Statutory Demands Overview and some common pitfalls

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Statutory DemandsOverview and some common
pitfalls
Wade Roper
Law Society of the Northern Territory
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Corporations Acts459E

• (1) A person may serve on a company a demand
  relating to
• (a) a single debt that the company owes to the
  person, that is due and payable and whose
  amount is at least that statutory minimum or
• (b) 2 or more debts that the company owes to
  the person, that are due and payable and whose
  amounts total at least the statutory minimum.
• (2) The demand
• (a) if it relates to a single debt must
  specify the debt and its amount and
• (b) if it relates to 2 or more debts must
  specify the total of the amounts of the debts
• (c) must require the company to pay the amount
  of the debt, or the total amounts of the debts,
  or to secure or compound for that amount or total
  to the creditors reasonable satisfaction,
  within 21 days after the demand is serve on the
  company

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Corporations Acts459E (Cont)

• (d) must be in writing and
• (e) must be in the proscribed form (if any)
• (f) must be signed by or on behalf of the
  creditor.
• (3) Unless the debt, or each of the debts, is a
  judgement debt, the demand must be accompanied by
  an affidavit that
• (a) verifies that the debt, or the total of the
  amounts of the debts, is due and payable by the
  company and
• (b) complies with the rules.
• (4) Assignee may make demand
• (5) Tax Liability demand
• (6)

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Checklist

• 1. Do we have a debt that is due and payable?
• (Bonnyview Pty Ltd v David Deane Associates
  P/L 2007 QSC 223, as to interest see Topfelt v
  State Bank of New South Wales Ltd (1993) 120 ALR
  155).
• 2. Is the demand in the Appropriate Form?
• The appropriate form is currently 509H to the
  Regulations. The notes in that Form constitute
  part of the same and must appear in the Statutory
  Demand. Always check for the latest version of
  the form before issuing any Statutory Demand do
  not rely on precedents.
• 3. Signed by the Creditor?
• Make sure the person who executes the Demand is
  authorised to do so i.e. a proper officer of
  the Company or legal representative.

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Checklist (Cont.)

• 4. The Affidavit The Achilles Heel.
• It is imperative that the Affidavit is sworn on
  the same day as the Demand is issued. Section
  459E(3) requires that the affidavit verify the
  debt is due and owing as claimed in the demand.
  While there is some contention, a number of
  Courts have held that an affidavit sworn before
  the date of the Demand itself cannot possibly
  satisfy this requisite criteria (see Chadmar
  Enterprises P/L v IGA Distribution P/L 92005) 190
  FLR 466, particularly the judgement of Templeman
  J and his discussion of the relevant
  authorities).
• Although the Act specifically provides an
  exemption from this requirement in the case of
  judgment debts, that is only where the exact
  amount of the judgement debt is claimed. (see
  Anderson Formrite P/L v CASC Hire P/L (2005) 147
  FCR 379).
• In the Anderson decision, the Court held that a
  Statutory Demand which claimed less than a
  judgment debt required an affidavit under
  459E(3). The same rationale would apply to any
  Demand for an amount in excess of a judgment debt
  i.e. a Demand which purports to claim the
  judgement debt and interest thereon.
• Again, check your forms for the requisite form
  of the Affidavit. Do not simply assume precedents
  are up to date.

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Checklist (Cont.)

• 5. Form 509H relevantly states in paragraph 6
• (insert the address for service of the
  documents in the State or Territory in which the
  demand is served on the company, being, if
  solicitors are acting for the creditor, the
  address of the solicitors)
• While a failure to comply may not vitiate the
  Demand per se, it can result in a foundation for
  leave to dispute the debt as owing under s459S
  and/or the dismissal of any winding up
  application under s467A- Highfield Woods P/L v
  Bayview Crane Hire P/L (1996) 19 ACSR
• 6. The Statutory Demand must be served in
  accordance with the Corporations Act (s109x).
• To avoid any argument as to the date and time of
  service, the documents should be hand delivered
  to the Registered Office of the debtor and an
  affidavit of service prepared immediately
  thereafter.
• Recommendation If the registered office is in
  another State use a firm of solicitors as agents
  and provide their address for service and have
  them effect service of the Demand.

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The 21 Days

• The time for compliance with a Demand is
• 1. 21 days (s459F(b)) or
• 2. If an application to set aside is made, 7 days
  after the determination of the same if the Demand
  remains on foot or such other time as the Court
  might allow (s459F(a)).
• Where the last day for compliance falls on a
  Saturday, Sunday or Public Holiday the effect of
  section 36 of the Acts Interpretation Act (Cth)
  and s28 of the Interpretation Act (NT) is that
  the application to set aside can be made on the
  next business day.

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Why Issue a Statutory Demand?

• Section 459C provides for a presumption of
  insolvency in the event a party fails to
• (a) comply with a validly issued Statutory
  Demand or
• (b) make application to set aside the same
  within the requisite timeframe (21 days).
• This is a powerful presumption which can be used
  to found winding up proceedings.

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Important Note

• Issuer
• The Presumption is only good for 3 months from
  the effluxion of the 21 day period.
• In other words, you need to finalise any winding
  up proceedings within that three month period or
  you will lose the benefit of the presumption.

• Recipient
• A failure to comply with or make application to
  set aside a Statutory Demand may constitute an
  act of insolvency for the purposes of any
  funding/general agreements your client has in
  place.
• Make sure the terms of your retainer are clear
  and if you are not instructed to give advice on
  these sort of issues, confirm that in writing.

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What to do when faced with a Statutory Demand

• First and foremost, there is absolutely no power
  or discretion given to the Court to extend the 21
  days under 459F other than where an application
  to set aside is already on foot.
• If an application to set aside is not made AND
  served within the 21 days, the presumption arises
  under s 459C. Moreover, the client cannot,
  without leave, raise any argument to the effect
  that the debt claimed is not owing in any
  subsequent winding up proceedings which rely on
  the demand (s459S).

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Setting Aside a Statutory Demand

• S459G sets out the requirements for an
  application to set aside.
• As intimated above, the application must be made
  and served within the requisite 21 days.
• An affidavit accompanying the application must
  also be filed and served (s459G(3)).

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Service

• Serve the Application at the Address provided in
  the Statutory Demand Jin Xin Investments
  Trade Australia P/L v ISC Property P/L (2006) 196
  FLR 350.

• Do not forget SEPA. If you serve interstate
  without a SEPA notice then notwithstanding
  whether the application comes to the attention of
  the other party there will be no effective
  service for the purposes of s459G and the Demand
  will not be set aside Elan Copra Trading P/L v
  JK International P/L (2005) 226 ALR 349 Marlan
  Financial Services P/L v New England Agricultural
  Traders P/L 1999 158 FLR 256 Highfield Woods
  (supra).

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Setting Aside a Statutory Demand (cont.)

• A Statutory Demand may be set aside where
• 1. there is a genuine dispute as to the
  existence or amount of the debt - s459H(a)
• 2. there is an offsetting claim for part or all
  of the debt (if for part only the balance will
  need to be paid in such further time as the
  Court allows under 459F(2)(a))
• 3. there is a defect in the demand which the
  Court is satisfied will cause substantial
  injustice 459J or
• 4. there is some other reason the Demand should
  be set aside.

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Genuine Dispute 459H

• Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR
  785 per McLelland CJ at 787
• It is however necessary to consider the meaning
  of expression a genuine dispute where it occurs
  in section of 459H. In my opinion that expression
  connotes a plausible contention requiring
  investigation, and raises much the same sort of
  considerations as the serious question to be
  tried criterion which arises on an application
  for an interlocutory injunction or for the
  extension or removal of a caveat. This does not
  mean that the court must accept uncritically as
  giving rise to a genuine dispute, every statement
  in an affidavit however equivocal, lacking in
  precision, inconsistent with the undisputed
  contemporary documents or other statements by the
  same deponent, or inherently improbable in
  itself, it may be not having sufficient prima
  facie plausibility to merit further investigation
  as to (its) truth (cf Eng Mee Young v
  Letchumanan (1980) AC 331 at 341) or a patently
  feeble legal argument or an assertion of facts
  unsupported by evidence.

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Genuine Dispute 459H (cont.)

• Solarite Air Conditioning P/L v York
  International Australia P/L 2002 NSWSC 411 per
  Barrett J at 23
• the task faced by a company challenging a
  statutory demand on the genuine dispute ground
  is by no means at all a difficult or demanding
  one. The company will fail in that task only if
  it is found upon hearing of its 459G application
  that the contentions upon which it seeks to rely
  in mounting its challenge are so devoid of
  substance that no further investigation is
  warranted. Once the company shows that even one
  issue has asufficent degree of cogency to be
  arguable, a finding of genuine dispute must
  follow

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Offsetting Claim

• Per Southwood J in Boutique Venues P/L v JACG P/L
  2007 NTSC 5
• 1. The offsetting claim must be arguable on the
  basis of facts asserted with sufficient
  particularity to enable the court to determine
  that the claim is not fanciful Macleay Nominees
  Pty Ltd v Belle Property East Pty Ltd 2001
  NSWSC 743 Cooloola Dairys Pty Ltd v National
  Foods Milk Ltd 2005 1 Qd R 12
• 2. Anyone can make a claim to a right of set off
  against a creditor. What the definition in s 459H
  (5) requires, however, is that it be genuine.
  The same word in s 459H (5) has already elicited
  so many synonyms and shades of meaning that it
  will not help to add more. Its antithesis is to
  be seen in the word artificial. The claim for
  set off against the debt demanded must not have
  been manufactured or got up simply for the
  purpose of defeating the demand against the
  company. It must have an existence that is
  objectively demonstrable independently of the
  exigencies of the demand which evoked it. JJMMR
  Pty Ltd v LG International Corp 2003 QCA 519 at
  par 18 Cooloola Dairys Pty Ltd v National
  Foods Milk Ltd 2005 1 Qd R 12

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Defect Causing Substantial Injustice 459J(1)(a)

• Section 9 of the Corporations Act defines
  defect for this purpose to include
• a. an irregularity
• b. a misstatement of an amount or total
• c. a misdescription of a debt or other matter
• d. a misdescription of a person or entity.
• While it was once the case that minor defects
  would serve, the Act now defines a Statutory
  Demand as including a document which purports to
  be a statutory demand.
• For a consideration of when defects will rise
  sufficiently high enough to justify a set aside,
  see his Honour justice Lockharts decision in
  Topfelt as cited above.

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Some other Reason 459J(1)(b)

• Some Examples
• 1. Issuing a demand for an ulterior purpose
• 2. Failing to state source of knowledge in
  affidavit verifying the same
• 3. Serving 2 statutory demands in relation to
  debts arising from the same matter.

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Winding up

• The presumption under 459C does not mean a
  winding up order automatically follows.
• It is a presumption only and is rebuttable.
• It is always open to the debtor to resist the
  winding up by proving solvency Ace Contractors
  Staff P/L v Westgarth Development P/L 1999
  FCA 728 Aussie Vic Plant Hire P/L v Esanda
  Finance Corp Ltd (2008)232 CLR 314.

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Consideration of when to rely on the Statutory
Demand Process
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Conclusion and Questions