Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Limited [2015] NSWSC 2041 | Case summary

Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Limited [2015] NSWSC 2041 | Case summary | Zoe

By Originating Process filed on 12 November 2015, the Plaintiff, Halal Meats Australia Proprietary Limited ("Company") applies to set aside a creditor's statutory demand dated 23 October 2015 ("Demand") served by the Defendant, H R Woodward Foods Australia Proprietary Limited ("HRW"). The application is brought under ss 459G, 459H and 459J of the Corporations Act 2001 (Cth), and I will refer to the particular grounds of the application below.
The Demand claimed that the Company owed HRW the amount of AUD$634,270.19 "being the amount of the debts set out in the Schedule". The Schedule in turn describes the debt, now put in the singular, as follows: "Monies due and payable by the Company to [HRW] for the supply of meat and meat products at the company's request." That amount attributable was quantified as AUD$634,270.19, the amount claimed on the face of the Demand. There is, however, no doubt that the amounts stated in the Demand is not the product of a single transaction. It is instead the product of multiple amounts claimed by HRW against the Company in respect of multiple transactions. That is apparent from the evidence that refers to, for example, individual invoices or individual supplies, as well as adjustments made to those invoices or issues in relation to for example, the weight of the particular supplies (see for example, Ex P1, 67- 70).
The Demand is in turn verified by an affidavit dated 21 October 2015 sworn by a director of HRW which refers to having inspected the business records of HRW in relation to the Company's account with HRW, states that the director is able to say that the debt in the amount claimed is due and payable by the Company and states that there is no genuine dispute about the existence or amount of the debt.
There were, essentially, three bases on which the Company seeks to set aside the Demand. I will deal with them in a different order from that in which Counsel dealt with them since, in the result, it seems to me that one of those bases is conclusive although it was not the basis to which Mr Katekar, who appeared for the Company, initially gave greatest weight.
It will be apparent from what I have said as to the nature of the Demand that it does not specify the particular transactions which relate to the debt claimed. The debt claimed is, in substance, it appears, the outcome for which HRW contends for multiple transactions that are not identified in the Demand. That outcome is put in a very precise way, by reference to the figure of $634,270.19 to which the Demand refers. Even after the hearing of this application, the components which comprise that figure have not been exposed, so far as the particular invoices, or any adjustments which have been made to them, to give rise to that total are not addressed in the evidence and were not addressed in submissions.
There is evidence that the parties have been in discussions as to the amount of HRW's claim against the Company for a considerable period, and a significant amount of "without prejudice" correspondence was tendered without objection, by the Company, and further "without prejudice" material was then tendered, over objection, by HRW. It appears from that correspondence that, at least by October 2015, a proposed resolution of the dispute involved the payment by the Company to HRW of the amount of AUD$430,000 in instalments and to be secured. The Company then made a counter proposal, involving a more detailed draft deed of settlement and release, which recorded that between May 2015 and September 2015, HRW had supplied frozen and chilled lamb carcasses and cuts to the Company for a totalled invoice amount of $740,000, exceeding the amount claimed in the Demand; identified allegations made by the Company against HRW in respect of the supply, and recorded a proposed settlement of the same amount, but apparently without security. At that point, the settlement discussions between the parties failed. However, by a later letter dated 20 November 2015, which was an open letter, HRW's solicitors referred, implicitly, to the earlier discussions and indicated that HRW was prepared to concede that the Company had an arguable claim for breach of contract in terms set out in Mr Prasad's affidavit, to which I will refer below, and to concede that the arguable value of that claim was the difference between the debt claimed in the Demand of AUD$643,270.19 and the amount of AUD$430,000 which the Company contemplated to pay under the October settlement, and proposed a variation of the Demand so as to claim a debt of AUD$430,000. I will proceed on the basis that that letter was, in effect, an open letter of settlement of the application to set aside the Demand.
This correspondence is significant, it seems to me, because it indicates that the components which comprise the figure of the demand of $634,270.19 are by no means self-evident, not least because the Company's proposed deed of settlement recorded invoiced amounts of greater than that amount, suggesting that some of those invoiced amounts had not been claimed in the Demand. There is, however, no identification of where the difference between the amount of $740,000 recorded in the Company's draft settlement deed and the amount of $634,270.19 recorded in the Demand arises, whether in the Demand itself, in the affidavit supporting it or the evidence in this application.
This in turn leads to the first basis on which the Company seeks to set aside the Demand. Mr Katekar, who appears for the Company, notes that the Demand refers, at one point, to a single debt, and at another, to debts, although I have noted above that in fact the figure quoted in the Demand, on the evidence, is the total arising from multiple transactions. Mr Katekar points to the decision in Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139; (2005) 56 ACSR 223, and submits that there is a "defect" in the demand, for the purposes of s 9 of the Corporations Act, because, where a creditor's statutory demand relates to multiple debts, a separate description and a separate amount is required for each debt. Mr Katekar also submits that the defect is of such a quality that substantial injustice will be caused unless the Demand is set aside, for the purposes of s 459J(1)(a) of the Corporations Act.
Mr Hancock, who appears for HRW, in turn responds that there is no substantial injustice, because the Company knows what is the debt. I am not persuaded by that submission and it seems to me that there is substantial evidence to the contrary. First, so far as the evidence goes, the affidavit of Mr Prasad dated 12 November 2015 read in the proceedings indicates, in paragraph 28, that he has assumed that the debt relates to the supply of frozen and chilled lamb carcasses and cuts to the Company in the period from May 2015 and September 2015, as to which he refers to various disputes to which I will refer below. Mr Prasad was not cross-examined and the contrary was not put to him. An assumption as to the subject matter of the Demand is not the same as knowledge of the particular transactions comprised in it.
Second, so far as the evidence of the Company's understanding of the amount due in that period is concerned, the figure stated in the draft deed of settlement to which I have referred above is different from the figure stated in the Demand. Third, it is difficult to see how the Company could know what that amount comprises if it is not possible for it to say, for example, whether the amount claimed does or does not include charges for particular transactions which are disputed, or are potentially open to dispute, in particular, a transaction addressed in the evidence in which goods were delivered with inconsistent production date records, and were required to be destroyed. That difficulty was emphasised by the fact that Counsel for HRW was not able to indicate whether the amount claimed in the Demand did or did not include that amount in the course of submissions.
Turning now to the legal position in respect of a defect of that character, professional commentary has long recognised that particular care is required when drafting a creditor's statutory demand for multiple debts, and that each of the debts claimed should be itemised in the demand together with the total sum demanded. That proposition is recognised in Mr Assaf's useful text, Statutory Demands and Winding Up in Insolvency, 2nd ed 2012, LexisNexis Butterworths at [3.18]. Mr Assaf there notes that a failure to do so will mean that there is a defect in the demand - a proposition which, although well-established, was not conceded by Mr Hancock in submissions - although a demand will not necessarily be set aside because of such a defect. Mr Assaf in turn refers at paragraph [7.24] to the observations of Barrett J in Condor Asset Management Ltd v Excelsior Eastern Ltd above, and points to the risk that a creditor's statutory demand will be set aside if it does not identify the particular debts which are the subject of the claim, and it cannot be said that the debtor has sufficient information to determine that matter from its own records. Here, it seems to me that cannot be said, because the debtor's statement of the amount that it believed to be due, in the draft settlement deed, is inconsistent with the amount specified in the Demand. Mr Hancock submitted that this line of authority is not applicable, because here there is one debt and not multiple debts. I do not accept that submission. It seems to me that a claim that involves multiple transactions or multiple claims necessarily involves multiple debts, and that proposition is not avoided by simply totalling them and claiming that the total of the separate transactions, claims or debts is a single debt.
In Condor Asset Management Ltd v Excelsior Eastern Ltd above, Barrett J referred to, and endorsed, the observation of Lindgren J in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 15 ACSR 682 that a statutory demand relating to two or more debts must give a description of the individual debts and state their amounts as well as state the total of those amounts. His Honour noted that that matter is of significance, not least because it will allow the debtor to determine whether any particular debt is genuinely disputed at the time of receipt of the demand. His Honour qualified that proposition by observing, and I also accept, that that question must be addressed in its context and that a defect will not be productive of substantial injustice if, viewed in the light of what the recipient of the relevant demand already knows or ought reasonably be expected to know, it contains sufficient information to assess its liability for the amounts demanded.
That decision has been noted, and approved, in multiple subsequent cases, in some of which substantial injustice has been established, and in others of which it has not. In Re YCH Logistics (Australia) Pty Ltd [2013] NSWSC 1874 at [10], Brereton J noted that a creditor's statutory demand must contain a sufficiently clear and accurate description of the debt claimed to identify to a reasonable person in the shoes of a director of the indebted company the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to its existence or amount, or any offsetting claim. His Honour noted that the demand must enable the Company served with it to identify with precision the debt of each and every one of the multiple debts upon which it is based and, where multiple debts are claimed, each must be itemised, together with the total sum claimed. His Honour observed that failure to describe a debt with sufficient clarity is a defect in the demand, although such a defect will warrant setting aside the demand only if the Court is satisfied that the defect will be productive of substantial injustice unless the demand is set aside.
In the present case, I am satisfied that the absence of specification of the way in which the Demand was made up, so as to allow the Company to determine whether, for example, it did or did not include the transactions and corresponding debts as to which particular issues had been raised, does give rise to substantial injustice. It seems to me that that necessarily follows from the fact that, first, Mr Prasad's unchallenged evidence is that he had to assume the matters to which the Demand relates and second, that the total claimed is inconsistent with the Company's reference to the total in the draft deed of settlement to which I have referred above. That proposition does not seem to me to be displaced because, as Mr Hancock submits, the Company here does not bring an application to set aside the demand by reference to a genuine dispute. Indeed, that matter points to the difficulty of the Company's position, because, if it was not possible to identify what were the components of the Demand, then it would also not be possible to assess whether those components were, individually, the subject of a genuine dispute. That is the very difficulty to which Barrett J pointed in Condor Asset Management v Excelsior Eastern Ltd above.
That conclusion is sufficient in itself for me to reach the result that the Demand should be set aside. I shall therefore deal more briefly with the other bases on which the Company claims that the Demand should be set aside.
The second basis on which the Company contends that the Demand should be set aside, to which the parties advanced substantial submissions, is the existence of a genuine offsetting claim. That matter is addressed at some length in Mr Prasad's affidavit and in the correspondence which is attached to that affidavit. Mr Prasad identifies four issues which are said to give rise to that offsetting claim, namely the supply of chilled lamb carcasses with non-conforming weights and weight discrepancies; incorrect labelling of frozen meat products or, more precisely, the fact that certain meat was not specifically labelled for export into Saudi Arabia and other meat was supplied in cartons with a particular brand identified rather than generic cartons; third, inconsistent records of production dates which, it appears, led to the destruction of at least one shipment of meat to which I referred above; and, fourth, an occasion on which lamb carcasses were supplied with a 12 month expiry date instead of a 24 month expiry date. Mr Prasad's affidavit identifies a number of occasions on which these disputes were referred to in correspondence, and I am satisfied that there is evidence that at least these matters arose in the dealings between the parties, although that is not sufficient in itself to establish an offsetting claim.
Mr Prasad relies on an indicative valuation report which he caused a firm of accountants associated with the Company to prepare, after the Demand had been served. Mr Katekar, rightly, acknowledges that that report has some difficulties. In particular, the report appears to calculate the loss claimed by the Company as the difference between the value of the Company on a going concern basis as at 13 May 2015 and its value on the basis of a winding up at that date. There are several difficulties with a calculation on that basis, so far as it is relied on to establish an offsetting claim. The first is that, as Mr Katekar fairly conceded, there is something of a disconnect between the evidence that Mr Prasad gives of damage to the Company's business in the Middle East, and the assumption of a winding up of the Company in that calculation, both because there is no evidence as to whether the Company exports to markets other than the Middle East, so as to allow an assessment of the extent to which the whole or part of its business has been damaged and, second, because there is no suggestion that the Company was in fact wound up in May 2015 so as to crystallise the loss which is said to be claimed. Indeed, Mr Prasad's evidence is to the contrary, so far as the Company, he says, has been forced to exit the Middle Eastern market, and the costs incurred by it have been wasted, but intends to re-enter the market.
There seems to me to be substantial force in Mr Hancock's submission that the loss which is quantified by that report does not correspond to the loss which would result, in the ordinary course, or indeed as a matter of fact, from the conduct alleged against HRW. The question for me, however, is not to determine a claim of that kind on its merits, but only to determine whether a genuine offsetting claim is established. Mr Katekar draws attention to authorities which indicate that the threshold for such a claim is relatively low, including Frederico's Restaurant Pty Ltd v Warwick Entertainment Centre Pty Ltd (1995) 18 ACSR 702 and, in a somewhat different context, Karimbla Construction v Alliance Group Building [2003] NSWSC 617 at [27]. The question of what is necessary to establish an offsetting claim has subsequently been considered by the Court of Appeal of the Supreme Court of New South Wales in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Limited [2013] NSWCA 344; (2013) 85 NSWLR 601, to which I drew the parties' attention during the course of submissions, and I have in turn reviewed the relevant principles, as they exist since Britten-Norman, in Re Diveva Pty Ltd [2015] NSWSC 509. In order to establish an offsetting claim, the Company must establish 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 and that claim is made in good faith and is arguable and not frivolous or vexatious. In Britten-Norman, after a detailed review of the authorities, the Court of Appeal noted the "relatively low minimum requirements" for demonstrating an offsetting claim, and noted that that required that the claim be made in good faith, and that there is "an issue deserving of a hearing" or a "plausible contention requiring investigation". The Court of Appeal noted at [36]: "It is apparent ...that evidence sufficient to satisfy this test, given the time period in which the affidavit must be filed, cannot and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable."
At the same time, the Court of Appeal referred to Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 and recognised that the Court is not required to accept uncritically every statement in an affidavit, where it was inherently improbable or did not have sufficient prima facie plausibility to merit for the further investigation, and summarised the position at [47] as being that the Court's role is: "[T]o 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."
Mr Katekar frames the claim as one of an implied term in contract, the contract plainly being of a very informal character, based on the dealings between the parties, or alternatively, possibly, as a claim for misleading and deceptive conduct arising, for example, from labelling of products as to weight. Given the conclusion which I have reached on another ground, it seems to me that I can properly address this issue relatively briefly. It seems to me that, at least in respect of the issues as to non-conforming weights, and the labelling of products to be exported into Saudi Arabia, and inconsistencies in production dates, a serious question requiring investigation has been established that there may exist an implied term requiring that products be delivered marked with accurate weights at the point of delivery rather than at the point of dispatch, that they be labelled for export into the countries into which they were intended to be exported, and that production dates be consistent, where the consequence of inconsistency would include potential destruction of the products that were supplied. I am not convinced that a serious question to be tried has been established in respect of the issue as to 12 or 24 month expiry dates, where it does not appear that there is any particular reason to think that a term could be implied that one is preferable to the other, as distinct from specified as between the parties.
I am not convinced, on the evidence as it stands, that the Company has established a serious question to be tried that it has suffered loss in the amount quantified in the valuation report on which it relies, but it is not necessary for me to express a view as to whether it has potentially suffered loss exceeding the amount of the Demand, given the views which I have formed on different grounds. I note that the position is complicated by the fact that, in the present case, HRW had conceded, as I noted above, in open correspondence between the parties, that the Company had an arguable claim for breach of contract and that the amount attributable to that claim would be the difference between the debt and the amount of $430,000 offered by the company in October. That might suggest that, in these circumstances, it would be difficult for the Court to avoid a conclusion that a genuinely arguable offsetting claim existed at least for that amount, where HRW had itself apparently conceded that amount. Given the conclusions which I have reached on other grounds, it is not necessary to reach a final conclusion in that matter.
Finally, the Company seeks to set aside the statutory demand on the basis of abuse of process, relying on the principle in Createc Pty Ltd v Design Science Pty Ltd [2009] WASCA 85; (2009) 71 ACSR 602 and initially contending that HRW knew that the debt was disputed, but issued the Demand in order to exert improper commercial pressure in the context of ongoing negotiations. It seems to me that, put in that way, the claim could not succeed, because I accept Mr Hancock's submission, that, in the particular case, the Demand was served after the rejection of the settlement deed propounded by HRW, and the making of a counter-offer by the Company, which I infer HRW was not inclined to accept. On the date that counter-offer was made, it appears the Demand was issued.
However, in oral submissions, Mr Katekar put this proposition on a somewhat wider basis, and it seems to me that the proposition has force on that somewhat wider basis. Section 459J(1)(b) of the Corporations Act permits the Court to set aside a demand where there is some other reason for it to do so. The Court's power to set aside a demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Corporations Act and is to be used to counter an attempted subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746; Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; (2005) 53 ACSR 229. A particular situation in which a creditor's statutory demand may be set aside is where it claims amounts that the issuer should have recognised are genuinely disputed: First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939; Wildtown Holdings Pty Ltd v Rural Traders Company Ltd [2002] WASCA 196 at [41]; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [44]. It seems to me that that proposition in turn reflects the wider proposition that the creditor's statutory demand regime under Pt 5.4 of the Act does not exist to collect debts that are the subject of dispute, or debts where significant offsetting claims are known to exist. That reflects the nature of the provisions, which are intended to create a summary procedure to give rise to a presumption of insolvency, where a company does not pay an undisputed debt as to which it has no genuinely arguable offsetting claim.
It is necessary to step back to recognise the position which existed at the time the Demand had been served and throughout this application. Here, there had been correspondence over a long period recording alleged difficulties with the products which had been supplied, including the difficulties on which reliance is now placed to establish an offsetting claim. Shortly before the Demand was served, a draft settlement deed was circulated, prepared by the solicitors for HRW, which itself recorded in its recitals, that a dispute had arisen between the parties about the supply and payment for the supply by HRW of meat and meat products, and also recorded a proposal to resolve the dispute for a lesser amount than the amount then claimed in the Demand. A further draft deed, prepared by the Company's solicitors, had gone further to expressly identify claims that HRW had supplied carcasses with non-conforming weights on labels and other weight discrepancies and that frozen meat products supplied by HRW were incorrectly labelled and that the Company had suffered loss and damage to its business and reputation as a result. That document also recorded a proposal for settlement in the same lesser amount, although, as I noted above, that settlement was not then concluded. Subsequently, but prior to the commencement of this hearing, HRW's solicitors had in turn, as I noted above, returned to the possibility of settlement, acknowledging the possibility, in open correspondence, that the Company had an arguable claim which could arguably be valued in an amount exceeding $200,000.
In these circumstances, when settlement discussions between the parties collapsed, it was open to HRW to commence proceedings to recover the claimed debt. Those proceedings should have been brought in a court of appropriate jurisdiction and determined at a hearing on the merits, at which evidence could have been led and witnesses cross-examined, in a full hearing and not in a summary procedure of the kind involved in an application to set aside a creditor's statutory demand. The commencement of such a claim would in turn have, in effect, required the Company to advance its defence, if it denied the amount due, or any cross-claim in respect of the disputes recorded in the draft settlement deed. Instead, in circumstances where there had been correspondence over a long period identifying the alleged difficulties and deficiencies with the supply, where there had been settlement proposals which recorded the fact of the dispute between the parties, including the claim made by the Company that it had suffered loss, a creditor's statutory demand was served, verified by an affidavit that confirmed there was no genuine dispute as to the amount claimed. That proposition may strictly be so, depending on what are the components of that amount, but it certainly did not address the existence of any offsetting claim of the kind that was plain from previous correspondence.
It seems to me that, in these circumstances, HRW's claim should properly be brought and determined as a claim for debt in the ordinary way. Such a claim would have allowed a determination of the issues in dispute on the merits. The service of a creditor's statutory demand in that circumstance, where it was plain that an offsetting claim existed, and its continuance in circumstances that it had been acknowledged that it was seriously arguable that that offsetting claim was arguable as to specific matters and could be allowed value in excess of $200,000, seems to me to amount to a misuse of the creditor's statutory demand procedure under Pt 5.4 of the Corporations Act, and in that sense creates some other reason to set aside the Demand. For that reason also, I would order that the Demand be set aside under s 459J(1)(b) of the Corporations Act.
Accordingly, I make orders that:
The creditor's statutory demand dated 21 October 2015 served by the Defendant upon the Plaintiff on 23 October 2015 be set aside.
The Defendant pay the Plaintiff's costs of this application, as agreed or as assessed.

Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Limited

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (3 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (10)

Cited By (8)