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[2010] NSWSC 56
Supreme Court of NSW
2010-02-04
Palmer J, Ms J
Original judgment source is linked above.
CITATION : Austech Institute for Further Education Pty Ltd v Britt [2010] NSWSC 56
JURISDICTION : Equity Division Corporations List
DECISION : Statutory Demand set aside.
CATCHWORDS : CORPORATIONS - STATUTORY DEMAND - Application to set aside a Statutory Demand - whether demand can be set aside for "some other reason" - whether sufficient for solicitor, in s 459E affidavit, to depose to matters in relation to the debt of which he has no first hand knowledge - whether solicitor authorised to make the s 459E affidavit on behalf of the creditor states the source of knowledge of matters in relation to the existence of a genuine dispute as to the debt - whether genuine dispute as to existence of debt. - COSTS - Indemnity basis - whether defendant's solicitors on notice of "glaringly deficient" Statutory Demand are liable to pay costs on indemnity basis.
PARTIES : Austech Institute for Further Education Pty Ltd v Britt (Plaintiff) Karen Ann Britt (Defendant)
COUNSEL : Ms J. Baxter (Plaintiff) Ms A. Tsekouras (Defendant)
SOLICITORS : Anderson Lawyers (Plaintiff) Warren McKeon Dickson (Defendant)
5360/09 Austech Institute for Further Education Pty Ltd v Britt 12343/10 Austech Institute for Further Education Pty Ltd v Britt
4 February, 2010 Introduction - Proceedings 5360/09
1 This is an application to set aside a Statutory Demand under s 459G, s 459H and s 459J of the Corporations Act 2001 (Cth). 2 The Statutory Demand is dated 27 October 2009. It claims an amount of $260,901.62, said to comprise an amount of $179,666.62 being unpaid rent from 1 March 2009 to 30 September 2009 pursuant to a lease between the Defendant, Ms Britt, and Austech which commenced on 1 December 2008, together with an amount of $81,235 being unpaid operating expenses relating to the premises payable under the lease for the period 1 December 2008 to 30 September 2009. 3 Essentially there are two grounds upon which the application is made. The first is that the affidavit verifying the Statutory Demand required by s 459E(3) of the Corporations Act is defective for reasons I will explain shortly, so that there is sufficient reason to set aside the Statutory Demand pursuant to s 459J(1)(b). 4 The second ground is that there are genuine disputes for the purposes of s 459H(1) both as to the existence of the debt under the lease and as to an offsetting claim. 5 Both these two broad grounds are adequately raised in the affidavit of Mr Banga filed in support of the Originating Process. There is no issue that the Originating Process and the supporting affidavit of Mr Banga were filed and served within the time required by section 459G(3). The s 459E(3) affidavit
6 The affidavit verifying the Statutory Demand is sworn by Mr Groundwater who is Mrs Britt's solicitor. The material part of the affidavit is as follows: "1. I am Solicitor of the Creditor, Karen Ann Britt, in respect of debts totalling 260,901.62 owed by Austech Institute for Further Education Pty Limited to it relating to:
Unpaid rent from 1 March 2009 to 31 October 2009 in accordance with a Lease commencing on 1 December 2008 $179,666.62
Unpaid Operating Expenses from 1 December 2008 to 30 September 2009 payable pursuant to a Lease between the Creditor and the Debtor commencing on 1 December 2008
$81,235.00 Total $260,901.62
[24] In para 3 of the document the solicitor says, 'I believe these matters to be true' . Again, his position as a solicitor could not be expected to give him independent knowledge of anything enabling him to say that.
[25] In para 4, he deposes to a belief on his part that there is no genuine dispute about the existence or amount of the debt. That presupposes an insight on his part into communications and discussions between the principals (that is, the defendant company and each of the Faji companies) from which the absence of allegations of dispute by the Faji companies is entirely absent. As with the earlier statements, he can have known nothing of these matters except what he was told by his client.
[26] In the Portrait Express case (above) at p758, Bryson J saw fit to observe that the court must 'register clearly and appropriately the importance of the requirement of verification of demands' .
[29] The affidavit in this case makes it clear that the deponent did not have first-hand knowledge of the matters to which he deposed. The sworn assurance that the recipient of a statutory demand is entitled to expect as to the essential substance of the demand, the existence of the debt, its quality as a debt due and payable, and the absence of genuine dispute about its existence or amount, was denied the Faji companies in this case. No one who might have been expected to have first-hand knowledge of those matters - for example, a company officer with access to the books and records of the defendant company - was put forward by the defendant company to give that sworn assurance.
[30] If a person claiming to be a creditor of a company is to obtain through service of a statutory demand the benefit of a presumption of insolvency under s 459C(2)(a), it is essential that that person provide the company with all the information that must be provided in connection with the service of the statutory demand. If important elements of that information are of a hearsay nature, without any assurance of their having been inquired into and verified by someone with actual knowledge, that entitlement is denied. This is sufficient to make good the ground under s 459J(1)(b) on which the plaintiff relies.
[31] Although the genuine dispute ground has not been established, each of the Faji companies has shown an entitlement under s 459J(1)(b) to have the demand served on it set aside." 9 The propositions which his Honour enunciates are, in my respectful opinion, amply supported by the authority which his Honour cited. However, Ms Tsekouras of Counsel, who appears for Ms Britt, says that Mr Groundwater's affidavit is different from the affidavits considered in the cases referred to in Faji (Australia). She submits the affidavit "complies with the rules" as required by s 459E(3) in that in accordance with Rule 5.2, it is made by a person authorised by Ms Britt and it states the matters mentioned in Form 7. Relevantly, Form 7 requires in paragraph 3: "[State the source of the deponent's knowledge of the matters stated in the affidavit in relation to the debt or each of the debts, eg 'I am the person who, on behalf of the creditor(s), had the dealings with the debtor company that gave rise to the debt', 'I have inspected the business records of the creditor in relation to the debtor company's account with the creditor']."
Ms Tsekouras says that Mr Groundwater's affidavit is sufficient because he avers that he has read "the Lease and the notices sent to the debtor company from the creditor's managing agent" and says that based on that reading and knowledge, he is "aware of the circumstances giving rise to and the state of indebtedness of the debtor company to a creditor" . 10 In my opinion, the affidavit of Mr Groundwater complies with the requirements of Rule 5.2 and Form 7 to the extent that it states the source of Mr Groundwater's knowledge of how the alleged debt arises and how it is quantified. He states what documents he has read in order to form his belief as to those two matters. All that Rule 5.2 and Form 7 require in relation to how the debt arises is that the source of knowledge is stated when the person making the affidavit is not the person who has dealt with the debtor but is a person authorised by the creditor to make its affidavit. 11 It is true that what was contained in the notices from Austech's managing agent may well have included hearsay, but I do not think that that alone would be sufficient to warrant setting aside the Statutory Demand under s 459J(1)(b). No complaint could have been made if the affidavit had said, following the example suggested in Form 7, "I have inspected the business records of the creditor in relation to the debtor company's account with the creditor", yet such business records could well have included hearsay. The fact that the deponent of the affidavit relies upon hearsay is, therefore, not in itself and without more a ground for criticism, as long as the source of the information relied upon is stated. 12 However, Mr Groundwater does not state the source of his belief that the debt is not genuinely disputed. Paragraph 3 of Form 7 requires the deponent to state the source of knowledge "of the matters stated in the affidavit in relation to the debt". Matters "in relation to the debt" encompass not only how the debt arises and is quantified, but also as to whether there is a genuine dispute, which the deponent must aver in paragraph 5 of Form 7. 13 It is clear from Mr Groundwater's affidavit that he has not investigated any records which could inform him as to whether a genuine dispute exists which arises outside the terms of the lease and by reason, for example, of representations said to have been made which induced the entering into of the lease. Accordingly, Mr Groundwater's averment that there is no genuine dispute as to the existence of the debt must be founded either on a complete absence of knowledge of the circumstances which would justify such an assertion, or else must be based on hearsay from a source not identified. In my opinion, for the reasons advanced in the authorities to which Barrett J refers in Faji, the affidavit of Mr Groundwater in this regard is glaringly deficient. 14 Before the machinery of Pt 5.4 Divs 2 and 3 of the Corporations Act is set in motion by service of a Statutory Demand, the creditor must consider seriously the consequences, both for the debtor and for itself. Expensive and wasteful litigation will ensue unless the creditor is reasonably sure that it can dispel convincingly any suggestion by the debtor that there is a genuine dispute as to the debt. Creditors should know that the threshold of proof which the debtor has to cross in this regard is very low: see Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, at 787 per McLelland CJ in Eq; Solarite Airconditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411 per Barrett J. 15 Many years ago a Statutory Demand under s 222 of the Companies Act 1961 (NSW) could be served without being verified by any affidavit. All that was required was that the demand was signed by the creditor or by a person authorised by the creditor. The consequence was that Statutory Demands were issued as a debt collecting strategy even when the creditor knew that the debt was disputed. 16 The Statutory Demand regime which existed under the Companies Act 1961 has long since been superseded. Statutory Demands now entail severe consequences for the companies upon which they are served. If they are not met by an application to set them aside filed and served within a short time, the debtor must pay the debt or be presumed insolvent: s 459C(2)(a). It is for this reason that a Statutory Demand must now be properly verified. These points are made in the authorities to which Barrett J refers in Faji, and particularly in the remarks of McLelland CJ in Eq in B & M Quality Constructions v Buyrite Steel Supplies (supra). 17 As is clear from the decision of Barrett J in Faji, with which I respectfully agree, failure to comply with the requirement to state in the affidavit supporting the Statutory Demand the source of knowledge or the basis of information for the belief that there is no genuine dispute as to the existence of the debt is fatal to the Statutory Demand by virtue of s 459J(1)(b). I do not think that the strict application of that principle should be diluted by creating any exceptions. 18 This case affords a salutatory reminder that, as a general rule, Statutory Demands ought not to be supported by an affidavit from the creditor's solicitor. It will be difficult, in most cases, for a creditor's solicitor to inform himself or herself adequately of "the matters in relation to the debt" required to be verified by Form 7 and Rule 5.2. Common experience shows that in most cases the creditor will simply inform his or her solicitor that a debt is owing pursuant to a contract and has not been paid. The creditor will probably not go into the surrounding circumstances as to any dispute with the debtor, at least in any more than a perfunctory way. In those circumstances it is easy for a solicitor, in good faith but without proper foundation of factual knowledge, to simply aver that he or she believes that there is no genuine dispute as to the existence of the debt. If the creditor himself or herself, or if the creditor's officer with personal knowledge of the circumstances, were required to swear such an affidavit, he or she might well pause, in the light of what he or she actually knows. 19 The Court should be astute to ensure the integrity of the Statutory Demand process by being satisfied that the person who says that he or she believes there is no genuine dispute as to the existence of the debt is qualified by personal knowledge or proper and sufficient instruction to make that statement. If the affidavit supporting the Statutory Demand is sworn by a solicitor who says no more than, for example, "I have inspected the books and records of the creditor and have taken instructions from the creditor" as the source of belief that the debt is owing and that there is no dispute, the affidavit would comply with r 5.2 and with Form 7, but the debtor would be justified in requiring the solicitor for cross examination in an application under s 459G for the purpose of testing whether the records of the creditor which the solicitor inspected and the detail of the instruction taken from the creditor is sufficient to support a reliable statement that the debt is owing and is not genuinely disputed. The difficulties in a solicitor divulging communications with the client are self evident. If the solicitor can say nothing of any particularity as to what his or her instructions were, then the Court will find it difficult to conclude that the solicitor has a reasonable basis for believing that the debt is not genuinely disputed. Considerations such as these show why it is highly desirable, as a general rule, that the creditor himself or herself, or a properly qualified officer of a corporate creditor, should make the affidavit under s 459E(3), rather than the creditor's solicitor. 20 For these reasons, the Statutory Demand in the present case must be set aside pursuant to s 459J(1)(b) without consideration as to whether or not there is in fact there a genuine dispute as to the existence of the debt or as to whether it is now presently payable. That much was made clear by the decision of Barrett J in Faji at [31], and I propose to apply that decision in this case. Whether debt genuinely disputed
21 However, in case the matter goes further, it is appropriate for me to say something about the other grounds upon which Austech says the Statutory Demand ought to be set aside, that is, whether there is in fact a genuine dispute as to the existence of the debt. I make these remarks lest the judgment on the question of sufficiency of the affidavit of Mr Groundwater alone should provoke the issuing of another Statutory Demand. 22 In my opinion, Austech has demonstrated that there is a genuine dispute as to the existence of the debt. Basically there are four grounds upon which it is said that a dispute exists. The first is founded upon the fact, conceded by Mrs Britt, that the lease is unregistered. Being a lease for a term in excess of three years, the lease is ineffective to confer upon or vest in Austech a legal estate in the demised premises: see Real Property Act 1900 (NSW) s 53 and s 41(1). That does not mean, of course, that the lease is ineffective for any purpose. 23 Relevantly, the consequences of a unregistered lease were discussed in Telado Pty Ltd v Vincent (1996) 7 BPR 14,874, a decision of the Court of Appeal. The Court there held that if the putative lessee, in reliance upon the unregistered lease, enters into possession and pays some, even though not all of the rent provided for in the instrument, there will come into existence at common law a tenancy at will, determinable by a month's notice in writing and otherwise upon the terms of the unregistered lease applicable to such a tenancy. Mrs Britt says that Austech entered into possession and paid some rent, so that Austech was a monthly tenant at will from March to September 2009 and owes rent at the rate stipulated in the lease for those months. 24 Austech submits that the requirements for a tenancy at will are not only that some rent be paid in respect of alleged term, but also that the tenant be in possession of the premises. Austech says that it was never in possession of the premises. 25 It is not in dispute that the premises were required by Austech for the conduct of a business of cooking tuition and that the premises would have to be made suitable for that purpose by the installation of substantial commercial kitchens. A development application was required to enable that to be done. 26 Austech negotiated with Mr Britt, the husband of Ms Britt, who is the principal of a building company called Jaeger, for the construction of those kitchens. In the event, negotiations did not result in a building contract and the work was never done. During the time from the commencement of the lease, until it was terminated in September 2009, Austech was never able to conduct its business in the premises. 27 Nevertheless, Ms Tsekouras says, Austech was in possession of the premises as a matter of law. It was in possession, she says, firstly because it had an executed agreement covenanting to give it possession even though the agreement was an unregistered lease and, secondly, because it had the keys to the premises. Accordingly, whether or not Austech physically occupied the premises was simply a matter for its own decision. 28 Mrs Baxter submits, on the other hand, that if Austech is to be held a monthly tenant at will, it must not only have paid some rent but must have taken possession. She says that even if Austech paid some rent, it was never in possession of the premises. It had been given the keys prior to the commencement of the lease but only for the purpose only of enabling its architects to inspect the premises for the purposes of preparing a development application. 29 There is much to be said for Ms Tsekouras' contention that whether Austech took physical occupation of the premises was a matter of its choice but that it had legal possession of the premises from the date of commencement of the unregistered lease. However, I do not think that the matter is by any means so clear as to be unarguable. The fact remains that Austech never conducted any operations in the premises, never seems to have exercised any physical control over the premises and received the keys for a limited purpose. Further, Austech says that it paid "rent" for some months only as a gesture of goodwill until the uncertainties of a development application could be resolved. 30 I think it is reasonably arguable as to whether there was possession of the premises taken by Austech for the purposes of creating a monthly tenancy and, secondly, as to whether it is a requirement of the law for a monthly tenancy that there be, in addition to the payment of rent, the taking and holding of possession by the putative tenant throughout the alleged tenancy at will. These are not matters which can be easily resolved in a hearing such as this, nor should they be. 31 It may be that Austech's failure to pay the stipulated rent under the lease from March to September 2009 was a breach of an agreement for lease. However, if that is the case - and I do not find one way or another that it is - Mrs Britt's remedy would be a claim for unliquidated damages rather than a claim for a series of liquidated debts. 32 Accordingly, I find that there is a genuine dispute as to whether the amount claimed for rent for the months of March to September 2009 is due and payable. That ground is, as I have said, sufficiently raised in Mr Banga's affidavit in support of the Originating Process. 33 The second ground for asserting that there is a dispute, at least to a part of the debt, is as to the amount claimed in the Statutory Demand for outgoings. Clause 4.2.7 of the lease provides a mechanism for Mrs Britt to give notice of an estimated amount for outgoings to Austech and thereafter Austech is obliged to pay that estimate by monthly instalments, subject to later adjustment. 34 It is conceded that no notice pursuant to clause 4.2.2 or 4.2.3 was ever given to Austech. A demand for payment of outstanding outgoings was certainly made on Austech by a letter from Mrs Britt's agent dated 16 September 2009 but it is clear that that letter does not comply with the notice requirements of clause 4.2.2 of the lease. 35 Clause 4.2.7 (which I need not set out) does not cure the problem for Mrs Britt. It simply enables Mrs Britt to sue in a Court for recovery of any debt outstanding in respect of outgoings under the lease, notwithstanding the absence of a notice of estimate given pursuant to clause 4.2.2 of the lease. 36 It seems to me that whether there is presently owing any amount for outgoings under the lease is a question capable of debate, so that there is a genuine dispute as to that component of the debt. 37 The third and fourth grounds of dispute are said to arise out of representations made by, or on behalf of, Mrs Britt to Austech upon which Austech says it relied in agreeing to enter into the lease. 38 The first representation is said to have been made by Mr Britt who, as I have noted, was the principal of a building company called Jaeger with which Austech was contemplating entering into a building contract for the installation of kitchens in the premises. The representation is said to be that Mrs Britt would permit only Mr Britt's company to carry out those building operations and that the cost of those renovations or alterations would be reasonable and in the vicinity of one million dollars. It is said that there was no reasonable basis for making the assertion that building work could be carried out for the price which Mr Britt represented to Austech. 39 I am satisfied that there is sufficient evidence to support the suggestion, at least arguably, that representations made by Mr Britt to Austech in respect of the terms and conditions upon which a lease would be entered into were made by him as agent for Mrs Britt. 40 The second representation is a representation by silence when there was a duty to disclose. Mr Britt's company was, at the time of the discussions prior to entry into the lease, under a Deed of Company Arrangement but that fact was never disclosed to Austech. Austech says that if that fact had been disclosed it would not have continued discussions with Mr Britt and would not have entered into the lease. 41 Ms Tsekouras submits that the fact that Jaeger was under a Deed of Company Arrangement is absolutely immaterial and could have nothing to do with Austech's entry into the lease. 42 I cannot agree. The building contract which was central to the suitability of these premises for Austech's purposes was a substantial contract - a million dollars or thereabouts. The financial ability of Jaeger to complete that work satisfactorily must of necessity have been of concern to Austech. 43 The fact that people have a legitimate commercial interest in knowing that a company is under a Deed of Company Arrangement when deciding whether or not to enter into a transaction with it is recognised by section 450E(2) of the Corporations Act which requires companies under a deed of company arrangement to state that fact in public documents and on their negotiable instruments. 44 I cannot hold that knowledge of the fact that Jaeger was still under a Deed of Company Arrangement was necessarily irrelevant to Austech's consideration whether to proceed with the lease transaction and the intertwined building contract. It seems to me that there is an arguable case that a failure to disclose that fact to Austech constituted a representation by silence that there was no reason to have any concern about the ability of Jaeger to complete the foreshadowed building work. 45 I note that as Mrs Britt was a party to the Deed of Company Arrangement she must have had knowledge of the fact of the Deed of Company Arrangement. It follows that there is an arguable case that failure to disclose that fact by her, or by her agent, namely her husband, was a representation by silence by Mrs Britt herself. 46 The claims based upon express representation and representation by silence are said to be capable of founding a claim under the Fair Trading Act 1987 (NSW) for the setting aside of the lease and the restitution of the amounts paid by Austech for rent under that document so that Austech says there is a complete answer to the whole of the claimed in the Statutory Demand. 47 It is not necessary to go further into these matters. It is necessary only to note that in my view there are sufficient grounds demonstrated in the material placed before the court and encapsulated in Mr Banga's first affidavit to support the contention that there is a genuine dispute as to the existence of the debt. 48 The result, therefore, is that the Statutory Demand must be set aside under s 459G and s 459H as well as under s 459J(1)(b). I so order. Costs
49 Austech seeks indemnity costs as from 24 November 2009 founded upon a letter of that date sent to Mrs Britt's solicitors offering a compromise, being withdrawal of the Statutory Demand and that Mrs Britt pay 50 per cent of the costs of Austech as agreed or assessed. Mrs Britt did not take up that offer and, having failed in the proceedings, would be liable under the usual costs order to pay 100% of the assessed costs of Austech. 50 I have some considerable degree of sympathy for Mrs Britt because the ground upon which the Statutory Demand succeeded - that is, pursuant to 459J(1)(b) - is a technical legal ground and it is one that ought not to have arisen had Mrs Britt been properly advised by her legal advisors. It is not something for which Mrs Britt herself can be held responsible, nor should any blame or criticism be levelled at her because the Statutory Demand was set aside for that reason. 51 Nevertheless, the fact remains that Austech's solicitors, in their offer of compromise, expressly warned of the ground upon which the Statutory Demand would be set aside and referred to the leading authority on the point. Mrs Britt's advisors ought to have been well aware that the Statutory Demand was doomed to be set aside. 52 Austech has been put to completely unnecessary expense in the conduct of these proceedings. The offer which Austech made in the 24 November letter was a reasonable offer and it was declined. 53 For those reasons, despite the sympathy which I have for Defendant in the position in which she finds herself, I feel compelled to order in this case that Mrs Britt pay Austech's costs on the indemnity basis from 24 November 2009 onwards. 54 Accordingly, the order of the court is that the Statutory Demand is set aside. The Defendant is to pay the Plaintiff's costs of proceedings up to and including 24 November 2009 on the party/party basis and thereafter on the indemnity basis. Such costs include the reserved costs of an interlocutory hearing on 14 December 2009. Proceedings 12343/10 - Costs
55 A second notice of Demand, the subject of proceedings 12343/10, has now been withdrawn. It ought never to have been issued. The amount claimed was utterly untenable, as Ms Tsekouras now concedes. All of the flaws inherent in the issue of that Statutory Demand had been referred to by Austech's solicitors in earlier correspondence relating to the first Statutory Demand. Austech ought never to have been put to the expense of having to commence proceedings. I note that the second Statutory Demand was withdrawn only a matter of days ago although there was correspondence much earlier. 56 I do not criticise Mrs Britt herself. She has legal advisors and, no doubt she relies upon them. It is a great pity that advice was not given to Ms Britt, and I assume it was not, that it was courting disaster to issue the second Demand, quite apart from what has happened to the first notice of Demand. 57 I order the Defendant to pay the costs of proceedings 12343/10 in relation to the second Statutory Demand up until the time that she advised that it would be withdrawn, on the indemnity basis. - oOo -
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Austech Institute for Further Education Pty Ltd
Britt