Plaintiff v Defendant

2 The statutory demand was dated 4 July 2014 and served by the defendant ('Amerind') upon the plaintiff on 10 July 2014. The demand seeks $20,650.37 (the total of 15 invoices from 17 March 2014 to 16 April 2014).

3 The affidavit accompanying the statutory demand was sworn by Matthew Byrnes, one of Amerind's joint and several receivers and managers who were appointed on 11 March 2014, the same day as the appointment of voluntary administrators. That affidavit is in the usual form. Byrnes refers to Amerind as the creditor, sets out that he is authorised by the creditor to make the affidavit, and states that he has inspected the creditor's business records in relation to the plaintiff's account with the creditor. In paragraph 4 of the affidavit he makes the usual statement, 'The total of the amounts of the debts, mentioned in paragraph 1 of this affidavit, is due and payable by the Debtor Company'.

4 As of 25 March 2014 Amerind owed the plaintiff $48,275.65. The goods, the subject of the debt, were ordered prior to the appointment of receivers and managers on 11 March 2014. Subsequent to this s 459G application, Amerind's creditors resolved that it be wound up. The winding up is not relevant to this proceeding. I gave leave to proceed to the plaintiff with this application.

5 The appointment of the receivers and managers was pursuant to a General Security Deed ('Deed') between Bendigo and Adelaide Bank Limited ('Bank') and Amerind. The Deed is undated, but bears the relevant New South Wales duty imprint dated 18 April 2013. I need not embark upon a considered analysis of the Deed. It is sufficient to note that upon default by Amerind, the Bank was entitled to appoint receivers to Amerind. Further, whenever Amerind obtained rights in debtors, the security interest provided to the Bank by the Deed also attached to those debtors.

6 On 20 December 2012, the Bank entered into a debtor finance agreement with Amerind. On 11 March 2014, the receiver and managers sent a circular letter to the customers of Amerind advising the intention to continue to trade the business and that subsequent supply would be continued under a new account entitled 'Amerind Pty Ltd (receivers and managers appointed)'. Subsequent to the appointment of the receivers and managers, the Bank entered into a new debtor finance agreement on or about 25 March 2014 with the receivers and managers on substantially the same terms as the 2012 agreement. I will hereafter refer to both as the 'Debtor Finance Agreements'.

7 In both Debtor Finance Agreements, the Bank agreed to purchase Amerind's existing and future debts on the terms in the agreement. In practice, Amerind would make an offer to sell such debts to the Bank, and the latter had the discretion to accept or refuse any such offers. The debts incurred by the plaintiff were factored by the Bank.

8 Subsequent to the appointment of the receivers and managers, the plaintiff ordered goods in the total sum of $20,650.37. It was able to do so as it had entered into a credit account with Amerind pursuant to an application made 31 July 2007. That application included a clause as follows:

The Buyer shall not be entitled to set off against or deduct from the Price any sums owed or claimed to be owed to the Buyer by the Seller.

That clause, however, was not relied upon by Amerind in argument.

9 On 13 March 2014 the Bank sent a Notice of Assignment of Accounts to the plaintiff ('Notice of Assignment'), informing it that:

(a) Amerind had entered into a funding facility with the Bank and outsourced all of its accounts receivable;

(b) All current and future debts of Amerind had been assigned and transferred to the Bank, which will manage the ledger and collection of payment for the invoices for Amerind;

(c) All debt payments were to be made into the Bank's debtor finance account for Amerind;

(d) A notation was to be made on the plaintiff's ledger regarding the Bank's interest;

...to obtain a valid discharge of your debt. Please note that as [the Bank] is now the legal owner of the debt any issues in relation to payment of the debt (eg any requests for time to pay) need to be discussed with [the Bank], and any deductions from or amounts to be set off from the debt (eg on the basis of alleged deficiencies in quantity or quality of goods/services supplied) also need to be discussed with [the Bank];

(f) The Notice remained in full effect until the plaintiff was notified by the Bank in writing that the arrangement had ceased; and

(g) The plaintiff was to acknowledge the terms of the Notice of Assignment by signing and returning it to the Bank.

10 On 18 March 2014, the plaintiff signed and returned the Notice of Assignment to the bank.

11 Amerind's Counsel argued that the plaintiff does not have an offsetting claim within the purview of s 459(1)(b) of the Act. The definition of 'offsetting claim' in s 459H is therefore germane:

"Offsetting claim" means a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

12 Amerind's Counsel submitted that the plaintiff cannot set off pre-receivership debt owed to it against the debt claimed by Amerind in the statutory demand. The two reasons submitted are that: the Bank, not Amerind, is the person against whom the plaintiff has an offsetting claim; and the two liabilities are not in the same right.

13 In relation to the first submission, Amerind's Counsel argued that Amerind was not the legal person against whom the plaintiff had an offsetting claim. Rather, the debt owed by the plaintiff became the legal and equitable property of the Bank pursuant to the Debtor Finance Agreement and the Notice of Assignment. Amerind's Counsel submitted that the Bank, as the secured party under the Deed, acquired all the debt due by the plaintiff to Amerind. That is, there was a purchase or legal assignment of the debt so that the amount of $20,650.37 was due to the Bank.

14 The authority to serve a statutory demand is found in s 459E(1) of the Act, which sets out:

A person may serve on a company a demand relating to:

(a) a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or

(b) two or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

459E(4) [assignee may make demand]

a person may make a demand under this section relating to a debt even if the debt is owed to the person as assignee.

...

459G(3) [affidavit and copy of application]

an application is made in accordance with this section only if, within those 21 days:

(a) an affidavit supporting the application is filed with the Court; and

(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.

15 The statutory demand was signed by Matthew James Byrnes, one of the joint and several receivers of the defendant. He signed the demand and made and swore the accompanying affidavit not for the Bank but for Amerind. The demand was made by Amerind, not the Bank. Further, the Debtor Finance Agreements set out the following:

12 GENERAL OBLIGATIONS - FACTORED DEBTS

12.1 You must not do anything that would prevent any Factored Debts

being paid to us by your Debtors. In particular you must not ask or require your Debtors to pay Factored Debts to any person other than ourselves unless we direct you in writing to do so.

16 Clause 21 of the Debtor Finance Agreement (headed 'YOU MUST APPOINT US AS YOUR ATTORNEY') does not assist Amerind. The clause provides for the appointment of the bank and its authorised officers to be attorneys and, in Amerind's name, to bring any action to wind up or bankrupt any debtor. Even if the statutory demand may be signed by the Bank and its authorised officers as attorneys for Amerind, such authorisation does not transpose the identity of the creditor or reinstate Amerind as creditor after the assignment. Clause 8 of the Debtor Finance Agreement provides that, in the event of default in payment by a debtor, Amerind was required to indemnify the Bank not that the particular debt would revert to or be assigned back to Amerind. Further, I note that the Bank argued that there had been a legal (not equitable) assignment to it. Therefore, Amerind as assignor did not have standing to serve a statutory demand.

17 Accordingly, at the date of service of the statutory demand and at the date for compliance with it, there was no debt due and payable to Amerind. It had specifically covenanted that it would not require payment of a factored debt to it. The debt that exists to support a statutory demand must be 'due and payable' and remain due and payable during the entire period for compliance.[1] That was not the case in this instance.

18 If I am wrong about the identity of the creditor, I would have set aside the statutory demand in any event.

19 Amerind relied upon Yeldham J's decision in Leichhardt Emporium Pty Ltd v AGC (Household Finance) Ltd.[2] In that case a retailer sued the its financier for monies owed to it. The financier sought to set off that debt by the same amount owed to it by the retailer. The financier also cross-claimed for that same amount. The debts resulted from an ongoing business arrangement between the retailer and its financier. The financier made cash purchases of furniture from the retailer and sold them on hire-purchase, or leased them, to the retailer's customers. The two parties subsequently entered into a second (but simultaneous) arrangement. The financier purchased fixtures and fittings in a new store that the retailer was opening, and sold those items to the retailer on terms. Around a year after the second arrangement commenced, the retailer gave its bank an equitable charge over assets to secure all current and future debts owing or payable by the retailer. Nine months later the bank appointed receivers of the retailer's business pursuant to the charge and with the financier's knowledge. The receivers continued the original business arrangement with the financier.

20 From the date on which the receivers were appointed, the retailer and financier owed each other the same amount. The financier began to offset what it owed to the retailer in the original arrangement against the balance of the debt owed by the retailer in the second arrangement. The financier informed the retailer, but not the receivers, of this approach to the two sets of debt. Counsel for Amerind referred me to the following passages in Leichhardt Emporium:

... the effect of the appointment of a receiver had the consequence that the post-receivership debt of the defendant to the company under receivership became in equity the property of the debenture holder.[3]

... the present matter is an example of a case "in which an unsecured creditor of a company has sought to obtain payment of his debt in priority to the secured creditor by purporting to set it off against a debt which he owes the company and which in equity belongs to the secured creditor".[4]

... a debt to a company under receivership, whether it was incurred before or after the date of the appointment of the receiver, cannot be set off against a debt owing by such company to the debtor prior to the appointment of the receiver, because the liabilities are not in the same right.[5]

21 Counsel for Amerind submitted that the offsetting claim must be in the same right or capacity as the debt. Counsel relied on Leichhardt Emporium, which was a recovery action, but the reasoning had been applied in PCH Group Ltd v Hallbridge Pty Ltd,[6] Boutique Venues Pty Ltd v JACG Pty Ltd[7] and Viva 4 Enterprises Pty Ltd v Octobay Pty Ltd.[8] In light of Amerind's submissions Barrett J's reminder in Toorallie Pty Ltd v Black (t/as Chapman & Eastway) is relevant:

s 459H abandons traditional concepts of mutuality and directs attention only to the question whether the person or persons who served the statutory demand are persons against whom the company has a genuine claim.[9]

Although statements relied upon by Amerind are germane to a recovery action, they are not necessarily relevant to the exercise to be embarked upon under the statutory demand regime. I further note that Yeldham J in Leichhardt Emporium held that the retailer was entitled to judgment on the claim, and the financier was entitled to judgment on the cross-claim, but the latter was not entitled to the set-off which it claimed.

22 In PCH Group, Sanderson M held that the definition of offsetting claim did not deal with the issue of mutuality: 'In my view it leaves the principle intact'.[10] The defendant in its capacity as the trustee of a superannuation fund had made demand for the debt due under a convertible note certificate. The plaintiff had acquired a third party through a subsidiary of the plaintiff. An express term of the deed was that a director of the defendant would provide services to the plaintiff's subsidiary for a period of three years. The director's services were provided to the plaintiff's subsidiary by way of a consultancy agreement with the defendant. The plaintiff determined that the defendant, through its director, had been negligent in his management and was in breach of the consultancy agreement. Putting aside the issue of the plaintiff not being a party to the contract relied upon, Sanderson M said:

As I have detailed above, in relation to the Convertible Note the defendant is the trustee of the [superannuation fund] ... The consultancy agreement ... shows the defendant contracting in its own right. Counsel for the plaintiff did not challenge these facts during the course of his submissions.[11]

23 In Boutique Venues, Southward J held that there was no mutuality between the plaintiff and defendant, who had entered into a construction contract. The property in question was owned by Jokhil Pty Ltd. The plaintiff argued that it had an offsetting claim based on proceedings in respect of certain workmen's liens. Those were described as: 'The existence of Workmen's Liens claims brought by sub-contractors against Jokhil Pty Ltd.' The defendant was the party engaged to undertake the construction. Although it is not apparent from the judgment, I assume that the plaintiff was under some obligation to indemnify Jokhil Pty Ltd with respect to claims made upon it by the defendant's sub-contractors. Southward J said:

I do not accept that the plaintiff has an offsetting claim in respect of the workmen's liens claims that have been brought against Johkil Pty Ltd by the subcontractors of the defendant. Under the relevant provisions of the Corporations Law there is a requirement of mutuality. The offsetting claim must be a claim by the plaintiff against the defendant in the plaintiff's own capacity: PCH Group ... [13] to [18]. Nor do the claims by the subcontractors against Johkil Pty Ltd and the need for Jokhil Pty Ltd to obtain finance constitute other reasons as to why the statutory demand should be set aside under s 459J(1)(b) of the Corporations Act. There are other procedural steps that the plaintiff and Johkil Pty Ltd can take to ensure that there is no double payment of the amounts claimed by the sub-contractors and that the defendant is not unjustly enriched.[12]

It is clear that Southward J considered that any claim for compensation in relation to the workmen's liens was a claim by Johkil Pty Ltd and not the plaintiff. Hence there was no mutuality.

24 In Octobay Applegarth J held that there was no mutuality where the defendant owed, and was owed, a debt while acting in different capacities. The defendant had served the statutory demand in its capacity as trustee of Trust A. The applicant, however, sought to make an offsetting claim against the defendant in its capacity as a trustee of Trust B. Applegarth J, referring to PCH Group and Boutique Venues, determined that there was:

... no mutuality between the debt claimed in the statutory demand and any claim the applicant may have against [the defendant] in a different capacity, namely, for breach of its duty of care in exercising its power of sale as trustee of [another trust].[13]

His Honour referred to Australian Aloe Ltd v Export Growth Finance Pty Ltd:[14]

In Australian Aloe ... the defendant submitted that the offsetting claim must be in the same right as the demand, so that where a demand is made against a company as trustee, the company cannot offset a claim for an amount owed to it in its personal capacity. Master McLaughlin considered the authority of PCH Group ... in relation to the requirement of mutuality and continued:

1. It is arguable that such mutuality may be required for an offsetting claim of the nature recognised by the [Act]. Nevertheless, in the absence of direct authority to that effect (especially authority of an appellate court), I do not consider that such a qualification should be imported into the clear and unambiguous words of the statute, to have the consequence that what on its face appears to be a genuine offsetting claim by the Plaintiff should be disregarded.[15]

25 Applegarth J then referred to Boutique Venues and observed that although Australian Aloe had not been drawn to Southward J's attention, Applegarth J was not convinced that PCH Group and Boutique Venues were wrongly decided or that they should not be followed. Applegarth J further noted with respect to Australian Aloe:

... that the first basis for the decision was that an absence of mutuality had not been demonstrated and that it was strictly unnecessary to decide whether a requirement of mutuality exists in respect of an offsetting claim.[16]

26 In Pearl Bay Corporation Pty Ltd v Lodur Pty Ltd Sanderson M considered an application to set aside the statutory demand. One of the issues was whether an offsetting claim was available against a judgment debt from a District Court proceeding. After setting out the definition of offsetting claim in s 459H(5), Sanderson M observed:

Clearly the definition is intended to be broad and that is the way that it has been consistently interpreted ... Given the clear wording of the [Act], in my view it is open to the plaintiff in these proceedings to seek to set off any counterclaim it may have against the defendant, despite the fact that raising this counterclaim was not sufficient to prevent summary judgment being granted. These proceedings are of an altogether different nature to the proceedings in the District Court [in which] the defendant had a contractual entitlement to be paid by the plaintiff. Because of the nature of the contract, any counterclaim could not stand in the way of that payment. But that does not mean that the plaintiff is precluded from bringing a claim in relation to the contract against the defendant in separate proceedings. Analysed in that way it is clear that this potential counterclaim can quite properly be raised in this action.[17]

27 In Property Builders Pty Ltd v Carlamax Properties Pty Ltd,[18] White J dealt with an offsetting claim in an application to set aside a statutory demand. White J said:

It must follow from the fact that a cross-demand can be raised as an offsetting claim even though it is not capable of being relied upon as a set-off against a debt, that a mere contractual agreement of one party that it will pay its debt without set-off or counterclaim and free of all deductions does not preclude it from relying upon such a cross-demand as an offsetting claim for the purposes of s 459H. To do so is not to deny that the debt claimed by the creditor is due and payable. If, as in the present case, the debt has been reduced to a judgment, the creditor can pursue all the remedies of a judgment creditor. Rather, to assert the cross-demand as an offsetting claim is merely to give effect to the principle recognised by the terms of the definition of "offsetting claim" that a presumption of insolvency should not arise from non-payment of a due debt where the debtor has a genuine cross-demand for an equal or greater sum.[19]

His Honour then referred to Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd,[20] in which Austin J accepted that it was open to the parties to contract that a particular payment obligation is to be performed separately from any rights of counterclaim or set-off. White J stated:

With respect, I do not agree with [Austin J's] reasoning. His Honour was not referred to earlier relevant authority that established, as the terms of the definition of 'offsetting claim' make clear, that a cross-demand does not have to be capable of operating as a set-off against the debt to be an offsetting claim: John Shearer Ltd v Gehl Company; Jem Developments ... That being so, it is, with respect, not to the point that the obligation to pay the debt the subject of the demand is not eliminated or reduced by the counterclaim. That is only another way of saying that the counterclaim does not operate as a set-off ... a[n] agreement precluding set-off cannot itself prevent the company relying on the claim as an offsetting claim under s 459H.[21]

28 In John Shearer Ltd v Gehl Co,[22] the respondent served statutory demands with respect to various dishonoured bills of exchange on the two appellants pursuant to s 459E of the Corporations Law. The appellants applied under s 459G to set aside those demands claiming, inter alia, that they had an offsetting claim within the definition of s 459H(5), which exceeded the amount of the dishonoured bills. The Full Court held that:

a cross-demand will include any claim for damages which exists at the time the application to set aside the statutory demand is made, which is for a monetary amount capable of quantification whether or not it arises out of the same transaction or circumstances as the debt to which the statutory demand relates.[23]

In reaching that decision, the Full Court considered the meaning of 'cross-demand', and reasoned that a broad interpretation was supported by the policy of the legislation:

The word "cross-demand" is a word of considerable width. While the words "counterclaim" and "set-off" are technical words, the meanings of which are confined, the same is not true of the word "cross-demand". That is not a technical term. Thus in In re A Bankruptcy Notice [1934] 1 Ch 431, Lord Hanworth MR, after discussing the technical meaning of the words "counterclaim" and "set-off" in the context of bankruptcy legislation, said (at 438):

I turn, therefore, to what to my mind is the wider word, 'cross-demand'. If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counterclaim, it adds nothing to the word 'counterclaim'. 'Cross-demand' seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. I do not desire to say what 'cross-demand' may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings.

...

The policy behind Division 2 of Pt5.4 of the Law supports this interpretation. Failure to comply with a statutory demand is taken to be evidence of insolvency. It is for that reason that application may be made to the Court to set aside a statutory demand in circumstances where the person against whom the demand is made has a genuine cross-demand, at least equal to the amount of the sum demanded from him or her. If it should turn out that there was a real cross-demand of equal amount to the sum referred to in the statutory demand, the company failing to comply with the statutory demand would be wound up in circumstances where clearly it was not insolvent and where a proof of debt from the person giving the statutory demand might well be rejected in liquidation because of the existence of a set-off: cf Gye v McIntyre (1991) 171 CLR 609.[24]

29 In Bakota Holdings Pty Ltd v Bank of Western Australia Ltd,[25] Barrett J followed the line of authority of John Shearer and Property Builders:

John Shearer ... was not drawn to the attention of the judges of this court sitting at first instance in Jem Developments ... It is the existence of a genuine claim by way of counterclaim, set-off or cross-demand that is relevant, not the ability to use it as a defence in an action for recovery of the demanded debt. As White J noted in Property Builders ... the inclusion of "cross-demand" in the definition of "offsetting claim" shows that the concept extends beyond claims that can be deployed by way of set-off or counterclaim in debt recovery proceedings. "Cross-demand" is a wide term apt to include a claim that a defendant can assert as an answer to the claim made against him, a cross-action of counterclaim maintainable in the proceedings in which the claim against him is advanced and a claim that can only be pursued in separate proceedings ...

Adoption of the wide term "cross-demand" in the particular statutory context is understandable. The purpose of the statutory demand process is to test whether a company's failure to pay a particular debt should be regarded as a reliable indicator of likely inability to pay debts generally so that, in proceedings for winding up on the insolvency ground, it should be for the company to prove that it is solvent rather than for the plaintiff to be put to proof of actual insolvency. The reliability of the indicator is undermined if there is a genuine dispute as to the existence or amount of the demanded debt. In such a case, the inference that failure to pay one debt is a product of inability to pay debts generally is not safe. Nor is it safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt.[26]

30 It follows that the principles which can be distilled from the cases are:

(a) 'The purpose of the statutory demand process is to [provide] a reliable indicator of likely inability to pay debts'.[27]

no[t] safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt.[28]

(c) The rigors of mutuality applicable to assessing whether a 'set-off' is available do not and should not limit the application of a 'cross-demand' in a statutory demand context.

(d) 'Cross-demand' is not a technical term. It is a word

introduced ... to give a wider ambit to the meaning of these claims, something that would not be described ... as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim ...[29]

(e) Although Lord Hanworth MR declined to define such a 'cross-demand' a useful illustration of the nature or effect of a 'cross-demand' is found in Leichhardt Emporium where Yeldham J permitted judgment on the cross-claim but determined that such cross-claim was not available as a set-off.

(f) Although there is a line of authority which preserves mutuality, that line may be confined to 'mutuality' in the context of the identity or capacity of the creditor or debtor.

31 The defendant filed supplementary submissions relying Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd.[30] Insofar as Diploma Constructions is relevant, that case reinforces the concept that an offsetting claim must also be genuine. I have found that it is common ground that prior to the appointment of the receivers and managers to the defendant, the defendant owed the plaintiff debts of an amount exceeding the claim set out in the statutory demand. I have found that, insofar as the defendant may be the creditor, the offsetting claim is available and thus, in this context, genuine.

32 I am satisfied that the plaintiff has a genuine cross-claim against Amerind which exceeds the amount set out in the statutory demand served by Amerind. I accept that upon the appointment of receivers and managers to Amerind, the issue of mutuality would exclude that cross-claim from being relied upon as a set-off in a recovery proceeding. That cross-claim, however, is a valid offsetting claim under s 459H(2) of the Act. In those circumstances, the failure to comply with a statutory demand does not give rise to a presumption of insolvency referred to in s 459C of the Act.

[1] Olympic Holdings Pty Ltd v Interwest Investments Pty Ltd (1998) 16 ACLC 1242.

[2] [1979] NSWLR 701 ('Leichhardt Emporium').

[4] 705, quoting the judgment of Jeffrey J in West Street Properties Pty Ltd v Jamison [1974] 2 NSWLR 435.

[6] [2002] WASC 88 ('PCH Group').

[7] [2007] NTSC 5 ('Boutique Venues').

[8] [2011] QSC 281 ('Octobay').

[9] [2001] NSWSC 1088, [28].

[14] [2003] NSWSC 252 ('Australian Aloe').

[17] [2000] WASC 315, [12].

[18] [2011] NSWSC 1068 ('Property Builders').

[20] [2006] NSWSC 1308 ('Jem Developments').

[22] [1995] FCA 1789; (1995) 60 FCR 136 ('John Shearer').

[25] [2011] NSWSC 1277 ('Bakota Holdings').

[29] John Shearer, quoting Lord Hanworth MR's decision in In re A Bankruptcy Notice [1934] 1 Ch 431, 438.

[30] [2014] WASCA 91 ('Diploma Constructions').