By application filed on 22 April 2015, the Plaintiff, PPK Group Ltd ("PPK Group") applies, under, relevantly, s 459H of the Corporations Act 2001 (Cth) to set aside a creditor's statutory demand dated 1 April 2015 ("Demand") served by the First Defendant, AC Mining Investments Pty Ltd ("ACMI") and the Second Defendant, Connexa Pty Ltd ("Connexa") on PPK Group. The Demand identified a total debt of $233,333.34, made up of two amounts of $116,666.67, described as follows:
"Pursuant to an Asset Repurchase Agreement [("APA)"] entered into on or about 28 August 2014 … PPK Mining Equipment Pty Ltd [("PPKME")] and PPK (IP) Pty Ltd [("PPKIP")] agreed to pay to the creditors the sum of $116,666.67 on 28 February 2015 and the sum of $116,666.67 on 28 March 2005. [PPKME] and [PPKIP] did not pay those amounts (or any part thereof) to the creditors. Pursuant to the guarantee clause 15 of the APA, [PPK Group] is liable to pay those amounts to the creditors."
The Demand was verified by Mr Alan Chapman, a director of AC Mining and Connexa and his verifying affidavit described the relevant debt in the same terms as the Demand, and verified that the amount of $233,333.34 claimed was due and payable by PPK Group and that he believed there was no genuine dispute about the existence or amount of the debt.
By way of background, ACMI sold engine management systems which are a component of mining equipment known as a "COALTRAM" which is used in underground coalmining in high methane gas environments and is sold to end users in the mining industry. ACMI previously sold those engine management systems exclusively to that third party, which installed those units in the COALTRAM vehicles which it then sold. Entities within the PPK Group acquired the shares in that third party in December 2013 and thereafter undertook that business and later acquired the business relating to the engine management systems from ACMI and Connexa.
The APA provided for entities within the PPK Group to acquire, from ACMI and Connexa, the intellectual property rights, inventory and equipment to allow PPKME and PPKIP to manufacture the engine management systems. It is convenient to say something further as to the terms of the APA at this point before turning to the affidavit evidence led by the parties. Clause 2.1 of the APA provided for the sale of the inventory to PPKME, the sale of intellectual property to PPKIP and the sale of tools and equipment to PPKME for a specified purchase price. Clause 4.1 provided for the payment of the Completion Amount (as defined) at Completion and the balance by consecutive monthly instalments of $116,666.67 commencing one month after the Completion Date.
The APA also contains a warranty as to the truth, accuracy and completeness of information given by the Sellers to the Buyers, and that all details relating to the Assets that would be material for disclosure to a prudent intending purchaser had been disclosed. Clause 9.4 of the APA in turn includes a provision that qualified the warranties by matters fairly disclosed in Disclosure Documents (as defined) but that qualification was in turn narrowed as follows:
"The Sellers acknowledge the vast volume and number of Disclosure Documents delivered by the Sellers to the Buyers and warrant to the Buyers that none of the Disclosure Documents contain any information, or qualification of a Warranty, which would have a material adverse effect on the Assets or the value of the Assets acquired by the Buyers pursuant to this agreement."
PPK Group in turn relies on a claims procedure set out in cll 9.5 - 9.9 of the APA and cl 9.10 of the APA which provides that:
"If any payment or allowance is made by the Sellers for, or in respect of, a breach of any of the warranties, the payment is to be treated as a reduction in the Purchase Price".
By cl 9.11 of the APA, ACMI, Connexa and Mr Chapman indemnified PPKME and PPKIP (but not, in terms, PPK Group) from and against any Claim (as defined) which they paid, suffered, incurred or were liable for in respect of any breach of the warranties and any breach by ACMI, Connexa or Mr Chapman of the APA. Pursuant to cl 15 of the APA, PPK guarantees the payment of the "Guaranteed Moneys", which are defined to include all monetary liabilities of PPKME and PPKIP under the APA and guarantees the performance of their obligations under the APA.
PPK relied on the affidavit of its director, Mr Jury Wowk dated 23 April and 24 July 2015. Mr Wowk's evidence is that PPKME and PPKIP paid the Completion Amount (as defined) and then five instalment payments of the specified amount plus GST. Mr Wowk acknowledges that instalment payments due by 28 February 2015 and 28 March 2015 were not been paid for reasons set out in his affidavit. Mr Wowk refers to suggested problems with the engine management systems identified in several Improvement Notices issued by NSW Trade and Investment under s 191 of the Work Health and Safety Act 2011 (NSW) in respect of issues relating to COALTRAM throttle responses. He also refers to the issue of a prohibition notice by NSW Trade and Investment under s 195 of the Work Health and Safety Act in respect of the use of COALTRAM vehicles at a mine in Mt Kembla, New South Wales, and indicates an expectation that other notices of this type will be issued until the issue with COALTRAM throttle responses is addressed. Mr Wowk gives evidence, on information and belief from a consultant to PPK Group, that one of the causes of the relevant issues is a lack of conformal coating on the throttle sensor printed circuit board, which is said also to amount to a non-conformity with relevant certificates of conformity which confirm the suitability of the equipment for use in underground mines. Mr Wowk also refers to an issue concerning failure of battery packs which he attributed to manufacture of those battery packs without "MOSFETs" which are a transistor used for amplifying or switching electronic signals.
Mr Wowk also gives evidence of alleged pre-contractual nondisclosures in respect of the APA, refers to the intention of PPKME, PPKIP and PPK Group to make claims against ACMI, Connexa and Mr Chapman, and identifies the possibility of claims for misleading and deceptive conduct under s 18 of the Competition and Consumer Act 2010 (Cth) Sch 2 ("Australian Consumer Law"), claims for breach of warranty under the APA or claims seeking a reduction of the purchase price under cl 9 of the APA. Mr Wowk in turn estimates that the costs of replacement of throttle sensor units is in the order of $202,500 and refers to the possibility that, rather than replacing battery packs as they fail, PPKME will replace all battery packs held in the field or in stock at an estimated cost of $900,000. Those amounts would, of course, substantially exceed the amount of the Demand.
By his affidavit dated 30 June 2015, Mr Chapman responds to the matters raised in Mr Wowk's first affidavit. Mr Chapman takes issue with numerous factual matters addressed in that affidavit, leading evidence that, inter alia, no throttles were sold to PPK under the APA, and throttles were previously sold to another party; the lack of conformal coating is a "non-issue" because circuit boards are fully encapsulated in a product described as "SILGEL"; that other factors may have given rise to difficulties with COALTRAMS, including missing connector seals and "weather boots"; that PPK Group's technical assessments are "inadequate and inconclusive"; that issues relating to throttle delays were within PPK Group's knowledge during the negotiation of the PPA; that the current issue as to throttles was also "active" during the due diligence process and an improvement notice was issued during the period of negotiation of the APA; that only one battery module was supplied under the APA; the battery module has specialist requirements; and that PPK Group's investigations and conclusions as to the question of battery packs are incorrect. Mr Chapman also addresses the function of certificates of conformity and the circumstances of quality assessment reports relating to Connexa in respect of the manufacture of engine management systems.
Mr Wowk's affidavit dated 24 July 2015 in response to Mr Chapman's affidavit in turn reiterates PPK Group's contention that the lack of a conformal coating on throttle sensor printed circuit boards is a cause of issues relating to COALTRAM throttle responses and that that issue was not disclosed prior to the entry into the APA. Mr Wowk takes issue with the proposition that throttle circuit boards of the engine management systems only require encapsulation in SILGEL and points to design drawings that refer to conformal coating of the relevant circuits as well as encapsulation of the assembly in SILGEL. Mr Wowk gives evidence, on information and belief, that SILGEL does not qualify as a conformal coating. Mr Wowk denies that PPK was aware of the present throttle issues, as distinct from an issue as to delayed throttle response, which he claims is not the subject of its present complaints. Mr Wowk also takes issue with the proposition that the battery module has special maintenance requirements, and leads evidence, on information and belief, that the design drawings require the use of "MOSFETs" or some other form of "FET" in battery packs.
PPK Group also tendered its draft Commercial List Summons and Commercial List Statement, which seeks declarations as to breach of warranty and as to issues of construction, including as to cl 9.10 of the APA, a declaration that ACMI, Connexa and Mr Chapman were liable to indemnify the PPK companies for loss or damage suffered by reason of the alleged breaches of warranty under cl 9.11 of the APA and damages at common law and/or under s 236 of the Australian Consumer Law. The draft Commercial List Summons and draft Commercial List Statement were a relatively late development, since they were sent to ACMI, Connexa and Mr Chapman on the day before the listing of the application to set aside the Demand.
[3]
Whether a genuine dispute is established for the purposes of s 459H(1)(a) of the Corporations Act
PPK Group 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 or an offsetting claim for the purpose of s 459H(1)(b) 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 to which that demand relates. That test has been variously formulated 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 helpfully 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."
[4]
Whether an offsetting claim is established
PPK Group also seeks to establish an offsetting claim. 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 (Aust) 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 off-setting claim (not the likely result of it)."
In Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 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".
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 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 also observed that evidence necessary to satisfy the test of a "serious question to be tried" or "an issue deserving of a hearing" or a "plausible contention requiring investigation" need not conclusively prove a claim or be substantially non-contestable.
[5]
Costs
PPK Group claims its costs of these proceedings on an indemnity basis, on the basis that it has made its position that a genuine dispute existed as to these matters clear to ACMI and Connexa at least since the issues were identified by letter sent by PPK Group's solicitors on 11 and 27 March 2015, which preceded the issue of the Demand on 1 April 2015. By a further letter dated 17 April 2015, following the issue of the Demand, PPK Group's solicitors also drew attention to the matters on which it has relied on this application, and to the fact that an indemnity costs order would be sought if the application to set aside the Demand went to a contested hearing (Ex P1, 367).
The principles applicable to an order for indemnity costs were summarised by Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 801; (1993) 46 FCR 225 at 232-234 where his Honour noted that the Court ought not usually make an order for the payment of costs other than on the party and party basis, and that some special or unusual feature in the case is needed to justify the Court in departing from the ordinary practice. His Honour noted several circumstances recognised in the authorities in which indemnity costs may be ordered, including the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions and observed that, ultimately (at 234):
"The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis."
The summary of principles in Colgate-Palmolive Co v Cussons Pty Ltd above was in turn applied in Lahoud v Lahoud [2006] NSWSC 126 at [11] and in Ng v Chong [2010] NSWSC 127 at [18]. In Liverpool City Council v Estephan [2009] NSWCA 161 at [100], Giles JA (with whom McColl JA agreed) observed that s 56 of the Civil Procedure Act 2005 (NSW) adds emphasis to the occasion to depart from costs on an ordinary basis where a failure to properly conduct the proceedings has caused costs to be incurred unnecessarily, but does not override the need for a rational connection between the reason for that departure and the extent of that departure.
It seems to me that a basis for indemnity costs is established. Mr Chapman may consider that ACMI and Connexa will prevail, in any proceedings as to the relevant matters, but it seems to me that it should always have been clear from the evidence led in these proceedings that a genuine dispute and/or an offsetting claim existed and Mr Chapman, having taken proper advice, ought to have appreciated that matter and not put PPK Group to the costs of a contested hearing to establish it.
[6]
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: 13 October 2015
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 principles applicable to whether a genuine dispute existed in Re Country Spring Water Co Pty Ltd [2013] NSWSC 1660 at [13] - [16], by reference to the authorities to which I have referred above, in a passage which Mr Marskell who appears for PPK Group refers. I also there observed (at [18]) that a genuine dispute would not arise in respect of the payment of the purchase price due under a sale contract unless some legal basis were articulated on which the alleged matters "invalidated any obligation of the purchaser to pay the balance due under the contract".
In order to establish a genuine dispute, for the purposes of s 459H(1)(a) of the Corporations Act, PPK Group therefore need only establish that it has a plausible contention as to the matters on which it relies so as to give rise to a genuine dispute as to the debt claimed by ACMI and Connexa. The submissions made for Mr Chapman for ACMI and Connexa misunderstand the test required to establish a genuine dispute or offsetting claim, at least to some extent, formulating that test as whether the creditor can "properly claim" to be a creditor of the company for more than a statutory minimum amount, and contend that the Court will dismiss the application if it is satisfied that the creditor may properly advance that claim. The question for the court in such an application is not whether the creditor may properly claim to be a creditor, in the sense that it may properly claim that it is owed the relevant amounts, but whether the alleged debtor can establish either a genuine dispute or an offsetting claim, to the level necessary to satisfy the relatively low threshold for those concepts. Mr Chapman rightly recognises that the threshold for a genuine dispute is that it be bona fide and truly exist in fact, and that the grounds for that dispute are real and not spurious, hypothetical, illusory or misconceived.
PPK Group submits that a genuine dispute arises because ACMI and Connexa had breached the warranty giving rise to an adjustment to the purchase price under the APA in accordance with a mechanism contained in the APA. A complexity arises in these proceedings because the Demand was directed to PPK Group, as guarantor of the obligations of PPKME and PPKIP, rather than to those entities, and it is therefore PPK Group rather than those entities that must establish that there is a genuine dispute as to the debt claimed against it. Mr Marskell draws attention to the discussion in Professor O'Donovan's Modern Contract of Guarantee of the right of a guarantor to rely on defences and cross claims which the principal, relevantly PPKME and PPKIP, have against the creditor, relevantly ACMI and Connexa. Professor O'Donovan also refers to Bechervaise v Lewis (1871-72) LR 7 CP 372 at 377, where Willes J observed that, if a principal has a good defence to a claim by a creditor, and a surety is entitled to call upon the principal to indemnify him, then the surety equally has a defence in equity against the creditor. In this case, PPK Group could therefore rely on any defence that PPKME and PPKIP have against a claim for payment of the relevant instalments by ACMI and Connexa, as well as any defence available to it in its own right.
PPK Group submits that cl 9 of the APA has the effect of impugning ACMI's and Connexa's right to payment of the purchase price, so far as it allows a reduction of the purchase price if any payment or allowance is made by ACMI and Connexa in respect of any breach of the warranties. Mr Marskell contends, and I accept, that correspondence from the solicitors for PPKME, PPKIP and PPK Group sent in March 2015 amounted to claims within the meaning of cl 9.6 of the APA, or at least that proposition is seriously arguable. However, it does not seem to me that there is a genuinely arguable basis for a contention that the making of those claims, not accepted by the vendors, in itself brought about a reduction of the purchase price under cl 9.10 of the APA. It does not seem to me that it is genuinely arguable that the clause could have any application in the circumstances where ACMI and Connexa have not accepted the justification of the claims under the warranties, or accepted that any reduction of the purchase price should be made, where that would permit the purchaser unilaterally to reduce its purchase price at will, by asserting a warranty claim which is not accepted by the sellers.
Mr Marskell also submitted in oral submissions that, until cl 9.10 of the APA had been applied, the Guaranteed Monies (as defined) would not be determined, so as to give rise to a debt owed by PPK Group as guarantor in that regard. It seems to me that that proposition is genuinely arguable.
Alternatively, in his oral submissions, Mr Marskell submitted that PPK Group's potential claim under s 18 of the Australian Consumer Law for misleading and deceptive conduct, in respect of the alleged nondisclosure of the throttle issue or the battery issue, was capable of creating a genuine dispute as to the obligations of PPKME and PPKIP to pay the instalments under the APA, on which PPK Group as guarantor could rely. I proceed on the basis that Mr Marskell presses that proposition, although at one point in submissions, he somewhat withdrew from that proposition so far as the buyers were concerned (T13), although he pressed it so far as PPK Group's obligations as guarantor were concerned (T18). It seems to me that PPKME and PPKIP have a seriously arguable claim that they would have paid a lesser price under the APA, but for the alleged nondisclosures, which would have had the result that the instalments now payable under the APA would not be due. PPK Group is in turn entitled to rely on that claim, both to the extent that it may rely on claims available to the principals whose obligations it has guaranteed, and to the extent that it may itself assert such a claim. That claim, where seriously arguable, does impeach the obligation to pay further instalments under the APA so as to give rise to a genuine dispute in respect of those amounts.
In his outline of submissions, Mr Chapman, who represented ACMI and Connexa in his capacity as a director of those companies, identified the territory of the dispute, noting that PPK Group contends that there are defects in the products that were purchased under the APA (or, perhaps more precisely, was sold by the business that was purchased by PPK Group under the APA) and it would not have agreed to the amounts payable under that agreement if it had known about those defects. Mr Chapman responds that the relevant products are not defective and there is no genuine dispute. Mr Chapman contends that the grounds for alleging the existence of a dispute are illusory, and seeks to establish that proposition by contesting the factual accuracy of the matters on which PPK Group relies to establish that dispute, by pointing, for example, as I noted above, to the fact that circuit boards are encapsulated in SILGEL which he contends is a conformal coating and that the PPK Group was well aware of the fact that SILGEL was used by ACMI and Connexa. He contends there is no need for the PPK Group to replace the throttles as they are no longer under warranty and, in relation to the battery issue, that the PPK Group was aware that MOSFET components were not required for safety compliance and that missing MOSFET components do not control the battery cell balancing function, and the dead battery cells have been caused by other causes. With all respect to the detail of Mr Chapman's affidavit evidence and these submissions, this identification of the factual matters in dispute confirms, rather than displaces, the existence of genuine factual issues between the parties that are properly addressed in litigation on the merits rather than in a summary application to set aside creditor's statutory demand.
In oral submissions, Mr Chapman also contended that he could not see a genuine dispute, and that he could see no expert evidence that "refutes what Connexa has done either technically or in a commercial sense". It is not necessary, in order to meet the relatively low threshold required to establish a genuine dispute or an offsetting claim, for PPK Group to lead the expert evidence which might be necessary to establish that claim in a contested substantive hearing of that claim, as distinct from an application to set aside a creditor's statutory demand which is to be determined on a summary basis. Mr Marskell in turn responded, not surprisingly, that the issues raised by the dispute were of a technical character, and would be the subject of expert evidence in contested proceedings, as distinct from the summary procedure involved in respect of a creditor's statutory demand, and that the technical character of the dispute made it more difficult for ACMI and Connexa to establish that their position was so obviously correct that PPK Group's claims did not warrant further investigation so as to establish a genuine dispute or offsetting claim. Mr Marskell pointed, by way of example, to the dispute between Mr Wowk on the one hand and Mr Chapman on the other as to whether SILGEL is a conformal coating, or is a substitute for a conformal coating so that a conformal coating is not required, and noted that such a dispute was scarcely a matter that could be determined in a summary proceedings of this character.
In oral submissions, Mr Chapman also relied on cl 15.8 of the APA which provides that the guarantee under cl 15 is a continuing obligation of PPK Group as guarantor despite any settlement or account or the occurrence of any other thing and remains in full force and effect until all of the Guaranteed Monies (as defined) have been paid in full, the obligations of the buyers under the APA have been fully informed, and the guarantor's obligations under that clause had been discharged in full. I accept that that clause has effect to preserve the operation of the guarantee. It does not, however, seem to me to alter the content of the obligations under the guarantee, so as to prevent PPK Group as guarantor relying on a genuinely arguable defence, including one available to PPKME and PPKIP, or relying on a genuine offsetting claim in opposition to a claim under the guarantee. I should also note, for completeness, that cl 15.7 of the APA provides that clause 15 is a principal obligation and not to be treated as ancillary or collateral to any other right or obligation and is enforceable against PPK Group whether or not ACMI and Connexa had made demand upon the buyers, given notice to the buyers, taken any other steps against the buyers or any other person and whether or not any Guaranteed Monies are due. I also do not understand that clause to alter the content of the guarantee, as distinct from confirming its status as a principal and independent obligation, so as to sever any connection between any obligation of the guarantor and whether any amount is due to ACMI and Connexa or whether any cross - claim exists against them.
It therefore seems to me that a genuine dispute has been established as to the purchasers' obligation to pay the purchase price and PPK Group as guarantor is entitled to rely on the same claim, as well as its own claim for misleading and deceptive conduct, and has established a genuine dispute as to the amount claimed in the Demand.
PPK Group submits that an offsetting claim arises as a result of breach of warranty and nondisclosure amounting to misleading and deceptive conduct under s 18 of the Australian Consumer Law. As I noted above, PPK Group contends that the alleged nondisclosure of the throttle issue or the battery issue amounts to it having been provided with misleading or deceptive material or nondisclosure in breach of the warranties contained in the APA. Mr Marskell identifies PPK Group's offsetting claim as a claim to be made under s 18 of the Australian Consumer Law seeking damages under s 236 of that Law and seeking a determination that PPK Group, as guarantor, had no further liability to ACMI and Connexa under the APA by reason of a breach of warranty or price adjustment under cl 9.10 of the APA. PPK Group contends that, where the engine management systems and battery packs were incorporated into COALTRAM vehicles manufactured by the PPK Group and onsold to end users, PPK Group has a potential liability to those end users in respect of those issues, which has been crystallised by the issue of the several improvement notices, so that PPK Group must now rectify the COALTRAM vehicles containing the defective engine management systems and battery packs. PPK Group also contends that, had the issues with the engine management systems been disclosed, PPKME and PPKIP would have paid only a nominal price under the APA or at least an amount lower than the amount already paid to ACMI and Connexa by reason of the initial payment and subsequent instalments paid under that agreement. It seems to me that that proposition is seriously arguable, where it would not be surprising that a purchaser would take account of rectification costs in determining the purchase price to be payable in respect of the purchase of a business.
In order to conclude that an offsetting claim is not established, by reference to Mr Chapman's evidence, I would need to conclude that that evidence showed that the claims advanced by PPK Group were so lacking in objective basis or were so implausible that they could properly be characterised as a "merely spurious claim, bluster or assertion", in the language of TR Administration Pty Ltd above at [71]. Mr Marskell submits, and I accept, that Mr Chapman's evidence points to the significant issues in dispute between PPK Group on the one hand and ACMI and Connexa on the other, but does not establish that PPK Group's claims are spurious or mere bluster or assertion. The issues in dispute are, as Mr Marskell points out, technical issues that are likely to require resolution by expert evidence in a properly constituted proceeding, and could not properly be determined in a summary proceeding such as an application to set aside a creditor's statutory demand. It is not necessary to deal with the detail of Mr Chapman's affidavit in this respect, although I note that Mr Marskell takes issue with much of its content in submissions, since the extent of the factual dispute between Mr Wowk on the one hand and Mr Chapman on the other reinforces the existence of, rather than displaces, an offsetting claim.
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. PPK submits that the costs of rectification in respect of the relevant defects, as set out in paragraph 73 - 74 of Mr Wowk's affidavit sworn 23 April 2015, will involve $202,500 for the replacement of an estimated 150 throttle sensor units; $219,000 already incurred in the replacement of failed battery and module packs; and $900,000 for the replacement of 750 battery packs. That quantification may ultimately overestimate the costs of rectification, if not all units were replaced, but I cannot say that it is fictitious or merely colourable, and it seems to me that there is no real doubt that a genuine offsetting claim in a quantum exceeding the amount of the Demand is established.
In this case, it seems to me that PPKEM and PPKIP each have genuinely arguable claims against ACMI and Connexa, in amounts that exceed the amount of the Demand, by reason of their claims for damages for breach of warranty under the APA, their potential right of indemnity for breach of warranty under the APA and their claims for misleading and deceptive conduct under the Australian Consumer Law. I have pointed above to the right of a guarantor, here PPK Group, to rely on cross claims that the principal, relevantly PPKME and PPKIP, have against the creditor, relevantly ACMI and Connexa. In Modern Contract of Guarantee, Professor O'Donovan notes that a guarantor can raise a cross claim for unliquidated damages against the creditor, although it may be necessary to join the principal. In the present case, no difficulty arises as to the joinder of the principal, because PPKME and PPKIP are also plaintiffs in the Commercial List proceedings proposed to be brought by PPK Group against ACMI and Connexa. Professor O'Donovan also notes that, absent clear and unequivocal words that would exclude the guarantor's right of counterclaim and set-off under the common law and in equity, then such counterclaims and set-offs will be available to the guarantor: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 709.
In the context of an application to set aside a creditor's statutory demand, it is not necessary or appropriate that I form a concluded view whether PPK Group may rely on claims available to PPKME and PPKIP in order to establish an offsetting claim, since it is sufficient that it is seriously arguable that they may do so. It seems to me plain, on the authorities to which I have referred above, that that is a seriously arguable proposition; it is also seriously arguable that the terms of the guarantee, to which I have referred above, do not clearly or unequivocally exclude such a claim; and the claims that are available to PPK Group, by that means, give rise to a genuine offsetting claim.
It also seems to me that PPK Group also has a genuine offsetting claim under the Australian Consumer Law, in its own right, so far as it claims that, but for misleading conduct of ACMI and Connexa, it would not have entered into the APA at a price higher than the amount already paid to those entities, by way of the Completion Amount and instalments already paid, and that the terms of the guarantee noted above cannot exclude a statutory claim of that kind.
In these circumstances, I am also satisfied that an order must be made setting aside the Demand on the basis that a genuine offsetting claim is established.
Accordingly, I make the following orders:
1 The creditor's statutory demand dated 1 April 2015 issued to PPK Group Ltd be set aside.
2 The Defendants, AC Mining Investments Pty Ltd and Connexa Pty Ltd, pay PPK Group Ltd's costs of the proceedings, on an indemnity basis, as agreed or as assessed.
Direct that exhibits and subpoenaed material may be returned forthwith; any exhibits returned must be retained intact by the party or person that produced the material until the expiry of the time to file an appeal, or until any appeal has been determined, provided that Ex D2 (being a throttle assembly) may be collected by Mr Chapman within 3 business days and is otherwise to be disposed of.