Australia: Statutory demands – how to make them and how to resist them

In brief – Statutory demands under section 459E of the Corporations Act

Creditors can make a statutory demand for payment of a debt under section 459E of the Corporations Act as long as the debt is due and payable. Companies which are served with a statutory demand have 21 days to apply to the Court to have it set aside.

Failure to comply with statutory demand common cause of presumption of insolvency

Under section 459C of the Corporations Act, a company is presumed to be insolvent if in the three months after the day on which a winding up application is made, one of these events occurs:

  • the company fails to comply with a statutory demand
  • a judgment remains unsatisfied
  • a receiver and/or manager or controller is appointed to the company, either privately or by the Court

Most commonly the presumption of insolvency arises from the failure to comply with a statutory demand.

While some parties attempt to use statutory demands as a means of collecting debts, the Courts have been quite clear that this is an improper purpose.

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 their debt position is largely wiped clean, a company is ultimately 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 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 in this area, the legislature introduced significant amendments in the mid-1990s to make the requirements for the statutory demand less presumptive to be effective.

In Scolaro's Concrete Constructions Pty Limited v Schiavello Commercial Interiors (Vic) Pty Limited, the Full Federal Court said about those amendments that:

Unless the debtor demonstrates that there is a genuine dispute about the claim, the inevitable result would be a prima facie conclusion of insolvency if the amount were not paid. The public interest is served by these provisions because they tend to bring about a situation in which insolvent companies are either discouraged or prevented from continuing to trade.

However, the amendments have not reduced the amount of litigation for 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

Demands can only be sent by creditors who have a debt which is due and payable (section 459E(1)(a)). The debt cannot be contingent or prospective. A creditor must be able to put a dollar value on it. The debt or debts claimed in the statutory demand must total at least the statutory minimum (section 459E(1)), which is presently $2,000.00 ( section 9).

The demand must be in the prescribed form ( form 509H). It must:

  • be in writing
  • be signed by or on behalf of the creditor
  • correctly state the debtor's company name and its registered office
  • 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, for best practice purposes, 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 terms. (See Topfelt Pty Limited v State Bank of New South Wales Limited [1993] FCA 589; (1993) 12 ACSR 381 (1993) 120 ALR 155 (1993) 47 FCR 226, 7 December 1993.)

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 requiring a Court to hold the demand to be invalid. (See Jarena Pty Limited v Sholl Nicholas Pty Limited [1996] FCA 1264.)

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 proposal. (See Commonwealth Bank of Australia v Parform Pty Limited [1995] FCA 1445.)

Statutory demand must comply substantially with the form

The purpose of the reforms implemented in the mid-1990s was to make statutory demands much more flexible than they had previously been.

Surprisingly perhaps, a recent decision of the Courts in Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 (11 August 2014) has seen the Courts adopt a more prescriptive attitude towards statutory demands. Technical compliance is not at the heart of "substantial compliance". For example, if the name of the creditor is incorrect, the Court will still consider whether the demand correctly identifies the party who claims to be entitled to payment. Allowance will be made for minor errors. (See Delaine Pty Limited v Quarto Publishing Pty Limited [1990] 8 ACLC 1026.)

It should be noted that the litmus test for a valid statutory demand remains one of "substantial compliance". The issue for the Court will be whether or not the party who has received the statutory demand has in some way been misled by the demand. Certainly, it is hoped that notwithstanding the authority in Kisimul Holdings, the Courts will continue to make allowance for minor errors.

If important words are omitted from the demand or the affidavit then the Court will see the demand as defective. (See Beralt Pty Limited v Joe Battaglia Plastering Pty Limited [1999] QSC 202.)

Unliquidated damages, multiple creditors and multiple proceedings

A statutory demand may not include a claim for unliquidated damages.

A multiple number of creditors are not allowed to serve a single demand on one company. 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 459J(1)(b). (See Perlake Pty Limited v Finance & Mortgage Corp (NSW) Pty Limited [1997] 15 ACLC 76.)

Judgment or affidavit required to make a statutory demand

If a judgment has not been obtained, there must be an affidavit accompanying the demand. The affidavit must verify that the debt is due and payable, and that it complies with the rules laid down for statutory demands as specified in section 459E(3). If the demand does not rely on a judgment and it is not accompanied by an affidavit, the demand will be set aside. (See Victor Tunevitsch Pty Limited v Farrow Mortgage Services Pty Limited [1994] 14 ACSR 565.)

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 address. (See Deputy Commissioner of Taxation v Abberwood Pty Limited [1990] 8 ACLC 528.)

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 the statutory demand on the company's director.

Serving a statutory demand interstate

A statutory demand may be served interstate. (See Section 15, Service and Execution of Process Act 1992 (Cth) ("SEP Act").) Service must be conducted in accordance with the SEP Act, which requires an address for the registered office of the company which the statutory demand is being served upon. ( See section 9(1), SEP Act.)

Additionally, interstate service must contain copies of Form 1 (as per Reg 4 of the Service and Execution of Process Regulations 1993 (Cth); Re 8D Pty Ltd [2013] NSWSC 1297, Black J at [6]) attached to the statutory demand. (See section 16, SEP Act.) Failure to do so will render service ineffective. (See Re Industrial Installation and Access Systems Pty Ltd [2011] NSWSC 1032, Barrett J at [9] and Energy Conservation Systems Pty Ltd v Downer EDI Engineering Electrical Pty Ltd [2008] NSWSC 1139.

The statutory demand must also specify an address for payment that is in the same jurisdiction in which it is served.

Three month time limit to presumption of insolvency

Section 459C(2) of the Corporations Act provides that the presumption of insolvency lasts for three months after the demand is served and before the application to wind up is lodged. If an application to wind up is not lodged within that time, 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, under section 459F(2)(a)(ii) compliance ends seven days after the application is finally determined.

Resisting a statutory demand

If a company wishes to have a statutory demand set aside, under section 459G(3) it must apply to the Court within 21 days of service of the demand and it must serve the application and 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 demand. (See Vicbar Pty Limited v Development Constructions (Newcastle) Pty Limited [1995] 13 ACLC 1220.)

An application can only relate to one demand, so if a company has received three demands, it must make three applications to the Court to have the demands set aside. (See Calquid Pty Limited v A & D R Illes Pty Limited [2000] NSWSC 558.)

The supporting affidavit should state the grounds for making the application, rather than simply asserting that the debt is not due. If the affidavit is insufficient, it cannot be supplemented by a further affidavit served outside the 21 day period. (See Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] 70 FCR 452.)

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 minimum ( section 459H)
  • there is a defect in the demand that would cause substantial injustice if the demand is not set aside (section 459J)
  • there is some other reason why the demand should be set aside (section 459J)

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 misstatement. (See Beta Trading Co Pty Limited v Specialised Laminators [1997] 15 ACLC 270.)

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 injustice. (See Besser Industries (NT) Pty Limited v Steelcon Constructions Pty Limited [1995] 13 ACLC 544.)

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 section. (See Chippendale Printing Co Pty Limited v Deputy Commissioner of Taxation [1995] FCA 1426.)

A demand containing grossly inflated amounts might be considered to be "some other reason". (See First State Computing Pty Limited v Kyling [1995] 13 ACLC 939.)

Statutory demands set aside if indebtedness genuinely disputed

A demand will be set aside where there is a genuine dispute regarding the debt claimed.

In Goldspar Australia Pty Limited v KWA Design Group Pty Limited [1998] NSWSC 502, Austin J of the Supreme Court of NSW 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, there is absolutely no opportunity to contest the demand unless there is a valid application filed and served to set the demand aside. (See David Grant & Co Pty Limited v Westpac Banking Corporation [1995] HCA 43.)

In those circumstances, if the demand is pressed, the only way of dealing with the demand is to pay the disputed debt (assuming there are resources available), reserve the company's rights and sue for the money back.

A creditor using a demand as a quick means of a debt recovery can likewise run into difficulty. 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. Thus a creditor on a contested statutory demand can often incur a costs order.

Consider your position and avoid insolvent trading

There is one further point that ought to be mentioned. If a demand is received by a company and the company is in financial difficulty, then it may be a trigger for that company's directors to consider again their position as directors of the company.

Directors of companies that are trading entities, where those companies are insolvent, leave themselves open to insolvent trading claims. Consequently, if a company is unable to pay its debts as they fall due and receives a statutory demand, it is probably time to reconsider 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 whether the debts can be paid as and when they become due and payable.

Peter Harkin
Restructuring and insolvency
CBP Lawyers

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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