The New South Wales Court of Appeal in Ligon 158 Pty Ltd v Huber [2016] NSWCA 330 has set out the principles relevant to determining whether a dispute asserted by a company served with a creditor’s statutory demand is a “genuine dispute” about the existence or amount of a debt for the purposes of s 459H(1)(a) of the Corporations Act 2001 (Cth).
Those principles, found at [8]-[11] of the judgment of Barrett AJA (with whom McColl and Meagher JJA agreed), can be summarised as follows. References to the cases have been omitted.
- A dispute was “genuine” if it was not “plainly vexatious or frivolous” or “may have some substance” or “involves a plausible contention requiring investigation”. The dispute had to be bona fide and be premised on sufficiently particularised grounds that were “real and not spurious, hypothetical, illusory or misconceived” and which demonstrated the “objective existence” and “prima facie plausibility” of the dispute.
- The test was governed by principles analogous to those which underpinned an application for an interlocutory injunction or summary judgment but the court had to guard against setting the threshold too low as that could defeat the legislative purpose of s 459H(1)(a).
- A company challenging a statutory demand on the genuine dispute ground was not faced with a difficult or demanding task. Once the company showed that even one issue had a sufficient degree of cogency to be arguable, a finding of genuine dispute would follow and the statutory demand would be set aside. A finding to the contrary could only be made if the company’s claims were so devoid of substance that no further investigation was warranted.
- The court’s function to merely determine the existence of a genuine dispute did not require or invite the court to weigh or assess the merits of the dispute but the court would not be exceeding its legitimate function by having regard to evidence relevant to whether the asserted dispute was genuine.
- Important points about the forensic approach to be adopted in s 459G proceedings included the following:
- While there had to be evidence showing a serious question to be tried or an issue deserving of a hearing, the evidence could not and need not conclusively prove the claim or otherwise be incontrovertible or substantially non-contestable.
- The short time allowed by s 459G(2) for the preparation of the affidavit in support of the application for an order setting aside the demand militated against the presentation of the fullest and best evidence in some cases.
- In determining whether there was evidence of a genuine dispute, the court was generally not concerned to engage in an enquiry as to the credit of the deponent of the supporting affidavit. However, the court was not required to accept uncritically every statement in the affidavit that was inconsistent with undisputed contemporary documents, was inherently improbable, did not have sufficient prima facie plausibility to merit further investigation or was an assertion of facts not supported by evidence.
- Inconsistent contemporaneous documents would not necessarily be sufficient to defeat the company’s challenge to a demand even though they could create difficulties for the ultimate proof of the case put forward by the company if the dispute was litigated.
- The grounds on which the company disputed the debt had to appear from the supporting affidavit filed by it within the period allowed by s 459G(2) (the so-called ‘Graywinter principle’). However, the issue for the court was not whether the company would succeed on those grounds in defending a debt recovery action brought against it by the creditor. Rather, the court had to determine whether the grounds of dispute delineated by the affidavit were grounds which, when viewed in the whole of the circumstances emerging from the evidence, indicated a plausible defence propounded in good faith and not one merely constructed in response to the pressure represented by the statutory demand. Credibility issues would generally be confined to the question whether the asserted grounds were of that quality, as distinct from questions going to the ultimate merits of the defence itself. For this reason, cross-examination of deponents was rare in these kinds of proceedings.
- The court needed to exercise restraint in considering the ultimate question of the indebtedness of the company. Except in a case in which it was patently obvious that there was no debt, judges, whether at first instance or on appeal, should generally be careful to perform the task of determining whether there was a genuine dispute without expressing a view on the ultimate question. Otherwise, things could be said which would embarrass the judge before whom the ultimate question came.
In the case before the Court of Appeal, the debt claimed in the statutory demand was a payment by way of a loan from the creditor to the company which the company had failed to repay. The company, however, maintained that the payment was not a loan but a non-refundable contribution towards certain legal expenses incurred by the company. The trial judge had considered this ground of dispute to be a recent invention which deprived the dispute of the “genuine” quality and had dismissed the company’s application to set aside the demand. The issue then on appeal was whether there was a genuine dispute or a defence merely constructed in response to the claim advanced through the statutory demand. Having regard to the evidence, the Court of Appeal concluded that the proposition that the creditor had made a non-refundable contribution as distinct from a loan was not so devoid of plausibility or was not so lacking in substance that the case could be dismissed without further examination. Accordingly, the appeal was allowed and the statutory demand was set aside.
