Til Debt Do Us Part: The effective use and pitfalls of statutory demands
A creditor who is claiming a debt from a company will often want to employ the quickest and cheapest method of recovery and the risks, costs and length of time associated with commencing court proceedings may not be the most appealing option.
Accordingly, many creditors will often consider issuing a company with a statutory demand under section 459E of the Corporations Act 2001 (Cth), which requires a debtor company to pay a debt it owes within 21 days. If the debtor company fails to pay the debt, come to a suitable arrangement with the creditor, or make an application to set aside the statutory demand within that time period, the company is presumed to be insolvent. Once there is a presumption of insolvency, it is then open to the creditor to commence proceedings to wind up the debtor company and have a liquidator appointed.
Properly used, a statutory demand can be both a fast and effective way to recover a debt from a corporation. However, they are often misused by parties, particularly where there is a genuine dispute as to the existence of the debt claimed.
The recent decision of In the matter of Bastow Civil Constructions Pty Ltd  NSWSC 934 is an illustration of this point.
Optus had engaged Bastow Civil Constructions Pty Ltd (Bastow) to perform certain civil construction works. Bastow engaged Networx Construction Pty Limited (Networx) as a subcontractor to undertake works involving drilling and backfilling trenches and installing conduit. During the course of the works, a number of drill rods broke off Networx’s drilling equipment and were left in the ground.
Networx then issued a statutory demand against Bastow for amounts it claimed were owed to it in respect of the building work it performed.
Bastow applied to the Supreme Court of New South Wales to set the statutory demand aside on the basis that there was a genuine dispute in respect of the amount being claimed in the statutory demand and for other reasons.
Bastow contended that the conduct of the works (in a manner that left such drill rods in the ground) did not constitute the proper provision of the services. On that basis, Bastow asserted that a genuine dispute existed and the statutory demand should be set aside with costs.
The Court agreed with Bastow. Importantly, Black J highlighted the difficulties that arise when claims that are in fact genuinely disputed are brought by way of statutory demand and, at paragraph  of his judgment, the importance of parties understanding the Court’s focus in determining whether there is a genuine dispute:
“…from time to time, the bases on which statutory demands are resisted have a degree of technicality about them, and may not appear to have substantial commercial merit. However, it is fundamental to the Court’s jurisdiction in dealing with creditor’s statutory demands that it does not determine their underlying commercial merit, but instead determines, within a summary and interlocutory procedure, whether there is a genuine dispute about the relevant debt, or whether there is a genuine offsetting claim, or some other reason to set aside the creditor’s statutory demand.”
This decision is one of many examples where a party has been punished with an adverse costs order for inappropriately issuing a statutory demand where a clear genuine dispute existed.
In summary, it is important that creditors of companies obtain sound legal advice and choose an appropriate way to resolve disputes, particularly those which may involve the Court having to decide questions of fact and the meaning and effect of contracts and the credit of witnesses.
If a genuine dispute exists, you will need to look at commencing Court proceedings rather than issuing a statutory demand in an attempt to recover the debt in question.