TGIF 05 November 2021 – An opportunity to reframe claims as ‘debts’ in statutory demands?

This week’s TGIF considers Re Simmoll Pty Ltd [2021] VSC 693, a Victorian Supreme Court decision that provides guidance on what constitutes a ‘debt’ for the purposes of statutory demands, how claims may be reframed as debts and the requirement to include the legal basis for a debt in statutory demands.

Key Takeaways

• A ‘debt’ for the purposes of a statutory demand is narrower than the more expansive approach taken to ‘debts and claims’ provable on a winding up.
  
  
• Some claims for unliquidated damages for breach of contract might be recast as restitutionary claims so as to be ‘debts’ for the purposes of a statutory demand.
  
  
• A statutory demand and, by extension, its supporting affidavit should include the legal basis for the debt demanded to minimise the risk of it being set aside.

What happened?

On 11 February 2021, Simmoll Pty Ltd (Simmoll), a registered builder that renovates homes, applied to set aside a statutory demand served by the owner of a property Simmoll had been contracted to renovate. The claim was for a refund of amounts paid for renovations that had not, or had only partly, been performed.

Simmoll’s challenge to the statutory demand was on grounds including:

• the demand did not claim a ‘debt’ that was due and payable; and
  
  
• the statutory demand failed to explain, and the affidavit in support did not verify, the debt claimed.

The Court set aside the statutory demand on each of those grounds.

How might claims be framed as ‘debts’ in statutory demands?

Associate Justice Hetyey considered that the presumption of insolvency arising from a statutory demand should only be available in clear cases of indebtedness, not where there is an inference that non-payment may be because an amount is presently unrecoverable or unenforceable.

His Honour considered that narrower meaning of ‘debt’ applied to statutory demands, rather than the more expansive approach taken to ‘debts and claims’ provable in a winding up.

The statutory demand served on Simmoll claimed a ‘debt’ which was, in fact, only a claim for unliquidated damages for breach of contract. It was not an amount fixed by an express clause of the building contract providing a mechanism for its calculation. Instead, it depended on an assessment of what work was actually performed by Simmoll and if, and to what extent, the property owner overpaid for that work.

Interestingly, his Honour noted that the property owner might instead have sought to claim the overpayment as a ‘debt’ on a restitutionary basis, as a claim for monies had and received or for failure of consideration. The property owner had not done so.

Why should statutory demands and supporting affidavits clearly set out the legal basis for the debt claimed?

Associate Justice Hetyey identified that a statutory demand may be set aside where the debtor is not placed in a position of being able to assess whether there is a genuine dispute as to whether the debt had become payable.

A statutory demand, and by extension its accompanying affidavit, must put the debtor on notice in an unambiguous way of matters including the nature of the debt and an explanation of how the amount claimed is composed or calculated.

A court will not expect a debtor to speculate on what a creditor is demanding.

His Honour concluded that a failure to specify in a statutory demand the precise legal basis for the debt claimed may constitute a defect justifying it being set aside, where that failure causes substantial injustice.

The statutory demand served on Simmoll was unclear as to the legal basis of the debt, and made no reference to any alleged agreement or provision of the building contract requiring Simmoll to refund the property owner. There was substantial injustice because Simmoll was placed in the difficult position of having to assess whether to apply to set aside the statutory demand by guessing what the demand related to.

Comment

This decision gives some indication that certain claims for breach of contract, which would not ordinarily be ‘debts’ for the purposes of a statutory demand, may instead be characterised as restitutionary claims so that they may be framed as ‘debts’ in that context.

Further, it serves as a reminder that statutory demands and their supporting affidavits must clearly put debtors on notice of the debt claimed and the legal basis for that debt. Otherwise, they risk being set aside.