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24.08.2022

News

Defective statutory demand upheld

Need to know?

  • It is important to take proper steps when serving a statutory demand – serious consequences may result from failing to adhere to those steps. 
  • The NSW Supreme Court recently upheld a statutory demand despite defects where the debtor failed to comply with formalities in serving its challenge interstate.
  • If you receive a statutory demand, it is important you receive legal advice as early as possible.
  • Properly documenting the relationship between parties that exchange funds is critically important. 

What is a statutory demand?

A statutory demand is a formal process pursuant to the Corporations Act for a debtor to demand payment of a liquidated debt from a company where there is a question as to the solvency of a company. 

Once a statutory demand has been served, the company has 21 days to either satisfy the demand or apply to set it aside. If neither occur, the company is deemed to be insolvent, and the creditor can apply to the court to have the company wound up.   


Background

In the recent case, Z4life Pty Ltd and Black Tie Holdings Pty Ltd were in business together developing and operating a digital platform for cryptocurrency coins or tokens. The companies were located in Victoria and New South Wales respectively.  

On 31 January 2022, Z4life served a statutory demand on BlackTie in New South Wales for repayment of an alleged loan. Black Tie disagreed there was a loan, and argued it was a ‘holding account’ under a consultancy agreement. The demand was erroneously dated ‘January 2021’ and contained a Queensland solicitor’s address for service for Z4life (instead of a New South Wales address as required under the Corporations Act).  

On the evening of 21 February 2022, Black Tie’s solicitor filed the originating process with the Court to apply to set aside the demand and served the same documents on Z4life’s solicitors by email. However, critically, Black Tie’s solicitors failed to attach a notice for effective interstate service as required by the Service and Execution of Process Act (SEPA). 


The application 

Black Tie argued there was a genuine dispute about the amount of the debt, and that the company had an offsetting claim ‘which greatly exceeds the amount of the alleged debt’. However, these avenues of challenge were closed off to Black Tie due to their failure to attach the SEPA notice and, therefore, the failure to make an application in accordance with SEPA.  

Black Tie amended its originating process to seek alternative relief to the effect the demand was null and void on the basis it had specified an incorrect interstate address and the amount claimed was not due and payable. Black Tie also attempted to make an estoppel argument that the lack of SEPA notice was caused by Z4life’s unconscionable conduct in stating a Queensland lawyer’s address for service in the demand. 


Decision 

Black Tie was unsuccessful. The Court did not find any defect in the statutory demand that could have caused substantial injustice or was so misleading as to render the statutory demand a nullity. 

The Court said the failure to annex the SEPA notice was ‘fatal’ to Black Tie’s application, despite accepting its email service was otherwise effective and within time. No estoppel or unconscionability was found in Z4life’s conduct to overcome the SEPA issue.  

The application to set aside the statutory demand was dismissed and Black Tie was ordered to pay Z4life’s costs. 


Importance of documentation

A secondary point considered in this case was whether there was a loan between the parties, or the amounts were a ‘holding account’. The relationship between Black Tie and Z4life was undocumented other than a balance sheet provided by Z4life. Whilst the Court considered the balance sheet unusual and remarked on other odd aspects of the evidence, the Court found there was sufficient evidence of a running loan balance which was due and payable without the need for a formal demand. If the relationship had been properly documented, this would not have been a point of contention.


Hot tips: electronic service and other obligations

In December 2020, the Corporations Act was amended to introduce provisions to facilitate electronic service of some documents, including statutory demands and applications to set them aside. The Federal Court has recently examined the first case (Bioaction v Ogborne) involving these electronic service provisions. 

The recipient of a statutory demand should also immediately consider any consequences of the statutory demand on their existing debt arrangements. It is usual for a borrower to have reporting obligations with short timeframes for receipt of statutory demands, and failure to report on time may cause an event of default (even if the issue of the demand does not).


Conclusion

Statutory demands are incredibly technical and can have serious consequences if not handled appropriately. If you receive a statutory demand, it is important you receive legal advice as early as possible. If you need assistance with receiving or issuing a statutory demand, please get in contact with our Litigation team.  


Authors

Selina Nutley

Selina Nutley

Partner

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