FEDERAL COURT OF AUSTRALIA

IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Company Ltd [2003] FCA 533

CORPORATIONS – application seeking to set aside a creditor’s statutory demand for payment of debt – claim that statutory demand fails to comply with legislative requirements – applicant asserts existence of genuine dispute – cheques for payment of debt drawn in favour of third party – failure to specify debt due and payable – supporting affidavit does not state belief as to the absence of any genuine dispute – whether statutory demand should be set aside

Corporations Act 2001 (Cth) ss 459E, 459G, 459H, 459J

Pro-Image Productions (Vic) Pty Ltd v Catalyst Television Productions Pty Ltd (1988) 14 ACLR 303 referred to

Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd (2002) 20 ACLC 352 cited

Wildtown Holdings Pty Ltd v Rural Traders Co Ltd [2002] WASCA 196 cited

B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 discussed

Technitrade Pty Ltd v Compucon Computers (SA) Pty Ltd [2002] SASC 309 cited

IFA HOMEWARE IMPORTS PTY LTD v

SHANGHAI JERRYS CANDLE COMPANY LTD

N 3077 of 2002

TAMBERLIN J

SYDNEY

30 MAY 2003

THE COURT ORDERS THAT:

1.         The statutory demand of the respondent dated 8 November 2002 be set aside.

2.         The respondent pay the applicant’s costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     The applicant (“IFA”) seeks an order setting aside a Creditor’s Statutory Demand for Payment of Debt served on it, dated 8 November 2002.

2                     On Thursday 24 April 2003, being satisfied that sufficient ground had been made out, I made an order setting aside the Statutory Demand and ordered the respondent to pay the applicant’s costs of the application.

3                     The application was made pursuant to ‘s 459 of the Corporations Act 2001’.  There is no such section in the Corporations Act 2001 (Cth) (“the Act”) and I have treated it as an application pursuant to s 459G.

4                     Essentially two grounds are relied on by the applicant to set aside the Statutory Demand.  The first is that the Statutory Demand is not made in compliance with s 459E.  The second ground is that there is a genuine dispute between the applicant and the respondent about the existence or amount of the debt to which the Demand relates, within the meaning of s 459H.

5                     Under s 459J the Court may by order set aside a statutory demand if it is satisfied that because of a defect in the demand, substantial injustice would be caused unless the demand is set aside or that there is some other reason why the demand should be set aside.  Unless such grounds are made out, the Court must not set aside a statutory demand merely because of a defect.  The effect of setting aside a statutory demand is that the statutory demand has no effect: s 459K.

6                     Section 459E provides that a creditor may serve a statutory demand on a debtor company.  However, the demand must be in the prescribed form and be signed by or on behalf of the creditor.  There is a requirement that unless the debt or each of the debts is a judgment debt the demand must be accompanied by an affidavit that verifies that the debt or the total of the amounts of the debt is due and payable by the company and which complies with the Federal Court (Corporations) Rules 2000 (“the Rules”). 

7                     The consequence of non-compliance with a valid statutory demand is that if the debt is unpaid at the end of the period for compliance the Court must presume that the company is insolvent: s 459C(2).

statutory demand

8                     The statutory demand in the present case is relevantly in these terms:

“CORPORATIONS ACT

PARAGRAPH 459E(2)(E)

To:                  IFA Homeware Import Pty Ltd A.C.N. 077 519 549

Of:                   33 Liberty Road, Huntingwood NSW 2148

1.         The company owes Shanghai Jerry’s Candle Company Limited of Unit 19, 2 Goodwin Street, Kangaroo Point Q. 4169 (“the creditor”) the amount of one hundred and sixty-one thousand eight hundred and eighty-two dollars and ninety-nine cents ($161,882.99) being the aggregate amount of two dishonoured cheques described in the schedule. 

2.         The amount is due and payable by the company.

3.         Attached is the affidavit of A. Shen dated 8 November 2002 verifying that the amount is due and payable by the company.

4.         The creditor requires the company, within twenty-one (21) days after service on the company of this demand:

            (a)        to pay to the creditor the amount of the debt; or

(b)       to secure or compound for the amount of the debt to the creditor’s reasonable satisfaction.

5.         …

6.         …

7.         …

SCHEDULE

Description of the debt

1.         A cheque in the sum of AU$100,000.00 drawn by the company in favour of the creditor was dishonoured upon presentation on 10 September 2002, and

2.         A cheque in the sum of AU$61,882.99 drawn by the company in favour of the creditor was dishonoured upon presentation on 10 September 2002.

DATED: 8 November 2002

….”

9                     Accompanying the Statutory Demand is an affidavit of April Shen, sworn on 8 November 2002, which relevantly reads:

“…

1.         I am a consultant retained by Shanghai Jerry’s Candle Company Limited (“the company”), a company duly incorporated in the Peoples Republic of China.

2.         I have been engaged by the company for the sole purpose of recovering a debt due by IFA Homeware Import Pty Ltd A.C.N. 077 519 549 (“the debtor”) to the company.

3.         I make this affidavit from the facts within my own knowledge as consultant to the company and from information derived by me from an examination of the books of account, documents and papers of the company and having made all due and proper enquiries of the company’s directors and agents.  The company carries on a business of the supply of candle products.  The debtor is a customer of the company.  The debtor purported to pay the debt due to the company by way of cheques which have been dishonoured upon presentation.

4.         On or about 30 September 2002 the company received advice that payment by the debtor to the company for the sum of:

i.          A cheque in the sum of AU$100,000.00 paid by the debtor to the company had been dishonoured and marked ‘payment stopped’;

ii.         A cheque in the sum of AU$61,882.99 paid by the debtor to the company had been dishonoured and marked ‘payment stopped’.

5.                  …

6.         Despite demand, the debtor has failed or refused to pay to the company the sum of Australian one hundred and sixty-one thousand, eight hundred and eighty-two dollars and ninety-nine cents (AU$161,882.99) and that amount is presently due and payable by the debtor to the company.

7.         All the facts and circumstances herein deposed to are within my own knowledge, save such as are deposed to from information only, and my means of knowledge and sources of information, appear on the face of this my Affidavit.

…”

10                  In an affidavit sworn on 12 December 2002, filed on behalf of the respondent, Mr Jerry Shen states that he is a director of the respondent, Shanghai Jerry’s Candle Company Limited, a company incorporated in the Peoples Republic of China.  Counsel for the respondent informed the Court that this company is not registered in Australia.  Mr Shen states that as at 12 December 2002 the amount of AU$161,882.99 was due and owing by IFA to the respondent and remained unpaid.  He also says that copies of the cheques given to him by Mr Li Wei on behalf of the applicant in payment of invoices for goods supplied was provided to the respondent and are annexed to his affidavit.  The relevant exhibit to the affidavit, JS10, includes copies of two cheques from the applicant which are stamped “Not Negotiable” and in which the words “or bearer” are not crossed out.  In total they amount to $161,882.99.  There is no entry as to the name of the payee on the copies included in the exhibit.  However, there are two other copies reproduced in the same exhibit, which are in the same amounts, and total $161,882.99 but the payee is designated “Shanghai Rising Dragon International Trade Co Ltd or Bearer” and there is a “Not Negotiable” crossing on each of the cheques.  In addition, there is a dishonour notice from the China Construction Bank, which states that the drawer’s bankers have advised that the cheques have been returned with the answer “Payment Stopped”.  The cheques in respect of which the payment was stopped were the two cheques in the name of Shanghai Rising Dragon International Trade Co Ltd.

principles

11                  It is well settled that there be strict compliance with the requirements of a statutory demand.  In Pro-Image Productions (Vic) Pty Ltd v Catalyst Television Productions Pty Ltd (1988) 14 ACLR 303, Marks J said at 305:

“The law requires strict compliance with a statutory provision to meet its purpose.  It is not an arid requirement to enforce discipline among lawyers or make examples of persons who make mistakes.  In my opinion, the proper test is whether an error of the kind which we are here concerned had the effect of frustrating in some way a purpose of the statutory provisions under consideration, or whether it was capable of depriving a party of a right or opportunity to exercise a right.”

12                  It is also clear that an error in a statutory demand will not of itself necessarily require the setting aside of a statutory demand.  The Act requires that “substantial injustice” is caused or that there is some other reason why the statutory demand should be set aside: s 459J.

13                  In the present case the Act requires that the Statutory Demand must specify the debt and its amount.  The Statutory Demand served on the applicant identifies the debt as the amount of $161,882.99 being the aggregate of two dishonoured cheques described in the schedule.  The schedule which purports to describe the debt, refers to a cheque in the sum of AU$100,000 drawn by the company in favour of the creditor, which was dishonoured upon presentation on 10 September 2002, and a cheque in the sum of AU$61,882.99 drawn by the company in favour of the creditor which was dishonoured upon presentation on 10 September 2002.  Accordingly, the debt which is said to exist is a debt arising in relation to two dishonoured cheques.

14                  However, it is evident from the copies of the cheques in evidence that the dishonoured cheques were not drawn in favour of Shanghai Jerrys Candle Company Ltd, the creditor, but were drawn in favour of another company, Shanghai Rising Dragon International Trade Co Ltd.  In this respect the specification of the debt in the Statutory Demand is clearly erroneous.  This is so for two main reasons.  First, the cheques were not drawn in favour of the creditor respondent but in favour of another entity.  Second, it appears that the cheques given to the respondent were not made payable to any specified payee but that the name of the payee, which appeared on the cheques dishonoured, was later filled in.  Furthermore, there is no material before me which would justify the inference that there was a debt in the sum of AU$161,889.22 at the date of dishonour or drawing of the cheques.  The asserted debt which appears to be relied on in the Statutory Demand is a debt arising from the dishonour of a cheque and not a debt arising in respect of the supply of goods or services or for any other reason.

15                  The position is not corrected by the affidavit of April Chen of 8 November 2002.  That affidavit asserts that the respondent carries on a business of the supply of candle products and that the applicant is a customer.  It also alleges that the applicant purported to pay the debt due to the company by way of cheques which had been dishonoured upon presentation.  The debt in question which appears to be relied on in the affidavit is the amount on the dishonour of the cheques.

16                  In addition, the affidavit of April Chen does not comply with the requirements of Form 7 of the Rules in so far as it fails to state, as required by that form:

“I believe there is no genuine dispute about the existence or amount of the *debt/*any of the debts.”

17                  In relation to the first matter, namely the reference to the wrong payee on the dishonoured cheques, the respondent seeks to rely on a statement by Jerry Chen in his affidavit sworn on 23 January 2002, in which he says:

“3.  By way of explanation, to export goods from China my company is required to transact its business through an authorised trading corporation, being Shanghai Rising Dragon International Trade Company Limited.  The invoices drawn by that company, Shanghai Rising Dragon International Trade Company Limited are invoices made by that company on behalf of Jerry’s Candles and directed to IFA.  The payments the subject of these proceedings, being the two dishonoured cheques, were payments made by IFA to my company which were dishonoured upon presentation to my company’s bank. The payments the subject of the two dishonoured cheques in the total amount of AU$161,882.99, were payments made by IFA for the two sales contracts being Exhibit ‘JS8’ to my affidavit sworn 12 December 2002.”

18                  Apart from the assertion that the invoices drawn by Shanghai Rising Dragon International Trade Company Ltd were made on behalf of the respondent, there is no evidence to support such an assertion and it is not referred to in the Statutory Demand.  I do not consider that any such agency has been made out on the evidence before me.

19                  The assertion by Mr Chen is that the payments, the subject of the proceedings, are the two dishonoured cheques and that there were payments made by IFA to his company which were dishonoured.  This is not so.  The cheques were made out as indicated above and then were made payable to a company other than the respondent.

20                  The specification of the debt in a statutory demand is a fundamental requirement and in the present case it is evident that the statement in the Statutory Demand is inaccurate.  The cheques on the basis of which the debt is asserted were not made payable to the alleged creditor-respondent.

21                  For this reason alone, I am satisfied that there is a substantial defect in the Statutory Demand and that it the defect is of such a nature that substantial injustice would be caused unless the demand is set aside.

22                  Independently, and in addition to this conclusion, April Chen, in her affidavit of 8 November 2002 in support of the Statutory Demand, does not swear that there is a belief that there is no genuine dispute as to the existence of amount of debt.  This is a material failure of significance.  The assertion that the proponent believes there is no genuine dispute about the existence or amount of the debt provides an important protection to the recipient of such a notice given the dire consequences which can ensue where there is no compliance.  It would in my view be unfair to the recipient not to insist upon observance of this statutory requirement.

23                  It has been pointed out that although a creditor’s view that there is no genuine dispute about a debt may be subjective, it is not for the Court to put words into the mouth of a deponent or ignore the omission of such a requirement for a sworn statement to that effect. 

24                  The legislature has specifically provided for a commitment to the position and an expression of a belief that there is no genuine dispute.  This is a valuable safeguard against possible abuse of statutory demands in circumstances where there may be a genuine dispute known to the creditor or the creditor’s authorised representative yet it is sought to exert pressure for payment.  In the present case, where there is a total omission to insert such a paragraph, it cannot be suggested that there has been any substantial compliance with this requirement.  Nor can it be described in the minimalist language used in the Act as “a mere defect”.  The express requirement of a statement that there is a belief as to the absence of any genuine dispute is additional to the requirement that the debt is due and payable.  A simple assertion that a debt is due and payable does not necessarily entail the consequence that there is no genuine dispute about the existence or amount of the debt or any belief as to the absence of a genuine dispute: see Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd (2002) 20 ACLC 352 at [32]; Wildtown Holdings Pty Ltd v Rural Traders Co Ltd [2002] WASCA 196 at [68]-[71].  The matter was also the subject of consideration by McLelland CJ in Eq in B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 15 ACSR 433 at 435-436 where his Honour pointed out:

“… the departure from the relevant rule in respect of the affidavit accompanying the statutory demand is a matter of substance. … It is important in this regard to bear in mind that the relevant matters include not only a belief as to the existence and amount of the debt, but also a belief as to the absence of any genuine dispute about the existence or amount of the debt.  The express requirement in the rule that the person making the affidavit depose to his or her belief that there is no genuine dispute is a significant mechanism for filtering out cases where there is in fact such a dispute, so as to prevent such cases from reaching the court on such an application as the present, with a consequent waste of time and resources.  This mechanism would be substantially weakened unless a person likely to have personal knowledge of the existence of a dispute if there is one makes the affidavit.  A statement of a belief that there is no genuine dispute based solely on hearsay is unlikely to have anything like the same degree of reliability.  I therefore do not regard what has occurred in the present case as merely a technical breach.”

25                  In that case the affidavit did not omit the statement but included an assertion that the deponent believed that there was no genuine dispute about the existence or amount of the debt.  Nevertheless, in view of the hearsay nature of the statement, his Honour considered that the omission was more than a mere defect.  His Honour expressed the view that he did not regard what had occurred in that case as a mere technical breach of the relevant rules, but rather that it went to the heart of what the legislative requirement was intended to achieve.

26                  I consider that the total omission of any statement in the present case provides an additional and independent ground on which to set aside the Statutory Demand: see Technitrade Pty Ltd v Compucon Computers (SA) Pty Ltd [2002] SASC 309.

27                  Accordingly, in view of the conclusion which I have reached with respect to the defective Statutory Demand, the application should be granted and the respondent should pay the applicant’s costs of this application.

28                  In view of the conclusion which I have reached on the first ground advanced for the applicant it is not necessary to consider the question as to whether there is a genuine dispute in the present case.

29                  I should add that in this case counsel indicated to me that the parties were continuing to engage in commercial relations and there is clearly much to be said for a close consideration of the possibility of reaching mutual agreement in relation to any outstanding dispute between the parties.

Associate:

Dated:              30 May 2003