Queensland tourism icon “The Big Pineapple” recently tasted sweet success in the Queensland Supreme Court with judgment setting aside a creditor’s statutory demand issued against it as part of an ongoing multi-million dollar dispute amongst investors.
After the temporary relaxation of rules during COVID, statutory demands are well and truly making a comeback as a creditor’s tool of choice for cost effective debt recovery. The Big Pineapple judgment serves as a timely reminder of the true criteria for issuing a statutory demand, and that Australian courts are willing to see through creditors who use statutory demands for illegitimate purposes.
In this case note, Emily Jennings and Lochlan Worrell of Moulis Legal break down the recent Queensland Supreme Court decision in Big Pineapple Corp Pty Ltd v Rankin Investments (Qld) Pty Ltd and others [2023] QSC 26 and revisit the circumstances in which the Court will set aside a statutory demand.
Slicing up the Big Pineapple
Registered in 2011, The Big Pineapple Unit Trust was a joint venture of several individuals and their associated investment entities to purchase and develop the Big Pineapple in Woombye Queensland (“Joint Venture”). The Applicant in the proceedings, Big Pineapple Corp Pty ltd (“BPC”), was its Corporate Trustee.
Initially, the Joint Venture was intended to be funded exclusively by the Joint Venture parties however certain individuals contributed funds from their self-managed super funds, which were not parties to the Joint Venture. How those funds were to be treated in the financial records of BPC was an ongoing point of contention between the respective accountants of BPC and one of the investors, Mr Rankin.
After being recognised for the first time in the 2014 financial statements, BPC executed three Deeds of Loan with Rankin Investments, Rankin Super and another entity known as CMC on 1 July 2015. Each of the Deeds of Loan were identical in their terms and included a termination date of 30 June 2022. By this time in 2015, there were just two parties left in the Joint Venture.
In 2019 the conduct of Mr Rankin led to an “event of default” under one of the agreements which regulated the Joint Venture. As a result, the other investor was entitled to buy the Rankin parties’ interest and assume ownership of the whole of the Joint Venture. In October 2021, an independent accountant was appointed to determine the value of the Rankin parties’ interest, to facilitate the buy-out process.
In May 2022, while the valuation process remained ongoing, Mr Rankin presented an offer to fellow investor Mr Kendall, for a third party to purchase the land subject of the Joint Venture. Despite Mr Kendall’s position that “the Pineapple is not for sale”, and that the valuation process was to take precedence, meetings were held in June 2022 to discuss the purchase and repayments of the loans to the Rankin parties.
On 1 July 2022, while the valuation process remained ongoing and the purchase offer remained open, Rankin Super served a creditor’s statutory demand on BPC. Unless payment was made in 21 days, BPC would have been deemed insolvent, which would have allowed Rankin to liquidate BPC and ultimately gain control over the Joint Venture.
BPC took issue with this and made an application to the Queensland Supreme Court for the statutory demand to be set aside on the basis that (amongst other things):
- the debt to which the statutory demand relates was not due and payable
- Rankin Super was using the statutory demand process unjustly and unconscientiously, and/or
- Mr Rankin’s position as a director of both debtor and creditor (BPC and Rankin Super) created a conflict of interest or otherwise rendered the statutory demand process inappropriate.
The core dispute
Companies served with a statutory demand may apply to to have it set aside pursuant to the Corporations Act 2001 (Cth) (“Corporation Act”)[1]. To succeed in this type of application, the Court must be satisfied of one of the following:
- there is a genuine dispute about the existence or amount of a debt to which the demand relates
- there is an offsetting claim
- there is a defect in the demand which will cause a substantial injustice unless the demand is set aside, or
- there is some other reason why the demand should be set aside.
In the BPC judgment, the Court considered the question of whether the was a “genuine dispute” within the meaning of the Corporations Act, and whether the demand was made for an improper purpose.
Was there genuine dispute?
Applications to set aside statutory demands on the basis that there is a genuine dispute often involve consideration of whether a debt exists at all, or the amount claimed. However, in the BPC judgment, the issue for the Court was whether the debt was due and owing as at the date the statutory demand was issued, or whether it was due at some other time.
Both Mr Rankin and Mr Kendall gave evidence about circumstances surrounding the purported loans and the treatment of these loans in the records of BPC. However, the Court was not convinced with either version of events, finding that:
- Mr Kendall was confused for the reasons for the 2015 loan deeds
- Mr Rankin gave evidence that supported the case against him, and
- Mr Rankin had not attempted to “sensibly justify” certain arguments advanced by the Rankin Parties.
Ultimately, the Court found that there was a genuine dispute about the debt, stating that:
“My finding, that there exists a genuine dispute about whether the debt was due and payable on 30 June 2022, in that there is a plausible contention, warranting investigation, that it is not, is enough to support the making of an order setting the statutory demand aside and I rely upon it”.
It is important to the note that the Court did not (and was not required to) determine the substantive issues about whether the debt was payable and when. Instead, it was enough for the Court to determine the existence of the genuine dispute as a reason to set aside the statutory demand.
Was the statutory demand issued for an improper purpose?
It was argued that the true purpose of issuing the statutory demand by Rankin was to:
- force the appointment of a liquidator to BPC
- avoid the completion of the valuation
- force Mr Kendall to agree to Rankin entering into an agreement with the potential purchaser of BPC’s land, and
- avoid Mr Rankin’s forced withdrawal from the Joint Venture. [3]
The Court considered that the chronology of events in 2022 gave rise to an inference that Mr Rankin had issued the statutory demand to exert commercial pressure upon BPC to achieve a desired outcome, being to avoid the Rankin parties’ forced withdrawal from the Joint Venture.
Although there were already sufficient reasons to set aside the demand, the Court also found the use of the statutory demand was improper for two additional reasons. Firstly, issuing the statutory demand during the compulsory buy-out process undermined one of the Joint Venture agreements and de-railed the valuation process. Secondly, Mr Rankin was conflicted between his position for the Rankin Parties and his position as a part owner of BPC. The conflict arose because BPC relied upon the contributions of the joint venture parties to meet its financial obligations, including to pay the statutory demand, but Mr Rankin had taken the position that the Rankin parties would not contribute funds to BPC to enable it to meet its financial obligations. The Court found that this was “unfair and a complication of his position of conflict as a director of both Rankin Super and BPC.”
Statutory demands as a sweet but prickly recovery tool
The findings in the Big Pineapple judgment are a timely reminder of the Court’s power and willingness to set aside statutory demands which have not been issued in accordance with the Corporations Act.
Creditors must fully consider the basis for the debt and ensure that there is clear evidence to support the debt’s existence and amount without dispute. As demonstrated in this case, failure to adequately establish the existence or the value of the debt or that the debt was due and payable, may amount to a “genuine dispute” for the purposes of setting aside a statutory demand.
Similarly, creditors should carefully consider the purpose for which the demand is being issued. The dominant purpose of the statutory demand is to establish a company’s insolvency, and to determine whether a company should be wound up. Where a statutory demand has been issued for an alternative purpose, such as attempting to coerce the debtor to take action other than to pay the debt, or to pay a disputed amount, it is likely to result in the demand being set side.
Ultimately, when used correctly, statutory demands are an extremely useful, cost effective and legitimate means to recover due and payable debts. However, creditors considering their use should remain aware of the underlying purpose of statutory demands, and handle this prickly tool with care.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
© Moulis Legal 2023
[1] Corporations Act 2001 (Cth), s 459G.
[2] Big Pineapple Corp Pty Ltd v Rankin Investments (Qld) Pty Ltd and others [2023] QSC 26, [179].
[3] Big Pineapple Corp Pty Ltd v Rankin Investments (Qld) Pty Ltd and others [2023] QSC 26, [104].
