Statutory Demands – How to Prove an Offsetting Claim

The slowdown of the mining boom in Western Australia has caused cash flows to tighten throughout the State economy.  This has seen a spike in the use of statutory demands, including by principals and contractors in the construction sector.  The corresponding rise in the number of local cases dealing with statutory demands has been notable, and we reported on some of these in our June legal updates.

Another recent decision of the Western Australian Court of Appeal, Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd, has clarified, and may change, what must be shown to set a statutory demand aside, making that task significantly easier.

The facts

Towards the end of 2012, Diploma Construction got into a dispute with Pravenkav Group Pty Ltd, which was designing and installing glazing works in one of Diploma’s projects in central Perth. Diploma alleged that Pravenkav had caused substantial damage to the premises.  Immediately after this allegation was raised, Pravenkav sent a progress claim for $113,807.00, which was most of the contract sum.

Between September and November 2012, Diploma provided photographs and other evidence of the damage, and Pravenkav acknowledged that it had some difficulties with some of its own sub-contractors. But Pravenkav still chose to issue a statutory demand on 5 December 2012 for the amount due under the progress claim, saying that the terms of the building contract allowed them to assert that there was no genuine dispute about the debt.

Diploma issued its application to set aside the statutory demand within 21 days, as it had to do to avoid deemed insolvency.  But the affidavit supporting the application provided no information about the extent of the loss Diploma had suffered from Pravenkav’s actions.  This information was provided in supplementary affidavits, but these were filed weeks after the application was made. Diploma was relying on this information to show that it had an offsetting claim against the debt claimed in the statutory demand, which was one of several arguments it raised to say that the statutory demand should be set aside.

The argument

Some readers will know of the decision in Graywinter Properties Pty Ltd v Gas & Fuel Superannuation Fund, which says that an application to set aside a statutory demand must be filed with an affidavit which discloses facts showing the dispute between the parties, not a bare assertion that there is such a dispute. Generally speaking, supplementary affidavits can only expand on issues identified in the supporting affidavit. In some cases this has been taken to mean that the initial supporting affidavit must set out enough information to show what the amount of the offsetting claim might be.

Diploma certainly didn’t satisfy this test.  The initial supporting affidavit set out the contractual basis of the dispute and referred to the alleged damage, but the evidence about the actual cost of the rectification works carried out by Diploma was described by the court as “cryptic”.  No substantive information about the quantum of the offsetting claim was provided until supplementary affidavits were filed, well after the application was made.

Pravenkav argued that this invalidated Diploma’s entire application, because there was no “supporting affidavit” filed within 21 days of the service of the statutory demand as required by the Corporations Act. Alternatively it at least meant that Diploma couldn’t rely on any of the evidence about the amount of its offsetting claim.

The result

However the Western Australian Court of Appeal took quite a different approach.  It found that there was enough in Diploma’s initial supporting affidavit to explain the basis of the offsetting claim, and that there was nothing in the Corporations Act that required an initial supporting affidavit to contain evidence enabling a Court to quantify an offsetting claim. So Diploma was able to provide evidence of the rectification works in the supplementary affidavits, notwithstanding that they weren’t mentioned in the initial supporting affidavit.

The Court of Appeal found that, to the extent that a number of other first instance decisions took a different approach, they shouldn’t be followed. The Court specifically questioned the reliance in these decisions on “the so-called Graywinter principle”, saying that “[I]t can be a mark that a principle is opaque when the principle is named after a case”.

The Court also took the opportunity to observe that if the statutory demand had been issued in an attempt for rapid debt enforcement, when the progress claim was clearly disputed, “this was a poor decision”.  This is one of the milder criticisms made by a Western Australian court in recent years upon the setting aside of a statutory demand for a disputed debt.

This case provides some useful comfort and guidance for companies which have been served with a statutory demand, particularly one where an offsetting claim is complicated or difficult to quantify. But it also provides another example of when not to use them.

Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132.

For more information on this update or any other insolvency matters please contact us on (08) 9321 3755.

The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.