Getting Paid – The importance of properly issuing a creditor’s statutory demand

Two recent cases in NSW illustrates how the failure to comply with legislative requirements when issuing a statutory demand means that you, as a creditor, are highly unlikely to be able to get a winding up order against a debtor company.

In both cases of Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262 (11 August 2014) (Kisimul) and In the matter of Ege Foods Australia Pty Ltd [2014] NSWSC 983 (24 July 2014) (Ege Foods) the creditor’s failure to comply with these requirements meant:

1. the creditor was prevented from relying on the presumption of insolvency that automatically follows from non-compliance with a valid statutory demand; and, consequently
2. the creditor’s application to wind up the debtor company was set aside.

 

Background & Issues

In Kisimul, the creditor had sent two statutory demands to the debtor company. The central issue in the case was that the affidavit accompanying these demands did not include a statement to the effect:

I believe that there is no genuine dispute about the existence or amount of the debt.

The debtor company applied, on three alternative grounds, for the statutory demands to be set aside pursuant to section 459G of the Corporations Act 2001 (Cth):

1. there was a genuine dispute about the existence of amount of the debt (section 459H(1)(a));
2. the company had an offsetting claim (section 459H(1)(b)); and/or
3. there was ‘some other reason why the demand should be set aside’ (section 459J(1)(b)) namely the absence from the affidavit of the creditor’s belief in the lack of genuine dispute about the existence or amount of the debt.

In Ege Foods, the creditor had sent one document titled ‘Creditor’s Statutory Demand for Non Payment of Settlement Cheque for Sale of Business’. The affidavit accompanying this demand did not:

1. verify the debt claimed was due and payable; or
2. include a statement to the effect that the creditor believed there was no genuine dispute.

The debtor company did not make an application under section 459G for the demand to be set aside. As such the Court was required to use its discretion under section 467A to dismiss the winding up application.

Court’s Findings

In both cases, the statutory demand was set aside and, in the absence of a valid statutory demand or other proof of insolvency, the creditors were prevented from proceeding with winding up the debtor companies.

In Kisimul the Court held the failure to include a statement to the effect that there was no genuine dispute about the debt constituted ‘some other reason why the demand should be set aside’.

In Ege Foods, the Court held that a statutory demand that did not comply with section 459E(3) could not take effect for the purposes of section 459F. The Court further observed, in line with Kisimul, that the debtor may have been able to rely upon the creditor’s failure to comply with section 459E(3) to set aside the demand under section 459G.