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Re O'Connell Street Premises Pty Ltd [2010] VSC 669 (15 September 2010)

Last Updated: 9 September 2011

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

CORPORATIONS LIST

LIST E

S CI 2010 02590

IN THE MATTER OF O'CONNELL STREET PREMISES PTY LTD (ACN 106 705 533)

BETWEEN:

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CORPORATIONS – Application to set aside statutory demand under section 459G of the Corporations Act 2001 (Cth) on basis of alleged genuine dispute as to whether funds advanced to defendant were in the nature of loan advances or were for payment of shares in the capital of the defendant – demand set aside.

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HIS HONOUR:

1 On 22 April 2010, the defendant (Mr Rogan) served a statutory demand dated 21 April 2010 and an affidavit sworn by him on the same day on the plaintiff (O’Connell Street).

2 By an originating process filed on 13 May 2010, O’Connell Street makes application to set aside the demand.

3 The demand by Mr Rogan is made in his capacity as trustee of the Peter G. Rogan Testamentary Trust and claims the amount of $108,220. The debt is described in the schedule to the demand as a loan advance from Mr Rogan in his capacity as trustee of the Peter G. Rogan Testamentary Trust to O’Connell Street, made in or about January 2004.

4 In support of its application, O’Connell Street relies on the affidavits of Mark Eddy sworn 13 May 2010, Dino Rotar sworn 1 July 2010 and Robert Cincotta sworn 2 July 2010. The two latter affidavits were filed in response to the affidavit of Mr Rogan sworn 1 June 2010, which was filed in opposition to the application.

5 O’Connell Street’s affidavit material concedes that it received the sum of $108,220 claimed to have been advanced by Mr Rogan but it disputes that the funds advanced had the character of a loan.

6 O’Connell Street contends that the funds were paid in partial fulfilment of Mr Rogan’s obligation to subscribe for 200,000 shares in O’Connell Street. As such, it states that the sum demanded is in the nature of a capital investment rather than a loan due to Mr Rogan and that Mr Rogan is indebted to O’Connell Street for the balance payable for the subscription of the shares, $91,780. It says that the funds were received in instalments, the first of $10,000 on 22 January 2004 from the Rogan Family Trust, the second, of $62,000 also on 22 January 2004, from a company Rushton Investments Pty Ltd and on and from December 2004 a number of advances totalling $36,703, again from Rushton Investments Pty Ltd.

7 O’Connell Street was incorporated in October 2003 for the purpose of purchasing a property at O’Connell Street in Sydney, from which address Rushton Valuers Pty Ltd, a company now in liquidation, could conduct its property valuation business.

8 In his affidavit, Mr Eddy describes the circumstances whereby an agreement was made in June 2004 between Mr Rogan, Mr Ross Johnston, Mr Dino Rotar and Mr Eddy (jointly with Mr Ian Henderson) whereby five hundred and twenty five thousand shares were to be issued in O’Connell Street at a price of $1 per share. Mr Rogan or his nominated entity was to take up 200,000 shares.

9 Mr Rotar, Mr Henderson, Mr Johnston and Mr Eddy performed their respective obligations under the agreement and paid for their shares. However, Mr Eddy states Mr Rogan has not paid the $200,000 agreed to and the sum of $108,220 which was paid was characterised in the plaintiff’s 30 June 2008 accounts as having been received from Mr Rogan as part payment for his subscription. The amount was entered as a noncurrent liability in the 2008 financial records of O’Connell Street under the classification “trade and other payables’. The notes to the 2009 accounts describe the advances as loans but then goes on to state that the sums “represent a part equity commitment of $200,000”. In his affidavit, Mr Eddy states that the advance was a capital contribution that would be converted to shares once the balance of the amount payable was received by O’Connell Street from Mr Rogan.

10 Mr Eddy’s affidavit exhibits documentation issued by O’Connell Street to Mr Rogan in February 2004, which acknowledges that “the Rogan Family Trust has invested the sum of $10,000 in our company for the purpose of acquiring shares”. Similar receipts were issued to the other parties. In a letter of 4 June 2004, the solicitors for O’Connell Street, Norton Gledhill, documented the proposed share allotments. That letter enclosed minutes of a directors’ meeting tabling and approving the applications for shares, share application forms (including one from Mr Rogan for 200,000 shares), unexecuted share certificates (including one for Mr Rogan for 200,000 shares) and an ASIC Form 484 notifying ASIC of a change in O’Connell Street’s details.[1]

11 The balance sheet for O’Connell Street for the period ending 30 June 2008 records the sums received by O’Connell Street as a loan account in favour of the Rogan Family Trust. Mr Minahan, counsel for O’Connell Street, observed that the entry is qualified by a note to the accounts describing the sum as “a part equity payment” in 2004 and 2005 and after 2005 to 2009 as a “part equity commitment of $200,000”.

12 In his affidavit, Mr Rotar supports Mr Eddy’s version of events in regard to the share subscription. He notes that each of the other proposed subscribers have paid the sums required of them and shares have been issued to them. Mr Rotar states that Mr Rogan explained to him and the other subscribers in 2004 and during the intervening period that he was unable to pay the balance until he had resolved proceedings in the Family Court between him and his exwife. He exhibits minutes of a meeting of the directors of O’Connell Street held in December 2006, which stated:

“It was noted that at this time that Mr Rogan has not been issued with the shares or moneys advanced against his commitment to acquire 200,000 shares in the company. Mr Rogan has advised Messrs Eddy and Johnston that he will not have any capacity to complete his share acquisition until a final property settlement takes place with his wife.”

13 Mr Rotar says that a number of strategies were considered for dealing with this situation and it was determined not to issue Mr Rogan with his shares until full payment was received. He states that the contribution was not and was never regarded as a loan, rather always as part-payment for the issue of shares. He says that the description of loan in the books for O’Connell Street was adopted as a consequence of advice received about how best to record the transaction. He states that Mr Rogan said to him at meetings during “this period” that Mr Rogan preferred not to have the shares issued while the Family Court proceedings were still on foot but that he would rather have the contribution characterised as a loan. Mr Rotar does not know if anyone instructed O’Connell Street’s accountant to treat the contribution as a loan but he states that he is sure that the money was part-payment for the issue of shares.

14 Mr Cincotta is an accountant who has prepared the financial statements of O’Connell Street since 2004 until the present time. He asserts that it is his understanding and belief that all moneys paid by Mr Rogan to O’Connell Street were paid as partpayment of a commitment to subscribe to $200,000 worth of shares in O’Connell Street. He states that in 2004 he was instructed by Mr Johnston and Mr Rotar of O’Connell Street that payments made by Mr Rogan to O’Connell Street were for shares in O’Connell Street. Mr Cincotta says that the payments made by Mr Rogan, Mr Johnston, Mr Rotar, Mr Eddy and Mr Henderson to O’Connell Street in 2004 were characterised in the books of O’Connell Street as “loans” as a means to accommodate the receipt of those payments in the accounts pending the issue of shares in O’Connell Street. He states that his instructions were that the payments were not loans. According to Mr Cincotta, the characterisation of the payments made by Mr Rogan to O’Connell Street was changed in 2009 in order to reflect the fact that the payments made by Mr Rogan were not a loan but he does not explain how or why the decision to do this came about at that juncture.

15 Counsel for Mr Rogan, Mr Randall, submitted that Mr Cincotta’s affidavit was inadmissible as being hearsay and assertion unsupported by factual particularisation. While there has been some judicial controversy on the subject, the Court of Appeal of the Victorian Supreme Court in Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corp Ltd[2] indicated that applications to set aside statutory demands are interlocutory in nature and therefore hearsay evidence can be admitted. While this might be so, I agree with Mr Randall’s submission that Mr Cincotta’s affidavit is for the large part merely assertive and unsupported by factual particularisation. Nonetheless, Mr Cincotta was the person who prepared the accounts for O’Connell Street and he does state that he was instructed by Mr Johnston and Mr Rotar in 2004 that the monies were paid on account of the proposed share subscription. While the description of the transaction as a loan is curious, the explanation for this is plausible for the purposes of the test I am applying in this application and the description is qualified by the accompanying note referring to the transaction as a part equity payment or commitment.

16 In addition to the affidavits relied upon by O’Connell Street, production was obtained by O’Connell Street of two affidavits filed in the Family Court of Australia in matrimonial proceedings between Mr Rogan and his former wife. Initially, Mr Randall submitted that I should not have regard to that material but ultimately he did not press that submission. I accept the submission of Mr Minahan that the affidavits are admissible in this application under the provisions of s 121(9) of the Family Law Act 1975 (Cth).

17 In his affidavit sworn 10 February 2006, and filed in the Family Court, Mr Rogan states at paragraph 2.36 :-

”The Rushton Group had been renting the O’Connell Street property in Sydney until 2004. The property was purchased for $1,900,000 by me and other third parties via a O’Connell Investment Pty Limited company. I acquired shares in the said O’Connell Investment Pty Limited. In order to complete the transaction to acquire a 38% interest in O’Connell Investment Pty Limited, I need to provide a further $80,000. My shares are held via the Peter Rogan Testamentary Trust“.

In his affidavit sworn 26 October 2009 and filed in the Family Court he stated at sub-paragraphs 25 (vi) and (vii):-

(vi)“I do not have shares in O’Connell Street Premises Pty Ltd. The Company is indebted to me in the sum of $108,000 being funds advanced to that entity in or about March 2004.

(vii) Whilst payment was made at first instance as a partial payment for the proposed share acquisition in the Company, I have been unable to pay the balance and, I am advised and believe that I have a Chose-in-Action against the Company which the Company is currently unable to pay.”

Thus, in his earlier affidavit Mr Rogan swears that he has entered into transaction of the type (in general terms) that O’Connell Street contends took place but in his later affidavit he characterises his position as being the holder of a cause of action akin to a claim for money had and received. Neither could be characterised as a loan as he now contends.

18 In his affidavit filed in opposition to the application, Mr Rogan points to the characterisation of the transaction in the accounts of O’Connell Street for the years ended 30 June 2005 and up to and including the year ended 30 June 2008, where the transaction is recorded as a current liability to Mr Rogan in his capacity as trustee of the Peter G. Rogan Testamentary Trust. He states that he has not been provided with any explanation as to why this characterisation has been modified in the subsequent accounts of O’Connell Street. He states that he has never agreed to any modifications or changes in this regard but I note that he is not recorded as a director or shareholder of O’Connell Street and there is no reason why he would have been required to have been consulted in that regard.

19 In his affidavit, Mr Rogan states that the sum which is now the subject of the demand was paid to O’Connell Street to “preserve the right of the testamentary trust to take up shares pursuant to the proposed equity structure of O’Connell Street described in paragraph 7 of Mr Eddy’s affidavit.” For my part, I find this statement rather vague and unclear and it is not supported by documentary evidence being generated during the relevant period. It seems to suggest that the monies were paid to secure an option for the shares in the company. It is not consistent with the position he puts in his earlier affidavit filed in the Family Court nor is it consistent with the transaction being in the nature of a loan. Further, he does not confront and address the documentation exhibited to Mr Eddy’s affidavit, which tends to support the position being contended for by O’Connell Street.

20 Mr Rogan states that, subsequent to June 2008, there were negotiations between O’Connell Street and himself about converting the debt into equity in O’Connell Street. He says that in this regard, on 7 July 2009, he attended a meeting of the shareholders of O’Connell Street in Melbourne. At that meeting, he states that he was asked by Mr Rotar to put his request to convert his loan to equity in writing. Approximately one week later, he received correspondence from O’Connell Street. That letter stated:

Prior to the Members meeting scheduled for 4.30 pm on Thursday 9 July 2009 you verbally requested that your 108,000 shares be issued.

I draw your attention to clause 13.6 of the O’Connell Street premises Pty Ltd constitution which is headed ‘Notices in Writing’. It states:

“A reference in this constitution to a notice in writing includes a notice given by fax or electronic means.

I, the undersigned, agree to:

(a) become a member of the company named in the cover of this constitution;

(b) adopt this constitution as the constitution of the company; and

(c) take up and subscribe for the number of fully paid ordinary shares in the company set opposite my name below at a price of $1 per share.”

Could you please formalise your request in accordance with this clause.

Yours sincerely,

O’Connell Street Premises Pty Ltd

21 That letter merely requests Mr Rogan to formalise in writing a request that 108,000 shares be issued to him. It is not evidence of an acknowledgment that the funds he had placed with O’Connell Street were in the nature of a loan. The letter is equally consistent with the position that the $200,000 subscription would not be proceeding because Mr Rogan could not afford to pay the balance but rather sought an allotment of the shares for which he had paid.

22 In his affidavit in reply, Mr Rotar says in the penultimate paragraph that at no time did he discuss with Mr Rogan the possibility of converting the debt of $108,220 into equity “since there never was a debt”.

23 The threshold for establishing a genuine dispute in the context of s 459G of the Corporations Act has been the subject of many statements in previous authorities.[3] I consider that O’Connell Street has established that there is a plausible contention which requires investigation raised by the affidavit material filed in support of its application, more particularly the characterisation of the payments made to O’Connell Street by or at the direction of Mr Rogan. On the one hand, it is characterised in the accounts of O’Connell Street until recently as a loan (but such description is qualified in a note to such accounts as being in respect of “a part equity commitment” by Mr Rogan). On the other hand, the contemporaneous documentation at or about the time of the payment from the solicitors for O’Connell Street, Norton Gledhill, suggests a transaction of the type contended for by O’Connell Street, which was never completed by Mr Rogan. It would appear that the funds paid by Mr Rogan were “parked” as loans in the books of O’Connell Street and suspended there under that description until the transaction was completed. The existence of a genuine dispute is also demonstrated by the affidavits sworn by Mr Rogan in the Family Court proceedings.

24 In my view, O’Connell Street has successfully established that there is a genuine dispute in respect of the debt the subject of Mr Rogan’s demand. As such, I will order that the statutory demand dated 21 April 2010 and served on O’Connell Street by Mr Rogan be set aside and that Mr Rogan is to pay the costs of the proceeding including reserved costs.

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^[1] The ASIC document is not part of Exhibit ME-3 to the affidavit of Mr Eddy’s.

^[2] [2007] VSCA 121; 63 ACSR 300. The subsequent appeal to the High Court of Australia leaves the position somewhat unclear – see  [2008] HCA 9 ; (2008) 65 ACSR 249.

^[3] The case law and relevant principles are collected and stated in the decision of the Court of Appeal in T.R. Administration v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67, particularly at para [71].