Supreme Court New South Wales

• Medium Neutral Citation: In the matter of Epsilon Knowledge Pty Limited [2014] NSWSC 544
• Hearing dates: Monday, 5 May 2014
• Decision date: 05 May 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

Creditor's statutory demand set aside.

• Catchwords: CORPORATIONS - winding up - winding up in insolvency - creditors statutory demand - application to set aside - genuine dispute - offsetting claim
• Legislation Cited: (Cth) Corporations Act 2001, s 459G, 459H, 459J
• Cases Cited: Advance Ship Design Pty Ltd v DJ Ryan t/as Davies Collison Cave (1995) 16 ACSR 129; Britten-Northern Pty Limited v Analysis & Technology Australia Pty Limited [2013] NSWCA 344; Elm Financial Services v MacDougal [2004] NSWSC 560; First Equilibrium Pty Litd v Bluestone Property Services Pty Limited (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108; John Shearer Ltd & Arrocrest Group Pty Ltd v Gehl Company (1995) 60 FCR 136; 18 ACSR 780; Macleay Nominees Pty Limited v Belle Property East Pty Ltd [2001] NSWSC 743; Mandarin International Developments Pty Ltd v Growthcorp (Aus) Pty Ltd (1998) 143 FLR 40; NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359; Solarite v York [2002] NSWSC 411
• Category: Principal judgment
• Parties: Epsilon Knowledge Pty Ltd (Plaintiff); Delegait Pty Ltd (Defendant)
• Representation: Counsel: D Robertson (Plaintiff); D Allen (Defendant); Solicitors: Tibby Morgenstern (Plaintiff); Ronayne Owens Lawyers (Defendant)
• File Number(s): 2013/353507

Judgment (ex tempore)

1 HIS HONOUR: By originating process filed on 22 November 2013, the plaintiff Epsilon Knowledge Pty Ltd applies pursuant to (Cth) Corporations Act 2001, s 459G, for an order setting aside a creditor's statutory demand served on it by the defendant Delegait Pty Ltd on or about 11 November 2013, claiming a sum of $67,234.07 described in the schedule to the demand as follows:

Description of the debt
The debt of $67,234.07 is owed by the Debtor Company to the Creditor in respect of the following unpaid invoices rendered for staff hosting services provided by the Creditor to the Debtor Company pursuant to the Staff Hosting Services Agreement between the Creditor and the Debtor Company dated 26 May 2008:
Invoice #79208 dated 11 January 2013	$2,035.00
Invoice #79231 dated 16 January 2013	$2,035.00
Invoice #79302 dated 1 February 2013	$2,035.00
Invoice #79324 dated 18 February 2013	$2,035.00
Invoice #79410 dated 1 March 2013	$2,035.00
Invoice #79426 dated 18 March 2013	$2,960.10
Invoice #79501 dated 1 April 2013	$2,821.28
Invoice #79527 dated 16 April 2013	$3,052.50
Invoice #79601 dated 1 May 2013	$3,052.50
Invoice #79616 dated 15 May 2013	$3,052.50
Invoice #79701 dated 1 June 2013	$3,052.50
Invoice #79718 dated 16 June 2013	$2,543.75
Invoice #79808 dated 1 July 2013	$2,543.75
Invoice #79819 dated 16 July 2013	$2,543.75
Invoice #79901 dated 1 August 2013	$2,543.75
Invoice #79916 dated 16 August 2013	$2,543.75
Invoice #80001 dated 1 September 2013	$2,543.75
Invoice #80019 dated 16 September 2013	$2,543.75
Invoice #80101 dated 1 October 2013	$2,543.75
Invoice #80113 dated 1 October 2013	$26,717.69
Less payment received	$8,000.00
Total Amount of the debt	$67,234.07

2 The originating process is expressed to found the application upon the grounds referred to in s 459H(a) (that there is a genuine dispute about the existence and amount of the debts) and (b) (that the plaintiff has offsetting claims against the defendant).

3 The creditor's statutory demand - and, for that matter, the offsetting claims propounded by the plaintiff - arise out of a staff hosting service agreement between the parties dated 26 May 2008. Relevantly, that agreement provides as follows:

"Fees" means the fees specified in the Schedule.

Clause 3. Service

...

3.2 Delegait will provide a Working Environment and Office Technology as specified; training in Australian business culture; training in PC usage and Microsoft office applications and basic supervision. Delegait will not provide day-to-day management of tasks assigned or training in the work required by Employer. Employer accepts that Delegait is a facility provide and not a provider of outsourced business process services. Accordingly, Employer accepts that delegait is not providing deliverables and is not responsible for the quality or volume of output of the work of any Staff Member. At all times, Employer will choose, train, manage and be responsible for its own Staff Members.

...

Clause 4. Obligations

...

4.2 Employer agrees to:

(a) Provide a Primary Contact, with appropriate levels of authority, to be responsible for communications between Employer and Delegait and for delivery of the services; and

(b) Pay Stakk Members for applicable leave to which they are entitled as well as the government mandated additional one month's pay annually.

...

4.6 Delegait will be responsible for:

(a) Payment of all statutory on-costs for all Staff Members (including same or different kind to Superannuation, Workers Compensation Insurance, Payroll Tax and Fringe benefits Tax) as well as government mandated taxes and employment costs imposed by the government of the Philippines, including increases in such costs and any new statutory charges which May be levied in the future;

(b) All overtime payable to Staff Members for working Philippines public holidays where these do not coincide with Australian public holidays;

(c) The cost of Orientation Training and PC Skills Training including all overtime payable to Staff Members attending such after hours training;

(d) All costs associated with the delivery of the employment on-costs inclusions listed in the Schedule.

...

Clause 5. Fees and Payment

5.1 Employer will pay delegait the Feeds plus the applicable GST by the due date. Delegait will only be required to provide the Service as set out in the Schedule as long as the fees set out in said Schedule are fully paid and up to date. DELEGAIT WILL NOT MAKE PAYROLL PAYMENT TO HOSTED STAFF WHERE CLEARED FUNDS ARE NOT AVAILABLE FROM EMPLOYER. Where payment is not made by the due date delegait May immediately terminate Employer's Hosted Staff and utilize the Security Deposit to pay the Hosted Staff their notice.

5.2 Delegait will assume all employment risk for Staff Members employed on behalf of Employer and accordingly, in the event of default, will incur costs associated with payment of unpaid salary and redundancy payments to Staff Members. Employer agrees to pay a refundable security deposit of $1,800 (one thousand eight hundred dollars) for each Staff Member engaged.

5.3 Delegait will pay staff in local Philippines currency and recover such salary costs based on the publicly published Westpac TT buy rate for Philippines currency averaged for the preceding quarter. Oncosts are already in Australian dollars and are not subject to exchange rate variances.

5.4 Employer will pay an additional 1/12th of one month's salary each month and Delegait will pay Employer's Hosted Staff one month's additional salary each December (or pro-rata on separation) in accordance with Philippine law.

...

Clause 12. Termination

12.1 Either party will give at least one month's written notice to terminate the service.

12.2 Refund of the Security Deposit will be made on the final day of service by the Employer's Hosted Staff, after satisfying Clause 13.2

12.3 A party May immediately (or with effect from any late date it May nominate) terminate this Agreement by written notice to the other party if:

(a) the other party breaches this Agreement and fails to remedy such breach within 7 days of receipt of notice from the first party specifying the breach and requiring it to be remedied;

(b) If a receiver, receiver and manager, an official manager, a controller, a liquidator, a provisional liquidator, an administrator or other like person is appointed for the whole or substantially the whole of the other party's assets , undertaking or business;

(c) If a mortgagee or charge enforces a security held in respect of the whole or substantially the whole of the other party's assets undertaking or business;

(d) Any scheme of arrangement between the party and its creditors is entered into;

(e) The other party becomes insolvent or is otherwise unable to pay its debts as and when they become due or otherwise if something with the same or similar effect to paragraphs (a), (b), (c) or (d) happens under the laws of any jurisdiction.

...

Clause 13. Consequences of Termination

...

Clause 13.2 Delegait May utilise the Security Deposit to defray its costs in the event of breach or default by Employer including but not limited to unpaid salaries and redundancy payments to Staff Members employed by delegait on behalf of Employer.

...

Clause 20. Waiver

Clause 20.1 A Waiver by a party of a provision or of a right under this Agreement is binding on the party granting the waiver only if it is given in writing and is signed by an authorised officer of the party granting the waiver.

Clause 20.2 A Waiver is effective only in the specific instance and for the specific purpose for which it is given.

Clause 20.3 Failure by a party to exercise or delay in exercising a right does not prevent its exercise or operate as a waiver.

Clause 21. Amendments in Writing

This agreement including its Schedule May only be altered in writing signed by all parties.

...

Schedule

...

Item 4 - Fees

Employer will pay Delegait the following each calendar month, exclusive of GST:

(a) Statutory and non-statutory Employee On-costs $925 plus GST per month.

(b) The monthly salary of each Hosted Staff member for 13 months each year as mandated by Philippine labour law (with 13th month collected monthly).

4 On 1 October 2013, the defendant's solicitors sent the plaintiff's solicitors a letter advising that the defendant was ceasing to provide services with effect from that date, together with a notice of termination of the agreement, as follows:

We refer to your email of 26 September 2013.

Clause 5.1 of the Staff Hosting Agreement between our client and Epsilon dated 26 May 2008 ("the Agreement") provides that our client is only obliged to provide the services set out in the schedule to the Agreement as long as the Fees set out in the schedule to the Agreement are fully paid and up to date.

This is unrelated to termination of the Agreement and accordingly it is incorrect to assert that our client would be in any way breaching the Agreement by ceasing to provide services prior to giving notice of termination in circumstances where there are Fees outstanding under the Agreement.

Our client will cease providing services to Epsilon at 5.00 pm today.

We enclose Notice of Termination of Agreement under subclause 12.3(a) of the Agreement, which has also been forwarded to the registered office of your client.

5 The enclosed "Notice of Termination" as in fact a notice to remedy breach under clause 12.3(a). It may be observed that there is no evidence that any subsequent notice actually terminating the agreement was ever given, but for the purpose of this application I do not think that anything turns on that.

6 The creditor's statutory demand followed, initially by email, on 4 November 2013. As I have said, the application was said to be brought under ss 459G and 459H and the originating process did not invoke s 459J. At the outset of the hearing, I refused an application for leave to amend the originating process to rely on s 459J, as the grounds sought to be relied upon under s 459J were not evident or even discernible from the s 459G affidavit. In any event, in my view had that argument been permitted to be raised, ultimately the court was very likely to conclude that any defect that might have been found in the particularisation and description of the debt was not causative of substantial injustice.

7 Turning, then, to the alleged dispute as to the claimed indebtedness, the test to be applied as to whether there is a genuine dispute for the purposes of s 459H is now well established. For present purposes, it is suffice to record what was said by Barrett J, as his Honour then was, in Solarite v York [2002] NSWSC 411 (at 23), namely:

It is appropriate to dwell for a moment on the guidance provided by these cases. The tests of "plausible contention requiring investigation", "real and not spurious, hypothetical, illusory or misconceived" and "perception of genuineness (or lack of it)", applied in the context of a summary procedure where "it is not expected that the court will embark on any extended inquiry", mean that the task faced by a company challenging a statutory demand on the "genuine dispute" ground is by no means at all a difficult or demanding one. The company will fail in that task only if it is found upon the hearing of its s 459G application that the contentions upon which it seeks to rely in mounting its challenge are so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger

8 Not all of the invoices referred to in the schedule to the demand are the subject of dispute. Those that were can conveniently be dealt with in three categories. The first is the last invoice listed, namely invoice 80113 dated 1 October 2013 for $26,717.69. The plaintiff says that it has never received that invoice and the plaintiff's evidence to that effect was ultimately uncontradicted. The claim for $26,717 is entirely unexplained. How it related to the head contract is obscure. Unlike other of the invoices - in respect of which it may be discernible that they relate to, for example, on-costs - in this case the basis of the claim is entirely unapparent. Where the basis of the claim is not at all apparent, then very little is required to show a genuine dispute about it [see Mandarin International Developments Pty Ltd v Growthcorp (Aus) Pty Ltd (1998) 143 FLR 40]. In my view, there is a genuine dispute about that invoice.

9 The second category is invoice 80101, also dated 1 October 2013, for $2,543.75. This invoice was disputed on basis that it is said to relate to the period after termination. This invoice was unquestionably received by the plaintiff. The contention that it relates to the period after termination is incorrect. While, under the letter of 1 October 2013, the supply of services was suspended under cl 5, the contract was not terminated with effect from that date and, indeed, was not terminated, if at all, at least until 15 October 2013. A suspension of services in accordance with cl 5.1 does not appear to involve any loss on the part of the defendant of its entitlement to fees under the contract, and the plaintiff did not satisfactorily explain how it could do so. I am not satisfied that there is a plausible contention requiring investigation that invoice 80101 is not payable.

10 The remaining category of disputed invoices comprises invoice 79527 dated 16 April 2013 for $3,052.50, 79616 dated 15 May 2013 for $3,052.50 and 79818 dated 16 July 2013 for $2,543.75. The plaintiff says that it has not received these invoices and, again, ultimately that evidence was not contradicted. However, although it was suggested that the plaintiff had no way of knowing to what those invoices related, I do not agree. It is discernible, from the amounts and the dates of the invoices, that they related to the on-costs referred to in paragraph 1 of item 4 of the schedule. Clause 5.1 requires the plaintiff to make payment by the "due date". There is nothing in the contract itself which identifies a "due date"; the only place in which any reference to "due date" is to be found is in the invoice. While I do not think that there can be a serious dispute as to the existence or quantum of the debts represented by those three invoices, it is arguable that they were not due or payable until they were invoiced, as it was it the invoice and only the invoice that specified the due date. Where a debt that is not yet due and payable is included in a statutory demand, that is a basis for the demand to be set aside, as such demands can relate only or can be made only in respect of debts that are due and payable [see NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359].

11 Accordingly, when one deducts from the total amount of the debt, invoices 80113, 79527, 79616 and 79819, that leaves an undisputed or indisputable amount of $31,867.63.

12 I turn, then, to the offsetting claims. For a claim to be an offsetting claim within s 459H, it must presently exist and be such that, if the company which received the demand established the alleged facts, it would be presently entitled to the sum claimed [see John Shearer Ltd & Arrocrest Group Pty Ltd v Gehl Company (1995) 60 FCR 136; 18 ACSR 780; Advance Ship Design Pty Ltd v DJ Ryan t/as Davies Collison Cave (1995) 16 ACSR 129, 135]. While there must be some evidence to support the factual allegations that go to make up an offsetting claim, that evidence does not need to be in a form admissible at a final hearing on the merits of the case, but it does need to be sufficient to satisfy the Court that the claim has a proper factual basis [First Equilibrium Pty Litd v Bluestone Property Services Pty Limited (in liq) (2013) 95 ACSR 654; [2013] FCAFC 108]. In Macleay Nominees Pty Limited v Belle Property East Pty Ltd [2001] NSWSC 743, Palmer J said (at [18]):

In my opinion, a genuine offsetting claim for the purposes of CA s 459H (1) and s 459H (2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "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. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purpose of s 459H (1) and s 459H (2).

13 Similarly, in Elm Financial Services v MacDougal [2004] NSWSC 560, Barrett J observed:

[19] It is not necessary that the party seeking to have the statutory demand set aside should particularise the claim to the last dollar and cent. There may be various ways of approaching the issue of assessment at this early stage. It is sufficient that there be, on the evidence, a plausible and coherent basis for asserting a claim to a sum which, despite elements of uncertainty, can be seen to be, in any event, greater than the amount of the debt the subject of the statutory demand.

14 Thus a company which relies on an offsetting claim to set aside a statutory demand must lead evidence to establish a plausible and coherent basis for asserting that claim, and show how that claim was calculated, but need not precisely quantify it.

15 Five offsetting claims were propounded. One of them, namely a claim for damages for wrongful termination of the provision of services, does not require any further consideration because it was not raised, in accordance with the Graywinter principle, in the s 459G affidavit. In any event, as it appears that the plaintiff was in default of payment of some undisputed invoices as at 1 October 2013, it is difficult to see how such a claim could be sustained.

16 Of the remaining offsetting claims, the first is for $596, said to be for wages for a period during which a worker was no longer providing services to the plaintiff. The defendant responded that this payment charged to the plaintiff was in respect of an accrued leave credit of the worker in question. Under clause 4.2(b) of the contract, the plaintiff was responsible for payments in respect of leave. The bare assertion that the payment was one in respect of a period in which the worker was no longer providing services to the plaintiff is insufficient to show that it was a payment not properly charged to the plaintiff, even if the bare allegation of fact was sustained. In those circumstances, I am not satisfied that an offsetting claim has been sufficiently raised in this respect.

17 The second offsetting claim is for $8,652.54, said to be in respect of hardware purchased or provided by the plaintiff for use by contracted workers and not returned by the defendant following termination of the contract. This must be a claim for damages for conversion or detinue. However, there is no suggestion of any demand for return having been made. In those circumstances, I am not satisfied that the plaintiff has demonstrated a claim based on an accrued cause of action such that there is a presently existing claim for the amount in question or any amount on that account. I am not satisfied that the plaintiff has established an offsetting claim on that account.

18 The third suggested offsetting claim is for a sum of $10,000 said to be a refundable security deposit paid under the contract and not repaid by the defendant. The defendant at first raised, but did not press in evidence, a response that since the date of the demand, the security deposit had been applied to termination payments of various employees. The plaintiff's reply to that, however, remained in evidence and denied that the plaintiff was in breach or default under the agreement so as to trigger any right of the defendant to retain the deposit under clause 13.2. When the undisputed unpaid invoices, dating from as early as January 2013, were put to Mr Tompkins in cross-examination, he was unable to offer any plausible or satisfactory reason for supposing that their non-payment did not manifest a breach or default under the contract. It seems to me not seriously arguable on the evidence presently before the Court that the plaintiff was not in breach or default in that respect.

19 Accordingly, as any entitlement of the plaintiff to return of the security deposit once the plaintiff is in breach or default depends on additional conditions, the fulfilment of which the plaintiff has not alleged or asserted, the plaintiff has not established an offsetting claim for the $10,800. It may be that in due course it is able to show that some part of the security deposit should be repaid to it, but on the material put before me it has not established, even to the level of bare assertion, that the conditions entitling it to reimbursement have been met. Accordingly, no offsetting claim in that respect is established.

20 The final offsetting claim is for $39,065.68, said to represent overcharges to the plaintiff over the life of the contract by the defendants failing to calculate foreign exchange rates in accordance with clause 5.3 of the agreement. Complaint in this respect was first raised by the plaintiff in a letter of 14 November 2013, after the statutory demand had been served. However, the fact that it is first raised in response to the demand does not necessarily mean that it is not genuine. Sometimes genuine complaints and offsetting demands are only identified and raised after closer than previous scrutiny was given to a basis of charging, in the face of a statutory demand. That letter provided a calculation made on behalf of plaintiff said to be based on Westpac's published TT buy rates for the period 1 October 2012 to 30 September 2013. The PDF images of the documents setting out those rates were said to be attached to the letter, but were not put into evidence. From that exercise, the plaintiff derived the conclusion that there was an average overcharge of 11.31 per cent, and applied that average overcharge to the earlier period 26 May 2008 to 30 September 2012, during which the plaintiff had received invoices expressed only in Australian dollars, not showing the actual conversion from Philippine pesos to Australian dollars.

21 Had the evidence remained in that condition, in the absence of any better information, that analysis or explanation would have provided a reasonable basis for particularising the plaintiff's claim at $39,000. The defendant responded, first, that it had, as a matter of policy, changed the terms of the agreement from using a quarterly average exchange rate to using the exchange rate on the day the invoice issued, and that this had been implicitly accepted by the plaintiff by paying invoices so calculated. The defendant claims that that change was communicated verbally and in writing to the plaintiff, but offered no evidence of the written communication. It seems to me that there is plainly a contestable question of fact as to whether the plaintiff accepted any such unilateral decision to change the terms of the contract, and that there is therefore a plausible contention that the plaintiff has been wrongly charged under the contract.

22 The defendant's second response was that the plaintiff's calculation was incorrect and wrongly included on-costs as well as payroll. Mr Gulliver of the defendant annexed his own calculation including a schedule setting out the foreign exchange rates that he had used, but he annexed no primary document and no reference was made to any primary document to show from what source the rates he used were derived. Neither party examined the basis of calculation made by the other, nor identified any error in the other's calculation. Neither put in evidence source documents establishing the relevant applicable exchange rates.

23 An examination of the calculations produced by both parties does not suggest that the plaintiff clearly included on-costs in the amounts payable: differences in the amounts on which the calculation was based and, differences between the invoiced amounts in the defendant's document do not appear explicable by the amounts of the monthly on-costs.

24 A mere contradiction of the plaintiff's claim, rising no higher in terms of evidence then the plaintiff's claim and without the slightest exposition of alleged error in the plaintiff's quantification cannot prevent a prima facie plausible contention from founding an offsetting claim [see Britten-Northern Pty Limited v Analysis & Technology Australia Pty Limited [2013] NSWCA 344, [70]]. In my view, the plaintiff has to the necessary extent raised an offsetting claim in this respect.

25 As the offsetting total of $39,065.68 exceeds the admitted amount, the substantiated amount is therefore less than the statutory minimum. Accordingly, pursuant to s 459H, the Court orders that:

(1) the creditor's statutory demand served on the plaintiff by the defendant on or about 11 November 2013 be set aside.

(2) the defendant pay the plaintiff's costs assessed in the sum of $12,500.

**********

Decision last updated: 28 October 2014