Hudson Investment Group v Mower Specialists Association of Australia

[2005] NSWSC 459

CITATION:	Hudson Investment Group v Mower Specialists Association of Australia [2005] NSWSC 459
HEARING DATE(S):	9 May 2005
JUDGMENT DATE :	9 May 2005
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Statutory demand not set aside. Time for compliance extended by 14 days.

CATCHWORDS:	CORPORATIONS - winding up - statutory demand - application to set aside - statutory demand based on guaranteed debt - circumstances in which guarantor of a specific debt can avail itself of cross-claims of the principal debtor against the creditor - whether on the facts any plausible contention that such a cross-claim exists - whether "some other reason" within section 459J(1)(b) Corporations Act to set demand aside - appropriate time by which to extend time for compliance with statutory demand
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Langford Concrete Pty Ltd v Findlay [1978] 1 NSWLR 14
PARTIES:	Hudson Investment Group Limited - Plaintiff Mower Specialists Association of Australia Limited (formerly Mower Specialists Association of Australia Co-operative Limited) - Defendant
FILE NUMBER(S):	SC 1491/05
COUNSEL:	P Walsh - Plaintiff A J Abadee - Defendant
SOLICITORS:	Deacons - Plaintiff Hunt & Hunt - Defendant

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

CAMPBELL J

MONDAY 9 MAY 2005

1491/05 HUDSON INVESTMENT GROUP LIMITED v MOWER SPECIALISTS ASSOCIATION OF AUSTRALIA LIMITED (FORMERLY MOWER SPECIALISTS ASSOCIATION OF AUSTRALIA CO-OPERATIVE LIMITED)

JUDGMENT – Ex Tempore (Re application to set aside statutory demand)

1 HIS HONOUR: This is an application to set aside a statutory demand. The statutory demand is one which was served on 25 January 2005. An application to set aside the statutory demand was commenced within what is conceded to be the correct statutory time period.

2 The company which served the statutory demand, which I shall refer to as MSAA, had sold a trademark to Hudson Imports Pty Ltd, under a deed of assignment of trademark dated 29 June 2000. That deed made provision for the trademark to be sold for a million dollars, payable in five roughly annual instalments. The last of those instalments of $200,000 was payable on 25 June 2004.

3 On 28 June 2000 a distribution agreement was entered into between Hudson Imports Pty Ltd (“Hudson Imports”) and MSAA. That distribution agreement was one which recited that Hudson Imports had the exclusive right to import into Australia certain lawn and garden care products from Sears Roebuck & Co of the United States. It conferred upon MSAA an exclusive right to distribute those products in Australia, for a period of five years.

4 There was provision in clause 5 under which MSAA would periodically place orders for the product, and whereby MSAA would pay the price of the product to Hudson Imports within 30 days of invoice.

5 Clause 6 of the agreement dealt with what amounted to a profit sharing agreement between the parties. It contemplated that the product price would be set at the cost to Hudson Imports plus a margin of thirty percent, and that Hudson Imports and MSAA would share equally in the mark-up which was charged by Hudson. That clause also contemplated that there would be a rebate of fifteen percent of the product price for certain of the products supplied to MSAA by Hudson under the agreement. As well, there was contemplation in clause 6 that market conditions might change, in which case they agreed to negotiate in good faith to vary the mark-up and rebate, but so that they would share equally in the final mark-up charged on the product.

6 The agreement for assignment of the trademark contemplated that the payment of the million dollars purchase price would be secured by a fixed charge given to MSAA over the trademark, on the terms of a certain mortgage debenture. It is not clear whether any such fixed charge was ever given. What the evidence in the present case does establish is that on 4 August 2000 an agreement was entered into between MSAA, Hudson Imports and the plaintiff in the present proceedings. The plaintiff in the present proceedings is the parent company of Hudson Imports. That agreement of 4 August 2000 recited that Hudson Imports acknowledged a debt of $800,000 as consideration for the assignment of the trademark, and that Hudson Imports’ obligations were secured by a fixed charge over the assets of Hudson Imports (not just over the trademark itself). It referred to the agreement for assignment of trademark as “the Agreement”. It recited that the plaintiff had requested MSAA to release that charge, accepting in substitution the guarantee and indemnity given by the document of 4 August 2000.

7 That document went on to provide that the plaintiff guaranteed to MSAA due payment of all moneys which would fall due under the Agreement or arising from any breach of the Agreement. It went on to say that, to the extent to which that guarantee might be void or unenforceable, the plaintiff gave an indemnity. However no-one says that the guarantee is void or unenforceable, so the indemnity can be left to one side.

8 The guarantee was a guarantee of payment of:

“each and all sums of money, interest and damages, whether present, future or contingent which the Debtor may be or hereafter become liable to pay to the Creditor under or pursuant to the Agreement or arising from any breach of the Agreement or on any account which the Agreement secures or in respect of any transaction contemplated by the Agreement, and the due and punctual performance of all other of the obligations, undertakings and provisions contained in or implied by the Agreement."”

That document said nothing about there being a distribution agreement entered the next day, or being intended to be entered the next day, or at all.

9 The amount which the statutory demand seeks payment of is the final instalment of $200,000 which fell due under the deed of assignment of trademark on 25 June 2004, and which neither Hudson Imports nor the plaintiff has paid.

10 The plaintiff says that it is justified in not meeting that statutory demand, because of certain dealings which have occurred between Hudson Imports Pty Ltd and MSAA under the distribution agreement. It says that there is an agreement in place whereby setoffs will be permitted between amounts owing under the deed of assignment of trademark, and amounts which become owing in connection with the distribution agreement, and that more than $200,000 has become owing by MSAA in connection with the distribution agreement.

11 The only affidavit which has been filed by the plaintiff is an affidavit of Mr Tan. He has been a director of the plaintiff since 26 September 2002.

12 At the time of entry of the deed of assignment of trademark, the distribution agreement and the guarantee, the affairs of the plaintiff were under a completely different control to the control they now are under. Mr Peter Holland had been a director of Hudson Imports from 1999 until about August 2003. The evidence is all to the effect that until Mr Holland left, the other directors of Hudson Imports and Hudson Investments were not involved in matters concerning the trademark agreement and distribution agreement.

13 The plaintiff contends that there is a sufficient case to warrant the setting aside of a statutory demand that there was an overall agreement whereby setoffs would occur. It submits that the case it appropriates to this effect meets the standard of a “plausible contention warranting further investigation”, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785.

14 The basis on which that contention is said to arise is a chain of correspondence which begins on 18 August 2003. On that date, Mr Wei Huang, who by that time had taken up some sort of an accounting function with one or other of the companies in the Hudson group, faxed to Mr Bernie Wynn, the financial controller, of MSAA, what he referred to as simply a “copy of invoice”. This was an invoice from Hudson Imports to MSAA, dated 31 March 2003, relating to “commission” said to have fallen due in the period from April 2002 to March 2003, in the sum of $27,660.79 plus GST. Mr Wynn faxed back saying “that now means we owe you $90,300.59. Do you agree? Do you just want to pay us the difference of $109,699.41 to square up both our books?”

15 The next document in the chain of correspondence is an email from Mr Wynn to both Mr Tan and Mr Huang of 3 October 2003. It says “with regard to the $200,000 due for payment on 1 Oct 2003 please deduct $113,990.80 off the cheque and send $86,009.20 in the mail today to MSAA.”

16 That fax needs to be seen in the context of the fact that the parties had been having some negotiations. Those negotiations included a meeting on 18 September 2003, where a proposal was put forward that one or other of the Hudson parties would pay the balance owing for the purchase price of the trademark by a payment of $200,000 “less due payment” on 1 October 2003, another $100,000 on 1 November 2003, and a final $100,000 on 1 December 2003. It was that proposal which was referred to in the fax of 3 October 2003 concerning the “$200,000 due for payment on 1 Oct 2003.” The reason why these negotiations were taking place at all was that Hudson Imports had not paid the $200,000 which fell due on 25 June 2003.

17 The next piece of correspondence relied upon is an email of 29 January 2004 from Mr Wynn to Mr Huang. It enquired:

“The 31 March 04 is the end of our financial year and I would like to tie up a few lose ends.
Would you be in agreeance to the following entries in your books and mine?
Now after you raise invoice 44 Jan sales of $24731.11 we will owe you $185308.04 and your HIPL loan owes MSAA $200,000 which was due for payment at 30 June 03.
At 31 Jan 04 in my books I would like to debit Hudsons creditor a/c with $200,000, and credit THT HIPL loan account with $200,000.
This would then show in my books Hudsons creditor in debit of $14691.96 and the balance on the HIPL loan account of $200,000.
I would very much appreciate you agreeing to do this as at 31 January 04.”

On February 20, 2004 Mr Huang Faxed Mr Wynn saying:

“Please find attached invoice for Jan 04 sales of $24731.11.
As at 31/01/04, the balance of Hudson Imports payment for trade mark payment $200,000 as at 30/06/03 is $14691.96.
Please contact me if you need further information.”

18 As can be seen, the email of 29 January 2004 was concerned with the way in which payment of the $200,000 which had fallen due on 25 June 2003 would be dealt with.

19 On 29 January 2004 Mr Wynn had faxed Mr Huang saying:

“Please raise and fax invoice 44 for $24731.11 including GST.
Do you agree balance of account is $185,308.04.
Please ring me.”

20 On 31 May 2004 Mr Wynn faxed Mr Huang saying:

“Please raise and fax invoice 48 for $4731.81.
Please confirm MSAA owe HIPL $18,298.53 and HIPL owes MSAA $200,000.”

21 On 22 June 2004 Mr Wynn faxed someone who I infer was Francis Choi, at one or other of the Hudson companies, saying:

“Please raise invoice 48 31.5.04 $4731.81 May sales.
Please raise invoice 49 22.6.04 $1733.12 June Sales.
Please raise invoice 50 22.6.04 $111019.84 Balance of stock and fax me invoices.
The above figures include GST.
If possible I would like to process these entries by 30 June 04.”

22 On 23 July 2004 Hunt & Hunt, solicitors for MSAA, faxed a letter of demand to Francis Choi of “Hudson Investment Group” relating to the final instalment of $200,000 which had fallen due on 25 June 2004.

23 Mr Scadden, the company secretary of one or other of the Hudson companies, wrote on 26 July 2004 to MSAA referring to the fax from Hunt & Hunt, and saying:

“In order for Hudson to consider the request for payment made by Hunt & Hunt, would you please provide:
i) an accounting for all stock sold by MSAA for the period 1 January 2003 to 30 June 2003;
ii) a stock listing for all stock held by MSAA as at 30 June 2004;
iii) a reconciliation of all stock held, sold or transferred during the period 1 January 2003 to 30 June 2004; and
iv) a calculation of the Royalty payment due to Hudson under the Distribution Agreement for the period 1 January 2003 to 30 June 2004.”

24 The rather cryptic reply to that, to Mr Scadden from Mr Wynn on 26 July 2004, was as follows:

“Re your fax Hudson Imports 26.7.04.
Item 1: Please refer to your sales invoices for this period.
All stock sold by MSAA during this period has been invoiced by Hudsons Imports Pty Ltd.
Item 11: Attached is a stock listing as at 30 June 2004 which totals $111019.84.
Item 111: Same as Item 1; and Item 11:
Item 1111: Please provide me with a signed copy of this agreement as I do not know of any such agreement in place.
Please note the distribution agreement of Craftsman and the agreement to purchase the Craftsman name are two separate agreements dated 29th June 2000.”

25 For some reason, a fax in the same terms was sent by Mr Wynn to Mr Scadden on 5 August 2004.

26 Mr Tan says that he believed, on the basis of this correspondence in the period between 18 August 2003 and 22 June 2004 that amounts owing from MSAA to Hudson Imports would be deducted from the sum of $200,000 recorded in the MSAA as owing from Hudson Imports. So far as the amount of $200,000 which had fallen due in June 2003 is concerned, that belief was warranted by that correspondence. The correspondence in my view provides no basis for a contention, not even one which meets the fairly undemanding standard of a plausible contention warranting further investigation, that there was any agreement in place relating to similar set-offs concerning the amount which fell due under the trademark assignment agreement, on 25 June 2004.

27 The witnesses for the defendants deny that there was any agreement to set-off relating to the June 2004 payment. If the plaintiff's evidence provided a basis for believing that there may be such an agreement I would not seek to choose between the plaintiff's evidence and the defendant's evidence on an application such as this. However, the plaintiff's evidence provides no basis for there being any such agreement.

28 The plaintiff recognises that the law in this state as presently understood and stated in Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561, Langford Concrete Pty Ltd v Findlay [1978] 1 NSWLR 14 and Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 is such that a guarantor of a particular debt of a debtor can avail itself of cross-claims which the debtor might have against the creditor to whom the guarantee has been given only when those cross-claims are ones which reduce or extinguish the particular debt which has been guaranteed. The plaintiff seeks to escape that difficulty by pointing to the statement by Dr Derham, in Law of Set-offs (3rd ed) para 18.08:

“A surety is entitled to the benefit of an agreement between the principal debtor and the creditor that cross-demands between those parties are to be set-off, since this operates as a payment: See Aurora Borealis Compania Armadora SA v Marine Midland Bank NA (The Maistros) [1984] 1 Lloyd's Rep 646; Cheetham v Crook (1825) M'Cle & Yo 307; Wreckair Pty Ltd v Emerson [1992] 1 QdR 700, 708. See also Re Bank of Credit v Commerce International SA (No 8) [1996] Ch 245,268.”

29 That principle is one which is not able to be applied to the facts of this case, when the evidence does not establish any plausible contention that there was an agreement between Hudson Imports and MSAA that there were to be any set-offs against the amount which was to fall due on 25 June 2004.

30 As well, the plaintiff pointed to the fact that some of the chain of correspondence to which I have referred was on the letterhead of the plaintiff. That does not assist as, even if there were to be an argument about whether the plaintiff was a party to any agreement which might have been entered into in that correspondence, the substance of any agreement entered into in the correspondence is not that there will be any set-off against the payment which fell due on 25 June 2004.

31 It was accepted that the terms of the deed of guarantee and indemnity were such that even if there were any right of equitable set-off, the guarantor could not avail itself of it.

32 While that is sufficient to dispose of the application, I should refer to some other submissions which were made.

33 The way in which the plaintiff set out to show that Hudson Imports had a set-off for more than $200,000 relied upon several different heads of accounting. The first of them concerned stock acquired from Hudson Imports which MSAA had on hand at 25 June 2004. It is common ground between the parties that at that date the defendant had in its possession stock acquired from Hudson Imports of a value of $111,119.84. The plaintiff's contention that the value of that stock ought give rise to a set-off has two different sources. One of them is the provision in the distribution agreement for the price of goods to be payable within 30 days of invoice. While the detail of when that stock was invoiced was not gone into in the plaintiff's evidence, it seems to have been assumed that it must have been due at 25 June 2004.

34 That submission, in light of the totality of the evidence, cannot be accepted as one which amounts to a plausible contention warranting further investigation. There is evidence from both Mr Bradshaw of the defendant, and Mr Holland, who was formerly of the plaintiff, that the terms of the distribution agreement were varied, so that stock was to be paid for only once it had been sold by MSAA. There is no skerrick of evidence which suggests otherwise.

35 The second source which is pointed to is MSAA’s request, made on 22 June 2004 to raise an invoice for the balance of stock. I do not accept that that shows even the beginning of an arguable case, even now, in light of the evidence of both Mr Bradshaw and Mr Holland, that the agreement was varied.

36 I also mention that the request for raising of an invoice was one which was not responded to by Hudson Imports until February 2005, and after the statutory demand had been served in the present case.

37 The second head of claim relied upon concerns an alleged wrongful deduction by the defendant of amounts for wages, salary and rent concerning the sale of product under the distribution agreement. That head of claim depends upon the provision in the distribution agreement concerning the manner in which mark-up and profit sharing would be dealt with.

38 There is evidence, from both Mr Bradshaw and Mr Holland, that that provision of the distribution agreement was varied. The substance of the variation was that the defendant would warehouse the stock, sell the stock at a price the market could bear, and MSAA and Hudson Imports would then share equally in MSAA's operating profit concerning that stock, after MSAA's specific costs concerning the stock were deducted. When there has been this variation of the agreement, in my view a claim which is based upon the agreement in its original form is not a sustainable one.

39 A third head of claim related to the fact that the defendant has been importing stock on its own account from Sears. The case put before me was that this was a breach of at least an implied term of the distribution agreement, for which Hudson Imports would be entitled to damages.

40 Evidence of the defendants, again from both Mr Bradshaw and Mr Holland, is to the effect that the circumstance which lead to the defendant importing stock directly from Sears was that Sears had refused to supply the plaintiff, and that Mr Bradshaw and Mr Holland had agreed that MSAA could bring in stock directly from Sears, and that Hudson Imports would not take any profit or royalties out of the stock which MSAA brought in from Sears in that fashion. In light of that evidence from both sides of the negotiation, which is not contradicted by anything, I cannot hold that there is a plausible contention warranting further investigation that Hudson Imports has a claim for damages against the defendant arising from the defendant's importation directly from Sears.

41 It was only today, pursuant to a notice to produce, that the defendant produced documentation relating to the amount of its importation from Sears. It has not been possible, in the time, for the plaintiff to put into proper form, or for the defendant to deal with, any contention which the plaintiff might wish to put about the quantum of any such damages to which it might be entitled. I record that I have proceeded with these reasons for judgment on the basis that, if I were to have come to the conclusion that there was a real contention which the plaintiff could put forward concerning this matter, it should have time to seek to establish the quantum. In light of the conclusion I have arrived at, there is no occasion to give the plaintiff that extra time.

42 Another head of claim relates to stock sold between February 2004 and June 2004 by the defendant. It seems to be agreed that $34,735 of stock was sold in that period. The disagreement between the parties relates to whether an amount of $14,691.96 should be treated as being credited against any future payments to be made by MSAA pursuant to the Distribution Agreement. It is sufficient for present purposes to say that this claim for unsold stock is not able to assist the plaintiff because its case about there being an over-arching agreement to set-off is not made out.

43 The final head of claim was one relating to a payment for “royalty” in the June 2004 financial year. The defendant accepts that an amount of $403.30 is owing to Hudson Imports on that account. However, because the case concerning over-arching agreement to set-off is not made out, it does not avail the plaintiff in the present proceedings.

44 In the result, I decline to set aside the statutory demand.

45 There is one other argument I should deal with. This is an argument that there is “some other reason” within the meaning of section 459J(1)(b) that the demand should be set aside. It was based upon a submission that, in Cellulose v Truda, Isaacs J pointed out that, when a guarantor was sued for a debt, it can immediately join the debtor, and claim indemnity from the debtor in the same proceedings, and the debtor is then able to raise any cross-claim which it might have against the creditor. While undoubtedly that procedure is available, I do not see it as a reason why I ought make an order under section 459J(1)(b). The statutory demand has been served for some three-and-a-half months now. There has been time in which any claim which Hudson Imports might seek to make to be commenced, but it appears none has been commenced. As well, I doubt that the submission is one which should in any event be given effect to as a matter of principle. If it were given effect to as a matter of principle, it would mean that proceedings on a statutory demand, brought against the guarantor of a particular debt who had not paid, could always, or nearly always, be frustrated. I do not see that any policies which the Court is called upon to give effect to, in exercising its discretion under section 459J(1)(b) ought lead to any such conclusion.

46 Section 459F(2) requires the Court to extend the period of time for compliance with a statutory demand in circumstances where there has been an application to set aside the demand, which has not succeeded. The statute sets a period of 7 days, or such other period as the Court decides. Mr Walsh, for the plaintiff, submits that I ought allow 21 days. This is put on the basis that it will provide enough time for the plaintiff to raise money to comply with the demand. Mr Abadee submits that 14 days is more appropriate, given the time that the proceedings have been on foot.

47 While I have difficulty in seeing how the time that the proceedings have been on foot has much relevance, except perhaps as establishing that the plaintiff has had some time in which to make contingency arrangements or raising money against the possibility that it might lose the present application, it seems to me that an amount of $200,000 is the sort of sum which a viable commercial entity ought be able to raise in less than 21 days. I therefore extend the period for compliance with the statutory demand by 14 days, namely, I extend it to midnight 23 May 2005.

48 I order the plaintiff to pay the defendants cost as agreed or assessed.

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