15
Jun 2018

Lest we offset – When are statutory demands inappropriate?

The courts have again confirmed that statutory demands are not an appropriate mechanism to recover a debt in circumstances where a genuine dispute or an offsetting claim exists between parties.

In the matter of Trico Constructions Pty Limited [2017] NSWSC 1831 concerned an application by Trico Constructions Pty Limited (Trico) to the Supreme Court of New South Wales (the Court) under section 459G of the Corporations Act 2001 (Cth) (the Act). Trico asked the Court to set aside a creditor’s statutory demand (the Demand) issued by the Defendant, Autolift Garage Doors Pty Limited (Autolift).

Background

Trico engaged Autolift to install garage doors at a residential property in Balmain, NSW. Autolift did not install the garage doors by the contractual due date, allegedly as a result of incorrect information provided to it by Trico concerning the dimensions of the garages and restricted access to the work site.

Despite the difficulties, Autolift issued a tax invoice to Trico following the completion of the job for $6,594.50. Trico failed to pay and a subsequent letter of demand was issued by Autolift for the full amount of the invoice. Trico sent a cheque back to Autolift for $1,094.50, a shortfall of $5,500, arguing the balance was offset due to Autolift’s alleged breach of contract.

Autolift served Trico with a creditor’s statutory demand for the balance, with Trico thereafter filing an Originating Process seeking and order under section 459H(1)(a) or alternatively 459J of the Act that the Demand be set aside.

Issue

The crux of Trico’s argument was that the Demand should be set aside as Trico had an arguable offsetting claim stemming from Autolift’s breach of contract. In contrast, Autolift contended that the breach was, at least partially, the fault of Trico. It was clear that the parties tacitly sought the Court’s determination of the dispute on the merits.

Another key issue in the case, and one that ultimately supported an arguable offsetting claim, was the fact that the concept of “trade works” in the contract, i.e. the work to be completed by Autolift , was not adequately defined. Issues arose around requests for extensions by Autolift and the timing of various stages from the installation of the doors right through to testing and certifying.

Creditor’s statutory demand procedure

Creditors can issue a statutory demand in relation to a debt under section 459E of the Act, as long as the debt is due and payable. Companies who are served with a statutory demand have 21 days to apply to the Court to have it set aside. A common presumption of insolvency arises from the failure of a corporate debtor in complying with a statutory demand. The creditor’s statutory demand procedure serves the public interest by preventing or discouraging insolvent companies from continuing to trade.[1]

Pursuant to section 459H of the Act, the court may set the demand aside if:

  1. there is a genuine dispute over the debt; or
  2. the debtor company has an offsetting claim.

A court may also set a demand aside where it contains a defect that would cause substantial injustice,[2]  or in the court’s view, whether there is ‘some other reason’ why it should be set aside.[3] ‘Some other reason’ has included grossly inflated amounts,[4] the swearing of affidavit material by persons who have no knowledge of the relevant facts,[5] or where the surrounding conduct or service of the demand amounts to an abuse of process.[6]

Importantly, while some parties attempt to use statutory demands as a means of collecting disputed debts, the Courts have been quite clear that this is an improper purpose.[7]

The Court

The Court acknowledged the compelling evidence Autolift had in support of its claim against Trico. Despite this, the court stressed that Autolift commenced proceedings not for the purposes of a hearing on the merits but rather to invoke the creditor’s statutory demand procedure for the purposes of compelling Trico to pay the full amount of the invoice. In the Court’s view the creditor’s statutory demand process:

“…is only appropriate in circumstances [where] there is no genuine dispute about, and no offsetting claim in respect of, the amount claimed in the Demand.”

In relation to the dispute, the Court noted that there were ultimately two competing constructions of the contract, both of which result from the insufficiency of the definition of “Trade Works”, and both of which have inconvenient consequences for one or the other party.

Unsurprisingly, the Court found that these issues were matters which a court cannot, and should not, finally determine in a summary application of this kind. In those circumstances, the Court found  in favour of Trico’s submission that Trico’s contention that “Trade Works” included commissioning (inspection and testing), and as a consequence, gave rise to an offsetting claim.

The Court acknowledged the disappointment that must have been felt by Autolift in having its Demand set aside where it otherwise had a strong claim for payment. However, the Court indicated:

“[the Trico judgment] must be approached with a proper understanding of the creditor’s statutory demand regime, and the fact that it is not properly available for debts where there is a genuine dispute or an offsetting claim. Once that is understood, then the result in this case is predictable”.

Lessons

The Courts have again sent a clear message to litigants that it will not look favourably on a party who seek to use the creditor’s statutory demand procedure as a mechanism for debt recovery. Existing case law confirms that the statutory demand procedure serves a broader public policy rationale in preventing insolvent companies from continuing to trade. Creditors seeking to recover a debt owed, particularly a debt not based on a court judgment or an unliquidated amount, should be alive to the serious consequences that follow successful resistance to a Demand.

In relation to disputed debts, the bar for an offsetting claim is not high. A debtor merely needs to demonstrate that there is ‘an issue deserving of a hearing’ that is arguable, made in good faith and not vexatious.[8]

Creditors also need to be aware of the prospect that a company who successfully sets aside a statutory demand will often be entitled to recover the legal costs of resisting the application.

For more information contact ERA Legal.

 

[1]Scolaro’s Concrete Construction Pty Ltd v Schiavello Commercial Interiors (Vic) Pty Ltd (1996) FCR 319 (Sheppard J)

[2] Corporations Act 2001 (Cth) s 459J

[3] Ibid, s 459J(2)

[4] First State Computing Pty Limited v Kyling [1995] 13 ACLC 939

[5] B&M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433

[6] Hoare Bros Pty Ltd v Deputy Cmmr of Taxation (1996) 62 FCR 302

[7] Lifese Pty Ltd v Lee Crane Hire Pty Ltd [2012] FCA 302, [22]

[8] Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 47 FCR 451