In brief – Section 459E statutory demand and insolvency
Under Section 459C of the Corporations Act, a company is presumed to be insolvent if during or after the three months preceding the day on which an application is made for the winding up of the company, one of a number of events occurred. This includes, most commonly, failure to comply with a Section 459E statutory demand which a creditor has served on the company.
In practice the process of making a statutory demand is often used as a means of collecting debts, although that is not what it is supposed to be about. A statutory demand is supposed to form the first part in a winding up application.
Most common reason for company liquidation is insolvency
Just as an individual can be bankrupted, so a corporation can be wound up and brought to a commercial end. Whereas an individual continues to live and breathe through and after bankruptcy and the slate is wiped clean, a company is brought to a commercial conclusion by a wind-up application.
The most common basis for placing a company into liquidation is insolvency.
The test of whether or not a company is insolvent as applied under Section 95A of the Corporations Act is whether or not the company is able to pay its debts as and when they become due and payable.
Legislative changes only serve to increase statutory demand litigation
In an attempt to deal with the abundance of litigation, the legislature introduced significant amendments in the mid-1990s.
In Scolaro's Concrete Constructions Pty Limited v Schiavello Commercial Interiors (Vic) Pty Limited, the Full Federal Court said about those amendments that:
As it turns out, the amendments have certainly have not reduced the amount of litigation in respect of statutory demands. In fact there seems to be more litigation. The result is at odds with the intention of the legislature.
Characteristics of a valid statutory demand
Valid demands can only be sent by creditors who have a debt, which is due and payable1. The debt cannot be contingent or prospective. You have to be able to put a dollar value on it. The debt or debts claimed in the statutory demand must total at least the statutory minimum2, which is presently $2,000.003.
The demand must be in the prescribed form4, must be in writing and must be signed by or on behalf of the creditor. It must correctly state the debtor's company name and its registered office and it must specify a place in Australia where the debt can be paid. It has been held that it is permissible to specify that payment be made to the creditor's solicitors.
If the creditor is a company, the statutory demand should be given under the common seal.
Because a creditor can gain the benefit of a presumption of insolvency if the statutory demand is not complied with, the creditor should ensure that any demand is expressed in clear, correct and unambiguous terms5.
Amount and nature of the debt being claimed
Under Section 459E(2), a statutory demand must specify the debt claimed. If relating to more than one debt, it must specify the total debts claimed and at least indicate the nature of the debt relied upon, for example, goods supplied and delivered.
Failure to specify the nature of the debt is a defect in the statutory demand, but it may not cause substantial injustice and require a Court to hold the demand to be invalid6.
The statutory demand requires the company to pay the debt or secure or compound the amount owed within 21 days of the date of the demand "to the creditor's satisfaction". Those words require an objective test. It is for the Court to decide whether a creditor acted reasonably if he or she rejected a debtor's proposal7.
Statutory demand must comply substantially with the form
A statutory demand does not have to comply strictly with the form. Substantial compliance is what is required. For example, in Daewoo Australia Pty Limited v Suncorp Metway Pty Limited (2000) 48 NSWLR 692 the Court accepted payment in a foreign currency as being appropriate, even though the form requires it to be translated into Australian currency.
If important words are omitted from the demand then the Court will see the demand as bad8.
Unliquidated damages, multiple creditors and multiple proceedings
A statutory demand may not include a claim for unliquidated damages. That is not a debt within the definition of debt9. However, you can subtract the amounts not due from the amount that is actually due and so long as more than $2,000 is owing, a statutory demand can be regarded as valid .
A multiple number of creditors are not allowed to serve a single demand on one company – it is a defect which will cause substantial injustice. A debtor is entitled to know what is owed to whom and how the debt may be discharged.
A creditor is not entitled to serve a demand at the same time as proceeding against the debtor company's directors in relation to the same alleged debt. That is an abuse of process and a reason for setting aside a Demand under section 459(1)(b)11.
Judgment or affidavit required
If a judgment has not been obtained then there must be an affidavit accompanying the demand, verifying that the debt is due and payable and that it complies with the rules laid down for statutory demands12. If the demand does not rely on a judgment and it is not accompanied by an affidavit, the demand will be set aside13.
If the name of the creditor is incorrect, the Court will consider whether the demand correctly identifies the party who claims to be entitled to payment. Allowance will be made for minor errors14.
How a statutory demand is served
A statutory demand can be served by leaving it at the registered office, sending it by post to that office or delivering a copy of the demand personally to a director of the company who resides in Australia.
Where a creditor becomes aware that the company no longer occupies the registered address and the creditor is aware of the new address, then he or she should bring the demand to the notice of the company at that new address15.
If the creditor is aware that the company no longer occupies the registered address but does not know where the company has moved, then it is prudent to serve it on the company's director.
Three month time limit to presumption of insolvency
Section 459C(2) provides that the presumption of insolvency only lasts for three months after the demand is served and before the application to wind up is lodged. If an application to wind up the debtor company is not lodged within that time then the demand cannot be relied upon.
A company is taken to have failed to comply with a demand at the end of 21 days after the date of service. The time for compliance may be longer if the company seeks to set aside the demand. The Court may extend the time for compliance where the hearing of an application pursuant to that section is sought. If the Court does not extend the time for compliance, then compliance ends seven days after the application is finally determined16.
Resisting a statutory demand
If a company wishes to have a statutory demand set aside, it must apply to the Court within 21 days of service of the demand and it must serve the supporting affidavit on the person who made the demand within that 21 day period as well. Strictly speaking, both documents should be served at the registered office and not the address in the demand18.
An application can only relate to one demand, so if a company has received three demands, it must make three setting aside applications to the Court to have the demands set aside19.
The supporting affidavit should state the grounds for making the application, rather than simply making an assertion that the debt is not due. If the affidavit is insufficient, it cannot be supplemented by a late affidavit served outside the 21 day period20.
Reasons for setting aside a statutory demand
A demand will only be set aside if the amount in fact owed is less than the statutory minimum21, if there is a defect in the demand that would cause substantial injustice if the demand is not set aside22 or if there is some other reason why the demand should be set aside23.
A demand which has a defect can only be set aside where it causes substantial injustice. It will not be set aside if it was a demand within the terms of the Act and the defect is only a minor irregularity or misstatement24.
A defect in the amount claimed in the demand is not, of itself, sufficient to set the demand aside, although the size of the defect may go towards the issue of injustice25.
Section 459J(1)(b) allows for the setting aside of the demand on the "some other reason" basis. The fact that a company is solvent is not "some other reason" for the purposes of this section26.
A demand containing grossly inflated amounts might be considered to be "some other reason"27.
Statutory demands set aside if indebtedness genuinely disputed
A demand will be set aside where there is a dispute which is genuine.
In Goldspar Australia Pty Limited v KWA Design Group Pty Limited  NSWSC 502, Austin J of the Supreme Court of New South Wales said that a genuine dispute required that the dispute be bona fide and truly exist in fact and that the grounds for alleging a dispute are to be real and not spurious, hypothetical, illusory or misconceived.
Pitfalls in statutory demands for both debtors and creditors
From a debtor's point of view, the problem with the statutory demand is that once the time for compliance with the demand has expired, unless there is a valid application filed and served to set the demand aside, there is absolutely no opportunity of contesting the demand28.
In those circumstances, if the demand is pressed, the only way of dealing with the demand is to pay the debt, reserve one's rights and sue for the money back. That can create major problems, particularly if the debt claimed is in fact disputed. A company that would otherwise be solvent can find itself having to pay a debt it does not believe it owes and one which renders it insolvent.
A creditor using a demand as a quick means of a debt recovery can likewise have the whole thing blow up in its face. Where there is no judgment already obtained, all a debtor has to show to set aside a demand is that there is some genuine dispute.
The Court is not interested in the merits of that dispute. All it needs to determine before it sets aside a demand, as it regularly does, is that there is a serious question to be tried.
Consider your position and avoid insolvent trading
There is one further point I ought to mention. If a demand is received by a company and the company is in financial difficulties, then it may be a trigger for that company's directors to consider their position.
Directors of companies that are trading entities, where those companies are insolvent, leave themselves open to insolvent trading claims. Consequently, if your company is insolvent, that is, it is unable to pay its debts as they fall due and you receive a statutory demand, it is probably time to think about your exit strategy from the company, or how the company's business might be otherwise saved.
There are a number of ways of doing that, including voluntary administration or a creditor's voluntary liquidation. The main thing to remember is that if you seek advice quickly, all may not be lost.
1 Section 459E(1)(a)
2 Section 459E(1)
4 Form 509H
5 See Topfelt Pty Limited v State Bank of New South Wales Limited  FCA 589; (1993) 12 ACSR 381 (1993) 120 ALR 155 (1993) 47 FCR 226 (7 December 1993)
6 Jarena Pty Limited v Sholl Nicholas Pty Limited  FCA1264
7 Commonwealth Bank of Australia v Parform Pty Limited (unreported, Federal Court, 11 August 1996) Sundberg J
8 Beralt Pty Limited v Joe Battaglia Plastering Pty Limited (1999) 17 ACLC 1702
9 First Line Distributions Pty Limited v Whiley (1995) 13 ACLC 1216
10 Re: Add-A-Cab Holdings Pty Limited (1996) 14 ACLC 1763
11 See Perlake Pty Limited v Finance & Mortgage Corp (NSW) Pty Limited (1997) 15 ACLC 76
12 Section 459E(3)
13 Victor Tunevitch Pty Limited v Farrow Mortgage Services Pty Limited (1994) 14 ACSR 565
14 Delaine Pty Limited v Quarto Publishing Pty Limited (1990) 8 ACLC 1026
15 DC of T v Abberwood Pty Limited (1990) 8 ACLC 528
16 Section 459F(2)(a)(ii)
17 Section 459G(3)
18 Vicbar Pty Limited v Development Constructions (Newcastle) Pty Limited (1995) 13 ACLC 1220
19 Calquid Pty Limited v A & D Illes Pty Limited  NSWSC 558
20 Grey Winter Properties Pty Limited v Gas & Fuel Corp Super Fund  FCA 1783
21 Section 459H
22 Section 459J
23 Section 459J
24 Beta Trading Co Pty Limited v Specialised Laminators (1997) 15 ACLC 270
25 Besser Industries (NT) Pty Limited v Streetcan Constructions Pty Limited (1995) 13 ACLC 544
26 Chippendale Printing Co Pty Limited v DCT  FCA 1426
27 First State Computing Pty Limited v Kyling (1995) 13 ACLC 939
28 David Grant & Co Pty Limited v Westpac Banking Corporation  HCA 43
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.