Supreme Court New South Wales Medium Neutral Citation: In the matter of Bastow Civil Constructions Pty Ltd [2017] NSWSC 934 Hearing dates: 21 April 2017 Decision date: 21 April 2017 Jurisdiction: Equity - Corporations List Before: Black J Decision: Set aside the creditor's statutory demand dated 16 September 2016 and order that the Defendant pay the Plaintiff's costs. Catchwords: CORPORATIONS — Winding up — Statutory demand — Application to set aside – where building work giving rise to debt claimed in statutory demand arguably defective – whether debt genuinely disputed – whether offsetting claim established – whether some other reason exists to set aside demand Legislation Cited: - Corporations Act 2001 (Cth), ss 459H(1), 459J Cases Cited: - 20*20 Pty Ltd v D&G Developments Pty Ltd [2009] WASC 343 - Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) [1996] 2 VR 386 - Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 - Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 - Independent Portable Buildings Pty Ltd v Modular Building Systems Pty Ltd [2011] FCA 511 - Ligon 158 Pty Ltd v Huber [2016] NSWCA 330; (2016) 117 ACSR 495 - Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; [1993] 3 WLR 408 - Re Datlas-Rahme Construction Pty Ltd [2016] NSWSC 1833 - Re J Group Constructions Pty Ltd [2015] NSWSC 1607; (2015) 303 FLR 139 - Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236 - Re Pages Sales Pty Ltd [2016] NSWSC 616 - Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; 120 ALR 173; 12 ACSR 341 Category: Principal judgment Parties: Bastow Civil Constructions Pty Limited (Plaintiff) Networx Construction Pty Limited (Defendant) Representation: Counsel: R D Glover (Plaintiff) D P O'Dowd (Defendant) Solicitors: Matthews Dooley & Gibson (Plaintiff) Emprise Legal (Defendant) File Number(s): 2017/4930 Judgment – ex tempore (revised 26 april 2017) 1. By Originating Process filed on 6 January 2017 the Plaintiff, Bastow Civil Constructions Pty Limited ("Bastow"), seeks to set aside a creditor's statutory demand ("Demand") issued by Networx Constructions Pty Limited ("Networx"). 2. Before turning to the substance of the dispute and the legal issues, I should observe that, from time to time, the bases on which statutory demands are resisted have a degree of technicality about them, and may not appear to have substantial commercial merit. However, it is fundamental to the Court's jurisdiction in dealing with creditor's statutory demands that it does not determine their underlying commercial merit, but instead determines, within a summary and interlocutory procedure, whether there is a genuine dispute about the relevant debt, or whether there is a genuine offsetting claim, or some other reason to set aside the creditor's statutory demand. That is a matter that is, or ought to be, well understood, and a failure to recognise it will often lead to disappointment, because a creditor's statutory demand will be set aside, as it ought to be, without a determination of the underlying merit of the dispute. 3. It should also be recognised that the consequence of setting aside a creditor's statutory demand in that manner is that the parties will ultimately be left to the course which ought to have been adopted in the first place, namely to bring proceedings in a Court of appropriate jurisdiction, where both parties can lead evidence, that evidence can be contested, and that Court can ultimately determine those matters that are the subject of the genuine dispute or the genuine offsetting claim. Difficulties arise when claims that are in fact genuinely disputed are brought by way of creditor's statutory demand, such that the demand has to be set aside, the costs of the application to do so are wasted, and the parties are then left to bring the proceedings that could have been commenced in the first place, after having incurred the delays and the additional costs of an application to set aside the creditor's statutory demand. Affidavit evidence and factual background 1. With that background, the Demand issued by Networx was dated 16 December 2016 and referred to an invoice dated 26 February 2015, invoice number 524, in the amount of $137,688.65. The Demand was verified by an affidavit of Mr Dustin Olsen dated 16 December 2010, which confirmed the claim for the debt in the amount of $137,688.65 and indicated Mr Olsen's belief that there was no genuine dispute about the existence or the amount of the debt. With respect to Mr Olsen, who has led affidavit evidence but was not cross-examined, it is difficult to see how a statement could have been made in an affidavit accompanying a statutory demand, in this case, that there was no genuine dispute about the existence or the amount of the debt, given the extent of the dispute that had in fact occurred about the amount or existence of the debt in the prior period. 2. The underlying facts of the case are straightforward, although the parties have led detailed affidavit evidence to expose them. Bastow relies on four affidavits of its sole director and shareholder, Mr Bastow, dated 6 January 2017, 21 March 2017, 28 March 2017 and 12 April 2017, which canvass the circumstances of a contract between Optus and Bastow to perform certain civil construction works in Hunters Hill; a subcontract issued by Bastow to Networx to undertake works involving drilling trenches and installing conduit and backfilling those trenches; events which occurred in respect of the works, where it appears that a number of drill rods broke off Networx' drilling equipment during the works and were left in the ground; and subsequent dealings between Bastow, Networx, Hunters Hill Council and Optus in respect of the consequences of the fact that those drill rods had been left in the ground. 3. Networx in turn relies on Mr Olsen's affidavit dated 13 February 2017 which deals with the history of claims for the debt, and responds to Bastow's claim that there is a genuine dispute or an offsetting claim in respect of the debt. Networx also relies on the affidavit of Mr McIntosh, a director of the solicitors who act for Networx, dealing with the circumstances in which an offer was made, and then withdrawn, to withdraw the Demand. In the event, I have not considered it necessary to address that question and will not need to address Mr McIntosh's affidavit, where that matter has no impact on the determination of these proceedings. 4. As I have noted, the underlying facts are now largely uncontentious. Although there was a question, over a period, as to whether Networx was prepared to concede that it had in fact left a number of drill rods in the ground, it ultimately made clear, in correspondence with Hunters Hill Council, that it had left one, or possibly several, such drill rods in the ground in the course of the drilling works. Hunters Hill Council has since made clear that its position is that it does not require the removal of those drill rods and that, more than that, it does not wish to have the drill rods removed, given the risk that that would cause harm to an adjoining tree which is owned by the Council. Optus, which is the entity that retained Bastow for the construction works, initially expressed the view, in effect, that it was a matter for Hunters Hill Council, as the owner of the relevant land. Bastow subsequently pressed Optus for a release from any liability in respect of the drill rods left in the ground, which Optus has declined to provide, and Optus in turn reacted to that request by seeking to require a release from Bastow in respect of the relevant matters. 5. In these circumstances, the questions which arise, and have been addressed at some length in Bastow's submissions, and more succinctly in Networx' submissions in response, are whether there is a genuine dispute in respect of the amount claimed in the Demand, whether an offsetting claim arises and whether the Demand should be set aside for some other reason. Whether there is a genuine dispute in respect of the amount claimed 1. I should first deal with the question whether there is a genuine dispute in respect of the amount claimed in the Demand and, in doing so, should refer briefly to the relevant authorities. There was ultimately no contest between the parties in respect of those authorities. Section 459H(1)(a) of the Corporations Act 2001 (Cth) provides that a creditor's statutory demand may be set aside when the Court is satisfied that there is a genuine dispute about the existence or amount of a debt to which the demand relates. The test for a genuine dispute has been variously formulated as requiring that the dispute is not "plainly vexatious or frivolous" or "may have some substance" or involves "a plausible contention requiring investigation" and is similar to that which would apply in an application for an interlocutory injunction or a summary judgment: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787. The Court of Appeal has recently summarised the relevant principles in Ligon 158 Pty Ltd v Huber [2016] NSWCA 330; (2016) 117 ACSR 495 at [8], and I have in turn referred to those principles in Re Modern Wholesale Jewellery Pty Ltd [2017] NSWSC 236, to which reference was made in submissions. 2. In this case, the genuine dispute on which Bastow relies arises from the terms of the contract between Bastow and Networx, in the applicable factual situation. Mr Glover, who appears for Bastow, draws attention to several provisions of the contract relating to the treatment of "defects" and to the circumstances in which a liability for payment arises. Relevantly, clause 3.9 provides, with a minor misprint, that the contractor, in this case Networx, is responsible to rectify all defects and will be liable for the rectification of any defects or omissions or items that fail to perform suitably and all costs associated with any such rectification. Clause 3.11 provides for dispute resolution in respect of a disagreement or dispute between the parties. Clause 8.2 provides that Bastow can withhold payment of any amount which it disputes and can set off from any payment to the contractor, here Networx, any amount that the contractor owes Bastow under the agreement or otherwise. Clause 8.3 in turn provides that: "In consideration for the proper provision of the Services, [Bastow] will pay [Networx] the Fee." 1. Mr Glover in turn draws attention to provisions of that contract which deal with restoration of the site after the completion of the relevant works. Bastow also seeks to rely on implied terms in the contract, including a term that Networx would carry out the works in a proper and workmanlike manner. 2. Two points may then be noted. The first is, as I noted above, it is now common ground that a number of drill rods were left in the site after the work had been done, although, as I have noted above, the Council has not objected to their being left there, while Optus has taken the position to which I referred above in respect of its dealings with Bastow. Bastow contends, simply enough, that the conduct of the works in a manner that left such drill rods in the ground does not constitute the proper provision of the services and, alternatively, that Networx did not comply with the requirements for restoration of the site when those drill rods were not removed. 3. Mr O'Dowd, who appears for Networx, contests what he rightly characterises as the fundamental premise of Bastow's position, namely that the leaving of the drill rods in the ground amounted to a defect in the work, or a failure to properly provide the services at least in circumstances where the Council has not objected to their being left on site. The difficulty is, it seems to me, that that proposition does not assist Networx. It is plain enough that Bastow contends, and it seems to me that it has a serious basis for contending, that work carried on in a manner that leaves drill rods in the ground, and subsequently requires engagement with the local council and with Optus to determine whether they can be left there, and what rights and liabilities exist between the parties when they are left there, does not amount to the proper provision of the services. In an application to set aside the creditor's statutory demand, the Court does not determine that question but, having recognised its existence, should recognise that it has the capacity to give rise to a genuine dispute in respect of the relevant claim. 4. In this case, that genuine dispute is the more apparent because clause 8.3 of the contract, in its terms, arguably conditions Networx' right to payment upon the proper provision of the services. Again, I accept that that may be an open question of construction, and that the contrary argument may be open. However, even if the contrary argument is open, there seems to me to be a genuine dispute arising from the fact that, first, the provision of the services with the defect which has been alleged was arguably not the proper provision of the services, and the obligation of Bastow to pay arguably did not arise when the proper provision of the services did not occur. That is not to say that, in a determination on the merits in a court having jurisdiction to determine the matter, after a contested hearing, the opposite result would not be reached. However, once again, the Court's role in this application is not to determine that question. 5. I should add that, as Mr Glover also points out, the result that would be reached on that basis, by reference to construction of the terms of the contract, is broadly consistent with that which has been reached in other circumstances, by reference to general law principles, where there is a seriously arguable allegation of a significant defect in the performance of the relevant works: compare Independent Portable Buildings Pty Ltd v Modular Building Systems Pty Ltd [2011] FCA 511 at [99]. That result is also reached, in the present case, by the term of the contract which, as I have noted above, permits Bastow, on its face, to withhold payment of an amount which it disputes. 6. Finally, Mr Glover refers to contractual principles of abatement, which have the consequence that, in an appropriate case, a party which has received defective work, and may face a claim against it for that work, may set aside the amount to which it may be liable in rectifying the defective works from the amount due under the contract: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; [1993] 3 WLR 408 at 427. It appears that, as Optus' present position stands, it has not given up any rights which it may have against Bastow in respect of any liability which it may have by a defect in the works. It does not seem to me to be out of the question that such liability could arise, if the drill rods left in the ground later cause difficulty for any other party undertaking activities in the area. Whether that is the case, or not, will ultimately be a matter that could only be determined in a contested hearing on the merits, and not in an application of this kind. 7. For these reasons, I am satisfied that a genuine dispute at least arises in respect of the debt that is the subject of the Demand, and that finding is sufficient for the Demand to be set aside. Whether an offsetting claim is established 1. Bastow also contends that an offsetting claim is established in respect of the Demand, and I will deal with that question somewhat more briefly, given that the finding I have reached above requires the Demand to be set aside. I summarised the relevant principles relating to an offsetting claim in Re Pages Sales Pty Ltd [2016] NSWSC 616 and again in Re Datlas-Rahme Construction Pty Ltd [2016] NSWSC 1833. Section 459H(1)(b) of the Corporations Act defines an offsetting claim, for the purposes of that section, as the amount of a claim that a company has against a person who served a creditor's statutory demand by way of counterclaim, set-off or cross-demand, whether or not that amount arises out of the same transaction or circumstances as to which the demand relates. If the Court is satisfied that a company has an offsetting claim, then the Court is required to calculate the substantiated amount of the demand by deducting any offsetting claim from the admitted amount of the debt. 2. An offsetting claim is in turn established if there exists a "serious question to be tried", or an "issue deserving of a hearing", as to whether the company has such a claim against the creditor and that claim is made in good faith and is arguable and not frivolous or vexatious: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451; 120 ACR 173; 12 ACSR 341. In this case, the findings that I have reached above — that there is a seriously arguable case that there is a deficiency in the performance of the works — lead to a conclusion that there is a potential claim by Bastow against Networx for the defect in the works. Mr O'Dowd submits that it is highly unlikely, as matters stand, that any remediation works would ever be performed, in circumstances where Optus has not sought to have them performed, and the Council has expressly indicated that it does not wish to have them performed. As a practical matter, there is much force in that submission. 3. However, as Mr Glover points out, it is nonetheless arguable that Bastow could maintain a claim against Networx for any liability arising from the defect in the works, without first committing to undertake any rectification works, and by reference to a contention that the work delivered to it was less valuable than the work for which it had contracted, although the amount that is recoverable may be reduced, and possibly reduced to a small amount, for the likelihood that any rectification works would not be undertaken: Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) [1996] 2 VR 386; 20*20 Pty Ltd v D&G Developments Pty Ltd [2009] WASC 343. In Re J Group Constructions Pty Ltd [2015] NSWSC 1607; (2015) 303 FLR 139, the cost of remediation was treated as a matter which could give rise to an offsetting claim, notwithstanding the remediation had not yet been performed and may never be performed. 4. In this case, it seems to me that there is at least a serious question to be tried as to the existence of such a claim and as to the amount of such a claim, although there may be a real question whether, after discounting for the limited prospect that the works would ultimately need to be done, the amount of that claim would exceed the amount of the debt. It seems to me that there is nonetheless attraction in the approach taken by the Supreme Court of Western Australia in 20*20 Pty Ltd v D&G Developments Pty Ltd above, in not undertaking a discounting exercise in respect of an application to set aside a creditor's statutory demand, where that is likely to require detailed factual inquiry. In this case, that inquiry would extend not only to the Council's position and Optus' position, but potentially also to the question whether Optus or Bastow may face other claims from other third parties in respect of the relevant works. It is ultimately not necessary to decide that question, where I have found that a genuine dispute exists in respect of the relevant debt in any case. Whether some other reason exists to set aside the Demand 1. Finally, Bastow seeks to set aside the Demand on the basis that there is some other reason to set it aside for the purposes of s 459J of the Corporations Act. As I understand it, there may be three bases on which that application is put, two of which I do not consider it necessary to determine. The first is that, as I have noted above, Networx had at one point offered to withdraw the Demand, but that withdrawal had not gone forward when the parties could not reach agreement as to the costs of the proceedings that had already been commenced to set aside the Demand. I do not consider it necessary to determine the effect of that matter, given the conclusions that I have reached on other grounds, although I see some force in Mr O'Dowd's submission that that offer was, in substance, a negotiation, rather than a concession as to the question of whether the Demand was or was not the subject of a genuine dispute. 2. The second basis on which the Demand is sought to be set aside on some other ground is that the Demand was made as a debt collection exercise, in circumstances that it was apparent that the debt was genuinely disputed. There are, at least, some circumstances in which the Court may set aside a creditor's statutory demand where it claims an amount that the issuer should have recognised as genuinely disputed: see the authorities which I collected in Re Modern Wholesale Jewellery Pty Ltd above at [33]. In the present case, it seems to me that there is at least an arguable case that it ought to have been apparent to Networx, from the correspondence before the Demand was served, that there was a real dispute arising from the fact that the drill rods had been left in the ground, and that Bastow was, in effect, resisting payment on the basis of any legal risk to which it might be exposed. I do not neglect the fact, to which Mr O'Dowd draws attention, and which is no doubt a matter of considerable frustration to Networx, that it appears that Bastow has received payment for its own work, without having troubled to make any corresponding payment to Networx. I ultimately do not consider that I need to determine whether the Demand should be set aside on that basis, where the authorities as to the circumstances in which a creditor's statutory demand can be served, in order to put a defendant to proof of the genuineness of its dispute, are not wholly consistent. 3. It seems to me, however, that there is a third and narrower basis, on which Bastow relies to set aside the Demand for some other reason, that would also succeed. I have pointed above to the fact that the contractual terms arguably condition payment upon the work having been performed in a manner that corresponds to a "proper provision of the Services". Where that is the case, it is at least seriously arguable that the debt does not arise unless and until the services are properly performed and is not presently due and payable. The case law generally treats a demand that is issued for an amount that is not presently due and payable as liable to be set aside for some other reason under s 459J(1)(b) of the Corporations Act. 4. For all these reasons, and notwithstanding the possibility that, first, Networx may have reason to be dissatisfied with Bastow's approach to the matter, and, second, the result in a contested hearing, on the merits, may be quite different from the result in an application of this kind, it seems to me clear that the Demand must be set aside. There at least exists a genuine dispute as to the debt claimed, and there is also some other reason to set aside the Demand, because the amount claimed is arguably not due and payable where the works have arguably not been properly performed. In the ordinary course, costs must follow the event. For these reasons, I order that: 1. The creditor's statutory demand issued by Networx Construction Pty Ltd dated 16 September 2016 to Bastow Civil Constructions Pty Ltd be set aside. 2. The Defendant pay the Plaintiff's costs of these proceedings, as agreed or as assessed. ********** 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: 18 July 2017