Britten Norman Pty Ltd v Analysis & Technology Pty Ltd

The nature of the Demand and the affidavit evidence

1. The Demand identified the amount claimed by QPL as $190,114.82, described in a Schedule as follows: "Unpaid amount due and owing under Payment Deed made by Christopher Joseph Sievers, Airclub Pty Ltd as trustee of the Airclub Discretionary Trust, and [QPL] on or about 26 September 2023."
2. The Payment Deed is made between those parties and provides, in cl 2, that the Sellers (as defined) must pay QPL the specified amount, exclusive of GST, to a specified bank account by 13 October 2023, and that amount is to be treated as a reduction of the purchase price under a Share Sale Agreement for the purposes of a clause of that Agreement.
3. Turning now to the affidavit evidence on which the parties rely in the proceedings, Airclub reads, in support of the application to set aside the Demand, an affidavit dated 27 September 2024 of its solicitor, Mr Humphrey. Mr Humphrey referred to the terms of a Share Sale Agreement dated 29 September 2022 between Mr Sievers and Airclub as Sellers and QPL as Purchaser in respect of companies forming the "Air Affairs Group". He referred to a term of the Share Sale Agreement, to which I have been taken, which required QPL to transfer $5 million to a bank account held by the "Escrow Agent" (as defined), and to cll 8.2 and 8.3 of the Share Sale Agreement which provided, broadly, for the Escrow Amount to be released to the Sellers, in an amount of $2.5 million on or about 30 November 2023 and $2.5 million on or about 30 November 2024, subject to claims for breach of warranty and the mechanism for determining those claims which gives rise to complexities which I address below.
4. Mr Humphrey in turn refers to notice of claims for breach of warranty given by QPL, which has declined to direct the Escrow Account holder to pay the First Escrow Amount to the Sellers and, as events have developed, declined to authorise payment of the Second Escrow Amount; to the entry into the Payment Deed, which appears to be connected with an aspect of that dispute; and to the commencement of proceedings in the Commercial List which are directed to resolving the relevant disputes and which are currently under way. Mr Humphrey in turn referred to the service of the Demand on 4 September 2024 and identified an offsetting claim for which Airclub contends: "on the basis that the amount claimed by [QPL] under [the Demand] is significantly less than the amount claimed by the Sellers in the [Commercial List] proceeding."
5. It is now common ground that the amount claimed by QPL in the Demand would not be significantly less, but marginally less, than the amount claimed by Airclub, which is a relatively small proportion of the amount claimed by the two Sellers in the Commercial List proceeding.
6. The exhibit to Mr Humphrey's first affidavit includes the Share Sale Agreement, and I have been taken to the recitals in that Agreement; to cl 2.2.1 which deals with the sale and purchase of the relevant shares; and to cl 3.1 which provides for the purchase price, including the Escrow Amount as defined, and provides that, relevantly, on Completion, QPL must pay the Escrow Amount as defined to an Escrow Account (as defined) in accordance with the Escrow Deed. Clauses 8.2 and 8.3 of the Share Sale Agreement in turn provide for the treatment of the First Escrow Amount and the Second Escrow Amount, in circumstances that, as at 12 and 24 months after the Completion Date, there are, first, no outstanding claims by QPL or breach of warranty, or there exist outstanding claims by QPL or breach of warranty. Each of those clauses provides that, where Outstanding Claims exist, as is now the case, within five Business Days after any Outstanding Claims are agreed, finally determined by a Court of competent jurisdiction or otherwise resolved, Airclub and QPL, relevantly, must direct the Escrow Agent to pay the value of the finally determined claims to QPL and the balance of the relevant escrow accounts to the Sellers, including, relevantly, Airclub. There has been significant focus on the operation of that clause in the course of submissions. Schedule 1 to the Share Sale Agreement in turn provides that Airclub was, relevantly, the seller of 3.87% of the shares that were sold pursuant to their Share Sale Agreement, and that has the consequence that the amount to which it would be entitled from the Escrow Amount is a lesser proportion, although sufficient, if established to exceed the amount claimed in the Demand.
7. By a second affidavit dated 12 December 2024, Mr Humphrey referred to the extension of the amount claimed in the Commercial List proceedings, which has now been effected by an amendment of those proceedings to extend to a claim for the Second Escrow Amount due on 29 November 2024.
8. QPL in turn relied on the affidavit of its solicitor, Mr Clarke, dated 10 October 2024, which addressed the position in respect of warranty claims and correspondence between the parties concerning that matter.

Whether Airclub has an offsetting claim under s 459H of the Act

1. As I noted above, the first basis on which Airclub seeks to set aside the Demand is by reference to s 459H(1)(b) of the Act, which provides that an offsetting claim is the amount of a claim or claims that a person has against the person who served the creditor's statutory demand by way of, inter alia, counter claim or cross demand, whether or not the amount arises out of the same transaction or transactions as to the debt to which the statutory demand relates.
2. In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70 at [71], Dodds Streeton JJA summarised what was ordinarily necessary to establish an offsetting claim, namely that the party that seeks to establish that claim: "It is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. The dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile... it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice"
3. In Britten Norman Pty Ltd v Analysis & Technology Pty Ltd (2013) NSWLR 601; [2013] NSWCA 344, the Court of Appeal observed that: "...to establish an offsetting claim, a party must show 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."
4. The relevant principles were also reviewed in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2010) 136 ACSR 583; [2019] NSWSC 60 at [62]ff where Bell P (as the Chief Justice then was) observed that: "The question is not whether the evidence is necessary to establish the offsetting claim or its amount, but whether it is sufficient to establish that the offsetting claim is genuine, and its genuine level... It is sufficient if there is a plausible contention requiring investigation... The offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and not be merely fanciful or futile..."
5. These observations point, however, to part of the difficulty here. There is little or no evidentiary dispute as to the relevant contractual arrangements; there is no dispute as to the fact that proceedings are ongoing in the Commercial List, and no attempt has been made to strike out or summarily dismiss Airclub's claim in those proceedings, although there is a dispute in those proceedings as to the extent to which QPL can establish warranty claims, so that a payment need not be made from the Escrow Account, brought by QPL by Cross Claim in those proceedings. There is, instead, a very close analysis, advanced by the parties, as to the contractual provisions and a debate as to whether those contractual provisions are such as to give rise to an "offsetting claim" for the purposes of s 459H of the Act, which I remind myself means a "genuine claim" that Airclub has against QPL by way of counterclaim.
6. Mr Mitchell draws attention, first, to the history of the proceedings and advances two propositions as to why the suggested claim is not presently an "offsetting claim". The first proposition is that, on the proper construction of the Share Sale Agreement, Airclub presently has no entitlement to any part of the First Escrow Amount, because there are outstanding claims against it for breach of warranty and otherwise in relation to the Share Sale Agreement that exceed the $2.5 million First Escrow Amount, and presently exclude any recovery by Airclub as a proportion of that amount. Mr Mitchell submits that there is not yet (even if there may in the future be) an obligation on QPL to direct the Escrow Agent to pay all or part of the First Escrow Amount to QPL, and such an obligation will not arise until the Cross Claim brought by QPL in the Commercial List is determined. This submission turns on the construction of cl 8.2 and cl 8.3 of the Share Sale Agreement, the former in respect of the first escrow claim, and the latter in respect of the second escrow claim where the same issues arise. There is force in that submission as a matter of construction of the relevant clauses, where each of the clauses provides that, where there are outstanding claims by QPL for breach of warranty, then the amounts are to be paid to the Sellers and QPL depending upon, relevantly, the determination by a Court of competent jurisdiction of the claims, which is presently occurring in the Commercial List proceedings.
7. I have also been taken to case law which addresses issues as to the status of contingent claims or claims which are not presently enforceable, for example, because proceedings to enforce them are stayed. These decisions include, in the bankruptcy context, in Re a Bankruptcy Notice [1934] 1 Ch 431; again in the bankruptcy context, James v Abrahams (1981) 34 ALR 657; in the context of the creditor's statutory demand where the proceedings to enforce the claim had been stayed, Manioitis v Valimi Pty Ltd (2002) 4 VR 386; and, in the context of a claim for costs that was yet to be assessed, Fleur De Lys Pty Ltd v Jarrett (2004) 51 ACSR 238; [2004] FCA 1357. None of these decisions is to be squarely on point, and the earlier decisions both concern the Bankruptcy Act as then in force, and do not address the definition of "offsetting claim" that is now contained in s 459H of the Act.
8. Here, it seems to me that an "offsetting claim" is established for the purposes of that section. That term is defined as a "genuine claim" that the company, relevantly Airclub, has against QPL by way of, inter alia, "counter claim". Airclub plainly has a genuine claim against QPL proceeding by way of counter claim in the Commercial List, which asserts that an amount is presently due to Airclub by reason of the time of amounts falling due for payment out of the Escrow Amount, on the basis that the warranty claims asserted by QPL do not have substance. I should proceed on the basis that that claim is a genuine one, because it is ongoing in the Commercial List with no attempt having been made to strike it out. I recognise that the relief claimed is not the payment of a monetary amount, or compensation, directly by QPL to Airclub, but orders for payment of amounts from the Escrow Account to the Sellers including Airclub. I will return to the relevance of that matter below. I accept that, to the extent that I can properly address construction issues in respect of cll 8.2 and 8.3 of the Share Sale Agreement in an application of this kind, these clauses contemplate that payment will only be made by QPL once a warranty dispute is determined. However, notwithstanding the decisions dealing with different matters to which I have been taken, it seems to me that Airclub's claim is still a "genuine claim" and it still presently exists against QPL so as to constitute an "offsetting claim" for the purposes of s 459H of the Act, notwithstanding the payment under it will only be made when the proceedings in which that claim is to be determined are resolved. For that reason, it seems to me that QPL cannot succeed on the first basis on which it contends that an offsetting claim is not established.
9. I can deal more briefly with the second basis on which QPL contends that an offsetting claim is not established. QPL submits, plainly correctly, that the relief sought by Airclub in the Commercial List proceedings is not itself a monetary demand, so far as it is not an order requiring payment by QPL to the Sellers. As I noted above, as presently framed, Airclub's Amended Summons in the Commercial List proceedings seeks orders that QPL direct the Escrow Agent to pay the First and Second Escrow Amount to Airclub pursuant to cll 8.2 and 8.3 of the Share Sale Agreement. The difficulty with QPL's contention, however, is that that is the way in which the claim is presently formulated in the Commercial List proceedings and not the only way in which a claim could be put. I raised with Mr Mitchell, in the course of submissions, whether Airclub's claim could equally well be brought as a claim for breach of contract, sounding in monetary damages, by reason of alleged non-compliance by QPL with the Share Sale Agreement, and that the elements of that claim would simply be that an obligation for QPL to cause the payment from the Escrow Account now existed, on the case put by Airclub in the Commercial List proceedings that there is no breach of warranty, and that QPL was, on that hypothesis, in breach of that obligation, with the compensation recoverable being the amount that had not been paid by it to the Sellers including Airclub.
10. Mr Mitchell, in subtle submissions in response, noted the possibility that damages recoverable could be a different amount to that claimed by Airclub, but it seems to me that those submissions did not displace an offsetting claim put on that basis. On that straightforward basis, it seems to me that an offsetting claim presently exists, notwithstanding that, likely for practical reasons, QPL has not sought to formulate its claim that way in the Commercial List, but instead to have recourse against the moneys held in the Escrow Accounts rather than to seek compensation against QPL. If I were wrong in that view, I would likely have accepted the alternative argument put by Mr Cooper, that Airclub's claim, for payment out of the Escrow Accounts sufficiently sounds in money to constitute an offsetting claim for the purposes of s 459H of the Act.
11. It follows that Airclub has established an offsetting claim which exceeds the amount of the Demand, where these were the only two bases on which QPL sought to displace that claim and they have not been established.

Alternative claim to set aside the Demand for some other reason under s 459J(1)(b) of the Act

1. It is therefore not necessary to address Airclub's alternate claim under s 459J of the Act, and I will not need to hear further submissions from the parties in respect of it or reach a final decision in respect of it. I should, however, make some preliminary observations, without expressing a final view. First, it seems to me that there is reason to think that, where the amount claimed by QPL in the Demand depended on legal issues that had a significant overlap with the matters that were to be determined in the Commercial List proceedings, then the issue of the Demand may amount to an abuse of the statutory regime under s 459G of the Act where it would require those issues to be determined in parallel to and in isolation from the issues raised in the Commercial List proceedings.
2. Second, there would arguably be a substantial disconnect between any non-payment of the amount claimed by the Demand and any proper inference of Airclub's insolvency, where any non-payment of the amount claimed by Airclub would potentially reflect the fact that connected issues are currently in dispute in the Commercial List proceedings, rather than any lack of solvency on its part. In these circumstances, it seems to me that there is also a real prospect that it is an abuse of the statutory regime under s 459G of the Act to serve the Demand, where that would potentially require Airclub either to make the payment claimed, without regard to its claims in the Commercial List proceedings, or incur the costs of proving its solvency. I am reinforced in that view because it seems to me very likely that a judge would ultimately either decline to wind up Airclub in the exercise of his or her discretion while the Commercial List proceedings are ongoing, or defer any winding up order until after the Commercial List proceedings were determined, because of the likelihood that the determination of those proceedings would significantly impact any basis for a winding up order.
3. Third, it seems to me that the issues to which I have referred, in respect of the need to construe complex contractual arrangements in order to address this application, at the same time that those contractual arrangements were likely to be construed by another judge in the Commercial List proceedings, may also give rise to some other reason to set aside the Demand.
4. I emphasise that I do not reach any final view as to these matters, as to which I did not hear full submissions. However, it seems to me the parties should exercise caution before issuing a creditor's statutory demand in respect of a matter which is closely connected with ongoing proceedings, against the risk that that demand would ultimately be set aside for some other reason under s 459J(1)(b) of the Act.

Orders

1. For these reasons, the Demand dated 4 September 2024 served by QPL is set aside with costs.

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 December 2024