24
May 2018

Statutory demands – revisiting a genuine dispute

On 18 August 2017, his Honour Black J dismissed with costs an application by which Creata (Aust) Pty Ltd (Creata) applied under section section 459G(1)(a) of the Corporations Act 2001 (Cth) (Act), for an order setting aside a statutory demand served on it by Gary Faull (Faull).

The New South Wales Court of Appeal overturned Black J’s decision in Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300, which serves as a useful reminder of the well established grounds for setting aside a statutory demand and the Court’s role in determining such an application.

Background

The debt the subject of the statutory demand arose from a deed between Creata and Faull (Deed). Pursuant to the Deed, Faull gave certain undertakings to Creata which, in turn, agreed that it would make certain payments to Faull. Faull claimed that Creata should have paid him $400,000 within 10 business days after 1 January 2017 pursuant to the Deed.

In seeking to have the statutory demand set aside, Creata contended that there was a genuine dispute as to the existence of the debt as Faull had breached certain provisions of the Deed and was not entitled to receive that payment.

The Deed

The relevant provisions of the Deed were: –

Clause 4(b): –

[Faull] agrees that he will not (unless required to do so by law or as required to obtaining judicial enforcement of the terms of this Deed): (i) use any trade secrets or Confidential Information for any purposes; or (ii) disclose any trade secrets or Confidential Information to any person including, without limitation any client of Creata or client of any Group Entity (“Client”), any supplier of goods and services to Creata or any Group Entity (“Supplier”) and any employee of Creata, any employee of any Group Entity, any employee of any Client or any employee of any Supplier.

Clause 4(c):

[Faull] acknowledges that during the term of his employment, he had access to and became acquainted with proprietary trade secret information belonging to Creata, Group Entity, Client and Supplier including, without limitation, information concerning their organization, business and affairs of Creata, Group Entity and any Client and Supplier, Client/Customer lists, Member lists, Supplier lists, pricing information, profit margins, referral source lists, vendor services lists, Client presentations [actual and proposed], sales and financing projections, budget information and procedures, accounting and financial records, policy and procedure manuals, industry contacts, computer software, computer programs, techniques of operation, employee compensation and financial structure, strategies of any kind or nature, and marketing, promotion, development or acquisition plans [whether past, current, future or potential] (“Confidential Information”).

Clause 4(f): –

[Faull] acknowledges that if [Faull] is in breach of this Clause 4, then Creata’s obligations regarding the making of the Payment [annual instalments of $400,000] pursuant to this Deed… shall cease upon Creata becoming aware of such breach and further [Faull] shall be obliged to repay to Creata any and all monies paid by Creata to [Faull] pursuant to this Deed.

Henderson’s evidence

Prior to the statutory demand being served on Creata, a company called NRG Nominees Pty Ltd (which a director of Creata, Norma Rosenhain, had a substantial interest in), served a statutory demand on a company called SAF Foods Pty Limited (SAF Foods).

Kenneth Henderson (Henderson) (another director of Creata who had an interest in NRG Nominees) gave evidence of a telephone call he had on 26 June 2015 with Mr Saunders (Saunders), a representative of SAF Foods: –

Then let me put it to you this way.  We understand from Gary [Faull] that the McDonald’s contract is coming up for renewal.  It’s an important part of your business. He’s [Faull] shared certain information with me about Creata’s and Norma’s [Rosenhain] tax and business and affairs.  If you don’t withdraw your statutory demand then I will send affidavits that I’ve already prepared about those matters to the ATO, the IRS, the Police, the FBI and McDonalds.

Faull denied having ever discussed with Saunders or anyone else within SAF Foods information about tax or business affairs of Creata.

Creata contended before that, having regard to the evidence given by Henderson, there was a plausible contention that Faull had breached the Deed and the $400,000 was not payable by Creata.

Decision of Black J

In addressing whether Creata had established the existence of a genuine dispute, Black J firstly considered the weight that should be given to Henderson’s evidence.

His Honour had earlier said that the evidence was admissible without any limiting order under section 136 of the Evidence Act 1995 (NSW).  This was because it was tendered not to prove the truth of the statements said to have been made by Saunders but to prove that he had made those statements, a fact relevant to the question whether a genuine dispute existed.

Black J noted that the specific content of any information that Faull was alleged to have shared with Saunders about the tax and business and affairs of Creata and Ms Rosenhain was not identified.  Therefore, his Honour considered the words attributed to Saunders did not provide an evidentiary basis for a finding that the unidentified information said to have been referred to by him was of a confidential character.

Black J then considered the interpretation of clause 4(b) and 4(c) Deed, opining: –

I do not accept that that construction of the clause is seriously arguable.  The clause defines “Confidential Information” as “proprietary trade secret information” and then gives examples of matters that are included within that category.  It does not seem to me that the inclusions within the category of “proprietary trade secret information” could, on any arguable reading of the clause, extend to information that was not proprietary or a trade secret or at least confidential.  In particular, it does not seem to me that there is any arguable basis for reading the definition of “Confidential Information” as extending to any matter relating to Ms Rosenhain’s tax and business and affairs, or Creata’s tax and business and affairs, whether confidential or not.

Black J concluded that Henderson’s evidence did not provide any evidentiary basis for any serious question to be investigated as to the truth of the third party’s statement and therefore no genuine dispute was established.  Rather, Henderson’s evidence went no further than to indicate that a third party said something, which may have been true or false, and Henderson chose to proceed on the basis that it may have been true by withdrawing the statutory demand served on SAF Foods.

Issues before the Court of Appeal

Creata identified 3 grounds of appeal: –

  1. That the primary judge erred in determining the construction of clauses 4(b) and 4(c) of the Deed.
  2. That, in any event, his Honour erred in his construction of those clauses.
  3. That his Honour erred in holding that the evidence of Henderson’s conversation with Saunders on 26 June 2015 was insufficient to establish a genuine dispute.

Decision of Barrett AJA

Barrett AJA (with whom Gleeson JA and White JA agreed) referred the decision of Gleeson JA In the matter of Litigation Insurance Pty Limited [2017] NSWSC 334 at [31] as a starting point: –

… First, the court dealing with a s 459G application is not compelled to determine questions of construction of documents.  Second, s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. Third, the cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number.  Fourth, the court’s state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared.

The Deed

Barrett AJA was of the view that the competing constructions of clauses 4(b) and 4(c) of the Deed for which counsel contended were plausible.  Neither side’s argument was so obviously correct or incorrect as to put the issue of construction beyond the realms of reasonable debate.  Ultimate resolution could only come from an objective determination, in appropriately constituted proceedings, of what a reasonable business person would have understood the clauses to have meant.  Accordingly, Barrett AJA opined that should have led to a finding that there was dispute on that question and therefore, a dispute as to the existence of the debt the subject of the statutory demand.

Conversation with Saunders 

Barrett AJA was of the view that while Black J had correctly recognised the admissible evidence going to whether there was a genuine dispute on the question whether Faull had breached clause 4(b) of the Deed existed, Black J erred in rejecting other possibilities as cogently arguable.  Once the possibilities were recognised and it was seen that the evidence might support any of the alternatives, the finding should have been one of serious question to be tried and therefore the existence of cogently arguable dispute.

Recent invention

Barrett AJA next considered whether the serious question or plausible contention was not something merely created or constructed in response to the pressure of the statutory demand.

It was submitted by Faull that grounds for a conclusion of recent invention existed on the basis that Henderson’s conversation with Saunders took place on 26 June 2015 and a payment of $400,000 due under the Deed in January 2016 was made by Creata without any dispute to it.

Faull provided further evidence of a telephone conversation with Henderson on 12 January 2017, whereby Henderson said that he would like to meet with Faull because times have changed at Creata and some financial issues had arisen.  In the course of that conversation, there was discussion about possible times for face to face meeting in Sydney.

Henderson accepted that a conversation as described by Faull took place and that he did not, at that time, raise with Faull the allegations that Faull had breached the Deed.  Henderson gave evidence that he thought that what he regarded as breaches of the Deed by Faull would best be raised and discussed face to face.  That was why he sought a meeting.

Given Henderson’s evidence that he intended to raise the issue of breaches of the Deed at the meeting he had sought with Faull and that the statutory demand was served after the meeting failed to materialise, Barrett AJA was not satisfied that a recent invention existed.

Decision

Having found that there was a serious question to be tried in respect of the construction of the Deed and the conversation between Faull and Saunders and that there was no sufficient basis for holding that the dispute alleged by Creata was of recent invention, the Court  allowed the appeal.

The decision serves as a timely reminder of the Court’s role in determining a section 459G application, that is: –

  1. the Court is not compelled to determine questions of construction of documents; and
  2. the proceedings are not ordinarily the occasion for the Court to construe a contract where there are competing views about its meaning.

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