FEDERAL COURT OF AUSTRALIA

G S Technology Pty Ltd v GSA Industries (Aust) Pty Limited [2007] FCA 1895

CORPORATIONS LAW – application to set aside statutory demand under s 459G Corporations Act 2001 (Cth) – where amount of demand not disputed – whether plaintiff has  genuine claims against the defendant to offset the admitted amount pursuant to s 459H(1)(b) –  where plaintiff found to have arguable genuine claims for offset in excess of admitted amount

Corporations Act 2001 (Cth), ss 459G, 459H and 459J

 Andi-Co Australia Pty Ltd v Meyers [2004] FCA 1358 considered
Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 considered
Fleur De Lys Pty Ltd v Jarrett (2004) 51 ACSR 238 considered
Gujarat NRE Australia v Williams [2006] NSWSC 518 considered
Intag Microelectronics Pty Ltd v AWA Ltd (1995) 18 ACSR 284 applied
Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 considered
Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACSR 362 considered
Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 considered
Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341 considered
Stack v Brisbane City Council (1999) 47 IPR 525 cited

G S TECHOLOGY PTY LIMITED (ACN 011 062 767) v GSA INDUSTRIES (AUST) PTY LIMITED (ACN 004 784 301)

QUD 307 OF 2007

SPENDER J

30 NOVEMBER 2007

BRISBANE

THE COURT ORDERS THAT:

1.                  The statutory demand for $33,264.80 served on the plaintiff by the defendant on 4 September 2007 be set aside.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     This is an application pursuant to s 459G of the Corporations Act 2001 (Cth) (the Act) seeking an order setting aside a statutory demand dated 30 August 2007 requiring the plaintiff to pay to the defendant the sum of $33,264.80.

2                     It is not disputed by the plaintiff that the plaintiff owes that sum to the defendant. It follows that s 459H(1)(a) of the Act does not apply, there being no “genuine dispute between the (plaintiff) and the (defendant) about the existence or amount of debt to which the demand relates”.

3                     Section 459G of the Act provides:

459G Company may apply

 (1)      A company may apply to the Court for an order setting aside a statutory demand served on the company.

 (2)      An application may only be made within 21 days after the demand is so served.

 (3)      An application is made in accordance with this section only if, within those 21 days:

(a)       an affidavit supporting the application is filed with the Court; and

(b)       a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.

4                     Section 459H(1) of the Act provides:

459H   Determination of application where there is a dispute or offsetting claim

(1)       This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

(a)       that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

(b)       that the company has an offsetting claim.

…

(5)       In this section:

…

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).

5                     459J of the Act provides:

459J    Setting aside demand on other grounds

(1)       On an application under section 459G, the Court may by order set aside the demand if it is satisfied that:

(a)       because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

(b)        There is some other reason why the demand should be set aside.

(2)       Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect.

6                     It is not suggested by the plaintiff that there is a defect in the demand, or that, because of a defect in the demand, substantial injustice would be caused unless the demand is set aside.

7                     The plaintiff asserts that the demand should be set aside, because it has offsetting claims which exceed the amount of the demand. 

8                     The question for decision on this application is whether the plaintiff has an “offsetting claim” in excess of the “admitted amount”.  The admitted amount is the amount of a judgment debt  for taxed costs in the High Court of $33,264.80. 

9                     It is urged by the defendant that there is also a question of whether any conditional order concerning at least the applicant’s reliance on any untaxed costs order(s) should be imposed.

10                  The expression “genuine claim” was considered by Hayne J in the Supreme Court of Victoria in Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACSR 362, where his Honour said:

… any application to set aside a statutory demand must be made very quickly; it must be made within 21 days.  Second, the statute contemplates a summary procedure, the only outcome of which will be an order affecting the statutory demand, not an order or judgment declaring a debt to be owing or not to be owing or ordering payment of any money sum.  Third, the only significance that the statutory demand has is that if there is a failure to comply with it then the company is deemed to be insolvent.  Thus the demand is no more than a precursor to an application for winding up in insolvency.  Fourth, an application to wind up in insolvency must be determined within 6 months (unless the court is satisfied that special circumstances justify an extension of that time): s 459R.  Firth, on the hearing of the application to wind up, the company may not oppose the application on grounds that it might have taken in any application to set aside the demand, unless those grounds are material to proving that the company is solvent.

11                  Hayne J then said:

These matters, taken in combination, suggest that at least in most cases, it is not expected that the court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute.  All that the legislation requires is that the court conclude that there is a dispute and that it is a genuine dispute.

12                  To like effect are the observations of Thomas J in the Supreme Court of Queensland in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, where his Honour said at 605-606:

There is little doubt that Division 3 is intended to be a complete code which prescribes a formula that requires the Court to assess the position between the parties and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim.  That is not to say that the Court will examine the merits or settle the dispute.  The specified limits of the Court’s examination are the ascertainment of whether there is a “genuine dispute” and whether there is a “genuine claim”.

13                  Lockhart J in Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 referred to the above observations of Hayne J and Thomas J, and also to the observations of Beazley J in Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341 at 356-7.

14                  Lockhart J said at 39:

… what appears clearly enough from all the judgments is that a standard of satisfaction is not a particularly high one …

Certainly the court will not examine the merits of the dispute other than to see if there is in fact a genuine dispute.  The notion of a “genuine dispute” in this context suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous.   It must be satisfied that there is a claim that may have some substance.  On the other hand the court must be careful, because if all an applicant has to do is to assert both a claim and some basis for it, without more, it would mean in almost every case that the court would set aside statutory demands where application is made to that effect.  Plainly that is not what the legislature intended by introducing this new regime.

15                  Palmer J in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 at [18] said:

In my opinion, a genuine offsetting claim for the purposes of CA s 459H (1) and (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 purposes of s 459H.

16                  Austin J in Gujarat NRE Australia v Williams [2006]NSWSC 518said:

[20]    Effectively, the standard to be reached to persuade a court that there is an offsetting claim is the same as the standard to be reached to persuade a court that there is a genuine dispute between the alleged debtor and the party claiming to be creditor.  The most effective cited description of the standard for establishing a genuine dispute is a passage in the judgment of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787.  There, his Honour said that the expression “genuine dispute” connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises in an application for an interlocutory injunction or for the extension or removal of a caveat.

[21]    It is of fundamental importance for parties to proceedings of this kind to understand that the court does not enter into the merits of any dispute between the parties.  The court merely satisfies itself, to the standard described by McLelland CJ in Eq, that the dispute, or the assertion of an offsetting claim, is “genuine”.  If it is, then the statutory demand procedure is out of place.  The whole purpose of the reforms introduced to corporate insolvency law, when the present Pt 5.4 was introduced, was to remove litigation about disputed claims from the winding up process.  That is why courts have said, time and again, that if a creditor is aware that there is a dispute, asserted on behalf of the alleged debtor with sufficient plausibility to meet that relatively low threshold described by his Honour, issuing a statutory demand is wholly inappropriate.  The correct course is to have the dispute resolved by proceedings asserting the debt.

17                  And finally, there are observations by Heerey J in Andi-Co Australia Pty Ltd v Meyers [2004] FCA 1358, which are apposite in the context of the affidavit material filed in the present application.  Heerey J said of the case before him at [17]:

… Mr Meyers has filed a substantial amount of affidavit material sworn by himself and others.  However, it needs to be kept in mind that the issue is not whether his version of events is more plausible than Andi-Co’s, but whether the alleged debts are the subject of genuine disputes and whether the alleged offsetting claims are genuine, that is to say, real and authentic as opposed to false, illegitimate, phoney, counterfeit and false.  Accordingly, I shall not engage in an assessment of the rival merits.

18                  The plaintiff asserts two offsetting claims.  The first of the offsetting claims relates to what is said to be a genuine claim of the plaintiff against the defendant for the infringement of three patents, arising out of the defendant’s manufacture and sale of water meter assemblies. 

19                  The second offsetting claim relates to an order for costs made in favour of the plaintiff against the defendant by me on 9 August 2004 in action Q69 of 2003. 

20                  The claim in respect of damages for patent infringements is in the context of assertions that the defendant and others have infringed one or more of the applicant’s water meter invention patents. 

21                  Mr Stack, a director of the plaintiff, says in his supporting affidavit that on 30 August 1990 he filed a patent application in respect of a water meter assembly device, which was invented by Mr Alan Grieves and himself.  He says that subsequent to the filing of a patent application in respect of that invention, a Petty Patent No 645740 was issued in Mr Stack’s name. 

22                  Mr Stack says that in approximately 1994, the defendant won a Brisbane City Council tender for the supply and installation of approximately 60,000 water meters. 

23                  It is asserted by Mr Stack that the design of those meters, the subject of the tender to the Brisbane City Council, infringed Petty Patent No 645740.

24                  Mr Stack says that on 27 October 2005, the plaintiff, through its assignors, was granted the following Letters Patent:

(a)       No. 780782 (Appln. No: 32815/95 – Divisional of 85236/91)

(b)       No. 781173 (Appln. No: 48033/01 – Divisional of 780782 85236/91)

(c)        No.781174 (Appln. No: 43779/01 – Divisional of 780782 85236/91).

25                  Mr Stack deposes to purchasing water meter assemblies manufactured by the defendant from a Tradelink Plumbing Centre at Camp Hill, and from a Reece plumbing store at Capalaba in Brisbane.

26                  Mr Daniel Patrick Fox, a registered Patent Attorney since January 1997, deposes in his affidavit filed 14 September 2007 that the water meter assemblies, purchased by the Brisbane City Council from the defendant and Davies Shephard, embodied the invention of Stack and Grieves in Petty Patent No.645740 and Petty Patent No. 662284, “both of these petty patents deriving from application No 85236/91 as divisionals.” 

27                  Litigation involving those petty patents in the Federal Court [(1999) 47 IPR 525] resulted in the plaintiff losing on the issue of entitlement, Cooper J otherwise being satisfied that the invention was a manner of new manufacture and was also novel, inventive, and useful.

28                  Mr Fox says: 

5.         GST [the plaintiff] is also the Patentee of three more recent patents (“the three new patents”) which also derive from application No. 85236/91 as divisional either directly or indirectly, those patents being No. 780782 (32815/95), No. 781173 (46033/01), and No. 781174 (43779/01) and all three new patents relate to the same “invention” as the two petty patents previously mentioned.  In fact, the claims of patent No: 781174 are identical to the claims of one of the petty patents, namely, No: 645740.  The claims of patent No: 781173 are identical to the claims of the other petty patent, namely, No: 662284.

29                  The tenor of his evidence is that those commercially sold water meter assemblies infringe the patents of the plaintiff.

30                  The defendant puts in issue the issues of patent validity and infringement and relies on the affidavit of Mr Terrence John Collins, a registered patent attorney since 1966.

31                  Mr Collins says in his affidavit filed 8 October 2007 that the validity of the three patents relied on should not be assumed because, unlike the plaintiff’s earlier petty patents, they are to be tested by reference to world wide prior art.  Mr Collins says that because Patent No 781173 and Patent No 781174 are “stand alone” applications, (that is, without the priority dates of earlier divisionals) they are invalid because of prior disclosure of the invention in earlier patents.

32                  Further, for reasons which he elaborates, he expresses the view that the defendant’s meter does not infringe the relevant patents.

33                  Mr Collins expresses the view that the plaintiff has no reasonable prospects of success in a patent infringement claim against the defendant. 

34                  The defendant also relies on evidence to suggest that there was a loss on sales of 1095 units of the defendant sold through commercial outlets during the relevant period of $8.79 per unit, contrasted with the estimate by Mr Stack of $70.00 per unit. 

35                  Clearly there is a dispute as to the quantum of damages if infringement is established.  The contention of the plaintiff is that damages for infringement are not calculated upon profit made by the infringing party, but upon the loss to the party whose patent has been infringed, noting also that there is also power for the award of exemplary damages.

36                  The contention is that at a minimum, applying the estimate of profit of $70 per unit, (an amount referred to by counsel for the defendant as simply a “guesstimate”) to the admitted sales of 1095 units, the quantum of damages for infringement greatly exceeds the defendant’s claim in the statutory demand.

37                  There are clearly serious issues in dispute as to the validity of the plaintiff’s patents, as to the infringement of them, and as to the quantification of any damages claim.  In particular, Mr Collins has gone into detail in support of his contention that the patents are invalid.

38                  Mr Fox, for the plaintiff, asserts that the three new patents derive from Application No 85236/91 as divisionals “either directly or indirectly” and all three new patents relate to the “invention” as did the two earlier petty patents.

39                  Having regard to the authorities earlier referred to, it is not appropriate that there be a resolution of these factual disputes.  While there is much force in the criticisms of the generality of the assertions made by the plaintiff, I am satisfied in the words of Lockhart J that the claim in respect of damages for infringement is one “that may have some substance.” 

40                  Having regard to the expert evidence of Mr Fox, the claims are, it seems to me, genuine claims put forward in good faith, and which are more than mere assertion. The claims are seriously disputed, as the expert evidence of Mr Collins demonstrates. Without looking too deeply at the issues of validity and infringement, the claims of the plaintiff in respect of damages for infringement are such that they have “some real chance of success”, to use the words of Young J in Intag Microelectronics Pty Ltd v AWA Ltd (1995) 18 ACSR 284 at 289. 

41                  In my opinion, the conclusion that there is an offsetting claim in respect of the costs orders made by the Court on 9 August 2004 are even stronger.

42                  On that day, the Court ordered that the decision of the AAT to affirm the decision of the Commissioner of Patents to decline an extension of time was set aside, and the matter was remitted to the AAT for consideration according to law.  The Court ordered that the second respondent pay the costs of the applicant to be taxed if not agreed.

43                  In respect of the order for costs therein, Mr Stack says:

34.              Those costs have been assessed by cost assessors except for photocopying fees.  The firm of Hickey & Garrett has made an assessment in the sum of $97,825.58.  Exhibited hereto and marked with the letters “GS-6” is a copy of a letter from Hickey & Garrett addressed to my solicitor.

44                  The letter referred to in that paragraph is not consistent with what Mr Stack says of it.  The body of the letter is in the following terms:

Re:      G S Technology Pty Ltd –v- Commissioner of Patents and Anor

-69 of 2003

G S Technology Pty Limited –v- Commissioner of Patents and

G S Technology Pty Ltd – 174 of 2004

This firm was engaged to prepare Bills of Cost for G S Technology Pty Ltd in respect of the two matters referred to above.  The total costs relating to the solicitor’s professional fees and outlays, excluding the photocopying costs relating to the Law Reports for the Court, have been delivered in the sum of $14,775.58.

Senior Counsel’s fees and Junior Counsel’s fees have been submitted in the sum of $80,050 inclusive of GST.  The Bills, including the anticipated costs of the assessment, totals $97,825.58.

45                  The reference to proceedings 174 of 2004 is a reference to an application for an extension of time to appeal from the orders I made on 9 August 2004.

46                  On 12 October 2004, solicitors for the defendant filed a notice of discontinuance in that application.  That notice of discontinuance said in note 1:

Under subrule 3(1) of Order 22, a party who discontinues a proceeding, or a part of a proceeding, without the leave of the Court and without the consent of the other party or parties, is liable to pay the costs of the other party, or parties, occasioned by the proceeding or the part of the proceeding that is discontinued.

47                 Against that background, the position with respect to costs is not free from some uncertainty.  The letter says “The total costs for solicitor’s professional fees and outlays “have been delivered” in the sum of $14,775.58.”

48                  As opposed to that terminology, the letter says “Senior Counsel’s fees and Junior Counsel’s fees have been submitted in the sum of $80,050 inclusive of GST.”

49                  The letter commences:

This firm was engaged to prepare Bills of Costs … in respect of the two matters referred to …

50                  And the last sentence says:

The Bills, including the anticipated costs of the assessment, totals [sic] $97,825.58.

51                  The significance of the difference in the term between “delivered” and “submitted” is not clear.  I think the figure of $97,825.58 is simply the addition of the solicitor’s professional fees and outlays, and the fees for Senior and Junior Counsel, together with the costs of the assessment described as  “anticipated” of the assessment, being a rounded figure of $3,000.00.

52                  Notwithstanding the significant evidentiary difficulties and uncertainties concerning a cross claim for costs by the plaintiff against the defendant, I am satisfied that there is a claim for costs in respect of 69 of 2003.  I am further satisfied that in respect of both proceeding 69 of 2003, and proceedings 174 of  2004, there is a cross claim by the plaintiff against the defendant that exceeds the amount of the debt in the statutory demand.

53                  On this cross demand also, I would set aside the statutory demand.

54                  I set aside the statutory demand on each of the bases referred to above. While acknowledging the paucity and lack of precision in the evidence concerning the quantum of the cross demand in respect of costs in proceeding 69 of 2003 and 174 of 2004, it is not appropriate in this case to set aside the demand on condition that the applicant make application for an assessment of costs.

55                  Such an order was made by Hely J in Fleur De Lys Pty Ltd v Jarrett (2004) 51 ACSR 238.

56                  The application by the plaintiff seeks an order for costs on an indemnity basis, relying on the fact that its solicitor had corresponded with the solicitor for the defendant indicating that the plaintiff claimed that it had a cross demand for damages for infringement of patents.  The defendant nonetheless persisted in resisting the setting aside of the statutory demand.

57                  In my opinion, it is not appropriate that there be an order for costs on an indemnity basis. 

58                  My present view is that it is appropriate to make the usual order, that the defendant pay the plaintiff’s costs of and incidental to the application to set aside the statutory demand, to be taxed if not agreed. 

59                  I will, however, hear the parties as to the costs order I should make.

Associate:

Dated:         30 November 2007