Setting aside a Creditors Statutory Demand – how much evidence is enough evidence?
Creditors’ Statutory Demands are formal demands for the payment of debts made under s.459E of the Corporations Act. They require the party issuing the Demand to attach a sworn statement to the effect that there is no “genuine dispute” in relation to the debt. If a company fails to respond to a Creditor’s Statutory Demand within 21 days by either:
(i) Paying the sum claimed;
(ii) Entering into an acceptable payment arrangement with the creditor; or
(iii) Applying to the Supreme Court or Federal Court to have the Demand set aside;
the Creditor can apply to the Court for the winding up of the debtor. The debtor can only avoid a winding up order being made by either paying the amount claimed (+ legal costs) or proving their solvency. Proving solvency is notoriously difficult for a lot of companies.
Most recipients of Creditors Statutory Demands negotiate deals with the claimants. Some do nothing and ultimately get wound up. Others run applications in Court to have the Demand set aside.
The usual position with Statutory Demands is that if the recipient can show the existence of any form of dispute in relation to the some claimed – including an offsetting claim – Courts will usually order the Statutory Demand to be set aside. The guiding principle is that Courts will not permit the use of Statutory Demands as a de facto debt recovery tool. Effectively, the Courts say, if there is a dispute over a debt, you should put on a claim, deal with any defence, run the case and obtain a judgment (or not). You can then use the Statutory Demand to seek to recover the judgment sum.
In allowing the appeal and ordering that the Statutory Demand be set aside, the Court of Appeal held that evidence that casts doubt, even significant doubt, on the existence of a genuine dispute or an offsetting claim will not of itself form a proper basis for the rejection of an application to set aside a Statutory Demand.
Background to the case
Britten Norman operates a sales and marketing business for Britten-Norman aircraft in the Asian-Pacific Region. Airborne Surveillance (Australia) Pty Ltd (ASA), an entity related to Britten-Norman, is a specialist aerial surveillance operator that contracts to various government agencies for aerial surveillance and mapping.
During 2009, ASA decided to seek contracts for aerial surveillance in connection with bushfire fighting activities. As a part of that process, it entered into discussions with A & T Australia in relation to the aerial surveillance systems offered by A & T Australia. An agreement was ultimately reached for Britten-Norman to lease an aerial surveillance system from A & T Australia, together with related services (such as support personnel).
On 4 December 2012, A & T Australia served a Statutory Demand on Britten-Norman, alleging a debt of $128,421.50 in respect of lease payments it claimed were owed in connection with the aerial surveillance system and support services.
The proceedings at first instance
On 13 December 2012, Britten-Norman filed an application with the Supreme Court of NSW to have the Statutory Demand set aside on the basis that it had an offsetting claim against A & T Australia.
The basis of the alleged off-setting claim was that the system supplied by A & T Australia did not reach the standard of accuracy required by Britten-Norman (and represented by A & T Australia) and accordingly, was not fit for purpose. It was alleged that, as a consequence of the system not being fit for purpose, Britten-Norman was forced to purchase and install a replacement system at a cost of $400,000. Britten-Norman claimed to have an off-setting claim for the cost of the replacement system, together with lost revenue of $144,000.
In dismissing Britten-Norman’s application, the trial judge noted that the evidence led by Britten-Norman as to the failure of the surveillance system appeared to be contradicted by emails that had passed between Britten-Norman and A & T Australia during 2011 and 2012. In those emails, Britten-Norman had not asserted that the system was not fit for purpose and had acknowledged that it was indebted to A & T Australia in respect of outstanding lease payments.
In the trial judge’s opinion, the existence of those emails rendered the evidence led by Britten-Norman on this issue as no more than mere assertions, which were not supported by contemporaneous documents. His Honour also found that even if the evidence led by Britten-Norman was sufficient to establish a serious question as to the existence of an off-setting claim, the evidence relied on by Britten-Norman was insufficient to establish the quantum of the offsetting claim. The trial judge ordered that Britten-Norman pay A & T Australia’s costs of the proceedings.
The Court of Appeal’s findings
In upholding the appeal and reversing the decision of Black J. the Court of Appeal held that in order for an application to set aside a Statutory Demand to succeed on the basis of the existence of either a genuine dispute as to the debt, or an offsetting claim, there must be evidence that satisfies the Court that there is “a serious question to be tried”, or “an issue deserving of a hearing” or a “plausible contention requiring investigation”.
In examining the evidence that had been adduced before the trial judge, the Court of Appeal was satisfied that the evidence relied upon by Britten-Norman was sufficient to make plausible the contention that Britten-Norman had an off-setting claim against A & T Australia.
While the Court of Appeal observed that the trial judge was “well justified” in considering that the email correspondence posed real difficulties for Britten-Norman in succeeding in a claim against A & T Australia, it found that that email evidence did not render Britten-Norman’s claim sufficiently implausible so as not to merit further investigation.
The Court of Appeal also reversed the costs order made at first instance. So, in addition to having the Statutory Demand it had issued set aside, it not only had to bear its own costs of the proceedings at first instance and the appeal, it also had to pay Britten Norman’s costs of both the first instance proceedings and the appeal
The Court of Appeal’s decision confirms that the key consideration for a Court when determining an application to set aside a Statutory Demand, is not whether the debt to which the Statutory Demand relates is owed, but rather whether there is a genuine dispute about whether the debt is owed, or whether there is an off-setting claim.
Accordingly, in order to succeed in support of an application to set aside a Statutory Demand, a company is not required to produce evidence that proves that the debt is not owed. Rather, the debtor company is required to lead evidence that proves that there is a plausible basis upon which the debt is disputed, or upon which the existence of an off-setting claim is asserted.
The Courts have long frowned upon the use of Statutory Demands as a debt-recovery-short- cut. Britten-Norman provides a timely reminder of the potential pitfalls in issuing Statutory Demands without first having obtained a judgment. Ultimately, all that A & T Australia achieved in issuing a Statutory Demand and challenging its setting aside, was the creation of substantial costs – theirs and the costs of the debtor. The moral of the story is that in circumstances where there is even a hint of a dispute as to whether a debt is owed, debt recovery proceedings are a safer way to proceed.