Australia: Statutory Demands and Abuse Of Process – How To Avoid Being Reported To The Police

Last Updated: 4 May 2013
Article by Elise Croft

This article was first published in Kott Gunning's Insolvency Case Note of 17 April 2013.

Commonwealth Bank of Australia v Garuda Aviation Pty Ltd[2013] WASCA 61

Rohanna Pty Ltd v Nu-Steel Homes Adelaide Pty Ltd[2013] WASC 109

During the last 18 months, there has been significant uncertainly about whether or not a statutory demand is valid when issued in relation to a portion of a debt.

In 2011, the South Australian case of Candetti Constructions Pty Ltd v M & I Samaras (No 1) Pty Ltd determined that a statutory demand for only part of a debt was invalid, even if that part was undisputed. In April last year, Master Sanderson of the Supreme Court of Western Australia reluctantly found that he was bound to follow that South Australian Judge's view when he set aside the Commonwealth Bank's statutory demand for an undisputed portion of a debt in Garuda Aviation Pty Ltd v Commonwealth Bank of Australia.

The Commonwealth Bank appealed Master Sanderson's decision and on 6 March 2013, the WA Court of Appeal found that Candetti was wrongly decided and allowed the appeal.

Creditors can now be confident that it is possible to issue a valid statutory demand for an undisputed portion of a debt. However, unless a portion of a debt is disputed, a single statutory demand should be issued for the whole of a debt. The Court of Appeal observed that in the absence of good reasons for doing so, serving multiple statutory demands for various parts of a single debt can be found to be an abuse of process.

On the subject of abuses of process, a particularly serious example was found to have occurred in another decision of Master Sanderson handed down last week.

In Rohanna Pty Ltd v Nu-Steel Homes Adelaide Pty Ltd, the defendant, Nu-Steel, served two statutory demands on the plaintiff, immediately before Christmas, for debts that were allegedly assigned to it by a third party.

Prior to receiving the demands, the plaintiff had not been contacted by Nu-Steel at all. The plaintiff had, in fact, settled with the third party and paid it $50,000. When the solicitors for the plaintiff wrote to Nu-Steel, providing clear evidence of the payment to the third party, the defendant failed to respond.

The solicitors for the plaintiff issued an application to set aside the statutory demand but did not serve it in time, so they amended the application to seek an injunction against the winding up of the company.

When they wrote to Nu-Steel's solicitor, explaining that the debt had been paid, the solicitor said that in the absence of an application to set aside the demand, his client would be entitled to proceed with, and advertise, the winding up application.

When the plaintiff provided clear evidence of its solvency, showing that, in the words of Master Sanderson, it was not just solvent but "a massively successful commercial enterprise" Nu-Steel's solicitor said the winding up application would not be withdrawn unless the plaintiff paid costs of $25,000.

In granting the application to set aside the demand and injunct the winding up application, Master Sanderson was scathing about the conduct of Nu-Steel, its director Mr Pearse and its solicitor, saying that it "looks very much like an attempt by the defendant to extort money from the plaintiff."

The Court was critical of many aspects of Nu-Steel's conduct, but was particularly unimpressed by the fact that Mr Pearse (who appeared for Nu-Steel at the hearing; the solicitor did not show up) had previously, unsuccessfully, attempted to bring winding up proceedings in similar circumstances against another company in New South Wales.

And the Court was even more critical of the lawyer. Master Sanderson said that his conduct in demanding $25,000 in costs for writing three or four letters "was tantamount to extortion." Master Sanderson indicated that he would be referring the matter to the WA police to examine Mr Pearse's conduct and would refer his lawyer to the regulators of the legal profession in South Australia.

This was an extreme case, both in terms of both the behaviour of the "creditor", and the outcome - you have to do pretty badly in court to end up being referred to the police. However, it is certainly not the only WA case in recent years where the motives and behaviour of a creditor who has issued a statutory demand have been closely examined. Any creditor who issues a statutory demand to exert pressure or collect a debt, rather than to establish insolvency, should tread carefully.

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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Elise Croft
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