Substantiating the debt – the requirements for issuing a valid creditor’s statutory demand

Creditor’s statutory demands for payment issued under section 459E of the Corporations Act 2001 (“the Act”) and in the form prescribed in Schedule 2 of the Corporations Regulations 2001 (“the Regulations”) are a useful mechanism for notifying a debtor company of its outstanding obligations. If the company fails to comply with a demand for payment made by a creditor under section 459E of the Corporations Act by paying the debt, or otherwise satisfying the creditor or having the demand set aside by the court, a presumption arises under s 459C(2)(a) of the Act that the company is insolvent. In that case the creditor may apply to the court for an order placing the company into liquidation.

The recent judgement of the Supreme Court of Victoria in Re Simmoll Pty Ltd [2021] VSC 693 serves as a useful restatement of the basic requirements for issuing a valid demand and the circumstances in which a demand will be invalid.

Background

This case arose from a dispute between a building company and its client.

On 13 November 2018, the builder agreed to renovate the client’s property for $714,000. The contract entitled the builder to payments for each construction milestone reached. A dispute arose, in which the client claimed a refund of $33,952.05, stating that certain work was incomplete and that the builder had taken payments it was not entitled to. On 21 January 2021, the client issued a statutory demand to this effect, drafted by its solicitors and supported by an affidavit. The builder challenged the validity of the demand.

The questions put by the builder to Associate Justice Hetyey were whether:

1. the client’s failure to particularise the debt claimed in the demand created substantial injustice to the builder under s 459J(1)(a) of the Act?

2. the affidavit accompanying the demand verified the debt as required under s 459E(3) of the Act and, if not, whether this qualified as ‘some other’ reason to set the demand aside per s 459J(1)(b)?

3. the debt was due and payable per s 459E(1)(a) and, if not, whether this qualified as ‘some other’ reason to set the demand aside per s 459J(1)(b)?

4. there was a genuine dispute about the existence or amount of the debt per s 459H(1)(a)? and/or

5. there were debts owed by the client that offset any amounts potentially owed by the builder per s 459H(1)(b)?

His Honour found in the builder’s favour in respect of questions one to four and set aside the demand. His Honour found for the client in respect of question five (rejecting the builder’s claim that there were offsetting amounts owing).

1. Did the client’s failure to particularise the debt claimed create substantial injustice to the builder under s 459J(1)?

Section 459J(1)(a) of the Act allows a court to set a demand aside on the grounds that it is defective and would create substantial injustice if allowed to stand. The builder argued that the demand contained errors and was imprecise enough to justify being set aside. The court applied an objective test of whether a reasonable person in the position of the builder’s director could understand the nature of the debt claimed, and at paragraph 29, summarised the necessary information a demand must contain in respect of a debt in order to be valid:

It follows that a statutory demand and, by extension, its accompanying affidavit, must put the debtor company on notice in an unambiguous way of the matters the legislation requires, including: the nature of the debt; a statement that the debt is due and payable; and an explanation of how the amount claimed is composed or calculated. Although a debtor company can be presumed to have some familiarity with the relevant subject matter of the statutory demand, it is not obliged to speculate upon what it is that the creditor demands. At the same time, whilst a failure to specify in the demand the precise legal basis of the debt claimed may constitute a defect, it will not necessarily be causative of substantial injustice sufficient to justify its setting aside.

His Honour determined that the demand failed to:

• explain the general nature of the debt;

• precisely identify the invoice substantiating the debt;

• identify the legal basis for the debt; or

• allow the builder to determine if there was a genuine dispute about the existence of the debt or the amount owed.

His Honour considered that these omissions in the demand put the builder in the substantially unjust position of being unable to determine whether to make an application to set the demand aside. Moreover, His Honour found it a substantial injustice that the builder would be presumed insolvent under s 459C(2)(a) if this vague and ambiguous demand were left in place. Consequently, His Honour set the demand aside under s 459J(1)(a).

2. Does the affidavit accompanying the demand verify the debt under s 459E(3)? If not, does this qualify as ‘some other’ reason to set the demand aside under s 459J(1)(b)?

The court found that the affidavit was as imprecise as the demand it purported to verify. While the client’s affidavit claimed a total debt of $33,952.05 derived from four invoices, the combined amount actually due under those invoices was $172,894.90 and the client did not include calculations to show how it arrived at the final figure. Moreover, the client’s affidavit stated that the builder had not performed any contracted for works, contradicting the claim in the demand notice that the builder had partly performed these works. In light of the unclear information, contradictions and ambiguities present in the affidavit, His Honour found that the debt in the demand was not verified under s 459E(3) and set the demand aside under s 459J(1)(b).

3. Is the debt due and payable under s 459E(1)(a)? If not, does this qualify as ‘some other’ reason to set the demand aside under s 459J(1)(b)?

To be due and payable under s 459E(1)(a), the debt identified in a demand must be ascertainable, immediately payable and presently recoverable or enforceable by action. His Honour decided that while the client might have a claim against the builder for breach of contract (for accepting progress payments it was not entitled to), it was premature to call any such debt ‘due and payable’. To crystallise the claim into a due and payable debt, the client would have first needed to sue the builder for breach of contract and have a court order it to pay damages based on the amount of work remaining unperformed. The client had failed to do so, had no debt ascertainable, immediately payable and presently recoverable and His Honour set the demand aside under s 459J(1)(b).

4. Was there a genuine dispute about the existence or amount of the debt under s 459H(1)(a)?

A statutory demand will be set aside under s 459H(1)(a) if there is a genuine dispute about the existence or amount of the debt claimed. During the hearing it emerged that there were unresolved questions about whether or not the builder had met its contractual obligations, whether it was owed progress payments, whether it agreed to repay undue payments, and, if so, whether it did so orally or in writing. His Honour found that these questions could only be answered with a thorough examination of communications between the parties, by obtaining an assessment of the payments made and the amount of works performed. Consequently, His Honour determined that the debt claimed by the client was the subject of genuine dispute and so found in favour of the builder in respect of Question Four.

5. Were there any debts owed by the client that offset amounts potentially owed by the builder?

The builder claimed that if it was found to owe the client money for incomplete work, these amounts should be offset by debts owed to the builder by the client for work done. Associate Justice Hetyey found, however, that the builder had not sufficiently particularised the invoices and items of work it relied on for this claim. His Honour also found that the offsetting claims were not made in good faith and did not allow them.

Lessons

Parties (and their solicitors) considering issuing a statutory demand should heed the legislative requirements in s 459E of the Act and Schedule 2 of the regulations and take care to ensure that there is no genuine dispute about the existence of the debt.

A creditor must ensure that it has regard to the requirements described at paragraph 29 of the judgment, and:

1. state the nature of the debt;

2. state that the debt is due and payable;

3. explain how the amount claimed is composed or calculated; and

4. not require the debtor to speculate or guess about what the creditor is demanding.

A creditor must take extra care where the debt owing is the subject of multiple invoices or is partly paid.

Tom Spillane

Lawyer