In the present economic climate, creditors are frequently confronted with the challenges of protecting themselves against the risks of impecunious debtors and shortfalls in the recovery of assets or services provided on credit. 

For unsecured creditors, the endemic risks, delays and uncertainties which exist in litigation against a potentially insolvent debtor present further obstacles on the path to recovery, particularly where the creditor's own financial resources may have been depleted by a debtor's failure to pay. 

In some circumstances, help may be available in the form of a highly specialised, potentially cheaper and quicker alternative to commencing litigation: the company statutory demand.

This procedure may be employed by creditors in circumstances where:

  • the debtor is a company;
  • the debt is presently due and owing and exceeds $2,000;
  • no 'genuine dispute' exists about whether the debt is owing; and,
  • no 'offsetting claim' or 'other reason' is available to the debtor against the creditor.

In these circumstances, a creditor may serve a demand on the company demanding payment of the outstanding debt within 21 days.  If the debtor does not comply with the demand or bring any application to set it aside within the 21-day period, the failure to comply creates a presumption of the debtor's insolvency, which the creditor may then rely upon in bringing an application to wind the company up, appoint a liquidator and obtain a rateable share of the asset proceeds alongside other unsecured creditors in the debtor company's liquidation. 

The practical advantage to a creditor is that the costs and delays of obtaining and enforcing a judgment against an insolvent debtor are circumvented. 

However, the courts will robustly protect the integrity of the specialised demand procedure and any attempt to utilise it as a means of placing undue pressure on a debtor over a disputed debt will be considered an abuse of process. 

Further issues that have been at the forefront of recent Supreme Court of Western Australia decisions include:

  • The need for precision in ensuring a demand is properly prepared, together with its supporting affidavit, in respect of a debt presently due, and which is compliant with the Commonwealth statutory regime;
  • Any dispute which is to be relied upon in setting a demand aside must be one which the debtor company 'genuinely believes to exist';
  • All that is required in order to demonstrate the existence of a 'genuine dispute' is that there is a 'plausible contention requiring investigation' that is 'not spurious, hypothetical, illusory or misconceived', presenting an arguably low threshold for a debtor to satisfy in applying setting aside the demand;
  • Despite that arguably low threshold, the Court may reject statements as giving rise to any 'genuine dispute' where the Court considers them to be either 'inherently improbable', lacking in precision, inconsistent with documentary evidence or where a supporting deponent has made inconsistent statements; nor is the Court obliged to accept 'an assertion of facts unsupported by evidence' or what is simply a 'patently feeble legal argument'; and,
  • A misconceived demand may expose a creditor to the potentially significant costs of dealing with a debtor's application to set it aside.

These principles highlight the significance of ensuring that the merits and circumstances of any attempt to employ the demand procedure are carefully considered against any alternative options (such as litigation) and that an informed decision is made by creditors as to the most suitable method of proceeding. Similar considerations apply when formulating any application on behalf of a debtor company to have a served demand set aside.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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