- MNWA Pty Ltd v DCT

Supreme Court of NSW|2024-04-24|Before: Black J

Solicitors: Rosemont Partners (Plaintiff) AHD Lawyers (Defendant) File Number(s): 2024/38482

Nature of the application

By Originating Process filed 31 January 2024, the Plaintiff, Forte Sydney Construction Pty Ltd ("Forte"), seeks to set aside a creditor's statutory demand ("Demand") served on it by Arctec Aluminium Pty Ltd ("Arctec") for the amount of $36,563.96. That amount is described in the schedule to the Demand as: "A debt being the unpaid contract sum and variation amount in connection with, and arising from, goods and services provided by [Arctec] to [Forte] pursuant to the building contract entered into between [Arctec] and [Forte] on 9 September 2019. The breakdown and calculation of the debt is set out in Annexure A."
Annexure A to the Demand in turn contains a detailed breakdown, involving numerous line items, as to how the amount of $36,563.96 is calculated. Essentially, the calculation comprises amounts charged for construction work in respect of, inter alia, windows and doors, glass and balustrades, privacy screens, roof screens and aluminium fences by Arctec, followed by several adjustments less several payments which are then further adjusted by reference to additional costs incurred in respect of an adjudication, prior to previous District Court proceedings between the parties. The amount claimed in the Demand is calculated by deducting the amount paid by Forte for the project from the final total contract sum, as calculated by Arctec, to reach the amount of $36,563.96 claimed by Arctec in the Demand.

Affidavit Evidence

The parties led affidavit evidence in respect of the proceedings, and voluminous exhibits were tendered, although it will not be necessary to refer to, or determine the numerous disputes concerning, a large part of that affidavit evidence in order to determine the proceedings.
Forte relied on the affidavit dated 31 January 2024 of its director, Ms Li, who set out her experience in residential property development, outlined the previous proceedings between the parties in the District Court of New South Wales, and referred to numerous reports which have now been prepared by, inter alia, the developer of a property at Jannali with which Forte and Arctec were involved, Fair Trading NSW and the Office of the Building Commissioner, each of which identifies defects in the construction of that property, some of which Forte claims are attributable to Arctec.
A lengthy exhibit to Ms Li's first affidavit contains at least some material which would be important to the determination of the proceedings and, in particular, that exhibit contains a subcontract between Forte and Arctec dated 9 September 2019, titled "Glazing, Aluminium and Louvre, Balustrade and Fence Subcontract - Design and Construct". That subcontract contains, in cl 9, a provision permitting Forte to withhold or set-off certain amounts in specified circumstances, to which Mr Campbell, who appears for Forte, draws attention, but which it will not be necessary to address further.
Clause 10.5 of the subcontract deals with a retention fund, which is described, in cl 10.5(a) as comprising security for the due performance by Arctec of its obligations under the subcontract. Clause 10.5(b), to which reference was made, refers to the treatment of one half of the retention amount, and the circumstances in which it will be released to Arctec. A claim in respect of that clause, which was referrable to a retention of $15,060.37 was not pressed by Mr Campbell in the course of submissions.
Clause 10.5(c) of the subcontract relevantly provides that, subject to the set-off provision which is not presently relevant, and a second clause which does not seem to exist, one half of the retention amount for security will be released to Arctec on request on the later of two events. The first of those events is the expiry of the defects period of the whole of the head contract works which, it is common ground, was an 18-month period from practical completion on or about 11 November 2020, expiring on or about 11 May 2022. The second of those events is: "the proper rectification (as determined by [Forte]) of all defects as notified to [Arctec]."
As will emerge below, defects were notified by Forte to Arctec, at least on 5 April 2022 (Ex P1, 185) and again on 6 May 2022 (Ex P1, 206) and there is no suggestion that Forte has reached any determination that they have been properly rectified. I will return to the significance of that matter below.
Clause 10.5(d) of the subcontract in turn provides that, if Arctec fails to pay an amount due and payable to Forte, under the subcontract or otherwise, Forte may have recourse to any retention amount or other security, and any deficiency remaining may be recovered by it as a debt due and payable by Arctec. It is, however, not necessary to determine how Forte may deal with the retention amount for present purposes, where, ultimately, the question in this application is only whether that amount is presently due and payable by Forte to Arctec.
The exhibit also contains the scope of the works for Arctec in respect of the project, which involves work across a number of items, including glazing works, aluminium and louvre works and balustrade and fence works, which are then described in greater detail. The exhibit also includes a Statement of Claim filed by Forte against Arctec in the District Court of New South Wales, which has given rise to disputes, which it will not be necessary to determine as to whether the determination of those proceedings prevents Forte raising any further claims as to defects in Arctec's work, irrespective of whether those defects were raised in those proceedings; and, if not, the extent of matters and defects that were in issue in the District Court and whether defects now claimed by Forte against Arctec are the same or different defects as those in issue in those proceedings.
The exhibit to Ms Li's first affidavit also contains correspondence, importantly the defect notifications of 5 April 2022 and 6 May 2022 to which I referred above, by which it is plain that Forte by its director, Ms Li, notified Arctec, by its representative Mr Ye, of a significant number of defects attributable to window and door and metal works in respect of the relevant property and provided narrative descriptions of some of those works which made clear that they related to, for example, defects in the performance of several sliding doors and glass doors which were within the scope of Arctec's works. I was also taken, in the course of submissions, to aspects of the proceedings before the District Court, including cross-examination recorded in the judgment, directed to the question whether particular issues were or were not raised in the District Court proceedings.
Forte also relies on the affidavit dated 28 February 2024 of its solicitor, Mr Koh, which referred to a Building Works Rectification Order which had since been issued by the Office of the Building Commissioner, under s 33 of the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW). Mr Campbell contended that the Building Works Rectification Order was binding upon the developer of the relevant property and the developer would in turn look to Forte by way of a claim for the costs that it would incur in complying with that order, and he referred to proceedings that had been brought in the New South Wales Civil and Administrative Tribunal ("NCAT") and to a claim which Forte in turn contended that it had available against Arctec in that that regard. It was not apparent how that submission could give rise to an offsetting claim in respect of the Demand, where it did not descend to the detail of the particular works required by the order that the developer required Forte to undertake, which Forte would or could in turn claim against Arctec, or the amount of costs which would be incurred by Forte and claimed against Arctec in respect of those particular works. It is again not necessary to determine the issues raised by that submission, to which Mr Campbell gave less emphasis as the difficulties with it emerged. That affidavit in turn exhibited the Building Work Rectification Order issued by the Office of the Building Commissioner, and I have been taken to various aspects of that order which in turn appear to relate to work which may be within the scope of Arctec's scope of work.
By a further affidavit dated 24 April 2024, Ms Li exhibited further documents, including a letter directed to proving the date of practical completion of the property, to which I have referred above, and an extract of the head contract for the property, directed to establishing the length of the defects period after the date of practical completion, to which I also referred above. Those matters are significant for the basis on which this matter will ultimately be determined. That affidavit also exhibited a further schedule of defects for the project, referring to works valued at $81,500, which generated a further dispute between the parties as to the extent to which a number of items, largely related to the question of a water stop in respect of balcony sliding doors in the property, had been or had not been in issue in the District Court proceedings, or could reasonably have been raised in the District Court proceedings, if they were not in fact in issue in the District Court proceedings. Again, it will not be necessary to determine that question.
Forte, finally, read a second affidavit dated 24 April 2024 of its solicitor, Mr Koh, which referred to an order which had been made by NCAT releasing Forte from the implied undertaking in respect of several reports and Scott Schedules in the proceedings in the NCAT, and in turn exhibited two lever-arch folders, printed double-sided, of reports which had been filed by the various parties in the NCAT proceedings. Those folders appeared to be directed to an exercise of extracting, from the multiple reports filed in NCAT, which defects related to Forte's work, and then which defects related to the scope of work performed by Arctec, and then further divide that subset of defects between those that were raised or not raised in the District Court proceedings. The Court was not provided with any real assistance by either party as to how that exercise could be undertaken but, happily, it is not necessary to undertake it to determine the proceedings.
Arctec in turn relied on the affidavit dated 21 February 2024 of its solicitor, Mr Zhu, which referred to the conduct of the District Court proceedings and the evidence led in the District Court proceedings, and drew attention to some of the issues raised in respect of cross-examination in the District Court proceedings.

The parties' submissions

Forte seeks to establish a genuine dispute or an offsetting claim for the purposes of s 459H of the Corporations Act 2001 (Cth) ("Act") or some other reason to set aside the Demand for the purposes of s 459J(1)(b) of the Act.
In opening submissions, in support of the proposition that there was a genuine dispute in respect of the Demand, Mr Campbell drew attention to several of the clauses of the subcontract, to which I have referred above, dealing with the question of the retention amount, and specifically to cl 10 of the subcontract, and also drew attention to the provision dealing with a set-off available to Forte to which I referred above. Mr Campbell submitted, and I accept, that the effect of those contractual provisions, combined with the date of practical completion of 11 November 2020 and the defects period of 18 months, was that the second retention amount was to be released on the later of 11 May 2022 or, using the language of the subcontract, the date of "the proper rectification (as determined by [Forte]) of all defects as notified to [Arctec]". Mr Campbell accepted, sensibly, that such a notification of defects by Forte would have had to occur by 11 May 2022, the earlier of the dates on which the second retention amount was to be released, so as to give rise to a deferral of that date. It is apparent that that occurred here where Forte gave notice of defects to Arctec, as I noted above, on 5 April and 6 May 2022, prior to the 11 May 2022 date. Mr Campbell in turn submitted that, apart from the defects raised in the District Court proceedings, there were other defects notified by Forte to Arctec on 5 April 2022, including defects for which Arctec were responsible, and that those were not rectified by Arctec within the time specified in the notice.
Mr Campbell initially submitted that that gave rise to a genuine dispute as to whether the amount of $15,060.38, comprising the second half of the retention amount, was due and payable by Forte to Arctec. In the course of oral submissions, he rightly recognised that that issue was also capable of giving rise to some other reason to set aside the Demand under s 459J(1)(b) of the Act.
Dr Greinke, who appears for Arctec, contended that, by reference to matters on which he relied in other aspects of Arctec's case, the District Court had determined Forte's defects claim adversely to Forte, after it had not admitted expert evidence purportedly given by Forte's director, and it was no longer open to Forte to raise those defects. The difficulty with that proposition, it seems to me, is that it is plainly arguable that it is no answer to the terms of cl 10 of the subcontract. The point at which the second retention payment is due and payable, under the terms of cl 10 of the subcontract, is when Forte determines that the proper rectification of the relevant defects has occurred. It is plainly arguable that the District Court's determination, in respect of the matters that were in issue in the particular proceedings before that Court, does not amount to the determination by Forte which cl 10.5(c) of the subcontract would require. While I recognise that Dr Greinke contends that it is not open to Forte to maintain a position that is contrary to that determined by the District Court as to the defects in issue in that Court, to the extent they are identifiable, that contention is not so plainly correct as to exclude the position for which Forte contends.

Applicable principles and determination

I now turn to the applicable authorities, which are well-established, and apply, in the present circumstances, in a straightforward way. In addition to the case law referred to in my oral ex tempore judgment, I should not that I summarised the relevant principles in Re MK Group Phoenix Pty Ltd [2014] NSWSC 1467 at [40] as follows: "The authorities make clear that a statutory demand that relies on, or includes, a debt that is not yet due for payment may be set aside, although the case law differs as to whether such an order may be made under s 459H or s 459J of the Corporations Act. In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1986) 132 FLR 300; 20 ACSR 746, Bryson J held that the inclusion of debts not yet due for payment at the date of the demand was a defect within the demand under s 459J(1)(a) of the Corporations Act, which would authorise the Court to set aside the demand if it was satisfied that subject substantial injustice would be caused unless the demand was set aside. In NT Resorts Pty Ltd v DCT (1988) 153 ALR 359 at 366-367, Finkelstein J considered that the Court could set aside the demand if it was satisfied that a genuine dispute existed as to whether the debt to which the demand related was due and payable, under s 459J(1)(b) of the Corporations Act. Statutory demands have also been set aside when issued in respect of debts that were not due or payable, or where there was a genuine dispute as to whether they were due and payable, in Re Carbon Polymers Ltd [2013] NSWSC 376 and Re Forza Plumbing Systems Pty Ltd [2013] NSWSC 1234."
This summary of these principles was cited, with apparent approval, by Gleeson JA (sitting at first instance) in Re Longjing Pty Ltd (2017) 123 ACSR 456 at [44]; [2017] NSWSC 1534. It is only necessary for Forte to establish that there is a plausible contention requiring investigation that the debt is not presently due and payable, and it need not establish that matter on the balance of probabilities: MNWA Pty Ltd v DCT (2016) 117 ACSR 446 at [131]; [2016] FCAFC 154; Re Longjing Pty Ltd above at [46].
In Re Essential Media and Entertainment [2020] NSWSC 990 at [98]-[102], Rees J undertook a comprehensive review of those authorities, pointing to the fact that there had been some inconsistency in the case law as to whether claims or amounts not due and payable should be treated as giving rise to a genuine dispute or some other reason to set aside a creditor's statutory demand, and concluding that, where the court found that there was a plausible contention requiring investigation that a debt was not presently due and payable, a creditor's statutory demand may be set aside under section 495H(1)(a) of the Act on the basis that a genuine dispute exists, or alternatively, on the basis that there is some other reason to set aside the demand under section 459J(1)(b) of the Act.
I prefer the view, which I have adopted in earlier cases, that, where a debt is not presently due and payable, a creditor's statutory demand should be set aside under s 459J(1)(b) of the Act rather than under s 459H(1)(a) of the Act: Re Benjamin & Khoury Pty Ltd [2023] NSWSC 756; Re Sydney Hire NSW Pty Ltd [2023] NSWSC 1580 at [21]. There is good reason for that approach, where the service of a creditor's statutory demand claiming a substantial amount that is not yet due and payable wrongly places the recipient of the demand at risk that it is presumed to be insolvent, unless it pays an amount that is not yet due or incurs the costs of an application to set aside the demand. Where a creditor's statutory demand is set aside for some other reason, no question of determining any lesser substantiated amount arises, as would be the case if a genuine dispute was found under section 459H(1) of the Act.
It seems to me that Forte has established at least a plausible contention requiring investigation that the second retention amount is not presently due and payable by Forte to Arctec. I have noted above that the evidence establishes that, prior to the first of the dates on which the second retention amount would have fallen due, 11 May 2022, Forte gave notice to Arctec of its claim that there were defects in respect of the work done by Arctec. Clause 10.5 (c) in turn provides that, where such defects were notified by Forte to Arctec as here occurred, the second retention amount is to be paid out on "the proper rectification (as determined by [Forte] of all defects" that were so notified. I noted above that there is no suggestion that Forte has reached a determination that Arctec has rectified such defects.
It is not necessary or appropriate for me to reach a conclusion on any final basis in that regard, because it is sufficient to set aside the Demand on the basis that there is a genuinely arguable case that a substantial part of the amount claimed by Arctec in the Demand is not presently due and payable, so as to give rise to some other reason to set aside the Demand. It seems to me that there is plainly a genuinely arguable case as to that matter here, where it is plainly open to Forte to contend that the determination of the District Court does not alter the fact that it has not reached a view that the defects that it notified to Arctec had been properly rectified, a fortiori given the wider issues that have now emerged as to defects in the development. I am satisfied, on that basis, that the Demand should be set aside in its entirety, because there is some other reason to do so consistent with the authorities to which I have referred above.

Other matters that need not be determined

It is therefore not necessary to determine any question as to whether a genuine dispute exists, although the findings that I have reached above likely have the consequence that a genuine dispute would also be established in respect of the part of the amount claimed in the Demand which Forte would arguably be entitled to withhold as the second retention amount.
It is also not necessary to determine the case put by Forte in respect of an offsetting claim, which raised significant factual and legal disputes. So far as those factual disputes are concerned, unless Arctec established that the District Court proceedings foreclosed any reliance by Forte on all defects that later emerged, the resolution of that case would have required, in respect of the range of defects identified in the schedule to Ms Li's 24 April 2024 affidavit, an investigation whether the particular defects were in issue in the District Court. In respect of the wider claims said to arise from the expert reports that were tendered, the resolution of that case would also have required an exercise in identification of those wider claims, before determining as to whether they were in issue in the District Court. It is not appropriate to undertake that investigation in a summary procedure to set aside a creditor's statutory demand where the proceedings can be determined on other grounds.
So far as the legal issues raised by Forte's reliance on an offsetting claim are concerned, it is common ground that the District Court proceedings could give rise to a res judicata or issue estoppel in respect of the matters determined by them, but significant disputes exist beyond that point. The first of those issues is whether the effect of s 18E(1) of the Home Building Act 1999 (NSW) ("Home Building Act") is that a contractor cannot bring a claim against a subcontractor in respect of a breach of a statutory warranty, other than for a "major defect" (as defined) in residential building work, after the end of the two year warranty period to which reference is made in s 18E(1) of the Home Building Act, notwithstanding that, for example, claims were brought by a developer or other party against the contractor toward the end of or at the end of that two year period.
The second of those issues concerns the effect of s 18E(2) of the Home Building Act, and in what circumstances any estoppel or res judicata which may arise from earlier proceedings (here, the District Court proceedings) is qualified by that subsection in respect of defects which existed when the work to which the warranty relates was completed, if Forte did not know or could not reasonably have known of them at that earlier point. That question was noted, although not finally resolved, by the Court of Appeal in Parkview Constructions Pty Ltd v The Owners Strata Plan No 90018 [2023] NSWCA 66 at [71]ff, which referred to earlier cases which had applied res judicata principles and the potential qualification to those principles arising from s 18E of the Home Building Act.
It seems to me that the legal issues as to res judicata and the potential application of s 18E of the Home Building Act should be left to be determined in a case in which it is necessary to determine them and where the factual basis for its determination is properly established, rather than in an application to set aside a creditor's statutory demand that is not a final hearing on the merits of the underlying dispute, and where the factual basis for the determination of those issues is obscure at best.

Orders

For these reasons I am comfortably satisfied that the Demand should be set aside, on the basis to which I have referred above, for some other reason within s 459J of the Act, and costs should follow the event. I make orders that:
The Creditor's Statutory Demand dated 10 January 2024 issued by Arctec Aluminium Pty Ltd to Forte Sydney Construction Pty Ltd be set aside.
Arctec Aluminium Pty Ltd pay the costs of Forte Sydney Construction Pty Ltd of and incidental to the proceedings, as agreed or as assessed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 May 2024

Home Building Act 1999(NSW)

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