1 HIS HONOUR: By an amended summons the plaintiff applies under s 459G of the Corporations Law to set aside a statutory demand dated 10 October 1998 and served on or about 26 October 1998. The summons was originally filed on 16 November and was subsequently amended to refer to the correct notice and date of service.
2 The summons claimed that the plaintiff owed the defendant $423,129. The debt was described in the demand as:
"Amount owing on loan account being cash advances as at 30 June 1996 recorded in the books of the creditor and verified by Messrs Hennessy Brigden & Co, chartered accountants, no part of which has been repaid as per schedule annexed hereto and marked 'A' headed Sydney Land Corp Inter Co Receivables and Payables as at 30 June 1996".
3 Annexed to the demand was a list of inter-company receivables and payables for the Sydney Land Corp as at 30 June 1996. One line in that list refers to "cash advances - NHPL" and under the heading "Sydney" there appears the figure $423,129. The plaintiff does not dispute that "NHPL" refers to the plaintiff and "Sydney" refers to the defendant, and that the list has the effect of asserting that as at 30 June 1996 $423,129 was owed by the plaintiff to the defendant.
4 Though the evidence of corporate structures is skimpy, it appears that the defendant was for a time the chief entity of a group that included the plaintiff. As the annexure to the statutory demand shows, there were substantial debts owing by various group companies to others in the group. Gregory Lindsay-Owen and Tracy John Lake were directors of the defendant.
5 At some point after 30 June 1996 the group structure was broken up and certain subsidiaries were acquired by Australasian Property Holdings Limited (APH), a New Zealand company. Mr Lake is a director of APH and interests associated with him have a significant shareholding in that company. Mr Lindsay-Owen is a director of the defendant and apparently has no interest in APH. The present litigation arises out of the break-up of the group and the consequent unravelling of the various inter-company loan accounts.
6 The plaintiff acknowledges that an amount of $423,129 was owing to the defendant at 30 June 1996. However, the plaintiff says that there are some adjustments to be made to that amount and further that there are some offsetting claims so that the balance owing as at 25 February 1999 was $190,873.80. By a letter of that date the plaintiff's solicitor tendered payment of $190,873.62 by bank cheque. The shortfall of 18 cents was a mistake which counsel for the plaintiff corrected by offering to pay that amount immediately.
7 According to the plaintiff the sum of $423,129 must be adjusted by adding two further amounts explained in Mr Lake's affidavit of 22 February 1999. Those additional amounts are $5,000 with respect to John Brown Tourism and air fares to New Zealand of $1,358, bringing the total owing to $429,487. However, two amounts must be deducted from that amount. First, there is a repayment of $19,109.20 which Mr Lake says is a payment which was made on 5 June 1996 and acknowledged in a demand by Mr Lindsay-Owen which he refers to in annexure B to his affidavit of 16 November 1998. The second amount is $1,145 which is a payment which was duplicated and the adjustment is made to remove the duplication. When those two amounts are deducted from the amount owing at 30 June 1996, the balance outstanding is $409,232.80.
8 The plaintiff says that it has three offsetting claims with respect to this balance. When the offsetting claims are deducted the balance due and payable is, as I have said, $190,873.80 and that amount has been paid.
9 According to the plaintiff the offsetting claims arise out of debts owed by the defendant to companies which were part of the defendant's corporate group when the debts were incurred. The creditor companies evidently ceased to be part of the defendant's group when the group was split up. The plaintiff says that it took assignments of these debts; and that by virtue of the assignments the debts came to be owed by the defendant to it and are offsetting claims.
10 This contention relies on subsections 459H(1), (2), (4) and (5) of the Corporations Law. By s 459H(1) certain calculations must be made by the Court if, inter alia, it is satisfied that the debtor company has an offsetting claim. "Offsetting claim" is defined in subsection (5) to mean a genuine claim that the company has against the respondent by way of counter-claim, set-off or cross-demand (even if it does not arise out of the same contractual circumstances as a debt to which the demand relates).
11 Where s 459H applies, s 459H(2) says that the Court must calculate the substantiated amount of the demand by deducting the offsetting total (the total amount of the offsetting claims) from the admitted total. If the substantiated amount exceeds the statutory minimum of $2,000, as it does here, the Court is to make an order under s 459H(4) varying the demand.
12 In my opinion s 459H speaks from the date of the hearing rather than the date of service of the demand, so that an offsetting claim which arises after the demand is served and even after the proceedings to set it aside are commenced, but before the hearing, is to be taken into account: see Equuscorp Pty Ltd v Perpetual Trustee WA Ltd (1997) 24 ACSR 194, 204 (Heerey J); (1998) 16 ACLC 12, 30 (Full Federal Court). Subsection (1) requires that the Court must be satisfied that the defendant "has" an offsetting claim; and an "offsetting claim" is defined as a genuine claim that the company "has" against the respondent. A claim based on an assigned debt is at least a "cross-demand" arising out of a different transaction or circumstances than the amount of the debt which is claimed, and as such falls within the definition of "offsetting claim" even if it does not technically constitute a counter-claim or give rise to a set-off: John Shearer Ltd v Gehl Co (1995) 18 ACSR 780; Foreman 25 ACSR 675.
13 In my opinion the Court's task in deciding under s 459H(1)(b) whether it is satisfied that the company has an offsetting claim is similar to its task in deciding whether it is satisfied under s 459H(1)(a) that there is a genuine dispute as to the existence or amount of the debt. Although the question posed by s 459H(1)(b) is whether the company has an offsetting claim, a claim falls within the definition of "offsetting claim" as long as it is a claim which is a genuine claim. Once the claim is judged to be genuine, it qualifies for the purpose of the calculation made under s 459H.
14 Many formulations of the standard to which the Court must be satisfied that a "genuine" dispute exists have been given in the cases. The defendant referred to Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 24 ACSR 353 at 365, where the Full Federal Court said that a genuine dispute requires that the dispute be bona fide and truly exist in fact; and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. An oft-cited observation of McLelland CJ in EQ is also helpful. In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, he said that the expression "genuine dispute", "connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises with an obligation for an interlocutory injunction before the extension or removal of a caveat". As Young J said in John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250, there must be something "between mere assertion and the proof that would be necessary in a court of law".
15 I have found it appropriate to emphasise these tests because much of the hearing was occupied by matters which appeared to me to go beyond the "genuine claim" criterion, and into the realm of full proof of the claims and counter-claims of the parties. All that the Court is required to do and all it can do in proceedings such as the present is to make a determination as to whether there is a genuine offsetting claim.
16 Although the Court must be careful not to allow the proceedings to become a hearing on the validity of the claim in which questions of credit of witnesses become matters for determination, I decided in the present case that it was appropriate to allow limited cross-examination of Mr Lake. This was because his evidence about the debts and their assignment was crucial and in documentary form it was potentially ambiguous.
17 Mr Lake's evidence in his affidavits and orally is that as a result of other demands for payment made in 1998, the directors of APH carried out a detailed review of all previous inter-company debts and consequently made journal entries in the plaintiff's loan account with the defendant reflecting the true updated position. Annexure E to his affidavit of 26 November 1998 is a summary of journal entries for that loan account which shows the debt of $423,129 owing as at 30 June 1998 and then shows subsequent adjustments. As I have mentioned earlier, Mr Lake's final evidence is that some of those adjustments produce a figure of $409,232.80 as the amount truly owing. The other adjustments in annexure E to Mr Lake's first affidavit relate to alleged assignments.
18 At the time it was prepared, annexure E produced a calculation of $180,456 as the balance which was acknowledged to be owing. It is significant for the Court's assessment of the genuineness of the cross-claim that the plaintiff wrote to the defendant on 3 August 1998 stating that according to its records, that amount was payable by the plaintiff to the defendant as at 30 June 1998. The defendant did not reply to this letter but served its demand on about 26 October 1998 knowing that the plaintiff had calculated that a much smaller amount was due than the amount which was demanded. The figure asserted at that time by the plaintiff, namely $180,456, appears as an unsecured loan in the plaintiff's audited accounts for the year ended 30 June 1998.
19 As I have mentioned, there are three items in annexure E to the first affidavit which are claimed to be the subject of assignments. The first is an entry of $10,000 described as "offset moneys owing to Bruce Craig Pty Ltd". The plaintiff's evidence is that by letter of 30 June 1998 Bruce Craig Australia Pty Ltd purported to assign its right to money owed to it by the defendant totalling $10,000 to the plaintiff in consideration of 287,500 fully paid shares issued to it by APH at NZ 4 cents per share. The defendant submits that this alleged transaction is fictitious or contrary to the evidence because the consideration had been supplied by APH rather than the assignee. But the plaintiff says, plausibly enough to satisfy the "genuine claim" test, that the transaction occurred in two stages which have been elided in the commercial document which evidences it. First Bruce Craig Australia Pty Ltd assigned its debt to APH in consideration of the APH shares; then APH assigned the same debt to the plaintiff. There is evidence of the latter transaction in a minute of a meeting of directors of the plaintiff held on 30 June 1998. The assignment from Bruce Craig to the ultimate assignee, the plaintiff, was notified to the defendant by notice dated 12 February 1999.
20 As to the sum of $74,475 described as "offset moneys owed to Numarra", there is evidence in the latter company's audited financial statements for the year ended 30 June 1996 that its then chief entity, the defendant, owed $41,530 at that time. The audited financial statements for the following year show that this debt had increased to $58,375. The plaintiff says that this amount was increasing by virtue of an arrangement (reflected in a letter from Hennessy Brigden to Numarra dated 28 May 1998) that Numarra would pay the defendant's audit fees. A minute of a meeting of directors of Numarra held on 30 June 1998 notes that the company is presently owed $74,475 by the defendant. The directors then resolved to assign the debt to the plaintiff.
21 As to the sum of $29,950 described as "offset moneys owed to Numarra for Hennessy Brigden debt", the plaintiff's evidence is that by the letter of 28 May 1998 Hennessy Brigden wrote to the directors of Numarra claiming that amount with respect to audit fees for the defendant. The letter stated that the debt with respect to the defendant was being paid by Numarra out of unit sales in accordance with an irrevocable letter of authority, and the letter made a demand because the payment arrangements were not at that stage fully complied with. The plaintiff says that by 30 June 1998 this arrangement with respect to payment of fees led to the debt of $74,475 referred to above. As at 30 June 1998 there remained a debt of $29,950 which was the subject of Hennessy Brigden's letter of demand. The debt was discharged out of settlement proceeds owing to Numarra. The plaintiff says that this created an inter-company debt of $29,950 owing by the defendant to Numarra. Numarra assigned the debt by resolution of its directors on 30 June 1998.
22 A notice to the defendant of Numarra's assignment of these two debts totalling $104,425 to the plaintiff, dated 12 February 1999, is in evidence.
23 The three offsetting claims just mentioned total $114,425. The plaintiff seeks to offset a further claim arising out of another assignment. This time the debt is for $103,934 which is said to have been owing by the defendant to Lopmand Pty Ltd, Mr Lake's family company. The plaintiff's evidence for the existence of this debt is principally in some working papers of Hennessy Brigden dated 30 June 1996. The directors of Lopmand purported to assign the debt at their meeting on 29 January 1999 and the directors of the plaintiff purported to accept the assignment on the same day.
24 Mr Lake's evidence is that notices of the assignments of the Lopmand, Numarra and Craig debts were served on Mr Lindsay-Owen on 14 February 1999 and on the defendant by mail subsequently.
25 As regards these debts and the assignment of them, the defendant contends that if one reviews the accounts of the defendant and its group, including the accounts of Numarra and the plaintiff, it becomes evident that the accounting entries which purport to acknowledge the debts and then the assignments of those debts cannot be correct. He submits that Mr Lake, having prepared and filed an affidavit in November 1998, had (as the defendant's legal representative says) "a brainwave" that further assignments would enable the plaintiff to resist the statutory demand. Some of the debts were in fact written off, and the defendant says that where a debt has been written off the Court should conclude that there is subsequently no genuine debt which could be the subject of an assignment.
26 My difficulty with these submissions is that they tend to go to the question of the actual existence of the debts and the actual efficacy of the assignments, rather than to the question whether there is a genuine offsetting claim in respect of each of the assigned debts. The documentary evidence does not demonstrate that Mr Lake's account is incorrect. So far as the writing off of debts is concerned, I merely observe that the step of writing off debts in a company's financial statements is an accounting operation which does not serve to extinguish the debt. A debt remains in existence (absent payment or set-off) unless the creditor waives its rights or the debt becomes statute barred. The debts in this case do not appear to be statute barred and there is no evidence of waiver other than the simple evidence of the writing off of the debts.
27 My opinion is that the evidence against the existence of the debts and the assignments of them is not strong enough to enable me to conclude that there is no genuine offsetting claim arising out of the alleged transactions. On the contrary, the evidence on the whole and in particular the plaintiff's evidence referred to above, suggests that there is some ground for the offsetting claims which the plaintiff asserts. The law is such that in those circumstances I must conclude that there is an offsetting claim for the total amount of the assigned debts.
28 In the result the statutory demand was for an amount which exceeds the proper amount which may be the subject of the demand because of the existence of the offsetting claims. The proper course for me to take now is to make an order varying the statutory demand under s 459G(4). In the present circumstances there is no occasion for making any order extending the time for the plaintiff to meet the varied demand because the balance which is properly the subject of the demand has been paid.
29 I made an order with respect to the costs of the hearing on 15 February 1999 (when I adjourned the case for further hearing on 26 February 1999) in favour of the defendant. What I now propose to do does not affect that order. My intention is I will not make any order with respect to costs of the hearing on 26 February 1999. I reach this conclusion as a balancing exercise having regard to what has been put to me on the question of costs. Although the plaintiff has substantially succeeded at the hearing, that success was dependent upon notices of assignments of debts which were served no earlier than 14 February 1999, the day before the case first came before me. Additionally, of the amount the subject of the statutory demand, some $190,000 was acknowledged to be owing and was paid on 25 February 1999, the day before the second hearing of the matter. I also take into account that Mr Lake's first affidavit of 16 November 1998 put the matter rather differently from subsequent affidavits. In particular the claim to the assignment of the Lopmand debt was only raised in the affidavit of 12 February 1999, and there was a substantial contest on 15 February 1999 as to whether the affidavit should be permitted to be filed and read. The full particularisation of the plaintiff's position arose only in the affidavit of 22 February 1999, a week after the date set down for hearing of the case.
30 It is true that the plaintiff informed the defendant on 3 August 1998 that it believed that the amount owing was much less than the amount claimed in the statutory demand, but this letter was in the form of an unparticularised assertion which made no reference to anything like the ultimate basis of the claim which was put by the plaintiff in the proceedings.
31 In those circumstances the defendant had no clear idea of the case it was required to meet until the day of the adjourned hearing on 26 February 1999. It seems to me, taking those matters into account and balancing against them the plaintiff's eventual success, that the appropriate course is that each party should pay its own costs except with respect to the hearing on 15 February 1999, as to which I have already ordered the plaintiff pay the defendant's costs.
32 My orders are these:
- Under s 459H(4) I order that the statutory demand dated 10 October 1998 be varied by substituting for the amount of $423,129 there claimed, the amount of $190,873.80.
- The summons is otherwise dismissed.
- Having made an order that the defendant's costs of the hearing on 15 February 1999 be paid by the plaintiff, I make no further order as to costs.