Company fails to set aside creditor’s statutory demand for payment of debt when application filed late

Key Points:

  • Winding up activity is expected to increase throughout 2021 and Hicksons has issued a number of bulletins on insolvency related matters recently.​
  • The first step in winding up applications is often issuing a creditor’s statutory demand for payment of debt. The majority of these demands will be served on the debtor’s registered address, but it is a mistake to assume that this is the only method of service.
  • A recent decision by the Federal Court of Australia highlights this and also the dire consequences of miscalculating the date of service and when the 21 day period for compliance with the demand expires.

During 2020, the Commonwealth Government introduced restrictions on the issuing of creditor’s statutory demands for payment of debt to debtor companies, increasing the threshold for debts from $2,000 to $20,000 and the time for compliance from 21 days to 6 months.

Not surprisingly, this had a significant impact on the volume of demands being issued and the number of winding up applications made.

Now that those restrictions have been lifted, it is expected that there will be an increase in creditor’s statutory demands throughout 2021 as creditors (who may themselves be desperate for funds) seek to recover debts owed to them.

Where a statutory demand is issued, the recipient only has 21 days from the date of service to pay the amount in the demand, reach an agreement with the creditor, on file and serve an application to set the demand aside. Failure to do so will mean that the debtor is presumed to be insolvent and can be wound up.

As such, it is essential that all debtors are familiar with the statutory demand process and the strict timeframes that apply. This includes the various methods that a statutory demand can be served.

Recently, the Federal Court of Australia had cause to consider how a statutory demand can be served and whether this meant an application to set aside the demand was filed and served out of time.

In Kookaburra Educational Resources Pty Ltd v MacGear Limited Partnership trading as MacGear Australia [2021] FCA 797, MacGear Australia (the Creditor) issued a statutory demand in the amount of $1,040,895.95 to Kookaburra Educational Resources Pty Ltd (the Debtor) dated 19 February 2021.

Service of the Demand

The chronology of service of the statutory demand is as follows:

  • On 19 February 2021 at approximately 4:40pm, the solicitors for the Creditor sent the demand and covering letter by both express and registered post to the Debtor’s registered address.
  • On 22 February 2021, the solicitors for the Creditor sent an email to the solicitors for the Debtor, advising that the demand had been sent to the Debtor’s registered address on 19 February 2021. Importantly, this email also attached a copy of the statutory demand.
  • The express post delivery was redirected to a post office box and delivered on 23 February 2021.
  • The registered post delivery was delivered on 26 February 2021.

Subsequent correspondence between the solicitor for the Debtor and its accountant confirmed that the two deliveries were in fact received and the accountant also provided copies to directors of the Debtor on those days.

On 17 March 2021, the Debtor filed an application to have the demand set aside, which was then served on the solicitors for the Creditor on 18 March 2021.

The Debtor applied to have the statutory demand set aside on the basis that there was a genuine dispute as to the debt and the demand itself was defective. However, at Hearing, the only issues before the Court were:

(a)  Whether the application was filed and served within time; and
(b)  Whether the demand itself was null and void.

When was the demand "served"?

The Creditor argued that the demand was served on the Debtor on 23 February 2021, as evidenced by the Australia Post tracking of the express post delivery and the emails between the Debtor’s solicitor and accountant. On that basis, the last date for the filing and service for any application to set the demand aside ought to have been filed by 16 March 2021.

The Debtor put forward a number of arguments that the application was not made out of time including:

(a)  The demand was not served in accordance with the Service and Execution of Process Act 1992 (SEPA);
(b)  There was no effective service on the registered office of the Debtor given that a mail redirection was in place;
(c)  The proper date of service (if any) was 26 February 2021, being the date on which the registered post delivery was received by the Debtor’s accountants; and
(d)  The further service of the demand on 26 February 2021 had the effect of withdrawing any service of the demand by express post on 23 February 2021.

The Court rejected all of these arguments and found that:

  • SEPA does not apply to statutory demands as a demand is not a court “process”;
  • The question of service is not necessarily when the document is received physically at the registered address of the debtor company in accordance with section 109X Corporations Act 2001;
  • Rather, section 109X is facultative and not proscriptive and whether there has been good service of a document is determined by whether the document in fact came to the attention of a responsible officer of the company;
  • In this case, the emails between the solicitor and accountant for the Debtor established that the demand was brought to the attention of at least one of the directors of the Debtor on 23 February 2021;
  • There was no principled basis to conclude that the first served demand could effectively be treated as withdrawn; and
  • On that basis, the proper date of service of the demand was 23 February 2021 and the Debtor’s application was therefore filed and served out of time.

The Debtor’s application was therefore dismissed, with the issue of costs reserved.

Lessons

It is a mistake to assume that documents can only be served on companies strictly in accordance with section 109X Corporations Act 2001. Although a creditor can rely on that section (and other facultative sections of the Evidence Act 1995 and the Acts Interpretation Act 1901) to establish deemed service it is not essential.

Service can also be established as a matter of fact based on the date on which the document came to the attention of a responsible officer.

In this case, confirmation from the Debtor’s accountant that the documents were received on 23 February 2021 and forwarded to a director on that same day was sufficient evidence for the Court to conclude that that was the proper date of service.

For debtors, this case highlights how vital it is to properly calculate the strict 21 day timeframe from the date of service of a statutory demand to file and serve an application to set the demand aside. It also highlights how important it is to properly consider the issue of service.

For creditors, this case demonstrates that although the service provisions under the Corporations Act 2001 can be relied on, evidence of when a document came to the attention of a proper person of the debtor will be of significant assistance in determining the proper date of service.

In this particular instance, the issue of the proper date for service may have been avoided for the relatively minimal cost of a process server delivering the documents directly to the registered address and providing an affidavit of service.

Hicksons’ insolvency team are experts in their field and recognised in Best Lawyers Australia. We can assist creditors, debtors and insolvency practitioners in this complex and technical area of the law.

Post by Hicksons Partner, Lachlan Wilson.

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