Australia: Setting aside statutory demands . . . on conditions

In our 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.

The Facts

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 (Downer).

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 invoices.

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 damages.

The Decision

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.

The Twist

However, the Acting Master also stated that "I am only satisfied by a thin margin that the off-setting 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.

KEP Management Service Pty Ltd v Goldwest Enterprises Pty Ltd [2015] WASC 132 (17 April 2015)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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