Stautory demand set aside due to misdescription of legal basis for the debt.
Executive summary
Insolvency in the construction industry is a significant concern. The case of CM Luxury Pty Ltd v Menzies Civil Australia Pty Ltd [2023] WASC 340 (7 September 2023) is a reminder of the precision required when preparing a statutory demand under Section 459E of the Corporations Act 2001 (Cth) (Act).
A company that is served with a statutory demand must, within 21 days of receipt, apply to court to set it aside or it will otherwise be presumed to be insolvent and can be wound up.
In this matter, the court set aside a statutory demand which described the general factual background to the debt but misdescribed its legal basis. While this may appear pedantic, it was held to be justified in circumstances where the error had prejudiced the company’s ability to make the necessary application to set aside the demand within the prescribed 21 days.
A takeaway lesson is that if a party is unsure as to the legal basis for a claim made in a statutory demand, it should claim each potential basis in the alternative. It should also ensure that each alternative claim is supported by evidence in the accompanying affidavit.
General principles
A company faced with a statutory demand must apply to court within 21 days of its receipt to set it aside on one or more of the following bases:1
a) there is a genuine dispute as to the existence of the debt;
b) the company has an off-setting claim;
c) there is a defect in the demand and substantial injustice will be caused unless the demand is set aside; or
d) for some other reason.
Facts
Menzies Civil Australia Pty Ltd (Menzies) alleged that it had entered into a contract dated 12 November 2021 (Purported Contract) with CM Luxury Pty Ltd (CML) for the civil works to a recreational club in Bindoon, WA.
Under the Purported Contract, the superintendent certified payment claims by Menzies in the sum of $1,302,973. Menzies then claimed this amount against CML in a statutory demand issued under Section 459E of the Act together with a supporting affidavit verifying the alleged debt.
CML applied to court within the 21-day period required under the Act. It argued that the demand should be set aside on the grounds that:
e) there was a “substantial injustice” as Menzies originally described the legal basis of the debt as a contractual claim; however, by the hearing date it changed the legal basis to one of quantum meruit;
f) Menzies’ supporting affidavit failed to properly verify the quantum meruit claim, which constituted “some other reason” to set aside the statutory demand; and
g) that there was a genuine dispute about the existence of the debt, alternatively CML had offsetting claims arising from liquidated damages under the Purported Contract.
This note will focus on (a) and (b). It was unnecessary to consider (c) as the Court found that the statutory demand could be set aside because of (a) and (b).
Misdescription of legal basis and failure to verify
The misdescription of the legal basis for the debt in the statutory demand and verifying affidavit occurred because Menzies was unaware that CML had not countersigned the contract. On becoming aware Menzies sought to argue that the source of the debt was quantum meruit. It was not in dispute that a claim could constitute a debt.
CML nevertheless asserted that the statutory demand was misleading. Furthermore, it argued that the affidavit in support of the demand was defective as it did not verify the debt based on quantum meruit by addressing the reasonableness of the amounts claimed.
Menzies contended as follows.
a) The misdescription of the legal nature of the debt was a “mere technical point”. CML understood the factual background of the claim, the history of the project and the work undertaken, and so there was no substantial injustice suffered.
b) It is sufficient that the statutory demand identifies the debt in a manner that enables a person in the position of the debtor company to identify with a sufficient degree of precision whether there is a genuine dispute as to existence or amount of the debt or debts, or any offsetting claim.2
c) The statutory demand referred to the source of the debt – being in relation to construction works performed and the costs set out in payment certificates. CML, therefore, had no real difficulty in understanding that the debts the subject of the statutory demand were those arising from unpaid payment certificates.
d) The failure to verify the reasonableness of the quantum meruit claimed was not a requirement under the Act. It was sufficient to verify that the amount was due and payable.
e) CML did not dispute that works had been performed or contend that works were defective. Nor did it explain what evidence it would have put on had it known that the basis of the claim was a quantum meruit.
What did the court find?
The Court disagreed with Menzies. It found as follows.
f) The misdescription of the legal nature of the debt was not a mere technical point. It had significant consequences for CML.
g) These errors resulted in injustice because CML had consequently limited its submissions and evidence to matters concerned with establishing that there was a genuine dispute as to whether a contract existed at all. CML was restricted to grounds/reasons which were supported by affidavit evidence filed within the 21-day period.3
h) Menzies should have verified the debt by confirming reasonableness based on the principles set out in Mann v Paterson Constructions Pty Ltd4 or provided evidence from which this could be inferred. The fact that it was not aware that CML had not countersigned the contract was irrelevant.
Discussion
On one view, the outcome for Menzies appears unduly harsh if it had a genuine quantum meruit claim.
On the other hand, so too are the consequences for party put at a disadvantage due to incorrect information provided in a statutory demand and supporting affidavit. A company facing insolvency if it does not apply to set aside the demand has 21 days should not be required to guess the legal basis for the debt when this is relevant to how it intends to respond.
There may well be cases where no prejudice is suffered by a company because it has no evidence to contradict the true basis on which the claim is made. That proposition could not be tested in this case as Menzies provided no evidence to support its quantum meruit claim.
Finally, the strict approach adopted by the court is also justified considering that the claiming party can always start the process afresh by reissuing an amended statutory demand. However, that will not be an option if there is a genuine off-setting claim.
This article was written by Leighton Moon, Partner, and Brian Rom, Special Counsel.
1 Sections 459H and 459J of the Act
2 Complete Hire and Sales Pty Ltd v Terra Firma Constructions Pty Ltd [No 2] [2018] WASCA 111 [92]
3 Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452 [31]
4 (2019) 267 CLR 560
