Obtaining instructions Four grounds for setting aside a statutory demand

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1 Setting aside statutory demands: A survival guide By FARID ASSAF Establishing the right grounds, presenting a valid argument and complying with procedural requirements are essential elements in fulfilling a retainer to have a demand for payment set aside. Farid Assaf is a barrister in Blackstone Chambers and author of "Statutory Demands - Law and Practice", published by LexisNexis Butterworths, [email protected]. It has probably happened to every solicitor in general practice at least once - a corporate client calls, wanting to know what they should do with this thing called a 'statutory demand'. More often than not, the call is received only a few days before the period for compliance with the demand expires. Failure to comply means your client will be presumed to be insolvent, paving the way for a winding up application. What's worse, you can't extend the time for compliance with the demand, not even by agreement. 1 Recent cases such as Ocerog Pty Ltd v Pr Finance Group Ltd, 2 where Palmer J described the affidavit in support of an application to set aside a demand as "utterly fail[ing] to give sufficient particularity" highlights what can go wrong in preparing such applications under severe time constraints. The purpose of this article is to provide a brief but practical guide to practitioners in setting aside a statutory demand, and better equip practitioners to deal with this nightmare scenario. Obtaining instructions The first step of course is to obtain proper instructions. After all, not every demand will be capable of being set aside. A company served with a statutory demand has available to it three options if it wishes to avoid the statutory presumption of insolvency created by s.459c(2) of the Corporations Act The first is to pay the amount demanded or to "secure or compound to the reasonable satisfaction of the creditor". 4 The second is to reach a compromise with the person making the demand. The third option is to make an application under s.459g of the Corporations Act to have the demand set aside. If the decision is made to set aside the statutory demand, a statutory basis for doing so must be identified (explained in the next section below). Practitioners should ensure that those instructing them to make any application to set aside a demand have the proper authority. 5 Four grounds for setting aside a statutory demand There are only four grounds contained in Division 3 of Part 5.4 for setting aside a statutory demand. The court's power to set aside a statutory demand under s.459h or s.459j is enlivened if the court is "satisfied" that: (a) there is a genuine dispute between the company and the person serving the statutory demand about the existence or amount of a debt to which the demand relates; 6

2 (b) the company has an offsetting claim; 7 (c) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; 8 or (d) there is some other reason why the demand should be set aside. 9 A company served with a statutory demand may rely upon more than one ground. 10 The court only has the power to set aside a demand that has been validly served upon a company. 11 Where a company disputes the demand that has been validly served, the proper course is for the company to apply for a declaration that the purported service was ineffective, or to rely upon ineffective service as a point in opposition to any winding-up application. 12 In practice, however, it is quite common for applications to set aside a statutory demand to also deal with the issue of service. Before dealing with the crucial procedural requirements, I discuss very briefly the above four grounds for setting aside a statutory demand. Genuine dispute By far the most common ground for seeking to have a demand set aside is the genuine dispute ground. The genuine dispute must relate to the existence or amount of the debt. 13 The company seeking to set aside the demand need only establish that there is a genuine dispute about the existence or amount of the debt, as the court's task is simply to determine the genuine level of a claim, and not the likely result of it 14 (this has implications for the affidavit in support discussed below). In the main case of Eyota Pty Ltd v Hanave Pty Ltd, 15 McLelland CJ in Eq 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 on an application for an interlocutory injunction". 16 The threshold for establishing a genuine dispute is a low one and by no means difficult or demanding. 17 In determining whether there is a genuine dispute, the court may resolve short points of law or the construction of documents where there is no conflicting evidence, 18 although the occasions in which this will be possible are likely to be rare. Practitioners should remember that an application to set aside a statutory demand is not the proper forum for assessing the credibility of witnesses and, as such, cross-examination will rarely be allowed. Offsetting claims The expression "offsetting claim" is defined in s.459h(5) to mean a genuine claim the company has, as opposed to will have, against the person serving the demand by way of counter claim, 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). 19 The offsetting claim must exist at the date of the hearing of the application to set aside the statutory demand. 20 Crucially, the offsetting claim must be something sounding in money. 21 Unlike a debt that supports a statutory demand, an offsetting claim is not confined to debts that are due and payable. 22 Accordingly, a claim for unliquidated damages may constitute an offsetting claim provided the claim is not statute barred or otherwise

3 prevented from being advanced. Any offsetting claim sought to be advanced by the debtor company must be genuine in the sense of being authentic or bona fide. 23 As is the case with genuine dispute cases, the court will not engage in an assessment of the merits of any offsetting claim or its likely success. 24 The threshold for establishing a genuine offsetting claim is relatively low. 25 A company seeking to establish that it has an offsetting claim need not prove its offsetting claim by adducing evidence, such as might be advanced at a trial. What is required, however, is for the company to identify, with appropriate evidence "the genuine level" of an offsetting claim, 26 although much less than full and complete proof is required to establish genuineness. 27 The courts have adopted a pragmatic approach in evaluating offsetting claims, and the company seeking to have the demand set aside is not required to "particularise" its offsetting claim "to the last dollar and cent". 28 Quite often a "broad brush" approach is utilised. 29 Defect in the demand Paragraph 459J(1)(a) allows the court to set aside a statutory demand if it is satisfied that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside. Paragraph 459J(1)(b) allows the court to set aside a demand if it is satisfied there is "some other reason" why the demand should be set aside. Paragraphs (a) and (b) of s.459j(1) are mutually exclusive 30 - a statutory demand that contains a defect can only be set aside where the defect causes substantial injustice to the company served with the demand. 31 The word "defect" when used in s.459j is a term of wide import, 32 and this is reflected in the inclusive definition of "defect" in s In the leading decision of Topfelt Pty Ltd v State Bank of New South Wales, 34 Lockhart J of the Federal Court observed that the ordinary usage of "defect" means "a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection". 35 The defect must be "in the demand", that is, the statutory demand itself, and not to any other document or thing such as the affidavit in support. 36 Minor defects such as the omission of a signature from the demand, 37 the omission of notes from the demand, 38 and misdescriptions of persons, entities, addresses and dates will not usually justify the setting aside of a statutory demand. 39 In order for the court's power to set aside a demand to be enlivened, the demand must cause "substantial injustice". The substantial injustice referred to in s.459j(1)(a) "must be an injustice caused to the company receiving the demand, and it is not to be treated as a punishment on the person giving the demand for being lax in not complying with the form of the demand". 40 Whether substantial injustice will be caused unless a demand is set aside must be addressed in a particular context in which the defect appears, 41 and the practical significance of a defect will vary according to each particular case. 42 Generally, a demand that is likely to mislead, confuse or fail to properly inform a debtor of the substantive requirements of s.459e will likely cause substantial injustice within the meaning of s.459j(1)(a). In Main Camp Tea Tree Oil Ltd v Australian Rural Group Ltd, 43 for example,

4 the statutory demand showed two completely different amounts being claimed by the creditor. 44 The main point is that both the statutory demand and accompanying affidavit put the recipient company on notice in an unambiguous way of the matters the legislation requires. 45 So, for example, where a demand contains misleading or ambiguous descriptions of the debt claimed, 46 the court will intervene to set the demand aside. Some other reason The expression "some other reason" referred to in s.459j(1)(b) refers to a reason not otherwise indicated by the Corporations Act as a ground for the setting aside of a statutory demand, namely a defect in the statutory demand. 47 The discretion conferred by s.459j(1)(b) is, not surprisingly, a discretion of broad compass. 48 The "other reasons" contemplated by s.459j(1)(b) include conduct "that may be described as unconscionable, an abuse of process, or which give rise to substantial injustice". 49 A court will not act under s.459j(1)(b) unless the decision to do so is supported by "some sound or positive ground or good reason which is relevant to the purposes for which the power exists". 50 The sound or positive ground, or good reason to set aside a demand under s.459j(1)(b), must be one that is consistent with promoting the legislative scheme. The fact that a company may be solvent is not relevant to setting aside a statutory demand. 51 The best way to illustrate is through the use of examples of courts setting aside a statutory demand for "some other reason": the failure to accompany a statutory demand with an affidavit required by s.459e(3); 52 failure by the creditor to provide proper evidence of the five substantive matters referred to in Form 7, for example failing to verify that the debt is due and payable; 53 and where the accompanying affidavit is not sworn contemporaneously with the statutory demand - an accompanying affidavit sworn even a few days before a statutory demand will be liable to be set aside for "some other reason". 54 Affidavit in support of application to set aside statutory demand One of the most common problems in applications to set aside a statutory demand relates to the affidavit in support of the application. An affidavit in support of an application to set aside a statutory demand must in some way support the particular ground relied upon. 55 Fortunately, the courts have recognised the onerous burden placed by s.459g and have tended to adopt a pragmatic and commercially sensible approach in determining whether an affidavit in support is sufficient for the purposes of s.459g. At a minimum, any affidavit in support should provide an evidentiary basis substantiating the grounds put forward by the company as to why the demand should be set aside or varied. Identification of the particular grounds in the affidavit need not be identified by reference to particular provisions of the Corporations Act 56 and the court can draw necessary inferences as to what ground is relied upon. For example, where the ground relied upon is a defect in the demand, the court can infer that s.459j is being relied upon simply by examining the

5 demand. 57 In genuine dispute cases, the Graywinter 58 principle must be strictly followed. That is, the affidavit must say something that promotes the company's case - it must in some way advance, further or assist the company's cause, which is to have the statutory demands set aside. A bare claim or mere assertion that the debt is disputed is not sufficient. 59 The grounds for setting aside the demand need not necessarily be expressly raised by the supporting affidavit and can in fact be raised by necessary inference, or by a reasonably available inference, provided they are raised. 60 The affidavit in support of an application to set aside a statutory demand should have annexed to it a copy of the demand or, at the very least, the affidavit should contain evidence of the existence and content of the demand. 61 Filing and serving the application and supporting affidavit A company seeking to set aside a statutory demand must file an originating process 62 and an affidavit in support. These should be filed together. 63 Both the originating process and the affidavit in support must be filed and served on the person who served the demand on the company within 21 days after the demand is served. 64 The importance of this cannot be overstated - the 21- day time limit for making an application to set aside a statutory demand cannot be extended. 65 Generally, one application should be made for each statutory demand to be set aside. 66 An originating process must be in accordance with Form 2 and state each section of the Corporations Act under which the proceeding is brought and also state the relief sought. 67 Practitioners should also comply with Corporations Rule 2.4A(3) by carrying out a search of the records maintained by the Commission in relation to the applicant company no earlier than seven days before the originating process is filed, and not later than the day before the hearing of the application, and either annex it to the affidavit in support or tender it on the hearing of the application. It is necessary to serve a "copy" of the application on the person who served the demand (this is the company serving the demand, not the process server or other person who actually served the demand). 68 "Copy" in this context means reproduction of the original, that is, an exact copy of the application and the affidavit in support (including all annexures). 69 The copy must show the following information: the proceeding number given to the application by the court; the return date for the hearing of the application to set aside; and the seal of the court. 70 Usually, the address stipulated in the demand will be sufficient. This, however, is not the case where the creditor is an interstate corporate creditor. The provisions of the Service and Execution of Process Act 1992 (Cth) (SEPA) produce an unusual result in cases involving interstate corporate creditors - in order for interstate service upon a corporate creditor to be effective the initiating process must be served in accordance with s.9 of SEPA by either leaving the application at, or by sending it by post to, the registered office of the creditor or by personal service upon a director resident in Australia. This is

6 so even though a different interstate address for service has been specified in the demand. 71 I suggest to my clients that they utilise the services of a process server. For the modest fee involved, it is one way of guaranteeing, or at least minimising, challenges to service. While in some cases service by fax or is possible, 72 the potential for things to go wrong is not worth the risk. ENDNOTES 1. The 21-day time limit imposed by s.459g cannot be extended by agreement or by the operation of estoppel. See Roach v Bickle (1915) 20 CLR 663 at See also MGM Bailey Enterprises Pty Ltd v Austin Australia Pty Ltd [2002] 20 ACLR [2009] NSWSC All references to the Corporations Act unless otherwise stated. 4. "Compounding a debt" means accepting an arrangement for payment of the amount of the debt or of a different amount see: Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1,309 at 1,311 per Sundberg J. The securing or compounding of the debt requires "an existing coming together" by the debtor and creditor by mutual agreement see: Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd (1981) 5 ACLR 607, CLC per Legoe J. 5. See, for example, Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38, where the managing director instructing solicitors to commence an application to set aside a statutory demand did not have the requisite authority to do so. 6. Section 459H(1)(a). 7. Section 459H(1)(b). 8. Section 459J(1)(a). 9. Section 459J(1)(b). 10. Midland Imports Pty Ltd v Asia Pacific International Pty Ltd [1999] NSWSC Section 459G(1). 12. Emhill Pty Ltd v Bonsoc Pty Ltd (2004) 50 ACSR Section 459H(1)(a). 14. NT Resorts Pty Ltd v DCT (1998) 153 ALR (1994) 12 ACSR The full Federal Court took a similar approach in Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1994) 12 ACSR 785 at 787, holding that a "genuine" dispute requires that the dispute be bona fide and truly existing fact, and the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. 17. Kirrak Pty Ltd v Compass Scaffolding and Plant Hire Pty Ltd [2007] NSWSC 1001; Roadships Logisitics Ltd v Tree [2007] NSWSC Delnorth Pty Ltd v State Bank of New South Wales (1985) 17 ACSR See Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd (unreported, SC(NSW), 3 July 1998, BC ) per Santow J. 20. An offsetting claim which arises after the demand is served, and even after the proceedings to set it aside are commenced, but before the hearing, is taken into account, Noroton Holdings Pty Ltd v Sydney Land

7 Corp Ltd [1999] NSWSC 192 per Austin J. 21. Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd (1995) 17 ACSR Fleur de Lys Pty Ltd v Jarrett (2004) 51 ACSR John Shearer Ltd v Gehl Co (1995) 18 ACSR Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR W&P Reedy Pty Ltd v MacAdams Banking Systems Pty Ltd [2007] NSWSC 146 per Beazley, Santow and Campbell JJA. 26. Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR Pakall Industries (QLD) Pty Ltd v Jadhill Pty Ltd (unreported, CA(QLD), 31 March 1998, BC ). 28. Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC See for example the approach of Barrett J in Karimbla Construction Services Pty Ltd v Alliance Group Building Services Pty Ltd [2003] NSWSC Kalamunda Meat Wholesalers Pty Ltd v Reg Russell and Sons Pty Ltd (1994) 13 ACSR Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 24 ACSR First Line Distribution Pty Ltd v Paul Whiley (1995) 18 ACSR Section 9 of the Corporations Act defines defect as including an irregularity; a misstatement of an amount or total; a misdescription of a debt or other matter or a misdescription of a person or entity. 34. (1993) 12 ACSR (1993) 12 ACSR 381 at Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35. For the contrary review see the decision of Santow J in W&F Lechner Pty Ltd v Drummond and Rosen Pty Ltd (2001) 38 ACSR 42, where his Honour construed the words "defect in the demand" as comprehending the affidavit must accompany the demand. 37. Noy's Works Pty Ltd (formerly Noy's Castings Pty Ltd) v Allcast Pty Ltd [2005] WASC See the decision of Hill J in Kalamunda Meat Wholesalers Pty Ltd v Reg Russel & Sons Pty Ltd (1994) 13 ACSR 525. See also, Willard King v CT Franchises [2009] NSWSC See Hornet Aviation Pty Ltd v Ansett International Air Freight (1994) 16 ACSR Hornet Aviation Pty Ltd v Ansett International Airfreight (1994) 16 ACSR 21 upheld in Hornet Aviation Pty Ltd v Ansett Aust Ltd (1995) 16 ACSR Condor Asset Management Ltd v Excelsior Eastern Ltd (2005) 56 ACSR Adams v Lambert (2006) 225 ALR 396. This observation was made by the High Court in relation to bankruptcy notices but is equally applicable to the present context. 43. (2002) 20 ACLC (2002) 20 ACLC (2002) 20 ACLC Main Camp Tea Tree Oil Ltd v Australian Rural Group (2002) 20 ACLC

8 726 where the demand showed three different amounts being claimed, one amount in the body of the demand and two different amounts in the schedule. 47. Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC Arcade Badge Embroidery Co Pty Ltd v DCT (2005) 157 ACTR In Arcade Badge Embroidery Co Pty Ltd v DCT (2005) 157 ACTR Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 at 757 per Bryson J. 51. Master Paving Pty Ltd v Heading Contractors Pty Ltd 15 ACLC 1025 per Lander J. 52. Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 14 ACSR Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR Appellate authority for this proposition is found in the Western Australian full court decision of Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002)172 FLR Financial Solutions Australasia Pty Ltd v Predella Pty Ltd (2002) 26 WAR Scope Data Systems v Bedi O'Nelson Parkhill (2003) 199 ALR In LSI Australia v LSI Holdings [2007] NSWSC So named after Justice Sundberg's decision in Graywinter Properties Pty Ltd v Gas and Fuel Corp Superannuation Fund (1996) 21 ACSR Graywinter Properties Pty Ltd v Gas and Fuel Corp Superannuation Fund (1996) 21 ACSR See the comments of White J in Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103. This can be done by examining documents attached to the affidavit as was the case in Callite Pty Ltd v Adams [2001] NSWSC 52 per Santow J. 61. Denet Pty Ltd v Global Marketing Group International Pty Ltd (2002) 20 ACLC Corporations Proceedings Rule 2.2(1). 63. Austar Finance v Campbell [2007] NSWSC1493 at [31] per Austin J. 64. It is not sufficient that the application be filed within 21 days and served outside the 2-day period. See Australian Foods Company Pty Ltd v O'Donnell [2002] WASC See the High Court's decision in David Grant & Co Pty Limited (Receiver Appointed) v Westpac Banking Corporation and ors (1995) 184 CLR 265 at Help Desk Institute Pty Ltd v Adams (1999) 17 ACLC Corporations Rule 2.2(3). 68. Players Pty Ltd v Interior Projects and other (1996) 20 ACSR 189 at 193 per Lander J. See also Rosefarms Pty Ltd v Stourhead Pty Ltd [2000] ACTSC 3 at [24] per Higgins J and Re Marlan Financial Services Pty Ltd; Marlan Financial Services Pty Ltd v New England Agricultural Traders Pty Ltd (1999) 33 ACSR 259 at [12] per Byrne J. See also Millerview Constructions Pty Ltd v Palmer Plumbing Pty Ltd [2008] QSC 3 at [6] per Wilson J.

9 69. Robowash Pty Ltd v Robowash Finance Pty Ltd, unreported, Western Australian Supreme Court of Appeal, BC at [27] citing Gobbo J in Bailey v Hinch [1989] VR See Chelring Pty Ltd v Coombs [2000] WASC 60 and LJAW Enterprises Pty Ltd v RJK Enterprises Pty Ltd [2004] QSC 134 (application served was unsealed, contained no return date and no file number. Application held incompetent). 71. Marlan Financial Services Pty Ltd v New England Agricultural Traders Pty Ltd (1999) 33 ACSR 259 at [22] per Byrne J. See also, for example, Elan Copra Trading Pty Ltd v JK International Pty Ltd (2005) 56 ACSR 416 per Doyle CJ, Perry and White JJ where a demand served in South Australia specified the address of solicitors in New South Wales and where the full court of the South Australian Supreme Court considered it was unlikely that the requirements of SEPA could be waived: at [38]. 72. See the analysis of Austin J in Austar Finance v Campbell [2007] NSWSC 1493.