Statutory demands in the COVID-19 era

  • On 26 March 2020 the Coronavirus Economic Response Package Omnibus Act 2020 came into effect.
  • Under this legislation, the threshold at which a statutory demand can be issued is increased from $2,000 to $20,000.
  • The legislation extends the time for response to a statutory demand from 21 days to six months.

Recent legislative changes have been made by the federal government in response to the COVID-19 pandemic. Parts of these changes affect the Australian insolvency regimes, including the rules surrounding the issuing of statutory demands by creditors.

This article discusses the recent changes to statutory demands, and provides a timely recap of the important principles relating to statutory demands in Australia.

COVID-19 update

On 24 March 2020 the federal government introduced, and parliament passed, the Coronavirus Economic Response Package Omnibus Bill 2020. The bill received royal assent on 25 March 2020, and came into force as the Coronavirus Economic Response Package Omnibus Act 2020 ( ‘the Act’). The Act provides with respect to statutory demands that:

  • The threshold at which a statutory demand can be issued is increased from $2,000 to $20,0001
  • The statutory period which a company has to respond to a statutory demand after it is served is increased from 21 days to six months.2

The date the Act received royal assent is important, as the Act provides that the legislative changes come into effect only ‘The day after this Act receives the Royal Assent’.3 For example, if a company was served with a statutory demand on or before 25 March 2020, the previous threshold of $2,000 and response time of 21 days will apply.

The Act includes a ‘sunset clause’ by which it will automatically expire on 15 October 2020 if no further action is taken to defer that date.

What is a statutory demand?

A statutory demand is a formal written demand served on a company by a creditor pursuant to section 459E of the Corporations Act 2001 (Corporations Act). Aside from the recent moratorium discussed above, a company has 21 days (now six months) to respond to the statutory demand, otherwise it is presumed to be insolvent4 and the creditor may apply to have that company wound up.5

The possible responses being served a statutory demand include:

  • Paying the debt amount;
  • Making an application to court to set aside the statutory demand on the basis that:
    • the company has a genuine dispute as to the debt6
    • the company has an offsetting claim7
    • there is a defect in the demand which would lead to a substantial injustice unless the demand is set aside8
    • for some other reason.9

Time is most definitely of the essence when dealing with a statutory demand, as the periods are strictly enforced by the court, as discussed in more detail below.

Statutory demands as a debt recovery tool

It is well established that, as a matter of public policy, a statutory demand should not be used as a ‘mere debt collection tool’,10 or as ‘an instrument of debt collection11. Instead a statutory demand should be used as a last resort in a creditors attempt to recover an unpaid debt or debts,12 for example, after a creditor has attempted to recover the debt by other debt recovery means, such as demand notices, letters of final demand, etc.

If a court finds that a statutory demand has been used as a debt recovery tool, the statutory demand is liable to be set-aside. In practical terms, this means a creditor should issue a statutory demand only after genuinely attempting another of other recovery options, which could include issuing proceedings seeking judgment for the debt amount.

Service of a statutory demand

The Corporations Act provides that a statutory demand can be served on a company by13:

  • posting to the debtor company’s Registered Address (as recorded with ASIC)
  • leaving it at the debtor company’s Registered Address’
  • delivering a copy personally on a director of the debtor company who resides in Australia.

If the statutory demand is served by post, thorough records should be kept to evidence the posting, and if possible a delivery receipt, of the demand. For example, photocopies of the envelope as posted, a completed mail out register, and a registered or Express Post delivery receipt.

Previously, courts have ordered that statutory demands be set aside for what some may consider to be minor administrative errors with the envelope containing posted statutory demands. Notable examples include statutory demands that were set aside due to:

  1. A ‘private and confidential’ stamp partially obscuring the postcode and street name on the envelope containing the statutory demand;14 
  1. Writing ‘Pacific Way’ as the street address rather than ‘Pacific Highway.15

Proper service of a statutory demand must be proved at any subsequent winding up proceedings. A prudent creditor may instruct a process server to hand deliver the statutory demand to the debtor company’s registered address, and/or personally service a copy of on a director of the company, and provide an affidavit of service for same.

Important times and periods

If a statutory demand is served by prepaid post, service can generally be considered deemed effective on the fourth working day after the demand was posted.16

The recent legislative changes discussed at the beginning of our article have extended the time for response from 21 days to six months. Previously, courts have found that this period starts the working day after the day service is deemed to have occurred,17 and there appears to be no reason why this doctrine will change for the temporarily extended six-month response period.

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Applying to set aside a statutory demand

It is important to note that when making an application to set aside a statutory demand, the onus of proof for that application lays with the company that was served with the statutory demand. This is the opposite of any application made by the creditor to wind up the debtor company, where the onus of proof in such an application rests with the creditor who served the statutory demand.

Most often, an application to set-aside a statutory demand is made on the basis that there is a ‘genuine dispute as to the debt’. The Corporations Act fails to define a ‘genuine dispute’, but there is an abundance of case law on its meaning and application.

In short, the courts have found that an application to set aside a statutory demand on the basis of a genuine dispute should:

  • Show that a plausible dispute exists that is not merely ‘spurious, hypothetical, illusory, or misconceived’.18
  • Satisfy the court that the genuine dispute:
    • ‘is a serious question to be tried’.19
    • ‘is not plainly vexatious or frivolous’20
    • Must not be ‘so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of a genuine dispute must follow’21
    • Is ‘something more than mere assertion because if that were not so then anyone could merely say it did not owe a debt’22

If a company is successful in an application to set aside a statutory demand, it will generally be awarded costs in its favour. As such, it can be prudent for a creditor to first obtain judgment against the debtor company before it issues a statutory demand. Such a judgment affectively crystallises the debt owing by the debtor company, and makes it more difficult for them to successfully argue that there is a genuine dispute as to the deb in any subsequent statutory demand or winding up proceedings.

Conclusion

A statutory demand is one way for a creditor to start the process by which a debtor company can be ultimately wound up. Directors and company officers should take statutory demand extremely seriously, as:

  • Failure to respond properly to a statutory demand served on a debtor company can lead to the company being wound up or 
  • Failure to correctly issue, serve, and progress a statutory demand by a creditor can lead to the creditors statutory demand being set-aside and substantial costs being ordered against them.

Due to recent legislative changes as detailed earlier, debtor company’s will have a longer time to satisfy statutory demands that usual. The impact of these changes is unknown however one of the outcomes might be creditors look to other ‘tools’ when dealing with a party they believe is likely insolvent.

Notes
  1. Coronavirus Economic Response Package Omnibus Act 2020, s1669
  2. Ibid
  3. Coronavirus Economic Response Package Omnibus Act 2020, ‘2 Commencement’
  4. Corporations Act 2001 (Cth), s459C(2)(a)
  5. Corporations Act 2001 (Cth), s459P
  6. Ibid, s459H(1)(a)
  7. Ibid, s459H(1)(b)
  8. Ibid, s459J(1)(a)
  9. Ibid, s459J(1)(b)
  10. Poonan Pty Ltd v Deputy Commissioner of Taxation [1999] NSWSC 1121; Muller and McIntosh (as joint and several liq of Arafura Equities Pty Ltd (in liq) v Academic Systems Pty Ltd QCA 218.
  11. Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379
  12. Equipped Constructions Pty Ltd v Form Architects Pty Ltd [2006] NSWSC 500
  13. Corporations Act 2001, s109X
  14. Deputy Commissioner of Taxation v ABW Design & Construction Pty Ltd [2012] FCA 346
  15. Mills Oakley (a partnership) v Asset HQ Australia Pty Ltd [2019] VSC 98
  16. Acts Interpretation Act 1901 (Cth), s28A
  17. FVerimark Pty Ltd v Passiontree Velvet Pty Ltd [2019] NSW SC 455
  18. Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681
  19. Scanhill Pty Ltd v Century 21 Australia Pty Ltd [1993] FCA 618
  20. Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37
  21. CGI Information Systems v Apra Consulting Pty Ltd [2003] NSWSC 728
  22. John Holland Construction Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250.

Shane Roberts can be contacted on (07) 3235 0103 or by email at shane.roberts@hwlb.com.au. Sam Marsh can be contacted on (07) 3235 0100 or by email at sam.marsh@hwlb.com.au

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