Anderson Formrite Pty Ltd v CASC Hire Pty Ltd

Supreme Court of NSW|2018-09-27|Before: White J

Solicitors: Carroll & O'Dea Lawyers (Plaintiff) Harrow Legal (Defendant) File Number(s): 2018/158845

Introduction

HIS HONOUR: On 1 May 2018 the plaintiff, SBC Construction Pty Ltd ("SBC"), was served with a statutory demand made by the defendant, Quick Smart Plumbing Services Pty Ltd ("Quick Smart"). The statutory demand stated that SBC owed Quick Smart "the amount being the amount of the debt described in the Schedule". The amount claimed in the Schedule was $125,890.49. This was described as follows: "Judgment Debt District Court of New South Wales Proceedings No. 2018/00122731 Date of Judgment: 19 April 2018."
The demand was not accompanied by an affidavit. This was because it was purportedly for a judgment debt, being a judgment of the District Court. Section 459E(3) of the Corporations Act 2001 (Cth) provides: "459E Creditor may serve statutory demand on company ... (3) Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that: (a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and (b) complies with the rules."
Section 459J provides: "459J Setting aside demand on other grounds (1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect."

Application to set aside statutory demand

The originating process and supporting affidavit seeking to set aside the statutory demand was filed on 21 May 2018.
SBC submits that the statutory demand should be set aside on two grounds. The first ground is that the statutory demand was not accompanied by an affidavit and when the statutory demand was served and when the originating process was filed, there was no judgment against SBC for the amount claimed in the statutory demand. On the reasoning of Siopis J in Anderson Formrite Pty Ltd v CASC Hire Pty Ltd (2005) 147 FCR 379; [2005] FCA 1424 ("Anderson Formrite"), Ward J (as her Honour then was) in Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531; (2011) 84 ACSR 296 ("Fitness First"), and Black J in In the matter of GTH Equipment Pty Ltd [2017] NSWSC 1617, ("GTH Equipment") this is prima facie a strong ground for setting aside the statutory demand. Their Honours held that where a creditor serves a statutory demand without a supporting affidavit for an amount that is either less than the judgment debt (because there was part payment) or more than the judgment debt (because the demand claimed a filing fee that was not part of the judgment debt when the demand was served or claimed post-judgment interest) the debt the subject of the demand was not a judgment debt within the meaning of s 459E(3) and therefore had to be accompanied by an affidavit. In each case, the demand was set aside under s 459J(1)(b). The principal issue raised under the first ground relates to the effect of the subsequent, but retrospective, correction of the judgment.
The second ground was that SBC had offsetting claims against Quick Smart. In the affidavit supporting the originating process an operations manager of SBC, Mr Salameh, claimed that Quick Smart was not entitled to any moneys as claimed and that SBC had an offsetting claim in respect of the works performed. He annexed a copy of a statement of claim filed by SBC in the Local Court in which SBC claimed damages from Quick Smart of $26,761, being the difference between its assessment of the value of work done by Quick Smart on the five projects (totalling $151,180) and the amount paid by SBC (totalling $128,837) and its claim for rectifying defective work of $49,104.
In a later affidavit Mr Salameh also claimed that SBC was entitled to liquidated damages. However, that was not a ground for an offsetting claim raised in the supporting affidavit and is not an available ground for asserting an offsetting claim on the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 that the supporting affidavit for the setting aside of a statutory demand must identify, either expressly or by reasonable inference, the grounds for setting aside the demand.
SBC did not contend that the judgment entered in the District Court did not give rise to a "judgment debt" within the meaning of s 459E(3). Accordingly, it is unnecessary to address that question. There are many cases where statutory demands have been issued and upheld for judgment debts based on a filed certificate: either an adjudication certificate under the Security of Payment Act or its interstate equivalents, or a certificate issued by a costs assessor or a Review Panel for legal costs. In the latter class of case it has been held that although on the filing of the certificate it is to be taken as a judgment of the court in which it is final and is enforceable as such, the entry of judgment is a ministerial act and does not make it a judgment of the court (Frumar v The Owners - Strata Plan 36957 [2010] NSWCA 172 at [8], [38], [42] ("Frumar"); Zepinic v Chateau Constructions (Australia) Ltd (No. 2) [2013] NSWCA 227 at [76]-[77]). The question whether a certificate of indebtedness issued not by a court but by a person acting quasi-judicially, that can be enforced as a judgment by being filed in a court's registry, is a judgment debt within the meaning of s 459E(3) does not arise, because it was not argued.
Many decisions have emphasised the importance of compliance with s 459E(3).
In Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 ("Kisimul Holdings") the supporting affidavit failed to comply with the requirement that the demand be accompanied by an affidavit that complied with the rules. Rule 5.2 of the Supreme Court (Corporations) Rules 1999 (NSW) required that the affidavit be in accordance with Form 7 and state the matters mentioned in that Form. Those matters included a statement by the deponent that he or she believe that there was no genuine dispute about the existence or amount of the debt. The supporting affidavit omitted that statement.
The primary judge in Kisimul Holdings referred to numerous cases where statutory demands had been set aside because the supporting affidavit did not include that statement, but declined to find that that was a sufficient reason to set aside the demand under s 459J(1)(b). That was for two reasons. The first was that the primary judge found on the evidence that there was no genuine dispute about the amounts claimed. The company had asserted an offsetting claim that was abandoned.
The second reason was that the primary judge found that the absence of the statement could not have made any difference to the company's response to the service of the statutory demand (at [16]).
On appeal, the statutory demand was set aside. The Court of Appeal did not overturn the primary judge's factual findings that informed his conclusion that there was not a sufficient reason to set aside the demand, notwithstanding non-compliance with the requirements of s 459E(3). Rather, the Court held that because the supporting affidavit omitted the statement as to the absence of genuine dispute the demand should be set aside to preserve the integrity of the statutory scheme for raising a presumption of insolvency on failure to comply with a statutory demand.
Barrett JA, with whose reasons Beazley P and Gleeson JA agreed, said: "30 ... the statement of belief as to absence of genuine dispute in the s 459E(3) affidavit is concerned not only to ensure that the company served with the demand is informed about the creditor's belief as to the relevant matter but also to instil in the creditor a sense of due attentiveness to the requirement that a debt other than an undisputed debt not be made the subject of a statutory demand. The latter aspect is no less significant than the former. Indeed, it might be thought to be more significant. 31 Mr Wood's researches have not brought to light any case in which absence of the relevant statement from the accompanying affidavit has not been seen as a sufficient basis for setting aside the statutory demand. Mr Wood drew attention to the observation of Kourakis CJ in Ceduna Marina Development Co Pty Ltd v Bria [2012] SASC 115; 281 LSJS 274 (at [15]) that such failure can be a sufficient reason to set aside a demand even if the company relies on that factor alone and does not file material disputing the debt. 32 The quality of the debt as undisputed is central to the proper working of Part 5.4. A presumption of insolvency can be allowed to arise through non-compliance with a demand for payment of a debt only if the debt is uncontroversially owing, due and payable. Unless the debt is of that kind, it cannot safely be presumed that non-payment is the product of inability to pay. 33 A creditor seeking the benefit of a statutory presumption of insolvency through service of a statutory demand has a responsibility to ensure that, so far as it is aware, the debt relied on is owing, due, payable and undisputed - or, more accurately, a responsibility not to rely on the debt unless it genuinely believes it to be of that kind. And the company served with the demand has a right, secured to it by s 459E(3)(b) and the provision of the rules requiring adherence to Form 7, to be assured that the demanding creditor recognises that responsibility and has conscientiously formed a belief that the responsibility has been discharged. 34 The statement by the deponent of the s 459E(3) affidavit of belief of absence of genuine dispute therefore provides a significant measure of assurance that the objectives of Part 5.4 are being observed by the creditor. Absence of the statement means that that measure of assurance is lacking and puts the recipient company into a position of uncertainty from which the legislation intends that it should be protected. 35 The primary judge was in error when he regarded the absence of the relevant statement as somehow offset or compensated for by particular factual matters. Those factual matters had nothing to do with preserving the salutary measure for which the legislation makes provision."
Earlier decisions to the same effect included B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Ltd (1994) 15 ACSR 433 at 435-6 (McLelland CJ in Eq) and Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35; [2002] WASCA 196 at 39-40 (Full Court of the Supreme Court of Western Australia).
In Anderson Formrite Siopis J referred to these latter decisions and observed that they should inform the construction to be given to the words "judgment debt" in s 459E(3) (at [61]). His Honour continued: "62 The rationale for exempting a statutory demand for the very sum of a judgment, from the need for verification by an accompanying affidavit is apparent. The judgment speaks for itself as to the amount which is due and payable and, prima facie, also in relation to the absence of a genuine dispute. 63 However, once the statutory demand is for a sum different from the sum in the judgment, the rationale for the exemption from the verification no longer applies because extraneous events or circumstances have intervened. There is then a need to identify the amount claimed by reference to the extraneous intervening events and circumstances. Further, these intervening events and circumstances are capable of giving rise to disputes as to the amount of an outstanding debt and, also, as to the continued existence of the debt. Thus, it is possible, depending on the nature of any agreement that the debtor and creditor may have reached in relation to the compromise or further payment of the judgment debt, that liability in respect of the judgment debt may have been discharged, to be replaced by a different contractual obligation (see McDermott v Black (1940) 63 CLR 161 at 183-185). In these circumstances, the same considerations which underlie the introduction of the legislative requirement for verification of statutory demands for amounts that were never the subject of a judgment, apply equally to demands for amounts different from the sum in respect of which a judgment was given. It follows, in my view, that a narrow construction should be given to the words 'judgment debt' in s 459E(3) of the Act so that the exemption is confined to demands for the very amount in respect of which judgment was obtained, and not for any different amount. 64 The defendant has not argued that in the event that I determined that, on the proper construction of s 459E(3) of the Act, there was a need for the statutory demand to be accompanied by a complying affidavit, that the demand should not be set aside under s 459J(1)(b) of the Act. As is evident from the matters referred to above, the failure to accompany the statutory demand with a complying affidavit is a serious omission. In my view, the statutory demand should be set aside (Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 458-459; Wildtown; Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 117 FLR 330 at 333). Accordingly, I order that the statutory demand dated 17 February 2005 be set aside."
In Anderson Formrite the defendant had obtained default judgment against the plaintiff in the District Court of Western Australia in the sum of $195,554.13. The plaintiff agreed to pay the judgment debt by instalments. Two instalments were paid but the next instalment was not paid when due. After extensive negotiations the defendant served a statutory demand claiming the sum of $95,554.13 described as the balance of the judgment of the District Court of Western Australia after the company had paid the creditor two sums of $50,000 (at [31]). No affidavit accompanied the statutory demand.
The plaintiff relied both upon the fact that the statutory demand was not in the same amount as the judgment and asserted that there was a genuine dispute as to whether the parties had reached an agreement to compromise the debt. Siopis J set aside the judgment on the first ground, although he would also have found that there was a genuine dispute as to whether such an agreement for compromise had been reached (at [65]).
In Fitness First the statutory demand described the debt as being two amounts that were subject of a certificate of a cost assessor's determination of costs and a sum of $78, being the cost of registration of the certificates in the Local Court (at [51]). Ward J held that whether a debt was a judgment debt was to be assessed by whether a judgment had been obtained in relation to the debt and not whether the debt had been quantified in the judgment (at [90]). Her Honour held that even if the costs certificates had not been filed with the Local Court at the date of the statutory demand, the amounts payable under the costs certificates could be described as judgment debts, although they could not be enforced as such until formal entry of the judgment as a result of the filing of the costs certificates (at [91]). Nonetheless, the filing fee of $78, described as costs of registration of the certificates, was not, at the date of the statutory demand, a judgment debt (at [92]). Her Honour applied Anderson Formrite in holding that the defendant needed to verify the demand as it contained an amount claimed which was not a judgment debt (at [96]). The absence of the affidavit was a sufficient reason under s 459J(1)(b) to set aside the demand (at [104]).
In GTH Equipment Black J set aside a statutory demand claiming moneys payable pursuant to a judgment entered against the plaintiff in favour of the defendant in the District Court of New South Wales: "...in the total sum of $198,425.23 (being made up of Judgment Sum of $143,000 plus interest ordered by the Court at the rate of 15% per annum from 3 February 2015 to 4 August 2017 in the sum of $55,425.23." (at [6])
In fact, the judgment entered in the District Court was for a sum of $143,000 "together with interest under the contract from 3 February 2015".
The judgment was given on 18 May 2017. The interest claimed in the statutory demand included interest at a contractual rate of 15 per cent per annum, both up to the date of judgment and up to the date of the statutory demand.
The demand was not verified by affidavit. After service of the demand, the plaintiff paid the judgment sum of $143,000 (at [5] and [14]). The defendant accepted that the demand should be varied to reflect payment of that sum (at [13]).
There was a genuine dispute as to whether the defendant was entitled to post-judgment interest at the rate of 15 per cent per annum as claimed in the statutory demand or only to post-judgment interest at the rates under s 101 of the Civil Procedure Act (at [17]-[21]). But Black J did not vary the demand because of that dispute. Rather, the demand was set aside under s 459J(1)(b) because the claim for interest in the demand was for an amount that was not a "judgment debt" and the demand had not been verified by affidavit (at [29]-[31]). After referring to relevant authorities his Honour said (at [31]): "It seems to me that, in these circumstances, the Demand was required to be verified by affidavit, since it extended to a claim for interest under s 101 of the Civil Procedure Act after the date of delivery of the District Court's judgment although it mischaracterised the nature of that interest and wrongly calculated it at a 15% interest rate. The failure to verify the Demand seems to me to warrant an order setting aside that Demand under s 459J(1)(b) of the Corporations Act for the reasons noted in Anderson Formrite and the several cases that have applied that decision. I am conscious that that has the result that the Demand is set aside as a whole, although the large part of the Demand constituted a judgment debt, and only a smaller part constituted the claim for post-judgment interest. However, that result is consistent with the case law to which I have referred and may be the necessary consequence of the fact that s 459J(1)(b) does not contemplate that a demand may be varied rather than set aside. The objects of Pt 5.4 of the Act and the interests of justice will often be better served by setting aside a creditor's statutory demand that claims a substantial unverified amount where the only alternative would be to allow that demand to stand and expose its recipient to a presumption of insolvency arising from an unverified claim. That approach will generally promote the important statutory requirement for verification of a debt that is not a judgment debt. That approach may also more readily be taken in this case where the 'principal' amount comprising part of the judgment debt has been paid and a substantial amount of the remaining debt claimed by the Demand is post-judgment interest that could and should have been, but was not, verified by affidavit and was been incorrectly calculated in any event."
In the present case, when the statutory demand and supporting affidavit were served on SBC, Quick Smart did not have a judgment debt in the amount claimed in the statutory demand. On the filing of the five adjudication certificates, it was taken to have five judgments for the debts the subject of each adjudication certificate (Security of Payment Act, s 25(1)). The total of those debts was less than the amount claimed in the statutory demand because they did not include the filing fee of $184. On the principles explained in the authorities referred to above, and in particular, the decision of Ward J in Fitness First, because the debts stated in the adjudication certificates are taken to be judgment debts by reason of s 25 of the Security of Payment Act, but were not for the amount claimed in the statutory demand (by reason of including a debt for the filing fee), there was non-compliance with s 459E(3) by reason of the absence of verification.
The form of judgment issued by the District Court on 24 May 2018 purportedly stated that the judgment was given on 19 April 2018 included the filing fee of $184 as part of the judgment amount. The form of judgment was in accordance with Form 43 said to be made under Uniform Civil Procedure Rules, r 36.11. UCPR r 36.11 relevantly provides: "36.11 Entry of judgments and orders (cf SCR Part 41, rule 11) (1) Any judgment or order of the court is to be entered. ... (3) In this rule, a reference to a judgment or order of the court includes a reference to any judgment, order, determination, decree, adjudication or award that has been filed or registered in the court, or of which a certificate has been filed or registered in the court, as referred to in section 133 (2) of the Civil Procedure Act 2005."
Section 133(1) and (2) of the Civil Procedure Act 2005 provides: "133 Judgments and orders unenforceable until entered (1) A judgment or order of the court may not be enforced until it has been entered in accordance with the uniform rules. (2) This section extends to: (a) any judgment, order, determination or decree of a court, and (b) any adjudication or award of a person having authority to make an adjudication or award, that may be filed or registered in the court, or of which a certificate may be filed or registered in the court, under any other Act or law."
Neither party made a submission as to whether the filing fee could properly be included in the judgment entered pursuant to r 36.11. Section 25 of the Security of Payment Act provides that the adjudication certificate, when filed, is enforceable as a judgment debt. There may be some statutory provision that enables the filing fee on the adjudication certificate to be included in the judgment, or it might be an implication of s 25(1) that the fee on filing can also be included in the judgment as part of the judgment debt. As no submissions were made on this question I express no view on it. I assume, without deciding, that the form of the certificate of judgment that includes the filing fee has statutory authority.
The form of the judgment issued on 24 May 2018 was not expressed to be made under the slip rule (UCPR, r 36.17). That rule provides: "36.17 Correction of judgment or order ("slip rule") (cf SCR Part 20, rule 10; DCR Part 17, rule 10; LCR Part 16, rule 10) If there is a clerical mistake, or an error arising from an accidental slip or omission, in a judgment or order, or in a certificate, the court, on the application of any party or of its own motion, may, at any time, correct the mistake or error."
A "judgment" is defined in s 3 of the Civil Procedure Act as including any order for the payment of money. Even if r 36.17 did not apply (because the "judgment" was not a judgment of the court but a ministerial act to allow enforcement of the adjudication certificates as if they were a judgment of the court), the earlier "judgment" could be corrected in the District Court's inherent jurisdiction (Frumar).
A correction of orders under the slip rule operates from the date of the original order (Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 61 FCR 385 ("Elyard Corporation")).
Elyard Corporation concerned s 459R of the Corporations Law (now s 459R of the Corporations Act), which provided in substance that an application for winding up is to be determined within six months after the application is made and unless the court makes an order extending that period, the application is dismissed if it is not determined within that time. The dismissal operates by force of statute. In Elyard Corporation a first order for extension was made by a registrar. When the matter came again before the registrar no further extension was sought and none was included in orders made by the registrar appointing a further directions hearing (at 388). The Full Court of the Federal Court held that the slip rule under the then order 35, r 7(2)(e) of the Federal Court Rules which permitted variation of a judgment or order that did not reflect the intention of the court was applicable. The rule extended to the intention which the court would have had but for the failure that caused the accidental slip or omission (at 391). The Full Court upheld the decision of the primary judge (Sheppard J) that, relying on the slip rule, the order of the registrar could be corrected retrospectively to provide a further extension of time.
In the present case, the judgment/order issued on 24 May 2018 and entered on that date was described as having been "made or given" on 19 April 2018. Clearly the District Court intended to correct its earlier order with retrospective effect. The fact that the entry of the "judgment/order" on each date was a ministerial act, and not a judicial act, does not mean that the principles applicable to the correction of judgments that are truly judgments are inapplicable. Rule 36.17 envisages that the rule can apply to the correction of a mistake in a certificate, which must include a certificate filed as a judgment. Although the present error was not a mistake in a certificate, the fact that the rule extends to the corrections of mistakes in a certificate indicates that there is no reason the rule should not extend to the correction of a judgment entered on the filing of a certificate.
SBC submitted that its rights were affected by the correction of the "judgment/order" and no such correction should have been made without its having been given an opportunity to be heard before the correcting order was made. That may well be right. But SBC made no application to the District Court to set aside the "judgment/order" entered on 24 May 2018. That judgment stands.
The question then is whether there is reason under s 459J(1)(b) to set aside the statutory demand because it was not verified when the debt claimed was not a judgment debt at the time of service of the demand, but is retrospectively to be taken as having been such a judgment debt. The originating process to set aside the demand and the supporting affidavit of Mr Salameh were filed on 21 May 2018. I infer that it was the result of the service of those documents that Ms Condoluci of Quick Smart spoke to a registrar of the District Court and procured the correcting judgment.
SBC did not suffer prejudice as a result of the District Court's error, nor by the failure of Quick Smart to provide a supporting affidavit verifying the debt claimed in the statutory demand at a time it did not have a judgment debt for the amount claimed. Kisimul Holdings demonstrates that the absence of prejudice is immaterial if there is a sufficiently serious contravention of the statutory scheme for creating a presumption of insolvency. However, it is not every failure to comply with the requirements of the prescribed form of affidavit that will provide a sufficient reason to set aside a statutory demand under s 459J(1)(b).
Although the correction of the District Court judgment has retrospective effect, that does not mean that one should ignore the fact that when the statutory demand and supporting affidavit were served it failed to comply with the requirements of s 459E(3) in a way which would have entitled SBC to have the statutory demand set aside. Giving the judgment retrospective effect is the converse of, but analogous to, declaring something done to be a nullity. As Gageler J said in New South Wales v Kable (2013) 252 CLR 118; [2013] HCA 26 at [52]: "Yet a purported but invalid law, like a thing done in the purported but invalid exercise of a power conferred by law, remains at all times a thing in fact. That is so whether or not it has been judicially determined to be invalid. The thing is, as is sometimes said, a 'nullity' in the sense that it lacks the legal force it purports to have. But the thing is not a nullity in the sense that it has no existence at all or that it is incapable of having legal consequences. [Forsyth, "'The Metaphysic of Nullity': Invalidity, Conceptual Reasoning and the Rule of Law", in Forsyth and Hare (eds), The Golden Metwand and the Crooked Cord, (1998) 141, especially at 147-148.] The factual existence of the thing might be the foundation of rights or duties that arise by force of another, valid, law. The factual existence of the thing might have led to the taking of some other action in fact. The action so taken might then have consequences for the creation or extinguishment or alteration of legal rights or legal obligations, which consequences do not depend on the legal force of the thing itself. For example, money might be paid in the purported discharge of an invalid statutory obligation in circumstances which make that money irrecoverable, [See eg Werrin v The Commonwealth (1938) 59 CLR 150; [1938] HCA 3 and South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65; [1957] HCA 69 as explained in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 372-374; [1992] HCA 48] or the exercise of a statutory power might in some circumstances be authorised by statute, even if the repository of the power acted in the mistaken belief that some other, purported but invalid exercise of power is valid. [See eg Ruddock v Taylor (2005) 222 CLR 612; [2005] HCA 48.]"
Notwithstanding the subsequent retrospective correction of the judgment, Quick Smart failed in a material way to comply with the requirements of Pt 5.4 Div 2 of the Corporations Act relating to the creation of a presumption of insolvency on non-satisfaction of a statutory demand that would require the statutory demand to be set aside. The fact that it procured (without notice to SBC) a retrospective correction of the judgment on which its statutory demand was based does not vitiate the need to enforce the integrity of the statutory scheme in Pt 5.4 Div 2 as expounded in the authorities referred to earlier in these reasons. The present issue is not concluded by the decision of the Full Court of the Federal Court in Elyard Corporation. Accepting that the correction of the judgment has a retrospective effect does not mean that the actual facts, including, but not limited to, the retrospective effect of the correction of the judgment, should be ignored.
For these reasons in my view the statutory demand should be set aside under s 459J(1)(b). However, it is well settled that such an order may be made on terms, including on terms that the amount of the judgment debt be paid into court.

Condition requiring payment of amount of debt into court

To decide whether such a condition on an order setting aside the statutory demand should be imposed, it is appropriate to consider SBC's contended offsetting claims and, indeed, the merits of its dispute that it is not liable to Quick Smart for the amounts the subject of the adjudication determinations.
SBC's statement of claim filed in the Local Court asserts that Quick Smart has breached its subcontracts in respect of the five projects in various respects. Its statement of claim identified the total amounts invoiced by Quick Smart in respect of the five projects, SBC's assessment of the value of the work done for which Quick Smart was entitled to payment, the amounts paid by SBC, and in the case of three projects a claim for the cost of defective work. In relation to a property in Wesley Street, Telopea, SBC assessed the value of the work done in the sum of $8,470 and conceded that it had paid only $5,000. In the case of a property in Farnell Street, West Ryde, it asserted that the value of the work done was $39,930. It conceded it had paid only $19,950, but said that it had incurred costs in rectifying defective work of $16,654. In the case of a property on Carlingford Road, Epping, SBC contended that the value of the work done was $19,950. It said it had overpaid this amount by $1,750 and had incurred costs in rectifying defective work in an amount of $11,550. It claims that Quick Smart is liable to it in respect of this project in the sum of $12,850. In relation to a property on Ross Street, Forest Lodge, SBC alleged that the value of the work done was $75,900, that the total amount paid was $82,637 and that it is entitled to $20,900 for the recovery of the costs of defective work. It claims that Quick Smart owes it in respect of that project a sum of $27,637. In the case of a property on Yurunga Street, Telopea, SBC says that the value of the work done was $6,930. It admits that it has not paid for that amount. It claims damages for $26,761. The statement of claim pleads that the total amount invoiced by Quick Smart in respect of the five projects was $243,698. SBC says that the value of the work done on those projects was $151,180 of which it paid $128,837, but has a claim for the cost of rectifying defective work of $49,104.
If this claim is accepted after a trial in the Local Court, the result will not only be that SBC is entitled to judgment for the amount claimed of $26,761 plus interest. The operation of s 32 of the Security of Payment Act would mean that Quick Smart could no longer seek to enforce its judgment in the District Court. SBC would be entitled after the conclusion of the proceedings referred to in s 32 to a permanent stay of that judgment (Frumar at [54]-[63]). Nothing would then be owed under the judgment (Frumar per Handley JA at [62]). If, instead, SBC paid the amount of the judgment prior to succeeding in the claims it asserts in the Local Court then it would have a restitutionary claim against Quick Smart for the amount of the judgment, and be entitled to damages in respect of the balance of $26,761.
The question is not whether SBC has an offsetting claim under s 459H, but whether, having regard to the claims it propounds in the Local Court, there is a sufficient reason not to make it a condition of setting aside the statutory demand that the amount demanded be paid into court.
Extensive evidence was led as to the genuineness of SBC's claims in the Local Court. Mr Salameh of SBC gave evidence supported by third party assessments of defective and incomplete works, the value of the works completed and the cost of remedying defects. It is unnecessary to go into the detail. By way of illustration, Mr Salameh said that Quick Smart had issued invoices for work done at a site in Ross Street, Forest Lodge totalling $145,780 and exhibited those invoices. He exhibited a report of ATP Group (AUS) Pty Ltd which had been engaged as a subcontractor to replace Quick Smart. Its manager reported: "I, ATP Group Pty Ltd, the engaged subcontractor at 11 Ross St, Forest [L]odge have inspected the site and reviewed architectural and hydraulic plans for the site mentioned and have come to [the] conclusion with the defective/incomplete works engaged with the previous plumber. Firstly, I have discovered missing/defective plumbing works with the stormwater drainage in basement and lower basement, with some to be redone or completed. Some stormwater junctions and pipes were not included to pick up certain points such as floor wastes. Some copper works to be redone due to non-compliance with Australian standards. Existing works include part basement stormwater and sewer, Unit Rough Ins (Hot, Cold, Gas) aerial drainage and sections of copper works/risers. Any works done or inspected to be re-done have been quoted or invoiced to contractor. After completing the inspection, based on my professional experience I have calculated the completed works and any other works to conclude a sum of $75,900 [sic]. Any other works to be completed or repaired have been quoted or invoiced and sent to contractor."
The report was accompanied by photographs of the allegedly defective and incomplete works. Mr Salameh deposed that it had paid Quick Smart $82,637 in respect of the work performed by it and had been invoiced or quoted $27,400 by ATM Group for repair of defective work and had been quoted $56,100 as the cost to complete the works that were the subject of Quick Smart's scope of works. This evidence establishes there is a genuine claim that at the trial of the claim in the Local Court it may be held that SBC is entitled to recover $27,637 (being the difference between what it contends is the value of the work done, less the amount paid, plus the cost of repairing defective work). The adjudicator's certificate establishes an interim but provisional debt owed by SBC to Quick Smart of $63,143.
Similar evidence was provided with respect to the other sites.
I am satisfied that the claims made by SBC are genuine. The construction of ss 459H and 459J(1)(b), including whether a condition should be imposed under s 459M that the amount the subject of the demand should be paid into court, should be informed by the purpose of the statutory demand procedure. That purpose was aptly described by Barrett J (as his Honour then was) in Bakota Holdings Pty Ltd v Bank of Western Australia Pty Ltd [2011] NSWSC 1277 ("Bakota"). His Honour said (at [25]): "...The purpose of the statutory demand process is to test whether a company's failure to pay a particular debt should be regarded as a reliable indicator of likely inability to pay debts generally so that, in proceedings for winding up on the insolvency ground, it should be for the company to prove that it is solvent rather than for the plaintiff to be put to proof of actual insolvency. The reliability of the indicator is undermined if there is a genuine dispute as to the existence or amount of the demanded debt. In such a case, the inference that failure to pay one debt is a product of inability to pay debts generally is not safe. Nor is it safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt."
Because I have concluded that the statutory demand is liable to be set aside under s 459J(1)(b) and not under s 459H and that the issue is whether it should be a condition of setting aside the demand that the amount of the demand be paid into court, it is not necessary and would not be appropriate to address the issues raised in the judgments of the Court of Appeal of Western Australia in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91, particularly at [73]-[79] and the judgment of Brereton J (as his Honour then was) in In the matter of Douglas Aerospace Pty Ltd [2015] NSWSC 167 at [90]-[91] ("Douglas Aerospace") as to the operation of s 459H in relation to offsetting claims against debts arising under the Security of Payment Act.
In Douglas Aerospace Brereton J said (at [92]): "Secondly, the general principle that a pending appeal may provide 'some other reason' for setting aside a demand only if the judgment is stayed or security is given indicates that the pendency of curial proceedings which seek relief to the effect that the adjudicated amount is not payable because the adjudication does not reflect the true legal rights of the parties cannot of itself amount to 'some other reason' for setting aside the demand. Such proceedings are, for present purposes, analogous to an application to set aside a default judgment, or an appeal. This conclusion is also supported by Broadbeach, as the legislative policy of the Act, referred to in the preceding paragraph, is analogous to the policy reflected in the taxation laws that tax debts are to be recoverable notwithstanding the pendency of any review proceedings. (It is unnecessary to decide, for the purposes of this proceeding, whether an arguable claim in curial proceedings for a different result coupled with a stay or provision of security might provide 'some other reason' for setting aside a demand founded on a filed adjudication certificate, as the principle relating to appeals and applications to set aside judgments suggests)."
It is reasonably well settled that where there has been a judicial determination that results in a judgment debt that has not been stayed, but which is subject to an appeal that appears to be reasonably arguable, the court may, under s 459J(1)(b), set aside the statutory demand based on that judgment debt, but on condition that the amount of the judgment debt be paid into court. The money paid into court is not security for the judgment debt that will give the judgment creditor priority over other unsecured creditors (Quarter Enterprises Pty Ltd v Allardyce Lumber Co Ltd [2011] NSWSC 1031 at [10]). The reason for imposing such a condition is to put the judgment debtor to proof of the genuineness of his dispute.
The same principle would not necessarily apply if the judgment debt sought to be enforced is a default judgment rather than a judgment given after a contested hearing on the merits.
There are significant differences between judgment debts arising after a contested hearing before a judge which is subject to appeal and debts that are taken to be judgment debts by force of statute, but which are in truth ministerial acts and not true judgment debts. One significant difference is that in accordance with s 32 of the Security of Payment Act the judgment debt arising from the adjudication certificate is provisional. A second significant difference is that in most cases it is inimical to the purpose of the Security of Payment Act for the judgment debtor to be able to obtain a stay of execution of the judgment (Grosvenor Constructions (NSW) Pty Limited (in administration) v Musico [2004] NSWSC 344 at [31]; Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australia Pty Ltd (No 3) [2007] NSWSC 459 at [72]-[75]; Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation) [2019] NSWCA 11 at [254]). In the case of a true judgment debt that is subject to appeal, the fact that the judgment debtor has not sought, or, if sought, has not obtained, a stay of execution of the judgment, is highly material to whether a condition should be imposed under s 459J(1)(b).
Having regard to these differences and the purpose of the statutory demand procedure described by Barrett J in Bakota, I do not consider that it should be a condition of setting aside the statutory demand that the amount demanded should be paid into court. Quick Smart is entitled to pursue its remedies as a judgment creditor.
It follows that the statutory demand should be set aside and Quick Smart should pay SBC's costs of the application. The originating process sought an order also for the payment of interest on costs. No evidence was adduced to support this order and no submissions were made in support of it.
Accordingly, for these reasons I order that: 1. the statutory demand dated 30 April 2018 served by the defendant on the plaintiff be set aside; 2. the defendant pay the plaintiff's costs.

Endnote

This is curious because s 101 provides for payment of interest at prescribed rates on judgment debts. The prescribed rates are two per cent higher than the rates prescribed for interest on debts for which judgment is given under s 100 of the Civil Procedure Act. There is no evident reason for interest to have been awarded at the rate prescribed under s 101 of the Civil Procedure Act. Although curious, this is not significant. 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: 27 March 2019

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