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
the debtor is a company;
the debt is presently due and owing and exceeds
no 'genuine dispute' exists about whether the debt is
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
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
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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This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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