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Risks of issuing a creditor’s statutory demand

If you have money owed to you by a company (not an individual), issuing a creditor’s statutory demand can be a quick means of debt recovery. By serving a statutory demand, the debtor company has 21 days to either pay the debt, come to a satisfactory arrangement with the creditor, or make an application to set aside the statutory demand. If the debtor company fails to do so within the prescribed time, it is presumed to be insolvent. Once there is a presumption of insolvency, it is 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, creditors should not use a statutory demand to try to force payment of debts that they know to be genuinely disputed.

The recent decision of Core Toughend Pty Ltd v Lisec Australia Pty Ltd [2015] VSC 534 is an illustration of this point.

Lisec Australia Pty Ltd (Creditor) sold glassmaking equipment to Saremach Pty Ltd (Saremach). Saremach, in turn, rented the equipment to Core Toughened Pty Ltd (Company). Over a period of 4 months, the Creditor attended the Company’s business premises which it shared with Saremach. The attendances were to deal with various issues arising with respect to the equipment sold. After the Company failed to pay, the Creditor issued a statutory demand. The Company applied to the Supreme Court of Victoria to set aside the statutory demand on the basis that it had an offsetting claim which exceeds the amount demanded. The Company submitted that the offsetting claim demonstrates at least a plausible contention requiring investigation. The offsetting claim should be determined on a contested factual evidence (including expert evidence as to the condition and functionality of the equipment). The Company also produced email correspondence between the parties which extensively documented the Company expressing dissatisfaction with the machine and raising issues with respect to performance. On that basis, the Company asserted that it had an offsetting claim and the statutory demand should be set aside with costs. The Court agreed with the Company. Importantly, Randall AsJ highlighted, at paragraph [47] of his judgment, that the various tests require me to identify whether there is a genuine dispute without resolving the same. Further, the dispute or off-setting claim should, as has been recognised, have some objective existence. That is, as the Full Federal Court has held, the dispute or off-setting claim must be ‘bona fide and truly exist in fact’, with ‘real and not spurious, hypothetical, illusory or misconceived’ grounds for claiming its existence.

The decision is one of many examples where a party has been punished with an adverse costs order for inappropriately using a statutory demand where a clear genuine dispute existed. The Court is not interested in the merits of the dispute. All it needs to determine before it sets aside a statutory demand is that there is a serious question to be tried. This sets a very low threshold.

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.

If a genuine dispute exists, the safer course is to commence Court proceedings rather than issuing a statutory demand in an attempt to recover a debt.