23 Aug 2010

Speak now, or forever hold your peace

by Karen O'Flynn

All companies, regardless of their size or solvency, must ensure that they have appropriate systems for dealing with statutory demands.

In my last article, I looked at the use of statutory demands. Time now to go through the looking glass and examine the impact of demands on the companies which receive them.

First, a brief recap …

A company which receives a statutory demand has 21 days to respond. If it does nothing, it is deemed to be insolvent and will almost certainly be faced with a winding up application.

In a large number of cases, it has to be admitted, that deemed insolvency simply reflects reality. However, there are many other cases in which solvent companies create unnecessary problems for themselves by failing to act promptly on receipt of a demand.

Unfortunately, no-one knows when a statutory demand is going to pop up in the morning post, so all companies, regardless of their size or solvency, must ensure that they have appropriate systems for dealing with them.

Receipt

As noted above, a company must respond to a demand within 21 days of receiving it. Unlike many other areas of the law, there is no wriggle room here. Many years ago, the High Court ruled that those 21 days are set in stone and that courts have no power to extend the time limit.

Twenty-one days sounds like a lot of time, but it's surprising how many companies fail to meet that deadline. The case reports are full of examples of companies which have been just one or two days late in their response. What lessons can be drawn from those cases?

There are many ways in which a demand can be validly served on a company. The two most common are by mail addressed to the company's registered office and hand delivery to the company's registered office.

Believe it or not, Lesson Number One is: know where your registered office is. The registered office is the address that the company has supplied to ASIC. Service to that address will be effective, even if the company is no longer there in reality. There are two good housekeeping measures to avoid this situation:

  • keep ASIC notified of your current address;
  • if you use your accountant's office as your registered office, make sure that your accountant keeps ASIC informed if he or she changes address (or if you change accountant).

Of course, keeping a registered office address up to date is only half the battle. What does a company do if a creditor claims to have served a statutory demand on a particular date but the company didn't receive it until a couple of weeks later?

Judges are often called on to decide who is telling the truth in this situation. As I mentioned in my previous article, canny creditors will keep records of when statutory demands were sent out. It's No Contest when a judge has to decide between a creditor who has good records and a company whose only witness is an office junior or receptionist who has only a vague memory of what happened on the critical day.

Just as with creditors, therefore, it is important for companies to have office procedures that can stand up in court. It may appear over the top to have office procedures to deal with the remote possibility that a statutory demand may turn up one day. There are two answers to this:

  • that a statutory demand is the corporate equivalent of an envelope with anthrax;
  • the office procedures can be tailored to fit the circumstances of the company.

Obviously, in a very large company, there should be procedures for handling and recording all mail addressed to the company, the company secretary or other senior officers. If that is too expensive for a small company, there should still be clear procedures for handling mail. For example:

  • the post office box should be cleared daily, and all mail brought straight to the company's premises;
  • there should be a designated person whose job is to distribute mail;
  • responsibility for opening mail should be clear (eg. a receptionist may be required to open all mail before distributing it);
  • there should be a policy that all mail is opened on the day it is received;
  • all staff and directors should be made aware of the importance of a statutory demand, and there should be a designated person to handle statutory demands.

We've got the demand: what do we do now?

Contact your lawyer right away! This may be easier said than done, for a couple of reasons.

The first is human nature. A statutory demand can be a shock to the system, especially if it's sent by a long-term customer or client, of if there has been no hint that the creditor is unhappy. It's quite understandable that your first reaction might be to pick up the phone and try to sort out the problem informally. Resist that temptation: the legal clock is now running on the survival of your company, and (dramatic as it may sound) every minute counts. There'll be time to talk to the creditor once you've prepared your legal response.

The second possible hitch is finding your lawyer. Some small companies may not even have a lawyer, but even companies with lawyers may sometimes experience problems arranging an appointment. The reason is that a statutory demand is a declaration of war, and the creditor will not go out of its way to make life easy for the recipient company. A South Australian judge recently commented that he was seeing increased numbers of statutory demands being served just before Christmas - when, he commented, many companies would have difficulty in getting legal advice.

Accordingly, if you don't have a regular lawyer, at least make sure that you have the name and contact details of a lawyer who can be contacted in an emergency. If you have a lawyer, make sure that you have contact details for times when the lawyer's office may be shut.

What will my lawyer tell me?

That all depends upon the circumstances.

A company which has received a demand has three legal options:

  • pay the debt;
  • work out a compromise with the creditor;
  • apply to the court to have the demand set aside.

(A fourth possibility is that the company really is in serious financial trouble, in which case, it's important to discuss with your lawyer (and accountant) whether to place the company in voluntary administration.)

With the first two options, it is again important to keep good records. A company which pays the debt even just one day late will still have failed to comply with the demand and will be deemed to be insolvent, so the date of any payment is important. If the creditor agrees on a compromise, that agreement should be put in writing and should include an undertaking from the creditor to withdraw the statutory demand (agreements made over the phone aren't worth the paper they're written on).

Applying to set the demand aside

Most applications to set aside a statutory demand claim that there is a genuine dispute about the debt or that the creditor actually owes money to the company.

It is also possible to argue that the statutory demand wasn't in a form that complied with the statutory requirements in the Corporations Act and Regulations. However, the Corporations Act makes it clear that this argument will only succeed if the defects in the demand would cause serious injustice to the company: a missing full stop or a minor typing error just don't cut it.

At this point, it might seem that the law is stacked against companies which receive statutory demands. That is definitely not true when it comes to disputing the debt claimed in a demand.

A demand will be set aside if the company can show that there is a plausible argument that the debt is genuinely disputed. The courts take the view that a set-aside application is not the appropriate occasion for a full trial of a commercial dispute, so the threshold for a "plausible" argument is fairly low (although it must be more than just a simple assertion that "we don't owe the money").

What happens if the demand is not set aside?

Making a set-aside application stops the statutory demand clock. If the application is dismissed, the company has seven days to comply with the demand. At the end of that seven days, the company will be deemed to be insolvent.

(The court can make an order extending that seven day time limit, but this is rare.)

Once the company is deemed to be insolvent, the creditor can apply to have the company wound up.

The sad reality is that most winding up applications are just rubber-stamp affairs. Most companies which have failed to pay a statutory demand debt or even to persuade a court that the debt is genuinely disputed don't turn up in court to contest the winding up application.

That said, there are a handful of situations in which a winding up application might be successfully resisted. For example, the company may never have received the demand or, despite have failed to comply with the demand, it might actually be solvent. One thing that cannot be done, however, is to oppose a winding up order using arguments that could have been (or were) used in a set-aside application.

There are also two out of court possibilities.

The company may be able to reach an out of court settlement with the creditor. That does not, however, totally remove the threat of winding up: other creditors can apply to take over the winding up application.

The other possibility is to place the company in voluntary administration before the court hears the winding up application. The court then has to decide whether to suspend the winding up application while the voluntary administration is in force. It is unlikely to do this if it believes that the voluntary administration is just a sham designed to postpone the inevitable.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.