BMDI Tuta Health Care Pty Limited v CME Medical Australia Limited

Judgment 1The plaintiff applies under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand dated 6 October 2010 served on it by the defendant. 2The debt or alleged debt referred to in the demand is in the sum of $83,996.12. It is made up of nine amounts, each represented by an invoice of a specified date in 2009 or 2010, subject to a $30.36 deduction for a credit note. Except for a component of $105.60, the overall amount was claimed by the defendant in the demand to be owing, due and payable by the plaintiff for items of inventory the subject of a business sale agreement dated 1 June 2009 and made between the defendant as vendor and the plaintiff as purchaser, with other companies associated with them as additional parties. 3The plaintiff's first contention is that it has an offsetting claim within s 459H(1)(b) in the sum of $12,350.10. The defendant accepts this and concedes that, even if it is successful in resisting the plaintiff's claim brought on the genuine dispute ground under s 459H(1)(a), the amount of the demand should be reduced accordingly. 4The plaintiff's claim under s 459H(1)(a) on the genuine dispute ground relates to part only of the balance of $71,466.02 remaining after the offsetting claim is taken into account. The plaintiff's contention is that there is a genuine dispute as to the existence of indebtedness to the extent of $47,232.81, with the result that, even if it succeeds in establishing the genuine dispute it alleges, there will be an undisputed balance of $24,233.21. 5The plaintiff's ultimate case is, therefore, that the amount of the statutory demand should be reduced to $24,233.21 pursuant to s 459H(4). 6I proceed, therefore, on the basis that I am required to decide whether the plaintiff has established that there is a genuine dispute as to the existence of indebtedness of $47,232.81 being, in broad terms, the amount attributed by it to slow moving or obsolete stock for the purposes of the business sale agreement between the parties to which I have referred and to which I now turn in more detail. 7By the agreement of 1 June 2009, the defendant agreed to sell and the plaintiff agreed to buy a medical technology business or, more precisely, the goodwill, plant and equipment, records, systems and other items of property making up or associated with that business. 8One component of the subject matter of the sale and purchase was "the Inventory", the meaning of which, as stated in clause 1.1, was: " Inventory means finished goods and saleable component parts used or to be sold in connection with or as part of the Business including any unpaid inventory and purchase orders received but not yet executed by the Business as at the Completion Date." 9The "Inventory" formed part of the "Business Assets" as defined by the agreement. 10By clause 2.1, the defendant agreed to sell and the plaintiff agreed to purchase the "Business Assets" for the "Purchase Price", being the aggregate of $625,000 and "the value of the Inventory calculated under clause 10 below". 11Clause 4 dealt with payment of the Purchase Price and allocation of it to different parts of the property sold. Clause 6 required certain action by an affiliate of the plaintiff, on the plaintiff's behalf, on completion. The affiliate was required to issue to the defendant certain shares in its own capital, to pay to the defendant $200,000 and to pay to the defendant "$250,000 on account of the Inventory". 12It seems to be common ground that completion occurred (and the completion date fell) on or about 30 May 2009 which, curiously, is two days before the date of the agreement; so that the agreement, it seems, spoke of things to be done which had in reality already been done, although the extent to which expressions referring to the future were in fact expressions dealing with the past may be obscure. 13From there, it is necessary to turn to clause 10 of the agreement: "10.1 Certificate of value The parties have jointly conducted a stock take of the inventory and agreed a value for the inventory of $365,000. Attached, as Schedule 12, is a certificate signed by both the Seller and the Buyer, itemising and assigning a value to each item of Inventory in accordance with clause 10.6 below. 10.2 Passing of Ownership On the Completion Date, ownership in and toInventory to the value of $250,000 as selected by the Buyer and as marked on Schedule 12 will pass to the Buyer. 10.3 Retention of Title The balance of the Inventory (the Remaining Inventory ) will remain the property of the Seller and title will not transfer until payment is received from the Buyer. 10.4 Risk, Sale and Storage The Seller must at its risk retain and store the Remaining Inventory for a period of 12 months from Completion. During this period, as and when required by the Buyer, the Seller must sell the Remaining Inventory only to the Buyer and not to any other party. The Seller must deliver the Remaining Inventory only to or under direction of the Buyer and only under the authority of a purchase order. Upon expiry of the 12 months period, the Buyer must purchase and pay for the balance, if any, of the Remaining Inventory. 10.5 Payment for Inventory On the Completion Date, the Buyer must pay to the Seller an amount of $250,000 on account of the value of the Inventory. The Buyer must pay for the balance of the Remaining Inventory 30 days from date of the Seller's month end statement to the Buyer in respect of Remaining Inventory drawn from the Seller during that month. For the avoidance of doubt, the Buyer's obligation to make payment for the Remaining Inventory will only commence after the Buyer will have drawn Inventory to the value of $250,000. 10.6 Determination of value Unless otherwise agreed by the parties in writing, the value of the Inventory will be determined as follows: (a) Inventory with a historical stock turn of more than 12 months will be regarded as slow moving and is to be assigned a NIL value or such other value as the parties agree in writing; (b) Inventory remaining which is not damaged, slow moving or obsolete will be the lower of cost to the Seller or net realisable value including duties and taxes; (c) Notwithstanding the preceding provisions of this clause 10.5, where an item of Inventory has been specifically purchased for a customer of the Business who has provided a written enforceable and assignable undertaking to the Seller to purchase all the remaining stock at the end of either a given period or upon a certain event, then the price payable for that item of Inventory is to be assigned its original cost." 14Several points seem to emerge tolerably clearly from clause 10. First, the parties had agreed $365,000 as the value of the inventory. Second, they had, in schedule 12, expressly identified, in more than five closely typed pages, numerous individual categories of inventory, each identified by a serial number and description, and with a quantity and amount recorded against each category. 15Third, schedule 12 identified in relation to each category an "initial inventory quantity" and an initial inventory amount, with all those amounts adding up to $250,000, from which it seems relatively clear that ownership of those initial quantities passed from the defendant to the plaintiff on completion by virtue of clause 10.2. 16Fourth, the reference in clause 10.3 to the "balance of the Inventory", which was designated the "Remaining Inventory", may be taken to be the total quantity given in schedule 12 against each category, less the quantity identified as "Initial Inventory Quantity". 17Fifth, by force of clause 10.3, the items making up the Remaining Inventory did not pass from the defendant to the plaintiff upon and by virtue of completion - but rather, as the parties there agreed, were retained, as to title and ownership, by the defendant "until payment is received from" the plaintiff. 18At this point it is necessary to look at the other provisions regarding the Remaining Inventory. Clause 10.4 says that, during the 12 months beginning on the completion date, the defendant must not sell the Remaining Inventory to anyone other than the plaintiff and must deliver it (or I suppose, more accurately, parts of it from time to time) to the plaintiff pursuant to purchase orders submitted by the plaintiff. Furthermore, at the end of the period of 12 months, the plaintiff "must purchase and pay for the balance, if any, of the Remaining Inventory". 19Clause 10.5 then goes on to deal with payment by the plaintiff for inventory "drawn from" the defendant during a particular month being, I think, by implication, one of the 12 months immediately after completion. Payment for inventory thus "drawn" during a month is to be made 30 days after the defendant's "month end statement" for that month. 20Finally, clause 10.6 makes provision for determining the "value" of the inventory. As counsel for the plaintiff emphasised, clause 10.6 is cast in the future tense and refers to things to be done. The meaning and purpose of clause 10.6 are obscure, given the statement in clause 10.1 that the values given to the several items in schedule 12 have been assigned to those items "in accordance with clause 10.6 below". This may mean that, although the parties have stated in clause 10.6 rules or principles which are to be applied in the future fixing of value, they are in reality saying in clause 10.1 that that process has been overtaken and superseded by an agreement they have recorded in clause 10.1. Alternatively, the correct construction may be that the schedule 12 values are agreed as being applicable at the date of contract and it acknowledged that some other value may prevail at a later time - particularly in light of clause 10.6(a) (which is concerned with the slow moving or obsolete stock), given that it is possible to identify what is slow moving or obsolete only over time. Clause 10.6 may be designed to establish values at points after the date of the contract and after the completion date. 21The defendant puts forward two basic propositions. First, it says that during the period of 12 months referred to in clause 10.6, the plaintiff ordered a number of items of inventory according to the contractual procedure; that these were delivered and that the plaintiff failed to pay the applicable price of $3,739.56. This is calculated by reference to the agreed values in schedule 12, referred to in clause 10.1, without any adjustment under or other resort to clause 10.6. Second, the defendant says that there remained unordered and undelivered at the end of the period of 12 months a quantity of inventory having a value at the schedule 12 rates of some $72,000. The plaintiff, as I understand it, accepts that it must pay $24,233.21 but says that the remaining $47,232.81 relates to slow moving or obsolete stock, to which clause 10.6(a) ascribes a value of nil. 22The particular question that arises is whether - if indeed a payment obligation arose at the end of 12 months - it was the schedule 12 value, a value yet to be determined under clause 10.6 or some other amount that was to be paid. The difficulty here is that, whereas the clause 10 regime is one that sees property in the remaining inventory firmly retained by the defendant as at completion (see clause 10.3) and goes on to impose on the plaintiff an obligation to purchase the remaining inventory at the end of 12 months (see the final sentence of clause 10.4), it does not really say what the price is to be. There are references to value in both clause 10.1 and clause 10.6, but nowhere does it seem to say that the sale is to be for a price equal to the value, whatever it may be. 23I have already referred briefly to clause 4. It is in the following terms: "4.1 In consideration for the sale of the Business and transfer of the Business Assets, the Buyer must pay the Purchase Price to the Seller on the Completion Date in accordance with the provisions of clause 6 below. 4.2 The Purchase Price must be calculated and allocated to the Business Assets on the following basis: (a) in respect of the Plant and Equipment, the written down book value thereof as reflected in the Final Accounts; (b) in respect of the Business Name/s, an amount equal to $1; (c) in respect of the inventory, an amount of $365,000 having the values attributed in terms of clause 10 below; and (d) in respect of the remaining Business Assets not otherwise referred to in this clause 4.2, an amount equal to the Purchase Price less the amounts in paragraphs (a), (b) & (c)." 24Clause 4 gives rise to problems of construction of its own. It refers in clause 4.2 to calculation and allocation of the "Purchase Price". The sum allocated to inventory is "an amount of $365,000, having the values attributed in terms of clause 10 below", and that leads directly back to the difficulty of reconciling clause 10.1 and clause 10.6. 25I turn now to the correspondence between the parties in the period after 31 May 2010 and before the issue of the statutory demand. I do so not in any attempt to discover the true meaning of the parties' contract. The use of post-contractual material for that purpose would be inconsistent with the third principle stated by Heydon JA in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at [26]. My reason for looking at the correspondence is to discover whether a dispute between the parties as to the existence of the debt to the relevant amount had crystallised through that correspondence and, if so, whether it can be characterised as a genuine dispute. 26The correspondence to which I refer began with a letter from Mr Wang of the defendant to Mr Donnison of the plaintiff dated 31 May 2010, stating that the defendant "has delivered all remaining stock as identified in schedule 12 ... as per the sale agreement". Mr Wang said that the value of the inventory delivered was as per the schedule less the stock taken by the plaintiff over the past 12 months, and that "full payment for this inventory is due at the end of June 2010 as identified in the sale agreement". The clear implication was that the defendant expected the plaintiff to pay a price equal to the clause 10.1 value as recorded in schedule 12. 27On 18 June 2010, Mr Donnison of the plaintiff wrote to Mr Kaye of the defendant saying that the plaintiff "would like you to review the schedule 12 inventory delivered recently as per the terms of the CME sale contract". It may be deduced from this that the plaintiff accepted that the delivery of the remaining inventory as referred to in Mr Wang's letter had been in accordance with the contract. 28Mr Donnison then made the point that much of the remaining stock was slow moving or obsolete, and must have been known at the time of contract to be of that quality. He then referred to clause 10.6(a) and its reference to slow moving stock having a nil value, adding, "Why was this stock not valued in this way at the time?" Mr Donnison then said that he accepted that "the pricing of these items was agreed at contract; however, it seems clear that the stock was not valued correctly within the terms of the contract", concluding with an allegation of unfitness for the intended purpose of resale. 29Mr Kaye responded on 21 June 2010. He referred to the process of fixing values of stock at the time of negotiation of the contract and then referred to the defendant's having "agreed to vendor finance of a portion", concluding with the observation that the contract must stand without renegotiation. 30Mr Mitchell of the plaintiff wrote to Mr Kaye on 14 July 2010. He said that the stock agreed to be purchased "was in part subject to it not being slow moving or obsolescent stock" and that that, rather than any concept of vendor finance, was the reason for the 12 months deferral. Mr Mitchell thus took a line somewhat different from that taken initially by Mr Donnison. 31Mr Kaye wrote to Mr Mitchell on 20 July 2010, saying that the statements in Mr Mitchell's letter were "untrue and irrelevant". He then quoted certain parts of clause 10 and paraphrased others. With respect to clause 10.6, he said: "The reference in clause 10.6 to the valuing of the inventory, having regard to 'slow moving or obsolete', referred to the valuation conducted at the time of entering into the contract. This is expressly stated in cl 10.1, and there is no basis for your company to claim that, having decided not to buy the stock for 12 months, the passing of that 12 months now makes the stock obsolete and of no value." 32On 6 September 2010 Mr Mitchell replied in terms that consolidated the line taken in his earlier letter. The salient content of his letter of 6 September 2010 was as follows: "One of the principal purposes of assigning a value to each item of the Schedule 12 stock was so that the values for stock drawn down over the twelve month period from completion could be assessed for the purposes of Clause 10.5. Clause 10.1 specifically refers to Clause 10.6 which provides (sub-clause 10.6(a)) that slow moving stock is to be assigned a nil value or such other value as the parties agree in writing. The stock in question is clearly slow-moving (and in some cases obsolete) and this was within the knowledge of the seller at the time of completion of the sale and not at that time within the knowledge of the buyer." 33The statutory demand was served a month later. 34It is, to my mind, clear that before the statutory demand was served, the parties had noted in their correspondence not only the difficulties about the interpretation of clause 10 that I have already mentioned - and in particular the meaning and intent of clauses 10.1 and 10.6 taken together - but the inconsistency between ascribing an immutable value to stock items in June 2009 and contemplating the possibility that some such items may later be worthless because obsolete or slow moving. 35In short, a clear dispute as to the meaning and effect of the contract - specifically, the parts of it envisaging further payment after 12 months - had crystallised before the statutory demand was created and served by the defendant. Nothing has changed since then. Each party puts forward a particular construction of clause 10. Neither is fanciful. Each is arguable. 36It was submitted on behalf of the defendant that, particularly in light of Mr Donnison's letter of 18 June 2010, the supposed dispute does not rise above the level of mere assertion and is, accordingly, not genuine. I do not accept that submission. The later correspondence puts squarely in issue the interpretation of clause 10, with particular reference to clause 10.1 and clause 10.6. 37It has been said in some cases that, upon a s 459G application, the court may and should determine a question of construction. That is no doubt true. Even in simple cases, questions about the existence of a debt often depend on the construction of a contract. But it will be appropriate for the court to resolve competing contentions as to construction only if the question is relatively straightforward. The case often cited is Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379, with particular attention to the passage at p 384. Mr Assaf has referred also to the decision of White J in BBX Holdings Ltd v American Home Assurance Co [2007] NSWSC 549, where his Honour determined the true meaning of a provision in an insurance policy. I quote paragraphs 4 and 5 of that judgment. "4 The relevant term of the policy provided: 'The policy holder may cancel this policy by providing written notice to the insurer in which case the insurer shall retain the customary short rate proportion of the premium. The insurer may cancel this policy in the manner permitted by law and shall be entitled to retain the pro rata proportion of the premium ...' 5 The issue in these proceedings is whether there is a genuine question to be tried as to whether the expression "the customary short rate proportion of the premium" means the pro rata proportion of the annual premium as the plaintiff contends, or whether it means the proportion of the annual premium which the insurer customarily charges as its "short rate" for policies of that kind which are in force for the short time corresponding with the period the plaintiff's policy was in force." 38This was, as it were, a short, sharp question of construction. White J had the benefit of evidence of custom and usage in the insurance industry, supplemented by academic writings. On that basis, he determined the question. 39That is not the case here. The construction of clause 10 is by no means a simple matter. In proceedings requiring that clause to be construed, it would very likely be held that it was ambiguous in such a way as to justify resort to pre-contractual documents and conduct casting light on its objective aim. This would be permitted under the first of the principles stated by Heydon JA in Brambles Holdings Ltd v Bathurst City Council (above). The defendant has in fact put such material before the court on this application in the form of earlier drafts of the sale agreement. Each party could no doubt produce witnesses to give evidence about the course of negotiations as they unfolded and those witnesses might well be cross-examined. 40The uncertainty about the meaning of clause 10 is a matter of some complexity. It is a matter on which the parties are in dispute. It is not something that the court can properly attempt to resolve upon a s 459G application: Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89 at [4]. Rather, the correct approach is to accept that, as I have said, there are competing contentions, neither of which is fanciful and each of which is arguable. In addition, there is no reason to doubt that the competing positions are conscientiously held. 41There is, accordingly, a genuine dispute according to the well-established principles stemming from cases such as Eyota Pty Ltd v Hanave Pty Ltd ( 1994) 12 ACSR 785. 42The correspondence between the parties to which reference has been made, culminated in a statement by the defendant that failure to meet the demand for payment would "result in action being taken to recover the monies owed". It is unfortunate that the defendant did not, in accordance with that foreshadowing, commence an action at law in a small debts court. As has been so often said, the statutory demand procedure is simply not appropriate in cases such as this. [Discussion on the form of the orders] 43I order that the statutory demand dated 6 October 2010 be varied by substituting the amount of $24,233.21 for the amount of $83,996.12. I declare that the statutory demand has had effect as so varied as from when the demand was served on the plaintiff. [Counsel made submissions on costs] 44As to costs, it has been said on behalf of the defendant that each party, as it were, had a measure of success and, accordingly, there should be no order as to costs. The response of the plaintiff is that the defendant has succeeded in sustaining the statutory demand only to the extent of $24,233.21 and that this is in circumstances where, by a letter of 6 September 2010, the plaintiff offered to settle the matter by paying $25,053.30. 45Given that offer and its non-acceptance, as well as the outcome, it is my view that the correct result with respect to costs is that the defendant should pay the plaintiff's costs of the proceedings. I so order.