Plaintiff v Defendants

Supreme Court of Victoria|2012-09-05|Before: GARDINER AsJ

CORPORATIONS - External administration - Application to set aside statutory demand under Section 459G of Corporations Act 2001 - Offsetting claims - Whether plaintiff has "cross demand" within the meaning of Section 459H(5) definition of "offsetting claim" by reason of claim to recover monies paid as deposit pursuant to contract which was rescinded - Whether such claim "sounded in money" - Plaintiff found to have offsetting claim - Demand set aside.

2 On 2 May 2012, the Martorellas served a statutory demand on Innovision demanding payment of that sum.

3 On 28 May 2012, Innovision made application pursuant to s 459G of the Corporations Act 2001 ("the Act") to set aside the demand. The application was supported by an affidavit of Paul Riggs sworn 28 May 2012. The Martorellas opposed the application and relied on an affidavit of Stephen Martorella sworn 14 June 2012.

Was the application to set aside the statutory demand filed on time?

4 When this matter first came on for directions, I invited submissions as to whether the application had been made within the 21 day period prescribed by s 459G as the evidence was not clear in this regard. Ultimately, this issue was held over for determination at the hearing of the originating process. Mr Gronow of Counsel, who appeared on behalf of Martorellas at the hearing of this proceeding on 28 June 2012, conceded that on an application of the relevant authorities and having regard to the state of the evidence on this issue , the application was within time.

5 The debt claimed in the demand, being a judgment debt, is not susceptible of being the subject of a genuine dispute.[2] Innovision's case is based on the contention that it has an offsetting claim as defined in s 459H(5) of the Act. That subsection defines an offsetting claim as:

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

6 In his affidavit, Mr Riggs deposes that in September 2009, Innovision entered into a contract with the Martorellas to purchase land at Diamond Creek. The sale price under the contract was $6 million and Innovision paid a $500,000 deposit to the Martorellas. Innovision was not able to settle on the appointed date of 8 September 2010. On 9 September 2010, the Martorellas served a 14 day rescission notice on Innovision. During the 14 day period of the notice, the parties entered into a Deed of Variation varying the contract, including a requirement that Innovision pay the Martorellas a further amount of $900,000 by way of deposit, resulting in a total deposit of $1.4 million. Under the deed, the date of settlement was extended to 21 January 2011. Innovision paid the additional $900,000 to the Martorellas.

7 The contract did not settle on 21 January 2011 and was ultimately terminated by the Martorellas.

8 The Martorellas claimed that the total of the moneys paid, being the initial deposit of $500,000 and the extra $900,000, was forfeited to them. Innovision lodged a caveat against the title to the land contending that it had an equitable lien arising from its relief against forfeiture of those monies. In May 2011, the Martorellas commenced a proceeding[3] ("the caveat proceeding") to remove the caveat.

9 The caveat proceeding was heard by Dixon J in June 2011. Dixon J had to consider whether there was a prima facie case with a sufficient likelihood of success to justify the maintenance of a caveat that the deposit, or at least in relation to the $900,000, was a penalty and whether Innovision was entitled in equity to relief from forfeiture of the deposit (or part of it). The Martorellas succeeded in that application and judgment was given on 24 June 2011.[4] The caveat was removed and Innovision was ordered to pay the Martorellas' costs of the application. This amount is now claimed in the statutory demand.

10 Innovision says it has an offsetting claim which is the subject of a separate Supreme Court proceeding[5] ("the forfeiture of deposit proceeding") against the Martorellas seeking, among other things, relief against forfeiture of the deposit paid on the basis that it is a penalty. The forfeiture of deposit proceeding was issued on 10 June 2011, after the first day of the hearing of the caveat proceeding and before the trial was resumed on 14 June 2011. Dixon J had directed such proceeding to be filed to justify the interest for which Innovision contended.

11 The statement of claim in the forfeiture of deposit proceeding sets out in detail the factual background I have summarised above. The Martorellas deny the plaintiff's claim in the forfeiture of deposit proceeding and have filed a defence. Of course, transformation of the claim by Innovision into a statement of claim is not, without more, evidence of the existence of an offsetting claim. The claim must be a genuine and arguable claim.

12 In the caveat proceeding, the Martorellas contended that the caveat should be removed because, among other things, they had undertaken that if Innovision issued a proceeding to substantiate its claims, the Martorella's would pay $900,000 from the proceeds of any sale of the property into court or otherwise secure it to the satisfaction of Innovision pending the resolution of that proceeding. The undertaking was proffered to support an argument that the balance of convenience favoured the removal of the caveat.

13 The statement of claim in the forfeiture of deposit proceeding alleges that the funds forfeited under the variation of contract were a penalty and not a payment in earnest of performance. Innovision contends that it is entitled to relief against the forfeiture in respect of the alleged penalty, that is, the sum of $1.4 million, and that it has a lien or charge over the property commensurate with the amount of the penalty. The property has now been sold and settlement of the sale is due to take place in December this year.

14 Dixon J ordered that the caveat be removed. He observed:[6]

In the view that I have reached, it is unnecessary to return to the balance of convenience. The appropriate order is that the caveat be removed forthwith. However, the plaintiffs had offered an undertaking to pay from the proceeds of any sale of the property the sum of $900,000 into court or to otherwise appropriately secure it on the terms to which I have already referred. Should it turn out at trial that the defendant has, following the resale, become entitled to relief from forfeiture, the lesser risk of injustice, in all of the circumstances, will be occasioned if I require that the plaintiffs give that undertaking to the Court as a condition of the removal of the caveat. ...

15 In the forfeiture of deposit proceeding, the prayer for relief makes certain claims and seeks declarations as follows:

(a) a declaration that the whole of the higher deposit, namely, $1.4 million is a penalty;

(b) alternatively, a declaration that the addition to deposit, namely, $900,000 is a penalty;

(c) a declaration that the plaintiff is entitled to lien or charge over the property commensurate with the sum of $1.4 million or, alternatively, $900,000;

(d) an order for the sale of the property out of court and the payment out of the proceeds thereof, the amount of $1.4 million or, alternatively, $900,000;...

(h) alternatively to (f), an order that the defendants pay equitable compensation.

16 The meaning of the expression offsetting claim in s 459H(5) was the subject of detailed consideration by the Full Court of the South Australian Supreme Court in Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation.[7] The Full Court collected the principles underlying the concept of offsetting claim at paragraphs 42 to 49:

The expression "an offsetting claim" is defined in s 459H(5) to mean:

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

Thus, although the epithet "offsetting" is used, the definition extends beyond a setoff to include a counterclaim and a cross-demand.

...

The expression "cross-demand" is an expression of considerable width. Its meaning was examined by Lockhart J in Re Brink, Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433 at 436 - 439 and by the Full Court of the Federal Court in John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136. It is sufficient to refer to the latter decision at 142:

The word "cross-demand" is a word of considerable width. While the words "counter-claim" 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 Re a Bankruptcy Notice [1934] 1 Ch 431, Lord Hanworth MR, after discussing the technical meaning of the words "counter-claim" 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 counter-claim, it adds nothing to the word "counter-claim". "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 counter-claim, 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 Full Court of this court took a similar view in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433; 44 FLR 135 at 138-9, emphasising that an unrestricted meaning should be given to the word "cross-demand", and see too Re Smith; Ex parte Chesson [1992] FCA 64; (1992) 106 ALR 359 at 364 (affirmed on appeal, sub nom Chesson v Smith (1992) 35 FCR 594).

The Court went on to define a cross-demand in these terms:

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.

See also Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263 at 269. As Lindgren J noted in Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; (1995) 17 ACSR 128 at 135, the definition of the expression "offsetting claim" is expressed in words of the widest import and is not limited to a claim of a kind which would afford a defence to an action by the person who served the statutory demand to recover the amount referred to in it.

The counterclaim, setoff or cross-demand must sound in money, that is to say, it must be for a liquidated or unliquidated money demand: Re Jocumsen (1929) 1 ABC 82 at 85; Vogwell v Vogwell (1939) 11 ABC 83 per Latham CJ at 85; Chase Manhattan at 135_._
The meaning of the expression "offsetting claim", like the meaning of "genuine dispute" has been illuminated by analogies found in applications for injunctions to restrain the commencement, advertisement and prosecution of winding-up proceedings pre-dating the enactment of s 459G and in the opposing of a notional application by the person who has served the statutory demand for summary judgment against the company for the debt the subject of the demand: Chase Manhattan at 136. Thus, when deciding whether an offsetting claim exists, the test is whether the court is satisfied that there is a serious question to be tried that the person on whom the demand has been served has an offsetting claim: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 357, or that the claim is not frivolous or vexatious: Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, or that it is not fictitious or merely colourable: Edge Technology Pty Ltd v Lite-on Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181 at 184-5, citing Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787.
The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must 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. The issue is whether the offsetting claim is bona fide, real and not spurious: Edge Technology per Santow J at [25].
I do not think that the test identified by Santow J imposes a more onerous task on the party disputing the statutory demand than the serious question test. The expression "good faith" means arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 per Palmer J. McPherson JA expressed the same concept in these terms in JJMMR Pty Ltd v LG International Corporation [2003] QCA 519 at [18]:

Anyone can make a claim to a right of setoff against a creditor. What the definition in s 459H(5) requires, however, is that it be "genuine". The same word in s 459H(1) has already elicited so many synonyms and shades of meaning that it will not help to add more. Its antithesis is to be seen in the word "artificial". The claim to set off against the debt demanded must not have been manufactured or got up simply for the purpose of defeating the demand made against the company. It must have an existence that is objectively demonstrable independently of the exigencies of the demand that evoked it.

The observations of Palmer J and McPherson JA were applied by Chesterman J in Cooloola Dairies Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12.

The task for the court, therefore, is not to decide the issue on its merits but examine whether there is a genuine offsetting claim. If there is a genuine claim sufficiently quantified to give rise to an offsetting amount the demand must be offset: see s 459H(4) and Edge Technology at [55].

17 The expression offsetting claim is defined in s 459H(5) to mean a genuine claim that the company has as opposed to will have against the respondent by way of counterclaim, set-off or cross-demand. In John Shearer Limited v Gehl Co,[8] the Full Court of the Federal Court observed:[9]

The policy behind Division 2 of Part 5.4 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 setoff.

18 As Barratt J explained in Bakota Holdings Pty Ltd v Bank of Western Australia Limited:[10]

It is the existence of a genuine claim by way of counterclaim or setoff 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 v Carlamax Properties Pty Ltd ([2011] NSWSC 1068) and had earlier observed in Seaham Air Pty Ltd v Australian Aerospace Pty Ltd ([2006] NSWSC 1241), 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 setoff or counterclaim in debt recovery proceedings. "Crossdemands" 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 or counterclaim maintainable in the proceedings in which the claim against him is advanced and a claim that can only be pursued in separate proceedings: see the discussion in McDonald and East Limited v McGregor ((1936) HCA 18; [1936] HCA 28; (1936) 56 CLR 50) and in Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation ([2006] SASC 91; [2006] SASC 91; (2006) 94 SASR 269 at [42]- [45]).

19 Mr Gronow submitted that Innovision's claim could not be regarded as an offsetting claim within the meaning of s 459H(5) of the Act because the claim is already fully secured by the undertaking given by the Martorellas. I do not accept that submission. It may be secured but there will only be access to that secured fund if Innovision establishes an entitlement to it at the trial of the forfeiture of deposit proceeding. In any event, the fact that it may be secured bears no relevance in my view to the question of whether or not the claim can constitute an offsetting claim.

20 Mr Gronow also submitted that by lodging the caveat which was the subject of the caveat proceeding, Innovision chose to characterise its claim as a proprietary one in the subject land. He said that Innovision has persisted in that claim by alleging in the statement of claim in the forfeiture of deposit proceeding that the plaintiff is entitled to a lien or charge over the property commensurate with the sum of $1.4 million, alternatively $900,000 and seeking an order for the sale of the property out of court and a payment out of the proceeds thereof, the amount of $1.4 million, alternatively $900,000. He submitted that Innovision's alleged offsetting claim could not be said to be a claim on a cause of action advanced in good faith for an amount claimed in good faith so as to satisfy the requirements of s 459H. As the claim has been characterised in that way, Mr Gronow submitted, it does not consist of something "sounding in money" or a liquidated or unliquidated money demand.

21 I do not agree with that submission. In my view, the substance of Innovision's claim in the forfeiture of deposit proceeding sounds in money. If successful, the Court will make an order in Innovision's favour which will result in a judgment in its favour of $900,000. If one goes to the policy underlying the offsetting claim provisions which are set out by the Full Court of the Federal Court in John Shearer Ltd & Anor v GEHL Co[11], extracted at paragraph 17 above, it results, in my view, in a conclusion that the claim made in the forfeiture of deposit proceeding is an offsetting claim within the meaning of s 459H(5).

22 Failure to comply with a statutory demand results in a presumption of insolvency. The offsetting claim provisions are designed for the circumstance where a company which has been served with a statutory demand and which has a genuine claim against the creditor which is equal to or greater than the amount of the sum demanded by the creditor. The provisions work so that companies found to have such offsetting claims are not presumed to be insolvent as the demand will be set aside; rather, the offsetting claim is required to be litigated in other proceedings in order to ascertain the balance of account between the parties.

23 Mr Gronow also urged me to find that the claim made in the forfeiture of deposit proceeding is not genuine or bona fide. I do not accept that submission. I could not conclude on the evidence before me that it is not a genuine claim. I am fortified in that conclusion by the requirement of provision of an undertaking in the caveat proceeding for the securing of the $900,000 pending the outcome of the forfeiture of deposit proceeding. It has not been the subject of a strike out application or application for summary judgment or otherwise been demonstrated not to be reasonably arguable.

24 Mr Gronow also argued that the claim which Innovision puts forward as an offsetting claim is not one which presently exists. Again, I do not accept that submission. The claim made in the forfeiture of deposit proceeding is fully constituted and merely awaits trial in the ordinary course. It is not contingent or inchoate.

25 In the circumstances, I consider that the statutory demand dated 2 May 2012 which was served on Innovision by the Martorellas should be set aside. I will hear the parties on the question of costs.

[1] Martorella v Innovision Developments Pty Ltd [2011] VSC 282.

[2] See Timberland Property Holdings Pty Ltd v Schindler Lifts Australia Pty Ltd [2011] NSWSC 466, [10].

[3] Supreme Court proceeding number S CI 2011 02184.

[5] Supreme Court proceeding number S CI 2011 2946

[10] [2011] NSWSC 1277, 24 (emphasis added).

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Judgment (49 paragraphs)

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Cases Cited (7)