The Dog Ate My Homework: What Not To Do If You Want To Set Aside A Statutory Demand

In the recent case of Milo Projects Pty Ltd v JK Smales Properties Pty Ltd [2022] FCA 154 (Milo Projects), the New South Wales division of the Federal Court considered an application by the plaintiff, Milo Projects Pty Ltd (Milo), to set aside a statutory demand on the basis that there was a genuine dispute as to the debt and/or a defect in the statutory demand.

In giving judgment on the application, the Federal Court was required to consider the strict requirements for setting aside a statutory demand and the meaning of ‘defect’ pursuant to section 9 of the Corporations Act 2001 (Cth) (Corporations Act).

The Federal Court was also required to consider a late application by Milo to adjourn the hearing of its own application for COVID related reasons, which was rejected by the Court.

Background

In early February 2019, Milo and the defendant, JK Smales Properties Pty Ltd (JK Smales), entered into a deed of settlement and release (the Deed).  Pursuant to the Deed, Milo was required to pay JK Smales:

• a principal sum of $200,000;
• a further amount in respect of “interest” of $13,500; and
• additional “interest” of $1,125 per month to be calculated from 1 August 2018 and to be paid until the principal sum, the agreed interest and any accrued additional interest are paid in full.

By 31 August 2021, Milo had defaulted on the Deed, having only paid $45,000 in total.

JK Smales subsequently issued a statutory demand to Milo for amounts owing under the Deed (Statutory Demand).

The Statutory Demand required payment of $209,000 comprising:

• the principal sum of $200,000;
• the agreed interest of $13,500;
• additional interest of $1,125.00 per calendar month from 1 August 2018 until 1 August 2021;
• less the $45,000 paid by the Milo.

The Statutory Demand and a supporting affidavit by a director of JK Smales were served on Milo on 8 September 2021.

On 20 September 2021, solicitors for Milo wrote to the solicitors for JK Smales advising (amongst other things) that Milo intended to apply to set aside the Statutory Demand.  The solicitors for JK Smales responded on 22 September 2021 asking that Milo confirm the grounds that it intended to rely on in seeking to set aside the Statutory Demand.

Milo did not respond to this request and instead, on 24 September 2021, proceeded to file an originating process seeking orders to set aside the Statutory Demand under sections 459H(1)(a) and 459J of the Corporations Act on the basis that there was:

• a genuine dispute as to the existence of the debt; and / or
• a defect in the Statutory Demand which would cause substantial injustice if not set aside.

The application was supported by an affidavit affirmed by the director of Milo, Ms Hubbard (First Hubbard Affidavit).  The First Hubbard Affidavit included a statement by Ms Hubbard that “I say that there is a genuine dispute as to the debt as a result of discussions between the parties between 2019 and 2020”, but did not provide any other evidence as to the alleged dispute.

On 9 November 2021, Milo filed a further affidavit of Ms Hubbard (Second Hubbard Affidavit) which principally described and exhibited 59 items of correspondence between Milo and JK Smales, but did not contain any further information about the basis for the alleged dispute as to the debt.

There then followed a series of unfortunate events.

• On 10 January 2022, Milo’s solicitors filed a Notice of Intention to Cease to Act;
• On 17 January 2022, Milo engaged new solicitors;
• On 20 January 2022, Ms Hubbard wrote to the solicitors for JK Smales requesting agreement to a four week adjournment/extension.  This was rejected by JK Smales on 24 January 2022 on the basis that the final hearing had been listed for some time, the issues in the proceedings were not complicated, and Milo had ample time to instruct new solicitors before the hearing on 9 February 2022;
• On 1 February 2022, Ms Hubbard wrote to the Court requesting copies of all of the court documents (on the basis that Milo’s former solicitors had not agreed to release the file).  The Court provided the court documents to Ms Hubbard on the same day;
• On 3 February 2022, Milo’s new solicitors wrote to JK Smales’ solicitors requesting a copy of the exhibits to the Second Hubbard Affidavit and foreshadowing an application for an extension of time for Milo to file its submissions.  JK Smales' solicitors replied on the same day, providing a download link to the exhibits;
• On 4 February 2022, Milo’s new solicitors wrote to JK Smales’ solicitors advising that the download link didn’t work and also that Ms Hubbard had contracted COVID-19 and was very unwell, and requested that the final hearing be vacated and re-listed.  JK Smales' solicitors replied on the same day rejecting this proposal on the basis that the matter was simple and Ms Hubbard would not be required for cross examination;
• On 5 February 2022, JK Smales’ solicitors sent the exhibits to the Second Hubbard Affidavit to Milo’s solicitors as a series of pdf documents; and
• On 7 February 2022 Milo’s solicitors confirmed receipt of the exhibits, advised that Ms Hubbard was “too unwell to instruct us” and confirmed that Milo was pressing on with an application to adjourn the final hearing.

The Hearing

The hearing before Goodman J dealt with Milo’s application for an adjournment, as well as Milo’s application to set aside the Statutory Demand.

As to the adjournment:

• Milo argued that the adjournment should be granted as it had not been able to obtain all of the relevant documents for the application in sufficient time, plus Ms Hubbard had fallen ill with COVID-19 from 4 February 2022 such that Milo’s solicitors could not take instructions on all of the documents including the exhibits to the Second Hubbard Affidavit; and
• JK Smales argued that the evidence of Ms Hubbard’s inability to instruct was inadequate, plus Milo had had sufficient opportunity to identify a genuine dispute and had not done so with the result that an adjournment would be futile as there was no evidence of any genuine dispute.

Goodman J ultimately rejected the application for an adjournment, and held that Milo had had a more than ample opportunity to identify a genuine dispute as to the debt between September 2021 (when the First Hubbard Affidavit was filed) and 4 February 2022. 

Further, Goodman J was not satisfied that the evidence filed by Milo confirmed that Ms Hubbard could not have instructed Milo’s solicitors between 4 and 9 February 2022 as there was no evidence as to Ms Hubbard’s symptoms or any medical evidence as to why Ms Hubbard was completely unable to provide instructions during this time.

As to Milo’s application to set aside the Statutory Demand, Goodman J held that:

• pursuant to section 459G(3)(a), an application to set aside a statutory demand on the ground that there is a genuine dispute as to the debt must be accompanied by an affidavit supporting the application, and both the application and the supporting affidavit must be filed within 21 days of service of the statutory demand;
• pursuant to the decisions in MNWA Pty Ltd v Deputy Commissioner of Taxation [2016] FCAFC 154 and Sceam Construction Pty Ltd v Clyne [2021] VSCA 270, the supporting affidavit “must raise a genuine dispute either expressly or by a necessary or reasonably available inference”;
• as the First Hubbard Affidavit did not raise a genuine dispute as to the debt, it did not constitute a supporting affidavit as required by section 459G(3)(a);
• as a result, Milo had failed to invoke the Court’s jurisdiction under section 459G within time and that aspect of the application must be dismissed; and
• as to Milo’s application to set aside the Statutory Demand on the grounds of the demand being subject to a material defect under section 459J, Milo had sought to rely on the same arguments which it said showed there was a genuine dispute as to the debt, but it would “unduly strain” the ordinary meaning of ‘defect’ to include these matters as defects, and this aspect of the application must also be dismissed.

Lavan comment

This case is a useful reminder that the courts will strictly enforce the requirements for an application to set aside a statutory demand, and that if a debtor seeks to argue that there is a genuine dispute as to the debt claimed then this genuine dispute must be clearly identified and explained in the supporting affidavit.

It is also a useful illustration of the fact that if a party intends to seek an adjournment based on medical reasons, then such a party should ensure that the Court is provided with sufficiently detailed evidence as to why the party is unable to meet its obligations, including if possible by way of appropriate medical evidence.

If you have any questions about an application to set aside a statutory demand, including if a bout of COVID-19 is making it difficult for you to comply with the statutory process, the Lavan team is here to help (remotely if appropriate).