Statutory demands, debt recovery and the PPSA
Owen Hodge Lawyers understands that from time to time, a business will consider using a statutory demand to recover a debt.
There is considerable misunderstanding in the business community as to what they are and how they operate. Frequently people who receive a statutory demand will discuss them with their accountant or even their financial planner but in doing so, they can lose valuable time trying to determine what to do with the statutory demand that has been served on them.
What they are
Under s 459P of the Corporations Act a creditor can apply to the Supreme Court to wind up a company that is insolvent. Section 459C(2) says a company will be presumed to be insolvent if the company has failed to comply with a statutory demand. The application to wind up based on the company’s insolvency must be made within three months of the failure to comply with a statutory demand.
The wind up application has to be determined (i.e finally dealt with by the Court) within six months from when the wind up application began (s 459R).
A statutory demand has to be served in accordance with s 109X of the Corporations Act. Section 160 of the Evidence Act 1995 (NSW) creates a presumption that documents sent by post are received on the fourth business day after posting.
A statutory demand for payment of a debt requires the debt to be paid within 21 days after the demand is served – s 459F(2) of the Corporations Act. In 1995, the High Court held that this period of 21 days cannot be extended (David Grant case (1995) 13 ACLC 1572).
Why would I issue a statutory demand if I have a personal property security?
Good question. You are a secured creditor so why give up that security? Sometimes secured creditors give up their security if they can get a better outcome for themselves as an unsecured creditor. That may happen for example if their security has disappeared or it has become worthless. Ten cents in the dollar as an unsecured creditor under a deed of company arrangement or liquidation is better than 100% of nothing.
But you don’t have to give up your security just to issue a statutory demand: In the Mark Eugene White Case  EWCA Civ 747 [a U.K. decision], the Court said that a creditor was not prevented from serving a statutory demand even where it had security over other property.
Can you challenge the statutory demand?
Yes. To challenge a statutory demand, you have to file an application in the Supreme Court and serve it on the creditor, within 21 days of receiving it.
How can you challenge it?
Section 459H of the Corporations Act says if you have a genuine dispute about the debt or a counter-claim, then you can apply to have the statutory demand set aside (i.e. cancelled) by the Court.
To succeed in having the statutory demand cancelled, you do not have to prove that you would win your claim disputing the debt or your counter claim. You only have to prove that there is a genuine dispute or that there is a counter-claim. The Courts interpret the section to mean that you have to show a “perception of genuineness” beyond “mere bluster or assertion” – Morris Catering Case (1993) 11 ACSR 601.That is quite a low threshold.
Is there anything else you can do?
Yes. Section 459J of the Corporations Act says that if you can show that the demand is technically defective or there is some other good reason why it should be cancelled, then the Court can cancel it.
What does some other good reason mean? In the TS Recoveries Case  NSWSC 1410, the company which received the statutory demand argued that the creditor was motivated by a desire to see the company wound up and was pleased at the prospect that the company might have to cease its business. The company argued that the service of the statutory demand was therefore an abuse of process and that this was some other good reason. This was a nice try, but the Court disagreed and upheld the validity of the statutory demand.
But 21 days is too short!
The Courts have long since recognised the fact that lawyers often have considerably less time than 21 days to prepare applications to set aside statutory demands as clients are not always diligent in bringing these matters to the attention of their advisors.
In the Hansmar Investments case  NSWSC 103, the judge said that at the very least the grounds for applying to set aside a statutory demand must be raised in the affidavit supporting the statutory demand, even if the affidavit is otherwise inadequate to prove it.
And if you miss the deadline?
Generally if you miss the deadline, s 459S of the Corporations Act provides that the only way you can stop your company from being wound up is to prove it is solvent.
Statutory demands issued by the ATO
Can there ever be a genuine dispute about a taxation debt? See the Broadbeach Properties Pty Ltd case  HCA 41. In that case the High Court relied on s14ZZM of the Taxation Administration Act 1953 and concluded that the answer is “no”.
If you can’t genuinely dispute a tax debt, what about s 459J? (which provides, as discussed above, for the defence of some other good reason)? Again, the answer is “no”. The above High Court case held that objections to assessments of tax taken in the Administrative Appeals Tribunal under Part IVC of the Taxation Administration Act 1953 which have been commenced and are well advanced still do not amount to some other good reason.
Examples of what works
In the Rite Flow Case  NSWSC 553 the Court held that the claim did not relate to a specific debt or debts, but to a general claim for damages. The statutory demand was cancelled.
A win for the taxpayer
In the ABW Design Case  FCA 346 the Deputy Commissioner of Taxation (DCT) sought a winding up order and relied on the company’s non-compliance with a statutory demand within 21 days after it was served.
The DCT relied on the address of the registered office of ABW Design as verified by a search of the ASIC records of the company trading by that name.
The evidence of the DCT included the original envelope which enclosed the statutory demand. But the postcode on the envelope was partly obscured. And ABW Design said that it had never been received.
After looking at numerous statutory provisions, the Court concluded that a postcode is part of an address. The Court held that the statutory demand had not been properly addressed and that the statutory demand had not been served as required by the legislation.
So what and who cares?
If you receive a statutory demand or you are thinking of serving one, then get in touch with Owen Hodge Lawyers Debt Recovery Lawyers. We understand them and either way, we can help save your business. We get you there!