New South Wales Supreme Court CITATION : Pearson's Products Pty Ltd v C P Technologies Pty Ltd [1999] NSWSC 575 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 1044/99 HEARING DATE(S) : 24/05/99 JUDGMENT DATE : 24 May 1999 PARTIES : Pearson's Products Pty Limited (P) C P Technologies Pty Limited (D) JUDGMENT OF : Young J COUNSEL : Plaintiff: R Wright Defendant: D R Pritchard SOLICITORS : Plaintiff: John Carmody & Co Defendant: Kemp Strang CATCHWORDS : Corporations [215]; Statutory demand; Claims both arising after commencement of winding up; Held offsetting; Corporations [264]; Mutual credits; Claims arising after winding up commenced ACTS CITED : Corporations Law ss 439C, 459H, 500(2), 553, 553C, 556(1)(a) (Cth) Bankruptcy Act 1966, s 86 CASES CITED : John Shearer Ltd v Gehl Company (1995) 60 FCR 136 Re National Arms and Ammunition Co (1885) 28 Ch D 474 DECISION : See para 29 THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG, J MONDAY 24 MAY 1999 1044/99 - PEARSON'S PRODUCTS PTY LTD V C P TECHNOLOGIES PTY LTD JUDGMENT 1 HIS HONOUR : This is an application to set aside a statutory demand. 2 The demand dated 22 December 1998 was in respect of the sum of $51,195.78. The affidavit accompanying the demand referred to a deed of 24 November 1998, pursuant to which the alleged debt was owing. 3 The plaintiff by its solicitor replied to the demand on 24 December 1998. Essentially the reply was that the debt arose out of the purchase of a product called "Wrinkle Free". That product was supposed to be able to be sprayed on to clothes and would produce the same effect as if the clothes had been ironed. It was packed in a spray can. Unfortunately, tests after about 9 December 1998 showed that the product had so corroded the can that if anyone sprayed the product on to a garment, the garment, rather than being quasi ironed, would in fact be stained. 4 The plaintiff then had the product removed from Woolworths and Franklins and other supermarkets which had stocked it. It says that it has lost the value of the product, it has had to pay for promotion of the product which was wasted, and it has had to pay some costs in connection with the removal of the product from the supermarket shelves. The claim that it makes is in the vicinity of $130,000. 5 On 29 December 1998 a creditor said that it would insist on the demand and any claim should be made in the usual way. The present proceedings were commenced on 11 January 1999. 6 The deed on which the defendant relies is a very peculiar one. It is a tripartite deed between the defendant, the plaintiff and the ANZ Bank. It would seem that the ANZ Bank had some claim to have had a fixed charge over the product which was delivered to the plaintiff, and the deed provided that the bank would be paid just short of $20,000, it would join in a document whereby the plaintiff was assured that it had title to the product, and the debt for the purchase price was acknowledged. Clauses 2.1, 2.2 and 6 of the deed are as follows: "2.1 In consideration of the Stock Purchase Price, the Company hereby agrees to sell and Pearsons hereby agrees to purchase the Stock. 2.2 Pearsons acknowledges that it has inspected the Stock and neither the Company nor the Liquidator nor ANZ warrants nor makes any representation as to the existence, condition, merchantability, saleability, quality or suitability for purpose of the Stock. 6. The Debt Pearsons acknowledges it owes the Debt to the Company, and hereby agrees to pay the Debt to the Company and the Liquidator in accordance with the Third Schedule. In consideration of the Company entering into this Deed and the Liquidator releasing any claim to the Intellectual Property, in the event that, for any reason, Pearsons fails to make any one or more of the payments listed in the Third Schedule to the Liquidator on or before their respective due date, Pearsons hereby irrevocably consents to, and the Company shall be immediately entitled to file for and obtain judgment in the amount of the Debt, or the balance of the Debt owing at the time of such default. The Company may plead this Deed in support of such consent judgment." 7 The Third Schedule to the deed provided that $10,000 of the debt would be paid on the first days of each month for the period December 1998 to May 1999, with the odd $1,195.78 being paid on the last mentioned date. Although the payment of $19,500 was made to the ANZ Bank, the payment due on 1 December was not made and none has been made since. 8 A minor question arises as to what was due and payable on 22 December 1998. Mr Pritchard for the defendant says that it was the full $51,195.78 because there had been a default of the payment due on 1 December. That entitled the defendant "to file for and obtain judgment in the amount of the Debt" and that filing for and obtaining judgment were merely procedural matters, indicating that the amount of the debt was owing as soon as the defendant was entitled to file for judgment, whatever those words may mean. Presumably they mean "to sue". 9 Mr Wright for the plaintiff says that the debt was only payable on the dates mentioned in the Third Schedule. If it was to be collected earlier then the defendant had to perform the preconditions which were set out in the deed, namely to file for and obtain judgment. It had not gone through those preconditions and, accordingly, the whole of the debt was not payable; all that was owing as at 22 December was $10,000. 10 I consider that of the two Mr Wright is correct. Normally in this sort of deed one expects a standard clause that if there is default in any one instalment the whole of the amount is immediately repayable. That is starkly absent. If parties specify that amounts are only to be due by a particular procedure then normally that is the only way in which a debt can be made payable (see Head v Kelk (1961) 63 SR (NSW) 340, 345). 11 However, all this would really mean would be that the demand might be bad, but a fresh demand could issue tomorrow, so it is necessary to deal with the main point in the dispute. 12 The facts reduced to their simplest, and making various assumptions, which at least at this stage of the litigation are warranted, are that by deed the plaintiff now owes the defendant $51,195.78. Against this, the plaintiff has an unliquidated claim against the defendant of perhaps $130,000. 13 The defendant went into administration on 3 July 1998 and the creditors passed a resolution to wind up the company under s 439C of the Corporations Law on 13 October 1998. The effect of that was that the administrator became the liquidator and the liquidation was deemed to have commenced on 3 July 1998. 14 Before 3 July 1998 the defendant had supplied a quantity of product "Mould Kill", but the first supply of "Wrinkle Free" occurred at least on or after 27 July 1998, after the notional date for winding up. Fourteen thousand eight hundred thirty-two cans, being the bulk, was supplied on 20 October 1998. It would thus appear that the claim for defective product or breach of warranty under the Trade Practices Act or any tortious claim arising out of the supply arose after the commencement of the winding up. 15 The defendant's claim also arose after the winding up commenced. Mr Pritchard says that this is being too technical. The plaintiff owed money to the defendant before the deed of 24 November 1998, but on 24 November any liability was translated into a specialty debt, so that the present claim of the defendant arose after the commencement of the winding up. 16 Under s 553 of the Corporations Law the claims against the company are provable as at the commencement of the winding up. Under s 553C mutual credits, mutual debts or other mutual dealings between the company and another are considered as at that date and set-off. One of the principal arguments for the defendant is that as this case does not involve a s 553C scenario there is not an off-setting claim within the meaning of s 459H of the Corporations Law. Accordingly, it does not matter what the plaintiff's claim is, it does not qualify for an excuse for setting aside the statutory demand. 17 Corporations Law s 553C which has been relied on in this case is, to my mind, a red herring. It is the draftperson's attempt to translate s 86 of the Bankruptcy Act 1966 into the field of corporations law. In the bankruptcy situation a claim that is made after the commencement of the bankruptcy against the trustee is a claim against the trustee personally and cannot be set-off under s 86; see eg Alloway v Steere (1882) 10 QBD 22 and the other cases referred to in para [86.1.15] of McDonald Henry and Meek's Australian Bankruptcy Law & Practice (LBC, Sydney, 1996). 18 Under the Corporations Law the liquidator has no personal liability, so those cases cannot be translated directly across. However, it would seem that the answer is that ordinarily the claim will be a claim against the company for payment which will be made under s 556(1)(a) of the Corporations Law. I say "ordinarily" because there may be some situations where the liquidator has acted ultra vires. 19 "Off-setting claims" is defined in s 459H (5) of the Corporations Law 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)". 20 That definition was considered by the Full Federal Court in John Shearer Ltd v Gehl Company (1995) 60 FCR 136. At 142 the three judges said that the word "cross-demand" is a word of considerable width. They pointed out it was not a technical term and said it should not be given too restricted a meaning. Heerey J applied that line of reasoning in the subsequent case of EquusCorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 24 ACSR 194, 203. 21 There are arguments the other way, as were well put by Mr Pritchard. Those Federal Court decisions are also perhaps inconsistent with some previous State authorities, which were not referred to, and, indeed, Robson's Annotated Corporations Law (LBC, Sydney) is bold enough to say that the Federal Court decisions are wrong (see 1999 edition page 501). 22 However, this Court should in Corporations Law matters follow the decision of a Full Federal Court. I have no problem in doing so here, especially as the decision reached in that court accords with the way I would, in any event, construe the definition. I hold that there does not have to be a set-off under s 553C in order for there to be an off-setting claim. 23 What then is the relationship, if any, between the plaintiff's claim and the defendant's claim? Mr Wright puts that the plaintiff's claim is one which arose after liquidation. He points to the decision of the English Court of Appeal in Re National Arms and Ammunition Co (1885) 28 Ch D 474, 479-480 where Bowen LJ said: "A broad line is to be drawn between obligations which have accrued before the commencement of the winding-up and those which accrue after the commencement of the winding-up. Persons who have claims that accrue due before the winding-up must come in as creditors pari passu. But on principle there is no reason why a debt properly incurred by the liquidator after the commencement of the winding-up should not be paid in full ... ". 24 Accordingly, prima facie the plaintiff is entitled to be paid its claim in full out of the assets of the defendant. One can speculate as to whether those assets will be sufficient, but Mr Wright has found some comfort in correspondence that strongly suggests that the defendant company is insured against this particular liability. 25 On the other hand, there would be no reason why as at the date after 1 May 1999 the amount of $51,195.78 should not be paid. 26 Where that contest takes place really does not concern me. The court, provided not too much court time is being used, is quite content to settle these disputes without people having to go through the normal processes of the District Court, but otherwise there would have to be a claim and cross-claim filed in the District Court after the appropriate leave was given under s 500(2) of the Corporations Law. 27 The scheme of the Corporations Law is that if it is clear that a corporation owes money to a creditor, then within a very short period of time the court should see that no expense has to be incurred by the creditor in recovering that amount and that undue technicalities are not put in the way of recovery. 28 Accordingly, the procedure has been devised of a statutory demand and a quick setting aside of the statutory demand. There will be cases under s 459H where the court can see that that is not the appropriate procedure, in which case the parties are put back into the position of normal litigants who have to have their claim litigated in the normal course. 29 In my view, in the instant case there is an off-setting demand. The off-setting demand may have a value of $130,000, that is the sort of amount claimed, and seems within the ballpark. This exceeds either the $10,000 or $51,000 claimed on the other side and, accordingly, in my view, the statutory demand should be set aside. 30 I hope the parties can deal with the matter commercially without the winding-up threat hanging over the plaintiff. 31 As the defendant has been unsuccessful the defendant should pay the plaintiff's cost of the proceedings. (Mr Wright sought costs on the indemnity basis) 32 I reserve further consideration both as to the question as to whether costs should be on the indemnity basis and whether the liquidator should file a cross-claim for judicial advice or otherwise. oOo Last Modified: 06/10/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.