Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : GARUDA AVIATION PTY LTD -v- COMMONWEALTH BANK OF AUSTRALIA [2012] WASC 115

Corporations law - Statutory demand - Corporations Act 2001 (Cth), s 459E(1) - Appeal against decision to set aside statutory demand - Whether statutory demand can be made for portion of a debt

Corporations Act 2001 (Cth), s 459E(1)

Arcade Badge Embroidery Co Pty Ltd v DCT [2005] ACTCA 3

Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2008] HCA 9; (2008) 232 CLR 314

Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd [2011] SASC 165

Clarke & Walker Pty Ltd v Thew [1967] HCA 28; (1967) 116 CLR 465

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265; (1995) 131 ALR 353; (1995) 18 ACSR 225

Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376

Hawkins v Bank of China (1992) 26 NSWLR 562

Inland Revenue Commissioners v Maple & Co (Paris) Ltd [1908] AC 22

Mann v Goldstein [1968] 1 WLR 1091

Oceanic Life Ltd v Chief Commissioner of Stamp Duties [1999] NSWCA 416; (1999) 154 FLR 129; (1999) 168 ALR 211

Powell (as joint liquidators of Nolex Yachts Australia Pty Ltd (in Liq)) v Fryer [2001] SASC 59; (2001) 37 ACSR 589

Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661

3 NEWNES JA: This is an appeal from a decision of Master Sanderson setting aside a statutory demand served on the respondent. The master found that as the demand was for part only of a debt it was not a demand permitted under s 459E(1) of the Corporations Act 2001 (Cth) (Corporations Act); a demand under s 459E(1) could only be made for the whole debt. The appellant contends that the master erred in so finding.

4 Pursuant to a written loan agreement made on or about 25 October 2007, the appellant advanced to the respondent the sum of USD $27 million to enable the respondent to purchase a Gulfstream aircraft. The loan was secured by a chattel mortgage over the aircraft and a guarantee by Mr Pankaj Oswal, a director of the respondent.

5 On or about 14 May 2010, the respondent made a payment of USD $10,350,000 to the appellant in reduction of the loan, leaving an amount of USD $16,650,000 owing.

6 As at 17 December 2010, the respondent was in default in a number of respects under the loan agreement and the chattel mortgage. On that date, pursuant to the terms of the chattel mortgage, the appellant appointed a receiver who took possession of the aircraft. On 23 December 2010, the appellant made demand on the respondent declaring all monies owing or payable under the loan agreement to be immediately due and payable.

7 The aircraft was subsequently sold by the receiver for the sum of some USD $12.9 million.

8 On 29 September 2011, the appellant served on the respondent a demand (the statutory demand), pursuant to s 459E(1) of the Corporations Act. The demand stated that the respondent 'owes [the appellant] the amount of USD $2,068,191.16 being the amount of the debt described in the schedule' and requiring payment of that amount within 21 days of service of the demand.

9 The statutory demand was accompanied by an affidavit of an officer of the appellant, Mr Ficko, verifying, as required by s 459E(3), that there was no genuine dispute as to the amount of the debt. In his affidavit

Mr Ficko said that the sum of AUD $2,099,047.13 was the undisputed portion of a debt in excess of USD $6,896,535.05 owing by the respondent under the loan agreement. He explained that the undisputed portion was made up as follows:

(b) interest at the rate of 5.95% to termination as at 30 December 2010; and

(c) interest at the rate of 7.95% thereafter, capitalised monthly, less the sum of USD $15.3 million in respect of the proceeds of sale of the aircraft. The sum of USD $15.3 million was deducted, rather than the sale price of USD $12.9 million, because the appellant accepted there was a genuine dispute as to whether the aircraft had been sold for its fair market value. The respondent contended that the fair market value of the aircraft was in the order of USD $15.3 million, rather than the $12.9 million for which it had been sold by the receiver. The amount demanded also did not include provision for break costs under the loan agreement, interest on break costs, or any other accrued costs and expenses.

The schedule to the statutory demand was as follows:

Principal owed by the Company under a Loan Agreement dated 25 October 2007 between the Company and the Creditor (Loan Agreement)

Interest at 5.95% from 9 November 2010 to 30 December 2011

Interest at 7.95% from 31 December 2010 to 19 May 2011

Debt reduction by nominal 'fair market value' of the aircraft of USD $15,300,000

Interest at 7.95% from 20 May 2011 to 19 September 2011

10 In making the statutory demand, the appellant expressly reserved its rights to recover the full amount of the debt.

11 On 20 October 2011, the respondent filed an application under s 459G of the Corporations Act to have the statutory demand set aside. The application came before the master on 21 March 2012. The respondent's point was a short one. It contended that as the demand was for part only of the total debt claimed by the appellant it was not a demand which could be made under s 459E(1); such a demand could only be made for the whole debt.

12 In support of its contention, the respondent referred to Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd [2011] SASC 165, in which Blue J had found that both the text and purpose of s 459E led to the conclusion that a statutory demand could not be made for what his Honour described as 'an undissected portion' of a debt.

13 The master concluded that, notwithstanding some misgivings as to the correctness of that decision, in the interests of consistency he should follow Candetti. He set aside the statutory demand on that basis.

14 The issue on the appeal was whether the master erred in finding that div 2 of pt 5.4 of the Corporations Act did not permit a statutory demand to be served for an 'undissected portion', or a part only, of a debt.

15 Section 459E(1) of the Corporations Act provides:

A person may serve on a company a demand relating to:

(a) a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or

(b) 2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

16 Unless the debt is a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt, or the total of the amounts of the debts, is due and payable by the company: s 459E(3).

17 The failure of a company to comply with a statutory demand creates a rebuttable presumption of insolvency: s 459C(2)(a).

18 A company served with a statutory demand may apply to the court for an order setting aside the statutory demand: s 459G(1). Such an application may only be made within 21 days after the demand was served: s 459G(2). The application must be supported by an affidavit, and be served on the party who served the statutory demand: s 459G(3).

19 Relevantly for present purposes, if on an application under s 459G the court is satisfied that there is a genuine dispute between the creditor and the debtor only as to the amount of the debt to which the demand relates or as to an off-setting claim, the court may by order vary the demand, provided that the undisputed (or 'substantiated') amount is greater than the statutory minimum: s 459H(4)(a). The court may then declare the demand, as varied, to have effect from when the demand was first served on the debtor: s 459H(4)(b). If, however, the substantiated amount is less than the statutory minimum, the court must set aside the demand: s 459H(3).

20 There have existed for a very long time, both in Australia and elsewhere, statutory provisions enabling a written demand for a debt to be used as a means of establishing the insolvency of a company for the purposes of winding up proceedings. A statutory demand provides a 'convenient method of proof' that a company is unable to pay its debts: Clarke & Walker Pty Ltd v Thew [1967] HCA 28; (1967) 116 CLR 465, 467.

21 Immediately prior to the amendments made by the Corporate Law Reform Act 1992 (Cth), the Companies Act 1981 (Cth) provided (relevantly) that if a company failed to comply with a written demand for a debt within three weeks of service of the demand, the company was deemed to be unable to pay its debts: s 364(2)(a). At that time there was, however, no requirement for a demand to be served with an accompanying affidavit verifying that the amount of the debt was due and payable and that the deponent believed there was no genuine dispute in relation to the debt. Nor was there any statutory facility for setting aside a notice of demand.

22 Where a notice of demand was challenged on the ground that the debt was the subject of a bona fide dispute, ordinarily the company's only remedy was to seek an interlocutory injunction to restrain the presentation of a winding up petition. The grant of such an injunction was regarded as an exercise of the inherent jurisdiction of the court to prevent abuse of its process: see, for instance: Mann v Goldstein [1968] 1 WLR 1091, 1094; [1968] 2 All ER 769, 772; Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376, 388 - 389. An applicant for such interlocutory relief had to show that there was 'a serious question to be tried whether liability for the alleged debt is genuinely disputed on a substantial ground or grounds': Forsayth NL (389). Inevitably, at the hearing of the injunction and upon the winding up application there were frequently disputes as to the company's indebtedness and/or the validity of the demand, often disputes of a very technical nature.

23 The 1992 reforms (among other things) introduced, by pt 5.4, a new regime in relation to statutory demands, including provision, for the first time, for a statutory demand to be set aside. One of the objects of the reforms was to enable any dispute about the debt upon which the creditor relied for a presumption of insolvency to be resolved prior to the hearing of a winding up application. The reforms were designed to minimise the delay and attendant legal costs which were a common feature of the battle of tactics in insolvency practice under the pre-existing scheme: Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661, 674.

24 In David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265, 270; [1995] HCA 43; (1995) 131 ALR 353, 355; [1995] HCA 43; (1995) 18 ACSR 225, 227, Gummow J (with whom the other members of the court agreed) described pt 5.4 as 'a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the interposition of disputes about debts unless they are raised promptly'. See also Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2008] HCA 9; (2008) 232 CLR 314 [14]. There were obvious advantages to a speedy and early resolution of any of those issues. Apart from reducing the time and costs involved, there was the consideration that, as Spigelman CJ observed in Switz, if a company is not solvent because a debt is owing there is a public interest in commencing the processes of winding up sooner rather than later (674).

25 Part 5.4 does not, however, enable a statutory demand to be set aside simply on the basis that there is an off-setting claim or a genuine dispute as to the amount of the debt. Instead, as described above, where there is an off-setting claim or a genuine dispute as to the amount of the debt, the court must calculate the undisputed, or 'substantiated amount', of the demand and if it exceeds the statutory minimum the demand may be varied accordingly and declared to be effective for the undisputed portion of the debt as from the date it was served on the company: s 459H. The Corporations Act thereby recognises that non-payment of an undisputed portion of a larger debt may be a sufficient basis for a presumption of insolvency under s 459C.

26 The respondent did not contend otherwise. Its position was that whilst the court may vary a statutory demand for the full amount of a debt so as to make it effective as a demand for part of the debt, a creditor is not entitled to start from that point. That is, a creditor cannot make demand under s 459E for part of a debt, but only for the full amount. A demand for part of a debt is only effective if the court so orders under s 459H(4).

27 The respondent submitted that if the legislature had intended that a statutory demand could be served for part only of a debt it would have expressly so provided. There is no such provision in pt 5.4. Section 459E refers to a demand for 'a single debt' or '2 or more debts', not for part of a debt. The respondent contended that, contrary to the appellant's submission, the words 'relating to' a debt in s 459E do not expand the concept of a debt. A demand 'relating to' a debt means a demand for a debt: the words 'relating to' are simply connecting words linking the demand and the subject-matter of the demand (either 'a single debt' or '2 or more debts') and do not expand the proper subject-matter of a demand beyond the whole debt.

28 The respondent argued that the balance of the language of s 459E and s 459H is also inconsistent with a demand for part of a debt. Those provisions refer throughout to 'the debt', not part of a debt. Where a genuine dispute or off-setting claim is established, under s 459H the starting point is 'the debt', from which the disputed amount or off-setting claim is to be deducted. Section 459H is inconsistent with the notion that part of the debt can be the starting point of the calculation.

29 The respondent further submitted that a statutory demand for part of a debt was inconsistent with the statutory purpose. A failure to comply with a statutory demand served to raise a presumption of insolvency. One of the objects of pt 5.4 was to have disputes about the existence of the claimed debt or debts determined before winding up proceedings were commenced. If a debt is disputed upon reasonable grounds it cannot be relied upon to give rise to a presumption of insolvency. The respondent contended that if part of a debt is disputed it is likely that disputed debts will be brought into the winding up procedure, which is what pt 5.4 was intended to avoid. The respondent submitted that a demand for part of a debt was in truth a de facto demand for the whole debt without the necessary verification of the whole indebtedness, as such a demand would require the company to establish a genuine dispute about the whole debt.

30 In my view, on the proper construction of s 459E there is nothing which would preclude a statutory demand for a portion of a debt. I do not accept that the words 'a demand relating to' a debt in s 549E(1) mean, as contended by the respondent, simply a demand 'for' the whole amount of the debt.

31 In Hawkins v Bank of China (1992) 26 NSWLR 562, in considering the meaning of the word 'debt' in s 556 of the Companies (New South Wales) Code (cf Corporations Act, s 592), Gleeson CJ observed that the word 'debt' is not a word of precise and inflexible denotation and wherever it appeared in s 556 it ought to be applied in a practical and commonsense fashion, consistent with the context and the statutory purpose (572). In the Corporations Act it generally bears its ordinary meaning of 'a liability or obligation to pay or render something': Hawkins (572); see also Powell (as joint liquidators of Nolex Yachts Australia Pty Ltd (in Liq)) v Fryer [2001] SASC 59; (2001) 37 ACSR 589, 598. I consider it bears that meaning in s 459E.

32 Although the words 'relating to' must always be interpreted in their specific context, they are ordinarily words of wide import: see Inland Revenue Commissioners v Maple & Co (Paris) Ltd [1908] AC 22, 26; Oceanic Life Ltd v Chief Commissioner of Stamp Duties [1999] NSWCA 416; (1999) 154 FLR 129, 143; [1999] NSWCA 416; (1999) 168 ALR 211, 224 - 225. In their present context, there is no reason to construe them in the narrow sense submitted by the respondent. The Corporations Act provides by the statutory demand procedure a convenient and quick method of resolving the issue of a company's insolvency. It recognises, as mentioned earlier, that a presumption of insolvency may be established by the non-payment of an undisputed portion of a debt so long as the undisputed portion exceeds the statutory maximum. In my view, the demand by the appellant for a portion of the whole debt was, in the ordinary meaning of the words of s 459E(1), a 'demand relating to ... a single debt'; it is a demand relating to the liability or obligation of the respondent to repay the loan funds.

33 Indeed, if the respondent's contention were correct it would lead to the odd situation that if the creditor became aware there was a dispute in respect of any portion of a debt before issuing a statutory demand, the undisputed amount could never give rise to a presumption of insolvency under s 459C(2)(a), notwithstanding that the undisputed amount exceeded the statutory minimum. The creditor could not serve a statutory demand for the whole debt because it would be unable to provide an affidavit deposing to a belief that 'there is no genuine dispute about the existence or the amount of the debt': s 459E(3)(b); Supreme Court (Corporations) Rules 2004 (WA), r 5.2(b), form 7. And on the respondent's case, it could not serve a statutory demand for the undisputed portion of the debt, notwithstanding that the undisputed portion exceeded the statutory minimum.

34 No purpose would be served by limiting a creditor's right to rely on a statutory demand in that way and neither the language of the Corporations Act nor the legislative purpose requires it. Where a portion of a debt exceeding the statutory minimum is undisputed there is no reason why a creditor should not be able to serve a statutory demand for that portion.

35 It is not the case, as submitted by senior counsel for the respondent, that it would then be open to a creditor simply to make a series of demands for different portions of a larger debt. In the absence of good reason for making separate demands of that nature, such demands would constitute an abuse of process and be liable to be set aside under s 459J(1)(b): see Arcade Badge Embroidery Co Pty Ltd v DCT [2005] ACTCA 3 [27]. In any event, it is not obvious why a creditor would choose to take such a course.

36 It is, of course, necessary that the portion of the debt demanded be described in the demand in clear and unambiguous terms, so that the company can assess whether there is a genuine dispute as to the amount demanded or any off-setting claim. It was not suggested by the respondent that there was any doubt or uncertainty in this case as to the identification of the amount demanded.

37 Finally, as mentioned earlier, the master concluded that he should follow the decision in Candetti, which he understood to be authority for the proposition that a demand for a portion of a larger debt is not a permissible demand under s 459E(1). I must confess, with respect, that I have had some difficulty in understanding the decision in Candetti. In that case, Blue J found that a demand for what he described as an 'undissected portion' of a debt was not a valid demand under s 459E(1). What his Honour meant by 'an undissected portion' of a debt is not explained and is not easy to discern, but to the extent his Honour may be understood to have held that a portion of a debt cannot be the subject of a demand under s 459E(1), I respectfully consider the case to be wrongly decided and would not follow it.

38 I would allow the appeal and set aside the decision of the master.