Statutory demand - genuine dispute?

1 August 2019


A recent decision by the Supreme Court of New South Wales has considered whether a dispute concerning the interpretation of a contract constitutes a ‘genuine dispute’ for challenging a statutory demand for payment of a debt.

Facts

In the matter of Universal Property Group Pty Limited [2019] NSWSC 796 involved a call option for the purchase of a property for $9.5 million. A developer paid the vendor a due diligence fee of $30,000 giving it the right to undertake due diligence on the property before paying a call option fee by 3 instalments as follows:

  • $170,000 payable on or before the expiry date of the due diligence period;

  • $300,000 payable 12 months after the date of the contract; and

  • $1,500,000 payable 30 days after the developer obtains development approval in relation to the property.

The contract also gave the developer the right to appoint a related party nominee to exercise the call option and purchase the property.

The developer paid the first instalment of the call option fee ($170,000) by the due date. Shortly before the second instalment ($300,000) was due, the developer appointed a nominee purchaser in accordance with the contract. The developer subsequently gave notice to the vendor that it did not wish to proceed with the purchase, and sought a refund of the call option fee paid to date ($170,000).

The vendor issued a statutory demand to the developer for $1,800,000, being the unpaid balance of the call option fee.

Issue

The developer submitted that, by validly appointing a nominee purchaser, the obligation to pay the balance of the call option fee fell on the nominee (not the developer). Accordingly, the developer argued there was a dispute as to the meaning and application of the contract, resulting in a ‘genuine dispute’ as to whether the amount claimed in the statutory demand was in fact a debt due and payable by the developer. Put simply, the developer submitted that the statutory demand was issued to the wrong company.

The vendor submitted that the developer’s position was untenable and was merely an attempt to avoid liability for the balance of the call option fee. The vendor further submitted that:

  1. The debt of $1,800,000 crystallised when the developer paid the first instalment of $170,000; and

  2. In the event of default, rescission or termination of the contract, the balance of the call option fee became a debt due and payable by the developer to the vendor.

The issue for the Court to decide was whether differing contentions as to the meaning of the contract constituted a ‘genuine dispute’ under section 459H(1)(a) of the Corporations Act 2001 (Cth), such that the statutory demand ought to be set aside.

Decision

The Court found that the developer’s interpretation of the contract was at least arguable, which was sufficient for the developer to clear the low hurdle of what is required to establish a ‘genuine dispute’ as to whether the alleged debt is due and payable. The Court held that, where there are clearly arguable alternatives as to the meaning of a contract term and related questions of construction, this, of itself, gives rise to a genuine dispute.

The statutory demand was set aside, and the vendor was ordered to pay costs.

Key takeaway

It is a well settled position at law that the statutory demand regime should not be used by creditors as a mechanism for the recovery of debt. As such, issuing a statutory demand will be an abuse of process if the purpose is not to pursue a winding up of the debtor company on the grounds of insolvency but rather as a means to obtain some collateral advantage beyond what the law offers, such as the application of pressure to compel payment of a disputed debt.

Further, in circumstances where there is an arguable dispute as to the construction of the contract, early notice of the grounds of dispute should be given to the alleged creditor to guard against a statutory demand being issued.

If you have received a statutory demand, we recommend that you seek legal advice immediately. Get in touch to arrange a free consultation.