Companies – Creditors Statutory Demands – Genuine Dispute

In terms of Section 459C(2)(a) of the Corporations Act a company is presumed to be insolvent where it fails to comply with a Creditor’s Statutory Demand (“a Demand”) in terms of Section 459(F) of the Act.

A Demand can be served on a debtor company by a creditor if the debt if for an amount of no less than $2,000.00

It is not necessary for a creditor to have obtained a judgment against the debtor.  Accordingly, a creditor who has a claim against a debtor is not obliged to obtain a judgment prior to issuing a Demand on the debtor. However, this must be considered in the light of the decision referred to below.

Where a Demand has been issued, the debtor company has 21 days to either:

  • Pay the debt in full; or
  • Apply to set aside the Demand; or
  • Do nothing with the result that at the end of the 21 days the company will be deemed insolvent and the creditor can proceed with a winding up application.

How Does the Company Set Aside a Statutory Demand?

Generally, the grounds upon which an application is made to set aside the Demand are restricted to a denial of the debt (that is it is denied that the debt claimed is due and payable on the basis that there is a genuine dispute about the debt) or the existence of a set-off claim.

A creditor should take particular care in ensuring that if a Demand is issued the amount claimed from the debtor company is immediately due and payable. There must be no genuine dispute in regard to the indebtedness or no anticipation of a genuine dispute failing which the creditor may be ordered to pay the costs of the application to Court by the debtor company to set aside the Demand.

In a recent case of Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) NSWCA 344 (“Britten”) it was apparent that the court has lowered the standard of evidence required for a Demand to be set aside.

In Britten’s case, the court allowed allegations of conversations between the representatives of the parties to be sufficient to set aside a Demand even where documentary evidence suggested the allegations regarding the conversations may not be accurate.

The debtor claimed that a director of the creditor had made representations regarding the accuracy of its surveillance system;

The debtor claimed the system did not work as represented;

As a result the debtor claimed loss of profits in the amount of $144,000;

The creditor produced a series of communications from the debtor’s director expressing gratitude for the creditor’s support and acknowledgements of the debt owed.

In setting aside the Demand the Court of Appeal followed the approach that the expression “genuine dispute” involves a party raising a plausible contention requiring investigation.

This decision emphasises that creditors must be aware of the risk of an adverse cost order in circumstances where the debtor company can raise the “genuine dispute”. This is so even where the evidence in regard to the dispute is very weak or might not be sufficient at a subsequent trial.

Should you require further information please contact Trevor Rosenthal. The advice provided in this information sheet is general advice only and may not apply to your particular circumstances. You should seek you own independent legal advice and not rely on this general information.