- Automatic Fire Sprinklers Pty Ltd v Watson

Supreme Court of NSW|2016-04-19|Before: Black J

Solicitors: Keith Bagley Lawyer (Plaintiff) J Brent & Co (Defendant) File Number(s): 2016/7246

The affidavit evidence

SCPL relied on an affidavit of Ms Ani Mirziani, its Research and Development Manager, in support of the application to set aside the Demand. SCPL is a firm of accountants and advisers. That affidavit annexed a copy of the BSA to which I will refer below. That affidavit also annexed correspondence in respect of the provision of services under the BSA and referred to a meeting between Mr Collins and the sole director of SCPL, Mr Philip Scahill, on 7 May 2015, which was described (in evidence admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as limited to Ms Mirziani's understanding) as about SCPL's concerns about Armacor's "continuing numerous failures to discharge its obligations under the BSA" (Mirziani 7.1.16 [6]). Ms Mirziani deposed, in evidence also admitted with a limiting order under s 136 of the Evidence Act as evidence of her understanding only, that no rectification had taken place of problems under the BSA and that (Mirziani 7.1.16 [7]): "Over the ensuing months, those failures continued to the point where [SCPL] became aware of adverse effects on [SCPL's] professional reputation and potential and actual loss of clientele directly related to the [Armacor's] failure to discharge its obligations under the BSA."
Ms Mirziani also referred to a review undertaken by her, at Mr Scahill's request, of work carried out by Armacor under the BSA and her affidavit annexed a copy of her memorandum dealing with that matter. The affidavit also noted that SCPL's solicitors had been instructed to bring proceedings against Armacor in the District Court of New South Wales in respect of the matters in dispute, although a Statement of Claim was not filed until 15 April 2016, just before the hearing of the application to set aside the Demand. Ms Mirziani also led evidence, by little more than a bare assertion, of SCPL's solvency.
SCPL also relied on affidavits of Mr Scahill, its sole director, dated 5 and 19 February 2016. Mr Scahill's affidavit dated 5 February 2016 referred (in evidence also admitted with a limiting order under s 136 of the Evidence Act as identifying the subject matter of the alleged dispute) to concerns which he claimed to have developed, from mid-2014, as to Mr Collins' lesser attention to carrying our Armacor's obligations under the BSA and referred to SCPL's clients having expressed concerns as to the provision of the relevant services. Mr Scahill annexed several emails raising concerns as to services provided by Armacor, including some correspondence which related to clients referred to in the Demand. Mr Scahill's affidavit also annexed correspondence with SCPL raising concerns as to Armacor's work in respect of the research and development grant program and also annexed correspondence from the Department of Industry and Science to SCPL dated 13 January 2015 and 21 July 2015 identifying issues with particular grants. Mr Scahill claimed that SCPL had suffered losses greater than the sum claimed in the Demand as a result of Armacor's poor performance or failures in respect of the BSA although, as I noted above, SCPL did not seek to establish an offsetting claim in respect of the Demand. Mr Scahill also identified three specific invoices which were said to be disputed, but the basis of that dispute was not identified, and also claimed, again largely by assertion, that SCPL was solvent.
By an affidavit dated 4 February 2016, Mr Collins responded to the evidence led by SCPL. Mr Collins' evidence was that payments by SCPL to Armacor were generally made promptly up until September 2014, and that payment of Armacor's invoices became erratic and SCPL started making partial payments in respect of some invoices after that time and, since November 2014, SCPL paid some of the smaller value tax invoices, but not others which were larger in value. Mr Collins also referred to correspondence between himself and representatives of SCPL in which he asserted that SCPL was in breach of the BSA. Mr Collins' evidence was that, at a meeting in mid-2015, he declined to go ahead with changes for new FY2015 research and development tax incentive applications for SCPL until current arrears were paid and that Mr Scahill did not dispute the arrears but said SCPL was not paying anything until Mr Collins agreed to changes that SCPL required to the BSA. It appears that Armacor continued to undertake some work for SCPL from that time. Mr Collins' evidence is that SCPL never raised with him any dispute over the validity or value of the tax invoices that Armacor had raised and presented to it. Mr Collins also claimed that he was not made aware of the matters referred to in Ms Mirziani's review or of the alleged breach of contract to which reference was made in her affidavit.
By a further affidavit affirmed 19 February 2016, Mr Scahill responded to aspects of Mr Collins' affidavit affirmed 4 February 2016, again asserting concerns as to Armacor's performance and referring to meetings with Mr Collins during the latter half of 2014 concerning issues with that performance. That affidavit also identified matters that are in dispute between the parties as to what was said at several meetings and as to the extent of the respective parties' responsibility for work done under the BSA.
By a further affidavit dated 15 April 2016, Mr Scahill led evidence of the bank accounts of SCPL, other entities he controlled and his personal account that apparently indicated significant available funds and asserted SCPL's solvency. That evidence was, in my view, manifestly insufficient to establish solvency, so far as it did not involve any real attempt to identify SCPL's present or anticipated liabilities or the time at which such liabilities were due for payment or the resources that would then be available to pay them. Accordingly, it does not seem to me that SCPL's solvency has been established, so far as that may be a matter that is relevant to the existence of a genuine dispute as to the Demand.

Terms of the BSA

Mr Collins' verifying affidavit in respect of the Demand and Ms Mirziani's affidavit each refer to the BSA. Clause 2.1 of the BSA provided that SCPL engaged Armacor to provide the Services (as defined) as an independent contractor "and in accordance with the provisions of this Agreement". The term "Services" was defined by reference to Item 2 in the Schedule to the BSA which identified the services to be provided as: "1. Prepare applications for government grants, rebates and concessions. 2. To prepare responses to inquiries from the administrating authorities of the government grants, rebates and concessions. 3. Assist with the preparation of supporting materials and instigate record keeping processes to back up any grant application in anticipation of audits. 4. Non-legal assistance with corporate restructuring where needed in relation to those grants. 5. Prepare the Client for relevant government audits as needed and assist in any audits which may arise. 6. Liaise with the Client's management team, external lawyers, accountants and other advisers to maximise any potential grants."
By clause 4.1 of the BSA, Armacor undertook to carry out all of the tasks or duties as designated in Item 2 of the Schedule (setting out the Services as defined) and that it would: "4.1.1 [A]ct reasonably and promptly in responding to [SCPL's] requests for provision of the Services or any information with respect to s[a]me; 4.1.2 [I]n carrying out the Services use his [sic] best endeavours to promote the best interests of [SCPL] and its products and/or services by giving the full benefit of his [sic] knowledge, experience, technical skill, training and ingenuity, and at all times seek to ensure that [SCPL's] reputation and integrity is maintained in relation to the carrying out of those Services. …"
Clause 5.1 of the BSA imposed additional obligations in respect of the Services, including requiring Armacor to take all reasonable steps to protect SCPL's reputation, professional integrity and goodwill and to receive, transmit and deal promptly with all communications with SCPL's clients.
Clause 7.1 provided that: "For carrying out of the Services under the terms of this Agreement the Contractor is to be paid the remuneration set out in Item 5 in the Schedule." Item 5 in turn provided that: "[SCPL] will charge its Clients a Success Fee of 30% of the total value of the Grant received by the Client. [Armacor's] Share of the Success Fee is 65% and the balance of 35% is retained by [SCPL]. Payment of the Share by [SCPL] to [Armacor] will be seven (7) days net from date of tax invoice or upon cleared funds being received by [SCPL] from the Success Fee paid by the Client. …" Clause 7.4 provided an example of the working out of the share of the Success Fee payable to Armacor, such that it would receive an amount of $9,750 in respect of the gross value of the grant to a client of $50,000.

Scope of s 459H(1)(a) of the Corporations Act

As I noted above, SCPL submits that there is a genuine dispute about the existence or amount of the debt to which the Demand relates for the purpose of s 459H(1)(a) of the Corporations Act. Section 459H(1)(a) of the Corporations Act provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which that demand relates. That test has been described as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6].
In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452 at 464, the Full Court of the Federal Court held that a "genuine dispute" must be bona fide and truly exist in fact, and the grounds for that dispute must be real and not spurious, hypothetical, illusory or misconceived. In CGI Information Systems & Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 (at [16]), Barrett J summarised the principle as follows: "[T]he task faced by the company challenging a statutory demand on the genuine dispute grounds is by no means at all a difficult or demanding one. The company will fail in that task only if it is found, upon the hearing of its s 459G application, that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that on rational grounds indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger."
In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71], Dodds-Streeton JA observed that a company which seeks to establish a genuine dispute or offsetting claim: "… is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for 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. … [I]t is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice."
In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44], Young AJA (with whom Hoeben JA and Ward J agreed) referred to Eyota Pty Ltd v Hanave Pty Ltd above and noted that the question for a primary judge, in determining an application to set aside a statutory demand under s 459H(1)(a), is: "[T]o determine whether there was a genuine dispute, that is one in which a plausible contention has been raised by the company on which the statutory demand was served."
I summarised the case law in Re PPK Group Pty Ltd [2015] NSWSC 1498 at [12]ff and in Rinfort Pty Ltd v Arianna Holdings Pty Ltd [2016] NSWSC 251 at [52]-[54], to which Ms Peden refers, on which I have drawn in the summary set out above.

A Graywinter point

Mr Sleight, who appears for Armacor, developed an attack upon Ms Mirziani's initial affidavit in support of the application to set aside the Demand, by reference to Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452 at 459, where Sundberg J noted that the requirement of s 459G(3), that there be an affidavit supporting the application to set aside a statutory demand, required more that a mere assertion of a dispute or a statement that the debt was disputed, and required that an affidavit disclosed "material facts" showing there was a genuine dispute between the parties. The balance of authority establishes that this requirement raises a fact-specific inquiry as to whether the affidavit in support of the application to set aside the demand in fact supports the application, and the initial affidavit will sufficiently raise a dispute if that ground is raised by a necessary or reasonably available inference, including from documents exhibited to that affidavit: Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143; (2007) 214 FLR 393; Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343; (2011) 87 ACSR 1 at [36]; Infratel Networks Pty Ltd v Gundry's Telco and Rigging Pty Ltd above at [27]ff.
Mr Sleight submitted (T34) that there was no evidence of substantial non-performance in Ms Mirziani's supporting affidavit and no identification of the particular tax invoices that were in dispute, such that the Court could not determine that matter from that affidavit so as to, for example, determine the substantiated amount under s 459H of the Corporations Act. Mr Sleight submitted that Ms Mirziani's affidavit was not, in itself, sufficient to establish the dispute on which SCPL relies. However, the Graywinter principle does not require that Ms Mirziani's affidavit lead all of the evidence on which SCPL would rely to seek to set aside the Demand, which would scarcely be practicable given the short time period within which that affidavit was required to be filed, and only requires that the affidavit identify the matters to be relied upon to set aside the Demand, where the evidence led in support of them could be, and was, supplemented by subsequent evidence.
Mr Sleight also raised a question as to the admissibility of evidence of deficiencies in Armacor's performance led in Mr Scahill's affidavits, also relying on the Graywinter principle. Mr Sleight submitted that Ms Mirziani's affidavit contained no evidence of any communications with Armacor disputing liability to pay the tax invoices and did not disclose facts that demonstrated that there was a genuine dispute as to the Debt. I accept that that affidavit does not disclose communications which dispute, in terms, liability to pay the tax invoices issued by Armacor; however, it does disclose disputes as to the adequacy of the services provided by Armacor and that is sufficient to allow further evidence as to those matters to be led in the further affidavits of Mr Schahill on which SCPL relies. As Ms Peden points out, the fact that that affidavit annexes a copy of the BSA in turn allows SCPL to raise the issue as to the proper construction of cl 7.1 of the BSA and Armacor's entitlement to payment under that clause, to which I will refer below.

Issues of construction of the BSA

The question whether a genuine dispute as to the amounts claimed in the Demand is established also depends partly on issues of construction of the BSA. There was at least some degree of common ground between Ms Peden and Mr Sleight in respect of the construction of the BSA.
Ms Peden refers to the nature of the "Services" to be provided under cl 2.1 and the Schedule to the BSA, to which I have referred above. Ms Peden emphasised, in the course of oral submissions, that the preparation of supporting materials and record-keeping processes to back up any grant application in anticipation of audits, as contemplated by the Services specified in Item 2 in the Schedule to the BSA, was a matter of significance, in circumstances that an audit regime was in place in respect of the grant process, and the grant applications were submitted by SCPL which may bear a degree of regulatory responsibility for that application in its capacity as a tax agent. Ms Peden pointed out that, in a substantive hearing, there would be a dispute as to the adequacy of the documentation maintained in respect of at least some of the relevant clients, and whether that documentation amounted to substantial performance of the contractual obligations (T21). Ms Peden also referred to the obligations of Armacor under cll 4 and 5 of the BSA to which I referred above. Ms Peden emphasised that cl 7.1 of the BSA provided that the payment of remuneration set out in Item 5 in the Schedule was "[f]or carrying out of the Services under the terms of this Agreement" and submitted that remuneration was not payable if the Services were not carried out as required by the BSA. Ms Peden also submitted that the formula for payment set out in Item 5 of the Schedule to the BSA was subject to the requirement that Armacor carry out the Services under the terms of the BSA to be entitled to such remuneration. Ms Peden submitted that Armacor was obliged to keep accurate documentation and appropriate records, sufficient for an audit of the relevant clients, to "earn" the fee it claimed in the invoices. Ms Peden submitted that it would be a highly unlikely construction of a commercial agreement that Armacor was to be paid although essential documentation was not provided to SCPL in the form promised and required by the government application process.
Ms Peden also submitted that the BSA was in the nature of an entire agreement, such that Armacor must carry out all the relevant services in respect of a particular client to be entitled to remuneration under cl 7.1 of the BSA in respect of that client. Ms Peden submitted that payment obligations in commercial agreements are generally dependent upon full performance of the corresponding obligation: Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435. Ms Peden drew attention to the Court of Appeal's decision in Segboer v AJ Richardson Properties Pty Ltd [2012] NSWCA 253; (2012) 16 BPR 31,235 at [82], where Sackville AJA (with whom Allsop P and Campbell JA agreed) observed that: "A promise to pay money in an agreement or a deed is a dependent obligation if it is expressly or impliedly contingent on the occurrence or non-occurrence of another event: J W Carter, Carter's Breach of Contract (2011), at [1-08]. The other event may be the performance of an obligation by another party to the agreement or deed: Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; 72 CLR 435, at 464, per Dixon J. Whether an obligation is dependent in this sense, or independent, is a question of construction of the instrument. An example of a dependent obligation is a promise by one party to indemnify a borrower against a liability to a third party provided the borrower makes certain payments punctually to the lender: cf Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57 ; 238 CLR 570."
Mr Sleight in turn helpfully drew attention to the treatment of dependent obligations in J W Carter, Carter's Breach of Contract, (2011, LexisNexis Butterworths) at [1-18]ff. The learned author there notes that, where a promisor's obligation to perform was dependent on a particular event, the occurrence of that event was originally treated as a condition precedent to the promisee's right to receive performance and required complete and precise fulfilment unless the promisee could establish some excuse for the failure to perform. The author notes that that approach has been qualified under the modern law, so that substantial performance is generally sufficient to enable a plaintiff to enforce a defendant's promise to pay the agreed price for the performance. The author also notes (at [6.99]ff) that the concept of substantial performance has been applied, almost exclusively, to defective building and analogous contracts, and does not apply if parties have agreed that performance precisely in accordance with the contract is a condition precedent to recovery of the contract price. The author in turn refers to the English decisions in H Dakin & Co Ltd v Lee [1916] 1 KB 566 and of the Court of Appeal in Hoenig v Isaacs [1952] 2 All ER 176. Those authorities suggest that one factor relevant to whether substantial performance has been provided will be the cost of rectification of the relevant work.
Ms Peden in turn pointed to evidence led by Mr Scahill referring to substantial costs referable to addressing issues as to record-keeping in respect of Armacor's work, although that calculation is open to challenge so far as at least some of those costs relate to internal activities of SCPL and have been charged on a profit basis rather than a costs recovery basis. Mr Scahill's evidence does, however, seem to me to raise at least a genuine question as to whether the costs of addressing such deficiencies are sufficiently large that the work done by Armacor cannot be treated as substantial performance of the relevant obligations under the BSA. Mr Sleight responds that the evidence does not come "anywhere near" showing a failure by Armacor substantially to perform the BSA (T32). It should be recognised, of course, that the question for me is not whether that matter has been established on the merits, but whether a genuine question as to that matter has been raised, so far as that would be relevant to establishing a genuine dispute in respect of the amounts claimed in the Demand.
Mr Sleight submitted, in his opening outline of submissions, that the invoiced amounts detailed in the Schedule to the Demand would became due and payable unless either no work had been undertaken in respect of the invoiced amount or a condition precedent for payment had not occurred. However, it seems to me that it is at least genuinely arguable that an alternative construction of cl 7.1 and the Schedule to the BSA is available, that Armacor must at least have substantially provided the required Services, rather than, as Mr Sleight's construction would suggest, provided at least some aspect of them to be entitled to payment of the relevant fee. Mr Sleight also submitted that Armacor was entitled to be paid its share of the success fee within seven days from the date of the tax invoice or upon cleared funds being received by SCPL from the success fee being paid by the client. That proposition reflects the terms of Item 5 of the Schedule to the BSA, dealing with the timing of payment, but arguably does not give sufficient weight to the fact that the entitlement to payment under the BSA is also conditioned by the reference to "[f]or carrying out of the Services under the terms of this Agreement" in cl 7.1 of the BSA. Mr Sleight submits, and I accept, that there is no suggestion that success fees have not been paid by the relevant clients in respect of the invoices that are the subject of the Demand.
In oral submissions, Mr Sleight also submitted that it would be sufficient to trigger Armacor's right to remuneration that it had substantially complied with its obligations under the BSA in respect of the provision of services in relation to a particular client, and that matter was to be determined at the point at which a grant was made, triggering the payment of a success fee by the client to SCPL. Ms Peden accepted that it may be that Armacor would be entitled to remuneration if it substantially carried out the relevant services in respect of a particular client, although expressing reservations as to the extent to which the authorities in respect of substantial performance were applicable outside the context of building work. It may be that Armacor would not need to have provided all of the relevant services in order to establish an entitlement to payment. So, for example, one would not expect that it would need to establish that it had assisted the client with an audit, prior to being entitled to payment, if no audit had been foreshadowed or occurred. That position may further be qualified, as Ms Peden noted in the course of submissions, by the fact that grants were made on an annual basis, so that it would be possible to determine at the time a grant was made and a success fee was paid to SCPL whether Armacor had provided the relevant services in the previous year.
In oral submissions, Mr Sleight submitted that Armacor's right to payment under the BSA was not dependent on its providing every service in its entirety before it was paid (T27). It did not seem to me that Ms Peden had contended to the contrary, but instead that Armacor's obligation to be paid in respect of a particular client depended on it having at least substantially provided the relevant services in respect of that client, and that there was a genuine dispute as to that issue in respect of at least several of the clients. Mr Sleight also submitted that payment was contingent upon the grant being paid to the client and that, if Ms Peden's submission was correct, Armacor could be deprived of its share of the success fee even if a grant was paid to the client and a success fee paid to SCPL (T28). Mr Sleight is correct in pointing to that consequence of SCPL's submission. However, it does not seem to me that that consequence deprives SCPL's submission of having a seriously arguable character, where SCPL had an interest, not only in the grant being made to its client so that it could derive a success fee, but also in the performance of the other obligations under the BSA so that SCPL could defend the propriety of that grant if it were audited or challenged.
In oral submissions, Mr Sleight accepted (T29) that there was at least some nexus between the provision of services by Armacor and the right to payment, such that Armacor could not establish a right to payment merely by showing that a grant had been made and a success fee paid to SCPL in respect of a particular client, unless it had provided requisite services as contemplated by the BSA in respect of that grant. Mr Sleight submitted, however, that all that was required of Armacor in order to earn its share of the success fee was that it prepare the relevant grant, that it be submitted by SCPL and approved, so that SCPL then received the success fee from the client (T29). That position may well be arguable; however, the fact that Armacor's position in that respect is arguable does not deprive SCPL of a serious question to be tried in respect of the contrary reading of the provisions, as requiring that Armacor have also provided the other relevant services required by the BSA in respect of the client.
It seems to me that there is at least a genuinely arguable case, as a matter of construction, that Armacor was at least required substantially to perform the relevant Services in respect of a particular client before being entitled to receive a portion of the success fee paid by that client. It seems to me that such a reading of cl 7 of the BSA is at least arguably consistent with its terms, so far as it links the right to remuneration with the provision of the relevant Services, and is also arguably consistent with an objective construction of the provision, in the surrounding circumstances known to the parties, and having regard to the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35]. It seems unlikely, having regard to the surrounding circumstances that would have been known to the parties as to the regime in respect of grants for research and development, and the purpose and object of the transaction, that the parties would have intended that the amounts due to Armacor by way of a share of the success fee would have been payable merely because a grant had been approved, even if Armacor had not complied, or substantially complied, with its other obligations that were directed to promoting the relevant client's ability to substantiate its entitlement to that grant in the case of an audit and to preserving SCPL's reputation.

Whether a genuine dispute arises as to whether the services provided by Armacor were sufficient to establish its entitlement to remuneration

Ms Peden's opening outline of submissions emphasised SCPL's dissatisfaction with the services provided by Armacor generally, including concerns expressed by SCPL and complaints from clients about Armacor's performance from September 2014. Ms Peden particularly relied on email correspondence by which SCPL had raised its concerns with Armacor and Mr Collins and Mr Scahill's evidence of his oral communications of those concerns to Mr Collins. Ms Peden also relied on matters identified in Ms Mirziani's memorandum and correspondence from Mr Scahill to Mr Collins, including complaints that grant applications were not signed by the relevant clients, that documents were not complete and that records were not adequately stored in SCPL's system.
By an email dated 5 May 2015 (Mirziani 7.1.16, Annexure "D"), a senior manager with SCPL wrote to Mr Collins referring to communications from the Australian Taxation Office in respect of its expectations as to the grant scheme and to the current Australian Taxation Office guideline as to important matters in a research and development claim and recording SCPL's concern that: "● R&D Applications are still not being signed by the client and by [Mr Scahill] as Tax Agent prior to lodgement with AusIndustry, despite our previous agreement that this would occur from the time of the meeting that we discussed this ● The records listed above are not available on our server at the time the application is lodged with AusIndustry, at the time of lodgement of the Income Tax Return, and finally at the time the funds are received and disbursement made to the clients, ourselves and yourself - we should keep a copy, have a checklist of items that have been kept or prepared by the client, signed off by them and yourself saved on our server ● In the final 'rush' to lodge AusIndustry applications and ultimately Income Tax Returns (under pressure from clients or consultants for cashflow) important issues are being missed, and supporting documents are not necessarily complete or available" That correspondence provides some contemporaneous support for the existence of concerns as to compliance with at least the record-keeping requirements under the BSA.
An email from Mr Scahill to Mr Collins dated 20 May 2015 (Mirziani 7.1.16, Annexure "E") referred to matters to be agreed in the interests of an ongoing relationship, including procedure for storage of documents in a timely manner, commencing with documents relating to the 2014 financial year applications already prepared and lodged; development of checklists to ensure compliance with record keeping requirements from 1 July 2015; signing of applications by both client and tax agent to ensure transparency; and seeking to avoid a rush of applications immediately prior to 30 April, presumably the close of the application period. Mr Scahill also refers (in evidence subject to a limiting order under s 136 of the Evidence Act as submission only) to concerns of clients and a third party consultants to SCPL as to the timeliness of services provided by Armacor during the relevant period (Scahill 5.2.16 [12], Annexure D1-D2]).
It also seems to me to be seriously arguable, at a factual level, that Armacor has not completed the work that would be necessary to establish its right to payment in respect of several invoices that are the subject of the Demand, on the construction of the BSA which I have held is seriously arguable. In fairness to the relevant clients, I will anonymise their names by using initials in dealing with this issue.
For example, the first invoice which is the subject of the Demand is an invoice in the amount of $52,713.98 relating to "A" (FY2013). The memorandum dated 13 November 2015 from Ms Mirziani to Mr Scahill, to which reference was made in Ms Mirziani's first affidavit in support of the application to set aside the Demand, identifies missing records in relation to that entity including the absence of an application form signed by the client or Mr Scahill as tax agent, the absence of substantiation records in respect of certain aspects of the claim and an absence of documentation as to how certain costs claimed for research and development purposes related to the registered research and development activities. A second tax invoice in the amount of $3,162.25 relating to "B" claimed in the Demand was also addressed in Ms Mirziani's memorandum annexed to her first affidavit, which identified the same criticisms as in respect of "A". The fourth invoice claimed in the Demand in the amount of $10,457.66 relating to "C" referred to claims for $77,500 of costs for research and development purposes which had been incurred to an associate of "C" and not paid during the 2014 year, and identified an issue as to whether those amounts were properly claimed for the purposes of the Income Tax Assessment Act 1997.
The seventh invoice claimed in the Demand related to an amount of $4,197.29 in respect of "D" for the financial year 2014. A letter dated 21 July 2015 from the Department of Industry and Science to SCPL identified several deficiencies in D's registration for the research and development tax incentive, apparently in respect of the 2013/2014 registration application, including insufficient information in respect of particular matters required to be addressed in the relevant application. By an email dated 9 March 2015, a third party which provided associated services to SCPL terminated its Business Services Agreement with SCPL based on complaints as to Armacor's work practices, including referring to issues in respect of the 2014 research and development discussion held with D in the previous year, as to which that third party was then waiting for Armacor's response.
A further invoice claimed in the Demand related to the amount of $2,029.13 in respect of "E" for the 2014 financial year. A letter from the Department of Industry and Science dated 13 January 2015 in relation to E again noted that the registration contained insufficient information in specified areas; however, those criticisms related to E's 2012/13 registration application and do not establish a genuine issue to be tried in respect of the work done in FY2014 to which that invoice relates. A further invoice claimed in the Demand relates to "F" in the amount of $6,041.11. An email dated 20 May 2015 from Mr Scahill to Mr Collins refers to issues relating to F, apparently relating to the lack of common document storage and to the fact that there was no alternative contact other than Mr Collins in the relationship, but the description of those issues does not seem to me to be sufficiently detailed to establish any genuine dispute in respect of the services provided in respect of F. A further invoice claimed in the Demand relates to "G" in the amount of $7,663.29; however, an email dated 30 March 2015 from a third party to Mr Scahill records that G was comfortable with paying SCPL's invoices in respect of the 2013 and 2014 research and development claims, and does not indicate any other issue in respect of that entity so as to give rise to a genuine dispute as to that amount.
I am conscious that Mr Collins responds to, and takes issue with, many of the matters alleged by SCPL in his affidavit, and gives evidence which takes issue with what was said at particular meetings. However, that evidence tends to reinforce, rather than displace, the existence of a genuine dispute as to the extent of compliance with the obligations under the BSA over the relevant period. Mr Collins' evidence is also that he was not informed of issues during the relevant period, but the correspondence to which I have referred suggests that there was at least some discussion as to record-keeping under the BSA over the relevant period. I have also had regard to Mr Sleight's submission that, to the extent that Mr Scahill's further affidavits depose to Mr Collins' failure to attend staff meetings, he was not under an express obligation to do so under the BSA and any such failure did not necessarily constitute a breach of the BSA. I also recognise that Mr Sleight in turn addressed the extent to which particular communications with third parties can properly be construed as complaints in respect of the services provided by Armacor and Mr Collins, and that Mr Sleight submits that Mr Scahill's email dated 20 May 2015 amounted to an attempt to negotiate a variation of the BSA, and to withholding payment to Armacor until agreement was reached to that variation. However, these seem to me to be in the nature of contested issues of fact that cannot displace, and are to some extent indicative of, a genuine dispute.
It seems to me that, on the construction of the BSA which I have held to be seriously arguable, the evidence is sufficient to raise a genuine dispute as to whether Armacor had substantially performed its obligations under the BSA in respect of at least A, B and C, and the amounts involved in those claims represent a substantial proportion of the amounts claimed in the Demand.

Conclusion as to genuine dispute

I have held above that SCPL has established at least a genuinely arguable case, as a matter of construction, that Armacor was at least required substantially to perform the relevant Services in respect of a particular client before being entitled to receive a portion of the success fee paid by that client. It also seems to me that the contemporaneous correspondence to which I have referred raises genuinely arguable issues as to whether Armacor substantially performed its obligations under the BSA, including the obligations directed to record-keeping, as distinct from the preparation of the applications that would allow the grant to be paid and a success fee to be paid by the client to SCPL. At the least, it seems to me that SCPL has a genuinely arguable case as to those matters that should properly be determined in substantive proceedings on the merits, rather than in a summary application of this kind. That finding is sufficient to require that the Demand be set aside.
I should note, for completeness, that, Mr Sleight also advanced various submissions as to the manner in which the BSA operated in practice, and submissions which were intended to demonstrate that SCPL lacked subjective good faith in failing to make the payment, where it had received the success fee from the client. The matters to which Mr Sleight referred in respect of the practical operation of the BSA do not seem to me to be of a character that could deprive SCPL of a serious question to be tried, were it otherwise to be established; and the question of whether a "genuine dispute" exists is directed to whether a serious legal or factual question is raised in opposition to the existence or amount of a debt claimed in the Demand, not to the subjective intent or commercial merit of the party who raises that dispute.

Whether there is some other reason to set aside the Demand under s 459J(1)(b) of the Corporations Act

SCPL also relies on s 459J(1)(b) of the Corporations Act to set aside the Demand. Ms Peden refers to authority that the Court can set aside a creditor's statutory demand if it is satisfied that a genuine dispute exists as to whether the debt to which the Demand relates is due and payable: NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359 at 366-367; Re MK Group Phoenix Pty Ltd [2014] NSWSC 1467 at [40]. The authorities to which Ms Peden refers relate to the position where a debt is claimed although it has not yet fallen due and payable, and that seems to me to reflect an arguable characterisation of the present position, to the extent that the services required to be performed by Armacor have arguably not yet been performed so as to trigger an entitlement to payment under cl 7 of the BSA.
It also seems to me that, so far as there is a genuine dispute as to Armacor's entitlement to payment in respect of at least the clients to whom I refer as A, B and C, and substantial amounts referable to those clients were claimed in the Demand, that provides a further basis to set aside the Demand under s 459J(1)(b) of the Corporations Act. The service of a creditor's statutory demand that comprises significant amounts that are known to be disputed can amount to an abuse of the regime under Pt 5.4 of the Corporations Act, sufficient to warrant the setting aside of that demand on that basis: First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939; Re UGL Process Solutions Pty Ltd above at [44]. I summarised the relevant principles in Re Halal Meats Pty Ltd [2015] NSWSC 2041 at [23] (omitting citations) as follows: "Section 459J(1)(b) of the Corporations Act permits the Court to set aside a demand where there is some other reason for it to do so. The Court's power to set aside a demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness … A particular situation in which a creditor's statutory demand may be set aside is where it claims amounts that the issuer should have recognised are genuinely disputed … It seems to me that that proposition in turn reflects the wider proposition that the creditor's statutory demand regime under Pt 5.4 of the Act does not exist to collect debts that are the subject of dispute, or debts where significant offsetting claims are known to exist. That reflects the nature of the provisions, which are intended to create a summary procedure to give rise to a presumption of insolvency, where a company does not pay an undisputed debt as to which it has no genuinely arguable offsetting claim."
On balance, the substantial amount of the Demand that is referable to the invoiced amounts that I have held to be genuinely disputed is such that the Demand should also be set aside for the reasons set out above.

Orders and costs

I therefore order that:
The creditor's statutory demand dated 18 December 2015 served by the Defendant on the Plaintiff be set aside.
The Defendant pay the Plaintiff's costs of and incidental to this application as agreed or as assessed.

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: 09 May 2016

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