- 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 - [2016] NSWSC 154 - NSWSC 2016 case summary

Supreme Court of NSW|2016-02-16|Before: Black J

Solicitors: Etheringtons Solicitors (Plaintiff) Grace Lawyers (Defendants) File Number(s): 2015/149120

Judgment

By Originating Process filed on 19 May 2015 the Plaintiff, Statewide Developments Realty Pty Limited ("Statewide") applies to set aside a creditor's statutory demand dated 24 April 2015 ("Demand") issued by the Defendants, The Owners Strata Plan No 77457 and 41 other entities and persons. That application is made under s 459G of the Corporations Act 2001 (Cth), which provides that a company may apply to the Court for an order setting aside a creditor's statutory demand served on it. The Defendants accept that Statewide's application had been served within the 21 day period specified in s 459G of the Corporations Act. Statewide accepts that there is no dispute as to the existence or amount of the debt identified in the Demand and instead contends that it has an offsetting claim of sufficient quantum to require that the Demand be set aside under s 459H(1)(b) of the Corporations Act. In oral submissions, Mr Bedrossian, who appears for Statewide, also submitted that there was some other reason why the Demand should be set aside under s 459J(1)(b) of the Corporations Act.
The Demand (Ex P4) claimed the amount of $97,832.68, being unpaid costs pursuant to a certificate of costs in respect of proceedings number 2013/205158 in the Supreme Court of New South Wales ("First Supreme Court Proceedings") which had been registered as a judgment in the Local Court of New South Wales (Ex D2, 1163-1172) and it identifies the judgment as being in favour of the 42 persons who issued the Demand. The Demand did not require verification where it was founded on a judgment debt. I note, for completeness, that that figure claimed in the demand was incorrectly stated on the first page of the Demand as $97,832.86; however, the parties sensibly took no point as to that matter. Mr Bedrossian also points out that some of those 42 persons who issued the Demand were individual owners of units in the Development and others were other body corporates but nothing turns on that for the legal issues raised by this application.
It appears that Statewide carries on, or carried on, a business of providing caretaker services to several owners corporations and owners of individual lots in a substantial development at Rhodes in New South Wales. It will be necessary to refer below to the documentation of that arrangement and to subsequent litigation in respect of it in dealing with aspects of this application. Statewide relies, in support of the application to set aside the Demand, on the affidavit of Mr Charlie Touma dated 19 May 2015. Mr Touma's evidence was that he was a director of Statewide from 28 February 2007 until 2013 and, during that time, he had the responsibility for day-to-day operational matters and running Statewide. Mr Touma described the physical structure of the buildings comprising the development for which Statewide had been appointed caretaker and manager and set out the history of proceedings in this Court and the Local Court. Mr Touma's affidavit also identified the reasons why Statewide contends that the Demand should be set aside, referring to Statewide's then claim to $961,777.24 inclusive of interest, filing and solicitor's fees, representing amounts due for work done from the period 28 August 2007 to 2014, additional payments claimed in accordance with increases in the consumer price index ("CPI"), claims to additional expenses and claims to an uplift for goods and services tax. That claim was subsequently dismissed as noted below, but Statewide recently commenced further proceedings in the District Court of New South Wales ("District Court Proceedings") against the First-Sixth Defendants in these proceedings which claim a substantially reduced amount over a shorter time period.
Statewide relies, in support of the application to set aside the Demand, on the affidavit of Ms Joanna Touma dated 10 July 2015. Ms Touma's evidence is in turn that she was responsible for preparation and issue of invoices by Statewide, and she refers to several invoices issued by Statewide to the strata manager for the Defendants and to a claim that Statewide had undercharged under the relevant contracts by failing to charge CPI increases and by charging its remuneration on a GST inclusive rather than GST exclusive basis.
The Defendants rely on the affidavit of Mr Rhys Jordan dated 17 September 2015. Mr Jordan is an employee of the strata manager for the Defendants and had day-to-day management of the strata schemes in issue in these proceedings. Mr Jordan's affidavit explains the structure of the development at Rhodes, comprising nine strata schemes, two residential stratum lots and one retail stratum lot. He also refers to the functions of a building management committee established under the relevant strata management statement, which was responsible for maintaining and dealing with shared facilities in respect of the development. Mr Jordan refers to the commencement of the First Supreme Court Proceedings by Statewide and his affidavit exhibits a substantial number of relevant books and records of the relevant strata schemes.
The Defendants also relied on the affidavit of a solicitor in the firm acting for them, Ms Sylvia Quang, dated 17 September 2015, which refers to the history of the First Supreme Court Proceedings which were dismissed when security for costs was not provided; the costs assessment and subsequent costs judgment in respect of those proceedings; the commencement by Statewide of subsequent proceedings in the Local Court of New South Wales ("Local Court Proceedings") which were also dismissed prior to a hearing; the commencement by Statewide of further proceedings in this Court (Second Supreme Court Proceedings") which sought to transfer the Local Court Proceedings to this Court and expand their scope, and the discontinuance of those proceedings; and the issue of the Demand on 24 April 2015. Ms Quang's evidence is also that she considers the Demand was issued reasonably, for reasons which she indicates. It does not seem to me that that evidence advances matters, other than potentially as to costs, because, as Mr Bedrossian points out, that is a matter which the Court must determine objectively rather than by reference to the subjective belief of the Defendants or their legal representatives. Ms Quang's affidavit does not address the further proceedings commenced by Statewide in the District Court of New South Wales which were commenced after her affidavit had been filed. I will refer further to these various proceedings below.

The nature of an offsetting claim

As I noted above, Statewide seeks an order that the Demand be set aside on the basis that it has an offsetting claim exceeding the amount of the Demand under s 459H(1)(b) of the Corporations Act. The definition of "offsetting claim" in s 459H(5) of the Corporations Act is particularly important in this application, and that term is defined as: "[A] genuine claim that the company has against the respondent by way of counter-claim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as that to which the demand relates)." The term "respondent" is in turn defined in s 459H(5) as "the person who served the demand on the company". If the Court is satisfied that the company has an offsetting claim, as defined, it is required to calculate the "substantiated amount" of the relevant debt by deducting any offsetting claim from the admitted amount of the debt: s 459H(2).
A company can establish an "offsetting claim" if there is a "serious question to be tried" as to whether the company has such a claim against the creditor and that claim is arguable: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 356-7; Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 603-4 . Mr Bedrossian relied upon my summary of the principles applicable to establishing an offsetting claim in Re PPK Group Ltd [2015] NSWSC 1498 at [25]-[27], and particularly the passage I had there cited from the decision of the New South Wales Court of Appeal in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85n NSWLR 601 at [30] ("Britten-Norman"), as follows: "A company can establish an "offsetting claim" if there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 356-7. In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605, in the context of an offsetting claim, Thomas J observed that: '… beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an off-setting claim (not the likely result of it).' In Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 at [30]-[31] and [39]-[55], the Court of Appeal in turn referred to the relatively low minimum requirements for demonstrating an offsetting claim. The Court of Appeal there noted at [30] that: 'It is settled law that s 459H requires the court to be satisfied that there is a serious question to be tried: see Scanhill v Century 21 Australasia at 467, or an issue deserving of a hearing as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824 ; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted with sufficient particularity to enable the court to determine that the claim is not fanciful'. The Court of Appeal there observed at [36] that there must, relevantly, be evidence that satisfies the court that there is a "serious question to be tried" or "an issue deserving of a hearing" or a "plausible contention requiring investigation" of the existence of an offsetting claim. The Court of Appeal summarised the position (at [47]) as being that the court's role is: 'to determine whether there was plausible evidence to establish the existence of a genuine dispute [or offsetting claim], not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim.' The Court also observed that evidence necessary to satisfy the test of a "serious question to be tried" or "an issue deserving of a hearing" or a "plausible contention requiring investigation" need not conclusively prove a claim or be substantially non-contestable."
Mr Baird, who appears for the Defendants, also relies on Britten-Norman at [30] for their Honours' summary as to the matters required to be established in order to establish an offsetting claim, namely that there is a "serious question to be tried" or "an issue deserving of a hearing". As Mr Baird also points out, the decision in Britten-Norman has subsequently been applied on several occasions in this Court and, I would add in other Courts; for example, Re Wollongong Coal Ltd [2015] NSWSC 1680.

Whether Statewide has an offsetting claim against the Defendants

I first address the question whether an offsetting claim exists and then the further question whether any such claim is genuine. Those issues would not generally be required to be dealt with separately but they are distinct in the particular facts of this case.
Mr Bedrossian submits that Statewide can establish an offsetting claim based on a claim against the First-Sixth Defendants in these proceedings, although they are only six of the 42 persons who have a costs judgment in respect of the costs of the First Supreme Court Proceedings and issued the Demand. Mr Bedrossian submitted (T9) that, as a matter of language, where s 459H(5) of the Corporations Act uses the word "respondent", then a claim against any one of the Defendants is a claim against the "respondent".
Conversely, Mr Baird submits that an offsetting claim cannot be established unless that claim is available against all of the persons who issued the Demand. Mr Baird submits that Statewide does not have a genuine offsetting claim against "the respondent" as defined in s 459H(5). As I noted above, the "respondent" is there defined as the person who served the creditor's statutory demand on the relevant company and, in the present case, that is the 42 Defendants to the First Supreme Court Proceedings, who in turn obtained an order for costs in their favour and an assessment of those costs which has now taken effect as a judgment in their favour in the Local Court of New South Wales. Mr Baird rightly points out that those 42 judgment creditors, acting jointly, issued and served the Demand against Statewide. Mr Baird submits that, in order for Statewide's claim to be an "offsetting claim" as defined, that is a claim against "the respondent" as defined in s 459H(5) of the Corporations Act, it must be a claim against all of the 42 persons who issued the Demand. If that proposition is correct, it is fatal to Statewide's claim to set aside the Demand, since its claim is brought against only six of the 42 persons who have the benefit of the costs orders in the First Supreme Court Proceedings, the judgment in respect of those orders and who issued the Demand.
It seems to me that the Defendants' approach is correct as a matter of construction of s 459H of the Corporations Act and that, as a matter of language, the reference to the person who served the creditor's statutory demand, in s 459H(5), when applied to one or more persons, must mean all and not some of the persons who issued the demand, in the absence of any textual indication to the contrary. That conclusion seems to me to be supported by the reasoning of Barrett J in Toorallie v Black [2001] NSWSC 1088 at [20]-[28], to which both Counsel referred, which addressed the issue which now arises in this case. His Honour there noted, in my view correctly, that that issue turned entirely upon the construction of s 459H of the Corporations Act, although the matter had been raised before him as a point of "mutuality". In that case, a creditor's statutory demand had been issued by three persons and his Honour held (at [23]) that an offsetting claim could only be established if there was a genuine claim against those three persons. Although proceedings in that case had been commenced against only two of those three persons, his Honour held that an offsetting claim did exist against those three persons, where a claim was also available against the third of them, and he deferred making orders so as to permit the recipient of the demand to establish that it was presenting a claim against the three persons. His Honour there expressly observed (at [28]) that: "… [s 459H] abandons traditional concepts of mutuality and directs attention only to the question whether the person or persons who served the statutory demand are persons against whom the company has a genuine claim."
Mr Baird submits, and I accept, that the ratio of his Honour's decision is that an offsetting claim under s 459H of the Corporations Act requires an identity between the persons who have served the demand and the persons who have the offsetting claim, a requirement that would have been satisfied in that case after a claim available against the third person who had issued the demand was brought against that person. By contrast, no such identity exists here, or can be achieved, where the Demand was served by 42 persons who could arguably only have served it jointly, and a claim against only 6 of them is now identified and pursued by Statewide, and any claim against the other 36 of them has apparently been abandoned.
Mr Baird also submits, and I also accept, that I should follow the decision of Barrett J in Toorallie v Black above unless I am satisfied that that decision is plainly not correct. I should take that course both because that decision is a decision of this Court dealing with the same matter, and because it is a decision, albeit not at an appellate level, in respect of uniform national corporations legislation: Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 492; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135]; see also M Leeming, "Farah and its Progeny: Comity among Intermediate Appellate Courts" (2015) 12 TJR 165 at 177. Quite apart from that matter, it seems to me that Barrett J's decision is correct, having regard to the terms of the legislation.
Mr Baird's submission also finds some further support, by way of analogy, in Randall Pty Ltd v Chepan Pty Ltd [2009] NSWSC 783; (2009) ACSR 267, where White J referred to authority that, in the ordinary course, all creditors were required to authorise the service of a bankruptcy notice for a debt owed to them jointly: Australian Workers Union v Bowen [1946] HCA 24; (1946) 72 CLR 575 at 589, 593. Although the question whether all creditors must sign a creditor's statutory demand, if it is not signed by a solicitor acting for all of them, may not be entirely closed, the approach adopted in the bankruptcy case law provides some further support, by way of analogy, for the approach adopted by Statewide. It would arguably be logically inconsistent to require all of the creditors jointly to authorise the issue of a creditor's statutory demand in respect of a costs judgment, on the basis that it is a joint debt, but to treat a claim against any one or more of the creditors in their individual capacities as sufficient to establish an offsetting claim allowing it to be set aside.
Mr Bedrossian also relied (T16-18) on several authorities which emphasise that the principle of "offsetting claim" in s 459H of the Corporations Act does not turn on a strict application of concepts of mutuality: Property Builders Pty Ltd v Carlamax Properties Pty Ltd [2011] NSWSC 1068; 85 ACSR 595 at [28]-[36]; In2Ply Pty Ltd v Amerind Pty Ltd (in liq) (recs and mgrs apptd) [2014] VSC 603 at [28]-[30]. I accept that general proposition, which follows from the fact that s 459H of the Corporations Act requires the application of a statutory test rather than principles of mutuality at general law. However, as I have noted above, it seems to me that that statutory test requires that the offsetting claim exist against the respondent(s) who issued the demand, in the relevant case, and that does not depend upon any application of concepts of mutuality at general law.
Mr Bedrossian also raised wider questions of policy in oral submissions, including whether it was appropriate that creditors should be entitled to rely on the presumption of insolvency which arises from service of a creditor's statutory demand that is not satisfied where a claim existed against only some of the creditors that served the demand. In addressing those submissions, I have had regard to well-established principles of statutory construction, although the parties did not refer to them at any length. In Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [47], the joint judgment of the High Court observed (references omitted) that: "This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself ... The language which has actually been employed in the text of legislation is the surest guide to legislative intention … The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision…, in particular the mischief it is seeking to remedy." In Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 at [39], the joint judgment of the High Court quoted the first sentence of the passage cited above from Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue and again emphasised the primacy of the text in statutory interpretation.
Mr Bedrossian submitted that, in a situation where claims were available against some of the persons that issue a creditor's statutory demand, there was potentially another reason why a demand was not met, other than insolvency, namely the existence of claims against some of those creditors (T8). I accept that the legislature could have taken that view, and provided an additional basis to set aside a creditor's statutory demand where a demand was served by a group of creditors and the company which received it had claims against some of them. Had the legislature taken that view, it would have needed to deal with other questions, including whether a demand should be set aside if, for example, many joint creditors served a single demand and a claim was available against only one of them, or whether it should only be set aside if a claim was available against a significant number of the creditors who had served the demand. However, it does not seem to me that s 459H of the Corporations Act can be read in the manner for which Mr Bedrossian contends, because of any a priori assumption that that approach would have been a desirable view for the legislature to take as a matter of policy.
Mr Bedrossian also pointed to various consequences of the approach for which the Defendants contend which he characterised as inconvenient or inappropriate as a matter of policy. These included, for example, that an offsetting claim may not be available where a company served with a creditor's statutory demand had a claim against the majority, but not all, of the persons who issued the demand. On the other hand, as Mr Bedrossian accepted in the course of oral submissions (T14), the approach for which he contends has the result that an offsetting claim could be established if, where many persons had served a statutory demand, a claim existed against only one of them. Each of those propositions points to a result of the definitions of "offsetting claim" and "respondent" in s 459H(5) of the Corporations Act, and whether that result is convenient or inconvenient seems to me to be largely a matter of perception. That emphasises the necessity of construing the section by reference to orthodox principles of construction, by reference to its language read in its statutory context, rather than seeking to reason from the consequences of its application in a particular case.
Mr Bedrossian also points, in oral submissions, to the fact that other avenues are available to the Defendants to pursue their claim including, for example, the issue of a garnishee order, and that such an order was in fact issued (Ex D2, 1173) although it did not bring about the recovery of any funds. The existence of other avenues of enforcement of a judgment does not seem to me to be a matter that should lead the Court more readily to set aside a creditor's statutory demand, which is directed, of course, to establishing the insolvency of a company in a proper case. Mr Bedrossian also points out that, if a construction which requires a company to have an offsetting claim against all persons that issued a demand is correct, then a company could not establish an offsetting claim if, for example, an order for costs was made against it in respect of one person against whom it had brought proceedings in error and against which it had no claim (T19-20). I accept that is the consequence of that construction of the section, and that consequence may operate harshly in some circumstances; however, it does not seem to me that the existence of that consequence provides a sufficient basis to read the section in a different manner.
For these reasons, I am satisfied that, irrespective of whether Statewide's offsetting claim is genuine in nature, it is not a claim against the respondent (being the 42 persons who issued the Demand) for the purposes of s 459H(5) of the Corporations Act, and is therefore not an offsetting claim for the purposes of s 459H(1)(b) of the Corporations Act.
Mr Bedrossian also raised an alternative proposition that, if (as I have held) an offsetting claim was not available to Statewide, because its claim was put against only some of the Defendants, then the Demand should be set aside for some other reason under s 459J(1)(b) of the Corporations Act. Mr Bedrossian did not seek to develop that submission at length, because it was only raised after he had completed his oral submissions and because it relied essentially on the other aspects of his submissions. Mr Baird responded that s 459J(1)(b) of the Corporations Act did not authorise the Court to set aside a creditor's statutory demand which was otherwise regular and consistent with the purposes of the Corporations Act and referred to my summary of the applicable principles in Re Infratel Networks Pty Ltd [2012] NSWSC 943 to the effect that: "The court's power to set aside a statutory demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted 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; Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229; CP York Holdings Pty Ltd v Food Improvers Pty Ltd [2009] NSWSC 409. A statutory demand may be set aside under that section where it involves conduct which is unconscionable or an abuse of process: Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; (2005) 157 ACTR 22."
It seems to me that no basis to set aside the Demand is established under s 459J(1)(b) of the Corporations Act. There is nothing inconsistent with the structure or purpose of Pt 5.4 of the Corporations Act or of the creditor's statutory demand procedure in allowing s 459H of the Corporations Act to operate in accordance with its terms, such that an offsetting claim is only available as a basis to set aside a creditor's statutory demand where it exists against all of the persons which issued that demand. It is not necessary to determine whether a case to set aside the Demand under s 459J(1)(b) might have been established if, for example, Statewide had previously tendered payment of costs, possibly based on a reasonable estimate of those costs, to the 36 persons who had issued the Demand against whom it has no offsetting claim because it has not done so.

Whether the claim against the Defendants is genuine

The findings that I have reached above are sufficient to require that Statewide's application to set aside the Demand be dismissed. I will, however, address the question whether the claim by Statewide against the First-Sixth Defendants raises a "serious question to be tried" or "an issue deserving of a hearing" so as to constitute an "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act, against the contingency that an appellate court were to take a different view.
Mr Bedrossian identifies the issues between the parties in this respect as whether, at a time after the first annual general meeting for each of the Defendants, binding contracts were entered into with Statewide; whether the terms of those contracts allowed Statewide an uplift for GST in relation to remuneration payable to it, included a right to CPI adjustments over the period of the contracts and was for a term of ten years, so as to permit Statewide to claim damages for early termination of the contracts by the Defendants; and whether Statewide has a genuinely and seriously arguable claim that the quantum of its claims against the First-Sixth Defendants exceeds the amount claimed in the Demand. It seems to me, as I will note below, that those questions depend on whether Statewide has established a serious question that the Defendants are bound by the caretaker agreements put before extraordinary general meetings of the Defendants in November 2007.
It is desirable to set out the sequence of events on which the parties rely in respect of these claims, before turning to the question whether Statewide has established a serious question to be investigated as to whether contracts were formed in the terms for which it contends and as to the amount of its monetary claims. It was common ground between the parties that there is a substantial overlap between the claims in respect of the six Defendants in respect of the several buildings in the development. Statewide initially focussed on matters relating to "Building A" in its written submissions; the Defendants initially focussed on matters relating to "Building C" in their written submissions; and Counsel helpfully addressed the common issues in respect of "Building B" in oral submissions. I will refer, by way of example, to events in respect of those Defendants in the outline which follows.
On 7 August 2007, notices were given of a first annual general meeting of each of the Defendants to be held on 28 August 2007 (First Defendant, Ex D1, 482-485; Second Defendant, Ex D1, 570-573; Third Defendant, Ex D1, 662-666). Those notices appear to reflect the requirement under the Strata Schemes Management Act 1996 (NSW) that an owners corporation hold its first annual general meeting within two months after the end of the "initial period", as defined, and that agenda of the meeting must include whether or not a building manager should be appointed. Proposed resolution 11 in those notices of annual general meeting provided for the appointment of Statewide as caretaker under s 40A of the Strata Schemes Management Act 1996 (NSW) in accordance with the agreements attached to the notices of meeting (First Defendant, Ex D1, 514-519; Second Defendant, Ex D1, 607-613; Third Defendant, Ex D1, 701-707), which were for a term of three years and related to the relevant buildings and that part of the common property which was set aside for the caretaker's use, as applicable.
It appears that a separate notice was given of an extraordinary general meeting of each of the Defendants to be held on the same date (First Defendant, Ex D1, 486-487; Second Defendant, Ex D1, 605-606; Third Defendant, Ex D1, 699-700) which provided for the appointment of a facilities manager with effect that: "according to clause 11 of the Strata Management Statement that the owners corporation resolved [sic] to adopt the appointment of Statewide Developments Realty Pty Ltd as Facilities Manager/caretaker for the Building Management Committee." That notice did not attach a form of that agreement.
The minutes of the annual general meetings of each of the Defendants held on 28 August 2007 (First Defendant, Ex D1, 526-527; Second Defendant, Ex D1, 617-618; Third Defendant, Ex D1, 710-711) in turn record that it was: "RESOLVED that in accordance with section 40A of the Strata Schemes Management Act 1996 (Act) [Statewide] is appointed as a caretaker and that in accordance with section 238 of the Strata Schemes Management Act 1996 the common seal of the Owners Corporation should be affixed to the agreement as circulated with the notice of meeting." Mr Baird contended that the initial appointment of Statewide as caretaker pursuant to the August resolution took effect, although it appears that the caretaker agreements were not executed in the form approved by those resolutions (T37). It is not necessary to determine whether that submission is correct, given the findings I have reached on other grounds.
The minutes of the extraordinary general meeting of each of the Defendants also held on 28 August 2007 (First Defendant, Ex D3; Second Defendant, Ex D1, 619; Third Defendant Ex D1, 712) record a resolution that: "RESOLVED that in accordance with clause 11 of the Strata Schemes Management Act [sic], the Owners Corporation adopt the appointment [of Statewide] as Facilities Manager/caretaker for the Building Management Committee." The Defendants distinguish, with substantial force, between the appointment of a caretaker in respect of the common property of the relevant strata plans, which was a matter relating to the particular strata plan, and the appointment of a facilities manager/caretaker for the Building Management Committee, which related to the shared facilities for all of the developments.
On 29 October 2007, notices were given of extraordinary general meetings to be held on 14 November 2007 in respect of each of the Defendants (First Defendant, Ex D1, 528-529; Second Defendant, Ex D1, 622-623; Third Defendant, Ex D1, 715-716) to consider resolutions to repeal the resolution passed at the extraordinary general meeting held on 28 August 2007 and to adopt the appointment of Statewide as facilities manager/caretaker for the Building Management Committee and adopt the terms of the new caretaker agreement which was attached. The written caretaker agreements dated 11 October 2007 which were annexed to the notices of meeting (First Defendant, Ex D1, 532-542; Second Defendant, Ex D1, 626-636, MFI 1; Third Defendant, Ex D1, 719-729) relate to the cleaning and building maintenance of the common property of the Defendants, rather than to the shared facilities which were under the control of the Building Management Committee. Those agreements provided, in cl 2.1 for CPI adjustments upon the specified remuneration; cl 4.1 provided that the term of the agreement was ten years, which is the maximum permissible period under s 40B(2) of the Strata Schemes Management Act; and cl 23.2 provided that amounts identified in the agreement were exclusive of GST, implicitly permitting an uplift for GST. It appears that the common seals for the Second-Fifth Defendants had been affixed to the respective caretaker agreements with them prior to the relevant meetings, and the common seal of the First and Sixth Defendants were not affixed to the relevant caretaker agreements with them, relating to Building A and Building K respectively.
The minutes of the extraordinary general meeting of the Defendants held on 14 November 2007 (First Defendant, Ex D1, 545; Second Defendant, Ex D1, 637; Third Defendant, Ex D1, 730) in turn record the passage of resolutions that: "RESOLVED that the previous resolution at the extraordinary general meeting held on 28th August, 2007 be repealed in that according to clause 11 of the Strata Management Statement the owners corporation had resolved to adopt that the appointment of [Statewide] as Facilities Manager/Caretaker for the Building Management Committee. RESOLVED that according to clause 11 of the Strata Management Statement that the owners corporation resolve to adopt the appointment of [Statewide] as Facilities Manager/Caretaker for the Building Management Committee and to adopt the terms of the new Caretaker's Agreement that was distributed with the agenda for this meeting."
By letter dated 30 April 2013, the Building Management Committee wrote to Statewide denying the existence of a written agreement relating to the shared facilities and terminating its services (Ex D1, 394-395). By letters in September and October 2014, the Defendants also wrote to Statewide denying the existence of caretaker agreements, or alternatively alleging that they had expired at the end of the three year terms on 28 August 2010 and terminating such agreements on one month's notice (Ex D1, 547-548, 640-641, 733).
Statewide contends that caretaker agreements took effect between it and each of the Defendants in the form put before the extraordinary general meetings in November 2007, which has a ten year term and which includes provision for a CPI adjustment and states the amount of remuneration payable on a GST-exclusive basis. By contrast, the Defendants contend that the only caretaker agreements formed between Statewide and each of the Defendants were formed in August 2007 (although, as I noted above, not executed) for a term of three years and did not include a provision for a GST uplift in respect of remuneration or for CPI adjustments. The Defendants submit that Statewide's claim is misconceived and based upon a demonstrably incorrect basis and that the Court would ordinarily determine a question of the construction of the contract between the parties in an application to set aside a creditor's statutory demand where the factual matrix for the determination is present and there has been sufficient time for the parties to make proper submissions as to the question. That submission, although it finds support in my observation in Re Infratel Networks Pty Ltd above at [24], may arguably be overstated. On appeal in Infratel Networks Pty Ltd v Gundry's Telco and Rigging Pty Ltd [2012] NSWCA 365; (2012) 297 ALR 372 at [46], the Court of Appeal noted that, although the Court may determine questions of construction of a contract in an appropriate case, that would be the exception and an application to set aside a creditor's statutory demand is not ordinarily the occasion for the Court to construe the contract that is in dispute.
First, the Defendants submit that the relevant caretaker agreements had been executed prior to the notice of the extraordinary general meetings being given on 29 October 2007 and prior to the extraordinary general meetings being held on 14 November 2007. Statewide responds that, so far as the resolution to adopt these agreements occurred after execution of the agreements and the fixing of the common seal by the Second-Fifth Defendants, the Defendants had the capacity to ratify, and had ratified, the previous act of execution of those agreements on their behalf: 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409; (2014) 88 NSWLR 488 at [54]-[59]. Statewide also relies on s 238(4) of the Strata Schemes Management Act 1996 (NSW) which provides that a strata managing agent who has affixed an owners corporation's seal to a document is taken to have done so under the authority of a delegation from the owners corporation. It seems to me that Statewide's reliance on principles of ratification is sufficient to establish that there is a serious question to be investigated whether the passage of the resolution at the extraordinary general meetings on 14 November 2007 constituted a ratification of the earlier execution of the agreements by the strata manager. I note, for completeness, that the parties did not distinguish the position of the First and Sixth Defendants where the agreements are not in executed form from that of the Second-Fifth Defendants in this respect.
Second, the Defendants submit that the extraordinary general meetings held on 14 November 2007 were directed to the appointment of Statewide as facilities manager/caretaker for the Building Management Committee, in accordance with clause 11 of the Strata Management Statement, and that the attachment of caretakers agreements relating to the common property was in error. They point to the distinction between "shared facilities" and "common property" under the terms of the relevant strata management scheme, and submit that the repealed resolution passed at the extraordinary general meeting held on 28 August 2007 was a different resolution from that passed at the annual general meeting held on 28 August 2007.
The critical step in that submission is that the resolutions passed at the extraordinary general meeting on 14 November 2007 were directed only to the entry into an agreement as facilities manager/caretaker for the Building Management Committee, in respect of the shared facilities, and not also separately to entry into the terms of new caretaker agreements in respect of the common property for each of the buildings. That proposition depends upon the inference, which the Court is asked to draw, that the attachment of caretaker agreements relating to the common property of each of the buildings to the notices of meeting was in error. That submission finds support in the fact that there would be no apparent reason for the Defendants to repeal the resolution passed at the extraordinary general meeting held on 28 August 2007 in respect of the shared facilities and then pass a further resolution in the same terms. The most obvious reason to pass a further resolution was that it was intended that a new caretakers agreement relating to the shared facilities was to be attached to the notice of meeting and approved at that meeting, although that did not occur, because agreements relating to the common property were attached to the notice of meeting. The Defendants submit that it follows that the form of caretaker agreements attached to the notice of the annual general meeting of 28 August 2007 with a term of three years was the operative form of the caretaker agreements entered into between Statewide and the Defendants, and there was no valid and subsisting caretaker agreements in the form on which Statewide now relies to establish its claim for damages for early termination, or for CPI adjustments or uplift amounts in respect of GST.
The Defendants' submissions in this respect have substantial force. However, it does not seem to me that the Court can conclude that it would not be reasonably open to Statewide to contend that it did not need to rescind any earlier resolution in respect of the entry into caretakers agreements in respect of common property of each of the buildings, where it appears that the caretaker agreements that had been authorised by the August resolutions had not been executed and arguably had not taken effect; and that the resolutions passed at the November meetings could properly be read as dealing with two separate matters, first the shared facilities and then the entry into the new caretakers agreement. While the submission put by the Defendants may well be accepted at a final hearing, it does not seem to me that it has the result that Statewide's claim does not now raise a serious question for investigation.
Turning now to the quantum of Statewide's claim, Mr Bedrossian submits that Statewide's claims significantly exceed the amount of the Demand, and the Court need not undertake a precise calculation of the amounts claimed or the different prospects of success on different portions of the claims, and relies on the fact that, in respect of GST and CPI adjustments, Statewide's claims would amount to a sum in the order of $158,432.70 as noted below. Mr Bedrossian also relies on the fact that the Defendants' claim for costs is held jointly by them to submit that Statewide is entitled to rely upon claims against any of the Defendants to respond to the claim for costs by them jointly. Statewide contends that it did not bill for the additional GST component or the CPI adjustment over the years in which relevant caretaker agreements were in effect. It issued an invoice claiming those amounts on 28 May 2014 and it pursues those claims in the District Court Proceedings to the extent they are not now barred by the Limitation Act 1969 (NSW). The claims against the First Defendant in respect of Building A total $71,452.83 plus interest, comprising unpaid GST and CPI adjustments calculated as $26,515.50; amounts claimed to have been invoiced but not paid in the amount of $16,599.66; and damages for loss of profits arising from early termination of the contract for Building A calculated as $28,337.67. The total claim against the Second Defendant in respect of Building B is similarly quantified as $131,837.47 plus interest; the total claim against the Third Defendant in respect of Building C is quantified as $66,710.07 plus interest; the total claim against the Fourth Defendant in respect of Building D is quantified as $60,224.16 plus interest; the total claim against the Fifth Defendant in respect of Building J is quantified as $55,856.32 plus interest; and the total claim against the Sixth Defendant in respect of Building K is quantified as $11,924.19 plus interest. Statewide points out that the amounts of its claims can alternatively be classified as total claims in respect of unpaid GST and CPI adjustments of $158,432.70; claims in respect of unpaid invoices of $70,530.70; and claims in respect of lost profits of $163,789.68.
A further claim in the amount of $87,839.00 is pursued by Statewide in the District Court Proceedings against each of the six Defendants, which are claimed to be jointly and severally liable for that amount. That claim relates to services claimed to have been provided to the Building Management Committee in respect of shared facilities in the developments, which are available for use by the residents in each of the relevant developments. It appears that at least part of that claim relates to a one month period said to have been required in respect of notice of termination of Statewide's services.
The Defendants submit that no serious question for investigation is established as to whether the First to the Sixth Defendants were jointly and severally liable for debts or obligations incurred by the Building Management Committee. The Defendants refer to clause 19 of the Strata Management Statement which provides for the relevant members to appoint the Building Management Committee as agent to enable the Committee or a person appointed by it to take any action authorised by resolution. The Defendants also point to the absence of a written agreement between the Building Management Committee and the facilities manager. Again, the proposition that either the Building Management Committee is not liable to Statewide, for these reasons, or that the Defendants are not liable for liabilities of the Building Management Committee, may well be accepted at a final hearing. However, it does not seem to me to have the result that the claim brought by Statewide can be said not to raise a serious question for investigation.
Had I found that Statewide had a claim against the persons who had issued the Demand, being the 42 Defendants to the First Supreme Court Proceedings, I would have found that that claim raised a serious question for further investigation and was sufficient to constitute an offsetting claim for the purposes of s 459H(1)(b) of the Corporations Act. It would follow that, so far as the damages claimed are referrable to the identified causes of action, a serious question for investigation would also be established that Statewide's claim to damages, against the Defendants as a whole and individually (including the amount that is claimed against each of them jointly) exceeded the amount of the Demand, or that part of the Demand which would likely be referrable to each Defendant if they were considered individually.

Whether the conduct of the earlier proceedings is such that there is no genuine claim

Mr Baird also submits that Statewide's claim is not being brought forward in a genuine or bona fide manner. That proposition assumes that whether a claim is "genuine", for the purposes of the definition of "offsetting claim" in s 459H(5), has regard not only to its substantive context, but also to the manner in which it is being pursued. Mr Baird refers to the observation of Palmer J in Macleay Nominees v Belle Property East Pty Ltd [2001] NSWSC 743 at [18] that a "genuine offsetting claim" for the purposes of s 459H(1) means "a claim on a cause of action advanced in good faith, for an amount claimed in good faith" in support of that proposition.
In his opening submissions, Mr Baird pointed to several matters which he contended deprived Statewide's claim, as brought in the District Court Proceedings, of the character of a "genuine" claim or a claim brought in "good faith". Before turning to those matters, I should refer to the chronology of events in respect of the relevant proceedings in greater detail. As I noted above, the Demand claims legal costs in respect of the First Supreme Court Proceedings. In those proceedings, Statewide claimed damages in respect of the termination of the relevant contracts. Statewide was ordered to provide security for costs in respect of those proceedings by judgment of White J delivered on 15 November 2013 ([2013] NSWSC 1750) and subsequently failed to provide that security for costs. By his judgment delivered on 21 March 2014 ([2014] NSWSC 330), Slattery J ordered that the First Supreme Court Proceedings be dismissed by reason of Statewide's failure to provide security for costs. Mr Bedrossian points to the acceptance by the Defendants, recorded in paragraph 10 of the reasons of judgment of Slattery J, that the dismissal of the First Supreme Court Proceedings would not prejudice Statewide's entitlements or its pursuit of subsequent proceedings. While I proceed on that basis, that proposition does not advance the question of the impact of any subsequent failure by Statewide to pay the costs of the First Supreme Court Proceedings on its ability to continue any further proceedings or, in this case, on its ability to assert an offsetting claim asserting the same matters to resist a creditor's statutory demand for those costs.
On 10 April 2014, Statewide filed the Local Court Proceedings claiming damages of $80,456.35, inclusive of interest and filing and solicitor's fees, against the First Defendant in these proceedings. On 24 September 2014, Statewide filed the Second Supreme Court Proceedings which sought to transfer the Local Court Proceedings to this Court and sought leave to file an Amended Statement of Claim in the form attached to an affidavit of Statewide's then solicitor sworn 13 October 2014 which joined additional defendants and increased its claim to damages to $961,777.24 inclusive of interest and filing and solicitor's fees. After various further delays in the Local Court Proceedings and the Second Supreme Court Proceedings, the Statement of Claim in the Local Court Proceedings was struck out on 9 April 2015. Mr Touma acknowledges in his affidavit evidence that the Local Court proceedings were dismissed by reason of delay in the matter proceeding. On 9 June 2015, leave was granted to Statewide to discontinue the Second Supreme Court Proceedings, previous costs orders were vacated and it was ordered to pay the costs of several defendants.
Subsequent to the dismissal of the First Supreme Court Proceedings, the dismissal of the Local Court Proceedings and the discontinuance of the Second Supreme Court Proceedings, and about two weeks before this application to set aside the Demand was listed for hearing, Statewide commenced the District Court Proceedings against six out of the 42 defendants in the First Supreme Court Proceedings, claiming specified amounts as against each of those Defendants and a further amount against all of them on the basis that each is jointly and severally liable for that amount. The District Court Proceedings and the First Supreme Court Proceedings at least have an identity of parties as to the six Defendants in them (but not otherwise) and a common factual substratum. A comparison of the Amended Statement of Claim sought to be filed in the Second Supreme Court Proceedings (Ex D2, 1216-1242) and the Statement of Claim filed in the District Court Proceedings (Ex P3) also indicates that the amounts claimed against the First-Sixth Defendants in the District Court Proceedings have been varied somewhat, claims against numerous defendants in the Second Supreme Court Proceedings have been abandoned and the claims have been restructured including to deal successively with the claims against various defendants.
Mr Baird submits that the claim now brought in the District Court Proceedings (or, I interpolate it, a wider claim with which it overlaps) had first been brought in the First Supreme Court Proceedings, which were then dismissed, giving rise to the judgment debt that is claimed in the Demand; that the gravamen of the dispute in the various proceedings is the same; that Statewide has previously sought to relitigate the same claims in the Local Court Proceedings, which were dismissed, and the Second Supreme Court Proceedings, which were discontinued, and that the commencement of the further District Court Proceedings seeks to relitigate the issues in the First Supreme Court Proceedings, without complying with the Court's order for costs made on 15 November 2013 or meeting the costs judgment against Statewide. Mr Baird submits that these matters constitute an abuse of process. Mr Baird also relies, in support of that submission, on Uniform Civil Procedure Rules 2005 (NSW) r 12.10, which provides that, where a party is liable to pay another party's costs as a consequence of the dismissal of proceedings, the Court may stay the further proceedings until those costs are paid and make such consequential orders as it thinks fit. Mr Baird expanded that submission, in oral submissions (at T55), to rely on the principles expressed in Rogers v The Queen [1994] HCA 42; (1994) 181 CLR 251 at [286]-[288] and Idoport Pty Ltd v National Australia Bank Ltd [2006] NSWCA 202 at [104]ff that the Court has an inherent power to prevent its procedures being abused in a manner that is unjustifiably oppressive to one of the parties and, in particular, the Court has an inherent jurisdiction to stay a second action in the same cause and against the same defendant until the costs of the first action are paid.
Mr Bedrossian responds, and I accept, that the fact that an order for security for costs has been made and not complied with, or that proceedings have been temporarily stayed, will not necessarily prevent the underlying claims from constituting an offsetting claim: Maniotis v Valimi Pty Ltd [2002] VSCA 91; (2002) 4 VR 386 at [2]-[3], [13]-[20], [54]; Seaham Air Pty Ltd v Australian Aerospace Ltd [2006] NSWSC 1241 at [17]-[18]; Re Hopetoun Kembla Investments Pty Ltd [2011] NSWSC 1343; (2011) ALR 768 at [130].
It is not necessary to express a final view as to these matters, given the views which I have reached on other grounds, but I will make some tentative observations in that respect. I am conscious that Mr Baird's submission finds some support in the fact that it may strain ordinary language to describe a claim as a "genuine claim" at the same time as recognising that the proceedings in which it is brought would constitute an abuse of process, by reason, for example, of a failure to pay the costs ordered against the plaintiff in earlier proceedings. However, with some hesitation, it seems to me that the language of "offsetting claim" in s 459H of the Corporations Act requires an assessment of the genuineness of the claim, by reference to its objective character, that is, whether that claim is legally and factually arguable, and not by reference to the manner in which it was, is or will be pursued. That approach is not inconsistent with the views expressed by Palmer J in Macleay Nominees v Belle Property East Pty Ltd, to which Mr Baird referred as I noted above, where his Honour went on to observe that "good faith means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful".
In particular, it does not seem to me that the concept of a "genuine claim" has regard to, for example, whether the claim is being or will be diligently pursued by a plaintiff, where the assessment of that claim will often have to be made before proceedings are commenced, or to whether the recipient of the demand will have, for example, the financial capacity to pursue that claim to completeness in other litigation. It also does not seem to me that a claim which, to take the facts of this case, would have constituted an offsetting claim at the time of the commencement of the First Supreme Court Proceedings could then be treated as not constituting such a claim merely because of errors or failures in the conduct of those or subsequent proceedings or, for example, a plaintiff had been required to abandon earlier proceedings because of lack of funding. It seems to me that there would also be real difficulties in engaging in an assessment of matters of that kind, in a summary procedure of the kind contemplated by an application to set aside a creditor's statutory demand, where they may well depend on the circumstances in which, for example, earlier proceedings were abandoned or security for costs not provided or costs not paid. It is possible, of course, that proceedings may not be conducted efficiently because of difficulties with the service provided by a legal practitioner, which may be capable of being addressed by a change of legal practitioner; it is possible that security for costs may not be provided because of temporary financial incapacity, which is later cured, or an inability to provide it may be continuing. Whether that is the case or not would require detailed factual inquiry in a particular case.
For these reasons, I would be inclined to the view that, had an offsetting claim otherwise been established, the difficulties that have arisen in respect of the conduct of the earlier proceedings by Statewide, or its commencement of the District Court Proceedings without paying the costs of the earlier proceedings, would not have deprived that claim of that character. It is not necessary to express a final view as to that matter where an offsetting claim has not been established in any event.
If an offsetting claim had been established, it may have been open to this Court to address the difficulties arising from the history of the earlier proceedings by imposing a condition on any order setting aside the Demand, under s 459M of the Corporations Act, that, for example, the District Court Proceedings be pursued with expedition, or that security for costs be provided for it or that the costs of the First Supreme Court Proceedings be paid. It is not necessary to address that possibility further where an offsetting claim has not been established and the parties did not address submissions to the form of such a condition.

Orders and costs

The application to set aside the creditor's statutory demand dated 24 April 2015 issued by the Defendants to the Plaintiff is therefore dismissed with costs.

Amendments 08 March 2016 - Cover sheet, Texts Cited change "JR" to "TJR" Para 10 - line 3 - change "required be" to "be required" Para 53 - line 1 - change "Had I held that an offsetting claim been" to "If an offsetting claim had been" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 March 2016

Strata Schemes Management Act 1996(NSW)

- 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943

At a glance

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Judgment (9 paragraphs)

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Legislation Cited (4)

Cases Cited (40)

Cited By (2)