Offsetting statutory demands: why time is of the essence

Last month, in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2018] NSWCA 336, the New South Wales Court of Appeal (Court) considered an appeal from a decision of the New South Wales Supreme Court which rejected a debtor’s application to set aside a statutory demand under section 459G(1) of the Corporations Act.¹ 

Background

In June of 2017, Grandview Ausbuilder Pty Ltd (Grandview) sub-contracted Budget Demolitions Pty Ltd (Budget) for demolition and excavation work in the region of $2.5 million in respect of a development being undertaken by Grandview. 

Following two unpaid progress claims totalling approximately $1 million, Budget served a statutory demand on Grandview on 31 January 2018 (Demand).

In the first instance, Grandview sought to set aside the Demand on the ground of 3 separate offsetting claims.  Parker J rejected Grandview’s application to set aside the Demand, finding (among other things) that 2 of the 3 claims were unsubstantiated and that the likely recoverable damages would not exceed the amount Grandview owed Budget in respect of the unpaid progress claims.

His Honour also cited the ‘Graywinter principle’, which is that it is not open to a plaintiff applying to set aside a statutory demand to introduce at the hearing a new ground not supported by the affidavit filed in support of the application.²

It was held that although Grandview’s claim had been foreshadowed in the supporting affidavit of a director of Grandview, the fact that it had not been properly quantified in that affidavit meant that Grandview was in breach of the Graywinter principle.

At a second hearing on 7 November 2018, Parker J granted an extension of time until 28 November 2018, on the condition that Grandview commence an appeal with all due dispatch and provide security for Budget’s costs of the appeal in the sum of $30,000.³

The Appeal

On appeal, Grandview sought an extension of time to comply with the statutory demand.

The key questions to be considered by the Court were:

• by when did any offsetting claim have to crystallise in order for it to be an available claim to meet a statutory demand; and
• was it appropriate in this case for an extension of time for compliance with a statutory demand to be granted in circumstances where the application to set aside the Demand had been dismissed.

Grandview submitted that the relevant time that an offsetting claim is to be available was at the hearing of an application to set aside a statutory demand under section 459G of the Act.

In relation to question two, Beazley P cited the matters the Court will address as set out in Creata (Aust) Pty Ltd v Gary Adrian Faull [2017] NSWCA 230 at [2]:

• whether an arguable case has been shown;
• whether the appeal will be rendered nugatory unless the extension is granted; and
• prejudice to the parties if an extension is either refused or granted.

The Court ultimately found in favour of Grandview, granting an extension of time for compliance with the Demand until (at least) after judgment on the application for leave to appeal is delivered, observing that:

• Grandview had, at least, a “sufficient argument” to support its application;
• there was no doubt that if an extension of time was not granted, the application seeking leave to appeal and any subsequent appeal would be rendered nugatory; and
• although Grandview delayed commencing proceedings in respect of its offsetting claim until after the first hearing, those proceedings had now been commenced.

Lavan comment

Before issuing a statutory demand, creditors should always carefully consider not just whether there is a dispute as to the debt, but also whether the debtor may be able to assert an offsetting claim.  It is not necessary for the recipient of a statutory demand to demonstrate their offsetting claim with absolute precision.

It is also important to remember that, where seeking to offset a statutory demand, time is of the essence.  If Grandview delayed commencing proceedings against Budget in respect of any offsetting claim any further, the Court may have rejected its application for an extension of time which would have been fatal to the application for leave to appeal.