Judgment
1By Originating Process filed on 15 August 2013, the Plaintiff, International Material & Technologies Pty Ltd ("IMT") seeks orders under ss 459G-459H of the Corporations Act 2001 (Cth) setting aside a creditor's statutory demand dated 26 July 2013 ("Demand") served by the Defendant, Hougen Australia Pty Ltd ("Hougen Australia").
2The Demand claimed the amount of USD164,532.73, as set out in a schedule, described as:
"Monies due and payable by [IMT] to [Hougen Australia] for goods sold and supplied by Hougen Manufacturing Inc to [IMT] the rights and title to which debt have been assigned by Hougen Manufacturing Inc to [Hougen Australia] on 6 March 2013."
The Demand was verified by a director of Hougen Australia, Mr Sven Burchartz. The verifying affidavit stated that, on 6 March 2013, Hougen Manufacturing Inc ("Hougen Manufacturing") assigned all of its right, title and interest in the debts owed by IMT to it to Hougen Australia and, on 26 March 2013, notice of the assignment was sent to IMT. Mr Burchartz's evidence was that, since notice of the assignment was given to IMT, further interest had accrued, and the debt had increased to USD164,532.73. Mr Burchartz's verifying affidavit also stated that IMT had not paid the debt and that he had inspected Hougen Australia's business records and believed the debt was due and payable by IMT and remained unpaid and that there was no genuine dispute about the existence or amount of the debt.
Background
3By way of background, IMT is a distributor of chemicals, machinery and other products to the mining, manufacturing and process industries. Hougen Manufacturing manufactures, inter alia, magnetic drilling machines, other machinery and lubricants and accessories. Hougen Australia is the Australian wholly owned subsidiary of Hougen Manufacturing. On 27 December 2001, Hougen Manufacturing entered into an exclusive distribution agreement with Industrial Supplies Pty Limited ("Industrial") for the supply of Hougen products. By agreement made on or about 1 August 2005, IMT acquired that exclusive distributorship.
4In October 2012, Hougen Manufacturing cancelled its exclusive distribution agreement with IMT with effect from 27 December 2012. There is no dispute as to the validity of that cancellation, although arrangements collateral to that cancellation are in issue. Hougen Manufacturing subsequently assigned (or purported to assign) its right, title and interest in amounts owed by IMT to Hougen Australia under s 12 of the Conveyancing Act 1919 (NSW) and gave notice of that assignment to IMT.
5IMT relies, in support of the application to set aside the Demand, on affidavits of a public officer of IMT, Mr Warwick Rule, dated 10 August 2013; IMT's Inventory and Logistics Manager, Mr Phillip Holliday, dated 28 October 2013; and IMT's accountant, Mr Christopher Charlton, dated 21 October 2013. Hougen Australia did not lead affidavit evidence in the application.
Whether a genuine dispute is established for the purposes of s 459H(1)(a) of the Corporations Act
6Section 459H(1)(a) of the Corporations Act provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount to which that demand relates. That test has been variously formulated as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290; (1993) 11 ACSR 362 at 368; Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6]. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464; (1997) 24 ACSR 353, the Full Court of the Federal Court that a "genuine dispute" must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 (at [16]), Barrett J helpfully summarised the principle as follows:
"[T]he task faced by the company challenging a statutory demand on the genuine dispute grounds is by no means at all a difficult or demanding one. A company will fail in that task only if it is found, upon the hearing of its s 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger."
In Roadships Logistics Ltd v Tree [2007] NSWSC 1084; (2007) 64 ACSR 671 at [24], Barrett J similarly observed that:
"Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor on rational grounds that indicates an arguable case on the part of the company it must find that a genuine dispute exists even where any case, even apparently available to be advanced against the company seems stronger."
7In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], Dodds-Streeton JA observed that a company which seeks to establish a genuine dispute or offsetting claim:
"... is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for the primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. ... [I]t is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice."
8In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44], Young AJA (with whom Hoeben JA and Ward J agreed) referred to Eyota Pty Ltd v Hanave Pty Ltd above and noted that the question for a primary judge, in determining an application to set aside a statutory demand under s 459H(1)(a), is:
"[T]o determine whether there was a genuine dispute, that is one in which a plausible contention has been raised by the company on which the statutory demand was served."
It follows that, in order to establish a genuine dispute as to the relevant debt, for the purposes of s 459H(1)(a) of the Corporations Act, IMT need only establish that it has a plausible contention as to the matters to which I refer below so as to give rise to a genuine dispute as to the debt claimed by Hougen Australia.
9Mr Rule accepts, in his affidavit dated 10 August 2013, that, subject to the matters noted below, the amount of $164,532.73 claimed in the Demand "with the exception of minor discrepancies" (which were not identified in that affidavit and were not in contest before me) remains to be paid to Hougen Manufacturing. However, Mr Rule's affidavit identifies, as a matter giving rise to a genuine dispute, a contention that cl 14 of the Distribution Agreement dated 27 December 2001 between Hougen Manufacturing and Industrial Equipment Supplies Pty Limited (which was later assigned to IMT) requires that agreement to be enforced and construed pursuant to the laws of the State of Michigan and any action with respect to the agreement must be brought in the courts of Michigan. In submissions, IMT contends, first, that the Demand is of no effect because any action, enforcement or construction of the Distribution Agreement is to take place under Michigan law and not New South Wales law.
10Clause 14 of the Distribution Agreement provides that:
"This Agreement shall be enforced and construed pursuant to the laws of the State of Michigan. The distributor [IMT] hereby submits to the jurisdiction and agrees that any action with respect to this Agreement shall be brought in the Michigan Courts."
Ms Culkoff, who appears for IMT, submits that this clause uses mandatory language and contends that the reference to "action" in this clause includes any "proceedings or form of procedure for the enforcement of such right", citing Osborn's Concise Law Dictionary, 7th ed, p 11. Ms Culkoff refers to case law recognising that the courts will generally give effect to choice of law and exclusive jurisdiction clauses, so as to stay proceedings brought in breach of such a clause: Akai Pty Ltd v People's Insurance Co Ltd [1996] HCA 39; (1996) 188 CLR 418; Global Partners Fund Ltd v Babcock & Brown Ltd (in liq) [2010] NSWCA 196; (2010) 79 ACSR 383; Venter v Ilona MY Ltd [2012] NSWSC 1029; Proactive Building Solutions v MacKenzie Keck [2013] NSWSC 1500. Ms Culkoff points out that, although a choice of foreign law does not exclude the jurisdiction of the Supreme Court of New South Wales, it may be a ground for the Court to refuse to exercise its jurisdiction: Akai above at 444-445. Mr Kaufmann, who appears for Hougen Australia, responds that cl 14 of the Distributorship Agreement provides only for the distributor, IMT, to submit to the jurisdiction of the Michigan Courts and does not constrain any action in Australia by Hougen Manufacturing or Hougen Australia as its assignee, and also that the issue of the Demand does not amount to an "action" with respect to the Distribution Agreement which, under the terms of cl 14, must be brought in the Michigan Courts.
11I will assume, without deciding, that a provision of this kind could potentially give rise to a genuine dispute as to the debt claimed, since both parties proceeded on this basis, although it seems to me that an issue of this kind should arguably be treated as a matter giving rise to some other reason to set aside the Demand under s 459J of the Corporations Act. Accepting that the threshold to establish a genuine dispute is a low one, it does not seem to me that cl 14 of the Distributorship Agreement is capable of giving rise to a genuine dispute in this context. The first sentence of that clause provides for the Distribution Agreement to be enforced and construed under the laws of the State of Michigan. I accept that such a provision may, in some circumstances, provide a discretionary reason for the stay of proceedings. However, in this case, there is in principle no reason why any relevant foreign law could not be proved in the proceedings.
12So far as the second sentence of cl 14 is concerned, it is in terms a submission by IMT to the jurisdiction of Michigan Courts and an agreement by IMT that any action with respect to the Distribution Agreement shall be brought in those Courts. It does not, in its terms, restrict any action brought by Hougen Manufacturing or Hougen Australia, or provide that they may not bring action against their distributor in the jurisdiction of its incorporation. This reading of the clause is consistent with its plain language and is not surprising where there was no need for Hougen Manufacturing to submit to the jurisdiction of the Courts of Michigan, where it was incorporated; there was good reason to require a distributor to submit to the jurisdiction of those Courts, where a distributor would often not be incorporated in that state; and there was no reason for Hougen Manufacturing to constrain its ability to bring actions against its distributor in the jurisdiction where the distributor was incorporated and, presumably, its assets were held.
13It also seems to me that the phrase "action with respect to this Agreement" in that clause must refer to an action which is capable of being brought in a court. That clause could not sensibly be read, for example, as preventing Hougen Manufacturing sending a letter of demand in respect of a debt to its distributor because that is, in one sense, an "action" with respect to the Distribution Agreement, where that is not an action that was capable of being "brought in the Michigan Courts". That clause also does not, in my view, prevent Hougen Manufacturing, or Hougen Australia as its assignee, issuing a creditor's statutory demand in respect of a debt arising under that Agreement where that is an extra-curial step permitted by the Corporations Act that cannot be taken in either the Michigan Courts or the courts of New South Wales. As Mr Kaufmann points out, the issue of a statutory demand is neither a "proceeding" or an action for the recovery of a debt, but is no more than a step taken which, depending on whether the demand is complied with, will affect the burden of proof in subsequent winding up proceedings: St George Bank v Active Property Investment Pty Ltd [2010] NSWSC 736 (2010) 77 NSWLR 148 at [9].
14Mr Rule's affidavit identifies, as a matter giving rise to a genuine dispute, a contention that any valid assignment of the debt ought to have been undertaken under Michigan law, not under s 12 of the Conveyancing Act (NSW). In written submissions, IMT contended that any assignment of the debt owed by it to Hougen Australia would need to take place under Michigan law and not New South Wales law, because the Distribution Agreement is expressly governed by Michigan law. In oral submissions, Ms Culkoff submitted that any valid assignment ought to have been undertaken under Michigan law rather than s 12 of the Conveyancing Act, because any action, enforcement or construction of the Distribution Agreement must be under Michigan law. Mr Kaufmann responded that, to the extent that that submission was dependent on the earlier submission as to jurisdiction, it should fail because that earlier submission should fail.
15Notwithstanding the relatively low threshold to establish a genuine dispute, I am also unable to accept that these matters give rise to a genuine dispute as to the relevant debt. First, even if s 12 of the Conveyancing Act were to be read as limited to the assignment of a debt or chose in action which had (using the language of JG Starke, Assignments of Choses in Action in Australia, (1972, Butterworths) at 3) "a kind of notional locality" in the jurisdiction, the usual position is that a simple contract debt is treated as situated in the place of residence of the debtor, unless there is an agreement for payment in another place: Anning v Anning (1907) 4 CLR 1049 at 1075-1076 per Isaacs J; Starke, Assignments of Choses of Action in Australia, above at 4, note 26 and the authorities cited therein. Ms Culkoff contended, when this matter was raised with her in oral submissions, that the position might differ given cl 14 of the Distributorship Agreement, to which I have referred above. However, nothing in that clause indicates that result particularly where, as I have held, that clause would not have prevented an action for debt against IMT to be brought in its jurisdiction of incorporation. Moreover, even if a plausible contention were established that the debt could only be assigned under the law of Michigan and not under s 12 of the Conveyancing Act, IMT has not sought to establish the necessary next step that there is a plausible contention that the assignment of that debt is not effective under the law of Michigan.
16Mr Rule's affidavit identifies, as a matter giving rise to a genuine dispute, a contention that any enforcement of debt should have been undertaken under Michigan law, not by the issue of a statutory demand under the Corporations Act. I do not accept that submission can establish a genuine dispute as to the relevant debt. In Reinsurance Australia Corporation Ltd v Odyssey Re (Bermuda) Ltd [2000] NSWSC 1118; (2000) 36 ACSR 348, Master Macready held that the issue of a statutory demand was permissible not withstanding that a term of the relevant contract provided that the English Courts had exclusive jurisdiction. In SMEC International Pty Ltd v CEMS Engineering Inc [2001] NSWSC 459; (2001) 38 ACSR 595 at [34]-[36], Austin J similarly observed that it was unlikely that a court would set aside a statutory demand on the bare ground that the service of the demand or the commencement of proceedings in consequence of it was in breach of an arbitration clause. I followed those decisions in Re Infratel Networks Pty Ltd [2012] NSWSC 943; (2012) 91 ACSR 170, a decision that was affirmed by the Court of Appeal in Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd above.
17In submissions, IMT also contended that a genuine dispute arose because Hougen Australia had only been appointed as Hougen Manufacturing's "attorney", as an agent to act on behalf of Hougen Manufacturing, rather than being assigned the relevant debt. In order to address this submission, it is necessary to set out the somewhat complex terms of the assignment, which provided that:
"HOUGEN MANUFACTURING INC, a Michigan Corporation ... ("Assignor"), for good and valuable consideration, receipt of which is hereby acknowledged, hereby sells, assigns and transfers to HOUGEN AUSTRALIA PTY LTD ... the Assignee, all its right, title and interest in and to the claims and accounts of [IMT], as set forth in the annexed accounts receivable schedule which is made a part hereof, and all moneys due or which may become due upon such claims and accounts.
Assignor hereby irrevocably appoints Assignee to be its true and lawful attorney in fact, for it and in its name and stead but for Assignee's benefit; (1) to sell, assign, transfer, set over, pledge, compromise, or discharge the whole, or any part, of such claims or accounts; (2) to do all acts and things necessary or proper in furtherance of any such purposes; (3) to ask, collect, receive and sue, in its own name, for the moneys due, or which may become due, upon such claims or accounts; and (4) to substitute one person, or more, with like powers, hereby ratifying and confirming all that Assignee, or its substitute or substitutes, shall lawfully do by virtue of this assignment."
18Again bearing in mind the low threshold that is required to establish a genuine dispute, I am not satisfied that a genuine dispute is established on this basis. As Mr Kaufmann points out, the first paragraph of the assignment makes clear that there is an assignment (as well as a sale and transfer) of the relevant claims to Hougen Australia. The second paragraph of the assignment does not seem to me to limit or otherwise derogate from that assignment. That second paragraph authorises Hougen Australia to act in Hougen Manufacturing's name but for Hougen Australia's own benefit in certain respects; that Hougen Australia would act for its own benefit in that regard is consistent, rather than inconsistent, with an assignment; and that provision would have application, for example, if the assignment took effect in equity so that any enforcement action would need to be taken in the name of Hougen Manufacturing rather than in the name of Hougen Australia.
19In oral submissions, Ms Culkoff also pointed to the difference between the amount of USD161,698.13 referred to in the schedule of the assignment and the amount of USD164,532.73 referred to in the Demand, to contend that there was a genuine dispute arising from the difference between those amounts, or at least an overstatement of the debt claimed. I do not accept that submission. First, Mr Burchartz's affidavit verifying the Demand makes clear that the difference between the two figures arises from interest on the debt between the date of the assignment and the date of the Demand, and IMF did not raise any specific challenge to the entitlement to or quantification of interest in this application. Second, as I noted above, Mr Rule's affidavit acknowledges that (with the exception of the suggested "minor discrepancies" that were not the subject of further evidence of submissions), there is no dispute as to the higher amount, which includes the amount of that interest.
20IMT initially relied on an estoppel claim to establish an offsetting claim and, in oral submissions, Ms Culkoff also relied on that claim to seek to establish a genuine dispute as to the debt. It is convenient to address the estoppel claim and the relevant evidence at this point. I address a corresponding contractual claim relied on to support an offsetting claim below. IMT contends, and I do not understand Hougen Australia to contest, that any defences which could have been raised by IMT by way of set-off, cross-claim or counter claim against a claim by Hougen Manufacturing, including any estoppel claim, are also available in respect of a claim by Hougen Australia, so far as any assignment of the relevant rights by Hougen Manufacturing to Hougen Australia takes effect subject to the equities: Franks v Equitiloan Securities Pty Ltd [2007] NSWSC 812 at [25], [31].
21Mr Rule's affidavit refers to correspondence which he contends constitutes an election by Hougen Manufacturing to repurchase the stocks of Hougen Products then held by IMT, for the purposes of cl 8.1 of the Distribution Agreement, or alternatively gives rise to an estoppel. IMT relies on emails dated 15 and 25 October 2012 and 10, 21 and 22 December 2012 in this regard. The relevant correspondence began with an email dated 11 October 2012, by which IMT responded to the notification of termination of the distributorship expressing its disappointment and indicating its expectation that Hougen Manufacturing would "credit us for all inventory that remains". By email dated 15 October 2012, Hougen Manufacturing responded thanking IMT for its past efforts with Hougen Products and indicating that "[w]e will credit all returned stock." By a further email dated 25 October, Hougen Manufacturing stated that:
"We have made plans to remove any remaining inventory from your location at the end of the year. At that time we will issue a full credit and settle the account. It is our intention to remain professional and keep our integrity throughout this process."
22A further email dated 10 December 2012 from Hougen Manufacturing to IMT requested it to send a list of the items it wished to return, and suggested that Hougen Manufacturing could arrange a trucking company to pick up the materials so that IMT would not have to deal with the charges, and that one shipment would be preferred, and again reiterated that Hougen Manufacturing "will credit all materials that you return".
23By email dated 20 December 2012, IMT responded that it could not start the process of returning the goods without a customer who would pay the taxes, referring to an issue in respect of liability for the goods and services tax. A further email from Hougen Manufacturing dated 21 December 2012 again requested a list of materials that IMT wished to return and indicated that Hougen Manufacturing was prepared to have them picked up at IMT's location. A further email dated 22 December 2012 from Hougen Manufacturing stated that:
"So everyone is on the same understanding, inventory remaining after your last trading day for Hougen Products (December 27th, 2012) will be returned to Hougen Manufacturing Inc as a product return and will be processed as a credit to your account. As a gesture of goodwill we are offering to make this process as cost effective as possible and will alter our own processing procedures by picking up product at your facility at our expense. This offer is good for one pick up prior to January 18th, 2013. After that date [IMT] can send returns, at your expense, to Hougen Manufacturing Inc in Swartz Creek Michigan, USA."
Mr Rule's evidence, as to which he was not cross-examined, was that IMT relied on the alleged representations so as not to contact its customer base and offer the sale of its stock, including at discounted prices.
24It seems to me that the correspondence to which I have referred above is capable of establishing a serious claim worthy of further investigation that Hougen Manufacturing had represented that it would purchase that part of that stock that IMT elected to return to Hougen Manufacturing. There was extended discussion as to the manner in which such a return could take place, whether to Hougen Manufacturing in the United States or to Hougen Australia in Australia, although no agreement was reached in that regard at least in part because of the dispute as to whether GST was payable on such a transaction and whether Hougen Manufacturing should pay any additional amount for GST.
25An estoppel claim may, but will not necessarily, give rise to a genuine dispute as to a claimed debt that is sufficient to set aside a statutory demand. Such a claim did not, for example rise to the level that required further investigation so as to support a genuine dispute in Quadrant Constructions Pty Ltd v HSBC Bank Australia Ltd [2004] FCA 111 or Hardel Pty Ltd v Burrell & Family Pty Ltd [2009] SASC 77; (2009) 103 SASR 408. The requirements for an equitable estoppel are well established and do not need to be repeated at any length here: see Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 428-429; Silovi v Barboro (1988) 13 NSWLR 466 at 472. In Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 at 610, those elements were formulated by Priestley JA (with whom Kirby P agreed) as requiring:
"the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant, and reliance on that by the plaintiff, in circumstances where departure from the assumption by the defendant would be unconscionable."
26In Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394 at 444, Deane J observed that the law does not permit an unconscionable departure by one party:
"from the subject matter of an assumption which has been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party's detriment if the assumption be not adhered to for the purposes of the litigation."
27In Summer Hill Business Estate Pty Ltd v Equititrust Ltd [2010] NSWSC 776 at [42]ff, Pembroke J identified three key elements of a representational estoppel as being that the defendant's words or conduct must be clear and unambiguous; the plaintiff's conduct in relying to its detriment on those words or conduct must be reasonable; and the defendant must know or intend that the plaintiff will act or abstain from acting in reliance on those words or conduct or in effect, have some reasonable expectation that its words or conduct will induce some detrimental reliance by the plaintiff. An equitable estoppel can be established although the relevant expectation contains elements that would not be sufficiently certain to amount to a valid contract: Tadrous v Tadrous [2012] NSWCA 16 at [39]. The remedy for an estoppel claim must be proportionate to the detriment which is its purpose to avoid: Commonwealth of Australia v Verwayen above at 413.
28Alternatively, Ms Culkoff contends that these matters can give rise to a conventional estoppel, based on an assumed state of affairs which both parties are estopped from denying: Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [201]. The elements of a conventional estoppel require that the party asserting that estoppel has adopted an assumption as to the terms of its legal relationship with the party to be estopped; that party has adopted the same assumption; the parties have conducted their relationship on the basis of the mutual assumption; each party knew or intended the other to act on that basis; and the departure from that assumption will occasion detriment to the plaintiff: Waterman v Gerling Australia Insurance Company Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300 at [83].
29In the present case, a genuine dispute as to the debt would be established if a serious question were shown, worthy of further investigation, as to whether Hougen Manufacturing's conduct gave rise to an estoppel that would prevent Hougen Australia claiming repayment of the debt. It is at least seriously arguable that representations were made by Hougen Manufacturing in the emails to which I have referred to the effect that it would "credit" all stock that IMT returned to it. I recognise that, as Mr Kaufmann points out, IMT has not to date returned any such stock and Hougen Manufacturing has not expressly departed from the representations it has arguably made by suggesting that it would not now "credit" stock returned to it and indeed has confirmed its continuing willingness to allow such a credit. Nonetheless, if such a "credit" is to be given in the form of a credit entry against IMT's account balance reducing any debt payable to Hougen Manufacturing or Hougen Australia as distinct from as a money payment to IMT - a matter which was arguably left open in the correspondence - then the demand for repayment of the debt against which that credit would arguably deprive that credit of substance.
30Whether Hougen Manufacturing's conduct allows relief in unconscionability may depend on matters such as whether IMT has unreasonably delayed in returning the goods or was unreasonable in its approach to the conditions of return. This in turn depends, at least in part, on the dispute between the parties as to liability for GST on a return of the goods if they were delivered to Hougen Australia in Australia. IMT relies, in this respect, on Mr Charleton's affidavit dated 21 October 2013 which expresses his view that, on the assumption that Hougen Manufacturing proposed to buy back unsold stock from IMT, but to have that stock delivered to Hougen Australia, GST would be payable upon that purchase by Hougen Manufacturing. On the other hand, Hougen Manufacturing made clear, when this issue was raised in correspondence, that it was not in fact prepared to pay GST on the stock returned to it, leaving it open to IMT (at its cost) to return that stock for credit to Hougen Manufacturing in the US, if it wished to do so, with the result that no such GST would be payable.
31These matters cannot be adequately investigated in a summary application of this kind. It seems to me that IMT has shown a serious question warranting further investigation as to whether the requirement for repayment of the debt, which would arguably deprive the offer of a credit of substance, is unconscionable in the circumstances. That question should properly be determined by proceedings for debt brought by Hougen Australia in the usual way, in which IMT can raise any estoppel by way of defence or cross-claim, rather than by the creditor's statutory demand procedure which is available only where no genuine dispute exists as to the debt. This conclusion is sufficient to require that the Demand be set aside.
Whether an offsetting claim is established
32I should also address the offsetting claim sought to be established by IMT against the contingency that an appellate court might take a different view as to whether a genuine dispute was established in respect of the Demand.
33An "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act is the amount of a claim or claims that a company has against the person who served the statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates: s 459H(5). If the Court is satisfied that the company has an offsetting claim, then the Court is required to calculate the "substantiated amount" of the demand by deducting any offsetting claim from the admitted amount of the debt: s 459H(2).
34A 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) 47 FCR 451; 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)."
35The amount of an offsetting claim is the amount claimed by a party in good faith, so long as that claim as so quantified is not fictitious or merely colourable: Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787 at 790. In Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], Ipp J observed that it is not necessary, for a company to establish an offsetting claim, that it lead evidence as to the damages claimed in "meticulous detail"; however, it is necessary that:
"there must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof":
36The test for an offsetting claim was summarised by Brereton J in BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982; 68 ASCR 1 at [4] as follows:
"The test for determining whether there is a genuine offsetting claim is whether the Court is satisfied that there is a serious question to be tried that a party has an offsetting claim (Scanhill Pty Ltd v Century 21 Australasia (1993) 47 FCR 451) or that the claim is not frivolous or vexatious (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37). In other words, the claim must be bona fide and a truly existing fact and not spurious, hypothetical, illusory or misconceived (Ozone Manufacturing Pty Ltd v DCT [2006] SASC 91; (2006) 94 SASR 269 at [46]). In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743, Palmer J put it in the following terms (at [18]):
In my opinion, a genuine offsetting claim for the purposes of [Corporations Act] s 459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "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 a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s 459H(1) and (2)."
37In Beauty Health Group v Sholl [2011] NSWSC 77 at [23], Barrett J observed that, in determining whether an offsetting claim was established, it is necessary for the Court to determine whether the plaintiff's claim "rises to the level of a serious question to be tried...is based on a cause of action for an amount claimed in good faith...and is not frivolous or vexatious". The matters necessary to establish an offsetting claim were recently summarised by the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344 at [30]:
"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 Corp [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 there 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.
38IMT contends that, on 15 October 2012, Hougen Manufacturing exercised an election under cl 8 of the Distribution Agreement by stating that it would "credit all returned stock". IMT contends that Hougen Manufacturing confirmed that election under cl 8 on 25 October 2012, to which I have referred above. IMT also relies on subsequent emails received by it from Hougen Manufacturing dated 10, 21 and 22 December 2012 which are said to have confirmed the election to repurchase all Hougen products held by IMT. IMT contends that the subsequent dispute as to whether GST would be payable by Hougen Manufacturing, on the return of product to it without export of that product from Australia, was the only relevant dispute in respect of the alleged repurchase agreement.
39Hougen Manufacturing responds that, on the evidence, the Court could not be satisfied that there was any such agreement for repurchase of the relevant stock in accordance with such an election. It is not a matter for the Court to be satisfied whether any such agreement existed, but only whether it is seriously arguable that such an agreement may have existed in the relevant sense in order to establish an offsetting claim. Hougen Manufacturing contends that there is no evidence of an offer that was accepted so as to form a concluded agreement and that the evidence reveals only that Hougen Manufacturing made an offer in the terms set out in its email of 22 December 2012 which was not accepted. Hougen Manufacturing also contends that the suggested GST dispute, on which IMT relies, confirms that there was no concluded agreement between Hougen Manufacturing and IMT in this regard. Hougen Manufacturing also contends that, even if the Court were to accept that there were such an agreement (or, I interpolate, relevantly, that there was a serious question as to that matter), there is no evidence of damage resulting from breach.
40Clause 8 of the Distributorship Agreement relevantly provides that, upon termination of that Agreement:
"[Hougen Manufacturing] shall be entitled (but not obliged) to re-purchase from [IMT] all or part of any stocks of the Products then held by [IMT] at their value when originally sold or the value at which they stand in the books of [IMT] whichever is the lower."
An essential aspect of an election under that clause was that Hougen Manufacturing determine that it wished to purchase either all, or some part, of stocks of the Products (as defined) then held by IMT. It does not seem to me that the correspondence to which I have referred above is capable of establishing a serious claim worthy of further investigation that, as IMT contends, Hougen Manufacturing had elected to purchase all of IMT's Hougen stock. As I noted above, that correspondence is directed to the purchase of stock that IMT elected to return to Hougen Manufacturing, whether to Hougen Manufacturing in the United States or to Hougen Australia in Australia. I accept that a serious claim may be established that Hougen Manufacturing may, by the email dated 15 October 2012 and subsequent correspondence, have elected to purchase part of IMT's stock, namely the part of the stock that IMT elected to return to it.
41However, any such election does not seem to me capable - at least at this point, as distinct from after any such stock is returned - of establishing an offsetting claim. As Mr Kaufmann points out, IMT has not in fact returned any stock to Hougen Manufacturing and subsequent discussions as to Hougen Manufacturing or Hougen Australia collecting that stock in Australia did not reach any agreement because of the GST issue to which IMT refers. It does not seem to me that that position is altered by the fact that IMT may have had good reason for taking the position it adopted in respect of the return of stock in Australia, by reason of its concern as to the position as to GST in respect of the transaction, since nothing in the terms of the Distribution Agreement or in the terms of the suggested election required Hougen Manufacturing to do anything other than to repurchase stock on the basis specified in the Distribution Agreement or, as proposed in the email of 15 October 2012, to "credit all returned stock".
42I should, however, address the quantum of such a claim, against the contingency that an appellate court may take a contrary view. Mr Rule's affidavit dated 10 August 2013 identifies matters relied on to establish the quantum of the alleged offsetting claim. He gives evidence as to the process for the purchase of stock and the maintenance of IMT's inventory records and exhibits an inventory report for Hougen products as at 9 August 2013. Mr Holliday's affidavit dated 28 October 2013 also deals with IMT's inventory as to the Hougen products and the process by which IMT's inventory report in respect of those products was prepared.
43Ms Culkoff submitted that the evidence supports a quantification of IMT's claim in the amount of USD329,212.96, being the inventory value of Hougen products held by it, to which she submitted there should be added the sum of USD107,861 referable to display stands, forming part of the stock purchased at the time of acquisition of the business. I do not accept the latter submission since Mr Rule's affidavit evidence (admitted as a submission) was that:
"[IMT] currently holds approximately $329,212.96 worth of Hougen Products. This includes the cost of transport, packing, insurance and duties as permitted under the Distribution Agreement, as well as the GST component, as required under Australian law. It also includes the stock of display stands for which [IMT] initially paid the sum of $100,000 (as detailed below)." [emphasis added]
Mr Rule's affidavit can only be read as indicating the value attributed to the Hougen products of USD329,212.96 include the stock of display stands said to be valued at USD100,000, now increased to USD107,861, rather than the value of those display stands being added to the value of those products as Ms Culkoff submitted.
44An in-house inventory report annexed to Mr Rule's affidavit in turn indicates that the components of the value of USD329,212.96 are the purchase price of the relevant products of USD243,861.45, transport duty and insurance of USD60,965.36 and goods and services tax of USD24,386.15. It is by no means clear that either transport duty and insurance or GST would by payable by Hougen Manufacturing on a repurchase of the stock under cl 8 of the Distributorship Agreement.
45However, there is a more fundamental difficulty with the quantification of IMT's offsetting claim. If a purchaser breaches his or her contract to purchase saleable goods, the vendor's damages is not ordinarily the entire value of the goods, but the difference between the amount payable by the purchaser and the amount which the goods would realise on market by selling those goods to mitigate its loss. Conversely, the vendor cannot both keep the goods and recover the full purchase price for them by way of damages for breach of contract. On the one hand, if the market value of any Hougen products returned by IMT exceeds or is equal to the price that Hougen Manufacturing would be required to pay for them, IMT may well recover only nominal damages for any breach of contract by Hougen Manufacturing in failing to purchase the goods. On the other hand, if the market value of those products was less than the price that Hougen Manufacturing would be required to pay for them, IMT has not led any evidence of that market value, so as to allow the quantum of any offsetting claim to be established on that basis.
46IMT also relied on its estoppel claim to establish an offsetting claim as an alternative to a genuine dispute. Had that estoppel claim not established a genuine dispute, it does not seem to me, for the reasons noted above, that IMT led sufficient evidence to allow any offsetting claim arising from the alleged estoppel to be quantified.
47Mr Rule's affidavit dated 10 August 2013 also relies, as a further matter giving rise to an offsetting claim, on a costs order in the amount of $5,000 in respect of a previous application made by IMT to set aside a previous statutory demand served upon it. It was common ground between the parties that an offsetting claim was established in respect of that amount. If the Demand had not been set aside on the basis that it was genuinely disputed, an offsetting claim in that amount would need to have been deducted from the amount of the Demand.
Orders
48For these reasons, I order that the Demand should be set aside with costs.