Supreme Court New South Wales

• Medium Neutral Citation: In the matter of MK Group Phoenix Pty Ltd [2014] NSWSC 1467
• Hearing dates: 2 October 2014
• Decision date: 24 October 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Black J

Decision

Orders made setting aside statutory demand and that the defendant pay the plaintiff's costs of proceedings, as agreed or as assessed.

• Catchwords: CORPORATIONS - winding up - statutory demand - application to set aside a creditor's statutory demand under Corporations Act 2001 (Cth) ss 459H and 459J - whether there is a genuine dispute as to the existence or amount of debt - whether an offsetting claim has been established - whether debt claimed was due and payable when demand was served - whether substantial injustice will be caused unless the demand is set aside - whether there is some other reason why the demand should be set aside.
• Legislation Cited: - Corporations Act 2001 (Cth) ss 495H, 459H(1)(a), 459H(1)(b),459H(2), 459H(5), 459J, 459J(1)(a), 459J(1)(b); - Evidence Act 1995 (NSW) s 136
• Cases Cited: - Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601; - CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100; - Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; - Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89; - Fermiscan Pty Ltd v James [2009] NSWCA 355; (2009) 261 ALR 408; - Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; (1996) 21 ACSR 581; - Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27; - Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787; - NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359; - Panel Tech Industries v Australian Skyreach (No 2) [2003] NSWSC 896; - Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300; 20 ACSR 746; - Re Carbon Polymers Ltd [2013] NSWSC 376; - Re Forza Plumbing Systems Pty Ltd [2013] NSWSC 1234; - Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601; - Re Passion Projects (allyouneedislove) Pty Ltd [2014] NSWSC 345; - Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256; - Royal Premier Pty Ltd v Taleski [2001] WASCA 48; - Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341; - Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452; - TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67
• Category: Principal judgment
• Parties: MK Group Phoenix Pty Ltd (Plaintiff); Tripod Funds Management Pty Ltd (Defendant)
• Representation: Counsel: D Neggo (Plaintiff); P Cutler (Defendant); Solicitors: Matthews Folbigg (Plaintiff); Mercantile Legal (Defendant)
• File Number(s): 2014/175629

Judgment

1 By Originating Process filed on 12 June 2014, the Plaintiff, MK Group Phoenix Pty Ltd ("MK Group"), applies to set aside a statutory demand dated 22 May 2014 ("Demand") issued by Tripod Funds Management Pty Ltd ("Tripod"). The application to set aside the Demand is brought under s 459H of the Corporations Act 2001 (Cth) or alternatively under s 459J of the Corporations Act. The application to set aside the Demand is supported by an affidavit of Mr Conan Kohler, a director of MK Group, dated 12 June 2014. MK Group also relies on an affidavit of its solicitor, made on 12 June 2014, which records that a contract has been exchanged for the sale of a property at Atchison Street, Crows Nest (which is relevant to the events leading to the Demand as noted below) to a person other than MK Group.

2 A director of Tripod, Mr Ian Lazar, signed the Demand on behalf of Tripod and verified the affidavit supporting it. Mr Lazar did not give evidence in this application. A consultant to Tripod, Mr Shane Reynolds, affirmed an affidavit dated 14 August 2014 in which he set out the basis on which Tripod disputed MK Group's application to set aside the Demand, in evidence largely admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) that it should be treated as submission only. I rejected Mr Reynolds' evidence that MK Group had "admitted" its liability to Tripod for the debt, which was based on an unverified and apparently incomplete transcript of a recording of a conversation at Mr Lazar's offices. I note that, in any event, the question of MK Group's liability to Tripod is, at least in large part, a question of law as to which any admission by MK Group would be of little weight. I did not admit a further affidavit of Mr Reynolds, which was, inter alia, served well after the date on which the Court had ordered that no further evidence be led without leave, for reasons indicated in an earlier judgement.

3 Before turning to the Demand, I should first set out the background facts, drawn from the narrative in Mr Kohler's and Mr Reynolds' affidavit of the dealings between MK Group and Mr Kohler on the one hand and Tripod, Mr Lazar and Mr Reynolds on the other, in respect of funding for a potential purchase of the Atchison Street property. I proceed on the basis, however, that an application to set aside a statutory demand is not a forum to determine contested issues of fact as to those dealings.

4 In early 2013, Mr Kohler and his business partner began making inquiries regarding potential land for development. He approached a third party to assist in acquiring finance and a development site in mid-2013 and was introduced to another entity, which he understood would assist in identifying an appropriate site and negotiating the purchase and to a firm that he understood would assist in obtaining development approvals for the site. In mid-July 2013, he and his business partner met with one of those advisers to discuss the potential development site at Atchison Street, Crows Nest and he was provided with a project information memorandum for that site (Ex P2).

5 Another company associated with Mr Kohler, which was a shareholder of MK Group, made an offer for the purchase of the Atchison Street site in August 2013, although MK Group still needed to obtain finance to proceed with any purchase of the site at that time. On 22 September 2013, one of MK Group's advisers referred to Mr Lazar as a potential funder for the purchase.

6 Mr Kohler was provided with a Mortgage Syndication Agreement ("MSA") documenting the proposed relationship between MK Group and Tripod for execution on 23 September 2013. Mr Kohler claims to have been placed under time pressure to sign the MSA and to have signed and returned it immediately without obtaining legal advice. The executed MSA is dated 1 October 2013 and is introduced by a statement of its purpose, as follows:

"Under this MSA you appoint us to facilitate a commercial loan for you. Usually, we will lend some or all of the money that you wish to borrow. Sometimes we arrange for our syndicate partners, underwriters, aggregators or other entities to lend to you; usually this will only happen when the loan does not meet our credit criteria. We charge a fee for our services and our fees are payable at different stages in the transaction. This MSA sets out what we will do for you, and what you must pay us at various points of time. It also sets out certain obligations that you accept."

7 Clause 6 of the MSA provides that Tripod works on an exclusive basis for a specified period of time and cl 8 sets out examples of the work which it would do. Clause 12 provides that:

"While we will exercise reasonable endeavours to settle the loan, we make no firm promise that the loan you seek will be made available to you. This may happen for a variety of reasons including opinions of value, fluctuations in cash rates, fluctuations in the property market, et cetera [sic]."

Accordingly, the agreement appears to be an agreement for the provision of services that may or may not result in the provision of a loan in exchange for fees payable by the borrower.

8 Clause 15 in turn provides for a fee to be payable when the borrower receives a letter of offer for a loan on specified terms, described as the "Entry Fee" which is set out in item 6 of Schedule A to the MSA. That amount is 3.3% (inclusive of GST) of the "indicative syndication fee". There is no definition of the term "indicative syndication fee" in the MSA although Mr Neggo, who appears for MK Group, points out that the amount claimed by the Demand corresponds to 3.3% of the proposed loan facility of $32 million. That clause also contemplates that Tripod will send MK Group "a tax invoice that requires you to pay the amount that we calculate to be the Entry Fee." Clause 15.11 provides that a fee is payable under cl 15.11 of the MSA if, inter alia, MK Group repudiates or terminates the MSA. Clause 17 provides for payment of fees described as Additional Fees, as to which a tax invoice is again to be sent, at the same time as the Entry Fee becomes payable. Clause 20 provides that, when Tripod sends the tax invoice, MK Group must pay the amount specified on it within seven days of the date of the invoice.

9 After entry into the MSA, MK Group made a further offer for the purchase of the site of $12 million in late October 2013, and Mr Kohler claims to have received assurances from one of the advisers that Tripod would fund $12 million for the purchase of the site.

10 Mr Kohler subsequently met Mr Lazar in early November 2013 and claims that Mr Lazar indicated an interest in entering into a joint venture arrangement in respect of the site, involving a sharing of the initial costs and of the profit, and sought to persuade Mr Kohler to discharge one of his existing advisers and use Mr Lazar to deal with the property. Mr Kohler was also introduced to Mr Shannon Reynolds, who swore an affidavit for Tripod in this application, as the project manager dealing with the matter for Tripod. On 19 November 2013, Mr Lazar and his partner executed a Deed of Appointment by which MK Group appointed and authorised Mr Lazar of Commercial Mortgage Trade Pty Ltd ("CMT") to act on its behalf with regards to procuring a contract of sale in relation to the Atchison Street property, on terms including the payment of a further appointment fee of $11,000 inclusive of GST.

11 Mr Kohler's evidence is that there were delays in the provision of financing documents through December 2014 and, in mid-January 2014, he was advised that estimated settlement would be in late February 2014. That did not occur.

12 Mr Kohler gives evidence of further conversation with Mr Lazar in early April 2014, in which Mr Lazar advised that he had negotiated the purchase of the Atchison Street property without tenants, rather than on a tenanted basis as Mr Kohler had previously understood; advised that MK Group could not afford the interest on the loan if it took more than the anticipated six months to get a development approval approved; and that the "underwriters" did not have enough confidence to give a loan unless $400,000 - $500,000 was paid by MK Group. Mr Kohler's evidence is that, several days later, Mr Lazar advised that he, Mr Lazar, had already purchased the property, or at least had acquired the vendors' mortgage over that property from their lenders and that Mr Lazar did not intend to be in a joint venture with Mr Kohler and his business partner and was seeing the vendors that afternoon to finalise a price for the purchase of the property, implicitly for interests associated with him. As I noted above, Mr Lazar did not give evidence. Mr Reynolds' evidence is that he was present during the conversations with Mr Lazar in April 2014 referred to in Mr Kohler's affidavit and he denies Mr Kohler's version of those conversations, without offering an alternative account of those conversations.

13 Tripod responds to MK Group's claim that Mr Lazar informed Mr Kohler that the site was no longer available by relying on Mr Reynolds' evidence that he was present at that conversation and denies that it occurred and the absence of contemporaneous correspondence from Mr Kohler or MK Group protesting the information provided by Tripod. I note, first, that the Mr Kohler's evidence seems to me to be plainly sufficient to raise a seriously arguable question of fact, particularly where Mr Lazar does not give evidence, which would not be appropriate to be determined in a summary application of this kind. There is, at least, some correspondence consistent with MK Group's position, in its email to Tripod dated 19 May 2014. So far as a suggestion is made that Mr Lazar may have purchased property, Mr Cutler, who appears for Tripod, also points out that the first conversation between Mr Kohler and Mr Lazar may go no further than the fact that Mr Lazar or interests associated with him had paid out the mortgage on the property and been subrogated to the mortgagee's rights. There is some force in that proposition. However, it does not address the further conversation in which Mr Kohler claims Mr Lazar referred to a meeting with the vendors to finalise a price for the purchase of the property.

14 By email dated 15 April 2014, an adviser to MK Group referred to a conversation with Mr Lazar, in which Mr Lazar had mentioned the option of "mutually ending [Tripod's] arrangements with [MK Group], allowing a refund of monies paid, and enabling all concerned to move on with their respective business activities" and put a proposal for a simple document to record that arrangement.

15 Mr Kohler refers to a further meeting with Mr Reynolds on 10 May 2014, dealing with a loan to be made by MK Group to Tripod (rather than the reverse) in which there was a further conversation as to the Atchison Street property, at which it appeared that Mr Reynolds was not aware of Mr Lazar's earlier claim to have purchased the property himself. Emails were subsequently exchanged between MK Group and Tripod concerning the Atchison Street property, in which Tripod seems to proceed on the basis that the proposal for MK Group to purchase the property was still open.

16 On 19 May 2014, Mr Kohler sent an email to Mr Lazar and Mr Reynolds which read, relevantly, as follows:

"Crows Nest has been on the cards quite some time now and has had a lot go on in the time since [Mr Kohler's business partner]'s and I [sic]) introduced to it last year.

Up until recently it has been the primary objective but [we] were then informed by you Ian [Lazar] that it (for a number of reasons) was no longer available to us and so have been exploring other opportunities.

Last week we were told that it may still be an option and the course of the history we have had trying to win the site, we had some interest.

Through further discussion and deliberation then came to the fact that after the site had been written off as unobtainable by you, we moved on to other things that we are now perusing [sic].

In conclusion, MK Group Pty Ltd are not perusing [sic] the purchase of Atchison Street, Crows Nest any longer."

Tripod's submissions make clear that it relies on a suggested repudiation of the MSA by this email to support a claim to the Entry Fee under cl 15.11 of the MSA.

17 Tripod issued a notice of default dated the same date, 19 May 2014, which relies on a default under, "inter alia", cl 15 of the MSA and identifies the default as arising because:

"As at 19th May 2014, you have terminated this MSA and provided notice that you have withdrawn from the proposed purchase of the subject Security Property listed in Schedule A, item 2, known as [address omitted] Atchison Street, Crows Nest NSW 2065.

Accordingly, as per Section 15 of the MSA, you are required to pay [Tripod] the following amount [$1,056,000) within seven (seven) days."

Although the default notice referred to a default based "inter alia" on the basis specified in cl 15 of the MSA, and implicitly cl 15.11, no other basis of the Demand was identified or pressed in the course of the hearing.

18 By letter dated 21 May 2014, Mr Kohler advised Mr Reynolds that his email dated 19 May 2014 was not meant to be interpreted as MK Group ending the MSA and was intended as a summary of the state of progress to date and that he anticipated receiving a letter retracting the default notice served on 19 May 2014. Mr Reynolds responded in aggressive terms, on 21 May 2014, that:

"your letter is also presumptuous and at no time in our meeting did I advise that any default would be retracted or that Tripod would act within any timeframes. I did say that I would put your submissions to Mr Lazar for his consideration."

19 Shortly after the receipt of the 19 May email, the notice of default and the exchange to which I referred above, Tripod issued the Demand in the amount of $1,056,000. The Demand is signed by Mr Lazar and dated 22 May 2014 and was served on 25 May 2014. The Demand states that MK Group owes Tripod the amount of $1,056,000 being the total of the amounts of the debts described in the schedule to the Demand and that the amount is due and payable by MK Group. The schedule to the Demand describes the debt as follows:

"Notice of default persuant [sic] to Mortgage Syndication Agreement between [MK Group] and [Tripod] (reference: Crows Nest (Atchison/649- 20130920) $1,056,000."

20 The Demand is verified by an affidavit dated 22 May 2014, the same date as the Demand, affirmed by Mr Lazar which states that he is the person who, on behalf of Tripod, had the dealings with MK Group that gave rise to the debt and that:

"The debt of $1,056,000 mentioned in the statutory demand is due and payable by [MK Group]".

Mr Lazar also states that he believes that there is no genuine dispute about the existence or the amount of the debt. That affidavit in turn annexes a notice of default and a copy of the MSA. It should be noted, at this point, that the default notice is dated 19 May 2014 and claims the amount is due within seven days, that is by 26 May 2014, and the Demand in respect of that amount was issued and verified on 22 May 2014, prior to the expiry of that seven day period.

21 As I noted above, Tripod relies on the evidence of Mr Reynolds. Mr Reynolds points (in evidence admitted as a submission only) to cl 15.11 of the MSA, to which I have referred above, as having been breached as a result of MK Group's termination of an arrangement concerning the Atchison Street property and contends that MK Group is required to pay Tripod the amount of $1,056,000, calculated as 3.3% of the "Entry Fee". His evidence is that, in order to carry out its obligations under the MSA, Tripod engaged the services of business consultants including solicitors and CMT which it appears, from the agency appointment to which I referred above, is an entity associated with Mr Lazar. Mr Reynolds' evidence is that "[t]here is no evidence that suggests the work done by the business consultants was not undertaken". There is also no evidence that that work was undertaken. As Mr Neggo points out, the suggestion in Mr Reynolds' affidavit that Tripod had carried out work cannot create a further basis to support the Demand, which did not claim a debt arising from an amount due on a quantum meruit basis in respect of that work.

Whether there is a genuine dispute as to the debt

22 MK Group contends that the Demand should be set aside on the basis that there is a genuine dispute as to the claimed debt, namely, a dispute that involves a "plausible contention requiring investigation" which is "real and not spurious, hypothetical, illusory or misconceived". Section 459H(1)(a) of the Corporations Act provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount to which that demand relates. Mr Neggo also refers to the decision of the Court of Appeal in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 (albeit in the context of an offsetting claim) at [29] - [31] which adopted an analogy with the test whether there was a serious question to be tried. Mr Neggo also points to the familiar principle that, in a summary procedure where it is not expected that the Court will embark on an extended enquiry, the task faced by a company challenging a demand on the "genuine dispute" ground is not a difficult or demanding one. He also refers to the well-established principle that if the Court sees a factor that, on rational grounds, indicates an arguable case on behalf of the company, it must find that a genuine dispute exists, even if any contrary case may have appeared stronger: Panel Tech Industries v Australian Skyreach (No 2) [2003] NSWSC 896 at [17] - [18].

23 The test applicable under s 459H(1)(a) of the Corporations Act has been formulated, consistent with the language adopted by Mr Neggo in submissions, as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6]. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 (at [16]), Barrett J summarised the principle as follows:

"[T]he task faced by the company challenging a statutory demand on the genuine dispute grounds is by no means at all a difficult or demanding one. A company will fail in that task only if it is found, upon the hearing of its s 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger."

24 In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], Dodds-Streeton JA observed that a company which seeks to establish a genuine dispute or offsetting claim:

"... is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for the 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. ... [I]t 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."

25 In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44], Young AJA (with whom Hoeben JA and Ward J agreed) referred to Eyota Pty Ltd v Hanave Pty Ltd above and noted that the question for a primary judge, in determining an application to set aside a statutory demand under s 459H(1)(a), is:

"[T]o 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."

26 Tripod in turn drew attention to the summary of the circumstances in which a statutory demand would be set aside under s 459H(1)(a) of the Corporations Act in my judgment in Re Passion Projects (allyouneedislove) Pty Ltd [2014] NSWSC 245 at [10], where I referred to the case law noted above. In summary, in order to establish a genuine dispute as to the debt claimed, for the purposes of s 459H(1)(a) of the Corporations Act, MK Group therefore need only establish that it has a plausible contention as to the matters to which I refer below so as to give rise to a genuine dispute as to the debt claimed by Tripod.

27 The first basis on which the relevant debt is disputed by MK Group is that, so far as the evidence goes, Tripod did not send a tax invoice for the Entry Fee. The obligation to make payment within seven days arises under cl 20 of the MSA and that time period runs from the date of the relevant invoice. It seems to me that a genuine dispute, in the sense of a seriously arguable case, has been established that no obligation to pay the Entry Fee had arisen in the absence of the issue of a tax invoice for that fee and that, as Mr Neggo points out, that is sufficient to require that the Demand to be set aside. In the course of oral submissions, Mr Cutler raised the possibility that the Entry Fee may be payable, under cl 15.11 of the MSA, without the requirement for a tax invoice. It does not seem to me that that proposition assists Tripod. Even if it were correct, then the Entry Fee would either be payable within a reasonable time of, or within seven days of, the notice of default. It seems to me that there would be at least a seriously arguable question whether a reasonable time had elapsed between the notice of default on 19 May and the issue of the Demand on 22 May 2014. Indeed, Mr Cutler accepted, in oral submissions, that there was nothing he could say for the proposition that three days after the issue of the default notice would be a reasonable time for payment. If the applicable time period were seven days from issue of the notice of default, that period had not elapsed at the time the Demand was issued.

28 MK Group also contends, and I accept, that there is a serious question whether MK Group had, by Mr Kohler's email of 19 May 2014, "repudiated or terminated" the MSA. It seems to me arguable that, as Mr Kohler claimed in his letter dated 21 May, the email of 19 May was no more than a summary of the then position, including that Mr Lazar had, on MK Group's account, purported to act in a manner that the property was not available to it.

29 MK Group contends that, if Tripod's claim is alternatively put on the basis of repudiation, there would be a serious question to be tried as to whether cl 15.11 of the MSA is a penalty and unenforceable, because it converts a conditional obligation to pay the Entry Fee upon the receipt of a Letter of Offer into an absolute obligation upon breach: compare Fermiscan Pty Ltd v James [2009] NSWCA 355: (2009) 261 ALR 408 at [133]-[153] per Allsop P, at [164]-[165] per Ipp JA. Tripod contends that the question whether the termination of the MSA by MK Group was lawful or whether the clause operated as a penalty are "hypothetical" and that the MSA was an arm's length commercial transaction. It does not seem to me that those questions are hypothetical, so far as they may establish a genuine dispute as to whether Tripod is entitled to rely on that clause in order to support the claimed debt, and the fact that a contract is at arm's length does not exclude the possibility that one if its terms may be a penalty so far as it is intended to coerce compliance with the contract rather than to compensate for breach. It also seems to me that a genuine dispute is established as to Tripod's ability to claim the Entry Fee on termination by MK Group under cl 15.11 of the MSA on that basis.

30 Mr Neggo submits that there is also a serious question to be tried as to the proper construction of cl 15.11 of the MSA, if any termination of the MSA by MK Group was on lawful grounds - for example, because the purported withdrawal of the property by Mr Lazar amounted to a failure by Tripod to comply with its obligations under cl 12 of the MSA - rather than constituting a repudiation of the MSA. Mr Cutler made clear in submissions that Tripod's position was that the effect of cl 15.11 of the MSA was that, for example, even if the property that was the subject of the proposed borrowing was sold to a third party the next day after the MSA was executed, and the borrower then did not proceed with the loan, because it could not purchase the property or give security over it as the MSA required, then that would amount to a termination of the MSA entitling Tripod to the payment of the Entry Fee although no loan had been made. The construction that Tripod puts on cl 15.11 of the MSA also appears to have the consequence that if, after the MSA was executed, Tripod advised MK Group that it changed its mind and proposed to acquire the property that was to secure the loan for itself and MK Group did not then proceed with the loan, then MK Group would be required to pay the Entry Fee although it had not received the loan. It seems to me that it is seriously arguable that that cannot be the proper construction of that clause, objectively construed in its commercial context.

31 Mr Neggo also submitted that:

"It would be a very strange and draconian result for clause 15.11 [of the MSA] to operate in the way that Tripod contends because it would mean that Tripod would be entitled to be paid the Entry Fee (which is, in effect, its reward for facilitating the loan) even if it was in fundamental breach of the loan entitling MK [Group] to terminate, and even if Tripod never in fact facilitated the loan. The practical effect would be that MK [Group] could never exercise an entirely lawful entitlement to terminate without paying an amount in excess of $1 million, and consequentially Tripod could breach the contract, and go on breaching it, with impunity."

Mr Neggo also submitted, and I accept, that it is seriously arguable that the clause should not be given that construction and, in particular, that the reference to "terminate" in that clause would be read, as a matter of construction, to a wrongful termination of the MSA by the borrower, of the same character as a repudiation also referred to in that clause. It seems to me that proposition is plainly seriously arguable. It also seems to me to be seriously arguable that the conduct set out in Mr Kohler's affidavit, and not contested by evidence of Mr Lazar, would amount to a breach of the MSA entitling MK Group lawfully to terminate it.

32 Next, MK Group contends that, if the purpose of the MSA was to facilitate its purchase of the site, there would be a serious question as to whether it was frustrated if the site was no longer available. Tripod contends that the unavailability of the property does not frustrate the MSA, where it was foreseeable that the property may be sold to someone else. I do not find it necessary to determine that question, where it seems to me clear that a genuine dispute is established on the other grounds to which I have referred above, and that the Demand must also be set aside under s 459J of the Corporations Act for the reasons to which I refer below.

Whether an offsetting claim is established

33 MK Group also contends that the Court should be satisfied on the evidence that there is a "serious question to be tried" or an "issue deserving of the hearing" or a "plausible contention requiring investigation" that MK Group has an offsetting claim in an amount exceeding the demand, using the language of Britten-Norman Ltd v Analysis and Technology Australia Pty Ltd above at [29] - [30] and [70]. An "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act is the amount of a claim or claims that a company has against a person who served the statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates: s 459H(5). If the Court is satisfied that the company has an offsetting claim, then the Court is required to calculate the "substantiated amount" of the demand by deducting any offsetting claim from the admitted amount of the debt: s 459H(2).

34 A company can establish an "offsetting claim" if there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; 12 ACSR 341 at 356-7; Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605. The amount of an offsetting claim is the amount claimed by a party in good faith, so long as that claim as so quantified is not fictitious or merely colourable: Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787 at 790. In Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], Ipp J observed that it is not necessary, for a company to establish an offsetting claim, that it lead evidence as to the damages claimed in "meticulous detail"; however, it is necessary that:

"there must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof."

35 In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd above at [30], on which MK Group relies, the Court of Appeal observed that:

"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."

The Court there observed that evidence necessary to satisfy the test of a "serious question to be tried" or "an issue deserving of a hearing" or a "plausible contention requiring investigation" need not conclusively prove a claim or be substantially non-contestable.

36 MK Group contends that Tripod was required to exercise reasonable endeavours to settle a loan under cl 12 of the MSA, and that conduct by which it or Mr Lazar diverted or sought to divert the property to interests associated with Mr Lazar, in circumstances that the property was to be the security for the loan, would amount to a breach of that clause or, so far as Mr Lazar or CMT had been appointed as MK Group's agent to acquire the property (as I noted above), a breach of fiduciary duty for which Tripod could be held liable as accessory. It is, of course, well established that an agency is a traditional category of a fiduciary relationship; an agent's acquisition of property that it is retained to acquire for its principal to itself can and often will constitute a breach of fiduciary duty; and the requirements for accessorial liability are also well-established following the decision of the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89. It seems to me that proposition is also genuinely arguable. Tripod responds that the relationship between it and MK Group is one of finance facilitator and borrower and no duties in equity arise from that relationship, and no breach of contract has occurred so that any alleged claim for offsetting damages is "spurious". That response does not address MK Group's claim that it has a seriously arguable case that Tripod is accessory to a breach of fiduciary duty by CMT or Mr Lazar as its agent, and, so far as breach of contract is concerned, does not address the proposition that MK Group may have a seriously arguable case for breach of the MSA against Tripod for the reasons noted above. Tripod also submits that the onus is on MK Group to make good the allegation that the property has been sold and it has not done so. I do not accept that submission, because the position attributed to Mr Lazar would amount to a seriously arguable breach of the MSA, or a seriously arguable breach of fiduciary duty (so far as CMT had been appointed as MK Group's agent) as to which there was a seriously arguable claim for accessorial liability against Tripod, even if CMT or Mr Lazar or his or its related entities were not successful in ultimately obtaining the property for itself.

37 Mr Kohler also gives evidence, based on the project information memorandum prepared by one of the advisers in respect of the Atchison Street property, that it was expected that the purchase, development and sale of the property would net a profit of approximately $9,932,878, based on a number of assumptions, and that he understood the costs payable to Tripod and the underwriter would come out of that profit. MK Group points to the quantification of its potential profit in that information memorandum to support the fact that it has an appropriately plausible and coherent basis for asserting a claim that exceeds the amount of the Demand. A question might well arise, at any final hearing of a contested claim, as to the weight to be given to such a profit projection, and MK Group's claim might well also be discounted, so far as it would be in the nature of a loss of opportunity claim, to recognise any risk that the project would generate a lesser profit or no profit. I do not consider it necessary to determine whether there is sufficient evidence to establish an offsetting claim since I have held that the Demand should be set aside on other grounds.

Whether the Demand should be set aside on other grounds

38 MK Group also sought, in its Originating Process, to set aside the Demand under s 459J of the Corporations Act. Mr Neggo did not initially address that matter in his written submissions. However, as matters emerged from the evidence and submissions, it became clear that the Demand must also be set aside on that basis.

39 As I noted above, the Demand was issued and verified on 22 May 2014. It followed the issue of a notice of default dated 19 May 2014, which required MK Group to pay to Tripod the amount that was the subject of the Demand within seven days. That matter was sufficiently identified in the affidavit sworn by Mr Kohler in support of the application to set aside the Demand, for the purposes of the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; (1996) 21 ACSR 581, because that affidavit annexed both the notice of default dated 19 May and the Statutory Demand dated 22 May, so that any issue arising from the dates on which they were sent arose by a reasonably available inference from that affidavit: see, for example, Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd above at [27]ff.

40 The authorities make clear that a statutory demand that relies on, or includes, a debt that is not yet due for payment may be set aside, although the case law differs as to whether such an order may be made under s 459H or s 459J of the Corporations Act. In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1986) 132 FLR 300; 20 ACSR 746, Bryson J held that the inclusion of debts not yet due for payment at the date of the demand was a defect within the demand under s 459J(1)(a) of the Corporations Act, which would authorise the Court to set aside the demand if it was satisfied that subject substantial injustice would be caused unless the demand was set aside. In NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1988) 153 ALR 359 at 366-367, Finkelstein J considered that the Court could set aside the demand if it was satisfied that a genuine dispute existed as to whether the debt to which the demand related was due and payable, under s 459J(1)(b) of the Corporations Act. Statutory demands have also been set aside when issued in respect of debts that were not due or payable, or where there was a genuine dispute as to whether they were due and payable, in Re Carbon Polymers Ltd [2013] NSWSC 376 and Re Forza Plumbing Systems Pty Ltd [2013] NSWSC 1234.

41 It seems to me that Tripod's issue of a statutory demand claiming that the Entry Fee was due and payable by MK Group, prior to the expiry of the period by which payment of the debt had been required, gives rise to a defect in the Demand that would cause substantial injustice for the purposes of s 459J(1)(a) of the Corporations Act and would also be an abuse of the statutory demand procedure for the purposes of s 459J(1)(b) of the Corporations Act. I would also set aside the Demand for those reasons under s 459J of the Corporations Act.

Orders and costs

42 For these reasons, I am satisfied that the Demand should be set aside. I make the following orders:

1 The statutory demand dated 22 May 2014 served by the Defendant, Tripod Funds Management Pty Ltd, on the plaintiff, MK Group Phoenix Pty Ltd, be set aside.

2 The Defendant pay the Plaintiff's costs of the proceedings, as agreed or as assessed.

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Decision last updated: 29 October 2014