Is it a debt – legal test and creditors’ statutory demands

A creditor may make a statutory demand for payment in an attempt to recover monies owed by a particular entity.  Some consternation may arise where there exists a genuine dispute about the existence or amount of a debt allegedly relating to a statutory creditor’s demand.

The law

Section 459E of the Corporations Act 2001 (Cth) (CA) provides that a creditor may serve a statutory demand on a company (Stat Demand) provided that the amount of the debt is more than the statutory minimum ($2000) and that it complies with the Rules of the respective state court or the rules of the Federal Court.

Section 459H of the CA provides as follows:

  • This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
  • That there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
  • That the company has an offsetting claim.
  • The Court may calculate the substantiated amount of the demand in accordance with the formula:

This provision essentially allows the Court to determine a dispute relating to the quantum of any statutory demand for payment of monies owed.  In such a case, the admitted total means ‘the admitted amount of the debt’ or ‘the total of the respective admitted amounts’ of the debts’.[1]  Offsetting total means the sum amount of any claims which the debtor may have against the creditor.[2]

What constitutes a genuine dispute?

The above formula, as mentioned, only comes in to play when the debt as demanded is disputed.  What is clear from a reading of the case law, however, is that any dispute against the statutory demand must be genuine.  In the case of Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 76 FCR 452 (Spencer) the Full Court of the Federal Court, having considered the leading cases on this issue at that time, held the following two (2) preconditions require satisfaction before determining that a dispute is genuine:

  • the dispute is bona fide and truly exists in fact; and
  • the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

The bar, having been set by Spencer, is not particularly hard to reach.  The Courts have stated as much, and in the case of Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 Barret J observed at [18] the following:

Once the company shows that even on issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any sort of balancing exercise between the strengths of competing contentions.  If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.

In other judgments, the Court has been satisfied of the existence of a genuine dispute where it can be seen that the dispute is not ‘plainly vexatious or frivolous’ or ‘may have some substance’ or involves ‘a plausible contention requiring investigation’.[3]  It is even that case that recourse will not necessarily need to be had to contemporaneous documentation in order to establish whether a dispute is genuine.[4]  Clearly, a ‘genuine dispute’ will not be a substantial hurdle to overcome.

Matrix Group

The issue of whether there was a debt was recently explored in the case of In the matter of Matrix Group Co Pty Ltd [2021] NSWSC 1042 (6 August 2021) (Matrix Group).  In that case, TPS Group Services (Defendant) send a creditors statutory demand to Matrix Group Co Pty Ltd (Plaintiff) in respect of $46,485.45 for work completed on the Northbridge Bowling Club.

The Plaintiff took issue with the works completed, stating they were either incomplete or not compliant.  In respect of these works which the Plaintiff considered unsatisfactory, two (2) payment schedules were provided to the Defendant, each highlighting a nil balance as owing for the works completed, reflecting the fact that the Plaintiff considered the work to be of poor quality.

A negotiation of sorts occurred between the parties, over both email and text message, and the Plaintiff eventually offered $40,000 to the Defendant on the condition that they return to work the following day and extinguish the default.  This offer was not accepted by the Defendant.

By originating application, the Plaintiff applied to the Supreme Court of New South Wales to set aside the statutory demand.   The Defendant argued that by offering $40,000, the Plaintiff had ‘acknowledged’ the debt it owed to the Defendant.  Accordingly, the Defendant submitted no ‘genuine dispute’ could arise over the debt as the Plaintiff has acknowledged it.  The Court, however, did not hold that view.  The Court considered that the question of ‘acknowledgment’ was serious and unable to be decided in summary proceedings.  In turn, this gave rise to a finding that a ‘genuine dispute’ arose on the facts.  As such, the Court set aside the statutory demand on the basis that a ‘genuine dispute’ existed.

Matrix Group provides interesting circumstances for the setting aside of a statutory demand.  Such demands are typically set aside on the issue of quantum, i.e. how much money is owed.  The case reiterates that a ‘genuine dispute’ can arise as to the very existence of a debt.

Takeaways in relation to creditors statutory demands

The existence of a ‘genuine dispute’ is relatively easy to prove and may arise in respect of whether a debt even exists and as to the amount sought from a statutory demand.  Companies ought to be certain when issuing statutory demands that no dispute can arise as to the amount the are claiming, less they have the statutory demand set aside and face expensive legal costs which could have been avoided.

Links and further references

Related articles

Applying to set aside a creditors statutory demand for payment.

Building disputes and arbitration clauses.

Civil Dispute Resolution Act 2011 (Cth) have you taken genuine steps?

Insolvency litigation.

Legislation

Corporations Act 2001 (Cth), ss 459E, 459H

Cases

In the matter of Matrix Group Co Pty Ltd [2021] NSWSC 1042 (6 August 2021)

Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896

Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256

Re Wollongong Coal Ltd [2015] NSWSC 1680

Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 76 FCR 452

Further information

If you need advice on initiating or defending a statutory demand for payment, please contact us for a confidential and obligation free discussion:

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.

Legal Practice Director

Telephone: (07) 3221 0013 (Preferred)

Mobile: 0419 726 535

e: mburrows@dundaslawyers.com.au

 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Corporations Act 2001 (Cth) s 459H “admitted total”.

[2] Corporations Act 2001 (Cth) s 459H “offsetting total”.

[3] Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6].

[4] Re Wollongong Coal Ltd [2015] NSWSC 1680 [22].

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