In the matter of Ming Tian Real Property Pty Ltd

1. [1]

   GLEESON JA: The plaintiff, Ming Tian Real Property Pty Ltd (the Company), seeks an order under s 459G of the Corporations Act 2001 (Cth) setting aside a creditor’s statutory demand dated 16 July 2019 served by the defendant, SGS Platinum Pty Ltd (SGS). The debt to which the statutory demand relates is described in the schedule to the demand as a “judgment debt” of the District Court of New South Wales in an amount of $423,262.77. The components of the debt are itemised in the schedule to the demand as follows:

2. [2]

   No verifying affidavit complying with s 459E(3) of the Corporations Act accompanied the statutory demand. This was because it was purportedly for a judgment debt, being a judgment of the District Court dated 19 June 2019.

3. [3]

   SGS obtained judgment against the Company in the District Court pursuant to s 25 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) upon the filing of an adjudication certificate dated 17 June 2019 in the amount of $448,472.09. The difference between the amount of the adjudication certificate and the “judgment debt” is a credit of $25,488.15 allowed by SGS, and the addition of interest of $86.92 and filing fees of $188.00. SGS now asserts that the credit of $25,488.15 was an error on its part when applying for registration of the judgment; however nothing turns on this asserted error for present purposes.

4. [4]

   The Company seeks to set aside the demand on two grounds. The first ground relies upon s 459J(1)(b). The Company says that the omission of a verifying affidavit complying with s 459E(3) constitutes “some other reason” why the demand should be set aside. The Company also relies upon the ground in s 459H(1)(b). It says that it has offsetting claims against SGS which exceed the amount claimed in the demand.

Factual background

1. [5]

   It is common ground that the Company carries on business as a builder and SGS carries on business as a contractor. On 22 February 2018, the Company entered into a design and construct agreement (head contract) with a partnership comprising a number of entities (the developer) in respect of residential works associated with a development known as Magenta Shores Townhouses on the central coast of New South Wales.

2. [6]

   In about April 2018, the Company and SGS entered into a subcontract agreement (the subcontract) for the supply and installation of all structural steel and structural timber at the project. A dispute arose concerning two progress claims issued by SGS to the Company in January and February 2019 totalling $542,668.51.

3. [7]

   SGS continued work on the project until about 5 March 2019 when the Company served on SGS a notice of termination of the subcontract. On 8 April 2019 SGS commenced an adjudication process and an adjudication determination was made on 30 April 2019. The adjudication amount was $422,412.77. The certificate amount, after adding interest due and payable, and fees, was $448,476.09.

4. [8]

   On 9 May 2019, the developer terminated the head contract with the Company. The developer subsequently commenced proceedings against the Company in the Construction and Technology List claiming damages in excess of $3.55 million.

5. [9]

   On 19 June 2019, SGS lodged the adjudication certificate as a judgment in the District Court of New South Wales. SGS claimed a filing fee, additional interest, and allowed a credit in the amount of $25,488.15 as follows:

6. [10]

   The application for judgment was verified by an affidavit of Mr Shamieh.

7. [11]

   On 20 June 2019, the District Court made orders on different terms to those set out in the application. Relevantly, the District Court ordered that $188 be paid in respect of filing fees and that the total to be paid was $423,262.77 (not $424,299.77 as claimed).

8. [12]

   On 19 July 2019, SGS served the statutory demand on the Company demanding payment of the amount of $423,262.77.

9. [13]

   The Company commenced proceedings to set aside the demand by originating process filed 8 August 2019, and relied upon an affidavit of Mr Dai dated 8 August 2019 (the Dai affidavit) which relevantly:

   1. (1)

      acknowledged receipt of the statutory demand on 19 July 2019 and exhibited a copy of the demand, which on its face did not include a verifying affidavit complying with s 459E(3);

   2. (2)

      disputed the method of calculation and entry of the “judgment debt” claimed in the demand in these terms:

   3. (3)

      asserted an offsetting claim against SGS under the subcontract for defective works, including claims for:

10. [14]

    On 29 August 2019, the developer filed an amended Technology and Construction List statement in Supreme Court proceedings against the Company claiming liquidated damages for delay and damages for defective works.

11. [15]

    On 19 September 2019, the Company filed a Technology and Construction List response and cross-claim against SGS. By the cross-claim, the Company sought indemnity from SGS in respect of the damages claim brought by the developer against the Company, and damages for SGS’s alleged breach of the subcontract, with respect to the matters referred to above at [13(3)].

12. [16]

    On 30 August 2019, the developer’s solicitors informed the Company’s solicitors that the developer would shortly be commencing rectification works in respect of the defective works performed by the Company under the head contract, and indicated that the extent of defect rectification works would be substantial and would include demolition works. The evidence indicates that the developer has commenced the foreshadowed rectification and demolition works.

13. [17]

    SGS has not yet filed a response to the cross-claim; it seems that it has deferred taking that step pending the outcome of this proceeding.

First ground: “some other reason” – absence of verifying affidavit complying with s 459E(3)

1. [18]

   Section 459E(3) provides:

2. [19]

   Supreme Court (Corporations) Rules 1999 (NSW), r 5.2 relevantly provides:

3. [20]

   Form 7 relevantly requires the following in pars 4 and 5:

4. [21]

   Section 459J provides:

5. [22]

   The Company submitted that the omission of a s 459E(3) affidavit verifying the demand constitutes some “other reason” why the demand should be set aside under s 459J(1)(b).

6. [23]

   SGS’s response is threefold. First, it says with reference to the so-called Graywinter principle, that the Company cannot raise the first ground because the first affidavit in support of the originating process did not, directly or by inference, raise this ground of dispute under s 459J(1)(b). This was a reference to the affidavit of Mr Dai of 8 August 2019 (the Dai affidavit)

7. [24]

   Second, SGS says that a verifying affidavit was not required because the debt claimed in the demand is a judgment debt, as Mr Dai acknowledged in his first affidavit.

8. [25]

   Third, and alternatively, SGS says that if the Court is minded to set aside the demand, it should do so on condition that the amount of $411,736.31 is paid into court by the Company.

9. [26]

   Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 involved the minimum requirements for an affidavit to qualify as a supporting affidavit, under the Federal Court Rules 1979 (Cth), Order 71, r 36B. Importantly that rule, which has since been repealed, is not in the same terms as the present rules in the Corporations Rules, rr 2.4A and 2.7.

10. [27]

    In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (2019) 99 NSWLR 397; [2019] NSWCA 60, Bell P observed at [40] that there are three reasons why the shorthand label “the Graywinter principle” is perhaps unfortunate or needs to be employed with some caution. One is that it has a tendency to distract from the language of the statute. Another is that subsequent decisions have explained and modified the so-called Graywinter principle: see, for example, Financial Solutions Australasia Pty Ltd v Predella Pty Ltd (2002) 26 WAR 306; [2002] WASCA 51; Infratel Networks Pty Ltd v Gundry’s Telco and Rigging Pty Ltd [2012] NSWCA 365; (2012) 92 ACSR 27; Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103; (2007) 61 ACSR 321; Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143; (2007) 214 FLR 393. Yet another reason is that the relevant Federal Court Rule the subject of Graywinter has since been repealed.

11. [28]

    I agree with Bell P that the use of the label “the Graywinter principle” should be avoided. Moreover, it is not correct to describe Graywinter as a principle. The case is no more than a decision on the facts with respect to a particular rule of court dealing with the content of a supporting affidavit to set aside a statutory demand, which rule which has since been repealed.

12. [29]

    In the present case, there are two reasons why the ground of objection based on the absence of a s 459E(3) verifying affidavit is available to be advanced by the Company.

13. [30]

    First, the Dai affidavit deposed to receipt of the statutory demand and exhibited a copy of the demand, which on its face did not include a verifying affidavit accompanying the demand. Thus the absence of a s 459E(3) verifying affidavit was at least indirectly raised by the Dai affidavit.

14. [31]

    Second, reliance could be placed on this ground as par 13 of the Dai affidavit and the documents exhibited to that affidavit recorded the inclusion of filing fees and interest in the purported judgment debt (Ex MD1, pp 4 and 6), even though the absence of a s 459E(3) verifying affidavit was not raised in the affidavit itself: Verimark Pty Ltd v Passiontree Velvet Pty Ltd [2019] NSWSC 455 at [51] (Ward CJ in Eq) citing Infact Consulting Pty Ltd v Kyle House Pty Ltd [2007] NSWSC 56 at [19] (White J).

15. [32]

    Accordingly, I accept that Company’s submission that the relevant ground of the application to set aside the demand under s 459J(1)(b) was raised, directly or by inference, by the supporting affidavit of Mr Dai filed within the 21-day period.

16. [33]

    It is not necessary to refer to the whole of the scheme of the SOPA with respect to the making of progress claims and the adjudication of disputes. The SOPA relevantly provides with respect to registration of an adjudication certificate as a judgment, that:

17. [34]

    Whilst a statutory demand based on a judgment obtained under s 25 of the SOPA is a judgment debt and does not require verification by affidavit: Re Cooperbrown Pty Ltd [2019] NSWSC 1341 at [31]-[32] (Black J), the position is different where the purported “judgment” under s 25 of the SOPA includes amounts which are not stated in the adjudication certificate, such as filing fees for the filing of the adjudication certificate with the court, or interest from the date of the adjudication certificate to the time the certificate is filed as a judgment. Nothing in s 25(1) of the SOPA authorises the inclusion of such amounts in the deemed judgment created by that provision.

18. [35]

    In Re Cooperbrown, Black J held at [16] that the inclusion of such amounts in a judgment under s 25 of the SOPA deprived the “judgment debt” arising under s 25(1) of the exception that would be otherwise available under s 459E(3) of the Corporations Act. His Honour continued at [17]:

19. [36]

    In support of this view, Black J referred at [19] to the remarks of Ward J in Fitness First Pty Ltd v Dubow [2011] NSWSC 531; (2010) 84 ACSR 296 concerning a deemed judgment created by registration of a certificate of a cost assessor’s determination which included a sum of $78, being the costs of registration of the certificate in the Local Court, noting that her Honour set aside a statutory demand that was not accompanied by a verifying affidavit. Black J also referred at [21] to Re SBC Construction Pty Ltd [2019] NSWSC 310 at [39], where White J accepted that where the amount claimed in the statutory demand included a debt for the filing fee for registration of an adjudication certificate, there was non-compliance with s 459E(3) by reason of absence of verification of the demand.

20. [37]

    Black J concluded in Re Cooperbrown at [22]:

21. [38]

    SGS submitted that the reasoning in Re Cooperbrown may be doubted, but counsel did not go so far as to submit that the decision was plainly wrong. As a matter of comity, I should follow Re Cooperbrown unless convinced that the decision is “plainly wrong” in the sense referred to in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485: [1993] HCA 15. In my view, Re Cooperbrown is not plainly wrong; on the contrary, I consider the decision to be correct.

22. [39]

    Applying Re Cooperbrown to the present case, it is not necessary for the Company to establish substantial injustice to obtain relief under s 459J(1)(b): Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 at 307. And Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 at [32]-[37] demonstrates that the absence of prejudice is immaterial if there is a sufficiently serious contravention of the statutory scheme for creating a presumption of insolvency. The absence of a s 459E(3) verifying affidavit accompanying the demand answers that description: Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 117 FLR 330 at 333; Fitness First v Dubow at [98], [103]-[104].

23. [40]

    Subject to consideration of the next argument relied upon by SGS, the demand should be set aside.

24. [41]

    SGS submitted that the Dai affidavit contained an acknowledgement that the amount claimed in the statutory demand was a “judgment debt” and the Company should not be permitted to raise the first ground, as SGS was led to believe that the Company did not seek to rely upon the omission of a s 459E(3) verifying affidavit accompanying the demand. I reject this argument.

25. [42]

    First, the references in the Dai affidavit to a “judgment debt” (see [13(2)] above), were simply a reference to the description of the debt referred to in the schedule to the demand.

26. [43]

    Second, as Lindgren AJA said in N A Investment Holdings Pty Ltd v Perpetual Nominees Limited [2010] NSWCA 210, this type of argument confuses the concept of “support” (as in an affidavit in support) with natural justice considerations. Lindgren AJA said at [85]:

27. [44]

    It was not suggested that SGS was forensically disadvantaged by the failure of the supporting affidavit to expressly state that the statutory demand was not accompanied by a verifying affidavit under s 459E(3).

28. [45]

    SGS further submitted that the inclusion of costs and interest in the judgment registered under s 25 of the SOPA was permitted, given the delegated powers of registrars of the District Court under s 13 of the Civil Procedure Regulation 2005 (NSW) and the operation of s 101(1) of the Civil Procedure Act 2005 (NSW). I reject this submission.

29. [46]

    First, the delegated power of a registrar of the District Court to order costs of proceedings under s 98 of the Civil Procedure Act is restricted to proceedings before a registrar. The registration of a judgment under s 25 of the SOPA does not answer the description of “proceedings” before a registrar. As Keane CJ observed in Birdon Pty Ltd v Houben Marine Pty Ltd [2011] FCAFC 126 at [53]:

30. [47]

    Second, s 101(1) of the Civil Procedure Act does not authorise the inclusion of interest upon registration of an adjudication certificate as a deemed judgment under s 25 of the SOPA. Section 101(1) provides that unless the Court orders otherwise, interest is payable on so much of the amount of the judgment (exclusive of any order for costs) as is from time to time unpaid. This provision is concerned with post-judgment interest.

31. [48]

    For these reasons, the statutory demand should be set aside under s 459J(1)(b).

32. [49]

    Corporations Act, s 459M provides that an order under s 459H or s 459J setting aside a demand, may be made subject to conditions. Thus the Court has the power to impose conditions even if the statutory demand is set aside: Natcraft Pty Ltd v WIN Television Pty Ltd [2003] 1 Qd R 196 at 197 (Williams JA). Such conditions may include that the recipient pay into court the amount of the alleged debt, although the view has been expressed that the court should not adopt a practice of imposing such a condition.

33. [50]

    In Get’m Pty Ltd v Triulcio [2004] NSWSC 291, Palmer J said at [30]:

34. [51]

    One circumstance in which the Court may, under s 459J(1)(b), set aside the statutory demand based on a judgment debt, but on condition that the amount of the judgment debt be paid into court, is where there has been a judicial determination that results in a judgment debt that has not been stayed, but which is subject to an appeal that appears to be reasonably arguable. Importantly in such a case, the money paid into court is not security for the judgment debt that will give the judgment debt priority over other unsecured creditors: Quarter Enterprises Pty Ltd v Allardyce Lumbar Co Ltd [2011] NSWSC 1031 at [10]. As White J said in Re SBC Construction at [64], the reason for imposing such a condition is to put the judgment debtor to proof of the genuineness of his dispute.

35. [52]

    The same principle would not necessarily apply where the judgment debt is not given after a contested hearing on the merits because, as White J explained in Re SBC Construction at [66]-[67]:

36. [53]

    Those remarks are equally applicable here. I do not consider that it should be a condition of setting aside the statutory demand that the amount demanded should be paid into court.

Second ground: offsetting claim

1. [54]

   In view of the above conclusion, there is no need to consider the second ground relied upon by the Company. However, as this ground was argued fully, I will briefly state my views.

2. [55]

   The test of an offsetting claim is not in dispute. The question is whether the Court is satisfied that there is a serious question to be tried that the party has an offsetting claim. The claim must be made in good faith and be arguable and not frivolous or vexatious.

3. [56]

   As to the meaning of good faith in this context and the nature of the evidence of the quantum of an offsetting claim that is required, the relevant principles are summarised in Re Powerpark Systems Pty Ltd [2018] NSWSC 793 at [31] – [34].

4. [57]

   The Company submitted that its offsetting claim comprised two parts. The first was a claim for damages and/or indemnification for SGS’s alleged breach of the subcontract comprising: (a) damages for defective works, presently estimated to be approximately $3.55 million; and (b) liquidated damages claimed by the developer against the Company under the head contract in the sum of $1,574,200 plus GST. The second was the Company’s costs of attending to rectification of defective structural works in the period 5 March 2019 to 9 May 2019 in the sum of $243,510 plus GST, being a total of $267,861.

5. [58]

   SGS’s response to second ground is that the offsetting claim is not genuine; that the amount of the offsetting claim has not been put before the Court in evidence; or alternatively, if the Court is minded to set aside the demand, it should do so on the same condition as to payment into court.

6. [59]

   Applying the test stated above, I would have rejected as speculative the Company’s primary submission as to element (a) that there is a plausible contention that SGS is liable for the whole of the developer’s $3.55 million damages claim against the Company for defective works.

7. [60]

   Insofar as the Company advanced a more restrained claim under element (a), by reference to an email dated 17 July 2019 from Mr Hurley on behalf of the Superintendent, the Company submitted that four of the top six major defective items under the head contract related to works carried out by SGS, and adopted the Superintendent’s description of the allegedly defective works under the head contract:

8. [61]

   As to item 1, the Company submitted that there was a sufficient nexus between the damage caused by mould to the works and SGS’s alleged breach of its obligations under the subcontract, given the terms of cl 11.1 of the subcontract which provided:

9. [62]

   The term “Works” is defined relevantly in cl 1.1 of the subcontract to mean the physical results of the Subcontractor’s Activities, including (where relevant) designs and materials (whether or not on Site) and constructions carried out by or for the Subcontractor on the Site.

10. [63]

    According to the Company’s preferred construction of cl 11.1, SGS is liable for mould damage to the works because SGS failed to ensure that the premises were secured or covered to avoid water damage to “the whole of its Works”. For the scope of a “care and protection of the Works” obligation, see by way of example, Optus v Leighton & Ors [2002] NSWSC 327 at [1017]-[1023]. Where the question of construction has any element of rational controversy to it, the Court must exercise particular restraint on an application to set aside a statutory demand for the reasons explained by Barrett AJA in Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300 at [26]-[29].

11. [64]

    Given the nature and terms of the subcontract, the absence on this application of evidence of any background circumstances mutually known to the parties which may assist resolution of the construction question, and the brevity of the submissions on the construction question, this is not one of the few cases where the Court should entertain a construction argument on a s 459G application.

12. [65]

    Accepting that the Company’s preferred construction of SGS’s “care and protection” obligation under cl 11.1 of the subcontract is arguable, SGS’s response is that the damaged works identified by the Superintendent, and relied upon by the Company for its offsetting claim, are outside the scope of its obligations under the subcontract and hence are not part of “its Works” for the purposes of cl 11.1. Under Sch A(2) to the subcontract, the primary scope of works by SGS was the supply, delivery and installation of structural carpentry and structural steelwork. Nothing in items 1, 11, 14, 16, 17 18 and 22 of Sch A(2) provides support for a plausible contention that the scope of SGS’s works included the supply and installation of fire separation panels or particle board flooring. Accordingly, I would have accepted SGS’s submission that neither the supply nor installation of the (subsequently mould damaged) fire separation panel and particle board flooring formed part of SGS’s scope of works.

13. [66]

    However, if I am wrong in this regard, I would have quantified the offsetting claim for mould damage at $383,838 for the removal and replacement of fire separation panels and $195,510 for the removal and replacement of yellow tongue flooring to level 1.

14. [67]

    Whether or not items 2, 3 and 4 referred to in the Superintendent’s email of 17 July 2019 are within SGS’s scope of works under the subcontract, the budget estimate document relied upon by the Company does not contain any quantification of the estimated cost of rectification works in relation to these items.

15. [68]

    The Company submitted that an inference can be drawn that the rectification works to address these alleged defects would be a significant cost, given the developer’s claim that the total rectification costs exceed $3.55 million. The difficulty with this submission is that the Company did not tender any evidence from which an inference could be drawn as to the likely quantum of this claim, let alone that the likely quantum exceeded the amount of the statutory demand: Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560 at [18]-[19]; Re Douglas Aerospace Pty Ltd [2015] NSWSC 167 at [40]; Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57].

16. [69]

    As to element (b), the Company submitted that its exposure to the developer’s claim for delay damages was a consequence of alleged delays by SGS in progressing its works under the subcontract.

17. [70]

    The difficulty with this claim at the level of plausible contention is that the Company failed to identify, by reference to the terms of the subcontract, the date by which performance was to occur by SGS such that its failure to perform makes it arguably liable to indemnify the Company for delay damages claimed by the developer. In the subcontract, the term “Date of subcontractor’s completion of works” was left blank. And insofar as work was to be performed in stages, there was no evidence tendered as to the “Current Target Program”, referred to in Sch K to the subcontract. Nor did the Company point to any evidence demonstrating any agreement with SGS as to the date of the subcontractor’s completion of works for the purposes of the subcontract.

18. [71]

    As to the second part of the Company’s offsetting claim of $267,861 (including GST) for the costs of attending to the rectification of the defective structural works (Ex MD2, p 1353), I would have quantified this offsetting claim at $3,135 (including GST), being a total of 47.5 hours at the carpenter rate of $60 p/hour (plus GST) as reflected in the day labour sheets reference # 1205 and 1206 (Ex MD2, pp 1356-1357). No attempt was made by the Company, either in evidence or by submissions, to substantiate its claim that any of the other day labour sheets said to underpin this offsetting claim for $267,861 involved rectification of alleged defective structural works by SGS.

19. [72]

    In summary, if it were necessary to determine, I would have assessed the amount of the Company’s offsetting claim as $3,135.

Orders

1. [73]

   The Court orders that:

   1. (1)

      Set aside the statutory demand dated 16 July 2019 served by the defendant on the plaintiff.

   2. (2)

      Defendant to pay the plaintiff’s costs.

   3. (3)

      The exhibits may be returned.