FEDERAL COURT OF AUSTRALIA

Citation Resources Ltd v IBT Holdings Pty Ltd [2016] FCA 1265

ORDERS

THE COURT ORDERS THAT:

1.    The statutory demand dated 6 May 2016 served by the defendant on the plaintiff on 13 May 2016 be set aside.

2.    The defendant pay the plaintiff’s costs of the application, to be assessed if not agreed.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

1    Citation Resources Ltd (ACN 118 710 508) applies to set aside a statutory demand notice on the grounds that there is a genuine dispute. For the reasons which follow, in these most unusual circumstances, I consider that while the case for a genuine dispute is presently not strong, there is a ‘genuine dispute’ and the notice should be set aside.

BACKGROUND

2    On or about 15 May 2014, Citation and IBT Holdings Pty Ltd (ACN 157 759 138) entered into a Loan Facility Agreement to which IBT was to advance $350,000 to Citation on or before 19 May 2014 in consideration for debt notes with a face value of $420,000. On or about 12 March 2015, the parties entered into a Convertible Loan Deed, pursuant to which IBT was to advance $100,000 to Citation on the same day. On or about 24 September 2015, the parties and various other parties entered into a Deed of Debt Conversion, Repayment and Release. By this Conversion Deed pursuant to cl 2.1, and subject to certain preconditions, the debt outstanding to IBT under the Loan Facility Agreement and the Convertible Loan Deed was to be converted into an adjusted settlement amount of $400,000: repaid partly in cash ($171,000), and partly in shares (4.58 million, to be issued at $0.05 per share). The debt conversion and payment so effected was to occur ‘on, or soon as reasonably practicable after, the Completion Date, and subject to receipt of any necessary regulatory and shareholder approvals of [Citation]’.

3    Citation relies upon evidence capable of demonstrating that perhaps as late as early December 2015, the terms of the Conversion Deed were ‘fundamentally varied’ in terms of a settlement arrangement set out in a 10 December 2015 email from a then director of Citation, Mr Anthony Eastman, to a then director of Citation, Mr Peter Landau, and Mr Victor Turco, another director of Citation. In that email Mr Eastman suggested that it had been agreed that ‘historical debt and convertible note arrangements’ owing to IBT (which Citation argues is a reference to the Conversion Deed) would be paid, that there would be an issue of 4 million options to IBT and that any entitlement to shares would be foregone. The only evidence of this alleged variation available to Citation is this email because there has been a change in control of the company. Those who currently direct Citation do not necessarily have, I infer, access to evidence and information from the former directors. There is therefore no evidence of the variation being recorded in writing or duly executed by the parties to the Conversion Deed. Nevertheless, for that and other reasons, Citation contends there is an arguable defence to its liability.

4    There is some corroboration for the variation, because on 9 December 2015, Citation issued 4 million options exercisable at $0.05 to IBT. There was at that time no other documented reason for those options to be issued from Citation to IBT. But IBT, through its director, Mr Ivan Brown, says that it was contacted by Mr Landau of Citation in November 2015 and that Mr Landau offered to issue the options to IBT. Mr Brown says that Mr Landau said in effect that because Citation had delayed in repaying the loan to IBT he would arrange for the 4 million options to be issued to IBT. Mr Brown said that at no time did Mr Landau or anyone else on behalf of Citation tell him that the issuance of those options to IBT was in part payment of IBT’s loans to Citation. Mr Brown also deposed to his belief that at no time did Mr Landau or anyone on behalf of Citation tell him that the issuance of those options would have any effect on the shares to be issued under the Conversion Deed. Mr Turco deposed to a conversation with Mr Brown during which Mr Brown said that he took the offer, which he accepted, as being in lieu of interest which would be due to IBT at that stage. I note, however, that as at November 2015, by virtue of the terms and effect of the Conversion Deed, it is quite unclear that any obligation to meet a payment had been incurred by Citation.

5    The 4 million options were issued on 9 December 2015. On 8 January 2016, Mr Turco, who had been a director of Citation since 1 December 2015, was provided by Mr Landau with a reconciliation statement of a Westpac bank account which had been opened in the name of Citation. That statement records a payment in the amount of $400,000 to IBT by Citation. Mr Landau resigned as a director from Citation on about 19 January 2016.

6    There were difficulties, however, and on or about 19 February 2016, Citation requested and was granted a trading halt with respect to its securities. Since 23 February 2016, those securities have been suspended from trading on the official quotation of the Australian Securities Exchange (ASX). On or about 26 February 2016, on the evidence as it is at the moment, Mr Turco was told by Mr Brown that IBT had not, in fact, received payment of funds owing to it from Citation. Prior to that, Mr Turco says that he understood that there were no outstanding payments due and owing to IBT from Citation. Two days later, on 28 February 2016, Citation was informed by Mr Landau that he had entered into a separate deal with IBT. Citation is unable at this stage to give particulars of the ‘separate deal’ and does not know whether the obligations under it have been discharged wholly or otherwise. According to a chain of emails between Mr Landau and Mr Turco on 28 February 2016, that supposed ‘separate deal’ appears to have been entered into between Mr Landau and Mr Brown after Mr Landau’s resignation as a director of Citation. It is not apparent, on its face, how a transaction entered into at that time could bind Citation, if Mr Landau was no longer a director or employee.

7    That, in any event, was not apparently the view of IBT and on 7 March 2016, IBT advised by email that it terminated the Conversion Deed.

8    The Termination Notice was in the following form by email from Mr Brown on 7 March 2016 to info@citation.net.au (and forwarded to victor@turco.com.au approximately 30 minutes later):

Hi Victor and co

This is written notice that I terminate the attached deed or agreement as it is more than 90 days from the end date and [Citation] has breached its obligations.

[Conversion Deed attached]

9    A week later, on 14 March 2016, IBT notified Citation’s employees and officers by email that ‘[Mr Landau] has indicated he will be transferring 850k aud to me imminently as part payment with a further 200k later’. The evidence is that no such payment was made and three days later, on 17 March 2016, IBT issued its initial statutory demand on Citation.

10    On 13 May 2016, IBT served a second statutory demand dated 6 May 2016 seeking the sum of $657,690.71, being the amount said to be owing to it from Citation under the Loan Facility Agreement and the Convertible Loan Deed.

11    In the account just given, the key documentary evidence is undisputed and is sufficient for the purposes of resolving the dispute at this stage. There is, additionally, hearsay evidence as to two possible tranches of negotiations. On the question of the admissibility of hearsay evidence, there is some debate on the authorities as to whether a decision dismissing an application to set aside a statutory demand is final or interlocutory, but on one view it is a final hearing: Keylink Physical Care Pty Ltd v Ergoline (Australia) Pty Ltd [1999] SASC 483. As such hearsay evidence is inadmissible and IBT objected to it under r 30.30 of the Federal Court Rules 2011 (Cth). This affects a number of matters, including the truth of the contents of the email from Mr Eastman dated 10 December 2015, the truth of the contents of the email from Mr Landau to Mr Turco and Mr Eastman of 28 February 2016, the truth of the statements made by letter dated 13 January 2016 of Mr Landau that debts had been paid, and the truth of oral statements made by Mr Landau on 14 January 2016. I give no weight to the pure hearsay evidence relating to a possible agreement reached early this year. But I do treat emails generated before the demands were made as being a contemporaneous business record.

THE ISSUE

12    Citation seeks to set aside the statutory demand pursuant to ss 459G, 459H and 459J of the Corporations Act 2001 (Cth) on the grounds that a genuine dispute exists about the debt in question and the amount of the debt, alternatively, there is ‘some other reason’ why the statutory demand should be set aside.

13    In support of the contention that there is a genuine dispute, Citation essentially relies upon two grounds:

(a)    the first is the proper construction of the Conversion Deed. There are three sub-issues to that topic:

(i)    whether the Conversion Deed effected a release of IBT’s debts in circumstances where the matters to effect completion under the Conversion Deed had been satisfied, but the pre-condition being the payment and issue of shares to IBT by Citation had not yet occurred;

(ii)    the operation of the termination clause (cl 2.4) in the Conversion Deed if the pre-condition to the Conversion Deed was satisfied; and

(iii)    whether the Deed of Conversion was subsequently varied; and

(b)    the second is whether, there is ‘some other reason’ to set aside the statutory demand, specifically, an abuse of process.

STATUTORY CONTEXT

14    Those statutory provisions are relevantly to the following effect:

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.

…

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;

...

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

Admitted total – Offsetting total

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.

(emphasis added)

459J    Setting aside demand on other grounds

(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.

(emphasis added)

LEGAL PRINCIPLE

15    In relation to s 459H of the Act, concerning a ‘genuine dispute’, several recent authorities set out the the current state of the legal position. In Treasury Wine Estates Vintners Ltd v Garrett (2015) 235 FCR 577, Davies J (at [5]-[6]) said:

5    The principles governing the application of s 459H of the Act were recently summarised in First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108. These principles include:

(1)    For there to be a genuine dispute, there must be a “plausible contention requiring investigation”. It raises the same sort of considerations as the “serious question to be tried” criterion applicable to interlocutory injunctions. The Court is not called on to determine the merits of, or to resolve, the dispute.

(2)    The threshold is not high or demanding; however the claim must have some merit and be genuine. That requirement has been described variously as the claim must be “real and not spurious”, the claim must have “a real chance of success”, there must be “a serious question to be tried”.

(3)    A useful analogy to the burden on the party asserting the claim is that of an alleged debtor resisting an application for summary judgment. If the Court sees any factor that, on rational grounds, indicates an arguable case, it must find that a genuine dispute exists even where any case apparently available to be advanced to the contrary seems stronger.

6    In Panel Tech Industries (Australia) Pty Ltd v Australian Sky Reach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], Barrett J stated:

… the task faced by a company challenging the 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.

The same principles apply to the company demonstrating that it has an offsetting claim.

16    Earlier, last year, in Pharmanet Group Ltd v Primeland Pty Ltd [2015] FCA 208 I collected various authorities (at [25]-[29]) in the following terms (which have some overlap):

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)

17    In short then:

(a)    For there to be a genuine dispute, there must be a ‘plausible contention requiring investigation’. It raises the same sort of considerations as the ‘serious question to be tried’ criterion applicable to interlocutory injunctions.

(b)    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.

(c)    The Court is not called on to determine the merits of, or to resolve, the dispute.

(d)    The threshold is not high or demanding; however the claim must have some merit and be genuine. That requirement has been described variously as the claim must be ‘real and not spurious’, the claim must have ‘a real chance of success’, there must be ‘a serious question to be tried’.

(e)    The Court does not engage in any form of balancing exercise between the strengths of competing contentions.

(f)    The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it).

(g)    A mere assertion of an oral agreement will not necessarily suffice.

18    Again, the principles concerning ‘some other reason’ under s 459J(1)(b) of the Act are not contentious. In Tekno Autosports Pty Ltd v Jenkins [2014] FCA 774, Gleeson J discussed those (at [23]-[25]), from which Citation extracts the following points of principle, which I accept:

(a)    Paragraph (a) and para (b) of s 459J(1) are mutually exclusive. Accordingly, ‘some other reason’ means some reason other than because of a defect in the demand.

(b)    The Court's power under s 459J(1)(b) exists to maintain the integrity of the process provided under Pt 5.4 of the Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness.

(c)    A statutory demand may be set aside under s 459J(1) where it involves conduct which is unconscionable or an abuse of process.

(d)    A statutory demand could be set aside under s 459J(1)(b) by reason of a substantial overstatement in the amount claimed, and that, where a statutory demand has been so grossly inflated as to comprise matters which it should have been obvious from the outset were in genuine dispute between the parties at the time the demand was served, then an order under s 459J(l)(b) setting aside that statutory demand may well be required to prevent such an abuse of the regime under Pt 5.4 of the Act.

(e)    The Court retains a residual jurisdiction to restrain reliance on the statutory demand procedure on the ground of an abuse of process and/or on the ground of impropriety of purpose.

(f)    There will be an abuse of process if the purpose of the party issuing the 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 a 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 of pressure to compel payment of the disputed debt.

CONSIDERATION OF FIRST ISSUE – PROPER CONSTRUCTION OF THE CONVERSION DEED

Termination of the Conversion Deed

19    Clause 2 of the Conversion Deed provides as follows:

2.    DEBT CONVERSION AND REPAYMENT

2.1    Conversion and Repayment

On, or as soon as is reasonably practicable after, the Completion Date, and subject to receipt of any necessary regulatory and shareholder approvals of the Borrower, each Lender’s entire proportion of the Debt will be:

(a)    reduced to the adjusted settlement amount set out in Schedule 1;

and such reduced settlement amount will then be:

(b)    converted into that number of Borrower Shares as are set out beside each Lender’s name in Schedule 1 [4,580,000] and which will be issued under the Capital Raising (Conversion Shares); and

(c)    in respect of Gorilla Pit and IBT only, partly repaid in cash by that amount which is set out beside their respective names in Schedule 1 [$171,000] from the proceeds of the Capital Raising (Repayments).

2.2    Issue of Conversion Shares and Repayments

(a)    On, or as soon as is reasonably practicable after, the Completion Date, the Borrower must issue the Conversion Shares and make the Repayments to the Lenders as set out in Schedule 1.

(b)    Immediately following the issue of the Conversion Shares under clause 2.2(a), the Borrower must:

(i)    procure that a holding statement for the Conversion Shares is sent to each Lender; and

(ii)    apply for quotation of the Conversion Shares on ASX.

(c)    Each Lender hereby:

(i)    consents to being a shareholder of the Borrower;

…

2.3    Effect of Conversion and Repayment

The issue of the Conversion Shares and the payment of the Repayments by the Borrower as set out in Schedule 1 will be deemed to have satisfied the Borrower’s obligations to repay each Lender’s entire proportion of the Debt.

2.4    Termination

(a)    If the Completion Date does not occur by the End Date, or necessary regulatory and shareholder approvals are not obtained by the End Date, any Party may terminate this Deed by written notice to the other Parties.

(b)    On termination, each Party is released from its obligations under this Deed, except those expressed to survive termination, and each Party retains the rights it has against the other Parties in respect of any breach of this Deed occurring before termination.

(emphasis added)

20    End Date (by cl 1.1) is defined as the date falling 90 days after the Execution Date, or such other date as the parties agree in writing.

21    By cl 12 of the Conversion Deed:

No modification or alteration of the terms of this Deed shall be binding unless made in writing dated subsequent to the date of this Deed and duly executed by the Parties.

22    IBT says the answer simply lies in determining, as a matter of law, the proper construction of the Conversion Deed. In particular, was the pre-condition to the compromise of IBT’s debts under the Conversion Deed ever actually effectuated? To that end, it relies upon an affidavit by Mr Brown which supports the statutory demand and which details background matters underlying the statutory demand.

23    The proper construction of the Conversion Deed is capable of being dealt with at this stage. The right of termination and the question of whether a right of termination exists and/or has been properly exercised is a question of law, not fact: Francis v Lyon (1907) 4 CLR 1023 (at 1040). Generally speaking, issues of law relating to the proper construction of a contract can be finally determined by the Court in the confines of a s 459G statutory demand application. The principles of contractual interpretation are well-known. IBT relies upon the statements of the High Court in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640, where French CJ, Hayne, Crennan and Kiefel JJ said (at [35]) (footnotes omitted):

Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

24    IBT argues that the release of the debts owed by Citation to it at the date of the Conversion Deed under cl 2.1 was entirely contingent upon the ‘Completion Date’ being achieved (defined as being Citation completing two separate achievements described as the Pearl Acquisition Agreement and the Capital Raising) and there then being the issue of the 4,580,000 conversion shares and the repayment of $171,000 in accordance with cl 2.2.

25    The Completion Date was achieved on 1 December 2015, which is common ground, when Citation announced to the ASX completion of the Pearl Transaction and the Capital Raising. However, at that date, and following that time, no payment was made and no shares issued. Certainly, the payment and shares to be issued pursuant to the Conversion Deed were not made. It follows, IBT argues, that the pre-condition to the release of the debts was not therefore satisfied and IBT obtained the right to terminate the Conversion Deed.

26    Citation contends that IBT incorrectly terminated the Conversion Deed by failing to follow the requirements set out in cl 2.4 of the Conversion Deed.

27    IBT accepts that it did not follow the requirements in cl 2.4, but says that it was not required to do so as it was inapposite. On its proper construction, cl 2.4 only operated where the ‘Completion Date’ did not occur by the ‘End Date’ or necessary regulatory and shareholder approvals were not obtained by the End Date. In both circumstances, termination is linked to when the ‘Completion Date’ occurred as compared to the ‘End Date’. The End Date is defined in cl 1.1 as meaning ‘90 days after the Execution Date’.

28    Both of the termination options under cl 2.4(a) did not arise in this instance, IBT argues, because the Completion Date occurred on 1 December 2015, being a date prior to the End Date, and the necessary shareholder approvals were obtained prior to the End Date.

29    IBT argues that even if Citation were to contend that the Completion Date did not occur on 1 December 2015, despite the clear terms of the 1 December 2015 announcement, the Completion Date has still not occurred and the End Date would be after the Completion Date, which would have entitled IBT to terminate the Conversion Deed under the first option under cl 2.4(a). Even on that construction, IBT’s notice dated 7 March 2016 would have validly terminated the Conversion Deed, it says.

30    IBT argues that in circumstances where the mechanism for termination under cl 2.4(a) was no longer applicable because the Completion Date had been achieved and relevant approvals obtained, IBT was left with its ordinary common law right to terminate the Conversion Deed on the ground that the repayment had not been made and the shares had not been issued as soon as ‘reasonably practicable’, or at all, under cl 2.1.

31    It is noted by IBT that Citation’s reason for the failure in making the $171,000 payment and issuing the 4,580,000 shares is said to be because of the conduct of Citation’s former officeholders not having the funds available from the Capital Raising. IBT makes the point that it is not apparent and far from clear, that the shares will ever be issued in the terms contemplated by the September 2015 prospectus or upon the terms of how the Pearl Acquisition Agreement was framed on 12 June 2015. In the absence of any express clause terminating the Conversion Deed in such circumstances and because of the common law rule against automatic termination of a contract (see Holland v Wiltshire (1954) 90 CLR 409 and Carter JW, Peden E, and Tolhurst GJ, Contract Law in Australia (5th ed, LexisNexis Butterworths, 2007) (at [29-19])), termination is a matter of election to be made by IBT as the promisee. IBT says that it was entitled to terminate the Conversion Deed immediately without providing Citation any further time to complete because there was nothing in the Conversion Deed to the contrary.

32    There is an obligation in cl 2.1 of the Conversion Deed for the shares to be issued as soon as ‘reasonably practicable’. Read in its context, cl 2.1 identifies that the shares were to be issued on the Completion Date, being the date that the Pearl Acquisition Agreement and the Capital Raising were completed as those terms were defined in the Conversion Deed.

33    It is common ground that the reference to the Capital Raising meant the proposed issue of 123,360,894 shares at an issue price of $0.05 to raise up to $6,168,045 pursuant to Citation’s Prospectus dated 23 October 2015. The Prospectus contemplated the shares would be issued for quotation on 12 November 2015. Citation’s ASX announcement, dated 1 December 2015, advised that the Pearl Acquisition Agreement and the Capital Raising had been completed.

34    The fact that completion had in fact occurred on 1 December 2015 is also consistent, IBT argues, with Citation’s 1 August 2016 ASX announcement attaching its half yearly financial statements by which, on p 7 of the half yearly report, Citation records, amongst other things, its ‘cash and cash equivalents’ as at 31 December 2015 to be $1,304,037 and on p 18 of the half yearly report, Citation records (at [14(e)]) that:

During the prior year, the Company made repayments on the loan comprising $700,000 in cash and issued 150,000,000 ordinary shares to the lenders, with the 150,000,000 shares being sold by the lender at an average prices of $0.0035 as settlement against the loan.

In addition, Citation recorded that, during the period, the loan holders agreed to an adjusted settlement amount of $1,365,000, which is fully payable in cash plus 15,000,000 listed options exercisable at $0.05 expiring on 30 June 2017. It records that a payment of $750,000 cash and allotment of 15,000,000 listed options were made in December 2015.

35    IBT makes the point that from those disclosures it is apparent that other creditors under the Conversion Deed received their repayments and their conversion shares, but IBT did not. In addition, the disclosures indicate that Citation in fact had $1,304,037 in cash and equivalents from which the $171,000 payment could have been made to IBT in December 2015. In those circumstances, Citation’s argument about ‘reasonably practicable’ is not open on the evidence because Citation has started the process of making payments and issuing conversion shares pursuant to the Conversion Deed and continues to have the capacity to do so. As to ‘as soon as reasonably practicable’, the discussion in Royal Society for the Prevention of Cruelty to Animals (Victoria) Incorporated v Marson Constructions Pty Ltd (2000) 1 VR 274 per Tadgell JA (at [5]-[7]) and per Ormiston JA (at [17]).

36    IBT draws attention to the fact that it was not until four months after 1 December 2015 that IBT exercised its common law right to terminate the Conversion Deed. The holding over in cl 2.1 of the Conversion Deed, based on the issue of shares when ‘reasonably practicable’, had no further work to do and IBT was entitled to terminate the Conversion Deed when it issued its Termination Notice on 7 March 2016.

37    Citation has also raised arguments in respect of the form in which the notice was issued and the email address to which the notice was sent. These are to no avail, IBT argues, because the unchallenged evidence, is that on 7 March 2016, IBT emailed the same notice to Mr Turco on behalf of Citation. In addition, the notice provisions within the Conversion Deed had no work to do because cl 2.4 provided no right of termination in circumstances where the Completion Date had already been achieved.

Satisfaction of the pre-conditions of the Conversion Deed

38    Further, IBT argues that the question of whether or not the Conversion Deed has been terminated is irrelevant in circumstances where the preconditions of the Conversion Deed becoming effective have not been satisfied. Citation has failed to make the repayment and issue the conversion shares as contemplated by the Conversion Deed. Until each of those conditions has been satisfied, IBT argues, IBT’s original debts that were the subject of the Conversion Deed and the statutory demand remain unaffected. IBT contends that is because the terms of the Conversion Deed make it clear that unless and until the repayment has been made and the conversion shares have been issued:

(a)    IBT’s debts would not be deemed to have been satisfied: cl 2.3 of the Conversion Deed;

(b)    Citation would not be released from paying the entire portion of the debts: cl 3(a) of the Conversion Deed; and

(c)    IBT would continue to have claims against Citation for the entire portion of its debts: cl 3(b) of the Conversion Deed.

Subsequent variation of the Conversion Deed

39    In relation to the issue of options dispute discussed above (at [4]), IBT contends there is no admissible evidence filed by Citation in respect of such agreement. The hearsay evidence of Mr Turco in respect of the evidence of Mr Landau was, initially at least, the subject of objections raised by IBT. The only evidence before the Court then, IBT says, is that contained in Mr Brown’s affidavit which disputes that the issue of the options achieved any variation to the Conversion Deed or had any effect on the shares to be issued under the Conversion Deed.

40    In any event, IBT argues that the allegation by Citation that the Conversion Deed was orally varied is contrary to the position advanced by Mr Turco himself for Citation in respect of the Conversion Deed only being capable of variation in writing by virtue of cl 12 of the Conversion Deed.

41    Importantly, IBT argues that at best Citation’s argument regarding the issuance of the additional options could only effect a reduction in the share component of the Conversion Deed by raising a genuine dispute as to the extent. Consequently, at worst, IBT’s statutory demand should be reduced to the undisputed amount of $171,000 under s 459H(2) of the Act.

Consideration of IBT’s response to Citation’s contentions

42    At least at a prima facie level, I must say there seems force in IBT’s arguments in relation to its right to terminate. They are based substantively on the premise that as the payment and issue of shares never occurred, the Conversion Deed did not come into operation. There is much to be said for this on the face of the matter and if so then Citation would appear to be indebted to IBT in accordance with the statutory demand. However, what is unsatisfactorily explained is the accepted issue of the options. It is not enough simply to deduct the value of those options from the amount in the notice. I have some regard to the content of the 10 December email from Mr Eastman (which I do not accept as being evidence of the truth but at least as being a relatively contemporaneous business record made in relation to an options issue effected at a time when no immediate obligations and debt were due). Given the friction and lack of co-operation between the new board and the old, I think there is a genuine dispute which warrants investigation. That is, there is a genuine dispute in the sense that deciding there is no genuine dispute would be unsafe.

43    Consideration as to whether it would be ‘unsafe’ to decide that there is no genuine dispute or in otherwise determining an application to set aside a statutory demand can be warranted in this context. For example, in Austral Softwoods Tumbarumba Pty Ltd v Tasman KB Pty Ltd [2001] NSWSC 1122, Santow J considered an application to set aside two statutory demands on the basis that there was a genuine dispute. Justice Santow noted (at [16]) that ‘it would be unsafe for a court in the present state of the evidence, to exclude that possibility for which the plaintiff contends.’ Further, at [24], his Honour observed:

Whether that letter was capable of varying the agreement by what appears to be a unilateral act will no doubt be tested in final proceedings. But again it would be unsafe to assume that there have not been even at the level of a plausible contention, a basis for concluding that the variation to seven days had occurred.

His Honour set aside the relevant statutory demands.

44    In relation to termination, Citation refers to the argument that IBT has relied upon its common law rights to terminate the contract constituted by the Conversion Deed. Citation contends that IBT would have no right at common law to terminate the Conversion Deed for a breach of contract unless there had occurred a breach by Citation amounting to a repudiation of the contract and IBT had expressly accepted that repudiation and elected to terminate the Conversion Deed in light of that repudiation.

45    In this case, the Termination Notice relied, in effect, on delay. However, the Conversion Deed does not stipulate that ‘time is of the essence’. If time is ‘of the essence’ and performance is not forthcoming when due, the party not in breach may forthwith elect to terminate the contract. If the contract fixes a time for performance only approximately, the normal inference will be that performance on time is a non-essential term. Thus, it has been held in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 (at 430-431) that a promise to ‘proceed with all due dispatch’ is non-essential. Similarly, phrases such as ‘on or about’ or ‘as soon as possible’ tend against essentiality of time: Seddon NC and Ellinghaus MP, Cheshire & Fifoot Law of Contract (9th ed, LexisNexis Butterworths, 2008) (at [21.19]).

46    Time was not of the essence, in my view, under the Conversion Deed. By cl 2.1 of the Conversion Deed, the time for performance of the obligation to make the repayment and to issue the shares is fixed in an approximate sense by specifying that it was to be ‘on, or as soon as reasonably practicable after, the Completion Date, and subject to receipt of any necessary regulatory shareholder approvals of the Borrower’. This might be compared with ‘as soon as possible’ and ‘on or about’ referred to above. In Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527, Burchett J said (at 558):

The words “as soon as possible” express a relative concept; possibility must be measured by reference to limiting factors. In Verelst's Administratrix v Motor Union Insurance Co Ltd [1925] 2 KB 137 at 142, Roche J (as Lord Roche then was) rejected the contention that a contract to do something “as soon as possible” meant to do it as soon as anyone could do it, holding that “the phrase means as soon as possible in the circumstances which prevail and apply to [the contracting party]”. …

47    In those cases where there is no express time stipulation, there is no entitlement to terminate at common law until a reasonable time has expired because the law allows a promisor a reasonable time to perform: Carter et al (2007) at [30-60]). It cannot be controversial that what is a reasonable time must depend upon all the circumstances.

48    Where time is not expressed to be essential, the usual rule is that the promisor’s failure to perform on time does not of itself give rise to a right to terminate: Rian Financial Services Pty Ltd v Alfred Investment Projects Pty Ltd (1988) 90 FLR 215. Where the promisor breaches a non-essential time stipulation, the law usually permits the promisee to serve a notice the effect of which is expressed by saying that time becomes essential. The three basic requirements (set out in Carter et al (2007) (at [30-61]) are that the notice must:

(a)    inform the promisor of the obligation which is to be performed;

(b)    fix a period of time which is, in the circumstances, a reasonable time to perform; and

(c)    clearly indicate either that it makes time essential or that failure to comply with the notice will give rise to a right to terminate.

49    Where a contract does not fix a time for completion, such that completion is due within a reasonable time, the promisee may give a notice requiring completion, but only where the promisor has been guilty of unreasonable delay in performance and the promisee is not itself in breach: Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286. In order to determine whether or not there has been any ‘unreasonable delay’, it should be delay which has impeded the opposing party in an improper conduct sense so as to justify the rescission of the contract if a reasonable notice is not complied with: Young J in Collingridge v Sontor Pty Ltd (1997) 141 FLR 440 (at 446), citing Fry J in Green v Sevin (1879) 13 CLD 589 (at 599).

50    In my view, in this matter, it is arguable that at the time and particularly in the manner it issued the Termination Notice, IBT had no right at common law to terminate the Conversion Deed as:

(a)    cl 2.1 of the Conversion Deed did not stipulate that time was of the essence, accordingly, performance of cl 2.1 on time was a non-essential term of the contract;

(b)    the Conversion Deed could not be terminated by IBT for delay without IBT first issuing Citation with a notice requiring performance of cl 2.1 within a reasonable time specified in that notice. The notice should also have specified that if it was not complied with, the contract may be terminated. There was no such notice requiring performance within a specified time before the purported termination;

(c)    in any event, given that the Conversion Deed was an ‘open’ contract, that is, a contract pursuant to which performance must occur within a reasonable time, IBT could only have validly issued any notice requiring completion if there had been an unreasonable delay on the part of Citation. Citation contends that at least arguably there was not any unreasonable delay, if the evidence of surrounding events is to be given any weight (I do not); and

(d)    since 26 February 2016, it has not been ‘reasonably practicable’ for Citation to perform its obligations under the Conversion Deed by reason of the misapplication of funds from the Westpac account, the fact that Citation is and has been since 26 February 2016 suspended from trading on the ASX, and the fact that Citation must determine the legal status of the variation, the subsequent arrangement referred to above and the impact of the issue of the 4 million options prior to performing any of its outstanding obligations under the Conversion Deed.

51    If this is wrong, Citation, at least contends that in all the circumstances, including the change of control of the company and the mystery surrounding the various negotiations (if any), the delay could not be so gross and protracted as to amount to a repudiation of itself. In all those circumstances, there is no common law right on the part of IBT to terminate the Conversion Deed.

52    A further difficulty which presents an arguable defence for Citation is that, if IBT did have a right to terminate the Conversion Deed at common law, contrary to Citation’s argument, the notice dated 7 March 2016 did not stipulate what obligations were alleged not to have been performed. It is unclear, Citation says, whether the notice related to the Conversion Deed or the Conversion Deed as purportedly varied. If IBT was treating the Conversion Deed as having been validly varied (and given the 4 million options that had been issued to IBT by 7 March 2016), it is perhaps arguable that there was only one obligation, rather than several obligations, to be performed. By its reference to ‘obligations’ (plural) in the notice of termination, it is unclear whether IBT was treating the variation as not having occurred and purporting to terminate the Conversion Deed because of the suggested breach of the obligations to pay $171,000 as soon as reasonably practicable and issue 4 million shares as soon as is reasonably practicable.

53    Citation’s argument is that in the absence of a valid termination, it is at least arguable that there was no entitlement to proceed against Citation on the earlier contractual documents. Citation also contends that it has a tenable argument that the Conversion Deed remained on foot and, therefore, IBT had no entitlement to purport to accept a repudiation and terminate the contract.

54    Citation also argues that there is a further live issue as to whether or not the Conversion Deed was varied as a consequence of the events leading up to the issue of the 4 million options. Whether or not the agreement constituted by the Conversion Deed was or was not varied would certainly have a bearing on: the amount required to be paid by Citation to IBT, and whether and in what circumstances IBT had the right to terminate the Conversion Deed and pursue the debts created by the Loan Facility Agreement and the Convertible Loan Deed.

55    Assuming for a moment IBT has effectively terminated the Conversion Deed, and if that has the consequence that its rights under the Loan Facility Agreement and the Convertible Loan Deed have not been fully released, there may be a tenable argument that the liability of Citation for the ‘debt’ the subject of the statutory demand has been in part released. Citation contends that an inquiry is required as to the extent to which it has been released. For example, it appears to be accepted that IBT did obtain $78,389 in benefit from the options by virtue of subsequent sales.

56    There is one concrete fact which may support this limb of the argument and that is that the 4 million options were undoubtedly issued. Citation submits that it is quite implausible that both the obligation to pay cash and the obligation to issue 4 million shares continued despite the details of variation to the Conversion Deed set out in the email communications and the issue of 4 million options. I would at present give little weight to the emails in the absence of further investigation and cross-examination, but certainly the issue of the 4 million options is something which is difficult to explain at a time when the issue of them was unnecessary and at a time when it might be inferred that Citation in truth (despite the cash position in the financial reports) was not particularly flushed with funds. To issue the 4 million options simply for interest for late payment at a time when there was no delay according to the state of the contractual arrangements between the parties, might well be explained by some contractual variation. If there was a variation, although I am mindful of the apparent need for it to be in writing, I am inclined to accept that there is a live issue as to the basis on which the 4 million options were issued and as to whether they were issued in part performance of the Conversion Deed as varied.

57    Of less persuasion is the subsequent evidence suggesting that Mr Brown for IBT entered into an arrangement with Mr Landau in his personal capacity with respect to the payment of money owed to Citation by IBT. Although this could not bind Citation as Mr Landau had resigned as a director of Citation at the time of the suggested subsequent arrangement, Citation contends that based on the evidence it is a ‘plausible contention’ that this subsequent arrangement, which existed between IBT and Mr Landau in his personal capacity, not as a director, may nonetheless have impacted Citation’s obligations to IBT.

58    If this were the only evidence in the case, it would fall short of the description of a genuine dispute. Nonetheless, as I consider the earlier possible variation accompanying the option issue, and to a lesser extent the termination arguments, do provide a genuine dispute, then the subsequent conduct, if any, by Mr Landau in his personal capacity could also fall for consideration to another day. I give it no weight now.

59    Finally, Citation argues that if repudiation did occur, and if IBT validly elected to accept the repudiation and terminate the Conversion Deed, the consequence is that IBT has a claim in damages as against Citation and such a claim is no basis for the issue of a statutory demand. Citation says that IBT ought to properly pursue any claim it may have against Citation and/or Mr Landau by proceedings for breach of contract brought in a court rather than by issue of a creditor’s statutory demand under which it may arguably obtain ‘some collateral advantage beyond what the law offers’. There is also some force in this contention, but I do not need to rely upon it to reach my conclusion.

60    In all the circumstances, I consider there is a genuine dispute as to the existence of the debt the subject of the statutory demand, or the amount of the debt.

THE SECOND ISSUE – ‘SOME OTHER REASON’ – s 459J(1)(b)

61    In this regard, Citation raises, amongst other things, the contention that it is an abuse of process for IBT to press for recovery of its debt by use of the statutory procedure. IBT, however, refer to the observations in FBM Corporation Pty Ltd v Redsilk Enterprises Pty Ltd [2014] WASCA 51, where Martin CJ, Pullin and Newnes JJA said (at [39]):

It is not possible to describe exhaustively the circumstances in which it will be appropriate to exercise the discretion conferred by s 459J(1)(b) and any temptation to attempt to do so must be resisted. However, whilst the discretion is wide it is not unlimited. Its exercise must be consistent with the legislative scheme and relevant to the purposes for which the power exists. A demand cannot be set aside merely on the basis of subjective views as to fairness: Meehan v Glazer Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229 [61].

62    The reference to Meehan v Glazer Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229 is a reference to a passage from the judgment of Young CJ, concurring with Santow JA, and observing (at [61]):

A judge is not at liberty to set aside a demand under s 459J(1)(b) merely because he or she subjectively considers it fair to do so.

63    In short, IBT argues that s 459J(1)(b) of the Act is not a ‘backdoor’ to reargue matters which were not successful to ground a genuine dispute. The second issue is effectively a re-agitation of matters raised by the first broad issue and should be dismissed on the same basis. There is nothing in IBT’s conduct which could be considered to be unconscionable or an abuse of process or which gives rise to substantial injustice. IBT says that is particularly so where the reason Citation has not paid IBT is because of the alleged conduct of former company officer holders and in circumstances where there is a clear admission by Citation that it does not have the funds to pay IBT.

Consideration of the arguments under the ‘other reason’ head

64    In light of my conclusions in relation to a genuine dispute existing in the way I have described it, it is unnecessary to consider but appropriate to record Citation’s contention that it would be an abuse of process for IBT to utilise the regime under Pt 5.1 of the Act to apply pressure on Citation to force payment of the purported debt the subject of the statutory demand. This is so, Citation says, if in fact:

(a)    there exists the ‘separate deal’ with Mr Landau;

(b)    the earlier statutory demand was issued by IBT for the purposes of procuring payment from Mr Landau and then on 9 April 2016 IBT then sought to procure payment from Citation by threatening that ‘if I don’t receive [the money] this week then I will be sending around the debt collectors, you know the ones’ (emphasis added); and/or

(c)    the second statutory demand is issued in spite of the fact that IBT knew of Citation’s circumstances.

65    I do not find these arguments persuasive despite the clearly inappropriate language used in (b) above. Were it not for my conclusions in relation to the existence of a genuine dispute, I would not be satisfied that the evidence points to an abuse of process.

CONCLUSION

66    A genuine dispute has been established for the foregoing reasons.

Associate:

Dated:    27 October 2016