Club Marconi of Bossley Park v AVR Services NSW Pty Ltd

CATCHWORDS : CORPORATIONS - STATUTORY DEMAND - Test as to whether genuine dispute as to debt exists - whether indemnity costs order appropriate. LEGISLATION CITED : Corporations Act 2001 (Cth) - s.459E, s.459G Trade Practices Act 1974 (Cth) - s.52 - Club Marconi of Bossley Park v AVR Services NSW Pty Ltd [2002] NSWSC 584 CASES CITED : - Process Machinery Australia Pty Ltd v ACN 057 260 590 [2002] NSWSC 45 - Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 165 FLR 72 PARTIES : Grass Manufacturers Pty Ltd - Plaintiff Sraennik Pty Ltd - Defendant FILE NUMBER(S) : SC 5265/02 COUNSEL : A.J.L. Ogborne - Plaintiff G. Carolan - Defendant SOLICITORS : Jeffrey Hinde & Associates - Plaintiff Back Schwartz Vaughan - Defendant

1 This is an application by the Plaintiff to set aside a Statutory Demand served on it by the Defendant under s.459E of the Corporations Act 2001 (Cth). The demand was served on 4 October 2002. 2 An application by the Plaintiff under s.459G of the Corporations Act was filed on 25 October 2002 supported by an affidavit which deposes to what is said by the Plaintiff to be a genuine dispute. 3 The circumstances giving rise to the matter may briefly be described as follows. The Plaintiff manufactures, markets and sells synthetic grass, principally for tennis courts, to the Australian and international markets. The manufacturing process of the Plaintiff involves receiving supplies of synthetic grass yarns and processing that yarn into rolls or tiles of synthetic grass on purpose built machinery at its factory. The Plaintiff is a major supplier of synthetic grass to the Australian and international markets. 4 For some time prior to February 2000, the Plaintiff had operated under an arrangement with Tapex Pty Limited ("Tapex") for the exclusive supply of synthetic grass yarn to the Plaintiff. 5 Between September and February 2000, the Plaintiff and the Defendant (formerly known as Kinnears Pty Ltd) entered into negotiations, the purpose of which was clearly enough to transfer, if not the whole, then the bulk of the Plaintiff's ordering requirements of yarn from Tapex to the Defendant. There were various discussions between the representatives of the parties, in which each indicated an intention to build up a substantial trading relationship between them. 6 What are said to be supply agreements were entered into between the parties from February 2000 onwards. Pertinent to note for the purposes of these proceedings is an agreement which was made in respect of the calendar year 2000. The document is headed " SUMMARY OF AGREEMENT BETWEEN KINNEARS P/L AND GRASS MANUFACTURERS P/L " . The document records a desire on the part of the parties to develop further the relationship commenced in 2000. Paragraph 2 states: "Kinnears will assign at least 250 tonnes of grass yarn production in 2001, commencing immediately."

Paragraph 3 states: "Beyond that date, both parties would review the relationship with the objective of Kinnears becoming the primary supplier."

Paragraph 5 states: "Kinnears will develop yarns to Grass Mfr. Specification, which if unique, would be exclusive."

Paragraph 6 states: "Kinnears will make its entire grass yarn capability available to Grass Mfr …." 7 The document goes on to stipulate for market support to be provided to the Plaintiff by the Defendant on specified terms, and it contains prices at which the yarn is to be supplied. There is also a term for the provision by the Defendant to the Plaintiff of technical facilities and personnel, a service which the Defendant valued at $50,000 per annum. 8 The parties signed another document, which is dated 5 March 2002, in respect of the supply of yarn for the calendar year 2002. The document states that the target objective for the year 2002 in tonnage terms is 350 tonnes. Beneath the heading, "The proposed promotional and marketing support is listed below" , there are a number of numbered paragraphs which are relevant and are set out below: "1. Grass Manufacturers and Kinnears to further develop and strengthen the relationship that commenced in earnest in 2001.

2. Kinnears have assigned up to 400 tonne of their production output of Grass yarn to Grass Manufacturers in the 12-month period coming January 02. Grass Manufacturers will commit to a minimum of 350 tonne of this volume with the option of taking up the full 400 tonne.

3. Kinnears will continue to develop grass yarns for Grass Manufacturers, which if unique, could be made exclusive to Grass Manufacturers.

6. Kinnears will continue to provide and develop POS/promotional material in conjunction with Grass Manufacturers to suit their Marketing objectives.

TECHNICAL SUPPORT - Kinnears technical facilities and personnel are available to assist development, site visits and training that Kinnears would value at $50,000 per annum." 9 What has happened is that during 2002 the business of the Defendant was taken over by Tapex. Without prior notice to the Plaintiff of the impending acquisition and its consequences, on 25 June 2002 the Defendant wrote to the Plaintiff informing it that "Kinnears has been acquired by Tapex Pty Ltd, effective 21 June, 2002" . It is not in dispute that the Defendant ceased its operations in mid-June 2002. It is said by the Plaintiff that the Defendant was manufacturing certain types of yarn which are not now available from Tapex. 10 The Defendant claims in its Statutory Demand payment of a number of invoices in respect of yarn supplied by it to the Plaintiff prior to the Defendant's cessation of business. The amount claimed in the Statutory Demand is $235,927.63. The Defendant admits that the Plaintiff has, since the date of service of the Demand, paid certain invoices. The amount actually paid is in dispute between the parties. The Defendant says that after crediting amounts paid, the outstanding debt due to it which it is entitled to enforce pursuant to the Demand is $218,497. The Plaintiff says, on the other hand, that after making due allowance for credits, the appropriate amount due in respect of the invoices is now $201,835.27. In the end, the difference between these two figures will not matter very much for the purpose of deciding this application. 11 The Plaintiff says that in respect of two invoices the subject of the remaining amount due under the Statutory Demand, there was an agreement between the parties that there would be no charge for the yarn the subject of those invoices because the yarn was supplied for the purpose of testing so that the Defendant's product would be suitable for use on the Plaintiff's machines. If those two invoices are disregarded, the Defendant's debt is reduced to $176,723. That contention is in dispute. 12 The determination of this application depends upon the Plaintiff's assertion that it has a Cross Claim against the Defendant for an amount which is larger by far than the Defendant's asserted balance now due, and that it is entitled to set off against amounts owed by it to the Defendant in respect of the invoices the amount in damages for which the Defendant is liable under that Cross Claim. 13 The Cross Claim founds upon two causes of action. The first is for breach of what the Plaintiff says is a contract which came into existence on 5 or 6 March 2002, namely the supply agreement to which I have earlier referred. The second basis of the Cross Claim is damages under the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct. 14 The claim in contract may be explained fairly briefly. The Plaintiff says that the second sentence of paragraph 2 of the supply agreement created an obligation on its part to purchase at least 350 tonnes of material from the Defendant during the 2002 year. Correspondingly, the first sentence of that paragraph, the Plaintiff says, contained an implied warranty that the Defendant would continue to have a capacity to supply at least 400 tonnes of material during the 2002 year. The Plaintiff says that in selling its operations to Tapex in mid-2002, the Defendant breached that implied warranty because the sale and consequent closure of the Defendant's business put it beyond the ability of the Defendant to perform its promise. The sale of the Defendant's business was, as I have said, effected without any notice to the Defendant before the letter of 25 June 2002. 15 The Plaintiff says that as a consequence of the breach of that warranty it has suffered loss in a variety of ways. Firstly, by reason of the lack of capacity of the Defendant to supply particular yarn, it has lost the benefit of an order which a large customer wished to place with it, that customer being a Chinese entity called Shanghai Pudong. Further, not only has it lost the benefit of a particular order and the profits to be derived therefrom, it has lost the goodwill and custom of that entity itself. It says that its profits from sales to Shanghai Pudong for the 2001 year amounted to some $450,000, so that the loss of profits generally to be attributed to the loss of that customer is a substantial amount in the vicinity of $450,000. 16 There are other losses which the Plaintiff says flow from breach of the contractual warranty. They are itemised in paragraph 49 of Mr Waterford's affidavit. He says, for example, that the Plaintiff has some $65,000 worth of left over stock of the Defendant which it cannot now usefully employ in its business. There are other claims such as loss of the Defendant's technical facilities which the Defendant itself had valued at $50,000 per annum. It is not necessary to go into great detail in relation to these other losses since the damages flowing from the substantial loss of custom from the Shanghai Pudong entity are, so the Plaintiff says, more than sufficient to extinguish the amount claimed by the Defendant to be owing under the invoices the subject of the Statutory Demand. 17 The second way in which the Plaintiff puts the case founded upon the 5 March supply agreement is that paragraph 2 contains a continuing representation that the Defendant will have the capacity to supply yarn to the Plaintiff throughout 2002 to up to 400 tonnes of production. The Plaintiff says that it must have been apparent at some time prior to mid-June 2002 that the negotiations between Tapex and the Defendant for the purchase of the Defendant's business would, if successfully concluded, entail the cessation of operations by the Defendant such as to render it unable to continue to supply the Plaintiff in respect of certain sorts of yarn. 18 The Plaintiff says that the continuing representation contained in paragraph 2 of the supply agreement would become misleading if the Defendant became aware of circumstances which would render it impossible of performance and did not inform the Plaintiff. As I have said, no notice of the acquisition of the business of the Defendant by Tapex was given to the Plaintiff prior to 25 June 2002. When it was announced, it was a fait accompli. The Plaintiff says that it had no opportunity to run down the stocks of its business acquired from the Defendant, or to make other arrangements for supplies such as would have avoided the losses from the loss of the Shanghai Pudong client and the other losses particularised in paragraph 49 of Mr Waterford's affidavit. 19 One can see that the Cross Claim formulated by the Plaintiff is founded on a clearly articulated cause of action in contract and an equally clearly articulated cause of action for misleading and deceptive conduct under s.52 of the Trade Practices Act . The parties have gone to considerable lengths in their evidence to assert on the one hand and to deny on the other the various allegations made in support of the Cross Claim. As has been said on many occasions, an application to set aside a Statutory Demand is not the process whereby the Court ultimately determines the validity or otherwise of a plaintiff's claim said to offset a debt founding a Statutory Demand. What has to be determined, as is well known, is whether a genuine dispute as to the debt exists. In order for the Court to make that determination, the Court must be able to see from particulars supplied by the plaintiff that the dispute is not fanciful or manufactured by the plaintiff simply to fob off payment of the creditor's debt, that there is an arguable cause of action and that there is evidence capable of being led, in the appropriate Court, which would support the plaintiff's case. In claims made by a plaintiff for economic loss, the Court will not require a great deal of evidence to quantify with precision the amount claimed by way of set off. Economic loss claims are necessarily complex and often require expert evidence. It is not appropriate in proceedings under s.459G to engage in a close analysis of each head of damage and to examine whether the quantification is correctly calculated. All that the Court can do is to determine whether the heads of damage claimed are reasonably arguable and whether the amounts of loss estimated by the plaintiff seem extravagant to the point of being unrealistic. 20 In the present case, there is sufficient evidence of the loss to the Plaintiff of a significant customer whose business was clearly of considerable value. The value of that customer's business is arguably far greater in amount than the amount claimed in the Statutory Demand. 21 In proceedings for the setting aside of a Statutory Demand, there is a very low threshold for a plaintiff to cross for the purpose of showing that a genuine dispute exists. The standard to be met, as has been said in a number of authorities, is no more onerous than a debtor would confront if it were seeking to meet an application to enter summary judgment: see the authorities collected by Barrett J in Process Machinery Australia Pty Ltd v ACN 057 260 590 [2002] NSWSC 45, and in Club Marconi of Bossley Park v AVR Services NSW Pty Ltd [2002] NSWSC 584, at paras 17-19. 22 In the present case, I think that the Plaintiff has clearly crossed that threshold. It has demonstrated with sufficient particularity how its causes of action on the Cross Claim are articulated and it has given sufficient particulars for the Court to be able to determine that the claims are not frivolous and are capable of being supported by evidence, when and if the claim is ever brought to trial in the appropriate Court. 23 There is also sufficient particularity in the Plaintiff's evidence to support the assertion that the amount of damages for which the Defendant could be liable on the Cross Claim exceeds the amount of the debt claimed in the invoices the subject of the Statutory Demand. 24 For those reasons, I am satisfied that the Plaintiff has demonstrated that there is a genuine dispute between the Plaintiff and the Defendant as to the Plaintiff's liability to pay the amount claimed by the Defendant in the Statutory Demand. The Statutory Demand will therefore be set aside. 25 The Plaintiff seeks the costs of the application on an indemnity basis. The Defendant on the other hand seeks an order that each party pay its own costs. 26 The relevant facts are these. The Defendant's invoices had been outstanding for some considerable time. There was then a Statutory Demand served by the Defendant on the Plaintiff. The Plaintiff's solicitors did not write immediately to the Defendant's solicitors alleging a genuine dispute as to the amount claimed, giving particulars of their allegations and saying that, unless the Statutory Demand was withdrawn, the Plaintiff would commence proceedings to set it aside under s.459G of the Act. The Plaintiff waited until the very last day of the period for commencing proceedings under s.459G before filing its Originating Process. 27 The affidavit in support of the application sworn by Mr Waterford particularised a number of heads of damage to which I have referred to in the course of judgment. The affidavit does not, however, particularise the loss said to flow from the loss of the Shanghai Pudong contract and from the fact that Shanghai Pudong ceased to be a customer of the Plaintiff as a result of the experience it had following the Defendant's cessation of operations. That particularisation was only given by the Plaintiff this morning. 28 The Defendant says that, on the basis of the material set out in the Plaintiff's affidavit in support of the application, it would have been justified in proceeding with enforcement of the Statutory Demand because the amount claimed by way of set-off did not extinguish the amount of the debt arising under the invoices. I am not able to accept that submission. It is apparent, when one totals the amounts in paragraph 49 of Mr Waterford's affidavit, that the sum claimed goes a considerable way towards extinguishing what is said to be, on the Plaintiff's computation, the balance of the debt owing. The Plaintiff says that when proper account is taken of credits due, the sum outstanding under the invoices is $176,723. The total amount of the Plaintiff's claim, in respect of which particulars are given in paragraph 49 of Mr Waterford's affidavit, exceeds that sum. 29 Even as the evidence stood in Mr Waterford's affidavit, it does not seem in my view a justifiable course of action for the Defendant to have persisted with the Statutory Demand and to have contested the proceedings in the way it has done. It should not, therefore, escape any adverse costs order. However, I do not think that this is a case where indemnity costs should be ordered. 30 It is often said by plaintiffs in cases such as this that the defendant ought to have known a genuine dispute existed and that a Statutory Demand was bound to be set aside and for that reason the Plaintiff should have indemnity costs of proceedings. As I have said in a number of judgments, I do not think that that is a proper basis upon which to make an indemnity costs order: see e.g. Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 165 FLR 72. The defendant in such cases is entitled to test the plaintiff's claim that the debt is genuinely disputed by serving a Statutory Demand and invoking the machinery of the Corporations Act . It is entitled to test the plaintiff's case by seeing what evidentiary material the plaintiff is able to marshal in support of its assertions. 31 I do not think that the conduct of the Defendant in this case has been so unreasonable as to merit the disapprobation of the Court expressed in an indemnity costs order. In my view the proper order for costs is that the Defendant pay the Plaintiff's costs of the application on a party/party basis, and I so order. 32 The exhibits may be returned.

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