FEDERAL COURT OF AUSTRALIA

R2M Pty Limited v Gourlay [2011] FCA 168

THE COURT ORDERS THAT:

1.    The statutory demand served by the defendant dated 16 August 2010 be set aside.

2.    The defendant pay the plaintiff’s costs (including reserved costs) of and incidental to the application on an indemnity basis, such costs to be taxed if not agreed.

3.    The defendant pay Williams Love & Nicol’s costs of complying with the subpoena issued to that firm on 21 September 2010, such costs to be assessed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    On 6 September 2010, the plaintiff commenced proceedings in this Court seeking an order setting aside a statutory demand served upon it on 17 August 2010. The defendant, Mr Gourlay, who served the statutory demand, is a former director of the plaintiff company, which was incorporated 19 August 2009. He is also a shareholder.

2    At the time of filing the application, the plaintiff also filed two affidavits in support (an affidavit of Christopher Gordon Cooke sworn on 6 September 2010 and an affidavit of Wayne Leslie Finlayson affirmed on 6 September 2010). Mr Cooke is a current director of the plaintiff company and Dr Finlayson is a former director, having resigned on 11 October 2010. Mr Gourlay filed a substantial affidavit in response, sworn on 26 November 2010.

3    For the purpose of the present application it has not been necessary to determine contested issues of fact and, having regard to the tests to be employed and the fact that further litigation is possible, it would be inappropriate to do so. The distillation of the facts which appears hereunder must be read with that qualification in mind.

The Facts

4    According to the affidavit of Mr Cooke, the plaintiff is a company which

conducts research and product development into various technologies to support food, water and energy security and develops those technologies into products and services for the Australian and International market. An example of this is the creation of microbial treatments to soils to promote soil health.

5    On 21 December 2009 the plaintiff and Mr Gourlay entered into an “Intellectual Property Licence Agreement”, expressed as commencing on 1 December 2009, whereby Mr Gourlay was to provide intellectual property to the plaintiff (“the licence agreement”).

6    Clause 1.1 of the licence agreement defined “intellectual property” as follows:

Intellectual Property means all of the Licensor’s methods, techniques, specifications, procedures, manuals, trade secrets, Confidential Information, knowledge and experience, prototypes, information imparted to R2M in confidence by the Licensor, any trademarks, service marks, trade names, copyrights, designs, patents and written or visual material relating to the technology and/or research as specified in Item 1 of Schedule 2.

(Emphasis added)

7    Item 1 of Schedule 2 of the licence agreement listed the following matters:

•    Recipes relating to development of new microbial formulations for soil, plants, animals and humans;

•    Procedures relating to microbial fermentation;

•    Procedures for extraction of ORMUS from sea water or other materials for addition to microbial formulations;

•    Reports and findings relating to the measurement of life force energy form [sic] a Beale device;

•    Findings relating to tests with the Booker water conditioning device;

•    Expertise and intelligence relating to:

о    the development of baseline data for trials and experiments of microbial formulations, including soil carbon mapping and measurement;

о    the application rates and timings for microbial formations to soil, plants and animals;

о    bio-conversion of organic wastes into soil, conditioners and liquid fertilisers;

о    the mapping and detection of primary water, earth generated water in fractured rock systems;

о    subtle energy research;

о    water structure/disassociation;

о    trace mineral application;

о    seawater processing and applications;

о    biological farming;

о    primary water;

о    bio-conversion;

о    fermentation technologies; and

о    ORMUS production.

8    Under the terms of the licence agreement Mr Gourlay was required to deliver the intellectual property within 3 months of the commencement date (i.e. by 1 March 2010). Clause 6 of the licence agreement provided (in part):

1.1    Delivery of Intellectual Property to R2M

(a)    The Licensor must, within three (3) months of the Commencement Date, provide to R2M the Intellectual Property including, but not limited to:

(i)    any and all documents recording the Intellectual Property including methods, techniques, manuals, procedures;

(ii)    any and all prototypes, designs, patterns;

(iii)    any other written or visual material relating to the Intellectual Property; and

(iv)    if part of the Intellectual Property is the provision of knowledge, experience or intelligence then the Licensor must document that knowledge, experience or intelligence to the best of their abilities and provide a copy of that document to R2M.

(b)    The Licensor warrants to R2M that it will provide R2M with all the Intellectual Property within the time frame specified in subclause 6.1(a) and will not withhold any information.

(Emphasis added)

9    It is apparent from the terms of the licence agreement to which I have referred that the provision of intellectual property was intended to be comprehensive. The licence agreement gave an exclusive, non-transferrable licence to the plaintiff to use the intellectual property for identified permitted uses, which included “development and commercialisation”, “further research and scientific experimentation” and “creation of products and commercial applications”.

10    The licence fee for the intellectual property was specified in Schedule 1 of the licence agreement as $195,000, 8% of ordinary shares in R2M Pty Limited and the equivalent of 8% of shares in a related company (calculated in a way specified in Schedule 1). The licence agreement stipulated that $100,000 and the shares were to be paid/delivered by 31 December 2009 and the remaining $95,000 was to be paid on 1 July 2010. There was no provision in the licence agreement in relation to GST. It is now accepted that no payment of any amount relating to GST was required under the licence agreement.

11    According to the affidavit of Mr Cooke, Mr Gourlay, as a director of the company, arranged for payment to himself of $110,000 in licence fees in about December 2009. This amount (incorrectly) included $10,000 for GST. The proceeds of a cheque for $110,000 were debited to the account of the plaintiff on 7 January 2010.

12    On 10 May 2010 Mr Gourlay sent an email to Mr Cooke setting out his dissatisfaction with the management of the company in relation to a number of issues, including changes to his own role and position. In relation the delivery of intellectual property he stated:

Further, you should not expect that any project that I have brought to the R2M will fall under your spell. Similarly, you should not expect that any IP will automatically transfer to R2M under current leadership and management arrangements. Current arrangements signal disharmony in the company and a lack of commitment to capitalisation to enable IP and technology transfer.

13    On 20 May 2010 Dr Finlayson was appointed a director of the plaintiff. He conducted an audit in June 2010 of the provision of intellectual property to the plaintiff by Mr Gourlay and others. He concluded that Mr Gourlay had not provided intellectual property as required. On 1 July 2010 an email was sent by Dr Finlayson to Mr Gourlay asserting that no intellectual property, as outlined in the licence agreement, had been provided. Dr Finlayson requested that Mr Gourlay provide the intellectual property required by the licence agreement and listed again the information referred to in Item 1 of Schedule 2 of the licence agreement.

14    Mr Gourlay responded by email on the same day. His response commenced with the following statements:

Wayne, I am happy to comply with this request as long as you comply with the following by 10 July:

1.    Payment of all of my consultancy, director fees and final IP payments as required by Agreements.

2.    Provide to the Board the R&D Plan, IP Property Transfer Plan, Quality Control Plan and IP/Product Commercialisation Plans that you were required to have completed by 30 March 2010.

15    Mr Gourlay went on to deny Dr Finlayson’s suggestion that he had provided no intellectual property as required by the licence agreement. He gave suggested examples of the provision of the required information. He also suggested that “if there are gaps in the IP transfer” they were due, amongst other reasons, to inadequate management, control and security arrangements by the plaintiff.

16    The plaintiff did not pay the second instalment of the licence fee. On 17 August 2010 Mr Gourlay served the plaintiff with a statutory demand (dated 16 August 2010) for payment of a debt allegedly owed to him in the amount of $104,500 (including $9,500 on account of GST). The debt was described in the Schedule to the statutory demand as:

Money owing under the terms of the Intellectual Property Agreement between Robert Clyde Gourlay and R2M Pty Limited being the final payment for Intellectual Property provided by Robert Gourlay to R2M Pty Limited under the terms of the agreement, as per Tax Invoice No 201008, dated 27 May 2010.

17    In a short affidavit accompanying the statutory demand, which was affirmed by Mr Gourlay on 13 August 2010, Mr Gourlay stated formally that he believed that there was no genuine dispute in relation to the existence or amount of the debt.

18    On 18 August 2010 solicitors for the plaintiff wrote to solicitors for Mr Gourlay. This letter noted Dr Finlayson’s demand for the provision of intellectual property. The letter alleged that Mr Gourlay had not provided any of the required intellectual property, although it referred also to Mr Gourlay’s assertion that he had done so. It advised that the plaintiff rescinded the licence agreement due to Mr Gourlay’s repudiation and fundamental breach of it and threatened litigation to recover the earlier payment and the shares which had been issued to Mr Gourlay. It asked that the statutory demand be withdrawn.

19    On 24 August 2010 solicitors for Mr Gourlay replied. They denied non-delivery of intellectual property, they alleged breaches of the licence agreement by the plaintiff and they declined to withdraw the statutory demand.

20    On 25 August 2010 solicitors for the plaintiff wrote once again. They suggested that the correspondence showed a “clear genuine dispute” about the debt claimed. Again they suggested that the statutory demand be withdrawn. This time there was no definite response and, on 6 September 2010, the present application to set aside the statutory demand was filed.

21    The affidavits to which I earlier referred served, amongst other things, to restate the respective positions of the parties. The plaintiff claims a failure on the part of Mr Gourlay to deliver intellectual property as promised. Although the plaintiff’s evidence is equivocal about whether it claims that no intellectual property at all has been delivered by Mr Gourlay, or some only, it claims to be relieved of the obligation to make any further payment to him. Furthermore, the plaintiff’s stated position is that Mr Gourlay’s defaults are such that not only is the payment which was due on 1 July 2010 one to which Mr Gourlay is not entitled but he is now disentitled to retain any part of the first payment made to him.

22    Mr Gourlay, on the other hand, claims that the obligation to make the second payment of the licence fee to him was unconditional. However, Mr Gourlay’s detailed response to the affidavits of Mr Cooke and Dr Finlayson (like his email of 1 July 2010) reveals that there is ample scope for a conclusion that there are a number of areas of disagreement between the parties about the extent of Mr Gourlay’s compliance with his own obligations under the licence agreement and whether the final payment to him, due on 1 July 2010, was one to which he was then, or is now, legally entitled.

The relevant law

23    The Corporations Act 2001 (Cth) provides a mechanism whereby a person claiming to be an unsatisfied creditor of a corporation, with an entitlement of at least (at present) $2,000, may serve a statutory demand for such payment (s 459E). Failure to satisfy the statutory demand erects an obstacle to a suggestion in subsequent winding-up proceedings that the debt was not due (s 459S). An application to set aside a statutory demand must be made within 21 days (s 459G). That requirement was satisfied in the present case.

24    Section 459H provides:

459H (1)    This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

(a)    that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

(b)    that the company has an offsetting claim.

(2)    The Court must calculate the substantiated amount of the demand in accordance with the formula:

where:

admitted total means:

(a)    the admitted amount of the debt; or

(b)    the total of the respective admitted amounts of the debts;

as the case requires, to which the demand relates.

offsetting total means:

(a)    if the Court is satisfied that the company has only one offsetting claim – the amount of that claim; or

(b) if the Court is satisfied that the company has 2 or more offsetting claims – the total of the amounts of those claims; or

(c) otherwise – a nil amount.

(3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.

(4)    If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:

(a)    varying the demand as specified in the order; and

(b)    declaring the demand to have had effect, as so varied, as from when the demand was served on the company.

(5)    In this section:

admitted amount , in relation to a debt, means:

(a)    if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt – a nil amount; or

(b)    if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt – so much of that amount as the Court is satisfied is not the subject of such a dispute; or

(c)    otherwise – the amount of the debt.

offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

respondent means the person who served the demand on the company.

(6)    This section has effect subject to section 459J.

25    Section 459J also allows the Court to set aside a statutory demand “on other grounds” if the Court is satisfied that:

(a)    because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

(b)    there is some other reason why the demand should be set aside.

However, s 459J(2) provides that unless a defect in the demand causes substantial injustice, the demand must not be set aside on the basis of a defect alone.

26    There is no need to go into the intricacies of the calculation directed in some cases by s 459H. The effect of s 459H in the present case is that if I conclude that there is a genuine dispute about the existence of the claim for $104,500 made by the statutory demand I must set it aside.

The statutory demand

27    As I indicated at the conclusion of argument on 28 February 2010, I am satisfied that there is a genuine dispute about the existence of the debt claimed by Mr Gourlay. Any suggestion to the contrary is not really tenable. It would depend on a firm conclusion that Mr Gourlay had fully complied with all his obligations to deliver intellectual property and had withheld nothing. That view of the facts appears to be denied by Mr Gourlay’s own statements. Denial of the existence of a genuine dispute about the debt thereafter depends on attributing to the licence agreement a construction which is also highly contestable, namely that Mr Gourlay was entitled to the second payment of the licence fee even if he had failed to deliver all the required intellectual property as promised and warranted. The present proceedings are not an appropriate vehicle for the determination of either of those issues. All that needs to be said is that they are each directly in dispute. In my view that should have been clear at a very early stage.

28    The plaintiff also alleged that the statutory demand should be set aside on the grounds that it had an offsetting claim (for the payment credited to Mr Gourlay on 7 January 2010) and that the statutory demand was defective because the affidavit in support of it was affirmed three days earlier than the date of the statutory demand.

29    It is not necessary for me to deal finally with either of these contentions. Short comments will suffice.

30    The notion that recovery of the earlier payment of $110,000 should be offset against the present demand for $104,500 lacks logical support. If the present claim is unsustainable, no question of an offset against it will arise. On the other hand, if the present demand is effective to identify a debt owed to Mr Gourlay (because he had satisfied his obligations under the licence agreement) there would be no basis to treat the bulk of the earlier payment (i.e. apart from GST) as recoverable. On either view, the suggestion of an offsetting claim (i.e. against an amount otherwise due and payable) is not available as an answer to the statutory demand, although such a claim may, of course, be available in its own right if Mr Gourlay has been in default of his obligations.

31    As to the more “technical” defect suggested, the position is more complicated. Mr Gourlay’s affidavit affirmed on 13 August 2010 did not simply depose to facts in support of the statutory demand; it stated that it accompanied the statutory demand and purported to verify it. Logically, it could not have done so in advance. In Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35 (“Wildtown”) the Full Court of the Supreme Court of Western Australia set aside a statutory demand under s 459J (“other grounds”) in part for such a reason. Templeman J (with whom Steytler J and Miller J both agreed) said (at [58]):

An affidavit executed two days before a statutory demand cannot verify that demand.

32    Templeman J concluded that the defect could not be waived or disregarded (cf. s 459J(2)).

33    Single judges of other courts have applied Wildtown (e.g. Higgins CJ (ACT Supreme Court) in Chadmar Enterprises Pty Ltd v IGA Distribution Pty Ltd (2005) 190 FLR 466). In Ri-Co Holdings (Australia) Pty Ltd v Allied Sandblasters Pty Ltd (2009) 231 FLR 139 Wilson J (Supreme Court of Queensland) observed (at [14]):

14    The efficacy of an affidavit purporting to verify the debt on which a statutory demand is based, but sworn before the date of the demand, has been considered in a number of single judge decisions in various Australian jurisdictions and a decision of the Western Australian Full Court: Wildtown Holdings Pty Ltd v Rural Traders Co Ltd . The cases do not speak with one voice. As the Corporations Act is Commonwealth legislation, concern for comity requires me not to depart from the decision of the Western Australian Full Court unless I am convinced it is plainly wrong.

34    I agree with Wilson J that the decision in Wildtown about this aspect of uniform national legislation should be followed unless plainly wrong. The Full Court of the Supreme Court of Western Australia was, at the time of the judgment in Wildtown, the relevant highest appellate court in that State (see, therefore, Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [135]).

35    In some of the cases there has been discussion concerned with the question of whether an affidavit, sworn or affirmed after the statutory demand had been made, could cure the defect in the statutory demand process identified in Wildtown. In the present case, there was no later affidavit, upon which reliance could be placed, which was served during the period in which compliance could have been made with the demand. That point, accordingly, does not arise for decision in these proceedings and I make no comment about it.

36    The statutory demand was, applying Wildtown, fatally flawed although, obviously enough at a practical level, the problem would be curable without difficulty by simply serving a new statutory demand. Although I would uphold the challenge to the statutory demand based on this point if necessary, it is not necessary that the decision to set aside the statutory demand be based directly upon it.

37    The statutory demand will be set aside as required by s 459H(3) of the Corporations Act for the reason that there is a genuine dispute about the existence of the claimed debt to which the statutory demand relates.

Costs

38    Mr Walker, who appeared for Mr Gourlay, accepted that he could not resist an order for costs if the statutory demand was set aside on the basis that there was genuine dispute about the existence of the alleged debt on which it was based.

39    However, the plaintiff has sought its costs on an indemnity basis. Those costs include the costs of an earlier application to set aside a subpoena addressed to the plaintiff’s solicitors, Williams Love & Nicol, which was granted by Stone J on 5 November 2010. An application has also been made, on behalf of the plaintiff’s solicitors, for their costs of complying with the subpoena.

40    Once the plaintiff’s written submissions dated 23 February 2011 had been served it should have been obvious that there was no answer to two of the three grounds given in support of the present application. Whatever view Mr Gourlay may have taken about the merits of his own position, attention to the tests required to be applied on the present application must have yielded the conclusion that it could not be resisted. Thereafter, costs were simply thrown away. Mr Gourlay is responsible for any waste of his own resources. The plaintiff, however, is entitled to some protection against the unnecessary waste of its own. I would have no hesitation in awarding indemnity costs from that date.

41    I was initially less persuaded that the plaintiff should have all its costs on an indemnity basis, as it sought, but I have ultimately decided that the plaintiff has made out a proper case for indemnity costs on that basis. My initial hesitation stemmed from the possibility that the plaintiff’s solicitors overstated the position in their letter of 18 August 2010 when they accused Mr Gourlay of failing to deliver any of the intellectual property required by the licence agreement. In my view the plaintiff’s evidence on the present application does not make that assertion good and it seems to me on the limited exploration of the facts so far that Mr Gourlay was entitled to resist it. He had earlier rejected the suggestion when it was made by Dr Finlayson. However, assuming in Mr Gourlay’s favour that this particular accusation will not ultimately be made good against him does not remove the central difficulty for his position on the present application.

42    The present application should not have been necessary. From the time that the statutory demand was served it was clear that there would be vigorous resistance to the suggestion that Mr Gourlay was entitled to a further payment. The nature of that resistance, the stated grounds for it, the contest about whether Mr Gourlay had discharged his own obligations and the earlier exchange between he and Dr Finlayson about that issue should all have made it quite apparent to Mr Gourlay and his advisers that his claim to payment was, and would be, denied. There is no basis to conclude that denial of his claim is fanciful or in any other sense not genuine. The statutory demand process, although efficient in appropriate circumstances, is not intended merely to provide a claimant with a means of imposing a short time for compliance with a disputed claim. It was not an appropriate process to use in the present case. That should have been obvious at the outset but, in any event, the plaintiff gave immediate advice that the statutory demand would be challenged. It was inevitable that a conclusion would be reached, if a formal challenge was then necessary, that there was a genuine dispute about the debt. In the circumstances, the plaintiff was put to unwarranted expense and is entitled to such protection as an order for costs may provide it.

43    Mr Katekar, who appeared for the plaintiff, also relied upon a “Calderbank” letter dated 26 November 2010. That letter demanded the abandonment of the statutory demand and payment by Mr Gourlay of $40,000 towards the plaintiff’s costs. That sum represented a substantial proportion of the costs which, it was alleged, the plaintiff had incurred. Those total costs were not itemised or particularised in any fashion. The letter also relied upon the earlier letter of 18 August 2010, as a statement of the plaintiff’s position, including, no doubt, the accusation that Mr Gourlay had failed altogether to meet his obligations to provide intellectual property under the licence agreement. I would not award indemnity costs against Mr Gourlay on the basis that he did not accede to the demands in the letter of 26 November 2010. I am not satisfied that it represented an offer of compromise of the necessary quality. It has not been demonstrated that Mr Gourlay acted unreasonably in not complying with the terms of the letter. That conclusion, however, leaves in place my finding that Mr Gourlay did act unreasonably in persisting with the statutory demand, and requiring the present application to be made, when the debt he claimed was clearly in dispute in a way that was not fanciful or lacking in substance.

44    In my view the appropriate order as to costs between the parties is that the defendant pay the plaintiff’s costs (including reserved costs), of and incidental to the present application, on an indemnity basis, such costs to be taxed if not agreed. The defendant must also pay Williams Love and Nicol’s costs of complying with the subpoena issued to that firm on 21 September 2010, such costs to be assessed if not agreed.

Associate:

Dated:    3 March 2011