Til Debt Do Us Part: The effec­tive use and pit­falls of statu­to­ry demands

Intro­duc­tion

A cred­i­tor who is claim­ing a debt from a com­pa­ny will often want to employ the quick­est and cheap­est method of recov­ery and the risks, costs and length of time asso­ci­at­ed with com­menc­ing court pro­ceed­ings may not be the most appeal­ing option. 

Accord­ing­ly, many cred­i­tors will often con­sid­er issu­ing a com­pa­ny with a statu­to­ry demand under sec­tion 459E of the Cor­po­ra­tions Act 2001 (Cth), which requires a debtor com­pa­ny to pay a debt it owes with­in 21 days. If the debtor com­pa­ny fails to pay the debt, come to a suit­able arrange­ment with the cred­i­tor, or make an appli­ca­tion to set aside the statu­to­ry demand with­in that time peri­od, the com­pa­ny is pre­sumed to be insol­vent. Once there is a pre­sump­tion of insol­ven­cy, it is then open to the cred­i­tor to com­mence pro­ceed­ings to wind up the debtor com­pa­ny and have a liq­uida­tor appointed. 

Prop­er­ly used, a statu­to­ry demand can be both a fast and effec­tive way to recov­er a debt from a cor­po­ra­tion. How­ev­er, they are often mis­used by par­ties, par­tic­u­lar­ly where there is a gen­uine dis­pute as to the exis­tence of the debt claimed. 

The recent deci­sion of In the mat­ter of Bas­tow Civ­il Con­struc­tions Pty Ltd [2017] NSWSC 934 is an illus­tra­tion of this point. 

The facts

Optus had engaged Bas­tow Civ­il Con­struc­tions Pty Ltd (Bas­tow) to per­form cer­tain civ­il con­struc­tion works. Bas­tow engaged Net­worx Con­struc­tion Pty Lim­it­ed (Net­worx) as a sub­con­trac­tor to under­take works involv­ing drilling and back­fill­ing trench­es and installing con­duit. Dur­ing the course of the works, a num­ber of drill rods broke off Networx’s drilling equip­ment and were left in the ground.

Net­worx then issued a statu­to­ry demand against Bas­tow for amounts it claimed were owed to it in respect of the build­ing work it performed. 

Bas­tow applied to the Supreme Court of New South Wales to set the statu­to­ry demand aside on the basis that there was a gen­uine dis­pute in respect of the amount being claimed in the statu­to­ry demand and for oth­er reasons. 

Bas­tow con­tend­ed that the con­duct of the works (in a man­ner that left such drill rods in the ground) did not con­sti­tute the prop­er pro­vi­sion of the ser­vices. On that basis, Bas­tow assert­ed that a gen­uine dis­pute exist­ed and the statu­to­ry demand should be set aside with costs.

Deci­sion

The Court agreed with Bas­tow. Impor­tant­ly, Black J high­light­ed the dif­fi­cul­ties that arise when claims that are in fact gen­uine­ly dis­put­ed are brought by way of statu­to­ry demand and, at para­graph [3] of his judg­ment, the impor­tance of par­ties under­stand­ing the Court’s focus in deter­min­ing whether there is a gen­uine dispute:

“…from time to time, the bases on which statu­to­ry demands are resist­ed have a degree of tech­ni­cal­i­ty about them, and may not appear to have sub­stan­tial com­mer­cial mer­it. How­ev­er, it is fun­da­men­tal to the Court’s juris­dic­tion in deal­ing with cred­i­tor’s statu­to­ry demands that it does not deter­mine their under­ly­ing com­mer­cial mer­it, but instead deter­mines, with­in a sum­ma­ry and inter­locu­to­ry pro­ce­dure, whether there is a gen­uine dis­pute about the rel­e­vant debt, or whether there is a gen­uine off­set­ting claim, or some oth­er rea­son to set aside the cred­i­tor’s statu­to­ry demand.”

Con­clu­sion

This deci­sion is one of many exam­ples where a par­ty has been pun­ished with an adverse costs order for inap­pro­pri­ate­ly issu­ing a statu­to­ry demand where a clear gen­uine dis­pute existed.

In sum­ma­ry, it is impor­tant that cred­i­tors of com­pa­nies obtain sound legal advice and choose an appro­pri­ate way to resolve dis­putes, par­tic­u­lar­ly those which may involve the Court hav­ing to decide ques­tions of fact and the mean­ing and effect of con­tracts and the cred­it of witnesses. 

If a gen­uine dis­pute exists, you will need to look at com­menc­ing Court pro­ceed­ings rather than issu­ing a statu­to­ry demand in an attempt to recov­er the debt in question.