of overdrawn expenses has ever been clearly formulated or quantified. It is impossible to conclude that there is a genuine offsetting claim for reimbursement of any particularised amount, because the evidence simply does not descend to do that. 3. I am not satisfied that there is an offsetting claim, save that the amount withdrawn for October 2014 appears to represent a double-counting of an amount for October 2014 claimed in the creditor's statutory demand. To that extent, it seems to me at least arguable that the demand is over-stated by the amount claimed for October 2014, and to that extent only there is a genuine dispute as to the amount of the debt demanded. That will be reflected by varying the demand by reducing it by that sum. Abuse of process 1. So far as the allegation that the demand is an abuse of process is concerned, it suffices to say that even if there is a collateral purpose for the demand, if it is underpinned by an amount that is not disputed on genuine grounds, then at least where the company is not patently solvent, it is not an abuse of process to serve such a demand. The mere fact that some collateral purpose might also be served does not render a demand for an amount due and payable by a company that is at least arguably insolvent an abuse of process. Whether statutory demand was defective 1. Finally, it was faintly argued that the demand was defective because it referred to unpaid invoices and it was not clear what was the employment agreement referred to. It seems to me that no recipient of this demand in the position of this company, in the light of the correspondence that had preceded it, could conceivably be under any misapprehension as to what it related to, bearing in mind that it claimed for seven months the sum of $3,915, which was the amount which Mr Papworth happened to have been paid by direct deposit into his account for the preceding many months. Conclusion 1. Accordingly, in my view, the demand should be varied by reducing it by the sum of $3,915, and otherwise the application should be dismissed. 2. The Court therefore orders that: 1. The creditor's statutory demand dated 1 May 2015 and served by the defendant on the plaintiff be varied by reducing the total amount owing by $3,915 so that the amount of the demand is $23,490 and it be declared that the demand has had effect as so varied as from when the demand was served on the company. 2. The originating process be otherwise dismissed. 3. The plaintiff pay the defendant's costs assessed in the sum of $15,000. ********** 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: 22 September 2017