HER HONOUR: This is an application to set aside a statutory demand on the basis of an offsetting claim under sections 459G and 459H of the Corporations Act 2001 (Cth). The statutory demand was issued by the defendant, Eternity Trading Pty Limited, in the amount of $18,526.56 in respect of rent and outgoings payable under a sub-lease of premises to the plaintiff, Fujian Xingxing Restaurant Pty Ltd. The offsetting claims are twofold and the subject of Federal Court proceedings commenced by the plaintiff against the defendant and Meetfresh Franchising Pty Limited (the franchisor), being:
1. damages of some $500,000 sought by the plaintiff from the franchisor under the Australian Consumer Law, for which the defendant is said to have accessorial liability;
2. outgoings and footway monthly fees of some $250,000 charged under a licence agreement executed in connection with the franchise agreement, which the plaintiff contends did not provide for such fees to be charged and which the plaintiff seeks to recover.
The statutory demand and these proceedings are, by my count, the third set of proceedings between these parties, and the second statutory demand.
The plaintiff relied on affidavits by Xin (Gordon) Zhou, a director of the plaintiff, and Chunyu (Grace) Gong, the plaintiff's solicitor. These affidavits exhibited further affidavits affirmed by Mr Zhou and Ms Gong in the Federal Court proceedings and a large volume of documentary material. Although objection was taken to the exhibited material by reference to the Graywinter principle (Graywinter Properties Pty Limited v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452; (1996) 21 ACSR 581) and the Harman undertaking (Hearne v Street (2008) 235 CLR 125; [2008] HCA 36), these objections fell away once the precise nature of the offsetting claims was clarified. The defendant relied on an affidavit of Kai Lee Charlie Chan, a manager employed by both the defendant and franchisor. There was no cross-examination.
[4]
FACTS
Much of the difficulty in this case is due to the poor quality of transactional documentation, which appears to have given rise to much confusion, exacerbated by changes in legal representatives on both sides so that what was intended to be achieved by the documents had to be re-discovered by subsequent practitioners. This difficulty was not remedied but, with respect, exacerbated, at the hearing of this application.
In 2001, the defendant company was incorporated. Shu-Ming (Tim) Hsu is the sole director and shareholder of the company.
[5]
A franchise and lease
In 2009, Meetfresh Australia Pty Limited was incorporated. Mr Hsu was the director and shareholder of the company, which entered into a master franchise agreement with Easy Way Station Co Limited. Easy Way Station is a Taiwanese company which owns the trade mark "Meet Fresh" and logo. Easy Way Station Co operates retail outlets specialising in desserts, beverages, snacks and food products associated with that name and logo. In 2010 and 2011, Mr Hsu exited Meetfresh Australia and Fungchao Liu became the sole director and shareholder.
In 2011, the franchisor company was incorporated. Mr Hsu is the sole director and shareholder of that company, which shares the same registered office as the defendant. From 2011 to 2014, "Meet Fresh" franchise businesses were opened in Eastwood, Cabramatta, Haymarket, Burwood, George Street Sydney and Kingsford. It is the Haymarket franchise store, initially operated by the franchisor, with which this case is concerned.
In 2014, the defendant leased premises in Dixon Street Sydney (also known as Goulburn Street Haymarket) for the Haymarket franchise store (the lease). While the lease is not in evidence, according to the Federal Court pleadings at least, the initial term of the lease provided that the term of a lease was four years commencing on 1 April 2014 and ending on 31 March 2019 with an option for a further five years. The annual rent was $368,177.64 plus GST. The franchisor operated the "Meet Fresh" franchise business on the ground and mezzanine floors of the premises.
[6]
A restaurant and sub-lease
In 2017, the plaintiff was incorporated. Mr Zhou is one of the directors of the company. On 28 March 2017, the plaintiff and defendant entered into a sub-lease of the Dixon Street premises. Although the sub-lease describes the leased property as the ground floor mezzanine and first floor, it appears that only the first floor was, in fact, sub-leased. This error is the first of several confusing elements of the documentation in evidence.
The sub-lease commenced on 1 May 2017 and expired on 30 March 2019 with an option for a further five years. In order to exercise the option, clause 2.5 provided:
2.5 A notice of exercise of option
(a) must, in writing, state clearly that the sublessee wishes to take a further Lease of the premises in accordance with the option contained in this Lease; and
(b) must be served not earlier that six (6) months and not later than three (3) months before the end of the term of this Sublease.
The sub-lease was not registered.
As to rent and outgoings, clause 3.1 and 3.13 provided: (amendments in original)
3.1 The sublessee covenants to pay rent to the sublessor or its nominated agent or manager with or without demand from the sublessor at the rate specified in Item 2 [4] of Reference Schedule to this Sublease.
…
3.13 The lessee shall pay to the sublessor 72% [16%] of Outgoings for the term of this Sublease. Payment [must be] made within seven (7) days of demand by the sublessor or the sublessors agent.
The sub-lease (and documents generally) contain a number of handwritten alterations which are not initialled. It is unclear whether the alterations formed part of the sub-lease when it was executed. In any event, Item 4 of the Reference Schedule provided that the annual rent payable by the sub-lessee was $180,000 plus GST.
Clause 1.1(g) of the sub-lease defined "Outgoings" as:
"Outgoings" means and includes:-
(a) all rates, taxes, charges and impositions, currently and in the future payable to any Federal, State, local government, statutory or public authority or corporation, in respect of the property, the Building or the lease premises including
(i) municipal, local and other rates and charges payable to a local authority.
(ii) rates and charges for the supply, reticulation or discharge of water (including excess water), sewerage, drainage and removal of waste and other garbage;
(iii) land tax or any similar tax, at the rate payable if the land on which the Sublease premises is situated was the only land owned by the head lessor; but not including any income tax, capital gains tax or similar tax payable by the head lessor.
(b) The insurance costs and charges paid by the headlessor in respect of risks to or in connection with the property and the Building and its use, control and management, which the headlessor reasonably considers necessary to cover by insurance.
(c) All charges for lighting power heating cleaning and maintenance in connection with the common parts of the building and the cost of operating and supplying all services provided by the lessor for tenants and occupiers of the building.
(d) Costs and charges paid by the sublessor in connection with the management of the property and the building.
[7]
A franchise and licence
The following month, in September 2017, the plaintiff began to explore the possibility of entering into a franchise agreement with the franchisor. According to Mr Zhou, his mother dealt with George Wang on behalf of the franchisor. At it happened, Mr Wang was also the person she dealt with in respect of the sub-lease. In affidavits filed in the Federal Court proceedings, Mr Zhou describes conversations with his mother before entry into the franchise agreement. Mr Zhou's mother was concerned to ensure that, if the plaintiff entered into a franchise agreement, the plaintiff would be entitled to occupy the ground floor and mezzanine area for a sufficient period of time to justify paying a franchise fee of $450,000. Mr Zhou's mother was not prepared to pay the franchise fee for a franchise of only the remaining term of the sub-lease, being to 31 March 2019. Mr Zhou's mother reported that Mr Wang said that the franchise agreement and licence to occupy the ground floor and mezzanine areas would be renewed as long as the lease was renewed.
On 15 September 2017, the plaintiff's solicitors sought various documents and information from the franchisor's solicitors including a licence agreement for the ground floor and mezzanine areas. To avoid confusion going forward, I should immediately state that the solicitors who acted for the franchisor also acted for the defendant throughout the transaction and subsequent legal proceedings. Whilst I have endeavoured in this judgment to delineate the capacity in which those solicitors corresponded, it is not always easy to do so. In any event, the franchisor supplied a copy of the sub-lease. The plaintiff's solicitor said, "the lease you provided to us is the sub-lease of the whole building and the licence agreement you previously provided was not specific about the fees payable re this particular premise". The franchisor's solicitor replied:
[P]lease find attached the existing sub-lease between the Franchisor and the Franchisee for the part of the building which the Franchisee currently occupies which is not the premises of the franchise business. The Licence Agreement refers to satisfying the obligations under the Lease, including the payment of rent.
The plaintiff's solicitor replied that the sub-lease was for another restaurant business, "We have not received the lease doc regarding this particular franchised premise. We have no idea about how much the franchisee is to pay to occupy the premise of Meetfresh Haymarket". The franchisor's solicitor replied:
The Lease is for the whole Premises.
The sub-lease is for the premises currently occupied by your client for a separate business.
The amount payable for the franchise premises is the balance between the lease and the sub-lease.
[8]
Invoicing
On 13 October 2017, the franchisor rendered an invoice to "Fujian Xingxing Desserts Pty Limited - MF HM Rent" for rent and outgoings for November 2017. As to why the invoice was rendered by the franchisor, Mr Chan explained that invoices for rent of the restaurant, the franchise premises and the charges in respect of the franchise business were all issued by the franchisor due to the convenience of using a single invoicing system. The invoices bore the name and logo of the franchisor and contained payment details for the franchisor's bank account. The plaintiff paid the invoices each month into the franchisor's bank account. In addition, on 18 October 2017, the defendant rendered an invoice to the plaintiff for "Difference of Rent until 31/10/2017". As I understand it, this invoice appears to have been rendered to levy any final rent payable under the sub-lease before the new billing arrangements - by the franchisor - continued going forward.
The franchisor rendered monthly invoices to "Fujian Xingxing Desserts" thereafter for rent and outgoings for the franchised premises. The fact that the invoice related to the franchised premises can be divined from the reference on each invoice to "MF HM Rent". As to why the invoice for the franchised premises was addressed to "Fujian Xingxing Desserts Pty Limited", this appears to be a consequence of the change of name of the licensee on the licence agreement already mentioned. It is the portion of the invoice in respect of outgoings which the plaintiff says were not payable under the licence agreement.
Also, each month, the franchisor rendered monthly invoices to the plaintiff for rent and outgoings in respect of level 1 of the premises, being the Chinese restaurant. The invoices for rent of the Chinese restaurant and those for rent of the ground floor and mezzanine area used for the franchise business could be differentiated by reference to the addressee of the invoice (Fujian Xingxing Desserts Pty Limited or the plaintiff) and their address (ground level or first floor).
In addition, each month the franchisor rendered invoices to the plaintiff for goods supplied to the franchise business and a marketing fee. From October 2017 to September 2019, the plaintiff paid the franchisor $890,277.02 for goods and $17,732.84 for marketing. Part of these monies are now sought to be recovered by the plaintiff from the franchisor in the Federal Court proceedings.
[9]
Efforts to exercise option
In November 2018, the plaintiff's solicitor wrote to Mr Chan noting that the licence was due to expire on 31 March 2019 and advised that the plaintiff wished to extend the licence. There does not appear to have been a reply.
On 8 January 2019, the plaintiff's solicitor sought an update on renewal of the lease but was informed by Mr Chan that the deadline for exercising the option to renew the sub-lease expired on 30 December 2018. It was said that the attempted exercise of the option on 8 January 2019 was not valid and the sub-lease would not be renewed. Further, the licence to occupy the franchise premises did not contain an option to renew and the attempt to renew the licence on 22 November 2018 was also not valid. On 16 January 2019, the plaintiff's solicitor requested various documents in respect of the lease, which were apparently not provided.
On 21 February 2019, the plaintiff's solicitor wrote to the defendant's solicitors in respect of the sub-lease, licence and franchise agreement. It was said that the plaintiff had entered into a sub-lease for the whole of the premises (which is certainly what the first page of the sub-lease said) but possession of the ground floor and mezzanine were not handed over notwithstanding that the plaintiff paid rent for the whole of the building. The plaintiff demanded a refund of partial rent for the ground floor and mezzanine areas from May to October 2017. The plaintiff's solicitor also queried why, in October 2017, the parties entered into a licence to occupy the premises in circumstances where the plaintiff was already leasing the whole of the premises under the sub-lease, "We fail to see why they were coerced into signing a Licence agreement with your client at the direction of the Franchisor". (It appears that the plaintiff's solicitor had only recently been retained and was confused by the imperfections in the documentation to which I have already referred.)
It was said that, under the licence, the plaintiff enjoyed the same rights and obligations as those conferred by the sub-lease including the option for a further five year lease, which it was said the plaintiff had validly exercised on 22 November 2018. However, if the defendant was determined to terminate the plaintiff's occupation, then the plaintiff would be seeking inter alia outgoings paid since October 2017. The plaintiff's solicitor pointed out that the sole director of the franchisor and the defendant were one and the same, and the licence to occupy was labelled as "Meetfresh Licence to Occupy Premises" and emblazoned with the Meet Fresh logo. Whilst the franchise agreement required the plaintiff to enter into a lease with the defendant,
… the sole director controlling both the franchisor company and leasing company, has been restricting this from happening. We understand your client, being [the defendant], has exercised the option on the lease, and therefore causing our client to purposely default on the terms of the franchise agreement. This is unconscionable conduct, to say the least.
[10]
NCAT proceedings
On 19 March 2019, the defendant's solicitor issued a notice requiring vacant possession of the premises by 5.00 pm on 30 March 2019 noting that, on termination of the sub-lease, the licence to occupy would expire and the franchise agreement would terminate. On 25 March 2019, the plaintiff's solicitors advised that the email of 22 November 2018 was sufficient to exercise the option for a further term and sought that the notice to vacate the premises be withdrawn, failing which injunctive relief would be sought. The defendant's solicitors rejected these contentions on 28 March 2019. On 29 March 2019, the plaintiff filed proceedings in the New South Wales Civil and Administrative Tribunal (NCAT) against the defendant, seeking interim orders and final relief in respect of renewal of the sub-lease.
On 3 April 2019, the plaintiff's solicitor wrote to the defendant's solicitor who, as mentioned, also acted for the franchisor, giving notice of an intention to renew the franchise agreement for a further four years and six months. On 4 April 2019, the head office of "Meet Fresh" in Taiwan issued an announcement declaring that the Haymarket store in Australia was no long affiliated with Meetfresh Taiwan. On 12 April 2019, the franchisor's solicitors wrote to the plaintiff's solicitors rejecting the attempt to exercise an option to renew the franchise agreement and alleging various breaches of the agreement.
On 4 July 2019, the plaintiff sent a detailed and comprehensive letter of demand to the franchisor alleging various breaches of the franchise agreement, to which the franchisor replied by denying the allegations. Further complaints were made by the plaintiff's solicitor on 31 July 2019. On 23 August 2019, the franchisor issued a breach notice to the plaintiff under the franchise agreement.
The plaintiff's operation of the franchised store continued nonetheless. Further conversations with Ms Chan about problems with the goods supplied are described in July 2019. The last payment made by the plaintiff to the franchisor for goods was in September 2019. The franchisor served a statutory demand on the plaintiff in respect of unpaid goods, totalling $89,119.29.
[11]
Federal Court proceedings
On 25 September 2019, the franchisor sent a notice of termination of the franchise agreement noting that, as a result, the licence agreement would also be terminated. It was said that if the outstanding amount (presumably that claimed in the statutory demand) was not paid by 27 September 2019 then the notice of termination would be enforced and the franchisor would take possession of the premises by 9.00 am on 28 September 2019. Whilst it is not entirely clear, it appears that the franchisor was writing on behalf of itself and the defendant. Attached to the franchisor's email was a notice of termination issued by the defendant of the licence and a notice of termination issued by the franchisor.
On 27 September 2019, the plaintiff commenced proceedings in the Federal Court against the franchisor in respect of the termination of the franchise agreement and against the defendant in respect of its termination of the licence to occupy. Interlocutory orders were made by Yates J restraining the franchisor and defendant from acting on the notices of termination.
On 1 October 2019, the plaintiff's solicitor wrote to the franchisor's solicitor in respect of the statutory demand, requesting that it be withdrawn on the basis that there was a genuine dispute as to the existence of the debt and an offsetting claim arising out of the alleged breaches of the franchise agreement. Also on 1 October 2019, the solicitors for the franchisor/defendant issued a notice of termination of the franchise agreement on the grounds of breach, a notice of expiration of term of the franchise agreement (presumably in the event that the notice of termination for breach was ineffective) and a notice of termination of the licence to occupy the premises. On 3 October 2019, the franchisor/defendant's solicitor declined to withdraw the statutory demand, rejecting the suggestion that there was any dispute as to the debt or offsetting claim.
On 4 October 2019, the plaintiff filed an originating application in the Federal Court proceedings seeking to extend the interlocutory injunctions and also final relief including setting set aside the statutory demand. The Federal Court proceedings continued with the plaintiff filing affidavits and a statement of claim. The NCAT proceedings continued but were later dismissed by consent on the basis that the dispute was incorporated into the Federal Court proceedings.
[12]
Statutory demand
On 24 January 2020, the plaintiff's solicitor wrote to the solicitor for the franchisor/defendant seeking payment of the rent and franchise fee refund said to have been agreed in November 2019 (some $22,059.85) together with the monies agreed to be paid for equipment and goods (totalling $10,349.46). Copies of the supporting invoices and WeChat messages were provided. The outstanding amounts totalling $32,409.31 were demanded within seven days, failing which further action would be taken including issue of a statutory demand claiming the outstanding agreed payments.
On 28 January 2020, the defendant sent by email a rental invoice dated 21 January 2020 on which the statutory demand now before the Court is based. By the invoice, the defendant (or, more precisely, the franchisor) rendered a charge to the plaintiff for rent and outgoings for February 2020 for level 1 of the Dixon Street premises. As usual, the payment details given were those of the franchisor. On 31 January 2020, the defendant's solicitor denied any obligation to refund rent and franchise fees and denied any agreement in respect of purchasing equipment and stock.
On 11 February 2020, the defendant's solicitors followed up payment of the February 2020 rent, requesting that it be paid by 4.00 pm on 14 February 2020 failing which the defendant reserved its right to take further action including repossessing the premises. On 26 February 2020, the defendant issued the statutory demand seeking payment of the February 2020 rent for the restaurant premises. The demand was received by registered post on 12 March 2020 and on 13 March 2020 the plaintiff's solicitor invited the defendant to withdraw the demand. On 19 March 2020, these proceedings were filed.
Initially, the plaintiff suggested that there was a genuine dispute as to the existence of the debt by reason of the fact that the invoice was issued by the franchisor rather than the defendant. This was not pressed, nor the suggestion that the demand should be set aside for "some other reason" under section 459J of the Corporations Act. An offsetting claim in respect of the alleged agreement to pay the plaintiff a refund of franchise and licence fees was not pressed, nor the agreement to pay for equipment and stock.
[13]
Claim in Federal Court proceedings
The plaintiff's claim in the Federal Court proceedings is now articulated in a Further Amended Statement of Claim. Ms Gong was informed by Mr Zhou and believed that the claims pleaded in the Further Amended Statement of Claim are true and genuine. The franchisor is the first respondent. The defendant in these proceedings is the second respondent. It is pleaded that the franchisor and defendant are related entities within the meaning of the Corporations Act.
It is said that, contrary to representations made by Mr Wang to Mr Zhou's mother before entry into the franchise agreement (described at [14], the franchisor failed to comply with its obligations under the franchise agreement and rejected the plaintiff's efforts to renew the franchise agreement but issued breach and termination notices and sought to take possession of the franchise store.
It is pleaded that, contrary to the financial disclosure made by the franchisor on 15 September 2017 and referred to at [17], the plaintiff's operation of the franchised business from October 2017 to September 2019 had a COGS of 32.75% of revenue and a net profit of 6.93% of revenue.
As against the franchisor, the plaintiff seeks to recover loss and damage of approximately $508,973.79 suffered by reason of entering into the franchise agreement. The damage comprises three items:
1. Monies paid for the franchise fee, security deposit and new equipment (referred to at [30]), totalling $550,549.32, less net profits earned by the plaintiff from the franchised business. As to the latter, the plaintiff relied on a spreadsheet entitled "Revenue and net profit for Fujian Xingxing franchised store from Oct 2017 to Sep 2015 ($)" annexed to an affidavit of Mr Zhou filed in the Federal Court proceedings and described as containing a breakdown of the financial figures for the franchised store. According to the spreadsheet, the franchise store generated revenue of $2,847,995.87 from October 2017 to September 2019 and net profit of $197,436.17. The net loss claimed is thus $393,113.15.
2. Advertising contribution of $17,732,84, comprising the total marketing fee paid by the plaintiff to the franchisor from October 2017 to September 2019, referred to at [34].
3. Overpayment for goods in the sum of $138,127.80. This figure is the difference between what the plaintiff spent on goods ($890,277.02, referred to at [34]) and what it would have spent if the percentage contained in the financial disclosure of 27.9% (referred to at [17]) was correct.
[14]
OFFSETTING CLAIMS
The plaintiff submitted that its claims in the Federal Court proceedings amounted to offsetting claims within the meaning of section 459H(1)(b) of the Corporations Act, relying on Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 per Palmer J at [16]-[18]; Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 at [30]. The defendant submitted that it was not sufficient for an affidavit in support of an application to set aside a creditor's statutory demand merely to assert the existence of a dispute or offsetting claim: Graywinter at 587. There must be some evidence to support the factual allegations that go to make up an offsetting claim. Whilst that evidence does not need to be in a form admissible at a final hearing on the merits of the case, it needs to be sufficient to satisfy the court that the claim has a proper factual basis: First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108 at [21].
In respect of claim for outgoings, the plaintiff submitted that the licence agreement provided that the licence fee was the difference between the rent payable under the head lease and the rent already being paid by the plaintiff under the sub-lease. In terms, this did not refer to and therefore did not include outgoings. However, the invoices rendered for licence fees included rent and outgoings and it was submitted that the plaintiff was entitled to recover these monies.
The defendant submitted, initially, that there was no connection between the invoices rendered for rent in respect of the franchise premises and those in respect of the restaurant as the invoices were addressed to different companies, being Fujian Xingxing Desserts Pty Limited and the plaintiff respectively. The poor quality of the paperwork during the course of dealings between the parties was certainly confusing, including perhaps to counsel. Further, it was submitted that it was not clear whether the outgoings sought to be recovered in the Federal Court proceedings were referable to the sub-lease and properly payable under the sub-lease.
The defendant also submitted that, unless the plaintiff could establish that the invoices were issued to the plaintiff rather than Fujian Xingxing Desserts and that the outgoings were not otherwise payable under the sub-lease, there could be no genuine dispute. As to this, it is tolerably clear that the invoices addressed to Fujian Xingxing Desserts were in fact issued to the plaintiff, by reason of the sequence of events described at [21]. As to whether the outgoings invoiced under the licence agreement were otherwise payable under the sub-lease, this argument was not developed. The question is whether the plaintiff has an offsetting claim based upon a plausible contention that it was not obliged to pay outgoings under the licence agreement, as invoiced by the defendant. In answer to any such claim, the defendant may be entitled to say it was entitled to charge outgoings by reason of another contractual right which was not asserted at the time the invoices were rendered in respect of the restaurant and franchise premises. That does not seem to me to have the consequence that the offsetting claim is extinguished, and certainly not without a clear explanation as to it is said that the defendant was entitled to recover the outgoings from the plaintiff in any event.
[15]
Principles
Section 459H of the Corporations Act provides that, on an application under section 459G, the Court may set aside a statutory demand where there is a genuine dispute about the existence or amount of debt or where there is an offsetting claim in an amount greater than the debt. The principles relating to both genuine disputes and offsetting claims are well-settled. The threshold to establish a genuine dispute about the existence of a debt is a relatively low one. Black J conveyed the principles in In the matter of Gorji Property Investment Pty Limited [2018] NSWSC 1671 at [14]:
[14] … In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the ground for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In Panel Tech Industries (Aust) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 at [18], Barrett J (as his Honour then was) formulated that proposition as follows, in a proposition applied in subsequent cases:
"Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger."
In Britten-Norman, the Court of Appeal (Beazley P, Meagher and Gleeson JJA) said in the context of an offsetting claim, at [30]:
It is settled law that s 459H requires the Court to be satisfied that there is a "serious question to be tried": see Scanhill v Century 21 Australasia [Pty Ltd (1993) 47 FCR 451] at 467, or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor: see Chase Manhattan Bank Australia Limited v Oscty Pty Limited [1995] FCA 1208; 17 ACSR 128 at [42] per Lindgren J; Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454 per Emmett J (as his Honour then was). The claim must be made in good faith: Macleay Nominees v Belle Property East Pty Ltd [[2001] NSWSC 743]. In that case, Palmer J observed, at [18], that good faith, in this context, meant that the offsetting claim was arguable on the basis of facts that were asserted "with sufficient particularity to enable the Court to determine that the claim is not fanciful".
Their Honours make it clear that a similar standard of proof is required whether an offsetting claim or a genuine dispute is alleged.
[16]
Outgoings
In In the matter of Acciona Infrastructure Australia Pty Limited [2019] NSWSC 1156 at [8] to [12], I reviewed the authorities which concern when the Court should engage in construing a contract on an application to set aside a statutory demand. It may be appropriate to determine the meaning of a contract if a patently feeble legal argument is put forward but, as Barrett AJA discussed in Creata (Aust) Pty Limited v Faull (2017) 125 ACSR 212; [2017] NSWCA 300 at [26], where the issue of construction has any element of rational controversy to it, the Court must exercise particular restraint, and his Honour adopted the statement of principle of Gleeson JA in In the matter of Litigation Insurance Pty Limited [2017] NSWSC 334 at [31]:
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, the 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.
It follows from my review of the licence agreement at [27]-[28] and [39] that the definition of "Licence Fee", whilst problematic, is an inclusive definition "not limited to rent and outgoings", with suggests that the licensor may be entitled to charge outgoings to the licensee. However, Item 5 of Schedule 1 includes a special condition which provides, "Notwithstanding any other provisions of this Deed …", the Licence Fee is the difference between the rent payable under the lease and the sub-lease. At various times, both the plaintiff and the defendant have contended that the special condition prevails such that the defendant was only entitled to charge rent but not outgoings. Such a construction of the licence cannot be said to be a "patently feeble legal argument" but has an "element of rational controversy to it" such that the plaintiff's claim to recover outgoings meets the description of an offsetting claim as canvassed by the authorities to which I have referred. It is not appropriate on an application such as this to venture further in considering the contractual argument. As White JA noted in Grandview Australia Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60 at [90]:
It is usually inappropriate on an application to set aside a statutory demand that the court attempt to decide competing contentions as to contractual interpretation, partly because to do so might embarrass a judge before whom that issue arises and fundamentally because if the disputed question of contractual interpretation is arguable there will be a genuine dispute as to the existence of the debt, albeit one that does not depend upon a disputed matter of fact. …
[17]
Accessorial liability
In respect of the offsetting claim which relies upon the defendant's accessorial liability for the franchisor's alleged misleading and deceptive conduct and unconscionable conduct, in Yorke v Lucas, the High Court held that section 75B of the Trade Practices Act 1974 (Cth) (now section 2 of the Australian Consumer Law) imports the requirements of the criminal law and the person sought to be made liable must be shown to have had actual knowledge of the essential matters which go to make up the contravention, unlike primary liability for misleading and deceptive conduct where liability may attach even though a corporation acts honestly and reasonably: Quinlivan v Australian Competition & Consumer Commission (2004) 160 FCR 1; [2004] FCAFC 175 at [8]. Thus, in Yorke, the alleged accessory was not liable because, although he was aware that the representations were made - and indeed made the representations himself - he had no knowledge of their falsity and thus could not be said to have intentionally participated in the contravention: Quinlivan at [9]. As Stone J (with whom Moore and Mansfield JJ agreed) explained in Medical Benefits Fund of Australia Limited v Cassidy (2003) 135 FCR 1; [2003] FCAFC 289 at [85]: (emphasis that of her Honour)
… The High Court interpreted the accessory liability provisions not as requiring that the accessory know the essential elements of the contravening conduct but that he or she know the essential elements of the contravention. … it is not necessary to show that the accessory subjectively intended that someone would actually be misled or deceived. It is sufficient that the accessory intentionally participated in conduct that he or she knew had the capacity to mislead or deceive. It is, however, difficult to conceive of circumstances in which a person intentionally participates in conduct that he or she knows has a misleading or deceptive character without intending to mislead or deceive, or at least wilfully blinding themself to this possibility.
Further, Brereton J explained the position in In the matter of HIH Insurance Limited (in liquidation) (2016) 113 ACSR 318; [2016] NSWSC 482 in the context of whether subsidiaries had accessorial liability for a holding company. His Honour noted at [21]:
To incur accessorial liability under these provisions, the alleged accessory must have, with actual knowledge of the essential facts which made what was done by the principal contravener a contravention, in some way participated in, assisted or encouraged the contravention. A director is not a party to the corporation's contraventions merely by being a director; to be party to a contravention, the alleged accessory must be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention. Thus, there are two elements of accessorial liability: knowledge, and participation.
In respect of 'participation', all that was required was doing something which acted to help, encourage or induce the contravention but mere participation was insufficient to attract accessorial liability unless accompanied by actual knowledge by the participant of the essential matters that constituted the contravention, noting that the knowledge of corporation can be established by the knowledge of a director, servant or agent by whom the relevant conduct was engaged in within that person's actual or apparent authority: at [22], [25].
[18]
Orders
Given the shambolic manner in which the plaintiff's case was advanced, I was tempted to make no order as to costs. However, as the plaintiff has ultimately established that it is entitled to the relief sought, and because I am mystified as to why the defendant thought it appropriate to issue a statutory demand in the midst of the litigious complexity which engulfs these parties, I make the following orders:
1. Order pursuant to section 459H of the Corporations Act 2001 (Cth) that the statutory demand dated 26 February 2020 issued by the defendant be set aside.
2. Order the defendant to pay the plaintiff's costs of these proceedings.
[19]
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: 25 August 2020
Whilst "property" was not a defined term in clause 1.1, the "property leased" was defined in Item (B) of the sub-lease by reference to the folio identifier "being premises known as Ground Floor Mezzanine and First Floor" of the Dixon Street property. "Building" was defined in clause 1.1(e) as:
"Building" means the building in which the premises are situated, including
(i) the land on which the Building is erected;
(ii) land, buildings and structures owned or controlled by the sublessor in conjunction with the building, which is or ma[y] in the future be erected or altered;
(iii) sublessor's fixtures, and the sublessor's chattels, plant, equipment, property and amenities.
Unremarkably, the description of the "property leased" and the definition of Building captured all costs and charges paid by the defendant in connection with the management of the whole of the property.
The plaintiff fitted out the first floor of the building as a Chinese restaurant at a cost of some $1 million. In August 2017, the restaurant opened. The plaintiff began paying rent of $15,000 a month plus GST.
Also, on 15 September 2017, the franchisor's solicitor sent a spreadsheet to the plaintiff's solicitor containing financial information on the performance of the franchise from 2014 to 2017. The spreadsheet indicated that the annual net profit for Meetfresh Haymarket was 23.59% of annual revenue for 2014-15, 22.64% of annual revenue for 2015-16 and 32.67% of annual revenue for 2016-17. The annual costs of goods sold (COGS) for each of those financial years was 27.9% of annual revenue.
On 5 October 2017, the plaintiff's solicitor sought clarification of various matters in relation to the proposed franchise agreement and licence, including:
We note that upon enter into the franchise business, our client will be taking the whole of the lease for that building.
However, we note that the licence agreement does not reflect the facts that our clients are to pay the Balance of the rents on the basis that they already signed the sublease for the other part of the premise.
The franchisor was asked to amend the licence agreement.
The franchisor's solicitor responded:
We can insert a clarifying clause making clear the rent payable under the licence is only the difference between the rent payable under the lease and the rent already payable under the separate sub-lease (no double up of payment is intended).
Soon after, the plaintiff, defendant and franchisor signed the transaction documents in respect of the franchise. First, the plaintiff, its directors and the franchisor signed a Prior Representations Deed acknowledging that the financial information provided on 15 September 2017 was not a projection or forecast of the earnings potential of the franchise and that they did not rely on the financial information for that purpose. The deed was signed by Mr Hsu as sole director of the franchisor.
On the execution page of the Prior Representations Deed, the name of the franchisee was amended in handwriting and then re-amended to change the franchisee from the plaintiff to Fujian Xingxing Desserts Pty Limited and back to the plaintiff. As the alterations are not initialled, it is difficult to know precisely how this unfolded. The plaintiff's solicitor said that initially a new company was established to run the franchise business, called Fujian Xingxing Desserts Pty Limited. The franchise documents were amended by hand to change the reference from the plaintiff to that company but then they decided to change it back again. Whilst there was no evidence as to this, such an explanation gains some support from the franchise documents and subsequent invoicing. The correspondence between the parties' solicitors thereafter certainly proceeded on the basis that the plaintiff was the licensee and franchisee.
Second, a "Meetfresh franchise agreement" was signed between the plaintiff and the franchisor in respect of the Haymarket store. Again, on the execution page of the franchise agreement, the name of the franchisee was amended in handwriting and then re-amended to change the franchisee from the plaintiff to Fujian Xingxing Desserts Pty Limited and back to the plaintiff. The franchise agreement provided that an initial franchise fee of $450,000 was payable together with a security deposit of $109,549.32.
Third, a "Meetfresh Licence to Occupy Premises" was executed by the plaintiff, its directors and the defendant. The licence bore the "Meet Fresh" trademark name and logo. The header and footer of the licence document contained the name of the franchisor. The relationship between the defendant and the franchisor was recorded in the recitals to the licence:
…
B. The Licensor is a Related Entity of the Franchisor, and the Licensor had entered into or intends to enter into a lease for the Premises of the Franchised Business (Lease).
C. The Licensor is to grant the non-exclusive right to the Licensee to occupy the Premises for the purposes of operating the Franchised Business.
…
Under the licence, the defendant granted the plaintiff a licence to occupy the Premises for the purpose of conducting the Franchise Business. "Premises" was defined in clause 1.1 as "the premises to be used for the purposes of operating the franchise as set out in the Lease and in Item 1", being Ground Floor Mezzanine and First Floor of the premises in Dixon Street. As I understand it, this area extended beyond that part of the premises which were to be used for the franchise business. "Lease" was defined in clause 1.1 as the lease of the Premises, a copy of which was said to be annexed to the deed as Schedule 2, although it is not annexed in the copy of the licence in evidence in these proceedings. The description of the Lease in Schedule 1, however, corresponds with the lease of the Dixon Street premises to the defendant.
The Licence Term was set out in Item 3. The expiry of the Licence Term was on termination or a day prior to the expiration of the Franchise Agreement or the Lease, whichever was the earliest. That is, expiry of the Licence turned upon expiry of the Lease rather than the Sub-Lease or, of course, expiry of the franchise agreement.
Clause 4 of the licence dealt with the plaintiff's obligations under the Lease, which I take to be the lease of the Dixon Street premises. Clause 4.2(b) provided that the plaintiff must:
pay the Licensor the Licence Fee seven (7) days before any amount included in the Licence Fee is due under the Lease;
Clause 1.1 defined "Licence Fee" as follows:
Licence Fee means the total sum payable by the Licensee from time to time in accordance with the terms and conditions of the Lease, including but not limited to rent and outgoings;
The suggestion that the "Licence Fee" may include outgoings is noteworthy. Also noteworthy is that the "Licence Fee" was the sum payable by the licensee under the lease, and that the plaintiff had no obligation to pay anything under the lease.
Item 5 of Schedule 1 to the licence included the following special condition:
Notwithstanding any other provisions of this Deed, the following Special Conditions shall apply:
(1) The Licence Fee payable under this Deed is the difference between the rent payable under the Lease and the rent payable under the separate sub-lease between the Licensor and Licensee
The plaintiff contends that the special condition prevailed over the definition of Licence Fee and, as the special condition made no reference to the licensee paying outgoings but only rent, the defendant was not entitled to charge any outgoings. Such a construction is certainly available and arguable.
Again, the execution page of the licence shows that alterations were made in handwriting to the name of the licensee from that of the plaintiff to Fujian Xingxing Desserts Pty Limited, and then back to the name of the plaintiff. None of these changes were initialled.
In the Federal Court proceedings at least, it is alleged that the initial franchise fee was paid. In addition, in these proceedings a bank cheque was in evidence which shows that, in December 2017, a security bond of $90,549.32 was paid to the franchisor. In addition, the plaintiff spent some $10,000 on new equipment. The equipment list in respect of these items was relied upon in these proceedings, comprising an ice machine, tables and chairs, bowls, trays and a wireless paging system.
Over the next two years, some problems emerged with the quality and supply of goods by the franchisor for use in the franchise business. In about March 2018, Mr Wang was replaced by Mr Chan, whose assistant was Emily Chan. Conversations in respect of problems with the supply and quality of goods were had with Ms Chan from March to November 2018, including over a WeChat chat group. Due to the franchisor's failure to properly market the franchise, the plaintiff stopped paying the marketing fee after April 2018, apart from unwitting payments made in August and September 2019.
On 15 March 2019, the defendant's solicitor rejected the proposition that the defendant was obliged to partially refund the rent paid under the sub-lease as, despite the wording of the sub-lease and the licence, it was the common intention of the parties that the sub-lease was only a lease of the first floor, whilst the licence gave possession of the ground floor and mezzanine areas. Further, it was said that the licence did not require any outgoings to be paid. Reference was made to the definition of "Licence Fee" and the special condition, such that the definition of "Licence Fee" had been overridden by the special condition. I note that the interpretation of the licence agreement proffered by the defendant's solicitor now accords with the plaintiff's basis for asserting an offsetting claim in respect of the outgoings paid under the licence agreement.
Further, the defendant's solicitor stated:
At no time since 16 October 2017, has your client made or our client received any payment of:
(a) outgoings in respect of the Licence; or
(b) Licence Fees, despite its right to be paid the Licence Fee pursuant to Item 5 of Schedule 1 of the Licence.
Accordingly, your client's demand for a refund of the Licence Fees and Outgoings is unsubstantiated.
If proceedings were commenced to seek a refund of licence fees and outgoings, the defendant intended to seek damages for breach of clause 4.2(b) of the Licence. Further, the defendant's solicitor rejected the notion that the plaintiff was entitled to the benefit of any option available under the lease and also the suggestion that the defendant caused the plaintiff to default in its obligations under the franchise agreement by reason of the plaintiff's failure to exercise the option to renew the sub-lease. The defendant's solicitors noted that the licence and sub-lease would expire and the franchise agreement would terminate on 30 March 2019. Vacant possession was expected by 5.00 pm on 30 March 2019.
On 15 November 2019, a hearing took place in the Federal Court as to whether the interlocutory injunctions should be discharged. During an adjournment, the plaintiff's solicitor negotiated with the solicitor for the franchisor and defendant. According to a later letter from the plaintiff's solicitor, negotiations ensued about a proposed refund of part of the November 2019 rent and franchise fees in exchange for vacation of the premises on 19 November 2019. The agreement was said to have been reduced to writing in a letter from the franchisor/defendant's solicitor confirming that the refund would be paid by 30 November 2019.
On 19 November 2019, further negotiations occurred between Mr Zhou and Mr Chan in respect of the plaintiff's furniture and stock. According to Mr Zhou, it was agreed that the plaintiff would sell the tables, chairs, air conditioning unit, stoves, refrigerator and ice blender for $7,000 plus GST with payment that evening. Later on 19 November 2019, the plaintiff and representatives of the franchisor and defendant met at the franchised premises and did a stocktake, and it was agreed to sell the stock at half price being $2,649.46 including GST, also to be paid that evening. Various text messages were exchanged about issuing invoices for the equipment and stock and, on 20 November 2019, Mr Zhou issued two invoices to Ms Chan for the equipment and stock. However, the money was not paid. Further WeChat messages were exchanged on 25 November 2019 and 4, 5 and 9, 21 and 23 December 2019 and 14 January 2020 in which Mr Zhou pressed for payment for stock and equipment.
As against the defendant, it is pleaded in the Federal Court proceedings:
Further and in the alternative, Eternity Trading was knowingly concerned in Meetfresh Franchising's breaches of s 18 and further and s 21 of the [Australian Consumer Law] in that, from at the date time of Meetfresh Franchising's Renewal Representation, Eternity Trading and First Respondent has the same sole shareholder, sole director and company secretary, and share the same registered office and staff.
It is also pleaded that the defendant breached the licence as, from October 2017 to November 2019, the plaintiff paid outgoings of $210,670.88 and footway monthly fees of $37,963.28 as requested by the franchisor and defendant in addition to licence fees under the licence. It is pleaded that the respondents were not entitled to invoice the plaintiff for outgoings and footway monthly fees and the amounts were invoiced in breach of the licence. The plaintiff claims its loss of $248,634.16 for outgoings and footway monthly fees paid to the defendant and the franchisor. In the alternative, it is said that these amounts are liable to be repaid by the franchisor and defendant by way of restitution as they have been unjustly enriched at the expense of the plaintiff.
In respect of accessorial liability, the plaintiff submitted that the defendant was fully involved in the franchise as both the franchisor and defendant shared the same sole director and shareholder, registered office and staff. Representations made by the franchisor before entry into the franchise agreement were made by Mr Wang, who worked for both companies. It was submitted that the franchisor and the defendant "share the people, the staff managing the franchise business and the licence actually are the same people".
The defendant submitted it must have done something more than merely having some knowledge of the matter: Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65; Australian Securities and Investments Commission (ASIC) v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342; Ashbury v Reid [1961] WAR 49 at 51. To suggest that mere knowledge - by virtue of the same officers, shareholders and staff - was sufficient to found derivative liability of companies was said to strip away the concept of separate legal entities. Whilst the defendant accepted that the plaintiff had a prima facie claim against the franchisor, it was submitted that the plaintiff had not adduced any evidence of facts supporting a claim that the defendant should be liable under section 76 of the Competition and Consumer Act for a breach of sections 18 and 21 of the Australian Consumer Law. It was not clear what act or acts were said to have been done by the defendant which would found such a liability. The claim that the defendant was "knowingly concerned" in the breaches alleged against the franchisor was said to be fanciful.
Further, the defendant submitted that where the offsetting claim is for unliquidated damages for economic loss, the plaintiff must adduce evidence to show the basis upon which the loss is said to arise and how that loss is calculated to enable the Court to determine whether there is a genuine offsetting claim for the purposes of section 459H: Macleay Nominees at [18]. The defendant submitted that there was no evidence as to how the alleged damages claimed in the Federal Court proceedings was said to arise.
It is not for the Court to engage in an assessment of a deponent's credit on an application such as this: Britten-Norman at [46]. What is called for is an assessment of the kind described by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; (1994) 12 ACLC 669 at 671 (approved in Britten-Norman at [46]) (citations omitted):
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", or "a patently feeble legal argument or an assertion of facts unsupported by evidence".
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACSR 67; [2008] VSCA 70, Dodds-Streeton JA, with whom Neave and Kellam JJA agreed, put the test in the following terms, at [71]:
As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. …
Often cited is the judgment of Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919; (1993) 11 ACSR 601 at 605 (Thomas J), which provides useful guidance:
It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.
The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).
Thus, the plaintiff has established that it has a plausible contention that it was not obliged to pay outgoings under the licence agreement. The further question is whether the plaintiff has established to the requisite level that the plaintiff had paid such outgoings such that it is entitled to seek to recover the amounts paid. In the letter from the defendant's solicitor referred to at [41], it is asserted that the plaintiff has never paid any outgoings in respect of the licence and thus the plaintiff's demand for a refund was said to be unsubstantiated. In the proceedings before me, the plaintiff relied upon paragraph 69 of the statement of claim filed in the Federal Court proceedings, which pleads:
The Applicant … says that, in addition to the licence fee, from October 2017 to November 2019, the Applicant has paid outgoings of $210,670.88 and footway monthly fees of $37,963.28 as per the Respondents' invoices.
The statement of claim is unverified although, as mentioned, the plaintiff's solicitor has deposed that she is informed by Mr Zhou on behalf of the plaintiff and believes that the claims pleaded in the statement of claim are true and genuine. In Britten-Norman, the Court of Appeal made plain that hearsay evidence may be admissible on an application such as this. At [37]:
Having regard to the test that applies in determining whether the evidence is sufficient for the purposes of setting aside the demand, which is discussed below, the hearsay rule will not apply with the same strictness as is required in a fully contested hearing of a principal dispute. Rather, as in the case of an interlocutory proceedings, hearsay evidence may be admissible provided evidence of the source of the hearsay is adduced: see the Evidence Act, s 75.
Thus, the plaintiff's solicitor having identified the source of her knowledge, there is some evidence that the claims pleaded in the Federal Court proceedings are "true and genuine" although not specifically that the outgoings were paid.
As to whether a pleading can be received as evidence of the facts pleaded, I canvassed the relevant authorities in The MCF Group Pty Limited v GJB Legal Pty Limited trading as Byles Anjos Lawyers [2019] NSWSC 333 at [71]-[76]. In Bhagat v Global Custodians Limited [2002] FCA 223; [2002] FCAFC 51, Mr Bhagat applied to set aside a bankruptcy notice founded upon a judgment debt. Mr Bhagat contended that the judgment was obtained by fraud and tendered a statement of claim in this Court seeking to set it aside on that basis. The Full Court of the Federal Court of Australia (per O'Loughlin, Whitlam and Marshall JJ) observed (at [53]):
… the mere production of a statement of claim in an action that pleads facts which, if proved, would support a claim, has long been held to be insufficient: "[a] statement of claim is no evidence of anything": In re Foster, Ex parte Basan (1885) 2 Morr 29 at 33 per Brett MR: see also Re Cox (1934) 7 ABC 98 at 101 and Re Verma; Ex parte Deputy Commissioner of Taxation [1984] FCA 340; (1985) 4 FCR 181 at 187. …
In ICM Agriculture Pty Ltd v Young [2009] FCA 109, Mr Young applied to set aside a bankruptcy notice by reason of a counter-claim for unliquidated damages sought in proceedings commenced in the District Court. He tendered the statement of claim and an affidavit verifying in which the deponent stated that he believed that the allegations of fact in the statement of claim were true. The affidavit verifying the claim was not read and, for that reason alone, Lindgren J considered that there was no evidence of quantum before the Court. Lindgren J noted at [76] and [78]:
76 If an attempt had been made to read the affidavit as evidence of any facts under the heading 'Claim for relief', there would have been an objection and the affidavit would have been rejected. First, the affidavit was nothing more than a statement of Mr Young's 'belief'; his state of belief was not evidence of any of the primary facts, and was not able to satisfy the test discussed in Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373 … Second, and more importantly, if Mr Young had sworn that the allegations of fact in the statement of claim were true, his affidavit would still have been inadmissible because of the nature of the material in the statement of claim. It was an amalgam of conclusions, rather than a statement of facts.
78 … it was not enough for Mr Young to formulate a claim in sweeping conclusory terms and to say on oath that he believed in his claim or was confident that he would be able to sustain it on a hearing: see, for example, Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 350-351; Bhagat v Global Custodians Ltd [2002] FCAFC 51 at [53].
A different result pertained in Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46, where a liquidator sought to recover unreasonable director-related transactions from directors, Mr and Mrs Frost, under section 588FE of the Corporations Act. Mr Frost appeared in person. The trial judge read into evidence the verified defence filed by Mr Frost. President Beazley, with whom Macfarlan and Gleeson JJA agreed, noted that ICM Agriculture was authority that, in a given case, depending upon the terms of the pleading, verified pleadings may constitute evidence of a person's belief in the matters asserted, although in ICM Agriculture the averments in the pleadings were conclusory only unlike the verified defence in Crowe-Maxwell v Frost which contained a detailed explanation that would have been admissible if given by way of formal affidavit or oral evidence: at [30], [34]. At [30]:
… I do not consider that the conclusion in ICM Agriculture Pty Ltd v Young is authority for the proposition that a verified pleading can only ever be evidence of the person's opinion. It is thus necessary to consider each of the paragraphs of the defence to determine whether they constitute evidence of the fact of the matters asserted.
Having regard to these authorities, I conclude that the affidavit of the plaintiff's solicitor on information and belief that a director of the plaintiff believes the claims pursued in the Federal Court are "true and genuine" does not prove that the outgoings were paid as pleaded in those proceedings. This is because a director's belief that the claims pursued are "true and genuine" does not tell me specifically whether each of the facts asserted in support of those claims are, to the director's knowledge, true and correct.
What is in evidence, however, are the plaintiff's financial statements for the year ended 30 June 2018, which report an expense of $88,906.36 for outgoings. The invoices in evidence also indicate that the plaintiff was charged outgoings for the restaurant each month of $1,584 plus GST, which equals $19,008 for the year. In respect of the franchise premises, on 13 October 2017, outgoings of $8,267.60 plus GST were invoiced and then $8,426 plus GST each month thereafter. Thus, outgoings charged for the franchise premises, if paid as invoiced, would have totalled some $67,250 for the year ended 30 June 2018. Added together, these outgoings amounts roughly equate to the expense recorded in the plaintiff's financial statements for that financial year.
Further, the invoices were exhibited to an affidavit of Mr Zhou filed in the Federal Court proceedings and tendered in these proceedings in which Mr Zhou deposed, "The rents of the whole of the Building have been paid on a monthly basis to the Respondents' bank account according to the Respondents' rent invoices", following which the invoices were described and annexed. By reference to the financial statements for the year ended 30 June 2018, the underlying invoices and Mr Zhou's affidavit deposing that rent has been paid according to the invoices, I am satisfied that the plaintiff has discharged its onus in establishing an offsetting claim in respect of outgoings.
It is necessary to plead the mental elements in any claim for accessorial liability. Thus, in Elecon Australia Pty Limited v Brevini Australia Pty Limited (2009) 263 ALR 1; [2009] FCA 1327, the pleading was set out at [270]:
The further amended statement of claim pleaded at paragraph 75:
75 Mr Patel has aided, abetted, counselled, procured and/or authorised the conduct of Elecon Australia and/or Elecon India by reason of:
75.1 executing the Know How Agreement on behalf of Elecon India;
75.2 being the Managing Director of Elecon India; and
75.3 being a director of Elecon Australia.
By reason of these matters, it was then pleaded that Mr Patel was knowingly involved in conduct in contravention of the Trade Practices Act. Buchanan J held that the bare facts pleaded were insufficient to fix Mr Patel with accessorial liability as the three facts pleaded did not establish that he had aided, abetted, counselled, procured or authorised the conduct complained of and failed to plead the necessary mental elements: at [271]-[272].
Whilst the plaintiff's pleading in the Federal Court proceedings may leave something to be desired, this is not a strikeout application. The question is whether the plaintiff's offsetting claim based on the asserted accessorial liability satisfies the Court that there is "a serious question to be tried", or "an issue deserving of a hearing" or a "plausible contention requiring investigation of the existence of an offsetting claim". Is the offsetting claim spurious, mere bluster and assertion? What appears from the facts canvassed in this judgment is that the defendant and franchisor's operations were overlapping and indistinguishable in the sense that the documentation prepared by the defendant and franchisor used the franchisor's logo and name, both companies pooled invoicing and payment arrangements, both used the same solicitors who did not always distinguish on whose behalf they were communicating or taking action, and it appears that the actions of one company were essentially the actions of the other. As the plaintiff's solicitor described it, Mr Hsu was "double-headed with the full knowledge of [Meet] Fresh and Eternity Trading". Mr Wang, who negotiated the franchise agreement with the plaintiff, was a servant or agent of both the defendant and the franchisor. I am satisfied that there is an issue deserving a hearing in respect of accessorial liability.
Of course, the evidence at a final hearing in the Federal Court may well depart substantially from the evidence before me. Nor is it for this Court to examine the merits of the plaintiff's claim but simply to ascertain whether it is genuine. "Beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed …: Re Morris Catering at 605.
As to whether the plaintiff has established that the offsetting claim is in an amount which exceeds the statutory demand of $18,526.56, as Palmer J observed in Macleay Nominees at [18]:
… In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s459H(1) and s459H(2).
I was taken to sufficient material (in the form of documents, affidavits and pleadings) in the Federal Court proceedings - referred to at [17], [30], [34] and [59] - to satisfy me that the unliquidated damages claim under the Australian Consumer Law exceeds the statutory demand.