Anderson Formrite Pty Ltd v CASC Hire Pty Ltd

Affidavit evidence

1. The parties relied on voluminous evidence although, as I will note below, the issues in dispute have now been narrowed to, essentially, one issue as to whether, as a condition of setting aside the Demand, Malvern should be required to pay the amount claimed into Court.
2. Malvern relied on the affidavit dated 6 April 2021 of its managing and sole director, Mr Gribble, which referred to the adjudication process, and to a claim for liquidated damages, relying on a claim that Devakon had delayed in completing a construction project for Malvern and a further claim in respect of defective works in the project. A bulky exhibit to that affidavit included the contract relating to the design and construction of an apartment building by Devakon for Malvern. Mr Li, who appeared for Malvern, drew attention to cl 34.3 of that contract which provided for the circumstances in which an extension of time may be granted. He also referred to cl 34.7 of that contract which allowed Malvern to claim liquidated damages if practical completion was not achieved by the date for practical completion. He referred to the date for practical completion initially set by an annexure to the contract, 24 April 2019, and the rate of liquidated damages specified in that annexure of $5,575 per calendar day, on which Malvern relies to assert an offsetting claim exceeding the amount of the Demand. That in turn raises the question, addressed by further evidence, as to the circumstances in which extensions of time for completion of the contact were given and, later, narrowed by Malvern and the superintendent appointed under the contract.
3. By a further affidavit dated 5 July 2021, admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW), Malvern's solicitor, Mr Pagin, referred to proceedings which Malvern has recently brought in the Commercial and Construction List, by which Malvern seeks liquidated damages against Devakon in an amount exceeding $3.8 million. Those proceedings were commenced while these proceedings were already under way. By a further affidavit dated 8 July 2021, Mr Pagin addressed the position in respect of a notice to produce issued by Malvern in these proceedings, which was ultimately answered on the day before the hearing. Malvern has not had practical access to the documents that were produced by Devakon on a USB drive, and they have not been relied on by either party in respect of the application.
4. Devakon in turn relies on the affidavit dated 13 May 2021 of its solicitor, Mr Wells, who refers to the adjudication determination on which reliance was placed by Devakon, to found the County Court and District Court judgments, and to Devakon's contention that the date for practical completion under the contract was extended to at least 30 March 2020, and the contract was then suspended by Malvern prior to that date, or by Devakon on 16 March 2020 or alternatively 29 April 2020. Devakon relies on that evidence for a submission that the amount of the extensions of time that were granted were sufficient to avoid any liability on the part of Devakon to liquidated damages, prior to the point at which the contract was suspended.
5. The exhibit to Mr Wells' affidavit in turn refers to several extensions of time under the contract. The first, dated 12 December 2019, referred to a revised contract completion date, as the date of the superintendent's appointment, of 13 November 2019, and to a further extension of time of 33 days to 22 January 2020. The second, dated 5 April 2020, records a revision of the revised contract completion date at the date of the superintendent's appointment to an earlier date, 21 August 2019, and records a further extension of time, with the result that the revised contract completion date brought forward from 22 January 2020 is 12 December 2019. That leads to the odd result that a second extension of time, of an additional 37 days, leads to an earlier completion date than had existed following the first extension of time, reflecting the revision of the contract completion date as at the superintendent's appointment. That is a matter on which Devakon relies to attack the process adopted in respect of extensions of time and undermine the claim for liquidated damages asserted by Malvern as its offsetting claim. A third extension of time claim was rejected, and no further extension was granted, leaving the revised contract completion date at 12 December 2019. A fourth revised an earlier extension of time granted for landscaping, to exclude an extension of time of 15 days that had previously been granted, but allowed an extension of time for an additional four days for weather, again moving the contract completion date forward to an earlier date of 26 November 2019. That process is again attacked by Devakon in order undermine Malvern's claim to liquidated damages.

Devakon's concession that an offsetting claim is established

1. With this background, the question then arose as to whether an offsetting claim had been established. An offsetting claim, for the purposes of s 459H(1)(b) of the Act is the amount of a claim or claims that a company has against the person who served a creditor's statutory demand by way of, relevantly, a counter claim or cross demand. If the Court is satisfied that a company has an offsetting claim, then it is required to calculate the substantiated amount of the demand by deducting that offsetting claim from the admitted amount of the debt. Such a claim will be established if there exists a serious question to be tried, or an issue deserving of a hearing, as to whether the company has such a claim against that creditor which is made in good faith and is arguable and is not frivolous or vexatious: see the authorities which I reviewed in Re Cooper Brown Pty Ltd [2019] NSWSC 1341 ("Cooper Brown") at [37]ff. A true offsetting claim can be raised, although a creditor's statutory demand is brought in reliance on a debt arising under the SOPA, although a claim to a genuine dispute under s 459H(1)(a) could not be raised in response to such a demand.
2. The narrowing of the matters in issue in this case, to which I referred above, arose because Mr Reynolds, who appears for Devakon, rightly accepted that the evidence led by Malvern in order to seek to establish a claim for liquidated damages arising from delay in completion, and the commencement of proceedings by Malvern in the Commercial and Construction List in respect of that claim, had the consequence that an offsetting claim would be established, and that the amount of that claim that was genuinely arguable, exceeded the amount claimed in the Demand, so the Demand would be set aside. Mr Reynolds also made clear, and it seems to me that the evidence suggests, that there will be a contest as to the merit of Malvern's offsetting claim, which depends in part on the process for granting, and then limiting, extensions of time to which I have referred above. However, Mr Reynolds is right to recognise that the Court's role, in an application of this kind, is not to assess the ultimate merit of the offsetting claim, or the likely result of the proceedings that will determine it, which will now be heard in the Commercial and Construction List, but only to determine whether such a claim exists. Mr Reynolds rightly anticipated that, in the relevant circumstances, it was likely that the Court would find that an offsetting claim was established for these reasons.
3. That narrowing has the consequence that, except so far as an issue arises as to whether a condition should be imposed on setting aside the demand under s 459M of the Act, it is not necessary to determine Malvern's claim that the demand should be set aside under s 459J(1)(b) of the Act, on the basis that it was not supported by a verifying affidavit, because the existence of an offsetting claim is sufficient basis to set aside the Demand.

Whether a condition as to payment into Court should be imposed

1. An issue remains between the parties, because Devakon contends that the Demand should be set aside on a condition, imposed under s 459M of the Act, that Malvern should pay the amount claimed by Devakon into Court. Mr Reynolds rightly recognises that there are cases, although they are relatively few, in which such a condition has been imposed under s 459M of the Act, where the Court has found that an offsetting claim is established. He refers in that respect to Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743, where Palmer J found that an offsetting claim for unliquidated damages met the low threshold that was required for the purposes of s 459H(1)(b) of the Act, but nonetheless imposed a condition that required the plaintiff which sought to set aside the demand to commence proceedings within a specified period to agitate its claim and pay a specified amount into Court. The former condition would not arise here where, of course, proceedings have already been commenced by Devakon in the Commercial and Construction List. Mr Reynolds also refers to subsequent decisions in which such a condition has been imposed, including Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 and Re Wabbits Pty Ltd [2018] NSWSC 532, both in the context of a genuine dispute having been established.
2. Mr Reynolds places particular reliance on Parker J's decision in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2018] NSWSC 1647 ("Grandview"), where his Honour imposed such a condition where an adjudication had been determined in favour of the defendant that had issued a creditor's statutory demand, and the plaintiff relied on a liquidated damages claim for delay in answer to that offsetting claim. His Honour there gave particular emphasis (at [58]-[59]) to the legislative intention of the SOPA, in manifesting an intention that claims that are upheld by adjudication should be immediately paid, and that any litigation should subsequently be determined, which his Honour characterised by the phrase "pay first, litigate later". His Honour also expressed the view that the imposition of such a condition did not involve any reading down of the relevant provisions of the Corporations Act by reference to the objectives of the SOPA, but instead recognised the commercial and legal environment governed by that legislation and the fact that the existence of debts and disputes as to those debts and offsetting claims fell to be determined in accordance with State law, and specifically that legislation. His Honour also rejected the suggestion that that approach would cause the Court, in dealing with offsetting claims, to be transformed into a "debt collecting Court" if it imposed conditions of that character. Mr Reynolds also referred to other cases where the Court had imposed conditions where a debtor sought to challenge a Court judgment on which a debt was based, by appeal, but those cases should be distinguished because they reflect a binding merits determination by a Court, which the debtor seeks to set aside on appeal.
3. Two things should be noted about Grandview and the other authorities to which I have referred above, before I turn to the parties' further submissions in this respect. First, these decisions are a small minority of the number of cases in which the Court sets aside creditor's statutory demands on the basis of genuine disputes and offsetting claims. Second, the approach adopted in Grandview has not universally been adopted in cases of a similar character. In SBC Construction Pty Ltd v Quick Construction Pty Ltd [2019] 136 ACSR 228; [2019] NSWSC 310 ("SBC Construction"), White J distinguished the position between judgment debts arising after a contested hearing before a judge, and judgment debts arising by force of statute, including the SOPA, which his Honour characterised as "ministerial acts and not true judgment debts". White J there declined to make it a condition of setting aside a statutory demand that the amount demanded should be paid into Court, while recognising that the party claiming to be a creditor was entitled to pursue his remedies as a judgment creditor. In a subsequent decision, Re Ming Tian Real Property Pty Ltd (2020) 145 ACSR 329; [2020] NSWSC 212 ("Re Ming Tian"), again arising in the context of an adjudication certificate under the SOPA that gave rise to a deemed judgment, Gleeson J reviewed the relevant authorities at some length, and also declined to make an order as a condition of setting aside the statutory demand that the amount demanded should be paid into Court.
4. Counsel made elaborate submissions as to whether such a condition should or should not be imposed on an order setting aside the Demand, but that matter can be determined on relatively narrow grounds. Mr Reynolds submits that Malvern's liquidated damages case has the "hallmarks of having been constructed to meet Devakon's claim", and refers to the timing of the revisions of the extension of time to which I referred above. It does not seem to me that the Court could reach such a finding, in an application of this kind, where that will be an issue that will be substantively disputed in the proceedings in the Commercial and Construction List on the merits. Second, Mr Reynolds advances a submission that Malvern's costs of completion and defects do not amount to an offsetting claim, where they had been taken into account in the adjudication process, but nothing turns on that here where Malvern's offsetting claim is ultimately founded upon the extension of time claims. Third, Mr Reynolds emphasises the approach adopted in the SOPA which he characterises, in language similar to that adopted by Parker J, in Grandview as a "pay first, argue later" regime. I accept that that matter was given some significance by Parker J, in Grandview, although it was given less significance, as I noted above, by White J, in SBC Construction and by Gleeson J in Re Ming Tian.
5. Fourth, in the submission which seems to me to be of some significance, Mr Reynolds contends that: "The ability of Devakon to enforce the judgment through writs is not particularly compelling in the present case, where Devakon has already issued a garnishee notice and recovered nearly 3% of the debt, in circumstances where Malvern does not own the land and was a special purpose vehicle for the project. In essence, without the condition, Malvern would have in substance procure[d] the stay of Devakon's presently enforceable and unchallenged order, to prosecute litigation that it has no apparent means to fund for its own resources. Bearing in mind that the underlying statutory purpose of the statutory demand regime is to facilitate the winding up of insolvent companies, the statutory purpose is not facilitated by an unconditional setting aside of a statutory demand issued to [Malvern] in these circumstances." I will explain below why, in my view, that submission undermines rather than supports Devakon's claim for the imposition of a condition in these circumstances.
6. Mr Li responds that there is no doubt about the genuineness of the dispute raised by Malvern and Mr Reynolds in turn points to the matters on which Devakon relies to assert that there are issues as to the extension of time process, to which I have referred above, which impugn Malvern's dispute. I accept that Malvern has raised an offsetting claim, in the sense of a claim that is genuinely arguable, and that is a matter that Mr Reynolds has fairly recognised, while contesting the merit of that claim and contending that it will ultimately not succeed at a hearing upon the merits. I also accept that it cannot be said that that claim is weak, so far as it depends upon the matters which will be determined at the hearing as to the process which was adopted in respect of extensions of time. Ultimately, it seems to me that that proposition rises no higher than its starting point; namely, that an offsetting claim is established, because there is a genuinely arguable dispute as to whether liquidated damages have been established, which will need to be determined on its merits in another forum. It follows, as Mr Li submits, that it could not be said that the claim was weak, or open to "trenchant criticism", although Mr Reynolds rightly responds that the circumstances in which the Court can require a payment into Court are not limited to that position. Mr Li also submits that the mere fact that a debt arose in the context of an adjudication under the SOPA is not reason to order security, but I do not understand Mr Reynolds to have put that proposition, as distinct from a proposition that the combination of the policy of that legislation and the facts to which I have referred above supports the imposition of such a condition in the present circumstances.
7. It seems to me that the matters to which Mr Reynolds refers are ultimately such that, whichever view one takes of the approaches adopted in Grandview on the one hand and SBC Construction and Re Ming Tian on the other, a condition should not be imposed in this case. Mr Reynolds' submission is, in substance, that the Court should infer that Malvern has limited assets and Devakon is unlikely to recover its claimed debt against it, because Malvern does not own the land and was a special purpose vehicle for the project, and because only a small amount of the debt was recovered by a garnishee notice. In that situation, it would follow that Malvern might well be insolvent if the debt claimed by Devakon was owed, but would not be insolvent, although it may be impecunious, if the debt was not owed by reason that it had a genuine offsetting claim against Devakon. If Mr Reynolds is correct as to Malvern's financial position, it could only comply with the condition which Devakon seeks if a third party or associated company puts it in funds to pay those funds into Court, and the practical consequence of that condition is that Malvern would be exposed to a presumption of insolvency, if it could not or did not comply with the condition of payment into Court and its offsetting claim was disregarded. That result, it seems to me, does not merely reflect the policy of SOPA that Malvern should pay the debt now and litigate later, but would advance Devakon's position beyond the position which would exist in contested litigation, by requiring Malvern, in order to protect its position in response to the Demand, to procure payment into Court by a third party or associated company. It does not seem to me that the Court's power to impose a condition under s 459M of the Act should be exercised to bring about that result.

Application of s 459J(1)(b) of the Act

1. I should note that Mr Li in turn put one further basis on which a condition should not be imposed, which it is not necessary to determine given the conclusion that I have reached above. Mr Li submitted that the Court would not impose that condition where the Demand was liable to be set aside by reason of s 459J(1)(b) of the Act for non-compliance with the requirement for an affidavit verifying the Demand under s 459E(3) of the Act. That in turn raises a question as to whether an affidavit verifying the demand was necessary, where the Demand relies on a judgment debt, but the amount claimed is reduced by allowing a credit, here for the amount recovered by a garnishee order.
2. The authorities in that regard are not entirely consistent. In Anderson Formrite Pty Ltd v CASC Hire Pty Ltd (2005) 147 FCR 379; (2006) 24 ACLC 154; [2005] FCA 1424 ("Anderson Formrite"), Siopis J appears to have taken the view that an affidavit verifying the demand is necessary where a credit is allowed against a judgment debt, by setting aside a demand which had reduced the amount claimed to allow for two payments of $50,000. Subsequently, in Jargon Pty Ltd v Good Earth Garden Products Pty Ltd (2006) 206 FLR 244; [2006] WASC 282 ("Jargon"), Newnes M appears to have taken a narrower approach, holding that it was not necessary for a demand to be verified by affidavit if the only difference between the amount of the demand and the amount of the judgment debt was a reduction which was "obvious and plainly unrelated to any issue as to the amount or existence of the debt". In Fitness First Australia Pty Ltd v Dubow (2011) 84 ACSR 296; [2011] NSWSC 531 ("Fitness First"), Ward J (as her Honour then was) referred to each of those decisions and appears to have taken an approach which is closer to that adopted in Jargon above, by observing that "where a portion of the amount claimed is not a judgment debt" then a verifying affidavit should be required. That would not be the case where what has occurred, as in Anderson Formrite and Jargon, is that the debt has been reduced, by allowing a credit to it, so that all of the debt claimed is the judgment debt, but subject to that credit. Subsequent cases, including my decision in Cooper Brown and the judgment of Gleeson J in Re Ming Tian do not advance that question, where they turn on circumstances where additional amounts were claimed as part of the debt, rather than on credits to the debt.
3. I am inclined to think that, on balance, the approach adopted in Jargon, and by Ward J in Fitness First, is likely to be preferable to the stricter approached adopted in Anderson Formrite, and in those circumstances the application to set aside the Demand under s 459J(1)(b) of the Act would have failed, where all that occurred here was that a credit was allowed against the amount of a judgment debt for a clearly identifiable and unchallenged amount recovered under a garnishee order. In those circumstances, the proposition that a condition should not be imposed, because the Demand would have been set aside under s 459J(1)(b) of the Act would not be established. However, it is ultimately not necessary to determine that matter where I have held that a condition should not be imposed in any event.
4. For these reasons, I will order that the creditor's statutory demand issued by Devakon Pty Ltd to Malvern Developments (Vic) Pty Ltd dated 11 March 2021 be set aside. I am inclined to think that costs should follow the event, but I will hear counsel if they advance a contrary view.

Costs

1. I have heard counsel as to costs. Mr Reynolds drew attention to the fact that the commencement of proceedings by Malvern in the Commercial and Construction List was here a relevant matter, so far as it had supported the conclusion that an offsetting claim would be established by Malvern. I am not persuaded that that matter is ultimately here sufficient to alter the result that would follow as to costs in these proceedings, although I accept Mr Reynolds' submission that it is a relevant matter.
2. I summarised the circumstances in which costs will be awarded in an application to set aside a creditor's statutory demand in Re Ming Tian at [6]ff. I there referred, in particular, to the observations of White J in Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital [2007] NSWSC 772 at [3]-[4] where his Honour noted that a party served with a creditor's statutory demand had no option but to commence an action to set it aside, if it wished to avoid the presumption of insolvency arising, and that a creditor who used that process where a genuine dispute existed (or, I interpolate, by extension, an offsetting claim existed) risked an order for costs, or indeed indemnity costs.
3. It seems to me that the matters to which I have referred, in respect of Malvern's claim for delay, were sufficient to give rise to an offsetting claim, although the commencement of Malvern's proceedings in the Commercial and Construction List proceedings no doubt emphasised the likelihood that the sufficiency of those matters to establish that claim would be recognised. It seems to me that the commencement of the Commercial and Construction List proceedings does not have the consequence that costs should only be allowed from that date, because what they emphasised was already implicit in Malvern's offsetting claim which existed prior to their commencement.
4. For these reasons, I also ordered that the Defendant pay the Plaintiff's costs of the application, as agreed or as assessed. I will, as Malvern requested, reserve the opportunity for Malvern to bring an application for indemnity costs, if so advised.

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