Federal Court of Australia

Naturally Australian Tea Tree Oil Pty Ltd v Jellyman [2024] FCA 625

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to ss 459H of the Corporations Act 2001 (Cth), the statutory demand dated 1 December 2023 served by the defendant on the plaintiff be set aside.

2.    The defendant pay the costs of the plaintiff in relation to the application filed on 20 December 2023, to be taxed if not otherwise agreed.

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

REASONS FOR JUDGMENT

COLLIER ACJ

1    Before the Court is an application filed by the plaintiff on 20 December 2023 pursuant to s 459G(3) of the Corporations Act 2001 (Cth). By that application the plaintiff seeks an order setting aside a statutory demand served on it by the defendant on 1 December 2023 in the amount of $1,503,446.00 (the Demand). The plaintiff also seeks its costs of the application. The plaintiff is represented by lawyers, the defendant is self-represented although I understand that he has practised as a lawyer.

BACKGROUND

2    The plaintiff is a company which conducts a business of growing tea trees on a plantation it owns, harvesting those trees, and producing tea tree oil for sale. The defendant is a former director and secretary of the plaintiff, as well as former in-house legal counsel and a manager of the plaintiff. I understand that he was appointed a director of the plaintiff on 3 July 2020.

3    Since the removal of the defendant as director and secretary of the plaintiff on or about 18 October 2023 the sole director and secretary of the plaintiff has been Ms Joanne Sawyer O’Leary. I understand that at all material times Ms O’Leary was a director of the company.

4    The amount of $1,503,446.00 claimed by the defendant (alleged debt) pursuant to the Demand comprises:

(1)    Wages and termination payments allegedly owed to the defendant in the amount of $51,747.00; and

(2)    Payments allegedly owed to the defendant in the amount of $1,451,688.00 referable to paying out his employment contract.

5    The total amount the subject of the Demand arose under an alleged Employment Agreement (Employment Agreement) between the plaintiff and the defendant which was apparently executed by the plaintiff and defendant on 9 March 2022.

6    In the Employment Agreement the company is referred to as “NATTO”. Relevant terms include:

1. AGREEMENT

It is agreed between the parties NATTO will engage the services of RHJ as their Director and Legal Counsel. RHJ is to primarily perform the duties of NATTO's in house Legal Counsel:

a.    Providing advice to NATTO's Board of Directors and Officers as required;

b.     Assisting NATTO to raise funds from appropriate sources;

c.     Preparing applications to Government Agencies in respect of the interests of NATTO, in particular in respect of any grants that may be available to NATTO; and

d.     Assisting Mrs Joanne Sawyer O'Leary in managing NATTO's plantations and business generally with RHJ being responsible for the day to day running of the plantation and the business's office.

e.     This agreement covers the period 1 January 2022 to 31 December 2032

2. REMUNERATION

RHJ is to be remunerated at the following rate:

$80,000.00 (Eighty Thousand ) Australian Dollars per year with annual increases of 10% per annum

…

6. TERMINATION OF THIS AGREEMENT

Should this Agreement be terminated for any reason RHJ shall be paid in full all monies he would have received under this Agreement had the termination not occurred.

Should at the time of termination of this Agreement RHJ holds any ordinary shares in NATTO such shares are to be brought back by NATTO at a price per share calculated as a minimum of fifteen (15) times the earnings of NATTO in the previous 12 months to the date of termination.

Monies owing are to be paid within 30 days of the Termination becoming effective.

(errors in original)

7    The circumstances in which the Employment Agreement was executed are, however, strongly contested.

8    Materially, the plaintiff relies on evidence of Ms O’Leary. Relevantly Ms O’Leary deposed in her affidavits dated 19 December 2023 and 21 February 2024 that:

    The company was commenced by her late husband Mr Terrence O’Leary, in 1998. Mr O’Leary died on 13 July 2020 aged 95 years. For some years before Mr O’Leary’s death the defendant had assisted Mr O’Leary manage and operate the tea tree plantations.

    Ms O’Leary was a disability and aged care support worker by occupation. She had no previous experience in any rural business or the tea tree oil industry.

    Following Mr O’Leary’s death, the defendant assumed the day to day running of the company’s plantations.

    The defendant attended her home at approximately 4.45am on 9 March 2022. Ms O’Leary was awakened by loud banging on her front door and the sound of the defendant calling to her. When Ms O’Leary opened the door the defendant told her that she needed to sign a paper, that it was an employment agreement for him, and that if she didn’t sign he was “out”. Ms O’Leary wanted to read the paper but the defendant told her that he didn’t have time for that.

    The defendant gave Ms O’Leary no option but to sign the document or documents he put in front of her, because she knew nothing about running a tea tree planation and felt she could not do so without the defendant. Ms O’Leary felt that she was being forced by the defendant to sign. Circumstances were exacerbated by flood damage to the plantations in February 2022.

    On many occasions after 9 March 2022 Ms O'Leary verbally requested a copy of the Employment Agreement from the defendant but he never provided her with one.

    Towards the end of 2022 Ms O’Leary began receiving complaints from company staff and business associates concerning the manner in which the defendant conducted the company’s business. As a result of her concerns, Ms O’Leary called a meeting of members of the company on 18 October 2023 and the members present voted to remove the defendant as a director of the company.

    At an unknown date after 14 March 2023, Ms O’Leary first read the Employment Agreement and became concerned about the implications of its contents, particularly clauses 1e, 2 and 6.

    On 27 October 2023, Ms O’Leary instructed NATTO’s lawyers to effect a rescission of the Employment Agreement.

9    The defendant in his affidavit dated 25 January 2024 deposed, in summary:

    The defendant met Mr O’Leary at a time in or about 1991 when the defendant worked for the Australian Securities and Investments Commission. The defendant became interested in tea tree cultivation at this point. The defendant’s relationship with Mr O’Leary continued until 2020. Mr O’Leary endeavoured to sell the plantations in 2020 but was unsuccessful.

    The defendant had conversations with Ms O’Leary concerning monies to which the defendant would be entitled if the company business was sold.

    A Deed of Agreement (the Share Deed) was executed by the defendant and Ms O’Leary on 17 August 2021 confirming Mr Jellyman’s entitlements.

    The company was in a dire financial situation in September 2023. Ms O’Leary had guaranteed a bank loan to the company and was concerned that she would lose her unit if the company’s business was not sold.

    Contrary to evidence of Ms O’Leary, the defendant did not attend her residence at 5.00am on 9 March 2022 as she claimed. The defendant and Ms O’Leary executed the Employment Agreement on or about 1.00pm on 9 March 2022 at the company’s registered office at Morningside in Brisbane, which Ms O’Leary was visiting to pay suppliers and employee’s wages. Ms O’Leary had driven there from her residence at the Gold Coast. The defendant suggested that Ms O’Leary needed to read the Employment Agreement and suggested that she obtain independent legal advice, however she responded that there was no need for her to get independent legal advice because the defendant was the legal counsel and he could tell her what the Employment Agreement involved. The defendant suggested that Ms O’Leary should read the Employment Agreement, and they later met at the office where he answered Ms O’Leary’s questions concerning it. Ms O’Leary stated that she did not want her late husband’s children to inherit any property. Ms O’Leary signed the Employment Agreement of her own free will.

    The defendant gave Ms O’Leary a copy of the Employment Agreement at her apartment at the Gold Coast at approximately 8.30am on 16 March 2023.

    The defendant was unlawfully removed as a director of the plaintiff because he was never provided with notice of the company meeting at which he was purportedly removed.

SUBMISSIONS OF THE PARTIES

10    The plaintiff made both written and oral submissions. It submitted in summary that:

    There was a genuine dispute between the parties as to whether the Employment Agreement was rescinded or otherwise voidable.

    In any event, there was a clear and genuine dispute as to the circumstances under which the Employment Agreement was signed by Ms O’Leary.

    There was a breach of fiduciary duty on the part of the defendant as a solicitor who had a fiduciary duty to his client (the company), and as a director of the company. The fact of benefit being derived by the defendant under the Employment Agreement is sufficient to give rise to a conflict of interest. The breach arose because there was no fully informed consent on the part of Ms O’Leary, and Ms O’Leary did not have the benefit of obtaining independent and skilled advice from a third party.

    There was unconscionable conduct on the part of the defendant within the meaning of s 20 of the Australian Consumer Law. That conduct included the defendant pressuring Ms O’Leary to sign the Employment Agreement without reading it, the defendant’s position as the company’s solicitor and director, and the extraordinary benefits which were to accrue to the defendant in the event of termination of the Employment Agreement.

    There was duress on Ms O’Leary from the defendant. Despite the fact that the defendant could lawfully withdraw his services, the defendant’s threat to do so in the circumstances amounted to lawful but actionable duress. Those circumstances included:

•    The defendant was aware of the significant financial and emotional pressure on Ms O’Leary at that time;

•    Relevant company property was experiencing flooding;

•    The defendant insisted on the Employment Agreement being signed after bursting through Ms O’Leary’s door at 5.00am; and

•    The defendant was a co-director and the in-house legal counsel of the company.

11    The defendant also made written and oral submissions. In summary he deposed:

    The statutory demand was calculated referable to his base salary (which was in itself an insignificant amount in the context of his experience as a lawyer) and an orthodox calculation of share values.

    Shares in the company were issued on 15 March 2022 in accordance with the Share Deed. Ms O’Leary was paying herself a salary of $125,000.00, rent of $850.00 per week, and telephone, car and other personal expenses. Ms O’Leary had previously offered the defendant equivalent conditions, which he had declined.

    There was no undue influence or duress on Ms O’Leary. Ms O’Leary was not, to the defendant’s knowledge, suffering from any special disadvantage affecting her decision-making capacity. Further, at material times Ms O’Leary was a Justice of the Peace who acted with free will and under no time pressure.

    There was no pressure on Mrs O’Leary perpetrated by the defendant which amounted to duress.

    The defendant did not visit Ms O’Leary on 9 March 2022 as she claimed, rather she attended the company office and they met at 1:00pm that day.

    The meeting to remove the defendant as a director of the plaintiff was unlawful.

    The plaintiff had breached the Corporations Act because of the manner in which it had been operated and had traded whilst insolvent.

    There was no genuine dispute between the parties, because the defendant’s remuneration package was structured so that there would be minimal stress on the plaintiff, however he would nonetheless receive appropriate recompense for his work for the company in the event that his employment with the plaintiff ceased.

CONSIDERATION

12    Section 459E(1) of the Corporations Act empowers a person to serve on a company a demand relating to:

(a)    a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or

(b)    2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

13    The debt claimed by the defendant is not a judgment debt. Section 459E(3) of the Corporations Act provides:

(3) Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that:

(a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and

(b) complies with the rules of court.

14    In this case the defendant’s demand for payment was accompanied by an affidavit within the scope of s 459E(3).

15    That the defendant served on the plaintiff a statutory demand within the meaning of s 459E of the Corporations Act is not in dispute. Section 459G permits a company served with a statutory demand to apply to the Court for an order to set it aside. Section 459H relevantly provides:

Determination of application where there is a dispute or offsetting claim

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

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

(b)     that the company has an offsetting claim.

16    As the learned author of Assaf’s Winding Up in Insolvency (3rd ed) explained:

Section 459H allows a court to set aside a statutory demand in three circumstances:

1.    where it is ‘satisfied’ that there is a genuine dispute between the company served with the demand and the creditor about the existence of a debt to which the demand relates;

2.    where it is satisfied that there is a genuine dispute between the company and the creditor about the amount of the debt such that the substantiated amount of the demand is less than the statutory minimum; or

3.    where it is satisfied that the company has an ‘offsetting claim’ in addition to, or as an alternative to, being satisfied as to the existence of a genuine dispute.

(Farid Assaf, Assaf’s Winding Up in Insolvency (3rd ed) LexisNexis Australia 2021 chapter 6.5)

17    The Full Court of the Federal Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464 held that a “genuine dispute” must be bona fide and truly exist in fact, and the grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory or misconceived. (See also In the matter of Gorji Property Investment Pty Limited [2018] NSWSC 1671 at [14]).

18    More recently in Thomson v Australia and New Zealand Banking Group Ltd [2024] QCA 703 the Court of Appeal of Queensland set out legal principles referable to s 459H. In particular their Honours said:

Legal principles — setting aside a statutory demand

[37]    In SGR Pastoral Pty Ltd v Christensen, Bowskill J referred to the test applicable on an application under s 459 of the Corporations Act:

[51]     The relevant principles concerning whether there is a genuine dispute under s 459H were summarised by McKerracher J in Citation Resources Ltd v IBT Holdings Pty Ltd (2016) 116 ACSR 274 at [17]. The threshold is not high or demanding; a genuine dispute means there must be a plausible contention requiring investigation; and it is only if the applicant’s contentions are so devoid of substance that no further investigation is warranted that the applicant will fail. The court is not called on to determine the merits of, or to resolve, the dispute.

[38]     There is authority to the effect that an application to set aside a statutory demand is not to be conducted as a mini trial but to be dealt with in a summary way. In Superior IP International Pty Ltd v Ahearn Fox Patent and Trademark Attorneys this was said by Reeves J:

[20]    There have been numerous expositions as to what amounts to a ‘genuine dispute’ for the purposes of s 459H of the Act, and the predecessors to that section. One of the more comprehensive and useful (with respect) s that of McLelland CJ in Equity in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 (Eyota) at 787–8 as follows:

It is, however, necessary to consider the meaning of the expression ‘genuine dispute’ where it occurs in s 450H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the ‘serious question to be tried’ criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must 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, it may be’ not having ‘sufficient prima facie plausibility to merit further investigation as to [its] truth’ … or ‘a patently feeble legal argument or an assertion of facts unsupported by evidence’ …

But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a despite. In Mibor Investments (at 366–7) Hayne J said, after referring to the state of the law prior to the enactment of Div 3 of Pt 5.4 of the Corporations Law, and to the terms of Div 3:

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 to weigh 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.

In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605 Thomas J said:

There is little doubt that Div 3 … 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).

[39]     In Australian Communication Exchange Ltd v Pilot Partners P/L, Jackson J said:

[18]    Nevertheless, the requirement that any dispute must be genuine entails that the court must examine the facts alleged to see whether the threshold of a genuine dispute is crossed. Beyond that the court does not go. First, that is what follows from the ordinary meaning of the words ‘genuine dispute… about the existence or amount’ of a debt in s 459H(1)(a) of the CA. Second, s 459H(3) provides that, on the hearing of an application to set aside a statutory demand brought under s 459G, if the ‘substantiated amount’ is less than the statutory minimum the court ‘must, by order, set aside the demand’. The calculation of the substantiated amount requires that any ‘offsetting total’ be subtracted from the ‘admitted total’, but there will not be any ‘admitted total’ unless there is first an ‘admitted amount’ and there is no ‘admitted amount’ if the court ‘is satisfied that there is a genuine dispute between the company and the [alleged creditor] about the existence of the debt’.

[19]    An applicant bears the onus of establishing the existence of a genuine dispute on the balance of probabilities. Courts have sought to articulate the nature of the inquiry involved. A recent example in the Court of Appeal of Victoria in Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd is as follows:

In determining an application under s 459G, the Court’s function is to identify whether a genuine dispute or offsetting claim exists, not to determine any such dispute or claim. This means that the applicant under s 459G is required only to establish a ‘plausible contention requiring investigation’ of the existence of a genuine dispute or claim. The application will fail only if the contended dispute or claim is ‘so devoid of substance that no further investigation is warranted’. The resolution of the application should generally not involve the deciding of disputed questions of fact, but might require determination of short points of law.

[20]    Courts have also sought to articulate what is required by way of evidence to satisfy the court that there is a genuine dispute. A recent example in the Court of Appeal of NSW, Ligon 158 Pty Ltd v Huber, says ‘about the forensic approach to be adopted in s 459G proceedings:

(1)    While there must be evidence showing a serious question to be tried or an issue deserving of a hearing that evidence cannot and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable.

(2)    The short time allowed by s 459G(2) for the preparation of the affidavit supporting the claim for an order setting aside the demand militates against the presentation of the fullest and best evidence in some cases.

(3)    In determining whether there is evidence of a genuine dispute regarding the debt, the court is generally not concerned to engage in an enquiry as to the credit of the deponent of the supporting affidavit. At the same time, it is not required to accept uncritically every statement in the affidavit that is inconsistent with undisputed contemporary documents, is inherently improbable, does not have sufficient prima facie plausibility to merit further investigation or is an assertion of facts unsupported by evidence.

(4)    Inconsistent contemporaneous documents are not necessarily sufficient to defeat the company’s challenge even though they might pose difficulties for the ultimate proof of the case that it would advance if the dispute were litigated’.

[40]    By reference to established authority, the principles applicable to whether there is a genuine dispute for the purpose of s 459H of the Act have been summarised as follows:

(a)    for a dispute to be “genuine” it must be “bona fide and truly exist in fact”;

(b)    “the grounds for alleging the existence of a dispute … [must be] real and not spurious, hypothetical, illusory or misconceived”;

(c)    the dispute must have a “sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile . … Something ‘between mere assertion and the proof that would be necessary in a court of law’ may suffice”;

(d)    a genuine dispute may involve a “plausible contention requiring investigation” and raise the same sort of considerations as the “serious question to be tried” test that applies in the case of interlocutory injunctions;

(e)    the Court should not uncritically accept statements about an alleged genuine dispute which are “equivocal, lacking in precision, inconsistent with undisputed contemporary documents … or inherently improbable …”;

(f)    if the dispute appears to be something “merely created or constructed in response to the pressure represented by the service of the statutory demand”, then it is not advanced in good faith and will not be regarded as genuine; and

(g)    whilst the underlying nature of the dispute about the existence of a debt “must be exposed”, the Court will not deal with the merits and nothing of substance will be decided.

[41] As was summarised by Reeves J in Superior IP:

[22]    … it can be seen from these decisions that, in determining whether or not there is a genuine dispute about the debt claimed in a statutory demand, the Court does not conduct a mini trial, or extended inquiry, in relation to the claims and counter-claims being made by the parties, nor does it, except in an extreme case, determine questions of credit. As well, the Court does not determine the merits of the dispute. Instead what the Court is required to do is to look to the material before it to ascertain whether there is a bona fide dispute that truly exists in fact and the grounds for alleging it are not ‘spurious, hypothetical, illusory or misconceived’.

(footnotes omitted)

19    Turning now to the case before me the plaintiff has argued that there is a genuine dispute as to existence of the debt claimed by the defendant, because to the extent that the plaintiff conceded that Ms O’Leary executed the Employment Agreement, that execution was procured by conduct on the part of the defendant which constituted a breach of his fiduciary duty, or which constituted duress or unconscionability.

20    In his affidavits the defendant gave extensive evidence concerning the affairs of the plaintiff company, his history with the plaintiff, circumstances referable to the business address of the plaintiff, other debts allegedly owed by the plaintiff to unrelated persons, and his opinions concerning the desirability of the plaintiff being placed into liquidation. Much of this evidence is either not relevant to the present proceedings, or goes to the substantive merits of the dispute between the parties which is not presently before the Court for the purposes of an application made pursuant to s 459G of the Corporations Act.

21    The plaintiff has alleged that a genuine dispute exists between the parties as to the existence of the debt claimed by the defendant, referable to principles of unconscionability, economic duress and breach of fiduciary duty. There are plainly cases where the Court has determined that there was a genuine dispute as to the existence of a debt on the basis of such principles.

Unconscionability and genuine dispute

22    An example of a case in which the Court accepted that allegations of unconscionability gave rise to a genuine dispute was In the matter of Gorji Property. The statutory demand in that case was for an amount of $300,000.00, being the amount of a debt described as a “Mortgage loan” set out in a loan agreement between the company and two other parties. The company in that case submitted, inter alia, that if it were found to be bound by the relevant mortgage, any attempt to enforce the mortgage could be answered by a defence that the mortgage should not be enforced by reason of unconscionable conduct under the Australian Consumer Law. Justice Black pointed out that the question before the Court at that time was whether there was a genuine dispute in respect of the debt claimed, as opposed to resolving the merits of the dispute. As his Honour explained:

22.    It seems to me that a seriously arguable case is established that the terms of the Mortgage could be found to be unconscionable in the relevant circumstances, where the Mortgage variously provides for interest of 8 per cent, 10 per cent, or a fixed amount of $150,000 over a six month period, and there is evidence which might be accepted by a Court that Mr Fathabadi had not read the agreement, and was not provided with a copy of it when it was signed, and did not take advice about it. It is not to the point, where the question of statutory unconscionability arises, to say that Mr Fathabadi personally, or Gorji if he had authority to act on its behalf, are bound by what they signed, or could have read the Mortgage or ensured that they obtained a copy of it, if they acted reasonably or diligently. Unconscionability may be established where a lender takes advantage of a borrower who is less than diligent or vulnerable because of its lack of care.

Duress and genuine dispute

23    Second, in Re Australian Builders Group Pty Ltd [2022] VSC 254 a company sought an order setting aside a statutory demand claiming $73,281.29 on the basis that the relevant circumstances involved economic duress exerted on it by the defendant, which served the demand. The claimed monies concerned rental arrears owing by the company under a repayment deed. The facts disclosed that, at a time when the company owed the defendant approximately eight months’ rent, the company commenced making regular payments of arrears in terms of a repayment deed, which provided that in the event that the company did not remedy a breach of the repayment deed within seven days of receiving a written notice of breach, the total amount owing pursuant to the repayment deed would become immediately due and payable to the defendant as a debt. Associate Judge Hetyey found at [54] that the company had established the existence of a genuine dispute about the enforceability of the repayment deed, on the basis that it was allegedly entered into by the company under economic duress. His Honour observed:

55    In my view, the evidence demonstrates at least a credible basis for the contention that Mind illegitimately applied economic and/or psychological pressure on ABG to agree to the terms of the repayment deed, including the process for ascertaining the amount of the arrears as contemplated by cl 2.2. The relevant pressure is found in Mr Shergold’s statement to the effect of ‘we don’t want the [landlord’s] agent to know you owe us money as this will affect your application.’ Mr Shergold does not deny making the statement. The plaintiff submits the statement constituted a threat by the defendant to notify the landlord’s agent about the plaintiff’s history of overdue rental payments which caused it to enter into the repayment deed on uncommercial terms (particularly cl 2.2 in relation to the determination of the arrears). Whilst counsel for ABG accepted that Mr Shergold’s statement could only represent an implied threat (as opposed to a direct threat), there is authority that a veiled threat may still constitute illegitimate pressure for the purpose of establishing duress…

…

58     The evidence identifies the alleged illegitimate pressure (being the purported threat to disclose ABG’s adverse rental history to the landlord) which was apparently used to compel ABG to sign the repayment deed. There is also a suggestion that ABG had no reasonable or practical alternative to entering into the transaction. Finally, there is an apparent causal connection between the alleged pressure and ABG’s entry into the repayment deed in circumstances where it apparently had ‘no choice and no reasonable alternative.’ Even if the pressure was not the sole reason for ABG executing the repayment deed, it is enough if it was one of the reasons for doing so.

(footnotes omitted)

24    His Honour concluded:

62    None of this is to say that ABG would necessarily succeed at trial in setting aside the repayment deed because of economic duress. Whilst the evidence is by no means extensive or overwhelming, it occupies the territory of something ‘between mere assertion and proof that would be necessary in a court of law.’…The plaintiff has cleared the requisite evidentiary hurdle of establishing a genuine dispute which is bona fide and which truly exists in fact. But it is not the Court’s role to determine the enforceability of the repayment deed in this summary proceeding…

(footnotes omitted)

Breach of fiduciary duties and genuine dispute

25    A case where the Court considered an application to set aside a statutory demand served on a plaintiff company on the basis that the relevant transaction had been entered in breach of fiduciary duties was Anobis Pty Ltd v Magoffin [2017] QSC 182. In that case a husband and wife incorporated the plaintiff company as a trustee of a discretionary trust to purchase a commercial property owned by two solicitors who had previously acted for the couple. The directors of the plaintiff were the husband, the wife, and a real estate agent (Mr Smith) appointed by the vendor/solicitors for the purpose of selling the relevant property. Allegedly at the suggestion of Mr Smith, one of the vendor/solicitors prepared a general power of attorney giving Mr Smith authority to act on behalf of the plaintiff company. A deed of rescission in respect of the contract of purchase was subsequently executed by the plaintiff company and the vendor/solicitors, which provided (materially) that the plaintiff company had paid the vendors the sum of $1,725,900.22 towards the purchase price on the basis that the amount was non-refundable, that the plaintiff company agreed to forfeit that amount to the vendor/solicitors, and that the plaintiff company remained indebted to the vendor/solicitors for the payment of default interest in the amount of $500,000.00. In support of an application by the plaintiff company to set aside a statutory demand served on it by the vendor/solicitors referable to the payment of the amount of $500,000.00, the husband and wife gave evidence that they were never informed that the deed of rescission contained a clause which obligated the plaintiff company (and further guaranteed them) to pay the sum of $500,000.00 by way of “default interest” to the vendor/solicitors. Rather, the husband and wife gave evidence that they were only presented with the execution page of the deed of rescission to sign.

26    Justice Henry noted at [33] that while Mr Smith was a director of the plaintiff company, he was also an agent of the vendor/solicitors, who knew that Mr Smith prima facie was in a position of conflict of interest in acting to bind the plaintiff company to the deed of rescission. His Honour continued:

[34]    Confronting that prospect, the respondent in effect submits that even if Mr Smith did mislead his fellow directors about the true nature of the transaction being entered into that would not have been in the context of his role as the vendors’ agent but in his role as the applicant’s director and thus it was not information it was in his interests to disclose, or which ought be imputed, to the vendors. The applicant submits equity would not enforce a contract entered into in breach of trust, choosing to characterise the conflict of interest occasioning the breach as a conflict between Mr Smith’s duties to his fellow directors and his personal interest in furthering his personal gain by securing a commission (although how his commission would be enhanced by a reduced purchase price is unclear). The applicant did not take up the argument that there was also a conflict as between Mr Smith’s obligation to act in furtherance of the vendors’ interests and his obligation to act in furtherance of the applicant’s interest.

[35]    It is unnecessary to analyse these points in further depth, bearing in mind the nature of the present task is not to determine prospects or merits but merely to determine whether the dispute is genuine. The very fact of Mr Smith’s obvious conflict of interest certainly suggests there is likely a genuine foundation for dispute about the enforceability of the deed…

(footnotes omitted, emphasis added)

The present case

27    Turning now to the present case, as Barrett J explained in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2)[2003] NSWSC 896:

18.    …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.

(emphasis added)

28    In the present case it is common ground that the defendant was a lawyer of long standing as well as a director and in-house counsel of the plaintiff. The evidence of the defendant was also that he had had engagement in the business of tea tree oil for several decades. The other director of the plaintiff, Ms O’Leary, gave evidence that she was not experienced in respect of conducting the business of the plaintiff, that the business had been commenced by her late husband, that she had no legal qualifications or expertise, and that she relied on advice from the defendant in respect of legal matters concerning the plaintiff. I note that even if Ms O’Leary was a Justice of the Peace, as contended by the defendant, that qualification is not indicative of legal proficiency equivalent to that of an experienced lawyer.

29    At the time of the execution of the Employment Agreement the defendant was a director of the plaintiff, and in a fiduciary relationship with the plaintiff. The prospect that the defendant has acted unconscionably or has placed himself into a conflict of interest, is objectively supported by the very favourable terms (to him) of the Employment Agreement, including the significant amounts potentially payable by the plaintiff to him. In particular, I note that the defendant’s entitlements escalated rapidly in a short period of time in a formula prescribed by the Employment Agreement, and that irrespective of the reason for termination of his employment (including, hypothetically, any misconduct on his part) the defendant was to be paid out a large sum of money representing his alleged entitlements for the balance of the employment term.

30    The defendant’s submission that the base salary of $80,000.00 nominated in the Employment Agreement was not commensurate with his lengthy experience as a lawyer and was simply agreed by him to ensure that the plaintiff could afford his services at that time, was not a satisfactory response to the obligation of the defendant to conduct himself as a fiduciary of the plaintiff company, in particular where his actions potentially placed him into a position of conflict of interest. As is well-settled, it is necessary that a fiduciary disclose to the beneficiary all information in his or her possession in relation to a proposed transaction which is relevant to the beneficiary's consideration of whether or not to consent to it, and at least the material facts: see Boardman v Phipps [1967] 2 AC 46 at 93, 98, 112; Re Pauling's Settlement Trusts [1962] 1 WLR 86 at 108; Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 455; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89; Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 191 FCR 1 at [110]; and the detailed discussion of Black J in Barescape Pty Limited as trustee for The V's Family Trust & Anor v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984 at [152] et seq.

31    Prima facie, there is no evidence before me of ratification by the plaintiff of the terms of the Employment Agreement, which so glaringly favoured the defendant.

32    There is clear disagreement between the parties as to whether the conduct of the defendant constituted a conflict of interest to the plaintiff amounting to a breach of fiduciary duty. There is also evidence to suggest a significant power imbalance between the defendant and Ms O’Leary (as the only other director of the plaintiff) at the time of execution of the Employment Agreement, such as to raise the question whether the defendant acted unconscionably towards the plaintiff.

33    Ms O’Leary and the defendant have also given very different accounts of the factual circumstances attending the actual execution of the Employment Agreement. The evidence of Ms O’Leary that she felt she had no choice but to execute the Employment Agreement, and the reasons for that belief, arguably form the basis of a claim of actionable duress on the part of the plaintiff. The evidence is contested as to whether Ms O’Leary was given the opportunity to seek independent legal advice in respect of the terms of the Employment Agreement before executing it.

34    That the defendant challenged Ms O’Leary’s evidence referable to the execution of the Employment Agreement is further supportive of the existence of a genuine dispute between the parties referable to the existence of the alleged debt.

CONCLUSION

35    I am satisfied on the balance of probabilities that the plaintiff has discharged the onus of establishing that there is a dispute as to the existence of the alleged debt, within the ordinary meaning of that term and for the purposes of s 459H of the Corporations Act. I am satisfied that that dispute is genuine for the purposes of s 459H of the Corporations Act, noting that the dispute raised by the plaintiff is real, plausible and supported by evidence rather than mere assertion.

36    It is premature for me at this stage to engage in any form of balancing exercise between the strengths of competing contentions of the parties, or to decide the merits of the dispute between the parties.

37    The appropriate order is that the statutory demand served on the plaintiff by the defendant on 1 December 2023 for the amount of $1,503,446.00 be set aside. It follows that the extension of time granted by Order 1 of 8 May 2024 ceases to have any effect.

38    Section 459N of the Corporations Act provides that where, on an application under s 459G, the Court sets aside a statutory demand, it may order the person who served the demand to pay the company’s costs in relation to the application. In the circumstances, I consider that costs ought follow the event and that the defendant should be ordered to pay the plaintiff’s costs.

Associate:

Dated:    13 June 2024