Statutory Demands – genuine dispute or genuine offsetting claim

Posted on Dec 12, 2016 by Janine Wilson   |   Categories: Commercial & Business Law

Statutory demands can be defeated by a genuine dispute or a genuine offsetting claim. Who says what is “genuine”?

If you run a company and you receive a statutory demand at your registered office, you need to seek legal advice fast.

You only have 21 days in which to settle the matter with the person who issued the demand or make an application to the Supreme Court of NSW to have the demand set aside. If you do nothing, you risk being wound up.

The usual grounds for setting aside a statutory demand are set out in section 459H of the Corporations Act 2001:

  1. That there is a genuine dispute as to the existence of the debt and the amount of that debt; and/or
  2. that the recipient has an offsetting claim.

Section 459H defines “offsetting claim” to mean a genuine claim that may be raised 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).

In March 2016, the Supreme Court of Victoria issued a judgment in relation to an application to set aside a statutory demand (see Valleyarm Digital Ltd v Shanaaz Peake [2016] VSC 98).

In this case, Peake served a statutory demand on Valleyarm for the sum of $38,542.59 in respect of alleged unpaid consultancy fees. Valleyarm applied to set aside the demand on the usual grounds that it had both a genuine dispute in relation to the existence of the debt and an offsetting claim.

However, not every dispute or offsetting claim raised by a recipient of a statutory demand is “genuine”.  The person applying to set aside the statutory demand is responsible for proving it has a genuine dispute or offsetting claim.

The Court’s task is not to determine which party has the better case but need only do its best to identify those disputes that are a “mere bluster or assertion” or lacking in any real substance from those that are genuine.

In Valleyarm, the Court found that the scope and performance of Ms Peake’s services were in dispute and that various issues could require further investigation. However, the Court noted that Valleyarm had failed to contend that any of the performance breaches would have allowed them to withhold payment from Ms Peake under the terms of the consultancy agreement.

The off-setting claim that was put forward was based on a loss of revenue of $120,000 (or $10,000 over 12 months) which Valleyarm had previously been receiving and that it said it would continue to receive for the next 12 months. Valleyarm said that the loss of this client income was due to the actions of Ms Peake.

Valleyarm’s evidence of its offsetting claim was inconsistent and incorrect. The Court found that the actual historical figures from the trading account showed a monthly sales income of only $3,500. Further, the Court said that it had not been provided with any evidence of expenses or guide as to the actual profit being made. The Court said “it would be tempting to dismiss the quantification of the offsetting claim out of hand”.

The Court elected not to reject the quantum of the offsetting claim out of hand but instead did the best it could to assess the quantum. Ultimately, the Court found that the off-setting claim could be no more than $10,000 in total. This was not enough to outweigh Ms Peake’s claim and Valleyarm was ordered to pay Ms Peake’s legal costs.

Remember:

  • Any dispute or offsetting claim must be “genuine”.
  • If your offsetting claim is not property supported by evidence, it is likely to be found to be a “non-genuine” offsetting claim.
  • Act fast so that there is time to prepare detailed evidence to support your allegation of a genuine dispute or off-setting claim. As Valleyarm shows, ill-prepared evidence probably means you will lose your Supreme Court application and have to pay the other party’s legal costs.