Reported Decision : 54 ACSR 677 New South Wales Supreme Court CITATION : Grace Consulting Pty Ltd v Bourke Constructions Pty Ltd; Grace Consulting Pty Ltd v JLB Projects Pty Ltd [2005] NSWSC 836 HEARING DATE(S) : 08/08/05 JUDGMENT DATE : 24 August 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Young CJ in Eq DECISION : Declaration that statutory demand valid. CATCHWORDS : CORPORATIONS [207]- Statutory demand- Application to determine validity- Defect in affidavit verifying- Affidavit stated that creditor "believed" that debt was due and payable- Whether belief that debt is due and payable is a verification of the existence of a debt or merely an assertion of the deponent's state of mind- Held a mere defect under Corporations Act, s 459J- Defect in affidavit verifying not fatal to a winding up based on the statutory demand it verifies. Corporations Act 2001 (Cth), ss 9, 459E, 459G, 459J, 459S LEGISLATION CITED : Supreme Court Rules 1970, Pt 80A r 15 Supreme Court (Corporations) Rules 1999, rr 1.7, 5.2, Sch 1 B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1995) 13 ACLC 88 Chadah Pty Ltd v Kubota Tractor Australia Pty Ltd [2003] NSWSC 456 Daewoo Australia Pty Ltd v Suncorp-Metway Ltd (2000) 33 ACSR 481 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 Dolvelle Pty Ltd v Australian Macfarms Pty Ltd (1998) 43 NSWLR 717 Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456 CASES CITED : IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd [2003] FCA 533 Main Camp Tea Tree Oil Ltd v Australian Rural Group Ltd (2002) 20 ACLC 726 Panel Tech Industries (Australia) Pty Ltd v Australia Skyreach Equipment Pty Ltd (2003) 200 ALR 321 Peel Valley Mushrooms Ltd v Corporate Investment Australia Funds Management Ltd (2000) 35 ACSR 535 Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 Topfelt Pty Ltd v State Bank of NSW Ltd (1993) 47 FCR 226 Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35 3580/05 - Grace Consulting Pty Limited (P) Bourke Constructions Pty Limited (D) PARTIES : 3581/05 - Grace Consulting Pty Limited (P) JLB Projects Pty Limited (D) FILE NUMBER(S) : SC 3580/05; 3581/05 M Lee (P) COUNSEL : D J Durston (D) Levitt Robinson (P) SOLICITORS : Searle & Associates (D) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST YOUNG CJ in EQ Wednesday 24 August 2005 3580/05 – GRACE CONSULTING PTY LTD v BOURKE CONSTRUCTIONS PTY LTD 3581/05 – GRACE CONSULTING PTY LTD v JLB PROJECTS PTY LTD JUDGMENT 1 HIS HONOUR: I have before me in each matter an identical question relating to virtually identical statutory demands issued against each of the defendant companies. 2 The present proceedings are proceedings to wind up the companies in insolvency. A separate question has been ordered within those proceedings. 3 The question I must address is whether the document entitled "Statutory Demand" served on the defendants on 7 April 2005 constitutes a valid statutory demand pursuant to s 459E of the Corporations Act 2001 (Cth). 4 The matter was argued before me on 8 August 2005, Mr M Lee appearing for the plaintiff and Mr D J Durston appearing for the defendants. I am indebted to both of them for their concise, yet meaningful submissions. 5 Mr Durston's clients are the moving party who seek to convince me that the purported statutory demand served on them could not amount to a "statutory demand" within s 459J of the Corporations Act. 6 Each statutory demand claims $2,071,403.43. The demand against JLB Projects is for the principal of loan payable under loan facility agreement of 27 January 2005 and interest. The demand against Bourke Constructions is for the same amount being monies allegedly owing under deed of guarantee and indemnity under which Bourke Constructions guaranteed the performance by JLB Projects under that loan facility. 7 In each case there was a statutory demand served on the defendant which commenced: "The company owes Grace Consulting Pty Limited … $2,071,403.43 … ". 8 Attached to the statutory demand was an affidavit of one Neil Macdonald. Paras 3, 4 and 5 of that affidavit read as follows: "3. I believe the amount of $2,071,403.43 being the Debt (comprising the total of the amounts of the Debts referred to in the Schedule to the accompanying Demand) specified in the Demand, is due and payable by the Debtor Company to the Creditor. 4. The information in the affidavit has been obtained by me from the Creditor's accounts records, maintained by the Creditor in the ordinary course of its business. 5. I believe that there is no genuine dispute about the existence or amount of the Debt (comprising the Debts listed in the Schedule), referred to in paragraph 4." 9 Section 459E of the Corporations Act sub-section 3 reads as follows: "Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that: (a) verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and (b) complies with the rules." 10 Section 459E is in Part 5.4 of the Corporations Act. It is quite clear and has been so held on many occasions, that a prime purpose of that Part is to ensure as much as possible that disputed debt claims are dealt with quickly. To this end, s 459G makes it mandatory for any application to set aside a statutory demand be made within 21 days and s 459S prevents the company from opposing its winding up in insolvency on any ground that the company could have relied on in bringing an application to set aside the statutory demand, without the leave of the Court. 11 Section 459J of the Act entitles the court to set aside the statutory demand, inter alia, because of a defect in the demand, but sub-section 2 of that section says: "Except as provided in sub-section (1), the Court must not set aside a statutory demand merely because of a defect." 12 At this stage one needs to turn to some of the definitions in s 9 of the Corporations Act. "Defect" in relation to a statutory demand is said to include: (a) an irregularity; (b) a misstatement of an amount or total; (c) a misdescription of a debt or other matter; and (d) a misdescription of a person or entity. In Topfelt Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226 at 237, Lockhart J said that this definition was an inclusive definition, thus it had to firstly be construed according to its ordinary meaning and then introducing into it a matter that was not otherwise included. He continued: "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 something which is of a minor nature, it may be either major or minor." At 238 he said that as the section is framed, it could not be said to exclude major defects. 13 His Honour then considered the definition of statutory demand in s 9 of the Corporations Act, viz: "A document that is, or purports to be, a demand served under s 459E." and continued: "The new Part 5.4 of the Corporations Law does not recognise two regimes: one dealing with documents that suffer from major defects such that they cannot be described as statutory demands for the purposes of 5.4 of the Corporations Law; and another dealing with documents that suffer only from minor defects and are capable of being saved from invalidity by the operation of s 459J(2). This is a distinction which the Parliament has sought to avoid and which for many years bedevilled the law and practice relating to bankruptcy notices. There may, however, be cases where deficiencies in the form of demands are so fundamental that the demands are incapable of assuming the description of statutory demands within the meaning of the Corporations Law." 14 As far as I am aware, there has never been such a case, at least none was cited to me by counsel during the present argument. 15 The scheme of Part 5.4 of the Corporations Act is that disputes over demands are to be dealt with in quick time. Section 459G has been so construed that unless an application is made to set aside the statutory demand within 21 days, it cannot be made; see David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. Indeed, I am informed that in the instant case an application under s 459G was made, or alternatively was to be made, but was out of time. 16 I should address four questions and I will do so, addressing each question in turn. (1) Was there a problem with the affidavit verifying the statutory demand? (2) Was that problem such as to make either the affidavit or the statutory demand a nullity rather than defective? (3) What is the effect on an application to wind up for insolvency of any problem with the affidavit verifying a statutory demand? (4) What is the result of this aspect of the case? 17 (1) Section 459E(2) requires that the statutory demand be verified as due and payable by the company. 18 Corporations Rule 5.2 provides that for the purposes of sub-section 459E(3) of the Corporations Act, the affidavit accompanying a statutory demand must be in accordance with Form 7 and state the matters mentioned in that form. However, the word "must" must be read bearing in mind Corporations Rule 1.7 which says that substantial compliance is sufficient; and see Dolvelle Pty Ltd v Australian Macfarms Pty Ltd (1998) 43 NSWLR 717 at 727 where Santow J declined to read the word "must" in s 459E(3) as comparable in effect to the words "may only". 19 Form 7 requires the following in paras 4 and 5: "4. The debt … mentioned in paragraph 1 of this affidavit is due and payable by the debtor company. 5. I believe that there is no genuine dispute about the existence or amount of the debt … ". 20 Mr Durston says that a belief that a debt is due and payable does not amount to a verification of the fact that the debt is due and payable. On the other hand, Mr Lee for the creditor, says the opposite, and furthermore, he refers to the former form, 154FA which was prescribed to carry out Part 80A rule 15 of the Supreme Court Rules which simply says: "1. I believe that the amount of $… , being the debt … specified in the accompanying demand, is due and payable by the debtor to the creditor. … 4. I believe that there is no genuine dispute about the existence or amount of the debt …". The old rule 80A(15) required the affidavit to, inter alia, set out the deponent's source of knowledge of matters stated in the affidavit concerning the debt and "(d) state that the deponent believes those matters to be true." 21 A purist might say that a person who merely states that he or she believes something is true does not verify that that something is true. However, there are a series of cases under the old Part 80A rule 15 which, whilst not dealing precisely with the present point, appear to say that for present purposes there is no real difference. 22 In Goldspar Australia Pty Ltd v KWA Design Group Pty Ltd (1999) 17 ACLC 456, Austin J said at 459 that the fact that the deponent had not said that he believed that the debt was due and payable meant that he had not fully complied with the rules, but such a failure was not of itself sufficient to set aside a statutory demand. For some reason or other his Honour did not direct his mind to the requirements of s 459E(3) but seems to have assumed that what was really required was a statement of belief that a debt was owing. The same Judge continued that thinking in Daewoo Australia Pty Ltd v Suncorp-Metway Ltd (2000) 33 ACSR 481 at 495. In that case the deponent actually said she verified the indebtedness. Austin J said that "by saying that she 'verifies' the first sentence of para 3 of the affidavit … the deponent makes it clear that she believes the truth of para 3, although she does not expressly say so in so many words." 23 In Peel Valley Mushrooms Ltd v Corporate Investment Australia Funds Management Ltd (2000) 35 ACSR 535 at 550, Santow J accepted that under the old rule, the mere fact that the deponent omitted to say what he believed was a mere technicality. 24 The line of thinking displayed in the cases to which I have referred, suggest that there is no real distinction, or if there is, it is a mere technical one, between believing that the debt is due and payable and saying that a debt is due and payable. One can understand this because in some situations whether a debt is due and payable may be a conclusion only reached after proper legal and accounting analysis. 25 The recent decision of Barrett J in Main Camp Tea Tree Oil Ltd v Australian Rural Group Ltd (2002) 20 ACLC 726 proceeds along similar lines. 26 I was referred to other recent cases which confirm this approach, namely IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd [2003] FCA 533; Chadah Pty Ltd v Kubota Tractor Australia Pty Ltd [2003] NSWSC 456 and Panel Tech Industries (Australia) Pty Ltd v Australia Skyreach Equipment Pty Ltd (2003) 200 ALR 321. 27 Accordingly, there does not appear to be a problem with the form of the affidavit, but if there is, then it is a technicality which could not result in the statutory demand being a nullity. 28 (2) It follows from what has been said that if there is a problem with the affidavit it is merely a defect or irregularity which can be dealt with under s 459G and s 459J of the Corporations Act. The Peel Valley case makes it clear that we are here dealing with a mere technicality. Even if we were not, the statutory definition of "statutory demand" includes a document which purports to be a statutory demand and this is a matter of significance as was recognised by the Full Federal Court in Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452. At p 459 the Court said: "So long as a document 'purports to be' a statutory demand, the power of the Court to set it aside on the basis that there is a defect in or relating to the demand, is to be determined by reference to s 459J." 29 The answer to this question is thus, "No". 30 (3) In view of what I have already written it is not necessary to deal with the matters arising under this third head. If it were necessary to do so, there would be another reason why the present matter should be determined adversely to the applicants. 31 In Dolvelle Pty Ltd v Australian Macfarms Pty Ltd supra at 727, Santow J said that a problem with an affidavit verifying is a matter which can be dealt with as a defect which may lead to a statutory demand being set aside under s 459J. There is no doubt that this is so and almost every case on the point in the last 10 years has acknowledged this; see eg B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1995) 13 ACLC 88 and Spencer Constructions supra at 461. Because this is so, any defect in the affidavit verifying is irrelevant on an application to wind up. This is because the company could have relied on that point under s 459J, and thus cannot, without leave raise the matter on the application to wind it up. 32 Mr Durston says that that is irrelevant because he is entitled to test the question as to whether the demand really was a statutory demand and that is not a matter going to insolvency. I was at first attracted by that argument as can be seen from my reasons when I ordered the separate question. However, when one looks at the statutory definition of statutory demand and sees that it includes a document which purports to be a statutory demand and when one sees what Santow J said in Dolvelle and what the Full Court in Western Australia said in Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35 which I will note shortly, one can see that the argument is untenable. As Templeman J said when giving the judgment of the Western Australian Full Court in Wildtown at p 43: "As Santow J said, an irregularity in the verification of the statutory demand is not fatal to a winding up application based on a failure to comply with that demand." 33 Accordingly, the defect has no relevance in the proceedings to wind up the defendants. 34 (4) The result is that the applicants are unsuccessful on the claim for interlocutory relief and accordingly the orders are as follows: (1) The Court declares that the document entitled "Statutory Demand" served on the defendant on 7 April 2005 constitutes for the purposes of the present proceedings a valid statutory demand pursuant to s 459E of the Corporations Act . (2) Order that the applicant pay the respondent's costs of the interlocutory process. 35 I note that a fresh return date for the application to wind up needs to be fixed. Unless counsel arrange some other date with my Associate on the day of delivering this judgment I will have both matters listed before the Registrar at 11 am on Monday 5 September 2005. *********************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.