Statutory demands and offsetting claims

In the recent decision of Australian Cinemas Pty Ltd v Australian Executor Trustees Ltd [2011] FCA 927 the Federal Court considered whether a statutory demand could be varied due to an offsetting claim against the creditor.

Facts

The plaintiff debtor (Debtor) had operated a cinema in a shopping complex since 2003.  The shopping complex was owned by the defendant creditor (Creditor) between 2007 and March 2011.

In June 2011, the Creditor issued a statutory demand to the Debtor for payment of debt comprising rent outstanding and interest.  The existence and amount of the debt was not in dispute, however the Debtor relevantly claimed that it had an offsetting claim pursuant to s 459H of the Corporations Act 2001 (Cth) (Act).

Offsetting claim

Section 459H of the Act provides that where a company in receipt of a statutory demand has a genuine claim against the party issuing the statutory demand, the statutory demand may be set aside or varied depending on the amount of the debt and the amount of the claim.

A genuine claim requires that “the dispute be bona fide and truly exist in fact” and that the “grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived”.

The Debtor’s offsetting claim related to costs incurred in repairing and replacing fixtures and equipment in the cinema, which the Debtor alleged were the responsibility of the Creditor to maintain under the retail shop lease.

The Creditor argued that by virtue of clauses in the retail shop lease, the Debtor was under an obligation to pay rent free from any “abatement, reduction, set off, defence, counterclaim or recoupment”.

Decision

Justice Robertson held that pursuant to s 43(1)(d)(i) of the Retail Shop Leases Act 1994 (Qld) (RSL Act), the Debtor had a genuine claim for compensation for loss or damage caused as a result of the Creditor’s failure to rectify equipment.  Robertson J held that the provision in the retail shop lease that restricted the offsetting claim was inconsistent with the RSL Act and was therefore void.

Robertson J also considered authorities which had rejected offsetting claims due to the fact that, in those cases, “the parties had made a special arrangement” under which the terminology and intention of the provision against offsetting was “clearer”.  In this case, Robertson J found there was no special arrangement separate to the lease and held that the clauses in the lease were intended to relate to the application of the principle of equitable set-off.

Comment

This decision confirms the principles of s 459H of the Corporations Act that where a company in receipt of a statutory demand has a genuine claim against the party issuing the statutory demand, the statutory demand may be set aside or varied.

A creditor who wishes to avoid or reject an offsetting claim, may be required to show a “special arrangement” existed between the parties to the statutory demand, such that it was the clear intention of the parties that the debt the subject of the statutory demand would not be varied or reduced by any other debt.