Supreme Court New South Wales Medium Neutral Citation: Property Builders Pty Ltd v Carlamax Properties Pty Ltd; Property Builders (Constructions) Pty Ltd v Carlamax Properties Pty Ltd [2011] NSWSC 1068 Hearing dates: 2 August 2011 Decision date: 14 September 2011 Jurisdiction: Equity Division - Corporations List Before: White J Decision: Refer to para [68]-[70] of judgment. Catchwords: CORPORATIONS - statutory demand - application to set aside statutory demand - offsetting claim - definition of "offsetting claim" in s 459H, Corporations Act 2001 (Cth) - offsetting claims include cross-demands that do not amount to a set-off - contractual agreement precluding set-off does not prevent company relying on the claim as offsetting claim under s 459H - Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308 not followed - whether offsetting claim genuine - arguable basis for offsetting claim - not possible to calculate offsetting claim on evidence adduced by plaintiffs - proceedings adjourned to allow the plaintiffs opportunity to properly quantify offsetting claim to extent found to be genuine CORPORATIONS - statutory demand - application to set aside statutory demand - "some other reason" to aside statutory demand, s 459J(1)(b) Corporations Act 2001 (Cth) - reason must be good reason as to why presumption of insolvency should not arise from non-compliance with the statutory demand - possibility that funds may become available to pay debt provides no reason why presumption of insolvency should not arise from non-compliance Legislation Cited: Corporations Act 2001 (Cth) Building and Construction Industry Security of Payment Act 1999 Cases Cited: Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 1783; (1996) 70 FCR 452 Adelaide Bank Ltd v Property Builders Pty Ltd [2010] NSWSC 830 Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1891) 147 CLR 589 John Shearer Limited v GEHL Company [1995] FCA 1789; (1995) 60 FCR 136 L & D Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536 Pearson's Products Pty Ltd v CP Technologies Pty Ltd [1999] NSWSC 575 Seaham Air Pty Ltd v Australian Aerospace Limited [2006] NSWSC 1241 Max Cooper & Sons (Builders) Pty Ltd v M & E Booth & Sons Pty Ltd [2003] NSWSC 929; (2003) 202 ALR 680 Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 Greenaways Australia Pty Ltd v CBC Management Pty Ltd [2004] NSWSC 1186 Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559 Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284 Falgat Constructions v Masterform [2005] NSWSC 525 BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982 Reed Construction (Qld) Pty Ltd v Dellsun Pty Ltd [2009] QSC 263; [2010] 2 Qd R 481 Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308; (2006) 205 FLR 432 Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1378; (2006) 60 ACSR 393 Blue Hills Village Management (Liverpool) Pty Ltd v Babcock & Brown International Pty Ltd [2009] NSWSC 87 Project Venture Development No. 11 Pty Limited v TQM Design & Construct Pty Ltd [2009] NSWSC 699 Abadeen Group Pty Limited v Bluestone Property Services Pty Limited [2011] NSWSC 137 Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 Category: Principal judgment Parties: Property Builders Pty Ltd (Plaintiff 2011/61609) Property Builders (Constructions) Pty Ltd (Plaintiff 2011/61746) Carlamax Properties Pty Ltd (Defendant) Representation: R Freeman (Plaintiffs) B Nolan (Defendant) Phontos Legal (Plaintiff) Deutsch Partners (Defendant) File Number(s): 2011/61609 2011/61746 Judgment 1HIS HONOUR : These are two applications to set aside statutory demands. Each statutory demand was served by the defendant, Carlamax Properties Pty Ltd ("Carlamax") and is dated 3 February 2011. Each statutory demand demanded payment of a debt of $648,872.52 owing pursuant to a judgment of the District Court given on 19 January 2011. Judgment was entered in favour of Carlamax against both plaintiffs (Property Builders Pty Ltd ("Property Builders") and Property Builders (Constructions) Pty Ltd ("Property Builders (Constructions)")). 2Property Builders and Property Builders (Constructions) do not dispute that they owe the debt the subject of each statutory demand. Nor has there been an appeal from the judgment. The grounds upon which they seek to have the statutory demand set aside are that: (a) they have an offsetting claim against Carlamax for an amount that at least equals the amount of the judgment debt; and (b) there is some other reason within the meaning of s 459J(1)(b) of the Corporations Act 2001 (Cth) why the demand should be set aside. 3The offsetting claim is a claim for damages or equitable compensation by reason of Carlamax having postponed its priority as mortgagee to Eurofinance Capital Ltd ("Eurofinance") and to Bank of Adelaide Limited ("Bank of Adelaide"). The plaintiffs contend that Carlamax was bound to enforce its rights as first mortgagee and that they suffered loss when it did not do so. Property Builders was liable to pay substantially more interest under its loan from Carlamax than under its loan from Eurofinance. 4The other grounds relied upon under s 459J(1)(b) are that the plaintiffs have claims against third parties that when realised will provide the plaintiffs with funds to pay the judgment debt, and that Eurofinance or the Bank of Adelaide are required to account to Carlamax for the proceeds of sale of mortgaged properties that they received and this will discharge the judgment debts. 5A claim that the statutory demands were issued for the purpose of preventing Property Builders from pursuing claims against third parties was not pressed. Background 6Property Builders is a property developer. Property Builders (Constructions) is a builder. The sole director of each company is Mr Michael Phontos, a solicitor. 7On or about 17 June 2005 Property Builders entered into a number of agreements for the financing of a residential unit development to be constructed at Twin Road, North Ryde. According to the reasons of his Honour Judge Rolfe in his judgment of 19 January 2011, Property Builders borrowed $2,070,000 from Provident Capital Limited ("Provident Capital"). Provident Capital took first mortgage security over the land on which the development was to be constructed. Carlamax advanced $160,000 to Property Builders. The loan was secured by guarantees given by Property Builders (Constructions) and Mr Phontos. The interest rate on the loan from Carlamax was 25 per cent per annum, or 29 per cent per annum if there were an event of default. If the borrower failed to pay any money on the due date, interest was to be compounded monthly. 8Provident Capital and Carlamax had entered into a deed on 17 June 2005 whereby Provident Capital was to have first ranking security for its advances up to $2,070,000 plus interest and any enforcement expenses, and that Carlamax was to have second ranking priority for its advance of $160,000 plus interest and enforcement expenses. Carlamax became registered as second mortgagee. The mortgage included a term that: " MORTGAGEE'S PRIORITY. The Mortgage confers on the Mortgagee priority over any subsequent security over the Mortgaged Land for the Secured Money even though the whole or any part of that money may be advanced, re-advanced, or made available after the date of the Mortgage or after the date of any subsequent security. The Mortgage operates as a continuing security even though at any time the Mortgagor's account with the Mortgagee is in credit. The Mortgagee's rights under the Mortgage will not be discharged, postponed, or in any way prejudiced by any subsequent security. The Mortgagee in its discretion may retain this security while payment of the Secured Money is liable to be avoided under any law relating to insolvency. " 9On 31 October 2006 the loan from Provident Capital was refinanced by Eurofinance. The terms of the loan were contained in a letter of offer from Eurofinance dated 10 October 2006, that was accepted by Mr Phontos for himself and Property Builders. Eurofinance stipulated that its security include a first registered mortgage over the Twin Road, North Ryde property. 10It was a term of the offer from Eurofinance that a condition of the loan was: " Customer's acknowledgment that this proposed mortgage may be transferred to Advance Investment Finance No. 2 Pty Ltd and onto Adelaide Bank Limited. " 11On 29 July 2010 Simpson J gave judgment for Adelaide Bank Limited against Property Builders and Mr Phontos ( Adelaide Bank Ltd v Property Builders Pty Ltd [2010] NSWSC 830). An appeal is part-heard in the Court of Appeal. That appeal provides one of the bases for the argument under s 459(1)(b) that there is " some other reason " why the demand should be set aside. Offsetting claim 12The alleged offsetting claim against Carlamax is pleaded in a statement of claim filed in the Equity Division of this court on 17 May 2011 (proceeding 2011/162167). The plaintiffs point to the fact that a defence has been filed and that although a timetable was ordered that provided a date by which Carlamax was to file a notice of motion to strike out the statement of claim, no such application was made. Carlamax points to the fact that the statement of claim was filed the day before the present proceedings were listed for hearing before Barrett J and the hearing being vacated because of the filing of the statement of claim. These are peripheral considerations. The real question is whether the claim made in the statement of claim is seriously arguable. Counsel for Carlamax did not submit that the offsetting claim was not available to the plaintiffs because it was not raised in the supporting affidavits filed and served within the period prescribed by s 459G (compare Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 1783; (1996) 70 FCR 452 at 459). 13The statement of claim was filed by Property Builders, Property Builders (Constructions) and Mr Phontos. They plead that the refinance provided by Eurofinance was to be secured by a first mortgage over the land. They plead that on 26 and 27 October 2006 the solicitors acting for Provident Capital (Bersten Pain), informed the solicitor for Property Builders (Phontos Legal) that if no arrangements had been made to pay out Carlamax, they would hand the certificate of title to the land to Carlamax's representative on settlement. The plaintiffs plead that at settlement, the certificate of title was handed over by Bersten Pain to Gadens, lawyers, who, at that time, Phontos Legal and Bersten Pain understood to be acting for Carlamax. They plead that on 11 January 2007 Gadens lodged at Land and Property Information New South Wales the certificate of title, the discharge of Provident Capital's mortgage, and the mortgage in favour of Eurofinance. Carlamax was recorded on the Register as first mortgagee and Eurofinance was recorded as second mortgagee. This was so notwithstanding that according to Eurofinance's offer to Property Builders, and the plaintiffs' pleading, Eurofinance's advance was to be secured by first mortgage. 14The plaintiffs plead that the land was subdivided on 26 October 2007. They plead that Carlamax became the first registered mortgagee over each of the five strata title lots. 15The debt owed to Carlamax was repayable by no later than 17 June 2006. The plaintiffs plead that by June 2007 Carlamax was threatening to take legal action to recover the debt, and that Property Builders proposed that the debt be paid sooner rather than later. 16Lot 4 in the development was sold in November 2007. It is admitted on the pleadings that on 13 November 2007 Phontos Legal, acting for Property Builders, requested Gadens to prepare discharges of mortgage for Carlamax as second mortgagee and Eurofinance as first mortgagee. The balance due from the purchaser on settlement was $545, 321.11. On 14 November 2007 Gadens directed Phontos Legal to provide a bank cheque for $545,321.11 to Eurofinance on settlement of the sale of lot 4. 17The plaintiffs' case is that contrary to Mr Phontos' assumption at the time, Carlamax and Eurofinance had not made an agreement whereby Carlamax agreed to give priority to Eurofinance's second mortgage. The plaintiffs say that clause 12.19 of the Memorandum of Mortgage quoted at [8] above was a term that operates for the plaintiffs' benefit and that Carlamax breached the term by not enforcing against Eurofinance its right as the registered first mortgagee to receive the proceeds of sale of lot 4. The plaintiffs also plead that Carlamax owed an equitable duty to Property Builders (Constructions) not to sacrifice or impair the priority of the mortgage as a first ranking security or allow that priority to be lost or diminished and that it breached that duty by releasing its mortgage over lot 4 without receiving payment of the proceeds of sale of that lot in priority to Eurofinance. 18Mr Phontos deposes that the sale of lot 2 of the development was settled on 25 January 2008 and that Eurofinance received $569,786.84 from the sale. The plaintiffs plead that Carlamax breached clause 12.19 of the mortgage and its alleged equitable duty to Property Builders (Constructions) not to sacrifice its first ranking security, by permitting Eurofinance to obtain those proceeds. 19On 9 May 2008 Eurofinance transferred its mortgage to Adelaide Bank. In separate proceedings Property Builders contended that the loan debt owed to Eurofinance was not assigned to Adelaide Bank. On 29 July 2010 Simpson J rejected that contention ( Adelaide Bank Limited v Property Builders Pty Ltd [2010] NSWSC 830). An appeal from that decision is part-heard. That decision is not directly relevant to the asserted offsetting claim against Carlamax. 20On 20 June 2008 Carlamax executed a postponement of its mortgage in favour of Adelaide Bank. 21The plaintiffs allege that thereafter other lots of the development were sold, but that Carlamax did not receive any of the proceeds of sale, except for $10,000. 22The plaintiffs plead that Carlamax breached clause 12.19 of the mortgage and its duty to Property Builders (Constructions) by producing the certificates of title to allow Eurofinance to transfer its second mortgage to Bank of Adelaide, by registering the postponement of its priority to Bank of Adelaide, and by not enforcing an alleged right as prior mortgagee to receive the proceeds of sale of lot 5. 23Counsel for Carlamax submitted that it was not open to Property Builders or Property Builders (Constructions) to assert an offsetting claim because of clauses 9.1(b) and 10.7 of the facility agreement between Carlamax and Property Builders dated 17 June 2005. Clause 9.1(b) provides that after an Event of Default the Lender could demand immediate repayment of the Debt. Clause 10.7 provides: " 10.7 Payments All money payable by the Borrower under this document must be paid in cleared funds without set-off or counter-claim and free of all deductions as and where the Lender directs on or before 12:00 noon local time on the due date or if none on demand. Payments will be credited to the Borrower only when actually received by the Lender. The Lender will have an absolute discretion (without the need to communicate its election to anyone) to apply at any time any payment received by it in reduction of any part of the Debt it elects. Any surplus money received by the Lender will not carry interest and may be paid by the Lender to the credit of an account in the Borrower's name in any bank the Lender thinks fit including the Lender. " 24It was submitted for Carlamax that because Property Builders' claim to damages or equitable compensation could not be relied upon as a set-off against the debt owed to Carlamax, the claim cannot be raised as an offsetting claim under s 459H. 25Counsel for Carlamax also submitted that there was no genuine offsetting claim because the claim was barred by the judgment in the District Court, either as a matter of issue estoppel, or estoppel on the principles of Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1891) 147 CLR 589. 26Finally, counsel for Carlamax submitted that the claim was not genuine. Whilst counsel did not make any detailed submissions as to the merits of the claim independently of her reliance on clause 10.7 of the facility agreement and on principles of estoppel, the underlying merits were raised as a real issue. 27I will deal first with the submission that clause 10.7 of the facility agreement precludes the plaintiffs from relying on the alleged offsetting claim. 28Section 459H relevantly provides: " (1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: ... (b) that the company has an offsetting claim. (2) The Court must calculate the substantiated amount of the demand in accordance with the formula: Admitted total - offsetting total where: ' admitted total ' means: (a) the admitted amount of the debt; or (b) the total of the respective admitted amounts of the debts; as the case requires, to which the demand relates. ' offsetting total ' means: (a) if the Court is satisfied that the company has only one offsetting claim--the amount of that claim; or (b) if the Court is satisfied that the company has 2 or more offsetting claims--the total of the amounts of those claims; or (c) otherwise--a nil amount. (3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand. ... (5) In this section: ' admitted amount ' , in relation to a debt, means: (a) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt--a nil amount; or (b) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt--so much of that amount as the Court is satisfied is not the subject of such a dispute; or (c) otherwise--the amount of the debt. ' offsetting claim ' means 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). ' respondent ' means the person who served the demand on the company. ... " 29It is clear from the definition of " offsetting claim " that it encompasses claims that do not give rise to a set-off against the debt claimed in the statutory demand. An offsetting claim can include not only a set-off, but also a counterclaim or a cross-demand, whether or not it arises out of the same transaction or circumstances as the debt to which the demand relates. 30In John Shearer Limited v GEHL Company [1995] FCA 1789; (1995) 60 FCR 136, the Full Court of the Federal Court observed (at 142) that although the terms " counterclaim " and " set-off " are technical words, " cross-demand " is not. The Court concluded that an unliquidated claim for damages was capable of giving rise to an offsetting claim within the meaning of s 459H, even though it could not be relied on as a set-off at general law against the debt the subject of the statutory demand. In that case the debt on which the statutory demand was based was due on a dishonoured bill of exchange. The alleged offsetting claim was for damages for breach of contract and misleading and deceptive conduct. Such a claim for unliquidated damages could not be set off against an action on the bill of exchange. Nonetheless it could be a cross-demand which, if genuine, would be an offsetting claim. 31This reasoning was sound not only as a matter of construction of the definition of " offsetting claim " in s 459H, but is consistent with the purpose of Pt 5.4. That is to set out the circumstances in which a company will be presumed to be insolvent. It was well settled ( L & D Acoustics Pty Ltd v Pioneer Electronics Australia Pty Ltd (1982) 1 ACLC 536 at 540) before the introduction of Pt 5.4 that " Apart from any question of legal or equitable set-off, the existence of a counter-claim based on substantial grounds for an amount equal to or exceeding the debt the subject of a demand will generally provide reasonable cause for omitting to pay the debt in accordance with the demand (See Re Jeff Reid (1980) CLC 40-651 at p 34,333; (1980) 5 ACLR 28 at p 31) ". 32There is a good reason the presumption of insolvency should not arise from non-payment of a debt, albeit that the debt is due and payable, if the debtor company has a cross-demand against the creditor in an amount that equals or exceeds the debt. In such a case one does not presume that the reason the due debt is not paid is because the company cannot pay. The reason may be that the company has a claim for a greater amount. This is reflected in the definition of " offsetting claim " in s 459H. 33In Pearson's Products Pty Ltd v CP Technologies Pty Ltd [1999] NSWSC 575 Young J (as his Honour then was) noted that the reasoning in John Shearer Ltd v Gehl Company had been criticised in some quarters, but should be followed. His Honour said that he agreed with the reasoning (at [20]-[22]). 34In Seaham Air Pty Ltd v Australian Aerospace Limited [2006] NSWSC 1241 there was no dispute that the company owed the debt the subject of a statutory demand. It had a genuine claim for damages against the creditor that far exceeded the amount of the debt. The creditor claimed a lien for repairs and the company agreed to pay the debt in order to release the goods. The claim for damages could not be set off against the debt at general law. I said (at [18]-[19]): "18 ... There is no doubt that the plaintiff has an existing genuine claim for damages against the defendant on causes of action which, if established at trial, have already accrued. For the plaintiff to satisfy the requirements of s 459H of the Corporations Act by showing that it has an offsetting claim, the question is not whether it would be precluded from relying on that claim as a set-off against the defendant's debt. The question is simply whether the company presently has that claim. It did not promise not to pursue its claim for damages. 19 Both the terms of the definition of 'offsetting claim' in s 459H(5) and authority ( John Shearer Ltd v GEHL Company (1995) 60 FCR 136), show that offsetting claims include cross-demands that do not amount to a set-off. Accordingly, unless the plaintiff is precluded by estoppel or waiver from relying on s 459H, the plaintiff is entitled to an order setting aside the demand. That is because the amount of the offsetting claim exceeds the admitted amount of the debt." 35In similar vein, it is settled that if a statutory demand is based on a judgment debt arising from an adjudication certificate given under the Building and Construction Industry Security of Payment) Act , the judgment debtor can assert an offsetting claim under s 459H, notwithstanding that there can be no set-off against that judgment and were an application to be made to set the judgment aside, the judgment debtor could not assert a set-off or counterclaim ( Building and Construction Industry Security of Payment Act 1999, s 25(4); e.g. Max Cooper & Sons (Builders) Pty Ltd v M & E Booth & Sons Pty Ltd [2003] NSWSC 929; (2003) 202 ALR 680; Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553; Greenaways Australia Pty Ltd v CBC Management Pty Ltd [2004] NSWSC 1186; Plus 55 Village Management Pty Ltd v Parisi Homes Pty Ltd [2005] NSWSC 559; Aldoga Aluminium Pty Ltd v De Silva Starr Pty Ltd [2005] NSWSC 284; Falgat Constructions v Masterform [2005] NSWSC 525; BBB Constructions Pty Ltd v Frankipile Australia Pty Ltd [2008] NSWSC 982; Reed Construction (Qld) Pty Ltd v Dellsun Pty Ltd [2009] QSC 263; [2010] 2 Qd R 481). 36It must follow from the fact that a cross-demand can be raised as an offsetting claim even though it is not capable of being relied upon as a set-off against a debt, that a mere contractual agreement of one party that it will pay its debt without set-off or counterclaim and free of all deductions does not preclude it from relying upon such a cross-demand as an offsetting claim for the purposes of s 459H. To do so is not to deny that the debt claimed by the creditor is due and payable. If, as in the present case, the debt has been reduced to a judgment, the creditor can pursue all the remedies of a judgment creditor. Rather, to assert the cross-demand as an offsetting claim is merely to give effect to the principle recognised by the terms of the definition of " offsetting claim " that a presumption of insolvency should not arise from non-payment of a due debt where the debtor has a genuine cross-demand for an equal or greater sum. 37Counsel for Carlamax relied on the decision of Austin J in Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308; (2006) 205 FLR 432. There the creditor was a building contractor. The plaintiffs were the owners of the site on which building work was carried out. They sought to set aside a statutory demand served by the contractor. The contractor served a statutory demand claiming a debt of $500,000 which was due as a bonus agreed to be paid under a settlement deed that resolved only some of the claims. The settlement deed provided that " the Bonus will rank in priority before any entitlement of the Principal to receive moneys in connection with the Project ". The plaintiffs asserted an offsetting claim by way of general damages arising out of the contractor's delay in completion and for defective work. The contractor submitted that the plaintiff's claim for damages for delay and defective work could not be set off against its claim for the bonus under clause 2 of the settlement deed and therefore the plaintiffs could not have any offsetting claim for the purposes of s 459H (at [22]). Austin J accepted this submission. After referring to cases that seek to elucidate the meaning of what is a " genuine " offsetting claim, his Honour continued: " 28 The cases to which I have been referred pay attention to the question of how far the court should enter into the merits of a claim for the purposes of a determination under s 459H, but little attention has so far been given to the meaning of the word 'offsetting'. It is not necessary for present purposes to attempt any general definition, or to relate that concept to the law of equitable set-off. However, this case raises the question whether it is open to the parties to a contract to stipulate that a particular payment obligation is to be performed separately from any rights of counter-claim or set-off. 29 That issue was addressed by the House of Lords in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689. Lord Salmon said (at 722-3): 'The parties to building contracts or sub-contracts, like the parties to any other type of contract, are, of course, entitled to incorporate in their contract any clause they please. There is nothing to prevent them from extinguishing, curtailing or enlarging the ordinary rights of set-off, provided they do so expressly or by clear implication.' Similar views were expressed in the other speeches in that case. 30 There is no good reason for denying effect to a contractual stipulation that is intended to segregate a particular debt and prevent it from being reduced by debts owing by the creditor to the debtor and by counter-claims of the debtor against the creditor. Thus, if A and B enter into a contract by which they agree that in stated circumstances, A will pay B $500,000, without any deduction for any debt that B may owe to A or any claim that A may have against B, and then the payment of $500,000 falls due and payable by A, then as a matter of contractual stipulation, A is prevented from reducing the payment obligation by reference to counter-debts or counter-claims. That being so, if B makes a statutory demand upon A under s 459E for payment of $500,000, A is prevented by the contract from relying on any claim it has against B as an offsetting claim for the purposes of s 459H. " 38After considering the circumstances in which the deed of settlement was entered into and its terms, his Honour concluded: "41 Consequently I have reached the conclusion, as a matter of construction, that clause 2.1(2) of the settlement deed has the effect that Jempac's obligation to pay $500,000 is not to be eliminated or reduced by reference to any entitlement of Jempac to receive monies in connection with the Project, and a fortiori, by reference to any claim by Jempac against HY in connection with the Project." 39With respect, I do not agree with his Honour's reasoning. His Honour was not referred to earlier relevant authority that established, as the terms of the definition of " offsetting claim " make clear, that a cross-demand does not have to be capable of operating as a set-off against the debt to be an offsetting claim ( John Shearer Ltd v Gehl Company ; Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1378; (2006) 60 ACSR 393 at [7]). That being so, it is, with respect, not to the point that the obligation to pay the debt the subject of the demand is not eliminated or reduced by the counterclaim. That is only another way of saying that the counterclaim does not operate as a set-off. For the reasons given at [36], a contractual agreement precluding set-off cannot itself prevent the company relying on the claim as an offsetting claim under s 459H. 40Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308; (2006) 2005 FLR 432 was followed by Barrett J in Blue Hills Village Management (Liverpool) Pty Ltd v Babcock & Brown International Pty Ltd [2009] NSWSC 87. In Project Venture Development No. 11 Pty Limited v TQM Design & Construct Pty Ltd [2009] NSWSC 699 Macready AsJ observed (at [21]) that it was unfortunate that Barrett J was not referred to the line of authority dealing with offsetting claims in the context of judgment debts arising under the Building and Construction Industry Security of Payment Act , to which might be added the other authorities referred to earlier in these reasons. 41With great respect to those of a contrary view, I think it is clearly incorrect to argue that merely because rights of set-off are excluded by agreement, a party cannot raise a counterclaim or cross-demand as an offsetting claim under s 459H. 42As to the second submission for Carlamax, there is no issue estoppel as the claim made in the statement of claim filed in the Supreme Court on 17 May 2011 was not raised in the District Court. 43In the hearing before the District Court Property Builders pleaded as a defence to Carlamax's claim for the debt that by postponing its mortgage to Adelaide Bank and failing to apply money received in connection with the securities and allowing Eurofinance and other companies to receive the proceeds of the sales of lots 4, 2 and 3, Carlamax breached the deed of priority with Provident Capital. That defence failed as the learned trial judge found that once Provident Capital's debt was repaid, the deed of priority became irrelevant. There was no evidence to support any breach by Carlamax of the deed of priority that Property Builders or Property Builders (Constructions) could rely on prior to the discharge of Provident Capital's mortgage. Property Builders and Property Builders (Constructions) did not plead a defence or cross-claim against Carlamax in terms of the pleading filed later in the Supreme Court. His Honour Judge Rolfe recorded: " A deal of time was taken up with correspondence from Gadens and the fact that there was no evidence as to why it was that Gadens at some subsequent point in time, were giving directions about the disbursal of funds on the sale of various units. It seems to me that this was an attempt made by the defendants to suggest that the documentation in question should give rise to an inference that Gadens were acting for the plaintiff, but I do not draw that inference. The inference I draw is that Mr Fontos [sic] was involved in discussions with Gadens concerning what was to happen to the funds on the sale of the properties and he went along with and agreed to what occurred. In any event, the issue is not properly pleaded. In all those circumstances there is no basis upon which the defendants could say that the plaintiff has done something which they can hang their hat on in order to avoid liability under the guarantee. " 44It could not be determined on this application whether or not a defence on the principles of Port of Melbourne Authority v Anshun Pty Ltd would be bound, or even likely, to succeed. 45Counsel for Carlamax also submitted that the offsetting claim is not genuine. The statement of claim was filed on 17 May 2011 which was the day before the application was initially set down for hearing before Barrett J. As Ball J observed in Abadeen Group Pty Limited v Bluestone Property Services Pty Limited [2011] NSWSC 137 at [33], judges have used various formulations to explain what is intended to be conveyed by the requirement that an offsetting claim be " genuine ", including that the claim be made in good faith ( Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18]) and that it raise a serious question to be tried. The requirement that the claim be made in good faith is no more than that the claim be arguable, i.e. that there be a serious question to be tried. In Macleay Nominees Palmer J said (at [18]) that: "'Good faith' means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. " 46An offsetting claim may be genuine even if it is lacking in any commercial morality if there is an arguable legal basis for it, but not otherwise. 47There is no merit, in the wider sense of the word, to the plaintiffs' claim. Property Builders intended, and agreed with Eurofinance, that Eurofinance should have a first mortgage. It agreed that that mortgage could be transferred to the Adelaide Bank. It now complains that Carlamax allowed Eurofinance and Adelaide Bank priority as first mortgagee. The question is whether there is an arguable basis for the claim. This question was not the subject of detailed submissions from Carlamax but was clearly raised. 48I accept that it is arguable that the clause of the mortgage quoted at [8] above is not only for the benefit of the mortgagee but impliedly required Carlamax not to surrender its priority without the mortgagor's consent. It is arguable that such a duty was owed to Property Builders (Constructions) as guarantor. 49There is no doubt that Property Builders agreed to the proceeds of sale of lot 4 being paid to Eurofinance in the knowledge that Eurofinance was the registered second mortgagee and not the registered first mortgagee. In various items of correspondence Mr Phontos (who acted for Property Builders on the sales of the various lots) referred to Eurofinance as holding the first mortgage and Carlamax as holding the second mortgage. The plaintiffs' case is that Mr Phontos was induced to assume that there was a binding agreement between Carlamax and Eurofinance that the latter would have priority. The plaintiffs contend that this assumption was made because Gadens was held out as acting for Carlamax on the transaction, and Mr Phontos assumed that Gadens, as solicitors for Carlamax, would not have agreed to the payment of the proceeds to Eurofinance unless there were such an agreement. Mr Phontos deposes that at the hearing before his Honour Judge Rolfe on 18 January 2011 evidence was given by Mr Christmas of Carlamax to the effect that Carlamax did not retain Gadens to act for it after 2005, and that he could not remember whether, prior to 14 November 2007, Gadens asked for his permission for the balance of the proceeds of sale to be paid to Eurofinance. According to Mr Phontos, Mr Christmas gave evidence to the effect that he was not told that Carlamax was entitled to receive the funds. 50The position taken by Eurofinance was set out in a letter written by Gadens on 15 March 2011 to the solicitors for Carlamax. Gadens asserted that Eurofinance had refinanced the Provident Capital loan in November 2006, that Eurofinance was to be the first mortgagee and that Carlamax was to remain as second mortgagee. Gadens stated that Carlamax was provided with an executed deed of priority and postponement of mortgage, but that document could not be located. Gadens provided a copy of a letter from their firm to Eurofinance of 7 November 2006 enclosing a deed of priority and postponement of mortgage for execution. 51There is an issue to be tried as to whether or not any such document was ever executed. Property Builders contends that it was not. 52By its agreement with Eurofinance, Property Builders consented to Carlamax having only a second mortgage, and not a first mortgage, on the discharge of Provident Capital's mortgage. Even if the plaintiffs could establish that no deed of priority was entered into between Eurofinance and Carlamax contemporaneously with Eurofinance making its advance to permit refinancing, by agreeing to the term that Eurofinance should have a registered first mortgage, Property Builders and Mr Phontos must have consented to whatever was necessary to be done between Eurofinance and Carlamax for that to be brought about. The plaintiffs could not complain that Carlamax was acting in breach of its mortgage, nor contend that Carlamax was in breach of any other duty owed to Property Builders (Constructions) by agreeing to Eurofinance having the first mortgage which Property Builders and Mr Phontos agreed it should have. 53Property Builders and Mr Phontos consented to the proceeds of lot 4 being paid to Eurofinance, notwithstanding that Carlamax was the first registered mortgagee. It is no answer to say that they assumed that a priority agreement had been made between Carlamax and Eurofinance. As they could have no objection to such a priority agreement, nor could they have any objection to a later agreement whereby Carlamax agreed that Eurofinance would be entitled in priority to it to the proceeds of sale of that lot. 54No argument was advanced for the plaintiffs that Property Builders (Constructions) was in a different position from Property Builders. Mr Phontos was the sole director of both companies. 55No evidence or submissions were addressed to the disposition of the proceeds of sale of lot 2 on 25 January 2008 to suggest that any different question arose in relation to those proceeds. 56Different questions arise in relation to the deed of postponement between Carlamax and Adelaide Bank. There is no evidence that Property Builders consented to that postponement. 57By its acceptance of Eurofinance's facility, Property Builders consented to Eurofinance having a first mortgage and acknowledged that the mortgage could be transferred ultimately to Adelaide Bank. I have found that Property Builders' consent to Eurofinance being entitled to a first mortgage necessarily implies that it consented to the proceeds of sale being paid to Eurofinance in priority to Carlamax, notwithstanding that Carlamax was the first registered mortgagee. On the sale of lot 4 it gave its consent independently to such payments and led no evidence that the position was different in respect of the proceeds of sale of lot 2. However, it is arguable that that consent and the agreement with Eurofinance might not extend to the plaintiffs' consenting to Carlamax's agreeing to postpone its mortgage to Bank of Adelaide. That question was not the subject of any submissions. To this extent I accept that the offsetting claim is genuine. 58But what is the arguable measure of damages or equitable compensation? It is not the amount of the proceeds of sale of lots in the development paid to the Bank of Adelaide. Had the proceeds been paid to Carlamax, Property Builders would have remained indebted to the Bank of Adelaide (or, if there was no effective assignment to the Bank of Adelaide, it would have remained indebted to Eurofinance or to any other assignee of Eurofinance). The measure of damages or equitable compensation would be the difference between the interest payable to Carlamax and the interest payable under the facility with Eurofinance. The letter of offer from Eurofinance of 10 October 2006 stated an indicative interest rate of "15.20% per annum reducing to 10.20% per annum variable providing repayment is received within seven (7) days of the due date and providing arrangements are not otherwise in default ." There was no evidence as to whether the interest charged was or was not in accordance with the indicative rate. 59The debt claimed in the statutory demands was $648,872.52. This was the amount of the judgment given on 19 January 2011. No additional interest was claimed in the statutory demand. There was no evidence as to how that debt was calculated. 60According to Mr Phontos' affidavit of 1 April 2011 there were two sales after 9 May 2008, namely the sale of lot 3 on 26 September 2008 that realised $586,789.24 said to have been paid to Advance Investment Finance No. 2 Pty Ltd and the sale of lot 2 (a typographical error for lot 1) on 17 January 2011 from which $742,350.24 was paid to Adelaide Bank. 61According to the statement of claim filed on 17 May 2011 the debt owed to Carlamax as at 16 November 2007 was $298,411. 62On the evidence adduced by the plaintiffs it is not possible to calculate how much worse off the plaintiffs were by reason of the sums of $586,789.24 and $742,350.24 being used to reduce the Eurofinance/Bank of Adelaide loan rather than the Carlamax loan. 63If, as is pleaded, the debt to Carlamax as at 16 November 2007 was $298,411, the debt as at 26 September 2008 would have been $391,123.71 ($298,411 (1 + (29/0.12) 11.33 ). The loss suffered by the plaintiffs could be no more than $648,872.52 - $391,123.71 = $257.748.81 plus interest at prescribed rates on the judgment and less the interest saved on the Eurofinance/Bank of Adelaide loan by the application of the proceeds of sale to reduce that loan. As the plaintiffs did not adduce evidence of the actual interest rates applicable to that loan (as distinct from an indicative rate) it is not possible to quantify the amount of the offsetting claim. The calculation could also be affected by the admitted receipt by Carlamax of $10,000, depending on when those moneys were received. 64The question then is whether the offsetting claim based on s 459H should be dismissed or whether I should stand the matter over for the parties to calculate the amount of the offsetting claim in accordance with these reasons. That would require the plaintiffs to establish the interest rates on the Eurofinance/Bank of Adelaide loan and possibly show how the judgment debt of $648,872.52 was calculated, i.e. by showing what amounts and at what times any of the sale proceeds were applied in reduction of the Carlamax debt (the plaintiffs plead that $10,000 was so applied but do not say when). An applicant relying on s 459H is required to quantify the offsetting claim unless it clearly exceeds the debt the subject of the statutory demand. If it does not its claim will usually fail. But this is an exceptional case. Carlamax took no objection that the grounds of the offsetting claim were not raised in the affidavits served within the 21-day period prescribed by s 459G. Carlamax took what might be considered the honourable course of allowing the existence of the offsetting claim to be determined on its merits. Neither party addressed submissions to the quantification of the offsetting claim as I have found it. Applying the same philosophy, I consider I should allow the plaintiffs the opportunity properly to quantify their offsetting claim to the extent I have found it to be genuine. Section 459J(1)(b): some other reason to set aside statutory demand 65The plaintiffs submit that they are entitled to moneys that would enable them to discharge the judgment debt owed to Carlamax. They say they have two sources of funds. One is from a deed of settlement between Property Builders (Constructions), Tresedar Pty Ltd ("Tresedar"), Mr Aris Evanian, and Tetbury Pty Ltd ("Tetbury") dated 14 October 2008. Under the deed Tresedar agreed to pay Property Builders (Constructions) $925,650. The payment was guaranteed by Mr Evanian and Tetbury. Proceedings are pending in the Technology and Construction List in relation to the deed. The other source of funds for the plaintiffs would be from a successful appeal from the judgment of Simpson J in proceedings commenced by the Bank of Adelaide. Mr Phontos deposed that if Property Builders was successful in its appeal it would demand that the Bank of Adelaide account to Carlamax for the proceeds of sale. 66These considerations are not " some other reason " why the statutory demands should be set aside. Any such reason under s 459J(1)(b) must be a good reason relevant to the purposes for which the power exists ( Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 at 757). The reason must be a good reason as to why a presumption of insolvency should not arise from non-compliance with the statutory demand. The possibility that funds may become available to pay the debt the subject of the statutory demands provides no reason why the presumption of insolvency should not arise from non-compliance with the demands. The possible receipt of moneys in the future does not mean that the companies are now able to pay all their debts that are due and payable. 67The suggested reasons for setting aside the demands under s 459J(1)(b) are not consistent with the purposes of Divisions 2 and 3 of Part 5.4 of specifying when a presumption of insolvency arises. I reject this ground. Conclusion 68I will stand over the proceedings to a convenient date. I direct the plaintiffs to provide to the defendant all documents relevant to calculating the amount of the offsetting claim consistently with these reasons. That is to say, the quantum of the offsetting claim is the amount by which the plaintiffs were worse off by reason of the payment of the net proceeds of sale of lot 3 and 1 in the development on 26 September 2008 and 17 January 2011 to the Bank of Adelaide rather than Carlamax. (The latter payment should be irrelevant to the calculation.) The calculation is to be made by first determining the quantum of the Carlamax debt as at 26 September 2008. That amount is to be deducted from the amount of the judgment debt plus interest at the prescribed rates up to the date the order is to be made. There is to be further deducted the amount of interest which would have been incurred on the Eurofinance/Bank of Adelaide loan had the Carlamax debt been paid off on 26 September 2008, but was not incurred because the proceeds of sale were applied in reduction of the Eurofinance/Bank of Adelaide loan rather than the Carlamax loan. 69I also direct the plaintiffs to serve and provide to my associate an affidavit showing how the offsetting claim is calculated in accordance with these reasons. The calculation should be made as at the adjourned date and the affidavit is to be provided not later than four business days before that date. If the affidavit does not enable the calculation to be made, the claim will have to be dismissed. 70I will hear the parties on costs on the adjourned date. 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. Decision last updated: 14 September 2011