Diploma Construction (WA) Pty Ltd v Consummo Painting Pty Ltd

[2017] WASC 31

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   DIPLOMA CONSTRUCTION (WA) PTY LTD -v- CONSUMMO PAINTING PTY LTD [2017] WASC 31

CORAM:   ACTING MASTER STRK

HEARD:   20 SEPTEMBER 2016

DELIVERED          :   14 FEBRUARY 2017

FILE NO/S:   COR 142 of 2016

BETWEEN:   DIPLOMA CONSTRUCTION (WA) PTY LTD

Applicant

AND

CONSUMMO PAINTING PTY LTD
Respondent

Catchwords:

Corporations law - Application to set aside statutory demand - Turns on own facts

Legislation:

Corporations Act 2001 (WA)

Result:

Demand set aside

Category:    B

Representation:

Counsel:

Applicant:     Mr A Clements

Respondent:     Mr M C Davies

Solicitors:

Applicant:     HopgoodGanim

Respondent:     Havilah Legal

Case(s) referred to in judgment(s):

Edge Technology Pty Ltd v Lite-On Technology Corp [2000] NSWSC 471

JJMMR Pty Ltd v LG International Corporation [2003] QCA 519

Kruger Ventures Pty Ltd v Alternative Engine Technologies Pty Ltd [2009] SASC 349

Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91

1. ACTING MASTER STRK:  This was the return of an originating process which sought to set aside a statutory demand (the Application).

2. After the Application was heard but before a decision was delivered, secured lenders of the applicant (Diploma Construction) appointed Martin Jones and Andrew Smith as receivers and managers of Diploma Construction.  Following this, Matthew Donnelly, Andrew Hewitt and David Hodgson were appointed voluntary administrators of Diploma Construction.

3. Despite the change in circumstances, it is appropriate that the decision be delivered, the Application dealt with and appropriate cost orders made.

Background

1. The Application was brought within 21 days.  It was supported by two affidavits sworn by Richard Steven King, the contracts manager for Diploma Construction.  The First King Affidavit was sworn on 1 July 2016, the Second King Affidavit was sworn on 16 September 2016.

2. A copy of the statutory demand appears as attachment RSK‑1 of the First King Affidavit.  The statutory demand refers to a debt totalling $184,039.55 in respect of work performed by the respondent (Consummo) on five projects, described as Hale House; Kwinana Shopping Centre; One‑on‑Aberdeen; Move Apartments; and Ocean Edge Apartments.

3. By the statutory demand, Consummo says that it is owed:

   (a)$61,621.27 in relation to Hale House;

   (b)$13,897.40 in relation to Kwinana Shopping Centre;

   (c)$42,007.64 in relation to One-on-Aberdeen;

   (d)$76,089.16 in relation to Move Apartments;

   (e)less $9,575.92 by a setoff due to Diploma Construction in relation to Ocean Edge.

4. The statutory demand was accompanied by an affidavit as is required by the Corporations Act 2001 (Cth). The affidavit of Mr Adam Ivan Peter Kukulj, the sole director of Consummo, sworn on 8 June 2016 (First Kukulj Affidavit), is attachment RSK‑2 to the First King Affidavit.

5. There is no dispute as to the existence of the debt the subject of the demand.  In the First Kukulj Affidavit, Mr Kukulj deposes to his belief that there is no genuine dispute about the existence or amount of the debt, and explains the basis for his belief.  He also deposes to payments received from Diploma Construction having reduced the debt owed to Consummo.[1]

   [1] First King Affidavit, 'RSK-2', [1(a)(ii)], [1(b)(ii)], and [1(c)(ii)].

6. Diploma Construction says that the statutory demand should be set aside on the ground that it has offsetting claims pursuant to s 459H(1)(b) of the Corporations Act, that are greater than the debt the subject of the demand.

7. Consummo says that the alleged offsetting claims are not genuine, but rather an afterthought by Diploma Construction, agitated only after Consummo pursued its payment claims and issued a statutory demand.  It says further that the offsetting claims are based on spurious and misconceived grounds and therefore the statutory demand should not be set aside.

8. Consummo relies on the affidavit of Adam Ivan Peter Kukulj, sworn on 23 August 2016 in opposition to the Application (the Second Kukulji Affidavit).

9. Consummo also objects to the Second King Affidavit on the basis that it was filed late.  The affidavit was filed on 16 September 2016, when the parties had agreed orders which provided that Dipolma Construction file and serve any responsive affidavit by 6 September 2017.  Consummo also complains that the Second Affidavit was not purely responsive, but raised new evidence.

10. In all of the circumstances, I have determined that it is appropriate that I have regard to the Second King Affidavit.  A significant part of the Second King Affidavit is responsive, and when offered a short adjournment so address any prejudice, Counsel for Consummo elected to proceed with the hearing of the Application on 20 September 2016.

Hale House - Diploma Construction's position

1. The position of Diploma Construction in relation to the Hale House project can be summarised as follows.

2. In early 2012, Diploma Construction and Consummo entered into a subcontract in respect of the Hale House Refurbishment (Hale Subcontract), by which Consummo was to undertake painting and associated works.  Consummo was responsible for the supply, delivery, installation, rectification of defects and completion of painting services and associated works as specified in the Hale Subcontract (the Works).[2]

   [2] Schedule 2, cl 1.0 of the Hale Subcontract, Second Kukulj Affidavit, 'AK9'.

3. Under the Hale Subcontract, Consummo was to perform the Works in accordance with the Hale Subcontract; complete each stage of the Works within the durations shown in the Diploma's Construction Programme (subject to any adjustment to that programme); and bring the Works to practical completion by the last date for completion of the Works as shown in the Construction Programme as adjusted (defined in the Hale Subcontract to be the Date for Practical Completion for the Works).[3]

   [3] Schedule 5, conditions 4.2(a) ‑ (c); 4.8(b); and 4.8(c) of the Hale Subcontract, annexed to the Second Kukulj Affidavit, 'AK9'.

4. In addition, in the event that Consummo did not complete the Works by the Date for Practical Completion for the Works, Consummo would be liable to pay, or allow to Diploma Construction, by way of liquidated damages, a sum calculated at the rate of $4,800 per day from the Date of Practical Completion of the Works until the date that the Works were completed.[4]

   [4] Schedule 5, condition 5.10 of the Hale Subcontract, annexed to the Second Kukulj Affidavit, 'AK9'.

5. Diploma Construction asserts that it advised all subcontractors of the construction programme (revision 6) which required Consummo to complete the Works by 21 September 2012.[5]  Although the Hale Subcontract provides for a procedure for notification of any delay and an extension of time to be granted by the Hale Subcontract,[6] Consummo had not provided any evidence that there was any extension of time of the Date of Practical Completion of the Works beyond 21 September 2012.[7]  Diploma Construction contends that, as such, the Date for Practical Completion of the Works was no later than 21 September 2012.

   [5] First King Affidavit [11], 'RSK-4'.

   [6] Schedule 5, conditions 5.7 and 5.8 of the Hale Subcontract, annexed to the Second Kukulj Affidavit, 'AK9'.

   [7] First King Affidavit [11] ‑ [12].

6. Diploma Construction says that it issued to Consummo three delay notices in respect of the Works, on 4 September 2012, 27 October 2012 and 15 November 2012, and that Consummo did not complete the Works until at least 15 November 2012.[8]

   [8] First King Affidavit [13] ‑ [15].

7. If the Works were completed on 15 November 2012, practical completion occurred 55 days after the Date for Practical Completion for the Works and Consummo is liable to Diploma Construction for liquidated damages totalling $264,000 under the Hale Subcontract.[9]  Further, Dipoma Construction says that it may deduct or setoff against any amount owing by it to Consummo any debt due and payable by it to Consummo, pursuant to sch 5 condition 8.4(a) of the Hale Subcontract.

Hale House - Consummo's position

[9] First King Affidavit [17].

1. In short, it was Consummo's position that revised construction programmes were issued by Diploma Construction such that the revised Date for Practical Completion of the Works was in fact 19 November 2012.[10]  On this basis, Consummo completed all Works on 15 November 2012, prior to the Date for Practical Completion of the Works, and Diploma Construction is therefore not entitled to claim liquidated damages in respect of the Hale Subcontract.

Move Apartments - Diploma Construction's position

[10] Second Kukulj Affidavit [21], 'AK14' (Construction Programme Revision 7) [27], 'AK21' (Construction Programme Revision 8) [40], 'RSK-5' of the First King Affidavit (Delay Notice No 3, which refers to the Date of Practical Completion being 19 November 2012) [41], [42].

1. The position of Diploma Construction in relation to Move Apartments can be summarised as follows.

2. In early 2013, Diploma Construction and Consummo entered into a subcontract in respect of the Move Apartments Project (Move Subcontract), by which Consummo was to undertake painting works.  Consummo was responsible for the supply, delivery, installation, rectification of defects and completion of painting services and associated works as specified in the Move Subcontract (again, defined in the Move Subcontract as the Works).

3. Under the Move Subcontract, Consummo was to: perform the Works in accordance with the Move Subcontract; complete each stage of the Works within the durations shown in Diploma's Construction Programme (subject to any adjustment to that programme); and bring the Works to practical completion by the last date for completion as shown in Diploma's Construction Programme (Date for Practical Completion of the Works).[11]

   [11] Schedule 5, conditions 4.2(a) ‑ (c); 4.8(b); and 4.8(c) of the Move Subcontract, annexed to the Second Kukulj Affidavit, 'AK35'.

4. In addition, in the event that Consummo did not complete the Works by the Date for Practical Completion of the Works, Consummo would be liable to pay, or allow to Diploma Construction, by way of liquidated damages, a sum calculated at the rate of $6,500 per day from the Date of Practical Completion of the Works until the date that the Works were completed.[12]

   [12] First King Affidavit [20(d)]; sch 5, condition 5.10(a).

5. Diploma Construction asserts that it issued several revised construction programmes which required Consummo to complete the Works by 7 October 2013 and then by 7 January 2014.[13]  By the Second King Affidavit, Diploma Construction also seeks to rely on correspondence by which it says Consummo was informed of an amendment to the construction programme so that the Works had to be completed by 20 December 2013, which it says was issued before the revised construction programme which required the Works to be completed by 7 January 2014.[14]

   [13] First King Affidavit [21], 'RSK-6', and [22], 'RSK-7'.  However, it appears that 'RSK-6' and 'RSK-7' are in fact the same document, being the first Move construction programme.

   [14] Second King Affidavit [21], 'RSK13'.

6. Diploma Construction asserts that although the Move Subcontract provides for a procedure for notification of any delay and an extension of time to be granted by the Move Subcontract,[15] Consummo had not provided any evidence that there was any extension of time of the Date of Practical Completion of the Works beyond 7 January 2014.[16]

   [15] Pursuant to sch 5, conditions 5.7 and 5.8 of the Hale Subcontract, annexed to the Second Kukulj Affidavit, 'AK9'.

   [16] First King Affidavit [22].

7. Diploma Construction says that Consummo did not complete the Works until 31 May 2014.[17]  Diploma Construction also says that it was not able to achieve practical completion of the Move Apartments Project until 13 May 2014.[18]

   [17] Second King Affidavit [27], referring to the Second Kukulj Affidavit, 'AK59'.

   [18] Second King Affidavit [26], 'RSK14'.

8. Diploma Construction asserts that Consummo is liable to it for liquidated damages in respect of the period from 7 January 2014 to 31 May 2014, totalling $936,000 under the Move Subcontract.[19]  Further, Diploma Construction says that it may deduct or setoff against any amount owing by it to Consummo any debt due and payable by it to Consummo, pursuant to sch 5 condition 8.4(a) of the Move Subcontract.

Move Apartments - Consummo's position

[19] In the Second King Affidavit, the period for which liquidated damages was claimed was corrected to the period commencing 7 January 2014 to 31 May 2014, and not 7 January 2014 to 1 May 2014, as was claimed in the First King Affidavit.

1. In short, it is Consummo's position that the Move Apartment Subcontract did not specify a Date of Practical Completion for the Works, rather the Initial Construction Programme was due to commence on 20 August 2012 with a planned duration for all services of 250 days.[20]  Consummo further says that despite request, Consummo was never advised of any revised Date of Practical Completion for the Works; the Date of Practical Completion for the Move Apartments Project was in fact 12 May 2014; and Consummo Painting completed the Works prior to the practical completion date for the Move Apartments project.

   [20] Second Kukulj Affidavit [47].

2. Consummo says that Diploma Construction is not entitled to claim liquidated damages in respect of the Move Subcontract as it completed the Works prior to the practical completion date for the Moves Apartments project.

One-on-Aberdeen and Kwinana Shopping Centre

1. Diploma Construction says that pursuant to sch 5 condition 8.4(a) of the One‑on‑Aberdeen Subcontract and of the Kwinana Market Place Redevelopment Subcontract, Consummo is liable to indemnify it for damages for any cost, expenses or losses incurred by it or claimed from it.  It is also entitled to deduct or setoff against any amount owing or to become owing by it to Consummo under the One‑on‑Aberdeen Subcontract and the Kwinana Market Place Redevelopment Subcontract, with the shortfall deducted from any other subcontract between Diploma Construction and Consummo.  Therefore, Diploma Construction is entitled to deduct or setoff the amounts owed to it under the Hale Subcontract and the Move Subcontract against amounts owed to Consummo under the One‑on‑Aberdeen Subcontract and the Kwinana Market Place Redevelopment Subcontract.

2. For the reasons summarised above, Consummo says there are no amounts owed by it to Diploma Construction under the Hale and Move Subcontracts, such that no right of setoff arises in relation to the amounts owed to it by Diploma Construction under the One‑on‑Aberdeen Subcontract and the Kwinana Market Place Redevelopment Subcontract.

3. Consummo also says that Diploma Construction not only does not dispute the calculation of the debt set out in the statutory demand, but entered into a payment arrangement with Consummo in relation to the moneys due and payable by Diploma Construction to Consummo in respect of the construction projects described in the statutory demand.[21]

   [21] Second Kukulj Affidavit [71] ‑ [73].

Legal principles - offsetting claim

1. Pursuant to s 459H(1)(b) of the Corporations Act, the Court may set aside a statutory demand where it is satisfied of either or both of the following:

   (a)that there is a genuine dispute between the company and the respondent about the existence or the amount of a debt to which the demand relates;

   (b)that the company has an offsetting claim.

2. For the purposes of s 459H(1)(b), an 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).

3. The test whether an offsetting claim exists is that the claim must be bona fide and truly exist in fact and the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived.[22]  As explained by Court of Appeal Justice McPherson in JJMMR Pty Ltd v LG International Corporation:[23]

   Anyone can make a claim to a right of set-off 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.

   [22] Ozone Manufacturing Pty Ltd v Deputy Commissioner ofTaxation [2006] SASC 91 [47], citing Edge Technology Pty Ltd v Lite-On Technology Corp [2000] NSWSC 471 [25].

   [23] JJMMR Pty Ltd v LG International Corporation [2003] QCA 519 [18].

4. However, the company is required in this context only to establish a genuine offsetting claim.  It is not necessary for the company to advance, at this stage, a fully evidenced claim.  Something 'between mere assertion and the proof that would be necessary in a court of law' may suffice:[24]

   [24] Kruger Ventures Pty Ltd v Alternative Engine Technologies Pty Ltd [2009] SASC 349 [27].

   35.Thus, when deciding whether an offsetting claim exists, the test is whether the Court is satisfied that:

   (a)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) 12 ACSR 341 at 357, or

   (b)that the claim is not frivolous or vexatious:  Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, or

   (c)that it is not fictitious or merely colourable:  Edge Technology Pty Ltd v Lite-on Technology Corporation (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.

   36.The task for the court is not to decide the issue on its merits but examine whether there is a genuine offsetting claim.  This was succinctly described by Thomas J in Re Morris Catering (Aust) Pty Ltd:

   '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 simple - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).'

   37.If there is a genuine claim sufficiently quantified to give rise to an offsetting amount the demand must be offset.  (footnotes omitted)

Determination

Does Diploma Construction have a genuine offsetting claim under the Hale Subcontract?

1. The question of whether Diploma Construction has a genuine offsetting claim under the Hale Subcontract requires the terms of that contract to be carefully considered.

2. The Hale Subcontract at sch 5 condition 5.8(c) provides as follows:

   5.8Extension of Time

   …

   (c)Notwithstanding that the Subcontractor has not given notice of a claim for an extension of time under clause 5.7, Diploma may, at any time and for any reason it thinks sufficient, by notice addressed to the Subcontractor, extend the time for completion of the Works by varying the Date for Practical Completion.

3. The circumstances in which liquidated damages are payable by Consummo are set out in sch 5 condition 5.10 of the Hale Subcontract:

   5.10Liquidated Damages

   If the Subcontractor fails to complete the Works by the Date for Practical Completion of the Works, the Subcontractor must:

   (a)pay or allow to Diploma by way of liquidated damages a sum calculated at the rate stated in Item 18 calculated from the Date for Practical Completion of the Works until the Date of Practical Completion of the Works; and

   (b)indemnify Diploma for any liability for damages for delay under the Head Contract.

   Liquidated damages shall be in addition to liability under clauses 4.8(i) and (j) and 8.4.

1. The evidence in fact reveals that:

   (a)the Date of Practical Completion for the Hale Subcontract was varied by Diploma Construction to19 November 2012; and

   (b)Consummo completed the Hale Works on 15 November 2012, before the Practical Completion Date.

2. Having regard to all of the evidence, I am not satisfied that Diploma Construction has established a genuine offsetting claim in the amount of $264,000 by operation of the Liquidated Damages provision at sch 5 condition 5.10 of the Hale Subcontract.

Does Diploma Construction have a genuine offsetting claim under the Move Subcontract?

1. The position in relation to the Move Subcontract is more complex.

2. For the purposes of an application to set aside a statutory demand it is unnecessary to reach a concluded view as to whether or not Diploma's claim for liquidated damages would succeed.  But on the evidence, a claim for liquidated damages under the Move Subcontract is arguable.

3. Having regard to all of the evidence, I am satisfied that Diploma Construction has, for the purpose of s 459H(1)(b), established a genuine offsetting claim in the amount of $936,000 by operation of the Liquidated Damages provision at sch 5 condition 5.10 of the Move Subcontract.

Delay in pursuing offsetting claim

1. Diploma Construction has never disputed the debt set out in the statutory demand.  Further, Diploma Construction made payments to Consummo between July and December 2015 in respect of the construction projects mentioned in the statutory demand - without raising an offsetting claim.

2. In this case, the delay in raising (or otherwise pursuing) the offsetting claim was not explained at all in the affidavits filed.  I find that the delay was to such an extent as of itself to jeopardise the bona fides of Diploma Construction's offsetting claim.

Determination

1. The absence of complaint before the service of the demand can be some evidence of a lack of bona fides in the alleged debtor's dispute and speak against s 459G or s 459H relief.  But it is not ordinarily conclusive by itself.[25]

   [25] Edge Technology Pty Ltd v Lite-On Technology Corp [34].

2. Whilst the bona fides of Diploma Construction's offsetting claim was indeed jeopardised and weighed heavily against the Application, in all of the circumstances, I find that the offsetting claim was arguable, the amount was substantiated, quantified and exceeds the amount of the statutory demand.  It is therefore appropriate that an order be made to set aside the demand.

3. I will hear from the parties as to the form of orders and as to costs.