New South Wales Supreme Court CITATION : Crontec Automotive Tooling v Allsteel [2006] NSWSC 555 HEARING DATE(S) : 26 May 2006 JUDGMENT DATE : 26 May 2006 JURISDICTION : Equity JUDGMENT OF : Austin J EX TEMPORE JUDGMENT DATE : 05/26/2006 DECISION : Creditor's demand varied by reduction of amount claimed CATCHWORDS : CORPORATIONS - statutory demand - offsetting claim - evidence quantifying claim LEGISLATION CITED : Corporations Act 2001 (Cth), ss 459G, 459H Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 156 FLR 181 CASES CITED : Eyota v Hanave (1994) 12 ACSR 785 Re Global Medical Imaging Ltd [2001] NSWSC 476 Scanhill Pty Limited v Century 21 Australasia Pty Limited (1993) 12 ACSR 341 PARTIES : Crontec Automotive Tooling Pty Ltd (P) Allsteel Australia Pty Ltd (D) FILE NUMBER(S) : SC 5262/05 COUNSEL : M J Cohen (P) R O'Keefe (D) SOLICITORS : Simpson Freed (P) Gray & Perkins (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J FRIDAY 26 MAY 2006 5262/05 CRONTEC AUTOMOTIVE TOOLING PTY LTD V ALLSTEEL AUSTRALIA PTY LTD JUDGMENT (Ex tempore; revised 30 May 2006) 1 HIS HONOUR: This is an application made under s 459G of the Corporations Act 2001 (Commonwealth) for an order to set aside a creditor's statutory demand. The statutory demand is undated but no point is taken with respect to the lack of a date. It makes a demand for a debt of $74,542.71 for "money owed to the creditor by the company arising from the supply of goods by the creditor at the request of the company". It is signed by Mr Marigliani as director of the defendant and is addressed to the plaintiff. 2 The affidavit supporting the statutory demand was made on 15 September 2005. Somewhat irregularly, the body of the affidavit refers to an exhibit said to comprise true copies of the outstanding amounts related to the debt owed by the debtor. The exhibit comprises a large number of invoices issued by the defendant to the plaintiff together with a statement which is partly illegible. The deponent says he believes there is no genuine dispute about the existence or amount of the debt. 3 The application was filed on 6 October 2005 and is supported by an affidavit of Robert John Priddle made on 5 October 2005. No issue has been raised as to whether the application was out of time and, on its face, it appears clearly to have been brought within time. 4 The principal issue for my decision, in light of the rulings that I have made on matters of evidence, is whether there is an offsetting claim to a value equivalent to part of the amount claimed in the statutory demand. 5 Section 459H(5) of the Act defines "offsetting claim" to mean a genuine claim that the company has against the respondent by way of counter-claim, set-off or cross-demand (even if it does not arise out of the same transaction for circumstances as the debt to which the demand relates). 6 Section 459H makes provisions having the effect that the Court is to deduct the amount of any offsetting claim from the amount in the statutory demand. If the amount of the offsetting claim is greater than the amount in the statutory demand, or is less than the amount in the statutory demand by a figure that is less that the statutory minimum of $2,000, then under s 459H(3) the Court is required to make an order setting aside the demand. If, however, the amount in the statutory demand is greater than the amount of the offsetting claim by more than the statutory minimum, then the effect of s 459H(4) is that the Court has the discretion to make an order varying the demand in the manner specified in the order and declaring the demand to have had effect, as so varied, as from when the demand was served on the company. 7 Under s 459H(1) the Court enquires whether it is satisfied either that there is a genuine dispute between the company and the respondent about the existence or amount the debt to which the statutory demands relates, or that the company has an offsetting claim. In the present case, my view is that the company has an offsetting claim in respect of part of the amount demanded in the statutory demand, the offsetting claim being for the sum of $41,640.40. I am further of the view that there is a genuine dispute, for reasons to be given, as to the amount of $13,302.31. 8 In those circumstances, the Court's task under s 459H(2) is to calculate the "substantiated amount of the demand". The Court does so in accordance with a formula by which the "admitted total" is ascertained and from that figure the "offsetting total" is subtracted. Here, the admitted total as defined in s 459H(2) is the amount for which the demand was issued, namely $74,542.71 less the amount in respect of which there is a genuine dispute, namely $13,302.31 (see the definition of "admitted amount" in s 459H(5)(b)). The "offsetting total" is the figure for the offsetting claim namely $41,640.40. By the application of the formula, the substantiated amount is $19,600. 9 Accordingly, the orders I shall make under s 459H(4) are orders varying the statutory demand so as to reduce the amount to $19,600 and declaring the demand so varied to have had effect from when the demand was served. 10 The plaintiff company conducts the business of manufacturing tools, dyes and moulds, predominantly for the automotive industry. The defendant was a supplier to the plaintiff of "D2 blocks of steel" which the plaintiff used for its business purposes. 11 On about 16 June 2004, a purchase order was placed with the defendant for blocks of D2 steel. The order, which is in evidence, was issued on letterhead of a company called Crontec Automotive Tooling Australia Pty Limited, a company different from the plaintiff. But the evidence given by the plaintiff's director, Mr Priddle, is that the purchase by that order was a purchase made by the plaintiff. 12 The defendant's director, Mr Marigliani, has given evidence corroborating that conclusion. In paragraph 5 of his affidavit of 28 October 2005 he says that "the plaintiff by purchase orders...dated 16 June 2004 was supplied...". During submissions, my attention was drawn to the fact that Mr Marigliani did not say, in so many words, that the plaintiff was the purchaser of the steel supplied pursuant to the order. In my opinion, however, when paragraph 5 of his affidavit is read in its context, Mr Marigliani's evidence is to the effect that it was the plaintiff that purchased the steel from the defendant. 13 There is in evidence an e-mail from Jonathan Priddle to a person at the defendant company, in which he speaks about "Crontec" taking certain issues seriously and he refers to the costs that "our company" has incurred. The e-mail is attributed to Mr Priddle as plant manager of Crontec Automotive Tooling (Australia) Pty Limited, rather than the plaintiff. 14 I prefer the evidence given in the affidavits themselves to the evidence that would be implied from the e-mail and the order forms. If the directors of both parties proceeded on the basis that it was the plaintiff that was purchasing the D2 steel blocks from the defendant, it is plausible to infer, on the balance of probabilities and on the evidence before me, that that was the case. 15 The issue is significant because the plaintiff wishes to assert an offsetting claim in respect of some of the D2 steel blocks supplied pursuant the order of 16 June 2004. If the purchaser in that order was some other entity, then the plaintiff would not have an offsetting claim. But my view is that I should infer that the offsetting claim is the plaintiff's claim. At the very least, one can infer that there is a genuine claim to be made by the plaintiff within the definition of "offsetting claim" in s 459H(5). 16 The defendant responded to the order of 16 June 2004 and the plaintiff allocated three D2 blocks for a major tooling project for Holden Australia. The plaintiff transformed those three blocks from their raw state to moulds ready for heat treatment by following a procedure which I need not set out in detail. Suffice it to say that the procedure involved a substantial quantity of work and that included fitting, polishing, dye spotting and matting with the use of a shroud and then a process of vacuum heat treatment by another company. 17 In the present case, the three D2 blocks were sent by the plaintiff to a company called M F Dippert Pty Limited for vacuum heat treatment, after it had processed them. According to Mr Priddle's evidence, they left the plaintiff's possession without any cracks and were in a fit state for their final purpose. In evidence, there is an order date 1 April 2005 which Mr Priddle says was an order from the plaintiff to Dippert for vacuum heat treatment for D2 blocks including the three blocks in question. 18 After the vacuum heat treatment, the three blocks were returned to the plaintiff on about 5 April 2005. Mr Priddle's evidence is that at that time, the plaintiff discovered that the three blocks had cracked. The plaintiff's staff contacted Dippert to inquire why the three blocks had cracked, and an agreement was reached as to the retainer of a metallurgist to prepare a report. Mayfield Engineering Pty Limited was engaged and they produced a report dated 26 June 2005. 19 The defendant submitted that the Court should not infer from the evidence that three blocks had cracked, since the metallurgist reported on only one block. But in my view it is not necessary, in order to reach the standard for establishing an offsetting claim, for the plaintiff to support every assertion of its director with external corroborating evidence. I am satisfied, reviewing Mr Priddle's affidavit and the external evidence together, that it is appropriate to infer that there were, as Mr Priddle says, in fact three blocks that were discovered to be cracked. 20 The report by Mayfield Engineering concluded that "the root cause of the cracking detected in the subject component was incorrect micro-structure prior to heat treatment". The report went on: "Essentially, carbides were present in the microstructure in a form which compromised the integrity of the structure when the material was heat treated". 21 Effectively, the expert opinion was that there was a defect in the D2 blocks supplied by the defendant to the plaintiff, causing the cracks, rather than any cracking caused by the handling of the blocks by the plaintiff or Dippert. 22 Mr Jonathan Priddle sent a copy of the report to the defendant on 30 June 2005. Mr Marigliani personally may not have discovered the contents of the reports immediately but I see no basis for concluding that the plaintiff delayed communication with the defendant for any undue period. 23 The evidence shows that while the cracking was investigated, the plaintiff continued to order D2 blocks from the defendant. The blocks that are the subject of the statutory demand relate to orders placed in May and June 2005. It appears that the plaintiffs ceased to place orders with the defendant after the report was obtained and a dispute between the parties emerged. I do not regard it as in any way irrational for the plaintiff to continue to place orders with the defendant while investigating the reason for the cracking. 24 There was then a process of correspondence between the parties and a discussion between Mr Priddle and Mr Marigliani, the content of which is disputed. It is unnecessary for me to make any finding about the conversation. It is enough to refer to the contents of the correspondence. 25 On 2 August 2005, Mr Marigliani wrote to Jonathan Priddle referring to the metallurgical report and expressing some doubt about it, saying, among other things, that there could have been other causes of the cracking. He said that because the plaintiff was a valued customer, the defendant would be happy to supply a block or blocks to the value of the failed piece free of charge. 26 Mr Priddle responded on 6 September 2005 disagreeing with Mr Marigliani's comments and saying that as a result of the problem, the plaintiff had been exposed to the major cost of fully re-building the dye steels, and he noted the impact this had had on other projects and customer relationships. He said that the plaintiff would be making a formal claim to recoup its costs and would not finalise outstanding invoices until the matter was settled amicably. 27 On 7 September 2005, Mr Priddle wrote again estimating the plaintiff's costs at $70,000 to $80,000 to replace and re-build the cracked blocks. He proposed a meeting to discuss outstanding accounts. 28 On 7 September 2005, Mr Marigliani and another officer of the defendant wrote to the plaintiff, in effect threatening the commencement of winding up proceedings if outstanding invoices were not paid and asking for additional information so as to investigate the problem of the cracked blocks further. The letter proposed sending samples to Germany. On 8 September 2005, Mr Priddle wrote to the defendant seeking clarification of the defendant's capacity to meet the plaintiff's foreshadowed claim. 29 What emerges from this correspondence, and further correspondence continuing over the ensuing weeks, is that the parties were endeavouring in various ways to advance their dispute towards resolution, but on the one hand the defendant was reserving its option of pursuing winding up proceedings (by which I take Mr Marigliani to have meant the issue of a statutory demand in the first instance) and was seeking to conduct further investigations with respect to the cracking; while the plaintiff was prepared to co-operate with investigations, provided they were with an independent metallurgist selected locally, but was not prepared to pay the outstanding invoices until the problem had been addressed. That was the state of affairs when the statutory demand was issued. 30 If a genuine dispute or genuine offsetting claim had been established by the evidence in respect of the whole amount of the statutory demand, the Court would have had no hesitation in concluding that the statutory demand should be set aside within indemnity costs. There is clear evidence in the correspondence that the defendant was using the statutory demand procedure, and hence the threat of winding up, to extract payment in circumstances where there was known to be a dispute. 31 However, while the plaintiff has satisfied me that there was cracking in the three D2 blocks and that it did cause loss to the plaintiff (rather than some other entity) for which the plaintiff was entitled to hold the defendant accountable, the plaintiff's case falls short of showing that the offsetting claim that it alleges was for the amount that it claims. 32 In his affidavit of 5 October 2005, Mr Priddle asserts that the plaintiff suffered damages in three categories. The first category arises out of its replacement of the three blocks, and works required to transform the new blocks to the stage that they had reached before sending them to Dippert for heat treatment. The calculations that the plaintiff has made for this loss are set out in an annexure to Mr Priddle's affidavit. 33 First, the plaintiff claims (I think, uncontroversially) damages measured by the costs of three blocks in the total amount of $4,492.90. Second, the plaintiff makes a claim in respect of each of the three blocks for "manufacture". The amounts claimed under this heading is $11,897.50 for two of the three blocks and $11,657.50 for the other block. Supporting those claims is what the schedule to the affidavit describes as a "Detailed break down of hours to remanufacture crack D2 tool steel blocks supplied to Crontec by Allsteel". For each of the three blocks, there is a table which sets out descriptions of the "scope of works", the number of hours, the hourly rate and the total costs (calculated by multiplying the number of hours by the hourly rate). 34 Counsel for the defendant submitted that these tables are insufficient to persuade the Court that the value of the offsetting claim is as asserted by the tables. The standard to be reached for the valuation of an offsetting claim has been described in several cases. In determining whether there is an offsetting claim the Court takes essentially the same general approach as it does to deciding whether there is a genuine question to be tried. The Court investigates whether there is a plausible contention requiring further investigation (see, in the case of a genuine dispute, Eyota v Hanave (1994) 12 ACSR 785; and in respect of the offsetting claims, Scanhill Pty Limited v Century 21 Australasia Pty Limited (1993) 12 ACSR 341). As far as quantification is concerned, it is unnecessary for the plaintiff to prove on the balance of probabilities either that it has suffered a specific quantified loss or that its loss was caused by the defendant. What is needed is for the plaintiff to show that the quantification of the offsetting claim that it asserts satisfies the test of plausible contention - that is to say, that the claim is not fictitious and there is a real basis for the asserted calculation (see Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 156 FLR 181). It is not necessary for the plaintiff to produce external corroboration of estimates, but the Court is unlikely to be satisfied that the standard has been reached if the plaintiff does no more than make an assertion of the amount of the offsetting claim, without providing any specific or particularised calculations to show how the final figure was reached. 35 Applying all of these principles to the tables set out in the schedule to Mr Priddle's affidavit, my view is that, although there is no external corroboration, the tables satisfy the requirements for an establishing an offsetting demand. 36 Other claims made in the schedule are for the costs of heat treatment of the blocks, once engineered, in the sum of $1,195 and for transport costs for heat treatment in the sum of $500. The calculations in the schedule add up to $41,640.40. I am satisfied that the plaintiff has an offsetting claim for that amount. 37 As I have mentioned, the plaintiff put forward three categories of damage. So far I have only addressed the first. 38 The second category is "additional labour costs incurred by the plaintiff to meet deadlines to complete other projects and the project for Holden Australia that had been delayed due to the replacement work" (see Mr Priddle's affidavit of 5 October 2005, paragraph 33(b). 39 The third category of damage identified by Mr Priddle is damage "to [the Plaintiff's] goodwill and reputation with customers that have had their jobs delayed". No quantification of this damage is given. 40 In his first affidavit, Mr Priddle simply describes these categories of damage in the quoted words and then quantifies the claim at $19,600. The schedules to the affidavit do not refer to this category of damage. This evidence gives inadequate quantification to satisfy the Court of the amount of offsetting claim. 41 In his affidavit, Mr Marigliani criticises Mr Priddle's quantification of the offsetting claim on several grounds (see paragraph 17 of his affidavit of 28 October 2005). By his affidavit 14 December 2005, Mr Priddle seeks to answer Mr Marigliani's criticism. He gives some further particulars of charge-out rates that he has used for the purposes of the schedule to his first affidavit. That evidence merely reinforces evidence that I have already held to be adequate. He then refers to the second category of damage. He says that the costs claimed are based on the work performed by the plaintiff company, and consequently, there are no invoices or tender documents to be supplied. He claims that the plaintiff has suffered additional labour costs to meet deadlines to complete other projects. He subdivides that assertion into two components: "(a) Penalty Rates - labour and machinery utilised at night and weekend rates to complete projects that the plaintiff was committed to in the sum of $9,790.00. (b) Financial Costs - the cost to finance the additional purchase and manufacture of the three blocks together with its impact to finance other projects and delays in the sum of $9,810.00". 42 I regard this further evidence as mere assertion. The calculation of the two specific amounts, which together add up to $19,600 (the figure given in the first affidavit), is not explained. There is a reference to weekend rates but they are not given. There is a reference to other projects but they are not named. There is a reference to work at night and on weekend but the hours worked on those occasions are not stated. The references to the costs of finance relate not only to the additional purchase and manufacture of the three blocks but also to the "impact to finance other projects and delays" but there is no further explanation of the financing arrangements. It is insufficient to make assertions at this level of generality, supported only by the final figures. 43 In my opinion there is a genuine dispute with the sum of $13,302.31, part of the amount claimed in the statutory demand, for the following reasons. The correspondence indicates that the plaintiff offered to pay a net amount reflecting the difference between the amount demanded and the amount which, according to the plaintiff's assertion, was the value of the offsetting claim. Mr Priddle, in his first affidavit, asserts that on or about 6 October 2005 he "caused to be forwarded to the solicitors for the defendants a cheque in sum of $13,302.31". As counsel for the defendant pointed out this evidence does not explain very much about the forwarding of the cheque. It does not identify the drawer of the cheque. 44 However, in his affidavit of 28 October 2005, in which he responded to Mr Priddle's affidavit, Mr Marigliani did not put in issue the assertion in Mr Priddle's affidavit. In the circumstances I think it is appropriate to infer from the evidence that there is at least a plausible contention requiring investigation, to the effect that the plaintiff tendered payment of the amount of $13,302.31 being part of the amount demanded. There is therefore a genuine dispute in respect of that sum. 45 My conclusion is that the statutory demand is to be varied to the sum of $19,600. I shall make orders accordingly, and hear the parties on the question of costs. ********** 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.