By application filed on 24 November 2014, the Plaintiff, Diveva Pty Ltd ("Diveva") applies under ss 459G, 459H(1)(a)-(b) and 459J of the Corporations Act 2001 (Cth) for an order that a creditor's statutory demand dated 30 October 2014 ("Demand") issued by Pacific Blue Metal Pty Ltd ("PBM") to Diveva be set aside. An issue addressed in the parties' opening submissions as to whether the application to set aside the creditor's statutory demand had been served within the 21 day period specified in s 459G of the Corporations Act was not pressed, and PBM accepted that service had occurred within that period.
The Demand (Ex P4) described the debt claimed as follows:
Description of Debt Amount of Debt
(a) Payment for the supply of goods, namely asphalt and quarry products from [PBM] to [Diveva] between October 2011 to May 2012, subject to the loan referred to in the affidavit of John Steven Cornish sworn 30 October 2014 $1,508,453.06
(b) Payment for the supply of goods, namely asphalt and quarry products from [PBM] to [Diveva] between May 2012 to October 2012 $320,366.39
(c) Interest on the loan from [PBM] to [Diveva] referred to in paragraph (a) above $407,282.31
(d) Finance charge on the unpaid invoices referred to in paragraph (b) above $199,734.05
TOTAL $2,435,835.81
[3]
Some aspects of the factual background of the application were uncontentious. Diveva carries on a civil construction business on the mid north coast of New South Wales, which includes the construction of roads, pavement stabilisation and the supply and laying of bitumen and asphaltic concrete. Diveva's customers at the relevant time included local councils particularly Port Macquarie Hastings Council and Greater Taree City Council. Diveva and PBM had dealt with each other since at least 2008, with Diveva being a substantial customer of PBM and PBM being the sole or major supplier of asphalt to Diveva. It is common ground that, as at May 2012, Diveva owed PBM the amount of $1,508,453.06, which it was unable to pay by reason of losses incurred in an unsuccessful attempt to expand its business beyond road construction and repair. An agreement was reached for repayment of that amount over time, although there is a dispute as to whether interest was payable on the amount to be repaid. It is not necessary to determine that dispute in this application, because PBM does not seek to support that part of the Demand which claimed interest on that debt. PBM continued to supply asphalt to Diveva after May 2012 and PBM made some payments in that regard.
The first and second claims in the Demand are the amounts of $1,508,453.06 and $320,366.39, totalling $1,828,819.45. The first amount is that which was due by Diveva to PBM in May 2012. The second amount is that which is said not to have been paid for supplies of asphalt after that date, although Diveva contends that the lesser amount of $207,331.69 has not been paid in respect of supplies after May 2012 and relies on its accounting records to support that proposition. PBM conversely relies on its accounting records to support the proposition that the larger amount is payable. Mr DeBuse, who appears for PBM, points out that there is at least no dispute that Diveva is indebted to it for the amount of $1,508,453.06 due as at May 2012 and a further amount of at least $207,331.69 due since that date. The third and fourth claim in the Demand dealt with interest claims. Diveva denies the alleged agreement to pay interest and PBM accepted that those claims should be treated as genuinely disputed for the purposes of this application.
The first substantive issue at the hearing was therefore whether there was a genuine dispute as to the amount due for supplies since May 2012 and the second substantive issue was whether Diveva could establish a genuine offsetting claim that warranted an order setting aside (or, I interpolate, varying) the Demand under s 459H(1)(b) of the Corporations Act.
[4]
The affidavit evidence
The Demand was supported by an affidavit of Mr John Cornish, the Chairman of PBM, dated 30 October 2014 which was not read in respect of this application. The Plaintiffs relied, in this application, on a further affidavit of Mr Cornish dated 9 April 2015 which annexed a substantial volume of emails and correspondence between Diveva and PBM.
Diveva relies on Mr Pinson's affidavit dated 24 November 2014 ("Pinson 1") which refers to Mr Cornish's affidavit sworn 30 October 2014 supporting the Demand. Mr Pinson sets out the history of the relationship between Diveva and PBM, to which I have referred above. He refers to Diveva's engagement to undertake the rehabilitation of the Taree Regional Airport, and to issues which delayed the completion of that project, which he identifies as including pavement design issues, inclement weather delays, the expiration of PBM's licence from Taree Council to produce asphalt during the night hours in which the work was to be done, and supply of contaminated asphalt by PBM. Mr Pinson acknowledges that the amount owed to PBM, in about May 2012 when a strategic direction plan was prepared by Diveva, contemplating repayment by an agreed payment schedule, was $1,532,659.99. Diveva also relies on a further affidavit of Mr Pinson dated 20 February 2015 ("Pinson 2") which exhibits additional documents located subsequent to his first affidavit. I permitted cross-examination of Mr Pinson as to his affidavits, having regard to the Court of Appeal's observation in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 (at [67]) that there are occasions where cross-examination may be permitted, if directed to whether there is a plausible basis for an offsetting claim, as distinct from the merits of any such claim, and the Court of Appeal's emphasis in that case on the fact that a witness who had given affidavit evidence of an offsetting claim had not been cross-examined (at [65] - [67]).
[5]
Whether there is a genuine dispute as to the amount due in respect of asphalt supplied after May 2012
As I noted above, the second claim in the Demand is an amount of $320,366.39 which is said not to have been paid for supplies of asphalt after May 2012. Diveva contends that the lesser amount of $207,331.69 has not been paid in respect of supplies after that date and relies on its accounting records to support that proposition.
Diveva relies on the following paragraph of Mr Pinson's first affidavit dated 24 November 2014, filed within the 21 day period permitted under s 459G of the Corporations Act, as sufficient to raise that issue:
"[Diveva] came to an agreement with [PBM] that [Diveva] would do work exclusively for [PBM]. [Diveva] would not charge [PBM] for that work but rather that the value of the work would be taken off the money owing to [PBM]. I am unable to depose to the veracity of the amounts claimed by [PBM] as [Diveva's accountant] is currently on annual leave and will not be returning to work until 2 December 2014."
Diveva also relies on the affidavit of Mr Greg Armstrong, its business manager, dated 20 February 2015, which was read reserving PBM's objection that the matters raised were not open by reason of the principle in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452; 21 ACSR 581 at 587. Mr Armstrong indicated his agreement to the amount of $1,508,453.06 claimed in the statutory demand for the amount due to PBM as at May 2012. Mr Armstrong denied indebtedness in respect of the further amount of $320,366.39 claimed and annexes a copy of Diveva's supplier ledger in relation to PBM for the period May 2012 to 1 November 2014, which is relied on to establish an outstanding amount owed by Diveva to PBM in the amount of $207,331.69.
PBM relies on the principle in Graywinter above to contend that it is not open to Diveva to raise the dispute as to the amount owing for goods sold and delivered since May 2012 because that dispute was not identified in Mr Pinson's first affidavit dated 24 November 2014. The weight of authority favours the view that this principle requires a fact-specific enquiry directed to whether the affidavit in fact supports the application, and the question is whether, expressly or by reasonably available inference, the grounds of challenge of the statutory demand were sufficiently identified in the affidavit: Financial Solutions Australasia Pty Ltd v Predella Pty Ltd [2002] WASCA 51; (2002) 26 WAR 306; 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 & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [27]ff; Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132; (2014) 46 WAR 483 at [43], [56]-[57]. I am not satisfied that the paragraph of Mr Pinson's first affidavit noted above sufficiently raises a dispute for the purposes of the Graywinter principle. It seems to me to do no more than reserve the position as to whether a dispute might or might not exist, depending upon his further inquiries with Mr Armstrong. It does not, in my view, identify the grounds of any challenge, where it leaves open the question whether such a challenge is made.
[6]
The nature of the offsetting claim
Diveva relies on an offsetting claim to set aside the Demand, being a claim that PBM supplied defective asphalt to it, in respect of many supplies over a considerable period of time and in respect of different jobs for different customers. I will address the detail of that claim below, after first identifying the applicable legal principles.
An "offsetting claim" for the purposes of s 459H(1)(b) of the Corporations Act is the amount of a claim or claims that a company has against the person who served the statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as the debt to which the demand relates: s 459H(5). If the Court is satisfied that the company has an offsetting claim, then the Court is required to calculate the "substantiated amount" of the demand by deducting any offsetting claim from the admitted amount of the debt: s 459H(2).
A company can establish an "offsetting claim" if there is a "serious question to be tried" or "an issue deserving of a hearing" as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 356-7. In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605, in the context of an offsetting claim, Thomas J observed that:
"… 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)."
The amount of an offsetting claim is the amount claimed by a party in good faith, so long as that claim as so quantified is not fictitious or merely colourable: Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787 at 790. In Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], Ipp J observed that it is not necessary, for a company to establish an offsetting claim, that it lead evidence as to the damages claimed in "meticulous detail"; however, it is necessary that:
"there must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof":
[7]
The nature of Diveva's offsetting claims
It is convenient first to identify the nature of the offsetting claims identified by Diveva, before turning to their particular aspects. Mr Pinson's first affidavit dated 24 November 2014 identifies the matters said to give rise to the offsetting claims, which he broadly describes as follows:
"On a number of occasions during the course of our business relationship with [PBM], [Diveva] has been supplied with sub-standard asphalt, contaminated asphalt, asphalt not complying with specification temperatures, unexplained breakdowns of delivery vehicles and delay in receiving asphalt."
Diveva contends that there is a serious question to be tried that PBM supplied goods that were not fit for purpose, in breach of a term implied by s 19 of the Sale of Goods Act 1923 (NSW) or an implied term to the effect that it would exercise reasonable skill and care in supplying products to Diveva. PBM responds that the evidence in support of the application to set aside the Demand did not identify a basis of such a claim and a relevant obligation is critical to the existence of an offsetting claim. I do not accept that submission, so far as it seeks to invoke the Graywinter principle or generally, because the reference to the commercial relationship between Diveva and PBM, their dealings in respect of the tender in respect of the Taree airport and the issues arising in respect of the supply of asphalt was sufficient to raise, by necessary implication, a claim under the Sale of Goods Act for breach of an implied term or in contract in respect of the relevant supply of goods.
Diveva identifies the consequences of PBM's claimed breach as including its loss of major customers, including local councils for which it had performed profitable work in earlier years and the cost of remedial work. Diveva points to correspondence exhibited to Mr Pinson's affidavits that suggests that several of its customers ceased dealing with it as a result of defective asphalt or defective works incorporating the asphalt, or at least that that matter adversely affected Diveva's customer relationships. Diveva accepts that there may be multiple causes of deteriorating relationships with customers, but contends that the evidence is sufficient to establish at least that a significant cause of the loss of customers is, to a reasonably arguable standard, the supply of defective asphalt by PBM. Diveva accepts that, obviously enough, questions of causation will also arise at trial.
[8]
The first category of claim - rectification works in respect of Greater Taree City Council works
Mr Giles, who appeared for Diveva, provided a summary of the quantification of Diveva's offsetting claim into ten categories, and I will deal with these categories in turn. The first category related to rectification work in respect of the Greater Taree City Council in respect of $40,000 (Pinson 1 [42], Pinson 2 [13]). This is a relatively confined claim, relating to the laying of three runs of asphalt provided by PBM which were said to have been contaminated, which were milled out and replaced over 2 days, with the cost of machinery and crew to Diveva being quantified at $20,000 per night for a total of $40,000. Mr Pinson refers to issues in respect of the asphalt provided for the works at Taree Airport, and also exhibits correspondence from Greater Taree City Council and records of meetings with the Council dealing with that issue and to costs incurred in replacement of contaminated asphalt. Mr Pinson's second affidavit supports the figure of $20,000 for nightly operational costs by reference to correspondence with Greater Taree City Council referring to the operational costs of Diveva per night and an invoice paid by Greater Taree Council relating to delay arising from a different matter.
The basis of this claim is clearly identified and there appears to be a real basis for the asserted calculation, in the nightly cost of works referred to in contemporaneous claims made by Diveva against the Council. Although that figure is not the subject of external corroboration, the decision in Crontec Automotive Tooling v Allsteel above indicates that such corroboration is not required, and Britten-Norman above is consistent with that view. The elaboration of the claim is sufficient for the court to make an estimate of the amount of the offsetting claim in monetary terms, of the kind referred to in Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd above. I am satisfied that an offsetting claim is established, to the requisite standard of a serious question to be tried, in respect of this amount.
[9]
The second category of claim - loss of contracts with Greater Taree City Council
The second category related to a claim for loss of contracts in respect to Greater Taree City Council (Pinson 1 [43] - [46]) in the amount of $534,000. Mr Pinson refers to the receipt of a show cause notice issued by Greater Taree City Council to Diveva on 5 April 2012, and his evidence is that Diveva has not been awarded further contracts from the Council since that date. The basis of this claim was undermined in Mr Pinson's cross-examination, as it emerged that Diveva was not seeking to tender for work from the Council in the relevant period and, as Mr Pinson accepted in cross-examination, Diveva did not in fact wish to work directly for Greater Taree City Council. The claim for loss of work through Kazac Civil, to which I will refer below, is at least in part an alternative to that claim, so far as it involves work done as a subcontractor, where Kazac Civil would have the direct relationship with Greater Taree City Council rather than Diveva having such a relationship. It seems to me that the claim in respect of the loss of work for Taree Council in the amount of $534,000 does not rise to the level of a genuine offsetting claim for these reasons.
The quantification of this claim also involves a significant issue, which also arises in other claims, so far as it depends on a claim that Diveva has a profit margin of 30%, at least at the level of particular jobs. Mr Pinson's evidence quantifies the damages suffered as loss of profit, calculated by reference to Mr Pinson's evidence that Diveva obtained work to the value of an average of $890,000 per year for Greater Taree City Council, inclusive of GST, between July 2003 and November 2014, from which he calculates two years loss of earnings of $534,000 based on an average net profit margin of 30%. However, I will address that issue below, since I have held that a genuine offsetting claim is not established in respect of this claim for other reasons.
[10]
The third category of claim - equipment costs
The third category, and a substantial claim, related to loss referable to the costs of Diveva retaining equipment on site in respect of the Taree regional airport works, initially quantified as $800,000 and subsequently as $2,120,000 (Pinson 1 [80], [82]; Pinson 2, [41]). Mr Pinson's evidence led in respect of delay at the Taree regional airport, leading to loss through equipment on the site, referred primarily to a four month period in which PBM's licence to operate supply of asphalt at night lapsed, although Mr Pinson also referred to incidents of delayed delivery of asphalt; incidents where delivery trucks developed problems, which in turn contaminated asphalt; and deliveries of contaminated asphalt to various sites. It is, I should note, entirely clear how the delivery of contaminated asphalt to other sites is said to have affected the work at the Taree airport.
Mr DeBuse submitted that there was no obligation upon PBM to supply Diveva with asphalt, particularly in circumstances where Diveva had not paid for previous supplies and Mr Pinson accepted that proposition in cross-examination (T40 - 41). Mr Giles responded that PBM's provision of prices for supply, used in Diveva's tender for the work gave rise to either a promise to supply, or a representation by reason of which Diveva would suffer loss if it were not supplied. I do not think that I can hold that either of those propositions is not genuinely arguable. The evidence also indicates that there were other causes of the delay in the Taree airport project from October 2010, the point at which PBM's licence to undertake night work lapsed, including wet weather on which Diveva subsequently relied to obtain extensions of time for the project from the Council (T29 - 30; Ex P1, pp 17 - 21). PBM also refers to contemporaneous acknowledgements that the causes of losses to Diveva were rain and weather, particularly in relation to the Taree airport project, and the losses suffered by Diveva in respect of the expansion of its business (Ex D3). Diveva accepts that the rain and weather and the losses suffered in its other business were causes of its losses but submits that the alleged deficiencies in the asphalt supplied by PBM were also causes of its losses. It seems to me that the existence of other causes of the delay does not exclude a plausible claim that the lapse in PBM's licence was also causative of the delay. I accept that there is a seriously arguable claim that the absence of the relevant licence caused at least some loss to Diveva, albeit that matters to which PBM refers indicates that it is likely to have been one of several operative causes of such a loss.
[11]
The fourth category of claim - Kazac Civil
The fourth category related to loss of work through Kazac Civil Pty Ltd ("Kazac Civil") in the Greater Taree area quantified as $366,871.33 (Pinson 1 [102] - [107]; Pinson 2 [46] - [49]). Mr Pinson led evidence of dealings with Kazac Civil, which have led to that entity changing asphalt supplier and to Diveva no longer receiving work from that entity, on the basis of issues as to asphalt quality. Mr Pinson also referred to documents produced by Kazac Civil under subpoena, apparently in other proceedings, by reference to which he supported a claim to income in the amount of $1,222,904.43 and, on the basis of an average profit of 30%, to the calculated loss of $366,871.33 (Pinson 2 [46] - [49]). The relevant paragraph of Mr Pinson's affidavit was admitted as a submission, which did not rise higher than the supporting documents, and those documents were not tendered. Nonetheless, the amounts claimed for loss of income (as distinct from profit) find some support in the level of income previously recorded in Diveva's accounts, although that is not allocated to particular regions or customers.
The quantification of this claim also raises the issue to which I referred above, that it depends on a claim that Diveva has a profit margin of 30%, at least at the level of particular jobs. Mr DeBuse submits, and I accept, that the evidence for a historical profit margin of 30% does not rise beyond Mr Pinson's statement of that figure, although I should recognise that Mr Pinson is experienced in the relevant business and his statement as to that profit margin is made on oath. Mr DeBuse also points to Diveva's financial records which record that Diveva made a profit of $94,000 for the financial year ending 30 June 2008, a profit of $82,573 in 2008-2009, a profit of $4,790 in 2009-2010, a loss of $742,000 in 2010-2011 and a profit of $4,229 for the financial year 2011-2012. For example, the profit and loss statement for Diveva for the year ended 30 June 2010 (Ex D3, p 107) records substantial contract receipts of approximately $7.1 million in 2009 and approximately $8.2 million in 2010, but also substantial expenditures, including for depreciation, fuel and oil, leasing charges, management fees and labour hire, material, subcontracting and plant hire, to generate profits of $82,573 in 2009 and $4,790 in 2010. Mr DeBuse submits that the level of profit recorded by those financial statements is inconsistent with the levels of profit margin adopted by Diveva in the calculations relied on to support its offsetting claim. He also points to contemporaneous email correspondence in which Diveva's representatives expressed the view that Diveva's making a profit of $1 million to support the level of repayments claimed by PBM "would be an almost impossible task" (Ex P1, p 2).
[12]
Fifth category of claim - Port Macquarie Hastings Council
The fifth category related to loss of an existing contract with Port Macquarie Hastings Council quantified in the amount of $322,536.69 (Pinson 1 [60] - [62]). Mr Pinson's first affidavit dated 24 November 2014 refers to an incident where Diveva laid asphalt in August 2011, the road failed within two days, and testing showed that the asphalt laid had not complied with the national standard for asphalt. He refers to the fact that the Council subsequently did not agree to the extension of the two year initial term of Diveva's tender for works for Council for a further 12 months, in April 2013, as had occurred in earlier years and, on June 2013, appointed a new panel of contractors for the supply, delivery and laying of asphalt in the Port Macquarie Hastings Council area. Mr Pinson also refers to proceedings between Diveva and Port Macquarie Hastings Council in the Supreme Court of New South Wales, where the Council claimed that Diveva had supplied asphalt that did not comply with the relevant specifications. Mr Pinson also refers to a substantial decline in the value of the work done by Diveva for Port Macquarie Hastings Council after this dispute arose.
Diveva's calculation of the loss of $322,536.69 in respect of this matter also depends on applying a profit margin of 30%, referable to January - June 2013. I am satisfied that a serious question arises that issues as to the quality of the asphalt supplied may have contributed to a loss of confidence by Port Macquarie Hastings Council in Diveva and may have contributed to the decline in the level of work given by the Council to Diveva, at least to the level necessary to establish a serious question to be tried. I am, also with hesitation, satisfied that the quantification of the claim establishes a serious question to be tried, at least to the standard recognised in Britten-Norman, albeit that the basis of the asserted profit margin of 30% is fragile as I noted above.
[13]
Sixth category - tender with Part Macquarie Hastings Council
The sixth category related to the loss of renewal of a tender with Port Macquarie Hastings Council quantified as not less than $1,920,000 (Pinson 1 [64] - [66]; Pinson 2 [28] - [29]). In qualifying this claim at this figure in submissions, Mr Giles did not rely on suggested escalations of earnings from that contract on a year by year basis which had been adopted in Mr Pinson's affidavit evidence. Mr Pinson's evidence was that the value of Diveva's work for Port Macquarie Hastings Council had increased each year in the 2005, 2008 and 2011 tenders and that, if Diveva had not fallen into dispute with Port Macquarie Hastings Council:
"[I]t is reasonable to expect that [Diveva] would have won the 2014 tender as it had won the 2005, 2008 and 2011 tenders. The loss to [Diveva] for not being awarded the [Port Macquarie Hastings Council] tender for 2014 is approximately $6.83 million. Using a profit margin of 30% this equates to a loss of $2.049 million."
Mr Pinson also refers (in his second affidavit) to invoices issued by SRS Roads Pty Ltd and Tropic Asphalt Pty Ltd, which were not led in evidence, to support a claim that they have undertaken approximately $2.8 million worth of work for Port Macquarie Hastings Council as at 20 August 2015 and, on the basis that Diveva makes a net profit of 30%, to claim the amount of $843,424.48 in lost profits on that work. The invoices that underlay the relevant calculation were not tendered and Mr Pinson's evidence was subject to a limiting order that it rose no higher than the supporting documents. However, the level of lost revenue claimed find at least some support in the level of revenue earned by Diveva in previous years, and recorded in its financial accounts. I am, again with hesitation, satisfied that the quantification of the claim establishes a serious question to be tried, at least to the standard recognised in Britten-Norman above, albeit that the basis of the asserted profit margin of 30% is fragile as I noted above.
[14]
Other categories of claim
The seventh, eighth, ninth and tenth categories related to rectification works in respect of a King Creek Road project quantified as $50,000 (Pinson 1 [78]). That claim relates to delay and failure to meet temperature specifications in respect of the delivery of asphalt by PBM in respect of works undertaken for Port Macquarie Hastings Council at King Creek Road. Diveva also makes claims in respect of allegedly contaminated or delayed supplies quantified as $46,062 (Pinson 1 [83]-[94]); a claim in respect of Elmac Plant Hire quantified as $40,000 (Pinson 1 [108]-[112]) and a claim in respect of Hopkins Consulting quantified as $8,000 (Pinson 1 [122]). Mr DeBuse, who appeared for PBM, did not put submissions in respect of those claims, which are not sufficiently material to either establish an offsetting claim, if other claims are not established, or to prevent an offsetting claim being established if other claims are established.
[15]
Outcome
The offsetting claims relating to the categories that I have held raise serious questions to be tried or issues deserving of a hearing for the reasons noted above total in excess of $2.8 million, even excluding the claims in the second and third categories, and substantially exceed the amount of $1,828,819.45 claimed in the first and second claims in the Demand. That result would follow even if some or all of those claims were discounted, at least to some extent, so far as they are loss of opportunity claims. In that situation, the demand must be set aside, leaving PBM to pursue a claim for debt in the ordinary way and allowing Diveva an opportunity to seek to make good, by way of defence or cross-claim, the claims identified in this application in that forum.
I note, for completeness, that I did not understand any alternative claim to set aside the Demand under s 459J of the Corporations Act to be pressed by Diveva. The matters which I have set out above do not seem to me to establish any other reason to set aside the Demand under s 459J of the Corporations Act, since there is nothing to suggest that the use of the statutory demand procedure by PBM in this case was an abuse of process or otherwise inconsistent with the statutory scheme under Pt 5.4 of the Corporations Act.
Accordingly, I order that the creditor's statutory demand dated 24 November 2014 be set aside. The Defendant must pay the Plaintiff's costs of the application as agreed or as assessed.
[16]
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: 06 May 2015
A genuine dispute is therefore not established as to the second claim, or the total of the first and second claims, of $1,828,819.45, in the Demand.
Several cases have addressed the extent of evidence which is required to establish an offsetting claim, an issue which squarely arose in this application. In Zenaust Imports Pty Ltd v Alembic Chemicals Works Co Ltd (1998) 28 ACSR 465, in circumstances where a creditor's statutory demand provided limited detail, Santow J held that an affidavit which went little further than an assertion that the creditor was indebted to the plaintiff on a balance of account was sufficient to establish a genuine offsetting claim. That case is distinguishable from this case, where PBM provided detailed information to support the Demand in Mr Cornish's affidavits.
In Stone Group Asia Pacific Investments v Johnston Taylor Corporate Ltd [1999] NSWSC 127 at [16], Master Macready observed that, in order to determine the amount of an offsetting claim:
"[T]he Court has to have some evidence on which it can base its decision. This is because the section requires it to determine the admitted amount after determining the amount of the offsetting claim."
In Lynch Management Group Pty Ltd v S.R. Electronics Co Pty Ltd [2001] NSWSC 39, Master Macready took into account a claim for loss of profits, in finding that an offsetting claim was established, where sales records led in evidence demonstrated the amount of monthly profit on an average basis.
In Crontec Automotive Tooling v Allsteel [2006] NSWSC 555 at [34], Austin J dealt with a submission that a table setting out total costs to remanufacture certain steel blocks was not sufficient to persuade the Court of the value of the offsetting claim asserted by the table. His Honour noted that:
"As far as quantification is concerned, it is unnecessary for the plaintiff to prove on the balance of probabilities either that it has suffered a specific quantified loss or that its loss was caused by the defendant. What is needed is for the plaintiff to show that the quantification of the offsetting claim that it asserts satisfies the test of plausible contention - that is to say, that the claim is not fictitious and that there is a real basis for the asserted calculation. … It is not necessary for the plaintiff to produce external corroboration of estimates, but the Court is unlikely to be satisfied that the standard has been reached if the plaintiff does no more than make an assertion of the amount of the offsetting claim, without providing any specific or particularised calculations to show how the final figure was reached."
His Honour there held that the relevant table satisfied the requirements for establishing an offsetting claim, notwithstanding that there was no external corroboration for them. His Honour again referred to that approach in LSI Australia Pty Ltd v LSI Holdings Ltd [2007] NSWSC 1406; (2007) 25 ACLC 1602 at [22], in holding that the evidence in that case fell "well short of what would be needed, in terms of particularity of valuation, to make out a case for a genuine offsetting claim under s 459H.
In Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 at [90], Pullin JA (with whom Newnes and Murphy JJA agreed) referred to Royal Premier Pty Ltd v Taleski above in identifying the test to be applied in establishing an offsetting claim, and observed (at [78]) that the evidence to support an offsetting claim need only be sufficient for the court to make "an estimate of the amount of the offsetting claim" in monetary terms. That decision was in turn cited for that proposition, with approval, in Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) above at [81].
The test for an offsetting claim was summarised by Brereton J in BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982; (2008) 68 ACSR 1 at [4] as follows:
"The test for determining whether there is a genuine offsetting claim is whether the Court is satisfied that there is a serious question to be tried that a party has an offsetting claim (Scanhill Pty Ltd v Century 21 Australasia [1993] FCA 618; (1993) 47 FCR 451) or that the claim is not frivolous or vexatious (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37). In other words, the claim must be bona fide and a truly existing fact and not spurious, hypothetical, illusory or misconceived (Ozone Manufacturing Pty Ltd v DCT [2006] SASC 91; (2006) 94 SASR 269 at [46]). In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743, Palmer J put it in the following terms (at [18]):
In my opinion, a genuine offsetting claim for the purposes of [Corporations Act] s 459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith" means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. 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 s 459H(1) and (2)."
In Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd above at [44], Young AJA (with whom Hoeben JA and Ward J, as her Honour then was, agreed) observed that the question for a primary judge, in determining the existence of an offsetting claim, is:
"to 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."
Mr Giles, who appeared for Diveva, also points to the observations of the Court of Appeal in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd above at [30]-[31] and [39]-[55], which it characterises as establishing the "relatively low minimum requirements" for demonstrating an offsetting dispute. The Court of Appeal there noted at [30] that:
"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 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 Ltd v Oscty Pty Ltd [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. 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".
The Court of Appeal there observed at [36] that there must, relevantly, be evidence that 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. The Court also observed that:
"It is apparent, therefore, that evidence sufficient to satisfy this test, given the time period in which the affidavit must be filed, cannot and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable." (at [36])
The Court of Appeal also observed at [46] that:
"In determining whether there is evidence of a genuine dispute as to the debt, or that there is an offsetting claim, except in extreme cases, the Court is not concerned to engage in an inquiry as to the credit of the deponent of the affidavit filed in support of the application."
At the same time, the Court of Appeal referred to Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 and recognised that the Court is not required to accept uncritically every statement in an affidavit, where it is inconsistent with undisputed contemporary documents, inherently improbable, does not have sufficient prima facie plausibility to merit further investigation or is an assertion of facts unsupported by evidence. The Court of Appeal summarised the position (at [47]) as being that the Court's role is:
"to determine whether there was plausible evidence to establish the existence of a genuine dispute [or offsetting claim], not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim."
The Court of Appeal there did not accept that inconsistent contemporaneous documents were sufficient to displace an offsetting claim, notwithstanding that they might pose "difficulties for the ultimate proof of the claim" (at [70]), and gave little weight (at [80]) to the absence of documents that might support a claim for loss of profit, although it held that an offsetting claim for loss of profits was not established in that case where essential integers in the calculation of lost profits had not been established. I do not understand the Court of Appeal's approach in Britten-Norman above to require the Court to eschew any evaluative exercise as to whether there is a plausible basis for an offsetting claim, where such an evaluation is contemplated by the earlier cases to which they refer, and seems to me to be necessarily required by any determination of whether there is a serious question to be tried, an issue deserving of a hearing, or a plausible contention requiring investigation.
Diveva also contends that the dispute between the parties is similar to a building case and points to Young J's observation in John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250 at 253 that such a case could generally not appropriately be determined on an application to set aside a creditor's statutory demand. I accept that, as a matter of common sense, it may be that genuine disputes and offsetting claims may readily arise in complex construction projects. Beyond that, it does not seem to me that much is to be gained by seeking to categorise cases in this manner, as distinct from applying the principles noted above in the particular case.
PBM responds that the offsetting claims advanced by Diveva:
"are implausible to a degree that the bona fides of the claim cannot be accepted and the amounts claimed are so highly improbable and so poorly quantified that even if there was a potential liability the quantification should be disregarded."
PBM also submits that the claim should not be accepted as made in good faith because they were not made during the period in which PBM supplied products to Diveva; they are advanced in the face of conduct inconsistent with the existence of such claims; the reasoning as to the existence of such claims is conjectural and speculative as to business that Diveva would have received; and the quantification of the claims is based upon false assertion and speculation and cannot be sustained in the fact of Diveva's financial documents.
PBM also relies on a deed dated 24 September 2013 (CB 1257) between PBM and Diveva which assigned to it retention moneys in respect of the runway contract; admitted an outstanding debt of $2,161,184.23 in Recital F, assigned the retention monies under the Taree airport contract to PBM (cl 2.1) and acknowledged that the balance of the debt after paying the retention sum would be due and payable (cl 2.3(2)). Those provisions would displace a genuine dispute as to the underlying debt as quantified in that deed, but Diveva does not seek to assert a genuine dispute in respect of that amount. PBM must go further, so as to submit that those provisions displace an offsetting claim, by relying on the absence of reference to such a claim in that deed. It seems to me that I cannot treat the absence of reference to that claim as having that result, where Diveva puts the submission, which is by no means implausible, that it chose not to complain of matters while it was continuing to deal with PBM as a supplier. It seems to me that there is also a plausible connection between the complaint and the loss of income in the present circumstances, so far as it is readily apparent that repeated issues as to the quality of asphalt supplied by PBM could lead to the loss of confidence by Diveva's customers, and thereby to the loss of their custom.
However, substantial issues also arise as to the quantification of this claim. As I noted above, the loss claimed by Diveva arising from this matter is quantified as $800,000 in Mr Pinson's first affidavit and $2,120,000 in Mr Pinson's second affidavit. I should set out the relevant paragraphs:
[Pinson 1 80] "In October 2010, [PBM] failed to renew its licence [causing] the Taree Regional Airport rehabilitation to be suspended for a period of 4 months. I estimate the cost to the plaintiff of having machinery on site, was required by the tender, for this period to be $800,000." …
[Pinson 1 82] It was a condition of the Taree Airport project that all work was done at night to allow the airport to operate as normal during the day. Consequently [PBM] was to maintain a night licence to supply [asphalt] at night. In October 2010 [PBM] failed to renew its licence causing the Taree airport project to be suspended for a period of 4 months. I estimate the cost to the plaintiff of having machinery on site, as was specified by the tender, for this period to be $800,000.
[Pinson 2 41] Since my first affidavit, I have not had the chance to calculate the number of operational nights which were lost as a result of the defendant failing to renew the asphalt licence which was 106 operational nights. The plaintiff has suffered loss as a result in the sum of $2,120,000.
The first two of these paragraphs in Mr Pinson's first affidavit are an estimate of the loss suffered, which seems to have been displaced by the much larger figure claimed in Mr Pinson's second affidavit. The amount of $800,000 for the relevant loss in that first affidavit reflects a calculation of delay of 40 operational nights at a cost of $20,000 per night. The calculation in Mr Pinson's second affidavit is introduced, confusingly, by the reference to Mr Pinson not having had the chance to calculate the number of nights lost. The increased amount of $2,120,000 claimed in the second affidavit reflects a calculation of 106 operational nights at the same cost of $20,000 per night (T32). Mr Pinson accepted in cross-examination that he had not personally undertaken any analysis to determine whether asphalt could have been laid for 106 nights over an extended period, if PBM's licence had not lapsed over that period, notwithstanding the wet weather indicated by contemporaneous documents, which he accepted would have prevented laying asphalt on a wet runway, and he said that he had relied on his staff for this calculation (T33 - 34). It also appears, from Mr Pinson's cross-examination, that Diveva could have acquired asphalt from another supplier, while PBM's licence to supply at night had lapsed, but did not do so because it had tendered for the contract on the asphalt price agreed with PBM (T37).
It seems to me that Mr Pinson has made no real attempt to determine on which nights asphalt could have been laid, given the acknowledged weather conditions, so that work was in fact lost or costs incurred by reasons of the lapse of PBM's licence, and that the basis disclosed for Diveva's claim for operational costs calculated over 40 nights in the first calculation and 106 nights in the second is fragile, at best. I recognise that Mr Pinson has advanced this claim on oath and did not abandon it in cross-examination, although he did little to support it other than refer to the work done by his staff. On that other hand, the question whether the weather was sufficiently wet on particular nights to prevent asphalt being laid is obviously a question of fact that would likely be the subject of detailed evidence in substantive proceedings. It seems to me arguable that a claim quantified on this basis cannot be treated as plausible or raising a serious issue warranting further inquiry, and this difficulty goes beyond what the Court of Appeal described in Britten-Norman as "difficulties for the ultimate proof of the claim" (at [70]), and that the difficulties here are such that the court could not make any sensible estimate of the amount of this offsetting claim in monetary terms, of the kind referred to in Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd above. That view seems to me open notwithstanding that a claim that involved a reasoned attempt to identify those nights in which PBM's failure to hold a licence rather than wet weather had prevented to work would very likely have established a serious question to be tried in respect of, potentially, a lesser claim. At the least, there seems to me a real difficulty where this claim (particularly in its second version, nearly three times as much as its first) may well be substantially overstated, and the form in which Mr Pinson's evidence is given does not allow the Court to assess any lesser amount that might have been the subject of a proper claim. It is, however, not necessary to determine this question since the findings that I reach below as to other claims indicate that the Demand must be set aside in any event.
Mr Giles responds that Diveva's profit margin on particular projects could have been 30%, as Mr Pinson indicates, notwithstanding that any profit generated at a project level was reduced by corporate overheads (including, it should be recognised, management fees) not allocated to particular projects, prior to determining the Company's profit and loss. Mr Giles also points out that the analysis of the profitability on particular contracts would be complicated by fixed costs, including for example depreciation on owned equipment, interest and leasing costs, which were likely to be the costs of leased equipment, and potentially also management fees and labour hire. He submits that a lost project might well be more profitable than the Company's overall level of profitability, to the extent that fixed costs were already covered by other projects. It does not seem to me that proposition could be characterised as not seriously arguable or open to proof at a substantive hearing.
Although Mr Pinson's affidavit goes no further than his statement of Diveva's profit margin of 30% on particular contracts, it does not seem to me that the limited profit recorded in the Company financial statements is necessarily inconsistent with that calculation, so far as at least some of the expenditures disclosed by the accounts would, as Mr Giles points out, have been overhead of the business generally, or, to put it another way, fixed costs, rather than arising in respect of particular projects. The email on which PBM relies so as to establish inconsistency with the level of profits claimed by Diveva also relates to the ultimate profitability of Diveva, rather than to the profitability of particular contracts prior to taking into account overhead that may not be allocated to those projects. I am, with some hesitation, satisfied that the quantification of the claim establishes a serious question to be tried, at least to the undemanding standard recognised in Britten-Norman, albeit that the basis of the asserted profit margin of 30% is fragile.