Half of the frauds committed in Australia are perpetrated by business “insiders”; either employees or management,[1] with the total value of frauds in Australia increasing to a value of $442m for the six month period ending in September 2016 (up by 19% compared with the previous six month period).[2]  More than half of those frauds were committed in Queensland.[3] 
 
The primary focus of a business owner is often the recovery of misappropriated assets or financial compensation.  However, the damage caused by employee fraud can extend beyond financial loss to include risk to operational viability, reputational damage, and a negative effect on employee morale.[4] 
 
We explore in brief below some of the strategies and relevant considerations when seeking to recover misappropriated assets or compensation (restitution) for cases involving employee fraud.
 
Where to start?
 
For many businesses, the initial response when discovering employee fraud is to:

• confront the employee and/or terminate their employment; and/or
• report the matter to police. 

However, for any business that seeks to recover compensation, their first considerations should be:

• obtaining information; and
• protecting or preserving assets (including in the hands of the employee or third parties).

 
Speed is key (delay will weaken your ability to obtain urgent Court orders), and employers should involve their lawyers in the evidence gathering at the earliest possible stage to ensure that:

• evidence is obtained is in a form that can be used in Court; and
• the prospect of recovery is maximised.

 Obtaining information
 
Before confronting an employee and alerting them to the fact that you are aware of the fraud, employers should seek legal advice to ensure that the evidence necessary to recover compensation has been properly obtained.  Because employee fraud can carry serious criminal consequences, recovery proceedings are often defended, and there are a number of restrictions on alleging fraud in Court proceedings which means that evidence must be carefully obtained.  For these reasons, an employer should take swift and careful steps to secure as much evidence as possible at an early stage. 
 
Part of the information gathering process can include obtaining a forensic accounting report, which can be used to “freeze” assets of the employee (including in the hands of third parties) and ensure that they are not disposed of, or diminished in value, while Court proceedings are on foot.
 
Once sufficient evidence is obtained, an employer can apply to Court urgently (without notifying the employee) to seek:

• “freezing orders”[5] (dealt with below);
• “asset disclosure orders”,[6] which requires an employee to provide details of the value and location of their assets;
• “search orders”,[7] which allow your solicitor to enter premises and seize evidence to prevent its destruction or disposal; and
• “travel restrictions”,[8] to prevent the employee from leaving Australia.

Protecting assets
 
Freezing orders are an extremely useful tool which can be obtained urgently and prior to the commencement of recovery proceedings to:

• “freeze” bank accounts;
• prevent the sale of real property or assets; and
• prevent the removal of assets out of Australia.

 
Such orders are of advantage to an employer because they prevent an employee from dissipating or disposing of assets which can later be used to satisfy a judgement obtained to recover compensation.[9]
 
Further considerations
 
Once criminal proceedings are commenced, it is often the case that recovery proceedings will be “stayed”, meaning that if the employee defends criminal proceedings, the business owner will be prevented from progressing civil proceedings to recover what has been stolen from them. 
 
Defending a criminal proceeding can also be a costly exercise that can have the effect of depleting the employee’s assets, and further preventing recovery.  For that reason, where recovery is possible, it is often recommended that this be pursued before reporting the matter to police.[10]
 
Recovering compensation
 
Freezing orders (and associated orders) are just one part of the recovery process; Court proceedings which seek an order for compensation must also be prosecuted.
 
Court proceedings can take many different forms, as there are a range of actions which can be taken against an employee (or third parties such as friends and family of the employee), to recover compensation. 
 
The relief which can be sought includes damages and restitution for (among other things):
·                “fraud”;
·                “fraudulent misrepresentation”;
·                “money had and received”; and
·                the “tort of deceit”.
Ultimately, the relief that an employer should seek from the Court will depend upon the nature of the fraud, and what has happened to the assets, including whether the assets remain in the hands of the employee, have been mixed with other assets, and even whether the assets have increased or decreased in value.
Further action
 
While prevention is better than a cure, there are no foolproof methods of preventing employee fraud; even the most sophisticated internal controls can be circumvented.  If faced with circumstances which cause you to suspect that your business has suffered from employee fraud, we recommend that you immediately seek legal advice.
 
If you wish to explore making a claim or seeking to recover assets as a consequence of employee fraud, contact Chad Gear on (07) 3227 1616, or by email at c.gear@taylor-david.com.
 
While attempts have been made to ensure the currency of information contained in this publication, we do not guarantee its currency.  This publication is intended to provide only general information on matters of interest.  As such, this publication is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.
 
© Chad Gear

[1] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[2] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[3] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[4] Chelan, David (1 May 2006) “The cost of corporate fraud”, Smart Business.
[5] Also known as “mareva orders”, Uniform Civil Procedure Rules 1999, r. 260A.
[6] Uniform Civil Procedure Rules 1999, r. 260B.
[7] Also known as an “anton pillar orders”, Uniform Civil Procedure Rules 1999, r. 261A.
[8] A write “ne exeat regno”, Uniform Civil Procedure Rules 1999, r. 259(2)(c).
[9] Supreme Court of Queensland, Practice Direction 1 of 2007, para. 3; http://www.courts.qld.gov.au/__data/assets/pdf_file/0020/86411/sc-pd-1of2007.pdf.
[10] It is important to note that in most states in Australia, if a person fails, without reasonable excuse, to report to the Police or other relevant authorities, conduct which amounts to a serious indictable offence, that person is liable to imprisonment for two years.  A reasonable excuse may include steps taken to recover misappropriated assets.

In “Creditor’s statutory demands; debt collection tool?”, I explored the circumstances in which a Statutory Demand can be issued to recover a debt.  In this article, I set out the circumstances in which a Statutory Demand can be set aside.
 
If you have received a Statutory Demand, we recommend that you seek legal advice immediately. 
 
Setting aside a statutory demand
 
An application to have a Statutory Demand set aside must, within 21 days after the date on which the demand is served on the company, be:
 

1. filed with the Court.[1]  This timeframe cannot be extended;[2] 
2. served (along with a supporting affidavit[3]) on the company or individual/s who issued the Statutory Demand.[4] 

 
It is not sufficient to simply file the application and supporting affidavit with the Court within the 21 day period; the application and supporting affidavit must also be validly served on the person who issued the Statutory Demand.  Although this can be done by serving the application and supporting affidavit at the address contained in the Statutory Demand (as long as the address for service is in the state in which the demand was served),[5] in circumstances where the issuing party is a company, the better course is to serve the documents at the registered office.[6]  In circumstances where the issuing party is an individual, service can be effected at the address for service contained within the Statutory Demand, or in accordance with section 28A of the Acts Interpretation Act 1901 (Cth).
 
The application[7] should be made pursuant to section 459G of the Corporations Act 2001 (the Act), in reliance upon sections 459H, or 459J of the Act.
 
The affidavit filed/served in support of the application:
 

1. should annex a copy of the Statutory Demand[8];
2. must annex a search of the records maintained by ASIC in relation to the applicant (carried out no earlier than 7 days before the application is filed);[9] and
3. must state the grounds for setting aside Statutory Demand.[10] 

 
Importantly, the “Graywinter principle”[11] requires, in short, that all of the grounds of dispute which are intended to be relied upon at the hearing must be raised in the supporting affidavit filed with the application.  In this regard, although Justice Sundberg made a number of observations in the Graywinter case regarding the minimum requirements of the contents of a supporting affidavit, the primary principles to be derived from the case were as follows:
 

1. the affidavit must say something that “promotes” the company’s case, ie. it must in some way advance, further or assist the company’s cause (setting aside the Statutory Demand); and
2. a bare claim or mere assertion that the debt is disputed is not sufficient.

 
21 days is not a long a long time to prepare an application and supporting affidavit, especially if a client is late in retaining solicitors (as is often the case).  Accordingly, the Courts recognise that “ideal standards are not always achieved or achievable.”[12]  As such, the Courts apply a “benevolent construction” to the contents of the affidavit.[13]  Importantly, the affidavit material can be supplemented.[14]  However, the weight of the authorities suggests that new grounds cannot be raised in an affidavit filed outside the 21 day time limit.[15]  In this regard, the High Court’s refusal to grant special leave to appeal in Energy Equity Corp Ltd affirmed that no new grounds  can be relied upon which are not contained in the material filed within the 21 day time limit.[16]  Accordingly, the affidavit served within the 21 day time limit must contain all of the grounds which the applicant seeks to rely upon at the hearing of the application.
 
Grounds to have a statutory demand set aside
 
A Court may grant an order to set aside a Statutory Demand where it is satisfied that one or more of the follow four categories applies:
 

1. there is a “genuine dispute” about the existence of a debt to which the Statutory Demand relates;[17]
2. the company who received the Statutory Demand has an “offsetting claim”;[18]
3. because of a defect in the Statutory Demand, substantial injustice will be caused unless it is set aside;[19]
4. there is some “other reason” why the Statutory Demand should be set aside.[20]

 
Genuine dispute
 
A company may have a Statutory Demand set aside on the basis that there is a “genuine dispute” about the existence or the amount of the debt the subject of the Statutory Demand.[21]  There are a number of different judicial tests for determining the existence of a genuine dispute.  The two main tests are as follows:
 
The test in Eyota[22]
 
In Eyota, McLelland CJ held that a genuine dispute “connotes a plausible contention requiring further investigation” and likened the test to a “serious question to be tried” in an application for an injunction.
 
The test in Spencer Constructions[23]
 
In Spencer Constructions, the Court held that:
 

1. the dispute must be bona fide and truly exist in fact;
2. the grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory or misconceived.

 
The test in Eyota is the most frequently used test[24] and is the test preferred in New South Wales, Western Australia, and South Australia.[25]  The test in Spencer Constructions is the test preferred in the Federal Courts.  The Courts in Queensland, Tasmania, Victoria, the ACT and the NT have applied the tests in Eyota and Spencer Constructions equally.[26]
 
Notwithstanding the different formulations, the following limbs are common to both tests:
 

1. a bona fide dispute that truly exists in fact; and
2. the dispute must have an objective existence, the genuineness of which must be capable of being assessed.[27]

 
The onus and the evidence

​While the onus to set aside a Statutory Demand is borne by the applicant, it is not a heavy one,[28] and while “considerable latitude” is afforded to a party asserting the existence of a genuine dispute which would justify the setting aside of a Statutory Demand,[29] an applicant will fail in discharging the onus if the contentions on which it seeks to rely are “so devoid of substance that no further investigation is warranted”.[30]  In saying this, Courts will not embark upon an “extended inquiry” and will not attempt to weigh or assess the merits of the dispute.[31]    The burden has been likened to an application for summary judgment,[32] an injunction[33] or an application to extend or remove a caveat.[34] 
 
Offsetting claim
 
A company may have a Statutory Demand set aside on the basis that it has an “offsetting claim”.[35]
Section 459H defines an “offsetting claim” as “a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).”

Although the offsetting claim must be “due and payable”[36], it can be liquidated or unliquidated[37].
 
Defect
 
A company may have a Statutory Demand set aside on the basis that, because of a defect in the demand, substantial injustice will be caused if it is not set aside.[38]
 
Section 9 of the Act defines a “defect” as including:
 

1. an irregularity; and
   
2. a misstatement of an amount or total; and
3. a misdescription of a debt or other matter; and
4. a misdescription of a person or entity.

 
The circumstances which can give rise to defects are varied.  In order to set aside a Statutory Demand on this basis, the defect must also cause “substantial injustice”.  As Justices French, Kiefel and Sundberg held in Equuscorp,[39] there must be “substantial injustice to ground the exercise of the discretion under subs 459J(1)(a)”.
In Spencer Constructions[40], the court held that a defect in the demand is only to be set aside if substantial injustice would otherwise be caused.  However, if there is any other defect, including a defect “in relation to the demand” rather than in the demand itself, the demand may be set aside only if the court is satisfied that there is some reason for doing so which goes beyond the mere defect itself, and as such may be set aside under section 459J(1)(b). 
 
Some other reason
 
Finally, a Court may set aside a Statutory Demand for “some other reason”.[41] 
 
The category of cases which fall within section 459(J)(1)(b) are not comprehensively defined.[42]  However, matters which may constitute “some other reason” include:
 

1. the absence of a supporting affidavit,[43] or the lapse of an unduly long time (ie. as little as two days) time between the swearing of an affidavit in support, and the signing of the Statutory Demand;[44]
2. deficiencies in the verifying affidavit (such as a failure to depose there is no genuine dispute about the existence or amount of the debt);[45]
3. a pending appeal against the rejection of an offsetting claim;[46]
4. when the issuing of the Statutory Demand is unconscionable;[47]
5. when the issuing of the Statutory Demand is an abuse of process.  This may include:

1. where the Statutory Demand is a means to a collateral and illegitimate end, and not as a bona fide means of obtaining payment of a debt;[48]
2. if the threat of proceedings is used as a means of extortion.[49]

 
What happens if the deadline is missed
 
If after 21 days of being served with a Statutory Demand, the demand is still in effect (ie. it has not been complied with, unequivocally withdrawn or no valid application to set it aside has been filed), the company is presumed to be insolvent,[50]  and the creditor can rely upon the presumption in an application to have the company wound up.  The presumption is effective for a period of three months,[51] and is rebuttable.[52]
 
Further action
Given the seriousness of the consequences which flow from non-compliance with a Statutory Demand, we recommend that legal advice be sought as soon as possible after receipt.
 
If you wish to explore issuing a Statutory Demand, or have been served with a Statutory Demand, contact Chad Gear on (07) 3227 1616, or by email at c.gear@taylor-david.com.
 
While attempts have been made to ensure the currency of information contained in this publication, we do not guarantee its currency.  This publication is intended to provide only general information on matters of interest.  As such, this publication is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.
 
© Chad Gear


[1] Corporations Act 2001, s. 459G(3). 

[2] David Grant & Co Pty Ltd (rec apptd) v Westpac Banking Corporation (1995) 184 CLR 265; 18 131 ALR 353; 69 ALJR 778; 18 ACSR 225; 13 ACL 1572; Healthy Industries Pty Ltd, Re [2018] NSWSC 1172.

[3] David Grant & Co Pty Ltd (rec apptd) v Westpac Banking Corporation (1995) 184 CLR 265; 18 131 ALR 353; 69 ALJR 778; 18 ACSR 225; 13 ACL 1572; Complete Windscreen Service Nominees Pty Ltd v Nielsen & Moller Windscreens Pty Ltd (1995) 121 FLR 178; 18 ACSR 320; 13 ACLC 1766.  Although the affidavit must be served, it need not be filed: Austar Finance v Campbell (2007) 215 FLR 464; 25 ACLC 1834; NSWSC 1493.  Rule 2.4A of Schedule 1A of the Uniform Civil Procedure Rules 1999.

[4] Corporations Act 2001, s. 459G(3).  Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; 21 ACSR 581.  The failure to file and serve an affidavit which complies with section 459G(3) of the Act means that there is no “application” before the Court, and accordingly, the Court has no jurisdiction to set aside the Statutory Demand; Verte Pty Ltd v Grisbrook (1997) 15 ACLC 1036; Kabra Plant Hire Pty Ltd v Total Earth Works (Qld) Pty Ltd [2005] QSC 254.

[5] Howship Holdings Pty Ltd v Leslie (Nos 1 & 2) (1996) 41 NSWLR 542.

[6] Zipvac Australia Pty Ltd v Ivan James [2011] NSWSC 392; Newsnet Pty Ltd v Patching [2011] NSWSC 690; Vicbar Pty Limited v Development Constructions (Newcastle) Pty Limited [1995] 13 ACLC 1220.

[7] Form 2, pursuant to rule 2.2(3) of Schedule 1A of the Uniform Civil Procedure Rules 1999.

[8] The Act and the Corporations Rules in the UCPR do not require the affidavit in support to annex a copy of the Statutory Demand.  However, a Court cannot set aside a Statutory Demand which has not been put into evidence, or at the least referred: Denet Pty Ltd v Global Marketing Group International Pty Ltd (2002) 20 ACLC 301.

[9] Rule 2.4A of Schedule 1A of the Uniform Civil Procedure Rules 1999.

[10] It is important to also be aware that a hearing to set aside a Statutory Demand is a final hearing, and hearsay evidence is not ordinarily admissible; Westpoint Management v Goakes [2002] WASCA 317 at 7.

[11] Derived from the decision of Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; 21 ACSR 581.

[12] Hire Works Pty Ltd v Elexpo Pty Ltd (1995) 9 ACSR 114.

[13] Z-Tec Computers Pty Ltd v Auslinx International Pty Ltd [1997] VSC 36, adopting the proposition found in a bankruptcy case: Re Brink; ex parte Commercial Banking Co of Sydney Ltd [1980] 44 FLR 135, 30 ALR 433.

[14] Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; 21 ACSR 581; Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation (2005) 157 ACTR 22; 58 ATR 456; [2005] ACTCA 3; Jian Xing Knitting Factory v SCASA Pty Ltd [2004] SASC 152 at 18.

[15] Energy Equity Corp Ltd v Sinedie (2001) 166 FLR 179; [2001] WASCA 419; Infact Consulting Pty Ltd v Kyle House Pty Ltd [2007] NSWSC 56.

[16] P7/2002 (9 May 2003); Reale Bros Pty Ltd v Reale (2003) 179 FLR 427; [2003] NSWSC 666.

[17] Corporations Act 2001, s. 459H(1)(a).

[18] Corporations Act 2001, s. 459H(1)(b).

[19] Corporations Act 2001, s. 459J(1)(a).

[20] Corporations Act 2001, s. 459J(1)(b).

[21] Corporations Act 2001, s. 459H(1)(a).

[22] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785.

[23] Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452.

[24] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602; [2009] WASCA 85 per Martin CJ; Auzcorp Pty Ltd v Alpha 1 Contracting Pty Ltd [2017] WASC 34.

[25] Statutory Demands and Winding Up in Insolvency, Farid Assaf, p. 233.

[26] Statutory Demands and Winding Up in Insolvency, Farid Assaf, p. 233.

[27] Statutory Demands and Winding Up in Insolvency, Farid Assaf, p. 233.

[28] Mega Engineering Pty Ltd, In the Matter of (1997) 24 ACSR 683; Solarite v York [2002] NSWSC 411; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37.

[29] Viktorija Pty Limited v Kevin Gerard Lindsay and Anor [2005] NSWSC 1274 t [9].

[30] Kirrak Pty Ltd v Compass Scaffolding and Plant Hire Pty Ltd [2007] NSWSC 1002 at [3].

[31] Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 per Hayne J at 295.

[32] Montage Group Pty Ltd v Wong (No 2) [2011] NSWSC 774 per Black J at [6]; Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 per Kindgren J at 353 and 354.

[33] Montage Group Pty Ltd v Wong (No 2) [2011] NSWSC 774 per Black J at [6]; Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 per Kindgren J at 353 and 354.

[34] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 per McLelland J at 787; Mayfair Realty Pty Ltd v Glen and Ors [2011] QSC 77 per Dalton J at [6].

[35] Corporations Act 2001, s. 459H(1)(b).

[36] Fleur de Lys Pty Ltd v Jarrett (2004) 51 ACSR 238; [2004] FCA 1357 at 30.

[37] Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743.

[38] Corporations Act 2001, s. 459H(1)(a).

[39] Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 80 FCR 296; 25 ACSR 675 at 694.

[40] Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; 24 ACSR 353; 15 ACLC 1001; [1997] FCA 681

[41] Corporations Act 2001, s. 459J(1)(b).

[42] Meehan v Glazier Holdings Pty Ltd (2005) 53 ACSR 229 [2005] NSWCA 24 Per Young J, otherwise agreeing with Santow J.

[43] Fitness First Australia Pty Ltd v Dubow (2011) 251 FLR 241; (2011) 84 ACSR 296; [2011] NSWSC 531; BC201103791, leave to appeal refused in Dubow v Fitness First Australia Pty Ltd [2012] NSWCA 323.

[44] Wildtown Holdings Pty Ltd v Rural Traders Co Ltd (2002) 172 FLR 35; [2002] WASCA 196.

[45] IFA Homeware Imports Pty Ltd v Shanghai Jerrys Candle Co Ltd [2003] FCA 533.  Kisimul Holdings Pty Ltd v Clear Position Pty Ltd [2014] NSWCA 262.

[46] Eumina Investments Pty Ltd v Westpac Banking Corp (1998) 84 FCR 454; 16 ACLC 1440; [1998] FCA 824.

[47] Willaire Pty Ltd v Equititrust Ltd (2010) 81 ACSR 200; [2010] QCA 350.

[48] Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 at 516; 21 ALR 425 at 427.

[49] Rozenbes v Kronhill (1956) 95 CLR 407 at 417.

[50] Corporations Act 2001, s. 459F, s.459C.

[51] Corporations Act 2001, s.459C(2).

[52] Corporations Act 2001, s.459C(2)(a).

Brisbane | 1 June 2017
We are pleased to announce the appointment of Chad Gear as commercial litigation Partner.
 
Chad brings with him over a decade of litigation experience having acted in many complex and high profile commercial disputes.
 
Partner Scott Taylor said: ‘I would like to heartily congratulate Chad on his appointment.  Chad has an enviable reputation in litigation among his peers.  We are excited to expand upon our traditional practice areas of reconstruction and insolvency to commercial litigation through Chad’s appointment.  This expansion enables us to deliver exceptional service to an expanding client base throughout Australia.  We are elated to have Chad join the firm and look forward to servicing clientele beyond the scope previously offered.’

Taylor David’s practice areas now extend to litigation and dispute resolution within the following areas:

• Corporate and commercial disputes
• Trade practices, competition and consumer law
• Shareholder, partnership and joint venture disputes
• Contractual disputes
• Property disputes

The appointment takes effect from 1 June 2017.

Chad may be contacted at:
 
               t: +61 7 322 71 616
               e: c.gear@taylor-david.com
 
For more on Chad, please visit his bio by clicking here.
 
Scott D. Taylor
Partner

Debt recovery series: Debt recovery should be a fast and inexpensive process.  For many businesses that are owed debts, issuing a “statutory demand” will often be the first avenue which is explored for the purpose of recovery.  In this article, I explore in brief the basics of a statutory demand, and whether it can be used as a debt recovery tool.

Creditor’s statutory demands; debt collection tool?
Creditor’s statutory demands (commonly referred to as Statutory Demands or Stat Demands) are written demands pursuant to section 459E of the Corporations Act 2001 (the Act), in which a creditor makes demand for payment of a debt within 21 days.  If the debtor does not pay the debt or otherwise comply with the Statutory Demand, the recipient will be deemed insolvent, and the party who issued the Statutory Demand can rely upon this presumption in applying to the Court to have the debtor wound up in insolvency.

In certain circumstances a Statutory Demand can be issued without first obtaining a judgment.  As such, they are often liable for use as a debt collection tool (dealt with in more detail below).

If you have received a Statutory Demand, we recommend that you seek legal advice immediately. 
​
How do they work?
A person who is owed a debt which is due and payable, and which is at least the statutory minimum (ie. $2,000 or more[1]) may serve a Statutory Demand on a debtor company.  Schedule 2 of the Corporations Regulations 2001 provides the prescribed form.  Because a defect in a Statutory Demand can provide grounds for having a Statutory Demand set aside, we recommend that legal assistance be obtained to issue a Statutory Demand. 

A debtor who is served with a valid Statutory Demand must either:

1. pay the debt/s which are the subject of the Statutory Demand;[2]
2. secure[3] or compound[4] for the amount of the debt/s, to the creditor’s reasonable satisfaction[5] (ie. negotiate a settlement); or
3. apply to have the Statutory Demand set aside.[6]

If the debtor company fails, within 21 days of receiving a Statutory Demand, to comply with the demand (as set out above), the debtor company will be presumed to be “insolvent”.[7]  This means that the creditor can apply to the Court for an order that the debtor be wound up in insolvency (ie. placed into liquidation).[8] 

The presumption of insolvency which arises when a debtor fails to comply with a Statutory Demand can be rebutted by evidence that the company is solvent.  However, this can be a costly and difficult exercise.

Why issue a Statutory Demand?
The main reason a creditor may choose to issue a Statutory Demand is because it can be an inexpensive process to recover a debt quickly (compared with the usual Court process). 

Practically speaking, a creditor who issues a Statutory Demand will quickly ascertain (ie. within 21 days) whether a debtor can pay a debt, or whether the debtor is content for a presumption of insolvency to arise.  In the latter circumstances, the logical conclusion is that the debtor may face an application to be wound up in insolvency.  However, the purpose of Part 5.4 of the Act is to:

1. discourage or prevent insolvent companies from continuing to trade and incur further debts which it will be unable to pay;[9] and
2. provide a means whereby the insolvency of a debtor company may be established for the purposes of an application to wind up that company.[10]

As such, the purpose of a Statutory Demand is to facilitate proof of insolvency to assisting in a winding up application.

Debt collection tool?
It is a settled position at law that that a Statutory Demand is not merely a debt collection device.[11]  In this regard, the Court has explicitly held that “the statutory demand is not provided by the law as a mechanism for the recovery of debt.”[12]

As such, issuing a Statutory Demand will be an abuse of process if the purpose of the party issuing the demand is not to pursue the Statutory Demand to wind up the debtor company on the ground of insolvency, but rather is to use the process as a means:

1. of obtaining an advantage for which the process is not designed; or
2. to obtain some collateral advantage beyond what the law offers, such as the application of pressure to compel payment of a disputed debt.[13]

The Courts have long held that when a company is solvent, the appropriate course is to commence Court proceedings for recovery of the debt, on the basis that to pursue winding up proceedings may be an abuse of process of the Court.[14]

However, Statutory Demands are undoubtedly a fast and inexpensive means of testing the bona fides of a debtor who disputes payment, and to recover payment.  While there is some judicial comment to the effect that service of a Statutory Demand may appropriately be used to assist in testing whether a dispute is genuine[15], the overwhelming view is that Statutory Demands do not provide a means to avoid commencement of proceedings for recovery of a disputed debt, by the application of commercial pressure.[16]

Further action
While Statutory Demands may provide an inexpensive and effective debt recovery tool, care must be taken not to use such a tool merely as a debt collection device, or for an improper purpose.  As such, they may be liable to be set aside.

If you wish to explore issuing a Statutory Demand, or have been served with a Statutory Demand, contact Chad Gear on (07) 3229 9800, or by email at c.gear@taylor-david.com.
 
While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed.  This publication is intended to provide only general information on matters of interest.  It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.
© Chad Gear
[1] Section 9 of the Act.
[2] Section 459F of the Act.
[3] The debt which is “presently due” must be secured.  In Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376, the Court held that a bank guarantee conditional upon the creditor establishing the existence of the debt by obtaining a judgment could not result in the debt being “secured” for the purposes of the section.
[4] “Compounding a debt” means entering into an arrangement for payment of the debt or a different amount; Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309 per Sundberg J at 1311.  In Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd (1981) 5 ACLR 607, an alleged arrangement to pay by instalment was held to be “compounding” for the sum due.
[5] Section 459F of the Act; the recipient of the demand need only secure or compound for the debt to the “reasonable satisfaction” of the creditor. Reasonableness is an objective test, to be determined by the Court and not the creditor, having regard to all the circumstances of the case: Commonwealth Bank of Australia v Parform Pty Ltd (1995) 13 ACLC 1309 per Sundberg J at 1311.  In this regard, it is more insightful to ascertain what is reasonable, by the Court’s analysis as to whether a creditor has acted “unreasonably”.  For example, when a cheque was tendered without explanation, and without payment of legal costs: Owners — Strata Plan No 17572 v Nomak Holdings Pty Ltd [2009] NSWSC 1412.  See also Forsayth NL v Juno Securities Ltd (1991) 4 WAR 376 and Kema Plastics Pty Ltd v Mulford Plastics Pty Ltd  (1981) 5 ACLR 607.  A history of failure to meet commitments may provide grounds for a reasonable refusal of an offer: K C Parksafe (Vic) Pty Ltd v Dallbrook Pty Ltd (1998) 87 FCR 509.
[6] Section 459G of the Act.
[7] Section 459C of the Act.
[8] Section 459P of the Act.
[9] Scolaro’s Concrete Construction Pty Ltd v Schiavello Commercial Interiors ( Vic) Pty Ltd (1996) 62 FCR 319 per Sheppard J.
[10] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602, per Martin CJ, cited with approval in Lifese Pty Limited v Lee Crane Hire Pty Limited [2012] FCA 302.
[11] Re QBS Pty Ltd [1967] Qd R 218 at 224 per Gibbs J; Re Bond Corp Holdings Ltd (1990) 1 WAR 465; Re Badja Pty Ltd [2000] QSC 441 (99/1143); Poonon Pty Ltd v DCT [1999] NSWSC 1121 Per Austin J at [21]; Muller and McIntosh (as joint and several liquidators of Arafura Equities P/L (in liq)) v Academic Systems P/L [2007] QCA 218.
[12] Equipped Constructions Pty Ltd v Form Architects Pty Ltd [2006] NSWSC 500 at [24].
[13] Williams v Spautz (1992) 174 CLR 509; 107 ALR 635; [1992] HCA 34; David Grant & CoPty Ltd v Westpac Banking Corp (1995) 184 CLR 265; 131 ALR 353; 18 ACSR 225; [1995] HCA 43.
[14] Niger Merchants Co v Capper (1877) 18 Ch D 557.
[15] Redglove Holdings Pty Ltd v GNE & Associates Pty Ltd (2001) 165 FLR 72.
[16] Createc Pty Ltd v Design Signs Pty Ltd (2009) 71 ACSR 602 at 2 per Martin CJ, with whom Owen and Miller JJA agreed.

Brisbane | 3 February 2017

Mr Tinkler is pleased with the decision of the Federal Court delivered earlier today and is looking forward to spending time with his children.

​He will return to Australia by 8 April 2017.

Mr Tinkler otherwise requests that the media respect his family’s privacy.

 - Scott D. Taylor


​The full decision may be accessed here.
​

Taylor David is proud to be a sponsor of the 2nd annual Brisbane Charity luncheon this year in support of HELP Enterprises. 
 
HELP Enterprises is a local charity supporting people with disabilities by providing a broad range of services including employment opportunities; training; respite accommodation; and family support.  Funds raised from this year’s luncheon will go directly in to developing  housing projects in Mitchelton to accommodate up to 20 residents who live with disabilities.
 
It is not too late to secure your ticket. 
 
Details of the lunch are:
 
                Date:                     Friday, 26 August 2016
                Time:                     12noon to 4.00pm
                Venue:                 Pullman Hotel Brisbane
                Cost:                      $200 per ticket
 
To register, please go to:  http://brisbane.idsupportevents.com.au/

In brief: An Appeal from a decision of the District Court of Queensland largely based upon evidentiary grounds concerning an unfair preference action, inclusive of: the good faith defence; the running account defence; the liquidators reliance upon books and records to determine solvency. 

Taylor David represented the successful Respondent Liquidator in this Appeal. 

Despite what many within the insolvency industry have viewed with controversy, the set-off  applied in the original District Court decision was not raised or addressed by the Court of Appeal.  It appears that is is only a matter of time before a superior court reconsiders the application of set-off to an unfair preference claim under section 553C of the Corporations Act 2001.


Grounds of Appeal

The grounds of appeal were broadly based upon claims the learned Trial Judge erred in:

1. Admitting certain documents into evidence.
2. His finding of insolvency based upon certain documents.
3. Failing to address the matters within the Appellants submissions.
4. Failing to give consideration to related party funding when determining solvency.

Result

All points of appeal failed largely for the following reasons:

1. The Appellant failed to adduce any evidence to contradict the Respondents evidence raised at first instance.
2. It was not necessary for the trial judge to frame his reasons with reference to the checklist within Australian Securities and Investments Commissioner v Plymin (No 1).
3. Due regard was provided to the relevant statutory and common law authorities.
4. The initial notice of appeal ‘…was incompetent because of the absence of an application for and grant of leave to appeal.’

Orders

The appeal was dismissed with costs.
 
Implications

The original decision of the District Court remains unchanged, namely:

• On Set-Off – Set offs under s 553C are available where unfair preferences apply: This is the first time an Australian Court has determined that s 553C can apply to unfair preferences.  The decision of Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia (involving the set-off of an uncommercial transaction rather than an unfair preference) was followed.  We reiterate this was not a matter considered by the Court of Appeal.
• On Solvency - Liquidators reliance upon books and records available to him/her: The failure of a company to keep correct written records (to satisfy s 286 of the Act) does not, of itself, destroy the basis of permitted reliance on those documents which are available in deciding issues such as insolvency and indebtedness at a particular point in time, or their efficacy.
•  On Running Account - Continued provision of goods/services may be isolated extensions of credit: Continuing to do business with a company may not constitute a series of transactions within a continuing business relationship, but rather, isolated extensions of credit ancillary to the primary objective of being paid.

•  On ‘Good Faith’ – Defence not made out notwithstanding some payments made pursuant to an agreed plan.

Author: Scott D. Taylor

For a copy of the full judgement, please click here.