Setting Aside Statutory Demands Part 1

If a debtor company receives a statutory demand, it has 21 days to file an application (along with a supporting affidavit) with the Court to set aside that statutory demand. The Court may set aside this statutory demand if:

1. There is a genuine dispute with respect to the debt: see section 459H(1)(a) of the Corporations Act 2001 (Cth) (Act);
2. The debtor company has an offsetting claim: see section 459H(1)(b) of the Act;
3. There is a defect in the statutory demand that will cause substantial injustice unless the statutory demand is set aside: see section 459J(1)(a) of the Act; or
4. Another reason applies: see section 459J(1)(b) of the Act.

If the debtor company has filed an application with the Court to set aside the statutory demand, the time for the debtor company to comply with the statutory demand is automatically extended until the Court has decided on the debtor company’s application: see section 459F(2) of the Act. If this application is however dismissed, the debtor company will have until 7 days after the date of the Court’s order to comply with the statutory demand.

This article will be part 1 to the various grounds based on which a debtor company can seek to have a statutory demand set aside.

 

Genuine Dispute

If the debtor company can prove to the Court that there is a genuine dispute as to the existence of the debtor that the creditor seeks under the statutory demand, then this can form grounds for the statutory demand to be set aside pursuant to section 459H(1)(a) of the Act. The standard test for what is meant by “genuine dispute” was laid out in Eyota Pty Ltd v Hanave Pty Limited (1994) 12 ACSR 785 where McLelland CJ stated:

A genuine dispute connotes a plausible contention requiring investigation and raises much the same sort of consideration as the “serious questions to be tried” criterion … It requires that the dispute be bona fide and truly exist in fact … and the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

This ground needs to be supported by evidence which outlines the facts on which the dispute is raised and that this material indicates an arguable case. The Court in Beauty Health Group Limited v Wendy Scholl [2011] NSWSC 77 considered factors such as whether there was a ‘plausible contention requiring investigation’ or a claim of ‘some substance’ that is not ‘plainly vexatious or frivolous’. It was important to note that the debtor company is not requires to establish the merits of any claim, meaning that the threshold for what constitutes a “genuine dispute” is lower than what is required to successfully defend a claim: see Turner Corporation (WA) Pty Ltd v Blackburne & Dixon Pty Ltd [1999] WASC 294 in this regard.

If the debtor company is successful in proving the existence of a genuine dispute and sets aside the statutory demand, the Court may order the creditor to pay the debtor company’s costs in relation to the litigation surrounding the application pursuant to section 459N of the Act.

This article was prepared with the assistance of Neil Bookseller.

 

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