Statutory demands – sale for undervalue claims

The recent judgment handed down in the matter of Modeca Investments Pty Ltd (Modeca)¹ confirmed the principle that a sale for undervalue claim can only be made if there are defects in the sale process undertaken.

Modeca made an application to set aside a statutory demand issued to it calling up an unsecured debt (being left for after the realisation of the security property of the secured creditor) on the basis that it had an offsetting claim (the Proceeding).  The offsetting claim being that the security property had been sold at an undervalue resulting in a breach of the secured creditor’s duty to exercise all reasonable care to sell the property at no less than market value.  Modeca relied on a valuation obtained for the purpose of the proceeding which valued the property at an amount greater than the sale price.  No criticism was made in the process by which the property was sold.

For a statutory demand to be set aside on the basis of an offsetting claim, the offsetting claim must be bona fide and truly exist in fact.  The grounds for alleging the existence of the claim must be real and not spurious, hypothetical, illusory or misconceived.

The Court was satisfied that there was insufficient evidence to support an argument that there was a genuinely arguable off-setting claim.

The Court upheld the principle that:

“… a sale below the estimated market value of the property does not of itself mean that the duty to take reasonable care has not been satisfied. The question that needs to be answered is whether the process utilised to effect the sale of the property for market value was undertaken with reasonable care.”

The Court found that in the absence of any defect in the sale process, there can be no breach of the s 420A duties.  The best guide as to the market value is the price obtained at sale, in the absence of any defect in the sale process. The Court relied on, inter alia, the decisions made in Boz One v McLellan, Stone v Farrow Mortgage, Apostolou v VA Corporation in support of this finding.

The Court found that despite differences in valuations, in the absence of any attack on the sale process, the breach of duty claim could not succeed.

Gadens who acted on the matter, can assist you with providing advice in relation to statutory demands and sale at undervalue cases.

¹ [2017] VSC 119