Monthly Archives: October 2021

Worldwide freezing orders – recent developments in Australia

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Three recent Australian judgments on freezing and ancillary disclosure orders, and their application to ‘worldwide’ (outside Australia) assets, are worth noting. The first is a High Court decision as to the courts’ discretion to compel disclosure of worldwide assets pursuant to freezing and ancillary orders, despite accepting a claim to the privilege against self-incrimination. The second is a decision of the Full Federal Court on the issue of a jurisdictional precondition for worldwide freezing orders to be made by the Federal Court. The High Court has granted special leave in this case and will be hearing the appeal tomorrow, 13 October 2021. The third is an illustrative Federal Court decision handed down last week, in which worldwide freezing orders were made.

Deputy Commissioner of Taxation v Shi [2021] HCA 22

In August the High Court (4:1 majority) upheld the Deputy Commissioner’s appeal over the proper construction and application of s 128A of the Evidence Act 1995 (Cth) and whether the taxpayer in that case could – and should be permitted to – decline to comply with an order to disclose his worldwide assets relying upon the s 128A privilege against self-incrimination

The Deputy Commissioner had obtained ex parte orders in the Federal Court freezing the worldwide assets of a Mr Zu Neng (Scott) Shi, up to the unencumbered value of $41,092,549.03. Mr Shi had been the head of a large labour hire business that supplied workers through various companies, to a number of abattoirs in Victoria and NSW. The Deputy Commissioner’s evidence in support of his application dealt with investigations relating to Mr Shi, his wife and his son by the ATO and the AFP, and allegations of asset stripping, phoenix activity and systematic non-payment of taxation liabilities as well as fraud and evasion (see [56]). The sum for which the freezing orders were sought and made was the total income tax, penalty and interest for which Mr Shi had been assessed. The freezing orders were made on the acceptance by the Court that that there was a risk that assets might be removed from Australia to the detriment of the Commonwealth (see [3]-[8] and [20] of the freezing order judgment). Ancillary orders required Mr Shi to disclose all of his worldwide assets including their value, location and details, and the extent of his interest in the assets (disclosure order) (see [14]). Five months after the freezing and disclosure orders were made, judgment for the debt alleged was entered for the Commissioner by consent against Mr Shi and other respondents with costs – see [1] of the first instance judgment.)

To pause here for a moment, in practical terms, a party against whom a freezing order with a disclosure order is made, who seeks to claim the privilege against self-incrimination, generally responds to the disclosure order by filing up to three affidavits: (1) an affidavit disclosing so much of the information ordered to be disclosed to which no objection is taken (disclosure affidavit), (2) an affidavit disclosing the information required to be disclosed to which objection is taken (privilege affidavit), and (3) a separate affidavit setting out the basis of the objection (objection affidavit). As to the latter two, pursuant to s 128A(2), the privilege affidavit is delivered to the Court in a sealed envelope, and the objection affidavit is filed and served on each other party.

At first instance in the Federal Court Steward J, as his Honour then was, was satisfied that there were reasonable grounds for Mr Shi’s objection to disclosure of his worldwide assets. In other words, Mr Shi had established his claim to privilege on the grounds that disclosure of his worldwide assets may tend to incriminate him. Under s 128A(5), subject to one matter, it would follow that the Court must not require the sealed privilege affidavit to be disclosed and must return it. However a discretion lies in the space between the Court concluding the objection has reasonable grounds, and it being wholly upheld, by virtue of s 128A(6). Once it concludes under s 128A(4) that the objection has reasonable grounds, the Court then turns to consider whether to exercise its discretion under s 128A(6) to require the disclosure of the whole or part of the privilege affidavit to the other parties in the interests of justice, despite the soundness of the objection taken.

The Court may require disclosure of the information under s 128A(6) if it is satisfied of three things. In this case, the Court had to be satisfied (a) that the information disclosed in the Privilege Affidavit may tend to prove that Mr Shi had committed an offence against or arising under an Australian law (it was), (b) that the information does not tend to prove that the person has commented an offence or is liable to civil penalty under a law of a foreign country (it was), and (c) that the interests of justice so required. If it was satisfied as to all three, the Court could exercise a discretion to order all or part of the information to be disclosed.

Steward J’s decision turned upon the third of these. His Honour held that, subject to one matter, the interests of justice did favour disclosure. However his Honour considered that he was entitled to have regard to the consequences of the issue of a s 128A(7) certificate. This would mean that much of the information disclosed would not be able to be used against Mr Shi in any Australian court under s 128A(8), which would impact any future criminal proceedings as well as any future tax appeal. Steward J considered it was open to the Commissioner to exercise the powers under s 353-10 of Sch 1 to the Taxation Administration Act to obtain the same information without the ability of Mr Shi to refuse production on the grounds of self-incrimination. (see [61]) His Honour declined to order disclosure, essentially because in his view the public interest would be better served by the Commissioner obtaining the information via different means. The High Court majority held that this was an irrelevant consideration to take into account in failing to be satisfied for the purpose of s 128A(6)(c). (see [11] and [68]) The Full Federal Court had also so held. (see [62])

On appeal, the Full Court held that the interests of justice did not require disclosure of the privilege affidavit to the Commissioner, but for a different reason than at first instance. Their Honours so held on the basis that because judgment had already been entered for the Commissioner for the sum sought to be recovered, disclosure of the information was sought solely for the purpose of assisting methods of execution. This meant it was relevant to consider whether there were other available ways that execution could be assisted, including the Commissioner’s ability to examine Mr Shi as a judgment debtor under s 108 of the Civil Procedure Act 2005 (NSW). (see [62]) Lee J had also identified a risk of derivative use of the information disclosed despite ss 128A(7) and (8). Like the primary judge, but for different reasons, their Honours also declined to exercise their discretion to order disclosure.

The High Court upheld the Deputy Commissioner’s appeal, holding that these matters too were irrelevant considerations (see [11] and [68]-[69]). As to the risk of derivative use raised by Lee J, Gordon J observed that this was contrary to the proper construction of s 128A, and was addressed by a number of measures: the certificate procedure in s 128A(7), the non-derivative use prescribed in s 129A(8), the Harman undertaking; the ability of the Court to craft the form of orders made under s 128A(6) including requiring only part of the information to be disclosed, suppression or non-publication orders could be made under s 37AF of the Federal Court of Australia Act 1976 (Cth) requiring the information not be provided or disclosed to anyone other than identified persons. (see [69])

The negative proposition in s 128A(6)(b)

I pause here to address an aspect of this case worth noting, which highlights the significance for a respondent to a disclosure order in taking and establishing the claim to privilege under s 128A(2)(e) in the objection affidavit; in particular, making it clear that the respondent is objecting on the basis of a risk of incrimination as to an Australian criminal or civil penalty law, a foreign criminal or civil penalty law, or both (and providing adequate evidence as to the legal and factual foundation for that objection).

The issue arises from the negative proposition of which the Court must be satisfied under s 128A(6)(b) before it is able to exercise the discretion, a matter raised by Mr Shi in his notice of contention. That proposition is, essentially, that the information in the privilege affidavit does not tend to expose Mr Shi to criminal or civil penalty liability in a foreign country. Mr Shi submitted to the High Court that once the Full Court majority had found that the onus was on the Commissioner to satisfy the Court of that matter, it should have found that it was not open to the primary judge to be satisfied of this negative proposition. (see [64])

However Gordon J noted that under s 128A(2), it had been open to Mr Shi to object to disclosure on the grounds of the risk of incrimination as to either Australian laws or foreign laws. Mr Shi did not object with reference to his exposure to incrimination for criminal or civil liability under a foreign law. His objection had been only based upon potential incrimination under Australian law. At best, her Honour noted, Mr Shi’s solicitor and counsel had made a bare general assertion that disclosure may tend to prove the commission of an offence against a law of a foreign country. However the objection was not taken on that ground, and bare assertion by counsel was not sufficient for s 128A(2). (see [65]) Her Honour concluded that a failure to object on the grounds of foreign law meant that the question raised by s 128A(6)(b) does not arise. (see [67])

The plurality also found that Mr Shi did not take the objection based upon a tendency of the information to incriminate him for a crime or civil penalty under any Chinese law, nor did he lead any evidence capable of establishing such a tendency. However rather than concluding that the question raised by s 128A(6)(b) did not arise, their Honours concluded that the omission of such a basis for objection pursuant to s 128A(2)(e) is a sufficient evidentiary foundation for the Court, in the absence of evidence to the contrary, to be satisfied of the negative proposition in s 128A(6)(b). (see [9]-[10])

Hence the plurality and Gordon J took different paths, but arrived at the same destination. Whether or not the requirement for the Court to be satisfied of the negative proposition in s 128A(6)(b) arose here, this was no impediment in this case. The discretion to compel disclosure could properly be exercised pursuant to s 128A(6) if the interests of justice so required (and, it was held, they did). Edelman J, in dissent, disagreed, taking the view that s 128A(6)(b) placed an onus upon the Deputy Commissioner to negate Mr Shi’s prima facie entitlement to the privilege, which was not done. (see [77]-[78] and surrounding passages)

On the question of onus as to the matters set out in s 128A(6)(a) and (b), Gordon J held that it is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). The premise that the onus is on the party seeking disclosure to satisfy the court of the matters in s 128A(6)(a) and (b) is contrary to the proper construction of s 128A. (see [70]) Edelman J in dissent disagreed, taking the view that it was for the party seeking to abrogate the privilege to satisfy the Court to exercise its discretion under s 128A(6) to strip the person of that privilege. (see [102]) Whilst generally agreeing with the views of Gordon J, the plurality did not address the issue of onus specifically.

The plurality make the point in obiter at [8] that if the person claiming the privilege based their objection to disclosure on the ground that it might incriminate them as to a criminal offence or penalty under a foreign law and if the Court was satisfied that there were reasonable grounds for the objection pursuant to s 128A(4), this would necessarily mean that the Could could not at the same time be satisfied of the negative proposition in s 128A(6)(b). This is an important point. It means that if the objection is taken based upon self-incrimination as to a foreign law, and the Court is satisfied on the material that there are reasonable grounds for the objection, then the Court cannot compel disclosure in the interests of justice. The discretion does not arise.

The interests of justice – s 128A(6)(c)

On the issue of the proper application of s 128A(6((c), and the matters properly to be considered by the Courts, the plurality Kiefel CJ, Gageler and Gleeson JJ observed –

“Evaluation of the interests of justice for the purpose of s 128A(6)(c) is informed primarily by balancing the public interest in the person to whom the extant disclosure order is directed complying with that disclosure order by disclosing information to the party to the civil proceeding in whose favour the order has been made, against the potential detriment to the person that arises from the tendency of the information to prove that the person has committed an offence against or arising under, or is liable to a civil penalty under, an Australian law. A court assessing that potential detriment must obviously take into account the prohibition in s 128A(8) on derivative use of the information disclosed. As recognised by the primary judge, and as explained by Gordon J, a court assessing that potential detriment must also take account of constraints on the use and dissemination of the disclosed information that arise within the context of the civil proceeding in which the disclosure order has been made. Those constraints include the obligation of the party to whom disclosure is made, and of any other person to whom the disclosed information might be given, not to make any use of the information other than for the purpose of the civil proceeding without leave of the court. they include too the availability of orders restricting the dissemination of the disclosed information, relevantly under s 37AF of the Federal Court of Australia Act 1976 (Cth).”

Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160

In this case, the taxpayer Mr Changran Huang successfully appealed the making of worldwide freezing orders against him and an ancillary order as to the disclose of information (asset disclosure order) only insofar as it applied to assets outside Australia. Mr Huang had substantial assets in China and Hong Kong.

The freezing orders had applied to assets held by Mr Huang in Australia to the unencumbered value of over $140million as well as to assets outside Australia. Mr Huang challenged the extension of the freezing and ancillary (disclosure) orders to assets outside Australia, submitting that foreign revenue laws would not be enforced either directly or indirectly in China or Hong Kong. The Deputy Commissioner’s own case was that enforcement of a judgment against Mr Huang in Hong Kong or China “is not likely” (see [23]-[24] and [34]) although she submitted that the evidence did not establish that enforcement in China or Hong Kong or elsewhere in the world was impossible. (see [25])

The plurality, Besanko, Thawley and Stewart JJ, observed that the purpose of a freezing order as identified in r 7.32 of the Federal Court Rules 2011 (Cth) is the prevention of the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. A freezing order is no doubt an important weapon in the Court’s arsenal, but it must not be used for a purpose beyond that identified in r 7.32. (see [41]) If assets are beyond the reach of the Court’s enforcement processes, then a freezing order with respect to those assets is not for the purpose identified in r 7.32 because there is no longer a realistic possibility that the removal or disposition of the assets will frustrate or inhibit the Court’s process such that a judgment or prospective judgment will be wholly or partly unsatisfied. (see [42])

Their Honours accepted that the primary judge had applied an incorrect test, as to whether it was “not impossible” that the Deputy Commissioner may be able to take enforcement action against Mr Huang in China or Hong Kong. Their Honours held that a realistic possibility of enforcement in a foreign State is necessary. That is, there must be a realistic possibility that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates. A test of a ‘realistic possibility’ is consistent with the approach taken by the courts in determining what must be shown in terms of the risk of the removal of assets or the disposal of assets, matters to which a freezing order is directed. (see [43] and [47]) Their Honours sought to make clear at [47] –

“At the same time, and at the risk of stating the obvious, we wish to make it clear that we are not laying down any general principle as to the evidence which will be necessary to satisfy that test. Each case is likely to turn on all its circumstances and the cogency of the evidence and the inferences which can be drawn from it.”

Their Honours then applied the test and concluded that none of the matters relied on by the primary judge, either individually or collectively, provided a basis for a conclusion that enforcement of a judgment in China or Hong Kong was a realistic possibility. (see [49] et seq) Those matters were –

  1. That there were exceptions to the presumption in Damberg v Damberg, the presumption that foreign law is the same as Australian law where a party with the onus fails to prove the content of foreign law. No particular exceptions were identified as possibly applicable. The law applied by the courts in this country will not countenance a claim by a foreign government, directly or indirectly, for the enforcement of a foreign revenue debt. (see [51]-[56])
  2. The potential use of bankruptcy procedures, the recognition of which in Hong Kong may be unaffected by the foreign revenue rule. The latter part of that proposition was doubted by the Court, where this would constitute indirect enforcement of a foreign revenue debt. (see [57]-[58])
  3. The potential willingness of the courts of Hong Kong and China to enforce Australian insolvency laws. Same point. (see [59])
  4. The possibility of Mr Huang moving assets to other jurisdictions where enforcement is readily available. There was no evidence of a threat to do this, and it was a theoretical possibility. Their Honours did not consider this could be a basis for an order restraining the disposition or diminution of assets in jurisdictions where enforcement was not a realistic possibility. (see [60])
  5. The potential willingness of the courts of China and Hong Kong to enforce Australian laws relating to the payments of penalties and interest. However these follow from the tax which is owed by reason of Australian revenue laws and arise by reason of those laws. Their Honours’ view was that it was not open to the Deputy Commissioner to argue that penalties and interest may not fall within China and Hong Kong’s reservations in the Convention on Mutual Administrative Assistance in Tax Matters in light of her failure to adduce evidence of the Convention in accordance with s 174 of the Evidence Act 1995 (Cth). In any event, in their Honours’ view penalties and interest are within the rule against the enforcement of the revenue laws of a foreign State. (see [61])

Their Honours concluded there was no realistic possibility that the Deputy Commissioners’ judgment debt would be enforceable in China or Hong Kong. (see [62]) The appeal was allowed.

On 11 February 2021, the High Court granted special leave to the Deputy Commissioner to appeal this decision. The Deputy Commissioner has submitted that the appeal is on the issue of whether the power of the Federal Court to grant a freezing order is subject to a mandatory jurisdictional precondition that there be proof of a realistic possibility of enforcement of a judgment debt against assets of the respondent in each foreign jurisdiction to which the proposed freezing order relates. The Deputy Commissioner submits that the Full Court was wrong to construe r 7.32 of the Federal Court Rules 2011 (Cth) as being subject to an unexpressed mandatory jurisdictional precondition to this effect. Difficulties of enforcement may be a permissible discretionary consideration in an application to discharge a freezing order previously made, weighed with other relevant discretionary considerations. However it ought not be a mandatory evidentiary requirement operating as a precondition to the power to grant or continue any freezing order, noting that worldwide freezing orders are frequently sought ex parte in urgent circumstances. (The DCOT’s submissions may be read here. Those for Mr Huang may be read here.) The appeal is due to be heard tomorrow 13 October 2021.

Rambaldi (Trustee) v Sumpton, in the matter of the Bankrupt Estate of Sumpton [2021] FCA 1199

In this case the Trustees in Bankruptcy of Mr Robert Sumpton had sought orders for the transfer of shares in Conecc Concrete Solutions Private Ltd, a foreign company located in India. The Bankrupt had failed to disclose his interest in these shares to the Trustees, which is an offence under s 265 of the Bankruptcy Act which may result in a maximum penalty of one year’s imprisonment.

The Trustees brought an ex parte application for freezing and ancillary (asset disclosure) orders, to reduce the risk of dissipation of those assets and preserve the Trustees’ interest in those shares for the benefit of the creditors of Mr Sumpton’s bankrupt estate. Anderson J agreed that the CCS shares fell within the description of property which vests in the Trustees following Mr Sumpton’s bankruptcy, having regard to ss 5, 58(1) and 116(1) of the Bankruptcy Act.

Applying the key principles governing freezing order applications (summarised briefly at [9]-[15]), one of the matters the Trustees needed to show was that unless the freezing order were granted, there was a reasonable apprehension that assets would be dissipated so as to frustrate the action or execution. They did not need to demonstrate a positive intention on Mr Sumpton’s part to frustrate a judgment, nor did they need to demonstrate that the risk of dissipation was more probable than not. It was enough for the Trustees to establish that, in the absence of relief, there was a danger or real risk that the assets would be dealt with in a way that would prevent them from recovering judgment.

Where allegations made against a respondent contain allegations of serious dishonesty, evidence of that nature is capable of satisfying the Court of the existence of the requisite danger to dispose of, deal with or dissipate assets: Spotlight Pty Ltd v Mehta [2019] FCA 1796 at [23]. In this regard the Trustees pointed to Mr Sumpton’s failure to disclose the shares, and that this was an offence punishable by imprisonment.

The Trustees submitted that their concern that if a freezing order is not made that their attempts to realise their interest in the CCS shares may be prevented by Mr Sumpton seeking to transfer them away without recourse to the Trustees, was based on the following matters –

  1. Mr Sumpton had failed to lodge his tax returns for the past 3 years.
  2. There had been no disclosure by Mr Sumpton of his shareholding in CCS.
  3. Mr Sumpton’s failure to provide further information in relation to his examinable affairs and answer questions in relation to his property interests.
  4. The difficulties for the Trustees in realising their interest in, and taking transmission of, the CCS shares.

The Trustees submitted that it was necessary for them to obtain a court order in the form of a ‘freezing order’, before engaging with CCS, so that they were able to engage with CCS in respect of realising the shares issued to Mr Sumpton which had vested in them as trustees of his bankrupt estate. (see [24])

His Honour noted that the Trustees sought a worldwide freezing order out of an abundance of caution in circumstances where the CCS shares relate to an Indian company. As Mr Sumpton is located in Australia and is an undischarged bankrupt, all of his assets whether local or intentional vested in the Trustees. The Trustees did not foresee any issue in effecting the transfer of the CCS shares once Mr Sumpton executed the necessary documentation.(see [27])

Anderson J referred to the pending High Court appeal from the decision in Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160, and noted that there is an issue as to whether it is a jurisdictional precondition to the granting of a freezing order with respect to overseas assets, that there be a realistic possibility that any judgment obtained by the applicant can be enforced against assets of the defendant in the place to which the proposed order relates. However his Honour concluded that to the extent that the jurisdictional precondition applies, the Trustees anticipate that they will be able to obtain the transfer of the CCS shares once Mr Sumpton executes the necessary documents, or alternatively, they will be able to obtain a transfer based on the provisions of the Articles of Association and the Indian Companies Act. (see [28]-[29])

His Honour was satisfied that it was appropriate to make the freezing order in the terms sought.

Conclusion – Takeaways

On the issues dealt with in these decisions, the takeaways are these –

  1. What informs the courts’ discretion to compel disclosure of worldwide assets in the interests of justice, despite accepting the soundness of a claim to privilege against self-incrimination – The High Court in DCOT v Shi has clarified what is and is not relevant to the “interests of justice” assessment to be made by the courts under s 128A(6)(c). Evaluation of the interests of justice in each case will primarily involve weighing the balance between the public interest in the disclosure sought on the one hand, against the potential detriment of the tendency of the disclosure to incriminate a person under an Australian law on the other. It is irrelevant to consider other means the plaintiff may have for obtaining the information sought. If the courts are inclined to order disclosure notwithstanding the reasonable grounds for the claim to privilege, they will give consideration to whether to order disclosure to the whole or only part of the privilege affidavit, and what other orders ought be made to minimise the detrimental impact of the disclosure on the respondent.
  2. Who bears the onus relevant to the exercise of the discretion – The question of onus as to the matters to be established for the discretion to arise – those at ss 128A(6(a) and (b) – is not clearly settled. It may be likely that Gordon J’s view on this will be treated as authoritative, given the alignment of her Honour’s judgment with that of the plurality. That is: that the onus is not on the party seeking the disclosure, which would be contrary to the proper construction of s 128A. It is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). (see DCOT v Shi [70])
  3. The discretion to compel disclosure despite the privilege is only available where the tendency to incriminate relates to Australian law – Where the party claiming the objection bases their objection on the risk of incrimination as to a foreign criminal or civil penalty law – and if that objection is accepted by the Court as based on reasonable grounds – the discretion to compel disclosure under s 128A(6) in the interests of justice is not available. This follows from the conclusion of the plurality in obiter that in those circumstances, the Court will be unable to be satisfied as to the negative proposition in s 128A(6)(b): the plurality in DCOT v Shi at [8].
  4. Is there a mandatory jurisdictional precondition to the making of worldwide freezing orders under the Federal Court Rules – High Court decision pending – The Full Federal Court has held in Huang v Deputy Commissioner of Taxation that there must be a ‘realistic possibility’ that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates, for a worldwide freezing order to be made in Australia pursuant to r 7.32 of the Federal Court Rules. The High Court will hear the Deputy Commissioner’s appeal on this tomorrow, 13 October 2021. We await the High Court’s judgment with interest.

Statutory demands – setting aside under s 459G – what is a ‘genuine’ dispute or offsetting claim?

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When a company is served with a statutory demand it may apply to Court to set it aside under s 459G Corporations Act 2001 (Cth) (see also s 459J). Where the ground for the application is that the company disputes that it owes the debt, or has an offsetting claim, s 459H requires that this be genuine (see s 459H(1) and the definition of ‘off-setting’ claim in s 459H(5)). So – when will an alleged dispute or off-setting claim be accepted as genuine? Or what should be pointed to as demonstrating that it is not?

Practitioners will in some cases quickly form a preliminary view on this based upon the old ‘smacks of recent invention’ hallmark. Certainly that preliminary view may be borne out on closer examination, as was the case in a Court of Appeal decision in which I appeared some years ago – Rescom Asia Pacific v Reapfield Property Consultants Pty Ltd [2014] VSCA 92. However there is of course more to it than that. Often a fair amount of evidence is filed, which must be addressed by the parties and considered by the Courts in making a determination. Hence it is worth having regard to the principles that govern this issue.

Principles – ‘genuine’

The principles to be applied in applications to set aside statutory demands are well settled, though they are sometimes restated or collected together in different ways or with different emphases in the authorities. On this particular issue / element, my distillation of the key principles are as follows:

To be accepted as ‘genuine’[1] a dispute or offsetting claim must be shown to be both real, have some merit, and be plausible,[2] as well as authentic, not spurious or artificial or have been ‘manufactured or got up’.[3] In summary – 

  1. “The threshold is not high or demanding; a genuine dispute means there must be a plausible contention requiring investigation; and it is only if the applicant’s contentions are so devoid of substance that no further investigation is warranted that the applicant will fail. The court is not called on to determine the merits of, or to resolve, the dispute.”[4] The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).[5]
  2. “This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ‘however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be’ not having ‘sufficient prima facie plausibility to merit further investigation as to [its] truth’.”[6]
  3. The questions for the Court have been identified as: “whether there is such a dispute and, if there is, whether it is genuine.” [7]
  4. “The claim must not be spurious or artificial, or have been ‘manufactured or got up simply for the purpose of defeating the demand made against the company’.”[8] “If the dispute is of that quality and is accordingly not advanced in good faith, it is not ‘genuine’.”[9]
  5. “[T]he court must decide whether the grounds of dispute delineated by the affidavit are grounds which, when viewed in the whole of the circumstances emerging from the evidence, indicate a plausible defence propounded in good faith and not one merely constructed in response to the pressure represented by the statutory demand.”[10]
  6. “Where an applicant to set aside a statutory demand contends for the existence of an offsetting claim it bears the onus of establishing that it is genuine in the sense of being authentic or bona fide, and real, not spurious, and not frivolous or vexatious.”[11]

In terms of the evidential burden and onus on the applicant – 

  1. “In order for [an alleged claim] to be genuine, there must be sufficient factual material to support the essential elements that go to make up that claim.”[12]
  2. “…the onus rest[s] on the [applicant] to provide a sufficient account of its dealings…to raise a genuine dispute and take the matter beyond mere assertion.”[13] 

Case Study

In Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85, Alpine Valley applied under s 459G (engaging s 459H and 459J) to set aside a statutory demand for just under $160,000 served on it by Grainlink in 2019 for unpaid invoices for grain supplied in 2018. The two companies had been trading since 2013.

Alpine Valley alleged an offsetting claim due to the alleged presence of weevils its customers had found in grain Alpine Valley had supplied to them, which it had acquired from Grainlink. Alpine Valley contended the grain was contaminated with weevil larvae at the time it was supplied by Grainlink, which had made the grain adulterated and unfit for purpose, causing Alpine Valley loss and damage. Alpine Valley estimated the value of that offsetting claim as almost $228,000, exceeding the amount of the statutory demand. (see [6]-[7],[23], [30])

Grainlink gave evidence as to is rigorous treatment and testing procedures for eliminating weevil and larvae from all grain (see [65]). Grainlink argued that Alpine Valley’s alleged offsetting claim was unsupported by probative evidence and was spurious (see [9] and [133]). Whilst Alpine Valley alleged that weevils had been a ‘constant issue’ (see [29]), Grainlink pointed out that the first time any issue was raised with them was when Alpine Valley filed its application to set aside the statutory demand in 2019 (see [132]).

Gardiner AsJ held that the offsetting claim was not genuine, based on the fact that the claim was only made after service of the demand, and was preceded by numerous promises to pay, with the reasons proffered for non-payment being cashflow problems and the internal turmoil within the company (the directors were in dispute). His Honour found that the alleged offsetting claim was not genuine, rather, it was spurious and had been ‘got up’ as an attempted means to defeat Grainlink’s demand. The application was dismissed. (see [148])

In particular, Gardiner AsJ found that the following features of the dealings between the parties in this case were ‘particularly powerful’ in convincing him that Alpine Valley’s alleged offsetting claim was not genuine (see [146]) –

  1. There was no notification of any kind by Alpine Valley of its alleged offsetting claim to Grainlink until it first served its material to set aside the statutory demand.
  2. There was evidence that Alpine Valley’s customers had received contaminated product from Alpine Valley. There were no contemporaneous documents generated by Alpine Valley connecting any of those complaints with Grainlink.
  3. Even if Alpine Valley had demonstrated that it had a genuine and arguable claim that Grainlink was responsible for the contaminated product, which his Honour found it had not, there was insufficient evidence to support the quantification of loss Alpine Valley claimed to have suffered as a result.
  4. Alpine Valley now claimed that throughout the trading period there was an endemic problem with weevil infestation in the grain. However Alpine Valley had paid all of Grainlink’s invoices between July 2013 and July 2018 without complaint.
  5. In December 2018, when Grainlink was pressing for payment of its invoices and any alleged claim would have been known to Alpine Valley, it simply conceded the amounts were overdue and a payment plan would be implemented.
  6. In January 2019 when Grainlink followed up, Alpine Valley responded that they hoped to pay $10,000 or $20,000 by the end of the month and hopefully a larger amount the following month.
  7. Grainlink then passed the matter to is collection agency. If Alpine Valley genuinely considered it had an offsetting claim, it would have raised it in its communications with the agency, and would not have been making promises to pay the debt in full.
  8. On 16 May 2019 shortly before the issue of the statutory demand, Alpine Valley made a payment of $10,000. Alpine Valley never explained why it would do so if it had a belief it had a genuine offsetting claim for a greater amount than it owed Grainlink.
  9. The age of the alleged offsetting claims, now said to have arisen throughout the trading period, was implausible.

While it is often said that the bar is not high or demanding in applications to set aside statutory demands, it still must be cleared. That an alleged dispute or off-setting claim is ‘genuine’ must be shown. In assessing the evidence, what the contemporaneous documents do – and do not – show will always be significant. For another recent example of a case involving promises to pay made without mentioning offsetting claims later raised to support an application to set aside a statutory demand, see Re CMG Automotive Pty Ltd [2020] VSC 779 – see [161], [164], [174].

[1] Within the meaning of s 459H(1) and (5).

[2] See quotes from authorities drawn together in Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [7] per Perram J; See also Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [33] per Ball J and the authorities there cited.

[3] See below.

[4] SGR Pastoral Pty Ltd v Christensen [2019] QSC 229 per Bowskill J, citing Citation Resources Ltd v IBT Holdings Pty Ltd [2016] FCA 1265; (2016) 116 ACSR 274 at [17] per McKerracher J.

[5] Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, 605 per Thomas J; cited with approval in In the matter of Essential Media and Entertainment Pty Ltd [2020] NSWSC 990 at [81] per Rees J.

[6] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, 787 per McLelland CJ in Eq, oft-cited and applied, as for example in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [63] per Bell P.

[7] Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [8] per Perram J.

[8] SGR Pastoral at [52], quoting from JJMR Pty Ltd v LG International Corp [2003] QCA 519 at [18]; See also the citing of the ‘must not have been manufactured or got up’ principle from JJMR Pty Ltd in: Brandon Industries (Vic) Pty Ltd v Locker Pty Ltd [2016] VSC 373 at [150] and Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [17].

[9] Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [95] per White JA, quoting from Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300; 125 ACSR 212 at [47] per Barrett AJA.

[10] Ligon 158 Pty Ltd v Huber [2016] NSWCA 330 at [10] per Barrett AJA, McColl and Meagher JJA agreeing.

[11] Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [15] per Gardiner AsJ.

[12] Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [40] per Ball J.

[13] Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd [2017] VSCA 51 at [78], citing Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 (McLellan CJ in Eq), TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] (Dodds-Streeton JA,Neave and Kellam JJA agreeing).