What are the grounds to set-aside a statutory demand?

Summary

Pursuant to section 459G of the Corporations Act 2001 (Cth) a company may apply to have a statutory demand set aside within 21 days of its service. The application must be supported by an affidavit filed with the Court and served on the other party. Under the Corporations Act 2001 (Cth) there are 4 grounds that can be relied upon in an application to set-aside a statutory demand:

1. Genuine dispute about the debt;
2. Company has an offsetting claim;
3. Defect in the demand and substantial injustice caused if not set-aside; or
4. Some “other reason” why the demand should be set-aside.

What are the grounds to set aside a statutory demand?

Pursuant to section 459G of the Corporations Act 2001 (Cth) a company may apply to the Federal Court of Australia or the Federal Circuit Court of Australia have a statutory demand set-aside within 21 days of its service. The application must be supported by an affidavit filed with the Court and served on the other party.

The evidence that is to be included in the affidavit must at least meet the threshold of the test of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) FCA 822. The evidence must “promote[s] the company’s case” and “further or assist the company’s cause”. This means that there must be enough evidence to promote a prima facie claim that one of the 4 grounds upon which a statutory demand can be set-aside can be substantiated. The affidavit must disclose the facts that give rise to one of the 4 grounds and be more than a “mere assertion” or “bare claim”.

Four grounds of having a statutory demand set-aside:

1. Genuine dispute about the debt (section 459H (1)(a))
   
   A statutory demand can be set aside on the basis that there is a genuine dispute regarding the debt that has been demanded. This is the most common ground relied upon by companies to set-aside a statutory demand.
   
   In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 McLelland CJ held that the test to determine whether a genuine dispute existed was analogous to the test of a “serious question to be tried” that needs to be satisfied in applications for interlocutory injunctions or the extension of caveats. The threshold for this type of test is low and only in obviously poor cases will the Court embark on an inquiry as to the validity and admissibility of evidence.
   
   In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, Northrop, Merkel and Goldberg JJ stated that a “genuine” dispute requires that:
   
   • The dispute be bond fide and truly exists in fact; and
   • The grounds for alleging the existence of a dispute are real and not spurious, hypothetical or misconceived.

     The core policy behind section 459H (1)(a) is that companies should not be required to comply with a statutory demand (i.e. pay the debt) if they have a bona fide reason disputing an alleged debt that is owed (see Moutere v Deputy Commissioner of Taxation (2000) NSWSC 379, [54]). For this reason, it is more robust to issue statutory demands on the basis of a judgment debt rather than any other type of claim because it can’t be set-aside on this ground.

2. Company has an offsetting claim (section 459H (1)(b))
   
   Pursuant to section 459H (5) an “offsetting claim” means a genuine claim that that the company has against the creditor by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same circumstances as a debt to which the demand relates).
   The Court in Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2013) NSWCA 344, discusses the nature of an offsetting claim and its requirements at paragraphs 30, 36 and 38. These are set out below:
   
   • An offsetting claim must exist and there needs to be a “serious question to be tried” (Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) FCA 618) or “an issue deserving of hearing” (Chase Manhattan Bank Australia v Oscty Pty Ltd (1995) FCA 1208).
   • The evidence needed to prove the above tests “need not conclusively prove the claim or otherwise be incontrovertible” and “does not have to be supported by contemporaneous documentation”. The corollary of this is that some of the rules of evidence (for example the hearsay or opinion rule) may not be applied in the strictest sense.
   • A dispute is not about whether there is debt, it is about whether there is a genuine dispute about whether a debt is owed.

     If it is held that there is a genuine offsetting claim or it is conceded that there is a genuine offsetting claim, if the residual amount falls below the statutory minimum (i.e. $2,000) then the statutory demand will be set-aside.

3. Defect in the demand and substantial injustice caused if not set-aside (section 459J (1)(a))
   
   Pursuant to section 459J (1)(a) a statutory demand can be set aside on the basis that it is defective and that substantial injustice would be caused by it. Critically, a statutory demand can only be set aside if it is both “defective” and “substantial injustice” is caused.
   Section 459E outlines the various requirements of the form of a statutory demand that include that it:
   
   • Must state the amount of the debt;
   • Must be paid within 21 days;
   • Must be in writing;
   • Must be in the prescribed form (Form 509H); and
   • Must be signed only behalf of the creditor.

     Section 9 of the Act states that a defect in a statutory demand includes:

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

     If a debtor company can prove that a statutory demand does not comply with section 459E and/or amounts to a section 9 defect, it will be open to the Court to determine if a substantial injustice will be caused. Courts do not like sloppy statutory demands and set them aside regularly.

     
     

     What amounts to a substantial injustice?

     
     

     A substantial injustice will occur if the effect of the defect in the demand results in the debtor company being unable to properly identify (due to the ambiguity created by the defect) what the statutory demand is in fact demanding. Some instances where the Court has held that substantial injustice has been caused by a defect include:

   • The failure to specify separate debts in the demand (In the matter of Acu Rate Pty Ltd (2017) NSWSC 1845);
   • Misstatement of debt owed (Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) WASCA 196).

     It may be that a statutory demand is defective, however, it has not caused substantial injustice. This may be that the defect was only minor or that the substance of the defect did not mislead the debtor company.

4. Some other reason why the demand should be set aside (section 459J (1)(b))
   
   Under section 459J (1)(b) the Court has the discretion to set-aside a statutory demand (see Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302. The Court has been reluctant to limit the scope of what “some other reason” means, however, it must be interpreted with the legislative intent of Part 5.4 (Winding Up In Insolvency) in mind: see Meehan v Glazier Holdings Pty Ltd (2005) NSWCA 24. Justice Ward in King Furniture Australia Pty Ltd v Higgs (2001) NSWSC 234 stated, when referring to the deliberate harsh operation of the statutory provisions, that when approaching section 459J (1)(b),” the question posed [by that provision] is whether there is some good reason beyond and separate from those which ss 459H and 459J (1)(a) are concerned for setting aside a statutory demand. Section 459J (1)(b) confers a remedial jurisdiction. The Courts overall haven’t used this section very much.

Use of statutory demands to recover debts

The issue of a statutory demand based on debt other than a judgment debt (having being verified by affidavit) for the purposes of debt recovery has not looked upon favourably by the Court. If there is a genuine dispute about the debt and a creditor is on notice of the genuine dispute, the issue of the statutory demand may amount to an abuse of process and therefore likely to be set-aside.

Result of statutory demand being set-aside

If a court decides to set aside a statutory demand the demand will have no further legal effect. A Court may make costs order against the party who issued the statutory demand. “Costs follow the cause” means that a costs order is very likely to be made against the respondent creditor.

Key Takeaway

When issuing a statutory demand, you should make sure your debt claim is solid and preferably based on a judgment debt.