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Statutory Demands: 5 Lessons from Recent Cases

CaseFlash 08 August 2012

In this Insolvency Solutions CaseFlash we look at three recent cases, Rite Flow Pty Ltd v Nahas Constructions (NSW) Pty Limited, Deputy Commissioner of Taxation, Re ABW Design & Construction Pty Ltd v ABW Design & Construction Pty Ltd exploring issues that commonly arise when creditors serve statutory demands and In the matter of Niruzzi Pty Limited, where the Court has indicated a willingness to fix the costs recoverable on a successful application to set aside a statutory demand.  We conclude by drawing five valuable lessons that insolvency practitioners and businesses should bear in mind.

Case 1

Rite Flow Pty Ltd v Nahas Constructions (NSW) Pty Limited [2012] NSWSC 553 – where Nahas Constructions (NSW) Pty Limited (“Nahas”) served a statutory demand on Rite Flow Pty Limited (Rite Flow) seeking the recovery of $336,190.37 as a debt due and owing pursuant to certain contractual clauses in a subcontract for building works.  The clauses relied on sought to deem an amount claimed to be a debt due and owing.

An application to set aside the statutory demand was filed within time. There was no appearance by Nahas until the date that the Court was ready to deliver judgment.  A late application for further adjournment was refused by the Court.  On the application, Rite Flow adduced evidence denying responsibility for the water damage the subject of the claim.  It also adduced evidence from a third party that the defect rectification work which was claimed for by Nahas had not in fact been performed.

In delivering judgment setting aside the statutory demand and ordering indemnity costs be paid to the creditor, Justice Black held (at [16]): “… the evidence led by Mr Karidis that Rite Flow did not cause the claim to damage sufficiently impeaches the basis of the invoices to establish a genuine dispute as to the claimed debt and the Demand should be set aside on that basis.”   Although not necessary to do so, His Honour stated (at [18]): “I also consider that the demand did not relate to a debt, but in substance an unliquidated claim for damages, and that the statutory demand procedure under the Corporations Act was not properly used in respect of such a claim.”

Case 2

Deputy Commissioner of Taxation, Re ABW Design & Construction Pty Ltd v ABW Design & Construction Pty Ltd [2012] FCA 346 – involved a winding up application following non-compliance with a creditor’s statutory demand issued by the Deputy Commissioner of Taxation in relation to a debt of $254,576.65 arising from a deficit in the running balance account maintained by the Commissioner in relation to ABW Design & Construction Pty Ltd (“ABW”).  The winding up application relied on non-compliance with a statutory demand within the 21 days after it was served on ABW.  The Deputy Commissioner relied on the address of the registered office of the company obtained from an ASIC search.  A copy of the envelope was placed into evidence.

By reference to various statutory provisions, Justice Logan found the postcode was recorded as part of the address of the registered office in the ASIC search for ABW.  As the postcode was obscured on the envelope, it was not properly addressed.  In the face of evidence of non-receipt, Justice Logan concluded there was want of proof of service of the statutory demand.  The necessary non-compliance with the statutory demand had not been established and the winding up application was dismissed.

Although not necessary to the reasons for judgment, Justice Logan observed that the registered offices of the company were less than 1km from the Australian Taxation Office at Upper Mt Gravatt.  By inference, there might not have been the same difficulties if an employee had attempted personal service of the statutory demand on the company from the offices of the Australian Taxation Office at Upper Mt Gravatt.

Case 3

In the matter of Niruzzi Pty Limited [2012] NSWSC 773 - involved an application to set aside a creditor’s statutory demand which was resolved by consent in favour of the Plaintiff, save for the question of costs.

The proceedings involved an interlocutory application to transfer the matter to the Supreme Court of South Australia as well as the substantive application for the setting aside of the statutory demand.  Evidence before the Court indicated that the Plaintiff’s costs were $38,000 – the judgment is unclear as to whether they were on a solicitor and own-client basis, or on a party/party basis.  Justice Brereton determined that $22,500 to have been a fair approximation of the Plaintiff’s reasonable costs on a party/party basis for the substantive application and the interlocutory application and orders were made accordingly.  In doing so, His Honour made reference to his own previous decision in K James Corporation Pty Limited [2012] NSWSC 602 where costs were fixed in the sum of $10,000 where there was a substantive application before the Court involving no more than the minimal amount of evidence and issues.

The decision is important and is of value as a precedent in circumstances where at least in New South Wales, the judges of the Supreme Court are setting guidelines as the costs likely recoverable by a Plaintiff on a successful application to set aside a creditor’s statutory demand.

5 lessons to bear in mind

Lesson #1 – creditors are reminded not to serve statutory demands hoping for a debtor to capitulate and pay the sum claimed – chances are the debtor will apply to set the statutory demand aside.

Lesson #2 – creditors should not issue statutory demands as a tool for the recovery of damages claims – there is risk that the statutory demand will be set aside “for some other reason” as an abuse of process.

Lesson #3 – if serving by post, always ensure that the address on the envelope is identical to the address appearing in the ASIC search.

Lesson #4 – attempt personal service.

Lesson #5 – be prepared to estimate and put on evidence of legal costs incurred in applications to set aside statutory demands – as fixed costs orders are increasingly more likely to be made by the Supreme Court.

Kirsten Farmer, Partner

CaseFlash 08 August 2012
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