Statutory Demands, Winding Up Applications and the Issue of Solvency: why a company served with a Statutory Demand should raise any dispute within 21 days of service of the Demand

Date: Jun 03, 2015
Document Type: Article

Insolvency law, in particular that part of insolvency law covered by Part 5.4 of the Corporations Act 2001 (Cth) (the Act), demands strict compliance with specific timeframes and legislative provisions.

In the case of a statutory demand and subsequent winding up application, this means making any application disputing the debt within 21 days of service of the demand, or, if this has not been done, seeking to invoke the power of the Court to grant leave under section 459S of the Act to raise certain arguments at the hearing. The recent QLD case of Re Bulwinkel Enterprises Pty Ltd [2015] QSC 112 (Bulwinkel) reinforces the importance of absolute legislative compliance and considers the Court’s application of the law in this area.

The Case

The debtor Company failed to pay the debt claimed in the statutory demand or to make an application, disputing the debt, pursuant to section 459G of the Act, within 21 days. Subsequently, the creditor commenced winding up proceedings. The Company submitted:

  • The debt was disputed;
  • The Company was solvent (even if the debt was found to exist); and
  • The ill-health of the director of the Company, together with personal issues and dealings with the Financial Ombudsman Service, provided some explanation for the Company’s failure to deal with the demand in time.
Material to Proving Solvency

In order for the Court to grant leave (pursuant to section 459S of the Act) for a Company to raise the argument that the debt was in dispute, the Court must be satisfied that such an argument is material to proving solvency: that is, it is “likely to influence the determination” of the issue before the Court. Complaints about defects in the demand, for instance, would usually not be material to proving solvency, and thus would not invoke the discretion of the Court to allow the Company’s opposition to the winding up application.

In Bulwinkel, the Company argued that the company would be insolvent only if the Court was satisfied that the debt in question was valid. As this issue was likely to influence the Court’s overall determination, the argument was allowed.

However, upon examination of the evidence, the Court found not only that the debt was valid, but that the Company was insolvent in any event. Thus, the Court allowed the winding up application.

Implications

Statutory demands should be treated seriously. If an application to set aside the demand is not made in time, the Court will only allow arguments – that could have been, but were not raised to set aside the demand – in circumstances where such arguments are material to proving the Company’s solvency. This may require a deeper probing of the Company’s financial circumstances that is undesirable to the Company, as well as adding to the time and costs of determining the application.

For further information and advice about statutory demands, winding up applications or corporate insolvency, please contact our office. Please note that the law in this article is current as at June 2015, but may have changed by the time you read this article.

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