FEDERAL COURT OF AUSTRALIA

Ballast Holdings Pty Ltd v Leonite Capital [2023] FCA 1245

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 459G and s 459H of the Corporations Act 2001 (Cth) the creditor’s statutory demand dated 17 November 2022 issued by the defendant to the plaintiff be set aside.

2.    The defendant is to pay the plaintiff’s costs of the proceeding.

3.    On or before 27 October 2023 the plaintiff is to file any application for payment of its costs on an indemnity basis and other orders it seeks in relation to its costs together with an affidavit in support and submissions, not exceeding three pages in length.

4.    In the event that an application is filed by the plaintiff in accordance with Order 3 above:

(a)    on or before 3 November 2023 the defendant is to file and serve any affidavit in response and its submissions, not exceeding three pages in length; and

(b)    the question of costs will be dealt with on the papers.

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

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 459G and s 459H of the Corporations Act 2001 (Cth) the creditor’s statutory demand dated 29 November 2022 issued by the defendant to the plaintiff be set aside.

2.    The defendant is to pay the plaintiff’s costs of the proceeding.

3.    On or before 27 October 2023 the plaintiff is to file any application for payment of its costs on an indemnity basis and other orders it seeks in relation to its costs together with an affidavit in support and submissions, not exceeding three pages in length.

4.    In the event that an application is filed by the plaintiff in accordance with Order 3 above:

(a)    on or before 3 November 2023 the defendant is to file and serve any affidavit in response and its submissions, not exceeding three pages in length; and

(b)    the question of costs will be dealt with on the papers.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    There are two proceedings before the Court. The first was commenced by Ballast Holdings Pty Ltd as plaintiff and the second was commenced by Nextgen Financial Group Pty Ltd as plaintiff. Leonite Capital LLC is the defendant to each proceeding. In each proceeding the relief sought by, on the one hand, Ballast Holdings and, on the other, Nextgen Financial is identical in that each of those companies seeks to set aside a creditor’s statutory demand for payment of debt issued by Leonite Capital. Relevantly, Leonite Capital served:

(1)    a statutory demand dated 17 November 2022 (Ballast Holdings Demand) and affidavit in support affirmed by Avi, also known as Avrohom, Geller on 17 November 2022 under cover of a letter dated 21 November 2022 by express post on Ballast Holdings; and

(2)    a statutory demand dated 29 November 2022 (Nextgen Demand) and an affidavit in support affirmed by Mr Geller on 29 November 2022 under cover of a letter dated 1 December 2022 by express post on Nextgen Financial.

2    Vitorio Vincenzo Turco, a director and secretary of Ballast Holdings and a director and secretary of Nextgen Financial received, among other things, the Ballast Holdings Demand on 25 November 2022 and the Nextgen Demand on 2 December 2022.

3    Each of Ballast Holdings and Nextgen Financial make their applications to set aside, on the one hand, the Ballast Holdings Demand and, on the other, the Nextgen Demand pursuant to ss 459G, 459H and 459J of the Corporations Act 2001 (Cth).

4    Section 459G of the Corporations Act permits a company to apply to the Court for an order setting aside a statutory demand served on it within the statutory period after service of the demand. An application is only made in accordance with s 459G of the Corporations Act if within the statutory period an affidavit supporting the application is filed with the Court and a copy of the application and of the supporting affidavit are served on the person who served the demand on the company. There was no dispute between the parties that, in each case, Ballast Holdings and Nextgen Financial had brought their respective applications to set aside the statutory demands in accordance with the requirements of s 459G of the Corporations Act.

5    Section 459H of the Corporations Act applies where, on an application under s 459G, the Court is satisfied that, relevantly, there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the statutory demand relates. Section 459J of the Corporations Act enables the Court to set aside a statutory demand if it is satisfied that, because of a defect in the demand, substantial injustice will be caused unless it is set aside or there is some other reason why the demand should be set aside. The principles relating to the application of, relevantly, for the purposes of my consideration of the applications before the Court, s 459H of the Corporations Act are set out below.

6    The facts and circumstances which gave rise to the service of the Ballast Holdings Demand and the Nextgen Demand arose out of the same transaction. Similarly, the basis upon which each of Ballast Holdings and Nextgen Financial seek to set aside those demands are relevantly the same. For those reasons the two applications were heard together and, in the circumstances, it is convenient that the applications be addressed in a single set of reasons.

BACKGROUND

Ballast Holdings and Nextgen Financial

7    Ballast Holdings and Nextgen Financial are each financial services companies domiciled in Western Australia. Nextgen Financial was formerly called The FinancialLink Group Pty Ltd. It changed its name to Nextgen Financial on 20 September 2022.

8    Ballast Holdings’ core business is as the ultimate holding company of two subsidiary companies, Ballast Accountants Pty Ltd and Ballast Financial Planning Pty Ltd which respectively provide accounting and financial services to their clients.

9    Nextgen Financial’s core business is as an Australian financial services licensee in the financial advice sector. It provides services to its network of authorised representatives.

10    On 7 July 2020 Genesis Financial Inc acquired all of the issued shares in Ballast Holdings and, as a result, Ballast Holdings became its wholly owned subsidiary.

11    According to a search obtained from the database maintained by the Australian Securities and Investments Commission (ASIC) that was in evidence before me, Nextgen Financial Group Holdings Pty Ltd is currently the immediate holding company of Nextgen Financial and Nextgen Financial Group Holdings is wholly owned by Genesis.

12    On 16 December 2021 Mr Turco was appointed a director and secretary of Ballast Holdings. Its other current director is Gayle Janine Alchin who was appointed on 20 August 2020. Prior to Mr Turco’s appointment the directors of Ballast Holdings were:

(1)    Hans Blazejczyk, appointed from 24 February 2017 to 20 January 2022;

(2)    Wayne Blazejczyk, appointed at various times between 26 October 1999 to 20 September 2004 and again between 2 April 2012 to 21 October 2019;

(3)    Dominique Monteleone, appointed 25 February 2016 to 24 February 2017;

(4)    Francesco Paratore, appointed 1 July 2012 to 25 February 2016;

(5)    Kaylene Blazejczyk, appointed 5 June 2003 to 2 April 2012;

(6)    Darryl Pearce, appointed 26 October 1999 to 17 April 2003; and

(7)    Laurence Hateley, appointed 26 October 1999 to 17 April 2003.

13    On 8 June 2021 Mr Turco was appointed as the secretary of Nextgen Financial and on 11 October 2021 he was appointed as one of its directors. The other current director of Nextgen Financial is Nick Brookes who was appointed on 30 June 2020. Prior to Mr Turco’s appointment the directors of Nextgen Financial were:

(1)    Warwick Kerridge, appointed from 30 June 2020 to 11 October 2021;

(2)    Peter Daly, appointed from 2 October 2013 to 30 June 2020;

(3)    Ian Williams, appointed from 15 April 2019 to 30 June 2020;

(4)    Paul Nielsen, appointed from 2 October 2013 to 11 March 2019;

(5)    Martin Lowe, appointed from 30 April 2008 to 2 October 2013;

(6)    Mark Rothnie, appointed from 20 May 2008 to 5 February 2013;

(7)    Alan Davies, appointed from 20 May 2008 to 1 October 2011;

(8)    Kay Russell, appointed from 25 March 1992 to 1 May 2008;

(9)    Wayne Elliott, appointed from 6 November 1992 to 27 January 1993;

(10)    Shane Philip, appointed from 25 March 1992 to 27 January 1993;

(11)    Nicholas Politylo, appointed from 25 March 1992 to 6 November 1992; and

(12)    Stephen Philip, appointed from 25 March 1992 to 4 August 1992.

Leonite Capital

14    Leonite Capital is a limited liability company domiciled in Delaware in the United States of America (US). It is a diversified family office investment vehicle. Mr Geller, who affirmed the affidavits in support of each of the Ballast Holdings Demand and the Nextgen Demand, is the chief investment officer of Leonite Capital.

Leonite Capital and Genesis

15    On 25 January 2021 Mr Geller received an email from William Stern of Venture Group Capital LLC, who is a consultant for companies seeking capital. Mr Stern’s email forwarded an email he had received from Etienn Couret dated 24 January 2021. Mr Geller understood Mr Couret to be a business advisor and consultant to Genesis. Mr Couret’s email contained a request by Genesis for a short-term bridging loan of US $100,000 to assist with the finalisation of its acquisition by FDCTech, Inc. Mr Stern’s email also attached the following documents in respect of the acquisition:

(1)    a 3% promissory note for US $100,000 dated 25 January 2021 signed by Russell Cameron as chief executive officer on behalf of Genesis; and

(2)    a term sheet dated 22 January 2021 signed by Mr Cameron as chief executive officer on behalf of Genesis.

16    Later that day Siegfried Eggert, Mr Geller’s colleague and an analyst at Leonite Capital, received an email from Mr Couret attaching a number of due diligence documents.

17    Between 25 and 28 January 2021 Mr Geller reviewed each of the documents that had been provided to Leonite Capital and decided that Genesis and FDCTech were credit worthy and, should Leonite Capital provide the short-term bridging loan sought by Genesis, it would be repaid upon finalisation of the acquisition.

18    On 28 January 2021 Mr Geller instructed Mr Eggert to send Mr Couret a term sheet for signature by Mr Cameron. Mr Couret returned the signed term sheet to Leonite Capital later that day. Mr Cameron had signed the term sheet on behalf of the borrower which was named as “Genesis Financials Inc, Ballast Group, Beacon Group, The FinancialLink Group PTY LTD and subsidiaries (‘Genesis’ or ‘The Company’) and its subsidiaries”.

19    As a matter of its usual business practice, if a borrower has subsidiaries, Leonite Capital requires each of the subsidiaries to enter into the loan agreement with the borrower. Mr Geller explained that, on Mr Cameron’s instructions, each of the Australian entities which were subsidiaries of Genesis were added as parties to the term sheet and later the loan transaction documents.

20    Mr Geller also gave evidence that, for the purpose of considering the short-term bridging loan sought by Genesis:

(1)    in relation to both Ballast Holdings and Nextgen Financial, he:

(a)    reviewed the US Security Exchange Commission website for Genesis’ published financial forms and reports;

(b)    reviewed the Form 10-K, which he described as “the annual Genesis report filed 13 August 2020”, the Form 3/A and each Form 3 filed 1 September 2020;

(c)    read a news article from “Globe Newswire” dated 23 August 2022 titled “SMC/Genesis Posts Second Quarter 2022 Financial Statements Six Months 2022 Revenues of $10.7 Million and Gross Profit of $2.2 Million”; and

(d)    reviewed the Form 15-K which was filed with the SEC on 14 February 2023;and

(2)    in relation to Ballast Holdings, he read a news article from Globe Newswire dated 7 July 2020 titled “Genesis Financial, Inc. completes acquisition of Ballast Group and Cosight Financial Limited”.

21    In relation to the Form 10-K, Mr Geller noted, among other things, that: it named Mr Cameron as chief executive officer, chief financial officer and a director of Genesis and Mr Kerridge as chair of the board and a director of Genesis; and Messrs Cameron and Kerridge had signed the Form 10-K on behalf of Genesis. He also noted that the Form 10-K showed that on 30 June 2020 Genesis had completed its acquisition of Ballast Holdings.

22    On 29 January 2021 Mr Geller instructed his US attorney, Dovi Berger of Berger Law Firm LLC, to draft the loan documents on behalf of Leonite Capital. By email sent on 4 February 2021 Mr Berger provided the draft loan documents to Mr Couret noting that:

I represent Leonite Capital in their potential transaction with Genesis.

Attached are drafts of the documents for the loan from Leonite. Please have the company review and when approved I will send the documents by docusign. In order to facilitate the process of closing the transaction, please note the following and provide where necessary:

•    For docusign, I will need the email address of Russell Cameron who will be signing the docs on behalf of the company as well as a personal guaranty and Tim Alford who will be signing a personal guaranty. For the Board resolution, there will be 3 signors, either officers or directors (and could include Cameron and/or Alford) so I need email addresses for that as well.

•    I also need mailing addresses for Cameron and Alford as well as mailing addresses for all of the entity borrowers (GENESIS FINANCIAL, INC., BALLAST HOLDINGS PTY LTD, FINANCIAL LINK GROUP PTY LTD, INTERACTIVE MORTGAGE AND FINANCE PTY LTD, and CCS OPERATIONS PTY LTD).

•    The company needs to have the “disclosure statement” completed. This should be done with advice of counsel. The disclosure statement will include certain statements that are referred to in the Securities Purchase Agreement (the paragraph references in the disclosure statement refer to the relevant paragraphs in the Securities Purchase Agreement to which they relate). Many of these items might be N/A or None in which case they should be noted as such – nothing should be left blank. The response for certain items can refer to SEC filings if the relevant disclosure is made there and is not materially changed.

•    The COJs will need to be signed by hand and notarized and then scanned with the originals mailed to Leonite.

•    The Transfer Agent Letter should be immediately sent to the transfer agent for review and signature.

•    Please provide wire instructions for the loan.

Let me know as soon as these are approved by the company.

23    The documents provided under cover of Mr Berger’s email referred to in the preceding paragraph, which were subsequently signed and dated 4 February 2021, included, among others:

(1)    a security and pledge agreement between Genesis, Ballast Holdings, Financial Link Group Pty Ltd (which appears to be a misspelling of Nextgen Financial’s former name, FinancialLink Group, as set out at [7] above), Interactive Mortgage and Finance Pty Ltd, CCS Operations Pty Ltd and Leonite Capital LLC;

(2)    a securities purchase agreement between Genesis, Ballast Holdings, Financial Link Group (now Nextgen Financial), Interactive Mortgage, CCS Operations and Leonite Capital;

(3)    a senior secured promissory note given by Genesis, Ballast Holdings, Financial Link Group, Interactive Mortgage and CCS Operations in favour of Leonite Capital;

(4)    a pledge and security agreement between Mr Cameron and Leonite Capital;

(5)    a pledge and security agreement between Timothy Alford and Leonite Capital;

(6)    a personal guarantee granted by Mr Cameron in favour of Leonite Capital; and

(7)    a personal guarantee granted by Mr Alford in favour of Leonite Capital,

(together Loan Transaction Documents).

24    The Loan Transaction Documents were signed electronically:

(1)    Mr Cameron signed them on behalf of Ballast Holdings and Financial Link Group as well as on behalf of the balance of the companies, other than Leonite Capital, namely Genesis, Interactive Mortgage and CCS Operations;

(2)    in the case of Genesis, Mr Cameron is described as chief executive officer and director;

(3)    in the case of the balance of the companies on whose behalf Mr Cameron signed, including Ballast Holdings and Financial Link Group, he is described as a director; and

(4)    Messrs Cameron and Alford each personally signed their respective pledge and security agreement and guarantee.

25    On 5 February 2021, in accordance with a document titled “flow of funds memorandum” dated 4 February 2021 signed by Mr Cameron, Leonite Capital transferred US $125,000.

The terms of the Loan Transaction Documents

26    It is convenient to set out some of the salient terms of the Loan Transaction Documents.

27    Pursuant to the terms of the senior secured promissory note Genesis, Ballast Holdings, Financial Link Group, Interactive Mortgage and CCS Operations (who were defined “each and collectively” as the “Borrower”) promised to pay Leonite Capital the principal sum of US $202,500 together with interest “[f]or value received”. Among other things the promissory note provided:

(1)    in relation to interest that:

The “Interest Rate” shall reset daily and accrue at a rate equal to greater of (i) the Prime Rate plus eight percent (8%) per annum, and (ii) fourteen percent (14%) per annum. The “Prime Rate” shall mean that variable rate of interest published from time to time by the Wall Street Journal as the prime rate of interest. In no event shall the Interest Rate exceed the maximum rate allowed by law; any interest payment which would for any reason be unlawful under applicable law shall be applied to principal.

(2)    the “Consideration” payable to the Borrower under the promissory note was the sum of US $135,000 to be paid on the “Issue Date”, being 4 February 2021, less US $10,000 to be retained by Leonite Capital to cover its legal fees;

(3)    the maturity date was 40 days from the Issue Date;

(4)    the term “Default Interest” was defined to mean “interest at the lesser of the rate of twenty four percent (24%) per annum or the maximum legal amount permitted by law”; and

(5)    at cl 3.8, is headed “Use of Proceeds”, that the Borrower “agrees to use the proceeds of the Consideration solely to pursue a transaction with FDCTech, Inc., a publicly traded company organized under the laws of the State of Delaware”.

28    The same parties also entered into a security and pledge agreement. In that agreement Genesis, Ballast Holdings, Financial Link Group, Interactive Mortgage and CCS Operations were named collectively as the “Debtor” and Leonite Capital was named as the “Secured Party”. Clause 3 of the security and pledge agreement provides:

Creation of Security Interest. In order to secure Debtor’s timely payment of the Obligations and timely performance of each and all of its covenants and obligations under this Agreement and any other document, instrument or agreement executed by Debtor or delivered by Debtor to the Secured Party in connection with the Obligations, Debtor hereby unconditionally and irrevocably grant, pledge and hypothecate to the Secured Party a continuing security interest in and to, a lien upon, assignment of, and right of set-off against, all presently existing and hereafter acquired or arising Collateral. Such security interest shall be a first priority security interest. Such security interest shall attach to all Collateral without further act on the part of the Secured Party or Debtor.

Relevantly, the term the “Obligations” is defined to mean “any and all present or future indebtedness or obligations of Debtor owing to the Secured Party under the [senior secured promissory note] and the other Subscription Documents”.

29    The security and pledge agreement also includes under the heading “General Provisions” that it “shall be binding and deemed effective against Debtor when executed by Debtor and the Secured Party”.

30    The securities purchase agreement was again between Genesis, Ballast Holdings, Financial Link Group, Interactive Mortgage and CCS Operations who were “each and collectively” referred to as the “Company” and Leonite Capital which was referred to as the “Purchaser”. That agreement included:

(1)    in the recitals:

B.    The Purchaser desires to purchase from the Company, and the Company desires to issue and sell to the Purchaser, upon the terms and conditions set forth in this Agreement, a Senior Secured Promissory Note of the Company, in the aggregate principal amount of two hundred two thousand five hundred 00/100 Dollars ($202,500) (the “Principal Amount,”) and together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, in the form attached hereto as Exhibit A (the “Note”), upon the terms and subject to the limitations and conditions set forth in such Note;

C.    The Note carries an original issue discount of sixty seven thousand five hundred and 00/100 Dollars ($67,500) (the “OID”), to cover the Purchaser’s accounting fees, due diligence fees, monitoring, and/or other transactional costs incurred in connection with the purchase and sale of the Note, which is included in the principal balance of the Note. Thus, the purchase price of this Note shall be $135,000, computed by subtracting the OID from the Principal Amount.

D.    Company wishes to issue to the Purchaser, as additional consideration for the purchase of the Note, two hundred twenty thousand (220,000) shares of the Company’s common stock (“Equity Interest”).

(2)    in cl 1 which is headed “Amount and Terms of the Note”:

1.1    Purchase of the Note. Subject to the terms of this Agreement, for consideration of one hundred thirty five and 00/00 Dollars ($135,000.00) in cash (the “Consideration”) paid on or shortly after the Issue Date (as defined in the Note), the Purchaser agrees to subscribe for and purchase from the Company on the Closing Date (as hereinafter defined), and the Company agrees to issue and sell to the Purchaser, the Note. The OID shall be earned upon payment of the Consideration.

(3)    in cl 5 which is headed “Further agreements; post-closing covenants”:

5.2    Use of Proceeds. Company shall use the proceeds of sale and issuance of the Note solely to pursue a transaction with FDCTech, Inc., a publicly traded company organized under the laws of the State of Delaware (“FDCT”).

Events following entry into of the Loan Transaction Documents

31    On 16 March 2021 Messrs Geller and Berger telephoned Mr Alford to discuss the loan repayment of US $135,000 which was due the following day and in a subsequent email Mr Berger provided wire instructions to Mr Alford.

32    On 18 March 2021 Mr Geller sent an email to, among others, Mr Couret noting that Leonite Capital had not received the wire and requesting that he advise them on the status of the loan repayment as soon as possible.

33    There followed exchanges between, among others, Messrs Geller, Couret, Alford, Berger and Cameron. These included a proposal to amend the Loan Transaction Documents which would amend the loan repayment date to 5 May 2021.

34    As at July 2021 Mr Geller understood that: the proposed merger between Genesis and FDCTech had not yet occurred; Mr Cameron was not willing to sign the proposed amendments to the Loan Transaction Documents; and Mr Kerridge was in charge of Genesis and was the person with authority within that company.

35    On 10 September 2021 Mr Geller contacted Mr Kerridge by email and telephone and thereafter they exchanged a series of emails. Among other things, Mr Geller provided Mr Kerridge with the Loan Transaction Documents and an excel spreadsheet setting out the default interest on the loan.

36    In December 2021 Messrs Geller and Kerridge engaged in settlement discussions and continued to exchange emails until about November 2022.

The statutory demands

37    As set out above, the Ballast Holdings Demand and the Nextgen Demand were each served by express post. Mr Turco received the Ballast Holdings Demand on 25 November 2022 and he received the Nextgen Demand on 2 December 2022.

38    In the Ballast Holdings Demand Leonite Capital seeks the amount of US $585,332.01 pursuant to the “Financial Loan Transactions Documents set out in Annexure A” to the demand.

39    In the Nextgen Demand Leonite Capital seeks US $588,026.14 pursuant to the “Financial Loan Transactions Documents set out in Annexure A” to the demand.

40    The “Financial Loan Transactions Documents set out in Annexure A” to each of the Ballast Holdings Demand and Nextgen Demand are the Loan Transaction Documents and a UCC financing statement describing Genesis as debtor and Leonite Capital as secured party. Also annexed to each of the demands is a spreadsheet showing the amount of the debt claimed.

41    Prior to receiving the Ballast Holdings Demand and the Nextgen Demand Mr Turco was not aware of any purported financial arrangements with Leonite Capital. Each of Ballast Holdings and Nextgen Financial allege that there is a genuine dispute about the existence of the debt the subject of the demands.

42    Based on Mr Turco’s evidence and a company search in evidence before me for each of Ballast Holdings and Nextgen Financial it is evident that no one by the name of Russell Cameron is or has ever been a director of either Ballast Holdings or Nextgen Financial.

Ballast Holdings

43    A copy of the Constitution for Ballast Holdings was in evidence before me:

(1)    articles 67-69 concern “Powers and Duties of Directors” and provide:

67. (1)    Subject to the Law and to any other provision of these Articles, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in promoting and forming the Company and may exercise all such powers of the Company as are not, by the Law or by these Articles, required to be exercised by the Company in general meeting.

(2)    Without limiting the generality of Sub-Article (1), the Directors may exercise all the powers of the Company to borrow money, to charge any property or business of the Company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the Company or of any other person.

68. (1)    The Directors may, by power of attorney, appoint any person or persons to be the attorney or attorneys of the Company for such purposes, with such powers, authorities and discretions (being powers, authorities and discretions vested in or exercisable by the Directors), for such period and subject to such conditions as they think fit.

(2)    Any such power of attorney may contain such provisions for the protection and convenience of persons dealing with the attorney as the Directors think fit and may also authorise the attorney to delegate all or any of the powers, authorities and discretion’s vested in him.

69.    All cheques, promissory notes, bankers drafts, bills of exchange and other negotiable instruments, and all receipts for money paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, by ONE Director or; in such other manner as the Director may determine.

(2)    article 85 is headed “Common Seal”. It provides:

(1)    The Company need not have a seal.

(2)    If the Company has a seal the Directors must provide for the safe custody of the seal

(3)    The seal of the company may not be affixed to any instrument except by the authority of a resolution of the Directors or a committee of the Directors duly authorised by the Directors.

(4)    Every instrument to which the seal is affixed must be signed by at least 1 Director and countersigned by another Director, a Secretary or another person appointed by the Directors to countersign that document or a class of documents in which that document is included, but the same person is unable to sign in the dual capacities of Director and Secretary.

(5)    If one (1) person is the only Director of the Company and is also the only secretary the seal may be affixed in the presence of that person only. The person must;

(a)    witness the use of the seal; and

(b)    state next to the signature that the person witnesses the sealing in the capacity of sole Director and sole Secretary of the Company.

(6)    The company may execute instruments without a seal as follows:

(a)    Two (2) Directors may sign; or

(b)    a Director and a company Secretary of the Company, but the same person is unable to sign in the dual capacities of Director and Secretary; or

(c)    if one (1) person is the only Director of the Company and is also the only Secretary, the instrument may be signed by that person only and the person must state next to his or her signature that the person signs in the capacity of sole Director and sole Secretary of the Company.

44    Mr Turco observes that for Ballast Holdings to have signed the Loan Transaction Documents effectively one or more of the following would need to have been done:

(1)    the person signing for Ballast Holdings would have needed to have been validly appointed as an attorney;

(2)    the person signing would have needed to be a single validly appointed director; or

(3)    two validly appointed directors or a single director and company secretary could have signed pursuant to s 127 of the Corporations Act.

Mr Turco notes, as is also evident from a review of the Loan Transaction Documents, that they were not signed by or on behalf of Ballast Holdings by an attorney, a single validly appointed director or by two directors or a director and a secretary of Ballast Holdings.

45    Mr Turco has reviewed Ballast Holdings’ company and business records and has not identified in those records:

(1)    any appointment of Mr Cameron as its attorney;

(2)    any consent by Ballast Holdings to secure a commercial loan with Leonite Capital; or

(3)    any delegations of authority to Mr Cameron to act on behalf of Ballast Holdings, including to sign any documents for it.

46    Prior to receiving the Ballast Holdings Demand: Mr Turco was unaware that Genesis had sought to secure a loan by the granting of a security over Ballast Holdings; and Ballast Holdings never received any ordinary demand for payment in relation to the Loan Transaction Documents from Leonite Capital.

47    Mr Turco’s evidence is that he is unaware of any financial benefit or otherwise said to have been received by Ballast in respect of any proposed transaction with FDCTech notwithstanding the terms of the senior secured promissory note.

48    On 14 December 2022 Ms Alchin, the other director of Ballast Holdings, informed Mr Turco that she had no prior knowledge of any loan documentation purportedly signed by Mr Cameron for Ballast Holdings in favour of Leonite Capital.

Nextgen Financial

49    No constitution for Nextgen was in evidence before me. Rather, Mr Turco described Nextgen Financial as a company subject to the Corporations Act and noted the effect of s 127 of that Act.

50    Mr Turco has reviewed Nextgen Financial’s company and business records and has not identified any consent by Nextgen Financial to secure a commercial loan with Leonite Capital or any delegations of authority to Mr Cameron to act on behalf of Nextgen Financial, including to sign any documentation for it.

51    Prior to receiving the Nextgen Demand Mr Turco: was unaware that Genesis had sought to secure a loan by granting security over Nextgen Financial; and Nextgen Financial never received any ordinary demand for payment in relation to the Loan Transaction Documents from Leonite Capital.

52    Mr Turco’s evidence is that he is unaware of any financial benefit or otherwise said to have been received by Nextgen Financial in respect of any proposed transaction with FDCTech notwithstanding the terms in the senior secured promissory note.

53    On 14 December 2022 Mr Brookes, the other director of Nextgen Financial, informed Mr Turco that he had no prior knowledge of any loan documentation purportedly signed by Mr Cameron for Nextgen Financial in favour of Leonite Capital.

LEGAL PRINCIPLES

54    Sections 459G, 459H and 459J are summarised at [4]-[5] above.

55    Given the conclusion I have reached it is only necessary to set out the principles in relation to the application of s 459H of the Corporations Act, about which there was no dispute between the parties. They were summarised by a Full Court of this Court (Gordon, Griffiths and Farrell JJ) in First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108 at [21] as follows:

(1)    The phrase “a genuine dispute” uses ordinary English words and its meaning in any particular set of circumstances must be a question of fact: Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSCA 176 at [5].

(2)    There must be some evidence to support the factual allegations that go to make up the claim: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18].

(3)    It is insufficient for the facts to be asserted in the supporting affidavit or by annexing a copy of the statement of claim: Endeavour Film Management Pty Ltd v Fox Studios Australia Pty Ltd [2003] NSWSC 831 at [13].

(4)    The relevant evidence does not need to be admissible at a final hearing on the merits of the case (Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 at 460; 21 ACSR 581 at 588) but the evidence needs to be sufficient to satisfy the court that the claim has a proper factual basis: John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250 at 253.

(5)    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. At this stage, the court is not called on to determine the merits of or to resolve the dispute: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787.

(6)    The threshold is not high or demanding: Kirrak Pty Ltd v Compass Scaffolding & Plant Hire Pty Ltd [2007] NSWSC 1002 at [3]; Roadships Logistics Ltd v Tree (as trustee for the Tree Superannuation Fund) (2007) 64 ACSR 671; [2007] NSWSC 1084 at [24]. 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 and, in some cases, it has been said that there is a requirement of good faith: see Abadeen at [33].

(7)    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: see Product People (International) Pty Ltd v Box Seat Company Pty Ltd (in liq) [2013] FCA 277 at [25].

CONSIDERATION

56    As set out above, Ballast Holdings and Nextgen Financial submit that there is a genuine dispute about the existence of the debt the subject of the Ballast Holdings Demand and the Nextgen Demand.

57    In summary, Ballast Holdings and Nextgen Financial contend that: they each received statutory demands from Leonite Capital relating to the same alleged debt which neither through their appointed directors authorised to be incurred; the available evidence suggests that persons purportedly representing their parent company, Genesis, sought to finance a corporate acquisition unrelated to either of them; and neither Ballast Holdings nor Nextgen Financial received any corporate benefit from the alleged loan giving rise to the debt the subject of the demands.

58    Leonite Capital accepts that, for the purposes of the applications to set aside the Ballast Holdings Demand and the Nextgen Demand: the bar to be met by Ballast Holdings and Nextgen Financial in establishing a genuine dispute over a debt is not high; and nor is the quality of the evidence to be adduced required necessarily to be evidence which would be receivable at trial. However, Leonite Capital also notes that a mere assertion that the existence of a debt is in dispute is not enough. Rather, evidence of facts establishing a genuine dispute is required.

59    Leonite Capital submits that the highest that each of Ballast Holdings’ and Nextgen Financial’s respective cases get on Mr Turco’s evidence is, leaving aside his submissions in relation to the documents supplied by Leonite Capital, that he was unaware of the existence of a transaction which occurred before his appointment as a director of either company.

60    Leonite Capital contends that, bearing in mind that it can have little or no knowledge of the internal affairs of Genesis and its subsidiaries, there is a clear inference to be drawn that evidence might have been adduced by Ballast Holdings and Nextgen Financial from available witnesses who could assist the Court, but who would not have assisted them on these applications. It also contends that the Court should conclude that the evidence of Mr Turco suffers from the same shortcomings in that it might be inferred that Mr Turco could have been expected to give further evidence which might have assisted it.

61    Leonite Capital submits that, in short, the Court should conclude that in the case of each application, Ballast Holdings, on the one hand, and Nextgen Financial, on the other, has failed to establish a genuine dispute, or indeed any dispute, as to the existence of the debt the subject of the demands. They contend that what has been established on the evidence is a lack of knowledge on the part of the directors of subsidiary companies.

62    The debt the subject of the Ballast Holdings Demand and the Nextgen Demand was apparently created by the Loan Transaction Documents and, in particular, the senior secured promissory note dated 4 February 2021 for the sum of US $202,500, issued at a discount of US $67,500 and which matured 40 days after its issue date. The loan the subject of the senior secured promissory note has not been paid and it continues to accrue interest.

63    However, based on the evidence before me I am satisfied that there is a genuine dispute about the existence of the debt the subject of the demands. Contrary to Leonite Capital’s submission there is sufficient evidence before me, which rises above mere assertion, to establish that is so.

64    In particular:

(1)    Mr Cameron, who signed the Loan Transaction documents:

(a)    was neither a director of Ballast Holdings nor Nextgen Financial; and

(b)    was not authorised by Ballast Holdings to sign the Loan Transaction Documents on its behalf nor was he appointed its attorney in accordance with its constitution for that purpose;

(2)    the Loan Transaction Documents were not, on their face, signed by either Ballast Holdings or Nextgen Financial pursuant to s 127 of the Corporations Act;

(3)    the current directors of Ballast Holdings and Nextgen Financial were, until such time as they received the demands, unaware of the loan made to Genesis and the debt the subject of those demands. This includes, in the case of Ballast Holdings, Ms Alchin and, in the case of Nextgen Financial, Mr Brookes. Ms Alchin and Mr Brookes were respectively directors of those companies at the time Mr Cameron signed the Loan Transaction Documents. Given the nature of the applications before me, that Mr Turco gave evidence about Ms Alchin’s and Mr Brookes’ knowledge of the debt the subject of the demands, based on his conversations with them, does not lead me to give that evidence any lesser weight;

(4)    Mr Turco undertook a search of the books and records of each of Ballast Holdings and Nextgen Financial and was unable to identify any record giving Mr Cameron any delegation of authority or power of attorney to sign the Loan Transaction Documents on their behalf; and

(5)    it is not apparent, given the stated purpose of the loan and having regard to their businesses, that either Ballast Holdings or Nextgen Financial received any corporate benefit from it.

65    These facts raise the question of Mr Cameron’s authority to sign the Loan Transaction Documents and, it follows, the question of whether those documents are binding on Ballast Holdings and Nextgen Financial. If, as those companies allege, they are not then the debt claimed in the Ballast Holdings Demand and Nextgen Demand is not due and payable.

66    As Ballast Holdings and Nextgen Financial submit, there is no evidence before me from which I could infer that Mr Cameron was given ostensible authority to act for Ballast Holdings and/or Nextgen Financial in relation to the Loan Transaction Documents. There is no evidence that those companies held out Mr Cameron as having any such authority. Certainly no such inference could be drawn from the material reviewed by Mr Geller as part of considering the loan to Genesis.

67    Nor can it be inferred that a chief executive officer of a holding company has the apparent authority to bind its subsidiaries to a contract. There was no evidence that the directors of Ballast Holdings or Nextgen Financial, either as a matter of practice or by agreement, permitted Mr Cameron, as chief executive officer of Genesis, to conduct their respective businesses or to enter into agreements on their behalf.

68    Whether Mr Cameron had any such authority is a question of fact that is clearly in contest and which is to be resolved at a hearing in a claim for recovery of the debt and not on these applications.

CONCLUSION

69    For those reasons the applications should be allowed. I will make orders setting aside the Ballast Holdings Demand and the Nextgen Demand. Costs should follow the event.

70    In the event they were successful, Ballast Holdings and Nextgen Financial foreshadowed an application for payment of their costs on an indemnity basis and an order securing those costs against Leonite Capital’s solicitors. I will make orders enabling any such application to be made and for the exchange of submissions in relation to it. Unless a party requests an oral hearing, or I form the view that a hearing is necessary, any such application will be dealt with on the papers.

71    I will make orders accordingly.

Associate:

Dated:    20 October 2023