FEDERAL COURT OF AUSTRALIA

PrimeSpace Property Investment Ltd v Vienne Pty Ltd [2015] FCA 326

THE COURT ORDERS THAT:

1.    The originating application be dismissed.

2.    The plaintiff pay the defendant’s costs.

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

THE COURT ORDERS THAT:

1.    The originating application be dismissed.

2.    The plaintiff pay the defendant’s costs.

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

THE COURT ORDERS THAT:

1.    The originating application be dismissed.

2.    The plaintiff pay the defendant’s costs.

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

REASONS FOR JUDGMENT

1    These three proceedings, which were heard together, concern applications to set aside three separate statutory demands. The central issues are:

(a)    whether each of the demands is a nullity for the purpose of s 459J(1)(b) of the Corporations Act 2001 (Cth) (the Act) because, contrary to s 459E(2) of the Act, the address for service of the relevant creditor as referred to in paragraph 6 of the prescribed Form 509H (the Form) (see Schedule 2 of the Corporations Regulations 2001 (Cth)) was an address in the Australian Capital Territory and not an address in New South Wales, where the demands were served; and

(b)    whether there is a “genuine dispute” within the meaning of s 459H(1)(a) of the Act.

Summary of relevant background facts

2    The plaintiff (PPI) is the responsible entity for the Prime Access Property Fund (the Fund). The Fund is a registered managed investment scheme under Chapter 5C of the Act. The Fund was established by the Constitution dated 18 March 2008 (the Constitution). Each of the defendants is a party to Subscription Agreements with PPI under which each paid for and held convertible notes issued by PPI as the responsible entity for the Fund. The relevant details may be summarised as follows:

(a)    on 13 December 2011, 1,100,000 convertible notes were issued to Vienne Pty Limited (Vienne) for the subscription amount of $1,100,000;

(b)    on 23 May 2011, 1,900,000 convertible notes were issued to DOMA Investments (ACT) Pty Limited (Doma) for the subscription amount of $1,900,000; and

(c)    on 9 June 2011, 100,000 convertible notes were issued to Judith Anne Jensen atf the Peridot Investment Trust (Jensen) for the subscription amount of $100,000.

3    Under the terms of the Subscription Agreements (which relevantly were in substantially similar terms):

(a)    the convertible notes fell due on 30 June 2014;

(b)    upon surrender of the notes, PPI must pay to the investor the face value (being the amount subscribed for) of the notes; and

(c)    upon the occurrence of an Event of Default (as defined) all monies outstanding under the notes became immediately due and payable.

4    On 7 November 2014, the board of directors of the Fund passed a resolution that the Fund be wound up.

5    On 20 November 2014, 12 December 2014 and 19 December 2014 respectively, the statutory demands the subject of the proceedings were served on PPI at its registered office in Queanbeyan, New South Wales. The address for service of any application or affidavit was stated in the demands as follows:

(a)    by Vienne, to be the Canberra address of its accountant;

(b)    by Doma, to be the address of its business in Canberra; and

(c)    by Jensen, to be care of the law firm acting for Jensen at its Canberra office.

The applications to set aside the statutory demands were filed in the Court within the time period specified in s 459G(2) of the Act.

6    It was not disputed that the convertible notes were issued to each of the defendants, that the subscription monies were paid or that the monies claimed are due and payable under the terms of the relevant Subscription Agreement.

Relevant provisions in the Constitution and Subscription Agreements

7    The convertible notes were issued by PPI as the responsible entity of the Fund pursuant to a power conferred by cl 18.1 of the Constitution, which relevantly is in the following terms:

18.    Powers of Responsible Entity

18.1    General

The Responsible Entity has all the powers in respect of, and in connection with, the Fund, the Assets and the Liabilities that it is legally possible for a natural person, corporation or body to have including power:

(1)    …

(2)    to borrow, raise money or obtain any other financial accommodation (whether or not on security) and to incur all types of obligations and Liabilities for any purpose including the purpose of assisting in the purchase or other acquisition of units in a unit trust or shares in its trustee or other special purpose vehicle in accordance with clause 18.1(3A) or 18.1(3B) or for any other purpose;

….

8    Clause 19 of the Constitution deals with the liability of the responsible entity. It is desirable to set out cll 19.1 and 19.2:

19.1    Limitation on Responsible Entity’s liability

The Responsible Entity and each director and officer of the Responsible Entity, is not liable in contract, tort, or otherwise to any Holder or other person for any loss suffered in any way relating to the Fund, or for any act or failure to act in connection with the Fund or with the office of trustee, or of director or officer, except to the extent that the Corporations Act imposes such liability.

19.2    Liability limited to Assets vested in Responsible Entity

Subject to the Corporations Act:

(1)    except where the Responsible Entity has acted with fraud or in breach of trust, the Responsible Entity is not in any event liable to the Holders to any greater extent than in respect of the Assets (net of Liabilities) actually vested in the Responsible Entity or received by it or its agents under this Constitution; and

(2)    the liability of the Responsible Entity to any person other than a Holder in respect of the Fund, including any contracts entered into as trustee of the Fund or in relation to the Assets, is limited to the Responsible Entity’s ability to be indemnified from the Assets.

9    Each Subscription Agreement is between PPI as the responsible entity for the Fund and the relevant defendant (referred to in the Agreements as “the Investor”). Each Subscription Agreement contains the following statement of “Background”:

A.    Primespace has requested the Investor to provide funds to Primespace for pre-development expenses and for other purposes.

B.    Primespace is the responsible entity of the Fund.

C.    The Fund is an unlisted unit trust governed by the Constitution.

D.    The Fund is a Registered Scheme as defined in the Constitution.

E.    The Investor has agreed to subscribe for the convertible notes of the Fund on the terms and conditions set out in this Agreement.

10    Clause 1.2 of each Subscription Agreement deals with “interpretation” and includes the following provision:

(k)    words and phrases used in this Agreement shall have the same meaning ascribed to them in the Constitution;

…

11    Clause 4 of each Subscription Agreement is in the following terms:

4    CONSTITUTION

The Agreement is supplemental to the Constitution. Should there be any inconsistency between the provisions of this Agreement and the Constitution, this Agreement shall prevail.

Relevant legal principles summarised

12    With one exception, the parties were in substantial agreement as to the relevant legal principles.

13    First, the plaintiff made clear that it was relying on s 459J(1)(b) of the Act, which is in the following terms:

(1)    On an application under section 459G, the Court may by order set aside the demand if it 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.

(2)    Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

14    Secondly, the plaintiff submitted that the “other reason” why the demand should be set aside for the purposes of s 459J(1)(b) was because the failure to specify an address of the creditor for service in New South Wales was a “fundamental defect rendering each demand null and void”, relying upon three decisions of Brereton J in the Supreme Court of New South Wales in Re International Materials & Technologies Pty Ltd [2013] NSWSC 787 (Re International Materials); Temperzone Australia Pty Ltd v Armcor Heating & Cooling Pty Ltd [2014] NSWSC 137 and Re Glenevan Pty Ltd [2015] NSWSC 201 and distinguishing other cases including that of Barrett J in Everkind Pty Ltd v Hazenforn Pty Ltd [2010] NSWSC 1031.

15    The defendants contended that Re International Materials was distinguishable because it was based on the unfairness of the creditor specifying an address for service that was not a valid address for the purposes of the Service and Execution of Process Act 1992 (Cth) and also that the service was invalid because that Act had not been complied with. The defendants submitted that the Court was bound to apply the Full Court’s decision in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 (Spencer Constructions) where it was held that significant defects in a demand fell to be determined under s 459J(1)(a), rather than s 459J(1)(b). The defendants emphasised that the plaintiff conceded that it could point to no substantial injustice as a result of the statutory demands providing an address for service in the Australian Capital Territory, as opposed to in New South Wales.

16    Thirdly, as to whether there is a “genuine dispute”, the parties were in substantial agreement that the relevant principles were as follows:

(a)    a genuine dispute is one that is bona fide and truly exists in fact and law. The grounds for the dispute must be real and not spurious, hypothetical, illusory or misconceived (Spencer Constructions at 464, citing with approval other formulations in other cases, including McLelland CJ in Eq’s observations in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 (Eyota) at 787, the observations of Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 at 294-296 and those of Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605);

(b)    as the Full Court also observed in Spencer Constructions at 464, while the various formulations can be helpful in determining whether there is a genuine dispute in a particular case, the formulation used should not become a substitute for the words of the statute;

(c)    the fundamental task is to identify the genuine level of a claimed dispute and it is generally recognised that the satisfaction which the Court requires “is not a particularly high one” (see Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39 per Lockhart J);

(d)    reference was also made to Barrett J’s observations in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18] where, after referring to formulations of the test such as “plausible contention requiring investigation”, “real and not spurious, hypothetical, illusory or misconceived” and “perception of genuineness (or lack of it)”, his Honour said:

These tests, applied in the context of a summary procedure where it is not expected that the court will embark on any extended inquiry, mean that the task faced by a company challenging a statutory demand on the “genuine dispute” ground is by no means at all a difficult or demanding one. The company will fail in that task only if it is found upon the hearing of its s.459G application that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger…; and

(e)    the defendants emphasised that the Court is not required to accept uncritically every statement in an affidavit or a “patently feeble legal argument or assertion of facts unsupported by evidence”, citing Eyota.

17    The plaintiff contended that there is a genuine dispute about the existence of the debts to which the demands relate because, on the proper construction of each Subscription Agreement, it as the responsible entity is not liable for the debts the subject of the demands. This question of construction related primarily to cl 19 of the Constitution and cl 4 of the Subscription Agreements. The plaintiff contended that each defendant was bound by the Constitution when they signed the Subscription Agreements (which then comprised an application for convertible notes). It further contended that the exclusion of liability in cl 19.1 of the Constitution extended to the debts claimed by each defendant, which all relate to the raising of money by PPI as a responsible entity for the Fund pursuant to the power conferred by cl 18.1(2) of the Constitution. It submitted that the reference in cl 4 of each Subscription Agreement to the Agreement being “supplemental to the Constitution” meant that the Subscription Agreements were additional to the Constitution and that the two documents had to be construed as a whole.

18    The plaintiff further contended that it was inappropriate in these circumstances for the defendants to use Part 5.4 of the Act to recover disputed debts and that the appropriate course was for each of the defendants to prove in any surplus on a winding up of the Fund.

19    The defendants emphasised that a managed investment scheme was not a separate legal entity. There is no distinction between a trustee acting in his or her personal capacity and a trust which he or she administers as trustee and the trustee remains personally liable even if he or she may have a claim against the trust assets (citing Astram Financial Services Pty Ltd v Bank of Queensland [2010] FCA 1010 (Astram Financial Services Pty Ltd) at [364] per Buchanan J and Re Stacks Managed Investments Ltd [2005] NSWSC 753; (2005) 54 ACSR 466 (Stacks Managed Investments Ltd) at [44] per White J). The defendants also submitted that PPI’s construction of the Subscription Agreements so as to exclude any liability on the part of PPI to repay the amounts advanced by the convertible noteholders produced “the most absurd commercial result imaginable”. That is because if PPI was not liable to repay the debts, nor would anyone else be so liable, with the consequence that the monies advanced were in fact gifts, which is commercially improbable. Furthermore, they contended that cl 19.1 of the Constitution had no application in any event because the liability to repay monies borrowed is not “loss” or damage within the meaning of that provision, but rather is a debt due and owing (citing Castlepines (IBM) v Residential Housing Corporation [2003] NSWSC 398 (Castlepines) at [8] per Barrett J).

20    The defendants drew attention to cl 19.2(2) of the Constitution which, contrary to PPI’s position, assumed that PPI was personally liable for the debts incurred by it while acting as the responsible entity. (The plaintiff placed no reliance on the cap on liability imposed by cl 19.2(2)).

21    In support of its primary contention that cl 19 of the Constitution does not form part of the bargain between PPI and the defendants, the defendants contended that the term “supplemental to” in cl 4 simply means that the Subscription Agreements added to (or supplemented or modified) the Constitution and did not mean that the Constitution is added to the Subscription Agreements. Emphasis was placed upon the fact that the second sentence in cl 4 was fatal to PPI’s position because it provided that, in the event of inconsistency between the obligations under a Subscription Agreement and the terms of the Constitution, the Subscription Agreement prevails. Such an inconsistency arises if PPI is obliged under the terms of the Subscription Agreement to repay the face value of the convertible notes within the specified time and there is a provision of the Constitution which limits or excludes that obligation. For these reasons, the defendants submitted that the “genuine dispute” raised by PPI “is manifestly untenable as a matter of law” and is “patently feeble”.

Consideration

22    It is convenient to deal first with the plaintiff’s challenge based upon the deficiency in the demands caused by the provision of the wrong address before considering whether the demands should be set aside on the basis of the existence of a genuine dispute.

(a) Setting aside the demands under s 459J(1)(b) of the Act

23    For the following reasons, the plaintiff’s reliance on s 459J(1)(b) of the Act as a basis for setting aside the demands must be rejected.

24    In Spencer Constructions, the Full Court held that, in the case of a defect in, or in relation to, a demand, strict compliance with the relevant statutory provisions is not a precondition to the validity of the demand, which means that such a defect does not result in invalidity. The Full Court found that the provision of an address for service of any application and affidavits in a jurisdiction other than the jurisdiction in which the demand was served was clearly a defect in the demand but that because no injustice was caused by the defect in the particular case, the demand could not be set aside merely because of that deficiency (referring to both s 459J(1)(a) and (2) of the Act). Furthermore, the Full Court held that the Court’s power to set aside a demand for “some other reason” under s 459J(1)(b) had no application because that provision was only available in relation to a reason other than a defect in the demand. The Full Court stated that this view was supported by the definition of “statutory demand” in s 9 of the Act, which defines a statutory demand as a document that is, or purports to be, a demand served under s 459E. Accordingly, as long as a document is or purports to be a statutory demand served under that provision, even significant defects in the document fall to be determined under s 459J(1)(a) and not s 459J(1)(b).

25    The Full Court did not reject the possibility that there may be cases where deficiencies in the form of a demand are so fundamental that the demand is incapable of meeting the definition in s 9 of the Act (see Lockhart J’s comments in Topfelt Pty Ltd v State Bank of New South Wales (1993) 47 FCR 226 at 238). It is plain, however, that the Full Court in Spencer Constructions did not regard the incorrect provision of an interstate address for service of any application or affidavit as constituting such a fundamental deficiency, at least in the circumstances of that case.

26    The circumstances of Spencer Constructions are in my view indistinguishable from those here. Acceptance of PPI’s position on this subject would clearly be at odds with the Full Court’s decision, which I am bound to apply. The plaintiff’s reliance on s 459J(1)(b) must be rejected. In the circumstances it is unnecessary for me to consider and determine the correctness of the series of recent decisions in the Supreme Court of New South Wales which were relied upon by the plaintiff which, on their face, seem difficult to reconcile with Spencer Constructions.

(b) Genuine dispute?

27    The relevant principles guiding the exercise of the Court’s powers under ss 459H and 459J of the Act to set aside a demand on the basis of the existence of a genuine dispute about the existence of the debts to which the demands relate are set out above. Having regard to those principles and the circumstances here I am not satisfied that there is such a genuine dispute.

28    As noted above, the plaintiff’s case rests on the following two core propositions:

(a)    it is not personally liable under the Subscription Agreements because it executed those Agreements in its capacity as the responsible entity of the Fund; and

(b)    it is not personally liable under the Subscription Agreements because of the terms of cl 19.1 of the Constitution.

29    In my view, both propositions are untenable.

30    As to the first, a trustee such as the plaintiff is personally liable for any debts it incurs in acting in its capacity as the responsible entity for the Fund. As Gummow J stated in Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 at 253:

It is fundamental that the common law does not recognise a trustee as having assumed an additional or qualified legal personality. This means that the liability of the trustee for debts he incurs includes those incurred in the course of performance of the trust. His liability to creditors is not limited or quantified by reference to the extent of the trust assets. The debts are his debts. However, the law does permit a trustee to contract with third parties on the basis that his personal liability is limited, for example, to the extent of his right to resort to and apply trust funds for the discharge of liabilities incurred by him in the authorised conduct of the trust. Nevertheless, third parties may in a given case, not be prepared to deal with a trustee on such a basis and, in any event, clear words are necessary to achieve a result whereby what is prima facie the unlimited personal liability of a trustee is so qualified.

(Emphasis added, citations omitted.)

31    And in the specific context of the winding up of a managed investment scheme as opposed to the winding up of the responsible entity, White J made the following observations in Stacks Managed Investments Ltd at [44]:

Winding up a trust is quite a different thing from winding up a company. Because the scheme, where it is a trust, is not a legal entity, the expression “scheme creditors” is at best a shorthand expression for those creditors of the responsible entity in respect of whose debts the responsible entity is entitled to be indemnified out of the scheme assets. There can be no question of settling an order of priority of “scheme creditors”, or of precluding “scheme creditors” from taking or continuing proceedings for the recovery of their debts, or requiring them to submit to a process of lodgement of proof of debts with consequent appeals to the court from a decision on the acceptance or rejection of proofs. Unless the responsible entity were itself being wound up, creditors could not be precluded from enforcing the personal liability of the responsible entity in accordance with the ordinary processes of the court.

(Emphasis added, citations omitted.)

32    The defendants’ submission, that, in the light of these authorities (as well as Astram Financial Services Pty Ltd at [364] per Buchanan J), unless and until PPI is itself wound up, the defendants cannot be precluded from enforcing the personal liability of PPI under the Subscription Agreements, should be accepted.

33    The plaintiff’s second proposition is also untenable. Even if it is assumed (and without deciding) that cl 19 of the Constitution forms part of the bargain between the plaintiff and the defendants, it has no application to exclude PPI’s contractual liability to repay monies advanced by the defendants. That is because that provision has no application to a claim to recover a debt which is due for payment. Such a claim is not a claim for breach of contract, nor is it a claim for a loss. As Barrett J pointed out in Castlepines at [8], there is a fundamental distinction between damages (or loss) and a debt:

Running through these provisions is the theme that there is a distinction between, on the one hand, “damages” and, on the other, “debt” and “other money”. The distinction between damages and debt is, of course, fundamental. As is pointed out by Professors Carter and Harland (in J W Carter and D J Harland, “Contract Law in Australia”, 4th edition, 2002, at page 875), the action to recover a debt due for payment has a longer history than the action to recover damages for breach of contract and, despite the concurrent administration of law and equity, it remains the case that an action to recover a contract debt due is not a claim for breach of contract. A person who points to a contract as the source of an unsatisfied right to be paid asserts a claim different in nature from that of a person who, relying upon a breach of contract, seeks compensatory relief in the form of monetary damages.

34    The exclusion of liability under cl 19.1 is not confined to liability in contract etc for any loss and extends to any act of the responsible entity (or its officers). It is clear, however, from the cap on liability imposed by cl 19.2(2) that cl 19.1 does not totally exclude liability in respect of contracts entered into by the responsible entity as trustee of the Fund, which would include these Subscription Agreements. Acceptance of the plaintiff’s argument would render cl 19.2(2) otiose.

35    Moreover, and upon the same assumption as that upon which [33] above is based, even if it be the case that the Constitution is incorporated into each Subscription Agreement, cl 4 of the latter expressly states that, if there be any inconsistency between the provisions of the two documents, the Subscription Agreement prevails. Acceptance of the plaintiff’s argument would produce an inconsistency between PPI’s obligation to repay the face value of the notes within a specified time and the exclusion of liability under cl 19 of the Constitution, which inconsistency would have to be resolved by giving primacy to the obligation under the Subscription Agreements.

36    Having regard to these matters, the Court is not satisfied that there is a genuine dispute. It is not a case of balancing competing arguments on the relevant issues of construction and principle, rather the plaintiff’s contentions are so weak that no genuine dispute exists.

Conclusion

37    Each of the applications should be dismissed and the plaintiff ordered to pay the defendants’ costs.

Associate:

Dated:    9 April 2015