Grounds for setting aside a Statutory Demand: Does your company have any? - JHK Legal Commercial Lawyers

3 May 2022

Grounds for setting aside a Statutory Demand: Does your company have any?

Written by Hayley Tibbie

Firstly, what is a statutory demand?

 A statutory demand is a demand for payment of a debt owed by a creditor to a debtor. Pursuant to section 459C of the Corporations Act 2001 (Cth) (“the Act”), failure of a debtor to make payment of the debt amount specified on the statutory demand within 21 days of being served with the statutory demand will result in a presumption of insolvency of the debtor company and will qualify the creditor with the right to apply to wind up the debtor company. However, in order to do so, the statutory demand must be valid in all respects. In order for a a creditor to issue a valid statutory demand, free from defects, for payment of a debt against a corporation the statutory demand must:

  • be in writing and be in the correct form – being form 509H;
  • correctly identify the debtor company, its registered office and the creditor;
  • correctly identify an address for service of the creditor being within the state in which the debtor company holds its registered office address;
  • require the debtor company to pay, secure, or compound for the debt amount specified on the demand within 21 days;
  • correctly and sufficiently identify and particularise the debts owed by the debtor company; and
  • be signed by the creditor.

Grounds to set aside a Statutory Demand

If a debtor company is seeking to set aside the statutory demand it may have received, it may rely on the following grounds:

  • It has a genuine dispute as to the debt amount claimed on the statutory demand;
  • The debtor company seeks to offset the debt amount claimed on the statutory demand;
  • There is a defect in the statutory demand and a substantial injustice will be caused unless the demand is set aside; or
  • It may seek to rely on some other reason that the demand ought to be set aside.

Genuine Dispute

Section 459H(1)(a) of the Act provides the right of a debtor to apply to set aside a statutory demand on the groundsthat there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates.

The definition of what a “Genuine Dispute” was concluded in the case of  Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 where it was found that: “a “genuine” dispute 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.” Furthermore and more recently, the case ofTR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70 Dodds Streeton JA provided when considering what is a genuine dispute: “The dispute … should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile.”

Essentially, a genuine dispute must be genuine and real, show plausible contention, exist with sufficient factuality with a serious question to be tried and be made in good faith. It will not be considered genuine if it is merely aspurious claim, bluster or assertion, has insufficient factuality or is vexatious and futile.

Offsetting the Claim

Pursuant to section 459H of the Act, in order to offset the claim made on the statutory demand, it must be genuine, and must be a counterclaim, cross-demand or set off.

It should be noted that any cross-demand against the creditor does not have to be an amount claimed arising out of the same transaction subject of the statutory demand. [1]

Furthermore, terms of cross-claim, set- off and cross-demand has been construed in case law over many years and has been considered in the case of  In the Matter of BMG Poseidon Corp Pty Ltd (No 2) [2009] FCA 404, where it was held that “the expression offsetting claim is defined in s 459H(5) … Although the expression may well include an unliquidated claim, that claim must be capable of being quantified as an amount of money.” In addition the right to set-off an amount of a claim must be against the same entity (creditor) who has issued the demand and cannot be against a third party. [2]

The test for offsetting a claim is the same as for a genuine dispute in that the claim must be bona fide and truly exist in fact, being a claim the debtor is entitled to litigate and have a chance of success in bringing.  It must also be able to be quantified. Finally, it must be real and not spurious, hypothetical, illusory or misconceived.[3]

Serious Defect

Section 9 of the Act defines defect in relation to a statutory demand as:

  • an irregularity;
  • a misstatement of an amount or total; and
  • a misdescription of a debt or other matter; and
  • a misdescription of a person or entity.

One of the main defects found in statutory demands is the misstatement of the amount of the debt and failure to state that the debt amount is due and payable. A debtor must be able to sufficiently identify with precision the debt and it being due and payable, or each and every one of the single debts- upon which a statutory demand is based. Failure to do so will provide grounds for a challenge of the statutory demand. [1]

Similarly, a defect in the name of the parties, or the service address of the debtor (or creditor) can amount to a defect in the document providing grounds for the debtor company to set aside the statutory demand. It is important that the creditor’s address for service is an address in the same state in which the debtor shares its registered office address.[2]  Not all errors will give rise to invalidity of the statutory demand, but the court will consider on fair construction of the demand, whether the error is slight and “does not in a substantial way frustrate the statutory provisions relating to this procedure”. [3]

Other errors such as failure to sign an affidavit supporting the statutory demand or a failure to sign the statutory demand itself may also amount to a defect in the statutory demand. If there is a defect in a statutory demand, it may provide grounds for the application to wind up a company to be dismissed.

Some other Reason

Whilst the above three reasons are the main grounds that you can seek to set aside a statutory demand, the Act provides reference to being able to rely on “some other reason” that can give rise to grounds to set aside a statutory demand. [1] In the past, “some other reason” has consisted of: a positive ground, for good reason and not cause a substantial injustice and maintaining legislative intention. The courts power to rely on this section is completely discretionary.[2]

If you have received a statutory demand, and you believe you have grounds to set aside that demand, JHK Legal can assist with providing you with valuable advice as to making such application through the courts.

[1] Section 459G of the Act.

[2] Portrait Express (Sales) P/L v Kodak (Australasia) P/L; Olan Mills Studio v Kodak (Australasia) P/L [1996] NSWSC 199

[1] Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139 

[2] Re Ad-a-Cab Holdings Pty Ltd [1997] 2 Qd R 115 

[3] Re Macro Constructions Pty Ltd [1994] 2 Qd R 31

[1] John Shearer Limited and Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789

[2] Canpoint International Pty Ltd v Anar International Pvt Ltd [2008] FCA 4

[3]  Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91