Setting up your offsetting claim

Last week, Master Sanderson handed down a decision[1] in relation to applications to set aside statutory demands based upon an offsetting claim.  It is a short point, but an important one.

Steelfab was the manufacturer of lined metal tanks for holding fluids.  BMS supplied a particular type of liner to Steelfab, to be used in the tanks.  A statutory demand was issued by BMS to Steelfab in the amount of $146,252.  The debt was related to unpaid invoices issued by BMS to Steelfab for the supply of liners.

Steelfab asserted that the liners supplied by BMS were not fit for purpose in that they would taint the fluid contained in the tank, or fail because of shrinking or cracking.  BMS conceded during the hearing before Master Sanderson that Steelfab had raised at least an arguable case that the liner supplied by BMS was faulty.

It was BMS’ position that Steelfab had not quantified its offsetting claim for the purposes of section 459H(2) of the Corporations Act 2001 (Cth).  Relevantly, section 459H(2) provides that where the Court is satisfied that the company has an “offsetting claim”, then the Court must calculate the substantiated amount of the statutory demand by deducting the “offsetting total” from the amount of the admitted debt.

Relevantly, 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 did not arise out of the same transaction or circumstances as a debt to which the demand relates).  And offsetting total is defined (relevantly) as the “amount of the claim”.

There was evidence before Master Sanderson that the cost of replacing a liner was $3,000.  BMS had supplied liners for 594 tanks.  On that basis, Steelfab asserted that it an off-setting claim in the amount of $1,782,000 and that the statutory demand should therefore be set aside (because that amount was far greater than the amount of the statutory demand).

However, there was evidence that only 6 to 15 liners had actually been replaced.  On the other hand, there was evidence that in most cases, the liners would inevitably fail and will have to be replaced.  Thus, BMS argued that because most of the liners had not failed, that means that the required calculation of the ‘offsetting amount’ could not be made.

Master Sanderson referred to the statement of the basic principle, in Karimbla Construction Services Pty Ltd v Alliance Group Building Services[2] by Barrett J:

Despite the clear need, according to the terms of the legislation, to quantify an off-setting claim in money terms, it is not necessary that the party seeking to have the statutory demand set aside should particularize the amount of the claim to be last dollar and cent. Particularly where the claim is of an unliquidated kind, there may be various way of approaching the issue of assessment of damages and there may be elements of the assessment that are, of necessity, based on a broad estimate … Of course, the narrower the margin between the alleged debt and the plaintiff’s estimate or initial quantification the greater will be the need for particularity in asserting the amount of the offsetting claim.

Here, Master Sanderson concluded that the proper approach was to accept that all the liners would need to be replaced.  He found that BMS arguably had an obligation to replace the liner in each tank sold.  BMS knew the liner was defective and the purchaser of the tank didn’t get what they paid for.  Although only a limited number of tanks had been repaired so far, the better view was that BMS had a present liability and that is the figure for the offsetting claim.

He set aside the statutory demand on the basis that the offsetting claim was greater than the amount of the demand.

Lavan Legal comment

Before issuing a statutory demand, creditors should always carefully consider not just whether there is a dispute as to the debt, but also whether the debtor asserts an offsetting claim.  It is not necessary for the recipient of a statutory demand to demonstrate their offsetting claim with absolute precision and it seems that the Court (or at least Master Sanderson) will take a fairly broad brush approach to the calculation of offsetting claims.

1 Steelfab Engineering Pty Ltd v BMS Group Australia Pty Ltd  [2015] WASC 299
2 Karimbla Construction Services Pty Ltd v Alliance Group Building Services Pty Ltd [2003] NSWSC 617
Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.