August 2014

Creditor's Statutory Demands - Defects in the Supporting Affidavit - Order Restored

In Kisimul Holdings Pty Ltd v Clear Position Pty Ltd, a decision seemingly inconsistent with established law, the Supreme Court of NSW earlier this year held that an omission in the affidavit supporting a statutory demand did not amount to “some other reason why the demand should be set aside”. The NSW Court of Appeal has now reversed the decision, restoring a degree of certainty in this much-litigated area of law.

The Law

When a liquidated debt owed by a company remains unpaid, a creditor can issue a creditor’s statutory demand pursuant to s459E of the Corporations Act 2001 (“the Act”).

If uncontested, an unanswered creditor’s statutory demand can lead to the debtor company being wound up.

Sections 459H and 459J of the Act state that a statutory demand may be set aside in circumstances where a debtor company can show that:

  • A genuine dispute exists in relation to the debt;
  • The debtor company has an offsetting claim;
  • A defect exists in the statutory demand, and that substantial injustice will be caused if the demand is not set aside; or
  • There is some other reason why the demand should be set aside

Section 459E(3) of the Act states that an affidavit accompanying a creditor’s statutory demand must comply with the Corporations Rules of the relevant Court.

Rule 5.2 of the Supreme Court (Corporations) Rules (NSW) states that an affidavit accompanying a creditor’s statutory demand must be in the form of Form 7 (“the Form”).

The Form, as found in Schedule 1 of the Rules, includes the statement “I believe that there is no genuine dispute about the existence or amount of the *debt/*any of the debts”.

In B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd, an authority that has been cited and followed by the Federal Court and numerous State Supreme Courts, the then Chief Judge in Equity, McLelland J stated that:

“The express requirement in the rule that the person making the affidavit depose to his or her belief that there is no genuine dispute is a significant mechanism for filtering out cases where there is in fact such a dispute, so as to prevent such cases from reaching the court on such an application as the present, with a consequent waste of time and resources.”

This view was reinforced in IFA Homeware Imports Pty Ltd v Shanghai Jerry’s Candle Co Ltd, where the Federal Court held that the failure to include the statement of belief in an affidavit accompanying a statutory demand is not just a “mere defect” but a “material failure of significance”.

The Facts

Clear Position Pty Limited, the creditor, issued two statutory demands to Kisimul Pty Limited for the payment of debts which totalled $94,879.87.

In addition to claims of a genuine dispute, an offsetting claim (that was ultimately abandoned by Kisimul in closing submissions), and a defect in the demands, Kisimul argued that the statutory demands served by Clear Position should be set aside because the affidavits accompanying the statutory demands failed to include the words “I believe that there is no genuine dispute about the existence or amount of the debt”, as required by the Rules. It was put by Kisimil that the omission in the affidavits should be seen as “some other reason” why the demands ought to be set aside.

The Judgment

His Honour first considered whether there was a genuine dispute as to the existence or amount of the debt claimed in the statutory demand, as contended by Kisimul.  He held that contention to be a “merely spurious claim, bluster or assertion” and rejected it.

His Honour then went on to consider whether the absence from the supporting affidavit of the statement of belief that there was no genuine dispute meant that the creditor’s statutory demand ought to be set aside for “some other reason.”

Stevenson J referred to the judgment of Barrett J in Safetrack Pty Ltd v Marketing Heads Australia that “some other reason” would exist “wherever there is a need to counter some attempted subversion of the statutory scheme”  and acknowledged the cases in which the absence of the statement of belief was enough reason for the statutory demand to be set aside.

Nonetheless, his Honour determined that in the particular circumstances of the case, the failure to include the statement of belief in the supporting affidavit was not enough to be “some other reason” to set aside Clear Position’s statutory demands given:

  • the “unsatisfactory and unpersuasive manner” in which Kisimul tried but was unable to establish the existence of a genuine dispute in relation to the debt, or an off-setting claim; and
  • that the absence of the statement in the affidavit did not make any difference to Kisimul’s response to the statutory demands.

Accordingly, his Honour concluded that the omission of the statement of belief had not caused any confusion, nor any injustice to Kisimul.  There was therefore no “subversion of the statutory scheme”.

As his Honour also concluded that there was no relevant defect in the statutory demands themselves, Kisimul’s application to set aside the statutory demands was dismissed.

The Court of Appeal

Barrett JA, to whose judgment in Safetrack Pty Ltd v Marketing Heads Australia Stevenson J had referred but not followed in the Court below, wrote the principal judgment.

After noting that Stevenson J had referred to numerous cases in which absence of a “no genuine dispute” clause from the affidavit was seen to be a reason to set aside a demand, and no case in which the opposite conclusion had been reached, Barrett JA distilled from the prior decisions the principle that there will be “some other reason” for setting aside a statutory demand:

  • where it is necessary to preserve the undistorted operation of Part 5.4 of the Act and to promote the objectives it is intended to serve; and
  • it is just to do so having regard to the purpose of the legislation.

Those conditions will be fulfilled when the “no genuine dispute” clause is missing from the affidavit in support because:

A creditor seeking the benefit of a statutory presumption of insolvency though service of a statutory demand has ….a responsibility not to rely on (a) debt unless it genuinely believes it to be (undisputed). And the company served with the demand has a right….to be assured that the demanding creditor recognises that responsibility and has conscientiously formed a belief that the responsibility has been discharged.

As particular factual matters, such as those relied on by Stevenson J, are irrelevant to preservation of the salutary measure for which the Act makes provision, Stevenson J was in error in not setting aside the demand for “some other reason”.

The Implications

The decision appears to put to rest any doubt that the absence of the “no genuine dispute” clause from the affidavit in support will result in a statutory demand being set aside.

More widely, it emphasises the need for creditors to take great care to comply with the Act and the Rules when drafting a statutory demand, or a debtor company will be able to rely simply on the existence of an error or omission in the form of the demand that is inconsistent with the legislative intent of Part 5.4, without filing material disputing the debt.
 

Authors: David Creais and Vivien Botsikas

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