FEDERAL COURT OF AUSTRALIA CORPORATIONS - application to set aside statutory demand - grounds available to set aside statutory demand where applicant alleges debt is not presently due and payable - whether inclusion of debt not presently due and payable in a statutory demand constitutes a "defect" in the demand STATUTES - statutory construction - meaning of "defect" in s 459J(1)(a) of the Corporations Law Corporations Law: ss 459H(1)(a), 459H(1)(b), 459J(1)(a), 459J(1)(b) Income Tax Assessment Act 1936 (Cth): s 222ALA Superannuation Guarantee (Administration) Act 1992 (Cth): ss 46, 48 Australian Securities Commission v Marlborough Goldmines Ltd (1993) 177 CLR 485 discussed Cadiz Waterworks Co v Barnett (1874) LR 19 Eq 182 referred to Chains & Power (Aust) Pty Ltd v Commonwealth Bank of Australia (1994) 15 ACSR 544 referred to Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562 referred to Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83 referred to Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 16 ACSR 213 referred to Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446 considered Metal Protectives Co Pty Ltd v Site Welders Pty Ltd [1968] 1 NSWR 106 referred to Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300 not followed Re Catholic Printing & Selling Co Ltd (1864) 46 ER 319 referred to Scandon Pty Ltd v Dome Supplies Pty Ltd (1995) 17 ACSR 662 referred to Stonegate Securities Ltd v Gregory [1980] Ch 576 referred to Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226 considered Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 117 FLR 330 referred to N.T. RESORTS PTY LTD v DEPUTY COMMISSIONER OF TAXATION VG 3342 of 1997 FINKELSTEIN J MELBOURNE 20 MARCH 1998 IN THE FEDERAL COURT OF AUSTRALIA DISTRICT REGISTRY vg no 3342 of 1997 between: n.t. resorts pty ltd applicant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGE: finkelstein j DATE OF ORDER: 20 MARCH 1998 WHERE MADE: melbourne THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicant pay the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA DISTRICT REGISTRY VG No 3342 of 1997 BETWEEN: N.T. RESORTS PTY LTD Applicant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGE: FINKELSTEIN J DATE: 20 MARCH 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT HIS HONOUR: NT Resorts Pty Ltd (the applicant) seeks an order setting aside a statutory demand that was served upon it on 31 October 1997 by the Deputy Commissioner of Taxation. In that demand the Deputy Commissioner alleges that the applicant owes $110,228.42 to the Crown in right of the Commonwealth for unremitted group tax and unpaid superannuation guarantee charges. The applicant does not dispute that it is indebted to the Crown in the amounts specified in the demand. What it does contend is that those debts were not due and payable when the statutory demand was served and for that reason the Deputy Commissioner was not entitled to serve the demand. As an alternative submission the applicant says that there is a genuine dispute between it and the Deputy Commissioner about whether the debts were due and payable and that entitles it to an order that the statutory demand be set aside. A statutory demand may be served on a company by a person to whom the company is indebted requiring the company to pay the debt or to secure or compound the debt to the reasonable satisfaction of the creditor: s 459E(2). If the company does not comply with the demand it will be deemed to be insolvent (s 459C(2)) and is liable to be wound up in insolvency under s 459P on the application of the creditor: see s 459B. Section 459E(1) describes the circumstances in which a creditor may serve a statutory demand. Those circumstances are where the company owes the creditor a single debt whose amount is at least the statutory minimum (i.e. $2000) or two or more debts whose amounts total at least the statutory minimum provided the single debt is, or the multiple debts are, "due and payable". That is, the only class of debt that can properly be made the subject of a statutory demand is a debt that is recoverable by action when the demand is made. The company upon whom a statutory demand has been served may apply to the Court for an order setting aside the demand (s 459G(1)) and if the order is made the demand will have no effect (s 459K). The application must be made within the time and in the manner specified by s 459G. An application to set aside a statutory demand must be based on one or more of four available grounds. Those grounds are: (a) that there is a genuine dispute about the existence or amount of the debt alleged to be due to the creditor (s 459H(1)(a)); (b) that there is a genuine claim that the company has against the creditor by way of counterclaim, set-off or cross-demand that is equal to or exceeds the debt that is owed to the creditor (referred to as an offsetting claim) (s 459H(1)(b)); (c) that there is a defect in the demand and substantial injustice will be caused if the demand is not set aside (s 459J(1)(a)); and (d) that there is some other reason why the demand should be set aside (s 459J(1)(b)). It will be necessary to consider which of these grounds can be relied upon when a company admits that it is indebted to the creditor that has served a statutory demand but contends that the debt to which the demand relates is not due and payable or where it is alleged that there is a genuine dispute about whether that debt is due and payable. But before turning to those issues it is convenient to set out the facts and circumstances which the applicant says establish that when the demand was served no debt was due and payable to the Crown or that it is genuinely arguable that no debt was due and payable. There is a group of companies, perhaps loosely so called, known as the Jewell group. The applicant is a member of that group. Each company in the group is indebted to the Crown for unremitted group tax and unpaid superannuation guarantee charges. None of the companies in the group is able to discharge its liability out of readily available funds. In July 1997 the Deputy Commissioner made application to wind up each company in the group, other than the applicant, on account of its failure to pay the unpaid tax and charges. The reason no application was made to wind up the applicant was that it had been deregistered as a defunct company. Subsequently its registration was reinstated. To avoid liquidation the members of the group entered into an agreement with the Deputy Commissioner to pay the unremitted group tax and unpaid superannuation guarantee charges by instalments. The agreement with the applicant is recorded in a letter from the Deputy Commissioner dated 26 August 1997. That letter states that the Deputy Commissioner would "defer legal action" against the applicant on condition that it pay the unremitted group tax by instalments of $10,000 per month commencing on 31 October 1997 with payment in full to be made by 30 June 1998 and that it pay the unpaid superannuation guarantee charges by two equal instalments of $14,009.50 the first on 29 August 1997 and the second on 26 September 1997. Similar agreements were made with the other group companies. Notwithstanding the agreement the applicant did not pay the first instalment of the superannuation guarantee charge on the due date. That instalment was paid on 15 September 1997. The other group companies also failed to comply with certain of their obligations under their respective agreements with the Deputy Commissioner. This caused the Deputy Commissioner to write to the group advising that unless all of the unfulfilled obligations were satisfied by 26 September and the balance of the superannuation guarantee charges paid by that day the Deputy Commissioner would pursue the applications to wind up the group companies. Those applications had been listed for hearing on 3 October 1997. For a variety of reasons, none of which need be mentioned, the group companies were not in a position to pay the final instalment of the superannuation guarantee charges that was due to be paid on 26 September 1997. On that day the financial controller of the group, Ms Elaine Barber, sent a letter by facsimile transmission to Ms Betty Wright of the Australian Taxation Office explaining the difficulties. In the letter Ms Barber indicated that the group would be able to pay the final instalment by 2 October 1997 and she requested that the time for the payment of the charges be extended until that day. Immediately following the transmission of the letter Ms Barber telephoned Ms Wright. There is a conflict in the evidence concerning what was said during their conversation. According to Ms Barber she explained to Ms Wright the reason the group could not pay the charges (presumably for the same reasons set out in the letter) and informed Ms Wright that payment would be made by 2 October. So much is not in dispute. However, Ms Barber says that the only response she received from Ms Wright was the statement: "that is cutting it a bit fine". Ms Barber took this to mean that the requested extension had been granted and she proceeded to act on that basis. On the other hand Ms Wright says that on being informed of the likelihood that the companies would not pay the balance of the superannuation guarantee charges on the due date she advised Ms Barber that the Deputy Commissioner would not extend the time for payment and, in so far as the applicant was concerned, the terms of the agreement set out in the letter of 24 September 1997 would stand. On 2 October 1997 the applicant purported to pay the final instalment of the superannuation guarantee charges. That payment was made by a cheque that was drawn on the account of a member of the group. When the cheque was presented for payment it was dishonoured by the bank. The final instalment was ultimately paid some time after the service of the statutory demand. Based on the foregoing the applicant submits that (a) by the agreement made on 26 August 1997 the unremitted group tax and the unpaid superannuation guarantee charges became due and payable to the Crown by the instalments and on the days specified in the agreement, and (b) the agreement was varied so that the final instalment of the superannuation guarantee charges became due and payable within a reasonable time after 29 September 1997 and that time had not expired by 31 October 1997, or (c) as an alternative to (b), there is a genuine dispute about whether the agreement was varied in the manner alleged. Accordingly, the applicant says that the statutory demand should be set aside. There is no doubt that when the Deputy Commissioner agreed to accept payment of the unremitted group tax and unpaid superannuation guarantee charges by instalments that tax and those charges ceased to be due and payable to the Crown and became due and payable in the manner provided by the agreement. This conclusion necessarily follows from the provisions of the legislation that gives to the Deputy Commissioner, as delegate of the Commissioner of Taxation, power to enter into an agreement to defer the payment of the tax and charges. The payment of a superannuation guarantee charge is regulated by the Superannuation Guarantee (Administration) Act 1992 (Cth). Section 46 of that Actsets out when the charge is payable. It is not in dispute that before the agreement was made the charge was due and payable to the Crown. By s 48 the Commissioner is given power to extend the time for the payment of the charge. When an extension is granted s 48(1) provides that "the charge is payable accordingly", that is, in accordance with the extension and not otherwise. The power to defer the payment of certain taxes, including unremitted group tax, is to be found in s 222ALA of the Income Tax Assessment Act 1936 (Cth). By that section a written agreement may be made with a taxpayer pursuant to which the taxpayer is to discharge his liability to pay tax by specified amounts on specified days. Section 222ALA(4) then provides that the amounts specified in the agreement are due and payable on the specified days. It follows that when an agreement is made under s 222ALA the tax to which the agreement relates is only due and payable by the instalments and on the days provided by the agreement. It should be noted that s 222 ALA(5) provides that if the tax is not paid in accordance with the agreement the total amount of any unpaid tax becomes immediately due and payable. The applicant's submission that the time fixed by the agreement for the payment of the final instalment of the superannuation guarantee charge was extended until sometime after 31 October 1997 must be rejected. But in rejecting that submission I should not be taken as having made a positive finding that no extension was granted. The reason for rejecting the submission is that the evidence that is before the Court does not permit any finding on this issue to be made. Each party only relied upon evidence by affidavit. Ms Barber's account of the relevant conversation was recounted in an affidavit sworn by a director of the applicant. The fact that this was hearsay evidence was not objected to. Ms Wright did swear an affidavit setting out her version of the conversation. But she was not cross-examined on its contents. Having regard to this state of the evidence it is not possible for me to make any positive finding about whether the extension was granted. The applicant's principal submission is that it is genuinely arguable that the extension had been granted and that it followed that there was a genuine dispute between the applicant and the Deputy Commissioner whether the debts to which the statutory demand relates were due and payable when the demand were served and therefore the demand should be set aside. This submission involves an implicit assumption namely that a statutory demand will be set aside if the Court is satisfied that there is a genuine dispute about whether the debt to which the demand relates was due and payable when the demand was served. The correctness of this assumption will depend upon which of the grounds for setting aside a statutory demand is available when the contention is that the debt to which the demand relates was not due and payable. Earlier in these reasons I made reference to the different grounds that can be relied upon to obtain an order from the Court that a statutory demand be set aside. A number of observations may be made about them. Where a company challenges the existence or amount of a debt to which a demand relates the company is not required to prove that it does not owe the debt or that the debt is excessive. The company need only establish that there is a genuine dispute about the existence or amount of that debt: see s 459H(1)(a). The same is true where the company contends it has an offsetting claim. In that case the company need only show that it genuinely claims that it has an offsetting claim: see the definition of offsetting claim in s 459H(5). The position is different when the complaint is that there is a defect in the statutory demand. Here it is necessary to establish the existence of the defect before the demand will be set aside. An arguable defect will not do. In most cases it will not be difficult to establish the existence of a defect in a demand. The word "defect" is defined in s 9 to include: (a) an irregularity; and (b) a misstatement of an amount or total; and (c) a misdescription of a debt or other matter; and (d) a misdescription of a person or entity;" The definition is an inclusive definition so it is still necessary to consider what is meant by the word "defect". Lockhart J considered this in Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226 in the following passage (at 237-238): "According to its ordinary usage a "defect" means a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection. A defect according to ordinary understanding is not necessarily of a minor nature, it may be either major or minor... The reference and the inclusive definition of 'defect' in s 9 to include, not only an irregularity, but a misstatement of an amount or total and a misdescription of a debt or other matter and a misdescription of a person or entity, is plainly designed to ensure that the interpretation of s 459J (and other sections) is not to be susceptible of rigorous or narrow reading down of the word 'defect' to exclude major defects and to confine its meaning to minor defects or irregularities." The power of the Court to set aside a statutory demand for some other reason (s 459J(1)(b)) was intended to cover matters that could not be dealt with in an application made under the other provisions. Paragraph 686 of the Explanatory Memorandum that accompanied the Corporate Reform Bill 1992 (which, when enacted, inserted the statutory demand provisions into the Corporations Law) referred to the three grounds for setting aside a statutory demand mentioned earlier and then said of the fourth ground,: "This last general power would enable the Court to take account of matters such as improper or invalid service and mistakes or misstatements in the notice of demand, in circumstances where this would significantly prejudice any party." See also the discussion by Lindgren J in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562 at 574-578 of the history of the provisions relating to statutory demands. The trend of the authorities so far is that each of the four grounds for setting aside a statutory demand is mutually exclusive. In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 16 ACSR 213 at 219 Olney J said, obiter, that s 459J(1)(b) was not intended to cover the case of a genuine dispute between the company and the person making the demand about the existence or amount of the debt referred to in the demand. On appeal, (19 ACSR 125) the Full Court was not required to consider this point. Further, there are a number of cases that have held that paragraphs (a) and (b) of s 459J(1) are mutually exclusive: see Kalamunda Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446; Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 117 FLR 330; Chains & Power (Aust) Pty Ltd v Commonwealth Bank of Australia (1994) 15 ACSR 544; but compare Topfelt Pty Ltd supra and Scandon Pty Ltd v Dome Supplies Pty Ltd (1995) 17 ACSR 662. When the allegation is that a debt that is specified in a statutory demand is not due and payable it is by no means clear under which ground the company must apply for an order setting aside the demand. In Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 132 FLR 300 Bryson J held that the inclusion of debts in a statutory demand that had not fallen due for payment constituted a defect in the demand rendering it liable to be set aside under s 459J(1)(a). If this decision is correct then it would not be sufficient for a company to show that there was a genuine or bona fide dispute that the debt was not due and payable. It would be necessary to prove as a fact that the debt was not due and payable. This was not a matter of concern in Portrait Express. It appears to have been conceded that the debts in question were not due and payable. The creditor resisted the application to set aside the statutory demand on the basis that no injustice had been caused by the inclusion of these debts in the demand. However an allegation that a debt is not due and payable is not always capable of easy resolution. There will be many cases where the Court will be required to examine and consider complex issues of fact, sometimes involving the credibility of witnesses, before it could resolve the matter. Thus, an application to set aside a statutory demand could become a hearing of significant proportions. The Court may be required to make orders for pleadings and discovery and there may well be cross-examination of witnesses. This would be a most unsatisfactory and unfortunate result. An application to set aside a statutory demand, being a summary process with evidence on affidavit, is hardly an appropriate vehicle for a trial of substantive issues. Moreover, on the current state of the authorities, this result could only be avoided if either Portrait Express was wrongly decided or if the cases that have held that the grounds for setting aside a statutory demand are mutually exclusive were wrongly decided. The view that I have reached is that where a creditor serves a statutory demand that relates to a debt that is not due and payable this is a deficiency of a more fundamental character than a defect that may be the subject of an application under s 459J(1)(a). In my view the word "defect" connotes the notion of something that is faulty or imperfect in the demand. It involves a fault or imperfection that might have been avoided. It does not cover the case of the inclusion in a demand of a debt in respect of which the statutory demand procedure is not available at all. In this regard I am in disagreement with the decision in Portrait Express. I appreciate that in Australian Securities Commission v Marlborough Goldmines Ltd (1993) 177 CLR 485 the High Court has made it quite clear that in the case of uniform national legislation such as the Corporations Law a single judge should not depart from an interpretation placed on that legislation by another judge unless convinced that the other interpretation is plainly wrong. I am convinced that Portrait Express is wrong on the point under consideration. My reasons for this conclusion follow. The history of the winding-up of companies shows that the procedure is not to be used as a vehicle for resolving commercial disputes. As long ago as 1844, with the passing of the Joint Stock Companies Act (7 & 8 Vict c.110), a creditor could petition the court for the winding-up of an insolvent company. But it was soon established that a creditor could not rely upon a bona fide disputed debt to obtain a winding-up order. In such a case the petition would be dismissed: see Re Catholic Printing & Selling Co Ltd (1864) 46 ER 319 for an early example. The reason given was that winding-up proceedings were not suitable proceedings in which to determine a dispute about whether or not the company is indebted to the petitioner: see also Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83 at 95-96; Stonegate Securities Ltd v Gregory [1980] Ch 576 at 598. The 1844 Act contained provisions to facilitate the proof of insolvency. One circumstance was where a creditor had sued out a writ of summons seeking to recover a debt and the company failed to pay or to secure that debt to the satisfaction of the creditor within one month of the service of the summons. By the time of the Companies Act 1862 (25 & 26 Vict c 89) a creditor could prove insolvency where the creditor had served a demand for the payment of a debt and the company had failed to pay or to secure that debt. This demand was commonly referred to as a statutory notice. With little variation this remained a feature of English and Australian company law until the passing of the Corporate Law Reform Act 1992. When a creditor served a statutory notice in anticipation of presenting a petition to wind up a company and there was a genuine dispute about the existence of the debt referred to in the notice the court would often restrain the presentation of the petition: see e.g. Cadiz Waterworks Co v Barnett (1874) LR 19 Eq 182; Metal Protectives Co Pty Ltd v Site Welders Pty Ltd [1968] 1 NSWR 106. There is nothing in the Corporations Law that suggests to me that the winding-up procedures have suddenly become an appropriate proceeding to resolve commercial disputes. Still less is there any indication in the provisions relating to statutory demands that would lead to that conclusion. On the contrary sections such as s 459H(1) suggests that the opposite is the case. Thus, a construction of s 459J(1)(a) that would require the Court to resolve a substantive dispute between a creditor and a company on an application to set aside a statutory demand is contradicted by the history of the winding-up of companies and the fact of the legislation. It follows that a construction of s 459J(1)(a) that avoids this result is to be preferred. There are two reasons why I believe that in Portrait Express Bryson J fell into error. First, once it was established that the statutory demand included debts that were not due for payment at the date of the demand it appears to have been accepted by the parties that there was a defect in the demand. The main argument on this aspect of the case was whether substantial injustice would be caused to the company if the demand was not set aside. Thus, it was not necessary for Bryson J to closely consider the meaning of the word "defect". Secondly, the applicant in Portrait Express had no difficulty in establishing the fact that certain of the debts specified in the demand were not payable. The debts were for goods sold and delivered. The terms of trade were recorded in a letter from which it was clear that credit was given. Accordingly, Bryson J was not confronted with a case where his Honour was required to consider the consequences of the construction that he placed on s 459J(1)(a). On what ground then should the applicant base its application? There are only two possibilities. The first is s 459H(1)(a) that permits an application to be made when there "is a genuine dispute ... about the existence .... of a debt to which the demand relates." Here there is no dispute about the existence of the debts due to the Crown. What is said is that those debts were not due and payable. Does such an allegation fit within the language of the ground? It would if the "debt" that is referred to in s 459H(1)(a) is only a debt of the class that can be included in a statutory demand; that is a debt that is due and payable. In that event the application could be made under s 459H(1)(a). But it is by no means clear that this construction is available. The second possibility is that the application should be based on s 459J(1)(b). There is no doubt that this ground is available if s 459H(1)(a) is not. In reality it is not necessary to reach a concluded view on the matter (although I should say that I incline in favour of the view that s 459J(1)(b)) is the only available ground) for the reason that the standard of proof would in either case be the same. That is to say if the application must be made under s 459J(1)(b) the Court would not exercise its discretion to set aside the demand unless it was satisfied that there was a genuine dispute about whether the debt to which the demand relates was due and payable. Before I leave this topic there is one final matter that I should mention. It may be open to argument that where the only debt that is specified in a statutory demand is a debt that is not due and payable then the demand is not a statutory demand at all. It is true that a statutory demand is defined by s 9 to include a demand that purports to be a demand. That is, a demand that professes or claims to be a statutory demand will be a statutory demand for the purposes of the Corporations Law: see Kalamunda at 452. Nevertheless, there may be a case where a document that professes to be a statutory demand contains such a serious deficiency that it is impossible to treat the document as a statutory demand no matter what it professes to be: Topfelt at 238; Kalamunda at 452. In this case it is not necessary to decide whether the demand is a statutory demand because it has not been established that the debts were not due and payable when the demand was served. Has the applicant established that there is a genuine dispute about whether the time for the payment of the final instalment of the superannuation guarantee charge was extended until some time after 31 October 1997? I propose to consider this question on the basis that is most favourable to the applicant namely only on the evidence upon which the applicant relies. That evidence falls far short of establishing the existence of any genuine dispute in my opinion. When Ms Barber wrote her letter of 26 September 1997 she requested a limited extension of time for payment. She asked that the time be extended until 2 October 1997. In her conversation with Ms Wright (or so much of it as is described in the affidavit) Ms Barber did not seek a longer extension. Indeed she informed Ms Wright that payment would be made by 2 October 1997. Whatever interpretation is to be placed on Ms Wright's response namely, "that's cutting it a bit fine", those words cannot be taken to mean that the applicant had been granted a reasonable time to pay the final instalment. Having regard to the history of the matter and the context of the discussion the most that can be said is that Ms Wright agreed to extend the time for payment until 2 October 1997. The applicant did not avail itself of that opportunity with the consequence that when the instalment was not paid on 2 October 1997 it was recoverable by action immediately thereafter. It follows that the application must be dismissed with costs. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein Associate: Dated: 20 March 1998 Counsel for the Applicant: PH Clarke Solicitor for the Applicant: Voitin Walker Davis Counsel for the Respondent: J Nolan Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 23-24 February 1998 Date of Judgment: 20 March 1998