Capacity for a debtor to set aside a creditor’s statutory demand
Accordent Investment Pty Ltd v RMBL Investments Ltd  SASC 144, Supreme Court of South Australia, Gray J, 22 May 2009
This case involved an appeal from an interlocutory decision in which Accordent Investment Pty Ltd (Accordent) applied to have a creditor’s statutory demand issued by RMBL Investments Ltd (RMBL) set aside. This appeal was heard by Gray J in the Supreme Court of South Australia.
Accordent made three main submissions:
1. that the demand was defective as it did not specify a single debt within the meaning of section 459E(1)(a) of the Corporations Act 2001 Cth (CA); and
2. that Accordent had provided sufficient security to RMBL that satisfied section 459E(2)(c) CA; and
3. in the alternative, there was ‘some other reason’ within the meaning of section 459J(1)(b) CA to set aside the demand.
Gray J dismissed the appeal.
In relation to the first submission, Gray J found that section 459E allows the creditor to demand the principal of a debt as a whole single debt within the meaning of section 459E(1)(a), despite the fact that there was interest being claimed on the principal. In resolution of the second submission, Gray J decided that existing security was not able to satisfy the terms of section 459E(2)(c) that security had been provided to the reasonable satisfaction of the creditor and it appears to have been held that the reason was that it was not further security. In addressing the third submission, his Honour found that the reasons claimed by Accordent (including a valuation of the property higher than the statutory demand and claimed inadequacies in the auction process) were not sufficient to set aside the statutory demand.
On 19 August 2005 Accordent and RMBL entered into a secured loan agreement for $7,812,000.00 which was subsequently increased to $12,408,000.00. On 26 February 2008, RMBL issued a notice of default pursuant to the terms of the loan agreement. The default arose from the non-payment of interest on the loan, and on default the total amount of the debt became due and payable. Also on 26 February 2008, RMBL took possession of part of the security, Windsor Park Shopping Centre.
On 11 September 2008, RMBL auctioned the Windsor Park property, however the auction was unsuccessful with the highest bid being $11,750,000.00. On 12 September 2008, RMBL served a statutory demand on Accordent pursuant to section 459E(2)(e), requiring Accordent to pay RMBL the amount of the debt or to secure or compound for the amount of the debt to RMBL’s reasonable satisfaction. The debt specified was the principal only and excluded interest and other charges which were disputed.
On 3 October 2008 Accordent applied to set aside the statutory demand, pursuant to sections 459H and 459J(1)(b). This application was dismissed by a Master of the Supreme Court of South Australia on 6 March 2009. Accordent appealed the decision of the Master on 22 May 2009 (by way of rehearing).
In the initial hearing, the Master took into account matters that were genuinely in dispute to reduce the amount of the demand to $10,081,924.95.
Accordent made the following submissions on appeal:
- The statutory demand was defective as it did not identify a single debt within the meaning of section 459E;
- Accordent had complied with the statutory demand by providing security for the amount of the debt as required by section 459E(2)(c); and
- In the alternative, ‘some other reason’ for setting aside the statutory demand had been established within the meaning of section 459J(1)(b).
Gray J rejected each submission and his Honour’s treatment of each submission is detailed below.
(i) Single debt under sections 459E
Section 459E provides that a person may serve on a company a demand relating to a single debt (section 459E(1)(a)) or two or more debts (section 459E(1)(b)). Section 459G allows a debtor to apply to have a statutory demand set aside if it relates to a disputed debt. Accordent claimed that the debt referred to in the statutory demand was not a “single debt” within the meaning of section 459E because it was not the whole debt. That is, it referred to the principal but not to the interest due on the principal.
Gray J indicated that the purpose of section 459E(1) is to prevent complicating proceedings for the winding up of the debtor company by ensuring that a creditor does not issue more than one statutory demand. His Honour found that the principal and interest components of a loan are distinct debts and that RMBL was able to demand the principal as a single debt.
His Honour also noted that there may be good reasons to exclude amounts from a statutory demand. In this case the purpose of excluding interest, which was a disputed debt, was to ensure Accordent did not have a basis for having the demand set aside under section 459G.
(ii) Providing further security for the debt – section 459E(2)(c)
Section 459E(2)(c) provides that a statutory demand must require the company to pay the debt or secure or compound to that amount or total to the creditor’s reasonable satisfaction within 21 days of serving the demand.
Accordent relied on a valuation of the property after the auction which valued the property at between $14,500,000.00 and $16,500,000.00. Accordant claimed that, given the value of the property according to the valuation, and in any case the highest bid at the auction, the value of the security exceeded the amount demanded. Accordingly, Accordent claimed that it had satisfied clause 459(2)(c) because it had provided sufficient security for the debt to the creditor.
Gray J found that the reference in section 459E(2)(c) to securing the amount of the debt is intended to permit the debtor to provide further security to the reasonable satisfaction of the creditor.
Although the judgment does not expressly state this, in citing the judgment of Cusack v Rateki, it appears that the decision of his Honour was that he agreed with the reasoning of the Master, that the security needed to be given after the demand and that, accordingly, Accordent could not rely on security originally provided to satisfy section 459E(2)(c) as that was not further security given.
His Honour then went on to find that “in the circumstances of the present proceeding, RBML was claiming an indebtedness of substantially more than the auction bid price . and in the circumstances Accordent had not established that he value of the security was substantially greater than the indebtedness claimed”.
The rationale behind this point is not entirely clear from the judgment (given that the value of the property at auction exceeded the revised value of the statutory demand). However, his Honour later suggested that there may be real differences in opinion about the value of the security and this may be the reason for the statement. Given that his Honour appears to have dismissed the appeal on this point for the reason set out above, it is not clear why it was necessary to make the point about the valuation of the property in response to this particular argument.
(iii) ‘Some other reason’- section 459J(1)(b)
Section 459J(1)(b) provides the court with a discretionary power to set aside a demand for ‘some other reason’. Accordent submitted that the value of the property was between $14,500,000.00 and $16,500,000.00 and that because RMBL did not submit alternative valuation evidence, RMBL was not able to contest Accordent’s submission that the security held by RMBL was sufficient. Accordent further submitted that the process engaged in by RMBL for the sale of the secured property was inept and inadequate. Accordent argued that the Master erred in failing to regard these facts as material considerations to be satisfied of the existence of ‘some other reason’ to set aside the demand by exercise of the power in section 459J.
In response to this submission, Gray J decided that there was no ‘other reason’ sufficient to set aside the demand. His Honour decided that the weight to be given to the valuation was to be limited because the letter was qualified and paid no regard to the circumstances of the auction. His Honour noted that the valuer appeared to have been given separate advice about the auction process and had suggested inadequacies within that process.
His Honour found that the evidence and inferences to be drawn from it militated against Accordent’s submissions that RMBL held more than adequate security for the alleged indebtedness (which his Honour, interestingly, noted as the principal of $10,081,924.95 and the further claims for interest and consequential expenses, notwithstanding that the statutory demand was only the amount of the principal).
Further, his Honour said that although Accordent had said that it wanted to refinance and the failed auction process had hampered that, Accordent had not led evidence of attempts to refinance. The fact that, according to the evidence, Accordent had not sought to refinance allowed the inference to be drawn that there was a difference in opinion about the value of the loan security.
Co-authored by Virginia Burns.
Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.