Beauty Health Group v Sholl

Judgment 1The plaintiff, Britten-Norman Pty Limited ("BN") initially sought orders under s 459H(1)(b) and 459J(1)(b) of the Corporations Act 2001 (Cth) setting aside a creditor's statutory demand dated 26 November 2012 ("Demand") issued by the defendant, Analysis and Technology Australia Pty Limited ("ATA") to BN. In the course of submissions, that application was extended to contend that there was a genuine dispute as to the claimed debt, for the purpose of s 459J(1)(a) of the Corporations Act by reason of a set-off arising from the claims giving rise to the alleged offsetting claim. 2The Demand described the relevant debt as outstanding moneys for the use of equipment and the provision of support between April 2010 and September 2011, as set out in a table of accounts showing the date and amount of moneys invoiced, when payments were received, and how the outstanding balance was calculated. The amount claimed was $128,421.50. 3The Demand was verified by an affidavit sworn 26 November 2012 by Mr Paul Fothergill, the managing director of ATA, which identified the claim as arising for "moneys due on the lease of equipment and services" provided to BN between April 2010 and September 2011; stated Mr Fothergill's belief that there was no genuine dispute about the existence or amount of any of the debts; and claimed that Mr Baddams, for BN: "has admitted the debts are owed to [ATA] in conversation and in numerous e-mails to me in my capacity as a director". 4The application to set aside the Demand is supported by an affidavit of Mr David Baddams dated 13 December 2012. Mr Baddams is a director of BN. Mr Baddams' evidence is that BN hires an aircraft, which is configured for aerial surveillance operations, to another entity, Airborne Surveillance (Australia) Pty Limited ("ASA"). Mr Baddams refers to conversations with Mr Fothergill, on behalf of ATA, in respect of a surveillance management system suitable for fire fighting, and acknowledges that, in March 2009, BN agreed to lease relevant equipment and obtain personnel and support from ATA, and equipment was installed in the aircraft in April 2010. 5Mr Baddams' evidence is that the equipment was used in trials and demonstrations for fire fighting services, but did not give the accuracy required by those services or perform to the standard promised by ATA. Mr Baddams' evidence is that he had numerous conversations with Mr Fothergill in respect of the inaccuracy of the surveillance equipment. Mr Baddams indicates that, after an unsuccessful demonstration in February 2011, he requested removal of the equipment from the aircraft, although it appears that in fact that did not occur. 6By letter dated 8 May 2011, ATA required payment of an amount owing then quantified as $122,553 inclusive of GST. 7Mr Baddams refers to the use of the surveillance equipment in one further trial in September 2011 and gives evidence that the requirements of the fire services were again not satisfied by the accuracy of the system; the system was then removed from the aircraft; and BN has since "purchased" a different surveillance management system at a cost of $400,000. The reference to "purchase" here provides little detail as to the form of such a "purchase" and, in particular, whether it is suggested that BN has paid that amount in full from its own resources, as an outright purchase of the equipment, as distinct from, for example, licensing or leasing the equipment. 8Mr Baddams' affidavit contends that ATA supplied defective equipment and engaged in misleading and deceptive conduct in its dealings with BN; that ASA has lost the opportunity to win contracts with the fire services and that has resulted in BN losing the opportunity to hire the aircraft to ASA. 9Mr Baddams gives evidence, not supported by contemporaneous documentation, of a hiring rate for the aircraft of $1750 per flight hour; an expected profit of $400 per flight hour, which is also not supported by documentation or by identification of BN's expenses in that regard; and of ASA's expectation that the aircraft would have flown 360 flight hours per year had it secured the relevant fire surveillance contracts, which is not expanded by evidence as to the basis of that expectation, or by identification of which contracts would be required to be secured by ASA to fulfil that expectation; and of BN's expected gross profit of $144,000 per year in its first year of operations. That gross profit figure is derived by multiplying the expected flight hours by the expected gross profit per flight hour, but can rise no higher than the basis of the respective expectations. 10Mr Fothergill's evidence in response, by his affidavit dated 1 March 2013, outlines ATA's dealings with BN in respect of the lease of the surveillance management system and the provision of associated services. Mr Fothergill's evidence is that BN did not challenge the invoiced amounts or advise of any problems or issues with the relevant services or equipment, and he refers to emails and conversations in which that issue is not raised. For example, in an email dated 16 May 2011 Mr Baddams stated that: "[i]t is a fact that BN PL owes A & T and I need to work out a way forward with you"; Another email dated 22 August 2011 refers to opportunities with two fire services not going forward where "they may choose a rotary wing solution" and does not refer to any issue as to the accuracy of the surveillance system supplied by ATA; and later emails referring to BN's taking steps to make payments again without identifying any such issue. A further email dated 13 July 2012 from BN to ATA argued that nothing could be achieved from legal action by ATA but again identified no issue as to the accuracy of the systems supplied by ATA. 11By an affidavit in reply dated 15 March 2012, Mr Baddams denies that he did not raise concerns as to the performance of the surveillance management equipment, but also gives evidence that he was reluctant to enter a dispute with ATA because his son was, until late 2012, employed by that company, and otherwise takes issue with Mr Fothergill's evidence. 12It is convenient first to address the question whether an offsetting claim is established for the purposes of s 459H(1)(b) of the Corporations Act. An "offsetting claim" for the purposes of that section is the amount of a claim, or claims, that a company has against a person who served a statutory demand by way of counter-claim, 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). A company may 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) 47 FCR 451; 12 ACSR 341. In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18], Palmer J observed that an offsetting claim: "means a claim or cause of action advanced in good faith, for an amount claimed in good faith" and that the requirement for "good faith" refers to the claim being: "arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine the claim is not fanciful". 13In Beauty Health Group 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 $2000. 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...is based on a cause of action for an amount claimed in good faith...and is not frivolous or vexatious...[citations omitted]". 14In Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], Ipp J noted that it was not necessary, on an application to set aside a statutory demand for an offsetting claim for evidence as to damages to be given in "meticulous detail". However, his Honour also observed 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". His Honour there held that the absence of evidentiary material from which damage suffered by the appellant could be calculated was fatal to its claim to set aside the statutory demand. 15BN contends that there is a genuine dispute as to whether Mr Fothergill, on behalf of ATA, assured Mr Baddams that ATA's system would give BN the accuracy it needed to win fire fighting contracts. There is a dispute as to that question, in the sense that Mr Baddams asserts that such an assurance was given and Mr Fothergill denies it. However, the absence of contemporaneous documentation to record what, one might have thought, would be a significant assurance, if given, is striking. BN also contends that there is a dispute about whether ATA's system fell short of the necessary standard and about whether BN had been given promises about that matter, and whether BN had raised claims as to issues as to the accuracy of the system. There is also a dispute in that matter, again in the sense that Mr Baddams contends that such promises and failures occurred, and Mr Fothergill denies that. Again, there is no contemporaneous documentation recording such promises or such failures, in circumstances that one might have thought that the fire services or BN would have recorded any such issue, if they existed, or referred to it in correspondence. 16BN identifies its offsetting claims as arising out of the failure of the system to meet the relevant accuracy requirements for fire fighting, and indicates claims for misleading conduct, breach of an implied term in the contract for provision of the system and associated services that it would be reasonably accurate for the relevant purpose and breach of an implied warranty that the system was fit for a known purpose. BN contends that the emails on which ATA relies as admissions of the debt are not inconsistent with the existence of such an offsetting claim. It appears that the claim is quantified either by reference to the cost of purchase of the replacement surveillance management system, of which the evidence is no more than Mr Baddams' statement that it was purchased and installed for $400,000, or alternatively the loss of profit from BN's first year of operation quantified as $144,000. 17ATA in turn contends that any genuine dispute is excluded by the contemporary correspondence evidencing the fact that further payments were made after trials with fire authorities were completed and that these matters make clear that BN's contentions are devoid of substance and no further investigation is warranted. 18There is, in my view, a first difficulty with BN's reliance on an offsetting claim that it rests on no more than Mr Baddams' evidence, unsupported by contemporaneous correspondence referencing the complaints now advanced, although I am conscious that BN seeks to address this difficulty by pointing to Mr Baddams' son's working for ATA. However, the more fundamental difficulty with the offsetting claim is that there is not, in my view, material before the Court that would allow it to conclude that any loss or damage sustained by BN was of an amount that exceeded the Demand or of a particular amount that should be offset against the debt claimed. Even if I had been satisfied that a serious question were established as to the existence of misleading or deceptive conduct or a breach of contract, it does not seem to me that BN's damages could be quantified as the entire cost of a different surveillance system, where that would make no allowance for any benefits derived from the operation of that system, as distinct from, for example, the additional cost to which BN had been put by having had the ATA system prior to installing the later system. In any event, as I have pointed out above, there is no evidence of substance as to the purchase, cost and terms of purchase of the replacement system in this case. So far as the separate claim for loss of profit is concerned, the evidence is not sufficient to support the quantification of flying hours, or the profit per flying hour, or to identify what contracts had to be won by ASA to make good that quantification, or the basis for any expectation that all or any of those contracts would in fact have been won by ASA had there been no allegedly misleading and deceptive conduct or breach of contract by ATA. 19In that situation, the Court cannot make a reasonable assessment of the amount of BN's asserted claim, so as to determine that it exceeds the debt and set aside the Demand on that basis, or determine a lesser amount which should be setoff against the amount of the debt. I find myself, in that regard, in the situation in which Ipp J found himself in Royal Premier Pty Ltd v Taleski, to which I have referred above. 20BN also seeks to establish a set-off to the debt, so as to establish a genuine dispute as to the debt for the purposes of s 459H(1)(a) of the Corporations Act. I have borne in mind that all that is required to establish a genuine dispute is a plausible contention that warrants further enquiry: Eyote Pty Ltd v Hanave (1994) 12 ACSR 785. Here, however, BN's claim for set-off depends on the same matters as its offsetting claim, and requires that the offsetting claim be such as to extinguish the debt. I cannot find a plausible contention that such a set-off extinguishes the debt, or gives rise to a genuine dispute as to its existence, where I have concluded above that the evidence does not allow the Court to reach a reasonable assessment of the amount of any claim by BN against ATA. 21I should add that, where a debt is claimed and an unliquidated claim for damages is asserted in response, the usual position is that such claim is assessed as an offsetting claim under s 459H(1)(b) of the Corporations Act and not as giving rise to a set off impugning the existence of the debt: Construction Management Services Pty Ltd v Bidnia Group Pty Ltd [2008] NSWSC 1152 at [5]. If there is an exception to that proposition where a failure of performance would amount to a total failure of consideration, of the kind considered in Independent Portable Building Systems Pty Ltd v Modular Building Systems Pty Ltd [2011] FCA 511, it was not relied upon by BN in this application and the evidence before me would not have supported its application. 22Finally, BN contended that the statutory demand could be set aside for some other reason under s 459J(1)(b) of the Corporations Act. A statutory demand can be set aside on that basis if there is an inconsistency between the demand and the integrity of the process established under Pt 5.4 of the Act, or the demand amounts to an attempted subversion of the statutory scheme, or there is some other unconscionability in the demand: see, for example, Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300; (1996) 20 ACSR 746, and the authorities referred to in Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [43]. BN did not here identify any other basis to set aside the Demand under s 459J(1)(b) other than the claim for deficiencies in the equipment and service provided by ATA to which I have referred above. Where that claim did not establish an offsetting claim or a genuine dispute as to the claimed debt, then I do not understand it to establish that reliance on the Demand is otherwise inconsistent with the statutory scheme or is otherwise unconscionable for the purposes of s 459J(1)(b) of the Corporations Act. 23The Plaintiff did not submit that an order for costs would not follow the event. 24Accordingly, I order that: