Describing the debt in a statutory demand

04 December 2009

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The recent Supreme Court of New South Wales decision of Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 1257 is a timely reminder of the importance of describing the debt in a statutory demand. The debtor must be able to assess the basis on which the debt is said to arise and determine whether there is a genuine dispute in respect of the debt.

Facts

In December 2007 a settlement deed was entered into.

Clause 5(c) of the deed required one party to pay $400,000 to another party on the happening of one of five particular events.

Clause 7 of the deed provided that the obligation to pay was guaranteed by Patonga Beach Holdings Pty Ltd (Patonga Beach).

In April 2009 the party entitled to payment served a statutory demand on Patonga Beach.

The statutory demand described the debt as “Balance of settlement sum due on or about 9 April 2008 as per subclause 5(c) of [sic] clause 7 of the deed”. However, the particular event which purportedly triggered Patonga Beach’s guarantee obligation was not identified.

Patonga Beach applied to the court for an order setting aside the statutory demand.

Decision

Section 459J(1)(a) provides that the court may set aside a statutory demand if it is satisfied that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside.

Section 459J(2) provides that except as provided in subsection (1), the court must not set aside a statutory demand merely because of a defect.

Justice Austin referred to the following passage in the decision of LSI Australia Pty Ltd v LSI Holdings Pty Ltd (2007) 25 ACLC 1602:

“If the demand is so vague or ambiguous that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree that the director can assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim, then there is a lack of something necessary for completeness, and therefore a defect in the demand”.

Justice Austin found that the failure to specify which of the particular events specified in clause 5(c) had apparently occurred meant that Patonga Beach could not assess whether there was a genuine dispute as to whether the debt had become payable. Therefore, the statutory demand was defective.

Moreover, his Honour stated that the nature of the defect was such that a substantial injustice would be caused unless the statutory demand was set aside. This was because the lack of information placed Patonga Beach in the unacceptable position of having to decide whether to apply to set aside the statutory demand without knowing precisely how the debt was said to arise and whether it could rely on there being a genuine dispute as to whether the debt had become payable.

Accordingly Patonga Beach’s application was successful. Justice Austin made an order pursuant to section 459J(1)(a) of the Corporations Act that the statutory demand be set aside.

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