Re Sneakerboy Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2020 01321

IN THE MATTER OF SNEAKERBOY PTY LTD (ACN 603 960 961)

COMMISSIONER OF STATE REVENUE	Plaintiff
v
SNEAKERBOY PTY LTD (ACN 603 960 961)	Second Defendant

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JUDICIAL REGISTRAR:	Matthews JR
WHERE HELD:	Melbourne
DATE OF HEARING:	29 April 2020; further written submissions on 1 June 2020
DATE OF RULING:	15 June 2020
CASE MAY BE CITED AS:	Re Sneakerboy Pty Ltd
MEDIUM NEUTRAL CITATION:	[2020] VSC 348

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CORPORATIONS – Application for winding up in insolvency – Application by supporting creditor to be substituted as plaintiff – Whether genuine dispute about debt – Whether genuine offsetting claim – Whether an offsetting claim is a basis for refusing substitution – Corporations Act 2001 (Cth), s 465B – Tokich Holdings v Shearton Constructions (2004) 185 FLR 130 – Re C2C Investments Pty Limited [2012] NSWSC 1443 – Rodenstock v Leahy [2002] NSWSC 957 – In2Ply Pty Ltd v Amerind Pty Ltd (in liq) (recs and mgrs apptd) [2014] VSC 603 – Application for substitution granted

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APPEARANCES:	Counsel	Solicitors
For the Applicant, Unita (Aus) Pty Ltd	Mr S Janczuk, solicitor	contractA Legal, town agent CBL Business Lawyers
For the Second Defendant	Mr C Brown	Logie-Smith Lanyon

TABLE OF CONTENTS

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

Background......................................................................................................................................... 3

Sneakerboy’s objection to aspects of the Third Fraser Affidavit............................................. 8

Applicable law.................................................................................................................................. 10

Applications for substitution as plaintiff in a winding up application.............................. 10
Applications to set aside statutory demands.......................................................................... 12
Is an offsetting claim a basis for refusing an application for substitution?........................ 15

Issues requiring consideration...................................................................................................... 20

Issue 1: Were Unita AUS and Unita ROA creditors of Sneakerboy as at the date upon which the Originating Process was filed?................................................................................................ 20

Unita AUS’s statutory demand................................................................................................. 22
Answer regarding Issue 1.......................................................................................................... 23

Issue 2: Is there a genuine dispute as to the existence of the debt relied upon by Unita? 24

Sneakerboy’s evidence............................................................................................................... 24
Sneakerboy’s submissions......................................................................................................... 26
Unita’s evidence.......................................................................................................................... 27
Unita’s submissions.................................................................................................................... 27
Analysis........................................................................................................................................ 28
Answer regarding Issue 2.......................................................................................................... 33

Issue 3: Does Sneakerboy have a genuine offsetting claim?.................................................. 34

Sneakerboy’s evidence and submissions................................................................................. 34
Unita’s evidence and submissions............................................................................................ 37
Limestone tiles................................................................................................................... 38
Delay claims....................................................................................................................... 39
Defects claims..................................................................................................................... 40

Analysis........................................................................................................................................ 40
Offsetting claim based on delays in completion of works.......................................... 42
Offsetting claim based on defects.................................................................................... 44
Offsetting claims based on limestone tiles..................................................................... 45

Answer regarding Issue 3.......................................................................................................... 45

Should Unita AUS and/or Unita ROA be substituted as plaintiffs in the winding-up application?........................................................................................................................................................ 46

Analysis........................................................................................................................................ 47

Conclusion......................................................................................................................................... 48

JUDICIAL REGISTRAR:

Introduction

This is an application by Unita (AUS) Pty Ltd pursuant to an interlocutory process filed 23 April 2020 to be substituted as plaintiff (‘Application’) in the originating process filed 16 March 2020 (‘Originating Process’).

By the Originating Process, the plaintiff in the proceeding (the Commissioner for State Revenue) sought orders that the defendant companies, Luxury Retail Group Pty Ltd and Sneakerboy Pty Ltd, be wound up in insolvency. At the first return of the originating process, the plaintiff discontinued the proceeding as against Luxury Retail Group Pty Ltd (the first defendant) and indicated that as the plaintiff’s debt had also been resolved against Sneakerboy Pty Ltd (the second defendant, ‘Sneakerboy’), the plaintiff would be withdrawing from the proceeding. The proceeding as against Sneakerboy was not discontinued at that time, as Unita (AUS) Pty Ltd (‘Unita AUS’) had filed a notice of appearance and sought directions for the making of an application to be substituted as plaintiff.

The application by Unita AUS for substitution as plaintiff is made under s 465B(1) of the Corporations Act 2001 (Cth) (‘the Act’).

The Application came on for hearing on 29 April 2020. During the course of the hearing, Counsel for Sneakerboy made submissions that Unita AUS did not have standing to make the Application. This was said to be because the debt relied upon by Unita AUS was a debt owed jointly to Unita AUS and to another company, Unita (ROA) Pty Ltd (‘Unita ROA’). As Unita AUS was a joint creditor, not a joint and several creditor, with Unita ROA, it was said that it did not have standing to make an application for substitution as it could not pursue the debt on its own or without evidence that it was doing so on behalf of both creditors. I heard submissions in relation to this point, following which Unita AUS sought orders permitting an amended interlocutory process to be filed by which Unita ROA would also be an applicant. I agreed to this and made directions that:

(a) any amended interlocutory process be filed and served by 6 May 2020, along with any further affidavits relied upon in respect of the addition of Unita ROA as an applicant (‘Addition’);

(b) Sneakerboy file and serve any affidavits in reply in relation to the Addition by 13 May 2020. At the request of the parties, orders were subsequently made extending this to 25 May 2020; and

(c) the parties file and serve written supplementary submissions addressing the Addition by 20 May 2020. At the request of the parties, orders were subsequently made extending this to 1 June 2020.

An amended interlocutory process, whereby Unita AUS and Unita ROA, as joint creditors, were the applicants for substitution (together, ‘Unita’), was filed on 7 May 2020 (‘Amended Application’). Unless it is necessary to distinguish between them, for convenience I will refer to both entities as Unita.

Unita relies upon three affidavits by William Shane Fraser, affirmed on 23 April 2020 (‘First Fraser Affidavit’), dated 28 April 2020 (‘Second Fraser Affidavit’),[1] and affirmed on 7 May 2020 (‘Third Fraser Affidavit’). Mr Fraser is the chief financial officer of the Unita group of companies, which includes Unita AUS and Unita ROA. The First Fraser Affidavit is an affidavit in support of the Application; the Second Fraser Affidavit is an affidavit in reply to Sneakerboy’s affidavits; and the Third Fraser Affidavit is an affidavit in support of the Amended Application.
[1]The Second Fraser Affidavit was signed by the deponent but not affirmed/witnessed, and has been filed unaffirmed, as it was not able to be affirmed and witnessed in the usual way due to the COVID-19 restrictions.

Sneakerboy opposes the application (both the Application and the Amended Application) for substitution, and relies upon the affidavits of:[2]
[2]The affidavits referred to in this paragraph were signed by the deponents but not affirmed/witnessed, and have been filed unaffirmed, as they were not able to be affirmed and witnessed in the usual way due to the COVID-19 restrictions.

(a) Nelson Mair, dated 28 April 2020 (‘First Mair Affidavit’). Mr Mair is a director of Sneakerboy;

(b) Jinghua Lu, dated 27 April 2020 (‘Lu Affidavit’). Ms Lu is the assistant financial accountant for what she describes as the Luxury Retail Group (‘LRG’);[3] and

(c) Jay Hewamanna, dated 27 April 2020 (‘Hewamanna Affidavit’). Mr Hewamanna is the financial controller of the LRG.

(d) Mr Mair, dated 22 May 2020 (‘Second Mair Affidavit’).

[3]Lu Affidavit, [1].

Unita filed a written outline of submissions prior to the hearing on 29 April 2020 (‘Unita First Outline’). Its solicitor, Mr Janczuk, also made oral submissions at that hearing. Sneakerboy relied upon the oral submissions made by its Counsel.

Written submissions were filed by both parties on 1 June 2020 (respectively, ‘Unita Second Outline’ and ‘Sneakerboy Outline’).

For the reasons which follow, the Amended Application will be granted, and Unita AUS and Unita ROA will be substituted as plaintiffs in the proceeding.

Background

I have attempted to summarise and express the background relevant to the application for substitution as neutrally as possible, as set out below.

Unita is a national design and construction company that specialises in commercial fit-out projects.[4] Sneakerboy and another entity in the LRG, Luxury Retail No.1 Pty Ltd (‘LR1’), are companies which operate retail stores.[5]
[4]First Fraser Affidavit, [3].
[5]None of Sneakerboy’s affidavits explain whether the LRG referred to by Ms Lu and Mr Hewamanna is the same entity as the first defendant, nothing turns on it. For the purposes of this application, I will presume that Sneakerboy and Luxury Retail No.1 Pty Ltd are both companies in the LRG, without making any assumption about whether the LRG is a company in its own right.

From around early 2018, Unita has completed a number of projects for the LRG, which has involved the performance of fit-out works in relation to various ‘Mulberry’ and ‘Sneakerboy’ retail stores in Australia. Under the relevant contracts between the parties, the principal in relation to the ‘Mulberry’ fit-out projects was LR1, and the principal in relation to the ‘Sneakerboy’ fit-out projects was Sneakerboy.[6] Except for the contract in respect of the ‘Mulberry’ retail premises at Emporium Melbourne, entered into on or about 30 August 2018 (‘Mulberry Emporium Contract’), the contracts with Sneakerboy and LR1 were entered into by Unita AUS. The Mulberry Emporium Contract was the only (relevant) contract Unita ROA entered into with either Sneakerboy or LR1.[7]
[6]First Fraser Affidavit, [5]-[6].
[7]Third Fraser Affidavit, [7]-[8]; First Mair Affidavit, [10].

As at around late 2019/early 2020, the total amount owed by Sneakerboy to Unita AUS was around $53,061.66, and the total amount owed by LR1 to Unita AUS was around $602,027.22.[8] As at around 13 September 2019, the amount owed by LR1 to Unita ROA was $91,617.30.[9]
[8]First Fraser Affidavit, [8]-[9].
[9]Third Fraser Affidavit, [6]-[10].

On or around 13 September 2019, the following deeds were entered into, whereby outstanding payments owed by Sneakerboy and LR1 (as the case may be) to Unita AUS and Unita ROA (as the case may be) were to be paid in instalments as set out in those deeds:[10]

(a) between Unita AUS, Sneakerboy and Mr Mair (as guarantor) (‘Sneakerboy Payment Plan’);

(b) between Unita AUS, Unita ROA, LR1 and Mr Mair (as guarantor) (‘LR1 Payment Plan’).

[10]Third Fraser Affidavit, [5]-[6].

On or about 5 February 2020, Unita AUS and Unita ROA entered into a new deed with Sneakerboy, LR1 and Mr Mair (as guarantor) (‘Consolidated Deed’).[11]
[11]First Fraser Affidavit, [10]. A copy of the Consolidated Deed is exhibit SWF-1 to the First Fraser Affidavit.

According to Mr Fraser, the reason for entering into the Consolidated Deed was because of the mounting debts owed by the LRG, which included numerous defaults under the Sneakerboy and LR1 Payment Plans, as well as the fact that LR1 intended to engage Unita AUS to perform various new construction works in relation to a proposed new ‘Mulberry’ store located at 80 Collins Street Melbourne (’80 Collins Street Project’).[12]
[12]First Fraser Affidavit, [10].

It is necessary to refer to some of the terms of the Consolidated Deed.

(a) The recitals to the Consolidated Deed refer to five contracts previously entered into by LR1 and Unita AUS, and four contracts previously entered into by Sneakerboy and Unita AUS. The Mulberry Emporium Contract is not one of these. Recital J refers to Appendix A and states that it is a schedule of amounts which the parties to the Consolidated Deed agree are outstanding and payable to the ‘Unita Entities’ (being a term defined in the deed as ‘Unita AUS and Unita ROA’) under the LR1 contracts. Recital K refers to Appendix B and states that it is a schedule of amounts which the parties to the Consolidated Deed agree are outstanding and payable to the Unita Entities under the Sneakerboy contracts. In both respects, these were defined in the Consolidated Deed as the ‘Outstanding Payments’. According to Appendix A, the Outstanding Payment in respect of LR1 was $602,027.22. According to Appendix B, the Outstanding Payment in respect of Sneakerboy was $53,061.66.

(b) It was a term of the Consolidated Deed that in consideration of the release provided by the Unita Entities in clause 3 of the deed (referred to below), LR1 and Sneakerboy, jointly and severally, agree to pay to the Unita Entities the amounts set out in the table at Appendix C to the deed on or before the dates set out in the table at Appendix C to the deed (‘Payment Plan’).[13]
[13]Clause 2 of the Consolidated Deed.

(c) Clause 3 of the Consolidated Deed provided that:

Except for the rights and obligations expressly imposed upon the Parties by this Deed, and in consideration for, and conditional upon full performance of the obligations imposed on [LR1] and Sneakerboy under this Deed, on and from the date of this Deed, the Unita Entities release and discharge [LR1] and Sneakerboy from any Claim which it has for the recovery of the Outstanding Payments as lump-sum amounts immediately due and payable (‘Release’)

(d) Clauses 4.1 and 4.2 of the Consolidated Deed also contained terms in respect of any default under the Payment Plan, summarised as follows:

(i) If Sneakerboy and/or LR1 fail to make a payment required by the Payment Plan, one or other of the Unita Entities shall notify Sneakerboy and/or LR1 that it is in default under the deed, whereby LR1 and/or Sneakerboy shall remedy the default within 3 business days of receipt of the notice (‘Default’); and

(ii) If Sneakerboy and/or LR1 fail to remedy the Default in accordance with the deed, then the full amount the subject of the Payment Plan will become due and payable by Sneakerboy and LR1 on a joint and several liability basis, less any payments already made by Sneakerboy and/or LR1 under the deed (‘Default Payment’).

(e) Clause 4.3 of the Consolidated Deed contained the following acknowledgment by Sneakerboy and LR1 (‘Default Payment Acknowledgment’):

[LR1] and Sneakerboy hereby acknowledges and agrees that in circumstances where the Default Payment becomes due and payable under this Deed, no genuine dispute, counterclaim or set-off exists that would limit or extinguish the Unita Entities’ ability to recover the Default Payment from LRG, Sneakerboy or the Guarantor.

(f) Clause 1.3 of the Consolidated Deed provided that it was ‘supplemental’ to the contract in respect of the 80 Collins Street Project and save and except as otherwise provided to the contrary in the Consolidated Deed, that terms and conditions of that contract were expressly ratified and confirmed.

(g) Clause 6.7 of the Consolidated Deed provided as follows:

This Deed contains the entire agreement between the Parties about its subject matter. Any previous understanding, agreement, deed, representation or warranty to that subject matter is replaced by this document and has no further effect.

The parties agreed to some amendments to the Consolidated Deed in accordance with a letter entitled ‘Payment Plan Deed Amendment Letter’ (‘Amendment Letter’).[14] The Amendment Letter is a letter dated 24 February 2020 from Unita (signed by Mr Fraser) to LR1 and Sneakerboy.[15] According to Mr Fraser, on or around 27 February 2020, Unita received a copy of the Amendment Letter signed by Mr Mair on behalf of LR1 and Sneakerboy.[16]
[14]Second Fraser Affidavit, [4(c)].
[15]Exhibit SWF-2 to the Second Fraser Affidavit.
[16]Second Fraser Affidavit, [4(h)].

The Amendment Letter relevantly provided:

(a) a payment default under clause 4 of the Consolidated Deed would also result in suspension of works on the 80 Collins Street Project until outstanding payments have been made;

(b) for the commencement of works on the 80 Collins Street Project, as follows:

Subject to:
·[LR1 and Sneakerboy] making payment of the overdue payment plan amount due on 18 February 2020 and the next payment plan amount due 25 February 2020;
·[LR1 and Sneakerboy] providing assurance that all future payment plan amounts will be paid by the due date specified in Appendix C of the [Consolidated] Deed;
·Execution of this letter and both contracts detailed above,

Unita will commence works onsite at [the 80 Collins Street Project] within 2 Business Days from date of execution.

On the copy of the Amendment Letter signed by Mr Mair, the words ’18 February 2020’ are crossed out in the passage set out above. According to Mr Fraser, the handwritten changes on the Amendment Letter were made unilaterally by Mr Mair.[17] There was no evidence before me as to whether Unita accepted or rejected or otherwise communicated with LR1 and Sneakerboy as to those handwritten changes.
[17]Second Fraser Affidavit, [4(f)].

The affidavits filed by the parties go into some detail as to alleged Defaults under the Payment Plan. I will deal with this later in this ruling, however for present purposes it is sufficient to note that for the purposes of the application for substitution, Unita relies on a debt of $349,075.32 (‘Alleged Debt’). In the letter of demand sent by Unita to LR1 and Sneakerboy on 16 March 2020, payment of the Alleged Debt is demanded, which I understand is the Default Payment under the Consolidated Deed arising out of earlier Default(s) for which notice(s) had been served but which had not been remedied.

Sneakerboy’s objection to aspects of the Third Fraser Affidavit

The parties are in dispute as to whether the content of the Third Fraser Affidavit goes beyond the orders I made following the hearing on 29 April 2020.

The orders were canvassed in discussion with the parties and were made at the end of the hearing. The orders went only to the filing of the Amended Application, and affidavits and written submissions in respect of the addition of Unita ROA as an applicant for substitution.

In stating that these orders would be made, I said that:[18]

I don’t want these affidavits from either side to deal with matters other than … whatever is necessary to support [Unita ROA] being one of the applicants. This isn’t an opportunity to go back and backfill any [issues] with the affidavits [filed] previously.

[18]Transcript, 45.13-17.

Sneakerboy contends that much of the Third Fraser Affidavit contains “backfilling” evidence. Sneakerboy’s solicitors raised these objections with Unita’s solicitors after the Third Fraser Affidavit was filed, and invited Unita to withdraw those parts of the affidavit. Unita refused to do so, arguing that the Third Fraser Affidavit did not go beyond the orders made, as all of the issues covered in it went equally to whether Unita ROA was a creditor who was able to be substituted.[19] Unita also said that Sneakerboy had an opportunity to respond, in a reply affidavit and in submissions.
[19]Second Mair Affidavit, [6]-[8].

As a consequence, according to Mr Mair, his second affidavit responds to the issues raised in the Third Fraser Affidavit, under cover of the objections made.[20]
[20]Second Mair Affidavit, [8].

In my view, the Third Fraser Affidavit goes further than setting out the evidence relied upon in respect of adding Unita ROA as an applicant for substitution: it revisits such matters as the entry into the Consolidated Deed, the negotiations over 80 Collins Street, the defaults under the Consolidated Deed, and Sneakerboy’s alleged offsetting claim. It adds to the evidence already filed in respect of each of these matters, in a way which is not confined to any consideration of Unita ROA as a creditor who should be substituted, with Unita AUS, as plaintiffs.

However, Sneakerboy has had an opportunity to respond to these matters, and did so, albeit under cover of objection.

As will be seen when the issues are explored in detail below, my analysis and findings do not hinge upon the objected to sections of the Third Fraser Affidavit: rather, my view of the evidence is that my conclusions would not be different, either with or without that material, save than in respect of the offsetting claim regarding the limestone tiles.

Applicable law
Applications for substitution as plaintiff in a winding up application

Section 465B of the Act relevantly provides that:

(1)    The Court may by order substitute, as applicant or applicants in an application under section 459P, 462 or 464 for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up.
(2)    The Court may only make an order if the Court thinks it appropriate to do so:
a.   because the application is not being proceeded with diligently enough; or
b.   for some other reason.

As Hetyey JR (as his Honour then was) noted in In the Matter of Erfanian Developments Pty Ltd:[21]

The purpose of the substitution procedure in s 465B is to ensure that the winding up application can be continued so that all creditors can take full advantage of the process [Re C2C Investments Pty Ltd (2012) 92 ACSR 266. See also Thomson Reuters, McPherson’s Law of Company Liquidation (5^th ed), vol 1 (at Update 59) 3.1040]. There is also a clear policy found in Part 5.4 of the Corporations Act that an insolvent company should be promptly wound up as a matter of public interest [See Kelly v J Stockland & Co Pty Ltd [2007] NSWSC 214 at [11] (Barrett J) and Equititrust [2012] QSC 206 at [90] (McMurdo J)]. It follows that a winding up proceedin[g] is not ordinary inter partes litigation in which a party may pursue or acquire a debt and prosecute an action to recover a judgment. It is a proceeding brought for the benefit and protection of all creditors of the company, including existing and future creditors.
In addition, in exercising discretion to order the substitution of a creditor under s 456B of the Corporations Act, the Court will seek to ensure that the winding up process is not used as a debt collection mechanism.

[21][2018] VSC 342 at [8].

It is clear, from the terms of s 465B of the Act, that the first question to be answered is whether the applicant for substitution was a creditor as at the time the plaintiff filed the winding up application.[22]
[22]In the Matter of HGC Properties Pty Ltd [2019] VSC 202, [11] (‘HGC Properties’). See also Re Elgar Heights Pty Ltd (No 2) (1985) 3 ACLC 480 and Re Rippon Investments Pty Ltd (1985) 3 ACLC 733.

The case law is clear that as a matter of discretion, where the debt is genuinely disputed the Court will usually not entertain the application for substitution.[23] This is because it goes to the question of whether the applicant has standing to bring an application for winding up.[24]
[23]Tokich Holdings v Sheraton Constructions (2004) 185 FLR 130, [68] (‘Tokich’).
[24]Tokich, [67].

In Tokich, White J of the Supreme Court of New South Wales stated:

The preponderance of authority is that a company may not be wound up on the application of a person claiming to be a creditor whose debt is disputed unless that dispute is resolved. Otherwise the applicant will not establish its standing to apply for the company’s winding up. Because the winding up jurisdiction should not be used to resolve disputed questions of debt, it may be an abuse of process for an alleged creditor, whose debt is disputed, to apply to wind up the company.[25]
However desirable it might be for the Court to wind up a company which is insolvent and whose continued trading might adversely affect the public with whom it deals, the Court has no power to order its winding up if the applicant for winding up has no standing to bring the application. To refuse a winding-up order where a company is insolvent on the application of a person without standing is not to favour the company over the public interest…. It is rather to recognise the jurisdictional limits upon the power to order the winding up of a company.[26]

[25]Tokich, [72].

[26]Tokich, [78].

If the debt is genuinely disputed, then the applicant may not be a creditor, at least until that dispute is resolved. It is well accepted that a winding up application is not the appropriate vehicle for a full trial as to the disputed debt.[27] This is why courts have consistently stated that the time for dealing with a genuine dispute as to the debt relied upon by the applicant for substitution is at the application for substitution, not at the winding up hearing.[28]
[27]Tokich, [72], [82].
[28]See Tokich at [79] and the authorities cited therein.

In Re C2C Investments Pty Limited,[29] Black J of the Supreme Court of New South Wales considered what a company opposing an application for substitution had to establish in order to challenge substitution on the grounds that the debt was disputed. Black J stated:[30]

It is well established that the Court should decline to permit substitution if it finds that the applicant’s alleged debt is the subject of a bona fide dispute upon substantial grounds: … to show there is a bona fide dispute about the debt claimed by the applicant for substitution, the onus is on the company to show that there are clear and persuasive grounds or substantial grounds for the dispute … the standard of satisfaction as to a disputed debt has often been expressed, for the purposes of s 465B of the Corporations Act, as to whether a “genuine dispute” as to the debt existed, and noted that term may well have been borrowed from s 459H of the Corporations Act which deals with the standard of satisfaction in relation to a disputed debt in the context of an application to set aside a statutory demand served on a company.
[29][2012] NSWSC 1443, (‘Re C2C Investments’).
[30]Re C2C Investments, [22] (omitting citations).

Applications to set aside statutory demands

As the authorities referred to above liken the consideration of a disputed debt in an application for substitution to the considerations applicable to setting aside statutory demands, it is necessary that I explore that a little further. This is also necessary for considering the impact of offsetting claims on an application for substitution.

Provided that an application is brought within the period for compliance with a statutory demand, a debtor can apply to the Court pursuant to s 459G of the Act for orders setting aside the statutory demand. Relevantly, under s 459H of the Act the Court may make such orders where the Court is satisfied of either or both of the following:

(a)that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b)that the company has an offsetting claim.

Section 459H(5) of the Act defines an offsetting claim as:

a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

The Court of Appeal in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq)[31] has summarised the principles applicable in applications to set aside statutory demands as follows (citations omitted):
[31][2015] VSCA 330, [47]–[51] (‘Malec’).

[47]The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one.
[48]In determining such an application, it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. This is because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt or an offsetting claim. It is therefore not helpful to perceive that one party is more likely than the other to succeed or that the eventual state of the account between the parties is more likely to be one result than another. Further, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised.
[49]The court is required to determine whether the dispute or offsetting claim is ‘genuine’. It has been said that the criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile. A rigorous curial approach is essential to the effective operation of the statutory scheme.
[50]The court is not required to accept uncritically every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be, as it may not have sufficient prima facie plausibility to merit further investigation as to its truth. The court is also not required to accept uncritically a patently feeble legal argument or an assertion of facts unsupported by evidence, although this should not be read as suggesting that the applicant must formally or comprehensively evidence the basis of its dispute or off-setting claim. Except in such extreme cases, the court should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on by the applicant to set aside a statutory demand.
[51]Solarite Air Conditioning Pty Ltd v York International Australia Pty Ltd involved a demand for payment of a debt alleged to be due under a contract for the supply of goods. The applicant relied on four matters, each of which had the potential to affect the respondent’s entitlement to be paid the entire amount of the debt. Barrett J held that all four matters were sufficiently plausible to raise a genuine dispute. He relevantly stated:
The [applicant] will fail in [the] task [of establishing a genuine dispute] only if … the contentions upon which it seeks to rely … are so devoid of substance that no further investigation is warranted. Once the [applicant] shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the [applicant], it must find that a genuine dispute exists, even where any case apparently available to be advanced against the [applicant] seems stronger.

I further note that in Powerhouse Australasia Pty Ltd v Viarc Pty Ltd,[32] Dodds-Streeton J considered the approach and standard to be applied when dealing with applications to set aside statutory demands:

While it is not a very exacting standard, on the other hand mere assertion of a dispute or off-setting claim, mere bluster or advancing grounds which are illusory or spurious or insufficiently particularised will not suffice. The Court must not enter into the merits of the dispute, but it is not crossing the line in relation to its legitimate role in these applications to consider evidence which ‘bears on whether or not the asserted dispute or off-setting claim is genuine’. Indeed, that is its necessary function.

[32][2006] VSC 508 [48].

It is clear, therefore, that for a statutory demand to be set aside by reason of a dispute over the existence or amount of the debt or by reason of an offsetting claim, that the dispute or offsetting claim (as the case may be) must be genuine.[33] The qualifier of ‘genuine’ applies to both the dispute and an offsetting claim.[34]
[33]See, in particular, Malec, [49].
[34]In2Ply Pty Ltd v Amerind Pty Ltd (in liq) (recs and mgrs apptd) [2014] VSC 603, [30] (‘In2Ply’), referring to Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91.

The court must also consider the amount of the offsetting claim. It has been said that the “amount of the claim” in s 459H(2) means the amount claimed “in good faith, so long as that claim is not fictitious or merely colourable”.[35]
[35]Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787, 790 (‘Jesseron Holdings’).

When it comes to unliquidated claims forming the offsetting claim, courts have taken a pragmatic approach and have said that the company is not required to particularise its offsetting claim “to the last dollar and cent”.[36] Nonetheless, failing to adduce sufficient evidence to convince the court that the claim is genuine will mean that the court will ascribe a nominal value to it.[37]
[36]Elm Financial Services v Macdougal [2004] NSWSC 560, [19].
[37]Jesseron Holdings, 463.

Justice Barrett explained this broad brush approach:[38]

Despite this clear need, according to the terms of the legislation, to quantify an offsetting claim in money terms, it is not necessary that the party seeking to have the statutory demand set aside should particularise the amount of the claim to the last dollar and cent. Particularly where the claim is of an unliquidated kind, there may be various ways of approaching the issue of assessment of damages and there may be elements of the assessment that are, of necessity, based on broad estimate. It is sufficient that there be, on the evidence, a plausible and coherent basis for asserting a claim to a sum which, despite elements of uncertainty as to details of calculation, can be seen to be, in any event, greater than the amount of the debt the subject of the statutory demand.
[38]Karimbla Construction Services Pty Ltd v Alliance Group Building Services Pty Ltd [2003] NSWSC 617, [28].

Is an offsetting claim a basis for refusing an application for substitution?

In terms of a matter of principle, the question of whether an offsetting claim can be a basis for refusing an application for substitution was not the subject of submissions by the parties. Rather, the parties appeared to assume that substitution could be opposed for the same reasons as a statutory demand could be set aside – namely, by reason of a genuine dispute or offsetting claim.

I was not taken to, and nor have I been able to locate in the time available to me, any cases where the issue of an offsetting claim as a basis for opposing a substitution application was squarely raised, other than in the context of whether it went to whether there was a genuine dispute or to the amount of the debt.

In Re Aquaqueen International Pty Ltd,[39] offsetting claims were mentioned, but do not appear to have been considered as a separate basis for refusing substitution as it was not necessary to do so, since the set-off was not established as being able to extinguish the amount of the debt.
[39][2014] NSWSC 527.

In Re Statewide Developments Pty Ltd,[40] an offsetting claim was taken into account in the context of considering the amount in respect of which the applicant for substitution was a creditor.
[40][2011] NSWSC 1537, [35].

In Corser & Corser (a firm) v E-Span Solutions Pty Ltd,[41] an offsetting claim was rejected as a basis for resisting substitution, as it was not supported by “anything more than general assertions”. In that case, the defendant’s evidence was “equivocal and lacking in precision, in circumstances where that was neither inevitable nor explicable” and the defendant had “entirely failed to condescend to any detail in respect of those matters”. These offsetting claims were not unrelated to the debt which the applicant was pursuing – they arose out of the same contract – and were considered in the context of a dispute over the debt.
[41][2004] WASC 199, [54]-[55].

While some claims by the debtor company against the applicant for substitution were mentioned in Re C2C Investments, these were mentioned in the context of whether they went to the existence of a dispute between the applicant and the debtor. Those claims do not appear to have been raised or considered as a separate basis, apart from a ‘genuine’ dispute, for refusing substitution.[42]
[42]Re C2C Investments, [45].

In John Shearer Ltd v Gehl Co,[43] the Full Federal Court considered the policy reasons for allowing a statutory demand to be set aside by reason of an offsetting claim (or cross-demand), stating that:[44]

Failure to comply with a statutory demand is taken to be evidence of insolvency. It is for that reason that application may be made to the court to set aside a statutory demand in circumstances where the person against whom the demand is made has a genuine cross-demand, at least equal to the amount of the sum demanded from him or her. If it should turn out that there was a real cross-demand of equal amount to the sum referred to in the statutory demand, the company failing to comply with the statutory demand would be wound up in circumstances where clearly it was not insolvent and where a proof of debt from the person giving the statutory demand might well be rejected in liquidation because of the existence of a set-off.

[43](1995) 18 ACSR 780 (‘John Shearer Ltd’).

[44]John Shearer Ltd, 786-7.

In Rodenstock v Leahy,[45] Justice Barrett of the Supreme Court of New South Wales also referred to the statutory purpose for setting aside statutory demands on the basis of a genuine offsetting claim, stating:

In Toorallie Pty Ltd v Black, I expressed the opinion that, particularly in light of the bracketed words in the definition of "offsetting claim", the purpose of these provisions is to prevent the statutory presumption of insolvency arising in cases where circumstances other than the existence of the debt the subject of the demand appear, on cogent grounds, to affect the true state of the overall ledger between the parties to that debt. I remain of that view …

[45][2002] NSWSC 957, [42] (‘Rodenstock’).

The matter of a genuine offsetting claim, therefore, does not go to the issue of standing in the winding up application (as a genuine dispute over the existence of the debt does, as it affects whether the applicant is a creditor). Rather, it goes to the statutory presumption of insolvency.[46]
[46]See also the principles referred to in paragraphs (a) and (b) of paragraph 127 below, which reinforces this proposition.

In the context of setting aside a statutory demand, the Court is considering an offsetting claim before the presumption of insolvency arises: it is effectively looking at the net position between the parties. It follows that in an application to set aside a statutory demand, in circumstances where the debt is not disputed but an offsetting claim is alleged, the offsetting claim does not go to the existence of the debt or the status of the person issuing the statutory demand as a creditor, but to whether the presumption of insolvency should be permitted if the net position between the parties would extinguish the debt.

In an application for substitution, the applicant must be a creditor, but the presumption of insolvency has already arisen. Hence the offsetting claim is considered after the presumption of insolvency has arisen. This is by virtue of the defendant’s failure to have complied with the original plaintiff’s statutory demand.

On that analysis, it could be said that an offsetting claim plays no role in an application for substitution, given the purpose of it being a factor in a statutory demand case[47] is not a purpose in the substitution context. The defendant is already presumed to be insolvent. It is consistent with the purpose of the substitution procedure, as referred to in paragraph 32 above, for a creditor whose debt is not genuinely disputed, to be substituted, and for an offsetting claim to be disregarded.
[47]See paragraphs 53 and 54 above.

An alternative analysis to that is that if the net position as between the applicant for substitution and the company is such that no amount is payable by the company, then the applicant is not to be regarded as a creditor. That seems to be consistent with the approach taken in the authorities referred to in paragraphs 49 to 51 above, although it was not expressed in this way and was not a basis for refusing substitution in those instances. However, I have not seen any discussion in the cases to suggest that status as a creditor is to be ascertained by establishing the net position between the parties.

On the other hand, in circumstances where the case law regarding setting aside statutory demands by reason of a genuine dispute is regularly resorted to when considering applications for substitution, it seems to me that in the absence of clear authority to the contrary, the other reason to set aside a statutory demand, being a genuine offsetting claim, could possibly be treated in the same way.

To do so is not inconsistent with the authorities I have referred to at paragraphs 49 to 52 above.

Put another way, if the applicant for substitution had served a statutory demand in respect of the debt relied upon, then the company would have had an opportunity to have it set aside, which is where a genuine dispute or offsetting claim would be dealt with. However, in an application for substitution, there is no such setting aside application.

On this analysis, why should the company not have the opportunity to raise an issue which it would have had, had there been a statutory demand served by the applicant, at the earliest time when it has an opportunity, being the application for substitution? If an offsetting claim against the applicant could only be raised by the company at the winding up hearing,[48] after the applicant has been substituted, this would seem to be inconsistent with the policy of the Act being to ensure that insolvent companies are promptly wound up, since the winding up hearing may take longer. On the other hand, the presence of an offsetting claim against the substituted plaintiff may possibly be a factor in the exercise of the Court’s discretion to order the winding up of the company, and/or it is likely to be a consideration if the winding up is resisted on the grounds of solvency.
[48]It seems to me that in such instances a company could possibly raise this at the winding up hearing without requiring leave under s 459S of the Act, since it was not a ground which the company could have relied upon in an application to set aside the statutory demand, since the operative statutory demand (being the one issued by the original plaintiff) is not the debt relied upon by the applicant for substitution. However, s 465B(4) of the Act entitles the substituted creditor to proceed as if it were the original plaintiff, which may mean that leave under s 459S may be needed. I do not need to resolve this.

I could not find any authorities which squarely considered the question of whether an offsetting claim could be a basis for resisting substitution. On balance, I consider that it is not a basis for resisting substitution, given that an offsetting claim does not go to the applicant’s standing as a creditor. When the policy basis for allowing an offsetting claim to be a ground for setting aside a statutory demand is analysed, it is clear that this has no bearing on a substitution application. A company is not precluded from relying on an offsetting claim in resisting a winding up application, for the reasons referred to in the previous paragraph.

However in this particular case, primarily due to the way in which the case was run, and also in the absence of clear authority to the contrary, as a matter of fairness it seems to me that I should consider the issue of the offsetting claims propounded by Sneakerboy when deciding whether to allow Unita to be substituted as plaintiff.

Issues requiring consideration

It follows that the issues requiring consideration so as to determine whether to grant the application for substitution are as follows:

(a) Were Unita AUS and Unita ROA creditors of Sneakerboy as at the date upon which the Originating Process was filed? (‘Issue 1’)

(b) Is there a genuine dispute as to the existence of the debt relied upon by Unita? (‘Issue 2’)

(c) Does Sneakerboy have a genuine offsetting claim? (‘Issue 3’).

I will consider each issue separately below, setting out, where necessary, the evidence relied upon by the parties and their submissions, along with my analysis and conclusions.

Issue 1: Were Unita AUS and Unita ROA creditors of Sneakerboy as at the date upon which the Originating Process was filed?

As set out above, in order to substitute as plaintiffs under s 465B(1) of the Act, Unita AUS and Unita ROA must show that they were creditors at the time the original plaintiff filed the winding up application. That application was filed on 16 March 2020, and so that is the relevant date for these purposes.

The debt relied upon for the Amended Application being the Alleged Debt arising under the Consolidated Deed, which is owed jointly to Unita AUS and Unita ROA, had arisen as at 16 March 2020 (as will be explored further below under Issue 2, it appears undisputed that the amounts due under the Consolidated Deed on 25 February, 3 March 2020 and 10 March 2020 were not paid), means that both Unita AUS and Unita ROA are creditors of Sneakerboy.

Apart from the broader questions of whether the debt claimed by Unita is the subject of a genuine dispute or whether an offsetting claim exists, which I will consider separately below, it did not appear to otherwise be a matter of contention that Unita (AUS) and Unita (ROA) were creditors of Sneakerboy as at 16 March 2020. In other words, if the Court rejected Sneakerboy’s position that there was a genuine dispute in respect of the debt in question, it was not otherwise contended by Sneakerboy that Unita was not a creditor at the relevant time.

As mentioned in paragraph 4 above, Sneakerboy contended at the hearing that the debt relied on by Unita AUS, being the Alleged Debt, arose under the Consolidated Deed and according to the terms of that deed, it was a debt owed jointly to Unita AUS and Unita ROA. At the time of the hearing, Unita AUS’s way of dealing with Sneakerboy’s contention that Unita AUS did not have standing to bring the application for substitution on its own as a result of it being a joint debt, was to say that it would file the Amended Application, by which Unita ROA was added as an applicant.

As it is clear that the debt relied upon for the substitution application is the one arising pursuant to the Consolidated Deed, it is appropriate for Unita ROA to be an applicant and that has now been done. I make no finding as to whether Unita ROA was a necessary applicant, as it is not necessary for me to do so, as the Amended Application has been filed.

In the Third Fraser Affidavit, Mr Fraser deposes to why he thinks Unita ROA was included in the Consolidated Deed and says that he now believes it was not necessary for that to have been done. In Unita’s Second Outline, extensive submissions are made as to whether Unita AUS can pursue the Alleged Debt or the Outstanding Payments on its own, without Unita ROA. I do not consider it necessary for any of these matters to now be the subject of findings by me, and I wish to make it clear that I make no such findings. The filing of the Amended Application and the addition of Unita ROA as an applicant for substitution make that unnecessary.

Although I do not consider it necessary to specifically make orders allowing for the interlocutory process to be amended to add Unita ROA, that amended interlocutory process having already been filed, if it was necessary then it follows from the above that I would make such orders.

Unita AUS’s statutory demand

As much of the evidence and submissions concerned a statutory demand issued by Unita AUS to Sneakerboy, it is necessary that I say something brief about it.

Mr Fraser deposes that on 18 March 2020 he instructed Mr Janczuk, Unita’s solicitor, to prepare statutory demands from Unita AUS for payment of the Alleged Debt on each of Sneakerboy and LR1, and that these were served by sending them on 18 March 2020 by registered post to the registered office of each company.[49]
[49]First Fraser Affidavit, [18]-[19]; Exhibit WSF-5 to the First Fraser Affidavit.

According to Mr Fraser, no payment has been received and no application has been made by Sneakerboy to set aside the statutory demand. He deposes that if Unita’s application for substitution is not granted, then Unita’s intention is to file an application for the winding-up of Sneakerboy, based on the presumption of insolvency which he says has now arisen in relation to the failure to comply with or make an application to set aside the statutory demand within 21 days of its service.[50]
[50]First Fraser Affidavit, [20]-[24].

The Lu Affidavit and the Hewamanna Affidavit, along with parts of the First Mair Affidavit, go to this statutory demand. They cover matters such as Sneakerboy’s process for dealing with incoming mail, when the statutory demand was received, and what was done with it upon receipt. In summary, Sneakerboy’s evidence is that the statutory demand was received by it on 25 March 2020.[51] According to Mr Mair, he has been given legal advice that Sneakerboy can rely on the temporary relief measures as set out in the Coronoavirus Economic Response Package Omnibus Act 2020 (Cth), such that Sneakerboy will have 6 months to comply with the statutory demand.[52]
[51]Lu Affidavit, [8]-[9], [14]-[16]; Hewamanna Affidavit, [7]-[9]; First Mair Affidavit, [36]-[37].
[52]First Mair Affidavit, [39].

In oral submissions at the hearing, Sneakerboy’s Counsel submitted that as Unita AUS relied on the Alleged Debt for the statutory demand, which specifically referred to the Consolidated Deed in the debt described in the statutory demand, Unita AUS could not (by itself) issue a statutory demand for the Alleged Debt. This was said to be because the Alleged Debt, under the Consolidated Deed, is owed to Unita AUS and Unita ROA jointly.

Unita made lengthy submissions in the Unita Second Outline as to why it was open to Unita AUS to pursue the debt by itself, either through the application for substitution or through this statutory demand. These submissions included the proposition that the Outstanding Payments owed under the Sneakerboy Payment Plan and the LR1 Payment Plan were able to be pursued by Unita AUS alone, and as an alternative to pursuing the Alleged Debt.

It is not necessary for me to consider the Alleged Debt in the context of the statutory demand, or for me to consider or determine any of the matters raised by the parties in respect of the service of the statutory demand, whether the temporary relief measures arise, whether Unita AUS can have issued it without Unita ROA, and whether Unita AUS could pursue the Outstanding Payments in the manner described in the previous paragraph. The reason for this is simple: to be substituted as plaintiff, the party seeking substitution does not have to have issued its own statutory demand.[53] All that is necessary is that it be a creditor as at the date the originating process was filed.
[53]In the matter of C2C Investments Pty Limited [2012] NSWSC 1443, [18].

I pause here to observe that, in any event, the application for substitution is not the appropriate mechanism for determining these questions as to the statutory demand.

Answer regarding Issue 1

It follows, therefore, that subject to the matters discussed below, Unita was a creditor of Sneakerboy as at 16 March 2020, the date upon which the Originating Process was filed.

Issue 2: Is there a genuine dispute as to the existence of the debt relied upon by Unita?
Sneakerboy’s evidence

Sneakerboy says that the Alleged Debt is not payable to Unita and that there is a genuine dispute as to the existence of the Alleged Debt.[54]
[54]First Mair Affidavit, [6(a), (b)].

According to Mr Mair, Appendix C to the Consolidated Deed contains a number of annotations, specifically:[55]
[55]First Mair Affidavit, [12].

(a) identifying a commencement date for works for the 80 Collins Street Project of 3 February 2020;

(b) identifying 13 April 2020 as the trading date for the 80 Collins Street store, which he says was the date by which trading was to commence;

(c) the details of the matters necessary to trigger the fitout contributions from the landlord at 80 Collins Street; and

(d) a handwritten notation reading ‘subject to change as 80 Collins tender signed’.

Mr Mair further deposes that the performance by Unita of the building works at 80 Collins Street was ‘a critical component’ of the Consolidated Deed, as ‘noted by the fact that’:[56]
[56]First Mair Affidavit, [13].

(a) instalments were intended to be applied to all projects, including the 80 Collins Street Project;[57]
[57]In this regard, Mr Mair says that the first instalment payment under the Consolidated Deed which was to include a payment in respect of 80 Collins Street was the payment ‘scheduled’ for 17 March 2020: First Mair Affidavit, [11].

(b) the start date of the 80 Collins Street works is identified ‘in proximity’ to the dates for which each instalment is to be made;

(c) the reproduction of the terms necessary for the fitout contribution, and the notation of the 80 Collins Street tender; and

(d) per the terms of the fitout contribution, Unita was required to complete certain works on site to allow the 17 March payment from the landlord to occur.

Mr Mair says that he attended a meeting with representatives of Unita on 16 January 2020 where a number of matters were discussed, including:[58]
[58]First Mair Affidavit, [14].

(a) alleged outstanding monies owed to Unity in respect of the Sneakerboy contracts and the LR1 contracts;

(b) substantial warranty claims to be completed by Unita at the Emporium store;

(c) the delay by Unita in completing the Mulberry South Wharf store and Sneakerboy South Wharf store;

(d) commencement of the shop fitout for the 80 Collins Street Project as soon as possible.

He says that subsequent to this meeting he executed the Consolidated Deed.[59]
[59]First Mair Affidavit, [15].

Mr Mair deposes that Unita did not commence works onsite at 80 Collins Street on 3 February 2020 and that apart from collecting the keys from the landlord, taking possession of the site and completing the induction works (all on 5 February 2020), Unita did not perform any other work at 80 Collins Street.[60] Mr Mair says that on that basis, the instalment due on 11 February 2020 was not paid.[61] Mr Mair then deposes that Unita issued a notice of demand under clause 4.1 of the Consolidated Deed on 12 February 2020, requiring payment of the instalment of $75,000 within three business days.[62] He says that this was paid on 17 February 2020, within the timeframe required, such that the default was remedied.[63]
[60]First Mair Affidavit, [17]-[18].
[61]First Mair Affidavit, [19].
[62]First Mair Affidavit, [20].
[63]First Mair Affidavit, [21].

Mr Mair then goes on to state that he is ‘instructed that the total amount owing is’ as set out below, which he defines as the “Outstanding Sum”:[64]

(a) $264,527.22 in respect of LR1, not $349,075.32; and

(b) $53,061.66 in respect of Sneakerboy.

[64]First Mair Affidavit, [22].

So far as I can ascertain, this is the evidence relied upon by Sneakerboy for the propositions referred to in paragraph 84 above.

Sneakerboy’s submissions

Sneakerboy submits that Unita should not be substituted, as there is a genuine dispute over the existence of the debt and Sneakerboy has a genuine offsetting claim. It says that when a debt is genuinely disputed, the Court will not entertain an application for substitution. Sneakerboy submits that it is evident from the extensive material now filed in respect of the Amended Application that the dispute regarding the Alleged Debt is complex and should be subject to further enquiry via the traditional mechanism for a disputed debt, and should not be determined in the context of an application for substitution. Sneakerboy submits that the test to be applied under s 465B is similar to that for a s 459G application under the Act, such that the test as to whether there is a genuine dispute has a low bar. Sneakerboy says that that test has been met in this instance.[65]
[65]Sneakerboy Outline, [4]-[5].

Sneakerboy submits that the parties are clearly in dispute as to the sequence of events over the 80 Collins Street Project, with Unita saying that it didn’t commence work because Sneakerboy had not made all payments due under the Consolidated Deed and Sneakerboy saying that it did not continue to pay because work had not commenced on the project. Sneakerboy says that it is telling that the earliest default relied upon by Unita is either 18 or 11 February 2020, there is no evidence of Unita having commenced the works on 3 February 2020, and that it is therefore not surprising that Sneakerboy refused to make further payments until work had been commenced.

Unita’s evidence

Unita relies on the terms of the Consolidated Deed and the evidence given by Mr Fraser as to the defaults under that deed to establish that it is a creditor of Sneakerboy (and was at the time the Originating Process was issued) and that there is no genuine dispute as to the Alleged Debt.

On 6 March 2020, Unita issued a default notice for payment of $187,500, being half the payment due on 18 February 2020, along with the payments due on 25 February and 3 March 2020.[66] On 16 March 2020, Unita issued a letter of demand under clause 4.2 of the Consolidated Deed, as this default had not been remedied within the requisite time, being 11 March 2020.[67] The amount claimed in the letter of demand was $349,075.32, being the full amount owing under the Consolidated Deed, the full amount then being due as a consequence of Sneakerboy’s failure to remedy the defaults under the 6 March 2020 notice. This is what is referred to as the Default Payment under the Consolidated Deed, which I have referred to as the Alleged Debt throughout this ruling.
[66]First Fraser Affidavit, [14]; Exhibit WSF-2 to the First Fraser Affidavit.
[67]First Fraser Affidavit, [16]; Exhibit WSF-3 to the First Fraser Affidavit.

Unita’s submissions

Unita submits that where the company opposes the application for substitution on the grounds of a dispute of offsetting claim, then the application will only be dismissed if the alleged dispute is a bona fide and substantial one.[68] It submits that the well-established common law position is that a bare allegation by the company that a dispute exists cannot be allowed to deprive a creditor of the remedy which the statute confers on them.[69] In other words, says Unita, the dispute must be genuine or bona fide, both in the sense that it must be honestly believed to exist by those who allege it, and in the sense that the belief must be based on reasonable[70] or substantial[71] grounds.
[68]Relying on Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290, 293.
[69]Relying on Re Brighton Club & Norfolk Hotel Co (1865) 55 ER 873, 205.
[70]Relying on Re Imperial Hydropathic Hotel Co Blackpool Ltd (1882) 49 Lt 127.
[71]Relying on Re King’s Cross Industrial Dwellings Co (1870) LR 11 Eq 149, 151; Re Imperial Anglo-German Bank (1872) 25 LT 895, 989; Re Imperial Silver Quarries Co Ltd (1868) 16 WR 1220; Re Welsh Brick Industries Ltd [1946] 2 All ER 197, 198.

Unita submits that Sneakerboy has sought to manufacture a dispute and offsetting claim so as to defeat the Amended Application. It says that Sneakerboy’s position is based on bare assertions that are spurious, hypothetical, illusory or misconceived, which ignore the contemporaneous evidence relied upon by Unita.

Unita says that there was no express requirement that it commence work at 80 Collins Street on 3 February 2020, the defaults in payments due on 18 and 25 February 2020 and 3 March 2020 were not remedied, and no dispute that they were required to be made was raised by Sneakerboy at the time.

Unita says that Sneakerboy’s position does not rise anywhere near the threshold required for a genuine dispute to be established.

Analysis

The basis upon which Sneakerboy contends that the Alleged Debt is not payable, whether it be for the amount claimed or the lower amount referred to in the First Mair Affidavit, is not entirely clear. It seems that Sneakerboy says that the Alleged Debt is not owing, as it was not required to make the payments due under the Consolidated Deed as Unita had not commenced works onsite for the 80 Collins Street Project on 3 February 2020. Presumably, Sneakerboy’s position is that if those payments were not due, then the acceleration provision in clause 4.2 of the Consolidated Deed is not able to be relied upon, so that the full amount is not due and payable.

However, Sneakerboy’s argument was not articulated in this way. Rather, there were bare statements in Mr Mair’s affidavits that the Alleged Debt is not payable to Unita and that there is a genuine dispute as to its existence.[72] There were submissions made that the onsite works were to have commenced on 3 February 2020, that this justified not making the instalment payments, and that failure to do so caused Sneakerboy/LR1 loss. There were also submissions made that the amount claimed was incorrect.
[72]First Mair Affidavit, [6(a), (b)].

I do not accept Sneakerboy’s contention that the Alleged Debt is not owing. Such a contention is inconsistent with the terms of the Consolidated Deed, which are crystal clear in terms of the amount owing and when instalment payments are due.

Sneakerboy did not take me to any provision of the Consolidated Deed which set out an obligation on Unita to commence works on the 80 Collins Street Project by or on a set date. All that was referred to was a date in the schedule set out at Appendix C which said:

80 Collins Street Works
Commencement Date Monday, 3 February 2020

Nor did Sneakerboy take me to any other contract or document which set out an obligation on Unita to commence works on the 80 Collins Street Project by a set date.

Further, Sneakerboy did not take me to any provision of the Consolidated Deed which linked the obligation to make the instalment payments to the commencement of works onsite (or offsite, for that matter), by or on 3 February 2020 (or any other date) by Unita.

Rather, Unita took me to the Amendment Letter, which specifically provided that Unita would commence works onsite at the 80 Collins Street Project within two business days of the payments due on 18 and 25 February 2020 being paid and confirmation that the future payments would be made. Whether one accepts the handwritten deletion of 18 February or not, the fact remains that the payment due on 25 February 2020 was not paid and so the works were not commenced under the Amendment Letter.

It seems to me that the terms of the Amendment Letter are inconsistent with there being a previous or other document setting out an obligation to commence onsite works on 3 February 2020, let alone an obligation for those works to have commenced by that time in order for the payments under the Consolidated Deed to then be due. In addition, the terms of the Amended Letter mean that the payments had to have been made for the works to commence. This is directly opposite to the thrust of Sneakerboy’s submissions as set out in paragraph 93 above. I realise that the Amendment Letter was entered into subsequent to 3 February 2020, but it is hardly consistent with the proposition that Unita had to commence works on that date for Sneakerboy to then be liable to make the payments under the Consolidated Deed. Sneakerboy made no attempt to explain the Amendment Letter or deal with its implications for the propositions it relied upon.

Further, such a proposition is inconsistent with the acknowledgment set out in clause 4.3 of the Consolidated Deed (set out in paragraph 18(e) above). The debts being paid in accordance with the payment plan set out in the Consolidated Deed were themselves acknowledged, in Recitals J and K of the deed, as being due and payable (see paragraph 18(a) above).

I do not accept the link which Mr Mair seems to be trying to suggest in the First Mair Affidavit between the matters he says were discussed at the meeting on 16 January 2020 and the terms of the Consolidated Deed.[73] He says that he executed the Consolidated Deed ‘subsequent to’ the meeting, which seems intended to suggest that it was either executed shortly after that meeting or as a direct consequence of it. However, most of the matters he says were discussed at the meeting, with the exception of the monies outstanding to Unita, are not dealt with in anything like the manner described (if at all) in the Consolidated Deed. I also consider it disingenuous for him to describe the outstanding monies owed to Unita in respect of the Sneakerboy Contracts and the LR1 Contracts as ‘alleged’, given that they are specifically acknowledged as due and payable in the Consolidated Deed.
[73] See paragraphs 87 and 88 above.

Nor do I accept the way in which Mr Mair attempts to characterise the performance by Unita of the works at 80 Collins Street as a critical component of the Consolidated Deed.[74] This might be how he subjectively views it, however the terms of the Consolidated Deed, read either individually or as a whole, do not support his proposition.
[74]See paragraph 86 above.

There was no explanation given for why Sneakerboy, having not paid the instalment due on 11 February 2020 ostensibly because works had not been commenced onsite at 80 Collins Street by Unita, then remedied this default in payment (in its own words) on 17 February 2020.[75] There was no evidence that Sneakerboy gave this explanation for the non-payment, or late payment, to Unita at the time. This seems to me to be little more than a retrospective attempt to bolster Sneakerboy’s position in this application. In any event, this default is not relied upon by Unita as foundation for the Alleged Debt.[76]
[75]See paragraph 89 above.
[76]Mr Fraser says that the first default relied upon for this purpose was the one due on 18 February 2020: Second Fraser Affidavit, [6(b)].

There is clearly a difference between the parties as to whether the payment due on 18 February 2020 was paid in full or not. Unita says that half of it was paid (being $37,500), whereas Sneakerboy says that all of it was paid.[77] What does not seem to be in dispute,[78] however, is that payments due under the Consolidated Deed on 25 February and 3 March 2020, along with the payment due on 10 March 2020, were not paid.
[77]Third Fraser Affidavit, [29(o)].
[78]Apart from Sneakerboy’s proposition that it was not obliged to pay because Unita had not commenced work at 80 Collins Street on 3 February 2020, which has been dealt with above.

In addition, there do not appear to be any contemporaneous communications where Sneakerboy disputes the Alleged Debt. There are instances where there seems to be a dispute about whether a particular instalment was paid on time or in full, but there does not appear to be any email or record of a conversation where it was disputed that payments were due on the dates referred to above. Nor was there evidence of Sneakerboy disputing the default notice dated 6 March 2020 and the demand letter dated 16 March 2020.

I do not accept the proposition that just because there has been extensive material filed and the parties disagree about many things, including the sequence of events regarding the 80 Collins Street Project, that this means there is a genuine dispute. A genuine dispute requires more than disagreement or differing positions: it requires there to be some substance to it.

Even if Mr Mair is correct that the Alleged Debt is not $349,075.32 but is $317,588.88,[79] this does not mean that the lower amount is not due and payable. If he is relying on this difference in the amount to contend that the Alleged Debt is not payable and that there is a genuine dispute about it, that is one thing. But he himself describes the lower amount as “the total owing” and defines it as the “Outstanding Sum”.[80] I pause here to note that Mr Mair appears to have misunderstood the amount claimed by Unita: he describes the “Outstanding Sum” as $264,527.22 in respect of LR1, “not $349,075.32”,[81] when that is actually the total amount claimed by Unita under the Consolidated Deed for both LR1 and Sneakerboy, not just for LR1.
[79]The figure of $317,588.88 for the “Outstanding Sum” was obtained by adding the two amounts in paragraph 22 of the First Mair Affidavit: see paragraph 90 above.
[80]See paragraph 90 above.
[81]First Mair Affidavit, [22].

For all of these reasons, I do not accept that Sneakerboy’s dispute of the Alleged Debt is bona fide and that clear and persuasive or substantial grounds exist for it. I do not accept the contention that it is not payable or that the whole of the amount is properly disputed. Applying the principles in Malec, I do not consider that this dispute is bona fide and truly exists in fact, or that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived.

Answer regarding Issue 2

It follows, therefore, that I do not accept that there is a genuine dispute as to the existence of the debt relied upon by Unita in order to be substituted as plaintiff in this proceeding. It seems to me that the dispute relied upon by Sneakerboy is that the payments under the Consolidated Deed are not due because works were not commenced onsite on 3 February 2020. That dispute does not hinge on whether the amount of the debt is the amount claimed by Unita or the amount stated by Mr Mair. For the reasons set out above, I do not accept that the dispute over whether the payments under the Consolidated Deed are due is genuine.

That there may be a dispute as to whether the debt is $349,075.32 (ie the Alleged Debt) or $317,588.88 (ie the “Outstanding Sum” stated in the First Mair Affidavit)[82] is immaterial to the question of substitution. There is a debt, it was owing as at the date the Originating Process was filed, and the disputed amount is $31,486.44,[83] which is not a basis to refuse substitution. Although it is not necessary for me to conclude whether the debt is the higher or the lower amount, I consider it more likely to be the former, as the explanation proffered by Mr Mair for the latter amount is unclear and is contradicted by the material filed on behalf of Unita. That this is immaterial to the question of substitution is consistent with the approach taken under the Act in respect of applications to set aside a statutory demand: if the only dispute is whether the amount owing was the higher or lower amount, in that instance the Court can vary the amount in the statutory demand to the lower amount.[84]
[82]Or for that matter, some other amount (provided, for the reasons explained in the next paragraph, the debt is for $2,000 or more).
[83]The difference between the Alleged Debt and the “Outstanding Sum”.
[84]Act, s 459H(2)-(5).

Further, all that is necessary for Unita to be eligible to be substituted as plaintiff is that it was a creditor of Sneakerboy as at 16 March 2020. That there may be a dispute over part of that debt, provided that the undisputed debt is above the threshold amount prescribed by the Corporations Regulations 2001 (Cth) (which at the time was $2,000), the applicant’s status as a creditor entitled to have brought an application for winding up is established.

Issue 3: Does Sneakerboy have a genuine offsetting claim?
Sneakerboy’s evidence and submissions

Mr Mair deposes that LR1 and Sneakerboy have incurred loss and damage which give rise to an offsetting claim against Sneakerboy. Based on the amounts set out in the First Mair Affidavit, the offsetting claim is in the amount of $1,385,400 (‘Offsetting Claim’).[85] As this exceeds the Alleged Debt, Sneakerboy says that Unita should not be substituted as plaintiff in the proceeding.
[85]First Mair Affidavit, [28]. The total figure is arrived at by adding each of the components as deposed to by Mr Mair.

The Offsetting Claim is said by Mr Mair to comprise the following:[86]
[86]First Mair Affidavit, [28]; Exhibit NM-3 to the First Mair Affidavit.

(a) Losses occasioned by the late delivery by Unita, without proper or legitimate excuse, of the Mulberry South Wharf project by 26 days, which delayed the opening of the store by an equivalent period. Completion occurred on 6 February 2020 as opposed to 10 January 2020. The loss is calculated by taking the budgeted turnover for the store for that period (being $369,642), less actual sales received from the pop-up store which was erected for a short period elsewhere in the centre (being $135,832), giving a loss of $233,811.

(b) Losses occasioned by the late delivery by Unita, without proper or legitimate excuse, of the Sneakerboy South Wharf project by 8 days, which delayed the opening of the store by an equivalent period. According to the spreadsheet at Exhibit NM-3, actual completion was 7 June 2019 as opposed to 30 May 2019. The loss is calculated by taking the average daily sales between 8 June and 30 November 2019, of $11,998, and multiplying it by 8, giving rise to a loss of $95,984.

(c) Losses occasioned by the failure of Unita to commence construction on 3 February 2020 at the 80 Collins Street Project, which has delayed the opening of the store (trading was to commence on 14 April 2020), at which the budgeted turnover was $60,000 per week. Mr Mair deposes that the losses ‘currently stand’ at approximately $984,605.60. The First Mair Affidavit does not set out in any further detail how these losses are calculated, although Exhibit NM-3 is a spreadsheet detailing the loss and damage incurred by LR1 and Sneakerboy. In that spreadsheet, there is an ‘actual completion’ date of 14 August 2020. No information is given, either in the spreadsheet or the First Mair Affidavit, as to how that date has been arrived at. It is apparent from the spreadsheet that the losses are calculated as the sales from 14 April to 13 August 2020.

(d) Losses in respect of the Mulberry South Wharf contract for defect claims which have not been remedied in the amount of approximately $49,000.

(e) Losses in respect of 13 slabs of limestone mahogany tiles which Unita is holding in the amount of approximately $22,000.

Sneakerboy submits that it is irrelevant that most of the claims relied upon for the Offsetting Claim are amounts which belong contractually to LR1 rather than to Sneakerboy. This is for two reasons: first, Unita relies on the debts of each of LR1 and Sneakerboy which form the amount to be paid by instalments under the Consolidated Deed, the terms of which make LR1 and Sneakerboy jointly and severally liable for the payment of the whole; and second, the authorities in respect of offsetting claims in the context of statutory demands/winding up applications do not require strict mutuality.

First, Counsel for Sneakerboy submitted that the payment plan under the Consolidated Deed is a combination of liabilities supposedly owing on a variety of projects, which have all merged into the Payment Plan, and Sneakerboy has assumed liability for that plan. In this way, if that is how the debt arises, there is clearly a mutuality between the Offsetting Claim and the debt that is being claimed.[87]
[87]Transcript, 15.9-24.

It was said that if Sneakerboy is not able to claim all of the Offsetting Claim, because most of it is referable to LR1’s contracts, then it should only be liable for the approximately $53,000 it was originally liable for prior to the Consolidated Deed.[88]
[88]Transcript, 16.9-11.

Second, Counsel for Sneakerboy submitted that the authorities establish that the usual concepts of mutuality do not apply in the context of statutory demands.

In Rodenstock, Justice Barrett considered this issue, in the context of an application to set aside a statutory demand. His Honour stated:[89]

There is also the point that the definition of ‘offsetting claim’ in s459H(5), in referring to ‘set-off’, does not pay attention solely to the question whether set-off is available in accordance with the general principles which allow a defendant to say, in answer to a plaintiff's claim, that he has a countervailing claim against the plaintiff which absolves him, in whole or in part, from the plaintiff's claim. Nor, in speaking of ‘counterclaim’ and ‘cross-demand’, does the definition refer only to the kind of cause of action asserted by the defendant against the plaintiff that will ground a cross-action in the strict sense. The words in brackets in the definition of ‘offsetting claim’ show that there is no requirement of mutuality and that the only question is whether the company has some cogently arguable claim against the person by whom the statutory demand has been served. The fact that such a claim exists is enough to satisfy the statutory definition. It does not matter whether, in a hypothetical action by the serving party to recover the alleged debt the subject of the statutory demand, the company could plead the cogently arguable claim by way of defence. It is sufficient that the claim is seen to exist.

[89]Rodenstock, [41], omitting citations.

In In2Ply, Associate Justice Randall also considered this issue in the context of an application to set aside a statutory demand. After an extensive survey of a number of authorities,[90] his Honour distilled the principles as follows:[91]
[90]In2Ply, [19]-[29].
[91]In2Ply, [30], omitting citations.

(a)The purpose of the statutory demand process is to [provide] a reliable indicator of likely inability to pay debts.

(b) The indicator is
no[t] safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt.

(c)The rigors of mutuality applicable to assessing whether a ‘set-off’ is available do not and should not limit the application of a ‘cross-demand’ in a statutory demand context.
(d)‘Cross-demand’ is not a technical term. It is a word
introduced … to give a wider ambit to the meaning of these claims, something that would not be described … as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim …

(e)Although Lord Hanworth MR declined to define such a ‘cross-demand’ a useful illustration of the nature or effect of a ‘cross-demand’ is found in Leichhardt Emporium where Yeldham J permitted judgment on the cross-claim but determined that such cross-claim was not available as a set-off.
(f)Although there is a line of authority which preserves mutuality, that line may be confined to ‘mutuality’ in the context of the identity or capacity of the creditor or debtor.

Unita’s evidence and submissions

Unita disagrees with Sneakerboy’s position in relation to the Offsetting Claim.

First, Unita says that Sneakerboy has no offsetting claim, as the matters relied upon by Sneakerboy are not correct.

Second, Unita submits that Sneakerboy cannot rely on any claims made under the 80 Collins Street Project or the Mulberry South Wharf contract as offsetting claims, as those alleged claims are only able to be made by LR1, since it is LR1 that is the relevant contracting party, not Sneakerboy.

The Second Fraser Affidavit sets out Unita’s response to each aspect of the Offsetting Claim as set out in the First Mair Affidavit. Mr Fraser deposes that:[92]
[92]Second Fraser Affidavit, [10]-[13].

(a) he denies that Unita is liable to LR1 or Sneakerboy for any of the amounts claimed;

(b) the Consolidated Deed was entered into after completion by Unita of the Mulberry South Wharf contract and the Sneakerboy South Wharf contract;

(c) the Consolidated Deed makes no reference to any dispute between the parties in relation to the Mulberry South Wharf contract or the Sneakerboy South Wharf contract;

(d) apart from the 80 Collins Street Project, Unita has not received any formal correspondence in relation to the claims made in respect of the Mulberry South Wharf contract, the Sneakerboy South Wharf contract, and the limestone tiles;

(e) he does not know what the complaint about the limestone tiles relates to; and

(f) the losses claimed in respect of alleged delays appear to be claiming a purported loss of revenue.

Limestone tiles

In respect of the limestone tiles, Mr Fraser clarifies Unita’s position in the Third Fraser Affidavit. He deposes that Unita was invoiced for and has paid for the limestone tiles. He also says that Unita can provide LR1 with the limestone tiles if reimbursed for their cost.[93] In response, Mr Mair deposes that the limestone tiles referred to in his First Affidavit are different to those referred to in the Third Fraser Affidavit. He sets this out in some detail, supported by exhibits.[94] The limestone tiles relied on by Mr Mair for the Offsetting Claim were for the Mulberry Chadstone store and were paid for by LR1. Mr Mair says that the limestone Mr Fraser is referring to was for the Mulberry South Wharf Store.[95] Mr Mair maintains the position set out in the First Mair Affidavit.
[93]Third Fraser Affidavit, [31(e)].
[94]Second Mair Affidavit, [9(l)(v)-(viii)]; Exhibits NM-5 and NM-6 to the Second Mair Affidavit.
[95]Second Mair Affidavit, [9(l)(v)-(vii)].

Unita submits that Mr Mair has not produced any evidence that it was put on notice by LR1 or Sneakerboy that it is apparently holding limestone tiles that LR1 or Sneakerboy has apparently paid for and required to be delivered up to it. Unita says that the claim is so vague and unspecified that it cannot possibly be entertained by the Court.

Delay claims

In the Third Fraser Affidavit, copies of the Mulberry South Wharf contract and the Sneakerboy South Wharf contract are exhibited.[96] These are the contracts pursuant to which two of the three delay claims are the defects claims are said to arise. Mr Fraser observes that neither of these contracts were exhibited to the First Mair Affidavit.[97]
[96]Third Fraser Affidavit, [31(a), (c)]; Exhibits WSF-6 and WSF-7 to the Third Fraser Affidavit.
[97]Third Fraser Affidavit, [31(a), (c)].

Mr Fraser deposes that neither of these two contracts specified a date for completion of the works, and each contract contained the following clause:[98]

The Contractor does not accept liability for damages (either direct or indirect) for failure to complete the Works in the time provided for under this Contract, unless specifically accepted by the Contractor in this Contract.

[98]Third Fraser Affidavit, [31(b), (b)].

In response to this, Sneakerboy relies on the Second Mair Affidavit. Mr Mair acknowledges that a completion date was not expressly specified in the Mulberry South Wharf Contract, but says it is to be implied, based on payment due dates and a revised project schedule.[99] Mr Mair also acknowledges that the completion date was not expressly specified in the Sneakerboy South Wharf Contract, but deposes that usual business practice for completion of fit-outs is 6 weeks. He says that the deposit was paid on 16 April 2019 so completion ought to have been on or about 28 May 2019. Unita submits that this evidence from Mr Mair is spurious, hypothetical and illusory.
[99]Second Mair Affidavit, [9(l)(ii)].

Unita submits that Sneakerboy does not have a genuine offsetting claim, relying on the matters referred to in the Second and Third Fraser Affidavits. Unita says that it has no liability to Sneakerboy for delay claims, and that the quantification of such claims is illusory.

Defects claims

The Second or Third Fraser Affidavits do not appear to directly respond to the defects claims, other than the general denial made of the Offsetting Claim.

Unita submits that Sneakerboy is asking the Court to blindly assume that Unita is liable for defects in the amount of $49,000 that have allegedly not been remedied. This involves assumptions that there are defects, which Unita has an obligation to rectify, that it has been put on notice of the defects, has failed to rectify them, and that the value of rectifying them is $49,000.

Unita submits that “it doesn’t get much more spurious, hypothetical or illusory than that”.

Analysis

It is clear from the authorities referred to in paragraphs 126 and 127 above that an offsetting claim in the context of an application to set aside a statutory demand is wider than what would be permitted by way of set-off in a traditional dispute, for the reasons summarised in those authorities. In effect, when the Court is looking at whether a presumption of insolvency should arise, it is looking to the net position between the parties.

Therefore, I accept Sneakerboy’s contention that a broader approach to mutuality applies in the context of setting aside a statutory demand or refusing substitution on the basis of an offsetting claim. In other words, Sneakerboy’s claims against Unita do not have to be capable of being raised as a set-off in a traditional dispute for those claims to be able to be deployed as an offsetting claim in this context.

However, it is also clear that those authorities have not abandoned the need for there to be mutuality in terms of the identity of the parties.

In Tatlers.com.au Pty Ltd v Davis, the debt the subject of the statutory demand was owed jointly and severally by the debtor company and its sole director. The creditor serving the statutory demand owed the director a separate debt. The debtor company argued that it could set off against the debt it owed to the creditor the amount owed by the creditor to its director. This submission was rejected by the Court, on the basis that there was no authority for the proposition and it offended the principle that one joint and several obligor who is sued alone cannot raise a set-off to which his or her co-obligor is entitled.[100]
[100][2007] NSWSC 835 (‘Tatlers’).

I would think that this would make it difficult, if not impossible, for Sneakerboy to rely on claims belonging to LR1 as a basis for Sneakerboy’s offsetting claim. This is because the parties to LR1’s claims are LR1 and Unita AUS, not Sneakerboy and Unita AUS. There is therefore no mutuality in identity of the parties for the Offsetting Claim, apart from the delay claim in respect of Sneakerboy South Wharf.

Sneakerboy says, however, that this is not an ordinary case.

Unita relies upon the Alleged Debt, which originally comprised amounts owed by LR1 and Sneakerboy separately, with the Sneakerboy component being a much smaller amount (some $53,000) than LR1’s component. As a consequence of the joint and several liability for the whole amount set out in the Consolidated Deed, Unita says that Sneakerboy owes the whole of that amount, being the Alleged Debt. Sneakerboy submits that if the debts of two entities, consolidated into a debt owed by both those entities, is relied upon for the purposes of Unita’s substitution application, then it ought to be able to rely upon claims which the other entity (being LR1) may be able to bring. Sneakerboy’s Counsel did not take me to any authorities in support of this proposition.

Sneakerboy’s submission ignores that by virtue of the terms of the Consolidated Deed, Sneakerboy became jointly and severally liable with LR1 for the amounts required to be paid under the Consolidated Deed. The Alleged Debt arises from the Consolidated Deed, not from the earlier separate deeds. In my view, this falls squarely within the circumstances considered in Tatlers.

Therefore, I accept Unita’s contention that as most of the offsetting amounts claimed by Sneakerboy actually relate to LR1’s contracts (being for Mulberry stores), these cannot be relied upon by Sneakerboy as constituting an offsetting claim in respect of the Alleged Debt. In doing so, I make no findings as to Sneakerboy’s submission that the Outstanding Payments under the LR1 and Sneakerboy Payment Plans have merged into the obligations under the Consolidated Deed. It is not necessary for me to do so.

Even if I accepted Sneakerboy’s submissions and allowed it to include claims belonging to LR1 and not it in its Offsetting Claim, I would not be persuaded that Sneakerboy has a genuine offsetting claim for the vast majority of the amount of the Offsetting Claim. Most of the Offsetting Claim is for loss and damage said to have arisen from delays to the opening of various Sneakerboy or Mulberry stores, such delays caused by Unita not completing works within allegedly stipulated times (‘Delay Claims’). The balance is for claims for defects arising from the works carried out by Unita (‘Defects Claims’) and a claim in respect of the limestone tiles (‘Limestone Tiles Claim’). The material relied upon by Sneakerboy for most of the Offsetting Claim is bare assertions in the First Mair Affidavit as to loss and damage, which I will explore further below.

Offsetting claim based on delays in completion of works

I was not taken to any contractual provisions making Unita liable for loss or damage caused by delays. Rather, Unita’s solicitor stated in submissions at the hearing that he thought there were exclusion clauses in the contracts for such losses. Sneakerboy had not provided any of the underlying contracts relied upon in respect of these alleged delays, even though it bears the onus of establishing the Offsetting Claim, but then complains that Unita included these with the Third Fraser Affidavit and sought to rely on their provisions.

Whether I take the evidence as it existed as at the date of the hearing, or as it exists now, with the entirety of the Third Fraser Affidavit and the Second Mair Affidavit, my view as to this remains the same. Sneakerboy has not established, on clear and persuasive or substantial grounds, that it (or LR1) has an offsetting claim arising from delays to the opening of various stores. Such a claim is hypothetical at best.

Further, the existence of Delay Claims in respect of Sneakerboy South Wharf and Mulberry South Wharf is inconsistent with the terms of the Consolidated Deed, where the amounts owing in respect of those contracts as being due and payable was acknowledged by LR1 and Sneakerboy.[101]
[101]Recitals J and K of the Consolidated Deed.

Even if I was persuaded to the contrary, there is no credible evidence before me as to the likely quantum of the Delay Claims. Sneakerboy relies on Mr Mair’s evidence as to budgeted turnover for Mulberry South Wharf and 80 Collins Street, which is then multiplied by the periods of delay. Turnover, or raw sales amounts, is not the measure for loss and damage in this context. Rather, loss and damage is likely to be measured by some other means, such as loss of profits. It can hardly be said that lost turnover is a measure of loss in and of itself: that would be to ignore the costs of the goods, along with other matters such as running costs for the stores. While the losses associated with delay for Sneakerboy South Wharf have been calculated by reference to actual sales, the same problems arise with relying on lost turnover/sales.

In respect of 80 Collins Street, the quantification of the alleged losses is purely speculative: there is no evidence to substantiate the assumption that there will be a four month delay; there is no evidence upon which to test the reliability/achievability of the budgeted turnover for that period; and no other factors, such as the likely significant decrease in retail sales occasioned by the COVID-19 lockdown measures or economic fallout, have been taken into account.

Therefore, there is no credible means by which an offsetting claim by reason of delay can be quantified. Even taking a broad brush approach (see paragraph 46 above), there has to be some plausible basis for the calculation. Otherwise, it is merely fictitious and colourable. Mr Mair’s quantification of the Delay Claims is spurious, illusory and misconceived, as well as hypothetical. There is no evidence before the Court capable of being accepted as to what the Delay Claims may be worth, and therefore they play no role in determining what the quantum of the Offsetting Claim may be worth. Here, there is no persuasive or substantial basis for contending that the Delay Claims are sufficient to outweigh the Alleged Debt.

In any event, even if I took a different view as to the genuineness of the Delay Claims and their quantification, it is only the claim in respect of Sneakerboy South Wharf which Sneakerboy could rely on as an offsetting claim, which is well below the Alleged Debt.

Offsetting claim based on defects

The spreadsheet in Exhibit NM-3 to the First Mair Affidavit itemizes, in some detail, the defects relied upon and the amounts of the claims in respect of those defects.

Apart from general statements made in the Second and Third Fraser Affidavits, Mr Fraser does not appear to give any evidence regarding the Defects Claims in respect of Mulberry South Wharf. There does not appear to be a direct response in Unita’s affidavits to the Defects Claims.

For the purposes of this analysis, I assume that the Defects Claims are said to give rise to an offsetting claim as the defects have not been remedied. Presumably, the amounts claimed are what it would cost LR1 to have the defects remedied. Obviously, if the defects are remedied by Unita, that would presumably be done without charge and then there would be no offsetting claim.

If was willing to accept LR1’s claims as being part of Sneakerboy’s Offsetting Claim, then I consider that for the purposes of this application, the unremedied Defects Claims can be an offsetting claim, particularly in circumstances where there has been no material from Unita to indicate that it intends to remedy the defects.

As there is no evidence disputing the offsetting claim in respect of defects, in those circumstances I would be prepared to accept that there is an offsetting claim in the amount claimed of $49,000.

Offsetting claims based on limestone tiles

Based on the Second Mair Affidavit, I accept that there is an offsetting claim in respect of the limestone tiles. Unita does not appear to dispute Mr Mair’s evidence that the tiles referred to in the First Mair Affidavit are not the ones referred to in the Third Fraser Affidavit, that is, that the relevant limestone tiles were paid for by LR1 and are being held by Unita. Rather, Unita’s complaint is that there is no evidence Unita was put on notice of this claim. This does not mean that there is no offsetting claim in respect of the limestone tiles, and I do not accept Unita’s submissions that the claim is vague and unspecified. However, the Limestone Tiles Claim belongs to LR1, not Sneakerboy (see paragraph 132 above).

If I was willing to accept LR1’s claims as part of Sneakerboy’s Offsetting Claim, then I consider that the Limestone Tiles Claim could be an offsetting claim.

The Limestone Tiles Claim has been quantified by Mr Mair as $22,000 and some evidence is given in respect of this amount. I see no reason to question this amount, but at best it gives an offsetting claim in the amount of $22,000. That does not exceed the amount claimed by Unita.

Answer regarding Issue 3

It follows from the above analysis that I do not accept that Sneakerboy has established, on clear and persuasive or substantial grounds, that it has a genuine offsetting claim in respect of the delayed opening of Mulberry South Wharf, Sneakerboy South Wharf, and 80 Collins Street. As stated by the Full Court of the Federal Court in John Shearer Ltd, claims which assert damage in the most general of terms, where damages of the requisite amount (ie the debt relied on by the creditor) are not self-evident, are not genuine and thus fall outside the category of offsetting claims.[102]
[102](1995) 18 ACSR 780, 791.

It also follows that I do not accept that Sneakerboy has an offsetting claim respect of the Defects Claims or the Limestone Tiles Claim. Even if Sneakerboy could rely on LR1’s claims in respect of those matters, then it would have an offsetting claim in the amount of $71,000.[103]
[103]This figure is arrived at by adding the $49,000 Defects Claims and the $22,000 Limestone Tiles Claim.

This by no means exceeds the debt relied upon by Unita, be that the Alleged Debt or the lower amount asserted to be outstanding by Mr Mair.

Should Unita AUS and/or Unita ROA be substituted as plaintiffs in the winding-up application?

Unita submits that in exercising its discretion whether to allow substitution under s 465B of the Act, the Court must balance two competing policies: that insolvent companies should not be allowed to continue to trade to the detriment of existing and future creditors, but should be wound up as expeditiously as possible; and that winding up should not be allowed to be used as a debt-collecting mechanism or as an instrument of oppression by a creditor whose debt is subject to a genuine dispute.[104]
[104]Relying on South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465.

Unita also relies on the High Court decision in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd,[105] where it held that the present legislative scheme focusses more on the company’s solvency, and the ‘evident policy … that there be a speedy resolution of applications to wind up in insolvency’,[106] so that the opportunity for the company to dispute the validity of the creditor’s debt in the winding-up proceeding (as opposed to an application to set aside a statutory demand) is more limited than previously, and there is no basis for an assumption that the proceeding will be dismissed or stayed where the company disputes the existence or amount of a debt.[107]
[105](2011) 244 CLR 1 (‘Lanepoint’).
[106]Lanepoint, [27].
[107]Lanepoint, [13], [30].

Relying on the submissions summarised in paragraphs 169 and 170 above, Unita says that the Court ought to substitute it as plaintiff for reasons including the following:

(a) Sneakerboy is presumed to be insolvent and has not served any evidence to rebut that presumption, an onus which Sneakerboy bears;

(b) Unita is a creditor of Sneakerboy;

(c) the debt owed by Sneakerboy was acknowledged in the Consolidated Deed;

(d) Unita was a creditor of Sneakerboy at the date of the filing of the Originating Process and remains a creditor;

(e) Unita has served a statutory demand on Sneakerboy, which has not been satisfied and which is not the subject of an application for it to be set aside; and

(f) Unita is a person who otherwise may have applied for Sneakerboy to be wound up.

Analysis

Unita’s reliance on Lanepoint, as set out in paragraph 170 above, is misplaced. Lanepoint concerned the defendant company seeking to raise matters as to a genuine dispute over the debt at the hearing of the winding up application. The High Court in Lanepoint emphasised the importance of debts being disputed through an application to set aside the statutory demand, rather than at the winding up hearing, which is the basis for the requirement for leave under s 459S of the Act to be obtained before such matters can be raised at the winding up hearing. The context for Lanepoint, and the principles relied upon, was not a substitution application. In an application for substitution, the distinction between relying on a genuine dispute as to the debt to apply for the statutory demand to be set aside, as compared with relying on a genuine dispute as to the debt to oppose the winding up application, simply does not arise.

I have dealt with the issues as to the statutory demand served by Unita above, and reiterate that I consider them to be irrelevant to this application. That Sneakerboy has not led any evidence as to rebut the presumption of insolvency is also irrelevant here: that is not a question which arises on the substitution application.[108]
[108]In the matter of Aquaqueen International Pty Ltd (No 2) [2014] NSWSC 947, [11].

I accept Sneakerboy’s submissions as to the principles, as set out in paragraph 92 above. However, it is clear from my analysis of Issues 2 and 3 that I do not accept Sneakerboy’s application of these principles to this case.

It follows from my answers in respect of each of the three issues, along with this analysis, that the Court should exercise its discretion to permit Unita AUS and Unita ROA to be substituted as plaintiffs in this proceeding.

Conclusion

For the reasons set out above, the application for substitution by Unita AUS and Unita ROA will be granted.

The parties are requested to confer regarding appropriate orders and as to costs. If such matters are not agreed between them, then each party should provide their proposed orders and a brief submission in support of them to my Associate, by 22 June 2020. The proceeding will be listed for hearing on 24 June 2020 so that orders can be made.

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[2020] VSC 348

15 June 2020