Re Alliance Paper Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2023 02891

IN THE MATTER of ALLIANCE PAPER PTY LTD (ACN 605 805 221)

BETWEEN:

ALLIANCE PAPER PTY LTD (ACN 605 805 221)	Plaintiff
v
OVATO LIMITED (IN LIQUIDATION) (ACN 050 148 644)	Defendant

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JUDGE:	Gardiner AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	20 September 2023
DATE OF JUDGMENT:	2 August 2024
CASE MAY BE CITED AS:	Re Alliance Paper Pty Ltd
MEDIUM NEUTRAL CITATION:	[2024] VSC 457

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CORPORATIONS — Application to set aside a statutory demand pursuant to ss 459G, 459H and 459J of the Corporations Act 2001 (Cth) on grounds that there were genuine disputes as to the existence of the debt the subject of the statutory demand and that plaintiff had an offsetting claim — Plaintiff in occupation of premises under a sub-lease from defendant — Defendant went into administration under Part 5.3A of the Corporations Act 2001 (Cth)— During period of an extension of the period mentioned in s 443B(2) of the Corporations Act 2001 (Cth) granted to the administrators, the administrators issued notice pursuant to s 443B(3) of the Corporations Act 2001 (Cth) to head lessor stating that administrators did not intend to exercise property rights in respect of the subject premises — Administrators informed the plaintiff of such notice and stated plaintiff should pay rent and establish direct tenancy or other occupancy rights with the head lessor — Plaintiffs remained in occupation of the premises and made no payment of rent after s 443B notice had taken effect — Administrators, who became the liquidators of the defendant, served statutory demand claiming rent for the period after notice that administrators did not intend to exercise property rights in respect of the subject premises — Whether genuine dispute established based on contention that administrators had repudiated sub-lease and with it the obligation to pay rent to the defendant referable to the terms of sub-lease relating to holding over —Whether court should determine question of law in application to set aside demand — Finding that the plaintiff had established the existence of a genuine dispute in respect of the debt claimed in the statutory demand of a nature which warranted a conventional inter partes trial — Whether the plaintiff had established that it had an offsetting claim arising from the defendant calling in bank guarantee provided under sub-lease — Offsetting claim established — Statutory demand set aside.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S Waldren of Counsel	Comlaw Barristers and Solicitors
For the Defendant	Mr C Hibbard of Counsel	Johnson Winter Slattery

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Background......................................................................................................................................... 1

Parties’ evidence............................................................................................................................... 12

Alliance’s evidence..................................................................................................................... 12
Ovato’s evidence......................................................................................................................... 14

Submissions of the parties............................................................................................................. 15

Alliance’s submissions............................................................................................................... 15
Ovato’ssubmissions.................................................................................................................. 34
Ovato’s supplementary memorandum.................................................................................... 40
Alliance’s response to supplementary memorandum........................................................... 41

Relevant statutory provisions and legal principles.................................................................. 43

Consideration.................................................................................................................................... 52

HIS HONOUR:

Introduction

On 15 June 2023, the defendant, Ovato Limited (In Liquidation) (ACN 050 148 644) (‘Ovato’) served a statutory demand (‘Demand’) on the plaintiff, Alliance Paper Pty Ltd (‘Alliance’) which claimed Alliance was indebted to it for $239,831.34 (‘the Debt’). The Demand was accompanied by an affidavit under s 459E of the Corporations Act 2001 (Cth) (‘Act’) of Christopher Clarke Hill (‘Mr Hill’) affirmed on 15 June 2023.

The schedule to the Demand describes the Debt as being comprised of rental arrears and outgoings of $439,831.34 which are payable to Ovato under a sub-lease for industrial premises at Wacol in Queensland for the period from July 2022 to December 2022, less a bank guarantee of $200,000 held by Ovato which had been called upon and applied against the gross debt claimed.

On 4 July 2023, Alliance filed and served an originating process seeking orders that the Demand be set aside under ss 459G, 459H and 459J of the Act.

The application has been made within the time prescribed by s 459G of the Act.

In support of its application, Alliance relies on the affidavits of one of its directors, Marc Lichtenstein (‘Mr Lichtenstein’) affirmed 4 July 2023 and 23 August 2023.

In opposition to Alliance’s application, Ovato relies on the affidavit of Mr Hill affirmed 2 August 2023 (‘Hill Affidavit’).

The parties also relied upon detailed written submissions.

Background

The following narrative as to the background of the matter is sourced from correspondence between the parties and their solicitors which is in evidence and is essentially uncontroversial.

On 21 December 2012, PMP Property Pty Limited, as lessor, entered into a head lease (‘Head Lease’) with PMP Print Pty Ltd (‘PMP Print’), as lessee for industrial premises at Wacol in Queensland (‘Premises’). Madad Property Pty Ltd (‘Head Lessor’) subsequently became the head lessor of the Premises.

On 30 March 2018, Alliance entered into a sub-lease with PMP Print for the Premises (‘the Sub-lease’) with a commencement date of 30 April 2018 for a term to expire on 30 December 2022. Under a Member’s Scheme of Arrangement entered into by Ovato and by force of an order of Black J of the Supreme Court of New South Wales made 21 December 2020, the Sub-lease between PMP Print and Alliance, along with its assets and liabilities, were vested in Ovato. The effect of this was that Ovato replaced PMP Print as sub-lessor under the Sub-lease.

On 21 July 2022, Ovato was placed into administration under Part 5.3A of the Act and Mr Hill, Benjamin Campbell and Ross Blakely (the ‘Administrators’) were appointed as joint and several Administrators of Ovato.[1]
[1]On 21 March 2023, Ovato was placed into liquidation by a resolution of its creditors and the Administrators became the Liquidators.

Until Ovato went into administration, Alliance was provided with a tax invoice for monthly rent and outgoings at the beginning of each month. Alliance paid the invoices issued prior to Ovato’s administration.

In July 2022, Alliance received a tax invoice from Ovato dated 1 July 2022 which required payment of $73,701.46 for rent and outgoings for July 2022.

On 28 July 2022, a representative of the Administrators, Eve Pedder (‘Ms Pedder’), sent an email to Jon Williams (‘Mr Williams’) of Alliance (’28 July Email’) with the subject heading ‘Redirection of Rent to Head Lessor’. In that email, Ms Pedder indicated the Administrators had obtained an order from the Federal Court of Australia extending the period under s 443B(2) of the Act to 18 August 2022. Ms Pedder requested Alliance to make all payments of rent and outgoings under the Sub-lease directly to the Head Lessor of the Premises. The email stated that, whilst the Administrators were considering whether they intended to exercise property rights in respect of the Head Lease, ‘any funds received from Alliance from the date of appointment (21 July 2022) would be returned’.

On 15 August 2022, Ms Pedder sent an email to Alliance on behalf of the Administrators (’15 August Email’) with the subject heading ‘Wacol Headlease update’. Ms Pedder referred to and reiterated the previous indication that it was likely the Administrators would not continue the Head Lease beyond 18 August 2022 and that Alliance should pay rent and establish a direct tenancy or other occupancy rights with the Head Lessor. Ms Pedder then confirmed ‘the Administrators will not be seeking to continue the Head Lease beyond 18 August 2022, and, shortly, will be formally notifying the [Head Lessor] accordingly’, and that after 18 August 2022, ‘Ovato will no longer be in a position to provide [Alliance] with any right of occupation as previously enjoyed under the [t]enancy’. The Administrators stated they ‘regret that this is a decision that they have to make but Ovato’s business is not in a position to continue to meet the obligations [as lessee] under the [Head Lease]’ and that they ‘hoped Alliance is able to negotiate successfully rights of occupation beyond 18 August’.

On 18 August 2022, the Administrators issued a Notice of Administrators’ Intention Not to Exercise Property Rights in Form 509B pursuant to s 443B(3) of the Act to the Head Lessor (‘Section 443B Notice’), stating they did not propose to exercise property rights in relation to the Premises.

Ms Pedder informed Alliance by email on the same day that the Section 443B Notice had been provided to the Head Lessor and that the Administrators would not be seeking to continue the Head Lease beyond 18 August 2022 (’18 August Email’). The email attached a copy of the letter to the Head Lessor containing the Section 443B Notice (‘Head Lessor Letter’).

Ms Pedder also noted in her 18 August Email that ‘[a]s stated previously, as a consequence of this decision, Ovato will no longer be in a position to provide [Alliance] with any right of occupation as previously enjoyed by [Alliance] under [the Sub-lease]’.

On 26 August 2022, a series of three emails were exchanged between Ovato and Alliance. The first, from Ms Pedder (‘First 26 August Email’), was sent to Alliance which confirmed, yet again, that Ovato would no longer be in a position to provide Alliance with any right of occupation under the Sub-lease and that all payments of rent and outgoings under the Sub-lease were to be paid directly to the Head Lessor from 19 August 2022 until a direct tenancy or other occupation rights were established between Alliance and the Head Lessor.

Alliance responded to Ovato shortly afterwards (‘Second 26 August Email’) and requested that, ‘given formal steps had now been taken to cease the Head Lease with the resulting predicament that this left Alliance in for the foreseeable future, …it is entirely appropriate that [Alliance] request[s] the return of the Security Deposit held by Ovato and issued by Alliance to the value of $200,000’.

Ovato responded to Alliance (‘Third 26 August Email’), noting Ovato understood Alliance’s position and was receiving advice on the matter, which involved a number of sub-tenants. Alliance was informed that once this advice was to hand, it would receive a response from Ovato.

During August 2022 and in the subsequent months, Mr Williams of Alliance liaised with the Head Lessor's representatives concerning the relocation of Alliance’s business from the Premises and the removal of its industrial plant. During that time, the Head Lessor's representatives attended the Premises to conduct site inspections, soil tests and fire risk reviews amongst other matters.

On 7 October 2022, Alliance received an email from Ms Pedder (‘7 October Email’) informing it that the rent invoiced for July 2022 remained payable to Ovato and attached another copy of the tax invoice of 1 July 2022 for $73,701.46. In a departure from the Administrators’ previous requests that rent be paid directly to the Head Lessor, Ms Pedder requested Alliance remit the July 2022 rent into the ‘post appointment bank account’.

On 1 December 2022, the Administrators’ solicitors, Johnson Winter Slattery (‘JWS’) wrote to Alliance (‘JWS 1 December Letter’) concerning the payment of outstanding sub-tenant rent, stating that JWS ‘understood the [Head Lessor] has to date refused to accept payment of sub-tenant rent and, because of this, there was a dispute between the [Head Lessor] and [Ovato] regarding (amongst other things) amounts due and payable under the [Head Lease] and deductible from the [bank guarantee provided by Ovato to the Head Lessor]’.

In their letter, JWS stated it had been instructed to request Alliance pay ‘all outstanding sub-tenant rent and any sub-tenant rent that may become due and payable (and which the [Head Lessor] refuses to accept) into [JWS’] trust account’. JWS stated that ‘these funds would comprise potential “settlement funds/damages” from which, once the dispute between the Head Lessor and Ovato regarding (inter alia) amounts due and payable under the Head Lease and deductible from the bank guarantee provided by Ovato as lessee under the Head Lease (‘Ovato Bank Guarantee’) was resolved, ‘any amounts outstanding under the [Head Lease] may be paid to either the [Head Lessor] and/or Ovato’.

JWS stated that they would not pay the funds out of their trust account to either the Head Lessor and/or Ovato without the consent of the Head Lessor. Alliance did not respond to the JWS 1 December Letter.

On 16 December 2022, Mr Williams informed Mr Smith via telephone that it was in the process of decommissioning the Premises as it had found an alternate site and had begun removing its stock from the Premises. Alliance also informed Ovato that it would face difficulties completing this process ‘by the expiry of lease end date of 31 December 2022’.

On 16 January 2023, Mr Williams informed Mr Smith via telephone that it ‘had undertaken an end of lease clean of the Premises and would exit by the third week of January 2023’. Alliance informed Ovato that it ‘had the support of the Head Lessor to remain in occupation of the Premises beyond the lease end date’.

Alliance continued to occupy the Premises and Ovato took no steps to interfere in its tenancy.

Alliance vacated the Premises in late January 2023 and commenced operating from new premises in early February 2023.

On 1 February 2023, Ovato received an email from the Head Lessor informing it as to the leasing arrangements with the Premises’ sub-tenants, including details of amounts owing under the Head Lease. Attached to that email was a notice from the Head Lessor directed to Ovato stating that there had been a breach of the Head Lease for failure to pay rental arrears and outstanding outgoings (‘Breach Notice’) along with a breach notice statement.

On 28 February 2023, the Head Lessor drew down on the Ovato Bank Guarantee for payment of rental arrears and outstanding outgoings.

The Head Lessor then took steps to procure a replacement bank guarantee for the remaining balance.

On 16 March 2023, Glen Smith (‘Mr Smith), who was assisting the Administrators, emailed Mr Williams attaching a draft invoice for rent and outgoings for the balance of the lease term in the amount of $366,129.87 (including GST) for August 2022 to December 2022 (’16 March Email’). The Administrators did not receive a response to that email from Alliance.

On 21 March 2023, Ovato’s creditors resolved that Ovato be wound up and Messrs Hill, Campbell and Blakley (now ‘the Liquidators’) be appointed as joint and several liquidators.

On 18 April 2023, Ms Pedder emailed Mr Williams attaching the final invoice for rent and outgoings for the balance of the lease term in the amount of $366,129.87 (including GST) for August 2022 to December 2022. The Liquidators did not receive a response to that email from Alliance.

On 3 May 2023, JWS emailed a letter of demand for payment to Alliance of $239,831.34 for all outstanding rent and outgoings for July 2022 to December 2022. There was no response to that email. On 15 June 2023, Ovato served the Demand on Alliance.

Between 23 June 2023 and 4 July 2023, the parties, through their solicitors, corresponded about the Debt claimed in the Demand. On 23 June 2023, Alliance’s solicitors, Comlaw Barristers and Solicitors (‘Comlaw’), wrote to JWS, explaining Alliance’s position and inviting Ovato to withdraw the Demand. In that letter, Comlaw stated Alliance did not dispute that $118,937.32 was required to be paid to Ovato for rent and outgoings pursuant to the Sub-lease for July 2022, as well as a portion of the rent and outgoings for August 2022. However, Alliance did not accept that it had any further liability to Ovato for any other rent or outgoings. Comlaw demanded the return of the sum of $81,062.68, i.e. the difference between the $200,000 drawn down by Ovato from the bank guarantee provided by Alliance (‘Alliance Bank Guarantee’) and the $118,937.32 Alliance believed it was required to pay pursuant to the Sub-lease. In its 23 June letter, Comlaw:

(a) asserted Ovato was not a creditor for the amount claimed or at all;

(b) asserted the Sub-lease of the Premises referred to in the affidavit accompanying the Demand came to an end on 18 August 2022 when Ovato:

(i) gave Alliance a copy of the notice given to the registered proprietor of the property pursuant to s 443B of the Act;

(ii) stated Ovato would not be continuing the Head Lease beyond 18 August 2022;

(iii) informed Alliance that Ovato would no longer be able to provide any right of occupation as previously enjoyed by Alliance under the tenancy;

(iv) asked Alliance to negotiate further occupation of the Premises with the registered proprietor directly;

(v) ceased to occupy the property on 18 August 2022; and

thereby repudiated the Sub-lease, which was accepted by Alliance by calling for the return of the Alliance Bank Guarantee;

(c) asserted that, on any view, by calling on the full Alliance Bank Guarantee, Ovato overpaid itself in an approximate amount of $81,062.68;

(d) noted there was accordingly a genuine dispute about the existence or amount of the Debt and contended it was an abuse of process to serve the Demand; and

(e) requested Ovato withdraw the Demand by midday on 28 June 2023.

On 29 June 2023, JWS wrote to Comlaw (’JWS 29 June Letter’) summarising the Liquidators’ position. JWS concluded Ovato did not accept Alliance was only liable for rent for July 2022 and the period from 1 August to 18 August 2022 for $118,937.32. The letter reiterated that under the terms of the Sub-lease, the rent for Alliance’s occupation of the Premises for July 2022 to December 2022 was immediately due and payable. The JWS 29 June Letter relevantly stated:

[JWS] are instructed that Alliance failed to pay the arrears in the amount of $439,831.34 for its occupation of the Premises from July 2022 to December 2022. From those arrears, $239,831.34 remains due and payable (following Ovato's call on the [Alliance Bank Guarantee] for [the Sub-lease]) (Debt). It remains the case that Alliance is in default of the [Sub-lease]. Given the Debt owing to Ovato, it is a creditor of Alliance.
Further, as Alliance failed to pay rent, the [Head Lessor] drew down in full on the [Ovato Bank Guarantee] in its favour for the rent unpaid under the lease. As a consequence, Ovato suffered a loss of $239,831.34 being funds that otherwise would have been returned to [Ovato] from the [Ovato Bank Guarantee]. While Alliance enjoyed the benefit of occupying the Premises (without paying rent), it was at the expense and detriment of Ovato. In the circumstances, Alliance did not act in good faith and was unjustly enriched at the detriment of Ovato, giving rise to a claim for restitution for the amount of $239,831.34.

In the JWS 29 June Letter, JWS:

(a) asserted Ovato had not repudiated the Sub-lease;

(b) asserted that if Ovato repudiated the Sub-lease, then Alliance had not accepted such repudiation;

(c) noted Alliance had not complied with Ovato’s request that it negotiate a new tenancy with the Head Lessor;

(d) noted Alliance continued to occupy the Premises without paying rent;

(e) asserted Alliance failed to pay arrears in the amount of $439,831.34 for its occupation of the Premises from July to December 2022;

(f) claimed Ovato suffered a loss of $239,831.34, described as ‘being funds that would have been returned to it from the [Alliance Bank Guarantee]’; and made a new claim for that amount on the basis of unjust enrichment.

The JWS 29 June Letter stated Ovato was prepared to settle the dispute for commercial reasons only and put forward the following proposal:

a)Alliance is to pay Ovato the sum of $209,831.34 within seven days of its acceptance of this proposal in writing;
b)Upon compliance with [sub-para (a)] above, Ovato will withdraw the Demand;
c)Each party is to provide a mutual release of all claims concerning [the Sub-lease]; and
d)Each party is to bear its own costs.

On 30 June 2023, Comlaw responded to the JWS 29 June Letter (‘Comlaw 30 June Letter’), contending there was a dispute as to whether the Sub-lease had been repudiated, with Ovato’s position being that it had not. Comlaw restated Alliance’s position and requested evidence of Ovato’s continued occupation of the Premises after 18 August 2022. The letter also requested evidence of payment of rent by Ovato to the Head Lessor on and after 18 August 2022. The letter went on to state:

Our understanding is that [Ovato] ceased paying rent to the [Head Lessor] and ceased occupying the [P]remises. It did so leaving [Alliance] to fend for itself, or as you put it to "negotiate its further occupation of the [Premises] with the [Head Lessor] and pay rent to the [Head Lessor] directly." Whether [Alliance] failed to pay rent to the [Head Lessor] does not with respect change the legal position concerning [the Sub-lease].
Once [the Sub-lease] came to an end any contractual obligation to pay rent under [the Sub-lease] ceased.
You refer to the terms of [the Sub-lease] as requiring [Alliance] to pay rent during the term of [the Sub-lease] and any period which Alliance continues to occupy the [P]remises. Please send us a copy of [the Sub-lease] to which you refer and point to us the actual provision you are referring to.
We do not have a copy of the [Ovato Bank Guarantee] to which you refer [to in paragraph 6 of the JWS 29 June Letter]. Please let us have a copy of the same. For the purpose of clarity, you state that it is the [Head Lessor] not [Ovato] that drew down on the [Ovato Bank Guarantee]. Is that correct?
We are confused as we do not understand how it is then the position that "as a consequence Ovato suffered a loss of $239,831.34 being funds that otherwise would have been returned to it from the [Ovato Bank Guarantee]" when the [Alliance Bank Guarantee] was for an amount of $200,000. Your explanation would be appreciated.
If it is the position that [Alliance] owes occupation rent that occupation rent is not payable to [Ovato] but the [Head Lessor] (the owner of the [P]remises).
Your assertion that [Alliance] has been unjustly enriched is premised on [Ovato] being in occupation of the [P]remises, which we are instructed [Ovato] was not and premised on [Ovato] having paid rent to the [Head Lessor], which from your letter we discern was not paid by reason of the fact that the [Ovato Bank Guarantee] (provided by [Ovato] to the [Head Lessor]) was drawn down upon.
However, the above does not change the fact that [Alliance’s] position is that it accepted [Ovato’s] repudiation and therefore [the Sub-lease] came to an end.
Evidence of the fact that [Ovato] considered [the Sub-lease] at an end is disclosed by the fact that it did not issue any monthly invoices to [Alliance] after 1 July 2022 until March 2023. That conduct is consistent with [Ovato] after August 2022 considering [the Sub-lease] at an end. For its own reasons it then sought to engage with [Alliance] to extract rent and outgoings in March 2023.
[Alliance] appreciates your proposal on a without admissions basis. It does not however change the position that [the Sub-lease] came to an end and that [Alliance] in remaining in occupation after [Ovato] ceased effective occupation as having a liability to the [Head Lessor].
As [Ovato] is not prepared to withdraw the [Demand] it leaves [Alliance] with no choice but to proceed with the application to set aside the [Demand].

On 3 July 2023, JWS responded (‘JWS 3 July Letter’) to the Comlaw 30 June Letter and stated:

At the outset it must be said that just because [Comlaw asserts] an argument on behalf of Alliance and [JWS responds], that does not render Alliance’s dispute genuine. If Alliance proceeds with its foreshadowed application to set the [Demand] aside, the Court will consider whether Alliance has a plausible defence propounded in good faith or a constructed one in response to the pressure represented by the [Demand]. In circumstances where Alliance has occupied the Premises without paying rent for the period the subject of the Debt, we anticipate that the Court will make a finding adverse to it.
Your [l]etter asserts, among other things, that there has been a repudiation of [the Sub-lease]. We do not wish to engage in further correspondence on this issue given it has been addressed in previous correspondence save to say that your references to paragraphs 19, 21 and 25 of Siliva V FEA Carbon Pty Ltd [sic] do not advance Alliance’s case. Alliance remained in occupation until December 2022 and contractually was obliged to pay rent, including under the [Head Lease].
It is apparent from [Comlaw’s letter] that Alliance admits that it remained in occupation of the Premises from August 2022. [Alliance’s] failure to pay rent is a breach of clause 4.1 of [the Sub-lease] noting clause 1 of Annexure A whereby [the Sub-lease] adopts the terms of the [Head Lease]. A copy of the lease is enclosed. [JWS’] suggestion that Ovato is liable to pay the rent to the [Head Lessor] after 18 August 2022 (pursuant to the terms of the [Head Lease]) is misplaced in circumstances where Alliance remained in occupation of the Premises.

The JWS 3 July Letter further stated that:

(a) the Head Lessor had served a Breach Notice under the Head Lease on 1 February 2023;

(b) the Head Lessor had drawn down on the Ovato Bank Guarantee under the Head Lease on or about 28 February 2023; and

(c) again asserted Ovato had a claim for unjust enrichment against Alliance by reason of the loss of funds that would otherwise have been returned to it from the Ovato Bank Guarantee.

On 4 July 2023, the Liquidators wrote to Westpac Banking Corporation (‘Westpac’) calling in the bank guarantee[2] provided by Alliance to Ovato under the Sub-lease in the amount of $200,000. On the same day Alliance made application to set aside the Demand.
[2]Referred to in the bank’s documentation as a ‘Banker’s Undertaking’.

Parties’ evidence

In addition to the foregoing survey of the background, the parties’ evidence in respect of particular aspects of the matter is discussed below.

Alliance’s evidence

In his evidence, Mr Lichtenstein states that in July 2022, Alliance received a tax invoice dated 1 July 2022 claiming $73,701.46. for rent and outgoings for the whole of July 2022. Mr Lichtenstein deposes that prior to Ovato being placed into administration on 21 July 2022, Alliance received a tax invoice for rent and outgoings for the Premises from Ovato on a monthly basis. He states that after Ovato went into administration, Alliance did not receive tax invoices for August, September, October, November and December 2022 from the Administrators.

Mr Lichtenstein states that on being informed in August 2022 by Ovato that the Sub-lease would end on 18 August 2022, he realised he needed to take immediate steps to ensure Alliance could operate as a going concern and would not close down. Mr Lichtenstein states he and others searched for new premises, and said new premises were found around the end of August 2022 and confirmed as suitable in September 2022. The negotiation of the lease terms of the new premises took some time and it was not until 2 December 2022 that Alliance was able to obtain access.

Mr Lichtenstein states that by the Second 26 August Email, Alliance accepted the Sub-lease between Ovato and Alliance was now at an end and requested return of the Alliance Bank Guarantee. Alliance was of the view that Ovato was no longer providing a sub-lease and abandoned possession of the Premises. Alliance approached the Head Lessor’s representatives concerning the relocation of Alliance’s business and the removal of its equipment.

Mr Lichtenstein states Alliance concluded Ovato was no longer providing possession of the Premises as required under the Sub-lease and Alliance accepted Ovato's breach of the Sub-lease and termination by repudiation as ending the Sub-lease.

Mr Lichtenstein also states Alliance received no subsequent communication in relation to the Third 26 August Email which indicated Ovato was proposing to seek advice in respect of the return of the security deposit.

In relation to the 7 October Email, Mr Lichtenstein deposes he did not see a need to attend to paying it as Ovato had not returned the Alliance Bank Guarantee and, if they were not going to do so, then he expected Ovato would deduct this outstanding amount from the Alliance Bank Guarantee before remitting the balance.

In relation to the JWS 1 December Letter, Mr Lichtenstein states he did not respond to the letter as he did not regard it as involving Alliance. Mr Lichtenstein deposes that he did not intend to pay an alleged rent due under a sub-lease which, in his view, was at an end. He does not elaborate however as to by what right Alliance continued to occupy the Premises.

Mr Lichtenstein deposes that although some preparatory work was done in relation to the move to the new premises, it was not until 2 December 2022 that the more substantial specialised equipment was able to be decommissioned and relocated. Mr Lichtenstein states the equipment required specialised carriers to ensure it was not damaged in transit. Such carriers were not readily available at that time. Mr Lichtenstein states that such a move would take a number of months and Alliance was not able to vacate earlier without causing serious disruption to its business. Mr Lichtenstein noted that one of Alliance’s long-term customers was Woolworths Group Limited (‘Woolworths’) and that the receipt rolls printed by Alliance for Woolworths are required to be in continuous supply.

Mr Lichtenstein states that in relation to the draft invoice received by Alliance in the 16 March Email, he informed Mr Williams to ignore it as he did not consider that Alliance had an obligation to pay it.

Mr Lichtenstein states that when Alliance received a final tax invoice dated 16 March 2023 on 18 April 2023 from Ovato claiming rent and outgoings for August, September, October, November and December 2022, which totalled the sum of $366,129.87, his position that Alliance did not have an obligation to pay it did not change.

Mr Lichtenstein confirmed Alliance received the Demand on 15 June 2023 and that at no time prior to its receipt was Alliance made aware that the Alliance Bank Guarantee had been called on and drawn down.

Ovato’s evidence

Mr Hill states he was informed by Mr Smith that throughout March and April 2023, there were various telephone conversations between Mr Smith and Ms Pedder with Mr Williams of Alliance to discuss the payment of the rental arrears. Mr Smith informed Mr Hill that on each occasion he spoke to Mr Williams, Mr Williams made a statement to the effect that he was unable to make a decision himself and the issue was being discussed by senior management.

Mr Hill states he has been informed by Mr Smith that Mr Williams never contacted him in relation to the payment of rental arrears.

Mr Hill states the Debt claimed in the Demand is comprised of the balance owing to Ovato for rental arrears and outgoings payable under the Sub-lease for July 2022 to December 2022, in circumstances where:

(a) Ovato has, through the drawing down of the Ovato Bank Guarantee by the Head Lessor, remitted rental payments to the Head Lessor in relation to the Head Lease in the amount of $633,258.96[3] for the occupation of the Premises from July 2022 to December 2022;
[3]This figure differs from paragraph 1 of the Breach Notice which specifies the amount as $653,540.32.

(b) an amount of $439,831.34 for rental arrears and outgoings was owing by Alliance to Ovato under the Sub-lease for the same period from July 2022 to December 2022 for its occupation of the Premises;

(c) Alliance remained in occupation of the Premises but has not paid rent or outgoings to either Ovato or the Head Lessor; and

(d) Ovato drew down on the Alliance Bank Guarantee in full for the amount of $200,000.

Mr Hill contends Ovato is a creditor of Alliance for the Debt and that Debt remains due and payable to it. Furthermore, he contends that as a consequence of the Head Lessor's draw down of the Ovato Bank Guarantee, Ovato suffered a loss of $239,831.31, being funds that otherwise would have been returned to it from the Ovato Bank Guarantee if not for Alliance's failure to pay rent for its occupation of the Premises.

Mr Hill states he is unaware of any breach of any agreement with Alliance by Ovato. He further states Alliance does not have a bona fide offsetting claim in light of the circumstances as set out above and there is no reasonable basis to withdraw the Demand.

Submissions of the parties
Alliance’s submissions

In its lengthy written submissions, Alliance contends there is a genuine dispute about the existence or amount of the Debt claimed in the Demand. In addition, because of the draw down against the Alliance Bank Guarantee in the full amount of $200,000, it contends Ovato is no longer a creditor of Alliance; rather, Alliance is now a creditor of Ovato, and has an offsetting claim against Ovato in the amount of $81,062.68, representing the amount remaining after the deduction of the rent and outgoings for which Alliance accepts it is liable for July 2022 to 18 August 2022 from the amount of the Alliance Bank Guarantee.

Alliance cites the general principles and authorities to be applied in applications of this type, which are now well settled, and to which further reference will be made below. Alliance also surveys the background of the matter, which for the most part is not controversial.

The submissions identify and emphasise what Alliance contends are the significant features of the evidence. Alliance begins by observing that in the 28 July Email, Ovato specifically requested that, in the interim, all payments of rent and outgoings under the Sub-lease with Ovato for Alliance’s occupancy of the Premises be paid directly to the Head Lessor of the Premises (described in the written submissions as the ‘Remittance Request’). Alliance notes that despite the Remittance Request, the information required to enable such a payment was not provided in the 28 July Email.

Alliance notes the terms of the Sub-lease provided for the payment of rent and outgoings. Following the expiry of the rent-free period, and until July 2022, monthly invoices for rent and outgoings were issued by Ovato and paid by Alliance on commercial terms. Alliance points to Ovato’s failure to provide further invoices from July 2022 as an indication of its repudiation of the Sub-lease.

Further, the 28 July Email specifically stated that ‘any funds received by [Ovato] from the date of appointment (21 July 2022) would be returned’(‘the Refusal’).

Alliance submits that, on and from 28 July 2022, by reason of the Remittance Request and the Refusal, any attempt by Alliance to remit any payment to Ovato in respect of its liabilities under the Sub-lease would have been futile.

Alliance points to the evidence that on 15 August 2022, Ms Pedder sent an email to Messrs Williams and Reeves of Alliance, to which Mr Smith of Ovato was copied, which stated, inter alia, that the Administrators would not be seeking to continue the Head Lease beyond 18 August 2022 and would formally notify the Head Lessor of this. Ms Pedder indicated that, consequently, on and from that date, Ovato would no longer be in a position to provide Alliance with any right of occupation under the Sub-lease. The email also stated Alliance ‘ought to engage in paying rent and establishing a direct tenancy (or other occupation rights) with the [Head Lessor]’.

Alliance contends that contrary to what is stated in the Hill Affidavit, there was no ‘direction’ for Alliance to make other arrangements with the Head Lessor in the 15 August Email. Alliance submits that in the context of what is said in the 15 August Email, and in particular the statement that a grant of a right of occupancy was about to be withdrawn by the foreshadowed notice, there is at best a re-statement of advice (‘you ought to…’) coupled with an expression of good wishes (‘we hope’).

Alliance contends that subject to formal notice under s 443B(3) being given to the Head Lessor, the 15 August Email amounts to a notice of the intended repudiation of Ovato’s most basic obligation under the Sub-lease, to give a right of occupancy at the Premises to Alliance over the balance of the term of the Sub-lease. In this regard, Alliance contends Ovato made repeated, plain and clear statements that, after 18 August 2022, it would not perform any of its obligations owed to Alliance under the Sub-lease.

Alliance submits that the 18 August Email from Ms Pedder which attached the Section 443B Notice and the accompanying Head Lessor Letter were consistent with Ovato’s discontinuation of the Head Lease and the withdrawal of Alliance’s right of occupation under the Sub-lease.

Alliance states the Section 443B Notice asserted Ovato ceased to occupy the Premises and referred to ongoing commercial discussions between Ovato and the Head Lessor regarding a settlement figure in respect of the Ovato Bank Guarantee. In this regard, Ovato specifically reminded the Head Lessor of its obligations to mitigate its loss, including finding a new tenant for the Premises to reduce any exposure in respect of rent.

Alliance points to the 18 August Email from Ovato which reiterated that:

[a]s stated previously, as a consequence of this decision, Ovato will no longer be in a position to provide you with any right of occupation as previously enjoyed by you under the [t]enancy.

Alliance contends that, consistent with what it describes as the ‘discontinuation by Ovato of the Head Lease’ and the withdrawal of the right of occupation due to Alliance under the Sub-lease, the Head Lessor Letter which accompanied the Administrators’ Section 443B Notice:

(a) asserted that Ovato had ceased to occupy the property;

(b) referred to ongoing commercial discussions between Ovato and the Head Lessor to reach a settlement figure in respect of the Ovato Bank Guarantee; and

(c) specifically stated that ‘if the negotiations were unsuccessful, we remind [the Head Lessor] of your obligations to mitigate your loss, including finding a new tenant for the [Premises] to reduce any exposure in respect of rent.’

Alliance submits the purpose of the Section 443B Notice is limited; it is to enable the administrator of a company under administration to elect to avoid incurring personal liability for rent and like charges unless, by their conduct, they adopted the lease. The Section 443B Notice does not affect Ovato’s liability (as distinct from the Administrators) under the Head Lease.

Section 443B of the Act states:

Payments for property used or occupied by, or in the possession of, the company
Scope
(1)This section applies if, under an agreement made before the administration of a company began, the company continues to use or occupy, or to be in possession of, property of which someone else is the owner or lessor, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods.

General rule
(2)Subject to this section, the administrator is liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period:
(a)that begins more than 5 business days after the administration began; and

(b) throughout which:
(i)the company continues to use or occupy, or to be in possession of, the property; and

(ii) the administration continues.

(3)Within 5 business days after the beginning of the administration, the administrator may give to the owner or lessor a notice that:
(a) specifies the property; and
(b)states that the company does not propose to exercise rights in relation to the property; and

(c) if the administrator:
(i) knows the location of the property; or
(ii)could, by the exercise of reasonable diligence, know the location of the property;

specifies the location of the property.

(4)Despite subsection (2), the administrator is not liable for so much of the rent or other amounts payable by the company under the agreement as is attributable to a period during which a notice under subsection (3) is in force, but such a notice does not affect a liability of the company.

(5) A notice under subsection (3) ceases to have effect if:
(a)the administrator revokes it by writing given to the owner or lessor; or
(b)the company exercises, or purports to exercise, a right in relation to the property.

(6)For the purposes of subsection (5), the company does not exercise, or purport to exercise, a right in relation to the property merely because the company continues to occupy, or to be in possession of, the property, unless the company:
(a)also uses the property; or

(b) asserts a right, as against the owner or lessor, so to continue.

Restrictions on general rule
(7)Subsection (2) does not apply in relation to so much of a period as elapses after:
(a) a receiver of the property is appointed; or
(b)under an agreement or instrument under which a security interest in the property is created or arises:
(i)the secured party appoints an agent to enter into possession, or to assume control, of the property; or
(ii)the secured party takes possession, or assumes control, of the property;

but this subsection does not affect a liability of the company.
(8)Subsection (2) does not apply in so far as a court, by order, excuses the administrator from liability, but an order does not affect a liability of the company.

(9) The administrator is not taken because of subsection (2):
(a) to have adopted the agreement; or
(b)to be liable under the agreement otherwise than as mentioned in subsection (2).

Alliance referred to two authorities on the question of whether service of a section 443B notice is considered repudiatory conduct by a lessee. In Silvia v FEA Carbon Pty Ltd (‘Silvia’),[4] Finkelstein J considered the legal effect of service of a section 443B notice on a lease by a tenant. There, in the context of an administrators’ concern that service of such a notice by the lessee might amount to a repudiation of the lease entitling the lessor to determine the lease, Finkelstein J found that the mere service of a section 443B notice alone, would not, without more, amount to a repudiation of the lease. He stated:

…the question of what amounts to a repudiation of a contract has been discussed in many authorities. What is at the heart of a repudiation is that a contracting party has acted in such a way as to lead the other party to the conclusion that the first party will not fulfil his part of the contract. “It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other end repudiating the contract; but there must be an absolute refusal to perform his side of the contract”.
By the service of a subsection (3) notice the administrator does [not repudiate the lease]. The notice need only state that the company will not exercise its “rights” in relation to the property. The notice only applies, at most, during the period the company is in administration, and as subsection (5) shows, may apply for an even shorter period. Further, subsection (6) makes clear that the mere fact that the company remains in occupation or possession of the leased property does not amount to exercising rights in relation to the property.
It is impossible to hold that a lessee has repudiated its lease simply by its administrator serving a notice under subsection (3) which says nothing about, and does not preclude the company from, continuing to occupy or possess the premises. Moreover, the notice relates to the “rights” of the company and is not concerned with the performance by the company of its obligations. As subsection (4) makes clear, the service of a notice does not affect those obligations.
In my view, a notice under subsection (3) is nothing more than an indication by an administrator that he will not “use” the leased property and a statement that he does not accept personal liability for the continuing occupation or possession of the property. Whatever rights the landlord has in those circumstances are to be found in the terms of the lease. Those rights are not altered, either to the lessor's advantage or the lessee's detriment, by the notice. [Emphasis added][5]

[4](2010) 185 FCR 301 (Finkelstein J).

[5]Ibid, [21]–[24].

Alliance contends, by adopting the analysis of Finkelstein J, that what is at the heart of a repudiation is that a contracting party has acted in such a way as to lead the other party to the conclusion that the first party will not fulfil its part of the contract. Alliance submits the withdrawal of a grant of occupancy by a lessor is the most obvious repudiation of the lessor’s obligations under a lease (or sub-lease); it is a refusal on the lessor’s part to perform their part of the contract – that of providing a right of use and occupation.

The second authority referred to by Alliance, Markham Real Estate Partners (KSW) Pty Ltd v Misan (‘Markham’),[6] considered the issue of repudiation in the context of an action by a sub-lessor against a guarantor of the obligations of an insolvent sub-lessee in administration. The Court was required to consider, inter alia, whether the sub-lease had been repudiated in the circumstances of that case. A section 443B notice had been served, however, in addition:
[6][2022] NSWSC 733 (Henry J).

(a) the sub-lessee failed to pay rent, outgoings or other charges under the sub-lease for 4 months;

(b) the sub-lessee failed to provide a bank guarantee as required by the sub-lease;

(c) such failures were specified in the sub-lease as breaches of essential terms which, but for the administration of the sub-lessee, triggered rights of re-entry and termination and common law rights on the basis of repudiation;

(d) a breach notice was issued; and

(e) there was further conduct which amounted to an inability to substantially perform the sub-lessee’s obligations under the sub-lease such as to amount to repudiation by the sub-lessee.

In that context, in Markham, Henry J said:

The s 443B Notice did not, of itself, amount to a repudiation, of the Sub-Lease: Silvia v FEA Carbon Pty Ltd [2010] FCA 515 at [18]. However, that notice together with the existing and further breaches by Wayl and the content of the communications from the Administrator made it clear that Wayl was unable to and would not substantially perform its obligations under the Sub-Lease and amounted to a repudiation of the Sub-Lease by Wayl.[7]

[7]Ibid, [121] citing Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 63 FCR 391, 396E (Branson J).

Alliance submits that in the present case, Ovato made repeated, plain and clear statements to Alliance that, after 18 August 2022, it would not perform its obligations to Alliance under the Sub-lease.

Alliance contends Ovato’s position was made more apparent to Alliance by the terms of the Head Lessor Letter, which made it clear that Ovato had moved well beyond the protections afforded to the Administrators by the Section 443B Notice and was abandoning its obligations under the Head Lease.

Alliance pointed to its evidence that, after being notified that the Sub-lease would end on 18 August 2022, Mr Lichtenstein identified the need for urgent steps to be taken to protect Alliance’s business operations to ensure it did not close down, and the activities of Alliance and Mr Williams after 18 August 2022 were directed to obtaining new premises and relocating to those new premises in an efficient manner as soon as practicable.

Alliance submits that by 26 August 2022, in circumstances where Ovato ceased to perform the Head Lease, refused to receive rent and outgoings, and stated it could not provide a right of occupancy to Alliance on multiple occasions, it is clear both Alliance and Ovato regarded the Sub-lease as being at an end and that Ovato was seeking advice regarding its obligation to return bank guarantees to former sub-tenants.

In this regard, Alliance points to the First 26 August Email which stated Ovato would no longer be in a position to provide Alliance with any right of occupation under the Sub-lease and all payments under the Sub-lease be paid directly to the Head Lessor from 19 August 2022, until a direct tenancy (or some other occupation right) was established between Alliance and the Head Lessor.

Alliance emphasises the Second 26 August Email as being evidence of its acceptance that the Sub-lease was at an end. In particular, Alliance observes the Second 26 August Email from Mr Williams to Ms Pedder relevantly stated:

Given the formal steps now executed to cease continuity of the Head Lease and the predicament that this leaves [Alliance] in for the foreseeable future, I believe it entirely appropriate that we request the return of the Security Deposit held by Ovato and issued by [Alliance] to the value of $200,000.

Alliance notes that, contrary to the commitment to provide a response to Alliance’s request that the Alliance Bank Guarantee be returned in the Third 26 August Email following the obtaining of legal advice, the 7 October Email said nothing on Alliance’s request for the return of the Alliance Bank Guarantee.

Alliance submits that, apart from the unexplained apology by reference to ‘confusion in our previous correspondence’, and without identifying or clarifying the cause of that confusion, the 7 October Email provided no response to the timing of the return of the Alliance Bank Guarantee and no explanation for the contradiction in Ovato’s position from its position in the 28 July Email, which was that Ovato would refuse to accept rent from Alliance.

Alliance contends that by 7 October 2022, in circumstances where it understood the Sub-lease had been unilaterally terminated by Ovato and that Ovato was no longer in occupation under the Head Lease, Alliance could not be confident that if it made payment to Ovato it would receive an effective discharge of its liabilities from the proper recipient of those funds and did not see a need to attend to paying the rent for July 2022 in relation to the 7 October Email.

In relation to the JWS 1 December Letter, Alliance contends JWS incorrectly asserted the express statements given to Alliance through the 15 August Email, 18 August Email and First 26 August Email were in fact given by the Administrators, not Ovato, and were to the effect that the Administrators were not able to provide any right to occupy the Premises.

Alliance submits that the JWS 1 December Letter ignored the events of the previous four months, including that:

(a) by the 28 July Email, Ovato made the Remittance Request and the Refusal in respect of rent and outgoings under the Sub-lease so that any tender of rent by Alliance was thereby made futile;

(b) by the 15 August Email, Ovato informed Alliance it was likely the Administrator would not continue the Head Lease beyond 18 August 2022;

(c) by the 15 August Email, Ovato informed Alliance that it ought to engage in paying rent and establishing a direct tenancy or other occupation rights with the Head Lessor;

(d) by the 15 August Email, Ovato informed Alliance that on and from 18 August 2022, it would no longer be in a position to continue to provide Alliance with any right of occupation under the Sub-lease; and

(e) by the 15 August Email, Ovato expressed a hope that Alliance would be able to negotiate successful rights of occupation beyond 18 August 2022;

(f) by the Head Lessor Letter sent on 18 August 2022, provided to Alliance, Ovato:

(vi) stated to the Head Lessor that it had ceased to occupy the Premises; and

(vii) specifically stated that if the negotiations were unsuccessful, the Head Lessor had their own obligations to mitigate their loss, including finding a new tenant for the Premises to reduce any exposure in respect of rent;

(g) by the 18 August Email, Ovato reiterated that as a consequence of this decision, it would no longer be in a position to provide Alliance with any right of occupation as previously enjoyed by Alliance under the Sub-lease;

(h) by the First 26 August Email, Ovato reiterated, for the third time, that it would no longer be in a position to provide Alliance with any right of occupation as previously enjoyed by it under the tenancy, confirmed (not ‘directed’) that all payments (rent and outgoings) under the tenancy continue to be paid directly to the Head Lessor from 19 August 2022, consistent with the suggestion in the 15 August Email, whilst a direct tenancy (or other occupation rights) was established between Alliance and the Head Lessor;

(i) by the Third 26 August Email, Ovato acknowledged Alliance understood the Sub-lease to have been terminated by Ovato and required the return of the Alliance Bank Guarantee. It assured Alliance it was receiving advice on the matter of the return of the Alliance Bank Guarantee and that it would revert once that advice had been obtained; and

(j) Ovato ceased to invoice Alliance for monthly rent and outgoings calculated in accordance with the Sub-lease.

The matters referred to in sub-paras (a) to (j) of para 92 are referred to by Alliance as the ‘Ovato Conduct’.

Alliance contends the JWS 1 December Letter ignored the substance of the Ovato Conduct and attempted to foster the impression that Ovato’s actions were not in fact on its own behalf, but rather on behalf of the Administrators themselves, so as to not affect the rights between Ovato and Alliance, and accordingly, Alliance had a continuing obligation to pay rent and outgoings under the Sub-lease.

Alliance submits that given the termination of the Sub-lease, neither the Administrators nor Ovato were in any position to require or demand Alliance pay any amount of rent or outgoings to Ovato after 18 August 2022. No explicit demand for such a payment is made in the JWS 1 December Letter.

Alliance observes that the JWS 1 December Letter requested Alliance pay ‘all outstanding sub-tenant rent and any sub-tenant rent that may become due and payable (and which the [Head Lessor] refuses to accept) into [the JWS] trust account’. The JWS 1 December Letter further states these ‘funds will comprise potential “settlement funds/damages” from which, once the dispute is resolved, any amounts outstanding under the Lease may be paid to either the [Head Lessor] and/or Ovato. [JWS] will not pay the funds out of our trust account to either the [Head Lessor] and/or Ovato without the consent of the [Head Lessor]’.

Alliance contends that by formulating the JWS 1 December Letter in these terms, JWS have sought an amount equivalent to what would have become due as rent and outgoings under the Sub-lease with Alliance’s consent and agreement in circumstances where Ovato was aware it could not do so relying on the terms of the Sub-lease itself as it was no longer on foot.

Alliance points to the facts that:

(a) in the 28 July Email, Ovato specifically stated that any funds it received from the date of appointment, 21 July 2022, would be returned;

(b) Ovato did not issue any monthly invoices for rent and outgoings for August, September, October, November and December 2022; and

(c) only on 7 October 2022, some 7 weeks after the termination of the Sub-lease and some 6 weeks after Alliance was informed Ovato was seeking advice as to its obligations to the former sub-tenants, did Ovato assert in the 7 October Email that the amount invoiced for July 2022 rent remains fully payable to Ovato; and

(d) despite this, Ovato still did not issue invoices in respect of August, September, October, November and December 2022.

Alliance referred to Mr Hill’s evidence that on 2 August 2023, Alliance was informed by Ovato that nearly 7 months earlier on 1 February 2023, the Head Lessor had served the Breach Notice under the Head Lease on Ovato, demanding an amount of $653,540.32 for unpaid rent, outgoings and GST.

The Breach Notice was required by cl 18.1 of the Head Lease, which relevantly provided:

18.1 Default
The Tenant shall be in default of this Lease if:
(a)any Rent shall be unpaid and in arrears for more than 14 days after formal demand shall have been received for such moneys; or
(b)any other moneys payable by the Tenant to the Landlord shall not have been paid within 14 days after formal demand shall have been made for
such moneys; or

(c) …; or
(d) …

Clause 18.1 of the Head Lease was incorporated without modification into the Sub-lease.

Alliance submits that, consistent with the approach taken in the JWS 1 December Letter, the 16 March Email sought Alliance’s agreement to the issue of an invoice in those terms:

Could you confirm that this is in acceptable form for you to pay and when you are likely to remit the funds?

Alliance contends the 16 March Email did not assert an entitlement to issue such an invoice because such an entitlement could only arise if the Sub-lease continued beyond 18 August 2022. Alliance states that even though Ovato knew the Head Lessor had issued the Breach Notice under the Head Lease on 1 February 2023 and on or about 28 February 2023 had drawn down on the Ovato Bank Guarantee under the Head Lease, Ovato did not purport to issue an equivalent formal breach notice under the Sub-lease. Alliance contends that in circumstances where the Sub-lease was terminated, Ovato had no entitlement to do so. Alliance did not respond to the 16 March Email or the draft invoice.

Alliance refers to Mr Lichtenstein’s evidence that, on 18 April 2023, Ms Pedder sent an email on behalf of the liquidators to Mr Williams attaching a formal invoice in the amount of $366,129.87 (including GST) for August 2022 to December 2022 (‘18 April Email’). In the 18 April Email, Ms Pedder says that she spoke with Mr Williams the previous week and was told Mr Williams would need permission from Alliance’s board to agree to pay an invoice from Ovato. It appears that the invoice issued in the 18 April Email was the first invoice issued by Ovato to Alliance since it had been placed into administration on 21 July 2022. Alliance did not respond to the 18 April Email or pay the attached invoice and contends that, given the termination of the Sub-lease, Alliance had no obligation to either respond to or pay the invoice.

Alliance notes the terms of cl 19.2 of the Head Lease, incorporated without modification into the Sub-lease, which provides:

19.2 Claims
The Landlord shall be entitled to demand payment from the Bank following the failure of the Tenant to comply within 21 days of receipt of a notice specifying the breach by the Tenant of its obligations under this Lease and shall be entitled to call upon payment of all or part and apply so much towards the satisfaction of any amounts or liabilities that may be payable or due to the Landlord as a result of any such breach.

Alliance contends that even if there was a valid sub-lease in place (which Alliance denies), for Ovato to validly call on the Alliance Bank Guarantee, a formal breach notice in the same form to that issued by the Head Lessor to Ovato under the Head Lease specifying the alleged breach of the Sub-lease must first be issued to Alliance. Alliance must then fail to remedy that breach within 21 days of receipt of that notice; there is no evidence of such a notice having been provided to Alliance.

On 3 May 2023, JWS, Ovato’s solicitors, wrote to Alliance (‘JWS 3 May Letter’). In the JWS 3 May Letter, JWS asserted Alliance was in breach of the Sub-lease:

We are instructed that Alliance is in default of the lease agreement with Ovato since July 2022 for the failure to pay outstanding rent and outgoings.

Alliance says that any lease agreement with Ovato was terminated on or about 18 August 2022. However, even if a sub-lease remained on foot between 28 July 2022 and at least 7 October 2022, Ovato’s position, as communicated by the Administrators, was that it would refuse and return all payments tendered to it for that period; between 7 October 2022 and at least 1 December 2022, Ovato’s position was that no payments beyond those invoiced prior to the Administrators’ appointment to Ovato on 21 July 2022 would be accepted.

Alliance notes that between 21 July 2022 and 18 April 2023, Ovato issued no invoices in respect of the amounts referred to in the JWS 3 May Letter. The JWS 3 May letter went on to relevantly state:

Pursuant to the terms of [the Sub-lease], an amount of $439,831.34 is immediately due and payable for outstanding rent and outgoings by Alliance to Ovato for the period of occupation of the Premises from July 2022 to December 2022.
…
Given Ovato has not received any payment to date, the Liquidators will immediately draw down on the [Alliance Bank Guarantee] in full leaving a balance of $239,831.34 owing by Alliance to Ovato (Outstanding Amount). Pursuant to the terms of the lease agreement, Ovato demands payment of the Outstanding Amount within 7 days of this letter …
…
Should Alliance fail to make payment of the Outstanding Amount within 7 days of this letter, Ovato reserves its rights to commence proceedings against Alliance to recover all amounts owing under the lease agreement including interest.

Alliance submits that the JWS 3 May Letter is not a formal notice in accordance with the Sub-lease that would entitle Ovato to draw down on the Alliance Bank Guarantee. In this regard it submits:

(a) although the ‘final invoice’ was dated 16 March 2022 and asserted the amount claimed was due on 16 March 2022, it was not issued until 18 April 2022. Accordingly, it contained no ‘due date’ from which a purported default under the former Sub-lease could be calculated or asserted;

(b) contrary to the requirements of cl 19.2 of the former Sub-lease, the JWS 3 May Letter did not contain a 21 day notice period to Alliance of an intention to draw down on the Alliance Bank Guarantee;

(c) instead, the JWS 3 May Letter stated that Ovato would immediately draw down on the Alliance Bank Guarantee in full, without notice to Alliance; and

(d) demanded the claimed outstanding balance be paid within seven days, without reference to any basis for that demand.

Alliance states the Liquidators drew down on the Alliance Bank Guarantee for the amount of $200,000, purportedly to enable partial payment of the arrears owing under the Sub-lease, but did not do so until at least 29 June 2023; it did so on the basis of communications it had with Westpac without regard to Alliance.

Alliance submits that the Debt claimed in the Demand claiming rent and outgoings for July 2022 to December 2022, could only exist if the Sub-lease continued beyond 18 August 2022 so that liability for rent and outgoings continued to fall due and so that Ovato could take the steps permitted by the Sub-lease to access the funds represented by the Alliance Bank Guarantee.

Alliance refers to the correspondence passing between its solicitors and JWS which is summarised above in which the respective positions as to whether the Sub-lease had been repudiated or not and the implications which flowed from this.

Alliance observes that in the JWS 3 July Letter, Ovato asserted that because Alliance continued to occupy the Premises without paying rent directly to the Head Lessor, Alliance did not act in good faith and was unjustly enriched to Ovato’s detriment. This gave rise to an additional claim for restitution by Ovato against Alliance.

Alliance contends the Demand does not claim a sum due on the basis of restitution or unjust enrichment and the existence or otherwise of such a claim has no relevance to the Court’s jurisdiction under ss 459G and 459H of the Act in the present case.

Alliance nonetheless contends the purported claim in unjust enrichment expressed in the JWS 3 July Letter is clearly unsustainable as:

(a) Ovato’s obligation to pay the rent and outgoings for the full term of the Head Lease was unaffected by the service of the Section 443B Notice on the Head Lessor;

(b) If the Administrators believed that by:

(viii) service of the Section 443B Notice;

(ix) notifying the Head Lessor that Ovato would cease to ‘occupy’ the Premises in a legal sense under the Head Lease; and

(x) withdrawing any right of occupation to Alliance under the Sub-lease;

Ovato’s liability under the Head Lease was affected, such a belief was always misconceived;

(c) Ovato’s actions from 28 July to 26 August 2022 clearly amounted to repudiation under both the Head Lease and the Sub-lease;

(d) as is apparent from the Head Lessor’s service of the Breach Notice and the subsequent draw down on the Ovato Bank Guarantee, in the face of Ovato’s repudiation of the Head Lease, the Head Lessor elected to affirm it and looked to the Ovato Bank Guarantee to recover unpaid rent and outgoings otherwise due to it under the Head Lease;

(e) the Head Lessor’s entitlement to do so arises under the Head Lease and does not depend on any act or omission by Alliance;

(f) if, as Ovato contends, the Head Lessor negotiated a direct tenancy agreement with Alliance, that direct tenancy agreement could have been regarded as the Head Lessor’s acceptance of Ovato’s repudiation of the Head Lease, and the Head Lessor was not required to accept such repudiation;

(g) it is also possible the Head Lessor regarded its acceptance of any rent directly from Alliance as being evidence of Ovato’s repudiation of the Head Lease, such repudiation was not required to be accepted by the Head Lessor;

(h) the contention in the JWS 3 July Letter that, in the face of Ovato’s repudiation of the Head Lease, the full amount of the guarantees under it would inevitably be returned to it, is misconceived. As is now the fact, by reason of Ovato’s actions, the Head Lessor became entitled to call on those guarantees, and did so;

(i) if, as a consequence of Ovato’s repudiation of both the Head Lease and the Sub-lease:

(i) Alliance was relieved of the obligation to pay rent under the Sub-lease; and

(ii) the Head Lessor did not require Alliance to pay occupation rent for its subsequent occupation of the Premises;

Alliance has not been unjustly enriched at Ovato’s expense; and

(j) in the circumstances, Ovato’s losses under the Head Lease were the direct and an inevitable result of its own inability to perform its obligations under the Head Lease; Ovato expressly identified and conceded that inability in July and August 2022 and any claim in unjust enrichment against Alliance is bound to fail.

Alliance contends that if Ovato genuinely believed there to be no genuine dispute about the existence or amount of any debt claimed against Alliance under the Sub-lease, it would be unnecessary for Ovato to articulate a claim against it in unjust enrichment.

Alliance contends the matters to which it refers demonstrate the existence of a genuine dispute between Alliance and Ovato concerning the existence and amount of the Debt in the Demand, including, without limitation:

(a) whether Ovato repudiated the Sub-lease by the Ovato Conduct during 21 July 2022 and 18 August 2022, and alternatively 26 August 2022;

(b) whether Alliance accepted that repudiation;

(c) whether Ovato was required to return the Alliance Bank Guarantee following the request made on 26 August 2022;

(d) whether Ovato’s subsequent conduct from 7 October 2022[8] to 18 April 2023 stands as an admission of its own repudiation of the Sub-lease;
[8]Alliance erroneously describes Ovato’s subsequent conduct as starting from 1 October 2022 in its submissions.

(e) whether any amount by way of rent or outgoings was payable to Ovato during the period 18 August to 30 December 2022 and if so, what amount and on what basis;

(f) whether, given the answers to the above, Ovato was entitled by the terms of the Sub-lease to call on the Alliance Bank Guarantee issued by Westpac at Alliance’s request, as it says it did;

(g) whether Ovato made full and proper disclosure to Westpac as to the proper basis of its entitlement to call on the Alliance Bank Guarantee;

(h) whether in the circumstances above, Ovato is properly a creditor of Alliance at all; and

(i) whether, as a consequence of calling on the Alliance Bank Guarantee, Alliance is properly a creditor of either the Administrators or Ovato in the amount of $81,062.68.

Alliance states that as late as the JWS 3 May Letter, JWS asserted it would be necessary for Ovato to commence ‘proceedings’ to establish and enforce the rights it claimed to have against Alliance.

In Alliance’s submissions, it is plain there is a genuine dispute about the existence of the Debt, or alternatively, the amount of the Debt and the value of the offsetting claim that Alliance has, given the unauthorised drawing against the Alliance Bank Guarantee.

Ovato’s submissions

Ovato submits its conduct was not repudiatory, and even if it was, Alliance’s fundamental problem is that it did not accept that repudiation. Ovato contends that following its purported repudiation, Alliance could have vacated the Premises, or could have reached a different agreement with the Head Lessor. Instead, Alliance remained on the Premises without paying rent and repeatedly ignored requests from Ovato to pay the Debt under the Sub-lease until the Demand was issued.

Ovato contends Alliance’s position appears to be that it does not owe rent to anyone; Ovato submits that such a position is not, to borrow from the phraseology adopted in the authorities ‘a plausible contention requiring investigation’. Ovato emphasises Alliance’s failure to raise any issues it now raises until after the issuing of the Demand and after more than six months after the Debt became due as being indicative that there is no genuine dispute.

In its submissions, Ovato, after canvassing what are essentially uncontroversial facts and the authorities describing the tests to be applied for assessing whether there is a genuine dispute,[9] contends there is no genuine dispute here as to the Debt for three reasons.
[9]Ovato cited the decisions of the Victorian Court of Appeal in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 (Kyrou, Ferguson & Kaye JJA), the New South Wales Court of Appeal in Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212 (Gleeson, White JJA & Barrett AJA) and the Full Court of the Federal Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 (Northrop, Merkel & Goldberg JJ).

First, Ovato submits that even if Ovato repudiated the Sub-lease, and even if Alliance accepted that repudiation, Alliance was still bound to pay rent as long as it remained in occupation of the Premises.

Ovato points to cl 4.1 of the Sub-lease as requiring Alliance to pay rent to Ovato ‘during the Term and any holding over period’. Ovato states that a ‘holding over period’ is the period of time for which a tenant remains in occupation of land subject to a lease, following the determination of the lease. Acceptance of repudiation is a recognised means of determining a lease. Ovato submits that accordingly, Alliance ‘holding over’ by failing to vacate the Premises rendered it liable for the outstanding rent.

Second, Ovato contends that in any event, the assertion that it repudiated the Sub-lease is not tenable; repudiation of a lease is not to be found or inferred lightly. Ovato submits that the assessment as to whether conduct is repudiatory is objective.

Ovato contends that the communications from the Administrators to Alliance, read in context, made it clear that Ovato could not remain as sublessor if the Head Lease was determined. Ovato submits that given the Administrators’ role, and their issuing of a s 443B notice, it is apparent the Administrators were simply attempting to mitigate the quantum of any claim the Head Lessor might have.

Ovato contends that once it became clear the Head Lease had not been determined and the Head Lessor would not accept rent paid by Alliance, the only available conclusion was that Ovato would be owed rent and the alternative would be for Alliance to occupy the Premises with no liability to pay rent.

Ovato submits that despite the dispute between Ovato and the Head Lessor, it was clear Alliance was liable to pay rent by 1 December 2022. On that date, the Administrators’ solicitors sent the JWS 1 December Letter to Alliance requesting that it pay ‘all outstanding subtenant rent and any sub-tenant rent that may become due and payable’. Alliance did not respond to that letter.

At the hearing of this application, Ovato submitted any commercial enterprise receiving a statutory demand for a significant amount of money and which states it does not owe that amount would respond to the JWS 1 December Letter, but there was no response from Alliance at all. Ovato emphasised Alliance’s repeated failures to dispute the Debt as being a very relevant factor to be considered in the determination of this application.

As to the Section 443B Notice, Ovato contends service of a s 443B notice alone cannot constitute the repudiation of a contract. In response to Alliance’s position that the current facts are similar to those in Markham, Ovato submits the Markham decision has limited application given the case concerned a sub-lessee in administration, rather than a sub-lessor. Further, the repudiatory conduct was of a particular type commonly arising in cases of repudiation by lessees.

In Ovato’s submission, to the extent Markham has any direct application here, Ovato asserts the following key facts emerge:

(a) the Administrators in this case served a Section 443B Notice on the Head Lessor, which itself was insufficient to constitute repudiation;

(b) to the extent that Ovato’s other conduct constituted repudiation of the Head Lease, the Head Lessor plainly did not accept that repudiation. That refusal to accept repudiation is apparent from the refusal to accept rent directly from Alliance, and the Head Lessor subsequently issuing a breach notice on Ovato;

(c) what it characterises as the conditional nature of Ovato’s statements to Alliance about the Sub-lease and the Head Lessor’s refusal to accept Ovato’s purported repudiation of the Head Lease means Ovato’s conduct in regard to Alliance cannot properly be regarded as repudiatory. There was no unconditional renunciation of the contract.

Thirdly, Ovato contends that even if Ovato’s conduct was repudiatory, Alliance did not accept the repudiation. Ovato asserts acceptance is an essential element for the termination of a lease by repudiation, and that it must be clear and unequivocal.

Ovato contends Alliance did not accept any purported repudiation of the Sub-lease, as Alliance elected to remain on the Premises. That election, and Alliance’s failure to pay any rent to the Head Lessor, were fundamentally inconsistent with accepting the repudiation of the Sub-lease. Furthermore, Ovato contends that whether Alliance requested the release of the Alliance Bank Guarantee has no relevance to that issue. Ovato asserts that to the contrary, the fact the Alliance Bank Guarantee was not released is a strong indication that no repudiation was intended.

Ovato states that if it is accepted that Ovato’s conduct was repudiatory, Alliance had three options in response: to vacate the Premises, to remain on the Premises and reach an alternative arrangement with the Head Lessor, or to remain on the Premises and continue paying Ovato rent. Ovato contends there was no legitimate option to stay in occupation without paying any rent and Alliance’s conduct constituted an election to take the third option. Ovato submits this election was not a ‘clear and unequivocal’ acceptance of the repudiation; rather, it affirmed the Sub-lease. Ovato asserts the only available inference is that Alliance intended to continue to have the benefit of remaining on the Premises and in the absence of some other arrangement, that meant the terms of the Sub-lease would continue to bind Alliance.

Ovato asserts the failure to accept the repudiation is underscored by Alliance’s consistent failure to dispute an obligation to pay the outstanding rent to Ovato prior to service of the Demand, despite the numerous opportunities Alliance had to dispute that obligation, which included:

(a) the request it make payment of ‘outstanding sub-tenant rent and any subtenant rent that may become due and payable’ directly to the Administrators on 1 December 2022;

(b) the draft invoice sent by Ovato to Alliance on 16 March 2023;

(c) the final invoice sent by Ovato to Alliance on 18 April 2023;

(d) the numerous telephone calls from Mr Smith and Ms Pedder (assisting the Liquidators) to Mr Williams to discuss payment; and

(e) the letter sent by the Liquidators’ solicitors on 3 May 2023 demanding payment.

Ovato submits that the Debt stated in the Demand is not described as arising in unjust enrichment. Ovato submits that the fact Ovato has been liable to the Head Lessor for rent for the Premises during the period between August 2022 to December 2022, and Alliance’s occupation of the Premises during that period without paying rent means that Alliance has been unjustly enriched. Ovato submits that a case of unjust enrichment, far from supporting the existence of a genuine dispute, only emphasises the actual liability of Alliance and provides a likely motive of Alliance in resisting the Demand.

Ovato submits that the Head Lessor’s draw down of the Ovato Bank Guarantee puts beyond doubt the fact that Alliance owes the outstanding rent to Ovato, and not to the Head Lessor.

Ovato further submits that Alliance seeks to make a point about the absence of any invoice until March 2023. Ovato notes that there was no obligation on Ovato to issue an invoice for rent to be payable under the Sub-lease and that, Alliance’s obligation to pay rent is expressly described as arising ‘without demand’.

Ovato contends that whether or not there was a ‘wrongful’ call on the Alliance Bank Guarantee, it can have no bearing on the genuineness of the Debt. Given that the Alliance Bank Guarantee has been set off against the rent owed by Alliance, the only effect of any finding that Ovato was not entitled to call on the Alliance Bank Guarantee is that the debt owed by Alliance is increased. Ovato contends that there can be no argument that the Alliance Bank Guarantee could be set off against the outstanding undisputed rent, being the rent owed in respect of July 2022 of $73,701.46.

The only question for us is whether the judge erred in determining that there was no genuine dispute. One can of course differ from the judge without deciding that the debt did not exist. A great range of states of mind on what we might call the ultimate question - the existence of the debt - may accompany the view that there is a genuine dispute, ranging from a clear conviction that the debt does not exist to the opinion that the genuine dispute hurdle has only just been cleared.
We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.

Mr Assaf concludes his review of the relevant principles with the observation that another aspect of assessing genuineness requires that the serious question or plausible contention not be something merely created or constructed in response to the pressure represented by the service of the statutory demand.
[citations omitted][24]

[24]Ibid, [217]–[222], [227].

As I have observed earlier, the factual background of this matter is essentially uncontroversial and resolution of the application therefore requires consideration of whether Alliance’s submissions as to the legal characterisation of the events regarding the tenancy gives rise to a genuine dispute.

In applications to set aside statutory demands which require the Court to investigate contested legal issues, the approach which has been taken in the authorities is that the Court will generally not proceed to determine such issues in the application. An example of this approach is to be found in Trecomax Pty Ltd v Prentice (‘Trecomax’),[25] where Sackville J stated:
[25](2004) 50 ACSR 314, (Sackville J).

In Spencer Constructions, the Full Court thought (at FCR 463; ALR 454; ACSR 363) it clear from the authorities that:
… in considering applications to set aside a statutory demand, a court will not determine contested issues of fact or law which have a significant or substantial basis. [emphasis added]

This suggests that the court should not investigate contested legal issues, beyond determining whether the argument has a “significant or substantial basis”.
There are authorities which support the proposition that if the facts are not in dispute, the court can decide the question of law. Thus in Delnorth v State Bank of New South Wales, Cohen J considered that where no further investigations of the facts was required, the court, in an application under s 459G of the Corporations Law could decide, as a matter of law, whether there is a genuine dispute. His Honour thought that the occasions where this is possible might be “few”, but he proceeded in that case to resolve the question of law: …
While this approach is open, in my view the court should take care to ensure that it does not go beyond the role that is appropriate, having regard to the considerations identified by Hayne J in Mibor Investments and the approach endorsed by the Full Court in Spencer Constructions. The procedure established by Div 3 of Pt 5.4 of the Corporations Act is not ordinarily the occasion for final resolution of a dispute, even if the matter in contest rests on a question of law…
[citations omitted][26]

[26]Ibid, [33].

In Trecomax, the facts were, as they are here, essentially uncontentious and resolution of the application involved a consideration of whether or not a legal submission by the plaintiff as to the operation of the terms of a partnership deed gave rise to a genuine dispute. Sackville J, after observing that the plaintiff’s submission faced ‘formidable difficulties’, and considered the case to be ‘... close to the borderline of genuine dispute’, on an application of the authorities found the ground raised was ‘real and not spurious, hypothetical illusory or misconceived’ and that it was not appropriate ‘to explore the issues further’.[27]
[27]Ibid, [41].

This approach was upheld by the New South Wales Court of Appeal in Infratel Networks Pty Ltd v Grundy's Telco & Rigging Pty Ltd (‘Infratel’)[28] where it was stated:

The primary judge said…that where the relevant dispute depends upon the construction of the relevant contract, the court will ordinarily determine that question on an application to set aside the statutory demand where the factual matrix for the determination is present and there has been sufficient time to make proper submissions as to the question…
With respect, the primary judge has to a degree misstated the principle. The court may determine questions of construction of a contract in an appropriate case. However, this is not, as his Honour said, the ‘ordinary’ situation, it is what may occur on a few occasions: Seduce at [28] and see Trecomax Pty Ltd v Prentice (2004) 50 ACSR 314; [2004] FCA 1057 at [35] where Sackville J actually said it was not ordinarily the occasion for the court to construe the contract.[29]

[28](2012) 297 ALR 372 (Hoeben JA, Young AJA & Ward J).

[29]Ibid, [45]–[46] (Young AJA).

In Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd,[30] Barrett J said:

While it has been said that “a short point of law or the construction of documents or agreed facts” may, unlike a disputed question of fact, be determined upon a s 459G application …..it does not follow that the court is compelled to make such a determination. In the case of a legal argument, determination might be appropriate if it were, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, a “patently feeble legal argument”.[31]

[30][2009] NSWSC 1192 (Barrett J).

[31]Ibid, [45].

It may be that in certain cases where the question of construction is a simple one and where there are no factual issues to be resolved, the relevant Court may construe the contract. For example, in Lodge Partners Pty Ltd v Pegum,[32] a case which concerned the construction of a document in the context of a genuine dispute, Lindgren J observed:

…where the dispute relates to a simple question of construction that can be decided following a short hearing and there is no factual issue to be resolved, the Court will decide the question and if construction is against the company the dispute will not be classified as “genuine” …[33]

[32](2009) 255 ALR 516 (Lindgren J).

[33]Ibid, [18].

However, this is not the ‘ordinary’ position. In Re Hobash Holdings Pty Ltd,[34] Black J, citing Infratel, stated that ‘[t]he Court will not generally determine questions of construction of a contract in an application to set aside a statutory demand, although it may do so rarely and in an appropriate case’.[35] In my opinion, this principle in the context of construction of contracts also applies to a court that is considering embarking on the resolution of other than ‘short points of law’ in an application to set aside a statutory demand.
[34][2012] NSWSC 1501 (Black J).
[35]Ibid, [22].

In Wellnora Pty Ltd v Fiorentino,[36] Barrett J stated:
[36][2008] NSWSC 483 (Barrett J).

In Tatlers.com.au Pty Ltd v Davis, White J said that a purely legal question could be decided on a s 459G application even though the question of law was fairly arguable. The question was as to the availability of a right of set-off. It went, therefore, to the existence of an offsetting claim for s 459H purposes.
White J referred with apparent approval to a passage in the judgment of Cohen J in Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384:
Section 459H(1) refers to the court finding that there is a genuine dispute. The parties have argued this case on the issue of whether the proper construction of the agreement and the facts results in the plaintiff owing money to the defendant. The facts were not in dispute and there was thus no question of whose evidence would be accepted on a final hearing. Under the previous legislation, when there was a claim that there was a bona fide dispute on substantial grounds as to the debt claimed, the court could decide that dispute if it arose from a question of law or was of short compass. See, for example, Offshore Oil NL v Acron Pacific Ltd (1984) 2 ACLC 8.
I consider that under the provisions of the Corporations Law, the same approach can be taken. Although questions of disputed fact will not be decided on an application to set aside a statutory demand, the issue of whether there is a genuine dispute can be resolved on that application where the question arises on a short point of law or the construction of documents or agreed facts.

These observations apply, in terms, to a case in which genuine dispute, as distinct from offsetting claim, is alleged. They have been approved and followed in later cases: see, for example, Lifestyle Retirement Projects No 2 Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 705 at [16] - [17]; BBX Holdings Pty Ltd v American Home Assurance Co [2007] NSWSC 549 also at [16] - [17]… But while a “short point of law” or a question of construction might be resolved on a s 459G application, I do not understand Cohen J to have said that every point of law or question of construction must be determined.
In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, McLelland CJ in Eq said (at 787) that the court must not accept uncritically as giving rise to a genuine dispute “a patently feeble legal argument”. His Honour was here indicating that if the basis for the alleged dispute is a “legal argument”, the court should decide whether the argument is “patently feeble” - and, if it is, recognise that it is not in truth productive of genuine dispute. In such a case, the dispute said to arise from the “patently feeble legal argument” would be seen not to be a genuine dispute.
Where the basis for the alleged dispute is a legal argument or question of construction which is not ‘patently feeble’ and does not involve a “short point of law” and there are clearly arguable alternatives as to the correct outcome, the court should not, upon the s 459G application, attempt to reach a definitive resolution. The reasons are stated in the joint judgment of Brooking JA and Charles JA in Spacorp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89; (2001) 19 ACLC 1270 at [4] (“Spacorp”):
We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.

The reference here to “the ultimate question” is a reference to the question whether the debt exists.
The real and only question upon a s 459G application based on s 459H(1)(a) - which, as noted by the Court of Appeal in W & P Reedy Pty Ltd v Macadams Baking Systems (Pty) Ltd [2007] NSWCA 146 at [12], is intended to be a “summary process” - is whether there is in truth a genuine dispute as to the existence of the alleged debt. A dispute about the legal effect of a statute or a question of construction is not, of its nature, incapable of being genuine. That is the position here. Potentially quite difficult and significant questions of statutory interpretation arise under the provisions about the force and effect of a deed of company arrangement and the effect and consequences of its termination. The arguments on each side are far from “patently feeble”; nor do they involve merely a “short point of law”. It was submitted on behalf of the plaintiff that the allied questions of construction relating to clause 14.2 might be affected by evidence about surrounding circumstances. That may be so. There is also the point that neither counsel actually made submissions on the true construction of s 445H. In fact, the question of the force and operation of the deed provisions generally (and clause 14.2 in particular) after termination was not addressed in argument.[37]
[37]Ibid, [46]–[52].

Consideration

Determination of this application involves consideration of whether it is plausibly arguable by Alliance that Ovato, by the conduct of its administrators, repudiated the Sub-lease with Alliance and that repudiation was accepted by Alliance, with the result that Alliance’s obligation to pay rent under the Sub-lease, including under its holding over provisions, was excused from further performance. While I have considerable reservations about Alliance’s prospects of ultimately successfully pressing its submissions in this regard, I consider that the issue it raises is arguable and is more than ‘a short point of law’ and is not susceptible of resolution in an application of this type.

The events which Alliance contends give rise to the repudiation on Ovato’s part are described as the Ovato Conduct and are set out in para 92 above. In short, the Administrators indicated to Alliance that they would no longer be in a position to continue to provide Alliance with any right of occupation under the Sub-lease and that it should pay rent and establish a direct tenancy or other occupation rights with the Head Lessor. Ovato, through its administrators, confirmed this to be the position on several occasions, and informed Alliance that any rent paid under the Sub-lease would be returned. Alliance says that it accepted this as repudiation of the Sub-lease and requested the discharge of the bank guarantee it had provided to Ovato.

The evidence is that until Ovato went into administration, Alliance received monthly invoices for rent and outgoings, but this ceased after July 2022 when Ovato went into administration. Alliance says this is a clear indication that Ovato regarded the Sub-lease as being at an end. Alliance argues that while service of the Section 443B Notice did not of itself amount to a repudiation of the Sub-lease, the Head Lessor Letter accompanying the notice, to which it was copied, made it clear that Ovato was moving well beyond the statutory protections afforded to the Administrators by that notice and was expressly abandoning Ovato’s obligations under the Head Lease. Alliance says that to protect its business operations, it began a process of relocation to new premises.

Alliance says that by 7 October 2022, by which point it contends it understood the Sub-lease to have been terminated by Ovato, and that Ovato was no longer in occupation under the Head Lease, it could not be confident that if it made payments to Ovato in respect of its occupation of the Premises that Alliance would receive an effective discharge of liability from the proper recipient of those funds. If it was later determined that Alliance should have made those payments to the Head Lessor and not Ovato, the Head Lessor would look to Alliance for payment.

Alliance observes that the JWS 1 December Letter, in which JWS requested that outstanding subtenant rent be paid into its trust account, points to the existence of a controversy not only as to who the rent should be being paid to, but whom Alliance’s tenancy was with after the August communications. During the period of August to December 2022, no invoices were issued in respect of rent under the Sub-lease. Up to the time of the JWS 1 December Letter, the position was that any payments made by Alliance to Ovato would be returned. As a corollary, as the claim in the Demand for rent and outgoings for July to December 2022 could only be made if the Sub-lease continued beyond 18 August 2022, Ovato had no right to call upon the Alliance Bank Guarantee, thus giving rise to its offsetting claim of $81,062.68, the amount remaining after the deduction of the rent and outgoings for which Alliance accepts it is liable from July 2022 to 18 August 2022, from the amount of the Alliance Bank Guarantee.

As to Ovato’s assertion that Alliance did not act in good faith and was unjustly enriched to Ovato’s detriment as it occupied the Premises without paying rent directly to the Head Lessor, Alliance emphasises that the Demand did not claim the sum due on the basis of restitution or unjust enrichment.

The matters upon which Alliance refers to as demonstrating the existence of a genuine dispute are identified in paragraph 118 above. In response, Ovato submits the conduct described was not repudiatory, and even if it was, Alliance never accepted that repudiation. Alliance did not vacate the premises and could have reached a different agreement with the Head Lessor, but instead remained on the Premises without paying rent.

Ovato describes Alliance’s position as being that it does not owe rent to anyone, and that such a position is not a plausible contention requiring investigation. Ovato also criticises Alliance’s failure to raise any of the issues now raised until after the issue of the Demand as being indicative that there is no genuine dispute; rather the matters Alliance raises have been manufactured in response to the Demand.

Ovato submits that even if the Sub-lease was repudiated by it and that repudiation was accepted, the obligation to pay rent subsisted so long as Alliance remained in occupation under the terms of the Sub-lease that deal with overholding.

In my opinion, Alliance, bearing the onus of establishing that it has a genuine dispute and an offsetting claim, has established, but only just, that there are features of this matter which result in a conclusion that on an application of the relevant authorities, there is a genuine dispute and an associated offsetting claim in respect of the Alliance Bank Guarantee, in respect of the claim made in the Demand.

In reaching that conclusion, I consider that the points Ovato makes in its submissions have much force. A prominent feature of the matter is that Alliance has continued to occupy the premises for several months after August 2022, and I did not discern, from Alliance’s submissions, how it characterised the tenancy by which it occupied the Premises or to whom, at the end of the day, rent should be paid. In particular, I consider that Ovato’s submission that Alliance is liable to pay rent and outgoings by reason of the provisions of the Sub-lease dealing with holding over have substantial merit.

I consider that, like the plaintiff in Trecomax, the position which Alliance presses has ‘formidable difficulties’ and is ‘close to the borderline of a genuine dispute’, but I do not consider it to be a straightforward claim for rent as Ovato would have it. Otherwise, as the Court of Appeal observed in Spacorp, once the Court has determined that a genuine dispute has been established, it should refrain from expressing a view as to the likely outcome of any subsequent conventional inter partes proceeding.

Spacorp describes the notion of there being a great range of states of mind which may accompany resolution of the ultimate question, i.e., the existence of a debt. That range extends from ‘a clear conviction that the debt does not exist, to the opinion that the genuine dispute hurdle has only just been cleared’. I would classify Alliance’s case to be in the latter category.

Reference has been made in the survey of the legal principles above to authorities which liken the Court’s task in this type of application to that of a Court considering an application for summary judgment. In my view, if, mutatis mutandis, this application was transformed into a summary judgment application for a claim for rent, Ovato would not be likely to obtain summary judgment.

The case law dealing with the relevant principles to be applied in this type of application emphasise the comparatively low threshold an applicant is required to establish to succeed in these applications.

I do not consider Alliance’s legal argument to be patently feeble, nor is it ‘as plain as a pikestaff that it has no basis’ and that no further investigation is warranted. Formulating the test in another way, I would regard it as being quite unsafe to make a finding that the position it puts is not arguable such as to give rise to a presumption that it is insolvent if it does not pay the Debt claimed.

In my view a consideration of the evidence together with the respective submissions made by the parties expose a legal question of substance which is not appropriate or possible to resolve in an application to set aside a statutory demand.

The evidence filed by the parties is, as I have remarked, uncontentious, but the legal position is sufficiently uncertain for me to determine that the matter should be the subject of a conventional inter partes trial where the legal arguments surrounding the Sub-lease can be properly examined.

In the circumstances, I consider that the statutory demand dated 15 June 2023 should be set aside on the basis that there is a genuine dispute in respect of the debt claimed in the Demand. The same consideration applies to the existence of the offsetting claim; there is an associated plausible contention as to whether Alliance was entitled to call on the bank guarantee in partial discharge of the Debt claimed in the Demand.

I will order that the Demand dated 15 June 2023 and served on Alliance by Ovato is set aside. The usual order is that costs should follow the event but if the parties seek to contend otherwise then they should file short written submissions not exceeding two pages by 9 August 2024.

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[2024] VSC 457

2 August 2024