In Re Australian Builders Group Pty Ltd [2022] VSC 254 the Supreme Court, per Hetyey AsJ, set aside a statutory demand based on a genuine dispute based on the construction of an agreement and default notice but also by a claim of duress.

FACTS

On or around 1 June 2017 Mind, a not-for-profit organisation providing community-managed specialist mental health services entered into an agreement with Australian Win Win Investment Pty Ltd (‘the landlord’) to lease a property located at 691 High Street, Thornbury, Victoria (‘the property’ and ‘the lease’ respectively) for an amount of $130,000 per annum (approximately $10,833.33 per calendar month) [1].

In early May 2018, Mind and ABG entered into a sublease agreement for the property (‘the sublease’). The parties to the sublease agreed that ABG would pay a reduced amount of rent of $121,000 per annum (approximately $10,083.33 per calendar month) [2].

From February 2019, ABG began to fall into arrears & by 15 April 2021, it owed Mind approximately eight months’ rent, totalling $82,279.92 (‘the arrears’). Pursuant to a repayment deed, ABG agreed to make regular payments of the arrears of $2,500 plus GST, together with interest, per week.

Regarding the repayment deed:

• Clause 2.1 of the repayment deed provides that ABG agrees to repay Mind the arrears in accordance with cl 2 with the arrears defined to mean ‘the outstanding amount of unpaid rent and other monies payable by [ABG] to [Mind] under the [s]ublease as at 30 April 2021, as notified to [ABG] in accordance with clause 2.2.’
• Clause 2.2 states that, on or before 1 May 2021, Mind was required to provide to ABG details of the arrears payable by way of an arrears notice. Except in the case of manifest error or fraud, the arrears notice was to be binding on ABG in respect of the amount of the arrears payable by it to Mind under the repayment deed.
• under cl 2.3, from 1 May 2021 (‘the commencement date’) and on the first day of each calendar week, ABG was required to pay to Mind the sum of $2,500 plus GST into a specified account. Interest is specified under
• under cl 2.4 the interest rate was 4% per annum of the amount of the arrears which remains unpaid from time to time and is calculated daily from the commencement date and continued until the arrears are paid in full.
• cl 2.5  set out ABG’s payment obligations under the repayment deed continues until such time as Mind is satisfied that the arrears and any interest and costs have been paid in full.
• cl 2.7 provides that ABG’s obligations to pay the arrears in accordance with the repayment deed continue to apply notwithstanding the surrender or termination of the sublease and that ‘in the event of any inconsistency between [the repayment deed] and the terms of any deed of surrender of the [s]ublease, the terms of [the repayment deed] prevail.’
• Clause 3.1 of the repayment deed provided that:

If:

3.1.1 [ABG] breaches this Deed, and does not remedy that breach within 7 days after the date on which [Mind] gives to [ABG] written notice of such breach (Breach Notice),

then:

3.1.2 the total amount owing to [Mind] pursuant to this Deed as at the date of the Breach Notice shall become immediately due and payable to [Mind] as a debt; and

3.1.3 [Mind] may, without further notice to [ABG], take all steps [Mind] considers necessary to recover the debt from [ABG] [21].

• Clause 4, described by his Honour as a critical provision of the repayment deed stated:

4.1 Delivery of notice

4.1.1 a notice or other communication required or permitted to be given to a party under this Deed must be in writing and may be delivered:

(a) personally to the party;

(b) by leaving it at the party’s address;

(c) by posting it by regular prepaid post addressed to the party at the party’s address; or

(d) by electronic mail to the party’s email address,

in each case, as specified in the notice details of that party.

4.1.2 if the person to be served is a company, the notice or other communication may be served on it at the company’s registered office.

4.2 Particulars for delivery

4.2.1 The notice details of each party are set out on page 1 of this Deed under the heading ‘Parties’ (or as notified by a party to the other parties in accordance with this clause).

4.2.2 Any party may change its notice details by giving notice to the other parties.

The repayment deed identified the physical address of each party, including Mr Dahdouh in his capacity as guarantor. While provision is made for an email address for each party, none have been included in the document. Nor is there any evidence of any change of notice details provided by either party in accordance with cl 4.2.2 of the instrument.

On 2 May 2021 Mind gave ABG an arrears notice in accordance with cl 2.2 of the repayment deed [24]

On 4 June 2021, ABG emailed to Mr Dahdouh letters of demand for the payments due on 24 and 31 May 2021 however, those demands were withdrawn on account of apparent typographical errors.  On 10 June 2021, Mind issued the default notices for the same payments referred to in the original letters of demand [24]. The default notices:

• stated that the defaults could be remedied if ABG paid to Mind within seven days the unpaid amounts, together with interest.
• were emailed by Mr Shergold of Mind (“Shergold”) to Dahdouh at the email address: me@mickjd.com.au, the email address Mind used to send proposed versions of the deed of repayment and deed of surrender for execution by ABG and  the email address Mind had on record for ABG and Dahdouh.
• clearly identified and are addressed to ABG as the debtor and Mr Dahdouh as guarantor under the repayment deed.
• referred to addresses specified on page 1 of the repayment deed [24].

The parties agree that the deed was essentially entered into in order to facilitate ABG taking over the lease of the property from Mind [4].

On 30 April 2021, the landlord, Mind and ABG executed a deed of surrender of lease and subleas (‘the deed of surrender’). Clause 9 of the deed of surrender stated that upon ABG complying with its obligations under the sublease and the deed of surrender and paying all amounts due to Mind pursuant to the sublease and the deed of surrender, ABG would be released by Mind from all liabilities, claims and demands associated with the sublease and the premises [4].

On 10 June 2021, Mind issued default notices against ABG for failures to make a number of required payments  due on 24 May 2021 and 31 May 2021 (‘the default notices’)[5].

As a result of ABG’s non?compliance with the default notices, Mind then issued the statutory demand & in the schedule:

• the debt claimed is described as relating to amounts owing to Mind by ABG under the repayment deed.
• the arrears are calculated in the amount of $82,279.92, interest is added to this sum for the period between 3 May 2021 and 30 June 2021, and
• credit is given for a number of instalment payments made by ABG under the repayment deed,
• a total debt claimed of $73,281.29.

The affidavit accompanying the demand confirmed that the debt arises from the sublease and the subsequent repayment deed in respect of which ABG is said to be in default [5].

Whether genuine dispute that arrears due and payable in accordance with terms of repayment deed

The plaintiff’s director, Dahdouh, deposed that

• at the relevant time, he was ‘under extreme pressure as there was a risk that ABG would lose the lease [of the property] if Mind did not consent to the transfer of the lease.’[46]
• ABG previously invested over $150,000 in the property as subtenant and could not afford to lose the opportunity to have the lease transferred to it.
•  ‘[s]ignificant and undue pressure’ was put on him by Mr Shergold of Mind to sign the deed of repayment in a very short time frame.
• he felt he could not negotiate anything in the repayment deed and that no legal advice was sought in relation to it [46].
• in the context of discussions about ABG taking over the lease as tenant and settling the terms of the repayment deed, Shergold said words to the effect of: ‘we don’t want the [landlord’s] agent to know you owe us money as this will affect your application.’[47] to which Dahdouh stated:

I was incredibly nervous and concerned that Mr Shergold would tell [the landlord’s] agent that ABG was in arrears to Mind, which would result in [the landlord] not granting ABG the lease. I therefore felt like I had no choice and no reasonable alternative but to enter into the [repayment deed] and the terms dictated by Mind. That is, because of the conduct of Mind in setting the terms of the parties transfer of the lease and threatening to reveal damaging information to [the landlord’s] agent if ABG did not agree, I caused ABG to assent to the deed.

•  in the event the lease was not transferred to ABG, ABG stood to forfeit the value of $150,000 invested in the property during the course of its tenancy and the employment of up to 20 people working at the property would be in jeopardy [48].
• confirmed that neither himself nor ABG obtained legal advice before entering the repayment deed as he did not believe there was an opportunity to do so ‘given the pressure (both economic and psychological)’ to agree to the document and refrain from any negotiations [48].
• when shown a draft of the repayment deed which required payments of $2,500 plus GST per week, he informed Shergold that he did not believe ABG could afford those payments with Shergold replying that the repayment deed was needed for the board of Mind to obtain approval for the release of the lease and that so long as ABG made some form of payment, it would be possible to ‘sort something out.’[48]
• described cl 2.2 of the repayment deed as being exceptionally unfair but something he believed he had ‘no alternative [but] to accept.’[48]
• ABG ultimately entered into the repayment deed because:

• • a belief there was no scope to disagree or negotiate in relation to any aspect of the repayment deed in the form proposed;
  • Dahdouh was extremely worried that Shergold would tell the landlord’s agent that ABG was in arrears and that the landlord might not consent to leasing the property to ABG;
  • ABG could not afford to lose the benefit of the $150,000 it had invested into the property;
  • a concern that if the lease was lost, the future employment of ABG’s staff was uncertain; and
  • the fact that Mr Shergold informed him that ABG could repay the arrears in smaller amounts to those specified by the repayment deed so long as it made regular repayments [49].

Mind’s evidence, per  Shergold as a senior manager of Mind was that:

• negotiations with Mr Dahdouh and ABG took a number of weeks as there was a delay in ABG providing the landlord with certain information required to enter into a new lease directly with the landlord
• Dahdouh said that ABG wished to retain a lease on the property as it had spent approximately $150,000 fitting it out.
• \whilst Mind originally proposed monthly repayments of $10,000 plus GST, the parties ultimately agreed on the arrears being paid by way of $2,500 plus GST per week & Mind would surrender the sublease and allow ABG to enter into a lease directly with the landlord.
• on 9 April 2021, Shergold sent a draft copy of the repayment deed to Dahdouh at his email address and the document was returned in executed form on 14 April 2021 [50].
• ABG was in default of the terms of the repayment deed from its commencement.
• upon receipt of Mind’s initial letter of demand on 4 June 2021 and a follow-up email on 8 June 2021,  Dahdouh replied on ABG’s behalf requesting a reduction of the weekly payments to $1,000.
• following the issuing of the default notices on 10 June 2021, Dahdouh responded by email:
  • stating: ‘I don’t know what you expect me to do with this? I am confused?’
  •  following up as to whether Mr Shergold had asked Mind’s board about reducing the repayment amounts to $1,000 per week. Mr Shergold responded to the effect that Mind required ABG to abide by the deed of repayment.
• on 11 June 2021, Dahdouh emailed Shergold stating, at [52]:

Made another payment.
Following up on the threats of litigation. I actually don’t care if you sue the company or myself because the company or myself has [sic] no assets so it would be a waste of financial resources by Mind Australia to do this and it would be done just out of spite.
I am paying money as a matter of principal [sic]. Not because litigation scares me!
I am not going to allow myself to affect my mental health by this! I felt that I have signed this under duress and agreed to that amount because of this.
I want to stick to paying but it would be helpful if it went to $1,000 a week for everybody’s benefit including mine. I don’t like this not keeping up to payments but when I cannot actually afford it, there is nothing I can do!
Please Bob I ask for your help to see if you can again ask to get it to a feasible amount of $1,000 which I can afford without stress!

• ABG failed to comply with the default notices and, as a result, the statutory demand was issued by Mind.
• since the statutory demand was served, ABG made four $1,000 payments between 26 July 2021 and 12 August 2021.
• acknowledge a further two payments made by ABG on or around 18 October 2021 and 25 October 2021 which reduced the amount owing under the demand from $73,281.29 to $68,281.28.

ABG submitted, at [26]:

• clause 4.1 of the repayment deed is mandatory in its terms and specifies the only available modes of service of notices and other communications under the instrument;
• the default notices were not delivered to ABG in the prescribed manner set out in cl 4.1 of the repayment deed. They were sent by email to ABG’s director, Mr Dahdouh, who was himself a party to the repayment deed; and
• because the notice provision in cl 4.1 was not complied with, cl 3.1 of the repayment deed was never triggered. Accordingly, the entire amount of the arrears did not become immediately due and payable [26].

Mind contended, at [27], that:

• the repayment deed is not a deed of settlement and release but is better characterised as a deed of forbearance.
• ABG’s liability to pay the arrears was preserved in cl 9 of the deed of surrender;
• the arrears remained due and payable at all times, regardless of the operation of cl 3.1 of the repayment deed;
• clause 3.1 is no more than an acceleration clause that confirms when the arrears and interest payable in accordance with cl 2 of the repayment deed would become immediately payable;
• the requirement in cl 4.1 is to give notice in writing is mandatory but the manner in which notice is to be given is permissive; and
• the default notices were properly served under the repayment deed in any event because ABG’s director was provided with the default notices via an email address that he used to communicate with representatives of Mind.

DECISION

The plaintiff applied to set the demand aside under ss 459G, 459H and 459J of the Corporations Act 2001 (Cth) (‘the Act’) [6].

The Court stated the principal questions were, [10]

• is there a genuine dispute that the arrears were due and payable because a condition precedent in the repayment deed was unmet?; and
• is there a genuine dispute that the repayment deed is unenforceable because it was obtained by economic duress? [10]

The Court reviewed the relevant provisions of the Act stating:

• 2 Section 459E of the Act relevantly provides, at [12]:

(1) A person may serve on a company a demand relating to:

(a) a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum;

• for the purpose of s 459E of the Act, a debt is due and payable when it is ascertainable, immediately payable and presently recoverable or enforceable by action [13]. 
• 14 Section 459G of the Act relevantly states:

(1) A company may apply to the Court for an order setting aside a statutory demand served on the company.

• Section 459H(1) of the Act provides:

This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:

(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

(b) that the company has an offsetting claim

• where a company applies to set aside a statutory demand under s 459H of the Act, the Court must calculate the ‘substantiated amount’ of the demand in accordance with the formula prescribed in s 459H(2).
• Section 459H(3) provides that where the substantiated amount is less than the statutory minimum, the Court must set the demand aside [16].

As is common in cases of this nature the court set out the relevant principles  applicable in determining what  constitutes a genuine dispute for the purpose of s 459H(1) of the Act, stating:

• a ‘genuine’ it must be ‘bona fide and truly exist in fact’
• ‘the grounds for alleging the existence of a dispute … [must be] real and not spurious, hypothetical, illusory or misconceived’;
• the dispute must have a ‘sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile … Something “between mere assertion and the proof that would be necessary in a court of law” may suffice’;
• a genuine dispute may involve a ‘plausible contention requiring investigation’ and raise the same sort of considerations as the ‘serious question to be tried’ test that applies in the case of interlocutory injunctions;
• the Court should not uncritically accept statements about an alleged genuine dispute which are ‘equivocal, lacking in precision, inconsistent with undisputed contemporary documents … or inherently improbable … ’;
• a dispute which appears  ‘merely created or constructed in response to the pressure represented by the service of the statutory demand’, then it is not advanced in good faith and will not be regarded as genuine; and
• whilst the underlying nature of the dispute about the existence of a debt ‘must be exposed’, the Court will not deal with the merits and nothing of substance will be decided [17].
• although the hurdle for establishing a genuine dispute is a relatively low one, an applicant must nevertheless satisfy the Court that a genuine dispute exists on the balance of probabilities [18]

The court stated that a proceeding brought under s 459G of the Act is not ordinarily an occasion for the Court to construe a contract where its meaning is in dispute [20].

His Honour was satisfied there is a genuine dispute as to whether the arrears claimed in the statutory demand were due and payable according to the operation of the repayment deed, [28], because:

• there were competing but plausible arguments as to whether the notice requirements and methods of delivery set out in cl 4.1 of the repayment deed are mandatory or facultative in nature [29]. relying on the principles set out in n JPA Finance Pty Ltd v Gordon Nominees Pty Ltd, whether a deed required strict compliance with its notice provisions as:
  • a) whether a contract requires strict compliance with provisions as to notice, in order for notice to be effective, is a matter of construction. That will turn on the language and, to some extent, the nature of the contract as one of suretyship or guarantee;
  • whether there has been compliance with a contractually stipulated mode of giving notice may also involve a process of construction of the notice itself.
  • The construction of both the contract and the notice raises common issues and concerns the same contractual and commercial context; and
  • the principles of construction of notices are not relevantly different to those governing the construction of contracts [30].
•  establishing whether there has been compliance with the specified mode of giving notice in cl 4.1 and  construing the default notices themselves is for a court to ascertain the commercial purpose of the notice clause and the repayment deed itself. Also relevant to that inquiry are the legal consequences of non-compliance with a default notice and the crystallisation of Mr Dahdouh’s liability as guarantor [35].
• whilst ABG’s construction of the notice provision was technical and literal it had a sufficient degree of cogency so as to be arguable [36].
• if ABG is correct that cl 4.1 is expressed in imperative terms, it didn’t matter whether Mr Dahdouh was provided with the default notices by email. There is no evidence that ABG ever changed its notice details under cl 4.2.2 of the repayment deed so as to nominate any email address. It would follow that service of the default notices was ineffective [37].
• ABG’s argument that strict compliance with the notice provision in cl 4.1 is necessary to enliven the right to immediate payment of the arrears under cl 3.1 was also a plausible contention requiring investigation [38]
• there was force to the plaintiff’s submission that that cl 3.1 provides for the accelerated payment of the arrears which were otherwise due and payable and this render cl 3.1 inutile. The proper construction of cl 3.1 was plainly a matter of genuine dispute between the parties [39].
• there were issues with the defendant’s suggestion that the repayment deed is better characterised as a deed of forbearance as it did not actually identify the amount of the arrears [40]
•  the competing questions of construction of the repayment deed referred to above are triable issues and should not ordinarily be considered in an application to set aside a statutory demand under s 459G of the Act [41]
• the court did not accept the argument  that the arrears remained due and payable at all times regardless of the operation of cl 3.1 as the parties to the repayment deed made specific provision for the terms of payment of the arrears [42].
• notwithstanding Mind’s claim that the arrears were due and payable at all times as an underlying debt the statutory demand itself only refers to the outstanding arrears owing by ABG under the repayment deed and not on any other basis [43].
• an additional instance of a genuine dispute is whether a debt which is due and payable by ABG  is independent of the amounts owing under the repayment deed, or whether Mind’s contractual right to payment of the arrears pursuant to the sublease has merged with its rights under the repayment deed [43].

Genuine dispute that repayment deed is unenforceable because obtained by economic duress

The court summarised the principles regarding economic duress as:

•  the law will not give effect to an apparent consent which was induced by illegitimate pressure however,
• the test is a stringent one;
• an agreement may be vitiated or a transaction impugned if it is established that a party has used an illegitimate form of pressure, which is physical, economic or psychological in nature, to compel or induce the other party to enter into the relevant agreement;
• pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct.
•  even lawful pressure can be duress so long as the pressure is illegitimate or wrongful, or goes beyond what is reasonably necessary for the protection of a party’s legitimate interests.
• an actual or threatened breach of contract may constitute an unlawful threat for the purpose of duress;
• illegitimate pressure may be evident even if the party alleged to have exerted the pressure genuinely believed it was properly exercising its legal rights,.  That is distinguishable from the ‘rough and tumble of the pressures of normal commercial bargaining’;
• the words and conduct of the party alleged to have exerted the pressure are judged as a matter of substance and reality and not simply form
• the identified illegitimate pressure must have the effect of:
  • producing compulsion or an absence of real choice and
  • leaving a party with no reasonable or practical alternative

but to enter into the relevant agreement.

• it is not necessary to show that a person’s will has actually been overborne;
• the illegitimate pressure must cause the complainant to assent to the agreement.
• the illegitimate pressure need not be the sole reason for the complainant entering into the agreement. It is sufficient if it is one of the reasons;
• factors relevant to assessing whether the complainant truly consented to the agreement or whether they were placed under unlawful or illegitimate pressure include:
  • whether they later affirmed or relied upon the agreement
  • whether there was an adequate alternative to the bargain;
  • whether the complainant sought legal advice;
  • whether they protested at the relevant time [53].

The court found there was a genuine dispute about the enforceability of the repayment deed on the basis that it was allegedly entered into by ABG under economic duress [54] as:

•  the evidence demonstrates at least a credible basis for the contention that Mind illegitimately applied economic and/or psychological pressure on ABG to agree to the terms of the repayment deed, including the process for ascertaining the amount of the arrears as contemplated by cl 2.2 [55].
• Shergold’s statement to the effect of ‘we don’t want the [landlord’s] agent to know you owe us money as this will affect your application may be an implied threat however there is authority that a veiled threat may still constitute illegitimate pressure for the purpose of establishing duress [55]. While the statement could be interpreted differently relevant words spoken by Mr Shergold are also capable of being construed in the way contended for by ABG [56].
• the surrounding context to the alleged threat was particularly relevant being:
  • Mind risking losing the benefit of approximately $150,000 in fit-out works undertaken at the property in the event the landlord did not agree to the transfer of the lease from Mind to ABG.
  • Dahdouh gave evidence that:
    • he was concerned that a failure to secure the transfer of the lease would endanger the employment of ABG’s staff;
    • that he had experienced economic and psychological pressure to enter the repayment deed; and
    • neither Mr Dahdouh nor ABG obtained independent legal advice in relation to its terms because he did not believe there was an opportunity to do so [57].
• the alleged illegitimate pressure was:
  • the purported threat to disclose ABG’s adverse rental history to the landlord  which was apparently used to compel ABG to sign the repayment deed.
  • that ABG had no reasonable or practical alternative to entering into the transaction.
  • the causal connection between the alleged pressure and ABG’s entry into the repayment deed in circumstances where it apparently had ‘no choice and no reasonable alternative [58].’
• Dahdouh’s email of 11 June 2021  suggestomg that the repayment deed, executed two months prior, was signed under duress and that the arrears fixed under cl 2.2 was agreed to because of this duress has prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. As  the email pre-dates the issuing of the statutory demand by six weeks it was therefore not raised in response to the statutory demand [59].
• while the evidence was not extensive or overwhelming, occupying the territory somewhere ‘between mere assertion and proof that would be necessary in a court of law the plaintiff cleared the requisite evidentiary hurdle of establishing a genuine dispute which is bona fide and which truly exists in fact [62].

The Court state aside the statutory demand  by reason of either or both of the alternative genuine dispute grounds advanced by the plaintiff pursuant to s 459H(1)(a).  [64].

ISSUE

Debts  related to or conditional upon the operation of a deed often cause problems if they are the basis for a statutory demand.  Cogent arguments demonstrating disputes about how the deed operates, requiring adjuciation, are often regarded as triable issues and are treated as genuine disputes.  In this case there associated facts involving the landlord made a genuine dispute even more likely.

The issue duress does not arise commonly and, as the court noted, the bar is high.  The applicant was fortunate in having written evidence that predated the statutory demand that was consistent with a claim of duress.  Statements from the defendant which could be interpreted as being consistent with such conduct provided a basis for the court to find there was a genuine dispute.  The defendant disputed the interpretation put on the statement however that, again is a triable issue.