TGIF 11 March 2022 – Court sets aside statutory demand premised on poorly drafted deed

This week’s TGIF examines the decision of the Supreme Court of New South Wales in In the matter of Jana Pty Ltd [2022] NSWSC 112, considering whether a ‘genuine dispute’ exists  in relation to a debt claimed in a statutory demand where the debt arises from a poorly drafted deed.

Key Takeaways

• In cases involving a dispute about the construction of a particular document, the Court is neither required nor expected to avoid all issues of construction on an application to set aside a statutory demand. However, the Court should exercise caution before expressing views about the merits of the dispute.
  
  
• Drafters of guarantees in contracts or deeds should be careful to ensure that the obligations of the party providing the guarantee are clear and unambiguous, so any statutory demand issued in relation to the guaranteed amount is not liable to be set aside as ambiguous.
  
  
• Parties contemplating issuing a statutory demand for a guaranteed amount should carefully consider whether there might be a genuine dispute as to the construction of the guarantee in order to avoid incurring unnecessary costs in issuing the statutory demand and defending proceedings to set it aside.

Background

On or around 19 January 2021, Jana Pty Ltd (Jana) and Allspec Constructions and Project Management (ACPM), among others, entered into a deed (the Deed). For the purposes of the Deed, Jana was defined as the ‘Landowner’ and ACPM was defined as the ‘Subcontractor’.

Clause 2.1 of the Deed provided that:

• the ‘Head Contractor’ (another party to the Deed) acknowledged and agreed upon the execution of the Deed that ‘from the date of execution of this deed, the sum of $481,865.51(‘Guarantee Debt’) is a debt owing to [ACPM] … for various loans from the Subcontractor or Joseph Elia to the Head Contractor or its related entities’; and
  
  
• the ‘Head Contractor’ and the ‘Guarantors’ agreed not to dispute the ‘Guarantee Debt’.

Further, clause 2.2 of the Deed provided that the ‘owner of the land charge’s [sic] its property … to the Subcontractor and or its nominee of the consents to the subcontractor or its nominee to lodge a Caveat over the said property as security for all monies owed pursuant to this deed’.

The purported definitions of ‘Guarantee’ and ‘Guarantors’ in the Deed were difficult to follow; instead of providing definitions, the Deed appeared to provide for further relevant obligations. There were other ambiguities arising from the terms of the Deed and, overall, the Court observed that it was “very poorly drafted”.

On 4 May 2021, ACPM issued a letter of demand to Jana, among other parties to the Deed. By that letter of demand, ACPM requested the parties, including Jana, pay the total sum of $481,865.51, being the amount referred to in clause 2.1 of the Deed. That amount was not paid by Jana or the other parties to the Deed.

On 13 September 2021, ACPM issued a statutory demand to Jana for the amount of $481,865.51, which was particularised as being the amount guaranteed by Jana under the terms of the Deed.

Jana applied to the Supreme Court of New South Wales to set aside the statutory demand pursuant to section 459G of the Corporations Act 2001 (Cth) (Corporations Act), including pursuant to section 459H(1)(a) of the Corporations Act on the basis that there was a ‘genuine dispute’ about the existence of the debt to which the demand related.

The applicable principles

Section 459G(1) of the Corporations Act permits a company to whom a statutory demand is issued to apply to the Court for an order setting the demand aside. Section 459H(1)(a) of the Corporations Act applies where, on an application under section 459G, the Court is satisfied that there is a ‘genuine dispute’ between the recipient of the demand and the party who issued the demand about the existence or amount of a debt to which the demand relates.

The Court addressed the key principles that apply to an application to set aside a demand on the basis that there is a ‘genuine dispute’. These include that the party seeking to set the statutory demand aside must demonstrate that the dispute is bona fide and truly exists in fact and that the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

The Court is only required to find that there is a ‘genuine dispute’ and is not required to consider the parties’ relative prospects of success in relation to the dispute.

The case before the Court in this context involved an issue of construction of a deed. In disputes about construction issues, the Courts have indicated (among other things) that the Court is neither required nor expected to avoid all issues of construction in section 459H(1) cases, however, the Court should exercise caution before expressing views about the merits of the ultimate dispute.

What did the Court decide?

The Court determined that there was a genuine dispute in relation to the whole of the debt that ACPM alleged Jana was required to pay to it because the language of the deed upon which the statutory demand was based was not clear.

The Court indicated that it did not express any view about which party’s arguments may ultimately succeed; however, the Court was not satisfied that there was not a bona fide disputed issue of fact or law in the circumstances.

To the contrary, the Court accepted that the application raised bona fide issues of law concerning the proper construction of the “very poorly drafted Deed”.  The Court accepted that there was a dispute concerning the existence of the alleged debt described in the demand and, if that debt exists, whether it was due and payable at the time that the demand was issued on 13 September 2021.

In light of the Court’s finding that there was a genuine dispute, the Court concluded that the demand should be set aside.

Comment

The Court’s decision provides a warning to drafters of guarantees to ensure that any guarantee is clear and unambiguous in specifying which party is, or which parties are, providing the guarantee. 

Further, drafters should ensure that there is no ambiguity around the obligation of the relevant guarantor to pay a particular amount and, if the amount is known at the time that the guarantee is being drafted, the drafter should be careful to ensure that the guaranteed amount is clear. 

This will serve to reduce risks which might arise down the track where a party for whose benefit a guarantee is drafted seeks to enforce the guarantee, including by issuing a statutory demand (if appropriate).

The Court’s decision also provides useful guidance to any party considering whether to issue a statutory demand for a guaranteed amount. If the guarantee is not clear and unambiguous or, alternatively, if there is some ambiguity in respect of the parties on whom the guarantee is imposed, careful thought should be given to whether it is appropriate to issue a statutory demand. 

In cases involving ambiguous contractual obligations and, or alternatively, poorly drafted contracts or deeds, the party contemplating whether to issue the statutory demand may be well advised to avoid doing so if there is a possibility that the demand is premised on an ambiguous contractual obligation and susceptible to being set aside.