- BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd

Whether an offsetting claim is established

Mr Somerville made clear in oral submissions that Pages Sales placed primary reliance on its offsetting claim (T9) arising from the 21 December invoice issued by Pages Sales to EBS. 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 a creditor's 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 a 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) 12 ACSR 341 at 356-7; Re Halal Meats Pty Ltd [2015] NSWSC 2051 at [18]. In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605, 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 off-setting claim (not the likely result of it)."
In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18], Palmer J observed that: "A genuine offsetting claim … means a claim or 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."
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) 47 FCR 451; 120 ALR 173; 12 ACSR 341) 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) 94 SASR 269; [2006] SASC 91 at [46]). In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 (Macleay Nominees), 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 Beauty Health Group Ltd v Sholl [2011] NSWSC 77 at [23], Barrett J observed that s 459H(1)(b), read in conjunction with the definition of "offsetting claim" in s 459H(5): "… requires the court to consider whether the plaintiff has a 'genuine' claim against the defendant in respect of the matter raised. It is also necessary to ascribe an 'amount' to any 'genuine' claim in order to determine, under s 459H(2), the 'offsetting total' which plays a central part in determining whether the 'substantiated amount' is less than the statutory minimum of $2,000. The court's task is not to make any final choice between the competing contentions about the relevant matter. It need only see that the plaintiff has asserted a claim and that the claim rises to the level of a serious question to be tried (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341), is based on a cause of action advanced in good faith for an amount claimed in good faith (Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743) and is not frivolous or vexatious (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37)."
In Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 ("Britten-Norman") at [30]-[31] and [39]-[55], the Court of Appeal in turn referred to the relatively low minimum requirements for demonstrating an offsetting claim. 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".
Not surprisingly, Mr Somerville also emphasised the Court of Appeal's observation in Britten-Norman above (at [36]) that, although there must 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 as to the existence of an offsetting claim: "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." Mr Somerville also emphasised the Court of Appeal's observation (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 enquiry as to the credit of the deponent of the affidavit filed in support of the application." 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."
At the same time, in Re Diveva Pty Ltd [2015] NSWSC 509, I in turn observed (at [26]) that: "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." Mr Somerville did not contend that Britten-Norman above precluded such an assessment.
Mr Somerville submits that: "The invoiced amount [in the 21 December invoice] is for the provision of administrative services performed by Pages Hire and [Pages Sales] for [EBS] from 1 February 2012 to 17 December 2015." However, the large part of the amount invoiced by the 21 December invoice relates to a claim for payment for administrative services alleged to have been provided by Pages Hire not by Pages Sales. Mr Somerville recognises that EBS contests Pages Sales' entitlement to invoice it for work done by Pages Hire and submits that there is evidence before the Court of "notice of the assignment" given to EBS on 9 September 2015. That submission refers to the email of that date to which I have referred above. That email does not refer to an assignment, but instead to a practice which it is suggested should in future be adopted as between Pages Sales and EBS.
Mr Somerville also submits that the "assignment" of the debt to Pages Sales was impliedly accepted by EBS on the basis that it continued arrangements previously in place with Pages Hire; did not raise any objection to the substance of the email "giving notice of the assignment"; rendered invoices to Pages Sales which it had previously rendered to Pages Hire; and there was no reconciliation upon substitution of Pages Sales into the agreement. However, the fact that EBS would in future deal with Pages Sales on the same basis as it had previously dealt with Pages Hire does not seem to me to require or imply whether a debt previously owed to Pages Hire had been assigned to Pages Sales; the email did not in fact give notice of an assignment, so no inference arises from EBS not taking an objection to such a notice; and the fact that EBS, at Pages Sales' invitation, re-invoiced it for amounts due by Pages Hire does not support the inference that Pages Hire had diverted a substantial asset, the debt Pages Sales now claims against EBS, to Pages Sales. It should also be recognised that the invoices that are the subject of the Demand are for services supplied by EBS to Pages Sales, after Pages Hire had ceased to trade, so there is no other reason why a debt allegedly owed to Pages Hire should be set off against a claim against Pages Sales.
Mr Lees responds, first, that the offsetting claim asserted by Pages Sales is not established because there was no agreement between Pages Sales and EBS to pay for the alleged services provided (primarily by Pages Hire) to EBS. Mr Lees refers to Mr Watt's evidence in support of the proposition that there was no agreement between Pages Sales and EBS to pay for the claimed administrative services. Mr Lees points out that Mr Watt leads evidence in admissible form and denies that there was any agreement to pay the Pages Group $850 per week or any other amount (Watt 11.3.16 [5], [15]). Mr Lees submits that, on the other hand, Mr Boros' evidence as to that agreement is vague and not in admissible form. Mr Lees also submits that, for various reasons, Mr Watt's account of the agreement is more plausible that Mr Boros' account, but the Court cannot and should not determine that matter in an application of this kind, where witnesses are ordinarily not cross-examined and were not cross-examined in this case. It is plain, as I have noted above, that there is a dispute between Mr Watt and Mr Boros as to these matters, and the authorities to which I have referred above emphasise that it is not the Court's role in an application of this kind to determine that dispute. It does not seem to me that Mr Watt's evidence is capable of excluding the existence of any offsetting claim that is otherwise established.
Mr Lees initially submitted, second, that the debt claimed by Pages Sales is not a genuine bona fide claim, and that claim was advanced to defeat the debt claimed in the Demand. Several matters might give rise to cause for scepticism as to whether the 21 December invoice on which Pages Sales relies for its offsetting claim is genuine in character. These include the fact that it purports to charge for services provided for several previous years, where there is no evidence that a receivable in respect of the costs of those services had previously been recognised in Pages Hire's financial records; there appears to be no objective basis for the amount of the charge claimed; and the invoice was issued shortly after the breakdown of the relationship of the parties and in circumstances that Pages Sales might well have anticipated that EBS would seek to recover the debt claimed by it. However, I recognise that the Court of Appeal's decision in Britten-Norman above suggests that the Court may only give limited weight to the absence of contemporaneous documents supporting the offsetting claim in determining whether it is genuine in character. Mr Boros was also not required for cross-examination and it was not expressly put to him that the invoice was a fiction, intended to defeat a claim by EBS against Pages Sales in respect of the relevant debt. I would not draw such an inference, where it was not put to Mr Boros to allow him the opportunity to answer it, and Mr Lees who appeared for EBS properly withdrew a submission of that kind on that basis.
Mr Lees submits, third, that even if there was an agreement for the provision of services to EBS, the bulk of any debt was owed by EBS to Pages Hire and not to Pages Sales. Mr Lees points out that Pages Hire ceased trading on 30 June 2015, and that $151,300 of the purported administration fees would relate to that entity and only $20,400 (being the fees claimed for 24 weeks between 30 June and mid-December 2015) would relate to Pages Sales. Mr Lees points out that Pages Sales has not adduced any evidence of an assignment to it of the entitlement to administration fees due to Pages Hire; that the email dated 9 September 2015 from Ms Connell to Ms Puntoriero, sent on the date on which an administrator was appointed to Pages Hire, does not refer to any debt owed by EBS to Pages Hire; and that no inter-company loan account recording such a debt has been placed in evidence by Pages Sales. Mr Lees also submits, with considerable force, that Pages Sales did not have the power to cause debts purportedly owed to Pages Hire to be assigned to Pages Sales on or after the date of appointment of an administrator to Pages Hire on 9 September 2015, and also not at the date the 21 December invoice was issued by Pages Sales. Mr Lees submits, fourth, that, if EBS owes Pages Sales an amount for payroll services, the amount recoverable on a quantum meruit would be significantly less than the $850 per week claimed by Pages Sales, having regard to Ms Puntoriero's evidence as to the cost of provision of such services by a bookkeeper.
In summary, no serious question has been established that the substantial part of the debt invoiced by Pages Sales was owed to it rather than to Pages Hire. The correspondence on which Mr Boros relied to assert that Pages Sales had assumed responsibility for administrative functions previously provided by Pages Hire did not establish that matter and, even if it had done so, that would not establish a seriously arguable question that it was entitled to appropriate a large amount allegedly due to Pages Hire for services previously provided by Pages Hire and not by Pages Sales. It does not seem to me that Pages Sales can establish a seriously arguable basis for a contention that an assignment had in fact occurred or been authorised by any proper corporate decision of Pages Hire, where it is not apparent that the administrator authorised such an assignment, or that the director(s) or management of Pages Hire had the authority to make, or made, such an assignment on the date an administrator was appointed to Pages Hire or that the diversion to Pages Sales of a substantial debt allegedly owed by EBS to Pages Hire could be for the corporate benefit of Pages Hire. While Mr Somerville submits, and I accept, that a detailed factual inquiry into the validity or otherwise of any assignment is beyond the appropriate scope of an application of this kind, Pages Sales must at least raise a seriously arguable claim as to that matter in order to establishing an offsetting claim. There is also no evidence to raise a seriously arguable question that Pages Sales had authority to invoice that debt on Pages Hire's behalf. It seems to me that an offsetting claim is not established by reliance by Pages Sales on an amount which was not due to it, but to another entity.
It remains to deal with the relatively small amount of $20,400 inclusive of GST (as agreed by Counsel at T24) which forms part of the 21 December invoice, and relates to the services allegedly provided by Pages Sales to EBS from 30 June 2015. With hesitation, but having regard to the approach adopted by the Court of Appeal in Britten-Norman above, it seems to me that I must treat the matters raised by Pages Sales as giving rise to an offsetting claim in respect of that amount. Again with hesitation, it seems to me that I must accept, at least as giving rise to a matter that warrants further inquiry, Pages Sales' claim as to the reasonable amount that can be charged for those services. I recognise that EBS has led evidence to the contrary, which may well be accepted at a final hearing, but that does not seem to me to be sufficient to deprive that lesser claim of an arguable basis.

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