A recent decision of Justice Ferguson of the Supreme Court of Victoria is worth reading by practitioners defending or making applications to set aside statutory demands under s459G of the Corporations Act 2001.  The decision is Elite Catering Equipment Pty Ltd v Seroshtan [2012] VSC 241(link), an appeal against a decision by Associate Justice Gardiner.  The decision at first instance, at [2012] VSC 194 (link),is also worth reading.

Very briefly, the creditor was a company director who was seeking to recover a loan to the company.  The other two directors claimed the loan was in fact equity.  There was most probably a genuine dispute about the issue, since there were no clear records at the time the advance of the money to the company to determine its nature,  save for two matters:  one of the other directors had signed a letter acknowledging the debt, and the Company accountant had prepared the accounts showing the amount to be a director’s loan.  In both decisions the Court relied on these last two matters in deciding there was no genuine dispute.

The decisions are worth reading because, first, the Court refused the application:  perhaps a rare occurrence in itself.

Second, the reasoning in the decisions illustrates that whilst the threshold for establishing a genuine dispute is low and the Court ought not try the case on its merits, nevertheless it is permitted to investigate the matter.   In this case the factual basis of the application appeared at first glance to be plausible given the lack of clear evidence about the nature of the advance when first made, but required some investigation by the Court, which it was willing to do, to determine that given the later in time evidence there was no real dispute.

Third, there is a short but pithy summary about the task of the Court in determining these applications.

On appeal, Justice Ferguson stated:

7 In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd,[7] DoddsStreeton JA said:[8]

The court, in the context of an application to set aside a statutory demand, must determine whether there is a genuine dispute about the existence or amount of the debt or whether the company has a genuine off-setting claim. No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised. (Citations omitted).

8 Her Honour also said:[9]

“As the terms of s 459H of the Corporations Act and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile. As counsel for the appellant conceded however, it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice.”

At paragraph 42 and 43 of the first instance decision, Gardiner AsJ  states;

42 The principles to be applied in assessing applications under s 459G of the Corporations Act are the subject of many authorities. The Court need only find that the plaintiff has a genuine dispute about the existence or amount of the debt. It has been said that this does not impose a particularly high standard. The grounds for alleging a dispute or an offsetting claim must not be spurious, hypothetical, illusory or misconceived. To quote from the Full Court of the Federal Court in Spencer Constructions v Aldridge,[2] it must be “real”.   In the well-known passage of McCelland CJ in Equity in Eyota v Hanave, his Honour said:

A genuine dispute connotes a plausible contention requiring investigation and raises much the same sort of considerations as a serious question to be tried arising on an application for the interlocutory injunction or extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute every statement in an affidavit, however equivocal, lacking in precision, inconsistent with the undisputed contemporary documents or other statements by the same deponent, or inherently and improbable in itself” it may not be – it may not having sufficient prima facie plausibility to merit further investigation as to its truth or a patently feeble legal argument or assertion of the facts unsupported by evidence.

43 In Powerhouse Australasia Pty Ltd v Viarc Pty Ltd,[3] DoddsStreeton J stated:

While it is not a very exacting standard, on the one hand mere, assertion of a dispute or offsetting claim, mere bluster or advancing grounds which are illusory or spurious or insufficiently particularised will not suffice. The court must not enter into the merits of the dispute, but it is not crossing the line in regard to its legitimate role on these applications to consider evidence which “bears on whether or not the asserted dispute or offsetting claim is genuine”. Indeed that is its necessary function.

Regards

Mark