Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd

[2002] NSWSC 45

CITATION:	Process Machinery v ACN 057 260 590 [2002] NSWSC 45
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4540/01
HEARING DATE(S):	04/02/02, 05/02/02
JUDGMENT DATE:	13 February 2002
PARTIES :	Process Machinery Australia Pty Limited t/as DCL Engineering - Plaintiff ACN 057 260 590 Pty Limited - Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr D. Ash - Plaintiff Mr M.J. Cohen - Defendant
SOLICITORS:	Henry Davis York - Plaintiff Watson Mangioni - Defendant
CATCHWORDS:	CORPORATIONS - winding up - application to set aside statutory demand - whether affidavit is supporting affidavit - applicant confined to grounds of opposition in supporting affidavit - cogent arguments arising from parties' contract demonstrate genuine dispute and offsetting claim
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd Badgin Nominees Pty Ltd v Oneida Ltd [1998] VSC 188 Re Bank of Credit & Commerce International SA (No 8) [1998] AC 214 Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1794 Dromore Fresh Produce Pty Ltd v W Paton (Fertilizers) Pty Ltd (1997) 23 ACSR 230 Eltin Open Pit Operations Pty Ltd v Warekim Pty Ltd [2001] SASC 377 Energy Equity Corp Ltd v Sinedie Pty Ltd [2001] WASCA 419 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 Graywinter Properties Pty Ltd v Gas & Fuel Superannuation Fund (1996) 70 FCR 452 Huddert Parker Ltd v The Ship Mill Hill (1950) 81 CLR 502 John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250 Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 1088 Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In liq) [2000] VSC 397 Raffles Corporation Pty Ltd v Cech [2001] QSC 129 SMEC International Pty Ltd v CEMS Engineering Inc (2001) 38 ACSR 595
DECISION:	Statutory demand set aside

22

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

WEDNESDAY, 13 FEBRUARY 2002

4540/2001 – PROCESS MACHINERY AUSTRALIA PTY LIMITED – T/AS DCL ENGINEERING v ACN 057 260 590 PTY LIMITED

Background

1 The plaintiff, Process Machinery Australia Pty Limited, carries on business as “DCL Engineering”. It is convenient to refer to it as “DCL”. The defendant, ACN 057 260 590 Pty Limited, was at the times relevant to the events about to be described, named Tolco Pty Limited. I shall refer to it as “Tolco”.

2 In November 1998, DCL and Tolco entered into an agreement under which Tolco was to perform certain work for DCL which, in turn, was already contracted to perform work for a company called Alstom Australia Limited (“Alstom”). All relevant work related to and was carried out as part of the construction of the Sydney Eastern Distributor project involving major road and tunnel works to improve the route from the City of Sydney to the Sydney Airport and Botany Bay. Alstom was itself a sub-contractor which had undertaken to perform certain works upon and in relation to that project for the head contractor, Leighton Contractors Pty Ltd.

3 A statutory demand under s.459E of the Corporations Act 2001 (Cth) dated 20 August 2001 was on 21 August 2001 served on DCL by Tolco. The demand related to an alleged debt of $154,949.93. The components of this debt, being sixteen in number, were set out in the statutory demand, with a separate sum attributed to each component. All but three of the components are described in such a way as to make it clear that each is the subject of an invoice identified by number and date – for example, “Invoice No 25680 dated 29 February 2000”. Each of the remaining three is identified by means of the same verbal formula but with the word “retention” appearing in brackets at the end. Some of these entries will be described in greater detail in due course.

4 DCL applies under s.459G of the Corporations Act for an order setting aside this statutory demand. It is not disputed that the application was initiated within the period of 21 days referred to in s.459G(2) but there is a dispute as to whether the steps actually taken within that time were, in light of s.459G(3), sufficient to support a conclusion that s.459G(2) was satisfied. Tolco says that the requirement under s.459G(3)(a) that a supporting affidavit be served within the 21 day period has not been met because the affidavit which DCL puts forward for that purpose, although filed and served in time, cannot properly be regarded as “an affidavit supporting the application”. Because of the central part the affidavit in question plays in this and other aspects of the proceedings, it will be convenient, at this point, to refer to it in some detail.

The affidavit

5 The affidavit relied upon by DCL for the purposes of s.459G(3)(b) is an affidavit sworn by Gregory Leon Green, a director of DCL, on 10 September 2001. The affidavit begins by reciting in paragraphs 3 to 16 what it calls the “background to dispute”, referring to the contract between Alstom and DCL and the separate but related contract between DCL and Tolco. Both contracts are exhibited to the affidavit. Mr Green records that difficulties arose on 3 February 2000 when DCL was informed by Alstom that acoustic ventilation material was being discharged from the south ventilation building stack on the Eastern Distributor. Representatives of Alstom, DCL (including Mr Green himself) and Tolco later met on site to inspect damage caused by the discharge and to consider removal of the damaged area. At the end of the meeting, it was Mr Green’s clear impression, he deposes, that Alstom was alleging a defect in DCL’s work. DCL, for its part, regarded the defective aspect as part of the work contracted to Tolco.

6 Also exhibited to Mr Green’s affidavit is a letter of 8 February 2000 from DCL to Tolco stating that certain retaining angles within the scope of Tolco’s work had been installed upside down and were in need of rectification. Another letter exhibited to the affidavit is a letter of the same date from Tolco to DCL saying that the specifications and drawings to which Tolco was required to work were not sufficiently detailed to make it clear how the retaining angles were to be installed, that the angles themselves, as supplied by DCL, would only fit one way and were fitted by Tolco in that way; also that if DCL wished to have Tolco attend to reinstallation, it should submit an order.

7 Mr Green’s affidavit next deals in paragraphs 17 to 24 with the subject of retention moneys as between Alstom and DCL. It alleges an entitlement on the part of DCL to retain $60,920 from Tolco against release by Alstom of a bank guarantee in that sum provided by DCL to Alstom. The entitlement is framed in this way:

“The sum of $60,920.00 is retained by DCL from Tolco as a set-off, cost, loss, expense and/or damage arising from the failure of Tolco to complete their works and as a result of a claim arising out of or in connection with the taking over of Tolco’s works.”

8 Mr Green’s affidavit then deals in paragraphs 25 and 26 with retention moneys as between DCL and Tolco, asserting that sums totalling $13,447.45 are not due and payable to Tolco at the date of the statutory demand “because those sums are being validly retained as retention moneys pursuant to the sub-contract”.

9 The affidavit then deals in paragraphs 27 to 29 with “back charges” and “set-offs” in respect of the cost of works undertaken by Alstom apparently to rectify defects arising from work done by Tolco for DCL and charged by Alstom to DCL which, in turn, claims a right of reimbursement as against Tolco. These sums total $18,722.00.

10 Paragraphs 30 to 32 of Mr Green’s affidavit are concerned with work done by Tolco itself by way of rectification for which Tolco raised a charge of $4,864.45. DCL denies liability for that sum.

11 Paragraphs 33 to 36 are based on an asserted contractual entitlement “to withhold any or all moneys which as at the date of 29 November 1999 are then, or which may become, due and payable to the sub-contract [ie Tolco] and may set-off and deduct therefrom all costs, losses, expenses and damages which DCL incurs in completing the works or as a result of claims which arise out of or in connection with such termination”. This part of the affidavit particularises costs, losses and expenses arising out of completion of the works or claims that have been made, by way of legal fees, engineers’ fees and other costs of managing the issues in dispute. These total $56,502.95.

12 Finally, the affidavit has exhibited to it a chain of correspondence dealing with various aspects of DCL’s objections forming part of its dispute with Tolco, including letters written by the respective solicitors in which various points about the interpretation and operation of the sub-contract between DCL and Tolco are asserted and countered.

The s.459G(3)(a) requirements

13 Tolco contends that Mr Green’s affidavit does not satisfy the requirements of s.459G(3)(a) because it does not identify sufficiently the basis for and nature of DCL’s assertions that the statutory demand should be set aside. It may be noted, in this connection, that the available grounds are limited by the requirement that Tolco as plaintiff show one or more of four bases of challenge to the statutory demand, namely, that there is a genuine dispute between DCL and Tolco about the existence or amount of a debt to which the demand relates (s.459H(1)(a)), that DCL has an offsetting claim (s.459H(1)(b)), that, because of a defect in the demand, substantial injustice will be caused unless the demand is set aside (s.459J(1)(a)) and that there is some “other reason” why the demand should be set aside (s.459J(1)(b)). Unless the court makes an order on one of the grounds thus provided by ss.459H and 459J, it is obliged to dismiss the application to set aside the statutory demand: s.459L.

14 It is appropriate, at this point, to refer to aspects of the decision of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 in which certain of the requirements concerning the affidavit called for by s.459G(3)(a) were discussed. Having regard to the decision of the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, Sundberg J confirmed that the jurisdiction to make an order setting aside a statutory demand is not attracted unless an affidavit filed and served within the requisite period of 21 days is in truth “an affidavit supporting the application”. The affidavit must satisfy what his Honour referred to as “the minimum requirements for an affidavit to be a ‘supporting affidavit’”. Dealing specifically with the case where the ground on which it is sought to set aside the statutory demand is that provided for in s.459H(1)(a) (that is, a genuine dispute about the existence or amount of a debt to which the demand relates), his Honour said:

“In order to be a ‘supporting affidavit’, an affidavit must say something that promotes the company’s case. An affidavit which merely says ‘I am a director of the company but am too busy at present to make a full affidavit, and I will do so later’ would not support the application. It would in no way advance, further or assist the company’s cause, which is to have the notice set aside. At the other extreme, the affidavit need not detail, in admissible form, all the evidence that supports the contention of a genuine dispute: John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250. That evidence must be available at the hearing of the application to set aside, because that application is for final and not interlocutory relief: 71 Paisley St Footscray Pty Ltd v Vineyards Estate Pty Ltd (19 August 1995, Olney J, unreported).
In a s.459H(1)(a) case, the affidavit must in my view disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute is not enough. Nor is a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of an affidavit, that it may read like a pleading.
An affidavit which exhibits an exchange of correspondence between the parties or between their solicitors from which it appears that a claim is made and rejected for reasons given can qualify as a supporting affidavit. And an affidavit verifying the pleadings in an action may qualify.
I am thus unable to accept the respondent’s submission that the affidavit must contain sufficient material to make out a case under s.459H. In reply, that submission was somewhat retreated from. It was said that the affidavit must, as a minimum, contain a statement of the material facts on which the applicant intends to rely to show a genuine dispute – it might read more like a pleading than a story. That accords with what I consider to be the minimum requirement.”
This approach has been approved and followed in this Court: see, for example, Dromore Fresh Produce Pty Ltd v W Paton (Fertilizers) Pty Ltd (1997) 23 ACSR 230 (Young J), SMEC International Pty Ltd v CEMS Engineering Inc (2001) 38 ACSR 595 (Austin J).

15 The reasoning in Graywinter Properties with respect to disputed debt must mean that, in a case where it is sought to set aside the statutory demand on one of the other bases of objection provided for in the statute (that is, offsetting claim, a defect in the demand productive of substantial injustice requiring the demand to be set aside and “some other reason why the demand should be set aside”), the affidavit must at least disclose facts showing the substance of the allegations relevant to the ground in question. In a genuine dispute case, the affidavit would necessarily disclose facts showing the substance of the allegations relevant to that dispute. In a case in which it was sought to rely upon a defect productive of substantial injustice, the affidavit would disclose facts showing the substance of the allegations relevant to both defect in the demand and the injustice that would flow from the defect if the demand were allowed to stand. In a case asserting “some other reason why the demand should be set aside”, the affidavit would disclose facts showing the substance of the allegations relevant to that other reason.

16 Furthermore, the applicant is confined to the grounds shown by the application and supporting affidavit filed and served within the 21 day period to which s.459G refers. This last point is important. It was recently confirmed by the Full Court of the Supreme Court of Western Australia in Energy Equity Corp Ltd v Sinedie Pty Ltd [2001] WASCA 419 (20 December 2001). Wallwork J (with whom Steytler J and Olsson AUJ agreed) quoted the following passage from the judgment of Perry J in D & S Group of Companies Pty Ltd v O’Connor Investments Pty Ltd (1997) 15 ACLC 1794 (in which the opening words refer to an observation of Gummow J in David Grant):

“It seems to be implicit in that observation and from the terms of 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, could not be taken into account in determining the application. Furthermore, David Grant is authority for the proposition that there is no ability to extend the time limit.”

17 Wallwork J also quoted from the judgment of Mandie J in Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In liq) [2000] VSC 397:

“I think that there is another reason for refusing special leave because it seems to me that the interpretation of the Corporations Law contained in D & S Group of Companies Pty Ltd v O’Connor Investments Pty ltd (1997) 15 ACLC 1794 at 1798 is applicable and should be followed by this Court. If a ground in support of an application to set aside a statutory demand is not identified within the period provided by the Corporations Law then it seems to me that it cannot be relied upon out of time upon appeal.”

18 Wallwork J’s conclusion was then stated:

“In my view it now seems to be accepted that an affidavit filed outside the 21 day period which raises a new ground or grounds to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit which has satisfied the threshold test) cannot be used in an application of this nature. The Corporations Law operates throughout Australia and uniformity of approach is desirable.”

19 This is consistent with the conclusion reached earlier in the same year by Wilson J of the Supreme Court of Queensland in Raffles Corporation Pty Ltd v Cech [2001] QSC 129:

“Under s.459G ‘an affidavit supporting the application’ must be filed within the 21 days. The affidavit must disclose facts showing a genuine dispute, but it need not go into evidence: as Sundberg J held in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 14 ACLC 1,703, the supporting affidavit filed within the 21 days may read like a pleading. It may be supplemented in the sense that a further affidavit containing evidence proving the facts asserted in that affidavit may be filed after the 21 days. Indeed on the hearing of the application only admissible evidence can be relied upon. However, evidence supporting some other grounds not raised in the affidavit filed within the 21 days may not be relied upon. See also Eden Bay Pty Ltd v Bennett (1997) 15 ACLC 1,634. Accordingly, the present applicant may not rely on grounds not set out in the affidavit filed within the 21 days.”

20 This raises a question about the nature and extent of definition or assertion required. In Energy Equity Corp, the company sought to rely on an offsetting claim in the form of a cause of action in negligence. It was not permitted to do so because this “was not specifically referred to in the first affidavit”. D & S Group of Companies was also a case in which a particular offsetting claim was raised for the first time after the expiration of the 21 day period. In Raffles Corporation, the company wished to argue, as part of an asserted genuine dispute, an alleged oral agreement varying the operation of a lease, an alleged termination of that lease and a calculation of interest in a way said not to be consistent with the lease terms. This was in circumstances where the affidavit dealt only with the identity of the lessor and a particular deduction of $2,500 and did not foreshadow in any way the additional objections later advanced.

21 It is thus reasonably clear that the relevant concept of “raising” or “identifying” a particular ground involves some verbal delineation of that ground in the s.459G(3)(a) affidavit. If a debt of $10,000 were claimed as one year’s interest under a contract providing for interest at the rate of 9% per annum on a principal sum of $100,000, it would not, in my opinion, be sufficient for the affidavit to annex the loan agreement and say no more. It would have to refer at least to the connection between the contract and the debt claimed and put in issue the calculation of interest – even if it merely said, “The debt does not accord with the annexed contract”.

22 The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by ss.459H and 459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period.

23 I shall return in due course to DCL’s contention that Mr Green’s affidavit does not satisfy the s.459G(3)(a) requirements and that it is accordingly not “an affidavit supporting the application”, with the result that DCL has not succeeded in activating a s.459G application.

The s.459J claims

24 The foregoing discussion about identification of grounds is a useful prelude to dealing with three of the grounds DCL has asserted in support of its application to set aside the statutory demand. The first is a ground within s.459J(1)(a) and the other two are raised under s.459J(1)(b).

25 DCL’s s.459J(1)(a) claim refers to the three invoices in relation to which the word “retention” is used. One of those invoices is No 25162 dated 16 July 1999 and addressed by Tolco to DCL. The narration is

“Southern Vent Building – Progress Claim No 1 – As per attached schedule – total claim this invoice: $25,800.00.”
A printed box designated “less retention” contains “0.00” and a “total” box contains “$25,800.00”. Appearing below in unidentified handwriting is:

“Retention held $2580-“.

26 The statutory demand claims $154,949.93 “being the amount of the debt described in the Schedule”. The Schedule contains two columns, “Description of the debt” and “Amount of the debt”, under which the references to the 16 invoices appear. The entry in the first column in respect of the invoice to which I have referred is, as already outlined:

“Invoice No 25162 dated 16 July 1999 (retention).”
In the second column there appears “$2,580.00”.

27 In these circumstances, Mr Ash, counsel for DCL, made a submission as follows in his written outline of submissions:

“9. Each invoice is described in the demand with the parenthetic word ‘retention’ … In fact, the sum of the invoices is by their face value ten times what is stated in the demand … The claim for (return of) ‘retention’ appears to be based on handwritten words appearing on each invoice.
10. It should be noted that each invoice on its face gives ‘0.00’ for retention. Indeed, this is consistent with the agreement. Retentions are administered in accordance with the retention terms stated in the annexure to the agreement … But if one goes to the retention terms …, one sees that terms are inconsistent with the demand.
11. The position is
(a) the invoices on their face, either in the amounts or by the fact that they give “0.00” for retention, do not involve the return of the retention moneys;
(b) yet this, by the words appearing in the demand, is what D claims;
(c) were the matter to have gone by pleadings, D as plaintiff would have to describe a cause of action for this amount whose particulars are fundamentally different to what is described in the demand;
(d) a person in the position of P, who is the other party in a complex construction contract, cannot reasonably be expected to put on all relevant evidence in relation to the matter within 21 days and in any event it is not the role of the court to make these sort of assessments in a s.459G application; and
(e) by reason of (c) there is a defect in the demand and by reason of (d) substantial injustice will be caused unless the demand is set aside: s.459J(1)(a); or independently
(f) by reason of the totality of (c) and (d), and having regard to what the court is entitled to expect from an alleged creditor in deciding to issue a demand, there is sufficient other reason why the demand should be set aside: s.459J(1)(b).

28 In paragraph (e) of this submission, DCL appears to assert a “defect” within the meaning of paragraph (b) or perhaps paragraph (c) of the definition of “defect” in s.9, that is, “a misstatement of an amount or total” or “a misdescription of a debt or other matter”. Invoice No 25162, as already described, is an invoice for $25,800, not $2,580, although it does carry the handwritten notation “Retention held $2580-“. DCL seems to be saying that “Invoice No 25162 dated 19 July 1999 (retention)”, followed by “$2,580”, asserts a claim or demand for the invoice sum of $25,800 rather than the $2,580 mentioned in the handwritten notation. I do not think anyone would read the relevant section of the statutory demand in that way. The combination of “(retention)” and “$2,580” makes it quite clear, in my view, that the sum demanded is the retention of $2,580 the subject of the handwritten notation on invoice No 25162. These observations and this conclusion apply equally to the other two items in the schedule to the statutory demand identified as “retention”. There is accordingly no “defect” of the kind contemplated by paragraph (e) of the submission and s.459J(1)(a) is not enlivened.

29 If, contrary to what I have just said, there is a “defect” as defined, I do not think that DCL can rely upon it consistently with the principle enunciated by Wallwork J for the Full Court of the Supreme Court of Western Australia in Energy Equity Corp. There is nothing in Mr Green’s affidavit (or in the application itself) to alert Tolco to the intention of DCL to assert a misstatement of an amount or a misdescription of debt. The affidavit is wholly concerned with the parties’ differences about responsibility for the cost of rectification work following detection of the problem in the south ventilation building stack.

30 Paragraph (f) of the submission, still dealing with the “retention” items, claims that a combination of the factors in paragraphs (c) and (d) of the submission means that the court should, in the case of a complex contract such as this, simply take at face value the fact that there is a clear difference of opinion between the parties which needs to be resolved in an appropriate forum and in an appropriate way before a court dealing with winding up can safely allow non-compliance with a demand for money said by one party to be due in the context of the complex contract to operate to provide prima facie grounds for the making of a winding up order.

31 There is some merit in this view. Dealing with not dissimilar contentions in a case involving a construction contract, Young J said in John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250:

“It may be that I am doing a disservice to this court in approaching the matter in this mathematical way. It may be that it is far more appropriate in the instant sort of case for the court to just take a broad brush approach. Thus the court might just say that because this is not a debt collecting court, where there is a construction case of this nature, the demand should be set aside under s.459J(1)(b) whenever it can be seen from the correspondence that there are honestly held views on either side which have brought a dispute between the parties. Thus, the matter can be dealt with in the ordinary way in which construction disputes are dealt with without the time and expense that is involved in running this sort of litigation ahead of that dispute. If I were to do that in the instant case, I would come to the same result.”

32 Again, however, I think DCL faces the problem that an intention to advance, by way of grounds, the contention that the matter involves issues arising under a complex building contract and that alone is sufficient to justify setting aside the demand does not appear, even by implication, from the application or Mr Green’s affidavit. The principle in Energy Equity Corp therefore stands in the way of DCL’s attempts to rely on any such grounds.

33 DCL advances a second complaint in reliance on s.459J(1)(b). It says that, because DCL and Tolco have, by their contract, submitted to a particular dispute resolution regime, Tolco should be compelled to adhere to that regime to the exclusion of the statutory demand process. The existence and effect of the dispute resolution clause are put forward, pursuant to s.459J(1)(b), as “some other reason why the demand should be set aside”.

34 It is true that courts will generally be astute to see parties abide by a compulsory dispute resolution agreement of certain operation. This is because departure from it by one of them entails a breach of contract: see, for example, the observations of Dixon J in Huddert Parker Ltd v The Ship Mill Hill (1950) 81 CLR 502 and Gillard J in Badgin Nominees Pty Ltd v Oneida Ltd [1998] VSC 188. I do not think that this line of reasoning assists Tolco here. At least in so far as there is any genuine dispute about the amount or existence of the debt alleged by Tolco or as to the existence of an offsetting claim, the Corporations Act adopts in s.459H its own approach to dispute resolution which would seem to me to preclude resort to s.459J(1)(b). I think “other” in that provision refers to a postulated basis for setting aside the demand which is not provided for in some other part of ss.459H and 459J.

35 In this connection, I would respectfully adopt what was said by Austin J in SMEC International v CEMS Engineering (above) as follows:

“However, in my view it is unlikely that a court would set aside a statutory demand on the bare ground that the service of the demand or the commencement of winding up proceedings in consequence of it, violated an arbitration clause. The question is a little artificial, because the application of the arbitration clause is likely to arise for consideration only if there is a dispute between the parties, and once there is a genuine dispute the court will set aside the statutory demand on that ground. In Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348 Master Macready held that the issue of a statutory demand was permitted notwithstanding a contractual provision which ascribed jurisdiction to the English courts, as the issue of a statutory demand, part of the winding up procedure, did not itself constitute a dispute. In the master’s opinion the International Arbitration Act operated to stay statutory proceedings such as those brought upon a statutory demand and did not provide a basis for setting aside the demand. I would be inclined to follow this reasoning were it necessary for me to decide the point.”

36 In any event, the ground of objection based on non-adherence to the dispute resolution clause in the parties’ contract does not seem to me to emerge from Mr Green’s affidavit. The principle approved in Equity Energy Corp will therefore not allow DCL to rely on that ground.

DCL’s s.459G(3)(b) argument

37 I return now to DCL’s contention that Mr Green’s affidavit may not properly be regarded as “an affidavit supporting the application”. For reasons already stated, I think that that objection may be regarded as well taken in relation to DCL’s attempt to rely on the two limbs of s. 459J. The absence from the affidavit of any indication of intended resort to the three matters which were advanced on the hearing by reference to that section seems to me to mean that the affidavit does not “support” an application in which it is sought to rely upon those matters.

38 When it comes to the s.459H grounds of genuine dispute and offsetting claim, Tolco attacks Mr Green’s affidavit and the general approach it evidences on a basis succinctly stated in the following parts of the outline of written submissions furnished by its counsel, Mr Cohen:

“22. The purported ‘evidence’ adduced by Mr Green goes to the facts and circumstances of the sub-contract which existed between the Plaintiff and Alstom, and thereafter is of no probative value in evidencing a dispute as it is no more than a series of assertions that the obligations upon the Plaintiff must be applied to the Defendant upon a ‘back-to-back’ basis.
25. The proper and fair characterisation of the argument propounded by the Plaintiff is that because it has suffered difficulty in its contractual relations with Alstom, it is at liberty to shift such liability onto the Defendant.
26. The impediment to such a step is that there is no warrant for this conduct within the terms and conditions of the contract between the Plaintiff and the Defendant. See p.181 ff of the exhibit to the Green affidavit.
34. Further, the purported offsetting claim, identified with paragraphs 24, 26, 27, 28, 32, 35 & 44 of the Green affidavit clearly lacks any probative force, having regard to the basis of the claim which is founded upon the Plaintiff’s presumption that a liability owed to Alstom may be transferred to the Defendant.”

39 Mr Green says in his affidavit at paragraph 24 that $60,920 is retained in accordance with the contract. He says the same in paragraph 26 as to a further $13,447.45. In paragraph 32, he says that there is “no contractual obligation” in respect of $4,864.45. In paragraphs 34 and 35, he asserts a contractual right of DCL to withhold $56,502.95, the necessary inference being that he is thereby alleging a dispute as to DCL’s liability to pay that sum. Somewhat different in concept is his assertion in paragraph 29 with respect to sums of $3,850 and $14,872 that “DSC is entitled under the subcontract to back charge Tolco for these amounts”. The objection here is formulated more in terms of offsetting claim than of disputed debt. The sums the subject of the several objections total $154,456.95, compared with $154,949.93 claimed in Tolco’s statutory demand so that, even allowing for the possibility that DSC may, at the hearing, have resiled from its objection in relation to one item of $787, success of the genuine dispute and offsetting claim contentions (including as to quantification) will result in an order s. 459H(3) setting aside the statutory demand, as the “substantiated amount” (being the “admitted total” minus the “offsetting total”) will be $1,279.98, which is less than the “statutory minimum” of $2,000.

40 Whatever may be decided in due course about the merits of DCL’s contentions thus articulated, it seems to me clear that Mr Green’s affidavit, with its theme of entitlement to resist Tolco’s claims on a “back-to-back” basis, does sufficiently evince an intention of relying on both the grounds made available by s.459H (genuine dispute as to the existence or amount of the debt and offsetting claim) to make it, in terms of s.459G and consistently with Graywinter Properties, an affidavit “supporting” an application advanced on those grounds. The sustainability of the grounds advanced is not relevant to the question whether the affidavit “supports” an application. The question is whether the affidavit shows an intention to rely on those grounds and addresses matters relevant to them, whether or not those matters are ultimately seen to establish a genuine dispute or offsetting claim. Tolco’s contention that DCL’s application is incompetent for want of compliance with s.459G(3) is therefore rejected.

The s.459H claims

41 I proceed now to examine the substance of DCL’s contentions of genuine dispute and offsetting claim the asserted basis for which, as advanced in Mr Green’s affidavit, has already been described.

42 So far as the genuine dispute ground made available by s.459H(1)(a) is concerned, probably the most often quoted guidance is that provided by Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 and by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785. The salient points emerge from the judgment of Lander J in the recent case of Eltin Open Pit Operations Pty Ltd v Warekim Pty Ltd [2001] SASC 377 (14 November 2001):

“In Mibor Investments Pty Ltd & Ors v Commonwealth Bank of Australia (1994) 2 VR 290 Hayne J considered the court’s role in determining whether there is a genuine dispute between the parties. He said after referring to a number of factors which identified the summary nature of the procedure:
‘These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark on any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.’
In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 McLelland CJ in Eq said at 787:
‘It is, however, necessary to consider the meaning of the expression “genuine dispute” where it occurs in s.450H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit “however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be” not having “sufficient prima facie plausibility to merit further investigation as to [its] truth” (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or “a patently feeble legal argument or an assertion of facts unsupported by evidence”: cf South Australia v Wall (1980) 24 SASR 189 at 194.’
The application does not mean that there should be a trial to determine the question of genuine dispute. The Court must simply satisfy itself that on the information before the Court there is a genuine dispute. The inquiry is as to whether a dispute exists. It is not to determine the dispute.”

43 A similarly useful recent statement of the appropriate approach in a case where an offsetting claim is asserted appears in the judgment of Palmer J in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 1088 (27 August 2001):

“In my opinion, a genuine offsetting claim for the purposes of CA s.459H(1) and s.459H(2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. ‘Good faith’ means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s.459H(1) and s.459H(2).”

44 While the court’s task on an application such as this is to apply the statutory criteria and to give effect to s.459H, that task is undertaken in a context where the ultimate issue is whether non-payment of the debt claimed in the statutory demand is in truth such a clearcut issue as to allow the presumption of insolvency to operate. The onus borne by a company asserting genuine dispute or offsetting claim is not a particularly demanding one.

45 The basis on which DCL asserts both genuine dispute and offsetting claim is the “back-to-back” proposition identified in Mr Green’s affidavit and attacked in Mr Cohen’s submissions quoted above. When submissions in relation to the contract between DCL and Tolco and its relevance to that “back-to-back” proposition were advanced, reference was made to a number of provisions some of which it is relevant to note. The first is in clause 35. It deals with progress claims and payments. Clause 35 contains the following subclause 35.7:

“Any payment due to the Subcontractor by DCL ENGINEERING under this Clause shall only be made after DCL ENGINEERING has received monies under its contract with Leighton which include the amount in respect of such payment.”

46 It is true that this provision refers to the head contractor “Leighton” when DCL’s direct contractual relationship appears to be with Leighton’s subcontractor Alstom rather than with Leighton. But that apparent error (or, at least, unexplained feature) does not, upon an inquiry such as the present, detract from the reality that clause 35.7 supports, to the extent necessary and relevant to such an inquiry, the possibility that there is some plausible contractual basis to an assertion by DCL of the “back-to-back” regime it asserts as a basis for resisting payment of sums demanded by Tolco.

47 Reference may also be made to clause 38.1(a) by which Tolco “expressly warrants” that

“all goods, materials and workmanship satisfy the specified requirements, are free from all defects and comply with all relevant warranties expressly or impliedly available at law.”

48 Clause 38.2, referring to the warranty just quoted and to the others in clause 38.1 then says that “such warranties … shall be in the form in Attachment No 4”. This perhaps implies that the things Tolco “expressly warrants” in particular terms in clause 38.1 are somehow subject to modification or elaboration by reference to one of multiple documents making up the 63 or so pages of Attachment No 4, being an unexecuted form of deed among the Roads and Traffic Authority, a company called Airport Motorway Limited, Leighton, Alstom and DCL. The precise way in which the warranties work may be the subject of some argument. But there is still a reasonably clear indication that, if Tolco did install retaining angles incorrectly and that was the source of defect and damage, a warranty claim may lie against it.

49 Provisions of clause 42 are also relevant. Clause 42.2(a) deals with the case where Tolco “commits an act, default, omission or breach of the subcontract” which is not remedied as stated in the clause and DCL “considers that damages may not be an appropriate remedy”. In such a case, DCL may “withhold any or all monies which are then or which may become due and payable to the subcontractor until the act, default, omission or breach is remedied. A similar right to withhold money is conferred by clause 42.3(a) where, consequent upon a matter referred to in clause 42.2(a), DCL elects to take out of Tolco’s hands the whole or any part of the uncompleted works. There is scope for cogent argument that one of these provisions applied in the circumstances under discussions.

50 By letter dated 30 August 2001 sent to Tolco’s solicitors, the solicitors for DCL canvassed numerous issues relevant to the claims in Tolco’s statutory demand. Various provisions of the contract were mentioned and opinions were expressed about their operation and effect. The validity of those claims was denied on the basis of the analysis set out in the letter. Tolco’s solicitors replied by letter dated 7 September 2001. They disagreed with certain of the contentions about the meaning of provisions of the contract and also said that, in the light of events as they had actually happened, provisions identified by DCL’s solicitors did not operate in the way asserted. There is nothing irrational or fanciful in the contentions of either firm. The letters serve to demonstrate that there are plausible arguments both ways – more significantly, for present purposes, that there are plausible arguments in favour of the position for which DCL contends.

51 As to possible quantum and the sustainability of DCL’s attempt to put in issue a total of $154,456.95 (or $153,699.95), it is appropriate to quote in full a letter from Alstom to DCL dated 8 February 2000 which is in evidence:

“On Thursday, 3 February 200, ALSTOM’s site personnel were notified that acoustic insulation material was being discharged from the South Ventilation Building stack.
As a result, the acoustic insulation material was deposited on or about residential and commercial properties in the immediate vicinity. ALSTOM commenced clean-up of the deposited acoustic material immediately.
Initial inspection of the ventilation systems indicated that the acoustic silencer pods on the discharge side of the exhaust fans, showed signs of rivet failure along the joints of the perforated aluminium sheeting. This failure allowed the joints in the perforated sheeting to open and thus permitted the acoustic insulation material to be forced into the air passage and discharged to atmosphere via the ventilation stack.
Closer investigation revealed that the retaining angles, at the top of each silencer paid, had not been installed in accordance with drawing N641/D/ME/11758/CD Rev 2 (M138/DG7/11758). The installation of the works associated with this detailed drawing formed part of your subcontract works.
It is estimated that the costs of repair and rectification of this problem will be in excess of $500k.
ALSTOM holds DCL Engineering accountable for all rectification, rebuilding and consequential costs that will be incurred as a result of your company’s failure to construct the works in accordance with the subcontract documentation.
Should you, or your insurers, wish to further inspect the damage, please contact Mr Peter Valeontis on phone number 9380 7195.
Thank you for your co-operation in relation to the above matter.”

52 Having regard to the whole of the evidence, I consider that the submissions made for DCL as to both genuine dispute and offsetting claim involve plausible, rather than fanciful, contentions requiring investigation. They indicate a serious question to be tried which can be asserted and pursued in good faith. DCL and Tolco are parties to a voluminous and in some respects complex contract relating to construction work involving technical issues of fault and allocation of responsibility obviously requiring detailed assessment in an appropriate forum, whether under the dispute resolution provision in their contract or otherwise. It is also clear, even from what is said in Mr Green’s affidavit, that the claims DCL may have against Tolco are not necessarily confined to claims under or in relation to their contract and that issues of duty of care may arise.

53 There exist, in relation to Tolco’s statutory demand, countervailing factors of the kind with which s.459H is concerned which not only pass the tests referred to in the above extracts from Eltin Open Pit Operations and Macleay Nominees but also entail sums making it clear that the “substantiated amount” is, at most, the sum of $1,279.98 to which reference has already been made.

The unregistered charge argument

54 I deal finally with a matter which, by consent, became the subject of written submissions by counsel for Tolco and written submissions in reply by counsel for DCL after I had reserved judgment. It was submitted for Tolco that DCL’s asserted “back-to-back” right to withhold moneys as against Tolco until DCL had itself been paid by Alstom or to have Tolco complete rectification work before being required to pay contract sums to Tolco amounts to a floating charge or a charge on book debts which, in the absence of registration under Part 2K.2, is void as against Tolco’s administrator under s.266.

55 This draws too long a bow and does not sufficiently recognise essential attributes of a charge. Those attributes were referred to in the following passage in the judgment of Giles JA in Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513:

“A charge involves a proprietary interest held by way of security. It may arise in consequence of contractual rights, as in an equitable charge, but the objectively ascertained contractual intention must be to confer a proprietary interest as security for a present or future debt. Being proprietary, the charge must in its nature be assignable.”

56 Sheller JA quoted with approval the following passage in the speech of Lord Hoffmann in Re Bank of Credit & Commerce International SA (No 8) [1998] AC 214:

“There are several well known descriptions of an equitable charge (see, for example, that of Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] KB at 449-450) but none of them purports to be exhaustive. Nor do I intend to provide one. An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.”

57 Sheller JA noted that, in Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588, Gaudron, McHugh, Gummow and Hayne JJ, referring to Lord Hoffman’s speech, had said that Lord Hoffmann:

“… gave a description of an equitable charge in which he emphasised that the proprietary interest created thereby is held by way of security, so that the chargee may resort to the charged asset only for the purpose of satisfying some liability due to the chargee. The charge is subject to the equity of redemption retained by the owner.”

58 Measured against these criteria, the “back-to-back” right DCL asserts does not amount to a charge. The elements of proprietary interest, equity of redemption and assignability are not present in this case. DCL’s claims involve no more than an alleged contractual right.

Conclusion and orders

59 DCL has made out its case under s.459H. As I have said, I am satisfied that the “substantiated amount” is less than the statutory minimum of $2000. As required by s.459H(3), the order of the court is therefore that the statutory demand of Tolco dated 20 August 2001 be set aside. Tolco must pay DCL’s costs of these proceedings.

******

Last Modified: 02/13/2002