Supreme Court of WA|1998-04-03|Before: Sundberg J

The application to set aside the statutory demand was filed on 9 December 1997. It was supported by an affidavit of Michele Anne Ehrenfeld (Ms Ehrenfeld) sworn 18 December 1997. A dispute arose in relation to this affidavit. The respondents said, first, that it did not satisfy the requirements of s459G(3) of the Corporations Law and that therefore the application to set aside the statutory demands was not properly made. In other words, there was no jurisdiction to order that the demands be set aside. Secondly, it was said that this affidavit contained hearsay material and such material was not permissible in a hearing such as this.

Under s459G of the Corporations Law a company may apply to the Court for an order setting aside a statutory demand which has been served on the company. This application, when made, is determined under the provisions of s459H. Section 459G sets out a code governing the making of an application to set aside: see David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; Section 459G(3) reads as follows:

"An application is made in accordance with this section only if, within those 21 days:

(a) an affidavit supporting the application is filed with the Court; and

(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company."

It was argued by the respondents that the affidavit filed by the applicant was not an "affidavit supporting the application" within the terms of s459G(3)(a). The question of what amounts to a supporting affidavit was considered by Justice Sundberg of the Federal Court in Graywinter v Gas & Fuel Corporation Superannuation Fund [1996] FCA 822; (1996) 21 ACSR 581. His Honour put the position as follows:

"In order to be a 'supporting affidavit' an affidavit must say something that promotes the company's case. An affidavit which merely says 'I am a director of the company but I am too busy at present to make a full affidavit, and I will do so later' would not support the application. It would in no way advance, further or assist the company's cause, which is to have the notice set aside. At the other extreme the affidavit need not detail in admissible form all the evidence that supports the contention of a genuine dispute."

In considering whether or not an affidavit is a supporting affidavit within the meaning of the subsection, it must first be determined what parts of the affidavit are admissible. This is dependent upon whether the proceedings are interlocutory or final. If they are interlocutory, then the provisions of O37 r6(2) apply. An affidavit in interlocutory proceedings "may contain statements of information or belief with the sources and grounds of that information and belief". By way of contrast, if the relief is final then the deponent is limited to evidence about which he or she has personal knowledge.

In my view, applications such as this are interlocutory in nature. I would adopt what was said by Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank [1994] VicRp 61; (1993) 11 ACLC 1062 at 1067:

"In my view this application [to set aside a statutory demand] is an interlocutory proceeding. Unlike the question in Cowie's case [which was whether a statutory authority had immunity from suit in a particular case because of the failure to give notice under the Statute of Limitations Act] the present proceeding determines only whether a demand may stand or not. If the demand stands, the consequences are serious but there is no final determination of any right. All that follows from the demand not being set aside is that the company will have a further perhaps short period within which it must make the demand or face a conclusion that it is to be presumed insolvent (unless it proves the contrary). No order can be made under s459G which finally determines the rights of the parties."

In Graywinter v Gas & Fuel Corporation Superannuation Fund (supra), Sundberg J appeared to reach the opposite conclusion. His Honour said:

"That evidence must be available at the hearing of the application to set aside, because the application is for final and not interlocutory relief."

It is also instructive to note that in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACLC 669, McLelland CJ declined the opportunity to agree with the views expressed by Hayne J. His Honour was dealing with an appeal from a Master who had determined that the proceedings were interlocutory. For my part, I find the reasoning of Hayne J compelling and I have no hesitation in deciding that the proceedings are interlocutory and that the provisions of O37 r6(2) apply to any affidavits filed in the proceedings.

Turning then to the affidavit of Michelle Ehrenfeld, she says then that she is a shareholder of Joshua and a former director. Her husband, Gabriel Ehrenfeld, appears to be the sole director of Joshua. She sets out the statutory demands and says that Joshua has traded with the respondents for the past five years, buying software from KTX and hardware from Edge. She then goes on in para 5 to say that there have been a series of awards made against Joshua in the Small Claims Tribunal amounting to around $80,000. She says that the responsibility for these awards lies with the respondents because they relate to defective material supplied by the respondents to Joshua. Further, she says that as a result of "other defective products supplied by the respondents", there exists warranty claims in the sum of $381,000. The remainder of the affidavit continues in a similar vein. Ms Ehrenfeld sets out a series of matters where she says the applicants were at fault and which have caused Joshua to suffer losses.

The affidavit goes much further than to suggest simply that there is a dispute between the parties and that further information will be provided at a later time. To that extent, it seems to me to satisfy the requirements of s459G(3). Counsel for the respondents made the point that many of the statements made in the various paragraphs by Ms Ehrenfeld do not identify the source of her information and belief. For instance, para 7 of the affidavit reads as follows:

"The applicant says that it has incurred losses as a result of the respondents' breach of warranty arrangements and in numerous cases the respondents have failed to honour warranty claims in a timely fashion and sometimes, did not honour warranty claims at all. As a result the applicant says that it was forced to give its customers new goods from its own stock at its own cost."

That paragraph, taken alone, does not give any indication of where Ms Ehrenfeld, a shareholder of Joshua, obtained that information. Counsel for the applicant suggested that all of the information was obtained by Ms Ehrenfeld from her husband and that is apparent from para 3 of the affidavit. That paragraph reads as follows:

"I am informed by the applicant and my husband and I verily believe that not only are the amounts claimed in dispute but that the respondents are indebted to the applicant in an amount exceeding the amount claimed by the respondents."

In my view, it would have been far preferable had Ms Ehrenfeld specified where she obtained the information about each of the matters raised in her affidavit. For instance, in relation to para 7, it would have been better if she had indicated if she had examined the books or whether she was given that information by her husband. But I accept the submission by counsel for Joshua that it is tolerably clear from the structure of the affidavit that the information deposed to by Ms Ehrenfeld was obtained from her husband. On that basis, it seems to me that Ms Ehrenfeld's affidavit complies with the requirements of the section, contains admissible material and that I have jurisdiction to deal with this application.

Turning then to the application itself. In further support of the application, Joshua filed an affidavit of Jason Donald Kraucevs sworn 27 January 1998, and three affidavits of Gabriel Ehrenfeld sworn, respectively, 27 January, 16 February and 19 March. In opposition to the application the respondents filed two affidavits of Duncan Ratter, one sworn 18 December 1997 and the other sworn 25 February 1998. At the conclusion of the hearing I allowed the respondents to file a further affidavit of Ratter and that affidavit is dated 26 March 1998. All of these affidavits, taken together with the affidavit of Ms Ehrenfeld, provide the evidence in support of, and in opposition to, the application.

During the course of his submissions, counsel for the respondents conceded that:

"At least as far as the second respondent is concerned, the affidavit evidence taken in its totality that has been filed on behalf of the applicant does give rise to a genuine dispute."

In fact, what the applicant has established is that there is an offsetting claim against the amount demanded by Edge and therefore the applicant is entitled to have the statutory demand set aside under s459H(1)(b). The result is the same, no matter which section applies. In my view, the concession is properly made.

So far as KTX is concerned, counsel for KTX submitted that the evidence established only that part of the amount claimed was in dispute. Thus, it was submitted, the amount of the demand could be reduced rather than the demand be set aside entirely. The calculation of any amended amount is made pursuant to s459H(2) to (6). These subsections read as follows:

"(2) The Court must calculate the substantiated amount of the demand in accordance with the formula:

(b) the total of the respective admitted amounts of the debts;

(a) if the Court is satisfied that the company has only one offsetting claim - the amount of that claim; or

(b) if the Court is satisfied that the company has 2 or more offsetting claims - the total of the amounts of those claims; or

(3) If the substantiated amount is less than the statutory minimum, the Court must, by order, set aside the demand.

(4) If the substantiated amount is at least as great as the statutory minimum, the Court may make an order:

(a) varying the demand as specified in the order; and

(b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company.

'admitted amount', in relation to a debt, means:

(a) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt - a nil amount; or

(b) if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute; or

'offsetting claim' means 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);

'respondent' means the person who served the demand on the company.

(6) This section has effect subject to section 459J."

The amount demanded in the statutory demand issued by KTX was $60,813.47. After reviewing all of the documentation, I am not entirely sure how this figure was reached. On 7 August 1997 KTX wrote to Joshua claiming they were owed $61,474.10. That letter is to be found as annexure DR4 to the affidavit of Ratter, sworn 25 February 1998. Annexed to that letter there was a "Statement of Account" which supported the sum claimed. The discrepancy of some five hundred odd dollars between the amount claimed in the letter of August 1997 and the amount demanded in the statutory demand is not explained. However, as the amount claimed is less than the amount referred to in the correspondence, very little would seem to turn on this point. Further, in none of the affidavits filed on behalf of the applicant is a challenge made to the amount claimed by KTX. The affidavit of Ms Ehrenfeld is directed to offsetting claims. The affidavits of Mr Ehrenfeld expand this position but do no more. In my view, then, the "admitted total" is $60,813.47.

Turning to the off-setting total, counsel for the respondents conceded a sum of $25,000. This is the total amount claimed for price protection credits and payments it is said were not correctly applied to KTX account. They appear as items 6 and 7 in annexure G to the affidavit of Gabriel Ehrenfeld sworn 27 January 1998. They quantify amounts referred to in paras 15 and 16 of Ms Ehrenfeld's affidavit. So, at least $25,000 must be included in the off-setting total for the purpose of calculating the substantiated amount.

It is somewhat difficult to see what, if any, further amount should be included in the off-setting total. Nowhere in the affidavit is there a calculation made by either Ms Ehrenfeld or Gabriel Ehrenfeld as to what particular claims they have against KTX. In the absence of any clear statement by Joshua, I have been unable to tease out of the evidence any amounts that should be added to the off-setting total. In para 4 of her affidavit Ms Ehrenfeld says that KTX supplied the software and Edge the hardware. This dichotomy appears to have been maintained in all of the dealings between the parties. There is reference in para 17 of Ms Ehrenfeld's affidavit to copies of Microsoft Encarta which it is alleged were improperly supplied. Encarta is, prima facie, a software product and therefore likely to be supplied by KTX. However, as Mr Ratter explains in paras 2 and 7(j) of his affidavit of 25 February 1998, because this software was pre-loaded it formed part of the hardware package. Nowhere in the further affidavits of Mr Ehrenfeld is this claim disputed.

In his affidavit of 16 February 1998, Gabriel Ehrenfeld suggests that there was some confusion between items supplied by KTX and Edge and that it was not always the case that one supplied software and the other supplied hardware. However, this point is not developed and, on my reading of the affidavit, there is no amount that I could find which is said to be wrongly debited against Joshua by KTX or about which there is a dispute. Further comment is made on this point by Mr Ehrenfeld in his affidavit of 19 March. In particular, paras 4, 5 and, to some extent 6, are relevant. But although these two affidavits raise a point there is not sufficient evidence to warrant my adding any amount to the off-setting total in regard to them.

During the course of argument, a question arose as to an invoice for the sum of $58,486.20 which is included in the statement of account to be found attached to annexure DR4 in the affidavit of Duncan Ratter sworn 25 February 1998 and to which I have already referred. There is no date next to that invoice. By para 10 of his affidavit of 19 March, Gabriel Ehrenfeld appears to suggest that this amount was paid as part of a settlement reached whereby Joshua was to make a payment of $275,000 to Edge. As I understand Mr Ehrenfeld's argument, he says that when the $275,000 was paid he directed that the sum of $58,486.20 be paid to KTX. The deed under which this payment of $275,000 was made is annexure DR3 to the affidavit of Duncan Ratter sworn 25 February 1998. It is not entirely clear how, in the face of that agreement, Mr Ehrenfeld was entitled to direct payment of part of the amount to discharge a debt owed to KTX. The agreement is between Joshua and Edge. I could see no basis for a unilateral decision by Mr Ehrenfeld that part of the payment to Edge should be directed to KTX.

But leaving that to one side, the position has been adequately explained by a further affidavit of Duncan Ratter sworn 26 March 1998. It is apparent from this affidavit that an amount of $58,983.60 was owed by Joshua to KTX. There is no explanation as to how the amount was reduced to the figure of $58,486.20, but as it is a lesser amount than the invoice Joshua could hardly complain. I am satisfied with what is said by Duncan Ratter in his affidavit and it seems to me that there is no basis upon which I could add any further amount to the off-setting total.

On this basis, I find the substantiated amount of the demand to be the sum of $35,813.47. I reach this figure by deducting from the admitted total of $60,813.47 the off-setting total of $25,000. I would therefore propose to make an order under s459M that the statutory demand should be set aside, subject to the payment by Joshua Corporation to KTX of an amount of $35,813.47 within 14 days of the date of this order.

I will hear the parties as to the precise form of the orders and in relation to costs.

Joshua Corporation Pty Ltd & Ors v Ktx Technology Pty Ltd & Ors [1998] WASC 90 (3 April 1998)

John Shearer v Gehl Co [1995] FCA 1293; (1995) 130 ALR 732

Joshua Corporation Pty Ltd & Ors v Ktx Technology Pty Ltd & Ors [1998] WASC 90

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Cases Cited (4)

Joshua Corporation Pty Ltd & Ors v Ktx Technology Pty Ltd & Ors [1998] WASC 90 (3 April 1998)