Stomp Pty Ltd v Dance Street Records ApS
[2009] VSC 658
•12 November 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2009 8152
IN THE MATTER OF STOMP PTY LTD
| STOMP PTY LTD | Plaintiff |
| v | |
| DANCE STREET RECORDS ApS | Defendant |
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ASSOCIATE JUSTICE: | Gardiner AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28 October 2009 | |
DATE OF JUDGMENT: | 12 November 2009 | |
CASE MAY BE CITED AS: | Stomp Pty Ltd v Dance Street Records ApS | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 658 | |
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CORPORATIONS – EXTERNAL ADMINISTRATION - INSOLVENCY – statutory demand - application to set aside statutory demand – whether a genuine dispute as to lower case or offsetting claim.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M J Stirling | Scanlan Carroll |
| For the Defendant | Mr A T Strahan | Cornwall Stodart |
HIS HONOUR:
The Plaintiff, Stomp Pty Ltd (“Stomp”), by originating process filed 5 August 2009, makes application pursuant to ss 459G and 459J of the Corporations Act 2001 (Cth) (“the Act”) to set aside a statutory demand dated 18 June 2009 which was served on it by the Defendant, Dance Street Records ApS (“Dance Street”) on 23 June 2009. The demand claims the sum of EUR111,849.18 for monies owing to pursuant to invoices for music compact discs and movie digital video discs sold and delivered by Dance Street to Stomp in January and February 2009.
In support of its application, Stomp relies on the affidavits of Andrew Miles Jorgensen, sworn 5 August 2009, and John Romuald Barry, sworn 29 September 2009.
Dance Street relies on the affidavit of Neils Peter Mossing Larsen sworn 8 September 2009.
Stomp’s evidence
Mr Jorgensen is a director of Stomp. He deposes that Stomp operates a retail business which sells music and video products in Australia and overseas with some of the overseas sales being effected electronically through its website. Dance Street is a wholesaler of music and video products which it supplies to Stomp for retail sale. Mr Jorgensen states that the agreement between Stomp and Dance Street was that sales of the CDs and DVDs in Denmark would be effected via Stomp’s website. Stomp would enable Dance Street to notify purchasers of the sale price of the product and to manage the Danish section of Stomp’s website. Mr Jorgensen states that it was stipulated that the sale price of such material would include a 30 per cent mark-up or profit margin.
Mr Jorgensen says that in breach of the obligation to impose a 30 per cent mark-up, the product was sold with a profit margin less than that specified by Stomp. As a result Mr Jorgensen says that substantial loss and damage has been incurred by Stomp. In addition, two invoices which are claimed in the demand claim fees for computer uploads. Mr Jorgensen says that Stomp never agreed to pay such fees.
Mr Jorgensen contends that Stomp has a genuine dispute about the existence and the amount of the debts to which the statutory demand relates. Save for the relatively small sum claimed in the two invoices I have referred to above, Stomp’s case is really that of an offsetting claim constituted by the failure of Dance Street to include a 30 per cent mark-up or profit margin in relation to the products sold. Stomp’s claim in that regard is the subject of a claim in this Court issued in August this year by Stomp as Plaintiff against Dance Street. It claims that between 1 July 2008 and 1 February 2009, the profit margin lost by Stomp was $359,986. Although that claim has been issued, it has not been served on Dance Street, which is a Danish company, and its solicitors in the current proceeding have not accepted service of the writ on its behalf.
Mr Jorgensen exhibits a letter from Stomp’s solicitors to Cornwall Stodart, the solicitors for Dance Street, of 30 June 2009. That letter was written in response to an earlier statutory demand of 18 June 2009, which was apparently withdrawn by Dance Street’s solicitors because of some technical defect involving the date of swearing of the affidavit being at variance with the date of the demand. The letter raises the matters raised by Mr Jorgensen in his affidavit to set aside the current demand.
Mr Jorgensen exhibits an email of 9 March 2009 from Mr Barry of Stomp to Mr Larsen, a director of Dance Street, outlining his concern about the pricing issue and the insufficient margin. Mr Jorgensen also asserts that Stomp did not authorise the monthly charge which is the subject of the offsetting claim. Mr Barry states that purchases between 1 July 2008 and 1 February 2009 were $907,257 (i.e. cost of goods sold) and sales (gross profit) between those dates as being $932,854. On those figures, costs of goods sold amount to 97.25 of gross profit. He states:
“It is clear from these figures that we have been trading at a considerable loss with BP (after freight from BP to HK is taken into account).”
He then goes on to complain that pricing had not been in accordance with instructions, that other third party suppliers were pricing successfully at the correct margins and that the monthly charge was not authorized.
Dance Street’s affidavit in opposition
Mr Larsen has sworn a detailed affidavit of 49 paragraphs in opposition to the application. He indicates that he agrees with identified parts of Mr Jorgensen’s affidavit but denies others. The affidavit descends into considerable detail as to the trading relationship between Stomp and Dance Street. There was a good deal of communication between the parties leading up to service of the statutory demand. The mark-up issue, as I shall call it, featured in those exchanges. An example is the email from Dance Street to Stomp of 10 September 2008, which contains a complex analysis of the pricing issue.
The exchanges which took place dealt with the mark-up issue and reveal that the dispute which is now at the centre of Stomp’s application has had a long gestation. The issue of the monthly charge for the service fee, which is the subject of the offsetting claim, is also featured. In an email of 21 February 2009, Mr Barry of Stomp advised Mr Larsen that Stomp would not be paying the monthly service fee and had suspended orders of Danish product on the site until Stomp “gets to the bottom of the monthly service fee issue and that of the profitability of the arrangement”.
The exchange of emails continued but matters remained unresolved. On 6 March 2009, Mr Barry, apparently mistakenly, sent to Mr Larsen and Messrs Hojlund & Erikson an email which stated:
“Looks like we have bought a bit of time here! Sticking to the one line or (sic) argument is (hopefully) working. I would have sworn he’d go legal by now … Wonder why not?”
In regard to the 30 per cent margin issue, Mr Larsen states:
“It is not true that Street Dance Records (sic) ever agreed to implement a thirty per cent margin on product sold for Stomp. On most products, such a margin is entirely unrealistic in the industry, at least in Europe.”
Affidavit in reply by Stomp
Mr Barry is a director of Stomp. He states that the initial email correspondence between the parties establishing the commercial relationship did not disclose either an agreement to pay or request a monthly service fee of EUR1,500. Requests for payment of the fee were rejected by Stomp on a number of occasions, including a meeting in London on 24 October 2007, and at Cannes on 26 January 2008.
In response to the assertion that Dance Street never agreed to implement a 30 per cent margin on product sold for Stomp and that for most products such a margin is entirely unrealistic in the industry, Mr Barry states that CD Wow consistently achieved a thirty percent margin on sale of products in Europe. He states that at the meeting in London on 24 October 2007 attended by himself and Messrs Larsen, Hojlund & Erikson, he told Mr Larsen that Stomp needed a 30 per cent margin. He exhibits detailed notes of that meeting which were compiled and emailed to his associates shortly after it took place. He notes under the heading “Best Price” the comment: “Told him we need thirty per cent margin off RRP after allowing for one GBP fright (sic).”
Mr Barry also deposes to a conversation between Mr Adrian Bortignon of CD Wow who told him that in November 2007, during a telephone conversation between Mr Bortignon and Mr Hojlund, Mr Bortignon did stress the requirement of a 30 per cent margin.
The failure to meet this margin was also the subject of subsequent email correspondence on 28 October 2008. Mr Barry states that the failure to maintain a margin of 30 per cent on all the product sales means that Dance Street has effectively overcharged CD Wow for its products. As a result, the invoices the subject of the statutory demand do not comply with the profit margin requirements stipulated by Stomp to Dance Street.
Stomp’s submissions
In the course of oral submissions, I pressed Mr Stirling, Counsel for Stomp, as to whether, save for the monthly service fee issue (about which there is a dispute as to EUR3,000) Stomp really based its application on an offsetting claim as, aside from this, the debts the subject of the statutory demand were not themselves disputed. He quite properly made that concession and essentially Stomp’s case depends upon it establishing whether there is a plausible contention requiring investigation concerning the 30 per cent price margin issue. Mr Stirling submitted that there was no response to Mr Barry’s affidavit concerning the discussions in London in October 2007. He submitted that Mr Larsen does no more than assert that Stomp took over the contractual position held by CD Wow under its agreement with Dance Street and, after discovering the low level of profits, was disenchanted with its position. Mr Stirling said this is nothing more than mere assertion and ought to be disregarded. Mr Stirling said that at the very least Stomp’s position in regard to the issue is arguable. He stated that Dance Street does not appear to contend that it has complied with the 30 per cent term, rather its submission is based on the contention that there is no such term.
Mr Stirling submitted that Stomp had been voicing the mark-up issue with Dance Street as early as 2 September 2008, notifying Dance Street that it was not pricing according to Stomp’s instructions. It is contended that, according to the figures presented, Stomp was being invoiced at a rate of 97.25 per cent of the gross sales figure, whereas if the agreement had been complied with by Dance Street, Dance Street would only have invoiced Stomp at the rate of seventy per cent of the gross sales figures. Further, in July 2009, Stomp issued proceedings in the Supreme Court of Victoria claiming the sum of $359,000 by way of damages for breach of agreement. Mr Stirling said this was some evidence that the claim was bona fide In addition, he submitted that the monthly service fee about which the parties are clearly in dispute gives rise to a dispute of EUR3,000 together with an EUR18,000 offsetting claim for the 14 months in which the fee has been improperly paid.
Dance Street’s submissions
Dance Street contends that the claim for the debt the subject of the statutory demand is established. Mr Strahan, Counsel for the Defendant, criticised the level of particularity presented by Stomp in respect of the mark-up issue. He described the evidence of Stomp in that regard as vague and imprecise and submitted that Stomp has had more than adequate time to comprehensively put forward material in regard to its position. In essence, Mr Strahan stated that the assertion of the offsetting claims amount to manufacture of a case when none exists.
Mr Strahan made much of the 6 March 2009 email extracted above. In particular, he contended that it impeached Stomp’s contention that it had a genuine dispute and that it was evidence that, in this application, Stomp was merely delaying payment of a debt. In effect, he said that the email “infects” the plausibility of Stomp’s contentions which must be looked at in light of this unguarded statement.
Relevant legal principles
The principles to be applied when considering applications to set aside statutory demands under s 459G of the Act have been the subject of numerous authorities. In the decision of TR Administration Pty Ltd v Frank Marchetti & Sons,[1] the Court of Appeal of the Supreme Court of Victoria collected and considered the cases dealing with those principles.
[1](2008) 66 ACSR 67
At paragraph [56] and following of the judgment Dodds-Streeton AJ stated:
[56]The Court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim.
[57]No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the ‘ultimate question’ of the existence of the debt should not be compromised.
[58]On appeal, the sole question is usually whether the primary judge erred in determining that there was, or was not, a genuine dispute or off-setting claim. That is, of course, a different question from whether the debt exists.
[59]As Brooking and Charles JJA observed in Spacorp Australia Pty Ltd v Myer Stores Ltd (‘Spacorp’):
The only question for us is whether the judge erred in determining that there was no genuine dispute. One can of course differ from the judge without deciding that the debt did not exist. A great range of states of mind on what we might call the ultimate question - the existence of the debt - may accompany the view that there is a genuine dispute, ranging from a clear conviction that the debt does not exist to the opinion that the genuine dispute hurdle has only just been cleared.
We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.
[60]In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (‘Spencer’), the Full Federal Court cited a variety of different formulations of the principles applicable to determining the existence of a genuine dispute or off-setting claim. Their Honours considered the different articulations helpful, but warned that they should not become a substitute for the words of the statute.
[61]As recognised by Heerey J in Gribbles Pathology (Vic) Pty Ltd v Shandford Investments Pty Ltd, any tendency to ‘trawl through a myriad of judgments’ and plethora of formulations is equally to be avoided.
[62]The Full Federal Court in Spencer concluded that:
In our view a genuine dispute required that the dispute be bona fide and truly exist in fact.
The grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.
At paragraph [64] Dodds-Streeton AJ quoted from the decision of McClelland CJ in Equity in Eyota Pty Ltd v HanavePty Ltd[2] where his Honour stated:
[2](1994) 12 ACSR 785 at 787
It is, however, necessary to consider the meaning of the expression “genuine dispute” where it occurs in s 45OH [sic]. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sorts of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for an extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a general dispute, every statement in an affidavit “however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be” not having “sufficient prima facie plausibility to merit further investigation as to [its] truth… or “a patently feeble legal argument or assertion of facts unsupported by evidence…
But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute.
…
These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.
[65]In Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 at 605 Thomas J said:
There is little doubt that Div 3 ... prescribes a formula that requires the court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the court will examine the merits or settle the dispute. The specified limits of the court's examination are the ascertainment of whether there is a ``genuine dispute'’ and whether there is a ``genuine claim'’.
It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it), the court has no function. It is 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.
The essential task is relatively simple — to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).
I respectfully agree with those statements.
[66]In the present case, the appellant stressed the formulation of ‘a patently feeble legal argument or an assertion of facts unsupported by evidence’ set out in[the decision of the Full Court of the Supreme Court of South Australia] South Australia v Wall.
…
[69]Cox J stated that, bearing in mind the policy, there was good reason for giving the words ‘genuine dispute’ a plain and uncomplicated meaning as a safeguard against allowing a colourable and insincere denial of liability to frustrate the goal of the provisions.
[70][Cox J rejected the view that any objective appraisal of the dispute was appropriate. His Honour stated that while ‘a patently feeble legal argument or an assertion of facts unsupported by evidence would more readily disincline the Court to consider the dispute to be a genuine one, so far as the employer is concerned’, the merits were otherwise not relevant. Only a dispute which was frivolous or ‘one made without adequate inquiry and consideration’ would run the risk of not being considered genuine.”
At paragraph [71] Dodds-Streeton AJ, stated:
[71]As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something ‘between mere assertion and the proof that would be necessary in a court of law’ may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less. [citation omitted]
Barrett J of the Supreme Court of New South Wales in Solarite Airconditioning Pty Ltd v York International (Aust) Pty Ltd[3] stated:
…[t]he task faced by a company challenging a statutory demand on the “genuine dispute” ground is by no means at all a difficult or demanding one. The company will fail in that task only if it is found upon the hearing of its s459G application that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of a company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seem stronger [Emphasis added].
[3][2002] NSWSC 411
My task in this application is to ascertain whether there are genuine disputes or offsetting claims in respect of the debt the subject of demand, not to express any opinion which may embarrass any other Court subsequently considering the matter.[4] As Robson J stated in Rhagodia Pty Ltd v National Australia Bank Ltd: [5]
It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond the perception of genuineness (or lack of it) the Court has no function. It is 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.
The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offseting claim (and not the likely result of it).”
[4] Spacorp Australia Pty Ltd v. Myer Stores Ltd (2001) 19 ACLC 1270 at [3]-[4]
[5](2008) VSC 195
Analysis
In my view, while there are criticisms that can be made of Stomp’s presentation of its case, I consider that it has discharged the onus which it bears of establishing that there is a plausible contention requiring investigation on the mark-up issue. Dance Street’s own material reveals a drawn out exchange between the parties on the issue and, while certain misgivings arise when one considers the 6 March 2009 email, I do not consider, as Mr Strahan contended, that it fatally infects the plausibility of the position that Stomp presents. The mark-up issue gives rise to questions of some factual complexity which, in my view, do not lend themselves to resolution by the s 459G procedure. Necessarily, there is no testing the evidence by cross-examination. The account which Stomp gives of the trading relationship is plausible and the issues it raises require further investigation.
Some authorities suggest that the test to be applied is akin to that appropriate in applications for summary judgment.[6] In this case, while the debt the subject of the statutory demand is for the large part left intact, save for the issue involving monthly service fees, I consider that leave to defend would be awarded to Stomp in such an application on the basis that it had an arguable counterclaim or cross-demand which, if successful at trial, would extinguish Dance Street’s claim and which Stomp ought to be allowed to litigate. I consider that the dispute and the offsetting claim raised by Stomp is, based on an examination of the contemporaneous communications passing between the parties, prima facie plausible, bona fide and genuine; it warrants further investigation. The position being contended for by Stomp is not, in my view, to adopt the words of Barrett J in the Solarite case, “so devoid of substance that no further investigation is warranted” nor is it “spurious, hypothetical, illusory or misconceived”.[7]
[6]See for example Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA& Pharmagel SpA (1994) 15 347 at 353. See also the discussion in Statutory Demands: Law and Practice, Farid Assat, LexisNexis Butterworths at para 5.18
[7]Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 464
For the above reasons, I will make orders that the statutory demand dated 18 June 2009 be set aside and that Dance Street be ordered to pay Stomp’s costs of the application including any reserved costs.
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