The Graywinter Principle in Practice

The Graywinter Principle in Practice, By Simon Trewavas, Barrister-At-Law




Simon Trewavas is a barrister who specialises in commercial litigation. Aitken Whyte Lawyers Litigation and Disputes Team often work with Mr Trewavas. Our combined expertise achieves results for our clients.

Mr Trewavas has a wealth of experience in civil and commercial litigation. In particular, he has experience acting for companies and their directors.

Mr Trewavas has written this article for our website and we thank him for his contribution. The following is further to Mr Trewavas’ article on Applying to Set Aside A Statutory Demand. As discussed there, the Graywinter principle is a key consideration for such applications. Mr Trewavas has written this to illustrate the Graywinter principle in practice.

The Graywinter Principle in Practice

The recent decision of the New South Wales Court of Appeal in Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) (see[2020] NSWCA 1) provides an excellent example of how the Graywinter principle is practically applied by the Court.

Background Facts

The background was:

  1. the two debts to which the statutory demand relates are judgment debts totalling $376,047.82 which were obtained by Fearndale on 4 June 2019.
  2. Fearndale is the owner of land at Luddenham in western Sydney on which, prior to 2017, Epic Mining Pty Ltd operated a mine. In March 2017, Fearndale entered into a lease of that land with Drama Unit. The lease was terminated by Fearndale in March 2019.
  3. Following termination of the lease, Fearndale commenced proceedings against Drama Unit seeking a declaration as to the validity of the termination and claiming damages in respect of unpaid rent and outgoings.
  4. On 4 June 2019, Black J gave judgments in favour of Fearndale in respect of unpaid rent ($341,890.72) and outgoings ($34,257.10):
  5. Drama Unit lodged a notice of appeal on 21 June 2019 but did not make any application for a stay of the judgments.
  6. The appeal was allowed in part by the Court on 17 December 2019 and the Court set aside the judgment against Drama Unit in respect of unpaid rent in the amount of $341,890.72.
  7. On 21 June 2019, Drama Unit filed and served an originating process seeking orders s459G application.
  8. The other affidavit was sworn by Drama Unit’s solicitor, Mr Damian Phair, on 27 June 2019 and asserted an offsetting claim that exceeded the amount claimed in the statutory demand. The affidavit contained a draft statement of claim annexed to that affidavit was unsigned, undated and unverified to support the proposition that there was an offsetting claim. The affidavit relevantly stated:
    1. I am the solicitor for the Plaintiff and I am authorised to make this affidavit on its behalf.
    2. I am advised which I verily believe to be true that:
      1. the Plaintiff will be filing a statement of claim in the Supreme Court of NSW, a draft of which is annexed hereto and marked “A”.
      2. the amount claimed in the said statement of claim will offset and exceed the amount claimed in the creditor’s statutory demand dated 7 June 2019.
    3. The Plaintiff respectfully seeks that the said statutory demand be set aside under ss459G, 459H of the Corporations Act 2001 (Cth), on the basis that the Plaintiff has an offsetting claim.
The Primary Judge’s Reasons

The primary judge proceeded on the basis that the affidavit filed within 21 days must raise the grounds on which the applicant seeks to have the demand set aside and those grounds may be raised expressly, or by inference, from the affidavit or documents annexed to it.

The primary judge noted that the draft statement of claim was unsigned, undated, and unverified and otherwise did not contain any evidence that Drama Unit was entitled to the amounts claimed in the statement of claim, or the basis upon which those amounts could be claimed, or the facts contained in the statement of claim were correct or were within Mr Phair’s knowledge.

The primary judge relevantly held:

“… Although the affidavit contained a conclusory statement of sorts along the lines of Infratel, the solicitor did not squarely assert, on information and belief or at all, that Drama Unit was entitled to the amounts that would be claimed in such proceedings, nor on what basis. The fact that the annexed Statement of Claim was in draft, unsigned and unverified by a director of Drama Unit may not have been fatal if, consistently with the authorities to which I have referred, the solicitor had in the body of his affidavit set out the material facts on which Drama Unit intended to advance that claim, on information and belief or at all. The solicitor did not depose, for example, that he had been informed by an identified person (ideally a director of Drama Unit likely to know first-hand) that the facts in the draft Statement of Claim were correct.”

The primary judge concluded that the draft statement of claim was merely “a series of draft assertions rather than anything concrete” and that the Phair affidavit did not raise the grounds nor state the material facts supporting the alleged offsetting claim.

The Reasons of The NSW Court of Appeal

The Court framed the issue in the following manner:

“The question before her Honour was whether the Phair affidavit was an affidavit supporting the s459G application on the ground that Drama Unit has an offsetting claim: s459H(1)(b). The proposed appeal seeks to challenge her Honour’s factual finding that the affidavit did not answer that description. That finding involved an evaluative judgment as to whether the Phair affidavit provided evidentiary support for the asserted offsetting claim.”

The appeal was disposed of in three sentences:

“The Phair affidavit did not verify any of the material facts asserted in the draft pleading. The affidavit said no more than that Drama Unit would be filing a statement of claim and the amount claimed would “offset and exceed” the judgment debts. But the mere foreshadowing of an intention to make a claim did not give those allegations in the draft pleading any evidentiary value.”

See [2020] NSWCA 1 at paragraph [34]

Incidental Matters

On an interesting side note, the Court of Appeal also explained why appeals against decisions refusing to set aside statutory demands are rather exceptional.  Simply put, any appeal against a refusal to set aside a statutory demand will be of no utility, as the time for compliance with the demand will have expired before any appeal is heard.

The Court relevantly explained it as follows:

  1. the automatic extension provided by s459F(2)(a)(ii) applies only where “the company applies in accordance with s459G for an order setting aside the demand”.
  2. the automatic extension provided for by s459F(2)(a) is triggered only by a valid application made in accordance with s459G, that is to say, one that complies with the requirements of s459G(3).
  3. it is well established that an application is not validly made for the purposes of s459G(3) unless there is a sufficient supporting affidavit.
  4. if the period for compliance with a statutory demand has expired, s459F(2) does not permit the making of an order extending the period for compliance.
  5. in the present case, the statutory demand was served on Drama Unit on 7 June 2019. It is common ground that the demand has not been satisfied. Absent any extension of the period for compliance, Drama Unit is taken to have failed to comply with that demand on 28 June 2019 by reason of the operation of s459F(2)(b), that is, 21 days after service.
  6. as Fearndale correctly submitted, given that no order extending the time for compliance was made under s 459F(2)(a)(i), either:
    1. the application by Drama Unit was not made “in accordance with s459G”, as the primary judge found, so that s459F(2)(b) applies and the period for compliance expired 21 days after service of the demand, that is, on 28 June 2019; or
    2. the application filed by Drama unit was brought in accordance with s459G, as contended for by Drama Unit, and was “finally determined” on 6 September 2019. On this hypothesis, the period for compliance with the statutory demand would have expired on 13 September 2019, by operation of s459F(2)(a)(ii).
  7. on either view, when the summons seeking leave to appeal was filed on 3 October 2019, the period for compliance with the statutory demand had expired. That occurred either on 28 June 2019 or on 13 September 2019 and no order can now be made extending the time for compliance. There is no point in Drama Unit attempting to have the statutory demand set aside because the appeal can have no purpose in either situation.

The relevant section is 459F of the Corporations Act:

When company taken to fail to comply with statutory demand
  1. If, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.
  2. The period for compliance with a statutory demand is:
    1. if the company applies in accordance with section 459G for an order setting aside the demand:
      1. if, on hearing the application under section 459G, or on an application by the company under this paragraph, the Court makes an order that extends the period for compliance with the demand – the period specified in the order, or in the last such order, as the case requires, as the period for such compliance; or
      2. otherwise – the period beginning on the day when the demand is served and ending 7 days after the application under section 459G is finally determined or otherwise disposed of; or
    2. otherwise – 21 days after the demand is served.

The process of statutory interpretation results in the conclusion that any appeal against the final determination not to set aside a statutory demand will be nugatory, unless the appeal is heard and decided within the seven-day period after the primary decision is made, which is, for all intents and purposes, never going to happen.

S W Trewavas


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