Solicitors:
Darby Jones Lawyers (Plaintiff)
ERA Legal (Defendant)
File Number(s): 2020/11399
[2]
Nature of the application and factual background
By Originating Process dated 13 January 2020, the Plaintiff, Vista Del Mare Pty Ltd ("VDM") applies to set aside a creditor's statutory demand ("Demand") issued by CBS Builders Pty Limited ("CBS"). The Demand was dated 23 December 2019 and identified a claim for an amount of $762,220.03, being the amount of a judgment entered by the Court in mid-June 2018, arising from the registration of the determination in an adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW) ("SOPA").
The application was originally founded on ss 459G, 459H and 459J of the Corporations Act 2001 (Cth) but, as it developed, it was properly narrowed so as to advance only an offsetting claim under s 459H(1)(b) of the Corporations Act. The parties relied on a number of affidavits in respect of the application, which dealt with broader issues than are ultimately in issue, and I was also taken, by Mr Corsaro, who appeared with Mr Allen for VDM, through the contractual documentation in respect of the construction project which gave rise to the adjudication and the judgment.
VDM relies on an affidavit of its former director, Mr Rudi dated 13 January 2020, which referred to aspects of the background to the matter. Mr Rudi noted, and it appears to be common ground, that IUR Australia Holdings Pty Limited ("IUR"), a company of which Mr Rudi's wife was or is the director, engaged VDM to develop certain land situated at Bellevue Hill, on which a block of units was to be constructed. VDM in turn engaged CBS to carry out building works in respect of the property, and I will refer below to the relevant documentation. Mr Rudi refers to the fact that a dispute arose in the course of the building works and, on 27 April 2018, CBS initiated an adjudication process under the SOPA against VDM. VDM subsequently issued a notice to show cause to CBS pursuant to the building contract, and thereafter took the remaining building works out of CBS's hands. CBS subsequently registered its adjudication determination as a judgment debt, which in turn provides the basis of the Demand. On 14 June 2018, CBS obtained an adjudication determination in its favour. IUR then terminated the development agreement with VDM, on the basis of VDM's non-compliance with the adjudication determination in breach of the development agreement between IUR and VDM. Mr Rudi's affidavit originally identified a range of offsetting claims, although the offsetting claims were put more narrowly in submissions, as constituting, first, a right to indemnity to a claim by IUR against VDM, to which I will return; and, second, the costs to rectify defective building work to which reference was made in an expert report relied on in the adjudication, to which I will refer below. VDM also read other affidavit evidence, including of its solicitor, Mr Khanji, which largely went to establishing documents which are in evidence.
CBS in turn relied on the affidavit dated 27 February 2020, of its director, Mr Athos, which referred to the outcome of the adjudication determination. Mr Athos also referred to information provided by solicitors acting for VDM, which identified it as having no assets and no debts. I will return to that matter below. Mr Athos's evidence was that at the date of his affidavit, CBS had not received any payment from VDM in respect of the judgment arising from the adjudication, nor had it received any communication which demanded payment of any amount by way of offset against the judgment or otherwise.
As I noted above, Mr Corsaro also helpfully took me through the contractual documentation for the project. By a Development Agreement dated 7 July 2016 between IUR and VDM, IUR appointed VDM to manage and deliver the development of 10 residential units upon the property (Ex P1, 44). That agreement contained a performance guarantee and indemnity, by which VDM guaranteed the builder's, that is CBS's, performance of its obligations under the building contract and indemnified IUR against any default, breach or damage of any kind as arising as a result of builder's performance of that contract. Clause 6.3 of that agreement required VDM to use all reasonable endeavours to ensure and cause the builder to complete all of the building works in a specified manner, including in a proper, workman-like and commercially prudent and reasonable manner and diligently and expeditiously. VDM relies on that agreement and the indemnity given to IUR in it to assert that IUR has a claim against it, which it contends gives rise to an offsetting claim by it against CBS. I will return to that contention below.
VDM and CBS entered into a construction contract (Ex P1, 63) on or about 2 September 2016. That construction contract required CBS to carry out and complete the relevant works in accordance with the contract and directions authorised by the contract and CBS there gives warranties in favour of VDM, including as to the standard of quality and construction. Clause 39 dealt with the position in respect of a default by CBS and clauses 39.4 and 39.5 provided for the circumstances in which VDM could take work out of CBS' hands, as it ultimately did. The construction contract in turn appointed a superintendent for the relevant works.
By a further agreement, titled the Building Multi party Deed, VDM, CBS and a financier entered certain arrangements, and that deed recited that CBS had entered into the building contract with VDM to carry out the relevant works and had entered into the multi-party deed for the benefit of the financier and CBS. Little otherwise turns on that document.
A notice to show cause, issued by VDM on 27 April 2018, identified a range of matters as constituting substantial breaches of the building contract by CBS. It is, of course, not appropriate to determine in an application of this kind whether those breaches were established. On 11 May 2018, notice was given of VDM's election to take over the relevant works. By the adjudication determination, the adjudicator determined the amount that was payable by VDM to CBS, for the purposes of the SOPA, which in turn founded the judgment and the Demand.
By a termination letter dated 1 June 2018, IUR, by its director, Ms Rosinska, Mr Rudi's wife, in turn wrote to VDM, by its director, Mr Rudi, noting that on 30 May 2018 judgment was issued against VDM in the amount of $762,220.03 and remained unpaid, and that that constituted an event of default under the Development Agreement and gave notice of termination of the Development Agreement. That termination letter also asserted in it a claim on which VDM heavily relies in this application that:
"In accordance with clause 12.4 of the Development Deed, we hereby demand payment of $3,649,160, this demand is without prejudice to our ability to claim such further amounts that may be incurred as a result of the termination of the Development Agreement."
Mr Corsaro relied on that demand made by IUR against VDM to seek to establish an offsetting claim by VDM against CBS of at least $3,649,160.
VDM also relied on an expert report of Mr Zakos, on which it had relied in the adjudication, which expressed the view that there were certain defects in the building work and quantified the cost of rectifying those defects as $227,100. While the reasoning underlying that quantification, in the expert report, was not extensive, and that part of the report may well not have been admissible in final proceedings between VDM and CBS, I admitted it in these proceedings as capable of identifying the basis of an offsetting claim and supporting a genuinely arguable case in respect of the defects arising from the costs of rectification.
[3]
Applicable legal principles
I now turn to the applicable principles before returning to the parties' submissions. An offsetting claim, for the purposes of s 459H(1)(b) of the Corporations Act 2001 (Cth), is the amount of a claim or claims that a company has against a 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 transactions as the debt to which the demand relates. 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, as defined. The SOPA does not prevent a defendant asserting a "true" offsetting claim, such as a cross-claim for damages for negligence or breach of contract, or recovery of amounts overpaid, in opposition to a claim under the SOPA, or in contesting a creditor's statutory demand based on such a claim: Re Douglas Aerospace Pty Ltd [2015] NSWSC 167; Re Cooperbrown Pty Ltd [2019] NSWSC 1341 at [37].
An offsetting claim is established if there exists 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: Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605; Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 951; (1993) 12 ACSR 341 at 356-357. The Court of Appeal has in turn explained the test for an offsetting claim in Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd [2013] NSWCA 344 at [30] as follows:
"It is settled law that s 459H requires the Court to be satisfied that 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… The claim must be made in good faith: …"
The Court of Appeal also addressed the applicable principles in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [8] and [62]-[66], in the judgment of Bell P, (with whom Sackville AJA agreed at [98]). I have in turn drawn on my summary of those principles in Re Cooperbrown Pty Ltd above at [37]ff for this summary of the principles.
[4]
The parties' submissions and determination
Mr Corsaro rightly accepts that the judgment debt established by the adjudication is a debt that is due and payable, and therefore does not pursue any claim that there is any genuine dispute in respect of the debt. He contends that a true offsetting claim is available, on two alternative bases. The first, and larger, is that VDM guaranteed CBS's performance of the construction contract and indemnified IUR in respect of any default of the construction contract by CBS under clause 6.1(b) of the Development Agreement, and that a further indemnity arose by VDM in favour of IUR against any additional costs arising from termination, under clause 12.4 of the Development Agreement. Mr Corsaro submits that VDM has a contractual obligation to indemnify IUR for any loss it has suffered by reason of any breach of the construction contract by CBS, or any loss to it arising from the termination of the Development Agreement, although that highlights the question of what that loss might be. VDM's larger claim proceeds on the basis that the quantum of that loss is established by IUR's demand in the amount of $3,649,160, to which I referred above.
This submission proceeds on the basis that, because IUR has asserted a claim for $3,649,160 against VDM, without identifying the basis of that claim or how it is quantified, VDM has a right of indemnity in respect of that claim (if it were justified and properly quantified) which gives rise to an offsetting claim against CBS. I reject that submission. An offsetting claim is only established if the claim gives rise to a serious question to be tried or an issue deserving of a hearing. For VDM to establish a claim against CBS of that character, derivative of the claim by IUR, it would first need to establish that the claim by IUR against it raises a serious question to be tried or an issue deserving of a hearing, as to the existence of an obligation under the indemnity, founding its consequential claim against CBS. To put that proposition another way, the strength of VDM's claim for indemnity against CBS can be no greater than the strength of IUR's claim against it. However, IUR's claim against VDM is articulated in a sentence, without identification of the basis on which it has been quantified, and it appears that no steps have been taken to pursue it since it was articulated. In those circumstances, it seems to me that there is no basis for a finding that IUR has a genuinely arguable claim against VDM, and therefore no basis for a finding that VDM has a genuinely arguable claim against CBS derivative of that claim. That is sufficient to dispose of the suggestion that, by relying on the single paragraph in IUR's letter asserting its rights against VDM, VDM can establish a consequential offsetting claim in an amount exceeding $3,649,160 against CBS.
The alternative basis on which VDM asserts an offsetting claim against CBS depends on defects in CBS' work identified in the expert report of Mr Zakos, on which VDM relied in the adjudication. Mr Corsaro submits that those defects give rise to several breaches of the construction contract, including obligations to carry out the work with due skill and care that are implied by law, or implied under s 18B of the Home Building Act 1989 (NSW) or an express obligation arising from a warranty in the construction contract to similar effect. I did not understand Mr Adamopoulos, who appears for CBS, to assert that such obligations did not arise, or were not capable of being breached, by defective work by CBS. VDM relies on Mr Zakos' quantification of the costs of rectifying the defects at $227,100, which the parties accepted was exclusive of GST, and submits that, on that basis, the Demand would be reduced from $762,220.03 to $512,410.03. CBS also identifies an alternative basis for that reduction, by reference to a potential liability to IUR in respect of the defective works, but it is not necessary to consider that alternative basis for present purposes.
It seems to me that VDM has established a serious question to be tried as to a claim in the amount of $227,100 arising from the defective works identified by Mr Zakos, and that is sufficient to meet the relatively low standard that is required to establish an offsetting claim. I do not neglect Mr Adamopoulos' submission that that amount was not recorded as an amount recoverable by VDM against CBS, in a letter sent by VDM's solicitors to CBS's solicitors identifying VDM's assets and liabilities, and it also appears that no action has been brought by VDM against CBS in that respect. I give limited weight to those matters since, provided the defects identified in Mr Zakos' expert report existed, and the costs of remedying them were as that report indicates, then VDM could readily bring a cross-claim in that amount in response to an action for debt brought by CBS in respect of the debt arising from the adjudication.
For these reasons, it seems to me that an offsetting claim is established on that basis, for the amount of $227,100 exclusive of GST quantified by Mr Zakos' report. Where an offsetting claim of that amount is established, then the Court is obliged to determine the substantiated amount, being the amount of the Demand, less the amount of the offsetting claim, which, as calculated by the Plaintiffs, would be $512,410.03 and order that the Demand be varied to that amount.
[5]
Costs
Having reached that result, my preliminary view was that the Defendant should have its costs of the application, where it had been substantially successful in the application. The application was one that sought to set aside the Demand, not to vary it, and has failed in that respect. The amount of the variation is not insignificant, but will still leave a Demand of substantial size on foot, and a failure to meet that Demand will in turn give rise to a presumption of VDM's insolvency.
Mr Corsaro responded that VDM has had some success, since the amount of the Demand that was originally in the amount of $762,220.03 will be reduced to $512,410.03. That is a somewhat limited success because the operation of a creditor's statutory demand is not to give rise to a debt that is payable, beyond the existing debt that arises from the judgment debt, but to give rise to a presumption of insolvency if it is not met. That presumption of insolvency will equally arise if the payment of $512,410.03 is not made, as it would arise if the payment of $762,220.03 is not made.
Mr Adamopoulos in turn pointed out, with considerable force, that the basis on which the Demand was originally sought to be set aside, and the evidence which was led in respect of it, was significantly wider than the basis on which the application was put at this hearing. Mr Adamopoulos rightly acknowledges that VDM's Counsel are to be thanked for the sensible way in which they narrowed the issues that warranted argument, and did not pursue issues which, on any view, could not have succeeded. However, Mr Adamopoulos points to the fact that those wider issues, which were pursued until Counsel sensibly narrowed the case at the hearing, has resulted in additional costs for CBS in responding to the claim that was originally put.
On balance, both because VDM's success in varying the Demand seems to me to be a somewhat limited one, and CBS has ultimately sustained the Demand in a very substantial amount, and because of the additional issues raised by VDM but not pressed, it seems to me that I should maintain the tentative order for costs that I had indicated. This does not seem to me to be a case, and neither Counsel put it was a case, where the outcome could be fairly reflected by an order for a proportion of costs, and I am not persuaded that it would be a fair result, as Mr Corsaro submitted, to make no order as to costs of the application.
[6]
Orders
For these reasons, I make the following orders:
1. Pursuant to s 459H of the Corporations Act 2001 (Cth), the creditor's statutory demand, dated 23 December 2019 be varied from $762,220.03 to $512,410.03.
2. Declare the demand to have had effect, as varied, as from the date on which the demand was served on the Plaintiff.
3. The Plaintiff pay the Defendant's costs of the proceedings, as agreed or as assessed.
[7]
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: 31 July 2020
Parties
Applicant/Plaintiff:
Britten-Norman Pty Ltd
Respondent/Defendant:
Analysis and Technology Australia Pty Ltd
Legislation Cited (4)
Building and Construction Industry Security of Payments Act 1999(NSW)