A creditor who wishes to issue a statutory demand should beware!

The case of Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344 appears to have lowered the bar for the standard of evidence required to set aside a statutory demand by permitting allegations of conversations to be enough to set aside a statutory demand even where documentary evidence casts doubt on those allegations.

Statutory demand process

Under section 459E of the Corporations Act 2001 (Cth.), a creditor may serve a statutory demand on a company if the creditor is owed more than $2,000.

Following service of the statutory demand, the debtor company has two choices:

1. Pay the debt in full within 21 days; or
2. Apply to set aside the statutory demand within that same period.

Grounds to set aside a statutory demand

Ordinarily, an application to set aside a statutory demand will be made on the basis that there is both a “genuine dispute” as to the existence of the debt and an “offsetting claim” the debtor company presses against the issuer of the demand.

In Britten-Norman an application to set aside a statutory demand was brought on evidence which seemed to fall below the usual level the court have traditionally required to set aside a statutory demand.  The case serves as a warning to creditors of the risks in issuing a statutory demand when there may be some dispute alleged as to the debt or an offsetting claim even where the evidence led by a debtor is considered weak or would be inadmissible at final hearing.

The facts

The creditor company served a statutory demand with a supporting statutory declaration on 4 December 2012 for a debt of $128,421.50.  The debt related to the use of an aircraft mounted “Surveillance Management System” used by the debtor between April 2010 and September 2011.

On 13 December 2012, the debtor filed an application to set aside the demand under section 459G of the Corporations Act on the basis that the debtor had a genuine dispute and an offsetting claim in relation to the debt. The application was supported by an affidavit from the managing director of the debtor.

That affidavit deposed that:

1. The debtor operated a sales and marketing company for Britten-Norman aircraft in Australia, Asia and the Pacific and was seeking contracts for aerial surveillance and mapping;
2. A director of the creditor made certain representations as to the accuracy of their surveillance system, specifically that it would be adequate for the debtor to win contracts to work with the NSW Rural Fire Service;
3. The surveillance system was inadequate and did not meet the accuracy required during trials of the system and the NSW Rural Fire Service did not accept the debtor’s tender;
4. The debtor then requested that the creditor remove the surveillance equipment from the debtor’s aircraft;
5. After this the director of the creditor represented that the surveillance system had been fixed and updated;
6. The debtor used the surveillance system again in trials in September 2011 with the Victorian Department of Sustainability and Environment;
7. Once again the debtor failed to secure the contract due to the surveillance system being inaccurate; and
8. Following the replacement of the surveillance system with a rival company’s system, the debtor was able to secure contracts for aerial surveillance and mapping operations.

The debtor claimed loss of gross profits of $144,000 which it claimed it would have made had the creditor’s surveillance system worked as represented.

The creditor’s director provided an affidavit denying the various conversations alleged by the debtor and alleged that he never made any specific promises about the accuracy of the surveillance system.  A series of email communications from the debtor’s director were led in evidence by the creditor including emails expressing gratitude for the creditor’s support and acknowledgments of the amounts owed.

Supreme Court Decision

The Supreme Court found at first instance that the debtor’s evidence had: –

1. little to no documentary evidence relating to the purchase of the alternative surveillance system; and
2. no evidence to the debtor’s anticipated profit.

In the email correspondence, there had also been no complaint as to the accuracy of the surveillance system.

The Court noted that in Royal Premier Pty Ltd v Taleski [2001] WASCA 48 at [57], it was held that an absence of evidentiary material from which damage suffered by the applicant could be calculated was fatal to an application to set aside a statutory demand.

The Court then held that even if it was satisfied that a serious question had been established as to the existence of misleading or deceptive conduct or breach of contract, the material before the Court was not sufficient to conclude that the debtor had sustained loss or damage in an amount that exceeded that claimed in the statutory demand. As a result, the application was set aside.

The debtor appealed.

Court of Appeal decision

The Court of Appeal confirmed the approach of McLelland CJ in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 that the expression “genuine dispute” involves a party raising a plausible contention requiring investigation and this raised the same sort of considerations as the “serious question to be tried” criterion that applied in the case of an interlocutory injunction.

That reasoning was applied in a number of cases, including in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 where it was said: –

“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… Beyond a perception of genuineness (or the lack of it) the court has no function… The essential task is… to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it)”.

The Court also referred to the case of Tokich Holdings pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) [2004] NSWSC 527 where it was held that evidence which may be inadmissible as hearsay or opinion to establish a fact relevant to indebtedness would not on that account be inadmissible to establish a fact relevant to whether there was genuine dispute about indebtedness.

Further, the Court considered the form of the affidavit read in support and noted that in Graywinter v Gas & Fuel Corp [1996] FCA 1983 Sundberg J noted that an affidavit “may read like a pleading” and still be acceptable for the reason that an application under s.459G of the Act need not be in a format that would be admissible at final hearing.  That is even if the evidence led in the application is disputed or unlikely to be accepted on final hearing, it can still provide a basis to establish a genuine dispute for the purposes of setting aside a statutory demand.

The Court was of the view that there was a “plausible contention requiring investigation” giving rise to a genuine dispute despite the absence of contemporaneous documentation to support the allegations in the affidavit.

In considering whether the offsetting claim was greater than the amount in the statutory demand, the Court held that: –

1. it was sufficient to address the claim based on misleading or deceptive conduct;
2. but for the misleading and deceptive conduct, the debtor would not have incurred any liability to the creditor said to be the amount in the statutory demand; and
3. that amount was not the amount of liabilities that the debtor had incurred as the debtor had already paid a portion of the total amount charged by the creditor.

The Court allowed the appeal and set aside the statutory demand.

Comment

The courts have made clear that a Statutory Demand is not intended to be used as a debt collection mechanism.   While a party seeking to set aside a statutory demand must show that a “genuine dispute” or offsetting claim is more than “fanciful,” this decision appears to lower the standard of evidence that will be required to establish a “genuine dispute.”  The Britten-Norman case has been cited in two more recent decisions ( and In the matter of Tesrol Holdings Pty Ltd [2013] NSWSC 1534) neither of which seemed to involve evidence falling below the usual standard of evidence expected to be led in applications to set aside statutory demands.  As such, lawyers should be careful to ensure a speedy and careful analysis of all the facts surrounding the debt and any dispute or offsetting claim and the preparation of comprehensive evidence in preparing an application to set aside a statutory demand and not be led into complacency by the absence of admissible evidence being led by a debtor.