Setting aside statutory demands: A
survival guide
By FARID ASSAF
Establishing the right grounds, presenting a valid argument and complying
with procedural requirements are essential elements in fulfilling a retainer to
have a demand for payment set aside.
Farid Assaf is a barrister in Blackstone Chambers and author of "Statutory
Demands - Law and Practice", published by LexisNexis Butterworths, email
[email protected].
It has probably happened to every solicitor in general practice at least once a corporate client calls, wanting to know what they should do with this thing
called a 'statutory demand'. More often than not, the call is received only a
few days before the period for compliance with the demand expires. Failure to
comply means your client will be presumed to be insolvent, paving the way for
a winding up application. What's worse, you can't extend the time for
compliance with the demand, not even by agreement.1 Recent cases such as
Ocerog Pty Ltd v Pr Finance Group Ltd,2 where Palmer J described the
affidavit in support of an application to set aside a demand as "utterly fail[ing]
to give sufficient particularity" highlights what can go wrong in preparing such
applications under severe time constraints.
The purpose of this article is to provide a brief but practical guide to
practitioners in setting aside a statutory demand, and better equip
practitioners to deal with this nightmare scenario.
Obtaining instructions
The first step of course is to obtain proper instructions. After all, not every
demand will be capable of being set aside. A company served with a statutory
demand has available to it three options if it wishes to avoid the statutory
presumption of insolvency created by s.459C(2) of the Corporations Act
2001.3 The first is to pay the amount demanded or to "secure or compound to
the reasonable satisfaction of the creditor".4 The second is to reach a
compromise with the person making the demand. The third option is to make
an application under s.459G of the Corporations Act to have the demand set
aside. If the decision is made to set aside the statutory demand, a statutory
basis for doing so must be identified (explained in the next section below).
Practitioners should ensure that those instructing them to make any
application to set aside a demand have the proper authority.5
Four grounds for setting aside a statutory demand
There are only four grounds contained in Division 3 of Part 5.4 for setting
aside a statutory demand. The court's power to set aside a statutory demand
under s.459H or s.459J is enlivened if the court is "satisfied" that:
(a) there is a genuine dispute between the company and the person serving
the statutory demand about the existence or amount of a debt to which the
demand relates;6
(b) the company has an offsetting claim;7
(c) because of a defect in the demand, substantial injustice will be caused
unless the demand is set aside;8 or
(d) there is some other reason why the demand should be set aside.9
A company served with a statutory demand may rely upon more than one
ground.10 The court only has the power to set aside a demand that has been
validly served upon a company.11 Where a company disputes the demand that
has been validly served, the proper course is for the company to apply for a
declaration that the purported service was ineffective, or to rely upon
ineffective service as a point in opposition to any winding-up application.12 In
practice, however, it is quite common for applications to set aside a statutory
demand to also deal with the issue of service. Before dealing with the crucial
procedural requirements, I discuss very briefly the above four grounds for
setting aside a statutory demand.
Genuine dispute
By far the most common ground for seeking to have a demand set aside is
the genuine dispute ground. The genuine dispute must relate to the existence
or amount of the debt.13 The company seeking to set aside the demand need
only establish that there is a genuine dispute about the existence or amount of
the debt, as the court's task is simply to determine the genuine level of a
claim, and not the likely result of it14 (this has implications for the affidavit in
support discussed below). In the main case of Eyota Pty Ltd v Hanave Pty
Ltd,15 McLelland CJ in Eq said that the expression "genuine dispute"
"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".16 The threshold for
establishing a genuine dispute is a low one and by no means difficult or
demanding.17 In determining whether there is a genuine dispute, the court
may resolve short points of law or the construction of documents where there
is no conflicting evidence,18 although the occasions in which this will be
possible are likely to be rare. Practitioners should remember that an
application to set aside a statutory demand is not the proper forum for
assessing the credibility of witnesses and, as such, cross-examination will
rarely be allowed.
Offsetting claims
The expression "offsetting claim" is defined in s.459H(5) to mean a genuine
claim the company has, as opposed to will have, against the person serving
the demand by way of counter claim, set off or cross demand (even if it does
not arise out of the same transaction or circumstances as a debt to which the
demand relates).19 The offsetting claim must exist at the date of the hearing of
the application to set aside the statutory demand.20 Crucially, the offsetting
claim must be something sounding in money.21 Unlike a debt that supports a
statutory demand, an offsetting claim is not confined to debts that are due and
payable.22 Accordingly, a claim for unliquidated damages may constitute an
offsetting claim provided the claim is not statute barred or otherwise
prevented from being advanced.
Any offsetting claim sought to be advanced by the debtor company must be
genuine in the sense of being authentic or bona fide.23 As is the case with
genuine dispute cases, the court will not engage in an assessment of the
merits of any offsetting claim or its likely success.24 The threshold for
establishing a genuine offsetting claim is relatively low.25 A company seeking
to establish that it has an offsetting claim need not prove its offsetting claim by
adducing evidence, such as might be advanced at a trial. What is required,
however, is for the company to identify, with appropriate evidence "the
genuine level" of an offsetting claim,26 although much less than full and
complete proof is required to establish genuineness.27 The courts have
adopted a pragmatic approach in evaluating offsetting claims, and the
company seeking to have the demand set aside is not required to
"particularise" its offsetting claim "to the last dollar and cent".28 Quite often a
"broad brush" approach is utilised.29
Defect in the demand
Paragraph 459J(1)(a) allows the court to set aside a statutory demand if it is
satisfied that because of a defect in the demand, substantial injustice will be
caused unless the demand is set aside. Paragraph 459J(1)(b) allows the court
to set aside a demand if it is satisfied there is "some other reason" why the
demand should be set aside. Paragraphs (a) and (b) of s.459J(1) are mutually
exclusive30 - a statutory demand that contains a defect can only be set aside
where the defect causes substantial injustice to the company served with the
demand.31 The word "defect" when used in s.459J is a term of wide import,32
and this is reflected in the inclusive definition of "defect" in s.9.33 In the leading
decision of Topfelt Pty Ltd v State Bank of New South Wales,34 Lockhart J of
the Federal Court observed that the ordinary usage of "defect" means "a lack
or absence of something necessary or essential for completeness; a
shortcoming or deficiency; an imperfection".35
The defect must be "in the demand", that is, the statutory demand itself, and
not to any other document or thing such as the affidavit in support.36 Minor
defects such as the omission of a signature from the demand,37 the omission
of notes from the demand,38 and misdescriptions of persons, entities,
addresses and dates will not usually justify the setting aside of a statutory
demand.39 In order for the court's power to set aside a demand to be
enlivened, the demand must cause "substantial injustice". The substantial
injustice referred to in s.459J(1)(a) "must be an injustice caused to the
company receiving the demand, and it is not to be treated as a punishment on
the person giving the demand for being lax in not complying with the form of
the demand".40 Whether substantial injustice will be caused unless a demand
is set aside must be addressed in a particular context in which the defect
appears,41 and the practical significance of a defect will vary according to
each particular case.42 Generally, a demand that is likely to mislead, confuse
or fail to properly inform a debtor of the substantive requirements of s.459E
will likely cause substantial injustice within the meaning of s.459J(1)(a).
In Main Camp Tea Tree Oil Ltd v Australian Rural Group Ltd,43 for example,
the statutory demand showed two completely different amounts being claimed
by the creditor.44 The main point is that both the statutory demand and
accompanying affidavit put the recipient company on notice in an
unambiguous way of the matters the legislation requires.45 So, for example,
where a demand contains misleading or ambiguous descriptions of the debt
claimed,46 the court will intervene to set the demand aside.
Some other reason
The expression "some other reason" referred to in s.459J(1)(b) refers to a
reason not otherwise indicated by the Corporations Act as a ground for the
setting aside of a statutory demand, namely a defect in the statutory
demand.47 The discretion conferred by s.459J(1)(b) is, not surprisingly, a
discretion of broad compass.48 The "other reasons" contemplated by
s.459J(1)(b) include conduct "that may be described as unconscionable, an
abuse of process, or which give rise to substantial injustice".49 A court will not
act under s.459J(1)(b) unless the decision to do so is supported by "some
sound or positive ground or good reason which is relevant to the purposes for
which the power exists".50 The sound or positive ground, or good reason to set
aside a demand under s.459J(1)(b), must be one that is consistent with
promoting the legislative scheme. The fact that a company may be solvent is
not relevant to setting aside a statutory demand.51 The best way to illustrate is
through the use of examples of courts setting aside a statutory demand for
"some other reason":
• the failure to accompany a statutory demand with an affidavit required by
s.459E(3);52
• failure by the creditor to provide proper evidence of the five substantive
matters referred to in Form 7, for example failing to verify that the debt
is due and payable;53 and
• where the accompanying affidavit is not sworn contemporaneously with the
statutory demand - an accompanying affidavit sworn even a few days
before a statutory demand will be liable to be set aside for "some other
reason".54
Affidavit in support of application to set aside statutory
demand
One of the most common problems in applications to set aside a statutory
demand relates to the affidavit in support of the application. An affidavit in
support of an application to set aside a statutory demand must in some way
support the particular ground relied upon.55 Fortunately, the courts have
recognised the onerous burden placed by s.459G and have tended to adopt a
pragmatic and commercially sensible approach in determining whether an
affidavit in support is sufficient for the purposes of s.459G. At a minimum, any
affidavit in support should provide an evidentiary basis substantiating the
grounds put forward by the company as to why the demand should be set
aside or varied. Identification of the particular grounds in the affidavit need not
be identified by reference to particular provisions of the Corporations Act56
and the court can draw necessary inferences as to what ground is relied
upon. For example, where the ground relied upon is a defect in the demand,
the court can infer that s.459J is being relied upon simply by examining the
demand.57
In genuine dispute cases, the Graywinter58 principle must be strictly followed.
That is, the affidavit must say something that promotes the company's case it must in some way advance, further or assist the company's cause, which is
to have the statutory demands set aside. A bare claim or mere assertion that
the debt is disputed is not sufficient.59 The grounds for setting aside the
demand need not necessarily be expressly raised by the supporting affidavit
and can in fact be raised by necessary inference, or by a reasonably available
inference, provided they are raised.60 The affidavit in support of an application
to set aside a statutory demand should have annexed to it a copy of the
demand or, at the very least, the affidavit should contain evidence of the
existence and content of the demand.61
Filing and serving the application and supporting affidavit
A company seeking to set aside a statutory demand must file an originating
process62 and an affidavit in support. These should be filed together.63 Both
the originating process and the affidavit in support must be filed and served
on the person who served the demand on the company within 21 days after
the demand is served.64 The importance of this cannot be overstated - the 21day time limit for making an application to set aside a statutory demand
cannot be extended.65
Generally, one application should be made for each statutory demand to be
set aside.66 An originating process must be in accordance with Form 2 and
state each section of the Corporations Act under which the proceeding is
brought and also state the relief sought.67 Practitioners should also comply
with Corporations Rule 2.4A(3) by carrying out a search of the records
maintained by the Commission in relation to the applicant company no earlier
than seven days before the originating process is filed, and not later than the
day before the hearing of the application, and either annex it to the affidavit in
support or tender it on the hearing of the application.
It is necessary to serve a "copy" of the application on the person who served
the demand (this is the company serving the demand, not the process server
or other person who actually served the demand).68 "Copy" in this context
means reproduction of the original, that is, an exact copy of the application
and the affidavit in support (including all annexures).69 The copy must show
the following information:
• the proceeding number given to the application by the court;
• the return date for the hearing of the application to set aside; and
• the seal of the court.70
Usually, the address stipulated in the demand will be sufficient. This, however,
is not the case where the creditor is an interstate corporate creditor. The
provisions of the Service and Execution of Process Act 1992 (Cth) (SEPA)
produce an unusual result in cases involving interstate corporate creditors - in
order for interstate service upon a corporate creditor to be effective the
initiating process must be served in accordance with s.9 of SEPA by either
leaving the application at, or by sending it by post to, the registered office of
the creditor or by personal service upon a director resident in Australia. This is
so even though a different interstate address for service has been specified in
the demand.71 I suggest to my clients that they utilise the services of a
process server. For the modest fee involved, it is one way of guaranteeing, or
at least minimising, challenges to service. While in some cases service by fax
or e-mail is possible,72 the potential for things to go wrong is not worth the risk.
ENDNOTES
1. The 21-day time limit imposed by s.459G cannot be extended by agreement
or by the operation of estoppel. See Roach v Bickle (1915) 20 CLR 663
at 671-2. See also MGM Bailey Enterprises Pty Ltd v Austin Australia
Pty Ltd [2002] 20 ACLR 765.
2. [2009] NSWSC 405.
3. All references to the Corporations Act unless otherwise stated.
4. "Compounding a debt" means accepting an arrangement for payment of the
amount of the debt or of a different amount see: Commonwealth Bank
of Australia v Parform Pty Ltd (1995) 13 ACLC 1,309 at 1,311 per
Sundberg J. The securing or compounding of the debt requires "an
existing coming together" by the debtor and creditor by mutual
agreement see: Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd
(1981) 5 ACLR 607, CLC 40-724 per Legoe J.
5. See, for example, Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38,
where the managing director instructing solicitors to commence an
application to set aside a statutory demand did not have the requisite
authority to do so.
6. Section 459H(1)(a).
7. Section 459H(1)(b).
8. Section 459J(1)(a).
9. Section 459J(1)(b).
10.
Midland Imports Pty Ltd v Asia Pacific International Pty Ltd [1999]
NSWSC 12.
11.
Section 459G(1).
12.
Emhill Pty Ltd v Bonsoc Pty Ltd (2004) 50 ACSR 305.
13.
Section 459H(1)(a).
14.
NT Resorts Pty Ltd v DCT (1998) 153 ALR 359.
15.
(1994) 12 ACSR 785.
16.
The full Federal Court took a similar approach in Spencer
Constructions Pty Ltd v G&M Aldridge Pty Ltd (1994) 12 ACSR 785 at
787, holding that a "genuine" dispute requires that the dispute be bona
fide and truly existing fact, and the grounds for alleging the existence of
a dispute are real and not spurious, hypothetical, illusory or
misconceived.
17.
Kirrak Pty Ltd v Compass Scaffolding and Plant Hire Pty Ltd [2007]
NSWSC 1001; Roadships Logisitics Ltd v Tree [2007] NSWSC 1084.
18.
Delnorth Pty Ltd v State Bank of New South Wales (1985) 17 ACSR
379
19.
See Collier Nominees Pty Ltd v Consolidated Constructions Pty Ltd
(unreported, SC(NSW), 3 July 1998, BC9803056) per Santow J.
20.
An offsetting claim which arises after the demand is served, and even
after the proceedings to set it aside are commenced, but before the
hearing, is taken into account, Noroton Holdings Pty Ltd v Sydney Land
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
Corp Ltd [1999] NSWSC 192 per Austin J.
Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd (1995) 17 ACSR
128.
Fleur de Lys Pty Ltd v Jarrett (2004) 51 ACSR 238.
John Shearer Ltd v Gehl Co (1995) 18 ACSR 780.
Edge Technology Pty Ltd v Lite-on Technology Corporation (2000) 34
ACSR 301.
W&P Reedy Pty Ltd v MacAdams Banking Systems Pty Ltd [2007]
NSWSC 146 per Beazley, Santow and Campbell JJA.
Re Morris Catering (Aust) Pty Ltd (1993) 11 ACSR 601.
Pakall Industries (QLD) Pty Ltd v Jadhill Pty Ltd (unreported, CA(QLD),
31 March 1998, BC9801018).
Elm Financial Services Pty Ltd v MacDougal [2004] NSWSC 560.
See for example the approach of Barrett J in Karimbla Construction
Services Pty Ltd v Alliance Group Building Services Pty Ltd [2003]
NSWSC 617.
Kalamunda Meat Wholesalers Pty Ltd v Reg Russell and Sons Pty Ltd
(1994) 13 ACSR 525.
Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 24
ACSR 353.
First Line Distribution Pty Ltd v Paul Whiley (1995) 18 ACSR 185.
Section 9 of the Corporations Act defines defect as including an
irregularity; a misstatement of an amount or total; a misdescription of a
debt or other matter or a misdescription of a person or entity.
(1993) 12 ACSR 381.
(1993) 12 ACSR 381 at 392.
Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35.
For the contrary review see the decision of Santow J in W&F Lechner
Pty Ltd v Drummond and Rosen Pty Ltd (2001) 38 ACSR 42, where his
Honour construed the words "defect in the demand" as comprehending
the affidavit must accompany the demand.
Noy's Works Pty Ltd (formerly Noy's Castings Pty Ltd) v Allcast Pty Ltd
[2005] WASC 185.
See the decision of Hill J in Kalamunda Meat Wholesalers Pty Ltd v
Reg Russel & Sons Pty Ltd (1994) 13 ACSR 525. See also, Willard
King v CT Franchises [2009] NSWSC 97.
See Hornet Aviation Pty Ltd v Ansett International Air Freight (1994) 16
ACSR 21.
Hornet Aviation Pty Ltd v Ansett International Airfreight (1994) 16
ACSR 21 upheld in Hornet Aviation Pty Ltd v Ansett Aust Ltd (1995) 16
ACSR 445.
Condor Asset Management Ltd v Excelsior Eastern Ltd (2005) 56
ACSR 223.
Adams v Lambert (2006) 225 ALR 396. This observation was made by
the High Court in relation to bankruptcy notices but is equally
applicable to the present context.
(2002) 20 ACLC 726.
(2002) 20 ACLC 726.
(2002) 20 ACLC 726.
Main Camp Tea Tree Oil Ltd v Australian Rural Group (2002) 20 ACLC
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
726 where the demand showed three different amounts being claimed,
one amount in the body of the demand and two different amounts in
the schedule.
Saferack Pty Ltd v Marketing Heads Australia Pty Ltd [2007] NSWSC
1143.
Arcade Badge Embroidery Co Pty Ltd v DCT (2005) 157 ACTR 22.
In Arcade Badge Embroidery Co Pty Ltd v DCT (2005) 157 ACTR 22.
Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996)
20 ACSR 746 at 757 per Bryson J.
Master Paving Pty Ltd v Heading Contractors Pty Ltd 15 ACLC 1025
per Lander J.
Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq)
(1994) 14 ACSR 565.
Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996)
20 ACSR 746.
Appellate authority for this proposition is found in the Western
Australian full court decision of Wildtown Holdings Pty Ltd v Rural
Traders Co Ltd (2002)172 FLR 35.
Financial Solutions Australasia Pty Ltd v Predella Pty Ltd (2002) 26
WAR 306.
Scope Data Systems v Bedi O'Nelson Parkhill (2003) 199 ALR 56.
In LSI Australia v LSI Holdings [2007] NSWSC 1406.
So named after Justice Sundberg's decision in Graywinter Properties
Pty Ltd v Gas and Fuel Corp Superannuation Fund (1996) 21 ACSR
581.
Graywinter Properties Pty Ltd v Gas and Fuel Corp Superannuation
Fund (1996) 21 ACSR 581
See the comments of White J in Hansmar Investments Pty Ltd v
Perpetual Trustee Co Ltd [2007] NSWSC 103. This can be done by
examining documents attached to the affidavit as was the case in
Callite Pty Ltd v Adams [2001] NSWSC 52 per Santow J.
Denet Pty Ltd v Global Marketing Group International Pty Ltd (2002) 20
ACLC 301.
Corporations Proceedings Rule 2.2(1).
Austar Finance v Campbell [2007] NSWSC1493 at [31] per Austin J.
It is not sufficient that the application be filed within 21 days and served
outside the 2-day period. See Australian Foods Company Pty Ltd v
O'Donnell [2002] WASC 129
See the High Court's decision in David Grant & Co Pty Limited
(Receiver Appointed) v Westpac Banking Corporation and ors (1995)
184 CLR 265 at 279.
Help Desk Institute Pty Ltd v Adams (1999) 17 ACLC 18.
Corporations Rule 2.2(3).
Players Pty Ltd v Interior Projects and other (1996) 20 ACSR 189 at
193 per Lander J. See also Rosefarms Pty Ltd v Stourhead Pty Ltd
[2000] ACTSC 3 at [24] per Higgins J and Re Marlan Financial
Services Pty Ltd; Marlan Financial Services Pty Ltd v New England
Agricultural Traders Pty Ltd (1999) 33 ACSR 259 at [12] per Byrne J.
See also Millerview Constructions Pty Ltd v Palmer Plumbing Pty Ltd
[2008] QSC 3 at [6] per Wilson J.
69.
70.
71.
72.
Robowash Pty Ltd v Robowash Finance Pty Ltd, unreported, Western
Australian Supreme Court of Appeal, BC200007859 at [27] citing
Gobbo J in Bailey v Hinch [1989] VR 78.
See Chelring Pty Ltd v Coombs [2000] WASC 60 and LJAW
Enterprises Pty Ltd v RJK Enterprises Pty Ltd [2004] QSC 134
(application served was unsealed, contained no return date and no file
number. Application held incompetent).
Marlan Financial Services Pty Ltd v New England Agricultural Traders
Pty Ltd (1999) 33 ACSR 259 at [22] per Byrne J. See also, for
example, Elan Copra Trading Pty Ltd v JK International Pty Ltd (2005)
56 ACSR 416 per Doyle CJ, Perry and White JJ where a demand
served in South Australia specified the address of solicitors in New
South Wales and where the full court of the South Australian Supreme
Court considered it was unlikely that the requirements of SEPA could
be waived: at [38].
See the analysis of Austin J in Austar Finance v Campbell [2007]
NSWSC 1493.