CBS Commercial Canberra Pty Ltd v Axis Commercial

Federal Court of Australia|2022-05-12|Before: Re J, Dr AJ, Mr P, Halley J

Solicitor for the Plaintiff: Meyer Vandenberg Lawyers

ORDERS ACD 34 of 2021 IN THE MATTER OF CBS COMMERCIAL CANBERRA PTY LTD (ACN 625 265 385) BETWEEN: CBS COMMERCIAL CANBERRA PTY LTD Plaintiff

AND: AXIS COMMERCIAL (ACT) PTY LTD Defendant

The statutory demand dated 28 April 2021 addressed to the plaintiff, CBS Commercial Canberra Pty Limited ACN 625 265 385, be set aside pursuant to s 459G of the Corporations Act 2001 (Cth).
Subject to any consent position with respect to the payment of the costs of the proceeding: a. the plaintiff is to file and serve written submissions on costs limited to three pages by 4.30 pm on Thursday, 19 May 2022; b. the defendant is to file and serve written submissions on costs limited to three pages by 4.30 pm on Thursday, 26 May 2022; c. the plaintiff is to file and serve any submissions in reply on costs limited to one page by 4.30pm on Thursday, 2 June 2022; and d. the issue of costs is be determined on the papers unless either party seeks an oral hearing. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

HALLEY J: 1 By an originating process dated 19 May 2021 the plaintiff (CBS) seeks to set aside a statutory demand dated 28 April 2021 issued by the defendant (Axis) in an amount of $845,674.79 (Statutory Demand). 2 The Statutory Demand was based on an adjudication determination (Determination) pursuant to the Building and Construction (Security of Payment) Act 2009 (ACT) (SOPA). The Determination was registered as a judgment of the Supreme Court of the Australian Capital Territory on 16 April 2021. 3 CBS contends that it has offsetting claims within the meaning of s 459H(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act) that arose in the period up to 23 December 2020 in an aggregate amount of $1,454,603.00 (Offsetting Claims) that it can rely upon to establish a genuine counterclaim falling within s 459H(5). 4 The principal issues to be determined in this case are: (a) whether an offsetting claim that has been rejected in an adjudication determination under the SOPA can be relied upon as an offsetting claim for the purposes of setting aside a statutory demand pursuant to s 459H of the Corporations Act; (b) whether the Offsetting Claims are in truth claims that can properly be characterised as offsetting claims; and (c) whether the Offsetting Claims are genuine. 5 For the reasons that follow, I have answered each of these questions in the affirmative.

Evidence 6 CBS relied on four affidavits from Mr John Katsanevakis, a director of CBS, sworn on 19 May 2021, 16 December 2021 (two affidavits) and 5 May 2021. Mr Katsanevakis was not cross examined. 7 The 19 May 2021 affidavit of Mr Katsanevakis was the affidavit that was served with the application to set aside the Statutory Demand. 8 In the shorter of his 16 December 2021 affidavits Mr Katsanevakis annexed a copy of his statutory declaration and the exhibit bundle that CBS had relied upon before the adjudicator, Mr John Murray (Adjudicator). In his longer 16 December 2021 affidavit Mr Katsanevakis gave evidence of events that had occurred following the Determination and identified additional offsetting claims for liquidated damages, backcharges and variations that CBS now made that had not been advanced to the Adjudicator in the course of the Determination. 9 CBS was granted leave to re-open its case on 6 May 2021 to read the affidavit sworn by Mr Katsanevakis on 5 May 2021 to clarify the date on which CBS received the Statutory Demand, given there were conflicting dates for service in his 19 May 2021 affidavit and the longer of his 16 December 2021 affidavits. 10 Axis relied on the following affidavits: (a) two affidavits from Mr Jiawei (Jerry) Zhu, a project engineer for Axis, sworn 28 October 2021 (providing a general overview of the factual background and annexing relevant contractual documents, notices, emails, certificates and orders) and 23 February 2022 (annexing a copy of his statutory declaration and the exhibit bundle that Axis had relied upon before the Adjudicator); (b) an affidavit from Mr George Diab, a director of Project Claims Analysis Pty Ltd, sworn 29 October 2021 (annexing a copy of his delay expert report that Axis relied upon before the Adjudicator); and (c) an affidavit from Ms Joy Yuan, a project estimator for Axis, sworn 22 February 2022 (disputing the alleged entitlement of CBS to the further backcharges identified by Mr Katsanevakis in his longer 16 December 2021 affidavit). 11 Mr Zhu, Mr Diab and Ms Yuan were not cross examined.

Factual Background 12 Axis was engaged by CBS as a sub-contractor to undertake work at a building site located in Gungahlin in the Australian Capital Territory (Site). 13 In or about September 2019, Axis was scheduled to commence set-out works on the Site but the formal commencement date for the set-out works was delayed to mid November 2019 due to alleged defects in the structural designs for the Site. 14 In the period between 21 November 2019 and 20 November 2020, Axis submitted 13 progress claims to CBS. CBS provided 13 payment schedules to Axis in response to the progress claims. 15 On 19 December 2019, CBS and Axis entered into an AS4303-1995 subcontract for the construction of internal partitions and the installation of external cladding at the Site (Subcontract). 16 Item 5 of Part A of the Subcontract provided that the "Date of Practical Completion" was 1 July 2020. Item 5 also provided that the rate of liquidated damages was $5,000.00 per day. By cl 35.6 of the Subcontract, CBS was entitled to liquidated damages at that rate if Axis failed to achieve practical completion by the Date of Practical Completion. 17 Axis did not reach practical completion by 1 July 2020. Axis did not ask CBS for a certificate of practical completion and no certificate of practical completion was issued to Axis. 18 On 3 November 2020, CBS sought liquidated damages of $550,000.00 for the period 2 July 2020 to 20 October 2020 in Payment Schedule 12 issued in response to Progress Claim 12. 19 On 4 January 2021, Axis submitted Progress Claim 14 in an amount of $1,192,580.83 (excluding GST), which included amounts previously unpaid for Progress Claims 11 to 13. 20 On 13 January 2021, CBS requested that Axis provide it with the keys for the apartment units constructed on the Site in order to achieve practical completion but Axis declined to provide the keys because of unpaid progress claims. 21 On 15 January 2021, CBS provided Axis with a payment schedule in response to Progress Claim 14. The payment schedule included 27 separate deductions, described as backcharges and numbered BC1 to BC26 (noting BC12 was split into two backcharge claims), for works performed by third party subcontractors, which in aggregate amounted to a sum of $264,287.75 (Payment Schedule). 22 On 20 January 2021, Axis served a show cause notice on CBS pursuant to cl 44 of the Subcontract alleging a number of breaches by CBS, including claiming back charges, making claims for unliquidated damages for which it had no entitlement and deducting liquidated damages and claiming delays when CBS's programmes were deficient and there was no critical path provided under the Subcontract (Show Cause Notice). 23 On 25 January 2021, CBS responded to the Show Cause Notice. 24 On 1 February 2021, Axis lodged an adjudication application under the SOPA. 25 On 16 February 2021, CBS lodged an adjudication response under the SOPA. 26 On 8 March 2021, the Adjudicator made the Determination under the SOPA in an amount of $783,474.63 (Adjudicated Amount). In summary, the Adjudicator relevantly concluded that: (a) the value of the contracted works completed to the date of the Determination was $5,425,295.51; (b) the aggregate amount of undisputed variations sought by Axis was $307,363.05 (Undisputed Variations); (c) all disputed variations sought were rejected, other than Variation 5 in an amount of $6,003.00 (Allowed Variation); (d) Axis had agreed to the deduction of an amount of $137,877.00, described as "Negative Variations", in respect of work that was within the original scope of the works but had subsequently been removed (Negative Variations); (e) he was precluded by reason of s 22(4) of the SOPA from considering BC2, BC5, BC6, BC8 and BC19, in an aggregate amount of $42,122.22, for work undertaken by other contractors because of alleged bad workmanship and/or incomplete work (Excluded Backcharges) because they were advanced pursuant to the indemnity provisions in cl 17.1 of the Subcontract, which was different to the basis on which they had been advanced in the Payment Schedule; (f) CBS was entitled to the amounts sought in BC1, BC3, BC4, BC7, BC10 and BC11, in an aggregate amount of $51,633.00, for work that Axis had agreed was to be undertaken by other contractors (Allowed Backcharges); (g) CBS was not entitled to the amounts sought in BC12(No 1), BC12(No 2), BC13, BC15, BC16, BC17, BC18, BC21, BC22, BC23, BC24, BC25 and BC26, in an aggregate amount of $116,605.28, for works taken out of the hands of Axis due to alleged delays in carrying out the works (Rejected Backcharges); (h) CBS was not entitled to charge Axis liquidated damages of $550,000.00 (Original Liquidated Damages Claim) as the expert evidence of Mr Diab was that the deficiencies in the construction programmes that CBS had provided to Axis were of such a serious nature that it was not able to identify a critical path and therefore it would follow that Axis would not be able to identify a critical path; hence, it would have been equally impossible for Axis to have submitted any claims to obtain an extension of time and equally, even if submitted, it would have also have been impossible for the Superintendent or CBS to have assessed such a claim in accordance with cl 35.6 of the Subcontract; and (i) a further reason for rejecting the Original Liquidated Damages Claim was that, as Mr Diab had explained, the "poor quality" of the CBS construction programmes would not have permitted Axis to "effectively plan and execute the construction, coordination, resourcing and management of its work from a time, risk and financial perspective" and so plan its activities to achieve practical completion by 1 July 2020, the date specified for practical completion in the Subcontract. 27 The basis on which the Adjudicator arrived at the Adjudicated Amount was as follows: Subcontract Works completed to date $5,425,295.51 Plus Undisputed Variations and Allowed Variations $313,366.05 $5,738,661.56 Less Negative Variations $137,877.00 $5,600,784.56 Less Allowed Backcharges $51,633.00 $5,549,151.56 Original Liquidated Damages Claim $nil $5,549,151.56 Less Retention capped at 5% of Subcontract sum $276,914.82 $5,272,236.74 Less Amount paid to date $4,559,987.07 Adjudicated Amount (ex GST) $712,249.67 Plus GST $71,224.96 Adjudicated Amount (incl. GST) $783,474.63

28 On 22 March 2021, the authorised nominating authority, Adjudicate Today Pty Limited, issued an adjudication certificate in an amount of $845,674.79, comprising the Adjudicated Amount, interest of $8,500.16 and total fees of $53,700.00 paid by Axis on behalf of CBS (Adjudication Certificate). 29 On 20 April 2021, CBS served a notice of dispute pursuant to cl 47.1 of the Subcontract on Axis in which it, inter alia, claimed an entitlement to liquidated damages for delay, backcharges and/or damages for defective works, and included further offsetting claims that had not been advanced before the Adjudicator comprising: (a) a claim for liquidated damages for delay between 20 October 2020 and 23 December 2020 at $5,000.00 per day, in aggregate an amount of $325,000.00 (Subsequent Liquidated Damages Claim); (b) a further 12 backcharge claims, numbered BC27 to BC38 for various matters including for a fire audit, replacing unit entry door and common area cylinders, rectification of fire doors and finishing incomplete insulation work, in an aggregate amount of $81,220.79 (Subsequent Backcharges); and (c) a further negative variation in an amount of $55,529.55 for plywood cladding on the basis that Axis had only performed a portion of the supply and installation of plywood cladding in the lobby at the Site and refused to complete the remainder (Subsequent Negative Variation). 30 On 16 April 2021, the Adjudication Certificate was filed in the Supreme Court of the Australian Capital Territory and registered as an enforceable order on 20 April 2021 (Judgment Debt). 31 On 28 April 2021, Axis served the Statutory Demand on CBS. The debt alleged to be due and owing in the Statutory Demand was the Judgment Debt. 32 On 19 May 2021, CBS filed the originating process in this proceeding seeking to set aside the Statutory Demand.

Offsetting claims 33 The meaning of "offsetting claim" is defined in s 495H(5): offsetting claim means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates). 34 The test for determining whether there is a genuine offsetting claim is whether the Court is satisfied that there is a serious question to be tried or an "issue deserving of a hearing" as to whether a company has such a claim against the creditor: Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 (Beazley P, Meagher and Gleeson JJA) at [30], citing Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451 at 467 (Beazley J, as her Honour then was); Chase Manhattan Bank Australia Ltd v OSCTY Pty Ltd (1995) 17 ACSR 128 (Chase Manhattan) at 136 (Lindgren J) and Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454; [1998] FCA 824 (Emmett J, as his Honour then was). 35 The offsetting claim must be bona fide and based on truly existing facts and not a claim that is spurious, hypothetical, illusory or misconceived: BBB Constructions Pty Ltd v Frankpile Australia Pty Ltd (2008) 68 ACSR 1; [2008] NSWSC 982 (BBB Constructions) at [4] (Brereton J), citing Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269; [2006] SASC 91 at [47]. 36 As Palmer J explained in Macleay Nominees Pty Ltd v Belle Property East [2001] NSWSC 743 at [18]: In my opinion, a genuine offsetting claim for the purposes of [the Corporations Act] s.459H(1) and (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith" means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s.459H(1) and (2). 37 In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, Thomas J stated at 605: [B]eyond a perception of genuineness (or the lack of it) the court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it). 38 The Court is not called on to determine the merits of, nor to resolve, the dispute. If the Court sees any factor that, on rational grounds, indicates an arguable case, it must find that a genuine dispute exists even where any case apparently available to be advanced to the contrary seems stronger: First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108 at [21]. 39 Only a claim that is capable of being quantified as an amount of money can qualify as an "offsetting claim": Chase Manhattan at 135 (Lindgren J).

SOPA and Security of Payments legislation 40 The SOPA and other equivalent State Acts (together Security of Payment legislation) apply to construction contracts. A person who carries out work under a construction contract is provided with a statutory entitlement to progress payments as and from each "reference date" under the contract. A scheme is also established by the Security of Payment legislation for the resolution of disputes, principally through extra-judicial adjudication, commencing with the service of a payment claim and concluding with an adjudication determination by an independent adjudicator. 41 The statutory object of the SOPA is set out in s 6: (1) The object of this Act is to ensure that a person is entitled to receive, and is able to recover, progress payments if the person - (a) undertakes to carry out construction work under certain construction contracts; or (b) undertakes to supply related goods and services under certain construction contracts. 42 In Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd (2010) 78 NSWLR 393; [2010] NSWCA 190 the scope and purpose of the New South Wales legislation equivalent to the SOPA was described by McDougall J at [110] in these terms: The Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act) seeks to ensure, among other things, that those who perform construction work pursuant to construction contracts have enforceable rights to progress payments. The statutory mechanisms for achieving that aim include a number of elements. There is a statutory right to progress payments despite any contractual provision to the contrary. In the event of disagreement, there is a statutory mechanism, called adjudication, for the interim determination of entitlements to progress payments. 43 Relevantly for present purposes the statutory mechanism for the payment of progress claims in the SOPA includes ss 25, 26 and 27. 44 Section 25 provides: 25. Respondent must pay adjudicated amount If an adjudicator decides that a respondent must pay an adjudicated amount to a claimant, the respondent must pay the amount to the claimant on or before - (a) the day 5 business days after the day after the day the adjudicator's decision is given to the respondent; or (b) If the adjudicator decides a later day under section 24(1)(b) - the later day. 45 Section 26 provides that if a respondent fails to pay an adjudicated amount the claimant may obtain an adjudication certificate from the authorised nominating authority to whom the adjudication application was made. 46 Section 27 provides: 27. Filing of adjudication certificate as judgment debt (1) An adjudication certificate may be filed as a judgment for a debt, and may be enforced, in any court of competent jurisdiction. (2) The adjudication certificate must be accompanied by an affidavit by the claimant stating that the amount of the adjudicated amount that has not been paid at the time the certificate is filed. (3) If the affidavit states that part of the adjudicated amount has been paid, the amount to be recovered is the unpaid part of the adjudicated amount. (4) If the respondent starts a proceeding to have the judgment set aside, the respondent - (a) is not, in the proceeding, entitled - (i) to bring any cross-claim against the claimant; or (ii) to raise any defence in relation to matters arising under the construction contract; or (iii) to challenge the adjudicator's decision; and (b) is required to pay into the court as security the unpaid part of the adjudicated amount pending the final decision of the proceeding.

Security of Payment legislation and s 459H 47 Until the decision of the Western Australian Court of Appeal in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 (Diploma), it had been established by a series of cases in New South Wales and in Queensland that it was sufficient to set aside a statutory demand founded on an adjudication debt under the SOPA if it could be established that there was a genuine dispute as to whether the adjudicated amount was in truth payable as a matter of contract. 48 In Diploma, the Court held that an argument that adjudicated amounts under the SOPA were not in truth, as a matter of contractual right, due and payable, could not give rise to a genuine dispute as to the existence or amount of the resultant judgment debt. In Diploma, Pullin JA (with whom Newnes and Murphy JJA agreed) stated at [77]: In my respectful opinion, Plus 55 and Ettamogah and the cases depending on them are plainly wrong and should not be followed insofar as they stand for the proposition that the person who owes a debt which is due and payable by reason of an adjudicator's determination and subsequent judgement, can raise a genuine offsetting claim merely by contending that it is not 'in truth, indebted for the amount' determined as due and payable or that, despite the determination, the contractor was not 'contractually entitled' to the amount determined or certified to be due by the adjudicator. 49 The interrelationship between offsetting claims considered in the course of an adjudication determination under the SOPA and any reliance on those offsetting claims in an application to set aside a statutory demand under s 459H of the Corporations Act has not been fully explored in previous authorities. 50 The Court of Appeal in Diploma, however, stated at [68] (Pullin JA, with whom Newnes and Murphy JJA agreed) that: There is no doubt that the recipient of a statutory notice may successfully apply to set aside a statutory demand based on an adjudicator's determination or a consequent judgment if it has offsetting claims arising from transactions separate from those that give rise to a judgment debt based upon an adjudication under the Act: Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 [17] (Campbell J). 51 In Diploma a distinction was drawn between, on the one hand, a debt that was due and payable by reason of the adjudicator's determination and subsequent judgment and on the other hand, an offsetting claim "arising from transactions separate from those that gave rise to a judgment debt based upon an adjudication under the Act". 52 The scope of what transactions the Court of Appeal had in mind is not readily apparent. For example, it is not apparent whether it intended to include offsetting claims that were considered and rejected by an adjudicator in the course of the adjudication determination but which, if they had been accepted, would have led to a reduction in the debt determined by the adjudicator. 53 A statement to the same effect as the statement in Diploma at [68] had earlier been made by Brereton J In BBB Constructions at [2]: Although in the past it was contentious, it is now well established that the circumstance that a creditor's statutory demand is founded upon a debt arising from an adjudication under the Building and Construction Industry Security of Payment Act does not preclude the setting up of an offsetting claim pursuant to s 459H on an application to set aside such a demand: Greenaways Australia Pty Ltd v CBC Management Pty Ltd [2004] NSWSC 1186; Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 at [18]-[20]; and, in particular, in respect of an offsetting claim Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284. 54 In Re Douglas Aerospace Pty Ltd (2015) 294 FLR 137; [2015] NSWSC 167, Brereton J rejected a contention that offsetting claims were also precluded by the reasoning of the Western Australian Court of Appeal in Diploma: 93 Third, as to offsetting claims, the authorities on BACISOPA are uniformly consistent with general principle relating to offsetting claims, holding that a "true" offsetting claim - for example, a cross-claim for damages for negligence or breach of contract, or the recovery by way of restitution of amounts already allegedly overpaid - may be relied on to set aside a statutory demand founded on an adjudication certificate. That is because the effect of s 459H(1)(b) is that any claim the company has against the creditor falls within the definition of offsetting claim, and this is unaffected by any special features of the debt that founds the demand. 94 Mr Botsman argued that it was inconsistent in principle with Broadbeach to admit such claims as offsetting claims under s 459H: Though Broadbeach concerned a s 459G application based on a "genuine dispute", as a matter of logic and the symmetrical structure of s s459H(1), the same reasoning applies where the review proceeding raises an offsetting claim. Thus, just as a genuine dispute in relation to a final debt is not a genuine dispute in relation to the interim debt, an offsetting claim in relation to the final debt is not an offsetting claim in relation to the interim debt and in both cases the operation of s 459G is excluded. 95 I do not agree. There is nothing inconsistent with holding that although a debt is beyond dispute, a demand for it may be met by an offsetting claim. Once it is appreciated that this encompasses any offsetting claim, which need have no connection with the debt, the special characteristics of the debt - including any legislative policy reflected in the statute that creates it - are not relevant to the availability of an offsetting claim [cf John Shearer Ltd v Gehl Co]. About such offsetting claims, Broadbeach is silent - unsurprisingly in the context where the Commissioner of Taxation is the creditor, it does not address at all the question of "offsetting claim". The judgment of the Court of Appeal in Diploma provides no support for the defendant's submission in the present case that Broadbeach precludes even an offsetting claim for damages for negligence or breach of contract; to the contrary, it accepts that such offsetting claims, if genuine, may be invoked to set aside a demand founded on a judgment debt arising from an adjudication. 96 Accordingly, the position that a genuine cross-claim for damages for negligence or breach of contract or restitution will result in a statutory demand being set aside or varied is undisturbed by Diploma. Thus while a demand for an amount adjudicated under BACISOPA is not amenable to a "genuine dispute" under s 459H(1)(a), it remains vulnerable to a genuine "offsetting claim" under s 459H(1)(b). 55 In Project Venture Development No 11 Pty Ltd v TQM Design & Construct Pty Ltd (2009) 234 FLR 391; [2009] NSWSC 699, a statutory demand was set aside on the basis of a claim for liquidated damages. 56 In Re J Group Constructions Pty Ltd (2015) 303 FLR 139; [2015] NSWSC 1607 (J Group), Robb J held that offsetting claims that had been rejected by an adjudicator in the course of undertaking a determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOPA) could be relied upon as offsetting claims in an application to set aside a statutory demand pursuant to s 459H, stating: 165 The court does not in the present case face the difficulty that I have discussed in theory above, that would have arisen if the adjudicator had determined an adjudication amount that made an allowance for the rectification costs of defective work, so that the amount in the adjudication certificate was already a net amount of a claim and an offsetting claim. I therefore do not have to deal with the problem of how to proceed, if the adjudicator had already made an allowance for some or all of an offsetting claim made by J Group. 166 Instead, in the present case, the better view is that the adjudicator has rejected both offsetting claims made by J Group, so that the amount of the adjudication certificate represents the value of the work done by PGA, so that the certificate is based upon the adjudicator's assessment of a debt that arises under the contract. 167 The real question that therefore arises in the present case is as to how the court should treat J Group's offsetting claims for the purposes of s 459H(1)(b) and (2), in circumstances where they have been rejected by the adjudicator. 168 In my opinion, the answer to this question is that the offsetting claims remain available for the purposes of the present application, and that they are "true" offsetting claims, being for damages for breach of contract: see Douglas Aerospace at [93]. Sections 23 and 25 of the Security of Payment Act may have the effect that the adjudication amount cannot reasonably be disputed by J Group, but the statutory provisions do not clothe the adjudicator's reasoning with any finality that must be accepted by the court.

CBS 57 CBS submits that it is advancing "true" offsetting claims and is not merely asserting that the adjudicated sums are not payable under the Subcontract. Accordingly, it submits that the decision in Diploma does not prevent it from relying on the Original Liquidated Damages Claim, the Rejected Backcharges and the Excluded Backcharges (together Original Offsetting Claims) to set aside the Statutory Demand. 58 CBS further submits that the Subsequent Liquidated Damages Claim, Subsequent Backcharges and Subsequent Negative Variation (together Subsequent Offsetting Claims) are claims that were not advanced before the Adjudicator and therefore on no view could they be precluded by the decision in Diploma from being raised as genuine offsetting claims and each was also a "true" offsetting claim. 59 CBS submits that the Original Offsetting Claims are "genuine" offsetting claims by reference to the reasoning of the Adjudicator and the findings that he made in the Determination. 60 CBS submits that it is apparent from the Determination that the Original Liquidated Damages Claim is a complex matter involving extensive submissions, expert evidence and disputed questions of fact and law. It submits the Subsequent Liquidated Damages Claim is in the same position. 61 CBS submits that it is also apparent from the Determination that the Rejected Back Charges raised complex questions of fact and law and that the Adjudicator did not address the Excluded Backcharges because the basis for the payment of those back charges had not been specified in any payment schedules. It characterised this as a kind of pleading point that arose under the SOPA and demonstrated that, in truth, these claims had not been determined by the Adjudicator.

Axis 62 The principal submission advanced by Axis is that the rejection of the Original Offsetting Claims by the Adjudicator means that they can no longer be genuinely in dispute and therefore CBS is precluded from now relying on them for the purpose of establishing a genuine offsetting claim for the purposes of s 459H(5) of the Corporations Act. 63 Counsel for Axis accepted that the decision of Robb J in J Group was an impediment for Axis in resisting the application by CBS to set aside the Statutory Demand but submitted that the decision was plainly wrong and should not be followed. He submitted that the decision was antithetical to the principle, established by Diploma, that a challenge to a debt the subject of a determination by an adjudicator under Security of Payment legislation could not subsequently be relied upon as giving rise to a genuine dispute for the purposes of s 459H. Axis submits that, logically, a matter which was taken into account in determining the quantum of the debt should be equally incapable of doing so. 64 Axis submits that CBS is "completely denuding" or "neutralis[ing]" the objects of the SOPA to advance a cross claim, relying upon matters that have been previously been determined adversely against it by the Adjudicator. It submits that it served the Statutory Demand by reason of the failure by CBS to make payment of the statutory debt created by operation of the SOPA. It submits that in the creation of that statutory debt, the Adjudicator considered the arguments advanced by the plaintiff in this application and rejected them. 65 The submissions by Axis were directed at the "Offsetting Claims" considered and rejected by the Adjudicator. It is apparent from the affidavit of Joy Yuan that the entitlement of CBS to each of the Subsequent Offsetting Claims is disputed, but no submission was advanced by Axis that these could not be relied upon by CBS as offsetting claims in its application to set aside the Statutory Demand. 66 Axis submits that the application by CBS should be dismissed; or, in the alternative, if CBS is successful in arguing that there is a genuine counter claim, the Court ought to find that the quantum of that claim remains less than the Judgment Debt by a sum that would justify the maintenance of the Statutory Demand, albeit for a lesser sum.

Is the decision in J Group plainly wrong? 67 Prior to J Group the authorities had not been required to address explicitly the availability of offsetting claims in s 459H applications that had been considered but rejected by an adjudicator in the course of determinations under Security of Payment legislation. 68 As explained above, in J Group Robb J determined that offsetting claims that had been rejected by an adjudicator could be relied upon as genuine offsetting claims in an application to challenge a statutory demand pursuant to s 459H of the Corporations Act. 69 His Honour's reasoning was based on the following considerations. 70 First, the underlying purpose of the procedure provided for in Division 3 of Part 5.4 of the Corporations Act. His Honour referred to the explanation of that underlying purpose in Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277 in which Barrett J (as his Honour then was) stated: The purpose of the statutory demand process is to test whether a company's failure to pay a particular debt should be regarded as a reliable indicator of likely inability to pay debts generally so that, in proceedings for winding up on the insolvency ground, it should be for the company to prove that it is solvent rather than for the plaintiff to be put to proof of actual insolvency. The reliability of the indicator is undermined if there is a genuine dispute as to the existence or amount of the demanded debt. In such a case, the inference that failure to pay one debt is a product of inability to pay debts generally is not safe. Nor is it safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt. 71 His Honour then observed at [150] that in applying that principle it was necessary to bear in mind that a creditor with the benefit of a statutory debt under the SOPA had various means of enforcing the debt without resorting to the statutory demand procedure. In that context his Honour referred to the following statement by Campbell J (as his Honour then was) in Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 at [20]: Next, it was submitted that, if it were possible to rely upon an offsetting claim to set aside a statutory demand, the object of the BACISOP Act would not be achieved. I do not accept that this is so. There are means of enforcement, short of a winding up action, which are open to a judgment creditor. When a judgment has been obtained pursuant to the BACISOP Act, if the judgment debtor does not pay it voluntarily, then the judgment creditor can use the range of remedies open to a judgment creditor. It is not possible, however, for the terms of a Commonwealth Act, the Corporations Act 2001 (Cth), to be construed, or limited, by reference to the intention implicit in a State Act. The provisions of Div 3 of Pt 5.4 of the Corporations Act 2001 (Cth) set out a regime whereby a statutory demand is set aside whenever there is an offsetting claim, as defined. 72 I pause to observe that there is some tension between the proposition that the regime established by Division 3 of Pt 5.4 for the setting aside of statutory demands cannot be construed or limited by reference to a State Act and the reasoning of the Court of Appeal in Diploma. Prima facie, one would expect the principle would apply equally to setting aside a statutory demand based on a genuine dispute as to the existence or the amount of the debt. 73 Second, the manner in which applications to set aside a statutory demand are intended to proceed from a practical perspective. In that context, Robb J referred to Drum Café Australia Pty Ltd v Lieberman [2010] NSWSC 642 in which Barrett J (as his Honour then was) stated at [13]: It must be emphasised that s 459G applications are not to be approached by the parties as some form of holding pattern or a formalised negotiation arena while they try to settle their differences. The procedure is expected to be a swift and efficient one under which the existence or non-existence of a genuine dispute is determined promptly and in a relatively summary way so that it can be seen without undue delay whether grounds for the presentation of a winding up position exist. A simple matter such as this should not have been before the Registrar on numerous successive occasions in the way that it was. 74 His Honour observed at [152] that there may be scope for unwarranted complexity if it was necessary in determining applications to set aside statutory demands to investigate the basis on which the adjudication decision was reached in order to determine whether an offsetting claim could be relied upon by the party seeking to set aside the demand. 75 Third, his Honour then stated that the "conclusive" approach taken to "tax debts" for the purposes of Div 3 of Pt 5.4 of the Corporations Act, as confirmed by the plurality (Gummow ACJ, Heydon, Crennan and Kiefel JJ) in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41 (Broadbeach), is explained by tax debts having "special incidents or characteristics attached, which do not pertain to ordinary debts" (J Group at [154]-[156]). His Honour also pointed to the legislative policy respecting the recovery of tax debts notwithstanding pending challenges to their assessments referred to by the plurality in Broadbeach but observed at [159] that: It is one thing, however, to say that a court applying s 459J(1)(b) of the Commonwealth Corporations Act must take into account the legislative policy in another Commonwealth statute; it is entirely another to say that the court should take into account the legislative policy in a State statute, particularly when to do so may compromise the fundamental objective of the Corporations Act: see the extract from Demir Pty Ltd v Graf Plumbing Pty Ltd set out above. 76 Fourth, his Honour stated that while ss 23 and 25 of the NSW SOPA may preclude a challenge to the adjudication amount, those provisions do not "clothe the adjudicator's reasoning with any finality that must be accepted by the court". Sections 23 and 25 of the NSW SOPA are in the same substantive terms as ss 25 and 27 of the SOPA. 77 I am not satisfied that the decision of Robb J in J Group was plainly wrong and should not be followed. 78 I accept that there is a degree of tension between the respective statutory purposes of the Security of Payment legislation and the statutory demand procedure in Division 3 of Pt 5.4 of the Corporations Act. Significantly, however, as Robb J observed, there is no statutory procedure in the Security of Payment legislation for offsetting claims equivalent to that provided for the payment of progress claims in ss 23 and 25 of the NSW SOPA (and in the equivalent ss 25 and 27 of the SOPA). 79 The enforcement of payment provisions in the SOPA are directed at payment of adjudicated amounts through the provision, if necessary, of an adjudication certificate and the filing of that certificate as a judgment for a debt that can be enforced by any court of competent jurisdiction. Offsetting claims might reduce by way of set off the adjudication amount but the SOPA does not purport to provide any prohibition on subsequently seeking to rely upon or advance claims that are in truth offsetting claims rather than disputes as to the existence of the underlying progress claims the subject of the adjudicated amount. 80 Moreover, I respectfully agree with Robb J that there is a material distinction between policy considerations concerning the finality of a statutory debt, in particular tax debts and judgment debts based upon an adjudication of disputed progress claims under Security of Payment legislation, and offsetting claims relied upon as a set off before an adjudicator. 81 Contrary to the submissions of Axis, I therefore do not accept that permitting an offsetting claim that has been rejected by an adjudicator to be relied upon by a party seeking to challenge a statutory demand is antithetical to the policy of the Security of Payment legislation. 82 Finally, I note that Robb J did not have to address in J Group the status of an offsetting claim that had been accepted by an adjudicator and taken into account by way of a set off in the determination of the adjudication amount. In my view, to the extent that the whole or any part of an offsetting claim had been "taken into account" by an adjudicator because it had been set off against amounts determined to be owing under progress claims, it has thereby reduced the adjudicated amount and cannot logically also be relied upon as an offsetting claim for the purposes of s 459H. Any alleged indebtedness owing on any part of an offsetting claim that has been set off against amounts conclusively to be found by an adjudicator to be owing on progress claims in determining an adjudication amount must necessarily be extinguished. The amount of the alleged indebtedness has in those circumstances, as a matter of substance, been incorporated in the adjudicated amount.

Are the CBS claims "true" offsetting claims? 83 I am satisfied that the Original Liquidated Damages claims are "true" offsetting claims in that the claims for delay damages exist independently of the progress claim and the variation claims the subject of the Determination. As counsel for CBS submitted, if the Adjudicator had rejected all of the claims made by Axis in the Adjudication Application, the delay claims for liquidated damages would not be affected. They could still be advanced by CBS against Axis. They turned upon the resolution of factual disputes distinct from the matters the subject of the progress claim and variations claims, in particular the adequacy of the construction programmes that CBS provided to Axis. They were advanced in the adjudication not to reduce the amount of the progress claim made by Axis but rather as a set off to any amount determined by the Adjudicator with respect to the variation claims. 84 Although not considered as part of the Determination, the Subsequent Liquidated Damages Claim also turned upon the resolution of the same distinct factual issues. 85 Further, it is not apparent how it could be alleged, and no submission was advanced that it could be alleged, that the Subsequent Backcharges and the Subsequent Negative Variation, neither of which were considered by the Adjudicator, could not also be relied upon as offsetting claims to set aside the Statutory Demand. I am therefore satisfied that they are offsetting claims falling within s 459G(5) of the Corporations Act and can be relied upon by CBS in its application to set aside the Statutory Demand. 86 Counsel for Axis initially appeared to concede that the various backcharges claims were also "true" offsetting claims but subsequently submitted that those claims did pertain "in part" to expenses that were incurred in "furtherance" of the variations the subject of the Determination. The submission was not further developed. For present purposes it is unnecessary to reach any concluded position on this issue as the combined quantum of the Original Liquidated Damages Claim and the Subsequent Offsetting Claims exceeds the amount sought in the Statutory Demand.

Are the CBS claims "genuine" offsetting claims? 87 Notwithstanding the extent of the affidavit evidence read by the parties on the application, the basis on which Axis contended that the Offsetting Claims were not genuinely in dispute and therefore could not be genuine offsetting claims was that they had been determined by the Adjudicator. Counsel for Axis did not seek to contend by reference to the affidavit evidence that the Offsetting Claims were not otherwise genuinely in dispute. 88 Independently of the approach taken by Axis, I am satisfied that the summary in the Determination of the competing contentions advanced by the parties and the Adjudicator's reasoning and conclusions in the Determination establish that each of the Original Offsetting Claims is genuinely in dispute. The Original Offsetting Claims were not merely assertions of claims before the Adjudicator but were quantified and substantiated by supporting documents, including tax invoices for the costs incurred by CBS rectifying the defects the subject of the Rejected Backcharges and the Excluded Backcharges and by references to specific provisions in the Subcontract. 89 I am also satisfied that the longer 16 December 2021 affidavit of Mr Katsanevakis establishes that the amounts sought in each of the Subsequent Offsetting Claims are genuinely in dispute. Again, these are not merely assertions of claims. They are quantified claims and substantiated by supporting documents, including tax invoices for the costs incurred by CBS rectifying the defects the subject of the Subsequent Backcharges and by references to specific provisions in the Subcontract. 90 Given my conclusions above, at least the Original Liquidated Damages Claim in the amount of $550,000.00, the Subsequent Liquidated Damages Claim in the amount of $325,000.00, together with the Subsequent Backcharges in the amount of $81,220.79 and the Subsequent Negative Variation in the amount of $55,529.55, were "true" offsetting claims. The quantum of those claims, in aggregate $1,011,750.34, substantially exceeds the amount of $845,624.79 sought in the Statutory Demand. I note, for completeness, that the quantum alone of the Original Liquidated Damages Claim and the Subsequent Liquidated Damages Claim, namely $875,000.00, exceeds the amount claimed in the Statutory Demand.

Disposition 91 An order is to be made setting aside the Statutory Demand. 92 I note the plaintiff has indicated that it wishes to be heard on the question of costs. I will give the parties an opportunity to make short written submissions on costs and I will then determine the form of the appropriate costs order on the papers unless a party seeks to have an oral hearing. I certify that the preceding ninety-two (92) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

Building and Construction (Security of Payment) Act 2009(ACT)ss 6, 25, 26, 27

Act, the Corporations Act 2001(Cth)

Corporations Act 2001(Cth)s 459H, ss 459G, 459H

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