It was long expected that debt collection activities would sharply increase as COVID-19 and the associated payment relief schemes are cast into the rear-view mirror.
The purpose of this article is to be a first port of call for Companies that have received a statutory demand from a creditor and are now quickly putting 21 day reminders in their calendars.
For those unaware, a statutory demand is best described as a mechanism for a creditor to demand payment of a debt of $4,000 or more, owed by a Company.
Upon receipt of a statutory demand, a creditor has 21 days in which to:
- Pay the debt;
- Secure or compound for the debt; or
- Apply to have the statutory demand set aside.
The 21 day period is as strict deadline and cannot be extended…at all. With that being said, recipients should note that they have until midnight on the 21st day after receipt, in which to file and properly serve an application to have the statutory demand set aside. While it is not advised to wait until the 21st day, it is helpful to know.
Application to set aside
This article focuses on the third of the three options above.
An application to set aside a statutory demand is made under s 459G of the Corporations Act (the Act) and must be accompanied by an affidavit setting out the relevant evidence in support of the application.
While the application itself is made under s 459G, it must also identify which of the following provisions the basis of the application is brought:
- a genuine dispute as to the debt amount claimed (s 459H(1)(a));
- the debtor company seeks to offset the debt amount claimed on the statutory demand (s 459H);
- there is a defect in the statutory demand and a substantial injustice will be caused unless it is set aside (s 459G); or
- there is some other reason that the demand ought to be set aside (s 459J).
We will discuss each of the -four grounds to set aside a statutory demand below. At this point in the article we would like to introduce some important reminders in relation to bringing the application.
(Gray)Winter is coming…and has passed
For several years Victorian Courts have applied the ‘Graywinter Principle’ which was borne out of Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452.
The crux of the Graywinter Principle is (was) that it is not open to a plaintiff applying to have a statutory demand set aside to introduce a fresh ground not supported by the affidavit filed in support of the application. Barret J put it more eloquently in Elm Financial Services Pty Ltd v MacDougal, stating:
‘Graywinter meant that the applicant’s supporting affidavit must ‘fairly alert’ the respondent to the nature of the case the applicant will seek to make in applying to have the statutory demand set aside’.
In a remarkable move, Barret J referred to his earlier decision of Elm in Safetrack Pty Ltd v Marketing Heads Australia Pty Ltd stating that perhaps his view was ‘too strict’. Perhaps this introspection was the progenitor for the change.
Nevertheless, simply put, the affidavit in support of the application should have all of the evidence that a plaintiff intends to rely upon in support of the application as the Plaintiff is unlikely to have another opportunity in which to adduce evidence.
The Graywinter Principle persevered since 1996, it was derailed by the Victorian Court of Appeal in Sceam Constructions Pty Ltd v Clyne  VSCA 270, wherein Ferguson CJ, Sifris J and Walker J took the view that interpretation of the ‘supporting affidavit’ should be confined to the language of the statute and stated:
‘…[W]hile the shorthand phrase ‘Graywinter principle’ is convenient in some senses, it may be preferable to avoid its use, given that the authorities have developed since Graywinter was decided’.
their Honours helpfully proposed a suitable replacement (or rather a refinement) of the Graywinter principle, stating:
‘…the particular ‘genuine dispute’ on which an applicant seeks to rely must be identified in the supporting affidavit filed within time; it is not sufficient to identify one genuine dispute in the supporting affidavit, and then to identify a different genuine dispute in later affidavits filed out of time and at the hearing of the application‘.
The end result? The affidavit in support of the originating process should clearly identify the grounds upon which an application says a genuine dispute arises and should include as much detail and supporting documentation as possible. While a subsequent affidavit that expands on the existing grounds raised may be admissible, any new ground sought to be relied upon and adduced by way of a supplementary or further affidavit will cast into the abyss of the Court’s paper shredder.
The Midnight Run
Though a discrete point (as the time-savvy Company will have their application and affidavit in support filed and served well in advance of the twenty-one day deadline), a creditor actually has until midnight on the 21st day after receipt of the statutory demand in which to file and serve the application to set it aside.
In addition, the Federal Court of Australia has recently cemented service by email as effective service, regardless of whether the creditor’s statutory demand bears an email address for service or not.
Therefore, with the ease of electronic filing and electronic service, one might argue that filing the application to set aside a statutory demand and properly serving it within the defined statutory period for doing so (21 days) is now ‘e-asier’ than ever.
Standing your Grounds
Turning back now to the grounds on which an application to set aside a statutory demand can be made.
Undoubtedly the favourite of the four is a genuine dispute, referable to s 459H(1)(a).
To demonstrate a genuine dispute in relation to the debt(s) claimed in a statutory demand, a successful applicant must show that a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates.
The definition of a genuine dispute, with recourse to case law is:
‘a ‘genuine’ dispute requires that…the dispute be bona fide and truly exist in fact…[and] the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived’.
Breaking down the wording of the section, there are two distinct bases on which to predicate the application on this ground.
The existence or the amount
The existence of the debt may be either a question of law a question of fact or both. The amount of the debt will ordinarily be a matter of fact.
In terms of threshold, a genuine dispute as to the existence of a debt will require the plaintiff to demonstrate that there is a plausible contention requiring investigation that the company is not indebted as alleged.
The second ground which a statutory demand may be set aside is where the company has an offsetting claim, referrable to s 459H(1)(b).
Section 459H(5) defines an offsetting claim as:
‘a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).’
The terms “counterclaim” and “set-off” have been defined more narrowly as technical terms in comparison with “cross-demand”, which has been defined with considerable width. A cross-demand will include any claim for damages, which is for a monetary amount capable of quantification, and it need not arise out of the same transaction or circumstances as the debt to which the statutory demand relates.
Another consideration with offsetting claims, is that it must be against the issuing entity in the same capacity as the statutory demand.
Pursuant to s 459H(2), the Court will calculate the substantiated amount of the demand by subtracting the offsetting total from the admitted total. In circumstances where the substantiated amount is more than statutory minimum, the Court will exercise its discretion to vary the statutory demand. However, where the substantiated amount is less than the statutory minimum, the Court is obliged to set aside the demand.
Is there a serious defect in the demand?
Pursuant to s 459J(1)(a), the Court may set aside a statutory demand on the basis that there is a defect in the demand which will result in a substantial injustice unless the demand is set aside.
Section 9 of the Act defines defect to include:
- an irregularity; and
- a misstatement of an amount or total; and
- a misdescription of a debt or other matter; and
- a misdescription of a person or entity.
In case law, a defect in the description of the debt is likely to exist where the description does not correctly identify the debt, the debtor is unable to sufficiently particularise the debt or multiple debts, the debt is not due and payable at the date of the statutory demand or the defect in the party details (i.e., the name, ABN or address for service).
It will not be sufficient for the statutory demand to be set aside merely because it contains a defect, rather there must be a substantial injustice caused to the debtor company if it is not set aside.
This ground is commonly relied upon in the second instance where the debtor company is not able to rely on the provisions of a genuine dispute under s 459H(1)(a), however the application of setting aside a demand on this ground will largely depend on the particulars of the matter.
Some other reason the Court may consider
The final ground which a statutory demand may be set aside, is whether there is some other reason for the Court to do so.
Although “some other reason” seems to be a broad discretionary power by the Court, the intention of the legislation by the drafters may act as a guide for the Court in determining what is or is not considered to be “some other reason”.
The Corporate Law Reform Bill 1992 Explanatory Memorandum states that a demand may set aside if the Court is satisfied that there is a substantial dispute as to whether the debt is owing, the company appears to have a counter claim which may exceed the amount of the debt, or the demand ought to be set aside on other grounds. Further, the general power of this section enables the Court to take account matters such as improper of invalid service and mistakes or misstatements in the notice of demand, in circumstances where this would significantly prejudice any party.
Case law demonstrates errors or omissions in the supporting affidavit accompanying the statutory demand is considered “some other reason” pursuant to s 459J(1)(b). An example of this is in Wollongong Coal Ltd v Gujarat Nre India Pty Ltd, where the Court set aside a statutory demand on the basis that the accompanying affidavit was signed before the statutory demand and no updated affidavit was filed to rectify this.
Similar to an application on the grounds of a defect in the demand, having a statutory demand set aside on the basis of some other reason will be dependent on the particulars of the matter.
Hearing the Application
Assuming you have filed your application in time, the application will ordinarily be listed for a first return within 4-5 weeks (depending on the Court’s availability). Presently, the Court’s preference is to treat the initial listing date as a directions hearing, with a further listing for determination within another 6 weeks. This is indicative timing only and will ultimately depend on the Court’s availability to list the matter for hearing.
At a high-level, the key takeaways from this article are:
- the clock is ticking…if you or your company receives a statutory demand, you must act immediately to ensure that you can file an application to have the demand set aside, within the 21 day period;
- the accompanying affidavit must capture all of the evidence that you rely upon to have the statutory demand set aside. While there is some scope to expand further on grounds already raised in the accompanying affidavit, you cannot raise new grounds in support of the application. The affidavit must be detailed and should include all relevant agreements and correspondence between the party.
- there are four recognised grounds to have the statutory demand set aside. When reviewing the statutory demand, start thinking about whether any (or more) of the grounds apply;
- seek advice as soon as possible. Given the technicalities canvassed in the grounds detailed above, it is always recommended that you contact a legal professional with insolvency experience to review the statutory demand and advise on the merits of having the statutory demand set aside. It could be fatal to your company to ignore or delay in seeking advice.
Contact a member of HWL Ebsworth’s Litigation and Insolvency Team to find out more.
This article was written by Jonathan Kramersh, Partner and Chris Melberzs, Associate.
 See eg, Bioaction Pty Ltd (ACN 136 817) v Ogborne (2022) 402 ALR 542. See also s 600G of the Corporations Act 2001 (Cth).
 Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785.
 Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast Digital 
 John Shearer Limited and Arrowcrest Group Pty Ltd v Gehl Company  FCA 1789.
 Canpoint International Pty Ltd v Anar International Pty Ltd  FCA 4; PCH Group Ltd v Hallbridge Pty Ltd (2002) 20 ACLC 1298.
 LSI Australia v LSI Holdings; LSI Australia v LSI Consulting  NSWSC 1406.
 Condor Asset Management Ltd v Excelsior Eastern Ltd  NSWSC 1139.
 Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 33 FCR 562.
 Corporations Act Portrait Express (Sales) P/L v Kodak (Australasia) P/L; Olan Mills Studio v Kodak (Australiasia) P/L  NSWSC 199.
 Re Macro Constructions Pty Ltd  2 Qd R 31; Scandon Pty Ltd v Dome Supplies Pty Ltd (1995) 17 ACSR 662.
 Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth) 138, 686.
 Ibid 138, 687.
 Wollongong Coal Ltd v Gujarat Nre India Pty Ltd  FCA 221.