AR Pilot Pty Ltd v Gouriotis [2024] NSWSC 493 | Case summary

Supreme Court of NSW|2024-04-09|Before: McGrath J

November 2021: Contract

As already stated, by about 19 November 2021, TZI and Black Ink had entered into the Contract. The Contract is variously dated on different pages, with the date 16 November 2021 appearing on the cover page of the Contract, the date 7 June 2021 appearing on the first operative page of the Contract, the date 12 July 2021 appearing below the signature of Mario Vecchio on behalf of TZI on the execution page of the Contract, the date 19 November 2021 appearing below the signature of Anthony Buckton on behalf of Black Ink on the execution page of the Contract and the date 22 November 2021 appearing in the definition of Commencement Date in clause 1.1(a) of the Contract. At the hearing I was informed by TZI that none of the issues to be determined by me depended on any aspect of these multiple dates (T10.44-11.24).
In the Contract, TZI is defined as the Company and Black Ink is defined as the Contractor.
The principal operative provisions of the Contract are as follows: 1. Black Ink agreed to provide the Services to TZI (cl 2.1). 2. Services are defined in cl 1.1(d) of the Contract as: …the services set out in Schedule A and such other services requested by [TZI] as may be reasonably ancillary to those services and/or otherwise requested by [TZI]. 1. Schedule A to the Contract provides: Overview Blackink is to be to [sic] assist TZ Limited with the planning, architecture, design and build out of a new SaaS customer enablement platform. The new platform is central to the recently announced TZ business strategy. Deliverables • Work closely with existing SLT and teams to plan, set up and run the program • Oversee and guide the discovery, roadmap, planning, architecture, design, and buildout which will also include customer engagement and product positioning • Evaluate, engage, and manage supplier relationships • Assist with budgeting and resource planning • Other works as agreed 1. Clause 2.2 states that Black Ink shall: (a) keep [TZI] informed, by providing a written monthly report, as set out in clause 4.2, of the nature and progress of the Services being performed and as otherwise requested by [TZI] from time to time; and (b) make available for inspection by [TZI] at any time, on reasonable notice, all files and other records relating to the Services performed by [Black Ink]. 1. Clause 4 is central to the issues to be determined on this application. Clause 4.1 of the Contract provides: In consideration of [Black Ink] providing the Services, [TZI] will pay [Black Ink] a monthly calendar rate of $14,170.00 ,Plus Gst [sic] providing a minimum of 112 hours of consulting is performed per month. 1. Clause 4.2 of the Contract provides: [Black Ink] shall furnish to [TZI] a monthly report including: (a) the date the Services were rendered, and (b) a description of the Services rendered, and (c) a monthly invoice for Services rendered. 1. Clause 4.3 of the Contract states: [Black Ink] will provide an invoice and [sic] the beginning of each month which shall be payable 30 days from receipt. [TZI] shall, if applicable, set-off against such payments any sum that [Black Ink] owes [TZI]. 1. Clause 6 deals with termination of the Contract, with each of TZI and Black Ink having the right to terminate immediately by notice on the occurrence of specified events and the right to terminate by giving one month's written notice to the other party. 2. Clause 7 contains a number of provisions directed at Black Ink holding the status of an independent contractor to, and not an employee of, TZI and setting out the standard to which the Services are required to be provided by Black Ink. Clauses 7.1, 7.3 and 7.7 relevantly state: 7.1 The relationship of the parties is that of independent contractors and nothing in this Agreement is to be taken to establish any semblance of an employment relationship between [TZI] and [Black Ink]. … 7.3 [Black Ink] warrants that [Black Ink] shall at all times during the Term: (a) provide the Services to [TZI]: (i) in an efficient, timely, competent and professional manner, consistent with [TZI's] expectations and standards; (ii) to a standard which is consistent with industry standards applicable to such Services; and (iii) to the best of [Black Ink's] ability. … 7.7 [Black Ink] may not expressly or impliedly or in any manner whatsoever bind or attempt to bind or purport to bind [TZI] in any way nor shall [Black Ink] represent to any party that [Black Ink] is an employee, servant or agent of [TZI] or that [Black Ink] is authorised to bind [TZI] to any legal obligation.

Relevant individuals

The individuals who rendered the Services under the Contract on behalf of Black Ink were Richard Frawley and Anthony Buckton. They also engaged in communications on behalf of Black Ink.
Across the relevant times, the directors of TZI were Mario Vecchio (who was also Chief Executive Officer of TZ Limited and ceased to be a director and the Chief Executive Officer on 30 January 2023), Simon Van Es (who ceased to be a director on 28 April 2023) and John Wilson (who is still a director and was the founder of TZ Limited).
On 28 February 2023, Peter Graham was appointed as a director of TZI and remains so, together with John Wilson.
Other personnel involved in the relevant events are Izzat Shadid (Finance Director of TZ Limited) and Jowins Jose (Chief of Software of TZ Limited).

December 2021-March 2023: Black Ink renders 27 invoices and TZI pays 25 of them

In the period from December 2021 to March 2023, Black Ink rendered 27 invoices to TZI under the Contract, 25 of which were paid, totalling $371,402.41.
Several of those invoices are in evidence, including the two unpaid invoices. All of them are on Black Ink's letterhead, addressed to TZI, with an invoice number, an invoice date, a due date, the number of units, a description of the services provided, the date range of those services, the unit price and the amount.

August-October 2022: Issues concerning Ricoh

On 23 August 2022, TZ Limited made an ASX announcement that it had entered into a software licensing deal with Ricoh utilising the TZ Cloud offering, with a total contract value of A$950,000, payable to TZ Limited in tranches over a three-year licence term. Ricoh was one of TZ Limited's major customers. The licensed software was to be used by customers of Ricoh, including DHL.
On 24 October 2022 at 2:05pm, Mr Vecchio sent an email to Mr Graham and others, copied to Mr Van Es, with the subject heading "DHL/Ricoh Licensing Payments Risk". In the email, Mr Vecchio said that he wanted "to alert the board to the following risk", and then set out what he described as "significant challenges with the DHL project" which he then detailed. He raised the potential issue of the contract with Ricoh being cancelled, which might give rise to the risk that DHL look to defer the contract payments of about $1 million due to TZ Limited.
On 24 October 2022 at 3:26pm, Mr Graham sent an email to Mr Vecchio and others, copied to Mr Van Es, in which he raised three questions regarding whether the Ricoh deal was a white label deal between TZ Limited and Ricoh, whether DHL was a client of Ricoh under the licensing deal and how interwoven the DHL transaction was with the Ricoh licence.
On 24 October 2022 at 3:33pm, Mr Vecchio sent an email to Mr Graham and others, copied to Mr Van Es, in which he provided answers to the questions that had been raised in Mr Graham's earlier email, stating that Mr Graham was correct that the Ricoh deal was a white label deal, that DHL was a client of Ricoh under the licensing deal and stating that while he was not really sure whether he understood Mr Graham's final question, if the question was whether Ricoh gave TZ Limited the order knowing that they had a DHL deal and would offset what they were paying TZ Limited, the answer was yes.
There is no reference to Black Ink in the ASX announcement or any of these emails. There is no direct or inferential evidence in any these documents demonstrating any involvement of Black Ink in the dealings between TZ Limited, Ricoh and DHL. Ultimately, TZI did not press any of these facts concerning Ricoh and DHL as supporting an alleged offsetting claim.

November 2022: Proposed costs savings

On 29 November 2022, Mr Shadid sent an email to Messrs Vecchio, Van Es and Frawley to which he attached what he described as "the proposed costs savings discussed in our meeting this afternoon". In the email he indicated that there were items highlighted for confirmation based on further meetings the following day. Attached to the email was a spreadsheet titled "Monthly Cost Savings to be incorporated at TZ Limited from 1 January 2023" with a heading "Other Costs Savings", under which appears a subheading, "Contractors". Below that subheading, the following appeared as part of a table: Richard Frawley time off Dec/Jan 3,333 Anthony Buckton 15,000
On the spreadsheet the amount of "3,333" is highlighted, and in a connected box next to it is the following: Izzat Shadid: 50% reduction in December/January split over six months
At the bottom of the table, it states "values to be confirmed".
There is no evidence that these "proposed costs savings" were agreed between, or the values confirmed by, TZI and Black Ink.

12 December 2022: Issue concerning Scape

On 12 December 2022 at 10:52am, Mr Graham sent an email to Messrs Vecchio and Frawley, amongst others, and copied to Mr Wilson, which was directed to Mr Frawley in the following terms: Good Morning Richard, Obviously the shareholders in TZ are going troppo over the share price at the moment and this causes them to question EVERYTHING. I have been dealing with this all weekend. The Directors have been aware of the issues with Scape…..ongoing was very very surprised on the weekend when some larger institutional shareholders knew about this Scape issue. Can you please summarise for the directors what the issue is with Scape ? Perhaps John Wilson may like to comment? This issue needs to be resolved to the clients [sic] satisfaction if possible - because Scape are not doing us any favours in the marketplace.
On 12 December 2022 at 10:55am, Mr Vecchio sent an email. It is not clear precisely to whom it was addressed but I infer that it was at least sent to Mr Frawley given that it refers to "Richard". The email said: Thanks Fuzzy Richard, I know you are all over this Please take the board through the potted history And our current plan in action that we agreed to last Friday
On 12 December 2022 at 11:33am, Mr Frawley sent an email to Mr Vecchio in response saying (all grammar and punctuation issues left in place): Broadway has to my knowledge (they have my number and have not called), is now stable. This required the development of new software (which was delayed a little by other higher priority fixes [caused by on going inherited technical debt], and to find and patch an unusual bug introduced by MSFT in a recent Windows 10) release. Add to that existing problems with the cabling, power supplies and locks due to bad implementation and locker design (the raceway makes it's easy to damage locks) There was as a result, a necessary remediation process that had to be followed. 1) Visit every site to ensure SOE power, locks and cabling was in place. Replace bad cables, smart hubs and locks. This took time as completion of major projects (and associated revenues) was deemed higher priority. 2) TZ Gateway software due to poor software design and implementation is known to be fragile and unreliable. A plan replace it with an upgraded version of Device Manager was put in place and delivered a while back, but for scape it had to ported and tested on the Residential platform, which again due to higher priorities and highly restrained resources, took longer than optimal. So, once all the precursor activities were completed and the new software and patch installed, the system at Broadway has so far performed perfectly. This is now being rolled out as new SOE at all sites. This is activity for the team this week.
There was no other evidence relating to whatever issues were being experienced with Scape. There was no direct or inferential evidence which would indicate that those issues might support a claim by TZI against Black Ink.

14 December 2022: TZ Limited powerpoint presentation on cost reductions

On 14 December 2022, Mr Vecchio sent an email to a number of people, including Messrs Graham, Shadid and Van Es, with the subject "Cost reductions" stating: Izzat will provide the details in his cashflow tomorrow. See attached
Attached to the email was a document titled "Cost Reduction Updates", with a subheading "Cost reductions Phase 1", followed by a succession of bullet points, amongst which was the following: • Technical Staff reductions. Anthony Buckton work paused; Richard Frawley paused for 1 month
There is no evidence of what became of the cash flow to be provided by Mr Shadid on the following day. There is no evidence that these "Technical Staff reductions" were agreed between TZI and Black Ink.

31 December 2022: unpaid invoice number 2475

On 31 December 2022, Black Ink rendered the December 2022 invoice to TZI.
The December 2022 invoice was on Black Ink's letterhead, addressed to TZI, bearing invoice number 2475 and stated units of 15.00, a unit price of $1,050.00, an amount of $15,750.00, GST of $1,575.00, an amount due of $17,325.00, a due date of 28 January 2023 and the following description: Consulting Services - TZ Limited CTO Work 1st Dec - 31st Dec
It was common ground that the reference to "CTO Work" is a reference to Chief Technical Officer, and specifies work performed by Mr Frawley for Black Ink providing the Services under the Contract (T21-22).

30 January 2023: termination of the Contract

On 30 January 2023, Mr Wilson sent an email to Mr Frawley stating: Per our discussion, although the attached contract expired in May 2022, both parties have continued to transact the contract in the spirit of the agreement. In the light of [sic] the recent management changes and the need to reduce current operating overheads, please take this email as one months' [sic] notice that TZ is terminating the current contractual arrangement at the end of February. Accordingly, the maximum billable hours for February will be the lesser of the contracted 112 hours ($14,170) or the actual hours worked, charged at a pro rata rate. Please note that there are new reporting lines for technology staff. We would appreciate that you act purely in a consulting capacity as opposed to any on-going line management responsibility. Any direct engagement with the Company's customers will need to be pre-approved by either Chris or myself. To ensure continuity of technology initiatives, I am happy to discuss your on-going engagement on a consulting basis pending confirmation of TZ requirements… terms of this engagement (if it proceeds) would be the subject of a new contractual agreement to be negotiated by the parties. I look forward to receiving a progress report on the current initiatives and an outline of the specific deliverables that you are currently working on.
This email clearly constituted one month's written notice by TZI terminating the Contract. The email made no mention of there being any agreed variation of the Contract to limit the hours that Black Ink might invoice for past work but instead there was an attempt to limit the billable hours for February 2023 which had yet to be worked.

31 January 2023: unpaid invoice number 2478

On 31 January 2023, Black Ink rendered the January 2023 invoice to TZI.
The January 2023 invoice was on Black Ink's letterhead, addressed to TZI, bearing invoice number 2478 and stated units of 14.00, a unit price of $1,050.00, an amount of $14,700.00, GST of $1,470.00, an amount due of $16,170.00, a due date of 28 February 2023 and the following description: Consulting Services - TZ Limited CTO Work 1st Jan 2023 - 31st Jan 2023
Again, the "CTO Work" refers to Chief Technical Officer and the work undertaken by Mr Frawley for Black Ink under the Contract.

10 February 2023: Black Ink request for payment of invoices

On 10 February 2023, Mr Buckton sent an email to Mr Graham listing three outstanding invoices which included the December 2022 invoice and the January 2023 invoice.
In relation to the December 2022 invoice, Mr Buckton said it was for: Services rendered by Richard [Frawley] in December with the invoice submitted at the end of December and due in January: $17,325
In relation to the January 2023 invoice, he said it was for: Services rendered by Richard [Frawley] in January and is due at the end of this month: $16,170.
Mr Buckton asked Mr Graham to advise when these invoices would be paid. He also commented that Mr Frawley was currently standing down to relieve pressure on the cash flow but was under pressure from the team to re-engage.

15-23 February 2023: Further Black Ink request for payment of invoices and TZI's demand for monthly reports

On 15 February 2023 at 7:47am, Mr Buckton sent an email to Mr Graham, copied to Mr Frawley, to which he attached a formal request for the outstanding invoices to be paid.
On 15 February 2023 at 4:15pm, Mr Graham responded by email to Mr Buckton by saying that TZI was reviewing the situation between TZI and Black Ink, "mainly the personal relationships between Vecchio and Frawley", commenting that "TZI does not have in its possession the Monthly Reports as required under the [Contract]" and asking for a copy of those monthly reports.
On 17 February 2023 at 11:42am, Mr Buckton responded by email to Mr Graham, copied to others including Messrs Wilson, Shadid and Frawley, stating that Black Ink was taking TZI's position "under advisement".
On 17 February 2023 at 12:17pm, Mr Graham sent an email to Mr Buckton, copied to others including Messrs Wilson, Shadid, Frawley and Vecchio, stating that: 1. Black Ink had received $356,069.00 in just over 12 months; 2. Mr Frawley/Black Ink were appointed by Mr Vecchio, with whom Mr Frawley "has a close personal relationship"; 3. the board of TZ Limited was not made aware of the Contract until after the fact; 4. TZ Limited was investigating the arrangement and agreement; 5. TZ Limited had a right to the monthly reports as outlined in the Contract; and 6. Black Ink should provide TZ Limited with copies of these monthly reports by 5:00pm that day.
On 22 February 2023 at 7:12pm, Mr Frawley sent an email to Mr Van Es which shared a Google Drive folder with him, which was then on sent that day at 8:22pm by email to Messrs Graham and Wilson.
On 23 February 2023 at 7:42am, Mr Wilson sent an email to Mr Graham, copied to Mr Van Es, in which he said: Richard's process was to create Google docs that were accessible by his team so they could add and edit content. The documents represent the dynamic evolution of the project as it progresses so it's a collection of notes, thoughts, agreements.. etc… They are a useful background to each project and what the team was working on. The link provides access to these documents - I believe Richard is still populating the folder.
In this description by Mr Wilson, there is no evidence as to what was contained in the Google Drive.
After this time and until 25 July 2023, there is no evidence of any communications between Black Ink and TZI regarding the outstanding invoices.

April-June 2023: Remuneration of Mr Jose

On 28 April 2023, Mr Jose sent an email to Mr Wilson in which he forwarded an email of 27 May 2022 sent by Mr Frawley to Mr Jose and attached a letter of offer dated 8 June 2022 from Mr Frawley to Mr Jose.
The email of 27 May 2022 from Mr Frawley to Mr Jose says: Transparency here. You offer [sic] is approved apart from the shares….I am waiting for Mario to confirm that he got clearance from the board…it [sic] quite a convoluted process, so he might not have that completed yet. Do you want me to give you the offer with the shares pending board approval or would you like to wait? I am mindful that I promised you this today, and I am bothered by it.
The letter of offer of 8 June 2022 from Mr Frawley to Mr Jose is on TZI letterhead offering him the role of Chief of Software of TZI. The letter stated: I am delighted to offer you the role of Chief of Software for TZ. This is [sic] key role in the organisation. I confirm that this role reports directly to me. In this, TZ offer you [sic] a revised annual remuneration package of $180,000 plus statutory superannuation, paid monthly. An additional $20,000 will be paid annually for the achievement of key performances. (Refer the [sic] following page). Included are 20 paid annual leave days and 10 sick leave days per year. The start date for the increased remuneration will be July 1st. I know it will be great working with you. Yours faithfully Richard Frawley Chief Experience Officer TZI Australia Pty Ltd
Attached to the offer was a document describing a "Bonus Payment Structure" indicating that 70% of the bonus would be paid on contribution to "firm outcomes" and 30% would be paid on acknowledgement of Mr Jose's "soft skill developments". The document then set out a description of the "Firm Outcomes" and "Soft Skills".
Having attached the email and letter of offer, Mr Jose said in his email of 28 April 2023 to Mr Wilson: When you have mentioned about stock, that reminded me of the below that I was offered $5K worth shares [sic] as part of the new role communication I had with Richard. Later I was told that, Mario has taken care of the approval from the board, and I should be getting the shares in that month itself, but I am yet to receive those shares. The offer attached do [sic] not mention it as that was not yet approved as per the email below. Could you please let me know the status?
There is no evidence of any response by Mr Wilson to Mr Jose in relation to this email.
On 9 June 2023 at 9:19am, Mr Jose sent an email to Mr Wilson concerning his remuneration, to which was again attached the letter of offer of 8 June 2022. In the email, Mr Jose said (all grammar and punctuation issues left in place): Attached is the compensation + bonus offered to me which clearly details the KPA's. It was Richard's decision to keep more bonus by reducing my base pay I originally requested. The reason stated was that I get the feeling of rewarded for committed deliveries which is one reason he offered stock options too. Since it was bind with my performance than companies, which I was certain to meet, I agreed with it. I would like to emphasise that; I personally have taken lot on my shoulders to roll out things in timely fashion implementing them along with making sure of efficient and quality delivery from the team. I am not sure if you are aware of all the changes, I brought across to the software. I will send you a list of achievements in comparisons to previous leadership.
Again, there is no evidence of any response by Mr Wilson to Mr Jose in relation to this email.
On 9 June 2023 at 9:24am, Mr Wilson sent an email to Mr Graham forwarding the email chain containing the email of 27 May 2022 from Mr Frawley to Mr Jose, the email of 28 April 2023 from Mr Jose to Mr Wilson and the email of 9 June 2023 from Mr Jose to Mr Wilson. In the email to Mr Graham, Mr Wilson said: FYI…letter of offer to Jowins. The KPIs are qualitative so very hard to objectively assess and argue otherwise. Based on the letter he would be entitled to a $20K payment.
On 9 June 2023 at 11:11am, Mr Graham sent an email to Mr Buckton with the subject line "Richard Frawley Representatiobns [sic]", which forwarded the email of 9 June 2023 from Mr Wilson to Mr Graham, together with all of the emails that were attached to it. Mr Graham said: Are you aware of these representations made by Richard Frawley? This was never presented to the board as suggested. TZ is now forced to honour this commitment to keep a now "disgruntled employee"? BlackInk [sic] was only ever a consultant to TZ!
There is no evidence of any response by Mr Buckton to this email.

July-August 2023: solicitors' correspondence concerning outstanding invoices

On 25 July 2023, the solicitors for Black Ink (Diamond Conway) sent a letter by email to the directors of TZI referring to the December 2022 invoice and the January 2023 invoice (by their respective invoice numbers, invoice amounts and due dates) demanding payment of the sum of $33,495.00 by 2 August 2023, failing which Black Ink would take such action as it was advised to recover that sum.
On 3 August 2023, the solicitors for TZ Limited/TZI (Nevett Wilkinson Frawley) sent an email to the solicitors for Black Ink stating that they were formulating a response to the letter of 25 July 2023 on behalf of TZ Limited which they anticipated would be finalised and forwarded by the end of the following week. I have taken all of the correspondence of Nevett Wilkinson Frawley to have been sent on behalf of both TZ Limited and TZI.
On 14 August 2023, the solicitors for Black Ink sent an email to the solicitors for TZ Limited/TZI asking that they indicate by close of business that day if they were instructed to respond, failing which Black Ink would not wait any longer and would proceed on the basis that TZ Limited/TZI did not intend to respond.
On 16 August 2023, the solicitors for TZ Limited/TZI sent an email to the solicitors for Black Ink stating that they did intend to respond to the letter of 25 July 2023, that Black Ink's claim was disputed and that they were still obtaining further instructions and would respond as soon as possible.
There followed a two-month gap in communication between the parties.

25 July 2023: Business possibilities concerning Ricoh

On 25 July 2023 at 10:57am, Mr Wilson sent an email to Mr Graham with the subject heading "RICOH EUROPE UPDATE". In the email, Mr Wilson refers to a discussion he had that evening with Spencer Handley (the head of Ricoh's annuity business in Europe) who stated that changes had occurred in the Ricoh organisational structure and that he would still like to consider TZ Limited for their enterprise software solutions, but Mr Wilson queried how genuine that was. Mr Wilson stated that opportunities for enterprise-wide deployments were few and far between and that while Ricoh had sought TZ Limited's help on a few opportunities, none had really come to fruition. Mr Wilson outlined a deal between Ricoh Poland and Polish Post for the supply of 1,000 locker banks, in which Polish Post would be using software they purchased from Alfred 24.
In the email, Mr Wilson stated: … It will be a long shot for TZ to win any of this business, short a major issue with their software provider. Spencer also said it was difficult for him to push TZ internally given the DHL debacle - Ricoh had to write off the EU230,000 they paid us…so they took a bath on the DHL deal. The mismanagement of the DHL opportunity has definitely hurt us.
There is no mention of Black Ink in this email. There is no direct or inferential evidence in this email demonstrating any involvement of Black Ink in the dealings between TZ Limited, Ricoh and DHL.

August 2023: email chain concerning ELC purchase order

On 22 August 2023, Shuannie Guo of TZI sent an email to Mr Wilson and Chris Kelliher stating: The ELC Board purchase order was discussed in the handover meeting. We were not told by Oscar that what he has already communicated with CWC [sic], more information see below. I have required the list and asked if the components consumable [sic] for other TZ products.
Below this email is a string of emails commencing on 8 September 2021 between personnel from Telezygology Inc (Oscar Ortiz) and Circuit Works Corporation (CWC) (Doug Mayer and Jessica Paredes) regarding the market for electronic components which appears to have been affected by supply chain issues during the period of COVID-19, particularly pushing out the date for the supply of a particular component used on PCA-102047 in purchase order 3898 to April 2022 and then November 2024.
On 11 January 2023 at 11:32am, Mr Ortiz sent an email to Mr Mayer and Ms Paredes, copied to Fernando Valadez of CMC, stating: We would like to cancel this PO and for TZ to pay for the raw materials. If CWC can help by offering the raw materials to your vendors as a buy back to recover some of the cost, please let me know. Part 102047-000 is an obsolete item for TZ.
In response, on 11 January 2023 at 11:41am, Mr Mayer sent an email to Mr Ortiz saying that they would go ahead and cancel the order and see if they could return any of the material.
Across January to April 2023, an exchange of emails between Mr Ortiz and Mr Valadez about the purchase order continued, culminating on 19 April 2023 with Mr Valadez sending an email to Mr Ortiz saying: Wanted to follow-up with you on this PO3898 for the 102047-000. Any progress on being able to build this. We have close to $60k of material sitting in inventory for this project. Do you have a forecast or timeline on when we will begin building this? Looks like this order has been sitting since 2021 from what I am seeing.
In respective emails dated 8 and 19 August 2023 from Ms Paredes and Mr Valadez to Mr Ortiz and Ms Guo, an update on purchase order 3898 was sought.
These were the last emails in the chain of emails attached to the email of 22 August 2023 from Ms Guo to Messrs Wilson and Kelliher set out above.
There is no mention of Black Ink in any of these emails. There is no direct or inferential evidence in these emails demonstrating any involvement of Black Ink in the dealings with CMC over the purchase order for these electronic components.

18 October 2023: Statutory demand

On 18 October 2023, the solicitors for Black Ink served the statutory demand and the supporting affidavit on TZI.
The statutory demand described the debts in the following way: Description of Debt Amount of Debt The amount payable to the creditor by the company for services pursuant to a contract for services between the creditor and the company dated on or about 16 November 2021 being the amount set out in the creditor's invoice number 2475 dated 31 December 2022 $17,325.00 Description of Debt Amount of Debt The amount payable to the creditor by the company for services pursuant to a contract for services between the creditor and the company dated on or about 16 November 2021 being the amount set out in the creditor's invoice number 2478 dated 31 January 2022 $16,170.00 $33,495.00

It was agreed that invoice number 2478 is dated 31 January 2023 and was incorrectly described in the statutory demand as dated 31 January 2022.

October-November 2023: solicitors' correspondence concerning statutory demand

On 24 October 2023, the solicitors for TZ Limited/TZI sent a letter by email to the solicitors for Black Ink responding to the letter of 25 July 2023 and the statutory demand served on 18 October 2023, stating that it was TZI's position that the statutory demand constituted an improper and unconscionable abuse of process and was liable to be set aside by the court. The email alleged several matters, being: 1. A deficiency in the statutory demand referring to an "invoice number 2478 dated 31 January 2022" which did not exist. 2. Black Ink did not comply with its obligation under cll 2.2(a) and 4.2 of the Contract to produce to TZI monthly reports for December 2022 and January 2023, which were demanded by Mr Graham on 15 and 17 February 2023. 3. Black Ink did not comply with its obligation to provide a minimum of 112 hours of consulting services in December 2022 and January 2023, rendering the fees invoiced unenforceable. 4. Black Ink failed to disclose Mr Frawley's alleged disciplinary issues with the Australian Securities and Investments Commission and his criminal sentencing. 5. TZI has a right under cl 4.3 of the Contract to offset any monies owed by Black Ink to TZI against monies owed to Black Ink by reason of Mr Frawley's alleged failures to consult and refer matters back to the TZI board of directors, including the making of a unilateral decision to discontinue the manufacture of ELC devices causing US$120,000 in parts to be acquired that TZI was liable for, making representations to Mr Jose which obliged TZI to increase his annual baseline salary by $20,000, causing the write-off of US$45,000 of ELC board components stock, overcharging and over invoicing TZI for services and failing to provide any monthly reports until after termination of the Contract.
The letter concluded that if Black Ink did not withdraw the statutory demand in clear and open correspondence by close of business on 25 October 2023, the solicitors for TZI were instructed to issue a setting aside application without further notice.
On 27 October 2023, the solicitors for Black Ink sent a letter by email to the solicitors for TZ Limited/TZI responding to the letter of 24 October 2023. In this letter it was stated that: 1. Black Ink did not understand the assertion that invoice number 2478 did not exist. 2. Black Ink rejected the assertion that it did not comply with cl 2.2 of the Contract, and even if that assertion was correct, the solicitors for TZ Limited/TZI had not identified any basis on which such non-compliance would disentitle Black Ink to payment. 3. Black Ink rejected the assertion that it failed to comply with its obligation to provide 112 hours of services per month in December 2022 and January 2023, stating: Your client will be aware that this obligation was varied by agreement to assist with your client's cash flow. In any event, our client does not accept the implicit proposition that it is not entitled to any payment where it has not provided at least 112 hours of services per month. 1. The issues relating to Mr Frawley's conviction did not affect TZI's obligation to pay for the services and, in any event, the assertions were baseless because TZI was aware of the conviction prior to engaging Black Ink. 2. Clause 4.3 of the Contract provides that TZI can set off against amounts owed to Black Ink any sum that Black Ink owes to TZI and does not entitle TZI to withhold payment by reason that it asserts that it has a claim against Black Ink, TZI having not identified any basis for the claim or quantified its asserted loss. 3. Black Ink rejected the assertion that the statutory demand constituted an improper and unconscionable abuse of process and was liable to be set aside by the court.
The letter concluded by saying that Black Ink was happy to consider any reasonable terms that TZI may propose for payment of the amounts due.
On 2 November 2023 at 9:19am, the solicitors for TZ Limited/TZI sent an email to the solicitors for Black Ink which referred to the emails sent on 22 February 2023 (referred to above) which forwarded a Google Drive folder, stating that TZI was no longer authorised to access the Google Drive folder and had not retained a copy of the documents enclosed in the Google Drive folder, and asking that Black Ink provide a copy of all documents contained in the Google Drive folder and all timesheets compiled by Black Ink to record the number of hours and days worked under the terms of the Contract. The email also stated: I refer to your letter of 27 October 2023 […] in which it is asserted that your client's contractual obligation to provide 112 hours of consulting services per month in December 2022 and January 2023 "was varied by agreement to assist with your client's cash flow". Apart from the bare assertion that clause 4.1 of the Contract for Services was amended to assist with our client's cash flow, we note that your letter does not provide any particulars as to the scope or terms of the alleged variation to the Contract for Services. In light of the above, please urgently advise as to the following: • The precise scope and terms of the alleged variation, including the agreed reduced number of hours of consulting services to be provided by your client per month in December 2022 and January 2023, and the remuneration to be paid in respect of same; • Which persons were party to the negotiations on behalf of the respective parties; and • Any other relevant circumstances to the negotiation of the alleged variation, including the date when the variation was purportedly agreed between the parties. We further request that your client provide a copy of any correspondence, contemporaneous notes, or other written evidence in your client's possession that substantiates the claim that the Contract for Services was varied by way of agreement between the parties, and the terms of the alleged variation.
The email concluded by stating that the solicitors for TZ Limited/TZI had instructions to bring an application to set aside the statutory demand and, in light of the looming expiry of the statutory timeframes to file and serve that application, requesting that the solicitors for Black Ink provide a response by close of business that day, failing which TZI intended to rely upon the correspondence in its application to have the statutory demand set aside.
On 2 November 2023 at 4:49pm, the solicitors for Black Ink sent an email to the solicitors for TZ Limited/TZI asking them to indicate specifically the legal basis for TZI's demand for a copy of the documents referred to in their email and how that related to the statutory demand.
On 6 November 2023 at 11:13am, the solicitors for TZ Limited/TZI sent an email to the solicitors for Black Ink referring to cll 4.1 and 4.2 of the Contract and stating that it was TZI's position that Black Ink was only entitled to render invoices under the Contract and seek payment of them in circumstances where Black Ink had strictly discharged its obligations pursuant to cll 4.1 and 4.2. The email also stated: It is our understanding that the documents uploaded to the GoogleDrive [sic] folder were provided to our client by way of evidence that your client had complied with its obligations pursuant to clause 4.2, following a request by our client for a copy of the monthly reports. Our client requires a copy of the documents uploaded to the GoogleDrive [sic] folder, and a copy of any timesheets held by your client, to confirm that your client fully discharged its obligation to provide reports containing all information as required under clause 4.2, and provided the specified number of units of services as set out in the disputed invoices. We therefore reiterate our request that your client provide the requested material without any further delay.
On 6 November 2023 at 3:13pm, the solicitors for Black Ink sent an email to the solicitors for TZ Limited/TZI responding to their emails of 2 and 6 November 2023. They said: Particulars of variation to the consulting agreement Having reviewed your letter dated 24 October 2023, it is apparent that the allegation that our client failed to comply with its obligation to provide 112 hours in December 2022 and January 2023 is based on a false premise. Our client provided in excess of these hours in each of those months. Accordingly whilst the number of hours was reduced by agreement from what had been supplied in preceding months, the number of hours provided did in fact exceed 112 hours per month. In the circumstances there is no utility in providing particulars of the amendment. The Google drive documents I note your explanation for the relevance of the Google Drive documents. I am instructed that the documents in the Google drive folder comprised working documents produced as part of the work being undertaken pursuant to the contractor agreement. Your "…understanding that the documents uploaded to the GoogleDrive [sic] folder were provided to our client by way of evidence that your client has complied with its obligations pursuant to clause 4.2, following a request by our client for a copy of the monthly reports" is not correct and this was not the mechanism used to comply with its obligation under the contractor agreement. I am instructed that our client supplied the relevant detail on the invoice supplied to your client each month.

6 November 2023: TZI applies to set aside the statutory demand

On 6 November 2023, TZI filed the originating process for orders to set aside the statutory demand.

10 November 2023: TZI asserts basis for challenging statutory demand

On 10 November 2023, the solicitors for TZ Limited/TZI sent an email to the solicitors for Black Ink, amongst other things, responding to the email of 6 November 2023.
In the email, it was stated that TZI's position was that the Contract was amended by way of agreement so that Black Ink would reduce by 50% the total quantum of hours of services rendered to TZI for December 2022 and January 2023 compared to November 2022 and Mr Buckton would provide no services to TZI on behalf of Black Ink from 1 January 2023 onwards. It was alleged that by issuing the December 2022 invoice and the January 2023 invoice, Black Ink was in breach of the terms of the Contract as amended by the parties and that Black Ink has charged TZI in excess of the agreed maximum number of billable hours for the months of December 2022 and January 2023.
In the email, it was also stated that TZI's further position was that neither the December 2022 invoice and the January 2023 invoice nor the documents provided in the Google Drive folder on 22 February 2023 discharged Black Ink's obligation to compile and provide monthly reports under cl 4.2 of the Contract.
The request was then repeated for all documents contained in the Google Drive folder sent via the link contained in the email of 22 February 2023 and a copy of all timesheets compiled by Black Ink to record the hours and days worked under the terms of the Contract.
The email concluded by requesting that the solicitors for Black Ink provide the precise scope and terms of the variation alleged by Black Ink, state which persons were party to the negotiations on behalf of the respective parties, and provide all other relevant circumstances to the negotiations, including the date when the variation was purportedly agreed and the written evidence to substantiate the variation.

ISSUE 1: DEFECT IN STATUTORY DEMAND

TZI allege that the statutory demand should be set aside because of a defect in it.

Legal principles

Section 459J of the Corporations Act is the source of the court's power to set aside a statutory demand due to, inter alia, the existence of a defect in the demand. That section provides: (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.
Section 9 of the Corporations Act defines "defect", in relation to a statutory demand, as including the following: (a) an irregularity; and (b) a misstatement of an amount or total; and (c) a misdescription of a debt or other matter; and (d) a misdescription of a person or entity.
The principal authorities on the application of s 459J(1)(a) of the Corporations Act concerning a "defect" in a statutory demand can be summarised as follows: 1. The definition of "defect" in s 9 is inclusive, and the term should be given its ordinary meaning (being a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection) and then, if not otherwise included, the deemed statutory meanings as well: Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226, Lockhart J at 237-8. 2. The company on which the statutory demand is served must be able to identify with precision each debt on which the statutory demand is based because if it cannot it will be denied the ability to even begin to consider whether there is a genuine dispute in relation to the debt: Condor Asset Management Ltd v Excelsior Eastern Ltd (2005) 56 ACSR 223; [2005] NSWSC 1139, Barrett J at [28], applied in Re YCH Logistics (Australia) Pty Ltd [2013] NSWSC 1874, Brereton J at [10]. 3. A statutory demand must be unambiguous and if ambiguity exists within a statutory demand such as to produce doubt in the mind of any reasonable reader as to the course that must be taken in order to avoid a situation where the statutory presumption of insolvency is created, the demand is defective: AR Pilot Pty Ltd v Gouriotis [2007] NSWSC 396, Barrett J at [29]. 4. The debtor company is not and cannot be expected to guess which of several possible courses suggested by the statutory demand is to be taken by it to forestall the statutory presumption of insolvency or to initiate inquiries of its own in order to ascertain the required course, and while some familiarity on the debtor company's part with the relevant subject matter may be presumed, it is not obliged to speculate exactly what it is that the creditor demands: Main Camp Tea Tree Oil Ltd v Australian Rural Group (2002) 20 ACLC 726; [2002] NSWSC 219, Barrett J at [37]. 5. If the demand is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim, then there is a lack of something necessary for completeness, and therefore a defect in the demand: LSI Australia v LSI Holdings; LSI Australia v LSI Consulting (2007) 25 ACLC 1602; [2007] NSWSC 1406, Austin J at [54], applied in YCH Logistics, Brereton J at [10]. 6. The substantial injustice to which s 459J(1)(a) is directed is the statutory presumption of insolvency which will arise in any subsequent winding up proceedings if the statutory demand is not set aside: LSI Australia, Austin J at [57]. 7. In relation to a statutory demand for multiple debts, it must give a description of the individual debts and state their amounts as well as state the total of those amounts, because the statutory demand must comply with s 459E(2) of the Corporations Act , including the prescribed form 509H: Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562, Lindgren J at 579, approved in Condor Asset Management, Barrett J at [20]-[22] and applied in YCH Logistics, Brereton J at [10].

Submissions

TZI claims that there is a significant defect in the statutory demand because TZI has never received an invoice from Black Ink with the number 2478 and dated 31 January 2022. TZI says that this error or misdescription in the statutory demand is a defect that brings it within s 459J(1)(a) of the Corporations Act. Although alluded to at the outset of written submissions, the "some other reason" for setting aside the statutory demand in s 459J(1)(b) of the Corporations Act was not the subject of any substantive submission by TZI.
Black Ink conceded that the statutory demand contained a typographical error in its description of the date of the January 2023 invoice, saying 31 January 2022 instead of 31 January 2023. But Black Ink submitted that even if this was a "defect" in a statutory demand as defined in s 9 of the Corporations Act, it was not capable of causing substantial injustice in the sense described in s 459J(1)(b) because the statutory demand still correctly described the quantum and the invoice number.

Consideration

I do not consider that the misstatement of the single numeral in the date of the January 2023 invoice in the statutory demand gives rise to any substantial injustice for TZI. It was abundantly clear to which invoice reference was being made in the statutory demand because the number of the invoice was stated and the amount of the invoice was stated. The misstatement of the date was obvious on the face of the statutory demand for TZI because it had received the January 2023 invoice with the correct date.
I have determined not to set aside the statutory demand under s 459J(1) on the basis of this argument by TZI.

Statutory provisions

Section 459H(1) of the Corporations Act is in the following terms: This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates; (b) that the company has an offsetting claim.
Section 459H(5) provides that "offsetting claim": means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

Legal principles - genuine dispute

In the recent decision of Re JDH Capital Pty Ltd [2024] NSWSC 164, Black J at [13]-[16] conveniently summarised the relevant principles governing the determination of an application to set aside a creditor's statutory demand under s 459H(1)(a) of the Corporations Act as follows: 13 In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 (at 464); [1997] FCA 681, the Full Court of the Federal Court observed that a genuine dispute must be bona fide and truly exist in fact, and the grounds for the dispute must be real and not spurious, hypothetical, illusory or misconceived. The threshold to establish a genuine dispute is not high, and it is necessary to bear in mind the observations of Barrett J (as his Honour then was) in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 (at [18]) 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 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." 14 I also have regard to the decision of the Court of Appeal in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 where, in summarising the case law applicable to offsetting claims, the Court of Appeal undertook a comprehensive review of the cases referable to establishing whether a genuine dispute was established. The Court emphasised (at [36]) that the evidence necessary for that purpose "need not conclusively prove or otherwise be incontrovertible or substantially non-contestable", and also observed (at [46]) that: "In determining whether there is evidence of a genuine dispute as to the debt, or that there is an offsetting claim, except in extreme cases, the Court is not concerned to engage in an inquiry as to the credit of the deponent of the affidavit filed in support of the application." The Court also emphasised (at [47]) that the Court's role was, in such an application: "… to determine whether there was plausible evidence to establish the existence of a genuine dispute, not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim." 15 In Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330 (at [8]), Barrett AJA in turn approved my observations in Re Wollongong Coal Ltd (2015) 110 ACSR 134; [2015] NSWSC 1680 (at [9]-[22]), that summarised the principles applicable to a genuine dispute as follows: "(1) A dispute is 'genuine' if it is not 'plainly vexatious or frivolous' or 'may have some substance' or "involves a plausible contention requiring investigation". A genuine dispute requires that it be bona fide and, to that effect, be premised on sufficiently particularised grounds that are "real and not spurious, hypothetical, illusory or misconceived" and which demonstrate the dispute's "objective existence" and "prima facie plausibility." (2) The test is governed by principles analogous to those which underpin an application for an interlocutory injunction or summary judgment. The court must, however, guard against setting the threshold too low for that is liable to defeat the legislative purpose of the section. (3) The task faced by a company challenging a statutory demand on the genuine dispute ground is by no means at all a difficult or demanding one. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow and the demand will be set aside. A finding to the contrary could only be arrived at if the contentions advanced are so devoid of substance that no further investigation is warranted. (4) The function of the court is merely to determine the existence of a genuine dispute. While this neither requires nor invites it to weigh or assess the merits of the dispute, the court will not exceed its legitimate function by having regard to evidence which bears upon whether the asserted dispute is genuine." [16] A similar approach was adopted by the Court of Appeal in Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; [2017] NSWCA 300 and again by the Court of Appeal in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60. I have drawn here on my summary of the applicable principles in Re PSR Refining Services Pty Ltd [2023] NSWSC 243 (at [16]ff). Where, as here, only part of the debt claimed is disputed, the Court must determine the "substantiated amount" under s 459H of the Act which, absent an offsetting claim, is the "admitted amount", as defined in s 459H(5) as, relevantly, so much of the debt as the Court is satisfied is not the subject of a genuine dispute.
The court must exercise restraint in determining any rational question concerning the proper construction of a contract where there are competing views in the context of an application under s 459H of the Corporations Act. This was a point emphasised in Creata by Barrett JA (Gleeson and White JJA agreeing) at [26]-[29] (supported by the authorities cited): 26 The grounds of appeal raise squarely the question of the extent to which it is open to the court to decide questions of construction in s 459H(1)(a) cases. In every such case, the issue is, of course, merely whether it has been shown that a "genuine dispute" exists. In determining that issue, the court is neither required nor expected to avoid all issues of construction. Where a contract contains a simple and unambiguous promise to pay, the court embarks on a task of construction (albeit not a difficult or controversial one) in determining that that promise creates a debt and no argument to the contrary is plausible. But where the question of construction has any element of rational controversy to it, the court must exercise particular restraint. 27 That matter was recently addressed by Gleeson JA in both Re Litigation Insurance Pty Ltd [2017] NSWSC 334 and Re Linton Developments (Qld) Pty Ltd [2017] NSWSC 336. In each of those cases, his Honour quoted the following passage in the judgment in Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 at [45]: A dispute as to the existence of a debt that is the product of a dispute about construction is not removed from s 459H(1)(a) just because the issue in contention is one of construction. While it has been said that "a short point of law or the construction of documents or agreed facts" may, unlike a disputed question of fact, be determined upon a s 459G application (see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384), it does not follow that the court is compelled to make such a determination. In the case of a legal argument, determination might be appropriate if it were, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, a "patently feeble legal argument". 28 Gleeson JA also referred to a similar formulation in Wellnora Pty Ltd v Fiorentino (2008) 66 ACSR 229; [2008] NSWSC 483 at [50] where attention was drawn to what was said by Brooking and Charles JJA in Spacorp Australia Pty Ltd v Myer Stores Ltd (2001) 19 ACLC 1270; [2001] VSCA 89 at [4]: We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), Judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes. 29 After referring to a summary of the position in in Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 at [22] and the statement by this Court in Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330 at [11] concerning the restraint that a court should exercise in considering the "ultimate question" of the indebtedness of a company served with a statutory demand (as distinct from the question whether genuine dispute exists), Gleeson JA said: 'The important points to be derived from the authorities are as follows. First, the court dealing with a s 459G application is not compelled to determine questions of construction of documents. Second, s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. Third, cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number. Fourth, the court's state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared.'
The approach of the court to such an application, and especially to the issue of whether the dispute is genuine, was further elucidated in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330, where the Victorian Court of Appeal (comprising Kyrou, Ferguson and Kaye JJA) at [47]-[50] stated (citations omitted): 47 The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one. 48 In determining such an application, it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. This is because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a "plausible contention requiring investigation" of the existence of either a dispute as to the debt or an offsetting claim. It is therefore 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. Further, the determination of the "ultimate question" of the existence of the debt at a substantive hearing should not be compromised. 49 The court is required to determine whether the dispute or offsetting claim is "genuine". It has been said that the criterion of a "genuine" dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile. A rigorous curial approach is essential to the effective operation of the statutory scheme. 50 The court is not required to accept uncritically every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be, as it may not have sufficient prima facie plausibility to merit further investigation as to its truth. The court is also not required to accept uncritically a patently feeble legal argument or an assertion of facts unsupported by evidence, although this should not be read as suggesting that the applicant must formally or comprehensively evidence the basis of its dispute or off-setting claim. Except in such extreme cases, the court should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on by the applicant to set aside a statutory demand.

Legal principles - offsetting claim

In Re Libdy Developments Pty Ltd [2023] NSWSC 647, Williams J at [10]-[11] collected the applicable principles from the authorities for determining whether there is a genuine "offsetting claim" within s 459H(1)(b) of the Corporations Act as defined in s 459H(5), saying: 10 In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; (2019) 136 ACSR 563; [2019] NSWCA 60 at [61]-[65], Bell P (as the Chief Justice then was) addressed what is required in order to demonstrate the existence of a genuine offsetting claim: [61] … it is desirable to say something as to the meaning of the word 'genuine' in the context of the definition of 'offsetting claim' in s 459H(5) of the Corporations Act and how it has been interpreted in the case law. … [62] In Ozone Manufacturing Pty Ltd v DCT (2006) 94 SASR 269; [2006] SASC 91 at [46]-[49] per Debelle J (with whom Besanko and Layton JJ agreed) said: [46] The meaning of the expression 'offsetting claim', like the meaning of 'genuine dispute' has been illuminated by analogies found in applications for injunctions to restrain the commencement, advertisement and prosecution of winding-up proceedings pre-dating the enactment of s 459G and in the opposing of a notional application by the person who has served the statutory demand for summary judgment against the company for the debt the subject of the demand: Chase Manhattan at 136. Thus, when deciding whether an offsetting claim exists, the test is whether the court is satisfied that there is a serious question to be tried that the person on whom the demand has been served has an offsetting claim: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 357, or that the claim is not frivolous or vexatious: Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, or that it is not fictitious or merely colourable: Edge Technology Pty Ltd v Lite-on Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181 at 184-5 , citing Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787 . [47] The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. The issue is whether the offsetting claim is bona fide, real and not spurious: Edge Technology per Santow J at [25]. [48] I do not think that the test identified by Santow J imposes a more onerous task on the party disputing the statutory demand than the serious question test. The expression 'good faith' means arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 per Palmer J. McPherson JA expressed the same concept in these terms in JJMMR Pty Ltd v LG International Corporation [2003] QCA 519 at [18]: Anyone can make a claim to a right of setoff against a creditor. What the definition in s 459H(5) requires, however, is that it be 'genuine'. The same word in s 459H(1) has already elicited so many synonyms and shades of meaning that it will not help to add more. Its antithesis is to be seen in the word 'artificial'. The claim to set off against the debt demanded must not have been manufactured or got up simply for the purpose of defeating the demand made against the company. It must have an existence that is objectively demonstrable independently of the exigencies of the demand that evoked it. The observations of Palmer J and McPherson JA were applied by Chesterman J in Cooloola Dairies Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12. [63] In addition to these valuable observations, reference should be made to the judgment of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 where his Honour, having characterised the test for whether or not there was a 'genuine claim' in terms of whether there was 'a plausible contention which requires investigation', went on to say: This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth'. (cf Eng Mee Yong v Letchunanan [1980] AC 331 at 341 ), or 'a patently feeble legal argument or an assertion of facts unsupported by evidence': cf South Australia v Wall (1980) 24 SASR 189 at 194. [64] The Victorian Court of Appeal has spoken of 'prima facie plausibility' in this context: TR Administration Pty Ltd v Frank Marchetti Pty Ltd [2008] VSCA 70; 66 ACSR 67 at [71]; see also Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [48]-[49]. [65] Most recently, in Re Citadel Financial Corporation Pty Ltd [2019] NSWSC 65 at [30], White JA said: In judging the sufficiency of the evidence to give rise to an offsetting claim, the question is not whether the evidence is sufficient to establish the offsetting claim or its amount, but whether it is sufficient to establish that the offsetting claim is genuine and its genuine level (Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605 ; Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [48] and [49] ). It is sufficient if there be a plausible contention requiring investigation (Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd at [70] ). The offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion and not be merely fanciful or futile (TR Administration Pty Ltd v Frank Marchetti Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] cited with approval in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd at [52]-[53]). 11 Bell P had earlier observed that at [8]: [8] The establishment of an offsetting claim for the purposes of s 459H does not, of course, constitute a finding that the claim is a good one, or that it has been made out. It represents nothing more than a finding that there is a serious question as to the existence of an offsetting claim or an issue deserving of a hearing as to whether the company has such a claim against the creditor and that a 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 at 460 , 467 per Beazley J (as her Honour then was); In the matter of OztecPty Ltd [2012] NSWSC 1234 at [22] per Black J…

Submissions

TZI submitted that on the proper construction of the Contract, TZI was not obliged to make payment of the December 2022 invoice or the January 2023 invoice to Black Ink because Black Ink failed to provide it with monthly reports as required under cl 4.2 of the Contract. TZI argued that the contractual provisions operated such that the monthly report was required to accompany the invoice and was a precondition to payment of the invoice so that if the monthly report was not provided before the 30-day period for payment of the invoice in cl 4.3 of the Contract, that invoice would not be payable and was unenforceable (T37.37-38.38).
Black Ink submitted that the proper construction of cll 4.1, 4.2 and 4.3 of the Contract do not require Black Ink to provide monthly reports to TZI as a condition which must be met before Black Ink is entitled to payment of any invoice which it rendered to TZI. Black Ink also submitted that in any event, the obligation of Black Ink to provide monthly reports was met in the form of the information contained in each of the December 2022 and January 2023 invoices.

Consideration

In line with the principles outlined in Creata, I consider that there is a rational basis for the competing views as to the proper construction of cll 2.1, 2.2, 4.1, 4.2 and 4.3 of the Contract and I have determined that I will not resolve that question on this application where I am only to determine whether there is a genuine dispute.
In any event, I consider that the December 2022 invoice and the January 2023 invoice each contained the information required by cl 4.2 of the Contract to be provided in a monthly report, being the date the Services were rendered ("1st Dec - 31st Dec" in the December 2022 invoice; "1st Jan 2023 - 31st Jan 2023" in the January 2023 invoice), a description of the Services rendered ("Consulting Services - TZ Limited CTO Work" in both the December 2022 invoice and the January 2023 invoice) and a monthly invoice for Services rendered (each of the December 2022 invoice and the January 2023 invoice themselves). To the extent that cl 4.2 of the Contract operated to require Black Ink to provide a monthly report as a condition for the payment of each invoice under cl 4.3 of the Contract, that condition was met in each case by the rendering of the December 2022 invoice and the rendering of the January 2023 invoice.
As a result, based on the terms of the December 2022 invoice and the January 2023 invoice, I consider that there is no genuine dispute between TZI and Black Ink about the alleged failure of Black Ink to provide monthly reports to TZI and it is not a basis on which the statutory demand ought to be set aside under s 459H of the Corporations Act.

Submissions

TZI submitted that in November 2022, TZI and Black Ink agreed that Black Ink would reduce by 50% the number of hours of Services provided in December 2022 and January 2023 as compared to November 2022 (or pause work for one month such that the total hours for the two months would be halved) and that Mr Buckton would provide no further services to TZI from 1 January 2023.
As evidence in support of the alleged variation of the Contract, TZI relied on: 1. the email dated 29 November 2022 from Mr Shadid and the attached spreadsheet of "proposed costs savings"; and 2. the email dated 14 December 2022 from Mr Vecchio to Messrs Graham, Shadid and others and the attached PowerPoint presentation which referred to "Cost reductions Phase 1" and "Technical Staff reductions. Anthony Buckton work paused; Richard Frawley paused for 1 month" (referred to above).
TZI contended that Black Ink admitted that there was a variation of the Contract in the form of the email of 6 November 2023 from Black Ink's solicitors to TZI's solicitors where the former stated that "whilst the number of hours was reduced by agreement from what had been supplied in preceding months, the number of hours provided did in fact exceed 112 hours per month".
Based on these alleged variations, TZI said that Black Ink was not entitled to render the December 2022 invoice and the January 2023 invoice under the Contract.
In response to TZI's contentions on the alleged variation to the Contract, Black Ink submitted: 1. The purported variation of the Contract only materialised after TZI was served with the statutory demand on 18 October 2023 and no mention was made of any such contract variation in the correspondence exchanged between TZI and Black Ink between February and August 2023. In particular, there was no suggestion of there being any such variation in the email of 30 January 2023 sent by Mr Wilson to Mr Frawley giving notice of termination of the Contract, which also sought to impose on Black Ink maximum billable hours for February 2023 to be the lesser of the contracted 112 hours ($14,170.00) or the actual hours worked, charged at a pro rata rate. 2. The evidence of the purported variation rises no higher than a proposal, with there being no evidence to demonstrate that Black Ink agreed to it. 3. TZI does not appear to know what the precise agreed variation was, on the one hand asserting that it was a 50% reduction of hours/costs charged by Mr Frawley in the months of December 2022 and January 2023 and, on the other hand, asserting it was a 50% reduction in the total hours/costs charged by Black Ink for each of December 2022 and January 2023 combining the services rendered by both Messrs Frawley and Buckton. 4. TZI's assertion concerning the alleged variation is inconsistent with: 1. the email of 30 January 2023 from Mr Wilson which stated that the maximum billable hours for February 2022 would be the lesser of the contracted 112 hours or the actual hours worked, charged on a pro rata rate, with no reference to any purported variation having occurred at an earlier time; and 2. the email of 24 October 2023 from TZI's solicitors to Black Ink's solicitors (the first communication received from TZI after the statutory demand of 18 October 2023) which asserted that Black Ink did not complete a minimum of 112 hours of consulting services in December 2022 and January 2023 as it was obliged to do, and which made no mention of a variation to reduce the hours to be charged by Black Ink. 1. To the extent that Black Ink's solicitors refer to an agreed reduction of hours in a limited form in their email of 6 November 2023: 1. it is consistent with the amounts in the December 2022 invoice ($17,325) and the January 2023 invoice ($16,170) being significantly less than the invoices which had been rendered in 2022, being 30 March 2022 ($20,240), 6 April 2022 ($23,276), 2 May 2022 ($22,264), 29 May 2022 ($22,264), 14 June 2022 ($22,264), 1 August 2022 ($23,100), 2 September 2022 ($26,565), 8 November 2022 ($20,790) and 30 November 2022 ($19,635), other than the invoice dated 21 August 2022 ($2,310); and 2. it was a response which was provided to meet the claim made by TZI that Black Ink had failed to meet the minimum number of hours required under the Contract and says nothing about the more recently alleged variation for which TZI contends.

Consideration

In my view, TZI has failed to satisfy the evidential burden it bears on this application to demonstrate that it has a genuine dispute with Black Ink about the existence or amount of the debt in each of the December 2022 invoice and the January 2023 invoice to which the statutory demand relates. Whilst TZI has a low bar to meet in the undemanding test, I consider that, in relation to its assertion that there was a variation to the Contract in the form it has alleged, it falls well short of being a plausible contention worthy of investigation as described in Wollongong Coal.
This is because there is no evidence of any sort that anyone at Black Ink agreed to a variation of the Contract which reduced the billable hours to the extent asserted by TZI, the suggestion of a variation of the Contract did not arise in any of the responses by TZI prior to the service of the statutory demand, the form of variation contended for by TZI is completely at odds with the email of 30 January 2023 seeking to reduce Black Ink's future hours and the letter of 24 October 2023 asserting that Black Ink failed to meet the requirement to provide Services for the minimum hours in the Contract.
It is clear that there was a reduction of the hours which were billed by Black Ink in the December 2022 invoice and the January 2023 invoice compared to the invoices for the previous months in 2022. That reduction is consistent with the form of variation which is referred to in the email of 6 November 2023 from Black Ink's solicitors.
The inconsistent and late positions taken by TZI on the alleged variation of the Contract suggests that it is not genuine, amounting to nothing more than an assertion of facts unsupported by evidence, of the type outlined in Malec. For that reason, it provides no support to justify the setting aside of the statutory demand under s 459H of the Corporations Act.

Submissions

TZI submitted that it has an offsetting claim against Black Ink for breach of contract and negligence in the amount of $20,000 in the form of the annual bonus that Mr Frawley promised to Mr Jose as an employee of TZI, which TZI was required to but did not honour. In this regard, TZI relies on the email of 27 May 2022 from Mr Frawley to Mr Jose and the letter of offer dated 8 June 2022 which were attached to the email dated 28 April 2023 from Mr Jose to Mr Wilson, and Mr Graham's assertion in his email of 9 June 2023 at 11:11am to Mr Buckton that the representations made by Mr Frawley were never presented to the board of TZ Limited (referred to above). TZI said that Mr Frawley acted outside the scope of his authority. TZI also said that by operation of cl 7.1 of the Contract, Black Ink was an independent contractor of TZI and the actions of Mr Frawley caused Black Ink to breach cl 7.7 of the Contract because Black Ink was obliged not to bind, attempt to bind or purport to bind TZI to any legal obligation.
Black Ink submitted that this alleged offsetting claim does not rise to the standard required to make it a genuine claim, only amounting to an assertion that Mr Frawley had involvement in a decision with which TZI does not agree. Black Ink said that there is no evidence of Mr Frawley's duties or responsibilities or TZI's policies and procedures which might support a claim that there had been a breach by him. Black Ink also said that an analysis of the email of 27 May 2022 from Mr Frawley to Mr Jose indicates very clearly that he was waiting for Mr Vecchio to say that there was approval from the board of TZ Limited before making an offer to Mr Jose so any submission that Mr Frawley was acting beyond his authority could not arise on the facts as evidenced in that email. Black Ink further asserted that, if such a claim were to arise, it needed to be properly articulated and it is not clear from anything in the evidence what cause of action TZI has against Black Ink by virtue of the email chain.
Black Ink also notes that its submission that this alleged offsetting claim is not genuine is underpinned by the fact that TZI: 1. has failed to properly articulate it; 2. did not mention this claim until its solicitor's letter of 24 October 2023, after the statutory demand was served on 18 October 2023; and 3. has done nothing to bring proceedings against Black Ink in respect of this alleged offsetting claim despite saying in Mr Graham's affidavit affirmed 6 November 2023 that it: intends to issue proceedings against Black Ink at the earliest practicable opportunity in respect of numerous breaches of the Contract by [Mr] Frawley, in his capacity as agent for Black Ink, and seek compensatory damages for losses flowing from same.

Consideration

None of the evidence put forward in support of this alleged offsetting claim rises to the level at which it could be considered genuine in the sense described in Grandview and Citadel Financial. The material does not found a serious question deserving of a hearing nor could it be considered as a plausible contention requiring investigation. There is no evidence that the email of 27 May 2022 was sent by Mr Frawley to Mr Jose without the authority of TZI. In fact, the terms of that email make it clear that Mr Frawley was acutely aware that the question of the remuneration of Mr Jose was a matter on which he could only act with the authority of the Chief Executive Officer of TZ Limited, Mr Vecchio, who was waiting on board approval.
Further, there is no evidence that the letter of offer dated 8 June 2022 was sent by Mr Frawley to Mr Jose without the authorisation of Mr Vecchio. This is a basic integer in the alleged offsetting claim and it is missing on the material before me.
There is also evidence from Mr Jose's email of 28 April 2023 to Mr Wilson that Mr Jose was told that Mr Vecchio had "taken care of the approval from the board". This supports the approach enunciated by Mr Frawley to Mr Jose - that he could only proceed after authorisation was given by Mr Vecchio, who was the person dealing with the board of TZ Limited.
I also agree with Black Ink that TZI's failure to mention this alleged offsetting claim until after the statutory demand was served and TZI's failure to take any action to prosecute the claim over the past five months further demonstrates that it should not be considered genuine.

Submissions

TZI submitted that it has a breach of contract claim and a negligence claim relating to the loss suffered by TZI in the amount of at least US$165,000 of wasted expenditure on purchasing ELC components that were made redundant as a result of decisions made by Black Ink. TZI relied on the email chain concerning the ELC purchase order 3898 for PCA-102047 which ends with an email on 22 August 2023 sent by Ms Guo and commences with an email dated 8 September 2021 between personnel from Telezygology Inc and CWC.
Black Ink submitted that this alleged offsetting claim is not genuine because no factual foundation for it was provided, it has not been articulated beyond assertion and there was no indication as to how it could be quantified. Further, Black Ink also submitted that it is also not genuine because it was not mentioned until TZI's solicitor's letter of 24 October 2023 (after the statutory demand was served on 18 October 2023) and it has taken no step to bring proceedings in relation to it, despite saying on 6 November 2023 that it intended to do so.

Consideration

There is nothing put before me that provides any evidential support for the assertion that TZI has an offsetting claim against Black Ink for wasted expenditure on ELC component parts. TZI conceded as much at the hearing (T18.32-20.2). On that basis alone, I consider that this alleged offsetting claim is not genuine because there is no plausible claim worthy of investigation, to use the description in Citadel Financial.
For this reason, it does not aid the application to set aside the statutory demand under s 459H of the Corporations Act.

Submissions

TZI submitted at the hearing that the emails of 12 December 2022 (which are referred to above) demonstrate that Mr Frawley of Black Ink was involved in a remediation process concerning Scape which caused actual loss to, and damage to the reputation of, TZI.
Black Ink submitted that this alleged offsetting claim is not genuine because no factual foundation for it was provided.

Consideration

I consider that the alleged offsetting claim concerning Scape is not genuine because it rises no higher than an assertion in submissions by TZI with no evidential support. It suffers from multiple problems. There is no clarity in the factual foundation which is said to have given rise to the alleged claim. It is not at all clear that it is a claim alleged by TZI as opposed to TZ Limited. There is no quantum attached to the alleged claim. It was not even raised in any correspondence from the solicitors for TZI when setting out the grounds on which the application to set aside the statutory demand would be made or in the written submissions provided by TZI for the hearing.
In my view, this alleged offsetting claim can be properly characterised using the descriptions used in Citadel Financial (there being no evidence sufficient to establish that the offsetting claim is genuine), and there has been a failure to demonstrate that it has sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, or something merely fanciful or futile.
Accordingly, it is not a basis on which the statutory demand can be set aside under s 459H of the Corporations Act.

ORDERS

For the reasons stated above, I propose to make the following orders: 1. The originating process filed 6 November 2023 is dismissed. 2. The plaintiff is to pay the costs of the defendant.

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: 01 May 2024

AR Pilot Pty Ltd v Gouriotis

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