Statutory Demands – A Complete Guide

Statutory Demands – A Complete Guide
Posted on 19 Jul 2022

Refresher on setting aside a statutory demand for a company debt. 

Some temporary but significant breathing room was given to companies who received statutory demands issued under s. 459E of the Corporations Act 2001 (Cth) in the COVID economy, but with those changes now well and truly behind us and the rules regarding compliance with statutory demands back to their pre-COVID strictest, don’t let a lingering lethargy catch you off-guard if you are served.  

 

What is a Statutory Demand?

To recover a debt that is owing by a company, a creditor has the option to issue a statutory demand under s. 459E of the Corporations Act 2001 (Cth) (Act), demanding that the debt be paid within 21 days of service of the statutory demand on the company. 

The debt being demanded must be at least $4,000, and the statutory demand itself must: 

  1. adequately specify the debt and its amount;
  2. be in writing in the prescribed form (which is Form 509H);
  3. require compliance (or payment) within 21 days after the demand is served on the debtor;
  4. be signed by or on behalf of the creditor; and
  5. must be accompanied by an affidavit of the creditor that verifies the debt is due and payable (unless relying on a judgment debt).

Once the company is effectively served, it will have only 21 days from the date of effective service to either:

  1. comply with the demand; or
  2. if the company is of the view that there is some genuine dispute about the debt (be it by virtue of a inadequate or unclear demand, or the debt itself is disputed),  apply to the Court under s459G of the Actfor an order to set aside the Demand.

If the debtor company fails to take at least one of these steps, the company is presumed insolvent, providing grounds upon which the creditor may apply to wind-up the company and for a liquidator to be appointed. It is prudent therefore to be on the front foot as soon as service is effected.   

 

Grounds for setting aside a statutory demand

A company served with a statutory demand can apply under s. 459G of the Act to set aside the statutory demand, and such an application must:

  1. be accompanied by an affidavit in support of the application;
  2. along with that supporting affidavit, be filed and effectively served within 21 days of service of the statutory demand; and
  3. be served on the person who served the statutory demand.

On application, the Court must set aside the statutory demand where the “substantiated amount” is less than the statutory minimum – which is $4,000.

 

What is the substantiated amount?

The “substantiated amount” will be calculated by the Court in accordance with the formula: 

Admitted Total (the amount that the Court is satisfied is not the subject of a genuine dispute), 

minus

Offsetting Total (the amount that the Court is satisfied that the Company has a genuine offsetting claim).

A “genuine dispute” requires that “the dispute be bona fide and truly exist in fact” and that the grounds for alleging the existence of the dispute are “real and not spurious, hypothetical, illusory or misconceived”.  

This is a summary question, so “it is not expected that a Court will embark on any extended inquiry”, and “the Court does not engage in any form of balancing exercise between the strengths of competing contentions”.

The test for a “genuine offsetting claim” is then similar to the above principles regarding a genuine dispute. 

Where the result is that, after deducting the Offsetting Total from the Admitted Total the balance of the debt is still above $4,000, the Court can simply vary the amount of the demand to match that balance to be paid by the debtor company, rather than being required to set it aside if that balance is less than $4,000. 

 

Other reasons that a Court may set aside a statutory demand

The Court also has a discretion, and may decide to set aside the Statutory Demand, where: 

  1. because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or
  2. there is some other reason why the demand should be set aside. 

It is not sufficient that there is a defect alone, that defect must, in the Court’s opinion, cause a substantial injustice to the debtor if the demand is not set aside. 

A “defect” in a statutory demand includes a:

  1. an irregularity;
  2. misstatement of an amount or total;
  3. misdescription of a debt or other matter; and
  4. misdescription of a person or entity.

Some examples of “substantial injustice” as a result of a defect have included:

  1. Gross overstatement of the amount owed;
  2. Failure to set out an identifiable basis on which the amount is owed;
  3. The demand does not otherwise provide enough information to ascertain what the debt relates to; 
  4. The demand including a debt that is not yet due for payment; and 
  5. The demand stating that a 21-day compliance period, at a time when the compliance period had been temporarily extended to 6 months as a result of the COVID-19 pandemic.

It has been accepted that “some other reason” cannot simply be that the Judge considers it subjectively fair to set aside the demand.  The reason must represent some unconscionability or abuse of process on the part of the issuer. For example:

  1. Serving a demand that comprises amounts that the issuer knows to be disputed;
  2. A creditor resorting to both the statutory demand regime and debt recovery proceedings in parallel; 
  3. The supporting affidavit being sworn prior to the date of the demand;
  4. Where the judgment that is the basis of the debt has been set aside; 
  5. Failing to accompany the statutory demand with a supporting affidavit (where the debt is not a judgment debt); and
  6. Failing to verify, in the accompanying affidavit, that the debt is due and payable, or failing to depose to the absence of a genuine dispute as to the debt.

The importance of valid service, within 21 days, of the application to set aside. 

Even if the debtor company can rely on any of the above grounds to set aside the demand, the application will nonetheless fail if it is not filed and served within 21 days of receipt of the statutory demand. 

Formal service on a company is effected in accordance with s. 109X of the Act. Generally speaking, formal service of a document on a company is effected by posting or leaving the document at the registered office recorded with ASIC or by delivering the document personally to the company’s director.  

Informal service of an application to set aside a statutory demand may also be sufficient, though. 

That is where the Court is satisfied that the document, or a copy of it, came into the person’s possession on or before the 21st day despite such service not being in accordance with s. 109X of the Act.  An order can be made by the Court in that case as to the date of effective service, as s. 109X(6) of the Act states that s. 109X does not affect any provision of another law that permits, or the power of a court to authorise, a documents to be served in a different way. 

What remains important to establish informal service though, is that you must be able to prove to the Court’s satisfaction that “the document in fact came to the attention of an officer of the company who was either expressly or implicitly authorised by the company to deal directly and responsively with the document”.

Case studies – failure to serve within 21 days

While there are many various ways in which you can bring a document to the attention of someone in order to prove that they have been informally, yet effectively, served with that document, there are a number of previous judgements which indicate that even administrative or practical errors can result in an application failing.  

Say, for example, that a company had until 21 July to file and serve an application to set aside statutory demand and, upon finalising the application and affidavit on 21 July, an officer of the company:

  1. emailed a copy of the unsealed application and supporting affidavit (i.e. yet to be filed in Court) to the person that served the statutory demand, early in the afternoon of 21 July, to which that recipient acknowledged receipt in an email in response; then
  2. arranged for that application to be filed in the Court, and by the time it received the Court sealed documents and arranged to hand deliver them to the company at level 5 of the building, it was after business hours and the building was locked, so left them at the door of the building at ground level; then
  3. emailed a copy of the sealed documents to same person at 9:00pm on 21 July, but received no confirmation of receipt or response from that person; and then
  4. the following day, on 22 July, hand delivered the sealed documents to the company at Level 5 of the building; 

 on current authority, service will be deemed to be ineffective. 

 

In relation to each of the above attempts at service:

a. in OpensoftAustralia Pty Ltd v Miller Street Pty Ltd [2011] FCA 653, it was held that:

The requirements of s 459G are clear. Section 459G(1) enables an application to be made to a Court to set aside a statutory demand. An application is made to a Court once it has been accepted by that Court. 

An application is made in accordance with s 459G(1) only if within the same 21 days two things occur: namely, an affidavit supporting the application is filed with the Court; and a copy of the application and of the supporting affidavit are served on the person who served the demand on the company. 

On the ordinary meaning of these provisions, it is difficult to see how the application and supporting affidavit can be other than the application as filed and the supporting affidavit as filed.

 

b. in Jin Xin Investment & Trade (Aust) Pty Ltd v ISC Property Pty Ltd [2006] NSWSC 7, where the statutory demand identified the address of the creditor as Suite 103, Level 1, 370 Pitt Street, Sydney, and the documents had been left in the letterbox on the Ground Floor, Barrett J held that this was ineffective service (at [21]):

“Had it been intended that the ground floor letterbox might be used, para 6 of the statutory demand would not have referred to suite 103 or to level 1.”

c. and in Woodgate v Garard Pty Ltd [2010] NSWSC 508, it was held that:

“a party invoking the effective informal service rule bears the onus of proving the time at which the document came to the actual attention of a responsible officer of the company and, in view of the serious consequences which may attend, the Court will not lightly draw inferences or make assumptions as to the time of service."

 

Failure to properly comply with strict statutory timeframes can have significant consequences for companies who are served with statutory demands. 

If you have been served with a statutory demand by a creditor, or if you have served a statutory demand on a debtor, do not delay in contacting us to for advice from our specialist commercial litigation team as to what you can, and should, do next. 

In Other News

Need Legal Advice?

Cronin Miller Litigation is a Gold Coast based law firm specialising in resolving commercial disputes, and providing effective results for persons who have a claim of a commercial nature.

Contact us today