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01 Dec 2007

Statutory Demands and Debts


5 min

One of the more active areas of debt collection is the challenging of statutory demands issued by creditors on debtor companies. Having a statutory demand expire is taken as deemed insolvency and is used as the basis for most winding up applications. Debtor companies have real hurdles trying to convince a court that they are not insolvent when a statutory demand has expired. For this reason it is not uncommon for debtor companies to challenge these demands on a variety of grounds.

Section 459E allows a creditor to issue a statutory demand to a debtor company for a debt(s) that is due and payable. This demand requires the company to pay the amount within 21 days.

A number of the challenges to statutory demands relate to their form and detail. Needless to say - if the demand is not in the correct form and does not sufficiently detail the debt it is probably not valid, and debtor companies challenging demands will look for any inconsistency to exploit.

The debt must be due and payable to form the basis of a statutory demand. This raises one large area of challenges:

(1) is the amount claimed a debt;
(2) is it due and payable; and
(3) is it disputed - is there some basis for an offset or counter claim?

Many statutory demands are challenged on the 'disputed debt' ground. The debtor company will try to convince the court that there is a genuine dispute and therefore the debt is not due and payable. This is very difficult when the debt is based on a Judgment, but many statutory demands are not. They are supported by an affidavit from the creditor.

The genuine dispute can relate to whether there is a quantifiable debt, or whether any debt is due and payable. A case decided earlier this year looked at the question of whether an amount payable from a breach of a contract was a 'debt' capable of basing a statutory demand, or an unliquidated claim for damages and not a debt under that section. [Hansmar Investment Pty Ltd v Perpetual Trustee Company]

That case examined a clause in a contract for the sale of a property. The vendor could not complete and lost their deposit. The property was eventually sold for less than the original contract amount and the claim was for the shortfall against the original contract less the amount of the deposit retained. The claim was made in accordance with the expressed terms of the contract. The contract specifically stated that the seller could claim the deficiency, or recover damages for breach of contract. The seller did the former.

Unliquidated damages by their very nature cannot be due and payable if the amount is yet to be quantified. The debtor company said that the claim was 'damages' under the contract and unliquidated, therefore could not be used to base a statutory demand. The creditor said that the claim was made in accordance with the terms of the contract and readily quantifiable. The Court determined that the claim was made under the terms of the contract, as distinct to a breach of the contract and was a debt.

One lesser litigated area of the section relates to assignment of debts ad whether the right creditor is issuing the demand. Section 459E(4) allows a holder of a debt that has been assigned to them to serve a statutory demand on the debtor. This opens another area of challenges, including:

(1) was the debt properly assigned;
(2) was the debt assignable; and
(3) was proper notice given of the assignment to the debtor?

The Hansmar case explored this issue too. Simplistically the seller of the property under the original contract was the mortgagee. After the original contract failed, the mortgage was assigned to a new mortgagee, who sold the property and issued the statutory demand for the shortfall. Part of the challenge to the statutory demand was that the party that issued the demand was not the correct creditor, as the mortgage was assigned, not the claim or any rights under the original failed contract.

The Court agreed. The debt - which was due and payable and capable to supporting a statutory demand - remained with the original mortgagee, not the party that issued the demand. The court also raised the point that, even if there had been an assignment of that claim, there was no evidence that notice of any assignment had been given to the debtor.

Creditors need to ensure that they:

  • have a quantified debt;
  • that is due and payable;
  • described correctly on the correct form of the demand;
  • that there is no genuine dispute; and
  • if the debt was assigned to them, that it was assigned correctly and that notice of the assignment was given to the debtor;

- amongst all the other technical points involving in issuing statutory demands.

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