The Supreme Court of New South Wales has recently provided useful guidance regarding the applicable principles to set aside a statutory demand on the basis of a ‘genuine dispute’.[1]
In the matter of One GC MQ Park Pty Ltd [2024] NSWSC 820, the company (One GC MQ Park Pty Ltd) received a statutory demand requiring payment of $1,117,466.33. The company applied to set aside the statutory demand on the basis that there was a genuine dispute as to the amount owing. The debt was claimed pursuant two contracts, being an ‘Option Deed’ and a ‘Variation Deed’. The company argued that on the proper construction of these documents, the debt was not due and owing, and therefore a ‘genuine dispute’ existed.
Statutory demands
The statutory demand regime in the Corporations Act is a powerful tool to pursue a debtor company for a debt due and owing. It provides a quick and inexpensive alternative to instituting a court proceeding to recover debts owed by a company.
In some ways, the potential consequences of non-compliance with a statutory demand are exceptionally draconian given the statutory presumption that the debtor company is insolvent if the demand is not complied with, withdrawn or otherwise set aside by the Court. This, of course, can have very severe ramifications if the debtor company is subject to other (potentially unrelated) contractual agreements which require notification of events of default (for example, financing facilities).
Setting aside a statutory demand
A statutory demand which has been issued to a company can be set aside on a number of different grounds. One of those grounds is that there is a ‘genuine dispute’ as to the debt claimed in the demand.
In One GC MQ Park Pty Ltd [2024] NSWSC 82, the Court was asked to determine whether a genuine dispute existed. If a genuine dispute existed, the statutory demand would be set aside. The Court found against the company and held that there was no genuine dispute as to the existence of the debt. In arriving at this decision, the Court re-affirmed a number of important principles regarding what is required to establish a genuine dispute.
‘Genuine dispute’ is not a high bar
It is well-accepted that the threshold to establish a ‘genuine dispute’ is not high. The genuine dispute must merely be bona fide and not spurious, hypothetical, delusionary or misconceived. If there is any rational ground which presents an arguable case for why the debt is not owing by the company, a genuine dispute will exist and the statutory demand can be set aside. This is the position even if the case against company (i.e. that the debt is in fact owing by the company) is apparently stronger.[2]
Importantly, on an application to set aside a statutory demand, the Court does not make evidentiary findings regarding the debt. The Court simply assesses whether there is plausible evidence to establish the existence of a genuine dispute, not whether the evidence is likely to be accepted at a final hearing.[3]
The Court does not determine questions of interpretation of contracts
Where the debt which gives rise to a statutory demand arises pursuant to a contract (as was the case in One GC MQ Park Pty Ltd [2024] NSWSC 82) a Court will generally not determine questions concerning the correct construction or interpretation of those contracts. This is said to prevent ‘embarrassment’ if a Judge were to make a finding about the correct interpretation of a contract on an application to set aside a statutory demand, which was then later contradicted by another Judge at a final hearing.
Additionally, an application to set aside a statutory demand is often a hearing brought with limited evidence and therefore the Court is often not furnished with all relevant material concerning the true meaning of the contract. To the extent that there are real issues of contractual interpretation that require determination by the Court, the prevailing view is that these issues should be determined at trial (rather than at the hearing of an application to set aside a statutory demand).
In other words, if the Court is satisfied that there are questions as to contractual interpretation which are reasonably arguable (and which are relevant to whether or not a debt is owed by the company), the Court will almost inevitably determine that a genuine dispute does in fact exist and therefore set aside a statutory demand. However, the Court will not, on an application to set aside a statutory demand, conclusively resolve these issues of contractual interpretation.[4]
This principle (that a Court will generally not determine the meaning of the contract for the purposes of an application to set aside a statutory demand) is subject to a very important qualification. If the meaning of the contract is “plain as a pikestaff”[5] the Court can determine the meaning of the contract and therefore determine that no genuine dispute exists. Put another way, if the construction of the contract which is said to give rise to a genuine dispute regarding the debt is so plainly wrong, a Court can reject that construction or interpretation and refuse to set aside the demand. The somewhat archaic phraseology of “plain as a pikestaff” [6], when referring to an argument about contractual interpretation, has been re-cast in a number of different ways, including:
- “patently feeble”[7];
- “no element of rational controversy”[8]; and
- “without basis or plainly wrong”[9].
In One GC MQ Park Pty Ltd [2024] NSWSC 82, the Court found that the argument put forward as to contractual interpretation (and which was said to give rise to a genuine dispute) fell within this category. The contracts which gave rise to the debt owed by the company were clear in their meaning and effect and provided no room for uncertainty or competing interpretations. The Court therefore determined that there was no genuine dispute as to the debt and refused to set aside the demand.
The ground of ‘genuine dispute’, when used to set aside a statutory demand, is not an opportunity to raise plainly unarguable contentions regarding the construction of contracts in the hope that a Court will determine that some dispute regarding the debt exists. Although the bar is not a high one, a Court can and will make findings about contractual interpretation when the legal position is clear. This reflects the underlying policy of the statutory demand mechanism found in the Corporations Act 2001 (Cth) that creditors of companies should have their debts paid promptly and with relatively little inconvenience or expense.
[1] Corporations Act 2001 (Cth), s459H(1)(a).
[2] Panel Tech Industries (Aust) Pty Ltd v Australia Skyreach (No 2) [2003] NSWSC 896.
[3] Britten-Norman Pty Ltd -v- Analysis & Technology Australia Pty Ltd (2013) 85 NSWLR 601.
[4] Grandview Ausbuilder Pty Ltd -v- Budget Demolitions Pty Ltd (2019) 99 NSWLR 397.
[5] Spacorp Australia Pty Ltd -v- Myer Stores Ltd [2001] VSCA 89.
[6] The idiom “plain as a pikestaff” is thought to be an original formulation of “plain as day”, used to mean something that is very obvious.
[7] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785.
[8] Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300.
[9] Grandview Ausbuilder Pty Ltd -v- Budget Demolitions Pty Ltd (2019) 99 NSWLR 397.