This article contains a case note on the recent decision of Omaya Investments Pty Ltd and Omaya Holding Pty Ltd v The Owners – Strata Plan No. 81539 [2024] NSWSC 1664. In that case, the Court considered whether defects in a statutory demand caused substantial injustice. The judgment serves as a reminder to carefully and accurately draft a statutory demand to avoid unnecessary legal costs arising from an application to set it aside.
Background – the statutory demand regime
The statutory demand regime contained in Part 5.4 of the Corporations Act 2001 (Cth) (Act) allows a creditor to serve a formal demand for payment of a debt. If the debt is not satisfied within a period of time, generally 21 days, the debtor company is presumed insolvent under s 459C of the Act and the creditor may apply to have the debtor company wound up in insolvency.
Given the potential gravity of the consequences of a statutory demand, the Act allows a debtor to apply under section 459J of the Act to set aside a statutory demand which has not been properly drafted or served in accordance with the legislation.
Case background and facts
The plaintiffs; Omaya Investments Pty Ltd and Omaya Holding Pty Ltd (together Omaya) were retained to build a development that was owned by the defendants; The Owners – Strata Plan No. 81539 (Owners Corporation). Omaya allegedly caused building defects during the course of the development and the parties became involved in a dispute.
On 14 December 2023, the parties settled the costs of the rectification works and entered into a Deed of Settlement & Release. The deed contained the following key terms:
- a Settlement Sum of $3 million be paid in quarterly $300,000 instalments with the first instalment due on 31 March 2024;
- if Omaya defaults on the loan, the Owners Corporation can issue a written notice for payment of the instalment within 14 days; and
- on a failure to comply with the written notice, the parties agree, that the remainder of the Settlement Sum will become immediately due and payable at the end of the 14 day period.
Omaya defaulted on the first instalment due 31 March 2025. The Owners Corporation issued a written notice to which Omaya did not comply.
On 9 August 2024 the Owners Corporation served statutory demands on each of Omaya Investments and Holding for the Settlement Sum plus interest.
Defects in the Statutory Demands
The plaintiffs each filed proceedings in the Supreme Court of New South Wales seeking to set aside the statutory demands. The proceedings were joined and heard together.
In their application, the plaintiffs sought to set aside the statutory demands relying on sections 459J(1)(a) and 459J(1)(b) of the Corporations Act 2001 (Cth).
Section 459J(1)(a) – Defect causing substantial injustice
The plaintiffs argued that four defects in the statutory demands caused substantial injustice to the plaintiffs:
- Description of debt: the statutory demands stated the debt arose from Omaya defaulting on the first and second instalment payments. In fact, it was only the first instalment that had not been paid;
- GST: the statutory demands stated the total amount claimed for the debt was inclusive of GST (‘$3,066,622.96 inc. GST’). However, GST was not part of the Settlement Sum agreed by the parties;
- Interest: the statutory demand itemised interest in the amount of $66,622.96 but that amount had been incorrectly calculated. The Owners Corporation accepted this at the hearing and applied to have the demand varied to remove any and all interest payable by Omaya; and
- Typographical error: the demands cited clause 2.2(d)(i) when describing the Settlement Sum of $3 million. There was no such clause in the Deed of Settlement. Instead, the correct clause was clause 2.2(c)(i).
The Court accepted that there were defects in the statutory demands. However, the Court applied the principles in Mearth Technology Pty Ltd v 40Seas Inc[1] and held that the defects in the Omaya demands did not cause substantial injustice because:
- the plaintiffs could precisely identify the debt;
- the ambiguity in the wording used to describe the debt was not misleading to a reasonable reader;
- the plaintiffs were not left to guess their required action to prevent insolvency; and
- the statutory demands contained enough information for the plaintiffs to assess their liability.
For these reasons, the plaintiff’s claim of defects causing substantial injustice failed under s 459J(1)(a).
Section 459J(1)(b) – Some other reason why the demand should be set aside
In relying on the same defects described above, the plaintiffs argued that the demands should be set aside for ‘some other reason’ pursuant to section 459J(1)(b) of the Act. In particular, the plaintiffs argued that the demands were made carelessly or vexatiously or in an abuse of process. Again, the Court affirmed:
- the errors were minor in nature;
- the demands clearly identified the debt and its legal basis;
- there was no attempt to subvert the statutory process or act unconscionably; and
- that setting aside a statutory demand over minor defects would ‘undermine the integrity of the statutory demand regime’ considering that the amount of debt is undisputed and arising from a fixed sum due and payable under a deed as agreed by the parties.
Decision
The Court then made orders to the effect that:
- each statutory demand to Omaya be varied to $3 million under s 459H(4);
- the Plaintiffs’ application be dismissed; and
- the Plaintiffs pay the defendant’s costs on an ordinary basis.
Key takeaway
The judgment is a cautionary tale regarding attention to detail. Even though the creditor was eventually successful, careless errors in the statutory demand resulted in the creditor defending an application to set aside the statutory demands. Attention to detail and accurate drafting of statutory demands will assist a creditor to avoid unnecessary legal costs.
By contrast, a defendant receiving a statutory demand needs to exercise caution when immediately instituting proceedings to have a statutory demand set aside as being defective under s 459J. The Court will always look at the substance of the defect and will allow the creditor to amend their statutory demand unless the plaintiff can provide substantial injustice arising from the defects. This is not always an easy threshold to prove where the parties can readily identify the debt even if misdescribed in the statutory demand. One is far better served relying on a genuine dispute or offsetting claim in conjunction with or as an alternative to an alleged defect in applying to set aside a statutory demand.
If you would like to discuss this article with us, please contact David Greenberg, Partner, or Adele Phillips, Paralegal on (02) 9261 5900.
[1] Mearth Technology Pty Ltd v 40Seas Inc [2024] NSWSC 656 principles outlined by McGrath J at [35]. The Court held a statutory demand describing the value of the debt in $USD was not a defect capable of causing substantial injustice.