The statutory demand process is one of many ways a company can be wound up. A creditor usually kicks off the ordeal by issuing a statutory demand on the debtor for a debt(s) that exceeds $2,000.
If the debtor fails to comply with the statutory demand, the creditor may seek an order from the Court that the debtor is insolvent and should be wound up.
A debtor may apply to the Court for an order setting aside the creditor’s statutory demand on a number of bases. Section 459H of the Corporations Act 2001 (Cth)(‘CA’), for instance, gives the Court power to set aside the statutory demand if it is satisfied that there is a genuine dispute between the creditor and the debtor or if the debtor has an offsetting claim against the creditor. A debtor may alternatively invoke section 459J CA and argue that the Court should set aside the statutory demand if satisfied that, by virtue of a defect in the statutory demand, substantial injustice will be caused unless it is set aside.
The latter of these two potential avenues to set aside a statutory demand is the more controversial. The first matter a debtor’s legal representative should consider is what the expression ‘defect’ means. Section 9 CA provides that a ‘defect’, in relation to a statutory demand, includes an irregularity, misstatement of an amount or total, misdescription of a debt or other or misdescription of a person or entity. In Topfelt Pty Ltd v State Bank of New South Wales (1994) 120 ALR 155 at , Lockhart J indicated that the phrase ‘defect’ may be considered:
‘According to its ordinary usage…a defect means a lack or absence of something necessary or essential for completeness, a shortcoming or deficiency, an imperfection’.
The Second Reading Speech by the Attorney-General made the following crucial point:
‘Companies will no longer be able to resist statutory demands on purely technical grounds such as a minor misstatement of the quantity of the debt. Demands will be able to be set aside only where injustice would otherwise be caused’.
The key phrase from the afore noted passage is ‘injustice’. A debtor must show that the defect is not merely ‘trivial’ but one that will cause an oppressive, prejudicial or unfair outcome. The simplest defects giving rise to substantial injustice are those likely to confuse a debtor or make it uncertain as to how to comply with the statutory demand i.e. failing to properly breakdown the debt into principal and interest. An interesting consideration is whether a defect in the creditor’s supporting affidavit could amount to substantial injustice. One may argue that the affidavit forms part of the statutory demand so the only thing that needs to be proved is whether substantial injustice occurs. Others have argued that, even if the affidavit is not considered part of the statutory demand, it could amount to ‘some other reason’ for setting aside the statutory demand. In Standard Commodities Pty Ltd v Society Socinter Department Centragel  NSWSC 294 Barrett J took the approach outlined by McLelland in B & M Quality Constructions Pty Ltd v Buyrite Steel Supplies Pty Ltd (1994) 13 ACLC 88 who provided that:
'It is important in this regard to bear in mind that the relevant matters include not only a belief as to the existence and amount of the debt, but also a belief as to the absence of any genuine dispute about the existence or amount of the debt. The express requirement in the rule that the person making the affidavit depose to his or her belief that there is no genuine dispute is a significant mechanism for filtering out cases where there is in fact such a dispute, so as to prevent such cases from reaching the court on such an application as the present, with a consequent waste of time and resources. This mechanism would be substantially weakened unless a person likely to have personal knowledge of the existence of a dispute if there is one makes the affidavit. A statement of a belief that there is no genuine dispute based solely on hearsay is unlikely to have anything like the same degree of reliability. I therefore do not regard what has occurred in the present case as a merely technical breach of the rules'.
McLelland CJ regarded the hearsay nature of the statements in the affidavit as constituting ‘some other reason’ for setting aside the statutory demand under section 459(J)(1)(b) CA.
If you would like to discuss statutory demands and setting them aside, please do not hesitate to contact me by:
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