Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 | Case summary

Judgment 1BARRETT JA: The principal question before the Court is whether a statutory demand should be set aside because the affidavit that accompanied it did not contain a statement by the deponent to the following effect: "I believe that there is no genuine dispute about the existence or amount of the debt." 2In proceedings in the Equity Division of the Supreme Court, Kisimul Holdings Pty Ltd (which I shall call "the applicant") applied under s 459G of the Corporations Act 2001 (Cth) for orders setting aside two statutory demands served on it by Clear Position Pty Ltd ("the respondent"), one dated 11 September 2013 and the other dated 2 October 2013. There was a separate proceeding in respect of each demand. The proceedings were heard together, evidence in each being evidence in the other. 3Each s 459G application was advanced on several alternative grounds, namely, that there was a genuine dispute about the existence or amount of the debt the subject of the demand (s 459H(1)(a)), that the applicant had an "offsetting claim" (s 459H(1)(b)) and that there was "some other reason why the demand should be set aside" (s 459J(1)(b)). The circumstance said to constitute "some other reason" within s 459J(1)(b) was, in each case, the absence from the affidavit accompanying the demand of a statement of the deponent's belief of absence of genuine dispute about the existence or amount of the debt. 4Stevenson J concluded that none of the grounds relied upon was made out and dismissed each originating process. 5An appeal from such a decision lies to the Court of Appeal only by leave: Supreme Court Act 1970 (NSW), s 101(2)(p). This Court heard concurrent argument on the applicant's applications for leave to appeal and the appeals themselves. 6In this Court, Mr C D Wood of counsel (with whom was Mr D Krochmalik of counsel) appeared for the applicant. The respondent filed a submitting appearance except as to costs and was not represented at the hearing. 7As I have said, the principal issue goes to the significance of the absence of the particular statement from the affidavit accompanying a statutory demand. The question is whether that absence, of itself, constitutes, in terms of s 459J(1)(b), "some other reason why the demand should be set aside". 8Part 5.4 of the Corporations Act deals with winding up in insolvency. A company's failure to comply with a statutory demand relating to an undisputed debt alleged to be owing, due and payable by it gives rise to a presumption of insolvency upon which a creditor may rely in seeking an order under s 459P for winding up of the company: s 459C(1)(a), s 459C(2)(a). Failure to comply with a demand occurs if, as at the end of the period for compliance, the demand is still in effect and the company has not complied with it: s 459F(1). Compliance entails payment of the debt or securing or compounding for the amount of it to the creditor's reasonable satisfaction. A statutory demand remains in effect, after it is served, unless and until it is set aside by order of a court exercising jurisdiction under the Corporations Act. 9Section 459E allows a person to serve a statutory demand on a company in relation to one or more debts that the company owes to the person. If, as in each of the present cases, there is one debt only, it is necessary that the debt be one that is due and payable and that its amount be at least the "statutory minimum". Section 459E(2) deals with the form of the demand. Section 459E(3) provides as follows: "Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that: (a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and (b) complies with the rules." 10The definition of "rules" in s 9 is as follows: "'rules' means: (a) rules of the Federal Court; or (b) rules of the Supreme Court of a State or internal Territory; as the case requires." 11In the Supreme Court of New South Wales, the "rules" are the Supreme Court (Corporations) Rules 1999 (NSW), rule 5.2 of which is: "For the purposes of subsection 459E(3) of the Corporations Act, the affidavit accompanying a statutory demand relating to a debt, or debts, owed by a company must: (a) be in accordance with Form 7 and state the matters mentioned in that Form, and (b) be made by the creditor or by a person with the authority of the creditor or creditors, and (c) not state a proceeding number, or refer to a Court proceeding, in any heading or title to the affidavit." 12Rule 1.6 says that a reference in the rules to "a form followed by a number" is a reference to "the form so numbered in Schedule 1 to these Rules". Form 7 in Schedule 1 sets out a form of affidavit containing five paragraphs as follows: "1 I am [state deponent's relationship to the creditor(s), eg, 'the creditor', '(name), one of the creditors', 'a director of the creditor', 'a director of (name), one of the creditors'] in respect of *a debt of $ [amount]/*debts totalling $ [amount] owed by [name of debtor company] to *me/*us/*it/*them relating to [state nature of debt or debts, ensuring that what is stated corresponds with the description of the debt or debts, to be given in the proposed statutory demand, with which this affidavit is to be served on the debtor company]. 2 [If the deponent is not the creditor, state the facts entitling the deponent to make the affidavit, eg 'I am authorised by the creditor(s) to make this affidavit on its/their behalf]. 3 [State the source of the deponent's knowledge of the matters stated in the affidavit in relation to the debt or each of the debts, eg 'I am the person who, on behalf of the creditor(s), had the dealings with the debtor company that gave rise to the debt', 'I have inspected the business records of the creditor in relation to the debtor company's account with the creditor']. 4 *The debt/*The total of the amounts of the debts mentioned in paragraph 1 of this affidavit is due and payable by the debtor company. 5 I believe that there is no genuine dispute about the existence or amount of the *debt/*any of the debts." 13The combined effect of these provisions is that a person with first-hand knowledge of circumstances concerning the debt on which the creditor relies must, as envisaged by paragraph 5 of Form 7, state on oath or affirmation his or her belief that there is no genuine dispute about the existence or amount of that debt. 14In the present case, each statutory demand served by the respondent was accompanied by an affidavit of Ms Sonia Simms, a director of the respondent. Neither affidavit contained any statement in terms of paragraph 5 of Form 7 or otherwise intimating a belief of Ms Simms of absence of genuine dispute about the existence or amount of the relevant debt. Ms Simms, as well as being a director of the respondent, is a solicitor. 15The primary judge held that the omission from the affidavit was not a "defect" in the statutory demand itself, that being a matter relevant to s 459J(1)(a). That conclusion was correct and is not challenged. His Honour then addressed the question whether the omission constituted "some other reason" within s 459J(1)(b). He made the following observations about decided cases on that subject (at [98]-[103]): "The reference in s 459J(1)(b) to "some other reason" to set aside a demand is a reference to a reason not otherwise indicated by the Act (for example in s459H) as a ground to set aside a demand: for example Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC 1143; 25 ACLC 1392 at [27] per Barrett J. There will be 'some other reason' to set aside a demand 'whenever there is a need to counter some attempted subversion of the statutory scheme': per Barrett J in Saferack at [33]. The failure to include a 'no genuine dispute' statement in a demand has been described as a 'material failure of significance' and not a 'mere defect' within the meaning of s 459J(2): per Tamberlin J in IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd [2003] FCA 533 at [22] and [24]. In B & M Quality Constructions Pty Ltd [v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433] the affidavit accompanying the demand did contain a 'no genuine dispute' clause but in an affidavit sworn by a mercantile agent with no personal knowledge of the facts. McLelland CJ in Eq set aside the notice on that basis but also said: 'The express requirement in the rule that the person making the affidavit depose to his or her belief that there is no genuine dispute is a significant mechanism for filtering out cases where there is in fact such a dispute, so as to prevent such cases from reaching the court on such an application as the present, with a consequent waste of time and resources.' (at 435-436) McLelland CJ in Eq's observations have been cited with approval of numerous occasions: see Chadmar Enterprises Pty Ltd v IGA Distribution Pty Ltd [2005] ACTSC 39; 190 FLR 466; Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11; Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746; Standard Commodities Pty Ltd v Societe Socinter Department Centragel [2005] NSWSC 493; 54 ACSR 489; Ambassador at Redcliffe Pty Ltd v Emerald Constructions Australia Pty Ltd; sub nom Ambassador at Redcliffe Pty Ltd v Barreau Peninsula Property Pty Ltd [2006] QSC 247; [2007] 2 Qd R 199; Rapcivic Contractors Pty Ltd v Mapol Nominees Pty Ltd t/as Amalgamated Painting Services [2008] QSC 310; [2009] 1 Qd R 21; Ri-Co Holdings (Australia) Pty Ltd v Allied Sandblasters Pty Ltd (2009) 72 ACSR 103. There are other cases where the absence of a 'no genuine dispute' clause has been one of the bases upon which statutory demands have been set aside: for example Technitrade Pty Ltd v Compucon Computers (SA) Pty Ltd [2002] SASC 309 per Burley M at [14]; Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [2001] WASCA 299; (2002) 20 ACLC 352 per Miller J at [32]; Wildtown Holdings Pty Ltd v Rural Traders Co Ltd [2002] WASCA 196 per Templeman J (Miller and Steytler JJ agreeing) at [70] - [72]." 16Having thus referred to numerous cases in which absence of a "no genuine dispute" clause from the s 459E(3) affidavit was seen to be "some other reason' within s 459J(1)(b) - and no case in which the opposite conclusion was reached - the primary judge said (at [104]-[109]: "However, in the particular circumstances of this case, I do not consider that the failure by Ms Simms to include a 'no genuine dispute' clause in her affidavits provides 'some other reason' to set aside either of the First or Second Demands. This for two reasons. The first is the unsatisfactory and unpersuasive manner in which Kisimul sought to propound the existence of a 'genuine dispute' and 'offsetting claim'. I have found that there was no basis upon which Kisimul could properly assert that there was a 'genuine dispute' about the amounts claimed in the First and Second Demands. The claim to an "off-setting claim" was abandoned in the circumstances to which I referred. The second is that, in my opinion, the absence of a 'no genuine dispute' assertion in Mr [sic; scil 'Ms'] Simms's affidavits could not possibly have made any difference to Mr McNeill's, and thus Kisimul's, response to the First and Second Demands. The deficiency is the affidavits has not caused any confusion, let alone injustice to Kisimul. In the particular circumstances of this case, I do not consider that the deficiency in Mr [sic; scil 'Ms'] Simms's affidavits has caused any 'subversion' of the statutory system, or provides any 'other reason' why the demands should be set aside." 17The applicant contends that the primary judge erred in reaching this conclusion and that the omission from the affidavit should have caused his Honour to set aside each statutory demand. The applicant places particular reliance on two decisions of the Full Court of the Supreme Court of Western Australia to which the primary judge referred, Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [2001] WASCA 299; 20 ACLC 352 and Wildtown Holdings Pty Ltd v Rural Traders Co Pty Ltd [2002] WASCA 196; 172 FLR 35. 18Before turning to those cases, I should say something about the power that s 459J(1)(b) puts at the disposal of the court to set aside a statutory demand for "some other reason" - that is, a reason other than those specified in s 459H and s 459J(1)(a): Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; 76 FCR 452 at 459. The jurisdiction is a remedial jurisdiction. The Court of Appeal of the Australian Capital Territory (Crispin P, Gray and Marshall JJ) said this of the provision in Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3; 157 ACTR 22 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 Commissioner of Taxation (1996) 62 FCR 302 at 317 to 318." 19In 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. 20The criterion based on whether the person serving the statutory demand had engaged in conduct that "was unconscionable, was an abuse of process or had given rise to substantial injustice" (these being words used by Black CJ, Einfeld and Sackville JJ in Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 at 317-318) had earlier been applied by the Queensland Court of Appeal in KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2004] QCA 91. In Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312; 25 ACLC 1341, however, Keane JA (as he then was) said, with the concurrence of Holmes and Muir JJA, that it may be better to avoid attempts to categorise a "reason" for setting aside a statutory demand under s 459J(1)(b) of the Act in terms of "unconscionability" or "abuse of process" because reference to these legal categories tends to distract attention from the real question which is whether there is good reason to deny effect to a statutory demand as creating a ground for the winding up of the debtor company. Similarly, Keane JA said, broad notions such as "substantial injustice" or "unfairness" may describe a judge's reaction to circumstances which may constitute a reason to set aside a demand without affording an explanation of the analysis which has led to that conclusion. I do not understand that aspect of Keane JA's reasoning to have been disapproved in the subsequent appeal to the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; 237 CLR 473 where (at [61]) it was said that legislative policy, not necessarily confined to that of the Corporations Act itself, is among the relevant considerations to be taken into account when determining the existence of the necessary satisfaction for s 459J(1)(b). 21In Meehan v Glazier Holdings Pty Ltd [2005] NSWCA 24; 53 ACSR 229, this Court emphasised that s 459J(1)(b) is to be applied in cases where it is necessary to preserve the undistorted operation of Part 5.4 and to promote the objectives it is intended to serve. Santow JA observed (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 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 [(1996) 20 ACSR 11], at 757 per Bryson J; Kezarne Pty Ltd v Sydney Asbestos Removal Services Pty Ltd (1998) 29 ACSR 11 at 18 per Austin J." 22Young CJ in Eq said (at [57]-[61]): "I agree with Santow JA and with his reasons. I merely wish to add one or two 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 discretionary 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." 23Meehan v Glazier Holdings Pty Ltd makes it clear that the "substantial injustice" criterion to which express reference is made in s 459J(1)(a) is not, by some process of osmosis, imported into s 459J(1)(b). 24The operation of s 459J(1)(b) is not confined to cases coming within established categories. The section applies whenever there is a need to counter some attempted subversion of the intended operation of Part 5.4. Its purpose was recently described somewhat more broadly. In Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91, the provision was said (at [83]) to be one "which will rarely be employed, but when employed, it will be for the purpose of meeting the demands of justice: Eumina Investments Pty Ltd v Westpac Banking Corp [1998] FCA 824; 84 FCR 454, 458-459". 25It is thus a remedial provision under which the court may deal with cases not within s 459H or s 459J(1)(a) in a way that is just, having regard to the purpose of the legislation. Furthermore and as the Full Federal Court said in Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (above) at 137, it is unwise to attempt to mark out the limits of the s 459J(1)(b) power. 26I return now to the two appellate decisions in Western Australia. In Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd, Miller J (with the concurrence of Wallwork J and Burchett AUJ) described absence of the "no genuine dispute" clause from the s 459E(3) affidavit as "a significant defect" and "a crucial and substantive omission", since the legislature had provided the statutory demand procedure only in relation to undisputed debts. The proposition to be inferred from Miller J's observation is that only a creditor who both believes that there is no genuine dispute as to the existence and amount of the debt and communicates that belief in the prescribed way to the company should be permitted to have the advantages that flow from service of a statutory demand. 27The same view was taken in Wildtown Holdings Pty Ltd v Rural Traders Co Pty Ltd. Templeman J said at [68], with the concurrence of Steytler and Miller JJ: "It is a requirement of Form 7 that the deponent to the affidavit accompanying a statutory demand should depose to his or her belief that there is no genuine dispute about the existence or the amount of the relevant debt or debts. Mr Newman's affidavit contained no such statement. The Master regarded that as 'a major defect': and rightly so, in my view." 28Templeman J then referred to the view expressed by the Master that, on the facts, the deponent of the affidavit, had he thought about it, could have deposed to the absence of genuine dispute and that the omission was therefore not significant. The judge rejected that view: "In my view, with all respect to the Master, that was not a proper basis on which to deal with this omission from the affidavit accompanying the statutory demand. I accept that the creditor's view that there is no genuine dispute about a debt is necessarily subjective. However, it is not for the Court to put words into the mouth of a deponent." 29The conclusion (at [70]-[71]) was: "There was, therefore, a major omission from the affidavit. As Miller J said in Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd (supra) at [32]: ' ... The failure of the deponent to swear that there was no genuine dispute between the parties was a significant omission. It is essentially because there is no genuine dispute that the legislation has provided for the (statutory demand) procedure.' Again, in my view, as a result of this failure, it cannot be said that there was either compliance or substantial compliance with O 81G r 31 [ie, the rule of court corresponding with the current rule 5.2]. On that ground also, in my view, the statutory demand should have been set aside." 30These two cases recognise (as do several first instance decisions to which the primary judge referred) that the statement of belief as to absence of genuine dispute in the s 459E(3) affidavit is concerned not only to ensure that the company served with the demand is informed about the creditor's belief as to the relevant matter but also to instil in the creditor a sense of due attentiveness to the requirement that a debt other than an undisputed debt not be made the subject of a statutory demand. The latter aspect is no less significant than the former. Indeed, it might be thought to be more significant. 31Mr Wood's researches have not brought to light any case in which absence of the relevant statement from the accompanying affidavit has not been seen as a sufficient basis for setting aside the statutory demand. Mr Wood drew attention to the observation of Kourakis CJ in Ceduna Marina Development Co Pty Ltd v Bria [2012] SASC 115; 281 LSJS 274 (at [15]) that such failure can be a sufficient reason to set aside a demand even if the company relies on that factor alone and does not file material disputing the debt. 32The quality of the debt as undisputed is central to the proper working of Part 5.4. A presumption of insolvency can be allowed to arise through non-compliance with a demand for payment of a debt only if the debt is uncontroversially owing, due and payable. Unless the debt is of that kind, it cannot safely be presumed that non-payment is the product of inability to pay. 33A creditor seeking the benefit of a statutory presumption of insolvency through service of a statutory demand has a responsibility to ensure that, so far as it is aware, the debt relied on is owing, due, payable and undisputed - or, more accurately, a responsibility not to rely on the debt unless it genuinely believes it to be of that kind. And the company served with the demand has a right, secured to it by s 459E(3)(b) and the provision of the rules requiring adherence to Form 7, to be assured that the demanding creditor recognises that responsibility and has conscientiously formed a belief that the responsibility has been discharged. 34The statement by the deponent of the s 459E(3) affidavit of belief of absence of genuine dispute therefore provides a significant measure of assurance that the objectives of Part 5.4 are being observed by the creditor. Absence of the statement means that that measure of assurance is lacking and puts the recipient company into a position of uncertainty from which the legislation intends that it should be protected. 35The primary judge was in error when he regarded the absence of the relevant statement as somehow offset or compensated for by particular factual matters. Those factual matters had nothing to do with preserving the salutary measure for which the legislation makes provision. 36The matters raised by this ground of appeal involve important questions about the meaning and significance of provisions to which resort is had in the commercial community on a virtually daily basis. For that reason, leave to appeal should be granted. 37On the analysis I have made and for the reasons I have stated, the primary judge erred in his conclusion as to absence of "some other reason why the demand should be set aside". For that reason, the appeal should be allowed and the orders sought by the applicant in the Equity Division should be made in relation to each statutory demand. 38It is unnecessary to deal with the grounds of appeal concerning the existence of a genuine dispute within s 459H(1)(a). 39I propose orders as follows for the substantive disposition of the matters before the Court: In proceedings CA2014/114146:

Grant leave to appeal.
Direct that a notice of appeal in the form of the draft in the white folder be filed within 7 days.
Appeal allowed.
Set aside the orders made in the Equity Division on 26 March 2014 and in lieu thereof: (a) Order that the statutory demand dated 11 September 2013 served on the plaintiff by the defendant be set aside. (b) Order that the defendant pay the plaintiff's costs of the proceedings. In proceedings CA2014/114162:
Grant leave to appeal.
Direct that a notice of appeal in the form of the draft in the white folder be filed within 7 days.
Appeal allowed.
Set aside the orders made in the Equity Division on 26 March 2014 and in lieu thereof: (a) Order that the statutory demand dated 2 October 2013 served on the plaintiff by the defendant be set aside. (b) Order that the defendant pay the plaintiff's costs of the proceedings. 40BEAZLEY P: I agree with the reasons and with the orders proposed by Barrett JA. 41GLEESON JA: I also agree with the reasons and orders proposed by Barrett JA. 42BEAZLEY P: In each proceeding, the Court makes the orders proposed by Barrett JA and the following additional order and directions:
Costs of the appeal reserved.
The respondent file and serve any submissions in respect of costs within 14 days of today's date.
The applicant to file any submissions in reply within 7 days thereafter.

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Kisimul Holdings Pty Ltd v Clear Position Pty Ltd

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