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

The applicable principles

1. I now turn to the principles which are applicable to an application to set aside a creditor's statutory demand under s 459H(1)(a) of the Corporations Act. It is important that I address those principles first, before turning to the background of this application and the chronology of events because, as from time to time occurs in applications of this kind, there were occasions in the course of submissions where it appeared that I was being asked to determine the substantive dispute between the parties, rather than the question which I am properly required to determine, in addressing an application to set aside a creditor's statutory demand, namely whether there is a genuine dispute as to the Demand. The creditor's statutory demand regime procedure established under the Corporations Act gives rise to a presumption of insolvency, on a failure to meet a creditor's statutory demand, implicitly on the basis that a party which does not pay an undisputed debt can properly be presumed to be insolvent by reason of its failure. Plainly, there is less reason to make that presumption, if a debt is in fact disputed.
2. Section 459H(1)(a) of the Corporations Act in turn 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 of the debt to which the demand relates. The test has been variously formulated as requiring that the dispute is not "plainly vexatious or frivolous" or that it "may have some substance" or that it 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]. It is important to bear those propositions firmly in mind because, in identifying some of the correspondence and arguments which were put below, one might be forgiven for thinking that one was some way from the circumstances in which a summary judgment application could reasonably be made.
3. Returning to the authorities, in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 at 295, Hayne J observed that the Court would generally not embark upon an extended inquiry in order to determine whether there was a genuine dispute and "certainly will not attempt to weigh the merits of that dispute" and what was required was that the Court conclude that there is a dispute and that it is genuine. 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 it must be real and not spurious, hypothetical, illusory or misconceived. In CGI Information Systems and Management Consultants Pty Ltd v APRA Consulting Pty Ltd [2003] NSWSC 728; (2003) 47 ACSR 100 at [16], Barrett J in turn pointed out that the task faced by a company challenging a statutory demand on the genuine dispute grounds "is by no means at all a difficult or demanding one"; that the company would fail only if it were found that the contentions which it sought to rely upon in mounting its challenge were "so devoid of substance that no further investigation is warranted"; and that a finding of genuine dispute must follow once the company shows that even one issue has a sufficient degree of cogency to be arguable, and that the Court does not engage in any form of balancing exercise between the strengths of competing contentions, and it must find that a genuine dispute exists, if any factor is established that on "rational grounds indicates an arguable case on the part of the company."
4. A similar approach was taken in TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] and in Infratel Networks Pty Ltd v Gundry's Telco & Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27 at [44]. In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601, the Court of Appeal, in dealing with an offsetting claim, conducted a comprehensive review of the cases referable to whether a genuine dispute was established, and noted that the evidence in such an application need not "conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable". Their Honours also summarised the position (at [47]) as requiring that the Court "determine whether there was plausible evidence to establish the existence of a genuine dispute, not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim".
5. Having identified what needs to be established in order to establish a genuine dispute as to the relevant debt, I should turn now to indicate a chronology of the events, which will highlight the complexity, and to some extent the confusing character, of the dealings between the parties, as to some extent each of them may have modified their positions through correspondence between them.

Further background and affidavit evidence

1. Spartan distributes sporting products, inter alia, to Australian retailers. Dunlop is a company incorporated in the United Kingdom, but appears to have been represented in this matter by IBML, and the managing director of IBML, Mr Peter Wood, swore an affidavit on which Dunlop relied in order to resist the application to set aside the Demand.
2. Spartan was granted a licence, by another entity, in May 2012 to manufacture and sell products branded with the Dunlop and Slazenger brands, which include Dunlop's trademarks. Dunlop assumed the rights and obligations under that licence agreement, at least in respect of its intellectual property, in November 2014 and the licence agreement expired on 30 June 2015. In the period prior to the expiry of the licence agreement, negotiations took place between the parties as to royalties claimed by IBML, presumably on Dunlop's behalf, in respect of the first and second quarters of 2015, and a further issue arose as to a claim by IBML for an advance payment, in an amount of approximately $84,000, if Spartan was to be permitted to sell goods that were already on order after the termination of the licence agreement.
3. Spartan relies on three affidavits of Mr Galbraith, its chief operating officer, in its application to set aside the Demand, and Dunlop in turn relies on the affidavit of Mr Wood dated 12 April 2016. Those affidavits in turn annex voluminous correspondence between the parties, discussing the terms of the relevant termination, and the manner in which the royalties should be treated, on which Spartan relies to seek to establish a genuinely arguable claim that it is not liable to Dunlop in respect of the royalties claimed for the first and second quarter 2015, which are the subject of the Demand.
4. It appears that, prior to the period which is dealt with in evidence before me, the parties must have been in dispute, because, by email dated 14 July 2015, Mr Wood of IBML advised Mr Sharma, with a copy to Mr Galbraith, of Spartan, that IBML has asked its lawyers to stand down while they try to reach an amicable solution by a commercial means, and referred to a call in which agreement had been reached that certain information would be provided. By email dated 17 July 2015, Mr Galbraith in turn provided information, including a royalty statement for the second quarter 2015, an inventory list and details of future orders to IBML, reflecting the information which had been requested by the email dated 14 July. On 20 July, IBML in turn sent an email which attached invoices for the royalties for the first and second quarters of 2015, which are the invoices relied upon in respect of the Demand. It is unclear whether this is the first occasion on which the first quarter 2015 was invoiced, but it appears to have been the occasion on which the second quarter was invoiced, following the receipt of the information from Spartan. At about that time, IBML also demanded payment of the invoices and, by email dated 22 July, Spartan responded that it was not in a position to pay those invoices by Friday and needed to take steps to discuss a handover with IBML. Mr Cook, who appears for Dunlop, submitted that I should read that statement as a statement by a debtor indicating that it was not in a position to pay its debts when claimed. This is not, of course, a winding up application, but an application to set aside a creditor's statutory demand. I would not, in any event, read that email in that way, since the email is equally consistent with a position being taken by Spartan that it did not propose to pay the amount claimed within such a short period, and without reference to the handover arrangements which were then under discussion. Subsequently, handover arrangements and arrangements in respect of the first and second royalties appear to have proceeded in parallel.
5. On 29 July 2015, Mr Wood of IBML sent an email to Mr Galbraith, copied to Mr Sharma of Spartan, indicating that he was "running out of patience" with the issue between IBML and Spartan and putting three options for resolution of the issues. That email is titled, as are several of Mr Wood's emails, "without prejudice and subject to contract". No party took any objection to tender of the "without prejudice" correspondence in this application, and the effect of the reference to "subject to contract" was not entirely clear, so far as the principles in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 and Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313 may be applicable and was not the subject of detailed submissions before me.
6. The three options indicated in that email were, first, payment of outstanding invoices and an arrangement by which stock in the warehouse could be sold, and the forward order books supplied by Spartan, on the basis that a royalty would be paid to Dunlop, in advance. That reference is not to the first and second quarter royalties, but to the future royalty which would be payable in respect of the supply of future stock. I should set out the second option in full, because it became of some significance for the hearing of this application: "You transfer the forward order book to our licensee and provide details of the orders with the factories. Our licensee buys the stock from the factory on the same terms that you or your retail customer would buy the stock and sells it (with our permission) to the retailers and pays IBML the royalty. You deliver your stock on hand to our new licensee free of charge. If this is agreed then we would be prepared to write-off the outstanding invoices. We would instruct our licensee to contact the factories and the retailers directly to take over the orders and we would put them in touch with you to arrange this." A third option was, in effect, legal action between the parties.
7. By a further email on 22 July, Mr Wood wrote to a representative of Dunlop's new licensee, an entity named DesignWorks, and Mr Sharma of Spartan noting that he had spoken to Mr Sharma and "we have agreed subject to it working for you [DesignWorks] in the terms of the second option set out in the email dated 29 July 2015". Mr Cook puts that, at that point, there was no agreement that Dunlop would release the existing debt. The question for me, in this application, is of course not to determine whether such agreement existed, on a final basis, but whether there is a genuinely arguable case as to the existence of such an agreement. The question is also not, as Mr Cook framed it, whether there had been, at that point, an immediately effective release of the debt, but whether there is an arguable case that an agreement had been reached, or was reached by reference to subsequent correspondence, with effect that, in exchange for certain contractual commitments by Spartan, Dunlop would write-off the outstanding invoices. That would be consistent with, in effect, a write-off of the existing claim, in exchange for the promise of performance on the terms of that agreement. Before returning to that question, I should note the emails which followed.
8. On 30 July, Mr Santamaria of DesignWorks emailed Mr Wood and Mr Sharma of Spartan, setting out his understanding of the arrangements for dealings between Spartan and the factories that manufactured the goods and payment of royalty and commission and also referring to arrangements for the transfer of stock. By a further email dated 30 July 2015, Mr Wood in turn wrote to Mr Sharma, noting that he was "pleased" that Mr Sharma and Mr Santamaria had spoken, and discussing arrangements for contacting the factories, so that they can in turn pay DesignWorks the royalty, from which IBML, or Dunlop, would presumably be paid its royalty. By a further email dated 30 July, Mr Sharma in turn noted that he would get the process moving, and referred to his travelling overseas and the fact that Mr Galbraith would progress the matter in his absence.
9. Pausing here, Mr Afshar submits, that, at this point, an agreement had been reached, or at least there is a genuinely arguable case that an agreement had been reached, that Dunlop would write-off the outstanding invoices, on the conditions contemplated by the terms of the second option proposed by Mr Wood. Mr Cook in turn points to various difficulties with an agreement in that form, including the complexity involved in a transfer of the forward order book to the new licensee, DesignWorks, and to the matters which would need to be worked out in respect of the purchase of the stock from the factories. The question for me, of course, as I have emphasised above, is not whether an agreement exists but whether it is genuinely arguable that an agreement existed or, to put that question in another way, whether a pleading of an agreement, by reference to these emails, could be summarily dismissed on the basis that no arguable case was shown by it.
10. Once the question is framed in that way, it seems to me plain that an arguable case for the existence of a contract to write-off the outstanding invoices is established at this point. No doubt, there may be complexities in that contract, and it may well be that ultimately Spartan's case is the weaker and Dunlop's is the stronger, but that is not the question which the Court must decide in an application of this kind. The language of Mr Wood's email of 29 July refers to agreement having been reached with Mr Sharma of Spartan, and there are steps which are subsequently taken which at least arguably suggest that DesignWorks was satisfied with that agreement and was progressing it. That may not be established at a hearing on the merits, but that is not the question which I must determine, but only whether it is genuinely arguable. It seems to me that it is genuinely arguable, and a claim on that basis could not be summarily dismissed, so that a genuine dispute is established on that basis.
11. Secondly, Spartan seeks to establish a genuine dispute by reference to subsequent correspondence, by which point the earlier proposal developed, at least to the point that what was now contemplated was a settlement agreement in written form. By email dated 31 July 2015, Mr Wood sent Spartan a copy of a draft settlement agreement, which contained three terms, relating to the transfer of Spartan's forward orders to DesignWorks within seven days of signature of the letter agreement, and provided that the transfer would be deemed complete once DesignWorks would be in a "legal position" to supply forward orders to purchasers; that Spartan would deliver up to DesignWorks the Slazenger stock and the Dunlop stock; and that IBML would write-off and not seek payment of the royalty due under the licence agreements for the period 28 November 2014 until 30 June 2015, the first two quarters of 2015. That agreement in turn provided that, if Spartan failed to transfer the forward orders or deliver up the relevant stock within seven days, then the royalty write-off would be withdrawn and the royalty would become due and payable. The document also provided that it would become effective and binding upon signature by Spartan and Mr Sharma. On 7 August, although it does not appear that this was what was contemplated by the original email, Mr Galbraith returned a copy of the draft agreement, which had been signed by Mr Sharma, in a way that did not make entirely clear whether he was signing it for Spartan, in his capacity as a guarantor to Spartan, or both, and which was also returned under cover of an email suggesting an additional provision in respect of the manner in which the transfer of forward orders to DesignWorks should operate. Mr Cook submits, first, that this approach was not capable of giving rise to an agreement, because the document was, as it made clear, a draft, and because it was to be issued on Dunlop letterhead, and contemplated signature by Spartan and Sharma. There is force in each of these propositions, but it seems to me arguable that, and it need be no more than that, it would be open to a party to accept an offer that was said to be effective and binding upon its signature, by signing it, and that the suggestion made by Mr Galbraith could be treated as a suggestion, to be accepted or not by Dunlop or IBML as it wished, consistently with the return of a signed letter to IBML.
12. There is in turn a significant question, to which Mr Cook draws attention, as to whether or not the relevant requirements of the clause were or were not complied with, which turns upon their content, and what was done which is the subject of evidence led in the proceedings, and depending upon the outcome of that contest, then the provision for the royalty write-off to be withdrawn and the royalty to become due and payable might well take effect. However, these seem to me to be matters of fact, which would properly be determined on a contested hearing on the merits, and not matters that are capable of depriving an arguable case based on this exchange of its arguable quality for the purposes of an application of this kind.
13. Mr Cook also draws attention to the fact that, shortly after that letter had been signed by Mr Sharma, there was further correspondence between the parties in which, inter alia, IBML was identifying matters that would need to be confirmed before a settlement could be effected, and the parties were exchanging views as to what would be done. One oddity of part of that process is that IBML seems to have been seeking to require that Spartan do, prior to execution of a final settlement agreement, those steps which Spartan would only be required to take (if, as IBML now contends, that agreement had not then taken effect) pursuant to the settlement agreement. A further oddity of this period is that, by the time further issues were arising as to the arrangements between the parties and immediately before IBML withdrew from discussions, it advanced a complaint as to Spartan's conduct in this period, formulated as follows, in an email dated 13 August 2015 from Mr Wood to Mr Sharma: "It doesn't appear that in the two weeks I've been away that you've completed the stock transfer or forward order book transfer to Design Works that we agreed. We sent you a settlement agreement to this effect which you signed but still haven't actioned the above."
14. This seems to me to be a significant statement, so far as the question whether a genuinely arguable case is established on the part of Spartan, because it plainly contemplates that, so far as IBML was concerned, a stock transfer and forward order book transfer to DesignWorks had been agreed, presumably in the same agreement which provided for a write-off of the debt, and that the settlement agreement had been signed, but that Spartan had not complied with it. That is not, contrary to the position put by Dunlop in this application, a contention that no agreement existed, but instead the contrary contention that an agreement existed but that Spartan had not complied with it. As I noted above, whether Spartan had in fact not complied with it is a matter of fact, which would properly be determined in a merits hearing, rather than in an application of this kind.
15. I have engaged in this lengthy analysis of the correspondence to indicate the complexity of the exchanges between the parties, and that those exchanges are capable of being read in different ways. Spartan's position, so far as its application to set aside the Demand is concerned, is that an agreement was formed either on the exchange of emails in around July 2015, which it submits can be treated as having binding effect, although it was potentially to be formalised by a further agreement, or alternatively that an agreement was formed by the signing of the draft settlement agreement and its return to IBML as noted above. Spartan in turn contends, and leads evidence that, it complied with the settlement agreement, a matter which is in turn contested by Dunlop. Spartan in turn submits that while there are questions of interpretation, and may be questions as to the adequacy of its performance, those are matters that do not deprive its case based upon the alleged settlement agreement of a genuinely arguable character.
16. Mr Cook in turn put very detailed submissions that the contemporaneous documents have the consequence that the agreements for which Spartan contends are not genuinely arguable, in the sense that they do not give rise to a claim that warrants further investigation, and that there was no concluded agreement between the parties, either by the first or the second claimed agreement to which I have referred above. I recognise the subtlety of Mr Cook's submissions, and I recognise the strength of those submissions, if what was to be determined was, on the merits, whether a settlement agreement had been reached. However, I repeat that that is not the question which I must determine, but instead whether there is a genuinely arguable case that such an agreement had been reached, and that the agreement contemplated the writing-off of the invoices for the first and second quarters, provided certain things were agreed to be done, or were done, and that there is a genuinely arguable case that those things were done. It does not seem to me, with all respect to the detail and subtlety of Mr Cook's submissions, that any of them rise to the level that that case is not genuinely arguable, although it may well be a case that would not ultimately succeed at a hearing on the merits.
17. For all these reasons, I am satisfied, on the relatively low standard that is required to set aside a creditor's statutory demand, that a seriously arguable case is established to support an order that the Demand be set aside. In those circumstances, the Defendant should pay the Plaintiff's costs of the application.
18. Accordingly, I make the following orders:
19. Order pursuant to s 459H of the Corporations Act 2001 (Cth) that the creditor's statutory demand for payment of debt dated 8 December 2015 served upon the Plaintiff by the Defendant is set aside.
20. The Defendant pay the Plaintiff's costs of the application, as agreed or as assessed.

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: 30 August 2016