Joshen Property Group v Malachi Corporation

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4119/04 JOSHEN PROPERTY GROUP PTY LIMITED v MALACHI CORPORATION PTY LIMITED JUDGMENT - Ex Tempore (Revised 1 November 2004) 1 HIS HONOUR: This is an application to set aside a statutory demand. The company serving the statutory demand, the defendant to this application, was involved in some building work, which was being carried out for the plaintiff. That building work involved construction of retirement units at Currans Hill. At least some of the work was done on a basis to which a building contract dated 24 March 2003 was relevant. I deliberately make that finding in imprecise terms, because there appears to be a dispute between the parties as to exactly how that contract was relevant. That dispute is not one which needs to be considered further for the purposes of this judgment. 2 The parties came into dispute, and settled that dispute on the terms of a deed entered on 19 December 2003. There were numerous other parties to that deed. The plaintiff was referred to in that deed as Joshen and the defendant was referred to in the deed as Constructions. The building work had, it seems, been progressing on a basis where the defendant would incur liabilities to various suppliers of goods and services for the project, and would then claim reimbursement for those liabilities from the plaintiff. For the purpose of claiming reimbursement, the defendant would provide tax invoices, which identified lists of payees and an amount for each payee. The plaintiff made money available to the defendant on the strength of those tax invoices. 3 By the end of December 2003, there were difficulties with the project, arising from the fact that various suppliers had not been paid within their trading terms, and some of them were becoming restive. The deed included a regime, in clause 8, whereby the plaintiff undertook to pay those outstanding expenses. The deed contained these provisions: "8(a) Joshen acknowledges it has an obligation to pay all suppliers and contractors to Constructions for expenses properly incurred pursuing the construction of Stage 1 and commencement of Stage 2 at Currans Hill under the Second Building Contract. … (c) The invoices of suppliers and contractors submitted by Constructions for payment by Joshen under clause 8(a) include, but subject to any more being received may not be limited to: (i) August, 2003 $24,371.60 (ii) September, 2003 $110,734.42 (iii) October, 2003 $140,215.74 (iv) November, 2003 $359,933.13 a total of $635,254.89 as detailed in tax invoice 78 from Constructions to Joshen dated 4th December, 2003, a copy of which is annexed and marked "A" to this Deed. These don't include any further invoices received during December, 2003. … (e) To facilitate those suppliers and contractors being properly identified and verified Constructions is to provide to Joshen and Project 1 copies of the latest statements of account or other claims for payment from those suppliers and contractors, showing the amounts owing. (f) Constructions is also to make available for inspection the supporting invoices reflecting the amounts owing in those statements of account and other claims, and Joshen and … can copy those invoices at their own expense if they wish, either at the time of inspection or at some other convenient later date, and in delaying the taking of copies can rely upon Constructions undertaking now given to keep the invoices for the seven years required by the Australian Tax Office." 4 There were some releases contained in that deed, as follows: "2(a) Joshen and Constructions mutually agree to release each other from the Second Building Agreement to the extent to which it has not yet been performed, and to mutually release each other from all rights and responsibilities under that agreement, save and except to the extent that such rights and responsibilities are specifically preserved or created under this Deed. (b) These mutual releases will be given and be effective upon payment of the creditors in accordance with clause 8, and in the event of a dispute concerning payment of any of those creditors, upon the making of any final payments required by expert determination concerning such dispute, in accordance with this Deed. … 23(a) Colin Shreeve, Glenda Shreeve, Constructions, Reece, C&G and Reece Corporation for the one party, and each of the other Parties to this Deed for the other part, mutually release each other from all claims they may have, or might in future have, against each other arising out of or in connection with the subject matter of this Deed up to and including the date of this Deed." 5 The deed also created an obligation, under clause 6, in the following terms: "6(a) In consideration of Constructions settling its dispute with Joshen and refraining from commencing litigation arising from that dispute Joshen agrees to pay Constructions $50,000.00 as reimbursement of expenses agreed to have been incurred on its projects. (b) Joshen is to use its best endeavors to effect repayment by its due date of 30th April, 2004. (c) If not sooner repaid, that sum must be repaid by 30th June, 2004 without deduction for any reason. Constructions agrees to provide a tax invoice in proper form for these expenses by the due date for payment." 6 The statutory demand, which was served on 2 July 2004, and which is the subject of these proceedings, was one which related to the failure of Joshen to pay the $50,000 it was obliged to pay by clause 6 of the deed. 7 Joshen's contention in these proceedings is that, though it accepts that the $50,000 is due, it has an offsetting claim, and therefore is able to have the statutory demand set aside under section 459H Corporations Act 2001 (Cth). The offsetting claim, which the plaintiff asserts, is one for an amount in excess of the $50,000 to which the statutory demand relates. 8 During the building project, the parties had been fairly trusting concerning each other, in consequence of which the plaintiff did not have invoices from individual suppliers to back up all of the demands for payment which were contained in the various tax invoices which the defendant had provided to it. Clause 8(f) of the deed aimed to remedy that problem. 9 On 11 February 2004 the plaintiff wrote to the defendant, requesting the full supporting documentation for the costs of this project. The letter asked: "… that this information be supplied urgently which will give us the opportunity to reconcile the costs with the funding and enable the Orion Pacific Group of Companies to have complete records of the project." 10 There was a meeting between various people from the plaintiff and the defendant on 15 March 2004, at which meeting the defendant handed over various invoices, and other accounting documents. 11 In mid June of 2004 the plaintiff's financial controller prepared a reconciliation statement, which purported to reconcile the various amounts which had been paid to the defendant with the invoices which the defendant had provided to the plaintiff, and with certain other amounts which were shown in the ledger of various companies associated with the plaintiff, and which the plaintiff accepted had been properly expended for the purpose of the project. That reconciliation came to the conclusion that there had been a significant overpayment by the plaintiff to the defendant. The overpayment shown by that reconciliation was of an amount which was in excess of $500,000. On 15 June 2004, the plaintiff's solicitor sent to the defendant's solicitor a copy of that reconciliation statement, and alleged that there had been an overpayment of that sum. 12 The plaintiff's financial controller, Mr Sandercock, has performed a more detailed reconciliation, as at 31 August 2004, which came to the conclusion that there had been an overpayment of a little more than $589,000. 13 As a result of criticisms of that reconciliation by witnesses for the defendant, Mr Sandercock has accepted that it contains some errors. He asserts, however, that there is still an amount of in excess of $500,000 which was overpaid. His reconciliation is one which identifies, with particularity, all of the payments which have been made by the plaintiff to the defendant, or direct to suppliers, and also identifies, with particularity, the invoices which have been provided to it, and the ledger entries which it accepts as being legitimate expenses. 14 The plaintiff asserts that its offsetting claim against the defendant is to recover this amount of in excess of $500,000, by an action for money had and received. Releases as Basis for there being No Genuine Claim 15 One basis upon which the defendant asserts that the plaintiff's claim is not a genuine claim, within the meaning of the definition of "offsetting claim" in section 459H(5) of the Corporations Act 2001 (Cth), is that the claim has been released by the releases which are contained in the deed. The releases which are contained in the deed, and in particular those in clause 23, are undoubtedly broad ones. However, as Grant v John Grant & Sons Proprietary Limited (1954) 91 CLR 112 makes clear, both at law and in equity general words of release are construed by reference to the circumstances which gave rise to them. Even words in general terms are construed as relating to the dispute which the parties either knew about, or had in mind as being intended to be released. This approach of equity to releases derives from the same strand of principle as does the law of rectification, which seeks to hold parties to the bargain which they intended to make, but no more. 16 Mr Eassie, counsel for the defendant, has taken me carefully through the correspondence which preceded the entry into of the releases in the deed. The predominant concern which was shown in that correspondence, so far as supplier payments were concerned, was with finding a way in which the suppliers who were unpaid in November and December 2003 could get paid. However, he points me to a letter of 21 November 2003, from the plaintiff's solicitors, which says that the plaintiff has paid to the defendant money greatly in excess of the contract price, and that for that reason the defendant has been fully paid under the terms of the contract, and is not entitled to any more. 17 That statement by the plaintiff's solicitors was no passing remark - it was included in letters which the plaintiff's solicitors sent to several people who were connected with the dispute. I do not see that statement, however, as necessarily concluding the question of what is the proper scope of the releases in the deed. It is an everyday occurrence for a person who is having building work done to find that he or she is paying more than the original contract price, through the making of variations to the contract, or builders claims for extras. That situation arises from the working through of the contractual arrangements between the parties. 18 The cross-claim which the plaintiff contends it has is not a claim under the contract - it is just a claim to recover an overpayment, made under mistake. There is no evidence which I have seen to suggest that the plaintiff had any belief or suspicion, before the deed was entered into, that it might have overpaid the defendant, in the sense of having paid the defendant more than it was contractually entitled to. In saying that, I am not making a finding that the plaintiff, indeed, has overpaid the defendant - what I am pointing to is the state of knowledge or belief or contemplation of possibilities with which the plaintiff entered the deed. In these circumstances there is, it seems to me, a serious question to be tried about whether the releases in the deed are sufficient to doom to failure the claim which the plaintiff wishes to assert. Whether Mr Sandercock's Reconciliation is Too Flawed to Give Rise to a Genuine Claim 19 The affidavit evidence of the defendant criticizes the reconciliation which has been produced by Mr Sandercock. It is criticism which deals with the reconciliation in minute particularity. Mr Sandercock has put on an affidavit which deals, item by item, with those criticisms. He accepts some of them, as I have mentioned earlier, but comes down to the conclusion that there is still a significant amount owing. The nature of the differences between them is such that it is not possible to say that Mr Sandercock is obviously wrong. The defendant has not attempted to produce its own reconciliation, to demonstrate positively that there has been no overpayment In those circumstances, there is a serious question to be tried about whether his reconciliation is indeed right. 20 When there is that serious question to be tried, the defendant's criticisms of the details of Mr Sandercock's reconciliation do not show the plaintiff's claim is not a genuine claim, within the definition of "offsetting claim". Does Absence of Expert Determination Stop there Being an Offsetting Claim 21 Another line of argument which Mr Eassie put forward, arises from a different clause in the deed. Clause 24 of the deed makes provision for expert determination of disputes, in the following terms: "In the event of there being a dispute between the Parties concerning the determination of: (a) the invoices properly payable to suppliers and contractors under clause 8; and/or … (each called "dispute"), such dispute must be resolved by: (e) Payment forthwith of the undisputed part of any such debt; and (f) expert determination in accordance with this clause concerning the balance of the debt, and in respect of the disputed part no cause of action shall arise for a Party until this clause has been followed unless a supplier or contractor commences proceedings against Constructions concerning a disputed debt. (g) Any Party concerned in a dispute (either because that party is called upon to make a payment, or is seeking to receive a payment) may give notice to each other concerned Party of the existence of a dispute and unless the dispute is settled between the Parties within seven days after the other party received notice of the dispute, the dispute shall be referred to an expert for expert determination in accordance with this clause 25." 22 The clause goes on to set out the mechanics by which an expert's determination is to be carried out, including provision that his or her determination is final and binding on the parties. 23 Mr Eassie reminds me that there can be an offsetting claim within the meaning of section 459H Corporations Act 2001 (Cth) only if the plaintiff's claim is one which gives rise to a presently existing cause of action: Advance Ship Design Pty Ltd v D J Ryan t/as Davies Collison Cave (1995) 16 ACSR 129 at 135. He submits that the provisions of clause 24 apply to the question of whether there is any obligation under clause 8(a) of the deed for Joshen to pay any suppliers and contractors. He then submits that, when it is undisputed that the expert determination mechanism has not been gone through concerning that obligation, clause 24(f) of the deed leads to the conclusion that Joshen has no accrued cause of action to recover back any money it might have paid to Constructions concerning payments to suppliers and contractors. 24 On an application such as the present, it is not the Court's role to finally determine the rights and wrongs of the dispute which the parties assert they have. It is, it seems to me, at the least, an available argument that the provisions of clause 24 do not apply to the type of claim which the plaintiff wishes to bring. It is an open construction of the document that clause 8 (a) is concerned only with Joshen's obligation to make payment to suppliers and contractors who were unpaid at the date of the deed. If that is so, then clause 24 would not attach to any dispute there was concerning payment of suppliers and contractors which had been paid in the past. 25 Another open construction of the agreement is that the claim which the plaintiff wishes to bring is not a claim in which there is the slightest element of doubt about who is obliged to pay suppliers and contractors. The plaintiff's claim accepts that all the suppliers and contractors who have been paid have been properly paid. All that the plaintiff is asserting is that it has paid moneys towards the payment of suppliers and contractors, and has paid too much, and wants the excess back. On that approach, likewise, clause 24 would not apply. It is not my task, today, to decide whether that approach is correct. All I need decide, and do decide, is that it is an argument which has sufficient prospects of success to prevent the claim of the plaintiff being held not to be a genuine one. Does Obligation to Pay Without Deduction Prevent an Offsetting Claim from Arising? 26 Clause 6(c) of the deed makes clear that the $50,000 which is to be paid, and which is the subject of the statutory demand in question, is to be paid "without deduction for any reason". I shall assume, without deciding, for the purposes of this judgment, that that means that it would not be open to the plaintiff, if sued for that $50,000 in an ordinary action to recover debt, to raise any defence of equitable setoff: Batiste v Lenin [2002] NSWSC 233 at [102] - [105]; cf Batiste v Lenin [2002] NSWCA 316 at [47] - [49]. However, that assumed state of affairs does not assist the defendant in the present case. 27 The Court, in deciding whether or not to set aside a statutory demand, works within the framework of section 459H Corporations Act 2001 (Cth). The definition of "offsetting claim" is: "… a genuine claim that the company has against the respondent by way of counterclaim, setoff or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)." 28 The claim to recover an overpayment is, it seems to me, a cross-demand. It is a cross-demand which can be made, even if it is recognised that the obligation to pay the $50,000 arising under clause 6(a) is not itself reduced by the existence of that cross-demand. Conclusion and Orders 29 For these reasons, I conclude that the plaintiff has an offsetting claim, in an amount greater than the amount of the debt claimed in the statutory demand, and so set aside the statutory demand. 30 I order the defendant to pay the plaintiff's costs of the proceedings. 31 The exhibits may be returned. **********

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