In the matter of Growthbuilt Pty Limited

[2024] NSWSC 1418

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Growthbuilt Pty Limited [2024] NSWSC 1418

Hearing dates:

1 November 2024

Date of orders:

7 November 2024

Decision date:

07 November 2024

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Orders made setting aside the creditor’s statutory demand and as to costs.

Catchwords:

CORPORATIONS — Winding up — Statutory demand — Application to set aside — Whether there is a genuine dispute about the existence or amount of the debt — Whether there is a defect in the demand — Whether the demand should be set aside on other grounds.

Legislation Cited:

- Building and Construction Industry Security of Payment Act 1999 (NSW)

- Corporations Act 2001 (Cth) ss 459H, 459J

Cases Cited:

- Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284

- Alucraft Pty Ltd (In Liq) v Grocon Ltd (No 2) [1996] VR 386

- Britten–Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344

- C&E Critharis Constructions Pty ltd v Cubic Metre Pty Ltd [2020] NSWCA 348

- Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; [2017] NSWCA 300

- Cubic Metre Pty Ltd v C&E Critharis Constructions Pty Ltd [2020] NSWSC 479

- Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473

- Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91

- First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939

- Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60

- Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330

- Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743

- Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896

- Re Douglas Aerospace Pty Ltd [2015] NSWSC 167

- Re Forte Sydney Construction Pty Ltd [2024] NSWSC 495 Re Gemi 169 Pty Ltd [2024] NSWSC 615

- Re Granite Power Ltd (admins apptd) [2019] NSWSC 1491

- Re Jana Pty Ltd [2022] NSWSC 112

- Re Libdy Developments Pty Ltd [2023] NSWSC 647

- Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605; 11 ACLC 919

Re Powerpark Systems [2018] NSWSC 793

- Re PSR Refining Services Pty Ltd [2023] NSWSC 243

- Re Tetbury Pty Ltd [2017] NSWSC 37

- Re TJM Holdings Group Pty Ltd [2024] NSWSC 1376

- Re Savemore Wholesale Pty Ltd [2021] NSWSC 307

- Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256

- Re Wollongong Coal Ltd (2015) 110 ACSR 134; [2015] NSWSC 1680

- Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; [1997] FCA 681

- TeknoAutosports Pty Ltd v Jenkins [2014] FCA 774

- Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253

Category:

Principal judgment

Parties:

Growthbuilt Pty Ltd (Plaintiff)
Square Civil Pty Ltd trading as Chalouhi (Defendant)

Representation:

Counsel:
T Boyle (Plaintiff)
J Pokoney (Defendant)

Solicitors:
Salim Rutherford Lawyers (Plaintiff)
Fortis Law (Defendant)

File Number(s):

2024/228115

Judgment

Nature of the application

1. By Originating Process filed on 20 June 2024, the Plaintiff, Growthbuilt Pty Ltd (“Growthbuilt”) seeks to set aside a creditor’s statutory demand dated 29 May 2024 (“Demand”) served by Square Civil Pty Ltd trading as Chalouhi (“Chalouhi”). The Demand relevantly claims payment of a debt of $501,453.55, made up of several specific claims arising from civil works and groundworks undertaken by Chalouhi as a subcontractor to Growthbuilt for six projects at Mount Druitt, St Marys, Ashfield, ‘Lumia’ at Norwest, Baulkham Hills and Frenchs Forest. Growthbuilt contends that a genuine dispute exists as to the debts to which the Demand relates for the purposes of s 459H(1)(a) of the Corporations Act 2001 (Cth) (“Act”); it also relies on an offsetting claim for the purpose of s 459H(1)(b) of the Act; and initially contended that there were defects in the Demand and now that there is some other reason to set aside the Demand for the purposes of s 459J(1)(a)-(b) of the Act. As will emerge below, the evidence does not support this miscellany of attacks on the Demand.

Affidavit evidence

2. Growthbuilt reads the affidavit dated 20 June 2024 of its legal counsel, Mr Donley, in support of the application to set aside the Demand. First, Mr Donley refers to a suggested failure to specify the debt and to errors in respect of the debts that were claimed in the Demand, and he contends that the Demand does not describe the debt or debts to which it relates. He also advances a criticism of the affidavit in support of the Demand.

3. Mr Donley also contends that Growthbuilt has offsetting claims for the purposes of s 459H(1)(b) of the Act, and refers, in general terms, to claims by Growthbuilt for breaches of contract by Chalouhi, including defective work. He refers to Chalouhi’s engagement to carry out civil works and groundworks at several sites. He contends that the work carried out by Chalouhi at several sites was defective and says that:

“Growthbuilt contends that its damages claims in respect of those defects exceed the debt/s referred to in the [Demand].”

4. Mr Donley states that relevant projects other than the Norwest project have been completed and Growthbuilt owes statutory warranties and/or duties on those projects and remains liable for defective works which appear on those projects until the statutory periods have expired. The obvious difficulty with that proposition is that every contractor remains liable for defective works until statutory liability periods have expired; it does not follow that every contractor can set aside a creditor’s statutory demand for an otherwise undisputed debt issued by a subcontractor, on the contingency that a liability which does not now exist might in future arise in that respect. Mr Donley does not there identify any facts supporting a quantification of the suggested claims.

5. Mr Donley also refers to an inspection by Mr Zraika, a customer care manager with Growthbuilt, at the Mt Druitt project on 12 June 2024, an inspection by Mr Logiudice at the Frenchs Forest, Baulkham Hills and Norwest projects on 11 and 13 June 2024 and notes that Mr Zraika and Mr Logiudice prepared schedules of defects. Mr Zraika and Mr Logiudice had also “estimated” costs of rectification, although Growthbuilt did not seek to establish that rectification was in fact required, and Growthbuilt contends that it has offsetting claims in respect of defects in the amount of at least $1,199,100 in respect of the multiple projects. Those inspections were made after the Demand was served and shortly before these proceedings were commenced; those schedules were plainly prepared in contemplation of these proceedings and were not business records; Mr Zraika and Mr Logiudice did not give evidence in this application; but little ultimately turns on these matters.

6. Mr Donley also refers to a suggested genuine dispute as to the Demand, where Chalouhi has claimed amounts owed pursuant to payment claims under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“SOPA”) and Growthbuilt has issued a payment schedule in response to the payment claim indicating that several amounts are not disputed. Mr Donley’s first affidavit otherwise asserted the existence of disputes in respect of several claims, largely without indicating any factual basis for those disputes. The majority of those matters are not now pressed. By a second affidavit dated 30 August 2024, Mr Donley expands on the evidence led in his first affidavit, addressing the questions of a suggested failure to specify the debts and a suggested genuine dispute as to the amounts claimed. Growthbuilt also reads an affidavit dated 14 October 2024 of Mr Donley in reply.

7. Growthbuilt tenders several expert reports of Mr Lever, a structural engineer, relating to the defective works at the several projects. A first expert report of Mr Lever dated 15 August 2024 dealt with defects including water ingress at the Norwest project; a second expert report of Mr Lever also dated 15 August 2024 dealt with defects also including water ingress at the Frenchs Forest project; a third expert report dated 15 August 2024 of Mr Lever dealt with defects, again including water ingress, at the Baulkham Hills project; and a fourth an expert report dated 15 August 2024 of Mr Lever dealt with defects, again including water ingress, at the Mt Druitt development. Growthbuilt also tenders further reports of Mr Lever responding to expert reports on which Chalouhi relied. Growthbuilt also tenders reports of Mr Madden, a quantity surveyor, expressing his views on the likely costs of the rectification work (if it were undertaken) in respect of the Norwest, Frenchs Forest, Mt Druitt and Baulkham Hills projects, which would exceed the amount claimed in the Demand.

8. Growthbuilt also reads on an affidavit dated 30 August 2024 of Mr Perdis, a pre-construction manager at Growthbuilt, which refers to his review of several reports of Messrs Lever and Madden and contends, without supporting reasoning, that the rectification methodologies identified by Messrs Lever and Madden are appropriate to remediate defects and the costs estimated by them are reasonable estimates of the costs of rectifying those defects.

9. Chalouhi reads the affidavit dated 30 September 2024 of Mr Rajaratnam which identifies the amounts claimed by Chalouhi in respect of the several projects, requested for payment previously made by Chalouhi and the issue of the Demand. Chalouhi also tenders expert evidence of Dr Ali Amin, a structural engineer, in response to Growthbuilt’s expert evidence, which appears to accept that at least some defects exist although not necessarily that Chalouhi was responsible for those defects.

Whether there is a genuine dispute as to the debts claimed in the Demand

10. First, Growthbuilt seeks to set aside the Demand on the basis of a genuine dispute under s 459H(1)(a) of the Act, although the scope of that genuine dispute was narrowed at the hearing. The Court has power to set aside a creditor's statutory demand under that section where there is a genuine dispute between the company and the issuer of the demand about the existence or amount of the debt to which the demand relates. In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 464; [1997] FCA 681, the Full Court of the Federal Court observed that a genuine dispute must be bona fide and truly exist in fact, and the grounds for the dispute must be real and not spurious, hypothetical, illusory or misconceived.

11. The threshold to establish a genuine dispute is not high, and it is necessary to bear in mind the observations of Barrett J (as his Honour then was) in Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 (at [18]) that:

“Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.”

12. I also have regard to the decision of the Court of Appeal in Britten–Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601; [2013] NSWCA 344 (“Britten-Norman”) where, in summarising the case law applicable to offsetting claims, the Court of Appeal undertook a comprehensive review of the cases referable to establishing whether a genuine dispute was established. The Court emphasised (at [36]) that the evidence necessary for that purpose “need not conclusively prove or otherwise be incontrovertible or substantially non-contestable”, and also observed (at [46]) that:

“In determining whether there is evidence of a genuine dispute as to the debt, or that there is an offsetting claim, except in extreme cases, the Court is not concerned to engage in an inquiry as to the credit of the deponent of the affidavit filed in support of the application.”

The Court also emphasised (at [47]) that the Court's role was, in such an application:

“… to determine whether there was plausible evidence to establish the existence of a genuine dispute, not whether the evidence was disputed or even likely to be accepted on a final hearing of any such claim.”

13. In Ligon 158 Pty Ltd v Huber (2016) 117 ACSR 495; [2016] NSWCA 330 at [8], Barrett AJA in turn approved my observations in Re Wollongong Coal Ltd (2015) 110 ACSR 134; [2015] NSWSC 1680 at [9]-[22], that summarised the principles applicable to a genuine dispute as follows:

“(1)    A dispute is “genuine” if it is not “plainly vexatious or frivolous” or “may have some substance” or “involves a plausible contention requiring investigation”. A genuine dispute requires that it be bona fide and, to that effect, be premised on sufficiently particularised grounds that are “real and not spurious, hypothetical, illusory or misconceived” and which demonstrate the dispute’s “objective existence” and “prima facie plausibility”.

(2)    The test is governed by principles analogous to those which underpin an application for an interlocutory injunction or summary judgment. The court must, however, guard against setting the threshold too low for that is liable to defeat the legislative purpose of the section.

(3)    The task faced by a company challenging a statutory demand on the genuine dispute ground is by no means at all a difficult or demanding one. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow and the demand will be set aside. A finding to the contrary could only be arrived at if the contentions advanced are so devoid of substance that no further investigation is warranted.

(4)    The function of the court is merely to determine the existence of a genuine dispute. While this neither requires nor invites it to weigh or assess the merits of the dispute, the court will not exceed its legitimate function by having regard to evidence which bears upon whether the asserted dispute is genuine.”

14. A similar approach was adopted by the Court of Appeal in Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212; [2017] NSWCA 300 (“Creata”) and again by the Court of Appeal in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60. In dealing with these principles, I have also drawn on my summary of these principles in Re PSR Refining Services Pty Ltd [2023] NSWSC 243.

15. Mr Pokoney, who appears for Chalouhi, rightly points out that, where a debt claimed within a statutory demand arises from an adjudication under the SOPA, it is not open for a company to seek to set aside the demand by alleging a genuine dispute as to the existence of the debt: Re Douglas Aerospace Pty Ltd [2015] NSWSC 167 (“Douglas Aerospace”) at [91]; Re Powerpark Systems [2018] NSWSC 793 (“Powerpark”) at [13]. He also points to a possibly unresolved question as to debts arising, not from an adjudication or judgment under SOPA, but from a failure of a company to serve a payment schedule or service of a payment schedule approving an amount: Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284 at [6]-[12]; doubted in Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 at [57]; Douglas Aerospace at [91]; Powerpark at [13]). As events have developed, it is not necessary to rely on these principles or determine that question to determine these proceedings.

16. Growthbuilt now only presses a claim for a genuine dispute in relation to part of the ninth debt claimed in the Demand, in the amount of $136,108.84. Growthbuilt contends that Chalouhi claimed the release of a retention, but had not satisfied the contractual obligations to be entitled to the release of that retention, because a deed of release in the requisite form had not been provided as a requirement for “Completion” of the subcontract works, and that the deed of release on which Chalouhi relies reflects a separate commercial agreement reached between the parties.

17. Mr Donley’s evidence in his first affidavit (Donley 20.6.24 [42]-[43]) is that Growthbuilt issued a payment schedule which indicated that Chalouhi was making a claim for payment to which it was not entitled, but he did not there refer to any issue as to the absence of a deed of release. By his second affidavit (Donley 30.8.24 ([24]-[30]), Mr Donley identified the amount of $127,734.58 (exclusive of GST) as relating to the retention release and notes that Growthbuilt had not allowed that amount in its payment schedule. Mr Donley there provided a fuller explanation of the dispute, namely that:

“In order to be entitled to claim its retention release under clause 39.2 of the subcontract, [Chalouhi] was required to achieve “Completion” under the Subcontract. Specifically, pursuant to Clause 37.7 of the Subcontract, as a condition precedent to the achievement of “Completion” the Subcontractor must deliver to Growthbuilt a duly executed and properly completed Deed of Release in the form of Annexure I.”

18. Mr Rajaratnam in turn contended (Rajaratnam 30.9.24 [44]) that the relevant deed of release (“Chalouhi Deed”) (Ex J1, CB 2326) was executed by Chalouhi and provided to Growthbuilt and that the full retention was and is due for release to Chalouhi and exhibited that deed of release to his affidavit. In reply (Donley 14.10.24 [39]-[48]), Mr Donley again pointed to the requirement for delivery of a duly executed deed of release in the form of Annexure I to the Subcontract pursuant to cl 37.7 of the Subcontract, and contended that the Chalouhi Deed was a separate agreement signed by the parties relating to contract works and liquidated damages rather than retentions.

19. I also have regard to the terms of the Subcontract Deed for the Norwest project (Ex J1, tab 35) which relevantly provides, in cl 37.7 that:

“Unless otherwise approved by Growthbuilt, [p]rior to and as a condition precedent to the achievement of Completion the Subcontractor must deliver to Growthbuilt a duly executed and properly completed Deed of Release in the form of Annexure I.”

I also have regard to the terms of the deed of release in that Annexure (Ex J1, CB 2214).

20. Mr Pokoney fairly accepts that the Chalouhi Deed was not in the form specified in Annexure I to the Subcontract. The Chalouhi Deed referred to disputes which had arisen between the parties (defined as “Disputes”) and provided for a full and final settlement of the Disputes. Clause 3 provided for an adjusted subcontract sum and noted an additional amount payable by Growthbuilt to Chalouhi, excluding the retention, and also provided for Growthbuilt to pay the balance of the subcontract sum, including the retention, in accordance with the terms of the Subcontract. Mr Pokoney fairly accepts that, unless the Court can conclude on the face of the Chalouhi Deed that it complies with the requirement of cl 37.7 of the Subcontract, then a genuine dispute is established as to this amount. I cannot reach that conclusion where the Chalouhi Deed did not comply with the form contained in Annexure I and reserved the question of the retention to be dealt with in accordance with the Subcontract. I must also conclude that Growthbuilt has a genuinely arguable case that it had not “otherwise approved” the entry into the Chalouhi Deed in a different form to Annexure I, for the purposes of cl 37.7 of the Subcontract, where there is no evidence that Chalouhi had raised that question with Growthbuilt or sought or obtained such approval from Growthbuilt. For these reasons, a genuine dispute is established on that basis, in respect of the amount of $136,108.04.

21. Subject to Growthbuilt’s contention that this matter gives rise to some other reason to set aside the Demand, which I address below, this matter is properly addressed by determining the substantiated amount of the debt claimed in the Demand in accordance with s 459H of the Act. Where the Court is satisfied that there is a genuine dispute as to the existence or amount of a debt to which the Demand relates (as I am in respect of the part of the debt claimed in the Demand that relates to the retention amount), the Court is required to calculate the "substantiated amount" of the Demand by deducting any disputed amounts from the admitted amount of the debt, being that part of the debt as to which no genuine dispute exists: s 459H(2). The Court must set aside a creditor’s statutory demand if the substantiated amount is less than the statutory minimum: s 459H(3). If the substantiated amount is at least as great as the statutory minimum, the Court can make an order varying the demand as specified in the order and declaring the demand to have had effect, as so varied, as from when the demand was served on the company: s 459H(4). In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605; 11 ACLC 919, Thomas J observed that the intention of these provisions is 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.”

22. If the substantiated amount exceeds the statutory minimum, the Court would generally vary the demand pursuant to s 459H(4), unless the demand was so grossly inflated, or comprised matters which were so obviously in dispute, that the service of the demand amounted to an abuse of the regime under Pt 5.4 of the Act and should be set aside for some other reason under s 459J of the Act: First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [12], [43]; Tekno Autosports Pty Ltd v Jenkins [2014] FCA 774 at [24]. I now turn to that question.

Whether the Demand should be set aside under s 459J of the Act

23. Growthbuilt initially contended, but did not press, a claim that there were several defects in the Demand which warranted an order that it be set aside under s 459J(1)(a) of the Act. Growthbuilt pressed a claim that the Demand should be set aside for some other reason under s 459J(1)(b) of the Act, if it were successful (as it has been) in establishing a genuine dispute in respect of the retention claim to which I referred above. That section permits the Court to set aside a creditor’s statutory demand where there is some other reason for it to do so. The power to set aside a creditor’s statutory demand under that section exists to maintain the integrity of the process provided under Pt 5.4 of the Act and is to be used to counter an attempt at subversion of the statutory scheme, but is not exercised by reference to subjective notions of fairness: see the authorities to which I referred in Re Gemi 169 Pty Ltd [2024] NSWSC 615 (“Gemi 169”) at [27].

24. Mr Boyle, who appears for Growthbuilt, referred to the decision in Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 (“UGL”), to which I drew the parties' attention, where I observed that a statutory demand for a substantially overstated amount would potentially be inconsistent with the proper use of the statutory demand regime, and that is a matter which can also support setting aside the Demand. I addressed the same issue in Re Tetbury Pty Ltd [2017] NSWSC 37 at [43], where I addressed the scope of the Court's power to vary a statutory demand under s 459H(4) of the Act and observed that the Court would generally vary a statutory demand:

“unless the demand was so grossly inflated, or comprised matters that were so obviously in dispute, that the service of the demand amounted to an abuse of the regime under Pt 5.4 of the Corporations Act, and should be set aside for some other reason under s 459J of the Act.”

25. In Re Granite Power Ltd (admins apptd) [2019] NSWSC 1491 at [39], Rees J expressed her agreement with the proposition that “[a] substantial overstatement, where much of the amount is later conceded to be generally disputed” may be an “improper use of the statutory scheme” such that a statutory demand should be set aside under s 459J(1)(b) of the Act. In Re Forte Sydney Construction Pty Ltd [2024] NSWSC 495 at [24], I noted, albeit in a different context, the policy that supports that approach, including that the service of a statutory demand claiming a substantial amount that is not properly due will place the recipient of the demand at risk that it is presumed to be insolvent unless it either pays the inflated amount claimed or incurs the costs of an application to set aside the demand. I also addressed these issues in Gemi 169 from which I have drawn this summary.

26. Here, a genuine dispute has been established as to the retention claim in the amount of $136,108.84 that I addressed above. This seems to me to be a situation where the Demand did not involve an improper use of the statutory scheme and the Court would properly determine the substantiated claim in respect of the Demand, as contemplated by s 459H of the Act, rather than setting aside the Demand for some other reason. The Court would then either vary or set aside the Demand, depending on the position as to the offsetting claim put by Growthbuilt, to which I now turn.

Whether an offsetting claim is established

27. An offsetting claim, for the purposes of s 459H(1)(b) of the Act, is the amount of a claim or claims that a person has against the person who served a creditor’s statutory demand by way of, inter alia, counterclaim or cross demand, whether or not the amount arises out of the same transaction or transactions as the debt to which the statutory demand relates. Mr Pokoney rightly acknowledges that, where a debt claimed in a statutory demand arises from an adjudication, it remains open to the recipient of the demand to assert an offsetting claim as Growthbuilt here seeks to do: Douglas Aerospace at [93]; Powerpark at [13].

28. In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70 at [71], Dodds Streeton JA summarised what was necessary to establish an offsetting claim, namely that the party that seeks to establish that claim:

“...is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. The dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile...

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.”

29. In Britten-Norman at [20], the Court of Appeal observed that, “to establish an offsetting claim, a party must show that there is a ‘serious question to be tried’ or ‘an issue deserving of a hearing’ as to whether the company has such a claim against the creditor”. The relevant principles were also reviewed in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] 136 ACSR 583, [2019] NSWSC 60 at [62]ff, where Bell J (as the Chief Justice then was), referring to the observations of Debelle J in Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269 and to the judgment of Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 and to the observations of White J in Re Citadel Financial Corporation Pty Ltd [2019] NSWSC 675 at [30], observed that:

“In judging the sufficiency of the evidence to give rise to an offsetting claim, the question is not whether the evidence is sufficient to establish the offsetting claim or its amount, but whether it is sufficient to establish that the offsetting claim is genuine, and its genuine level...

It is sufficient if there be a plausible contention requiring investigation... The offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion and not be merely fanciful or futile...”

30. Mr Boyle also refers to Williams J’s summary of these principles in Re Libdy Developments Pty Ltd [2023] NSWSC 647 at [10]–[11] and I have here drawn on my summary of the applicable principles in Re TJM. Holdings Group Pty Ltd [2024] NSWSC 1376 at [19]ff.

31. In order to establish an offsetting claim, it is also necessary for Growthbuilt to establish a seriously arguable case not only as to liability, but also as to the quantum of an offsetting claim: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743. In Douglas Aerospace at [40], Brereton J observed that:

“While the full amount of an offsetting claim is to be deducted from the admitted total to ascertain the substantiated amount [Classic Ceramic Importers Pty Ltd v Ceramic Antiga SA (1994) 13 ACSR 263], that applies only to the extent that the offsetting claim is genuine. Thus a company relying on an offsetting claim must adduce evidence that enables the court to ascertain the amount of the genuine claim to the extent necessary to apply the formula in s 459H. If the offsetting claim must plainly exceed the amount of the demand, it is unnecessary that it be precisely quantified. But where that is not clear, the court must be able to quantify an offsetting claim, and if the evidence does not permit it to do so, will attribute to it only a nominal value [Jessen Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 1) (1994) 13 ACSR 455].”

32. I took the same approach in Re Savemore Wholesale Pty Ltd [2021] NSWSC 307 at [36].

33. Growthbuilt here put its offsetting claim on the basis that it had a genuinely arguable claim that there were defects in work done by Chalouhi and it was entitled to recover the costs of repairing those defects, or was at least entitled to recover that amount as discounted to reflect the prospect that it might or might not be required to repair those defects. I referred to the expert reports tendered by both parties above, although it is ultimately not necessary to address those reports in detail where Mr Pokoney was content to proceed on the assumption that they supported a genuinely arguable case that there were defects in the work done by Chalouhi and that the costs that would be incurred to repair those defects, if they were in fact repaired, would exceed the amount claimed in the Demand.

34. Mr Boyle submitted that:

“Growthbuilt’s claims of offsetting claims are premised on the existence of defective works. That there are at least some defective works is common ground when the expert evidence before the Court is considered, even in a cursory fashion. It cannot be said that the grounds for these claims are “illusory” or “spurious”, as the authorities would require before Growthbuilt’s application could be dismissed.

Furthermore, the various subcontracts entitle Growthbuilt to set off its claims against amounts that might otherwise be payable to Chalouhi: see, e.g., clause 2.6 of the Mount Druitt Subcontract... That right of set off is in respect of “any amount which in the opinion of Growthbuilt is due or owing”, including “(3) estimated cost of rectifying any defective works”.

Insofar as it may be suggested that Growthbuilt has not required Chalouhi to rectify the defects to date (in accordance with, for example, clause 8A.4 of the Mount Druitt Subcontract…) that is of no real consequence to the present application … It remains open to Growthbuilt to rectify works itself and recover from Chalouhi, as reflected in the discretionary nature of clause 8A.4 (“may Direct”).

Furthermore, the Court would not conclude by reason of the present lack of rectification that it will not be done in the future. For example, clause 6 of the Mount Druitt Subcontract … provides that Growthbuilt can direct Chalouhi to rectify within a period of 24 calendar months after the Date of Completion, and given clause 8A.4 it remains possible that when directed to perform rectification works in that period if Chalouhi fails to comply then Growthbuilt would perform itself (including through another contractor) and be entitled to recover those costs from Chalouhi as a debt (i.e. there remains a claim against Chalouhi).

In the alternative, it is plain on the material that there has been a breach by Chalouhi of the subcontracts in terms of the defects, for which Growthbuilt could sue Chalouhi and seek to recover an amount reflecting the loss which Growthbuilt faces in the event that the principals under the head contracts call on Growthbuilt to rectify the defective work during the warranty period. Whilst that amount may need to reflect some discounting for the possibility that Growthbuilt is never called upon to rectify, it still follows that the claims are genuine ones for the purposes of the Act and s 459G.”

35. Mr Pokoney responded that Growthbuilt’s approach does not give rise to an arguable offsetting claim as a matter of law. He submits that:

“Where (as here) a head contractor advances a claim for damages against its subcontractor arising from construction defects, it is necessary for that contractor to establish that its principal (usually the property owner) has called upon it to rectify those defects. Until that occurs, the head contractor has not suffered loss beyond exposure to a risk (which may never eventuate) that the principal calls upon it to rectify.”

36. Mr Pokoney here draws attention to Alucraft Pty Ltd (In Liq) v Grocon Ltd (No 2) [1996] VR 386 (“Alucraft”), where a head contractor sought damages against its subcontractor by reason of defective steelwork. Smith J held (at 396) that the head contractor was not in the same position as a property owner and could not simply claim the cost of rectifying the identified defects and that its loss was instead the “potential liability to the proprietor for breach of the head contract”. His Honour there found (at 400) that that risk was “very remote”, and that $5,000 was “reasonable compensation having regard to that risk”. That decision was approved by Giles JA (with whom McColl and Campbell JJA agreed) in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 at [46] (“Westpoint Management”), where his Honour observed that:

“…In [Alucraft], the builder claimed from a subcontractor the cost of rectification to bring steelwork to specification. The builder had denied any obligation to the proprietor to rectify the work, the proprietor had apparently accepted the work and had issued a final certificate, and the builder had been paid for the work. The builder did not intend to carry out the rectification work. His Honour considered, with respect correctly, that the builder was not in the same position as an owner, because the benefit it expected to derive from the subcontract was fulfilment of the head contract and payment under the head contract, not a building in conformity with the specification; he distinguished Bellgrove v Eldridge for that reason. On the assumption that, in accordance with Bellgrove v Eldridge, the rectification measure of damages was prima facie to be applied, his Honour found that it would not be reasonable to assess damages “on the basis of the work being rectified”, and assessed damages on the basis of the builder’s loss being the money it paid for the defective work or alternatively the risk of being required by the proprietor to rectify the work or pay for its rectification. Apartments did not contend for a loss of either kind.”

37. The decision in Alucraft was also applied by Adamson J (as her Honour then was) in Cubic Metre Pty Ltd v C&E Critharis Constructions Pty Ltd [2020] NSWSC 479 at [96]-[101]; and the Court of Appeal refused leave to appeal from that decision and noted (at [11]) that Alucraft had been followed in Westpoint Management and in C&E Critharis Constructions Pty Ltd v Cubic Metre Pty Ltd [2020] NSWCA 348 (“Cubic Metre”). Mr Pokoney submits that Growthbuilt’s claim for an offsetting claim, quantified as the costs of repairing the defects identified in the expert reports, is not seriously arguable for the same reasons as described in Alucraft, Westpoint Management and Cubic Metre. While I accept that proposition, that does not exclude a claim by Growthbuilt reflecting the risk that it will be required to remedy the identified defects and incur the costs of doing so.

38. I recognise that, despite the volume of the evidence led by the parties, Growthbuilt has not sought to show, and has not shown, that it would or might voluntarily repair the relevant defects or be required by property owners to repair them. It would, of course, have been open to Growthbuilt to volunteer to remedy these defects in respect of each of the properties, irrespective of whether their owners required it to do so, but it leads no evidence that it has taken that course. It would also have been open to Growthbuilt to advise the owners of the properties of the defects and seek their indication as to whether they required those defects to be repaired, which may have depended on the owners’ assessment of the significance of the defects, having regard to the use to which the relevant properties will be put, which may differ between different owners and different properties. Again, Growthbuilt leads no evidence that it has done so or that the owners, having been informed of those defects, have requested that they be remedied. Third, consistent with the case law to which I referred above, Growthbuilt could have led objective evidence to provide a basis for a preliminary assessment of the risk that the owners of the properties would ultimately bring claims against it in respect of the identified defects, and of the costs to which it would be exposed in consequence, which would also likely need to address matters such as the significance of the defects for the owners’ intended use of the properties. Growthbuilt also does not lead such evidence.

39. I recognise the strength of the legal argument put by Mr Pokoney and the real defects in the evidence led by Growthbuilt as to whether it will, or will be required to, remedy these defects. Having recognised these matters, it seems to me that it would be wholly unrealistic for me not to recognise that, where at least the Norwest project is a large apartment block and the expert evidence indicates that the water ingress has the potential adversely to affect the life of the concrete in the basement areas, the owners of the properties will likely require that these defects be remedied rather than simply ignoring them. On that basis, it seems to me that Growthbuilt has a seriously arguable case that there is a substantial prospect, or a likelihood, that it will be required to remedy these defects. There is also a seriously arguable claim that the loss reflecting that risk, after discounting for the fact that is not a certainty, would exceed the balance of the debt claimed by the Demand, after it is varied to exclude the retention claim.

40. For this reason, the Demand should be set aside. I remind myself that that does not prevent Chalouhi from seeking to recover the amount claimed in substantive proceedings in which Growthbuilt can bring a cross-claim for the remedial costs noted above, rather than by the use of the summary procedure of a creditor’s statutory demand.

Orders and costs

41. I therefore order that the creditor’s statutory demand dated 29 May 2024 issued by the Defendant, Square Civil Pty Ltd trading as Chalouhi, to Growthbuilt be set aside with costs.

**********

Decision last updated: 12 November 2024