Zone v Allards

5369/03 - ZONE PRODUCT AUSTRALIA PTY LIMITED v ALLARDS PTY LIMITED

1 MASTER: This is an application to set aside a statutory demand under s 549G of the Corporations Act. The demand, which was dated 28 September 2003, claims a sum of $67,425 pursuant to a sub-distribution agreement between the parties. 2 The plaintiff is a subsidiary of Zone Products Inc which entered into a non exclusive sub-distribution agreement dealing with the supply of software and equipment for closed circuit television dated 26 October 2001. At the same time there was a variation of the agreement which gave exclusivity in respect of Australia and New Zealand for a fee apparently of $10,000 per month. 3 The parties have apparently agreed, and it was common ground before me, that the plaintiff has succeeded to the rights and duties of its holding company which was a party under the amended agreement. 4 The original agreement contained the non exclusive grant under clause 2.1 of the agreement. The relevant clauses dealing with this are contained within 2.2 and 2.3, which are in the following terms: "2.2 ZPI's appointment pursuant to Clause 2.1A is subject to the following conditions:

B. ZPI must meet the minimum quarterly sales targets set in Schedule 6 Part 1B;

C. In determining whether the minimum sales quotas have been met new system sales within any particular quarter shall be counted and credit shall be given for any sales in excess of the minimum quota amounts in any earlier quarter but any sales in respect of the upgrade on an existing system (whether a version upgrade or increase in system size) shall be disregarded. If ZPI fails to meet any quarterly sales target the target for the following quarter (or quarters if required) shall be increased by the number of short sales;

D. Provided that ZPI meets the quarterly sales targets, Allards must not appoint any exclusive sub-distributor in the ZPI Non-Exclusive Territories. If ZPI fails to meet any two consecutive quarterly sales target Allards may after giving ZPI 30 days notice of its intention to do so, appoint an exclusive sub-distributor in the ZPI Non-Exclusive Territory to which that sales target relates and thereafter ZPI must not market or sell the Allards CCTV System or Allards CCTV Software in such territory. This Clause is fundamental to this Agreement.

E. ZPI may apply to Allards for additional territories to be included in the ZPI Non-Exclusive Territories. Allards may accept or reject such application in its unfettered discretion. If Allards accepts any such application it may do so on conditions, including specifying minimum sales targets, for any additional territory;

2.3 ZPI's appointment pursuant to Clause 2.1B is subject to the following conditions:

B. ZPI must meet the minimum quarterly sales targets set out in Schedule 6, Part 2;

C. In the event that ZPI fails to meet the minimum sales target for any two consecutive quarters, then Allards may forthwith terminate ZPI's sub-distribution rights in the Non-Exclusive Territories by notice in writing to ZPI. This Clause 2.3C is fundamental to this Agreement;

D. In determining whether minimum sales targets have been met the criteria set out in Clause 2.2C shall apply;" 5 It can be seen that the minimum quarterly sales target set out in Schedule 6 Part 1B that the relevant parts to that schedule are as follows: "PART 1A: ZPI Non-exclusive Territories:

(i) America including all countries in North, South and Central America. (ii) Australia and New Zealand.

Minimum copies to be sold per quarter to retain Non-Exclusive rights to America (including all countries in North, South and Central America):

200 copies per quarter in each year of this Agreement;

Minimum copies to be sold per quarter to retain Non-Exclusive rights to Australia and New Zealand:

50 copies per quarter in each year of this Agreement;" 6 The variation agreements contained a number of clauses which are relevant to the arguments before me. 1. Exclusivity Provided, and for so long as, Zone Products Inc. ('ZPI') meets the minimum sales targets set out in Schedule 6 of the Agreement, as varied by this letter, and as otherwise determined by applying clause 2.2C of the Agreement, for the territories of Australia and New Zealand, Allards agrees that it shall not appoint any other sub-distributors or supply the Allards CCTV Software and the Allards CCTV System in Australia and New Zealand following the date of the Agreement.

2. Targets The minimum sales target for the Australia and New Zealand territory as set out in Part 1B of the Schedule 6 to the Agreement is varied to 0 copies for October 2001 and 10 copies per month commencing 1 November 2001. For the purpose of this variation references in Clause 2.2C of the Agreement to 'quarter' shall be construed as references to 'month'.

3. Payment for the Australian and New Zealand Targets In consideration of Allards agreeing not to appoint any other sub-distributors or supply the Allards CCTV Software and the Allards CCTV System in Australia and New Zealand as stated under Paragraph 1 above, ZPI must order and pay Allards for a minimum of AUS$10,000 worth of Allards CCTV Software in the first week of each calendar month (excluding October 2001) in respect of the Australia and New Zealand territory.

For the avoidance of doubt, her Honour monthly minimum payments due in each calendar month have to be paid within the first week of each calendar month irrespective of any credit payment arrangement that may exist for orders. ……… 5. Meanings of Words and Phrases

Words and phrases used in this letter have the same meaning as ascribed to those words and phrases in the Agreement except where it is clearly stated herein to the contrary. To the extent of any inconsistency the provisions of this letter of variation shall prevail over the terms of the Agreement.

If ZPI fails to meet the varied minimum sales target for any month or fails to make strictly when due any payment required by clause 3 of this letter, then Allards may be written notice immediately terminate these terms of variation and except to the extent that any rights have accrued to either party prior to termination, the Agreement shall be construed as if these amendments had never been made. The terms of this letter shall not in any event survive the termination of the Agreement." 7 The plaintiff says that a genuine dispute exists for three reasons: (1) There is a failure to account for some payments. (2) The demand or affidavit in support of the demand is misleading and thus is defective. (3) The agreement properly construed means there is no liability because credits for purchases and payments made in earlier months can be taken into account in respect of a later month's liability to order and pay for the minimum monthly amount of $10,000. 8 I have been referred to a number of authorities in respect of the principles to be applied. I think the most useful summation is that given by McLelland J in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACLC 669. At page 671 his Honour made the following comments in respect of a "genuine dispute": "It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s 459H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to (its) truth' (cf Eng Mee Yong v Letchumanan (1980) AC 331 at 341), or 'a patently feeble legal argument, or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194). But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at ACLC 1066; ACSR 366-7) Hayne J said, after referring to the state of the law prior to the enactment of Division 3 of Part 5.4 of the Corporations Law, and to the terms of Division 3: 'These matters, taken in combination, suggest that at least in most cases, it is not expected that the Court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.'

In Re Morris Catering (Australia) Pty Limited (1993) 11 ACLC 919 at 922; (1993) 11 ACSR 601 at 605 Thomas J said: 'There is little doubt that Division 3 ... prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the Court's examination are the ascertainment of whether there is a 'genuine dispute' and whether there is a 'genuine claim'.

It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another.

The essential task is relatively simply - to identify the genuine level of a claim (not the likely result of it).'

9 There is one item in this area where the defendant's calculation of the amount due for the $10,000 per month figure for May 2002 appears to be in error. A credit for the return of what are described as Dongals, which I understand are connectors in the sum of $7,425, were the subject of a credit request which was numbered C91, which was credited to the account in May 2002, during the first week. This should be taken into account and is not in the plaintiff's calculation. Subject to what I shall say later, as to whether there is an obligation to pay $10,000, there is clearly a genuine dispute in respect of this amount. The Schedule to the demand or affidavit is misleading and there is thus a defect justifying the setting aside of the demand.

10 The relevant statement to which I am referring is annexure C to the affidavit of Mr Nolan sworn on 17 October 2003, and it is said in his affidavit to be annexed to the demand. On the face of the demand, it is not and the parties conducted the case on the basis that it was attached to the affidavit. The affidavit is not in evidence, and it is thus hard to see whether the schedule is misleading in some respects. 11 In order to see whether there is in fact a defect in the affidavit substantial injustice does not have to be demonstrated. However, the seriousness of any misleading effect of the schedule should be considered, to see whether there is a defect such that the demand should be set aside. It is only if the defect goes to confusion of some kind or breaches the basic statutory principles behind the regime, then the demand would be set aside. 12 However, it is clear from a comparison of annexures C and D that annexure C does not include the actual payments received in respect of the months of November 2001 to June 2002, but does include the actual payments from October 2002 to June 2003. To this extent, one might say, looking at it on its face, it is misleading. 13 However, it is perfectly apparent from the affidavits the plaintiff filed in support of the application, and the way the plaintiff has treated the demand, that it is not confused and it is clearly able to deal with the discrepancies in the schedule. This is in fact what it does in annexure D. In the circumstances, I do not think the defect is sufficiently serious to warrant the setting aside of the demand. The proper construction of the agreement 14 There is a preliminary point that has to be determined in respect of this claim and that is whether the ground was included in the affidavit filed within time. There has been a dispute in the cases as to whether or not, provided there has been a supporting affidavit filed within the 21 day period of the application, that it may be amended by allowing additional grounds raised after the 21 day period. 15 In Civil Systems Pty Limited v B T Constructions Pty Limited, a decision of mine of 15 December 2000, I drew attention in paragraph 11 to the different first instance decisions to which I had been directed at that time. The matter has been dealt with further by a judge of this Court, and also the Full Court of Western Australia. In Process Machinery v ACN 057 260 590 (2002) NSWSC 45, Barrett J decided that a new ground could not be raised in such circumstances. At paragraph 16 and following, his Honour expressed his views as follows: "Furthermore, the applicant is confined to the grounds shown by the application and supporting affidavit filed and served within the 21 day period to which s 459G refers. This last point is important. It was recently confirmed by the Full Court of the Supreme Court of Western Australia in Energy Equity Corp Ltd v Sinedie Pty Ltd (2001) WASCA 419 920 December 2001). Wallwork J (with whom Steytler J and Olsson AUP agreed) quoted the following passage from the judgment of Perry J in D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1975) 15 ACLC 1794 (in which the opening words refer to an observation of Gummow J in David Grant): 'It seems to be implicit in that observation and from the terms of section 459G(3) that if an affidavit is to be used in support of the application, it must be filed within the defined period of 21 days.

It seems to me then that the affidavit of Mr Savvas having been filed and served well after the expiration of the period of 21 days, insofar as sit raises any ground offered in support of the application not identified in the affidavit of Mr Gerovasilis filed within time, could not be taken into account in determining the application. Furthermore, David Grant is authority for the proposition that there is no ability to extend the time limit.'

Wallwork J also quoted from the judgment of Mandie J in Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In liq) (2000) VSC 397: 'I think that there is another reason for refusing special leave because it seems to me that the interpretation of the Corporations Law contained in D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1794 at 1798 is applicable and should be followed by this Court. If a ground in support of an application to set aside a statutory demand is not identified within the period provided by the Corporations Law, then it seems to me that it cannot be relied upon out of time upon appeal.'

Wallwork J's conclusion was: "In my view it now seems to be accepted that an affidavit filed outside the 21 day period which raises a new ground or grounds to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit which has satisfied the threshold test) cannot be used in an application of this nature. The Corporations Law operates throughout Australia and uniformity of approach is desirable." This is consistent with the conclusion reached earlier in the same year by Wilson J of the Supreme Court of Queensland in Raffles Corporation Pty Ltd v Cech (2001) QSC 129: "Under s 459G 'an affidavit supporting the application' must be filed within the 21 days. The affidavit must disclose facts showing a genuine dispute, but it need not go into evidence: as Sundberg J held in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 14 ACLC 1703, the supporting affidavit filed within the 21 days may read like a pleading. It may be supplemented in the sense that a further affidavit containing evidence proving the facts asserted in that affidavit may be filed after the 21 days. Indeed, on the hearing of the application only admissible evidence can be relied upon. However, evidence supporting some other grounds not raised in the affidavit filed within the 21 days may not be relied upon. See also Eden Bay Pty Ltd v Bennett (1997) 15 ACLC 1634. Accordingly, the present applicant may not rely on grounds not set out in the affidavit filed within the 21 days." This raises a question about the nature and extent of definition or assertion required. In Energy Equity Corp the company sought to rely on an offsetting claim in the form of a cause of action in negligence. It was not permitted to do so because this "was not specifically referred to in the first affidavit". D & S Group of Companies was also a case in which a particular offsetting claim was raised for the first time after the expiration of the 21 day period. In Raffles Corporation , the company wished to argue, as part of an asserted genuine dispute, an alleged oral agreement varying the operation of a lease, an alleged termination of that lease and a calculation of interest in a way said not to be consistent with the lease terms. This was in circumstances where the affidavit dealt with the identity of the lessor and a particular deduction of $2500 and did not foreshadow in any way the additional objections later advanced. It is thus reasonably clear that the relevant concept of 'raising' or 'identifying' a particular ground involves some verbal delineation of that ground in the section 459G(3)(a) affidavit. If a debt of $10,000 were claimed as one year's interest under a contract providing for interest at the rate of 9 per cent per annum on a principal sum of $100,000, it would not, in my opinion, be sufficient for the affidavit to annex the loan agreement and say no more. It would have to refer at least to the connection between the contract and the debt claimed and put in issue the calculation of interest - even if it merely said "the debt does not accord with the annexed contract". The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy that it is identifiable with one or more of the grounds made available by ss 459H and 459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within that period."

16 Having regard to his Honour's reasoning, and the cases to which he referred, I think that the better view is as decided by his Honour, namely, that unless the particular dispute is raised in the affidavit filed within time, it cannot be dealt with in later affidavits. This is subject to the qualification, of course, that a genuine dispute arising out of a matter of law, which does not require evidence to support it, would, of course, always be available to be argued. See Callite v Peter John Adams & Ors [2001] NSWSC 52. 17 The question requires a consideration of Mr Nolan's affidavit. That is a fairly short affidavit and, after dealing with formal matters, paragraph 4 says that an application is made to set aside the demand on the basis that the company has paid the sum claimed. The remaining paragraphs of the affidavit are then in the following form: "5. Annexed hereto and marked with the letter 'C' is a copy of a statement which formed part of the statutory demand

6. This statement is for the period from November 2001 to April 2003.

7. The statement fails to take into account the fact that additional payments were made to the defendant which with some qualifications are recorded in annexure 'D' which is a copy of a document prepared by the plaintiff and which is a reconciliation of the statement annexure 'C'.

8. Annexure 'D' indicates the additional payments which were made in the months referred to above with the following qualifications: a. The payment for November 01 to the defendant was for $24,387.97 which took into account the credit referred to in the note to annexure 'D' in the sum of $68.03. b. The March 02 payment took into account an additional internet banking payment of $853.16 made on 6 March 2003. See annexure D1.

c. The May 02 payment took into account a credit note issued of $7,425.00 as referred to on the note to annexure 'D' and in annexure D2.

d. The amounts paid on December 2002 and January 2003 total $45,760.00 and in fact $12,320.00 was paid in December 2002 and $33,440 paid in January 2003. 9. Annexed hereto and marked with the letter 'E' are selected bank statements of the plaintiff showing the debit of each of the amounts to the plaintiff's account. There is no page 19 because when I numbered the pages I inadvertently omitted that number.

10. The plaintiff asks this Honourable Court to make the orders set out in the originating process upon the basis that the debt has been paid." 18 It was suggested in accordance with the words that are in paragraphs 4 and 10 that all this disclosed was a claim for overpayment. I think that is a bit of an oversimplification of what is being said in the affidavit. The form of the annexures clearly indicates that the claim that the total amount actually paid was paid against the amount due as per the contract. Although the contract was not annexed, there is clear reference to the contractual entitlement in annexure D to the affidavit. 19 In these circumstances it seems to me that the affidavit made plain that the overpayment related to the contractual entitlement to demand payment under the contract and it clearly raises the whole question of the contract between the parties. 20 In the circumstances I am satisfied that there has been sufficient included in Mr Nolan's affidavit to raise the ground. The construction argument 21 The plaintiff submits that the effect of clause 2.2C of the agreement, which is incorporated into the variation agreement in paragraph 1, is: (a) to require payments of $10,000 per month; (b) to permit the giving of credit for payments for actual purchases over and above $10,000 so that such credit can roll forward, so that a $10,000 payment is not necessary so long as ZPI was in credit overall. 22 The first thing to observe about this submission is that the variation agreement does not require payment of $10,000 per month. What it requires is that the plaintiff: "Must order AND pay Allards for a minimum of AUS$10,000 worth of Allards TV software ...." 23 It will be noted from clause 6 of the variation agreement that the failure to meet this requirement leads to a right to terminate. It does not give a right to recover the $10,000. 24 That failure to order and pay is a breach of clause 3, which will only lead to a claim for unliquidated damages, the normal measure being the loss of profit on the sales to be made under the clause. The defendant has led no evidence of any such loss, and the claim in the demand is plainly wrong. 25 A statutory demand can only be issued in respect of a debt which means a "liquidated sum of money presently due, owing and payable to one person called the debtor, to another person called the creditor. This does not include a claim for unliquidated damages for breach of contract." See Rothwells v Nommack (No 100) 6 ACLC 1199 at 1200; and First Line Distribution v Paul Whiley 13 ACLC 1216 at 1218; and also the unreported decision of Griffiths Producers Co-operative Limited v Calabria, McLelland CJ in EQ, 28 November 1996. On this basis there is not an appropriate debt to substantiate the demand. 26 The problem, however, for the plaintiff is that this aspect was not raised in the affidavit in support, which in the schedule to it conceded the contract amount due. Nor was the matter argued before me. Accordingly, I must put this matter to one side for the moment. 27 Both agreements have to be read together, subject to the direction as to inconsistency in clause 5 of the variation agreement. Clause 2.2C of the agreement clearly allows a roll over of excess minimum sales to the next period, which have been converted to a monthly period by clause 2 of the variation. Clause 3 of the variation deals with both the ordering and payment. 28 It is certainly arguable, on the basis that clause 1 of the variation applies to clause 2.2C to both minimum sales and the targets "set out in schedule 6 of the agreement as varied by this letter", that the roll over might apply. The contrary construction looks to the additional exclusive rights given and the obligation to "order ... in the first week of each calendar month". 29 It is interesting that the second part of clause 3 of the variation agreement only deals with payments and not orders. 30 In my view the matter is arguable but I should deal with a matter raised in argument which was a reference in clause 2.2C of the agreement to credit being given for "sales in excess of the minimum quota amounts ... but any sales in respect of the upgrade of an existing system ... shall be disregarded". 31 Annexure D clearly shows an excess applying to a roll over but there does not seem to be any evidence that the relevant sales to be rolled over were new system sales. I note that clause 3 of the variation, when describing what "must be ordered", refers to "Allards CCTV software" which is a defined term in the agreement and includes updates. This would tend to suggest the orders for the purposes of clause 3 are not restricted to new system sales. Certainly the matter is one which is the subject of argument on both sides. 32 Accordingly, I am satisfied that there is a genuine dispute in respect of the whole of the sum claimed in the demand. In the event that I came to a different view on this question, I would have reduced the demand by $7,425 and taken steps to address the status of the alleged debt, the subject of the demand. 33 Under s 459P(1) a company may be wound up in insolvency on the application of a creditor (even if the creditor is not a secured creditor but is a contingent and prospective creditor). Under s 459P(2) a contingent or prospective creditor is required to obtain the leave of the Court. 34 By reason of the matters I have mentioned before, the respondent would not ordinarily be a creditor of the company because there is no debt. See also Fire and All Risks Insurance Company Limited v Southern Cross Exploration NL (No 1) (1983) ACLC 971; and R & In Re Garbaume Pty Limited (1984) 2 ACLC 103. 35 There is a dispute on the authorities as to whether a claim for non liquidated damages is one by a creditor in respect of a contingent or prospective debt. The affirmative view is espoused by Mansfield J in Commissioner for Taxation v Simionator Holdings Pty Limited (1997) 15 ACLC 477; and the negative by Santow J in The Roy Morgan Research Centre Pty Limited v Wilson Market Research Pty Limited (1996) 14 ACLC 925. 36 There are many judgments of this Court of single judges that have followed Santow J's view, although there are other judgments that follow Mansfield J's view. Because of the obvious problems with the respondent's claimed debt, I would have been most concerned that an application to wind up or leave to wind up may be made without these difficulties coming to the attention of the Court asked to make such an order. 37 Under s 459M the demand may be set aside or varied subject to conditions when an order is made pursuant to section 459H and section 459J. In the circumstances, and in the absence of any undertaking by the respondent, I would have, as part of my inherent jurisdiction to prevent any abuse of process or under section 459M as a condition of the variation of the demand, required the respondent in any application for leave to wind up, or application to wind up based upon the demand in this Court, to notify the Court to whom the application was made of the terms of this judgment. 38 A similar course was taken by Senior Master Mahoney in Ultimate Manufacturers Pty Limited v Lyall Mines Pty Limited (1995) 13 ACLC 1268. In any event, I only make these comments for the benefit of anyone else in case someone else may take a different view of the arguability of the construction point which I have determined against the respondent, at least so far as a genuine dispute is concerned. 39 Accordingly, the only orders I make are orders A and C in the originating process. I order the exhibits be returned.

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