In the matter of Access Elevators Australia Pty Ltd

The plaintiff, Access Elevators Australia Pty Ltd (Access Elevators), filed three originating processes on 4 March 2016, in which the primary relief sought are orders under ss 459G, 459H(1) and 459J(1) of the Corporations Act 2001 (Cth) in the first case, and ss 459G and 459J(1) in the second and third cases, that three statutory demands be set aside.

In the first proceedings (No 69888 of 2016), the statutory demand (the First Demand) was dated 15 February 2016, and made by Mr Garry John Kearns. The demand claimed a debt of $43,100, described as follows:

Mr Kearns claimed the debt in his personal capacity as creditor.

Mr Kearns is the defendant named in the originating process.

This is a convenient place to note that in Mr Kearns’ affidavit, in respect of the First Demand, he indicated that the debt claimed of $3,900 had been recalculated, and the amount claimed should have been $1,439.78. He also stated, in relation to the $39,200 debt, that he accepted evidence, given on behalf of Access Elevators, as to a reduction in interest rate that occurred in November 2013 (although he disagreed as to the actual date in November when the change took place). Be that as it may, he accepted that the amount of the second debt claimed in the First Demand should be changed to $40,028, rather than $39,200. This increase was strangely brought about by the evidence served by Access Elevators. The ultimate result is that the amount claimed in the First Demand should be reduced from $43,100 to $41,467.78.

Access Elevators asserts that there is a genuine dispute in relation to the $1,439.78 claim, largely on the basis that no evidence has been found concerning the existence of that debt. It accepts the existence of the $40,028 debt, but asserts that it has an offsetting claim of $20,776. Its position is that the amount claimed in the First Demand should be reduced under s 459H(4) of the Corporations Act.

In the second proceedings (No 69908 of 2016), the statutory demand (the Second Demand) was dated 15 February 2016, and made by Mr Kearns in the capacity of “joint creditor”. The Second Demand states that Access Elevators owed Mr Kearns and Mr Robert Pirona the amount of $313,314.80, being the amount described in the Schedule, as follows:

Mr Kearns and Mr Pirona are named as the defendants in the originating process.

In relation to the debt claimed in the Second Demand, it is agreed between the parties that the amount of $93,314.80 claimed for rent should be reduced to $87,594.80, to allow for a number of rent payments that Mr Kearns did not appreciate had been made before the Second Demand was served.

In the third proceedings (No 69922 of 2016), the statutory demand (the Third Demand) was dated 15 February 2016. It was signed by Mr Kearns in the capacity of “partner”, and the partnership was identified as “Kearns Enterprises”. The Third Demand states that Access Elevators owes Mr Kearns, Mr Pirona, Mr Warren Hanson and Mr Anton Okorn, trading as Kearns Enterprises, the amount of $20,416.67, as described in the Schedule, being:

The four gentlemen named as creditors in the Third Demand are named as defendants in the originating process.

Mr Hanson, Mr Pirona, Mr Kearns and Mr Okorn each hold 4,650 ordinary shares in the capital of Access Elevators. In addition four women, who I infer from the addresses in the ASIC Current Organisation Extract for the company, are the wives or partners of the four ordinary shareholders, each hold one share each of a type described as “Dividend ‘V’”. The evidence in each of the matters establishes in a general way that Access Elevators is one of those companies which has operated as a partnership in corporate form. Each of the shareholders has been, until recently, a director of the company, and each is to a greater or lesser extent a creditor of the company. As appears from the schedules in the three statutory demands, Mr Kearns and Mr Pirona are the principal creditors.

Initially, at the hearing, there was some doubt as to who counsel appearing for the defendant or defendants in the three proceedings represented. On a perusal of the court’s files, it appeared that the only defendant who had been served with the originating processes and supporting affidavits was Mr Kearns, and he was the only defendant who had filed an appearance.

In relation to each of the Second Demand and the Third Demand, Mr Kearns signed the demand unilaterally, in the sense that he did not have the prior approval of Mr Pirona in the case of the Second Demand, or the prior approval of the other three partners in the Kearns Enterprises partnership, in the case of the Third Demand.

Mr Hanson is presently the managing director of Access Elevators, and is the person who caused Access Elevators to commence each of these proceedings. He does not support the Third Demand being made against Access Elevators on his behalf.

Mr Pirona has sworn the affidavit in support of the originating process that seeks an order setting aside the Second Demand. Thus, even though Mr Kearns purported to make that demand on behalf of himself and Mr Pirona as joint creditors, in practical terms, Mr Pirona joins with Mr Hanson in seeking to have that demand set aside. Further, there is evidence in the form of a letter written by Mr Pirona’s solicitor to Mr Kearns’ solicitor on 9 February 2016, that Mr Pirona did not give consent to the Third Demand being made in his name.

Mr Okorn’s position in relation to the fate of the three statutory demands was unknown. The evidence suggests that Mr Okorn is presently on sick leave from Access Elevator’s business.

The difficulty caused by the defendants other than Mr Kearns not having been served, and no appearances having been filed on their behalf, was cured by each of those gentlemen filing an appearance after I reserved judgment.

Mr Pirona filed an appearance in the Second and Third Proceedings, in which he was named as a defendant, and Mr Okorn filed an appearance in the Third Proceedings, in which he was also named as a defendant.

However, each of Mr Pirona’s and Mr Okorn’s notices of appearance was not a submitting appearance, but stated that the defendant intended to appear before the court to support the application. Neither gentleman, of course, in fact appeared at the hearing, as his notice of appearance was only filed after the court had reserved judgment, in order to cure a doubt as to who counsel for Mr Kearns appeared for.

At the further hearing of the proceedings, to which I refer below, the parties did not address submissions toward the significance of defendants to the Second and Third Proceedings filing appearances that stated that they supported the applications to set aside the Second and the Third Demands. I will proceed upon the basis that Mr Pirona and Mr Okorn support the relevant applications by Access Elevators.

The practical consequence of these events is that it is clear that counsel for Mr Kearns does not speak for the other defendants. Accordingly, no submissions he made will constitute ratification by any of those defendants of the making of any of the statutory demands signed by Mr Kearns.

At the request of the parties who were before the court, I made an order that the three proceedings be heard together. I did not make an order that the evidence in each proceeding would be evidence in the others.

I listed the three proceedings for judgment on 11 May 2016. Soon after Mr Kearns’ solicitors were notified of the listing for judgment, Mr Kearns advised the court that he would make an application to reopen his case in the Second Proceedings in order to tender additional evidence.

That application was made on 11 May 2016. The court dispensed with the need for Mr Kearns to file a notice of motion. Access Elevators opposed Mr Kearns being given the leave sought. Directions were made to deal with the application, which led to Mr Kearns filing an affidavit in support of his application sworn on 13 May 2016. Mr Kearns filed written submissions in support of the application on 20 May 2016, and Access Elevators filed written submissions in response on 25 May 2016.

Access Elevators informed the court that, if Mr Kearns was given leave to reopen his case to rely upon the new evidence referred to in his affidavit, Access Elevators did not wish to file evidence in reply, but would rely upon its submissions in response to that evidence.

It will be convenient to deal with Mr Kearns’ application to reopen his case in the Second Proceedings in the context of my consideration of Access Elevators’ application to set aside the Second Demand below.

I will deal first with Access Elevators’ application concerning the First Demand.

The first issue is whether, for the purposes of s 459H(1)(a) of the Corporations Act, there is a genuine dispute as to the existence of the adjusted debt of $1,439.78 claimed in the First Demand.

The principle that the court is to apply is sufficiently stated in the judgment of McClelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. It is not necessary to refer to the multitude of authorities that have followed this case. His Honour said:

Access Elevators’ case was simply that Mr Kearns was the managing director of the company, up until his termination by a resolution of the directors on 4 February 2016. Until then, Mr Kearns managed the company’s financial and accounting functions, as well as all the software belonging to the company. Mr Hanson said in his primary affidavit that he cannot locate any written loan agreement; that he is not aware of the debt; and he does not know whether it has been paid in full. He has made enquiries of Mr Pirona, who has said that he is not aware of the existence of the debt. Thus, Access Elevators submits there is a genuine dispute about the existence of the debt, because it can find no evidence that the loan was ever made.

Mr Hanson exhibited to his affidavit what he described as the company’s balance sheet from July 2015 to November 2015. Mr Kearns objected to the document being admitted into evidence.

The parties agreed that I should deal with the objections to evidence contained in their written lists of objections in my reasons for judgment, where it became necessary to deal with an objection.

The document is an Excel spread sheet printed out from a MYOB database on 3 March 2016. It covers the period from July to November 2015. There is no explanation as to why it did not cover the period up to, say, the end of January 2006. The document appears to be a printout of accounts in the MYOB database from the general ledger of the company that would be relevant to the preparation of a formal balance sheet. The document does not take the conventional form of a balance sheet. There is no evidence that it was formally received by the directors, and the inference drawn must be that it was not. Nonetheless, the evidence establishes that it is a business record of Access Elevators. It is therefore, in my view, admissible. The complaints that Mr Kearns made concerning the provenance of the document go to its evidentiary weight.

There is a line item under the heading “Long Term Liabilities” for “Director Loan Garry Kearns”. The amount of the loan is the same amount of $29,976.64 for the months of July, August and September, and the same amount of $4,976.64 for the months October and November.

There is also a separate line item for “Accrued Interest – G Kearns”. That shows an amount of $32,700 for each of the five months.

Although Mr Hanson tendered this evidence, he did not explain it. The total amount owed to Mr Kearns, as at November 2015, was $37,676.64.

In his affidavit, Mr Kearns said that, in relation to the $10,000 loan, Access Elevators repaid a total of $11,366.30 between 22 December 2009 and 11 February 2010. He annexed to his affidavit a document called “Account Transactions [Accrual] for the company for the period 1/10/2009 to 18/02/2010”. The provenance of the document was not explained. I do not know, but it may be a spread sheet printed out from MYOB. It appears to have been printed on 18 February 2010, at 10:41 AM. It shows a total of $11,366.30 being repaid in relation to “Director Loan Garry Kearns”. Unfortunately, the document does not contain figures for the opening debt or the closing debt. Nothing in the document identifies the payments as having been made against a loan of $10,000 made by Mr Kearns to the company on 30 June 2007. The total amount paid is greater than the amount of the debt, and there is no information that would explain how the difference may be attributable to accumulated interest.

I should add that, in par 17 of his affidavit, Mr Kearns had exhibited a document described as “Plaintiff’s calculation of the debt owing under the First Debt”. Access Elevators objected to this evidence and it was not read.

In the circumstances, the evidence justifies the claim by Access Elevators that there is a genuine dispute about the existence of the $1,439.78 debt. It is reasonable for the company to say that the existence of the debt requires further investigation. That conclusion is justified by the circumstance that, faced with the evidence of Mr Hanson that Access Elevators had no evidence that it was indebted to Mr Kearns for the amount claimed, Mr Kearns did not respond by bringing forward evidence to establish the debt.

I should mention that the second debt claimed in the First Demand is an amount of $39,200 in respect of $35,000 loaned to Access Elevators on 21 July 2008, plus interest up until 31 December 2015. Mr Hanson in his affidavit said, at par 15, that the balance of the loan should be $40,028, and this figure was obtained relying upon a report by a Mr Corben. Even though this evidence increased one of the debts claimed in the First Demand, Mr Kearns objected to the admission into evidence of the relevant parts of Mr Hanson’s affidavit and Mr Corben’s report. As I have said above, counsel agreed that I should deal with objections in my judgment. I propose in this case to ignore the objections, as, notwithstanding the inexplicable nature of the objection, the amount at issue is small, and it is preferable that the court act upon the correct facts.

The primary issue in relation to the First Demand is whether Access Elevators has established that it has an offsetting claim for the purposes of s 459H(1)(b) of the Corporations Act.

A sufficient test for determining whether Access Elevators has an offsetting claim may be found in the following extract from Assaf, Statutory Demands and Winding Up in Insolvency (2nd ed, LexisNexis Butterworths) (citations omitted):

In the present case, the aspect of this statement of the applicable principles that is relevant is the requirement that the alleged offsetting claim not be based on mere assertion. In Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd (unreported, SC (NSW), 3 July 1998, BC9803056) Santow J (as his Honour then was) said at 20:

The claim is that Mr Kearns is indebted to the company in an amount of at least $20,776, because when Mr Kearns was the managing director of the company, and in control of its finances, he wrongly caused expense claims in that total amount to be paid to him out of the company’s funds.

The evidence relevant to this aspect of Access Elevators’ claim may be summarised as follows.

The company operates a lift installation and servicing business, and currently employs 21 staff members.

Mr Hanson and Mr Okorn became directors of Access Elevators on 1 July 2011. I infer from the limited evidence that this came about as a result of the effective merger of two businesses. Mr Pirona and Mr Kearns were also directors, the latter being the managing director. Mr Hanson asserted in evidence that, after he became a director of the company, he observed that Mr Kearns had made a large number of expense claims, which did not appear to be legitimate. Prior to 2013, there was no approval process for directors who wished to submit expense claims, and the process of reimbursing director’s expenses was an honour system. Any receipts that were submitted by any of the directors would be approved without examination. Mr Hanson claimed that, in about 2013, there were discussions at a directors meeting at which Mr Kearns was told that certain expenses that he was claiming were improper. At the same time, it was also decided that any expenditure would have to be approved by one other director, who was not the same person as the director claiming the expenses. In about 2015, there were further discussions at directors’ meetings, and it was eventually resolved that any expenditure would have to be approved by two other directors.

Mr Hanson did not give evidence that Mr Kearns had caused expense claim payments to be paid to himself in violation of the requirement of other directors’ approval.

Mr Kearns objected to the paragraphs of Mr Hanson’s affidavit in which he gave evidence concerning the requirement that initially one other director, and then two subsequent directors, approve expense claims, on the ground of “hearsay form opinion”.

In Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527; (2004) 185 FLR 130 at [21] – [25], White J said:

White J’s observations at [21] - [22] were approved by the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; 92013) 85 NSWLR 85 NSWLR 601 at [38].

I hold that this evidence is admissible on the issue of whether Access Elevators has an offsetting claim in relation to the expense claims made by Mr Kearns.

The evidence is not, on balance, damaging to Mr Kearns’ case. As I have said, in the absence of evidence that the payments made to Mr Kearns were not approved by one or two other directors, as was required at the time of payment, the inference must be that the payments were authorised by Access Elevators.

A meeting of the directors of Access Elevators occurred on 29 January 2016. Most of the resolutions for which notice had been given were not passed, because the vote was split between Mr Hanson and Mr Okorn on the one side, and Mr Kearns and Mr Pirona on the other. The minutes note that letters of demand from Mr Kearns and Mr Pirona were tabled. There is a note that during the meeting, Mr Kearns in his capacity as landlord, made an oral demand for immediate payment of the outstanding rent.

At a later meeting of the directors, on 4 February 2016, Mr Kearns informed the directors that, if a proposed motion for an adjournment of the meeting for 30 days was not carried, he intended to issue statutory demands on the company. At the meeting, the directors resolved to remove Mr Kearns from the position of managing director. Mr Hanson and Mr Okorn voted in favour of the resolution, and Mr Pirona abstained.

There was also a resolution carried for an accountant to be appointed to investigate and report “on the benefits of by and/or loans from directors”. Mr Hanson, Mr Okorn and Mr Kearns are recorded as having voted in favour of the resolution.

It appears that Access Elevators appointed Mr Robert Corben to carry out the investigation. The letter of instructions is not in evidence. On 21 February 2016, Mr Corben provided a report to the solicitor who acts for the company in these proceedings. Mr Corben stated that he had been given a copy of a statutory demand for $43,100. He had also been given records relating to directors’ expense claims, wages records, fuel accounts and other records associated with directors’ remuneration. The evidence does not disclose what that material is. Mr Corben said that he was provided with loan transaction details from company records, which were arithmetically incorrect. Significantly, Mr Corben stated that he had been given “background information in respect of Director entitlements and what is their understanding of agreed benefits to board members” in a meeting with Mr Hanson and Mr Okorn. The letter does not fully disclose the background information given by those gentlemen. However, Mr Corben said that he was informed of various matters, including: “kitty litter product is for Mr Kearns’ animals, not for oil leaks”. I infer that the matters listed by Mr Corben reflect Mr Hanson’s and Mr Okorn’s views about what expense claims Mr Kearns was entitled to make.

Mr Corben attached four schedules to his letter. Schedule 3 is not presently material. Schedule 1 lists a significant number of vouchers under the heading “Queried expense claims G Kearns”. The items range in date between August 2011 and October 2015. The total amount of queried claims is $15,991.70. Schedule 2 is described as “G Kearns loan account amended to have regard to queries and specific matters raised by other board members”. The schedule starts with a recalculation of Mr Kearns’ loan account showing a debt of $40,028. That recalculation starts with the debt of $43,100 claimed by Mr Kearns in the First Demand, and reduces it by ignoring the $3,900 debt, and recalculating the interest on the $35,000 debt on the basis that the interest rate was reduced to 4.5% per annum from 20 November 2013. Schedule 2 then reduces that amount by $15,991.70 from schedule 1, and three additional amounts of $1,970, $810 and $222, which are explained as being the costs to the company of Mr Kearns causing employees of the company to work in company time for Mr Kearns’ private benefit. Mr Corben described these additional deductions as “Claims as advised by Mr Warren Hanson 17 February 2016”. Mr Corben’s letter also contains a list described as “’Questionable’ expense reimbursement payments extracted from expense vouchers. I infer from the evidence that this was a supplementary list of ‘questionable’ claims after Mr Corben had another meeting with Mr Hanson. The total amount is $29,205.35.

Mr Hanson said, in par 29 of his principal affidavit, that Mr Corben reported that out of all of the expenses that Mr Kearns had claimed over the last five years, “$45,197.05 was considered to be improper or queried expenses claimed by Mr Kearns”. Mr Hanson annexed schedule 1, and what he described as “the supplementary schedule of Mr Corben’s report”. Mr Hanson said: “I have reviewed report and annotated on schedule 1 and the supplementary schedule of Mr Corben’s report to what I believe was considered as company expenses”. The annexure to Mr Hanson’s affidavit is very difficult to follow. That is partly because wording inserted by Mr Hanson has been highlighted, and the photocopy that has been used for the annexure to the affidavit makes the insertions illegible. It appears that Mr Hanson has accepted that many of the expenses were legitimate “company” expenses. I have not been able to reconcile the document.

Access Elevators said, in par 14 of it is written submissions, that overpayments to Mr Kearns of $20,776 had been identified, as a result of the examination of the company’s financial records by Mr Corben. I will assume, without having been able to verify the calculation myself, that the total of the overpayments that Mr Hanson has asserted in the annexure to his affidavit is $20,776.

Mr Kearns objected to Mr Corben’s report being received into evidence, and also objected to Mr Hanson’s use of that report in his affidavit.

In my view, Mr Corben’s report is admissible based on the principle in Tokich Holdings and Britten-Norman considered above, but for the reasons that follow, it should be given very little weight. The schedules to the report, when read with Mr Hanson’s annexure, identify the amount of the offsetting claim asserted by Access Elevators. However, even on an application such as the present, I do not accept that Mr Corben’s report should be read as an expression of expert opinion by Mr Corben that any particular expense payments were unauthorised, or unjustified. First, Mr Corben has not purported to give expert evidence, and he has not complied with the expert witness code. Secondly, and more importantly, Mr Corben appears to have acted upon unidentified assertions by Mr Hanson and Mr Okorn, or perhaps identified vouchers recording expense claims by Mr Kearns that Mr Corben described as “questionable” on the basis of his instructions.

It is important that Mr Hanson himself has not provided any reasons, even at the level of proof required to establish an offsetting claim, as to why particular expense payments were not authorised or justified.

I do not accept that Mr Corben’s report can be described as the result of an independent investigation carried out by himself. Mr Hanson’s own evidence is also no more than a bare assertion that some claims in Mr Corben’s schedules were excluded because of “what I believe was considered as company expenses”.

In my view, the evidence put forward by Access Elevators to support its offsetting claim is no more than bare and unsubstantiated assertion, and Mr Corben’s report is no more than a collection of information based upon bare and unsubstantiated assertion.

It is also relevant to the issue of whether Access Elevators has established that it has an offsetting claim, that the directors’ decision to retain Mr Corben was only made in the context of the dispute between the directors and shareholders that led to Mr Kearns being removed as managing director, and shortly thereafter being removed as a director. As I have said, the expense claims had been paid by the company to Mr Kearns over a period of more than four years. The directors have not taken any steps to challenge or recover the payments in that period.

As I have noted above, Mr Hanson said that, from some time in 2013, the directors resolved that expense claims by directors would not be paid without the authority of one other director. Access Elevators did not give any evidence that expense claims after that date had been paid to Mr Kearns without the authority of another director. In the absence of evidence suggesting the contrary, it is probable that expense claims paid to Mr Kearns were paid in accordance with the administrative requirements imposed by the directors.

More importantly, however, Mr Kearns put into evidence the minutes of a meeting of directors of Access Elevators that occurred on 1 October 2015. The relevant entry reads:

It follows that a majority of directors ratified the payments that had been made to that date by the company in respect of Mr Kearns’ expense claims. Mr Okorn did so, even though he expressed the view that they were not legitimate work-related expenses.

It should be mentioned that, before Mr Corben’s report was prepared, Mr Kearns demanded, on a number of occasions, that he be provided with the material that was to be given to Mr Corben, and be given an opportunity to respond to any allegations made against him. Those demands were declined by Access Elevators, and Mr Corben’s report was therefore prepared on a totally one-sided basis.

On 11 March 2006, Mr Kearns’ solicitor provided to the solicitor for Access Elevators a detailed response by Mr Kearns to the schedules in Mr Corben’s report. By and large, that response provides a credible explanation for most of the expense claims. While it is no part of the present application for the court to actually decide the issue of whether the expense claims were valid, it may be noted that Mr Kearns has at least provided some credible explanation in response to a claim by Access Elevators that does not, upon proper examination, rise any higher than mere assertion.

I have borne in mind that the only issue is whether the alleged offsetting claim “fails to rise to the level of a plausible contention requiring further investigation, or perhaps more aptly in the case of an offsetting claim — if it fails to establish a triable issue”, to use Santow J’s words from Collier Nominees, and I have come to the conclusion that the offsetting claim fails that test, principally because it is based upon mere assertion; but also because of the history of the matter; the delay in any claim being made; the context in which it was made; and the evidence that suggests that the payments were either authorised or ratified by the directors of the company.

I will start by dealing with the Second Demand on the basis of the evidence and submissions at the initial hearing. That will in substance show the conclusion that I have reached, and my reasons in support of that conclusion, even without the additional evidence upon which Mr Kearns seeks leave to rely upon following his application to reopen his case. I will then deal with that application.

The Second Demand claimed an amount of $313,314.08 on behalf of Mr Kearns and Mr Pirona. It was made up of two loans of $100,000, plus interest, and an amount for outstanding rent. The Second Demand was signed by Mr Kearns alone, in his capacity as “joint creditor”. In the space provided on the form for “corporation or partnership name (if applicable)”, nothing was written.

Apart from the agreed, minor variation to the amount of the debt payable under the Second Demand, the only issue is whether the Second Demand was validly issued. Access Elevators submits that the Second Demand was not validly issued, because the debts, being the subject of the demand, are owed to Mr Kearns and Mr Pirona jointly. Therefore, as a matter of law, the Second Demand could not validly be issued unless it was signed by both joint creditors.

The evidence in this matter establishes the same recent corporate history of Access Elevators, as was proved in the matter concerning the First Demand. There were meetings of the directors that led to Mr Kearns being removed from his position of managing director on 4 February 2016. Before that date, on 29 January 2016, Mr Kearns and Mr Pirona served letters of demand on Access Elevators, requiring repayment by the company within seven days of debts owed to them. The debts are as follows, Mr Pirona $440,482.10, Mr Kearns $20,416.67, Kearns Enterprises $43,100, and Mr Kearns and Mr Pirona $295,000. Mr Pirona apparently signed the demands in the two cases in which he was a creditor.

However, on 9 February 2016, Mr Pirona’s solicitor wrote two letters to the solicitor for Mr Hanson and Mr Okorn. In the first letter, the solicitor stated that he had been instructed by his client that Mr Pirona in fact gave no consent to the making in his name of any demand on Access Elevators. The solicitor said: “He is willing to allow the debts in his name to remain owing pending discussions and agreement on the manner of timing of repayment. He does not presently have any intention of calling in the debts without reasonable notice of not less than one month”. He further said: “My client is also willing to permit the company to negotiate the claims by Mr Kearns so that its solvency may be preserved”.

In the second letter, the solicitor repeated his instructions that the demands made in Mr Pirona’s name had been made without his consent. He said that Mr Pirona’s objectives for the future of the company included: “1. He wishes to ensure the businesses continue either in their present form or some other form acceptable to majority of directors/voting shareholders”.

At a meeting of directors of Access Elevators on 11 February 2016, Mr Pirona repeated the statements that his solicitor had made on his behalf, in particular, his objectives for the future of the company.

Mr Pirona swore the principal affidavit in support of Access Elevators’ application for an order setting aside the Second Demand.

Mr Pirona said that the two debts of $100,000 referred to in the Second Demand related to advances made by Mr Kearns and himself, but that there was no interest payable, as the four directors had agreed that the advances would be interest-free. The evidence included the minutes of a meeting of directors of Access Elevators, and another, apparently associated, company called Lift Fix Pty Ltd, which recorded: “GK stated that at present the most recent amount of $265,000 deposited into the company bank account would not earn interest”.

Mr Pirona gave the following evidence concerning the circumstances in which he signed the letters of demand dated 29 January 2016, at a meeting attended by Mr Kearns and Mr James Leslie, who Mr Pirona described as the company’s solicitor:

Mr Kearns swore an affidavit in opposition to Access Elevators’ claim, but he did not contradict this evidence of Mr Pirona’s.

Mr Kearns acknowledged that he signed the Second Demand as a joint creditor, but he said that he and Mr Pirona were in fact partners, and he should have described himself as being a partner, when he signed the Second Demand. Mr Kearns gave the same evidence concerning his statement in par 1 of the affidavit that accompanied the Second Demand, which said that he was “one of the joint creditors named in the statutory demand”.

In support of Mr Kearns’ claim that the relationship between himself and Mr Pirona was one of partnership, Mr Kearns tendered a number of documents; as follows:

The reason for Mr Kearns’ claim that his relationship with Mr Pirona was one of partnership, and not just joint creditor, was to rely upon authority that one partner may validly execute a statutory demand on behalf of all partners, and to avoid authority to the effect that a statutory demand in relation to a joint debt must be executed by all joint creditors, in order to be valid.

In Re Australia Seiwa Pty Ltd [2012] NSWSC 1334 at [11], Black J said:

On the other hand, in Re Kevin McNamara & Son Pty Ltd [2014] VSC 337; (2014) 287 FLR 96, Robson J, after discussing the relevant authorities, said, in relation to the general case where a statutory demand is signed by one of a number of joint creditors (footnotes omitted):

Earlier in his reasons, Robson J considered the decision of Rein J in 115 Constitution Road Pty Ltd v Alan Downey as Trustee for NBD Systems & Anor [2008] NSWSC 997; (2008) 220 FLR 216 (footnotes omitted):

I accept the conclusion reached by Robson J that, where a debt is owed to joint creditors, all of the creditors must sign the statutory demand, because at law, a joint creditor cannot sue for the entire debt without the consent of the other joint creditors. If one of a number of joint creditors does have the consent of the other joint creditors, or for some other reason the one has authority to unilaterally demand repayment on behalf of all other creditors, then the one may validly sign a statutory demand alone. In that case, as Rein J held in 115 Constitution Road, the affidavit in support of the statutory demand should contain appropriate evidence that the creditor has the consent or the authority of the other joint creditors. Absent that evidence, the basis upon which the creditor’s statutory demand has been issued may be too uncertain to support its validity. The position may be otherwise, where one of a number of joint creditors has authority at law to bind the others, even in the absence of their consent, such as the case of partnership or where there are joint executors.

The authorisation given by s 459E(1) of the Corporations Act for a person to “serve on a company a demand”, and the requirement in s 459E(2)(f) that the demand “must be signed by or on behalf of the creditor” should be interpreted as requiring that the demand be clearly binding on the creditor, or that there be evidence that it is binding, so that the company is not left in default.

Mr Kearns has, therefore, attempted to sidestep the consequences of him having signed the Second Demand as one of two joint creditors, by arguing that in reality he signed as one of two partners. That argument would raise issues; first, whether the evidence establishes that Mr Kearns and Mr Pirona were partners; and secondly, whether the Second Demand should be allowed to stand, given the circumstance that it was not authorised by Mr Pirona, and Mr Pirona supports the Second Demand being set aside.

There is, in my view, however, an antecedent issue, which arises from the consideration that Mr Kearns’ argument depends upon the court accepting that, although the Second Demand was signed by Mr Kearns as one of two joint creditors, it should in fact be treated as having been signed by one of two partners.

It follows directly from Mr Kearns’ argument that the debt claimed in the Second Demand was misdescribed. A debt owed to a partnership is materially different from a debt owed to ordinary joint creditors for the very reason that in the former case, it may be the subject of a valid demand for repayment by one of the partners, but not in the latter. The argument is fatally flawed at its inception. “Specification of the debt in a statutory demand is a fundamental requirement and failure to observe this requirement will constitute a defect in the demand within the meaning of ss 9 and 459J(1)(a)” of the Corporations Act: see Assaf at [3.5].

The question then is whether, because of the defect, substantial injustice will be caused unless the demand is set aside, as is required by s 459J(1)(a) of the Corporations Act. In my view, substantial injustice will be caused if the Second Demand is not set aside. Mr Kearns described the debts claimed in the Second Demand in a manner that demonstrated that the Second Demand was not validly signed, because it was not signed by all joint creditors. That course created the risk that Access Elevators, as the recipient of the Second Demand, might ignore it and fail to apply to set aside the demand under s 459G the Corporations Act, on the basis that the Second Demand was an invalid instrument. It would be a matter of substantial injustice for the court to permit the Second Demand to stand, by finding that it was validly signed by Mr Kearns, by reason of facts not disclosed in the demand itself, which gave him an authority to sign the demand that was inconsistent with that disclosed.

Even if that conclusion was wrong, it would still be necessary for Mr Kearns to have proved that he and Mr Pirona were partners.

Section 1(1) of the Partnership Act 1892 (NSW) defines a partnership in the following terms: “Partnership is the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership”.

Section 2 of Partnership Act the relevantly provides:

Mr Kearns initially swore that he was a joint creditor in his affidavit in support of the Second Demand, and that is how he described himself in the Second Demand. He did so notwithstanding that he was prompted by the standard form to state that he was signing on behalf of a partnership, if that was the case. The address for service stated in par 6 of the Second Demand is the address of Mr Kearns’ present solicitors, so I infer that Mr Kearns had legal advice on the issue of how the form should be completed. Mr Kearns stated in his affidavit in opposition to Access Elevator’s application that he should have described himself as Mr Pirona’s partner, but he did not provide any explanation for why he did not do so originally.

Mr Kearns did not provide any evidence concerning the nature of the business undertaken by the supposed partnership, in order to satisfy the definition of partnership in s 1 of the Partnership Act. I would not be prepared to find that such a business existed, merely from the fact that Mr Kearns and Mr Pirona made two joint loans, and jointly owned a property that they leased to Access Elevators. Whatever may be regarded as being sufficient evidence to prove the existence of a partnership business in the ordinary case, in my view, clear evidence is required in the present case, where Mr Kearns initially swore that he and Mr Pirona were merely joint creditors.

Mr Kearns’ reliance upon the Australian Business Registration Form and the Australian Business Name search referred to above in par 78 is not conclusive, because Australian taxation law treats as partners not only persons who fulfil the definition of partnership in the Partnership Act, but also persons who are not partners but who are “in receipt of ordinary income or statutory income jointly”: see for example the definition of “partnership” in s 995.1 of the Income Tax Assessment Act 1997 (Cth) (and the equivalent definition in s 6(1) of the 1936 Act), and Federal Commissioner of Taxation v McDonald 87 ATC 4541. The evidence is consistent with Mr Kearns and Mr Pirona being merely joint creditors, rather than partners.

It is then necessary to consider whether the Second Demand should stand, on the assumption that it has been established that Mr Kearns and Mr Pirona were partners. Mr Kearns’ submissions assumed that, if he and Mr Pirona were partners, it would necessarily follow that the Second Demand was valid. In my view, that submission confuses the difference between the power of one partner to sign a statutory demand in a manner that makes it valid, and the authority of a partner to do so in a manner that binds the other partners.

In Seiwa, Black J found that the partner who signed the statutory demand in fact did so with the authority of the other partner. He held that, in any event, the effect of s 5 of the Partnership Act, and the prescribed Form 509H, would have been that the single partner had authority to sign the creditor’s statutory demand on behalf of the other partner. Accordingly, there would be no defect in such a demand for the purposes of s 459J(1)(a) of the Corporations Act, even in the absence of actual authority.

However, it does not follow that a statutory demand that is signed by one partner will necessarily remain valid in the absence of the authority of the other partners for the one partner to sign the demand. In the present case, the evidence positively establishes that Mr Kearns did not have Mr Pirona’s authority to sign the Second Demand. Mr Kearns did not tender evidence of any agreement between himself and Mr Pirona that gave Mr Kearns authority to sign a statutory demand without Mr Pirona’s authority. Not only did he not have Mr Pirona’s authority, but Mr Pirona expressly refused to authorise the signing of the Second Demand. Furthermore, not only is that the case, but Mr Pirona has joined in supporting Access Elevators’ application to set aside the Second Demand, by providing the principal affidavit in support of the application, and by the terms of his notice of appearance.

In deciding that a single partner has authority to sign a statutory demand in a manner that makes it valid as against the company to which it is addressed, Black J said nothing about whether or not the demand would be liable to be set aside if the single partner did not have authority to act unilaterally, or more particularly, where he was positively denied that authority, and the other partners have joined the company in seeking to have the demand set aside. Seiwa may have the effect that a statutory demand may be valid if signed by a single partner, and it will not avail the company to prove that the signing of the demand was in fact not with the authority of the other partners. It is not necessary to consider that question, because in the present case, the other partner has acted to support the setting aside of the Second Demand on the ground that it was signed without that partner’s consent.

Section 5(1) of the Partnership Act relevantly provides:

This provision empowers one partner to act for the partnership, unless the partner lacks authority, and the other person knows of the absence of authority, or does not know or believe that the partner is a partner. It enables a person dealing with a single partner to enforce a contract or transaction made on behalf of the partnership by a single partner without authority, unless the person knows of the lack of authority, or does not know or believe that the single partner was a partner. The section is not directed at making a transaction entered into by a single partner on behalf of the partnership without authority enforceable by the partners, because that result could be achieved in any event by the partners ratifying the transaction. The purpose of the section is to permit third parties dealing with a single partner to enforce a contract or other dealing against the partnership. The point, for present purposes, is that s 5 of the Partnership Act does not make the transaction valid for all purposes, simply because it was entered into by one of a number of partners.

As Rein J noted in 115 Constitution Road at [16], the Full Court of the Supreme Court of South Australia observed obiter in Bentham Management Pty Ltd v Union Finance Pty Ltd [2007] SASC 42; 247 LSJS 103:

Even if, in the present case, Mr Kearns had signed the Second Demand as a partner of Mr Pirona, so that there was no defect in the Second Demand for the purposes of s 459J(1)(a) of the Corporations Act, there would still be a question of whether there was “some other reason why the demand should be set aside” within the meaning of s 459J(1)(b) of the Corporations Act.

This is a relatively exceptional case, where one of two partners would have signed the statutory demand in circumstances where: (a) the assigning partner did not have authority to sign without consent; (b) the other partner expressly refused his consent; (c) the other partner was the largest creditor of the company; (d) the winding up of the company could jeopardise the chances of the other partner being paid the debts owed by the company; (e) both partners were shareholders in the company; (f) both partners were former directors of the company, and the other partner remained a director; (g) the winding up of the company could subject the other partner to the risks faced by a director in a winding up as a result of the manner in which the company has traded; and (h) the service of the statutory demand is, at least in part, a gambit employed by the signing partner as part of an internal dispute that led to his being removed as managing director.

Even though the Second Demand was valid as against Access Elevators, it was liable to be set aside at the suit of Mr Pirona, because it was signed without authority. In my view, in considering the application of s 459J(1)(b) of the Corporations Act, it is not necessary for Mr Pirona to have taken any formal steps to set aside the Second Demand. His entitlement to do so can be taken into account in considering the application of the provision. If the court were to set aside the Second Demand on this ground, it would be acting on a reason why the demand should be set aside that is consistent with the purposes of Part 5.4 of the Corporations Act, for the fundamental reason that a statutory demand that is invalid, or liable to be set aside, should not be given legal effect, at least if opposed by those entitled to prove its invalidity or have it set aside. The demand would not have been served by the creditor in accordance with s 459E(1) of the Corporations Act, or have been signed by or on behalf of the creditor, as required by s 459E(2)(f) of the Corporations Act.

It follows from the conclusion that I have reached on the basis of the evidence and submissions at the initial hearing, that the outcome of the Second Proceedings will not change, even if Mr Kearns is given leave to reopen and tender the additional evidence upon which he wishes to rely. That is because Mr Kearns merely seeks to bolster his case that he and Mr Pirona were partners in relation to the debt upon which the Second Demand was based. I have decided above that the Second Demand should be set aside even on the assumption that Mr Kearns and Mr Pirona were partners.

I will nonetheless deal with Mr Kearns’ application to reopen, and consider the effect that the additional evidence would have had. In the circumstances I will state my reasons briefly.

The additional evidence upon which Mr Kearns wished to rely was the following:

In his affidavit in support of the application to reopen, Mr Kearns said that following the initial hearing, he returned home to see if he could locate any documents that would evidence or record the partnership that he believed existed between himself and Mr Pirona, in connection with the ownership and leasing of the property upon which Access Economics conducted its business. Mr Kearns said that, for the purpose of preparing his affidavit sworn on 13 April 2016, he searched all of his files containing records of the partnership, and obtained some records from the accountant who he said provided accounting services to the partnership. He exhibited the records that he obtained to his original affidavit.

After Mr Kearns heard the argument concerning the partnership issue at the initial hearing, he returned home to review all of the records in his possession, including those that did not directly relate to the affairs of the partnership. He found the documents upon which he now seeks to rely in a separate file relating to the affairs of Access Elevators, which did not concern the affairs of the partnership. He said that he believes that he misfiled the documents.

Mr Kearns also gave evidence of requests that he had made of Access Elevators for access to the books and financial records of the company, following his removal as managing director, and as a director, but he was denied that access. It is not clear from the evidence whether or not the minutes of the meetings of the directors of Access Elevators that are described as documents (2) and (3) above, would have come to Mr Kearns’ attention if he had been given that access. It must be possible that he would have found those documents, if he had been given access.

Both parties expressly relied upon the decision of Einstein J in The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2009] NSWSC 132, at [4]-[8], as the case setting out the principles that govern an application by a party to reopen its case to tender additional evidence, in cases such as the present, where the application is made between the time the court reserves judgment and the time when the court hands down its decision. There was therefore no issue as to the principles to be applied. Einstein J said:

It is appropriate to start the consideration of the application of these principles by considering the effect that the additional evidence may have had, if it had been led at the initial hearing.

Access Elevators submitted that the additional evidence would not have affected the outcome on the question of whether or not the evidence established that there was a partnership between Mr Kearns and Mr Pirona, because Mr Kearns described himself as a joint creditor, and not as a partner, in the Second Demand; statements in the minutes of meetings of directors of Access Elevators would carry little weight; and even the minutes of the meeting of partners would not be conclusive, as mere statements by persons that they are partners are not conclusive, as the issue depends upon whether the persons are engaged in an undertaking that satisfies the definition of a partnership in the Partnership Act.

I accept that references to the partnership in the minutes of the meetings of directors of Access Elevators would have carried relatively little weight, primarily because those minutes were only signed by Mr Kearns, and were probably prepared by him as the company secretary. There was no evidence that Mr Pirona had adopted those minutes in any way.

The position is different concerning the minutes of the partnership meeting that occurred on 22 January 2009, as those minutes were signed by Mr Pirona. If those minutes had been in evidence at the initial hearing, and if the effect of the description of the relationship as a partnership had not been answered by persuasive evidence led on behalf of Access Elevated, the existence of the minutes would, so to speak, have tipped the balance in favour of Mr Kearns on the issue of whether or not the relationship was one of partnership.

However, the minutes were not tendered at the initial hearing. The evidence establishes that all three documents were found by Mr Kearns in his own records, when he made a further attempt to find them after the conclusion of the initial hearing. It is possible that Mr Kearns would have obtained the two minutes of the meetings of the directors of Access Elevators, if he had been given access to that company’s books and records. However, as I have said, I would have given those minutes little weight. The position is different in relation to the more cogent partnership minutes, as those minutes could only have come from Mr Kearns’ own records. It appears that he did not search far enough in his initial search, before his first affidavit was prepared.

I do not accept that Mr Kearns could not have found the three documents before the initial hearing, if he had exercised reasonable diligence. It was his case that he signed the Second Demand as a partner in fact, even though he only described himself as a joint creditor. Mr Kearns, and his legal advisers, should have appreciated that Mr Kearns was under a special burden to prove that his relationship with Mr Pirona was different to the one that he had described in the statutory demand. Mr Kearns has not explained in his 13 May 2016 affidavit, in any detailed or persuasive way, why it was reasonable for him to miss the partnership minutes in his initial search for evidence in support of his case.

Furthermore, in my view, the public interest in the finality of litigation is particularly significant in the case of applications to set aside statutory demands, where the established purpose of the procedure in Divisions 2 and 3 of Part 5.4 of the Corporations Act is to ensure an early determination of the issue of whether it should be presumed that the relevant company is insolvent. This approach is consistent with the view expressed by Austin J in ASIC v Rich [2006] NSWSC 826; (2006) 235 ALR 587 at [18], where his Honour said, in point (i), that a relevant factor is the nature of the proceedings.

I do not mean to lay down any general rule, or to suggest that the principles concerning reopening dealt with by Einstein J, in The Movie Network Channels case, do not have application in the context of applications to set aside statutory demands. I merely suggest that the circumstances of the particular case may justify the court in applying those principles more stringently; so that the company does not remain under the cloud of insolvency for longer than is necessary. That is at least so, where the additional evidence is not conclusive, and where allowing the case to be reopened may lead to the need for further evidence, and an additional hearing. In this regard, I do not consider Access Elevators’ decision not to file further evidence to mean that it concedes the partnership issue. The decision is consistent with the tactical objective of not unduly prolonging the determination of the application, as it would have been necessary for Access Elevators to explore the history of the business relationship between Mr Kearns and Mr Pirona in some detail, if it wished to lead evidence on the issue of whether the relationship was genuinely one of partnership.

I would therefore have rejected Mr Kearns’ application to reopen, even if I had not already determined that the Second Demand should be set aside on the assumption that the relationship between Mr Kearns and Mr Pirona was one of partnership.

In the case of the Third Demand, Access Elevators accepts that Mr Kearns was acting on behalf of the Kearns Enterprises partnership, when he signed the demand. He expressly did so in the capacity as a partner, and gave Kearns Enterprises as the name of the partnership in the demand.

Mr Hanson was one of the partners in the partnership. Not only did he not give his consent to Mr Kearns to sign the Third Demand on behalf of the partnership, but he has supported Access Elevators’ application for an order setting aside the demand by causing the application to be made, as the company’s managing director, and by providing the affidavit in support of the application.

Mr Hanson gave evidence that he had been told by Mr Pirona and Mr Okorn that they agreed with his view that it was not in the interests of the partnership to force the company into liquidation, as there would be no realistic alternative hirer for the partnership’s equipment. Mr Hanson, Mr Pirona and Mr Okorn have agreed to call a meeting of partners in order for the partnership to pass a formal resolution for the Third Demand to be withdrawn. That meeting has not yet been held.

Tokich Holdings and Britten-Norman are authorities for the proposition that the hearsay evidence given by Mr Hanson of the views of Mr Pirona and Mr Okorn is admissible. Even if it were not, Mr Hanson’s own evidence establishes that Mr Kearns did not sign the Third Demand with the authority of all of the partners.

Furthermore, the evidence in this matter included a copy of the letter from Mr Pirona’s solicitor, dated 9 February 2016, which I have discussed above in relation to the Second Demand, in which he indicated that Mr Pirona had not given consent to make any demand in his name.

The Third Demand should be set aside for the same reasons that I have given above in relation to the Second Demand, in relation to the assumption that Mr Kearns signed the Second Demand as a partner of Mr Pirona.

In these proceedings I make the following orders:

In these proceedings I make the following orders:

In these proceedings I make the following orders: