The Company Will Repay The Loan When It Can Afford To! How Certain Is That?

Dynamic Window Systems Pty Ltd v Robinson [2016] VSC 152

The Supreme Court of Victoria has dismissed an application by a company to set aside a statutory demand which sought repayment of a loan which was to be repaid “as soon as practicable”.  The Court held that that term as to repayment was void for uncertainty, and that the loan was accordingly immediately due and payable from its inception.

Section 459E of the Corporations Act 2001 (“the Act”) permits a creditor to serve on a company, a demand relating to a single debt, or to two or more debts, that the company owes, that are “due and payable”.  Section 459G provides that a company may apply to the Court for an order setting aside a statutory demand served on the company, and pursuant to section 459H of the Act, if the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which the demand relates, and/or that the company has an offsetting claim, the Court may set aside the demand.

In this case, the company, as plaintiff, sought an order pursuant to section 459G of the Act, setting aside a statutory demand served upon it by the defendant, demanding repayment of loans totalling $250,000.  It contended that it had two arguable defences to the defendant’s claim, the first being that the debt was not due and payable because the company could not afford to repay the loan, and the company had not notified the lender that it would be making any repayment, and the second being that the defendant was estopped from seeking payment.  Primarily, the case turned on the issue of whether the terms of the loan agreement that the loan would be repaid “as soon as practicable”, and that the company would give “at least 2 months’ notice of any repayments”, were void for uncertainty, with the consequence that in the absence of any term as to repayment, the loan was instantly due and payable from its inception.  The Court held the terms to be void, and furthermore that the loan was due and payable at the time of the statutory demand.  The application to set aside the statutory demand was dismissed.

Background

In July 2014, the defendant (Mrs Robinson) lent the plaintiff $250,000.  The circumstances surrounding the loan were as follows.  At the time of the loan, the defendant’s husband (Mr Robinson) was employed by the plaintiff as the General Manager of its manufacturing business.  He had been a director of another company which had sold the business to the plaintiff the previous year.  The plaintiff sought funding from Mr Robinson, and he responded that Mrs Robinson would loan $250,000 to the plaintiff, provided that the plaintiff gave a letter that acknowledged that it was a loan.  A letter was provided, and there were no discussions about the loan being repayable on demand.  The director of the plaintiff deposed that he had discussions about the repayment of the loan in which he said to Mr Robinson that the loan would rank equally with the existing shareholder loans and would be repayable when the plaintiff could afford to do so.  Mr Robinson told him that this was acceptable to him but he wanted in writing for his wife.  A letter dated 21 July 2014 was provided to the defendant, which included an acknowledgement of the loan being provided by the plaintiff to the defendant, and stated that the loan would rank equally with the other shareholder loans and would be repaid as soon as practicable.  The letter also said that at present the plaintiff could give no specific date for repayment, but could provide continuing updates as to the performance of the business, and would give at least two months’ notice of any repayments.

Decision

The Court set out the well-established legal principles as to the meaning of a “genuine dispute” in the context of a challenge to a statutory demand.  The Court noted that the defendant did not dispute the terms of the loan as alleged by the plaintiff, so that there were no disputed questions of fact.  As such, it was an appropriate matter to determine in the context of an application under section 459G of the Act to set aside a statutory demand.

The Court noted that the defendant submitted that the loan of $250,000 was due and payable both at the date of the hearing, and at the time the statutory demand was served.  The defendant contended that the terms of the agreement which the plaintiff relied upon in support of its contention that the loan was not due and payable, were void for uncertainty and could not be enforced.  The defendant submitted that the letter dated 21 July 2014 was riddled with uncertainty in multiple ways.

The Court referred to Bailes v Modern Amusements Pty Ltd [1964] V.R. 436 (“Bailes”), in which Sholl J considered a claim by a shareholder for repayment of a loan made to a company.  There was an agreement in place that loans by the shareholders would be repaid by the company when the company considered that it was in a position to repay them.  In Bailes case the Court held that the agreement was void for uncertainty.

The decision in Bailes case was referred to and applied in Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd 11 ACSR 1; (FCA, Drummond J, 25 June 1993) (“Argyll”).  That case related to an application to set aside a statutory demand.  The plaintiff had borrowed money from the defendant.  The directors of the plaintiff deposed that the loans were owed, however the loans were only repayable when the plaintiff was in a position to repay them.  Drummond J dismissed the application to set aside the statutory demand and held that the term of the borrowing arrangements was void for uncertainty.  Drummond J held that the law is that where there is an agreement for a loan and the time for repayment is not fixed by the agreement, any money advanced will be repayable on demand.

The Court in the instant case then applied Universal Greening Pty Ltd v Sabine [1999] FCA 529; BC9902161 (“Universal Greening”) in which the Federal Court of Australia dismissed an application to set aside two statutory demands.  The defendant in that case made loans to the plaintiff which were allegedly to be repaid only when the plaintiff came into funds so it could afford to make the repayments.  The plaintiff contended that it could not yet afford to repay the loans, and accordingly, the loans were not due and payable.  The Court held that the term was void for uncertainty and the loans were repayable on demand.

Turning to the term as to repayment in the subject case, Associate Justice Efthim held that it was also void for uncertainty. The requirement that “the loan…will be repaid as soon as practicable” was uncertain, and unable to be enforced,  It was entirely dependent upon the subjective intentions of the plaintiff, via its directors, as to when that would occur, and there were numerous factors which could come into play.  For example, would the plaintiff need to satisfy every liability that it had, and then save up enough money to pay the shareholders loans before the defendant’s loan was repaid?  If the plaintiff needed to buy new plant and equipment, would that be done rather than repay the loans?

Moreover, the wording in the 21 July 2014 letter which stated “[the plaintiff] will give at least two months’ notice of any repayments” did not specify any time limit within which the plaintiff was required to give such notice, and added to the uncertainty.

Efthim AsJ held that the term regarding payment was void, and the loan was repayable immediately because there had been no time for payment agreed.  There was also no need for any demand for repayment.  In so holding, His Honour applied the decisions in Ogilvie v Adams [1981] VR 1041, 1043, and 1053, and VL Finance Pty Ltd v Legudi [2003] VSC 57, paragraphs [39]-[58]

The Court also rejected an alternative argument by the plaintiff to the effect that the defendant was estopped from seeking repayment.

The application to set aside the statutory demand was dismissed.

Commentary

Where a company borrows money on the basis that it will repay the lender when it can afford to do so, or on some similar basis, it is highly likely that such a term of repayment will be invalid.  This will render the loan agreement silent as to the time for repayment.  The case law in Victoria, as applied in this case, has established that where a loan agreement is silent as to when repayment is due, the loan is repayable instantly upon the making of the loan, without the need for the lender to make a demand for repayment.  This will render the company exposed to a liability to repay the loan instantly, from the time of the making of the loan.  The lender would be entitled to commence a proceeding to recover payment of the loan, without making any prior demand.  Moreover, the lender would be entitled to serve a statutory demand, which if not satisfied, would then entitle it to take winding up proceedings.