Recent applications to set aside statutory demands considered in the Court of Appeal

This post considers two recent cases in the Victorian Court of Appeal where applications to set aside statutory demands pursuant to section 459G of the Corporations Act were appealed.

Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd [2017] VSCA 5

The first case is Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd [2017] VSCA 5.

The central issue in this case was whether a statutory demand could be set aside on the grounds of a genuine dispute (pursuant to section 459G of the Corporations Act) where a settlement deed in a group proceeding expressly precluded reliance on a genuine dispute or offsetting claim from being raised by a group member in respect of outstanding loans.

Facts

The respondent debtor company (Pekell) failed to make loan repayments pursuant to a loan agreement. The creditor bank served a statutory demand for $53,580.33.

Before an Associate Justice in the Supreme Court, the respondent company successfully had the demand set aside pursuant to section 459G, with costs. The creditor bank appealed.

The Court of Appeal was not satisfied with the respondent’s evidence at first instance that it had opted out of a group proceeding for three main reasons (para 77):

Evidence from the director’s assistant as to posting opt-out notices was insufficient;
Evidence of communications regarding opt-out communications was conclusionary and mere assertion; and
There was insufficient evidence of a notice of proposed settlement and the respondent’s actions in respect of it.

Finding

The Court of Appeal allowed the appeal by the bank. It ordered that the order setting aside the statutory demand be dismissed.

Ultimately, the Court of Appeal found that the evidence relied upon at the first instance hearing fell short of establishing a genuine dispute (para 78). On that basis, the statutory demand ought not to have been set aside because there was no genuine dispute.

The onus was on the respondent to provide a sufficient account of its dealings in relation to the group proceedings to raise a genuine dispute and take the matter beyond mere assertion.

Key principles regarding s 459G applications to set aside

Although the main issue in Bendigo and Adelaide Bank was the effect of the deed of settlement insofar as it impacted on a statutory demand, the court has usefully re-stated the general principles and authorities for applications to set aside a statutory demand pursuant to section 459G of the Corporations Act:

[25] the approach to be taken to s 459G applications per Cohen J in Delnorth Pty Ltd v State Bank of New South Wales:

Although questions of disputed fact will not be decided on an application to set aside a statutory demand, the issue of whether there is a genuine dispute can be resolved on that application when the question arises on a short point of law or the construction of documents or agreed facts.

[47] In determining an application under s 459G, the Court’s function is to identify whether a genuine dispute or offsetting claim exists, not to determine any such dispute or claim. This means that the applicant under s 459G is required only to establish a ‘plausible contention requiring investigation’ of the existence of a genuine dispute or claim. The application will fail only if the contended dispute or claim is ‘so devoid of substance that no further investigation is warranted’. The resolution of the application should generally not involve the deciding of disputed questions of fact, but might require determination of short points of law.

The footnotes in these paragraphs (deleted here) are worthy of analysis.

Graywinter principle

The court also considered and applied the well-known Graywinter principle, which curtails an applicant seeking to set aside a statutory demand from adding a new ground to an application outside the 21-day statutory period:

[62] First, the applicant submitted that the respondent was seeking to add a new ground upon which the statutory demand should be set aside, well outside the 21 day period in s 459G(3) for the filing of evidence in support of its application. It submitted that the respondent should not be permitted to do so, by virtue of the principle in Graywinter. By that principle, if an affidavit in support of an application under s 459G does not state material facts sufficient to show the existence of a genuine dispute or offsetting claim, the Court lacks jurisdiction to entertain the application unless the deficiency is repaired within the 21 day period. A corollary of that principle is that an affidavit may also not be filed outside the 21 day period in order to raise a new ground for setting aside the statutory demand. Further evidence at that time must be confined to supplementing evidence filed within time which already discloses the general nature of the case being advanced.

Click here for another of my posts on Graywinter.

Go Connect Ltd v Sino Strategic International Ltd (in Liq) [2016] VSCA 315

The second case is Go Connect Ltd v Sino Strategic International Ltd (in Liq) [2016] VSCA 315. In this case the Court of Appeal considered a statutory demand issued by the creditor company (Sino) for $1,589,316.24. The debtor company (Go Connect) applied to set it aside, relying on two supplementary affidavits filed outside the 21-day period.

Facts

At first instance, the Associate Justice had refused to admit the supplementary affidavits into evidence, held there was no genuine dispute, and dismissed the application to set aside the statutory demand (para 4). The statutory demand survived. The debtor company appealed.

Finding

The Court of Appeal dismissed the application for leave to appeal (para 57). All four grounds of appeal were dismissed. The statutory demand survived, again.

As to ground 1, the court of appeal had to decide whether the construction of a clause in the loan agreement between the parties gave rise to a genuine dispute. The ground was dismissed:

[55] In the present case, cl 6 of the loan facility agreement provided that ‘[t]he Board of Directors of [GoConnect] will review monthly the need of [GoConnect] for this financial assistance, and will repay the loan or part thereof deemed appropriate’. The obligation to repay was wholly within the discretion of the debtor company. As outlined by the authorities summarised at [47] to [54] above, this type of obligation is illusory and void for uncertainty. As a consequence, the loan is repayable on demand. Accordingly, there was no basis for setting aside the statutory demand as GoConnect had failed to establish that there was a genuine dispute or offsetting claim within s 459H of the Corporations Act. For that reason, leave to appeal on proposed ground 1 should be refused.

As to grounds 2 to 4, the court had to decide whether the primary judge had erred in refusing to admit two supplementary affidavits filed outside the 21-day period. The primary judge had dismissed the application to set aside because (at para 23):

The debtor’s case had not been set out sufficiently or at all in the original 21-day affidavit;
The content of the supplementary affidavits was inadmissible as they sought to adduce evidence of the subjective understandings of the parties as to the meaning of their written agreement; and
They sought to raise a new argument regarding an estoppel arising from conduct of the parties.

The debtor company argued that the Associate Justice had misapplied the Graywinter principle by excluding the supplementary affidavits.

Section 459G: what must an applicant establish?

The Court reaffirmed the requirements that an applicant must establish pursuant to s 459H of the Corporations Act:

The court re-affirmed the principles and authorities set out in Malec (see my post on Malec on here):

[45] In Malec, the Court set out what an applicant must establish pursuant to s 459H of the Corporations Act. The Court said that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. It is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute. An application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt or an offsetting claim. The criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact. The grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory or misconceived. They must have sufficient factual particularity to exclude the merely fanciful or futile. A court is not required to accept uncritically statements that are improbable or inconsistent with contemporary documents. Generally speaking, the court should not embark on an inquiry as to the credit of witnesses. Finally, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised.

Conclusion

Both these decisions clarify and confirm the current 'good law' in relation to applications to set aside. Although the circumstances of Bendigo & Adelaide Bank are particular to group proceedings, the principles in both cases have broad relevance to s459G applications to set aside.