This mechanism is a fast-tracked way to wind up a company. It has been around for many years. In this short article, we look at some issues which can defeat the process if not handled the right way.
What is the best way to serve a statutory demand?
Many debtors try to evade or challenge the service of the demand. However, generally speaking, the ingenuity of the novice debtor is usually no match for the seasoned lawyer who has a focus in this area.
The best way to serve is not the cheapest way. The cheapest way is to rely on section 29 of the Acts Interpretation Act 1901 (Cth) which says that service by post is deemed to be effected at the time at which the letter (containing the statutory demand) would be delivered in the ordinary course of post – in the absence of proof to the contrary.
Of course, this leaves it wide open for a delinquent debtor to assert that the statutory demand was never received or was received much later than that provided by the deeming provision in section 29.
To avoid losing control of the process at this point, the best way to serve is by using a fully qualified process server who serves the statutory demand at the registered office of the company – section 109X of the Corporations Act 2001. Make sure your ASIC search of the company’s registered office is made on the day of service!
As a more general comment, the cases also show that any mechanism which brings the document to the attention of the company will be taken to be valid service – see the Howship Holdings Case for example.
Why not serve the demand and sue at the same time?
You want to be paid. Your co-director suggests putting maximum pressure on the debtor. Why not commence proceedings for the debt at the same time as serving the statutory demand? That will give the debtor twice as much to think about, won’t it?
This will not work, however. The Perlake Case confirms that this is an abuse of process and the statutory demand can be set aside.
Can you serve the demand in relation to the loss of profits?
This will not work. The Vimblue Case shows that the debt must be a liquidated one – that is, due and payable – and it cannot be contingent or prospective.
Genuine dispute
The Court does not have to examine the merits or settle the dispute. The court simply has to ascertain whether there is a “genuine dispute” or whether there is a “genuine claim”.
It is often possible to discern the spurious and to identify mere bluster or assertion. But beyond the perception of genuineness or lack of it, the court has no function.
Offsetting claim
The Corporations Act defines an “offsetting claim” as a genuine counterclaim, set – off or cross – demand which the debtor company has against the creditor. Unlike the claim of the creditor in the statutory demand, the offsetting claim of the debtor does not have to be for a liquidated amount – but it does have to be at least a claim which is capable of being quantified as an amount of money.
“Some other reason”?
If the debtor cannot show that there is a genuine dispute about the existence or amount of the debt, or if the debtor cannot show that the debtor has an off-setting claim, then the debtor frequently looks to section 459J of the Corporations Act for help.
That section says that the Court can set aside a statutory demand if there is “some other reason“ why the demand should be set aside.
The reason is good notice but not fair notice
In the Woodgate Case, even though service of the statutory demand had taken place in accordance with legal requirements, the creditor knew that the demand had not actually come to the attention of the company within the 21 day period given to the debtor to challenge the demand and the creditor knew that the company would have disputed the demand if made aware of it within time.
The court said that whilst the service was in accordance with law “some other reason” was made out because service was not “fair notice”.
The reason is that the company is solvent
As a matter of public policy, even if there is non-compliance with a statutory demand, the courts will not wind up the debtor company in subsequent wind-up proceedings if the debtor company is solvent.
But will the solvency of a company of and in itself constitute “some other reason” to set aside a statutory demand?
The first decision on this point was in 1996 in the Chippendale Printing Case. It has been followed ever since. The case clarifies that the answer to the question is “no”.
Where, however, a statutory demand is served on a company which is obviously solvent, then the court will take this fact into account in determining whether the issue of the statutory demand is an abuse of process.
In the Paper Links Case, a creditor served a statutory demand on a publicly listed company which had a book value of over $4 billion.
The court said that the statutory demand served on the company was bound to fail not because the money owing had been paid but because the company was clearly solvent. The court said that where winding-up proceedings have been threatened in such circumstances, the company could seek appropriate relief such as an injunction to prevent the winding up an application from being filed.
The reason is that the affidavit in support of the demand is defective
This will work and it is a good reason to use a lawyer when preparing the documents. In the Kezame Case, the affidavit verifying the demand had failed to comply with the Court rules in at least five respects and the statutory demand was accordingly set aside.
But money is due from a third party!
Many creditors endeavour to rely on the “some other reason” exception by showing that there is a possibility that funds may become available to the debtor company to pay the debt the subject of a statutory demand.
In the Carlamax Properties Case, the debtor company argued that it had claims against third parties that when realised, would provide the funds to pay the amount claimed.
The court said that this was not “some other reason”. It said that the reason must be relevant to the purposes for which the power exists. It said the reason must be a good reason as to why a presumption of insolvency should not arise from non-compliance with the statutory demand. The court continued its explanation by stating that the possibility of funds becoming available to pay the debt the subject of the statutory demand provided no reason why the presumption of insolvency should not arise from non-compliance with the demand.
The final nail in the coffin was this statement by the Court: “The possible receipt of money in the future does not mean that the company is now able to pay all its debts that are due and payable”. In other words, it does not mean that the company is solvent.
Where to from here?
A lot can go wrong when issuing statutory demands. Contact Leigh Adams for more details on 1800 770 780. He is a member of ARITA and can help make yours work.