KV RENTALS v HKAC [2010] NSWSC 405 | Case summary

(b) 24 Financing SPCs and RILAs relevant to the AAFL demand. 12 As pointed out in the defendants' submissions, a Management Fee Letter governed the relevant obligations of the parties to each aviation lease transaction. Standard documents were used for each aviation lease transaction, although there were some minor variations. 13 As mentioned the claim in the demands is for a liability to pay input tax credits. By way of illustration I will take one such Management Fee Letter referred to in the defendants' submissions, which is at Tab 4 of "DLV-1" in the AML proceedings. It was there relevantly described in these terms: (a) The parties to the Management Fee Letter were KV Rentals, the Financing SPC, the RILA (collectively referred to in the Management Fee Letter as "Companies") and AML (referred to in the Management Fee Letter as "Manager"). In the Management Fee Letters referred to in the AAFL proceedings, AAFL was the "Manager". (b) The Companies appointed the Manager (that is, AML or AAFL) to perform various functions, in consideration for which the Companies agreed to pay the Manager a monthly fee. The Companies were jointly and severally liable for these payments, with payment by one satisfying the obligations of all. (c) The Manager's duties included preparing GST returns for the Companies and keeping accounting records of the Companies. (d) Clause 12 of the Management Fee Letter deals with GST, and provides: "If the whole or any part of any Payment (including, without limitation, the management fee payable in accordance with clause 2 of this agreement) is consideration for a Taxable Supply, the person making the Payment ("payer") must pay to the payee in cash an additional amount equal to the ITC Amount promptly after receipt of the Input Tax Credit. References in this clause to the payer includes the Representative Member of any GST Group of which the payer is a member. " Defined terms in clause 12 were generally given the same meaning as those terms have under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ("the GST Act"). 14 The evidence shows that: (a) The Financing SPCs in each aviation lease transaction paid the management fee to AML or AAFL. (b) The Financing SPCs were grouped together with KV Rentals for GST purposes in a 'GST Group'. KV Rentals was the Representative Member of that GST Group. (c) Since at least September 2004, KV Rentals has lodged a monthly Business Activity Statement to the Australian Taxation Office as a Representative Member of the GST Group of which the Financing SPCs are members. The financing SPCs do not lodge individual Business Activity Statements. (d) In its Business Activity Statements, KV Rentals claims an Input Tax Credit for the GST component of the fees paid by the Financing SPCs to the Manager (AML or AAFL). KV Rentals paid the net amount of GST owing to the Australian Taxation Office less these Input Tax Credits. 15 Applying clause 12 of the Management Fee Letters the defendants' submit that on the evidence in the case: (a) The person paying the management fee ("payer") was the Financing SPC. As the Representative Member of the GST Group of which the payer was a member, KV Rentals is also the "payer". (b) The person receiving the management fee ("payee") was AML or AAML. (c) The person receiving the Input Tax Credit is KV Rentals. (d) Accordingly, KV Rentals must pay to AML or AAFL in cash an amount equal to the Input Tax Credit. 16 In short the person who received the benefit of the input tax credit as a result of the group payment system is obliged to pay that sum to the relevant manager. The liability for the debt and its amount is not contested but it is necessary to understand the nature of the debt for the purposes of the matters that arise on the offsetting claim. The offsetting claim 17 In Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 Palmer J usefully described a genuine offsetting claim in these terms: 18 In my opinion, a genuine offsetting claim for the purposes of CA 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). 18 There has been no litigation to quantify the offsetting claim. The evidence refers to the amount of the loss involved in the offsetting claims. Against AML the amount is $63,400.61 and against AAFL the amount is $91,866.19. The nature of the claim was set out in a letter of 7 December 2009, which was sent by AAHL Pty Ltd, the holding company of the RILA's and KV Rentals. Amounts were claimed in respect of alleged breaches following a termination of a Management services agreement of 3 May 2006. Under that agreement, various special purpose vehicles appointed AML as manager to provide management services. 19 Mr Veal deposed in his first affidavit of 8 March 2010: "24. ... the individual RILAs are entitled to set off against the Demand the following amounts: (a) Losses caused by AML/AAFL's breach of the Management Fee Deeds and/or Management Fee Letters; (b) Losses arising as a result of the termination of the Management Fee Deeds and/or Management Fee Letters. 25. Full details of these offsetting claims are set out in correspondence to AML dated 7 December 2009. ... 26. Details of the individual amounts attributable to each individual RILA are set out in the schedule ..." 20 In his second affidavit of 15 April 2010, Mr Veal provided details of his calculation of the offsetting claim, explaining how he had apportioned the claim asserted in the letter of 7 December 2009 "to each individual RILA". 21 In his third affidavit of 22 April 2010, Mr Veal sought to further explain the offsetting claim, which was repeatedly described as a claim "per each relevant RILA". 22 Thus in the affidavit material the claims are said to be the claims of the RILA's. There is no suggestion in the evidence that the Financing SPC was making a claim except for their inclusion in the 7 December 2009 letter as part of the AAHL group of companies. In this state of the evidence I can only accept the sworn evidence as to who was making a claim because presumably they are the ones who suffered the loss. Leaving aside for the moment whether there is evidence to support the alleged breaches, it is appropriate to consider how a claim by each RILA who are not parties to this action can be raised as an offsetting claim. Under s 459A of the Act this court must satisfy itself that the plaintiff company "has an offsetting claim". 23 It is submitted that where a party is jointly liable for a debt, it is permitted to set off an amount owing to the joint obligor by the claimant. This is a matter of some debate as White J in Tatlers.com.au Pty Ltd v Davis [2007] NSWSC 835 held that where there were joint debtors, one of them being the plaintiff, that company could not raise such an offsetting claim available to its co-debtor. I have also dealt with the matter in Saratoga Integration Pty Ltd v Canjs Pty Ltd & Anor [2010] NSWSC 654. 24 Before pursuing that debate it is necessary to see whether the plaintiff is a relevant joint debtor. The plaintiff, in it submissions, referred to the liability to pay management fees under the terms of the various fee letters. Taking for example the letter of 1 August 2006 (at p 92 of the court book) the parties to the Management Fee Letter were KV Rentals, the Financing SPC, the RILA (collectively referred to in the Management Fee Letter as "Companies") and AAFL (referred to in the Management Fee Letter as "Manager"). 25 The Companies appointed the Manager to perform various functions, in consideration for which the Companies agreed to pay the Manager a monthly fee. The Companies were jointly and severally liable for these payments, with payment by one satisfying the obligations of all. These provisions appear in clause 2 of the Management Fee Letter of 1 August 2006 which is as follows: "2 Consideration In consideration for the Manager accepting its appointment, and performing its obligations, under this agreement: (a) the Companies agree to pay the Manager on each date shown in column 1 of the attached Schedule, the corresponding amount shown in column 2 of the attached Schedule; and (b) in the event of the payment of a Casualty Value, the Companies agree to pay the Manager an amount equal to the aggregate of the amounts set out in column 3 and column 4 of the attached Schedule for the date shown in column 1 of the attached Schedule immediately before the date on which that Casualty Value is due (or if a lesser amount is actually received by Allco Financing SPC and RILA under the Intercreditor Deed, that lesser amount); (c) in the event of the payment of Net Sales Proceeds or Insurance Proceeds, the Companies agree to pay the Manager an amount equal to the aggregate of the amounts set out in columns 3 and 4 of the attached Schedule for the date shown in column 1 of the attached Schedule immediately before the date on which Net Sales Proceeds is due. (d) in the event of the payment of Termination Value, the Companies agree to pay the Manager an amount equal to the aggregate of the amounts set out in column 3 and column 4 of the attached Schedule for the date shown in column 1 of the attached Schedule immediately before the date on which Termination Value is due (or if a lesser amount is actually received by Allco Financing SPC and RILA under the Intercreditor Deed, that lesser amount). The Companies are jointly and severally liable for these payments, and these payments may be satisfied by payment in full from any one of the Companies. The liability of a Company in relation to a payment under this clause is limited to amounts actually received by that Company under the Transaction Documents that are due under the Transaction Documents on or about the date of that payment, and the Manager may not seek to recover any shortfall by bringing proceedings against a Company, applying to have a Company wound up, or proving in the winding up of a Company. The Manager agrees to pay all of the establishment and other upfront fees incurred by Allco Financing SPC, RILA and Allco Rentals in relation to the transaction documentation, including related costs." 26 The evidence demonstrates that all fees due under this clause were and are paid by the Financing SPC. The defendants' submissions on this point were: "20 The amounts claimed in the statutory demands are for Input Tax Credits received by KV Rentals from July 2009 to December 2009. As clause 12 (set out above) provides, the obligation to pay the Input Tax Credit falls on the "payer", being the party who actually paid the management fee, and "payer" is defined to include the Representative Member of any GST Group of which the payer is a member. As Ms Paki's evidence made plain: (a) The payer was (initially) the Financing SPC. (b) KV Rentals was the Representative Member of a GST Group of which the Financing SPCs (and not the RILAs) were members. (c) KV Rentals claimed and received the benefit of the Input Tax Credit on behalf of the GST Group from July 2009 to December 2009. 21 The RILAs are not jointly liable with KV Rentals for the amounts claimed in the statutory demands. The statutory demands sought payment of Input Tax Credits received by KV Rentals from July 2009 to December 2009. KV Rentals' liability to pay these monies to AML and AAFL arose because KV Rentals claimed and received the benefit of an Input Tax Credit as the Representative Member of a GST Group comprising Financial SPCs. Having claimed and received the benefit of the Input Tax Credits, KV Rentals alone is obliged by the terms of the Management Fee Letters to account for this benefit to AML and AAFL: KV Rentals is the "payer" pursuant to the definition in clause 12 of the management fee letters. 22 Accordingly, it is submitted that it is not even necessary for the Court to consider whether Tatlers.com.au Pty Ltd or Saratoga Integration Pty Ltd apply as there simply is no joint liability between KV Rentals and the RILAs for the amounts claimed in the demand." 27 The relevant clause to which reference is made above is: "If the whole or any part of any Payment (including, without limitation, the management fee payable in accordance with clause 2 of this agreement) is consideration for a Taxable Supply, the person making the Payment ("payer") must pay to the payee in cash an additional amount equal to the ITC Amount promptly after receipt of the Input Tax Credit. References in this clause to the payer includes the Representative Member of any GST Group of which the payer is a member. " 28 The only possible joint liability in respect of that part of this clause which deals with GST is the "person making the payment" and the "representative member of any GST group". It is clear that in respect of the liability under that clause the RILA has none on the facts of this case as it did not make any payments and therefore was not a "Payer". It is beside the point that some other person referred to in clause 2 such as one of the RILA's had the opportunity to make the payments. In these circumstances there is no joint liability between the RILA and KV Rentals and thus no question arises about the right to set off a joint debtor's claim against the management company. 29 In these circumstances I dismiss the claims. In the event that I had not reached this conclusion it would be necessary to consider the fact that AAFL was not a party to the 3 May 2006 Management agreement which is the source of the damages claim in the 7 December 2009 letter. In submissions it was suggested that there were also damages claims for breach of the individual management letters. Suffice it to say there is no evidence of what those claims were. 30 I dismiss both proceedings and will hear the parties on costs. **********

KV RENTALS v HKAC

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