In the matter of Gemi 169 Pty Ltd

These proceeding involve an application to set aside a creditor's statutory demand dated 2 November 2023 (“Demand”) served by Gemi 169 Pty Ltd (“Gemi”) on F & L Violi Pty Ltd (“Company”). The application was brought on the bases that there is a genuine dispute as to the amount of the debt claimed in the Demand; or alternatively that an offsetting claim existed (a proposition which is no longer pressed); or that there was some other reason to set aside the Demand. I will first outline the relatively complex facts, which overlap with matters that are in issue in existing proceedings in the Commercial List (“Commercial List Proceedings”) between, inter alia, the same parties, before turning to the applicable principles and their straightforward application to find that the Demand should here be set aside.

The Demand described the debt claimed by Gemi in an amount of $3,010,000, comprising a sum of $510,000 alleged to have been paid by Gemi on 2 March 2020 to the Company's bank account bearing a particular number and a further sum of $2.5 million alleged to have been paid by Gemi to the Company's bank account on 5 March 2020. The evidence establishes that those amounts were not paid to the Company's bank account, likely because it did not have a bank account, but to a bank account held by two persons associated with the Company, Mr Violi and his late wife. There is no suggestion that the misdescription of the payments in the Demand gave rise to any prejudice and that is not a matter that is a relied on to set aside the Demand.

The Demand was supported by an unusually complex affidavit dated 2 November 2023 of Mr Epstein, a director of Gemi, which outlined, in some 27 paragraphs, the reasoning process which led Mr Epstein to reach the conclusion that, notwithstanding the existence of the Commercial List Proceedings relating to the transaction that allegedly gave rise to the debt claimed by Gemi, there was no genuine dispute about the existence or amount of that debt. Mr Epstein began with a description of a loan agreement by which Gemi, as lender, agreed to advance the sum of $19.5 million to a third party, Suria Global (L) Pty Ltd (in liq) as borrower, and referred to guarantees and mortgages purportedly provided by the Company in that respect. It is apparent from the Commercial List Proceedings that the fact that those guarantees and mortgages were provided by the Company is in dispute, and the Company there denies that it or its officers were aware of those guarantees or mortgages or had executed them.

Mr Epstein then says that Gemi made specified payments direct to the Company's "nominated bank account", in the two amounts then claimed by the Demand. That phrasing may be intended to recognise, at least implicitly, that the payments were not made to an account held by the Company but to Mr and Mrs Violi’s account. Mr Epstein does not explain how, if the Company was not party to the transaction but the victim of a fraud (as it claims), it could have nominated that bank account to receive those funds. Mr Epstein also refers to what are described as the first and second payments, which are set out in detail, and to aspects of the Commercial List Response, filed by the Company in the Commercial List Proceedings, to deduce from that response that the debt claimed by Gemi was not genuinely disputed. That reasoning process has the further difficulty that, as events have developed, admissions made by the Company in the Commercial List Response, on which Mr Epstein there relies to conclude that the debt was not disputed, have since been withdrawn by leave in the Commercial List Proceedings. Mr Epstein also referred to a letter sent to the Company claiming payment of the amounts claimed by the Demand, before concluding, as I noted above, that there was no genuine dispute about the existence or amount of the debt.

Mr Epstein’s affidavit exhibited several documents which were relied on to support his expressed belief that there was no genuine dispute as to the debt claimed by Gemi, notwithstanding the existence of the Commercial List Proceedings, including the then Commercial List Response which contained the admissions which have since been withdrawn on the part of the Company and correspondence relating to the debt claimed by Gemi. That correspondence, I pause to note, included a letter from the solicitors acting for the Company which made clear that the Company denied that it was indebted to Gemi. That, of course, was not the most promising basis for Mr Epstein to reach a conclusion that the debt, which his solicitors had been informed was denied, was not genuinely disputed.

I note that, of the amount of $3,010,000 claimed in the Demand, which Mr Epstein’s affidavit had indicated was not genuinely disputed, Gemi now does not press its claim for the first amount of $510,000 identified in the Demand, and also does not press a claim for the amount of $1.2m, being part of the second claim for $2.5 million identified in the Demand which had been paid out by the Company or Mr Violi to a third party, so that the amount of the Demand that is now pressed is $1.3 million, rather than the initial amount claimed of $3,010,000. I will return to the significance of that matter below.

The Company relies on the affidavit dated 1 December 2023 of its director, Mr Violi, in support of the application to set aside the Demand. Mr Violi there refers to the fact, now reflected in the withdrawal of the admission in the Commercial List Proceedings, that the relevant payments were made to a bank account in his and his late wife's name, rather than to a bank account in the Company's name. He also refers to the pleadings in the Commercial List Proceedings, including the Commercial List Statement filed by Gemi, and a Second Cross Claim Summons and Second Cross Claim Statement filed by the Company, and observes that the principal cause of action by Gemi and an associated company in the Commercial List Proceedings is to enforce two loans and mortgages, and that the Company’s Cross Claim contends that the loans and mortgages were procured fraudulently and without the Company's knowledge or involvement, and the remedies sought in the Commercial List Proceedings including cancellation of those mortgages. Mr Violi states that:

Mr Violi also refers to the Commercial List Response in the Commercial List Proceedings, and the matters on which Mr Epstein had relied to contend that the debt was not disputed, and points out that the admission on which Mr Epstein relied was incorrect, where the relevant account was not the Company’s bank account. As I have noted above, the Company has since withdrawn that admission by leave.

Mr Violi also referred to the fact that he had then not yet served his affidavit evidence in the Commercial List Proceedings, although he has now done so, and observed that, in relation to the matters in issue:

Mr Violi also there addressed the circumstances of a second payment which is also in issue in the Commercial List Proceedings. He referred to an aspect of the Commercial List Response in the Commercial List Proceedings, which denied that the amount of $2.5 million, which is the second amount claimed in the Demand, was advanced pursuant to the first loan, and that the Company or Mr Violi had any knowledge that the sum was advanced in payment of the first loan, and said that part of it, $1.2 million, had been paid to a third party, implicitly as part of the alleged fraud. An aspect of that Commercial List Response also referred to orders made by Slattery J on 15 July 2022, but it appears those orders related to a different amount, and possibly a different mortgage, and do not take this matter further.

Mr Sommerville, with whom Mr Meyerowitz-Katz appears for Gemi, criticises the suggested lack of a detailed account of the relevant transactions in Mr Violi’s affidavit in these proceedings, and suggests that that affidavit asserts a dispute as to the debt claimed by Gemi without providing sufficient evidence of that dispute. That proposition assumes that Mr Violi, who was addressing these matters by a lengthy affidavit that has now been filed in the Commercial List Proceedings, should do so in parallel in this application.

Gemi tendered Mr Epstein’s affidavit in support of the Demand and also read an affidavit dated 5 April 2024 of Mr Buhagiar, Gemi’s solicitor, which refers to the mortgages granted in respect of the properties, although the relevance of that matter to this application ultimately did not become clear.

Gemi also tenders a redacted version of Mr Violi’s affidavit dated 25 January 2024 filed in the Commercial List Proceedings, from which very substantial parts of the affidavit were redacted. Mr Somerville indicated that that process had been adopted because limited leave had been obtained to rely on that affidavit in these proceedings, to avoid any breach of the Harman undertaking, and that the parts of the affidavit that were tendered were those that were within the scope of that limited leave. Mr Somerville referred to aspects of that affidavit and to the evidence then given by Mr Violi in respect of the transactions, which are said to give rise to the loans which are the subject of the Demand, and vigorously criticised aspects of that evidence.

Mr Somerville also submitted that Mr Violi had not there given sufficient explanation of what had occurred with the funds paid by Gemi to the relevant account in order to establish any genuine dispute that the Company retained some part of the funds. I should again pause to note the oddity of the process that Gemi here seeks to adopt. Mr Somerville here tenders an affidavit in the ongoing Commercial List Proceedings, large parts of which were redacted so that they are not available to me, including paragraphs in the middle of passages on which he relied, and then invites me to reach findings as to the adequacy of Mr Violi's explanation of events, a matter which will likely be in issue in the Commercial List Proceedings in due course and as to which a judge in that List, who will hopefully have access to all and not only part of that affidavit, will reach findings in due course. Gemi also seeks to have me reach those findings without Mr Violi having been cross examined in these proceedings as to any aspects of the dispute.

Gemi also tendered a letter dated 13 November 2023 between the solicitors which appears to be directed to a dispute as to whether there exists a genuine dispute as to the Company's entitlement to retain, at least while the proceedings are ongoing, any part of the amount paid by Gemi in the proceedings.

I deal with this question briefly, because it is ultimately not necessary to the determination of these proceedings.

The Court has power to set aside a creditor's statutory demand under s 459H(1)(a) of the Corporations Act 2001 (Cth) (“Act”) where there is a genuine dispute between a company and the issuer of the demand about the existence or amount of the debt to which the demand relates. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 464, the Full Court of the Federal Court observed that a genuine dispute must be bona fide and truly exist in fact, and the grounds for the dispute must be real and not spurious, hypothetical, illusory or misconceived. The threshold to establish a genuine dispute is not high, and it is necessary to bear in mind the observations of Barrett J (as his Honour then was) in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], that: “[o]nce the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow."

Mr Priestley also refers to my summary of the applicable principles in Re Wollongong Coal Ltd (2015) 110 ACSR 134; [2015] NSWSC 1680 at [9]–[22] for the propositions that:

I have reviewed other, more recent, authorities, including observations of the Court of Appeal in Ligon 158 Pty Ltd v Huber [2016] 117 ACSR 495; [2016] NSWCA 330 at [8], and in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60, in my decision in Re PSR Refining Services Pty Ltd [2023] NSWSC 243 at [19]ff, and I do not repeat that review.

I should now add, to the observations made in my oral ex tempore judgment, more detailed reference to the parties’ submissions as to this issue. In his opening outline of submissions, Mr Priestley who appears for the Company refers to Mr Violi’s evidence in support of this application and submits, inter alia, that:

Mr Somerville in turn makes detailed submissions as to Mr Violi’s evidence in the Commercial List Proceedings, to which I have referred above, and submits, as to the second payment made by the Company, only part of which is now in issue, that:

In his outline of opening submissions in reply, Mr Priestley responds that:

Mr Priestley also responds to Gemi’s formulation of a restitutionary claim as follows:

Mr Somerville indicates in oral submissions that Gemi does not seek to rely on a debt arising from the transaction documents, in order to support the debt claimed in the Demand, because it recognises that a genuine dispute arises from the challenge to the execution of those documents by the Company. It instead asserts only a restitutionary claim, and I will assume, without deciding, that a restitutionary claim may, in a proper case, be characterised as a debt which can support a creditor's statutory demand: see the review of the applicable case law, in the context of a quantum meruit claim rather than a claim for monies had and received, in F Assaf, Assaf’s Winding Up in Insolvency, 3rd ed, [3.41]ff. As events have developed, that restitutionary claim is limited to the amount of $1.3 million, being part of the second payment of $2.5 million paid into Mr and Mrs Violi's bank account by Gemi, which Gemi seeks to treat as a receipt by the Company for that purpose.

It seems to me that the Company has plainly established a genuine dispute as to Gemi’s claim for debt as formulated in that way, not least because a substantial issue arises as to whether such a restitutionary claim exists, not against the Company, but against Mr Violi and Mrs Violi, who were the recipients of the funds, and that depends upon the contested question of the extent to which a payment into their account could be treated as involving a payment at the direction of the Company, where there is a substantial dispute in the Commercial List Proceedings as to whether the Company had any involvement in the transaction, and, therefore, in giving any directions which were involved in it.

For that reason, if it were necessary to do so, I would find that a genuine dispute existed in respect of Gemi’s claim to a debt founded on a restitutionary claim. However, it is not necessary to reach my decision on that basis, because I am comfortably satisfied that the demand should be set aside for some other reason under s 459J of the Act, and I now turn to that question.

Section 459J(1)(b) of the Act permits the Court to set aside a creditor’s statutory demand where there is some other reason for it to do so. The Court's power to set aside a creditor’s statutory demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Act and is to be used to counter an attempt at subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746; [1996] NSWSC 199; Meehan v Glazier Holdings Pty Ltd (2005) 53 ASCR 229; [2005] NSWCA 24; and see my observations as to the scope of the Court's power to set aside a statutory demand on that basis in Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236 at [24] ("Modern Wholesale").

I should again add, to the observations made in my oral ex tempore judgment, more detailed reference to the parties’ submissions as to this issue. In his opening outline of submissions, Mr Priestley refers to Modern Wholesale and submits that:

He also submits that:

Mr Somerville responds that:

It seems to me that there are here two parallel, and overlapping, reasons why the Demand should be set aside for some other reason under s 459J(1)(b) of the Act. First, it is now apparent that the primary allegation brought by Gemi against the Company in the Commercial List Proceedings is a knowing receipt and knowing assistance claim, which is there put on the basis that, if the instruments giving rise to the first loan and the first mortgages were not signed by or with the authority of the Company (which is denied by Gemi), then the Company received and became chargeable with the sum of $3,010,000, which was misappropriated from Gemi, and the Company participated with knowledge in a dishonest and fraudulent design. Plainly, that proposition puts in issue the factual circumstances in which Gemi paid $3,010,000 to the Company or to Mr and Mrs Viola, being the same amount as was initially claimed in the Demand, apparently relying, as I noted above, upon restitutionary principles. The circumstances of that transaction are then addressed, whether adequately or not, by Mr Violi in his evidence in the Commercial List Proceedings, to which I have referred above, as well as in his briefer affidavit in this application.

Mr Somerville submits, and I will assume, that Gemi has not brought a restitutionary claim against the Company in the Commercial List Proceedings. I accept that, for that reason, it is not possible for Gemi to seek, for example, summary judgment on the basis of that restitutionary claim in the Commercial List Proceedings, so far as it contends there would be no genuine dispute about that claim, had it brought that claim in those proceedings. However, that result reflects Gemi’s choice not to bring that claim in the Commercial List Proceedings and instead to split its claims against the Company, so that one claim arising from the relevant transaction, for knowing assistance and knowing receipt, is raised in the Commercial List Proceedings, and another claim is sought to be dealt with by way of the Demand.

It seems to me that that approach is an abuse of the statutory demand process, and not less so because it reflects Gemi’s choice not to raise the claim in the Commercial List Proceedings, so that all matters arising from the same transaction and the same evidence could be dealt with in those proceedings, rather than to claim the debt in the Commercial List Proceedings and also issue the Demand in parallel to those proceedings.

I reviewed the relevant authorities at length in my decision in Modern Wholesale at [24]ff, referring, inter alia, to Perlake Pty Ltd v Finance and Mortgage Corps (NSW) Pty Ltd [1996] 15 ACLC 76, dealing with the position where a creditor's statutory demand was issued for the same debts as were claimed in other proceedings, and to the extent to which that would constitute an abuse of process. In Re Zarzar Pty Ltd [2017] NSWSC 93, to which I also referred in Modern Wholesale at [30], Barrett J in turn addressed the question of the parallel commencement of proceedings and the issue of a creditor's statutory demand and observed (at [22]):

His Honour went on to identify issues of principle that support that conclusion, which relate to the different purposes of contested proceedings and the statutory demand procedure. I also identified a further reason why the commencement of contested proceedings in respect of a debt and the service of a creditor's statutory demand in respect of the same debt may amount to an abuse of the creditor's statutory demand procedure in Modern Wholesale (at [31]ff), pointing to the duplication and wasted costs which arise from that process.

I recognise that, here, Gemi seeks to distinguish that case law, first, on the basis that the claim for debt is not raised in the Commercial List Proceedings, although I pointed above to the fact that the same transaction and the same facts will be an issue in respect of the claim for knowing assistance and knowing receipt in those proceedings. Gemi also submits that where, to its perception, the debt is not disputed (a proposition that I have not accepted above), then it is appropriate to allow it to issue the Demand, and at the same time bring proceedings in respect of the same facts and the same matters in the Commercial List Proceedings, and put the more complex claim for knowing assistance and knowing receipt in those proceedings.

I do not accept either proposition. First, the wasted costs and duplication arising from Gemi’s approach are the same, where the transaction and the facts giving rise to it are in issue in both the Commercial List Proceedings and in this application to set aside the Demand, notwithstanding that Gemi relies on a restitutionary claim to support the Demand, which it chooses not to bring in the Commercial List Proceedings, and a different claim in the Commercial List Proceedings. Second, the prejudice attached to the process is emphasised by the fact that Gemi here sought to rely on parts of the evidence led by Mr Violi in the Commercial List Proceedings, in order to resist the application to set aside the Demand, and invited me to reach findings as to that evidence, and at least as to the question whether it was adequate to displace the restitutionary claim, where a judge in the Commercial List Proceedings will be required to reach findings as to the same evidence as to the same transactions to determine the knowing assistance and knowing receipt claims in the Commercial List Proceedings. That plainly involves the risk of inconsistent findings, where two judges, albeit for different purposes, are asked to review the same evidence as to the same transactions and to reach conclusions about that evidence. For these reasons, it seems to me that the Demand should be set aside on the basis that it is a subversion of the creditor's statutory demand process to rely on it, in effect, to pursue a debt which arises from the same transaction that is already at issue in the Commercial List Proceedings.

I would also reach the conclusion that the Demand should be set aside for some other reason on a second basis. In Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 (“UGL”), to which I drew the parties' attention, I observed that a statutory demand for a substantially overstated amount would potentially be inconsistent with the proper use of the statutory demand regime, and that is a matter which can also support setting aside the Demand. I addressed the same issue in Re Tetbury Pty Ltd [2017] NSWSC 37 at [43], where I addressed the scope of the Court's power to vary a statutory demand under s 459H(4) of the Act, as Gemi now seeks to have done, and observed that the Court would generally vary a statutory demand:

In Re Granite Power Ltd (admins apptd) [2019] NSWSC 1491 [39], Rees J expressed her agreement with the proposition that "[a] substantial overstatement, where much of the amount is later conceded to be generally disputed” may be an “improper use of the statutory scheme” such that a statutory demand should be set aside under s 459J(1)(b) of the Act. In Re Forte Sydney Construction Pty Ltd [2024] NSWSC 495 at [24] I noted, albeit in a different context, the policy that supports that approach, including that the service of a statutory demand claiming a substantial amount that is not properly due will place the recipient of the demand at risk that it is presumed to be insolvent unless it either pays the inflated amount claimed or incurs the costs of an application to set aside the demand.

I recognise that, here, the position has moved adversely to Gemi in the course of these proceedings, once the admissions initially made in the Commercial List Response by the Company were withdrawn with leave. Nonetheless, it seems to me that was a risk which Gemi assumed in serving the Demand where the relevant transactions were in issue in the Commercial List Proceedings, and the fact that the Demand initially claimed $3,010,000, of which Gemi now accepts that only $1.3 million can be pressed, is a further reason to set aside the Demand.

For completeness, Mr Priestley, who appears for the Company, also contended that the Demand involved an abuse of process of the kind addressed by the High Court in Williams v Spautz (1992) 174 CLR 509; [1992] HCA 34, where it was served by Gemi at a time that the Company was pressing a claim for security for costs in the Commercial List Proceedings. It is not necessary or appropriate to reach a finding as to that submission given the findings I have reached on other grounds.

For these reasons, I order that the creditor's statutory demand for payment of debt issued by Gemi 169 Pty Ltd dated 2 November 2023 be set aside.

I have also now heard Counsel as to costs. Mr Priestley submitted that Gemi should pay the Company’s costs of the application on an indemnity basis. Mr Somerville properly accepted that an order for costs on the ordinary basis would follow, but submitted that Gemi should not be liable for costs on an indemnity basis.

The circumstances in which the Court will make an order for indemnity costs are well established. I recognise that the Court has power to award costs on an indemnity basis under s 98(1)(c) of the Civil Procedure Act 2005 (NSW) and, in order to establish a claim to indemnity costs, a party must ordinarily show conduct of the other party that is unreasonable or delinquent: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) (2008) 65 ACSR 324; [2008] NSWSC 199. An indemnity costs order does not punish an unsuccessful party for bringing a case that failed but compensates the successful party for incurring costs arising from the other party’s unreasonable conduct: Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 at [20].

Mr Somerville here points, in response to the application for indemnity costs, to the fact that Gemi had reasonably not pressed aspects of the amount claimed, so as to reduce to the amount claimed to the amount of $1.2 million to which I referred above. I accept that the withdrawal of those amounts was reasonably undertaken, and that Gemi would have acted more unreasonably had it not occurred. It seems to me, here, that there was nonetheless a degree of unreasonableness in Gemi's conduct, from the commencement of the proceedings, because a review of the relevant authorities in respect of overlapping creditor’s statutory demands and contested proceedings would have indicated the probability that the Demand would have been set aside for some other reason in any event. It seems to me that whatever justification the Demand might have had was further significantly undermined, when the admissions made by the Company on which Gemi had originally relied were withdrawn with leave of the Court on 11 April 2024.

I do not consider that I should make an order for indemnity costs before the date on which those admissions were withdrawn, where there was at least some basis before that date for Gemi to consider that aspects of the transaction were not disputed, although the issue of overlap between the Demand and the Commercial List Proceedings existed. It seems to me that, after that date, when the dispute as to those aspects of the transaction became clear from the withdrawal of the admissions, exacerbating the further issue as to the overlap of issues between the Demand and the Commercial List Proceedings, then it was plainly unreasonable for Gemi to continue to resist the application to set aside the Demand. On that basis, I order that the Defendant pay the Plaintiff's costs of the proceedings on an ordinary basis up to and including 11 April 2024, and on an indemnity basis from that date, as agreed or as assessed.