Upset by the offset – and other statutory demand traps

This week’s TGIF considers the decision of In the matter of Trico Constructions Pty Limited [2017] NSWSC 1831 and the broader question of when creditors should – and should not – issue statutory demands.

BACKGROUND

Trico Constructions (Company) subcontracted Autolift Garage Doors (Creditor) to install two garage doors at a residential property. The Creditor did not complete the work by the date specified, but issued a tax invoice in the belief that the delay was accepted (and at least partly caused) by the Company.

After the Company failed to pay, the Creditor issued a statutory demand (Demand) under the Corporations Act 2001 (Cth) (Corporations Act). The Company then applied for an order setting aside the Demand.

THE STATUTORY DEMAND PROCEDURE

The often used (and often litigated) statutory demand procedure involves a creditor who is owed a due and payable debt greater than the statutory minimum ($2,000) issuing a written demand to a company in a specified form along with a supporting affidavit verifying that the debt is due and payable.

If a company does not comply with a valid demand or apply to the Court to set it aside within 21 days, the company’s failure to pay creates a presumption of insolvency that can be relied upon to have the company wound up.

If the company applies to have the demand set aside, the Court must set aside a statutory demand if:

• there is a genuine dispute over the debt; or
• the debtor company has an offsetting claim

either of which would reduce the undisputed amount owed to less than the statutory minimum of $2,000.

The Court may also set aside a demand if there is a defect in the demand that would could substantial injustice, or if the Court in its discretion finds there is some other reason why it should be set aside.

ISSUE

In this case, the Company submitted that it had an offsetting claim for liquidated damages against the Creditor because the Creditor had failed to complete the work on time. The Creditor submitted that the offset should be rejected, as the Creditor was partly responsible for the delay.

The parties’ evidence put forward differing views on both the cause of the delay and whether the stated completion date applied to installation only, or to both installation and later adjustments to the garage doors.

DECISION

Justice Black held that the statutory demand be set aside on the grounds that the Company had an offsetting claim.

His Honour noted that the Creditor’s underlying debt “may well be more plausible” than the Company’s, but the Creditor had chosen to issue a statutory demand, “which is only appropriate in circumstances that there is no genuine dispute about, and no offsetting claim in respect of, the amount claimed”.

His Honour reflected that failure to recognise this will often lead a creditor to disappointment. After the demand is set aside, they are left to bring proceedings that ought to have been commenced in the first place, having incurred the additional delays and costs of contesting the application.

Justice Black also issued a creditors with further note of caution – they may be ordered to pay the company’s indemnity costs if they proceed with a statutory demand once they have notice of a genuine dispute or offsetting claim.

COMMENT

Issuing a statutory demand is often not a substitute for commencing substantive proceedings to pursue a claim or recover a debt. The procedure’s serious consequences for a debtor company mean they will be vigorously defended. Moreover, the procedure carries its own risks, as a creditor may be required to pay the company’s indemnity costs of setting the demand aside.

The following observations might help decide when, as a creditor, a statutory demand might properly be used or when, as a debtor, a statutory demand might readily be set aside:

• Some examples of debts that may generally be suitable for statutory demands are debts based on court judgments, debts for goods or services supplied (for ascertained amounts) and debts based on contractual rights to liquidated damages.
• Some examples of claims or debts that are generally not suitable are claims for damages for breach of contract in unspecified amounts, prospective liabilities such as payments that are not yet due, or debts due under complex or staged contracts, where there will often be grounds for a dispute or provisions for offsetting claims.
• The bar for a debtor to establish there is a “genuine dispute” or an “offsetting claim” is not high. The question is not whether the creditor would succeed at a final hearing. As Justice Black stated, debtor need only show that their defence or offsetting claim is “deserving of a hearing” – a fairly low bar.
• Put another way, if a creditor could not obtain summary judgment for the underlying debt, a statutory demand is likely to be set aside. This emphasises the limited scope of the procedure – the High Court has said that the power to grant summary judgment “should be exercised with great care and never be exercised unless it is clear there is no real question to be tried[1].

In summary, where there is a dispute with a debtor company or some potential for an offsetting claim, creditors should consider moving directly to substantive proceedings for recovery, rather than risk time and money in issuing a statutory demand that may only be set aside.