Macleay Nominees v. Belle Property East [2001] NSWSC 743

1 This is an application by the plaintiff under s.459G of the Corporations Act 2001 ("CA") to set aside a statutory demand served by the defendant on the plaintiff. In that statutory demand the defendant claims a debt amounting to a total of $121,618.64. The debt is said to arise in respect of advertising fees, expenses and sales commissions earned by the defendant from the sale of a number of units in the plaintiff's development in a building at 77 Macleay Street, Potts Point. 2 The question in these proceedings is whether the plaintiff has shown a genuine offsetting claim for the purposes of CA s.459H(1)(b). The plaintiff says that it does have such an offsetting claim and that the amount of that claim exceeds the amount of the statutory demand so that the statutory demand should be set aside. 3 The plaintiff has advanced several claims, some of which I would have held not to have been genuine. In the circumstances, however, I need deal only with the principal claim put forward by the plaintiff because that claim is said to result in an amount which will be owing to the plaintiff far in excess of the amount of the statutory demand. 4 The plaintiff says that its principal claim arises out of negligent advice said to have been given by the defendant to the plaintiff relating to the development design of the plaintiff's project at 77 Macleay Street. The project comprised the redevelopment of three floors in a high rise building. Those three floors were the lower level floors. The project envisaged the complete refurbishment and redevelopment of the accommodation on those three levels to provide one-, two- and three-bedroom units. The lower two levels of the plaintiff's project were to comprise one-bedroom and two-bedroom units. 5 According to the plaintiff's evidence, in September 1999 the defendant, which carries on business as a real estate agent and marketing consultant, gave the plaintiff advice as to the composition of the development, that advice including the advice that the third of the levels in the plaintiff's project should comprise three 3-bedroom luxury units. The advice was said to be to the effect that there was a good market for such luxury units and that those units would be sold with relative ease. 6 The plaintiff says that it was assumed at the time that the development was under consideration in September 1999 that the plaintiff would be able to acquire car parking spaces for the 3-bedroom units and that those car parking spaces would be incorporated into the strata titles for the 3-bedroom units. 7 Construction of the project commenced in January 2000 but by March 2000 it became apparent that the acquisition of car parking spaces for the luxury units could not be achieved. The best that could be achieved was to obtain car parking spaces in the building upon licence for a maximum term of one year. 8 The plaintiff says that marketing of the 3-bedroom luxury units was very difficult indeed, for two reasons. Firstly, as I understand the evidence so far adduced, the plaintiff says that there was not a strong demand for luxury 3-bedroom units at that level in the building. Luxury units were in demand certainly, but at the upper levels of the building, not in what the market regarded as the "poor relation" part of the building, namely the lower part. 9 The second reason that the luxury units proved difficult to sell, according to the plaintiff's evidence, was market diffidence in the purchase of luxury units at prices exceeding 1 million dollars when car parking space for those units was not guaranteed to the owners by reason of being incorporated in the strata title to the unit. 10 The plaintiff says that when the difficulty in securing car parking spaces became apparent in March 2000 the defendant ought to have advised the plaintiff that the design of the third level in its project ought to be revisited, and that consideration should be given to redesigning that floor so as to provide for one-bedroom and two-bedroom units in the same way as the plaintiff's project had provided for such units on its lower two levels. 11 The plaintiff says that if correct advice had been given by the defendant in September 1999, or in March 2000 when the problem of car parking spaces became apparent, then by the time that marketing of the units commenced it would have had one- and two-bedroom units on the third level of its project and that all units in the development would have been sold and the sales settled by mid-September 2000. 12 The plaintiff says that the difficulty and delay in marketing the 3-bedroom units on level three has resulted in the plaintiff realising far less for the total project than it would otherwise have realised. As part of its loss in that respect it says that it has incurred holding charges, namely interest, in respect to the project for many months longer than it need have done. 13 There is evidence adduced of an agreement between the defendant and the plaintiff whereby the defendant would advise the plaintiff as to the design for the project and its marketing. There is evidence to the effect that the defendant should have realised that it would be difficult to market 3-bedroom luxury units at that level in the building. There is also evidence suggesting that the defendant should have realised that by March 2000 it would be impossible to secure car parking spaces for the 3-bedroom units and without such car parking spaces it would be extremely difficult to sell those units. 14 There is also evidence suggesting that the units took longer to sell than would have otherwise been the case had smaller units been designed for level three in the same way as had been done for levels one and two in the plaintiff's project. 15 There is strong criticism of this evidence by Mr Alexis, who appears for the defendant, and it is fair to say that much of the evidence can only be described as slight and tenuous. However, despite the fact that the evidence supporting the plaintiff's causes of action is open to criticism on many fronts, it is not possible for me to say at this stage that the plaintiff's claim founded on negligent advice is bound to fail and that the complaint made by the plaintiff is not genuine within the meaning, of and for the purposes of, CA s.459H. 16 The real difficulty in this case is: what is the amount of the plaintiff's alleged offsetting claim. A claim for the purposes of CA s.459H(1) and (2) can encompass both a claim for a liquidated sum, such as a contract debt, and a claim for unliquidated damages. Where the case involves a claim for a liquidated sum, the application of CA s.459H(2) is relatively easy. The Court simply determines whether the cause of action is a genuine one, and if that proves to be the case the amount of the offsetting claim is the amount of the liquidated sum the subject of that claim. The position is by no means as easy where the claim is a claim for unliquidated damages and the damages are said to be economic loss suffered by the plaintiff. 17 In my view, a "claim" for the purposes of CA s.459H(1) and (2) means not just a cause of action, so that once a genuine cause of action for unliquidated damages is shown by a plaintiff, the Court is compelled to accept at face value the damages claimed by the plaintiff as the amount of the offsetting claim for the purpose of the calculation required by s.459H(2). As has been said in Jesseron Holdings Pty Ltd v Middle East Trading Consultants (1994) 12 ACLC 490, an action for damages will often include what is described as an "ambit claim", that is, a sum which is in excess of what the claimant realistically expects to recover. 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). 19 I turn now to the evidence in the present case. As I have noted, the plaintiff says that the loss which it has suffered is the difference between the profit it would have realised for the sale of the whole project if the units on the third floor had been one- and two-bedroom units and the profit it has actually derived from the project. 20 The only evidence which supports an overall amount claimed in this respect is that of Mr Phippen, a real estate agent, who prepared a report showing what the fair market value as at 6 August 2001 would have been for level three of the plaintiff's project subdivided into seven one- and two-bedroom units as compared with the fair market value of the existing three 3-bedroom units on level three. 21 Mr Phippen's view was that the fair market value of level three, hypothetically divided into seven units, would have been $5,450,000 compared to a fair market value of $4,800,000 for the existing units, producing a differential in value of $650,000. There are great difficulties with accepting that this report is of any utility. 22 The obvious criticism is open that the plaintiff's loss is not the difference between the gross sales prices of the units as they are and the gross sales prices of the units as the plaintiff says they ought to have been. The plaintiff's loss, if any, is the profits it would have derived had the allegedly negligent advice not been given. Those profits, of course, cannot be determined unless an exercise is done showing what costs and expenses would have been incurred by the plaintiff in converting level three into seven units rather than three units. No such exercise is in evidence. 23 Mr Gray, who appears for the plaintiff, has produced a calculation showing that a net claim of some $515,000 is demonstrable if one simply takes as a starting point Mr Phippen's calculation of a differential in value of $650,000. The problem is that Mr Gray's calculation makes a number of assumptions as to conversion costs, interest, commissions and so on, all of which are unsupported by any evidence. 24 It would be quite impermissible, in my view, to arrive at some figure as representing the genuine amount of the plaintiff's overall claim by simply taking Mr Phippen's evidence as to comparative sale prices as at 6 August 2001 and endeavouring, as a matter of speculation and conjecture, to work back from there to some realistic sum. I do not think that sufficient evidence has been adduced by the plaintiff to enable the Court to quantify any amount as being a genuine amount in respect of the total losses said to arise by reason of the defendant's alleged negligence. However, that does not end the matter. 25 The plaintiff has put forward a calculation showing that it has, at the very least, suffered a loss arising out of additional holding charges it says it has incurred. Those holding charges are set out in annexure "W" to Mr Keith's affidavit of 7 June 2000. The calculation assumes that if all units in the project had been one-bedroom and two-bedroom units, then all units would have sold and all settlements would have occurred by 15 September 2000. The calculation then sets out particulars of the units which were sold up to 30 June 2000, what units were sold thereafter at various times, how the proceeds of sale were applied in reduction of initial principle borrowed, and calculations resulting in a total sum of $182,814.84 as being excess holding charges incurred by reason of non-completion of the sale of all units by 15 September 2000. 26 If one compares the assumption that sales of all one- and two-bedroom units would have been achieved by 15 September 2000 with the sales and settlements of one- and two-bedroom units actually achieved, as appears from annexure "T" to Mr Keith's affidavit, one will see that in fact a number of sales of one- and two-bedrooms units settled later than September 2000, some settlements occurring in October 2000, some in December 2000 and, I think, one in March 2001. No doubt some adjustment should be made to the figures calculated in annexure "W" of Mr Keith's affidavit and one ought not necessarily accept at face value a calculation of holding charges based upon the assumption that all one- and two-bedroom units in the project would have settled around mid-September 2000. Nevertheless, I do not think it likely that the adjustments would reduce the figure of $182,814 claimed in annexure "W" by a sum in excess of $60,000. As I have noted, the amount of the defendant's claim as appears from its statutory demand is $121,618. 27 It seems to me that the plaintiff has adduced sufficient evidence to enable the Court to identify the basis upon which it claims economic loss and the means by which it calculates at least the sum of $182,000 odd in respect of that economic loss. I have no doubt that those calculations will be as much in dispute as the very basis of liability itself, but I am satisfied that for the purposes of s.459H the plaintiff has established a genuine offsetting claim in an amount which exceeds the amount of the defendant's debt as claimed in its statutory demand. In those circumstances, I must set aside the statutory demand. 28 Mr Alexis submits that this has been a very borderline case and that the plaintiff has only barely succeeded in demonstrating that there is a genuine offsetting claim for a sufficient amount, so that there should be no order as to costs. While I agree with those observations, I do not think that is a sufficient basis for depriving the plaintiff of the costs of the application. Many such claims at this stage of proceedings would appear to be tenuous, but if they are genuine then the alleged debtor company is entitled to the benefit of CA s.459G and s.459H. In those circumstances the defendant will pay the plaintiff's costs of the Originating Process.

After further submissions 29 In this matter I have given reasons as to why I have found that the plaintiff has a genuine offsetting claim within the meaning of s.459H of the Corporations Act . 30 After delivering those reasons, I invited Counsel to address me as to whether I should make an order setting aside the statutory demand under CA s.459H(3) only upon conditions, as permitted by s.459M. As is demonstrated in the judgment of Young J. (as he then was) in Jesseron Holdings v Middle East Trading Consultants Pty Ltd (supra, at 493), the fact that the Court finds that there is a genuine offsetting claim within the meaning of s.459H does not necessarily require that an order setting aside the statutory demand ends the matter. The Court is empowered by s.459M to impose conditions upon the making of an order under s.459H. The Court may frame such conditions as it considers just in the circumstances. 31 As appears from the judgment of his Honour in Jesseron , one of the circumstances which the Court can take into account in imposing conditions pursuant to s.459M is the strength or weakness of the plaintiff's offsetting claim and the likelihood of the plaintiff being ultimately successful in proving the whole of the amount to which it is entitled as a result of that claim. 32 That discretion must be exercised, of course, in light of the fact that the evidence in support of the plaintiff's offsetting claim is at this stage of the proceedings likely to fall far short of that which would ultimately be available on a final hearing. Nevertheless, the Court should be in a position to form some view of the strength of the plaintiff's claim if the plaintiff has adduced sufficient evidence to demonstrate that it does have a genuine claim. 33 In this case, I do appreciate that the evidence filed on behalf of the plaintiff in support of its claim is at an early stage. However, even so, that evidence is open to trenchant criticism. In the course of my reasons, I have drawn attention to only some of the matters upon which the plaintiff's case may be criticised. 34 In my view, this is an appropriate case for the Court to exercise its discretion under s.459M to impose conditions as the price of the plaintiff obtaining an order setting aside the statutory demand under s.459H. In this regard, I bear in mind that at the commencement of the hearing today Mr Gray, who appeared for the plaintiff, informed me that if I was otherwise disposed not to set aside the statutory demand, his client, Mr Keith, personally was prepared to undertake to the Court to provide for the payment to the defendant of the sum the subject of the statutory demand, whether by security, payment into Court or otherwise. 35 A second matter I take into account in the exercise of discretion is that on 6 August 2001 when this matter came before the Court, the plaintiff, by its Counsel, proffered an undertaking to the Court, which was accepted, that the plaintiff would not, pending further order of the Court, deal with or dispose of any of the proceeds of sale of units 8 and 19 at 77 Macleay Street, Potts Point so as to reduce the balance retained by the plaintiff to less than $121,620, without seven days' prior written notice to the defendant's solicitors. 36 At the commencement of the hearing today, Mr Gray very frankly and properly informed me that units 8 and 19 in the development had been sold, the settlement of the sales had taken place subsequent to 6 August 2001, but the whole of the proceeds of sale had been appropriated in discharge of the plaintiff's liabilities to its mortgagee. Mr Gray stated, and I accept, that the disposal of those proceeds of sale was not made dishonestly or in deliberate breach of the undertaking to the Court. Nevertheless, it is my view that a proper appreciation of the terms of the undertaking proffered to the Court required that the plaintiff's solicitors give notice in writing to the defendant's solicitors of the sales of units 8 and 19 and of a distribution which would result in the whole of the proceeds of the sale being paid otherwise than in conformity with the undertaking proffered. 37 Bearing in mind what I regard as serious weaknesses in the plaintiff's case as it presently stands, bearing in mind the undertaking which was given to the Court on 6 August and the undertaking which Mr Gray suggested to me this morning as being available in the event that I otherwise determined not to set aside the statutory demand, it seems to me appropriate to require as a condition of making an order setting aside the statutory demand that the plaintiff give certain undertakings to the Court. What I propose to do now is outline briefly the nature of those undertakings and stand the matter over before me tomorrow morning so that the parties in the meantime can consult as to the appropriate terms of the undertakings which I would extract from the plaintiff as a condition of setting aside the statutory demand. 38 The first undertaking will be to the effect that the plaintiff is to file and serve within 28 days of today a Statement of Claim in the appropriate Court commencing proceedings against the defendant for all causes of action presently known to it arising out of the subject matter of the defendant's statutory demand and the matters referred to by the plaintiff in its affidavits, and that it further undertakes to prosecute those proceedings with diligence. 39 The second undertaking will be that the plaintiff either pay into the Court which is to hear the proceedings to be commenced a sum of $100,000 to abide the decision of that Court, or else provide by some other satisfactory means security for that payment. I have in mind that a bond or bank guarantee could well be sufficient for that purpose. I have selected the sum of $100,000 as appropriate for payment or security because I am of the view, as the evidence presently stands, that even if the plaintiff succeeds on some aspect of its claim against the defendant, that claim is not likely to exceed some $20,000. I do not by any means intend to express the view that the plaintiff's claim for an amount in excess of $20,000 is not arguable, but for the purposes of exercising the discretion under s.459M I am content to adopt the attitude which Young J. adopted in Jesseron Holdings (supra) and that is to form a view as to what is the likely value of the plaintiff's claim. 40 The parties should bring in Short Minutes of Order to reflect the reasons which I have given and I will hear argument then if there is any dispute. I will stand the matter over to 9.30 tomorrow morning before me. - o0o -

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