By Stuart Walter, Partner, Alex Myers, Senior Associate, and Daniel Ashby, Associate

Creditors may serve a statutory demand under Part 5.4B of the Corporations Act 2001 (Cth) (Act) at any time, including shortly prior to or shortly after Christmas. Of course, at that time of year, there are numerous public holidays, plus the common practice of professional service firms (which often act as company registered offices) closing (with some not re-opening until near the middle of January).  The 21-day period to either meet the demand or apply to set it aside does not increase over this period, which may tempt a purported creditor to view the issuance of a demand at this time as creating an ‘advantage’.

However, as the Supreme Court of Victoria’s decision in In the matter of Three Pillars Lynbrook P/L [2022] VSC 540 (Three Pillars) demonstrates:

1. Courts may take a pessimistic view as to the motivations of a creditor that serves a statutory demand shortly prior to Christmas; and
2. The Court may more readily set aside a statutory demand due to a defect (under section 459J(1)(b) of the Act) because substantial injustice results from the substantively shorter timeframe a recipient has to respond – this is particularly so where the defect is a lack of detail in the description of the debt, the basis upon which it is alleged to be owing, and/or how the amount claimed has been calculated.

The Three Pillars decision also highlights the importance of responding to correspondence issued prior to the expiry of the demand in which the recipient identifies an asserted ambiguity in a demand and contends on that basis that the demand is defective. Failing to respond to such correspondence may further strengthen a recipient’s contention that it will suffer substantial injustice due to a defective demand, unless it is set aside, thereby exposing a creditor to a successful challenge to the demand, and an adverse costs order.

Background

Three Pillars Lynbrook Pty Ltd (Company) undertook a subdivision project at Lynbrook, the construction stages of which were finalised in about May 2020. Over the following months, a dispute arose between two groups of Company stakeholders, mostly regarding the financial entitlements of various participants in the development. One group of stakeholders remained appointed as the Company’s directors (Internal Stakeholders), with the other group having resigned shortly after completion of the development (External Stakeholders).

By late 2021, the relationship between the Internal and External stakeholders had significantly deteriorated. On 24 December 2021, four statutory demands (issued on behalf of four different entities alleging to be creditors) were sent to the Company’s registered office (an accounting firm) by express post. One of the four alleged creditors was Three Pillars Development Management Pty Ltd (TPDM), which issued a demand claiming to be owed $165,000 in respect of “‘Manager remuneration payable to the company from the creditor” (TPDM Demand).

On 12 January 2022, the Company’s solicitors sent a letter to TPDM’s solicitors in relation to the TPDM Demand and other demands that had been issued on the same date. The letter contended that the TPDM Demand was defective by reason of asserted ambiguities in the description of the debt, namely that:

1. the TPDM Demand did not identify the legal basis upon which the alleged manager remuneration had been charged (such as by stating the entitlement to remuneration arose pursuant to an agreement, whether identified or not);
2. the calculations that were said to support the quantification of the debt claimed were not clear – the letter observed that there were no details of the time period over which the alleged remuneration was incurred, the identity of the individuals that undertook the work said to give rise to the entitlement to remuneration, or the rates at or basis upon which remuneration was to be charged.

The letter also recorded that the Company’s instructions were that it had not been provided with any agreement between it and TPDM relating to manager remuneration, or any request for payment pursuant to any such agreement, prior to issuance of the TPDM Demand.

TPDM did not respond to the letter, whether within the statutory period for compliance with the demand (which the Court ultimately found ended two days later) or at all. On the last day of that period, the Company filed and served an application under section 459G of the Act seeking orders that the TPDM Demand be set aside (Application).

The Application sought orders that the TPDM Demand be set aside under sections 459J(1)(a) (being due to an alleged defect in the demand), 459J(1)(b) (being that there was some other reason the demand should be set aside) and 459H(1)(b) (on the basis that the Company had an offsetting claim – this ground was ultimately not pursued at the hearing).

The Application and legal principles

Section 459J(1)(a) of the Act empowers the Court to set aside a statutory demand where it is satisfied that, because of a defect in the demand, substantial injustice will be caused unless the demand is set aside. Section 459J(2) in turn provides (in substance) that the Court may only set a demand aside because of a defect if the defect will cause substantial injustice – minor defects that do not cause substantial injustice do not provide a basis for setting a demand aside.

“Defect”, has a wide and inclusive meaning, in light of the definition of that term in section 9 of the Act. A defect may include “an irregularity, a misstatement of an amount or total, a misdescription of a debt or other matter, or a misdescription of a person or entity”.[1] A defect will also be present where a demand is “…so vague or ambiguous such that it fails to identify, to a reasonable person in the shoes of a director of the debtor company, the general nature of the debt to a sufficient degree to enable the director to assess whether there is a genuine dispute as to the existence or amount of the debt or an offsetting claim”.[2]

Finally, a demand and any supporting affidavit must “…put the debtor company on notice in an unambiguous way of the matters the legislation requires, including the nature of the debt, a statement that the debt is due and payable, and an explanation of how the amount claimed is composed or calculated”.[3]

Section 459J(1)(b) provides that the Court may set a demand aside where the Court is satisfied that there is some other reason the demand should be set aside. Grounds for setting aside a demand on this basis include where there is a defect in relation to a demand (but not within the demand itself), such as a defect in the supporting affidavit.

The Court observed that the Application under both limbs of section 459J was “…put on the basis that the [TPDM] Demand and [the supporting affidavit] do not adequately describe the Debt, such as to allow the [Company] to identify whether there is a genuine dispute about the existence or amount of the debt”.

Grounds for challenge to TPDM Demand and Court’s decision in Three Pillars

The Company made two key submissions in support of the Application, which were that:

1. the TPDM Demand and affidavit sworn to verify it (Affidavit) in their terms did not describe the debt in a way that permitted the Company to assess within the statutory period whether a genuine dispute existed – this submission rested on the alleged failure to properly articulate the nature of the debt, its legal basis, or the manner of its quantification; and
2. the Affidavit also lacked an adequate description of the debt, did not comply with the prescribed form for affidavits supporting statutory demands, and further, was not consistent with the TPDM Demand – the Company observed that the Affidavit described the debt as arising in respect of “manager remuneration”, whereas the demand itself stated the debt arose due to “remuneration”.

Based on the first submission, the Company contended there was a defect in the TPDM Demand that would cause substantial injustice unless it was set aside (in reliance upon section 459J(1)(a) of the Act). The second submission was said to constitute some other reason the TPDM Demand should be set aside pursuant to section 459J(1)(b) of the Act, as the Affidavit was said to not properly verify the debt (as section 459E(3)(a) of the Act required) and to not comply with the prescribed form.

The Court held that the TPDM Demand was defective on the grounds the Company had alleged. TPDM sought to rely upon emails (which had been sent to the Company prior to service of the TPDM Demand) and a tax invoice said to particularise the debt to contend that the demand was not defective. However, the Court noted that the TPDM Demand did not refer to that material, such that it could not be considered when determining if the demand was defective due to a lack of detail. Finally, the Court observed that the material had not been provided to the Company’s solicitors during the statutory period, and that TPDM had not responded to the letter the Company’s solicitors sent that contended the demand was defective.

As to whether the ambiguity defect had caused substantial injustice, the Company argued that because of it, it was unable to identify whether there was a genuine dispute about the debt within the 21 day period. The Court accepted this, and held it was appropriate to assess what the Company was practically able to do in relation to the TPDM Demand within the statutory timeframe for making the Application. In arriving at the conclusion that the defect had caused the Company substantial injustice as it had deprived the Company of the ability to identify the existence of a genuine dispute, the Court noted that:

1. the timeframe for the Company to make an application to challenge the TPDM Demand was strict, and was not extended or otherwise altered by the closure of Courts and professional offices during a substantial portion of the relevant period;
2. the time at which the TPDM Demand had been served (on 24 December 2021) and the manner in which this had occurred (by express post to the Company’s registered office, which was ASIC records identified as an accounting firm) were relevant, as the demand was unlikely to have come to anyone’s attention until much of the period had elapsed;
3. a vague demand served shortly prior to Christmas would place a debtor company in an even more difficult position than if such a demand were served at another time, given the reduced timeframe for the recipient to obtain advice on and challenge the demand;
4. the Company’s solicitors had notified TPDM’s solicitors of the asserted defect within the statutory period in correspondence; and
5. TPDM had therefore had an opportunity to address the defect and potentially prevent substantial injustice from arising by supplementing its material in correspondence during the statutory period – however, no substantive response was provided to the Company’s solicitors.

Finally, the Court also held that the description of the debt in the Affidavit was not consistent with the terms of the TPDM Demand, and that the Affidavit did not comply with the prescribed form as it did not state the nature of the debt claimed. On this basis, the Court observed that it would have also been appropriate to set the TPDM Demand aside under section 459J(1)(b), as the issues with the Affidavit provided “some other reason”, for doing so.

The Court made orders that the TPDM Demand be set aside pursuant to sections 459J(1)(a) and (b) of the Act, and ordered TPDM to pay the Company’s costs of the Application.

Conclusion and takeaway points

The key takeaways from the decision include:

• There is no prohibition on creditors invoking the statutory demand procedure shortly prior to or shortly after Christmas, and the time for compliance with a statutory demand does not change, even though Courts (and offices) may be closed.
• However, creditors should take care, as Courts may take a cynical view of a creditor’s motivation for choosing that timing.
• Statutory demands that contain a defect such as an ambiguity or lack of detail are more susceptible to challenge under section 459J(1)(a), as the combination of ambiguity and the timing issues may well result in the defect causing substantial injustice.
• Material relied upon in opposition to an application seeking to set the demand aside is unlikely to cure an ambiguity and avoid substantial injustice, unless it is contemporaneous to the date the demand is issued.
• If a creditor produces contextual material during the statutory period, this may avoid a finding that a defect will cause substantial injustice.
• On the other hand, failing to respond to correspondence that notified the creditor of a defect may result in a company being deprived an opportunity to identify a genuine dispute, causing substantial injustice.
• Overall, statutory demands should not be used as a tactical or mere debt recovery mechanism.

[1] Re MHC Pathology Pty Ltd (2020) 356 FLR 222.

[2] LSI Australia Pty Ltd v LSI Holdings Ltd (2007) 25 ACLC 1602 at [54].

[3] Re Simmoll Pty Ltd [2021] VSC 693 at [29].