September legal updates, we reported on a decision of the
Western Australia Court of Appeal, Pravenkav Group Pty Ltd v
Diploma Construction (WA) Pty Ltd. In that case, a company
which was resisting a statutory demand described an offsetting
claim in very broad terms, which was nonetheless held to be
sufficient for the Court to set aside the demand. We suggested that
the decision made it significantly easier to establish off-setting
claims, particularly in circumstances where they were difficult to
describe or quantify.
Another recent decision of the Western Australian Supreme Court
is a useful reminder that, if the recipient of a statutory demand
manages to convince a Court that a statutory demand should be set
aside on the basis of a weak offsetting claim, there are still
tactics that a creditor can use to prevent the statutory demand
procedure from being a waste of time.
Like so many Western Australian insolvency cases in the last
year or so, the dispute appears to have arisen because of the
slowdown in the mining and resources sector.
KEP Management Services Pty Ltd which traded as Phillips
Engineering (Phillips), had two labour hire
contracts with Goldwest Enterprises Pty Ltd, by which Goldwest
provided workers to Phillips. The workers were employed on projects
which Phillips was undertaking for BAE Systems Australia Defence
(BAE) and Downer EDI
In November 2014, Phillips suspended of Goldwest's services
on the basis that some of their workers were not entitled to work
in Australia, and declined to pay Goldwest's outstanding
Goldwest served a statutory demand on Phillips on 9 December
2014 in the sum of $524,842.45.
Phillips filed an application to set aside the statutory demand.
It argued, among other things, that to the extent that Goldwest
provided workers who were not entitled to work in Australia, it
could not enforce the agreements. Phillips also claimed to have an
offsetting claim, being damages against Goldwest arising out of
losses it suffered as a result of BAE and Downer ceasing to provide
it with further work, which it said was worth $3,000,000 in
Acting Master Gething carefully evaluated the evidence in
support of this first argument and found that although the claim of
illegality did raise a genuine dispute, $190,381.40 of the
outstanding invoices related to the labour of workers for whom
there was no dispute about their entitlement to work in Australia.
On this basis, the statutory demand was varied to $190,381.40, but
not set aside.
The Acting Master also carefully reviewed the evidence relating
to the damages claim. Although BAE and Downer had unquestionably
given Phillips work in the past, the Acting Master did not find
Phillips' evidence of the likelihood of future work
particularly compelling. But this was, after all, a matter in which
the evidence doesn't have to be very compelling. The Acting
Master found that "although the amount claimed is speculative,
as a matter of principle, it is plausible" and decided that
the statutory demand should be set aside.
However, the Acting Master also stated that "I am only
satisfied by a thin margin that the off-setting claim...is
genuine". The Acting Master pointed out that statutory
demands can be set aside on conditions, and in this case he imposed
two of them, namely:
within 28 days of the date of the Order, Phillips commenced
proceedings in relation to its damages claim; and
within the same period of time, Phillips pay the sum of
$190,000 into the Court in which the proceedings had commenced, or
provide equivalent or alternative security for that amount to the
satisfaction of Goldwest.
The effect of these Orders was that the statutory demand
remained in place until Phillips complied with the conditions.
The $190,000 was to be paid into Court pending the outcome of
the new proceedings, it was not paid to Goldwest. No doubt Goldwest
would have preferred to be paid its $524,845.00 or to wind up the
company. But Goldwest was still left in a significantly better
position than would have been the case if the statutory demand had
been unconditionally dismissed. The case is a very useful and
timely reminder to debtors, creditors and their lawyers that just
because a shadowy, uncertain offsetting claim is enough to set
aside a statutory demand, it does not have to mean that a debtor
company has to get entirely off the hook.
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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