QUBE LOGISTICS (VIC) PTY LTD -v- UNITED EQUIPMENT PTY LTD [2015] WASC 70 (26 February 2015)

3 The plaintiff filed extensive affidavit material in support of the application. The defendant filed no evidence at all. Accordingly there is no dispute between the parties as to the relevant facts. They can be summarised as follows.

4 The plaintiff as lessee and the defendant as lessor are parties to two rental agreements dated 23 September 2010 for two forklifts. It was a term of the rental agreements that the defendant would carry out all maintenance and repairs on the forklifts and as was submitted by the plaintiff it is implicit that the defendant would not be negligent in carrying out the maintenance and repairs.

5 In 2011 cracks in the weld seams between the frame members and the rear part of the frame assembly were detected by the defendant during a maintenance inspection on one of the forklifts (M8292). In October 2013 cracking in the mast area was identified in the other forklift (M8286). In January 2014 a fracture across the chassis of M8292 occurred resulting in the rear counter weight and steering axel assembly section separating from the cabin section. In other words the forklift split in half.

6 Although the affidavit material goes into great detail as to what occurred between the parties after the splitting of the forklift it is unnecessary to even summarise this evidence. It is sufficient if I say the plaintiff decided the forklifts were, or were potentially, unsafe. It wanted assurances from the defendant the forklifts were fit for the purpose they were hired. It was not satisfied with what it was told by the defendant and it stopped paying rent for the forklifts. It is the invoices rendered for the rental which are the subject of the statutory demand. For its part the defendant says it has repaired the forklifts and they are fit for the purpose intended. It says it has done everything it can to reassure the plaintiff. Further it says the assurances the plaintiff seeks as to the suitability of the forklifts for the work intended is not part of the contractual arrangement between the parties and the plaintiff has no right to make demand for such assurances. In the circumstances it says it is entitled to be paid rent for the forklifts. The plaintiff says the forklifts are not fit for the purpose they were hired. It says it has been unable to use the forklifts and it quantifies the loss it has suffered as more than the amount of the demand.

7 This brief outline of the facts would in most circumstances lead to a finding there was an offsetting claim greater than the amount of the demand resulting in the statutory demand being set aside. There was no dispute between the parties as to the principles upon which demands are to be set aside when there is an offsetting claim. In this case there is a serious question to be tried as to whether or not the forklifts were fit for the purpose intended. Whether the argument be total failure of consideration or some remedy under the Trade Practices Act 1974 (Cth) is beside the point. There is clearly on the face of it an arguable offsetting claim.

8 What makes this case different is one term in the rental agreement. It is condition 7k. It provides that:

The Renter's obligations to make payments and otherwise perform its obligations under this Agreement will continue regardless of any defect in, or lack of performance of, the Equipment and the Renter has no right to claim any setoff or withhold any payments.

9 It is the defendant's position this clause precludes the defendant from advancing an offsetting claim in these proceedings. The plaintiff at least for the purposes of these proceedings was prepared to concede the clause was effective. Accordingly, if the defendant sued in the normal course for unpaid rental the plaintiff would not be able to meet the claim with a counterclaim and setoff. The plaintiff would have to pay the amount of the rental and then litigate in an attempt to recover damages its says it has suffered.

10 This situation has been the subject of three decisions in New South Wales. In Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308; (2006) 205 FLR 432, Austin J came to the conclusion in these circumstances any alleged damage suffered could not provide an offsetting claim. Barrett J reached the same conclusion in Blue Hills Village Management (Liverpool) Pty Ltd v Babcock & Brown International Pty Ltd [2009] NSWSC 87. As I have said both of these decisions were made specifically in the context of an application to set aside a statutory demand pursuant to s 459H of the Corporations Act 2001 (Cth) on the grounds of an offsetting claim in a contractual context. Both cases held no offsetting claim could arise. The complicating fact in all of this is that in Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277, Barrett J concluded these two earlier decisions were wrongly decided. His Honour said:

For reasons discussed in John Shearer Ltd v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136, an 'offsetting claim' within the s 459H(5) definition may exist even though it could not be pleaded by way of setoff or counterclaim in an action for recovery of the debt the subject of the statutory demand. The debt in the John Shearer case was the engagement of the acceptor of a bill of exchange to pay the face value to the holder on maturity. The asserted 'offsetting claim' was a claim by the acceptor against the holder for damages for misleading or deceptive conduct or for breach of contract. The court (von Doussa J, Hill J and Tamberlin J) noted the wellestablished principle that unliquidated crossclaims cannot be relied upon by way of extinguishing setoff against a claim against the acceptor of a bill of exchange. The court then said:

'It does not follow from the rule or its underlying rationale, that a claim, as alleged on behalf of Shearer, could not constitute an "offsetting claim" as that expression is defined in s 459H. All that follows from the rule (subject to any exception relevant to cases where s 52 has been breached) is that if Shearer [the acceptor of the bill] were sued by Gehl [the holder] and sought to set up a crossclaim or crossdemand for an unliquidated amount based either upon s 52 of the Trade Practices Act or a claim for breach of an implied term, a court would not stay judgment on the proceedings to recover moneys owing under the bills until the hearing of any crossclaim or crossdemand. Summary judgment would be ordered upon proof of the bills, no stay of execution would be granted and the crossclaim or crossdemand would proceed for hearing in due course. But to say that is not to say that Shearer has no crossdemand.'

In both Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd and Blue Hills Village (Liverpool) Pty Ltd v Babcock & Brown International Pty Ltd, it was decided, in effect, that if $X is owing, due and payable by A to B in circumstances where, as a matter of contract or for some other reason, A could not successfully assert in debt recovery proceedings brought by B a right to set off a sum of $Y owed by B to A, then A has no 'offsetting claim' for the purposes of s 459H. As White J pointed out in Property Builders Pty Ltd v Carlamax Properties Pty Ltd [2011] NSWSC 1068, however, that will be so only if the effect of the contract is to extinguish A's claim for $Y against B, as distinct from merely making it unavailable as a basis for eliminating or reducing A's obligation to pay if and when B sues A for the $X debt.

John Shearer Ltd v Gehl Co is a decision of the Full Federal Court. It was not drawn to the attention of the judges of this court sitting at first instance in Jem Developments and Blue Hills Village. To the extent that those cases proceeded on the basis that there is no 'offsetting claim' if the claim relied on by the company could not be pleaded by way of set off or counterclaim in an action for recovery of the debt the subject of the statutory demand, they introduced into the definition of 'offsetting claim' an element that is, in truth, not there. It is the existence of a genuine claim by way of counterclaim, setoff or crossdemand 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 (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. 'Crossdemand' is a wide term apt to include a claim that a defendant can assert as an answer to the claim made against him, a crossaction 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: see the discussion in McDonnell & East Ltd v McGregor [1936] HCA 28 ; (1936) 56 CLR 50 and in Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91 ; (2006) 94 SASR 269 at [42] [45].

Adoption of the wide term 'crossdemand' 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.

I am accordingly of the opinion that the provisions of the guarantee set out at paras [12] to [14] above do not remove the ability of the plaintiff to seek, pursuant to s 459H(1)(b), to have the statutory demand set aside on the basis of the existence of a genuine claim that it has against the defendant [22] [26].

11 Counsel for the defendant submitted Bakota Holdings was wrongly decided. He submitted the John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136 decision being concerned as it was with bills of exchange was entirely different from the present position where there was a contractual agreement between the parties which did not permit the plaintiff to advance a counterclaim or setoff in relation to the rental unless and until the rental was paid. In my view there is no substance in that submission. Whether the inability to raise a counterclaim in a setoff arises pursuant to a contract or as a consequence of a rule of law makes no difference.

12 It is a less than satisfactory situation where there are conflicting first instance decisions - particularly when two of the three decisions were determined by the same judge. If I was determining this application at first instance and without the benefit of authority I would have found the plaintiff did not have an offsetting claim because of the contractual provisions in the rental agreement. It is unnecessary and probably inappropriate for me to say anything further. It is sufficient if I refer to the reasoning in both Jem Developments and Blue Hills Village. However, mindful of the national nature of the corporations regime and allowing for the fact Bakota Holdings has stood for just over three years it would seem to me I should follow that decision. Moreover, I do think the decision of the Full Court of the Federal Court in John Shearer plays out in the way in which Barrett J explained in Bakota Holdings. It would be inappropriate then for me not to follow a decision of an intermediate appellate court.

13 That being so the plaintiff in this case has clearly raised an offsetting claim which is greater than the amount of the statutory demand. Accordingly the statutory demand ought be set aside.