FEDERAL COURT OF AUSTRALIA

Pharmanet Group Limited v Primeland Pty Ltd, in the matter of Pharmanet Group Limited [2015] FCA 208

IN THE MATTER OF PHARMANET GROUP LIMITED ACN 006 640 553

THE COURT ORDERS THAT:

1.    The Creditor's Statutory Demand for Payment of Debt dated 19 March 2014 served on the Plaintiff by the Defendant on 20 March 2014 be set aside.

2.    The Defendant pay the Plaintiff's costs of and incidental to this application, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF CONSOLIDATED GLOBAL INVESTMENTS LIMITED ACN 009 212 293

THE COURT ORDERS THAT:

1.    The Creditor's Statutory Demand for Payment of Debt dated 19 March 2014 served on the Plaintiff by the Defendant on 20 March 2014 be set aside.

2.    The Defendant pay the Plaintiff's costs of and incidental to this application, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF PHARMANET GROUP LIMITED ACN 006 640 553

THE COURT ORDERS THAT:

1.    The Creditor's Statutory Demand for Payment of Debt dated 19 March 2014 served on the Plaintiff by the Defendant on 20 March 2014 be set aside.

2.    The Defendant pay the Plaintiff's costs of and incidental to this application, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF PHARMANET GROUP LIMITED ACN 006 640 553

IN THE MATTER OF CONSOLIDATED GLOBAL INVESTMENTS LIMITED ACN 009 212 293

IN THE MATTER OF PHARMANET GROUP LIMITED ACN 006 640 553

REASONS FOR JUDGMENT

INTRODUCTION

1    In these commercial disputes between two brothers, who have been referred to as John and Tony, the plaintiff companies controlled by John seek to set aside winding up notices served by the defendant companies controlled by Tony. In WAD 77 of 2014, Pharmanet Group Limited seeks to set aside a winding up notice served by Primelane Pty Ltd. In WAD 78 of 2014, Consolidated Global Investments Limited (CGI) seeks to set aside a winding up notice by Monarch Corporation Pty Ltd. In WAD 79 of 2014, Pharmanet also seeks to set aside a winding up notice served by Monarch.

2    Although the circumstances vary slightly, the central question is whether there is a genuine dispute. One of the features of the relationship underlying the argument in favour of a genuine dispute is the informality in the business dealings between the two brothers. While some transactions were recorded in writing, many were not reduced to writing. There was a serious falling out between the brothers, who worked together for many years until Tony moved out of the office he shared with John without notice. That gave rise to proceedings in the Supreme Court of Western Australia before Justice McKechnie in which John was the successful party. Following the outcome of the Supreme Court proceedings, Tony caused the various companies to issue the winding up notices.

STATUTORY PROVISIONS

3    Of the various setting aside provisions, s 459G and s 459H(1) of the Corporations Act 2001 (Cth) are directly relevant to this dispute. They provide:

Division 3 - Application to set aside statutory demand

459G    Company may apply

(1)    A company may apply to the Court for an order setting aside a statutory demand served on the company.

(2)    An application may only be made within 21 days after the demand is so served.

(3)    An application is made in accordance with this section only if, within those 21 days:

(a)    an affidavit supporting the application is filed with the Court; and

(b)    a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.

459H    Determination of application where there is a dispute or offsetting claim

(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.

…

4    There is a deal of evidence contained in various affidavits, including affidavits sworn by John in each proceeding on both 15 April 2014 (John’s April affidavit) and 27 June 2014 (John’s June affidavit). Also in each of the proceedings is an affidavit of Tony sworn on 6 June 2014 (Tony’s June affidavit).

CONVERTIBLE NOTES

5    The statutory demands all relate to amounts claimed and said to be due and payable by the various plaintiffs pursuant to convertible note agreements.

6    WAD 77 involves an unsecured convertible note deed dated 31 March 2008 and an unsecured convertible note agreement dated 31 December 2008. Each was entered into between Pharmanet and Primelane.

7    WAD 78 concerns an unsecured convertible note deed dated 20 August 2008 entered into between CGI and Monarch.

8    WAD 79 relates to an unsecured convertible note deed dated 6 June 2008 and an undated unsecured convertible note agreement entered into by Pharmanet and Monarch.

(together the Convertible Note Agreements).

9    The Convertible Note Agreements are in broadly similar terms. Each contains terms under which:

(a)    the parties acknowledge that the lender, being the defendant in each proceeding, has provided an advance to the plaintiff in each proceeding;

(b)    the respective plaintiff has issued a Convertible Note Certificate to the respective defendant

(c)    interest is to accrue daily at the rate of 12% per annum on the unpaid principal amount of the advance calculated monthly, and payable in arrears in cash;

(d)    subject to early repayment of the whole or part of the advance in accordance with the Convertible Note Agreements, the advance, or any part of it, which is outstanding and interest thereon may be converted into shares in the respective company at the issue price at the election of either the lender (during the term) or the company (within 30 days before the end of the term) by notice in writing to the other;

(e)    subject to early repayment, the respective plaintiff must repay to the respective defendant the advance and interest accrued on the advance in cash on the date of expiry of the term, or, in the case of the undated unsecured convertible note agreement in WAD 79, within five business days after the ‘Repayment Date’;

(f)    an event of default occurs if, amongst other things, the plaintiff companies default in fully performing any provision of the Convertible Note Agreements and the default (being capable of remedy), has not been remedied within 20 business days; and

(g)    if an event of default occurs, any money owing under the Convertible Note Agreements shall be paid by the plaintiff company within 10 business days of the defendant lender issuing a written notice to the company requiring payment of such money.

THE DEMANDS

10    The evidence details correspondence from the defendants’ solicitors to the plaintiffs’ solicitors noting that the respective advances had been extended for various periods set out in the correspondence and that various statements in the plaintiffs’ annual reports ‘arguably’ suggested that they had been extended for further periods such that, therefore, they were not due and payable. The defendants, through that correspondence, requested the plaintiffs to let them know in writing whether the advances were extended for the further periods as arguably suggested in the annual reports, or whether there were any other reasons why the advances were not yet due for repayment. Assuming that the advances were due and owing, payment was requested by the plaintiffs to the defendants within seven days of the date of the letters, all sent on 7 March 2014, in each case together with the amount of interest, which was purportedly calculated during the period commencing on the date of the respective Convertible Note Agreements and ending on 28 February 2014. The defendants also foreshadowed that if the plaintiffs did not make payment, or propose a payment arrangement, or respond to the correspondence, the defendants expected to receive instructions to issue the demands.

11    The plaintiffs, through their solicitors, did respond within the seven day period requested by the defendants confirming that they were seeking instructions as to the factual background. Despite this, on 19 March 2014 the statutory demands were served by the defendants prior to receiving further communication.

12    The basis of the demands in each instance was for payment in respect of moneys allegedly due and payable by the plaintiffs to the defendants pursuant to the Convertible Note Agreements. No further computation or breakdown is set out. In each instance, it would appear that the total claimed included the principal amount advanced pursuant to the Convertible Note Agreements and interest. This is an inference only based on the fact that the total claim in each case is greater than the principal amount initially advanced. There is no particularisation of the amount of interest claimed or how it is calculated.

13    The principal and interest is detailed in the defendants’ submissions and Tony’s June affidavit as follows:

(a)    the statutory demand served by Primelane on Pharmanet demanded payment of the sum of $422,500, which represented $195,000 owing under the convertible note deed dated 31 March 2008 and $227,500 owing under the convertible note deed dated 31 December 2008. The $195,000 owing under the deed dated 31 March 2008 is made up of principal of $150,000 and interest of 12% per annum from 30 September 2011 to 28 February 2014 totalling $45,000. The $227,500 owing under the deed dated 31 December 2008 is made up of principal of $175,000 and interest of 12% per annum from 30 September 2011 to 28 February 2014 totalling $52,500;

(b)    the statutory demand served by Monarch on CGI demanded payment of the sum of $390,000, being the sum of $300,000 advanced by Monarch pursuant to the convertible note deed dated 20 August 2008 and interest at the rate of 12% per annum from 30 September 2011 to 31 December 2013 totalling $90,000; and

(c)    the statutory demand served by Monarch on Pharmanet demanded payment of the sum of $858,000, made up of $533,000 owing under the convertible note deed dated 1 June 2008 and $325,000 owing under the Convertible Note Agreement of 5 February 2010. The $533,000 owing under the deed dated 1 June 2008 is made up of principal of $410,000 and interest of 12% per annum from 30 September 2011 to 28 February 2014 totalling $123,000. The $325,000 owing under the agreement of 5 February 2010 is made up of principal of $250,000 and interest of 12% per annum from 30 September 2011 to 28 February 2014 totalling $75,000.

IS THERE A GENUINE DISPUTE?

14    For the purposes of s 459H(1)(a) CA, the plaintiffs’ starting position in establishing that there was a genuine dispute about the existence or amount of a debt to which the demand relates was relatively simple. It was contended that each of the terms of the Convertible Note Agreements was orally varied. The plaintiffs contend in John’s April affidavit that the terms were extended by oral agreement between John and Tony. John says at various times up to September 2011, it was orally agreed that the advances would be converted into shares in the plaintiffs, and in any event, that the defendants would not request the plaintiffs to pay the advances, or any part of them, until the plaintiffs made a profit. The advances would then be paid from that profit.

15    Tony’s June affidavit in response deposed to the cessation of interest payments in about September 2011. That was the approximate date when the relationship between the brothers deteriorated to such an extent that Tony moved out of the offices the brothers shared.

16    After receiving Tony’s June affidavit concerning interest, the plaintiffs filed John’s June affidavit three weeks later in which, for the first time, the alleged oral agreements as to interest payments were raised.

17    The plaintiffs make the point that Tony has failed to deny the existence of the agreements which the Court should have regard to in assessing whether the threshold under s 459H(1)(a) has been met: Meadowfield Pty Ltd v Gold Coast Holdings Pty Ltd (in liq) [2001] WASCA 360 (at [28]-[29]). I do take into account the failure to deny, but, by the same token, the denial is expressed firmly in written submissions. This failure to expressly deny the agreement on which the genuine dispute is said to exist is something that would be capable of cure if it was the only factor on which the arguments turned. As it happens, there are a number of issues that arise.

18    It does not appear to be in dispute on the evidence (as distinct from submissions), that extensions of some description were made. I draw this inference for present purposes only on the basis that Tony’s June affidavit in response to John’s April affidavit did not introduce any contradictory evidence, save to depose simply that the defendant companies did not receive interest payments from the plaintiffs after 8 September 2011. The position for the plaintiffs is that in or around mid-2011, John, on behalf of the plaintiffs and, Tony, on behalf of the defendants, agreed that the plaintiffs would cease making interest payments to the defendants under the Convertible Note Agreements until such time as Pharmanet and CGI made a profit.

19    John’s June affidavit takes the position beyond that set out in John’s April affidavit by asserting that the oral agreements reached in relation to the conversion of the advances also related to the payment of interest which may otherwise have been payable pursuant to the Convertible Note Agreements. That is, as I understand it, that not only would the principal be extended, but also payment of the interest would be extended, and no payment would be required until the companies were making a profit and the interest would be repaid from the companies’ profit. John argues that the conduct of the parties after that time is consistent with this as there was never any demand of any description issued by the defendants until after the Supreme Court proceedings (implicitly, John says, by way of retaliation), as John had succeeded in that court.

20    The plaintiffs urge the Court not to take a rigid view of the absence of express documentation in light of the formerly close relationship between the brothers and the informality of their dealings.

21    On the basis of those oral communications, the plaintiffs submit that there is a genuine dispute about the existence and/or amount of the debts in respect of which the statutory demands were issued. It is therefore said, pursuant to the oral agreement reached between the parties, that repayment would not fall due until such time as the plaintiffs made a profit. Further, the plaintiffs contend that there is evidence that no such profit has yet been made and, therefore, the Court should be satisfied that a genuine dispute exists in relation to the debts.

ADMISSIBILITY OF SUBSEQUENT AFFIDAVITS

22    The defendants object to the plaintiffs’ reliance upon the supposed further oral agreement as to interest deferral on the basis that the plaintiffs are out of time to raise these matters. An affidavit in support of an application to set aside a statutory demand that is filed outside the 21 day period for compliance with the statutory demand which raises a new ground or grounds to set aside a statutory demand cannot be used to set aside a statutory demand: Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; Energy Equity Corp Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 (at [29]). The inclusion of interest in the alleged oral agreements is said to raise a new ground for opposing the statutory demands and raising a genuine dispute. The asserted interest deferral only emerged after the defendants pointed out that interest was not being paid. Further, the agreements as to interest are said to have been made at the very time that the relationship between the brothers was breaking down, which would suggest that such an agreement was implausible. The defendants argue that this response should neither be admitted into evidence nor accepted as part of the genuine dispute argument, if it is admitted.

23    The plaintiffs argue that John’s June affidavit which set out the interest agreement are admissible for two reasons. The first is that each of the supporting affidavits to the statutory demands say nothing more than the debt due and payable ‘is in respect of a $[X] owed by the [plaintiff] to the [defendant] relating to a [Convertible Note Agreement] entered into by the [defendant] and the [plaintiff] in or about [a date]’. The affidavits do not spell out that these are the Convertible Note Agreements, nor the expiry dates under them and importantly, nor that the debt comprised any interest or the amount of interest. Where a creditor has imperfectly articulated the statutory demand, the affidavit supporting the application to set aside the demand cannot fairly be expected to do the creditor’s job by articulating with greater particularity his response to a claim which itself is barely articulated: Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42 per Debelle J (at [18]) (Doyle CJ and Perry J agreeing). The plaintiffs argue that it was the defendants who raised and quantified in Tony’s June affidavit, for the first time, the asserted interest component of the debts.

24    I am inclined to give the benefit of the doubt to John and permit the topic of the interest agreements to be raised as this material was responsive. John’s June affidavit is properly characterised as being responsive affidavits, supplementing the initial affidavits. They expand on the plaintiffs’ initial ground for contending that a genuine dispute exists. See Product People (International) Pty Ltd v Box Seat Co Pty Ltd (in liq) [2013] FCA 277 per Farrell J (at [47]), where the supplementary affidavit was characterised as responsive and admitted:

After argument on the Graywinter objection I ruled that the December Affidavit is properly characterised as made in reply to the Edwards Affidavit and was therefore admissible. The items raised in paragraphs [15]–[29], and in particular those in paragraphs [21], [22] and [25] of the December Affidavit (which are the heart of the defendant’s objection), directly address the accounting exercise undertaken by Ms Edwards at paragraph [16] of her Affidavit. Those items dealing with the proper accounting of TPP ultimately do not matter, but they are responsive to the Edwards Affidavit. The material in paragraph [24] of the December Affidavit corrects a statement made by Ms King in paragraph [10] of the Supporting Affidavit which she now knows to be false. This correction was necessary so as not to mislead the court.

RELEVANT CONSIDERATIONS

Genuine dispute

25    The parties accept that ‘genuine dispute’ connotes a ‘plausible connection requiring investigation’: Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602 per Martin CJ, Owen and Miller JJA agreeing (at [44]).

26    It is well established that the demand will be set aside if there is a bona fide dispute concerning an issue of fact or law, so long as it is not based on spurious, hypothetical, illusory or misconceived grounds, and which is not frivolous or vexatious, but which has some substance: Apex Gold Pty Ltd v Atlas Copco Australia Pty Ltd [2011] WASC 49 (at [25]); Createc per Martin CJ (at [45]). The function of the Court is to determine whether there is a genuine dispute. The Court is not expected to undertake an extended inquiry nor to attempt to weigh the dispute: Createc (at [46]). Of course, where credibility of key witnesses is crucial, that issue would not usually be resolved on an application to set aside a statutory demand: Violet International Pty Ltd v Grandwood Homes Pty Ltd [2004] QSC 152 (at [31]). That is not to say, however, that every assertion must be accepted without question. In particular, as noted in Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 (at [11]) (Murphy JA and Buss JA agreeing) the Court is not required to accept uncritically as giving rise to a genuine dispute, every statement in an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent or inherently improbable in itself, such statement may be.

27    When it comes to oral agreements such as those relied upon by the plaintiffs in the present case, a mere assertion of an oral agreement deposed to in an affidavit will not necessarily suffice to set aside a statutory demand. Something beyond implausible assertion is required from an applicant to demonstrate the genuineness of its claim: WEC Pty Ltd v Cypriot Community of Queensland Inc [2002] QCA 506 per McMurdo P (at [11]) (Cullinane and Holmes JJ agreeing).

28    Similarly, although an exhaustive analysis of a legal argument would rarely be appropriate, the Court would decline to accept a patently feeble legal argument: Central City (at [11]).

29    In Trecomax Pty Ltd v Prentice (2004) 50 ACSR 314 (at [25]-[28] and [33]-[35]) Sackville J summarised the considerations, saying:

[25]    The test for determining whether there is a ‘genuine dispute’ for the purposes of s 459H(1)(a) of the Corporations Act was addressed by a Full Court of this Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452. The Court (Northrop, Merkel and Goldberg JJ) pointed out that the decided cases contain many explanations of the statutory expression. Among the cases cited by the Full Court are three to which I refer below.

[26]    In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 (SCt Qld), Thomas J said (at 605) that:

‘there is little doubt that Div 3 [of Part 5.4 of the Corporations Law] is intended to be a complete code which prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court’s examination are the ascertainment of whether there is a “genuine dispute” and whether there is a “genuine claim”.

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.

The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).’

[27]    In Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290, Hayne J pointed out (at 293) that there has long been a practice, as a matter of discretion, that a winding-up order will not be made on a debt which is bona fide disputed, provided the dispute is on substantial grounds. His Honour endorsed the reason given by McPherson, The Law of Company Liquidation (3rd ed, 1987), at 63, for the practice, namely

‘that a winding-up application is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt which would certainly be discharged as soon as the company’s liability was shown clearly to exist.’

[28]    Hayne J expressed the view that this consideration applied equally to Div 3 of Pt 5.4 of the Corporations Law (the predecessor to Div 3 of Pt 5.4 of the Corporations Act). His Honour pointed (at 294–295) that other considerations should also be taken into account:

‘First, any application to set aside a statutory demand must be made very quickly: it must be made within 21 days. Secondly, the statute contemplates a summary procedure, the only outcome of which will be an order affecting the statutory demand, not any order or judgment declaring a debt to be owing or not to be owing or ordering payment of any money sum. Thirdly, the only significance that the statutory demand has is that if there is failure to comply with it then the company is deemed to be insolvent. Thus the demand is no more than a precursor to an application for winding-up in insolvency. Fourthly, an application to wind up in insolvency must be determined within six months (unless the court is satisfied that special circumstances justify an extension of that time) (s 459R). Fifthly, on the hearing of the application to wind up, the company may not oppose the application on grounds that it might have taken in any application to set aside the demand, unless those grounds are material to proving that the company is solvent.

These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.’

…

[33]    In Spencer Constructions, the Full Court thought (at 463) it clear from the authorities

‘in considering applications to set aside a statutory demand, a court will not determine contested issues of fact or law which have a significant or substantial basis’.

This suggests that the Court should not investigate contested legal issues, beyond determining whether the argument has a ‘significant or substantial basis’.

[34]    There are authorities which support the proposition that if the facts are not in dispute, the Court can decide the question of law. Thus in Delnorth v State Bank of New South Wales (1997) 17 ACSR 377 (SCt NSW), Cohen J considered (at 384–385) that where no further investigations of the facts was required, the Court, in an application under s 459G of the Corporations Law could decide, as a matter of law, whether there is a genuine dispute. His Honour thought that the occasions where this is possible might be ‘few’, but he proceeded in that case to resolve the question of law. See, too, Burdon Pty Ltd v Gillford Pty Ltd [1995] FCA 1096, per Hill J, with whom Whitlam J agreed.

[35]    While this approach is open, in my view the Court should take care to ensure that it does not go beyond the role that is appropriate, having regard to the considerations identified by Hayne J in Mibor Investments and the approach endorsed by the Full Court in Spencer Constructions. The procedure established by Div 3 of Pt 5.4 of the Corporations Act is not ordinarily the occasion for final resolution of a dispute, even if the matter in contest rests on a question of law. The question for the Court is whether there is a genuine dispute about the existence or amount of the debt.

(emphasis added)

30    The defendants argue that the arguments advanced for the plaintiffs fail to meet all the tests. There is an imprecise recollection of the date at which the oral agreements have been reached. There is no indication of the precise words used or the location of the parties or the circumstances surrounding the reaching of the oral agreements.

Lack of consideration

31    More importantly, the alleged oral agreements, the defendants say, must fail as a matter of law due to the total absence of consideration. There was no consideration flowing from the plaintiffs to the defendants as they were entirely one sided. The plaintiffs undertook and promised nothing. According to the defendants, on the face of the matter, to the extent that the alleged oral agreements included promises on the part of the plaintiffs to repay the principal and/or interest, or convert the principal sum to shares, that was something they were already bound to do under the Convertible Note Agreements. The defendants say it was, at best, past consideration and, therefore, no consideration at all: Stilk v Meyrick (1809) 2 Camp 317; 6 Esp 129.

32    Only a person who has given consideration under a contract may enforce a contract not made under seal: Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 (at 853). Consideration is a right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other: Currie v Misa (1875) LR 10 Ex 153 (at 162); Conlan v Registrar of Titles (2001) 24 WAR 299 per Owen J (at [203]).

33    The plaintiffs’ written response on the consideration point, until the hearing, was not particularly illuminating. To support a contract, the plaintiffs contended, consideration need only be sufficient in law (not adequate) and it must move from the promissee: Cheshire & Fifoot Law of Contract, (10th Aust ed)‎ (at 4.6, 4.9 and 4.12). The plaintiffs argued that ‎absent examination of the totality of the evidence, which is not before the Court nor is it required on such an application, the Court cannot with certainty make findings on whether or not consideration has moved from the promissee. It was also argued that, in any event, sufficient consideration and, indeed, valuable consideration moved from the plaintiffs to the defendants in that the defendants retained their right to convert the debt to shares beyond the initial term of the notes. This latter aspect is a topic which received considerable amplification at and after the oral hearing, as I will explain.

34    At the hearing before me, the plaintiffs amplified its arguments by contending that:

(a)    the consideration for the promises alleged to have been made by the defendants was that the plaintiffs would remain solvent, thereby benefitting the defendants and related parties who held shares in the plaintiffs;

(b)    the Convertible Note Agreements on their proper construction do not require the plaintiffs to pay interest to the defendants after the expiration of the terms for the Convertible Note Agreements, so the extension of the term has the effect of preserving or extending the obligation to pay interest at the contractual rate beyond the last date at which interest would be due and payable, thus it provides consideration; and

(c)    the issuing of statutory demands by the defendants was an abuse of process in that the defendants did not issue the demands for the purposes of winding up the plaintiffs on the grounds of insolvency.

35    I turn to consider these new or more fully developed arguments related to consideration, (a) and (b), and I will return to the abuse of process argument, (c).

36    As to consideration in terms of the plaintiffs’ continued solvency, this is a novel argument. The continuing solvency of the plaintiffs does not accord with conventional notions of consideration. Consideration is a quid pro quo offered for the promise that is sued upon: Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 (at 456-457). The root of the matter is the relation of reciprocal, conventional inducement, each for the other between consideration and promise: R v Clarke (1927) 40 CLR 227 per Isaacs ACJ, Higgins and Starke JJ (at 236); Beaton v McDivitt (1987) 13 NSWLR 162 per McHugh JA (at 181).

37    The continuing solvency of the plaintiffs might have been an incidental consequence of the defendants’ alleged promise to forebear to enforce their rights to payment. It was not, however, a consequence of any act, promise, omission or forbearance on the part of the plaintiffs in exchange for the defendants’ promise not to seek repayment. It did not flow from the plaintiffs to the defendants. It was not a benefit offered by the plaintiffs as a quid pro quo for the promises alleged to have been made by the defendants. Of course, the plaintiffs may have entered into any number of other arrangements which had the potential to affect their solvency notwithstanding that the defendants had allegedly agreed for forebear from enforcing their right to repayment. The defendants’ forbearance gave no promise or guarantee that the plaintiffs would remain solvent.

38    The plaintiffs pointed to no authority or precedent which would support the consideration argument that they advance. In my view, the argument advanced by the plaintiffs in relation to consideration (being to maintain their own solvency) is without merit. It does not, at least as presently expressed, appear to me to satisfy the conventional definition of consideration to be given to support contractual relationships.

39    As to the interest question (which is also related to consideration), this is more problematic for the defendants, at least at this stage. The essence of the argument for the plaintiffs, as developed at the hearing, was that, whether it be by drafting flaw or otherwise, interest had ceased to be due and owing under the Convertible Note Agreements on expiry of their terms, so the extension of the term by the alleged oral agreement preserves the defendants’ contractual right to interest, thus gives consideration.

40    The circumstances are slightly different in each of the respective proceedings.

41    WAD 79 relies upon a February 2010 agreement, which provides (at cl 3.1) in relation to the interest rate, that:

The Convertible Note shall bear interest at the rate of 12% per annum on the Outstanding Amount from the date of its issue until the earlier of:

(a)    the Repayment Date; and

(b)    the date the Convertible Note is converted to its entirety into Shares or repaid in full in accordance with this agreement.

(emphasis added)

42    ‘Repayment Date’ is a defined term in the February 2010 Agreement to mean the date 24 months after the completion date. ‘Completion Date’ is defined to mean the date of the February 2010 Agreement. It is on that basis that the plaintiffs contend that interest ceased to accrue on 5 February 2012. The defendants, however, stress that the meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean. They are to be construed so as to avoid the contract making commercial nonsense or working commercial inconvenience: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (at 657). There is no rule of law or of construction which requires the Court to apply a definition where to do so would be at variance with a context or with a general intent to be gathered from the whole of the instrument: Halford v Price (1960) 105 CLR 23 (at 33).

43    The defendants argue that the general intent to be gathered from the whole of the Convertible Note Agreements, is that interest accrues on the principal amount even, (one might say especially), when the debtor is in default of a payment. Construing the February 2010 agreement commercially, the words ‘Repayment Date’ in cl 3.1(a) are to be given their ordinary meaning, so that interest is payable by the plaintiffs up until the date in which the advances were in fact paid. The sensible and obvious explanation for this is that in cl 3.1(a) the parties intended to refer to that date and the use of the defined term is a drafting slip.

44    Applying the defined term mechanically would produce an absurd result, according to the defendants, as on a breach of an obligation to repay the advances to the defendants, the plaintiffs would no longer be required to pay interest on the principal advanced. This would effectively encourage or reward a breach of the February 2010 agreement by providing the plaintiffs with an interest free loan if they failed to comply with their obligations to repay. The defendants contend this is a result which is commercially nonsensical and which no reasonable business person would understand the February 2010 agreement to mean.

45    If the language in a contract is open to two constructions, the construction which will be preferred is that which avoids consequences which appear capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 per Gibbs J (at 109) (ABC v APRA). The two alternatives for the ‘Repayment Date’ are the defined meaning in the February 2010 agreement or the ordinary meaning of the words. The former approach would give an absurd result, whereas the latter approach would give a just result. To reward the debtor for non-payment would amply answer the description for commercial nonsense. In context, ‘Repayment Date’ should mean the date of actual repayment.

46    Moreover, in WAD 79, the defendants argue that, in any event, interest is still due and owing to the defendants, irrespective of whether the interest continues to accrue after the expiration of the February 2010 agreement. The ‘Repayment Date’ under that agreement is 5 February 2012, being the date 24 months after the date of the February 2010 agreement. Interest payments stopped in or about 8 September 2011, and in total the interest has been paid only until 31 August 2011. Even accepting the construction contended for the plaintiffs, it is said that interest of some $12,910.95 is owed to Monarch for the period 1 September 2011 to 5 February 2012. The agreement entered into between Pharmanet and Monarch on 6 June 2008 expired on 1 June 2012. However, Pharmanet ceased making interest payments to Monarch on or about 8 September 2011, and in total has paid interest for the period ending 6 September 2008 only. Accordingly, even on the construction advanced by the plaintiffs, interest for the period 7 September 2011 to 1 June 2012 totalling $40,269.86 is owed to Monarch.

47    The plaintiffs argue that determining what a reasonable business person would have understood the terms of a commercial contract to mean requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purposes of, or objects to be secured by, the contract: Electricity General Corporation (at [35]). The plaintiffs stress that it is not part of the Court’s function to speculate on an abstract commercial purpose to rewrite what is otherwise clear because it appears to produce unreasonable results: ABC v APRA per Gibbs J (at 109).

48    The plaintiffs contend that it is an extraordinary proposition by the defendants that the Court should, on an application to set aside a statutory demand, in effect, rewrite the definition of ‘Repayment Date’ in WAD 79 to correct what the defendants suggest is a ‘drafting slip’ or at least to ‘construe’ the words in a manner very differently from the unambiguous language used in the definition. The plaintiffs contend that such a determination would deprive the parties of the opportunity to adduce evidence of surrounding circumstances to support their competing arguments on construction. They argue, therefore, that the question of law raised by the plaintiffs as to construction plainly raises a ‘genuine dispute’.

49    The other Convertible Note Agreements relevant to the WAD 77 and WAD 78 proceedings contain a slightly different cl 3.1 which reads:

Interest shall accrue daily at the Rate on the unpaid principal amount of the advance and is payable monthly in arrears in cash. (emphasis added)

50    The plaintiffs argue that cl 5.3 of the Convertible Note Agreements prevents the defendants from claiming interest after the expiration of the terms of each agreement. It provides:

Repayment on Expiry

Subject to early repayment under clauses 5.1 and 5.2, the Company must repay to the Lender the advance and interest accrued on the advance in cash on the date of expiry of the Term.

51    This clause imposes on the plaintiffs the obligation to repay the principal advance and any interest accrued on expiration of the term of the agreements. However, it does not limit the interest payable by the plaintiffs to the period prior to the expiration of the agreements. That obligation to pay interest is governed by cl 3.1 of the agreements which dictates that interest continues to accrue on ‘the unpaid principal amount’. The same arguments apply in relation to sensible construction to this cl 3.1 as in respect to the differently worded cl 3.1 at issue in WAD 79.

52    The defendants also contend that, in relation to WAD 77, the agreement entered into between Pharmanet and Primelane on 31 March 2008 expired on 30 April 2012. However, Pharmanet ceased making interest payments to Primelane on 8 September 2011, and in total has paid interest for the period ending 31 July 2011 only. Accordingly, even on the construction contended by the plaintiffs, it is said that interest for the period 1 August 2011 to 30 April 2012 totalling $13,500 is owed to Primelane. Also, according to the defendants, it is said that the agreement entered into between Pharmanet and Primelane on 31 December 2008 expired on 31 December 2011. However, Pharmanet ceased making interest payments to Primelane on 8 September 2011, and in total has paid interest for the period ending 31 July 2011 only. Accordingly, even on the construction advanced by the plaintiffs, interest for the period 1 August 2011 to 31 December 2011 totalling $8,750 is owed to Primelane.

53    In relation to WAD 78, the agreement entered into between CGI and Monarch on or about 20 August 2008 expired on 31 August 2012. However, CGI ceased making interest payments to Monarch on or about 30 June 2011, and in total has paid interest for the period ending 30 June 2011 only. Accordingly, even on the construction advanced by the plaintiffs, the defendants say that interest for the period 1 July 2011 to 31 August 2012 totalling $42,000 is owed to Monarch.

54    In relation to the earlier convertible notes issued in 2008, the plaintiffs emphasise that cl 3.1 requires interest on the unpaid principal amount to be payable monthly in arrears, and cl 5.3 deals with the requirement of the plaintiffs to repay to the defendants the advance and interest on the date of expiry of the term. The obligation under the Convertible Note Agreements is a promise to pay to the defendants the ‘amounts payable’ in accordance with the terms and conditions detailed in the 2008 agreements.

55    The plaintiffs argue that crucial to the construction question is when the amounts are ‘payable’, in the sense that a liability to pay arises. According to the plaintiffs, cl 3.1 specifies when interest is payable, namely, monthly in arrears in cash. The words ‘interest shall accrue daily at 12% on the unpaid principal amount of the advance’ in the 2008 agreements concern the method of calculation and accrual. The plaintiffs argue those words say nothing about the period during which interest is payable or paid. The use of the word ‘unpaid’ is merely to confine the daily calculation and accrual of interest to unpaid parts of the advance (on the day of calculation and accrual), as opposed to parts of the advance that have been repaid or converted to shares. The plaintiffs contend that if this were not so, in the absence of the word ‘unpaid’, interest would be calculated on the amount of the (initial) advance and paid monthly in arrears for the term of the note, even if half the advance was repaid one day after the note was issued.

56    The plaintiffs assert that cl 5.3, to which cl 3.1 is subordinate, requires the company to repay the advance and interest accrued on the advance in cash on the date of expiry of the term. The plaintiffs point out that had the parties intended that interest be paid until the date of repayment, they could have easily said so.

57    Further, the plaintiffs submit that cl 3.1 has no work to do after the date of expiry of the term. The notes do not contemplate interest being paid after the expiry, in the same way that the conversion right cannot be exercised after expiry.

58    From a commercial perspective, the plaintiffs argue that such a result is not surprising because the note is for a fixed term, for a fixed amount over the term and up to maturity. The consideration, the plaintiffs argue, for the advance is a fixed amount of interest, and a right to convert to shares during and only during, the term (but subject to earlier repayment or conversion). I express no view on this argument in light of the complexity of the affairs of the parties to this litigation and for reasons apparent in my conclusion.

59    In addition, although the affidavits in support of the statutory demands are silent on the question of interest, the correspondence from the defendants’ solicitors reveals that the defendants do not assert any claims on the basis that the notes, or any of them, were extended beyond the initial terms, let alone, verify any such claims on affidavit. Rather, that correspondence is said to reveal that the defendants contend that interest is payable regardless of expiry of the notes, until repayment, and, indeed, are equivocal as to whether certain extensions occurred and dispute certain other extensions.

60    The plaintiffs contend, and I accept, that the variation of the statutory demands to a lesser amount (even if that course were open in these circumstances), as the defendants appear to suggest, would be inappropriate because:

(a)    the amounts do not accord with the claims verified on affidavit by the defendants; rather, the evidence suggests that the defendants question or dispute the substratum of facts underlying those lesser sums; and

(b)    there is a genuine dispute between the parties about the existence of the debts.

Uncertainty

61    Further, it is contended by the defendants that the alleged oral agreements would be void for uncertainty. The defendants contend that, pursuant to the Convertible Note Agreements, if the advances are converted into shares, the plaintiffs are not entitled to repayment of the advances. Equally, if the advances are repaid to the defendants from the plaintiffs’ profits, the advances cannot be converted into shares. The oral promises are said to be mutually exclusive, and any agreement or promise to do both of those things would be inherently inconsistent in its terms. Both promises, if made, would have been fundamental to the alleged oral agreements. The defendants argue that it cannot be said that one is paramount over the other, so that they cannot be reconciled that way. Where two terms are inconsistent and irreconcilable, they must be treated as being void for uncertainty: National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (1997) 217 ALR 365 per Sheller JA (at 378-381).

62    This submission is, with respect, rather overly complicated. In my view, the short point is whether the nature, terms and content of each version of the oral agreements are so vague as to be impossible to enforce. Whether this is so, whether there were any such agreements, and whether there was an intention to create legal relations, is presently impossible to determine.

Abuse of process

63    The abuse of process argument was raised for the first time in the oral hearing. I do not accept this contention. The plaintiffs contend that statutory demands are an abuse of process in that they were not issued by the defendants for the proper purpose of winding up the plaintiffs on the ground of insolvency. They are not based, the plaintiffs say, on antagonism, but rather, that the circumstances surrounding the issue of the statutory demands, including:

(a)    the issue of the demands so soon after Tony’s loss in the Supreme Court proceedings, following the lengthy period of inaction during which no payments had been made;

(b)    Tony’s own remarks in cross-examination in the Supreme Court proceedings to the effect that ‘at times we had to go for long periods of time [without getting paid] to keep the companies afloat, otherwise they would go to the wall’; and

(c)    the other evidence on the plaintiffs’ application, including the agreements to defer repayments,

viewed collectively suggest that the process is being used to compel payment of disputed debt and, therefore, an abuse.

64    The plaintiffs stress that an abuse of process is not confined only to those cases where the company served with the demand is clearly solvent. They contend the relevant enquiry is whether the purpose of the party issuing a statutory demand is not the purpose of pursuing the statutory demand to wind up the company on the ground of insolvency, but rather to use the process as means of obtaining an advantage for which the process is not designed or to obtain some collateral advantage beyond what the law offers, such as the application to pressure to compel a disputed debt: Createc (at [50]).

65    An assertion of an abuse of process is serious and cannot be made lightly. The onus of proving abuse of process is a heavy one: Williams v Spautz (1992) 174 CLR 509 (at 529). Its use in the context of the issue of a statutory demand is confined to cases where the issue of the notice is strategic and bears no relationship with the solvency of the company. A typical example of the circumstances in which the issue of a statutory demand will constitute an abuse of process is Createc.

66    As distinct from service of a notice on a wealthy company, the plaintiffs are yet to make a profit. As the defendants observe, in the financial year ended 30 June 2013 Pharmanet made a consolidated loss after tax of over $2.2 million with net liabilities of over $1.2 million, cash at bank of $381,328 and a total deficiency of over $1.2  million. Similarly, CGI made a consolidated loss after tax of $782,585, had net liabilities of $243,104, cash at bank of only $468,522 and a total deficiency of $243,104. The evidence relating to the financial circumstances of the plaintiffs does not support the submission that the statutory demands were issued for a purpose other than to wind up the plaintiffs on the grounds of insolvency.

CoNCLUSION

67    Even in those cases which have emphasised that a court should not accept uncritically as giving rise to a genuine dispute every statement in an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent or inherently improbable, the courts have exercised real caution in rejecting a sworn contention as to a genuine dispute: see Central City per Murphy JA, (Buss JA agreeing), (at [11]) citing Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 (at 787); Createc (at [4]); and Jarpab Pty Ltd v Winter t/as Bolden Haulage (1994) 14 ACSR 255 (at 261). In Central City and Createc, the existence of a ‘genuine dispute’ was found. This is not to say that such a conclusion would be reached without due analysis, but it is a matter of weight, taking into account, importantly, the statutory purpose of a demand notice.

68    There is a deal of complexity in the relationship outlined in the history of these proceedings and in the proceedings before the Supreme Court of Western Australia. Whether oral agreements were reached in the terms contended, or in similar terms, is not a topic on which I can reach a conclusion at this stage. Despite the reservations I have (tentatively only) expressed in attempting to balance the arguments, the real question for me is whether there is a plausible issue requiring investigation as to whether there were oral agreements between the brothers to vary the obligations of repayment of principal and interest.

69    While I have concerns about the plausibility or efficacy of either of the oral agreements relied upon by the plaintiffs in these proceedings, I expressly take into account the fact that there was an informal relationship between the siblings which could underlie, certainly the first agreement, and possibly the second. Further, there is an absence of a denial, at least on affidavit by the defendants, of the oral agreement. Even if the absence of sworn denial was an oversight, statutory demand notices are intended for clear cases. The purpose of the notice is to demonstrate insolvency. It is not possible at this stage for me to conclude that, despite my reservations about the oral agreements, there is not a bona fide dispute as to fact or law, which could underlie a genuine dispute for the purposes of s 459H(1)(a). This is particularly so, as would appear to be the case, if the credit of the key witnesses will be crucial to the outcome. I have discussed above the cases underlying these important principles, including Violet International. Within the meaning of the cases I have discussed, I would accept that there is a ‘genuine dispute’ as that expression is understood in the authorities.

70    In those circumstances, in each of the applications there will be orders in terms of the relief sought in the originating process.

71    The following orders are made:

1.    The Creditor’s Statutory Demand for Payment of Debt dated 19 March 2014 served on the Plaintiff by the Defendant on 20 March 2014 be set aside.

2.    The Defendant pay the Plaintiff’s costs of and incidental to this application, to be taxed if not agreed.

Associate:

Dated:    13 March 2015