Setting aside a statutory demand – is there a ‘genuine dispute’ when there is a failure to provide information about a debt?

Key points

• A statutory demand poses an existential threat for the recipient company. If a company receives a statutory demand and does nothing, it risks being wound up by Court order.
  
• One ground for setting aside a statutory demand is that there is a genuine dispute about the debt which is the subject of the statutory demand.
  
• A genuine dispute about a debt does not exist simply because (a) the debtor has requested information about the amount payable and (b) the information hasn’t been provided by the creditor.
  
• If a company is a creditor – careful structuring of terms and conditions will put you in the best position to minimise the risk of a dispute over whether a debt is payable, even where there is an entitlement to verify the debt or request other information.
  
• If a company is a debtor – act quickly if you receive a statutory demand as there is a strictly limited time to respond and serious consequences if you do nothing.

The case

1. In WA Glass Pty Ltd v Auto Control Systems Pty Ltd (No 2),^[1] the Court of Appeal (WA) recently upheld a first instance decision to allow statutory demand to stand. The decision turned on the key issue of whether there was a ‘genuine dispute’ about the debt which was the subject of the statutory demand.
   
2. WA Glass Pty Ltd (WAG) engaged Auto Control Systems Pty Ltd (Contractor) to perform electrical works at WAG’s glass recycling plant in Bassendean. The Contractor issued 11 invoices to WAG. WAG refused to pay some of those invoices.
   
   
3. On 19 February 2021, the Contractor served a statutory demand on WAG. WAG applied to set the statutory demand aside, relying on the assertion that there was a genuine dispute as to the debt because (among other things), the Contractor had not responded to WAG’s requests for information as to the amounts charged on 5 invoices.
   
   
4. At first instance, Master Sanderson dismissed WAG’s application to set aside the Contractor’s statutory demand. The Master accepted the Contractor’s submission that:

“It may well be [WAG] is genuinely dissatisfied and is acting in good faith. But that is not enough. There must be at least a plausible and genuine claim the debt is not due on some identified basis which warrants further investigation. If the basis for seeking to set aside the demand rests solely on the company’s wish to verify the amount of the debt, the court cannot be satisfied that a dispute truly exists...”.

1. The Master stated:
   
   “An applicant to set aside the demand must show how pursuant to the contractual relationship between the parties a debt is not due and owing. There may or may not be within the contract a right for the creditor to call for an account. Such a term might be implied into the contract. If the creditor was able to establish a breach of that term and was able to establish it was arguable upon breach no payment was due, there might well be a genuine dispute which would justify the demand being set aside. But that was not the case here. It was not the basis upon which [WAG] put its case. [WAG] relied solely on an alleged inability to ascertain whether or not [the Contractor] had properly charged it for those invoices not the subject of a quote. On that basis, it has not established there is a genuine dispute.”

Grounds of appeal

1. WAG appealed the Master’s decision, arguing that:
   1. there was a ‘settled rule’ that an unanswered request for information (genuinely required to determine whether an amount claimed is payable) necessarily gives rise to a genuine dispute about the existence or amount of a debt within section 459H(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act); and
      
      
   2. there was an implied term in its contract with the Contractor that liability to pay was conditional on provision of information where requested, and therefore there was a genuine dispute about the debt.
2. WAG pointed to the practical aspects of any trading relationship. It was concerned about being double-charged as there were fixed price quoted works being completed as well as variable work being completed at the same time. It argued that “without access to the timesheets or records of labour, there was … real doubt surrounding the correct amount (if any) payable of the total claimed for the variable work”.

Outcome

1. The Court of Appeal dismissed all of WAG’s grounds of appeal and held:
   1. a genuine dispute is established where a company applying to set aside a statutory demand raises a plausible contention requiring investigation; and
      
      
   2. there is no settled rule of law as alleged by WAG, as the terms and conditions relevant to each debt must be considered in each unique case.
2. It distinguished cases which had been cited by WAG:

1. 1. in PDR Pty Ltd v Cottesloe Constructions Pty Ltd, the relevant terms implicitly provided that the payment obligation was conditional on the builder providing invoices and detailed accounts, and this gave rise to a genuine dispute about the debt; and
      
      
   2. in Odyssey Re (Bermuda) v Reinsurance Australia, the recipient of a statutory demand was denied access to information in breach of an agreement and this gave rise to a genuine dispute about the debt.​​​​

1. In allowing the statutory demand to stand, the Court of Appeal held that there is a distinction between:​​​​

1. 1. an idle wondering or concern as to whether there has been some overcharging or double-charging; and
      
      
   2. a genuine belief, having a proper foundation based on the objective fact, that the whole of a claimed debt is not due and payable.

Implications for payment / credit risk

1. There are potentially serious consequences if a company is served with a statutory demand. A presumption of insolvency will arise if the company does not pay the statutory demand within the 21-day timeframe.
   
   
2. In considering whether there a statutory demand should be set aside because the sums claimed are ‘genuinely disputed’, you must carefully review the applicable terms and conditions of the relevant contract.
   
   
3. The terms and conditions agreed for a transaction are critical when any dispute arises, and should be regularly reviewed to actively manage current risks.
   
4. As a customer/debtor, consider including an express term making payment conditional upon the provision of supporting evidence of an amount due, in order to avoid an automatic payment liability despite a need to verify. Act quickly and obtain advice if you receive a statutory demand.
   
   
5. As a supplier/creditor, consider structuring terms to minimise the risk of disputes arising in relation to amounts due to you. Carefully review contractual terms before issuing a statutory demand or demand for payment.

Please reach out if we can assist.

^[1] _{[2023] WASCA 85}