Responding to statutory demands – 21 days and that’s it says the High Court

In the case of Aussie Vic Plant Hire Pty Ltd (“Aussie Vic Plant Hire“) v Esanda Finance Corporation Ltd (“Esanda Finance’) the High Court has absolutely verified the legal position that once the time for compliance with a statutory demand has expired, no application can be made by the debtor to extend the time for compliance. The only remedy available to the debtor company is to defend itself by proving its solvency, which can not only be very difficult but also very costly.

Under the provisions of the Corporations Act 2001 (the “Act“) an unpaid creditor can serve a statutory demand on a debtor company requiring payment of the debt within 21 days after service.

If the debtor company does not comply with the statutory demand, or make an application to the Court to set it aside within the 21 days, the debtor company is deemed to have committed an “act of insolvency”. Relying on that “act” a creditor can make an application for an order to wind up the debtor company and the Court must presume that the company is insolvent. The onus of proof of insolvency is then reversed and the debtor company must prove it is solvent.

The test of solvency is set out in the Act and can be summarised as being the debtor company demonstrating that it is able to pay its debts as and when they fall due.

Aussie Vic Plant Hire applied to the Supreme Court of Victoria for an order to set aside the statutory demand by Esanda Finance for the amount of $400,000. Master Efthim dismissed the application however granted an extension of time to comply with the statutory demand.

Aussie Vic Plant Hire appealed from the decision of Master Efthim to a single judge of the Supreme Court on a hearing de nuvo (being a new hearing on the merits to set aside the statutory demand).

The appeal was lodged before the time for compliance had expired but did not get allocated a hearing date before that time. An application was made to extend the time and both that application and the appeal came on for hearing before Justice Whelan. Justice Whelan was asked by the debtor company to extend the period for compliance. His Honour took the view that he was unable to do so given the provisions of the Act. On appeal to the Court of Appeal the Court agreed with Justice Whelan’s view. Aussie Vic Plant Hire appealed to the High Court.

The issue before the High Court was whether section 459F(2) of the Act, which fixes the period for compliance with a statutory demand as 21 days, can be extended by the Court on the basis of s.459F(2)(i) which states ‘if, on hearing the application under section 459G [to set aside statutory demand]… the Court makes an order that extends the period for compliance…’that period becomes the period for compliance.

The High Court considered the meaning of the power to extend under the Act and held that it could not extend the time for compliance with the statutory demand because of the contrary underlying policy of the Act for the speedy resolution of applications to wind up companies in insolvency.

This decision confirms that the Court is unable to extend time for compliance with a statutory demand and exemplifies the need to take immediate steps to either comply with a demand or to make an application to set it aside within 21 days, to avoid the unfavourable consequences of the presumption of insolvency.

An application to set aside a statutory demand is a relatively simply one, requiring the debtor to raise a genuine dispute as to the debt, or show defect in the creditor’s compliance with provisions of the Act, in its form or service.

If the deadline is missed, to avoid winding up, the company has no alternative but to demonstrate its solvency.  Whilst doing so might sound easy it requires detailed accounting evidence and valuation evidence of the current value of the assets of the company as against the debts it owes which can be an extremely expensive process so don’t get caught out.

For further information please contact one of our Dispute Resolution & Litigation lawyers.

Author: Mary Nemeth