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International Finance Co v K.K. Kingston Ltd [2019] PGSC 82; SC1872 (13 November 2019)

SC1872

PAPUA NEW GUINEA
[IN THE SUPREMECOURT OF JUSTICE]


SCANo 160 of 2018


BETWEEN
INTERNATIONAL FINANCE COMPANY
Appellant


AND
K. K. KINGSTON LIMITED
Respondent


Waigani: Yagi, Collier and Berrigan JJ
2019: 30th October & 13th November


SUPREME COURT – CIVIL APPEAL – appeal against a decision of a primary judge which set aside a statutory demand issued under the Companies Act 1997 – statutory demand issued for the payment of debt – debt being the redemption price for shares in a company – statutory demand issued for a specified amount – whether there exists a substantial dispute as to the debt claimed, Companies Act 1997, ss. 338(1) and 4(a) – power of the Court is discretionary – whether the decision of the primary judge was unreasonable or plainly unjust – no identifiable error was manifest in the decision – appeal dismissed with costs.


Cases Cited
Papua New Guinea Cases


Government of PNG v Barker [1977] PNGLR 386
PNG Balsa Company Ltd v New Britain Balsa Company Ltd (2004) N2520
Curtain Bros (PNG) Ltd v University of Papua New Guinea (2005) SC788
Pacific Rim Constructors – Singapore PTE Ltd v Huala Hire & Construction Ltd (2012) N4710
BeMobile Ltd v Wettao (2014) N6776
Northbuild Construction PNG Limited v All Power Services Limited (unnumbered, Supreme Court, Sawong, Collier and Geita JJ, 15 December 2016, SCA 117 of 2016)
National Superannuation Fund Ltd v Yawenaik Holdings Ltd (2018) SC1709


Overseas Cases


Hare v Nicoll [1966] 2 Q.B. 130
Coulton v Holcombe [1986] HCA 33; [1986] 162 CLR 1
Di Luca v Juraise (Springs) Ltd [1997] EWCA Civ 2419
Bishop Industries (Wellington) Limited v Construction Labour Hire Limited [2016] 2848


Legislation cited:


Companies Act 1997
Companies Regulation 1998


Counsel:


Mr D. Hill with Ms W. Mai, for the Appellant
Mr I. Molloy with Mr E. Rere, for the Respondent


REASONS FOR JUDGMENT


13 November, 2019


  1. BY THE COURT: This is an appeal from the decision of the National Court in OS No. 50 of 2018 – K. K. Kingston Limited v International Finance Company, in which the primary Judge set aside a statutory demand for payment of debt in the sum of K7,264,333.33. The statutory demand was issued by the International Finance Company (IFC)and served on K. K. Kingston Limited (Kingston) on 8 January 2018. The primary Judge’s decision was made pursuant to s 338(1) and (4) of the Companies Act 1997.
  2. The appellant contends that the primary Judge erred in making the above finding, and therefore erred in setting aside the statutory demand in the exercise of his discretion.
  3. In order to disturb the National Court decision, the respondent must establish that his Honour’s conclusion that a bona fide substantial dispute existed between the parties was “clearly wrong”: see Government of PNG v Barker [1977] PNGLR 386 at 397; Northbuild Construction PNG Limited v All Power Services Limited (unnumbered, Supreme Court, Sawong, Collier and Geita JJ, 15 December 2016, SCA 117 of 2016) (Northbuild); Curtain Bros (PNG) Ltd v University of Papua New Guinea (2005) SC788 (Curtain Bros); National Superannuation Fund Ltd v Yawenaik Holdings Ltd (2018) SC1709.
  4. Before turning to the grounds of appeal, it is useful to examine relevant background facts and the decision of the primary Judge.

BACKGROUND


  1. Many of the relevant background facts are common ground. The key fact which is not agreed is whether IFC validly exercised a contractual right of redemption of its shares in Kingston.
  2. In 2010, IFC entered into two agreements to acquire a shareholding in Kingston of a total of 196 “A” Ordinary Shares. These agreements were:
  3. IFC, Mr Kingston, Kula Fund II Limited and Kingston also entered into a Shareholders Agreement dated 2March 2010 (the Shareholders Agreement) where provision was made for the relationship of the shareholders after IFC became a shareholder of Kingston pursuant to the Share Purchase Agreement and the Subscription Agreement.
  4. The process whereby IFC was to obtain 88 A Ordinary Shares under the Subscription Agreement was set out in the Subscription Agreement as follows:
Section 2.01. Subscription...

  1. On the terms and subject to the conditions of this Agreement, the Subscribers agree to subscribe and pay for the A Ordinary Shares in the Company (the “Subscription Shares”) specified in the table below:
Subscriber
Number ofA Ordinary Shares
Subscription Price (AUS$)
Approximate percentage shareholding
IFC
88
1.89 million
7.48%
...



(b) Subject to the terms of this Agreement and the satisfaction (or waiver by the Subscribers) of the conditions of subscription set forth in Section 4.01 (Conditions of Subscription), either:

(i) the Company may request the Subscribers to subscribe for the Subscription Shares by delivering a Subscription Notice to the Subscribers; or


(ii) the Subscribers may notify the Company that they shall subscribe for the Subscription Shares by delivering a Subscription Notice to the Company,

at least ten (10) Business Days prior to the date of the Subscription specified in such Subscription Notice which date shall be no later than the Cut-off Date (“the Subscription Date”).


(c) If a Subscription Notice is delivered by the Company to the Subscribers in accordance with section 2.01(b)(i), or the Subscribers deliver a Subscription Notice to the Company in accordance with section 2.01(b)(ii), then the Company shall be obliged to issue the Subscription Shares to the Subscribers on the Subscription Date and shall take all necessary corporate and other action, including but not limited to all appropriate steps to ensure that a general meeting of the Company's shareholders or a meeting of the board of directors, as applicable, is promptly convened, to ensure that the Subscription Shares shall be issued to the Subscribers on the Subscription Date, in accordance with the terms of this Agreement.

(d) On the Subscription Date:


(i) the Subscribers shall pay the amount equal to the Subscription Price in dollars to the following account of the Company:

...


(ii) the Company shall:


(A) issue to the Subscribers, or as the Subscribers direct, the Subscription Shares free of all Liens or other encumbrances or rights of third parties and record the Subscribers as the legal and beneficial owners of the Subscription Shares in the Company's Share Register; and

(B) deliver to the Subscribers, or as the Subscribers direct: (A) a share certificate in customary form; and (B) a certified copy of the relevant extract of the Company's Share Register, evidencing the Subscribers' valid title to the Subscription Shares, free of all Liens or other encumbrances or rights of third parties; and

(C) provide the Subscribers with evidence satisfactory to the Subscribers that the Subscription Shares have been duly and validly authorized and issued, and are fully paid and non-assessable and otherwise freely transferable without requiring any Authorization of any Authority, and that all other legal requirements in connection with their authorization, issue and delivery have been duly satisfied. (save any post-issue filings and other requirements to be undertaken by the Company in accordance with section 2.01(f)).

The parties agree that the fulfillment of the obligations of the Company set forth in sections 2.01(d)(ii)(A) through (C) above are conditions precedent to the application of any funds disbursed by the Subscribers under section 2.01(d)(i) to the Subscription for the Subscription Shares and that, accordingly, any funds disbursed in accordance with section 2.01 (d)(i) shall be held in trust by the Company (for the benefit of the Subscribers) until the acts set forth in section 2.01(d)(ii)(A) through (C) have been performed and the Subscribers have notified the Company in writing that such funds can be released to the Company,...


  1. In section 1.01 of the Subscription Agreement the following relevant definitions are set out :
  2. The Share Purchase Agreement relevantly provides:

Section 2.01 Sale and Purchase ...


(a) Upon the terms and subject to the conditions set forth in this Agreement, the Selling Shareholder agrees to sell, transfer, convey and deliver and the Purchasers agree to buy 216 fully paid A Ordinary Shares in the Company (the "Shares") on the Completion Date.

(b) The aggregate purchase price of the shares is 4.62 million Dollars ($4, 620,000)(the "Share Purchase Price").

(c) .......
Section 2.02 Completion ...

(a) Subject to the terms of this Agreement and the satisfaction (or waiver by the Purchasers) of the Completion Conditions, either the selling shareholder or the Purchasers may deliver a Purchase Notice to the other stating that all Completion Conditions have been satisfied (or waived by the Purchasers) and stating the date on which the Purchase is to be completed, which shall be a date which is on or prior to the Cut-off Date and not less than ten (10) Business Days after the delivery of the Purchase Notice (such date being the "Completion Date").

(b) Completion shall take place at Brisbane and/or Port Moresby on the Completion Date.

(c) At Completion:

(i) the Purchasers shall pay the Share Purchase Price in Dollars to the following account of the Selling Shareholder:
...

(ii) the Selling Shareholder shall:

(A) transfer to the Purchasers, or as the Purchasers direct, the shares free of all Liens or other encumbrances or rights of third parties and ensure that the Company records the Purchasers as the legal and beneficial owner of the Shares in the Company's Share Register; and
(B) procure that the Company delivers to the Purchasers, or as the Purchasers direct: (1) a new share certificate in customary form; and (2) a certified copy of the relevant extract ofthe Company's Share Register evidencing the Purchasers' valid title to the Shares.

The parties agree that the fulfillment of the obligations of the Selling Shareholder as set forth in section 2.02(c)(ii)(A) and (B) are conditions precedent to the application of any funds paid by the Purchasers under section 2.02(c)(i) and that, accordingly, any funds paid by the Purchasers in accordance with section 2.02(c)(i) shall be held in trust by the Selling Shareholder (for the benefit of the Purchasers) until the acts set forth in section 2.02(c)(ii)(A) and (B) have been performed and the Purchasers have notified the Selling Shareholder in writing that such funds can be released to the Selling Shareholder...
...

Section 2.03 Requirements until Completion

  1. Prior to completion, the Selling Shareholder shall ensure that the Company conducts its business in the ordinary course and uses, and its Subsidiary uses, its reasonable best efforts to preserve intact its business, organisations and relationships with third parties and to keep available the services of its present officers and employees.
  1. Relevant defined terms in the Share Purchase Agreement are:
  2. A mechanism for the redemption of shares in Kingston was set out in the Shareholder Agreement as follows:

Section 4.01 Redemption of Shares ...


(a) Each of the investors will have the option to require the Company to redeem its A Ordinary Shares to the extent permitted by law as follows:

(i) on the fifth (5th) anniversary of the Closing Date - 196 A Ordinary Shares; and

(ii) on the sixth (6th) anniversary of the Closing Date - 196 A Ordinary Shares.

(b) A Ordinary Share shall be redeemed for an amount in cash equal to the greater of:

(i) the Net Asset Value per share; or

(ii) the amount per share as is equivalent to a price earnings (PE) multiple equal to the investor's entry multiple based on the Net Profit After Taxation (adjusted to (a) add expenses relating to Enviro Technologies and amalgamation of the Amalgamating Companies... or

(iii) the then current market value of the A Ordinary Shares, ascertained by a reputable independent third party, plus all accrued but unpaid dividends...
(c) ...

(d) A redemption of shares will be subject to Applicable Law and any rights of existing chargeholders. A Ordinary Shares redeemed shall be cancelled and may not be reissued by the Company.

  1. Relevant defined terms in the Shareholders Agreement are:
  2. IFC provided a Subscription Notice dated 14 April 2010 to Kingston,stating:
INTERNATIONAL FINANCE CORPORATION....
hereby apply for 88 A Ordinary Shares in the Company fully paid in accordance with the provisions of Subscription Agreement dated 2ndMarch, 2010.

INTERNATIONAL FINANCE CORPORATION agrees to accept the said shares allotted and to be bound by the Constitution of the Company and hereby authorize our name to be placed on the Register of Members in respect of the said shares as holding the same beneficially.

  1. It is not in dispute that, on 20 April 2010, and to give effect to the Subscription Agreement and the Share Purchase Agreement, Kingston did the following:
  2. On or about 30 April 2010, Kingston subsequently lodged documents with the Investment Promotion Authority, reporting the above events.
  3. On 7 March 2016 IFC served a “Notice for Redemption of Shares” on Kingston. The notice was in the following terms:
NOTICE FOR REDEMPTION OF SHARES

Reference is made to the shareholders agreement dated 2 March, 2010 (the “Shareholders Agreement”) among KK Kingston Limited (the “Company”), Keith Kingston, International Finance Corporation (“IFC”) and Kula Fund II Limited. Terms defined in the Shareholders Agreement and not otherwise defined in this letter, shall have the same meaning when used in this letter.

Pursuant to Article IV Section 4.01(a)(ii) of the Shareholders Agreement, IFC is hereby exercising its option to redeem 196 of A Ordinary Shares held by IFC on March 10, 2016 being the sixth (6th) anniversary of the Closing Date.

The Redemption Price is to be determined pursuant to Article IV Section 4.01(b) of the Shareholders Agreement.

  1. According to evidence of Mr Hasham Mehmood, a senior investment officer with IFC, in his affidavit sworn 26 February 2018, a replacement notice was issued by IFC and served because Kingston advised IFC, through its then chairman Mr Bob Hansen, that the first notice of 7 March 2016 contained an incorrect date.
  2. IFC issued the replacement notice on 12 April 2016. The notice relevantly stated:
NOTICE FOR REDEMPTION OF SHARES

Reference is made to the shareholders agreement dated 2 March, 2010 (the “Shareholders Agreement”) and the subscription agreement dated 2 March, 2010 (the “Subscription Agreement”), both agreements among KK Kingston Limited (the “Company”), Keith Kingston, International Finance Corporation (“IFC”) and Kula Fund II Limited.

Reference is also made to the share purchase agreement dated 2 March, 2010 (the “Share Purchase Agreement”) among Keith Kingston, IFC and Kula Fund II Limited.

Terms defined in the Shareholders Agreement, the Subscription Agreement and the Share Purchase Agreement, and not otherwise defined in this letter, shall have the same meaning when used in this letter.

Pursuant to Article IV Section 4.01(a)(ii) of the Shareholders Agreement, IFC is hereby exercising its option to redeem 196 of A Ordinary Shares held by IFC on the sixth (6th) anniversary of the Closing Date.

The Redemption Price is to be determined pursuant to Article IV Section 4.01(b) of the Shareholders Agreement.

  1. Material before the Court includes a “NOTICE OF REDEMPTION OR ACQUISITION OF SHARES BY COMPANY” in Form 11 as set out in Schedule 1 of the Companies Regulation 1998. Form 11 is prescribed for the purposes of s 56(4) of the Companies Act 1997 which provides:
(4) Immediately following the acquisition or redemption of shares by a company, the company shall submit a notice in the prescribed form to the Registrar of the number and class of shares acquired or redeemed.

  1. A company document of Kingston headed “Particulars of Notice of Redemption or Acquisition by Company (Form 11)” refers to redemption of shares, the “date redeemed” being 20 April 2016, and relevantly “Shareholder 1” being IFC.
  2. The “Notice of Redemption or Acquisition of Shares by Company” of Kingston was dated 26 April 2016, referred to the date of redemption of shares in Kingston held by IFC on 20 April 2016, and appeared to be under the hand of “NIGEL PAUL MERRICK, SECRETARY”.
  3. From 20 April 2016, IFC no longer held the relevant shares in, and was no longer a shareholder of, Kingston.
  4. On 8 January 2018 the lawyers for IFC, Allens, wrote to Kingston care of Kingston’s lawyers Warner Shand Lawyers. The subject of the letter was “Debt owing to International Finance Corporation – Statutory Demand”. The letter attached, by way of service, a Statutory Demand in the statutory Form 42 prescribed by s 337 (2)(b) of the Companies Act 1997 signed by Mr Sergio Pimenta, Director and was dated 29 December 2017. Key details of the statutory demand were as follows:
Name of debtor company: K.K. Kingston Limited

Full name of creditor: International Finance Corporation.

Description of debt: Payment of the redemption price of 196 A Ordinary Shares held by International Finance Corporation in the Company, K. K. Kingston pursuant to Section 4.01(b) of the Shareholders Agreement dated 2 March 2010 executed between K.K. Kingston Limited, Keith Kingston, International Finance Corporation and Kula Fund II Limited.

Amount of debt (s): K7,264,333.33

NATIONAL COURT PROCEEDINGS

  1. On 6 February 2018, Kingston filed an originating summons in OS No. 50 of 2018 (Comm), seeking the following relief:
    1. Pursuant to Section 338(1) of the Companies Act 1997, an Order that the Creditor’s Statutory Demand for Payment of Debt dated 21 December, 2015 demanding the sum of K7,264,333.33 and served on the Plaintiff on 8 January 2018, be set aside.
2. An Order that the Defendant shall pay the Plaintiff’s costs of these proceedings.

3. Such further or other orders as this Honourable Court deems fit.

4. The time of entry of the Orders be abridged to the time of settlement by the Registrar which shall take place forthwith.

(We note that in written submissions IFC conceded that the date identified in paragraph 1 of the Originating Summons as 21 December 2015 was an error).


  1. The primary Judge summarised the submissions before the Court in the following terms:
    1. Kingston contends that the statutory demand should be set aside as amongst others:
      1. There is a substantial dispute as to whether the amount claimed by IFC in the statutory demand is owing or is due. Kingston contends that there is a live issue between the parties as to the effective date of redemption and whether IFC had any right to redeem its shares in Kingston at all;
      2. If there is an amount due and owing, then there is a substantial dispute as to that amount as the redemption price cannot be calculated until uncertainty as to the redemption date is resolved;
      1. If IFC did correctly exercise its right to redeem its shares on the sixth anniversary of the closing date, the redemption price is less than the sum claimed.
    2. IFC contends that the statutory demand should not be set aside as amongst others:
      1. Kingston allocated shares to IFC and issued a share certificate on 20thApril 2010. The subscription date is 20th April 2010 and any non-compliance by IFC has either been waived by Kingston’s conduct, or the requirements of s 2.01(b) subscription agreement have been varied by the conduct of both parties. The sixth anniversary is 20th April 2016;
      2. IFC relies solely on the notice of redemption dated 12th April 2016. By its conduct, Kingston has accepted the validity of the notice of redemption date 12thApril 2016 by cancelling IFC’s 196 A Ordinary shares subsequent to the receipt of the 12thApril 2016 notice;
c) To the extent that Kingston disputes the quantum of the amount owing and due, IFC is prepared to accept a reduction in its debt to K7,118,666.66.

  1. His Honour first considered whether there was a substantial dispute that the debt was owing or due within the meaning of s 338 (4)(a) of the Companies Act 1997, and noted that Kingston relied on the Supreme Court decision in Northbuild. His Honour then observed that Kingston relied on PNG Balsa Company Ltd v New Britain Balsa Company Ltd (2004) N2520 (PNG Balsa Company) as authority for the proposition that it only needed to demonstrate a “fairly arguable basis” that a substantial dispute existed, and that basis must be genuine. The primary Judge accepted this principle, referring further to BeMobile Ltd v Wettao (2014) N6776 at [13] and the decision of the High Court of New Zealand in Bishop Industries (Wellington) Limited v Construction Labour Hire Limited [2016] NZHC 2848 at [16].
  2. His Honour noted the contention of Kingston that clause 4.01(a) of the Shareholders Agreement allowed IFC to redeem its shares in Kingston on the fifth and sixth anniversaries of the “Closing Date”, and continued:
    1. ... The “Closing Date” cannot be later than 31st May 2009 or any such other date as the parties must agree. There is no evidence of any such agreement and it is not disputed that the two purported redemption notices were given after 31st May 2015. They are therefore are [sic]out of time and invalid.
  3. His Honour then had regard to authorities referable to options for the purchase or repurchase of property in particular Hare v Nicoll [1966] 2 Q.B. 130 and Di Luca v Juraise (Springs) Ltd [1997] EWCA Civ 2419, and agreed with the well-established principle that an option for the purchase or repurchase of property must in all cases be exercised strictly within the time limited for the purpose.
  4. His Honour continued:
15. ... after a consideration of the evidence and submissions I am satisfied that Kingston has demonstrated on a fairly arguable basis that is genuine that there is a substantial dispute as to whether the debt claimed by IFC is owing or due. The two purported redemption notices were issued significantly after 31stMay 2015 and there is no evidence before the court that there has been an agreement betweenthe two parties for another “cut-off date” (Closing Date), other than that defined in the subscription agreement being 31stMay 2009. I am satisfied that there is a substantial dispute as to whether IFC has complied strictly with the conditions stipulated for the exercise of its option and consequently whether the debt claimed is owing or due.

16. In the exercise of this Court’s discretion, I am satisfied that the statutory demand should be set aside. Given this it is not necessary to consider the other submissions of counsel.

  1. In the result the National Court ordered that, pursuant to s 338(1) of the Companies Act 1997, the Creditor’s Statutory Demand for Payment of Debt dated 21 December 2015 demanding the sum of K7,264,333.33, and served on Kingston on 8 January 2018, be set aside. IFC was ordered to pay the costs of Kingston.

GROUNDS OF APPEAL IN THE SUPREME COURT

  1. On 1 October 2018, the appellant filed a Notice of Appeal, appealing the whole of the decision and orders made on 23 August 2018 by the primary Judge. The appellant relies on two grounds of appeal, each of which has a number of sub-grounds. The grounds of appeal are as follows:
    1. The primary judge committed errors of law or mixed fact and law and his discretion thereby miscarried and his Honour erred in finding that there was a substantial dispute as to whether IFC has complied strictly with the conditions stipulated for the exercise of its option and consequently whether the debt claimed was owing or due in that:
      1. His Honour failed to take into account or sufficiently take into account that under the shareholders agreement the "closing date" meant the "subscription date" which under the subscription agreement had the meaning set forth in section 2.01 of the subscription agreement;
      2. His Honour failed to take into account or sufficiently take into account the provisions of the subscription agreement relating to the issue of shares in the Respondent to the Appellant (the Subscription Shares), in particular section 2.01 contained in article II of that agreement;
      3. His Honour failed to take into account or sufficiently take into account that under the subscription agreement the Subscription Shares were to issue to the Appellant on the "subscription date";
      4. His Honour failed to take into account or sufficiently take into account the date on which the Respondent issued the Subscription Shares to the Appellant, namely 20 April 2010;
      5. His Honour failed to take into account or sufficiently take into account the Appellants evidence regarding the issue of the Subscription Shares to the Appellant;
      6. His Honour failed to take into account or sufficiently take into account that under the shareholders agreement the Appellant had the option to require the Respondent to redeem the Subscription Shares on the 6th anniversary of the "closing date" which meant the "subscription date";
      7. His Honour failed to take into account or sufficiently take into account that under the shareholders agreement immediately following such redemption the Subscription Shares were to be cancelled:
      8. His Honour failed to take into account or sufficiently take into account that the Respondent had accepted the Appellants notice for the exercise of the Appellants option to require the Respondent to redeem the Subscription Shares;
      9. His Honour failed to take into account or sufficiently take into account that the Respondent redeemed and cancelled the Appellants Subscription Shares after receipt of the Appellants notice for the exercise of the Appellants option;
      10. His Honour failed to take into account or sufficiently take into account that the Respondent redeemed and cancelled the Appellants Subscription Shares on 20 April 2016;
      11. His Honour failed to take into account or sufficiently take into account that on and from the cancellation of the Subscription Shares the Appellant no longer held such shares and was no longer a shareholder in the Respondent;
      12. His Honour failed to take into account or sufficiently take into account that under the shareholders agreement the "redemption price" as defined, was payable by the Respondent to the Appellant;
      13. His Honour failed to take into account or sufficiently take into account that the Respondent did not contend it had any other basis to cancel the Subscription Shares, other than pursuant to acceptance of the Appellants exercise of its option;
      14. His Honour failed to take into account or sufficiently take into account that despite redeeming and cancelling the Subscription Shares after receipt of the Appellants notice for the exercise of the Appellants option, the Respondent failed to make any payment for such shares as required by the agreements between the parties;
      15. His Honour failed to take into account or sufficiently take into account that any dispute over the redemption date for the Subscription Shares prior to the issue of the statutory demand did not relate to the validity of the Appellants option but the date for determining the value of such shares;
      16. His Honour failed to take into account or sufficiently take into account that the exercise by the Appellant of the option after 31 May 2016 did not give rise to a substantial dispute as to whether the option had been properly exercised
      17. His Honour erred in finding there was no evidence before the Court there had been an agreement for a "closing date" after 31 May 2009.
    2. The primary judge committed errors of law or mixed fact and law and his discretion thereby miscarried and his Honour erred in finding that the statutory demand should be set aside in that:
      1. His Honour failed to take into account or sufficiently take into account that there was a debt due by the Respondent to the Appellant that was not the subject of a substantial dispute, nor was it the subject to a counterclaim, set-off or cross­demand;
      2. His Honour failed to take into account or sufficiently take into account that the Respondents by the evidence of Lutz Heim disputed only a small portion of the debt claimed by the Appellant and there was no substantial dispute as to the balance;
      3. His Honour failed to take into account or sufficiently take into account that the statutory demand should only be set aside to the extent of that dispute:
      4. His Honour failed to take into account or sufficiently take into account that the statutory demand should not be set aside in respect of the debt which was not the subject of a substantial dispute.
  2. The appellant seeks the following orders:
    1. The decision be set aside.
    2. The statutory demand be set aside in respect of all of the amount demanded in excess of K 7,118,666.66. The statutory demand be otherwise upheld in respect of the balance claimed of K 7,118.666.66.
    1. The Respondent be ordered to pay the sum of K 7,118.666.66 to the Appellant within 21 days of the date of this order. In default of payment within that period, the Appellant may make an application to put the Respondent into liquidation.
    1. The Respondent is ordered to pay the Appellant's costs of and incidental to this appeal and the National Court Proceeding.
    2. Such further or other order as this Honourable Court sees fit.


POSITIONS OF THE PARTIES

  1. The first ground of appeal relates to the decision of the primary Judge concerning the purported exercise by IFC of its right of redemption in respect of its shares in Kingston giving rise to the claimed debt. The second ground of appeal relates to issues which his Honour ultimately did not address in the primary judgment, namely in respect of the amount of the debt claimed by IFC.
  2. At the hearing before us, Mr Hill for the appellant made oral submissions relating to the first ground of appeal only, although he also provided further written submissions concerning the second ground of appeal if the Supreme Court was minded to consider that ground and make a finding on whether there was in reality a substantial dispute concerning the quantum of the debt owed by Kingston to IFC. Mr Hill accepted, however, that the Supreme Court might not be minded to make rulings on that substantive issue which was not determined by the primary Judge, and that an appropriate order would be for the matter to be returned to the National Court if IFC was successful in its appeal against his Honour’s decision.
  3. In Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1, Gibbs CJ, Wilson, Brennan and Dawson JJ in the High Court of Australia said at 7:
It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.

(Emphasis added.)

  1. In our view these principles are equally applicable to the consideration of issues on appeal in the Supreme Court.
  2. To the extent that the primary Judge did not determine issues relating to whether there was a substantial dispute concerning the quantum of the alleged debt, if we take the view that his Honour erred in respect of that part of the case he did decide, it would be appropriate to remit the proceedings to the National Court for proper determination of such issues. Accordingly, we will confine our decision to the questions raised in the notice of appeal insofar as they relate to that which his Honour did decide.
  3. Turning now to those submissions, we note the following.
  4. In summary, IFC submitted that:
  5. Kingston submits, in summary:

CONSIDERATION

  1. The statutory demand regime is found in Pt XVIII Div5 of the Companies Act 1997. In particular s337 provides:
337. STATUTORY DEMAND.

(1) A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.

(2) A statutory demand shall–

(a) be in respect of a debt that is due and is not less than the prescribed amount; and

(b) be in the prescribed form; and

(c) be served on the company; and

(d) require the company to pay the debt, or enter into a compromise under Part XV, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within one month of the date of service, or such longer period as the Court may order.

  1. The consequences of a debtor company failing to comply with a statutory demand are very serious. A debtor company which has failed to comply with a statutory demand is presumed to be unable to pay its debts as they become due in the ordinary course of business (unless the contrary is proved, and subject to s 336 of the Companies Act 1997): s 335 of the Companies Act 1997. Further, in circumstances where the Court is satisfied that the company is unable to pay its debts as they become due in the ordinary course of business, the Court may appoint a liquidator pursuant to s 291(3)(a) of the Companies Act 1997.
  2. The prescribed amount for the purposes of s 337 is K1,000, so prescribed by s 16 of the Companies Regulation 1998. The fact that the statutory demand procedure can lead to the liquidation of a company in respect of failure of the debtor company to pay what could be, in relevant circumstances, the relatively modest debt of K1,000, means that the safeguards set out in s 338 of the Companies Act 1997 are entirely appropriate. Specifically – the debtor company can apply for an order that a statutory demand served on it be set aside. Section 338 provides:
338. COURT MAY SET ASIDE STATUTORY DEMAND.

(1) The Court may, on the application of the company, set aside a statutory demand.

(2) The application shall be made, and served on the creditor, within one month of the date of service of the demand.

(3) No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the Court may extend the time for compliance with the statutory demand.

(4) The Court may grant an application to set aside a statutory demand where it is satisfied that –

(a) there is a substantial dispute whether or not the debt is owing or is due; or

(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) the demand ought to be set aside on other grounds.


(5) A demand shall not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.


(6) In Subsection (5), "defect" includes an immaterial misstatement of the amount due to the creditor and an immaterial misdescription of the debt referred to in the demand.


(7) An order under this section may be made subject to conditions.


(Emphasis added.)


  1. Turning now to these proceedings – in short the primary Judge found that there was a substantial dispute between the parties as to whether or not the debt claimed by IFC in respect of the redemption of its shares was owing or due.
  2. In Northbuild the Supreme Court observed as follows:
The power conferred on the Court to set aside a creditor’s statutory demand pursuant to section 338 is discretionary. The discretion of the Court conferred by section 338 is constrained by the terms of section 338 (4), and more generally by the requirement that the discretion be exercised judicially. Principles applicable to appellate review of an exercise of judicial discretion were set out by Dixon, Evatt, and McTiernan JJ in the High Court of Australia in House v R (1936) 55 CLR 499 at 504-5 in the following terms:

The manner in which the appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure to properly exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

(Emphasis added.)

  1. Further, in Curtain Bros the Supreme Court said:
The appellate Court will not interfere with a discretionary judgment on a procedural matter within its jurisdiction, except where the exercise of the discretion is clearly wrong. A discretionary judgment may be set aside if an identifiable error occurred in the exercise of discretion. Alternatively, it may be set aside where there is no identifiable error, but the resulting judgment or order is “unreasonableor plainly unjust” and such that an error can be inferred. These principles are well established.

(Emphasis added.)

  1. In respect of the question his Honour was required to consider in light of Kingston’s originating summons, namely whether there was a “substantial dispute” whether or not the debt claimed by IFC was owing or was due, the principles his Honour was required to apply are relatively well settled. In PNG Balsa Company Ltd v New Britain Balsa Company Ltd [2004] PGNC 247, Lenalia J considered the test which should apply on an application to set aside a statutory demand, and said:
By my reading of three New Zealand authorities that of BB Shipping (NZ) Limited CIV – 2003 – 404 – 2626, Fletcher Homes Limited v Be Ellis and S.Baldick M 471 im 99, judgements of MASTER Lang and Master Fair of the High Court of New Zealand and Taxi Trucks Ltd v Nicholson [1989] 2 NSLR 297, the principles set out in the above cases say that first, to set aside a statutory demand, an application must demonstrate that “there is arguably a genuine” and substantial dispute. This simply means that there must be some evidence to show that the debtor company owes debts and such debts ought to be adequately itemised. Secondly, where there is mere assertions that there exists a debt or debts is not sufficient. Materials short of proof is required to support the claim that the debt is disputed. Thirdly, where proof has been given that there exist a substantial dispute, the matter should be resolved in other means. See the case of Queens City Residential Limited v Patterson Co-Partners Architects (No.2) 3 NZLR 307.

  1. In the present case, the primary Judge found that there was a fairly arguable basis, that was genuine, that there was a substantial dispute. This was in circumstances where:
  2. Mr Hill for IFC submitted that his Honour ought to have found that the effect of the subsequent conduct of the parties was that the “Closing Date” referable to the redemption could only be 20 April 2010 when steps were taken by Kingston to give effect to the Subscription Agreement and the Share Purchase Agreement, and therefore the fifth or sixth anniversary to which cl 4.01 of the Shareholders Agreement referred had to be referable to 20 April 2010.
  3. In our view however, such a conclusion is by no means obvious, or free from substantial dispute on these facts. Indeed Kingston does dispute such an interpretation – Mr Molloy for Kingston submitted that 31 May 2009 could be found to be the “Closing Date” within the meaning of cl 4.01 of the Shareholders Agreement, particularly as it was nominated as such on proper construction of the relevant contractual documentation.
  4. We agree that this is a potential conclusion. The determination of the proper date for exercise of the contractual right of redemption by IFC is not a simple and obvious matter as submitted by Mr Hill. There is clearly a dispute between the parties in relation to the Closing Date and therefore the final date on which the appellant could exercise that contractual right of redemption. To determine this dispute it is necessary to examine principles of contract law and construction. We note, for example, there is a real legal question as to whether the actions of IFC in issuing the Subscription Notice, Kingston issuing the subscription shares and IFC accepting these shares contractually gave rise to a new “subscription date” in circumstances where the terms of the contract expressly stated that the subscription date was to be no later than the cut-off date of “31 May 2009 or such other date as the parties may agree”.
  5. Our view that there is a substantial dispute is strengthened by the terms of both the Subscription Agreement and the Shareholder Agreement which appear to restrict the interpretation of those agreements to the specific, written terms as found in those agreements, which are entire agreements. Contrary to the submission of Mr Hill, for the purpose of determining whether there is a substantial dispute within the meaning of s 338(4), it was clearly open to his Honour to reject IFC’s contention that 31 May 2009 could not be the Closing Date, and to further reject IFC’s contention that it was indisputable that IFC had validly exercised a contractual right of redemption.

CONCLUSION

  1. To adopt the language of the Supreme Court in Curtain Bros, we are not satisfied that, in exercising the discretion to set aside IFC’s statutory demand, the learned primary Judge was clearly wrong, or that an identifiable error occurred in the exercise of discretion. His Honour applied correct legal principles in determining that the statutory demand served by IFC on Kingston should be set aside. Further, we are not satisfied that his Honour’s resulting judgment or order was “unreasonably or plainly unjust” such that an error could be inferred.
  2. The role of the Court where a statutory demand has been served is not to resolve any substantial dispute between the parties, such as whether in the present case the conduct of the parties effectively gave rise to an agreement to amend relevant contractual dates. As Hartshorn J correctly observed in Bemobile Ltd v Wettao at [13], where there exists a substantial dispute the matter must be resolved by other means, meaning that the statutory demand must be set aside. We also note, and adopt, the observation of Davani J in Pacific Rim Constructors – Singapore PTE Ltd v Huala Hire & Construction Ltd [2012] N4710 at [17] that:
Once the Court determines or notes from evidence that the debt is not as straight forward as it is made out to be and that it is disputed, then the Court must be hesitant in allowing the Statutory Demand to remain because that will mean that the matter will proceed to a liquidation when the debt is disputed...

  1. The existence of a substantial dispute between the parties in this case is such that it could not be resolved by the statutory demand procedure in Pt XVIII Div 5 of the Companies Act 1997. This of course does not mean that IFC cannot pursue its claims by way of appropriate process in the National Court.
  2. The appropriate order is to dismiss the appeal with costs.

THE COURT ORDERS THAT:

  1. The appeal is dismissed.
  2. The appellant pays the costs of the respondent, to be taxed if not otherwise agreed.

Allens: Lawyers for the Appellant
Corrs Chambers Westgarth: Lawyers for the Respondent


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