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[2011] NSWSC 234
Supreme Court of NSW
2011-03-18
Ward J, Alrc DP
Original judgment source is linked above.
Background 6Briefly, by way of background, the plaintiff company (King Furniture) carries on business as a furniture retailer. By letter dated 13 June 2001 King Furniture wrote to Mr Higgs confirming a verbal offer of employment as its Factory Production Manager. (I was informed that Mr Higgs had previously been employed by King Furniture for some time in the mid 1980's, had left the company and then had later recommenced employment under the terms of the June 2001 letter of offer.) I note that there was in evidence a letter dated 17 June 2010 from King Furniture's lawyers asserting that Mr Higgs was already employed at the time the written contract was formalised but nothing turns on the actual date on which he recommenced employment with the company. 7Mr Higgs signed the letter of offer on 4 August 2001. Under the contract constituted by his acceptance of the letter of offer, Mr Higgs was entitled to a 'base salary' of a specified amount per annum; there was no reference to any entitlement to bonus pay. Nevertheless, it seems that there was a practice within King Furniture of paying bonuses from time to time to its employees, seemingly at the discretion of King Furniture. 8Mr David King, the managing director of King Furniture, who has sworn a number of affidavits in these proceedings, said in his first affidavit of 9 July 2010 at [25], that for the first two years of Mr Higgs' employment he received one week's extra pay in June and December as a bonus. In 2003, he says there was a discussion with Mr Higgs in relation to his eligibility for a bonus and from 1 July 2003 Mr Higgs' bonus was "adjusted to a percentage profit of the business of King Furniture which was calculated by our accountant at the time". Mr King says (at [26] of his first affidavit) that it was in or about June 2003 that he decided to increase Mr Higgs' potential bonus to be based on a percentage of the profits of King Furniture (as a means of 'incentivising' Mr Higgs) and that he had a conversation with Mr Higgs in which he said "I would like to consider changing the basis upon which we calculate your bonus to be based on the profitability of the business. As the profits grow under this system so should your bonus" and Mr Higgs agreed, saying that he was "up for it". 9In the letter dated 17 June 2010 (annexure A to Mr Harkin's affidavit of 9 July 2010), Mr King's position on the issue of bonus entitlements was conveyed to Mr Higgs' lawyers as follows: We are, however, instructed that in addition to the Written Contract, Mr Higgs and Mr King agreed in June 2001 [sic] that Mr Higgs would be eligible for a 10% share of profits of the furniture business. That agreement was oral but also contained an implied term that it was payable only at the discretion of the employer. Such discretion is common in arrangements made between employers and employees in respect to profit share. 10Mr Spencer submits that the June 2003 conversation is a critical conversation as evidencing the bonus contract (a contract admitted by the solicitors for King Furniture in their 17 June 2010 letter). Further, it is submitted that even, if discretionary, the bonus entitlement in effect became fixed when the election to pay it was made (and hence is not open to review). 11Mr King says that the bonus was always within his discretion. He admits that he gave his former accountant instructions to calculate a bonus for Mr Higgs based on 10% of the net profit of the company and (at [27]) that Mr Higgs' bonuses after that were worked out having regard to the profitability of King Furniture (but also having regard to Mr Higgs' performance). Mr King denies that there was a contractual entitlement to the bonus. 12Nevertheless, whether or not there was a contractual entitlement thereto, Mr King accepts that "throughout 2003 up to and including 2008 ... [he] elected for King Furniture to pay [Mr Higgs] bonuses" at [28]. Mr King also deposed to the manner in which the bonuses were usually worked out about a year after the relevant period ([29]). I was informed that for each subsequent year from 2003, Mr King instructed his accountant to calculate and pay 10% of the net profit as a bonus. 13Mr King deposed to the importance of Mr Higgs' role in managing both the Australian and Chinese operations of the company (at [29]). However, according to Mr King, by 2009 he had notice a significant deterioration in Mr Higgs' performance (examples of which are provided in his first affidavit at [30]ff). 14In late January 2010, Mr Higgs had a serious (non work-related) injury and was away from work for several weeks. At around this time a draft new employment contract was apparently prepared and forwarded to Mr Higgs (with which Mr Higgs seems later to have taken issue, having regard to the email communication which is annexure F to Mr King's 9 July 2010 affidavit). According to Mr King, without prior notice Mr Higgs failed to return to work in March 2010 when he was due to return to work and (when contact was made with him) Mr Higgs said, in effect, that he was resigning for family reasons. Annexed to Mr King's affidavit were various emails around that time in relation to Mr Higgs' seemingly sudden resignation (both Mr King and Mr Higgs expressing disappointment in each other's conduct). 15Not surprisingly, Mr Higgs' resignation led to a calculation of the entitlements due to him on termination of his employment. It is a dispute as to those entitlements that has led to the present application. 16The accountant who had acted for King Furniture for some years (and who had prepared the previous bonus calculations) had by this time been replaced by a new accountant (the former accountant having developed a "brain disease which rendered him incapable of undertaking the work"). The new accountant, Ms Anna Carrabs commenced that role in about April 2009 (some months before the termination of Mr Higgs' employment) and from about June 2009 was reviewing the records of the company. 17Mr King, in his first affidavit, says that he instructed the company's new accountant (Ms Anna Carrabs) to prepare some 'draft accounts' so that he could "look at Higgs' potential bonus" (para [44]). The draft or otherwise status of the material prepared by Ms Carrabs is a matter hotly in dispute, as is the question whether the reference to a review of the financial records indicates that there was any general issue in relation to the accuracy of the accounts. However, what seems not to be in dispute is that from about July 2009 Ms Carrabs was reviewing the financial records of the company. 18A schedule was prepared in about April 2010 (by someone apparently in Ms Carrabs' office) (Annexure K to Mr King's 9 July 2010 affidavit), which was headed "Steven Higgs - Final Pay 1.4.10 - Calculation of Bonus Backpay". That Schedule (to which I refer as Schedule K) was forwarded to Mr Higgs, apparently in an attempt to reach agreement as to the final payout amount due to him. It is the amount shown at the foot of Schedule K which formed the basis of the statutory demand and Mr Spencer made it clear that the debt now claimed by Mr Higgs under the statutory demand is that appearing in the final column of that schedule. 19Broadly, what the schedule does is to set out for each income tax year from the year ending 2003 a figure representing the total profit of King Furniture (less $1m - that representing a notional salary for Mr King) and another entity, Standard Distributors, (in the fourth column) and then, after deductions and 'addbacks', there is a figure for 'normalised profit', and a column showing 10% of that normalised profit. The two final columns are, respectively, the 10% "normalised profit" figure less "gross bonus already paid" and the final column shows the calculation of Mr Higgs' bonus backpay as a result. For the 2009 year the spreadsheet makes it clear that these are draft figures (based on "Final Draft accounts 2009, subject to change"). There is no such qualification contained in the schedule for the figures in respect of the earlier years. That schedule records the amount of gross bonus already paid to Mr Higgs at a total (up to and including the 2009 year) of $3,228,923 and the total bonus back pay at $1,733,278.17 (though subject to change for the 2009 component of $367,210.55). 20It is submitted by Mr Spencer that there is nothing in Schedule K, or in the affidavit evidence served at the time of the application to set aside the statutory demand, to suggest any dispute as to the amounts shown as bonus backpay due to Mr Higgs for the 2003-2008 years (and that Mr King's own affidavit records his instruction to the accountant to pay 10% of the net profit). It was submitted, in effect, that whether or not there was a discretion as to the bonus to be paid to Mr Higgs for any particular year, there had been an election made for those 2003 - 2008 years and hence there is a liability on the part of King Furniture at least to pay the amounts totalling some $1.5m (representing an underpayment of bonus on the figures as prepared by King Furniture's own accountant). 21It should also be noted that in separate Commercial List proceedings instituted in this Court by Mr Higgs against King Furniture in January this year (after the issue of the statutory demand), Mr Higgs asserts that it was a term of his 2003 employment contract that, in addition to his base salary, he would be paid a bonus calculated at 10% of the combined profit of the company and of Standard Distributors Pty Ltd for each financial year (thereby squarely putting in issue the discretionary nature of the bonus entitlement as asserted by Mr King) and that on that calculation (leaving aside that he disputes the methodology of that calculation) he was underpaid his bonus entitlements by a figure of $2,229,498.28 "or in any event a sum not less than $1,733,278" (that being the figure in Schedule K). Mr Higgs disputes the calculation of the amount of net profit but, as Mr Spencer emphasises, does not dispute that at a minimum the amount noted in Schedule K is payable.` 22A copy of Schedule K was provided to Mr Higgs' lawyers in about April 2010. It seems they were invited to comment on the schedule. However, a meeting apparently scheduled for that purpose was cancelled. What then happened was that demand was made for the sum shown in the schedule (on the basis that at least that amount was not disputed by King Furniture) and, when that demand was not acceded to, the statutory demand was issued. 23The principal affidavits sworn in support of the application to set aside the statutory demand (by Mr King and Ms Carrabs, respectively) and served within the 21-day statutory period, raised a dispute as to the alleged entitlement to a 10% bonus but seem to have done so by reference to the calculation of the 2009 bonus (the figures for which were clearly indicated as being in draft in Schedule K). Mr Kings referred to various matters that he considered would be taken into account in determining that bonus (having regard to his contention that it was discretionary and not a fixed entitlement). What was not clearly identified as in dispute was the calculation of the amount claimed by Mr Higgs as owing for unpaid bonus (or bonus backpay) over the 2003 - 2008 period; nor was there any suggestion that Mr Higgs may already have been paid unaccounted for sums exceeding the amount representing bonus backpay in the schedule over that period (or that King Furniture maintained any offsetting claim in respect of a claim for damages for breach of Mr Higgs' employment contract, though the affidavit did depose to Mr King's shock at his sudden resignation, or for recovery of any overpayments made by way of bonus in previous years.) There was nothing in that affidavit material to suggest that there was any dispute as to amounts that had been paid to Mr King by way of bonus in the past. 24After the expiry of the 21-day period, King Furniture served what was described by Mr Spencer as a plethora of additional affidavits from Mr King and Ms Carrabs deposing to the methodology for calculation of the bonus and, relevantly, a review of the payments made to Mr Higgs. 25As noted above, from Ms Carrabs' evidence it seems that she became involved in June 2009 in a review of the company's accounts (following the discovery of the previous accountant's illness and his admission that he had not been able adequately to perform his tasks). That review seems only to have been completed in December 2010 but by about September 2010, Ms Carrabs' review had raised questions as to additional payments made to Mr Higgs or his wife that may have been referable to bonus entitlements (and that therefore cast some doubt on the accuracy of the figures in Schedule K for the 2003-2008 years). (King Furniture contends that it has a claim for recovery of overpaid bonus entitlements, relying on the principles in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353). Questions were also raised as to how the "profit" had been calculated in the past for the purpose of calculation of the bonuses. 26King Furniture contends that, following the review of additional payments made to Mr Higgs over the relevant period, an amount exceeding the amount of the unpaid bonus back pay noted as due to Mr Higgs in Schedule K has already been paid to him. Those additional (unaccounted for in Schedule K) payments to Mr Higgs or his wife over the 2003 - 2008 period exceed by about $890,183 the amount shown as payable to him as bonus under Schedule K (the largest discrepancy being for the 2005 year). It must be noted, however, that the evidence is somewhat uncertain as to what the so-called additional payments represented. All that seems able to be said is that if those payments were referable to bonus entitlements then the calculation of what remains unpaid out of the 10% bonus for the 2003-2008 years seems to be inaccurate and Mr Higgs, far from being owed the money recorded in that schedule, may have a liability to repay amounts to King Furniture. 27I turn then to the issues raised before me.
Graywinter principle 28Mr Spencer contended that King Furniture could not (on this application to set aside the statutory demand) rely on grounds not identified, expressly or by necessary inference so as to be clearly delineated as a ground for challenging the statutory demand in the July 2010 affidavits (ie he contends that the disputes as to the calculation of the 2003 -2008 bonuses and the alleged cross-claim for breach of Mr Higgs' employment contract could not be relied upon) by reasons of the principles outlined in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 (at 459-460); (1996) ACSR 581 (at 588) (applied, among others, in Process Machinery Australia Pty Ltd v ACN057 262 590 Pty Ltd [2002] NSWSC 45, at [22]; Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; [2004] NSWSC 527, at [56]; and Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560, at [7]) 29In Graywinter, Sundberg J held that the failure of an affidavit to satisfy the minimum requirements for an affidavit to be a "supporting affidavit" is a jurisdictional impediment to an application under s 459C. In David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, the High Court confirmed that the court cannot entertain, as an application under s 459G of the Corporations Law, a case in which an affidavit containing the minimum requirements has not been served within time. 30What is required, by way of a supporting affidavit in this regard, is that the affidavit and application alert the party to the nature of the case sought to be made on the application to set aside the statutory demand, identifying the "area of controversy" so that it is identifiable with one or more on the grounds available under ss 459H and 459J ( Process Machinery and Elm ). In Graywinter, it was held that it is not sufficient merely to assert the existence of a dispute or offsetting claim (though it is not necessary for the affidavit to contain in admissible form all the evidence supporting the claim that the there is a dispute/offsetting claim). 31In the case of an application to set aside based on an offsetting claim which is unliquidated, in Broke Hills Estate Pty Ltd v Oakvale Wines Pty Ltd [2005] NSWSC 638, Gzell J held that an affidavit in support is insufficient if it does not contain material from which a court can make an estimate of the amount of an offsetting claim. There must be sufficient material indicating the nature of the offsetting claim and the way in which it is calculated in order to enable the statutory exercise under the Corporations Act 2001 (Cth), s 459H(2) to be carried out by the court. 32Insofar as the requirement extends to any grounds under s 459J(1)(b), this would mean that the affidavit needed sufficiently to identify the "other reason" why the statutory demand should be set aside. 33In Hansmar Investments Pty Ltd v Perpetual Trustee Ltd [2007] NSWSC 103; (2007) 61 ACSR 321 , White J noted that the Graywinter principle is based on an implication from the requirement in section 459G that an application to set aside must be accompanied by an affidavit supporting the application within 21 days after service of the demand. His Honour referred to what had been observed by Austin J in POS Media Online Ltd v B Family Pty Ltd (2003) 21 ACLC 533 (namely, that s 459G was satisfied if the ground was raised expressly or by necessary inference or by a reasonably available inference) and suggested that the reasoning of his Honour in that case would be consistent with that in Callite Pty Ltd v Adams [2001] NSWSC 52 where it was an available inference from the documents annexed to the relevant affidavit that a particular ground of challenge had been raised. 34The issue was also considered by Barrett J in Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143. His Honour there noted that s 459J(1)(b) creates a remedial jurisdiction and said (from [26]): In the present case, the three grounds of objection advanced by reference to s 459J(1)(b) are evident on the face of the affidavit accompanying the statutory demand, ... . This is because the grounds involve the absence of required content from the affidavit accompanying the statutory demand - a deficiency therefore obvious on the face of that affidavit. The grounds of objection are therefore available to be advanced by the plaintiff. (my emphasis) 35Thus, in Saferack , it was sufficient that the ground of challenge (there, a defect by reason of an omission from the creditor's accompanying affidavit) was discernible on the face of a document annexed to the affidavit in support accompanying the statutory demand (or as, in Callite, in the invoices for the solicitor's fees in question) even though attention had not been drawn to the point sought to be raised thereby. 36Lindgren AJA in NA Investment Holdings Pty Limited v Perpetual Nominees Limited [2010] NSWCA 210, considering a submission that the failure to draw attention to the particular issue on which reliance was later sought to be placed (even though the material in support of that issue was annexed) gave rise to some procedural disadvantage, said that this confused the concept of "support" (as in an affidavit in support) with natural justice considerations. His Honour was of the view that the requirement in s 459G(3) was met where, as in that case, the only issue sought to be raised was one of construction within the four corners of the provision on which the statutory demand depended and the document in question, albeit with other documents, had been put into evidence by the affidavit filed within the 21 day period. 37Lindgren AJA stated (from [85]): I accept that there was nothing in the affidavit or exhibits to alert Perpetual to the particular construction to be advanced by the Company. Indeed, the affidavit was directed to an offsetting claim and was therefore apt to put Perpetual "off the scent". Nonetheless, as noted above, the very clause on which the statutory demand depended contained the limitation of liability sub-clause. In my respectful opinion, Perpetual's submission confuses the concept of "support" with natural justice considerations which will attend the court's hearing and determination of the application to set aside. Whatever may be the outer limits of the concept of "supporting" in s 459G(3), in my view the requirement is met where, as here, the only issue sought to be raised by the company is one of construction within the four corners of the provision on which the statutory demand depends, and the document in question, albeit with other documents, is put into evidence by the affidavit filed and served within the 21-day period. The court's powers of case management and the possibility of an adjournment and costs sanctions are available to ensure that the creditor is accorded procedural fairness in terms of an opportunity to respond to the construction advanced by the company. (It was not suggested that the Company was forensically disadvantaged by the failure of the affidavit to identity the construction ultimately advanced.) It may be suggested that s 459G(3) serves no useful purpose if it is not to require the company to inform the creditor of the construction that is to be relied on. This is not so. Another purpose served is that of accelerating the filing and service of evidence in the interests of an early hearing of the application to set aside. 38Although an applicant may supplement initial affidavits by leading further evidence relevant to matters raised by the initial application, it cannot rely on any ground not raised in the affidavit filed within the 21-day limit. (see the discussion and cases noted in Austin & Black's Annotations to the Corporations Act (s 459G). 39The initial question in the present case is whether there is sufficient in the supporting affidavits filed within the 21 day period to raise expressly or by necessary, or a reasonably available, inference either the now alleged inaccuracy of the accounts (and of Schedule K as a result) or the alleged cross-claim for damages for breach of the employment contract or for repayment of moneys overpaid by mistake of fact, so as to enable King Furniture to rely on those as grounds under either s 459H(1)(a) or (b) (or, for that matter s 459J(1)(b) to set aside the statutory demand (and to permit the adducing of further affidavit evidence after the 21 day period by way of supplementation or clarification of those grounds). 40I was required to rule on that issue during the hearing of the application (as it affected what evidence was able to be put before me on that application). It seemed to me that there was insufficient identification in the initial affidavits of any ground based on the alleged cross-claim for breach of Mr Higgs' employment contract to permit the raising of that ground (the mere expression of shock on the part of Mr King at the suddenness of the resignation not necessarily giving rise to any assertion by the company of a claim for damages - and the communications in relation to calculation of the termination entitlements similarly not doing so). Moreover, any such damages claim was not adequately identified having regard to the test outlined in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743, where Palmer J said (at [17]); In my view, a claim for the purposes of CA s 459H(1) and s 459H(2) means not just a cause of action, so that once a genuine cause of action for unliquidated damages is shown by a plaintiff, the court is compelled to accept at face value the damages claimed by the plaintiff as the amount of the offsetting claim for the purposes of the calculation required by s 459H(2). .... In my opinion, a genuine offsetting claim ... means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. "Good faith" means arguable on the basis of facts asserted with sufficient particularity to enable a court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that losses calculated. If such evidence is entirely lacking, the court cannot find that there is a genuine offsetting claim ... . 41His Honour had earlier in that case said (at [16]); the real difficulty in this case is the amount of the plaintiff's alleged offsetting claim. Where the case involves a claim for a liquidated sum the application of the section is relatively easy, the court simply determines whether the cause of action is a genuine one and if that proves to be the case, the amount of the offsetting claim is the amount of liquidated sum, the subject of that claim. The position is by no means as easy where claim is a claim is for unliquidated damages and the damages are said to be economic loss suffered by the plaintiff. 42Hence I rejected those parts of the additional affidavits relating to the alleged offsetting claim for damages for breach of contract. 43Similarly, I was not inclined to the view that, simply by annexing Schedule K (and deposing to the review of the accounts of the company), any dispute as to the actual amount of backpay referable to the 2003 - 2008 years had been raised. Schedule K on its face only indicates a doubt as to the 2009 year; it does not suggest that the earlier figures represented anything other than King Furniture's calculation of amounts due and payable by way of bonus backpay to Mr Higgs (the Schedule itself is headed "Final Pay Calculation"). A reader of that schedule would not be able to discern any dispute as to the existence of liability for the earlier years and the circumstances in which it was provided to Mr Higgs did not suggest that there was doubt otherwise than as to the final year's bonus payment, if any. Still less would it be apparent that the company's position was that there had been amounts exceeding the amount shown as unpaid bonus backpay already paid to Mr Higgs or his wife (by way of bonus over that period) so as to have discharged the liability apparently recorded in the Schedule K calculations in respect of those earlier years. (That may not be surprising as it seems that by that stage Ms Carrabs' review of the company files may not have revealed those payments, but it does indicate that at that stage there was no identification of this as a ground on which the existence or amount of the claimed debt was disputed.) 44Accordingly, the supplementary material going to the accuracy of the scheduled amounts was only provisionally admitted and read by me subject to any relevance it might have to the s 459J ground for setting aside the statutory demand, on which Mr Spencer had already maintained a Graywinter objection. I consider this issue further in relation to the second basis on which the application to set aside the statutory demand is made.
Genuine Dispute 45I turn then to the first basis in relation to the setting aside of the statutory demand, namely that there is a genuine dispute as to the existence of the debt (or, as it was also submitted, though the application was not initially put on the basis of s 459H(1)(b) as such, on the basis that there is an offsetting claim by the company). 46It is conceded by Mr Higgs that there is a dispute as to whether or not the sum claimed for bonus in respect of the 2009 year is owing. What is, however, submitted is that there is nothing to disclose a genuine dispute as to the backpay claimed for the preceding years. 47The meaning of a genuine dispute in the context of a challenge to a statutory demand was considered by McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; ( 1994) 12 ACLC 669. In Eyota , his Honour said: It is, however, necessary to consider the meaning of the expression "genuine dispute" where it occurs ... in my opinion that expression connotes a plausible contention requiring investigation, and raises much of the same sort of considerations as the "serious question to be tried" criterion which arises on an application for an introductory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to genuine dispute, every statement in an affidavit "however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be not having "sufficient prima facie plausibility to merit further investigation as to its [truth]" (cf Eng Me Yong v Letchumanan [1980] AC 331 at 341), or "a patently feeble legal argument or an assertion of fact unsupported by evidence": cf South Australia v Wall (1980) 24 SASR 189 at 194. But it does mean that, except in such an extreme case [i.e. where evidence is so lacking in plausibility], a court required to determine whether there is a genuine dispute should not embark upon an enquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute .... In Re Morris Catering Australia it was said the essential task is relatively simple - to identify the genuine level of a claim ... 48In Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34 ACSR 301, (where the court was considering whether a breach of warranty in supply of goods gave rise to a genuine dispute or offsetting claim and the question of quantification of the offsetting claim), it was again said that the court's task was not to resolve competing claims but to determine whether there was a genuine dispute concerning the debt or a genuine offsetting claim against the party serving the statutory demand and if so in what amount. It was said that it was not necessary, nor was it appropriate, for the court to consider the merits of the dispute or offsetting claim (citing Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456; Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporises Pty Ltd (1994) 13 ACSR 37). 49In Edge Technology , it was further said (at [43]) that there are several matters of fact bearing on whether the dispute or the asserted offsetting claim is not genuine (ie that it is, "spurious, hypothetical, illusory or misconceived"): the question must be answered having regard to the evidence before the court at this time and on the basis that the contract has not been terminated. ... The threshold presented by the test to set aside a statutory demand does not however require of the plaintiff a rigorous and in-depth examination of the evidence relating to the plaintiff's claim, dispute or offsetting claim. That is why cross-examination in contested statutory demand proceedings is limited: Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290. 50His Honour referred (at [57]) to what was said by Young J (as his Honour then was) in Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 122 ALR 717; (1994) 13 ACSR 787; (1994) 12 ACLC 490 : It is well known that many claims are ambit claims, and not even the person making them has any real hope of recovering the maximum amount claimed. Often it is appropriate to work out what is the maximum likely amount to be recovered. However, it does not seem to me, although I have tried hard to fit this meaning into the subsection, that one can get this result. The amount of the claim is an expression which has a more or less defined meaning ... [it] means the amount claimed in good faith, so long as that claim is not fictitious or merely tolerable. 51A genuine dispute is therefore one which is bona fide, which exists as a matter of fact and is not spurious, hypothetical, illusory or misconceived. It exists where there is a plausible contention which places the debt in dispute and which requires further investigation. The debt in dispute must be in existence at the time at which the statutory demand is served on the debtor ( Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; Eyota ). 52In Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) [2003] NSWSC 896 , Barrett J noted that the task faced by a company challenging a statutory demand on genuine dispute grounds is by no means a difficult or demanding one - a company will fail in its task only if the contentions upon which seeks to rely in mounting the challenge are so devoid of substance that no further investigation is warranted. The court does not engage in any form of balancing exercise between the strengths of competing contention. If there is any factor that on reasonable grounds indicates an arguable case it must find a genuine dispute exists even where the case available to be argued against the company seems stronger. 53Insofar as whether the evidence sought to be relied upon suggests that there is an arguable basis for an offsetting claim, as noted in Rainbow and Nature v Bronson and Jacobs [2006] NSWSC 217 by Austin J, the ingredients of s 459H to be satisfied are that it is a "genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates"). 54The difficulty for King Furniture, in establishing a basis under either s 459H(1)(a) or (b) is that, although the task faced by a company seeking to set aside a statutory demand, is conceded to be not a particularly challenging one, the affidavit material served within the 21 day period does not raise as a basis for disputing the demand the claims now made (either as to the proper basis for the calculation of the bonus or as to the alleged receipt by Mr Higgs of moneys referable to that entitlement but not hitherto taken into account in relation to Schedule K). The problem is not that those new claims are obviously spurious, hypothetical, illusory, misconceived or devoid of substance. It is, rather, that they were not raised on the material accompanying the application to set aside the statutory demand and served within the 21-day period. The authorities which have followed Graywinter make it clear that reliance cannot be placed, on an application such as the present, on grounds emerging in affidavits served after the 21-day period. 55The test outlined by Palmer J in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 1088, applied by Barrett J in Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560 at [13], as referred to above, was simply not satisfied on the evidence accompanying the present application. 56I find, therefore, that on that evidence there is no dispute raised on the affidavits served within the statutory period in support of the present application as to the existence of a liability on the part of the company to pay bonus backpay in the amounts set out in the Schedule K for the years 2003 - 2008 (whether because there is an offsetting claim having regard to the additional payments alleged to have been made to Mr Higgs over the years or because they were bonus payments and therefore discharged any liability the company had to pay a 10% bonus in those years). This means that the application to set aside the statutory demand on this ground must fail. 57Therefore, no ground (under s 459H) for setting aside the statutory demand has been shown.
"Some other reason" - s 459J 58The second basis on which the application to set aside the statutory demand is made is that there is "some other reason" for the purposes of s 459J(a)(b). In such a case it is not necessary for a company to establish substantial injustice ( Hoare Bros Pty Ltd v DCT (1996) 62 FCR 302, 135 ALR 677.) 59The exercise of the jurisdiction under s 459J(1)(b) was considered by Emmett J in Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454 at 457-458. Emmett J (having rejected the argument that the company there seeking to set aside a statutory demand had a genuine offsetting claim that exceeded the amount claimed in the demand - on the basis that the doctrine of res judicata precluded a contention to the contrary of the judgment against the company) turned then to consider the application of s 459J(1)(b) and said (at [458G]): However, s 459J(1)(b) appears to me to have relevance in the present context. It may be that "some other reason" within the meaning of s 459J(1)(b) is something other than defect in a demand, the existence of a genuine dispute or the existence of an offsetting claim. The language of s 459J(1)(a) indicates that s 459J is concerned with the possibility of injustice if a statutory demand is permitted to stand with the consequence of the presumption of insolvency which is then compelled by s 459C(2). though noting that the discretion under s 459J(1) may be exercised even without showing that substantial injustice would be caused (citing Hoare Bros ). In that context (namely considering what might amount to substantial injustice) his Honour observed that: One circumstance where it may be unjust for a demand to stand, ... is where there is a judgment or order which precludes a contention that there is a genuine dispute or an offsetting claim but there is on foot a bona fide appeal from that judgment or order. In those circumstances, the Court may, if justice requires, and subject to the possibility of imposing conditions as required by s 459M, set aside a demand which is based on the judgment or order which is subject to appeal or in respect of which, if an appeal succeeds there would be an offsetting claim. 60Relevantly, his Honour seems to have placed weight on the fact that there was no mechanism available to the company in that case other than s 459J(1) to prevent the consequences of the presumed insolvency that would follow from non-compliance with the statutory demand as a matter enlivening the remedial jurisdiction of that subsection. 61In Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379; (2000) 34 ACSR 533 Austin J, when explaining the policy underlying s 459H, said: The policy underlying s 459H is that the statutory demand procedure should not be used to coerce a person to pay a disputed amount. A statutory demand is not an instrument of debt collection. By analogy, the commissioner should not use the statutory demand procedure to apply coercive pressure to a taxpayer who genuinely objects to the commissioner's decision. ... If the court forms the view that the commissioner has acted oppressively or unfairly by issuing a statutory demand in such circumstances, the appropriate course is for the court to set aside the demand under s 459J(1)(b). By so doing the court does not deny that the debt is recoverable although an objection has been made, but it thereby insists that the statutory demand procedure should not be used to apply pressure for payment of an amount which might ultimately be found not to be payable . (my emphasis) 62Whether a matter constitutes "some other reason" is to be determined by reference to the legislative intent of Part 5.4 of the Act ( Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 229 at 235; [2005] NSWCA 24). In Meehan , Santow JA said (at [35]): There being no defect in the demand, reliance was placed upon whether there be "some other reason" as would satisfy s 459J(1)(b). The claimants contend [and his Honour accepted] that such reason cannot be based simply on some need to bring to the relationship between the parties some broad form of perceived fairness or reasonableness. Rather there must be "sound or positive ground or good reason" to set aside the statutory demand for "some other reason", which was consistent with the legislative intent of Pt 5.4 of the Act: Portrait Express (Sales) Pty Ltd v Kodak (A'asia) Pty Ltd (above) a t 757 per Bryson J; Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11 a t 18 per Austin J. 63Young CJ in Eq (at [58]-[61]), concurring with Santow JA, added the following observations: Although the wording of s 459J(1)(b) of the Corporations Act appears wide, its context and history requires reading it down to encompass in general terms only cases where the Court is satisfied that injustice will be caused unless the demand is set aside because of a defect relating to, but not in, the demand, see Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11 at 17. In Portrait Express (Sales) Pty Ltd v Kodak (A'asia) Pty Ltd (1996) 20 ACSR 746 at 757, Bryson J truly said that the discretio nary power under s 459J(1)(b) should not be activated "unless the decision to do so is supported by some sound or positive ground or good reason which is relevant to the purposes for which the power exists". It is not possible to set out fully the cases that might fall within s 459J(1)(b) nor if it were possible would it be wise to do so. The sort of case that will be covered will include gross defects in supporting affidavits and documentation and where the alleged creditor has made statements or representations relating to the statutory demand which have reasonably induced a change of the alleged debtor's position. A judge is not at liberty to set aside a demand under s 459J(1)(b) merely because he or she subjectively considers it fair to do so. (my emphasis) 64Further, in Meehan Santow JA said (at [52]): Indeed, it is an error of principle to invoke as a test "substantial injustice to the party seeking to set aside the statutory demand" for the purpose of subparagraph (b) of s 459J(1) when this is solely based on the position of the party subject to the statutory demand. Rather one must look at the relative position of both parties against the objectives of Pt 5.4. That is why the more general formulation of Bryson J in Portrait Express i s to be preferred as an approach; that is, setting aside a statutory demand under s 459J(1)(b) where there is proper reason viewed in the circumstances of the parties taking into account the purposes of Pt 5.4. 65Barrett J in CP York Holdings Pty Ltd v Food Improvers Pty Ltd , BC200904015 noted that Santow JA in Meehan had made it clear that the relevant concept of injustice for the purposes of s 459J(1)(b) is not concerned with the personal position, or the personal circumstances, of the party served with the statutory demand. 66What then is the purpose or legislative intent of Part 5.4 and is it distorted if, in the present case, the statutory demand is not set aside? 67The thrust of Part 5.4 of the Act has been noted as being to make, as far as possible, the procedure of application under s 459G the only avenue for a company's objections to a statutory demand. If a company receiving a statutory demand has a reason for objection to the demand it cannot procrastinate or defer its objections until the hearing of the winding up application ( Ford's Principles of Corporations Law at [27.062]). 68Barrett J said in CP York at [11]: Part 5.4 seeks to ensure that questions about statutory demands are determined separately from a hearing of a winding up application. The objective is to ensure that the result of a creditor's attempt to obtain the benefit of a presumption of insolvency through service of a statutory demand should be known - and definitively known - before the hearing of any winding up application. The statutory provisions as a whole and s 459S in particular aim to confine issues about the effectiveness of the statutory demand to s 459G proceedings heard and determined in advance of the winding up hearing so that that hearing, when and if it subsequently occurs, will proceed on the basis that there is (or, as the case may be, is not) an established but admittedly rebuttable presumption that the company concerned is insolvent. The Pt 5.4 regime has elements of rigidity to it. It is in some ways unforgiving. Both Gummow J in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 and Spigelman CJ in Switz Pty Ltd v Glowbind Pty Ltd ( 2000) 48 NS W LR 661 referred to aspects of the harsh operation of the statutory provisions. As their Honours noted, these are deliberate aspects of the statutory intention and purpose. It is with the purpose of Pt 5.4 in mind that one approaches s 459J(1)(b). The question posed by that provision is whether there is some good reason beyond and separate from those with which ss 459H and 459J(1)(a) are concerned for setting aside a statutory demand. Section 459J(1)(b) confers a remedial jurisdiction. (my emphasis) The Court of Appeal of the Australian Capital Territory described the provision in Arcade Badge Embroidery Co Pty Ltd v DCT [2005] ACTCA 3 as follows (at [27]): What is contemplated by s 459J(1)(b) is a discretion of broad compass which extends to conduct that may be described as unconscionable, an abuse of process, or which gives rise to substantial injustice: Hoare Bros Pty Ltd v Cmr of Taxation (1996) 62 FCR 302 at 317-318. In that case, the creditor had agreed to withdraw the statutory demand but later reneged on its agreement. Those circumstances were seen as coming within the relevant concept of unconscionability. Section 459J(1)(b) will operate where the person serving a statutory demand has "engaged in conduct that was unconscionable or an abuse of process or had given rise to substantial injustice", these being words of Black CJ, Einfeld, Sackville JJ in Hall Brothers Pty Ltd v Cmr of Taxation (1996) 62 FCR 302 at 317-318 which were also applied by the Queensland Court of Appeal in KW & KM Quinn Investments Pty Ltd v DCT [2004] QCA 91. 69By reference to the purposes for which the power exists, Barrett J said "the power exists to maintain the integrity of the Part 5.4 process. It should be used as necessary and appropriate to counter attempted subversion of the statutory scheme. And as Young CJ in Eq said, subjective notions of what is fair play no part." 70In that case, Barrett J held that the bases upon which the plaintiff had contended for the exercise of the s 459J(1)(b) power (in effect seeking time to pay an undisputed indebtedness and raising issues as to the hardship occasioned by the fact that the plaintiff had been required to bear the whole of what had been a joint and several liability and had in fact already paid a significant portion of the admitted debt) were in no way related to the due administration of Part 5.4 or any need to protect its provisions from abuse or distortion. His Honour said: There is simply no ground on which the court can properly intervene to forestall the result the defendants legitimately seek. It cannot look solely to inconvenience and discomfort or worse that the plaintiff may be experiencing or expects to experience. It must, as Santow JA said at [52] of his judgment in Meehan , look at the relative position of both parties against the objectives of Pt 5.4. The due obtainment of those objectives will be served by allowing the unfolding course of events to unfold. 71His Honour further accepted that even if the plaintiff company was solvent (as the evidence suggests is the case here), that was something that had no bearing on the decision faced by the court under s 459J(1)(b) for reasons stated by Lindgren J in Chippendale Printing Co Pty Ltd v DCT (1995) 55 FCR 562. 72In Chippendale , Lindgren J accepted that there was cogent evidence of the solvency of Chippendale for the purpose of the present application but said: Two propositions must be distinguished: (1) that solvency is potentially relevant to the issues of "genuine dispute" and "offsetting claim" grounds for setting aside under s 459H and, for that matter, to the grounds for setting aside provided for in subs 459J(1); and (2) that solvency, without more, constitutes an "other reason" within para 459J(1)(b) for the setting aside of a statutory demand. Chippendale put both submissions. In my view, the first proposition is to be accepted and the second rejected. It may be easier to conclude that a dispute about a debt or an offsetting claim is "genuine" when raised or made by a solvent company than in other cases (cf Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (in liq) (1989) 1 ACSR 118 (WA/Ipp J) at 121); Beverage Holdings Pty Ltd v Greater Pacific Investments Pty Ltd (1990) 3 ACSR 743 (WA/FC) at 747 (Wallace J)). Similarly, the solvency of a company is clearly relevant to the "substantial injustice" issue posed by para 459J(1)(a) and may be relevant to an "other reason" for setting aside provided for in para 459J(1)(b). I now turn to the second proposition referred to above. The issue raised is highlighted by assuming an unquestionably solvent company which receives a statutory demand for a debt which it does not dispute and in respect of which it has no offsetting claim: will the demand be set aside if the company can prove that winding up proceedings would inevitably fail? 73Lindgren J considered the interaction between the statutory presumption of insolvency arising by non-compliance with a statutory demand and subs 459C(3) which provides that this presumption operates "except so far as the contrary is proved for the purposes of the application" and thus contemplates that a company may prove its solvency for the purposes of the winding up application against it. His Honour then considered the derivation of para 459J(1)(b), noting among other things, that paragraph 114 of The Australian Law Reform Commission's Discussion Paper No 32 of August 1987 entitled General Insolvency Inquiry (ALRC DP 32) proposed that a demand might be set aside if the court was satisfied that there was a substantial dispute as to whether the debt was owing, that the company appeared to have a counter claim which might exceed the amount of the debt, or that "the Court [was] satisfied, on other grounds, that the demand ought to be set aside" (Vol 2, WU8(3)(c)), and at para [114] that: This latter general power would enable the court to take into account matters such as improper or invalid service, mistakes or misstatements in the notice of demand ... and unreasonable refusal of the creditor to accept an offer of the company to meet the debt . (my emphasis) and that the Harmer Report which generally adopted the discussion paper's proposals said of the "other grounds" basis for setting aside a statutory demand, (para 150 of the Harmer Report) that the power "would enable the court to take into account matters such as improper or invalid service and mistakes or misstatements in the notice of demand". 74Lindgren J stated that the genesis of para 459J(1)(b) made it clear that solvency alone was never in contemplation as constituting "some other reason" for setting aside a statutory demand and set out a number considerations in support of the view that solvency was not intended alone to constitute "some other reason" within para 459J(1)(b) for the setting aside of a statutory demand. 75His Honour considered that while a genuine dispute as to the existence or amount of the debt did not give rise to a defect in the demand within the meaning of s 459J(1)(a), "such a dispute may allow the demand to be set aside for some other reason under s 459J(1)(b)" (without establishing that it would give rise to substantial injustice), thus drawing a distinction between the two grounds in s 459J. 76Is there some other reason in the present case? King Furniture places reliance on the allegation that Mr Higgs knew (or must have known) at the time he issued the statutory demand and swore the accompanying affidavit that it was incorrect, based on the receipt of the additional (unaccounted for payments). 77In Polstar Pty Ltd v Agnew [2007] NSWSC 114; (2007) 25 ACLC 293, Barrett J at [33] again noted that s 459J(1)(b) confers a remedial jurisdiction. His Honour accepted that in the circumstances of that case the conclusion seemed inescapable " not only that a genuine dispute as to the amount of the debt existed when the statutory demand was served but also that the defendant was then aware of the dispute " at [43] (my emphasis) and went on to say at [44ff] that: The intention underlying Part 5.4 is that a creditor who genuinely believes that a debt is due and payable and is unaffected by either genuine dispute as to existence or amount or offsetting claim may obtain, for the purposes of a winding up application, the benefit of a statutory presumption of insolvency. Such a creditor may be met, at the threshold, by a claim on the part of the alleged debtor company that a genuine dispute or offsetting claim exists. If the creditor then wishes to persist with his or her attempt to obtain the benefit of the presumption of insolvency, he or she must succeed in defeating the allegation of genuine dispute or offsetting claim. Clearly implicit in this statutory scheme is the proposition that a person claiming to be a creditor will not resort to the statutory demand process where that person is already aware of the existence of a genuine dispute or offsetting claim. Section 459E(3)(a) requires that person to say on oath or affirmation that the relevant amount is due and payable by the company. Via s 459E(3)(a) and the rules of court (Form 7), the person must also say that he or she believes that there is no genuine dispute about the existence or amount of the claimed debt. In the present case, the defendant did not so believe when she caused her solicitors to serve the statutory demand. Those solicitors, in foreshadowing court action in their letter of 30 June 2006, adopted an unexceptionable approach to resolution of an acknowledged and recognised contractual dispute. But resort instead to the statutory demand procedure intended for cases where the creditor must proceed on the clear footing that there is no dispute as to the amount or existence of the debt (and swear an oath or make an affirmation accordingly) was for a purpose quite incompatible with the purpose that procedure is intended to serve. Reference was made by counsel for the plaintiff to First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 and Equuscorp Pty Ltd v Perpetual Trustee WA Ltd (1997) 80 FCR 296. I am satisfied that the present case is of the type of which Santow J (as he then was) spoke in the former case (at p 951): "It has been said on numerous occasions that the Companies Court is not to be the court which deals with disputed debts. If there is an honest dispute between the parties as to the amount of the debt, they are expected to resolve their dispute through the normal channels such as litigation in the Common Law Division or the District Court, not by the means of winding up proceedings; for example, see John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716 at 717 per Young J. Where a statutory demand has been so grossly inflated as almost exclusively to comprise matters which it should have been obvious from the outset were in genuine dispute between the parties at the time the demand was served, then an order under s 459J(1)(b) setting aside the demand may well be required to prevent such an abuse of the regime under Pt 5.4. This is even if the substantiated amount remained above the statutory minimum. The lack of bona fides on the part of the creditor in serving a demand where substantially the whole claim was obviously in dispute might be relevant to this." On the basis that, for the reasons I have stated, the statutory demand was an abuse of process and that s 459J(1)(b) therefore applies, there will be an order that the statutory demand be set aside and an order that the defendant pay the plaintiff's costs of the proceedings. 78The first question, therefore, is whether in the circumstances of this case it can be said that there has been an abuse of process in the issue of the statutory demand. 79It was submitted that there was an abuse of process by reference to the swearing of the accompanying statutory demand with the (alleged) knowledge as to the receipt of the additional payments. 80Reliance was placed by Mr Harris in this regard on Perlake Pty Ltd v Finance & Mortgage Corporation (NSW) Pty Ltd (1997) 15 ACLC 76 in which McLaughlin M (as his Honour then was) held that service of the statutory demand on the company for the same alleged debt that was the subject of separate proceedings against two individuals was said to be an abuse of process and some other reason for setting aside the demand under s 459J(1)(b). There, the subject matter of a claim in the Local Court was identical to the subject matter of the statutory demand in the Supreme Court proceedings thus there were clearly inconsistent demands. The Local Court proceedings had been instituted prior to the statutory demand against Mr and Mrs Gray personally for the same amount which the defendant then claimed against Perlake Pty Limited by the statutory demand. 81McLaughlin M said: That fact alone would seem to suggest that the statutory demand and any attempts grounded upon that demand to wind up the present plaintiff would constitute an abuse of process. I consider that the concurrency of the Local Court proceedings together with the service of the statutory demand constitutes some other reason which would entitle the Court to set aside the demand under section 459J(1). 82His Honour noted that the existence of the Local Court proceedings must also have a bearing upon the legitimacy of the statement contained in the affidavit accompanying the statutory demand. McLaughlin M said: She, as a director of the defendant company, must be taken to know that the defendant company had on foot at the time when the demand was served proceedings in the Local Court of New South Wales at North Sydney claiming the same amount of money not from the company Perlake Pty Limited but from the two individuals Mr and Mrs Gray. In those circumstances I do not see how that deponent can possibly have been in a position to state that to the best of her knowledge and belief there was no genuine dispute about the existence of the debt. 83The distinction here, however, is not only that the proceedings in the Commercial List were instituted after the statutory demand was issued but also that the two proceedings are against the same entity (and hence it is not a situation where the same debt is asserted to be owing by separate entities and therefore there are clearly inconsistent affidavits). Moreover, Mr Spencer submits that although the methodology of calculation of the bonus payment is disputed by Mr Higgs in the Commercial List proceedings, what is not disputed is that at least the amount claimed in the statutory demand is owing to him. 84In Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867, where it was contended that it was an abuse of process for a creditor to invoke the legislative scheme of Part 5.4 for then purpose of debt collecting especially when the creditor knows that the debt is genuinely in dispute, Palmer J was not prepared to accept that the mere issuing of a statutory demand to invoke the procedure was an abuse of process. His Honour said at [30]: It follows from the above discussion that I consider the reasoning of Tamberlin J in Liverpool Cement is correct. I am unable to accept the reasoning of Heerey J in Intergraph . I disagree with the view that the issuing of a statutory demand when the creditor knows that the debt is disputed gives rise to an inference that the demand is issued for the purpose of exerting improper pressure on the company for payment. In my opinion, the only inference which should be drawn, absent compelling evidence to the contrary, is that the demand is issued in order to invoke the statutory procedure for testing whether or not the dispute is genuine. 85In Liverpool Cement Renderers (Aust) Pty Ltd v Landmarks Constructions (NSW) Pty Ltd (1996) 19 ACSR 411, a statutory demand had been served, the plaintiff had failed to make an application in time to set it aside and the plaintiff then sought both an injunction to restrain the defendant from proceedings further with a winding up application founded upon the statutory demand and an order to dismiss the winding up application as an abuse of process. Tamberlin J found that the debt was genuinely in dispute but on the question of abuse of process said: Counsel for Landmarks seeks to rely on this statement in the present case in relation to the residual power of the court to grant injunctive relief. In order to do so, facts must be proved which amount to a threat to wind up the company for a collateral and improper purpose, so as to be an abuse of process: see Williams v Spautz , supra, at 522. In my view, no such improper purpose has been shown in the present case. Indeed, the purpose which emerges from the evidence, is that Liverpool seeks to recover the moneys allegedly owed to it, which, it seems to me, is not only proper but is the purpose for which the statutory demand was issued. There is no suggestion of threats of undue pressure, extortion, or commercial duress. Nor is there any suggestion that the demand was a charade in that it was not intended to be pursued to its conclusion. 86Palmer J, in Redglove, when considering the question whether in the case before him there was an abuse of process, said: In order to resolve the question at issue in this case one must go back to what was meant by Gummow J when his Honour referred, in David Grant , to making or threatening a winding up application "for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz ". His Honour clearly chose those words carefully, intending to convey that "abuse of process" is a concept precisely defined in law and is not to be loosely used, as it often is in strenuously contested proceedings when one party considers that the other is motivated by animosity or else has a patently insupportable case. In Williams v Spautz the majority said (at 526) that an abuse of process occurs when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or for some collateral advantage beyond what the law offers. At 529, the majority said that a party alleging abuse of process bears a heavy onus of proof that the predominant purpose of the other party in commencing the legal process had been one other than that for which it had been designed. and (at [29]): Every creditor claiming payment by a company of a disputed debt is entitled to test the genuineness of that dispute by serving a notice of demand under s459E in order to invoke the procedures of Pt5.4. If the dispute is indeed genuine, the creditor will pay the penalty of a costs order when the debtor successfully applies to set aside the demand under s459G. That is the risk that the creditor takes in serving the notice of demand. But if the debtor company fails to substantiate the dispute in the manner which is required by Pt5.4 and, in particular, by s459G, then it cannot, without more, be an abuse of process for the creditor to proceed with a winding up application in reliance upon s459C, s459Q and s459S. This is the very procedure which the legislature has devised to secure either the prompt payment of just debts or else the winding up of insolvent companies unable to pay their just debts. Where the debtor company has failed to set aside a statutory demand, it would have to establish by very cogent evidence that, despite the existence of a debt which can no longer be disputed, the creditor's purpose in seeking the winding up is not to collect payment of its debt or, in default to have 'the company wound up, but is, rather, to achieve some entirely collateral end. Such a case is conceivable but would be extremely rare in reality. 87Here it was submitted that Mr Higgs must have known that he had received the additional payments and must have been aware that there was a dispute as to the claimed debt and could not have correctly sworn the affidavit accompanying the statutory demand (the suggestion that the affidavit had been falsely sworn, though intimated, was not ultimately put.) It is by no means clear to me that Mr Higgs was in fact aware when the initial process was issued that payments earlier received by him were or should be treated as referable to his bonus entitlements (and the evidence of King Furniture is itself somewhat equivocal on that point). Therefore, by reference to the mere fact that the records now show that Mr Higgs or his wife has received additional amounts that may or may not be referable to a bonus entitlement, does not lead me to conclude that the issue of a statutory demand for the amount recorded in Schedule K was of itself an abuse of process. 88What has been of more concern to me is the fact that, on the evidence served after the 21 day period, it would seem that there is an issue of which King Furniture was not aware, within the time available to permit it to articulate this as an objections to the statutory demand (and hence to move to have it set aside on one of the grounds available under the statute), that on its records the bonus back pay for the years 2003-2008 shown in Schedule K as unpaid may in fact already have been received by Mr Higgs. (Whether that is the case or not is not determined. While there was no evidence by Mr Higgs in the current proceedings to suggest that there was a dispute as to the receipt of those moneys, the characterisation of those payments is not clear.) 89In those circumstances, it might be thought that the case is not dissimilar from the situation considered in Paperlinx Ltd v Skidmore (2004) 51 ACSR 614; [2004] FCA 1624, where the court considered an application to set aside a statutory demand in circumstances where, after it was issued, it was contended that the debt had been paid (albeit with a deduction said to have been required by statute in relation to tax). The defendant refused to acknowledge that upon his receipt of part of the judgment debt (the balance having been withheld for payment to the Commissioner of Taxation) he was not entitled to act upon the statutory demand and move to wind up the company (even though on the hearing to set aside the demand, his Counsel conceded that his client did not intend to do so). 90Finkelstein J was prepared to accept that the plaintiff's (admitted) solvency was in general not a basis on which to set aside a statutory demand but considered that the demand had been served for a purpose foreign to the Corporations Act. His Honour could see no reason in principle why the demand (which otherwise may have some life) could not be set aside under s 459J(1)(b) in those circumstances (though in the event it was not necessary to do so in light of the acknowledgement that no action would be taken to move for a winding up order based on the demand - an acknowledgment of the kind not proffered in the present case). 91Another situation where it was contemplated that "some other reason" might be shown was where a creditor unreasonably refused the company's offer to meet the debt ( Hoare citing ALRC NSW). Both that scenario and the scenario considered in Paperlinx , seem to focus attention on the conduct of the creditor in relation to the events in question. However, here there is nothing to suggest that Mr Higgs has been in any way responsible for any error in the company's accounting of moneys paid to him or that he was aware that there had been additional amounts paid to him that were not taken into account in Schedule K (even assuming that they were referable to his bonus entitlement). 92It seems to me to be difficult to see the discovery by King Furniture of additional payments that might be referable to the bonus entitlement as something that (in the words of Barrett J in CP York ) is beyond and separate from matters that could have been raised under s 459(1(a) of (b). The making of those payments raises a dispute as to the existence of the bonus back pay debt (if it can be said that they discharged the liability at the relevant time) or as to the existence of an offsetting claim (if they did not discharge the liability for the debt but are recoverable as moneys paid under a mistake of fact or law). If that be correct, then the difficulty for King Furniture is that it did not identify in its supporting affidavits within the the 21 day period this ground of dispute and the authorities seem to me to make it very clear that it cannot later rely on such a ground (whether to set aside the statutory demand for those reasons or to contend that they amount to "some other reason" under s 459J()(b). 93Although in NT Resorts Pty Ltd v DCT (1998) 153 it was considered arguable that a company served with a demand for an admitted debt but one alleged not to be due and payable at the time of service of the demand might be able to apply for it to be set aside under s 459J(1)(b) even if s 459H(1)(a) was not available (Finkelstein J in obiter saying that if the application was one that in those circumstances must be made under s 459J(1)(b) (because it was not a dispute as to the existence of the debt but as to when it was payable) the court would not exercise its discretion to set aside the demand unless it was satisfied that this was a genuine dispute about whether the debt to which the demand related was due and payable) that does not appear to be the conclusion to be drawn from CP York . 94What has troubled me is that, in effect, the position contended for by Mr Spencer means that if the recipient of a statutory demand is not aware within the 21 day period of facts that give rise to a genuine dispute or offsetting claim for the purpose of s 459(1)(a) or (b) (and is therefore unable to delineate such a ground within the requisite period) then the result is that (absent some other reason unrelated to those facts) the company must pay the debt claimed or be subjected to the statutory presumption of insolvency even though it may later become aware of such facts. 95(In Tatlers.com.au Pty Ltd v Davis [2006] NSWSC 1055; (2006) 203 FCR 473; at [11] and [29] it was said that there is some "other reason" why the demand should be set aside must be determined in the circumstances obtaining when the court comes to consider the s 459G application, thus suggesting that the s 459J(1)(b) grounds might be able to relate to a change in circumstances such as the discovery of new facts not known at the time and not discovered within the 21 day period. However, there is some logical difficulty in reconciling reliance on events outside the 21 day period as grounds to set aside on an application under s459G with the Graywinter requirements.) 96Mr Spencer's answer to this concern is that this does not subvert the statutory regime (the potential harshness of which has been recognised by the courts on a number of occasions). Although it was at first suggested that this was because any such presumption of insolvency would be worthless (as there would be an available challenge to the standing of the applicant as creditor at the time of any winding up application), the reason it was ultimately said that the statutory regime would not be subverted if the demand were not to be set aside was that the company would nevertheless have the opportunity to pay so as to avoid the presumption of insolvency (and would then presumably be left to seek leave to raise this issue under s 459S on a winding up application or to seek a stay of those proceedings until liability for the disputed debt were to be determined in other proceedings) (or, I might add, might be able to seek an injunction to restrain the filing of a winding up application as was done in the Liverpool Cement case). This raises squarely the question as to the legislative purpose of the statutory regime in respect of statutory demands to which I have earlier adverted. 97In B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 at 435-6; 13 ACLC 88, in the context of considering the requirement for an affidavit attesting to the belief that there was no genuine dispute, that requirement was said by McLelland CJ in Eq to be "a significant mechanism for filtering out cases where there is in fact such a dispute, so as to prevent cases where there is a genuine dispute as to the debt from reaching the court on such an application as the present, with a consequent waste of time and resources". 98The legislative purposes identified in relation to s 459J in the Explanatory Memorandum focussed on "overcoming the prolonged proceedings which can result from legal disputation in relation to the effectiveness of a statutory demand which occurs on the hearing of a case for the winding up of a company". The legislative purpose is thus to ensure that questions about the ability to rely on the presumption of insolvency are known in advance of the winding up application. 99It was submitted by Mr Spender that the harshness of operation of the statute was no ground for setting aside the statutory demand (by reference to David Grant and Switz ) and that if the relative position of the parties were taken into account, the burden of not receiving payment (albeit one to which Mr Higgs might not subsequently be found to be entitled) would be greater on Mr Higgs than the burden on King Furniture of making payment (when it is conceded that it has "millions" of dollars in the bank). In response, Mr Harris submits that this is not a summary judgment application (and suggested there might be legitimate concern as to recovery of moneys from an individual in Mr Higgs' position). Further, Mr King has deposed to King Furniture's preparedness to pay the disputed amount into court as a condition of any order setting aside the demand. 100The harshness with which the statutory regime may operate was recognised in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37, where Spigelman CJ said (at [40] - [51]): There are many ways in which an obligation to pay an amount of money can be contested in legal proceedings. There are ways in which an amount paid notwithstanding a denial of an obligation to do so, can be recovered. The practical effect of the operation of Pt 5.4 may very well be that companies will be obliged to actually make payments in circumstances in which they deny the obligation to do so. The fact that one party in a commercial context, rather than another, thereby receives the commercial and legal advantages of being in possession of a sum of money which is in dispute, raises no issue of principle and causes no injustice of a necessarily irremediable character to the party which is not in possession of the funds, even if it once were. The position may be otherwise if the necessity to make the payment causes an otherwise solvent company to be subjected to the costs and disadvantages of a process of winding up. There is a public interest in avoiding that consequence. On the other hand, if the company is not solvent, because the disputed debt is indeed owing, there is a public interest in commencing the processes of the winding up sooner rather than later. These are offsetting public `interests. The legislature has adopted a particular scheme which causes the balance to be drawn in a specific way. The circumstance that commercial injustices may, on some occasions, be caused to the debtor company by the operation of that scheme, may be offset by the commercial injustices that the continued operation of an insolvent company may cause to existing and, if permitted, increased or future creditors of such a company. (my emphasis) The 1992 reforms were intended to minimise the opportunity for delay by ensuring that disputes as to debts are determined at an early stage and do not delay or prolong the hearing of the issue of solvency. The strict requirements of s 459 G are subject only to s 459 S , which Hayne J has called the "only safety net": Texel Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 298 at 300-301. However, the scheme did not confer on the court a general discretion. A mandatory pre-condition was introduced in s 459 S (2). The purpose of the legislative scheme is best served by giving that subsection a strict construction. 101Similarly, in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, Gummow J said: No doubt, in some circumstances, the new Pt5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand. It also may transpire that a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term, as explained in Williams v Spautz . However, in an appropriate case, injunctive relief may then be available to the company in a court of general equity jurisdiction. 102I accept that the circumstances in which King Furniture did not (apparently due to its former accountant's unfortunate medical condition and the time apparently required in order to review the books of the company after the new accountant was retained) appreciate within 21 days after service of the statutory demand that there was an issue as to whether additional or unaccounted for payments allegedly earlier made to Mr Higgs would have provided a basis on which to dispute the demand or to raise an offsetting claim, if operating to preclude King Furniture now seeking to set aside the demand, may be seen as unfair to King Furniture. Had that information been available within the 21-day period (and had it not been challenged by Mr Higgs, as it was not challenged when the matter came before me) then there can be little doubt that a genuine dispute would have been established and (if quantified in an appropriate manner) a genuine offsetting claim. 103In those circumstances, reliance on the statutory demand (with the consequent effect of the presumption of insolvency arising) seems harsh. However, it is clear that the outcome of an application such as this is not to be determined by a judge's subjective view as to what is fair in the circumstances. 104The application of Graywinter seems to me to preclude reliance on the grounds now sought to be relied upon as constituting "some other reason" to set aside the statutory demand. I am not satisfied that the grounds now sought to be relied upon are beyond and separate from those which could have been relied upon under s 459H. Nor am I satisfied that there was an abuse of process in the circumstances in which the statutory demand was issued by Mr Higgs so as to permit a finding that it should now be set aside. The unfortunate position seems to me to be that there is now a dispute that would most appropriately be dealt with in the Commercial List proceedings without putting the company at risk of the presumption of insolvency. However, the legislative intent behind Part 5.4 (which is to require the existence of such a dispute to be determined at an early stage) carries with it the need for companies to be diligent in identifying the grounds of any dispute within the 21 day statutory period allowed and where that has not happened then it would subvert the legislative intent underlying Part 5.4 to proceed to set aside the statutory demand for a reason that it is contemplated will be raised within that 21 day period. 105Accordingly, the application to set aside the statutory demand must fail. I do, however, consider it appropriate (as conceded by Mr Higgs) to vary the statutory demand to exclude the disputed amount relating to the 2009 year. 106For those reasons I make the following orders: (1)I order that the statutory demand served on the plaintiff on 21 June 2010 by the defendant be varied by reducing the amount of the claimed debt to $1,502,724.80, by deleting the sum of $1,749,416 where appearing in the Schedule and inserting instead the sum of $1,502,724.80. (2)I declare that the statutory demand has effect, as varied, from the date the statutory demand was served on the plaintiff. 107Subject to any submissions in relation to costs, I consider that the appropriate order would be for the plaintiff to pay the defendant's costs of the application to set aside the statutory demand.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 March 2011
In the matter of King Furniture Australia Pty Ltd - King Furniture Australia Pty Ltd
Higgs
33 Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45 Rainbow and Nature v Bronson and Jacobs [2006] NSWSC 217 Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601 Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37 Tatlers.com.au Pty Ltd v Davis [2006] NSWSC 1055; (2006) 203 FCR 473 Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 130; [2004] NSWSC 527 Texts Cited: Austin & Black's Annotations to the Corporations Act Ford's Principles of Corporations Law General Insolvency Inquiry (ALRC DP 32) Category: Principal judgment Parties: King Furniture Australia Pty Ltd (Plaintiff) Steven Higgs (Defendant) Representation: Counsel: C Harris SC (Plaintiff) A Spencer (Defendant) Solicitors: Colin Biggers & Paisley (Plaintiff) Gillis Delaney Lawyers (Defendant) File Number(s): 10/229204
[2005] ACTCA 3
[2004] QCA 91
(1995) 55 FCR 562
(1995) 184 CLR 265
(1992) 175 CLR 353
(1998) 84 FCR 454
(1996) 70 FCR 452
(1996) 62 FCR 302
(1994) 122 ALR 717
(1998) 153 ALR 359
(1997) 76 FCR 452
(2006) 203 FCR 473
(2004) 185 FLR 130
(1980) 24 SASR 189
(1997) 80 FCR 296