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It is common knowledge that there is an increase in insolvencies in the building industry in 2023. [1] Coinciding with this is an increasing in the serving of winding up applications to the courts for orders to “wind up” companies who may be insolvent under the relevant provisions of the Corporations Act 2001 (Cth) (“the Act”). [2]

What is a statutory demand and when is it used?

A statutory demand is “a document that is, or purported to be, a demand”,[3] served by a creditor in order to enforce payment of a debt that is ‘due and payable’ by a company.[4] The amount of the debt owed must be at least the statutory minimum, which is currently (at 5 April 2023) $4,000.[5]

It is not appropriate to proceed with a statutory demand if there is a “genuine dispute” regarding the alleged debt, or any genuine offsetting claims.

The requirements for making a statutory demand

Among other requirements, a statutory demand must be made in the correct format and in accordance with the requirements set out in the Act.[6] The creditor’s statutory demand for payment of debt must be in writing, be in the prescribed form, specify the debt, and the total amount owed by the company.

It must also require the company to pay the total amount of the debt, or to secure or compound (make an arrangement for payment) for the total amount of the debt within the Statutory Period of 21 days (“the Statutory Period”) and must be signed by or on behalf of the creditor.[7]

Further, unless the debt is a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt or the total amount of the debt is due and payable by the company and complies with the relevant provisions of the Act and the relevant court rules.[8]

If a statutory demand is not accompanied by an affidavit or the affidavit does not comply with section 459(3) of the Act, the statutory demand may be set aside.[9]

For instance, if the affidavit verifying the demand is not sworn by a person with the authority of the creditor company, this may give rise to the statutory demand being set aside .

Service

A statutory demand must be served in accordance with the requirements for service. A defect in this serving can give rise to the demand being set aside. A statutory demand is generally served in accordance with section 109X of the Act, which states that:

     “(1)  For the purposes of any law, a document may be served on a company by: 

• leaving it, or mailing it to, the company’s registered office; or

• delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory; or…”

It follows that it is important to conduct an organisational search to ascertain the company and or the director of the company’s current registered address for service.

Service of a statutory demand may be served interstate and authorised by the Service and Execution of Process Act 1992 (Cth).

The reasons for issuing a winding up proceeding are not always genuine. Some use it as a mechanism to catch respondents off-guard in circumstances where the amount owed is disputed.

It follows that contractors across the board (and even developers) have to maintain a constant vigil to ensure that they are alert to being on the receiving end of winding up notice.

If for whatever reason, you have failed to respond to a statutory demand within the statutory period, it may be prudent to contact the relevant court to see if a winding up application has been filed against your company.

What do you do if you receive a winding up notice?

You must act swiftly as the application has to be contested within the 21 days statutory period. There are two options available for the respondent:

1) comply with the demand by paying the debt;

2) apply to the court under section 459G of the Act for an order that the demand be set aside, as follows:

• the application must be made within the statutory period; and
• an affidavit supporting the application must be filed with the court and
• serve a copy of the application and the supporting affidavit on on the creditor within the statutory period.

A failure to comply with a Statutory Demand within the statutory period, will crystallise a presumption of insolvency under the Act. Note that it is a “presumption”- the debt is then deemed due and payable. Amongst other things notification of the application will be published on the Australian Security and Investments Commission’s (“ASIC”) website, which can have an adverse effect of the defendant’s creditor rating.

Setting aside a statutory demand

A statutory demand may be set aside by making an application to a court on the following grounds:

(a) there is a genuine dispute regarding the alleged debt;[10]

(b) the company has an offsetting claim;[11]

(c) the demand is defective and the defect will cause substantial injustice unless the demand is set aside;[12] or

(d) for some other reason, including an abuse of process.[13]

Note: a mere defect may not necessarily give rise to the demand being set aside, the court must be satisfied that unless the demand is set aside, substantial injustice will be caused as a result of that defect in the demand.

What happens if you fail to comply with a statutory demand?

A company is taken to fail to comply with statutory demand if the company fails to apply for an order setting aside the demand within the statutory period. [14]

A presumption of insolvency will then crystallise under the Act and the other side can rely on your failure to comply with the demand to make an application under section 459Q of the Act for the company to be wound up in insolvency.

Once a wind-up application is filed, it is then open to other creditors to join the proceeding in support of the Plaintiff’s winding up application against the debtor’s company.

What to do if you are served with a winding up application

One can still defend the insolvency application but this is a costly and demanding process when compared with the far more straightforward contesting of the statutory demand within the said 21 day statutory period.

If you intend to oppose the application, you must file and serve a notice of appearance in the form prescribed (currently Form 4) stating the grounds on which you oppose the winding up application made against your company.

The common grounds for opposing a winding up application are usually:

• the company is a solvent company [emphasis added]; and
• there is a genuine dispute in respect of the alleged debt.

Under section 459P of the Act, the Court may order that an insolvent company be wound up in insolvency, unless the contrary is otherwise for the purposes of the application.

The defendant will have to file an affidavit (usually by the director of the company) and with respect to filing the affidavit evidence will have to be brought to bear to defeat the presumption of insolvency.

First of all it will have to be established that the company is indeed a going concern, a viable business that displays all of the hallmarks of business sustainability.

Typically, this will require an accountant to verify that the books are in good order and the company has been able to and is able to pay it’s debts as they become due and payable including its common liability, and internal wages. The type of evidence that will be adduced in exhibits that support the affidavit narrative include; but not limited to:

• Financial documents (ATO)
• Bank statements
• Financial returns
• Companies assets and liabilities statement
• Verified accountancy statements, that depose to profitability
• Evidence of ongoing work in progress
• Evidence of lack of problematic indebtedness
• Evidence of prima facie solvency that corroborates the going concern,

In many instances plaintiffs if they are overwhelmed by evidence of the respondent’s insolvency, may elect to withdraw the application. However, one is ill-advised to assume that this will occur as these types of applications are do or die.

If there is no settlement, the matter will be heard in the Supreme Court and if it runs both parties will vigorously contest; the defendant fighting for their solvency and the applicant (having chosen to take the matter to trial) as they likely have significant legal costs which may be visited upon them if the application is successful and the presumption of insolvency defeated.

Conclusion

Winding up applications should be taken incredibly seriously for the obvious reason that if uncontested and undefended, they can culminate in the insolvency of the company. Furthermore, sometimes disingenuous parties serve statutory demands where genuine disputes are on foot but they try and “wrong foot” the respondent by catching them off guard.

As stated above, it is critical to contest a statutory demand within the 21 days and the expiration of the time period should be regarded as somewhat of a guillotine, mindful of the costs and risks that will be sustained on account of tardiness or neglect. So, if one is in the unfortunate position of receiving a statutory demand, it is paramount that one “lawyers up” with the view to defending the viability of a going concern as a matter of upmost urgency. This is a highly technical area and it is critical that lawyers retained have experience and expertise in this specific jurisdiction.

Whether you are on the receiving end of a statutory demand, or a creditor pursuing a debt, Lovegrove & Cotton Lawyers can assist you with preparing the required technical legal instruments such as a statutory demand, winding up applications, and verifying affidavits, as well as with filing and serving the same.

This is a Lovegrove and Cotton publication. Article written by Tsigereda Lovegrove.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact a construction law firm. The experienced team at Lovegrove & Cotton can help property owners and building practitioners resolve any type of building dispute.

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[1] S Danckert, S Johanson, N Sambul, J Gordon and R Clun, “Building industry ‘on the brink’ after two groups collapse in 24 hours” The Sydney Morning Herald, (31 March 2023) < https://www.smh.com.au/business/companies/home-builder-porter-davis-in-trouble-20230330-p5cwvn.html>.

[2] Corporations Act 2001 (Cth) ss 459P and 459A.

[3] S 9  of the act

[4] Ibid s 459E (1).

[5] Regulation 5.4.01AAA of the Corporations Regulations 2021 (Cth)- ($4,000 as of 1 July 2021).

[6] S 9  of the act, s 459E.

[7] Ibid s 459E.

[8] Ibid 459E (3).

[9] Chadmar Enterprises v IGA Distribution Pty Ltd (2005) 53 ACSR 645 [52].

[10] (s459H(1)(a).

[11] (s459H(1)(b)

[12] (s459J(1)(a)

[13] (s459J(1)(b)

[14] 459F