Genesis Management Services Pty Ltd v Soniclean Pty Ltd
[2005] SASC 224
•24 June 2005
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
GENESIS MANAGEMENT SERVICES P/L v SONICLEAN P/L
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice Perry and The Honourable Justice Sulan)
24 June 2005
CORPORATIONS
STATUTORY DEMAND
The appellant appealed against the order of a Master setting aside a statutory demand which it had served on the respondent pursuant to s 459E(1) of the Corporations Act 2001, claiming that it was owed a substantial debt - discussion of relevant principles as to the question whether there was a genuine dispute or a genuine offsetting claim - held that the Master erred in finding that there was a genuine offsetting claim which equalled or exceeded the amount of the statutory demand - appeal allowed - statutory demand varied by substituting a lesser amount.
Corporations Act 2001, s 459E, s 459F, s 459G and s 459H, referred to.
Edge Technology Pty Ltd v Lite-On Technology Corporation (2000) 18 ACLC 576; Federico's Restaurant Pty Ltd v Warwick Entertainment Centre Pty Ltd (1995) 18 ACSR 702; Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179, applied.
D & S Group v O'Connor Investments and Ors (1997) 15 ACLC 1794, discussed.
Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37; John Shearer Ltd and Anor v Gehl Co (1994) 134 ALR 1; David Grant & Co Pty Ltd (Receiver Appointed) and Ors v Westpac Banking Corporation (1995) 184 CLR 265, considered.
GENESIS MANAGEMENT SERVICES P/L v SONICLEAN P/L
[2005] SASC 224Full Court: Doyle CJ, Perry and Sulan JJ
DOYLE CJ: I would allow the appeal, set aside the Order made by the Master, and order that the Orders proposed by Perry J be substituted. I agree with his reasons for so deciding.
PERRY J. Soniclean Pty Ltd (“Soniclean”), the respondent to the appeal, carries on a business specialising in the design and manufacture of ultrasonic equipment for various cleaning and industrial applications.
The appellant, Genesis Management Services Pty Ltd (“Genesis”), contracted with Soniclean to supply to Soniclean certain consulting, management and information technology services.
By a statutory demand dated 4 March 2004 made pursuant to s 459E(1) of the Corporations Act 2001 (“the Act”), Genesis asserted that Soniclean owed to it $409,545.00, being the total of a number of invoices which it had issued for services which Genesis alleged that it had provided to Soniclean.
Pursuant to s 459G of the Act, on 25 March 2004 Soniclean filed an application in this Court seeking an order setting aside the statutory demand.
After several hearings before him, a Master made an order on 5 October 2004 disposing of the application. The Master held that he was satisfied that Soniclean had a genuine offsetting claim equal to or exceeding the claim the subject of the demand, which he set aside.
Genesis appeals to this Court, seeking an order quashing the order of the Master.
On the hearing of the appeal, by leave, Genesis was represented by one of its directors, William Wright.
Background
Early in 2002, Soniclean engaged Genesis as a consultant to supply business management services. Mr Wright supplied the services on behalf of Genesis.
Initially, the arrangements were relatively informal. However, the relationship between the two companies was formalised by a written agreement dated 4 March 2002, described as a “Consulting Services Contract” (“the contract”). The contract set out details of the management services and information technology services to be provided as part of the consulting services, the calculation of fees to be paid, and the procedures pursuant to which the contract might be terminated by either party.
After it was entered into, Mr Wright continued to provide the consulting services pursuant to the contract.
At some stage during 2002, he was accorded the status of General Manager of Soniclean. Soniclean maintains that his appointment as such dated from about July 2002. Mr Wright asserts that his appointment was later in that year. For present purposes, nothing turns on the point.
As well as acting as General Manager of the business, Mr Wright provided administrative support, in part in person, and in part through the engagement of subcontractors to Genesis.
As Mr Wright established himself as General Manager, a director of Soniclean, Peck Yok Lee, known as Susan Lee (“Mrs Lee”), gave up day-to-day management of the business.
It is Soniclean’s case that over a period of time, Mr Wright gained complete control over the operation of the business, to the exclusion of Mrs Lee and the other directors.
Towards the end of 2003, differences arose between Mr Wright, Mrs Lee and the other directors of Soniclean.
Matters came to a head in January 2004. By a letter from Royle & Co, solicitors, dated 20 January 2004, written on behalf of Genesis, Genesis gave notice of its intention to terminate the contract “with effect from 3 March 2004”.
With the letter was enclosed an invoice in the sum of $384,477.00, which was said to be payable to Genesis for fees and a termination payment by way of fees due on termination. The letter also enclosed a schedule which detailed other invoices said to be outstanding.
It is the sum of all of the invoices, which amounts to the claim set out in the statutory demand.
Although Royle & Co’s letter spoke of termination with effect from 3 March 2004, Mr Wright withdrew his services and the services of other personnel supplied by Genesis as from 30 January 2004. No further consultancy services were provided by Genesis after that date.
The proceedings before the Master
In accordance with the obligation imposed by s 459G(3) of the Act, an affidavit supporting Soniclean’s application, being an affidavit of Mrs Lee, was filed with the court at the time the application was taken out.
When the matter first came on for hearing before the Master, which was on 5 May 2004, he directed that answering affidavits be filed within 21 days.
Pursuant to that direction, Genesis filed an affidavit sworn by Mr Wright.
The matter came on again before the Master on 5 July 2004. After hearing further argument, the Master said, in the course of brief reasons recorded on the court file, that he proposed to adjourn the matter “on the basis that I am being given most of the information from the bar table and not from the affidavits”. He went on to observe that on the material before him, it was “impossible” for him to establish whether the plaintiff had “any arguable case to dispute the amount claimed”.
He directed that Soniclean file a further affidavit, and gave leave to Genesis to file a further affidavit in response. He adjourned the matter to 12 August 2004.
On 10 August 2004, Soniclean filed a further affidavit, this time by another of its directors, Julian MacDonald Smith (“Mr Smith”).
When the matter was listed on 12 August 2004, the Master adjourned it over for further argument to 2 September 2004, to give to Genesis an opportunity to respond to Mr Smith’s affidavit.
It did so by a further affidavit of Mr Wright.
Before the matter came on for hearing again, Soniclean filed another affidavit of Mr Smith, and Genesis filed an affidavit of its solicitor, Mr John Royle.
On the basis of the material then before him, the Master heard further argument on 5 October 2004, after which he made the order the subject of the appeal.
The case advanced by Soniclean in the three affidavits which by then had been filed on its behalf, put shortly, was that:
·during the period of his involvement with the company, Mr Wright had seriously mismanaged its operations, with the result that it made substantial losses;
·he had concealed the true position of the company from the directors.
·eventually the directors were obliged to arrange for substantial injections of capital by way of cash advances from banks and other sources;
·certain intellectual property the subject of various patents registered in the name of Soniclean had been wrongfully made over to Mr Wright or to a company which he controlled;
·he had allowed the total owed by Soniclean to outstanding creditors to blow out;
·he had failed to ensure that Soniclean paid certain taxes on time, with the result that penalties were imposed;
·calculations in various of the invoices proffered by Genesis could not be substantiated;
·Mr Wright’s precipitate departure from Soniclean, associated with his removal at that time of certain computer equipment, had adversely affected Soniclean’s business operations and caused substantial losses to it.
As a result of the above matters, Mrs Lee claimed that there was a substantial dispute as to Genesis’s claim against it, and that there were what she described in her affidavit as “substantial as yet unquantified claims against Genesis and/or Mr Wright”.
In the language of the Act, Soniclean contended that there was a genuine dispute as to the existence or amount of the debt to which the demand related, and that Soniclean had a substantial offsetting claim.
In his responding affidavits, Mr Wright asserted that the contract had been regularly terminated in accordance with its terms; that the only computer equipment which had been removed belonged to Genesis; that no damage to any property of Soniclean was caused by its removal; and that none of the intellectual property of Soniclean had been appropriated. He denied all of the allegations of mismanagement, and re-asserted Genesis’s entitlement to the monies the subject of the demand.
In the course of disposing of the application, the Master dictated onto the file some extempore reasons. In those reasons, he said that in his view there was “no genuine dispute” in respect of the claim upon which the notice of demand had been issued.
However, as to the alleged offsetting claim, he commented:
… it appears to me that there is a very arguable case that the defendant mismanaged the plaintiff’s business. Examples of that mismanagement may well be evidence that taxes were not paid; that the company allowed far too many creditors to be “carried” over a period of some years; that rent was unpaid; that huge losses were incurred and so on.
He went on:
It is the result of that general mismanagement that is said to have caused an erosion of capital and that the claim on an offsetting basis equals or exceeds the defendant’s claim for payment. On what has been put to me I believe there is some genuine basis for finding that there is a genuine offsetting claim for a sum that may well equal or exceed the primary claim.
I express some doubt in relation to the amount because, as I have said, I think a very detailed accountant’s examination of the alleged mismanagement and the results of that mismanagement would have to be undertaken before any particularity can be achieved but using my own experience of these essentially commercial disputations if mismanagement can be demonstrated (and I think there is an arguable case) then the losses resulting from that (on the material that I have before me) might well “set off” the primary claim, …
Some matters of law
It is convenient at this stage to refer to relevant provisions of the Act, and some authorities as to their construction and application.
Pursuant to s 459E of the Act, a demand relating to a debt or debts may be served on a company. Such a demand may be served before the existence of the debt has been established in any judicial proceedings, although the demand must be accompanied by a short affidavit verifying the debt and confirming that it is due and payable (s459E(3)).
Ordinarily, the period for compliance with the demand is 21 days from the date upon which it is served (s 459F).
Within the period of 21 days, the company may apply to the court for an order setting aside the demand. In such a case, the procedure is as defined in the following sections:
SECTION 459G COMPANY MAY APPLY
459G(1) [Company may apply] A company may apply to the Court for an order setting aside a statutory demand served on the company.
459G(2) [Time limit] An application may only be made within 21 days after the demand is so served.
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.
SECTION 459H DETERMINATION OF APPLICATION WHERE THERE IS A DISPUTE OR OFFSETTING CLAIM
459H(1) [Court satisfied of dispute or offsetting claim] This section applies where, on an application under section 459G, the Court 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 amount of a debt to which the demand relates;
(b)that the company has an offsetting claim.
459H(2)[Calculation of substantiated amount] The Court must calculate the substantiated amount of the demand in accordance with the formula:
Admitted total - Offsetting total
Where:
admitted total means:
(a)the admitted amount of the debt; or
(b)the total of the respective admitted amounts of the debts;
as the case requires, to which the demand relates.
offsetting total means:
(a)if the Court is satisfied that the company has only one offsetting claim - the amount of that claim; or
(b)if the Court is satisfied that the company has 2 or more offsetting claims - the total of the amounts of those claims; or
(c)otherwise - a nil amount.
459H(3) [Substantiated amount less than statutory minimum] If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.
459H(4) [Substantiated amount equal to or greater than statutory minimum] If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:
(a)varying the demand as specified in the order; and
(b)declaring the demand to have had effect, as so varied, as from when the demand was served on the company.
459H(5) [Definitions] In this section:
admitted amount, in relation to a debt, means:
(a)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or
(b)if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or
(c)otherwise - the amount of the debt.
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).
respondent means the person who served the demand on the company.
Insofar as it was necessary for the Master to calculate a substantiated amount in accordance with the formula in s 459H(2), the starting point was the amount of the demand, given that he held that there was no genuine dispute as to the claim upon which the notice of demand was based.
For reasons which I will come to in due course, Soniclean has not made out any ground upon which it would be proper for this Court to interfere with that conclusion.
It follows that to succeed in persuading the court to set aside the notice of demand, it is incumbent upon Soniclean to satisfy the court that it has a genuine offsetting claim as defined in s 459H(5), of an amount equalling or exceeding the demand.
There is a considerable body of case law relating to the statutory requirements as to establishment of an offsetting claim.
It was not necessary for the Master to determine whether the alleged offsetting claim was likely to succeed. In the case of a disputed debt, the question is whether there is a genuine dispute, and in the case of an offsetting claim the question is whether there is a genuine claim.
As it was put in Re Morris Catering (Australia) Pty Ltd:[1]
Broadly speaking the Court is required to examine the claim, assess the undisputed parts of the debt that has been demanded, and deduct from it any offsetting claims of the debtor company. If the result is $2,000 or more, the Court has a discretion to vary the demand and to declare the varied demand to have had effect from the time when the original demand was served. It is possible to discern an intention that a company should pay the undisputed part of a demanded debt even if the demand may have been excessive, but that it should not be placed under pressure of being wound up with respect to any part of the debt that is genuinely disputed, or where there is any genuine contra-claim, whether or not it arises out of the same transaction as the debt to which the demand relates. ..
There is little doubt that Division 3 is intended to be a complete code which 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 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).
[1] (1993) 11 ACLC 919 per Thomas J at 922.
In Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd,[2] Lockhart J observed:
… what appears clearly enough from all the judgments is that a standard of satisfaction which a court requires is not a particularly high one. …
Certainly the court will not examine the merits of the dispute other than to see if there is in fact a genuine dispute. The notion of a “genuine dispute” in this context suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance.
[2] (1994) 13 ACSR 37 at 39.
While the arguments advanced in Mr Wright’s affidavits may be relevant to the determination of the question whether or not the offsetting claim is “genuine”, it does not avail the creditor in this situation to argue that there is a genuine dispute about the offsetting claim: Edge Technology Pty Ltd v Lite-On Technology Corporation.[3]
[3] (2000) 18 ACLC 576 per Santow J at 581.
In John Shearer Ltd and Anor v Gehl Co,[4] the Full Court of the Federal Court observed:
In order to show that an offsetting claim is genuine it must be put forward in good faith. There must be something more than the mere assertion. (my emphasis)
[4] (1995) 134 ALR 1 at 8.
Later in the judgment of the Full Court in that case appears the following passage:[5]
Another difficulty in the way of Shearer is that there is nothing in the material before the court which can be said to amount to more than a mere allegation that damage of the kind specified has been suffered. While it must be accepted that it is not contemplated that, in an action to set aside a statutory demand, evidence needs to be adduced of the kind that would need to be adduced at a trial of the issues between the parties; it is simply not enough for Shearer to assert damage in the most general of terms without more, particularly in a case where damages of the requisite amount, that is to say damages that are at least equal to or exceed the debt of the creditor, are not self-evident.
[5] Ibid 12.
A question arises as to the extent to which an offsetting claim must be capable of estimation in money terms. In D & S Group v O’Connor Investments and Ors,[6] I said:
The difficulty for D & S is that, even if the assertions in paragraphs 5 and 6 of the affidavit of Mr Savvas were to be taken at face value, there is simply no detail offered as to the amounts which D & S might, by reference to those paragraphs in Mr Savvas’s affidavit, be entitled to offset. In order for the court to be satisfied of an offsetting claim within the meaning of s 459H, it must be able to be satisfied as to the total of that claim, so that the calculation of the substantiated amount may be effected in accordance with s 459H(2).
[6] (1997) 15 ACLC 1794 at 1797.
On reflection, that may be pitching the onus too high. There may be cases where it is evident that very substantial damages, clearly exceeding the admitted total within the meaning of s 459H(2), are the subject of a genuine offsetting claim, even although a figure, even a broad estimate, cannot be put on the offsetting claim.
The approach of Lehane J in Federico’s Restaurant Pty Ltd v Warwick Entertainment Centre Pty Ltd[7] is apposite. That case concerned a statutory demand for amounts outstanding for rent due in respect of leased premises. On an application to set aside the demand, the applicant, the lessee, asserted an offsetting claim exceeding the demand. Wildly fluctuating figures as to its value were suggested.
[7] (1995) 18 ACSR 702 at 710.
Looking at the matter broadly, Lehane J concluded that there was “… an offsetting claim the amount of which, at least arguably, exceeds the amount of the debt claimed in the statutory demand”. He ordered that the statutory demand be set aside without ascribing a specific amount to the offsetting claim.
Another aspect of the matter which needs to be considered, and which is a matter of some importance in the context of this case, is the question of the approach to be taken by the court where an affidavit supporting the application under s 459G is filed within the 21 day period referred to in the section, but further affidavits are filed by the applicant after the expiration of that period. All of the affidavits, except that sworn by Mrs Lee, were filed outside the 21 day period.
In David Grant & Co Pty Ltd (Receiver Appointed) and Ors v Westpac Banking Corporation,[8] Gummow J (with whom Brennan CJ, Dawson, Gaudron and McHugh JJ concurred) observed:
The temporal requirements in subsections (2) and (3) and s 459G operate to define the jurisdiction of the court in respect of an application to set aside a statutory demand.
[8] (1995) 184 CLR 265 at 276.
In D & S Group v O’Connor Investments and Ors,[9] after referring to that passage, I said:
It seems to be implicit in that observation and from the terms of s 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 it raises any ground offered in support of the application not identified in the affidavit of Mr Gerovasilis filed within time, it could not be taken into account in determining the application. (my emphasis)
[9] Supra at 1798.
The question was further addressed in the decision of the Full Court of the Supreme Court of Western Australia in Energy Equity Corporation Ltd v Sinedie Pty Ltd.[10] In that case, Wallwork J, with whom Steytler J and Olson A-UJ agreed, referred with approval to my observations in D & S Group and other authorities and concluded:[11]
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. (my emphasis)
[10] (2001) 166 FLR 179.
[11] Ibid 185.
I approach the matter on the footing that this accurately states the law on the topic.
The appeal
What might be described as alleged procedural errors on the part of the Master advanced in support of the appeal may be disposed of shortly.
Genesis complains that the Master erred in allowing Soniclean to file further affidavits after the expiration of the 21 day period, more particularly the two affidavits of Mr Smith.
The Master had a discretion as to what further evidence he might receive, and in my view, no error has been demonstrated as to his exercise of his discretion in that respect.
On the other hand, consistently with authority, neither of the affidavits filed after the 21 day period could be used as evidence of a genuine dispute as to the existence or amount of the debt to which the demand related, or to support Soniclean’s offsetting claim, on a ground which was not raised in the affidavit filed within time, that is, the affidavit of Mrs Lee.
Mr Wright on behalf of Genesis also contended that the course of the proceedings before the Master meant that Genesis was deprived of a reasonable opportunity of answering the case advanced by Soniclean, more particularly the two affidavits of Mr Smith.
It is true that the proceedings before the Master were determined somewhat peremptorily when the Master made his order on 5 October 2004. But I am unable to agree that there was any procedural irregularity which affected the fairness of the proceedings.
There was clearly a limit to the extent to which the Master could be expected to go into the fine detail of the dealings between the parties, and as to the financial position of Soniclean and the extent to which it might be thought to support the view that Mr Wright had been guilty of mismanagement of the company.
In my view, that limit had been reached, by the time the Master came to consider the matter on 5 October 2004.
Genesis is on firmer ground when it asserts that the Master erred in the manner in which he reached his finding that there was an offsetting claim exceeding the amount of the demand.
If one starts with Mrs Lee’s affidavit, this contained only the most generalised allegations of mismanagement of the company and misappropriation of its intellectual property. Except for a reference to the amounts of additional capital raised by the company at various times, the amount of outstanding creditors of the company and the amount of a demand from the Australian Taxation Office, it is bereft of any material upon which any assessment could be made of the quantum of an offsetting claim.
Mr Smith’s first affidavit gave more particularity as to the damages alleged to have been suffered by reason of the removal by Mr Wright of computer equipment from Soniclean at the end of January 2004. It also gave further particularity as to the circumstances of the various loan applications by which Soniclean raised further working capital. He sets out figures, in the form of broad estimates, as to the losses to Soniclean occasioned by the removal of the computer equipment.
In his second affidavit, Mr Smith goes into further detail as to the trading performance of Soniclean while it was under Mr Wright’s management. In that affidavit, he also attempts to pull together the somewhat disparate unparticularised claims advanced in Mrs Lee’s affidavit, and put figures on the various heads of claim. He sets out some twenty items of claims which he asserts reflect the loss and damage suffered by Soniclean with respect to Mr Wright’s alleged negligent management.
In my view, there is no doubt that the directors of Soniclean entertain a genuine belief that Mr Wright mismanaged the company and was guilty of other breaches of duty which resulted in substantial losses to the company. But it is another matter as to whether or not the evidence which they have presented as to those matters may properly be regarded as a genuine claim within the meaning of the statutory provisions.
It must be accepted that the making of what might be thought to be poor management decisions is not necessarily an indication of negligent mismanagement or a breach of the consulting services contract. However, the difference between poor management and negligent mismanagement is not a question which properly can be addressed in proceedings of this kind.
But the major heads of loss which are claimed, which comprise the various loans utilised by the company as working capital, could not, in my view, be said to demonstrate, even having regard to the limited nature of the present exercise, a genuine claim against Mr Wright. The loans were obtained after the directors made a decision to raise further capital. The money was paid to the company, and the company had the benefit of it.
It may be that if the matter was closely enough investigated, the necessity to obtain the loans might be attributed to losses which the company was suffering as a result of Mr Wright’s alleged mismanagement. But that is not something which is shown to have been even reasonably arguable on the affidavit material which was before the Master, even having regard to the fact that the standard of satisfaction which the court requires in cases such as this is not a high one.
On the other hand, the remaining specific items set out by Mr Smith in his second affidavit and particularised by him, are, in my view, evidence of a genuine offsetting claim in the various amounts which he assesses against each item.
In paragraph 19 of his second affidavit he particularises the claims as follows:
19.The trading losses, directors’ loan and other direct costs incurred by the Plaintiff in consequence of the Defendant’s negligent management and/or breach of the Consulting Services Contract can be summarised as follows:
Item Affidavit reference Claim/Set-off Amount 1.
Lee affidavit paragraph 41
Loans by directors to support cash flow and to maintain solvency
$600,000.00
2.
Paragraph 14 hereof
Loans by directors to support cash flow and to maintain solvency
$100,000.00
3.
Lee affidavit paragraph 8
Dispute as to hourly rate for Defendant’s administrative services, a variation between $50.00 and $60.00 per hour calculated at
$1,246.00
4.
Lee affidavit paragraph 26
Solicitor’s fees improperly incurred approximately
$6,000.00
5.
Lee affidavit paragraph 30
Cost to remedy inappropriate involvement of UniSA in development for UVD technology
$34,857.00
6.
Lee affidavit paragraph 36
Increase in Westpac overdraft facility
$250,000.00
7.
Lee affidavit paragraph 39
Draw down of equipment loan applied to support cash flow
$50,000.00
8.
Lee affidavit paragraph 43
Contingent liability to Mathew Salkeld
$27,242.75
9.
Lee affidavitSmith affidavit (1) paragraph 30Lost sales $50,000.00
$50,000.00
Off-setting claim as acknowledged by Defendant
10.
Lee affidavitSmith affidavit (1) paragraph 8Kay salary
$6,000.00
11.
Lee affidavitSmith affidavit (1) paragraph 9Extra staff costs
$20,000.00
12.
Lee affidavitSmith affidavit (1) paragraph 11Woithe fees
$20,000.00
13.
Lee affidavitSmith affidavit (1) paragraph 13Tax penalty
$8,131.00
14.
Lee affidavitSmith affidavit (1) paragraph 22Patent registration fee (wrongly shown as $12,500)
$12,000.00
15.
Lee affidavitSmith affidavit (1) paragraph 26Bank fees, etc
$18,500.00
16.
Lee affidavitSmith affidavit (1) paragraph 26Capital Strategies
$15,000.00
17.
Lee affidavitSmith affidavit (1) paragraph 27Directors fees
$30,000.00
18.
Lee affidavitSmith affidavit (1) paragraph 28Project staff
$5,000.00
19.
Lee affidavitSmith affidavit (1) paragraph 29Wasted project
$20,000.00
20.
Lee affidavitSmith affidavit (1) paragraph 30Recreate information
$10,000.00
[The references in items 9 to 20 inclusive are to items in Mr Smith’s first affidavit and not the affidavit of Mrs Lee. I have corrected the reference accordingly.]
For the reasons I have given, I would not allow the items referable to the loans to the company. These are items 1, 2, 6, 7, 15 and 16.
The remaining items are as follows:
3. $1,246.00 4. $6,000.00 5. $34,857.00 8. $27,242.75 9. $50,000.00 10. $6,000.00 11. $20,000.00 12 $20,000.00 13. $8,131.00 14. $12,000.00 17. $30,000.00 18. $5,000.00 19. $20,000.00 20. $10,000.00 Total $250,476.75
In my view, the Master should have found that there was a genuine offsetting claim amounting to a total of $250,476.75.
Notice of alternative contentions
In a notice of alternative contentions, Soniclean raises the following matters:
1.The learned Judge correctly found that the plaintiff has an offsetting claim within the meaning of s 459H(1)(b) of the Corporations Act 2001 which exceeds the amount of the statutory demand.
2.The learned Judge erred in that he did not also find that there is a genuine dispute between the plaintiff and the defendant about the existence of a debt to which the statutory demand relates within the meaning of s 459H of the Corporations Act 2001.
3.The learned Judge erred in that he failed to find that there was no debt payable because:
3.1 The defendant had failed to give 30 days notice of termination in accordance with clause6 of the consulting services contract between the parties.
3.2 In breach of the said consulting services contract, the defendant abandoned its work under the contract and the contract was terminated before any entitlement to a termination payment under the contract had accrued.
3.3 The defendant had failed to provide an invoice substantiated with time sheets for time actually spent as required by clause 3.5 of the said contract.
Ground 1 does not identify an alternative contention.
Ground 2 does not identify any particular basis upon which it is contended that the Master should have found a genuine dispute.
Ground 3 pitches the onus on the Master too high when it refers to an alleged failure to find that there was no debt payable.
All that the Master was obliged to address was the question whether there was a genuine dispute between the two companies as to the existence or amount of the debt to which the demand related.
I would read ground 3 down accordingly.
On the hearing of the appeal, when he came to deal with the notice of alternative contentions, Mr Dal Cin of counsel for Soniclean presented an argument which related only to ground 3.
But as he did not expressly abandon ground 2, I will deal briefly with that ground.
In Mrs Lee’s affidavit, she does assert in general terms that there was a:
“… substantial dispute on a number of grounds as to the basis of any claim by the defendant, the method of calculation of that claim, the conduct and intent of the defendant and its discharge of its consultancy agreement. [Par 50]
In the preceding paragraphs of her affidavit, she refers to the various invoices relating to Genesis’s demand. The most that can be made of the matters which she deposes to, is that she was unable to calculate the basis of the claim advanced in some of the invoices and that she did not believe that the invoices could be substantiated. She goes on to make a bald denial of liability.
Mr Smith’s two affidavits do not advance Soniclean’s case on the issue whether or not there was a genuine dispute as to the debt the subject of the demand.
However the matter is approached, there was not sufficient evidence before the Master upon which he could have found that there was a genuine dispute as to the debt asserted by Genesis.
This leaves for consideration ground 3 of the notice of alternative contentions.
Put shortly, Soniclean’s argument as to this aspect of the matter was that the termination payments alleged to be due by Genesis, which form the greater part of its claim the subject of the demand, were not payable, as Genesis was in breach of contract in that it abandoned its work under the contract and withdrew its services on or about 30 January 2004, which was before the expiration of the notice of termination.
The difficulty which confronts Soniclean in advancing that argument is that the only affidavit filed within the 21 day period, being the affidavit of Mrs Lee, makes no mention of any such contention in support of the application to set aside the statutory demand.
The matter was canvassed to a degree in the first affidavit of Mr Smith. He refers (paragraph 3) to clause 6 of the contract which provides for notice of termination, and goes on to refer (paragraphs 4 and 5) to the removal on the night preceding 30 January 2004 by Mr Wright and other consultants of various documents, computers and other property of Soniclean.
But Mr Smith does not in as many words suggest that the invoices supporting the bulk of the claim the subject of the demand could not be substantiated, in that the contractual prerequisites for payment had not been satisfied.
Even if Mr Smith’s affidavit could be construed as evidence of a genuine dispute as to Genesis’s demand, to allow Soniclean to develop that argument would be to run counter to the authorities to which I have referred as to the strict operation of the time limit in s 459G.
The arguments advanced in support of the notice of alternative contention should be rejected.
Conclusion
In my view, the Master erred in holding that there was “a genuine offsetting claim for a sum that may well equal or exceed the primary claim”. He should have held that there was within the meaning of the relevant provisions, an offsetting claim of $250,476.75.
The appeal should be allowed for the limited purpose of reducing the assessment of the offsetting claim accordingly.
This means that the substantiated amount should be calculated in accordance with s 459H(2), being the difference between the admitted total (as defined), being the amount of the demand, and the offsetting claim.
That difference is $159,068.25.
In accordance with s 459H(4), and in the exercise of the power to extend the period for compliance as provided in s 459F(2)(a)(i), I would make the following order:
1.Varying the statutory demand by substituting for the amount of $409,545 the amount of $159,068.25.
2.Declaring the demand to have had effect as so varied from the date upon which it was served on Soniclean.
3.Extending the period for compliance with the demand to 21 days after the date of the order.
SULAN J: I would allow the appeal. I agree with the reasons of Perry J. I agree that the Order of the Master should be set aside. I would substitute the Orders proposed by Perry J.
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