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Supreme Court 12 December 2006

Jem Developments v Hansen Yuncken

[2006] NSWSC 1378

Other
CORPORATIONS RELEVANT DISCRETIONARY CONSIDERATIONS APPROPRIATE FORM OF ORDER

Citation: Jem Developments v Hansen Yuncken [2006] NSWSC 1378
Court: Supreme Court of New South Wales, Equity Division (Corporations List)
Date: 12 December 2006
Judge(s): Austin J

Background

The defendant had served a statutory demand on the two plaintiff companies under the Corporations Act 2001 (Cth). The plaintiffs applied to set the demand aside, arguing they had an "offsetting claim" under s 459H. On 4 December 2006, Austin J dismissed that application but granted a short extension of the compliance period to 18 December 2006.

The plaintiffs then filed a summons in the Court of Appeal seeking leave to appeal the dismissal. Before the compliance period expired, they returned to Austin J seeking a further extension of that period, to run until seven days after the Court of Appeal determined their appeal.

The defendant contested the further extension. The core question was whether the circumstances justified holding the statutory demand in abeyance for the duration of the appeal.

  • Whether the plaintiffs had established a reasonably arguable case for success on appeal, particularly regarding the meaning of "offsetting claim" under s 459H of the Corporations Act.
  • Whether the appeal would be rendered nugatory if the compliance period was not extended, that is, whether the plaintiffs faced prejudice that a successful appeal could not remedy.
  • How the court should weigh the competing prejudice to each party in the alternative eventualities.
  • What form any extension order should take, including the nature of undertakings required from the plaintiffs.

Decision

Austin J applied the three-part test drawn from Australian Beverage Distributors v Cranswick Premium Wines, which treats this kind of application as analogous to a stay of execution pending appeal. The three matters to address are: whether there is a reasonably arguable case for appeal; whether the appeal would be rendered nugatory without the extension; and the balance of prejudice between the parties.

On the first matter, Austin J accepted that the plaintiffs raised a reasonably arguable ground of appeal concerning the scope of "offsetting claim" under s 459H. His Honour had held that contractual provisions quarantining a debt from set-off or counter-claim could prevent an offsetting claim from being raised to reduce a statutory demand. The plaintiffs intended to challenge that conclusion, relying on the broad statutory definition of "offsetting claim" and several cases, including decisions of the Full Federal Court and the Full Court of the Supreme Court of South Australia, that had not been cited at the original hearing. Austin J acknowledged the plaintiffs' argument would be difficult to sustain but found it was not so implausible as to be beyond reasonable contention.

On the second matter, Austin J was satisfied the appeal would be rendered nugatory without an extension. Compliance with a statutory demand, if unpaid, triggers a presumption of insolvency under s 459C, which can be used to found a winding-up application. That consequence cannot be undone by a later successful appeal, making the extension necessary to preserve the utility of the appellate process.

On the balance of prejudice and discretionary considerations, Austin J noted that the defendant held security over property relevant to its claim, and that any continued delay was mitigated by undertakings the plaintiffs agreed to give. Those undertakings included prosecuting the appeal with expedition and refraining from seeking summary judgment or issuing their own statutory demand against the defendant for a related sum during the extension period.

Orders Made

  • The compliance period for the statutory demand was extended until seven days after the determination of the plaintiffs' appeal by the Court of Appeal, subject to the plaintiffs giving undertakings to:
  • prosecute the appeal with expedition, accepting the earliest hearing date the Court of Appeal allocated regardless of counsel availability; and
  • not seek summary judgment or issue a statutory demand for the sum of $590,931.32 (the subject of the relevant Superintendent's certificate) until after the expiry of seven days following the determination of the appeal.
  • Costs of the extension application were reserved on terms: if the plaintiffs succeeded in the appeal or any rehearing, they would be entitled to their costs of the application; if they did not succeed, each party would bear its own costs.

Key Takeaways

  • An application to extend a statutory demand compliance period pending appeal is treated as analogous to a stay of execution, requiring the applicant to demonstrate an arguable case on appeal, a risk the appeal will be rendered nugatory, and a favourable balance of prejudice.
  • Because non-compliance with a statutory demand triggers an irrebuttable presumption of insolvency that can found winding-up proceedings, failure to extend the compliance period will ordinarily render an appeal nugatory, satisfying the second limb of the test.
  • Austin J confirmed that contractual provisions quarantining a debt from set-off or counter-claim can, in his view, prevent an "offsetting claim" from being raised under s 459H to reduce a statutory demand, though he acknowledged this interpretation remained open to serious challenge on appeal.
  • The breadth of the term "cross-demand" in s 459H(5), as emphasised in cases including John Shearer v Gehl Company, means that an offsetting claim need not constitute a technical set-off at common law or in equity, nor arise from the same transaction as the debt in the demand.
  • Where an extension is granted, courts may attach undertakings requiring the applicant to prosecute the appeal expeditiously and to refrain from taking related enforcement steps against the opposing party during the extended period, balancing the interests of both parties.

Legislation and Cases Referenced

Legislation
- Corporations Act 2001 (Cth), ss 459C, 459E, 459F, 459G, 459H

Cases
- Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544
- Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 25 ACSR 675
- John Shearer Ltd v Gehl Company (1995) 60 FCR 136
- Pearson's Products Pty Ltd v CP Technologies Pty Ltd [1999] NSWSC 575
- Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation (2006) 94 SASR 269
- Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd [2006] NSWSC 1308 (the earlier judgment in the same matter)
- Algons Engineering Pty Ltd v Abigroup Contractors Pty Ltd (1997) 14 BCL 215
- Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85
- Graywinter Management Pty Ltd v Deputy Commissioner of Taxation (1996) 22 ACSR 636
- Ketrim Pty Ltd v Jaeger Corporation Pty Ltd (2003) 21 ACLC 8
- Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 2
- Shakespeares Pie Co Australia Pty Ltd v Multipye Pty Ltd [2005] NSWSC 1201
- Vista Commercial Construction Pty Ltd v Deputy Commissioner of Taxation (1997) 79 FCR 288