Court identifies a ‘very poorly drafted deed’ and sets aside Statutory Demand – reminder to have a properly drafted deed to avoid potential disputes

In the matter of Jana Pty Ltd[1] is a decision of the Supreme Court of New South Wales setting aside a Statutory Demand issued for an alleged guaranteed debt arising out of a Deed. The Deed contained conflicting and ambiguous clauses which led to a dispute about the debt specified in the Statutory Demand. This decision confirms the settled position of the Courts that the threshold to establish a genuine dispute within the meaning of section 459H of the Corporations Act 2001 (Cth) (Act) is not high.

After setting aside a Statutory Demand on 14 February 2022 and ordering costs against Allspec Constructions and Project Management Pty Ltd (ACPM) in favour of Jana Pty Ltd (Jana), Williams J subsequently provided written reasons.

Background

Jana and ACPM entered into a deed with numerous other parties on 19 January 2021 (Deed). The Deed named ACPM as the Subcontractor and Jana as the Landowner and made provision for the payment by the Head Contractor named in the Deed and Jana of various amounts owing by the Head Contractor or its associated entities to ACPM, being the total amount of $481,865.51. On 13 September 2021, ACPM demanded this amount from Jana in a Statutory Demand which specified that Jana ‘as Guarantor, Guaranteed payment of the Acknowledgement of Debt of $481,865.51 and the terms and conditions set out in the Deed…’

On 1 October 2021, Jana Pty Ltd applied, pursuant to section 459G of the Act, to the Supreme Court of New South Wales to set aside the Statutory Demand.

Jana’s application was made on two grounds pursuant to sections 459H(1)(a) and 459J(1)(b) of the Act – that there was a genuine dispute as to the debt having regard to the proper construction of a deed or in the alternative, that for some other reason (an alleged improper purpose), the Statutory Demand should be set aside as it gave rise to substantial injustice.

Was there a Genuine Dispute?

In respect of the first ground, the Court examined the relevant provisions of the Deed, said to be ‘very poorly drafted’ and made the following observations:

1. the Recitals of the Deed provided that ACPM loaned the Head Contractor sums of money which have never been repaid, and that the Head Contractor and ACPM agreed in the Deed to crystallise the amount owing by the Head Contractor. Jana’s director, the Landowner (being Jana) and the guarantors guaranteed the terms and conditions set out in the Deed;
2. clause 2 of the Deed provided that:
   1. the Head Contractor acknowledges and agrees upon the execution of the Deed, the sum of $481,865.51 is a debt owing to ACPM, and that the Head Contractor and the Guarantors agree not to dispute the Guarantee Debt – clause 2.1;
   2. the Landowner charges its property identified in the Deed to ACPM to lodge a Caveat over the property as security for all monies owed pursuant to the Deed – clause 2.2; and
   3. the Landowner and guarantors acknowledge and confirm that all amounts due to ACPM will be paid at settlement or in the alternative, the further sale by the Landowner of land to another party to the Deed or from the refinance of the property – clause 2.3;
3. in contrast to clause 2.3, the definition of ‘Guarantee’ in clause 8 of the Deed went beyond a definition and imposed an obligation that payment to ACPM is guaranteed by each Guarantor upon demand;
4. clause 8 makes references to guarantors in the plural or to ‘each Guarantor’, whereas the Guarantor named in the Deed was Jana’s director only; and
5. ‘Guarantee Debt’ was limited in clause 2 to the amount demanded in the Statutory Demand but at clause 8 was defined widely.

Jana submitted there as a genuine dispute as to whether it is a ‘Guarantor’ under the Deed and further, whether the alleged debt was due and payable by it at the time the Statutory Demand was issued on 13 September 2021 as the events in clause 2.3 had not yet occurred.

ACPM submitted that under the Deed, the debt was repayable on demand and that Jana is properly described as a ‘Guarantor’ under the Deed as a result of having granted a charge over land. It also submitted that on the evidence of Jana’s director, there was an admission of the debt that was said to be owed.

The Court found that Jana’s contentions about the Deed’s construction were not ‘baseless’ and that bona fide issues of law had been raised as to the proper construction of the Deed. Whilst being mindful not to make comments in relation to the merits of the dispute, Williams J ultimately was satisfied that there was a genuine dispute in relation to the alleged debt and set aside the Statutory Demand.

The Court found it unnecessary to determine the other ground supporting Jana’s application.

Key takeaway

This case highlights that ambiguous and unclear terms in an agreement or deed may prove costly especially where such ambiguity leads to a genuine dispute in relation to the debt stipulated in a statutory demand and adverse costs orders.

This case also confirms the party applying to set aside a statutory demand need only demonstrate in support of an allegation that there is a genuine dispute as to debt, that there is ‘a plausible contention requiring investigation’ even if it is only ‘one issue that has a sufficient degree of cogency to be arguable’. If satisfied that the relatively low threshold has been met, a Court will not concern itself with the parties’ relative prospects of success in relation to the dispute.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Barbara-Ann Sim, Partner
Violet Li, Solicitor

[1] [2022] NSWSC 112