How hard is it to show a “genuine dispute” in setting aside a statutory demand?
Answer: Not very hard!
A party who is claiming a debt from a company will often want to consider the quickest and most cost-effective way for recovery. A drawn out court case over many months can often lead to a very unsatisfactory result, including lost time and legal fees. For these reasons, many will consider the use of a Statutory Demand under Section 459 of the Corporations Act 2001 which basically entails making a demand in a prescribed form and which allows 21 days to resolve the matter of the debt, or face a winding up on the grounds of insolvency. Properly used, it can be a fast and effective way to recover debts.
However, this process is often misused by parties particularly where the issue is not solvency of the company, but a genuine dispute as to the existence of the debt claimed.
The recent decision of ABC Constructions No 1 Pty Ltd v. Bonelli Constructions Pty Ltd  QSC 35 (4 March 2016) is an illustration of this point.
Bonelli issued a statutory demand against ABC for monies it claimed were due and payable as a consequence of a payment claim made under a building contract. ABC applied to the Court to set the Demand aside. At issue was whether there was a genuine dispute about the existence or amount of the debt that was the subject of the demand, and whether there was a genuine off-setting claim.
ABC claimed that the debt claimed under the statutory demand was genuinely in dispute. Bonelli had failed to submit documentary evidence supporting its progress claim; the debt has been the subject of a Principal’s Notice to Show Cause with a subsequent termination of the building contract by the applicant; and there are differences between separate progress claims issued by the respondent, at a relevant point in time.
ABC also contended that under the building contract it had a right to claim delay costs subject to a specified procedure, which had not been followed by ABC. ABC expressly disputed Bonelli’s right to make any claim for delay costs prior to service of the statutory demand.
Finally, ABC claimed that the statutory demand was issued in circumstances where there was a pre-existing dispute between the parties resulting in a termination of the contract by it.
On all of its arguments, ABC asserted a genuine dispute existed and that the Statutory Demand should be set aside with costs.
The Court agreed and set aside the Statutory Demand and ordered that Bonelli pay the costs of the application.
In reviewing the well-established principles and cases, the Court had no hesitation in finding a genuine dispute existed. Importantly, the court emphasised the relatively low threshold required to show a “genuine dispute”:
“No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised.”
The Court quoted with approval the decision of TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd in which Dodds-Stretton J said:
“As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile… it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less.”
In other words, a party does not need to actually prove their case to show that a “genuine dispute” exists, but it should show the basis or grounds do actually exist. This usually requires the presentation of an affidavit that exhibits relevant correspondence and documents, and setting out of relevant facts to show a credible basis for a genuine dispute.
This recent decision is another of many examples where a party has been punished with a costs order for issuance of a statutory demand where a clear genuine dispute existed.
It illustrates the need to have good legal advice and to choose an appropriate way to resolve disputes, and particularly those which may involve the Court having to decide questions of fact and the meaning and effect of contracts and credit of witnesses. Such disputes are clearly not able to be decided under a Statutory Demand process.
If you have any reason to consider recovery of a debt or have received a statutory demand, and require urgent advice, contact us for assistance.