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Statutory Notice of Demand – What is a genuine dispute?

By Daniel Wignall24 Feb 2016

You probably already know that if you want to recover a debt from a company, a Statutory Notice of Demand (Statutory Demand) is a powerful tool to use. This is predominately due to the fact that unless a company takes steps to set aside the Statutory Demand or pays the debt in full within 21 days, that company is deemed insolvent and can be wound up.

You may have been on the receiving end of a Statutory Demand; at this point, either a fuse has been lit or at the very least someone’s holding the match.

Did you know that a Statutory Demand can be set aside if there is a genuine dispute as to the existence of the debt in question? What really constitutes a genuine dispute is not as straightforward as you might think. In this article we breakdown an interesting Queensland Court of Appeal case that considers whether one party’s genuine dispute warranted the  setting aside of a Statutory Demand.  

In Leisure Kart City Pty Ltd v Professional Auction & Valuation Services Pty Ltd [2013] QCA 298 (Leisure Kart Appeal), the Queensland Supreme Court of Appeal overturned the decision at first instance (to set aside a statutory demand) on the basis that the dispute between the parties did not constitute a “genuine dispute”.

Background Facts

The appellant owned a property located at 32 and 60 Allworth Street, Northgate which had been partitioned into several tenancies (Property). The respondent company entered into a lease with the appellant for Unit 1, to be used as a “storage and auction yard” (Unit 1). A related company of the respondent, PVAS Building Auctions Pty Ltd (PVAS), also leased from the appellant Unit 2, to be used as “general auctions” (Unit 2).

During August 2012, termite damage prevented PVAS from occupying Unit 2 for approximately five and a half weeks; additionally, Unit 1 was also unable to be occupied during that time due to the withdrawal of public liability insurance (required by the respective leases) as a result of the condition of the Property. This made it impossible for the respondent and PVAS to occupy their respective units.

Between September 2012 and December 2012, a series of events ensued between the respondent and the appellant, which involved

  • purported termination of the lease for Unit 1 by the respondent and Unit 2 by PVAS;
  • the re-occupancy of Unit 1 by the respondent, and Unit 2 by PVAS, notwithstanding the termite damages and lack of public liability insurance;
  • the appellant re-entering into possession of Unit 1, following the service upon the respondent of a notice to remedy breach;
  • the payment of all arrears for Unit 1 by the respondent;
  • the appellant’s threatened re-entry and possession of Unit 2 following the service of a notice to remedy breach; and
  • the appellant granting the respondent access to Unit 1 on the basis that all rent and outgoings for Unit 1 were paid by the respondent in advance upon receipt of an invoice from the appellant. 

In January 2013, the respondent gave written notice to the appellant that it was terminating the monthly rental (Notice), inadvertently referring to the address 2/32 Allworth Street (being neither the address of Unit 1 nor Unit 2). Notwithstanding the obvious error in the Notice, the appellants assumed the Notice related to Unit 2. Further compounding the issue, the Notice failed to include key information (such as the date upon which the tenancy would terminate) required by sections 130, 131 and 134 of the Property Law Act 1974 (PLA). In February 2013, the respondent returned the keys for Unit 2 to the appellant.

The Statutory Demand and decision at first instance

On 15 March 2013, the appellant served a statutory demand on the respondent for an alleged debt of $15,643.28 for outstanding rent and outgoings owed by the respondent for the period of February and March 2013. Interestingly, the statutory demand did not specify whether the alleged debt was for Unit 1 or Unit 2; yet the respondent did not allege any defect in the statutory demand. Accordingly, the judge at first instance proceeded on the basis that the statutory demand related to Unit 1.  

The respondent applied to the court to set aside the statutory demand arguing that the lease had been frustrated as a result of the termite damage to Unit 2 (consequently interrupting the respondent’s use of Unit 1) and hence a “genuine dispute” existed between the parties as to the amount claimed by the respondent.

The Judge at first instance considered the inter-relatedness of the work as between the respondent and PVAS, and noted that, due to the damage to Unit 2, the respondent could not conduct its business at Unit 1 (as it would breach the requirement for public liability insurance as required by the lease).  The Judge ultimately held that a genuine dispute existed as to:

  1. the frustration of the lease or the tenancy;
  2. the basis of the occupancy of the premises;  and
  3. the termination (or various terminations) of the monthly tenancy;

accordingly, the Statutory Demand was set aside.

The appellant appealed to the Supreme Court of Appeal, arguing as follows:

  1. the Judge erred in finding a genuine dispute;
  2. the following disputes did not constitute a genuine dispute to justify setting aside the Statutory Demand:
  • the dispute as to whether the lease in respect of Unit 1 was frustrated, and consequently whether the respondent had lawfully terminated the lease, in circumstances where it was common ground that the lease had been terminated and a debt the subject of the demand did not relate to an amount payable pursuant to the lease;
  • the dispute regarding the effectiveness of the respondent’s notice of termination of the then month-to-month tenancy by letter dated 3 January 2013, which regardless of referring to the wrong premises, was in any event incapable, as a matter of law, of effectively terminating the tenancy.

What constitutes a genuine dispute?

One of the most common grounds for which a Court will set aside a Statutory Demand is where it is satisfied that a genuine dispute (in relation to the subject of the Statutory Demand) exists between the parties (as was asserted by the respondent in the Leisure Kart Appeal). What constitutes a bona fide “genuine dispute” is not defined by the Corporations Act 2001; the test that the Courts have developed is of a relatively low threshold, similar to that applicable to interlocutory injunctions – that is, whether there is a serious question to be tried as to the existence or the sum of the debt. The role of the Court is to determine whether a dispute does in fact exist, which is genuine and rational and not “spurious, hypothetical, illusory or misconceived” (Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681). 

The decision on appeal

The Supreme Court of Appeal overturned the decision in the first instance and held that the statutory demand should not have been set aside for the following reasons: 

  1. the issue of frustration was irrelevant because it was common ground that the lease for Unit 1 was terminated by the appellant’s re-entry on 29 November 2012;
  2. following the voluntary resumption of occupation of Unit 1, the basis of the respondent’s further occupancy was not formalised, and the circumstances - including the payment of rent in advance - deemed a periodic monthly tenancy to have arisen;
  3. the Notice was entirely deficient and therefore incapable of terminating the tenancy because it failed to comply with:
  • the mandatory requirements contained in sections 131(2)(c) of the PLA, that is, it failed to identify the date on which the tenancy ended; and
  • sections 130(1)(c) of the PLA, because the Notice was incapable of providing the period of notice required by section and 134(1),

meaning that the obligation to pay rent and other monies continued.   

The Court concluded:

“Neither letter, as a matter of law, could have relieved the respondent from its obligation to pay the amounts the subject of the statutory demand”.

For companies served with a Statutory Demand              

The existence of a “genuine dispute” is the most common ground in making an application to set aside a Statutory Demand. However, a respondent must disclose specific facts to advance an argument that there is a genuine dispute between the parties. 

It is critical that a respondent company seeks urgent legal advice following service upon it of a Statutory Demand in order to:

  1. determine whether there are any valid grounds for setting the Statutory Demand aside;  and if so,
  2. make an application to the Court within the limited time period of 21 days of receipt of the Statutory Demand; or
  3. consider whether any alternative options are available to the respondent company. 

If your company has been served with a Statutory Demand, it is vital that you take immediate action. If you need assistance following receipt of a Statutory Demand do not hesitate to contact our office for an initial consultation with our insolvency litigation director Daniel Wignall.

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