Lock v Weatherhead [2008] NSWSC 46

New South Wales Supreme Court

CITATION : Lock v Weatherhead [2008] NSWSC 46

HEARING DATE(S) : 05/02/08

JUDGMENT DATE : 5 February 2008

JURISDICTION : Equity Division

JUDGMENT OF : Macready AsJ at 1

EX TEMPORE JUDGMENT DATE : 5 February 2008

DECISION : Paragraph 14

CATCHWORDS : Corporations Law. Application to set aside statutory demand under s459G of the Corporations Act. No matter of principle.

PARTIES : Lock & Hardware Supplies Pty Limited v Chris Weatherhead

FILE NUMBER(S) : SC 3892/06

COUNSEL : Mr J Johnson for plaintiff

SOLICITORS : Rutlands Law Firm for the plaintiff

- 1 - THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

ASSOCIATE JUSTICE MACREADY

TUESDAY 5 FEBRUARY 2007

3892/06 - LOCK & HARDWARE SUPPLIES PTY LIMITED v CHRIS WEATHERHEAD

JUDGMENT 1 HIS HONOUR: This is an application to set aside a statutory demand under s 459G of the Corporations Act. The demand is dated 22 June 2006 and claims the sum of $32,565 pursuant to a judgement in the Magistrates Court of Queensland made on 5 November 2004. The judgement resulted from a hearing in the Queensland Industrial Relations Commission. It follows upon the dismissal of the defendant as general manager of the plaintiff company on 1 June 2004. 2 The statutory demand was served on 1 July 2006 and the proceedings were commenced on 24 July 2006 supported by an affidavit affirmed by Mr Hung, the sole director of the plaintiff company, on 24 July 2006. 3 The plaintiff submits that it has a number of offsetting claims against the defendant arising out of his employment with the plaintiff. The claims made in that initial affidavit were in the following areas:

(a) Breach of directions to purchase stock from overseas suppliers rather than from local suppliers; (b) Failing to keep proper records; (c) Continuing supply to debtors who had unpaid accounts; (d) Purchase of gift vouchers which were unauthorised. 4 The plaintiff commenced proceedings in the District Court of New South Wales against the defendant on 31 January 2008 seeking damages for, inter alia, the claims referred to in the first affidavit. The amounts claimed in the proceedings are in respect of: (a) $72,252.82; (b) Nil; (c) $13,724.02; (d) $20,274.75. 5 The Court's task in assessing an offsetting claim has been dealt with in a number of cases. For instance, in Edge Technology Pty Ltd v Lite-On Technology Corp (2000) 18 ACLC 576, Santow J had the following to say at paras 24 and 25: "It is here again true (as it was in Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456) that it "is not my task in the present proceedings to seek to resolve the competing claims of the Plaintiff and the Defendant": per Austin J at 462. Rather, it is to "resolve whether, for the purposes of s459(H)(1)(a), there is a genuine dispute between the Plaintiff and the Defendant about the existence or amount of the debt to which the Defendant's statutory demand relates": Austin J at 462. Or alternatively, whether there is a genuine counter-claim, set-off or cross-demand against the Defendant and, if so, in what amount. In particular, how should it be quantified; at a nominal $1 or at a large figure and if the latter, how is the quantification to be arrived at? The latter question essentially asks whether the counter-claim or set-off is fictitious or merely colourable; Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Limited (No. 2) (1994) 12 ACLC 490; 13 ACSR 787. In that context, to come up with a plausible contention to requiring further investigation which, if later established, would preclude there being an offsetting claim. That would not establish that the counter-claim or set-off was fictitious, or merely colourable. In that sense, the counter-claim or set-off is not the reciprocal of the statutory demand debt. Rather it is a means of offsetting the statutory demand debt with a genuine counter-claim or set-off. I adopt the approach of the Full Federal Court in Spencer Constructions Pty Limited v G & M Aldridge Pty Limited (1997) 15 ACLC 1,001 at 1,011, [1997] FCA 681 ; (1997) 76 FCR 452 at 464; that 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 are real and not spurious, hypothetical, illusory or misconceived". The same applies to the counter-claim or set-off. One asks: Is it bona fide, is it real and not spurious?" 6 He later went on to say: "For the demand to be set aside on the basis of the demand debt being genuinely disputed, it must be established by the Plaintiff that the dispute concerning its existence is bona fide and not spurious, hypothetical, illusory or misconceived: Spencer's Case (supra). In other words, there must be a plausible contention requiring further investigation which genuinely puts in dispute the debt which grounds the statutory demand. But the merits are not now to be determined beyond the preliminary testing as to whether there is a serious question to be tried. The alternative basis for the demand to be set aside or reduced by reason of an offsetting claim involves, as I have said, a different test. The question is not whether there is a genuine dispute in the above sense against the offsetting claim. The question is rather whether the "offsetting claim" can be shown to be "not frivolous or vexatious"; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37. That places a heavier onus on the party seeking to maintain its statutory demand, than if it merely had to establish the reciprocal of a genuine dispute against the offsetting claim." 7 I turn to each of the different claims. The direction to purchase from overseas suppliers 8 Evidence was given by Mr Hung in his first affidavit of the conversation in the first half of 2003 when a direction was given not to purchase from local suppliers in order to improve profitability. That conversation was denied by the defendant. In the affidavits there is evidence of continuing purchases from local suppliers after that time. In a later affidavit Mr Hung repeated the conversation. In his reply the defendant did not deny the conversation this time but merely said there was some other later conversation when a change occurred. The plaintiff's affidavit evidence suggested that in respect of particular purchases the loss was as is now claimed in the statement of claim. If that process was applied to all purchases it now would be much higher according to the affidavit evidence. 9 The affidavit evidence of the defendant raises the issue as to the quantification of that loss but I am not in a position to resolve that dispute. Given that the conversation occurred according to the plaintiff at a meeting where rates of profitability for local and overseas purchases were discussed with an Investigative accountant there is a good basis for perhaps the alleged conversation having occurred. I, unfortunately, in these proceedings cannot determine the matter as to what evidence will be accepted in respect of this dispute. There are questions of credit in respect of the witnesses. This procedure is not such that one could determine these questions of credit in the present case because there is normally no cross examination. 10 The claim is quantified and in my view there is an offsetting claim. The question is whether it can be described as not frivolous or vexatious. 11 Although the District Court proceedings only started last week, no doubt in anticipation of this hearing today, by starting the proceedings the plaintiff does indicate that it takes the matter seriously. It has expended funds to get the proceedings going at it has put itself at risk as to costs if it does not continue with the proceedings. Given the setting in which the matter arises I would not describe it as frivolous and vexatious and the ultimate determination of the rights and wrongs of the matter will have to await the determination of the District Court proceedings. In my view it qualifies as an offsetting claim. Continuing to supply to defaulting debtors 12 There is no proper evidence of this claim which is only referred to in the most general way in the initial affidavit. I would not accept it as an offsetting claim. Purchase of unauthorised gift vouchers 13 There is once again a clear dispute on the affidavit evidence as to whether there was authority for the purchasing of the gift vouchers. The evidence quantifies the claim of $20,274.25 and I will find an offsetting claim in this amount. 14 In the result I am satisfied that there is an offsetting claim in the amount of $92,527.07. As this exceeds the amount of the statutory demand I set aside the statutory demand served by the defendant on the plaintiff dated 22 June 2006 and order the defendant to pay the plaintiff's costs. I order the exhibits be returned.