JUDGMENT NO. suede wat NOT FOR DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3366 of 1994 GENERAL DIVISION ) BETWEEN: EASTCOAST UNDERGROUND PTY LTD Applicant AND: INSITUFORM TECHNOLOGIES INC Respondent RECEIVED CORAM: LINDGREN J PLACE: SYDNEY . 2 5 OCT 1994 DATE: 17 OCTOBER 1994 EAAL COURT OF PRINCIPAL REGISTRY NS FOR D HIS HONOUR: In this matter application is made by the applicant by notice of motion dated 12 October 1994 for an order that a certain notice to produce filed by the respondent be set aside. The notice to produce was filed on 28 September 1994 and calls upon the applicant to produce documents described in eight categories. The applicant no longer seeks to have the notice to produce set aside in so far as it comprises paragraphs 7 and 8. Accordingly, the argument has proceeded this morning on the footing that the motion relates to paragraphs 1 to 6 only. By the substantive application the applicant applies for an order setting aside a statutory demand under paragraph 459E of the Corporations Law. The basis of the application is that there is an "offsetting claim" to use the language of s. 459H (1) (b). neds The statutory demand itself was served on 4 July 1994 and is in respect of a total amount of $209,695.52. According to that statutory demand the applicant is indebted to the respondent in that amount for goods supplied. There are invoices in evidence issued by the respondent to the present applicant for amounts which, I am informed, total the equivalent in US dollars of that sum. The alleged offsetting claim is said to arise in various ways. The first is under the Trade Practices Act 1974 (Cth) s. 52. The nature of that offsetting claim is deposed to in an affidavit of John Thomas Atkins, the managing director of the applicant, sworn 22 July 1994. Mr Atkins says that the applicant was assured that it would have an exclusive licence in respect of the use of a pipe-relining technology in Australia and New Zealand. Secondly, it is said that there was a representation made on behalf of the respondent that "Rocla" would not be in competition with the applicant. Thirdly, it is said that it was represented that certain patents were on foot in respect of the technology, the protection of which would enure to the benefit of the applicant. What is alleged is that all these representations were false. This is said to constitute misleading and deceptive conduct on behalf of the respondent which induced the applicant to enter into a certain agreement for the grant of an "exclusive licence «-. to use a technology for a pipe-relining known as the insituform process in Australia and New Zealand" (see below). The other major head of claim is that the applicant says that it is faced with claims from its customers in respect of defective liners which were supplied to it by the present respondent, and, in turn, supplied by it to its customers. In other words, the claim is for an indemnity, the applicant saying that there is a liability on the part of the respondent to the applicant to indemnify the applicant in respect of such liability as the applicant has incurred to its customers arising from the defective goods. The key issue in the substantive proceedings will apparently be vad the genuineness of the alleged offsetting claim. At this point it is appropriate to list the six paragraphs of the notice to produce which are in issue. They are as follows: » "1. latest management accounts; 2. latest balance sheet and latest profit and loss account}; 3. bank statements from 1 January 1994 to date; 4. any statutory demand served upon the company during the period 1 January 1994 to date; 5. correspondence from the period 1 January 1994 to date from creditors or taxation agencies seeking payment; 6. documents evidencing all dispositions of the company's property in the period 1 January 1994 to date." The respondent's case is that the alleged offsetting claim is an afterthought which has been contrived by the applicant to defeat its entitlement. It is said on its behalf that the assertion of the offsetting claim has been made only very recently and certainly since the statutory demand was served. I was taken to evidence which indicates that on a date subsequent to service of the statutory demand the present applicant caused its equipment to be advertised for auction. The first advertisement to which I was taken was in the Sydney Morning Herald on 16 July 1994 and that was in respect of an auction to take place on 21 July 1994. According to the advertisement, the auction was "due to cessation of the business". I was also taken to another advertisement of the auction which included the same language. The way in which the respondent puts its case to support the notice to produce is that these advertisements indicate that the applicant was insolvent and can be taken to have raised the alleged offsetting claim spuriously. There is thus raised a question as to the insolvency of the applicant, not as a basis for winding up the applicant, but as an element in showing the spuriousness of the alleged offsetting claim. In passing, I should note another matter which may, on the final hearing, be some indication of spuriousness but of course I reach no conclusion in relation to it. This is the fact that the licence agreement referred to earlier was one bearing date 10 March 1993 which was entered into between INA Acquisition Corp as licensor and Insituform Nupipe Holdings Pty Limited as licensee. Apparently the applicant will seek to argue that it acquired rights as licensee under that licence agreement. Mr Taylor of counsel for the applicant has said that what will be contended is that the parties as named in the licence agreement were nominees of the parties to these proceedings or vice versa. Be this as it may, and again only in passing, I note that the parties to the present proceedings are not, on the face of the licence agreement, the parties to that licence agreement. The possibility that the alleged offsetting claim has no basis is thus raised. I certainly accept what Mr Taylor says when he submits that insolvency as_ such is not an issue in these present proceedings. However, the spuriousness or otherwise of the alleged offsetting claim is clearly an issue. The question is whether the insolvency of the applicant is potentially relevant to the alleged fabrication of a spurious claim said to be the "offsetting claim". I think that it is. The respondent will point to the facts that the applicant put forward the alleged offsetting claim after service of the statutory demand upon it, that the claim was based upon a licence agreement to which the parties to this litigation were not parties, and that- the applicant was more or less contemporaneously attempting to sell assets due to cessation of its business. In these circumstances I think that the respondent is entitled to attempt to show that the applicant was insolvent as a "plank" in its contention of spuriousness. The documents may provide material on which the officers of the applicant can be cross-examined as to their motive in raising the claim at such a late stage. Although the relevance of the various classes of documents referred to in paragraphs 1-6 may vary as between themselves, I think that all of paragraphs 1 to 6 should be sustained. Accordingly, I order that the applicant's motion on notice of motion dated 12 October 1994 for an order setting aside the notice to produce be dismissed, and I order that the applicant pay the respondent's costs on the motion. I certify that this and the preceding 4 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Dated: 25 Actober 1994 Heard: 17 October 1994 Place: Sydney Decision: 17 October 1994 Appearances: Mr P T Taylor of counsel instructed by Brock Partners appeared for the applicant. Mr D Robinson of counsel instructed by Gadens Ridgeway appeared for the respondent.